How Investors can get more ‘hits’, by helping portfolio companies, balance scale & sustainability.

Start-ups, are running ONE venture and for them its their, ONE and only ONE venture. Hence, the Founder’s interest in the venture is for a term, longer than that of their Investors. It’s safe to assume, that they are all in for a marathon.

The Venture Capital / Private Equity Investors have seen some great hits like Alibaba & Yahoo, where these start-ups initially worked for scale, at the cost of making huge initial losses. Investors are likely to continue this approach of chasing scale, as it has done wonders for them. Their mandate is to grow their money in many multiples. They make their money when a portfolio start-up scales up fast and goes for the next round of funding. Here, the investor gets an exit and is able to make 3x or 4x (if not more) of their investment. So, they are willing to risk their money on these ‘scale chasing startups’, hoping that, even if one out of ten or perhaps hundred becomes the next unicorn, they would cover the possible losses from the other nine or ninety nine.

One would accept that the rules of success in a marathon are different, than that of a sprint. A marathoner has to conserve his energy for the long race. Accordingly, in this case, the start-ups also have to conserve energy i.e. grow value in terms of sustainable profits. At least, they have to work in that direction.

However, Start-ups will chase scale, as that is the current game,  and investors, being very important shareholders, will exert their influence, on the strategy of the start-up.

But, do they have to chose between the two – scale vs sustainablity . Or is there a way to “have the cake and eat it too” ?

Thankfully, there may be a way to do that.

It is well known that today’s Start-Up founders, initially get attracted to an idea that solves a perceived problem. They, then start looking out for ways to find money for funding. However, to solve their chosen problem, they have to be in the market for years. And to do that they have to create value and win-win relationships in their marketplace. When every player in their marketplace is winning, the word of mouth publicity will have a viral effect of attracting more service providers, vendors, and users to the platform, thereby driving scale as a by-product.

It may take some brainstorming during business / product blue printing as well as during execution, to find ways to have win-win-win across their entire value chain. Once, the magic sauce is discovered and seen to be delivered, the venture will scale-up faster than one can imagine. In a chain, its always easier to have all parties winning, than leaving even one ‘Whining’.

It is clear that when, scale is chosen above profitability, it leads to choosing customer/vendor acquisition over customer/vendor retention. But power of improving retention cannot be ignored. It’s very important to find out why vendors/customers are leaving the platform or not coming back. It holds the key to future improvements. Any start-up chasing sustainability will consider it worth their while to discover and fine-tune their model, measurements, services, and communication to help retain their vendors/customers and even employees, (rather employees foremost).

I would advise Start-ups to understand that their Board of Directors has to balance between Investors/Shareholders on one side and CXOs on the other. The CXOs have to run the business profitably and ‘see’ the business scale as a byproduct. Which means that the CXOs, need to primarily focus on what the customer/vendor wants, and scaling up has to be seen as something that has to happen as a result of driving customer/vendor satisfaction. This is important, while they are reaching out to new customers/vendors. This will lead to perhaps earning the right value from the customers, and paying the right value to the vendor, that not only keeps them both coming back to the platform, for good reasons, but also bring other folks into the platform.

The Board’s job, then, is to see how they can meet the expectations of the Investors/Shareholder’s without compromising the focus of the CXOs. It is not undoable. It is like walking a tightrope and there is a need for people within or even outside of the Board, who could help do just that, and keep all stakeholders happy about their respective goals, being achieved. If even one party is ‘whining’, it  will exert pressure on the entire system and may succeed in making others ‘whine’ as well, which is not the Goal.

It may be possible to walk this tightrope, by balancing the forces within the company. While certain teams like Operations are focused on driving scale, other teams can focus on driving customer / vendor / employee retention / experience / engagement, and operational excellence.

In a start-up, mostly the Founder (who is a shareholder), is also the Director (that’s a Board Member) and also the CEO (which is the head of the CXO team). In such a situation, the Founder has to juggle the three hats, depending upon the audience, be it the Investors, other Shareholders, other Board Members or the CXOs. It’s quite a daunting task, which is possibly why only 1 out of 100 succeed.

While my focus is to assist Founders to succeed, in making money today and in the future. These successes will also solve the large numbers of socio-economic-business problems, the start-ups are trying to solve.

With this balancing act, the investors should win, more often. While 1 out 10,00,000 (or more) may become the unicorn they are looking for, the rest may also be possible winners, thereby improving their ‘hit’ rate.

The investment firms, have investment bankers as part of their teams. They specialise in reading the pulse of the market, tracking the innovations taking place, finding opportunities, identifying the right start-ups to invest on, working on valuations, etc. This is very essential and the core of their investment business. However, it’s also important to have a team internally that switches the focus post funding, from driving valuations to mentoring Start-ups, on doing what they are meant to do… i.e. to make money in a self-sustainable way. This way the investment firm can continue doing what has worked so far, while helping more Start-ups succeed.

If you are a decision maker in a PE/VC/Angel Investing firm or a Start-up founder and agree or even disagree to my line of thinking, please leave your comments. In case you want to discuss further, do leave your co-ordinates, so we may have a conversation.