This is related to the previous enigma of managing the near-term and the long-term. A growing business needs cash. A question facing the entrepreneur constantly is how to generate cash to fund the business. As the entrepreneur attempts to build out his key ideas, it is very tempting to fund the business through externally raised capital. In todays times, raising VC money is not just difficult, it is well nigh impossible for most entrepreneurs. That is where the entrepreneur has to look at generating cash from an existing bread-and-butter business.
One may disagree with me: a new business needs focus, and one has to take risks. My point is that one cannot hope to build businesses on other peoples money. Even if it takes time, the entrepreneur must use his small initial capital combined with creativity to build out a business which is not unrelated to what he finally wants to do but which at the same time generates the necessary cash to meet expenses every month. Dependency on external sources of capital in todays times is a surefire recipe for disaster.
The best time to raise venture capital is when the entrepreneur is absolutely certain that the business is on firm footing, and that the investors will get returns on their capital. In other words, there is more growth and less risk to look forward to. Of course, this is easier said than done money is the engine for a business. My contrarian point is that in the early days of a business, this engine should be powered as much as possible by customers and not by investors.
Entrepreneurs coming out with new ideas need to decide which markets they will address. One market is the current set of users for whom the product or service may offer additional functionality or better price points or greater convenience. The other market is where the competition is nonconsumption the product/service is a disruptive innovation which seeks to open up new markets. The first market will entail battles with entrenched competitors, while the second will require pioneering efforts in concept selling. The enigma an entrepreneur faces is which are the first markets that he should target.
It is not an easy question to answer. Besides, the answer depends much on the type of product and service that is on offer. One point I do want to make is that in today’s world, the opportunities in targeting the newer markets at the bottom of the pyramid are likely to be far greater. These are markets which current players probably find unattractive. So, if entrepreneurs could use a mix of innovation and affordable pricing strategies, they could find the new markets very attractive and profitable. Over time, there is no reason why they cannot then move up the value chain.
These new markets are in countries like India and China the world’s emerging markets. They need solutions at much lower price points. This requires a radical rethink of the value chain and feature list of products. An entrepreneurs, with little legacy to hold him back, is ideally placed to carve open these markets. The enigma arises from the fact that these are markets which are invisible to everyone else. It appears far easier to tread the beaten path than to create a new one.
Tomorrow: Entrepreneur’s Enigmas (continued)
Tech Talk Entrepreneur’s Enigmas+T