By Alok Mittal and Mukul Singhal, Canaan Partners
Wiki defines a business plan as a “formal statement of a set of business goals, the reasons why they are believed attainable, and the plan for reaching those goals.” Two phrases in this crisp definition become important to us – why goals are attainable and the plan for reaching them. We have discussed two basic factors below which help in answering the above questions and and guide discussions in an investment decision. We have often seen gaps in these two areas while interacting with startup teams.
1. Focus on Consumer Needs NOT Product Features
This is frequently noticed in many business plans, even with experienced teams and especially with technology startups. The teams write the entire business plan with a focus on product features and capabilities. This leaves the important aspect of consumer pain points and the ways to resolve them unattended.
Here’s an example: “For any healthcare problems we will be the first service provider at the customer’s door step as health services on the customer’s mobile phone will be provided instantly.” The executive summary around this theme goes ahead to explain the features provided on the mobile phone and completely ignores the consumer pain points or needs. Such an approach will often ignore the current user behaviour and give businesses a false sense of user adoption. This ends up in false growth projections and how early the business can break-even.
In the 2006-2007 timeframe, we noticed many businesses replicating the Orkut social network model in India with the hypothesis of an Indian social network. We always questioned the need for an Indian social network. What makes it Indian? We were never satisfied by the various arguments and we never saw much user growth in such businesses. However, since then, businesses have undergone some learnings and now we are seeing growth in community centric businesses around Indian themes like cricket and Bollywood. Orkut and Facebook may not be necessarily fulfilling those needs.
Apart from consumer needs, businesses should also observe the local environment and current user behaviour. Take the example of enterprise products on the SaaS (software-as-a-service) model. It has all the good things that can be offered: on-demand, web-enabled, low capex and low TCO. However, SaaS has still not taken off in India. The target market, small and medium enterprises (SME), currently work with manual processes, low automation, use paper, use the Internet sparingly and have non-transparent accounting. All of this poses a challenge to customer adoption of such systems. While there is a need for automation in this market segment, current behaviour and constraints discourage the adoption.
Therefore, to summarize, a business plan should elaborate on the user pain points and needs. It should further explain the different ways to solve the problem and how the proposed solution is best suited for the same. While doing so, it should also lay out the current user behaviour while explains issues around user adoption and hence growth.
Businesses often take a very narrow view of the competition since they have not thought of alternative ways of fulfilling the same pain points. This often gives a wrong estimation of the market share a business can achieve. For example: in the online DVD rental business, ‘convenience’ is a pain point and is also solved by neighbourhood video libraries which take orders on the telephone. Hence this becomes a competition to the online DVD rental model.
2. Ability to Scale-up
Nascent businesses often project high growth rates using market size derived from national level demographic numbers, industry estimates, sector size, etc. This ignores various factors like the degree of fragmentation, availability of sales channels, local market dynamics, discontinuities and enabling factors. Some of these factors highly influence the target market and hence have implications on the scalability of the business. Let’s look at each of them in more detail:
- Degree of Fragmentation: The tuition market in India is a classic example. National level estimates put it at upwards of $10 billion. However, the biggest player in the market is only $20 million and there are 3-5 such players. The rest of the market is unorganized and scattered all over the country across numerous individual-driven businesses. This makes it tough to build a case for a large business in a given timeframe.
- Availability of Sales Channels: The Indian SME sector depicts this well. We have seen many businesses providing technology automation tools to the SME sector. Numbers look attractive with more than 3 million SMEs in India. However, we have not seen sales channels that can reach out to these SMEs. The question that arises: How do businesses target these SMEs? Mass marketing mediums like television and print may not drive your ROIs because of low-priced products. Sales-on-feet becomes tough to scale.
- Enabling Factors, Ecosystem Constraints, Discontinuities: Many business plans leave out constraints, infrastructure issues and enabling factors while estimating the target market size. Discontinuities are disruptive in nature. Regulation often adds to the discontinuities in businesses. Mobile payments is one such recent example. The advent of ‘low cost airlines’ is another example. It has increased the potential air travel market and helped to increase the market size of online travel agents.
Teams should consider these factors while estimating market size. They should identify micro markets and estimate market size by a bottom-up approach. This gives a realistic view of the scalability in the early stages of the business. This also helps in nailing down a good rollout plan.
The above two points are crucial in laying out a good business plan which can be understood by various stakeholders. It also indicates the understanding of the team about its businesses. Other areas such as sales and marketing strategy, rollout plan, financials and so on are also important parts of a business plan. But these two points lay the basic foundation for all other discussions. Apart from this, we would suggest that teams take care of hygiene issues while presenting a business plan. It should not be more than 20-25 slides. Slides should not be loaded and appropriate fonts should be used. Often, fonts are so small that it becomes tough to read in a conference room setting.
Authors: Alok Mittal and Mukul Singhal lead venture capital investments for Canaan Partners in India. Follow @alokmittal001 and @mukuls97.