The 4 P’s of Startup Success – Profit

You have made it to the fourth and final “P” which is profit, as a recap the other three P’s were – people, passion and perseverance. Unless you are running a non-profit organization, profit is what drives a startup to exist. With those profits, it allows a startup to hire great people, acquire strategic assets, innovate, stay competitive and potentially give back to the community.

Some startups go off course when revenue is the only metric that is looked at. It’s similar to people that are only concerned about the money they will make. For individuals compensation is one aspect, there is also career development, knowledge and many other things to look at. Likewise, when startups only focus on revenue they might look for a quick deal to bring in revenue or might view an IPO as the ultimate path to the big payout. In the past many startups have IPO’d however many of them have faded away as their team, passion or perseverance was not strong enough.

Revenue is important but profit is what really needs to be looked at. You might bring in a large 2 million dollar deal but if you spent 5 million to get the deal, then there is something clearly wrong with the business model. Growing your revenue and profit organically is the best way to build a startup into a company. With the 4 P’s – people, passion, perseverance and profit you have a combination that is tough to beat and it’s the qualities that any startup should strive to achieve.

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The 4 P’s of Startup Success – Perseverance

Now that you have selected the right people to build your team and they are passionate about the idea it’s time to work. However, will they stick around when things get bumpy? Perseverance is what sets the dreamers apart from the doers.

It’s easy to get excited about a PowerPoint presentation and the “hugh” market potential of industry XYZ. In most instances whatever you put down for milestones in your business plan or PowerPoint will most likely not be met. You expected to reach 10,000 customers in your first year but what if it takes 5 years? You might have the passion for the idea but what you really need is the mental toughness to get through the tough times that you will invariably face.

The story of retail heavyweight Kishore Biyani is a classic text book example of perseverance. It may appear he captured the Indian retail market overnight with Pantaloons, Big Bazaar and his various other brands but that is just not the case. Kishore started his career several decades ago selling acid-washed jeans all the while tinkering with the idea of organized retail. For Kishore it took him several decades to be an overnight retail success.

Another example of perseverance is Audi, in the mid 80’s it was dealt a serious blow to it’s flagship Audi 5000 car. In 1986, US television news magazine 60 Minutes aired a segment on the Audi 5000’s “unintended acceleration” problem. In the end, the US government concluded that the problem was caused by drivers confusion in pushing the wrong pedal and not a design flaw. But, the damage was done and overall Audi sales went from over 75,000 a year to around 12,000 a year.

At the time, people were calling for Audi’s demise and hinted it might leave the lucrative US market because of the public relations disaster it faced. However, Audi redesigned the car and sold it as the Audi 90/100 series. Almost 25 years later, Audi is stealing the thunder from the other German brands Mercedes and BMW. Now people look to Audi for design cues and it’s much talked about headlight designs which have been copied by almost every high end car manufacturer.

When hiring, perseverance is one of the toughest attributes to look for in an individual because it’s such a personal trait.  Some people can work on something for 15 years whereas others get disillusioned after 15 days.  Many people like to say luck plays a major role in why a startup might have succeeded but the reality is if you try something 2-3 times you will most likely fail every time. However, if you try something 1000 times then you have a much better chance of succedding. It comes down to trying, trying and trying some more until your product/service is the right fit for the market.

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UPDATE: After I published this blog post, Fred Wilson had a similar blog post that really summed it up – “The Second Year“.

The 4 P’s of Startup Success – Passion

This is the 2nd in a series of what I believe are the four basic components needed to turn a start-up into a successful long-term company.

The second ‘P’ is passion. When hiring people you want individuals that share the same level of enthusiasm and excitement as everyone else on the existing team. Passion goes beyond liking a particular product or industry. Just because you like Ferrari’s does not mean you would make a great car mechanic or car salesperson. However, if you eat, sleep and breath cars and in particular Ferrari’s then you might make a great addition to the Ferrari organization. You have to be consumed by that product or industry and want to read everything about it and learn as much as you can.

I started my career as a technical person building large scale wide area networks and spent countless hours optimizing routers to get TCP/IP packets from destination A to destination B. Did I have a passion for it, probably not. Since the 7th grade, I have been consumed by financial markets. Most of my classmates thought I was going to be a stockbroker because I was reading the Wall Street Journal back then. I love technology but financial markets are my true passion for reasons even I don’t fully understand.

When you are passionate about something you just naturally tend to be more knowledgeable about that topic area because it interests you. And when you are more knowledgeable it adds so much more to the team. The drive and passion does not have to be in the main area of the company. If you are a technology startup and your CFO is in love with Excel and gets excited by P&L statements, then lucky for you.

An example of someone with a lot of passion is Gary Vaynerchuk. Gary has a passion for wine and it shows – he runs a retail wine shop in New Jersey but has became an internet sensation with his Wine Library TV podcast. When you watch one of his podcasts you can feel the excitement and passion he has for wine industry and he can talk about vineyards like its second nature. Gary has turned a field that was typically dominated by older middle aged men and “crushed it” as he would say. With passion comes knowledge and it shows, Gary is someone you would trust blindly because he eats, sleeps, breaths and drinks the wine industry.

Startups have enough drama on their own in the early days and you want the core team to stay and build up the company. Early on, having team members come and go can throw off the overall rhythm of a startup. By finding passionate people they hopefully will stick around even if things look grim because they are enthusiastic and excited about the product or industry they are in.

But finding passionate candidates is not straight forward. Luckily in this age of social networks, you can keep tabs on someones blog or twitter stream to get a better understanding of what interests them. More often than not, you have to interact with them on an ongoing basis to build a mental social graph of what truly gets them enthusiastic, excited and passionate.

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The 4 P's of Startup Success – People

Over the next two months, I’m going to discuss what I believe are the four basic components needed to turn a startup into a successful long term company. They are – people, passion, perseverance and profitability. I will highlight each of these four components in separate posts in the coming months.

It may sound cliche but the most important component is having great people. It took me many years to figure this out, but people truly are the cornerstone of any company. You might have a great idea but without the right people the idea might never reach its full potential. Not only do you require smart people, but people who share the long term vision of the startup. With the early employees you want to build the right culture which is needed to attract top talent as the company grows. For many years Google was the place to be in Silicon Valley if you were a coding genius, the culture was built by early employees who were from a computer science background and insisted on the corporate motto “don’t be evil.” Nowadays, all the top computer science talent wants to work at Facebook partly because of the stock options they would receive but also because the other top people they would be working with. Top talent likes to work with top talent.

In addition to having smart people who know the market you also want people that can challenge business decisions in a constructive manner. Initially, you will spend a large part of your time with the core team building out the business and having people who are easy to get along with in a work and personal environment is highly recommended. Startup’s are inherently stressful and the last thing you need is to surround yourself with negative people. People who are always negative can be very destructive and should be removed immediately, no need for additional drama from within the company.

An excellent example of two companies that have gone in opposite directions even though they are in the same space – Google and Yahoo. As stated before, Google has a history of treating it’s employees like kings such as providing free gourmet cooked meals, haircuts and so much more. They even provide their engineering staff with something called 20%, where a programmer can work on anything that interests them. Google’s real asset is their search algorithm but without the right people to tune it and tweak it might have ended up like so many other internet search giants. At the other end of the spectrum is Yahoo – in the early 90’s it was the Silicon Valley startup to work for, but over the years many top ranking employees left. This led to a vicious cycle where other people left and then they couldn’t attract new talent that was sorely needed in such a competitive industry.

One of the most difficult tasks for any company is hiring people. That difficulty is even more amplified at a startup, as many people don’t want to take the risk of joining an unknown entity. And, if you are lucky enough to experience hyper-growth then you have all sorts of people applying and the hiring standards usually get relaxed in order to fill a job role. By maintaining a strict adherence to hiring great people can only benefit the company in the long run.

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The Customer is King

I recently read through “Delivering Happiness” by Tony Hsieh who started, the worlds largest shoe store, and it surprised me how quickly the company multiplied around a simple decision – be customer focused. It’s almost cliche when a company says they are customer focused or care about their employees however at Zappos it’s genuine.

At one point within the company they were debating whether to outsource customer service, but they decided it was a core function of the company and that should never be outsourced. That decision is what defines Zappos today. It’s not some new technology they created, it’s not some cool application they coded, it’s just basic customer interaction in helping a customer with their buying needs.

Have you heard this story before? I have, it’s called Nordstrom. Nordstorm is a large department store chain in the US that was known for their customer service back in the day (I don’t know about today, have not visited in years). Like Zappos they also wrote a book documenting their path called “The Nordstrom Way to Customer Service Excellence.” In one story, a customer wanted a refund for tires that were bought.  The salesperson refunded the money to the customer even though Nordstrom does not sell tires.  I’m guessing the salesperson figured they could take the tires to the actual store and get a refund and then payback Nordstrom. I’ve noticed more and more companies emulating the Zappos model in the apparel vertical including Bonobos. They have a heavy internet presence but if you need assistance you can call them on the phone and talk to a “customer service ninja” who can guide you through the process.

As I mentioned before Zappos was looking to outsource their customer service department and of course India was at the top of the list.  If Paul in the US can help a customer at $15 an hour, then someone named “Paul” in India can do the same thing much cheaper, it’s all about labor arbitrage. So naturally you would think Indians living in India would have access to amazing customer service everywhere…WRONG.

It’s almost a given that you can expect poor customer service in India, whether it’s a store, restaurant or your mobile phone provider. I believe it’s because there is so much pent up demand that these companies are just trying to scale to meet the demand.  At some point when the market is saturated you will see companies offer true customer service.  In the meantime the companies that are providing a high level of customer service are growing exponentially such as Flipkart.  Flipkart is what happens when Zappos meets Amazon, they are an online bookstore with excellent customer service. I swear by them, I might goto Crosswords to browse books but I usually end up going online and buying them from Flipkart.  I recently order a book on a Monday night and by Tuesday evening I had it in my hands…that customer experience just blew me away.

I would love to see a company like Bonobos or J. Hilburn start in India, considering India has such a rich textile history. Imagine the customer service they could provide by sending a “tailor/ninja” to the customers house, take measurements and then show various fabrics available. Then come back a week later for a trial fitting and then deliver the final product in a couple weeks. This would also solve the issue I always hear from entrepreneurs that getting commercial space in Bombay is very expensive and throws every business model out the window.

Honestly, there is no excuse for an Indian company to provide sub par customer service today.  With all the technology that is available via forums, Facebook, Twitter, help desk software, blogs, podcast, etc…you can constantly stay in touch with your customers and find out if they are happy or have issues. By getting a customer addicted to your customer service you have locked in a customer for life. Granted you might end up targeting early adopters but these same early adopters will tell all their friends and family about their experience just like I did with Flipkart.

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MBAs vs. Non-MBAs

Someone recently asked me about MBAs vs non-MBAs in the startup world. It’s always fun when you stick 3 tech people and 3 MBA types in a room and drop that question on them. My answer was “MBAs build in Excel while non-MBAs build. In reality, I believe both are needed but at different stages of a company.

During the initial startup phase you really need people that can build the product/service. Which includes developers, sales people that can cold call and support people that can respond to customer issues. If you are a programmer and you come up with an idea you can personally develop a site, launch it and see what happens. Whereas, if you are a typical MBA with a great idea you will likely have to hire a developer to implement your vision and thus non-MBA types are required.

People like to ridicule MBA’s and use them as punching bags but as a company grows, people with MBA’s bring a couple things to the table. First, they most likely have access to a great network of people if they went to a top notch business school such as IIM-A or Harvard Business School (HBS).  Second, many have a very process driven way of looking at things whether it’s due diligence, market research or product management. Some may argue that’s the wrong way to look at markets but I would say look at Proctor and Gamble (P&G). P&G employ 100’s of MBA’s to sell very mundane things as toothpaste, shavers and detergents…and they do it successfully year after year.

However, there are startups that are founded by MBA’s. is an example, it’s an Indian personal finance site which was co-founded by Dhruv Agarwala and Kartik Varma who are both HBS alumni and was recently sold to Karvy Private Wealth Management. So, although my initial quote was a poke at MBAs I do believe there is a time and place for them.

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Hiring Hurdles

They say one of the toughest parts of running a company is managing all the human resource issues that invariably come up. However, I would say in India the toughest part is hiring people. We recently wanted to hire a technical person so we did the usual by using an online job site to find someone.  We got flooded with over 300 resumes and had to sift through them to find the gems, in the end we found 10 gems. We emailed them all and five responded back saying they would be available on an interview on Saturday. The big day came and only one person arrived and that candidate was clearly under qualified with an over-inflated resume.  It was a waste of time and resources for everyone involved.

Now, suppose all the interviews are done you would think all the heavy lifting would be done…wrong.  Now, you have to wait and hope the person you have extended an offer to actually shows up.  This is where it really gets crazy, because you might call the person several times and they will give you an excuse they are sick or someone else is sick.  Most people will not come out and say they don’t want to join your company, they just string you along till you stop calling. Unfortunately, there is nothing you can do about this and it’s back to the whole recruiting process again.

So what do we do now? Job portals do work for many people but we decided it was not worth our time and effort to screen the candiates so now we use an outside recruiter. The recruiter screens the candidates and makes sure they show up for the interview. We also conduct a pre-interview phone call, this helps us establish the candidates speaking skills and whether they can communicate clearly. There is no point in having people spend time traveling to our office and then realize they can’t communicate effectively. With these two changes we have been more effective and the hiring process doesn’t seem so daunting as before.

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