Experts say if a start-up feels it's going belly up, there are two options: it must fail fast or learn faster
Bangalore: Till three months back, Mumbai-based quick service restaurant chain Rocket Sandwiches ran a small but profitable business. It had five outlets from where it had delivered more than 120,000 sandwiches to its customers.
But Vivek Jha, chief executive and founder of Rocket Sandwiches, along with co-founder Tenzin Thargay, realized that they could not scale up their business with just 70-80 sandwiches orders a day.
“Sandwiches are not the kind of meal that people have for lunch, and we realized we didn’t have the money to make customers build a new habit," said Jha, who raised approximately ₹ 4 crore from Indian investors, India Quotient and Unilazer Ventures Pvt. Ltd, in late 2013.
So Rocket Sandwiches decided to “pivot", or alter its strategy, because “giving up seemed too easy", Jha said.
“To be a successful ₹ 200 crore business, you need to have 200 outlets with at least 15 employees in every outlet. We couldn’t have had 3,000 people on our payroll. We would need north of ₹ 20-30 crore for that. We might have had to shut shop," said Jha.
Experts say if a start-up feels it’s going belly up, there are two options: it must fail fast or learn faster. In start-up jargon, ‘learn faster’ is synonymous to pivoting a business, which means altering the product and steering it in a direction where there are better opportunities.
Start-ups across the globe are resorting to this strategy as they keep reacting to the market. Take the case of e-commerce firm Myntra Designs, which started out as a personalized gifting platform in 2007, but was forced to rebuild itself and was finally acquired for around $300 million by Flipkart.com early this May, a testimony to its success.
“When we started, we loved it and thought it was unique. So we jumped into it. After jumping is when we thought objectively," said Ashutosh Lawania, co-founder, Myntra Designs.
After both founders, Lawania and Mukesh Bansal, raised $5 million in a series A round in 2008, they found scaling their business posed a big challenge.
“We were doing well, but our growth was not in line to what we had expected, neither was the market potential for personalized gifting big. It was self-realization that we needed something else to create a big business," said Lawania, adding that the current market size for fashion and lifestyle is close to $50 billion.
In 2010, Myntra started showcasing and retailing lifestyle products at MRP (maximum retail price) online. Following its success, the company expanded into many more categories over the next two years.
According to Ravi Gururaj, serial entrepreneur and product and executive council of software lobby body Nasscom, every year around 15,000 to 20,000 ideas and start-ups are born in India out of which about 200 get external funding and 1,500-2,000 remain bootstrapped (self-funded, or on customer-generated revenue).
Effectively, thousands of start-ups fail year after year. When these failing start-ups hit roadblocks such as lack of creativity in scaling up, lack of funding and change in competition dynamics, there is always an option of altering its strategy.
“It is not common to find entrepreneurs pivoting their businesses. This could be because they usually enter a space and they want to continue in the space. Also, because it is difficult to pivot into something outside the sector of experience," said Sandeep Singhal, managing director, Nexus Venture Partners, adding that less than 10% of failing businesses choose to do so.
According to Singhal, these kinds of gradual tweaks sometimes result in a different product from what it started out.
For instance, firms such as Snapdeal.com (Jasper Infotech Pvt Ltd) have shifted from a pure deals website to an e-commerce website, and succeeded by tweaking their product offerings and business strategies instead of letting themselves fail.
Recently, Exotel (Exotel Techcom Pvt. Ltd), a cloud telephony service provider for Indian small- and medium-size enterprises, or SMEs, decided to shift focus from India and go global.
Indian investors encourage pivoting except in the cases where someone else has a better product and you cannot compete with them, say experts. This strategy, the experts add, is also discouraged in the case of incremental changes that do not make much of a difference, or where the founders have run out of ideas or the start-up has run out of money.
“When entrepreneurs come and ask us to fund their pivots, we objectively look at the idea and think, ‘Would I have given these guys the money if this was a new business?’," said Singhal.
“Start-ups by definition must fail, and that is the difference between start-ups and large enterprises," said Gururaj, adding, “We should not sweat about the failures, but celebrate successes."
“It might not be true to say that 90% start-ups fail. From what I’ve seen, I think 40-50% actually fail, while 20-30% never fail, they sustain themselves in a fashion that Paul Graham describes as Ramen Profitability (having just enough revenue for the founders and employees to be able to survive on meals of ramen), while the remaining 10-20% actually scale up," said Rutvik Doshi, partner, Inventus Capital, who founded Taggle Internet Ventures Pvt. Ltd, a Groupon-like e-commerce venture that shut down within two years after launching.
Whether to pivot or not is only a matter of instinct, said Singhal.
“It is all about how the entrepreneur feels: does he want to wrap up, barely survive, or does he want to tap larger opportunities that are present out there?"