The proof is in the scaling

The grim reality is that nearly nine out of 10 start-ups fail. But start-ups can dramatically increase their chances of success if entrepreneurs adopt a systematic approach to establish what is called a minimum viable business, asserts Vishwanathan (Vish) Sahasranamam, co-founder and CEO, Forge Accelerator, Coimbatore. His Minimum Viable Business (MVB) framework provides an approach to convert innovative ideas into high-growth and profit-generating enterprises.

“Not every new business is a start-up; you must bring to market an innovative value proposition coupled with an incrementally or radically new model of operating a profitable business,” he says. In his view, a start-up is really an experiment to build a proof — to show that it can solve a big problem at scale, effectively and profitably.

For a solution to become a product, you need proof that there are enough customers who would find the solution useful and would be willing to buy it. The constancy in the target customer profile, the value proposition, the revenue model and price, and the cost and process of customer acquisition and sales, make up the ‘proof of product’.

Vish says start-ups may feel building a Minimum Viable Product (MVP) is the same as a prototype. The difference is that MVP is a good enough product that the target customer will pay for.

This constraint pushes founders to sell early. That requires identifying the first target customer who can’t wait to have the problem solved and usually benefits the most.

“You need a predictable path towards operating break-even or ‘proof of business’. The next question is growing revenues at a rate much faster than costs — the pursuit of building proof of scale,” says Vish. You must also identify partners with capacities for value creation, delivery and customer acquisition — these can significantly reduce costs.

One should find a problem with the potential to unlock an ignored market; alternatively, you can look for a profitable way to target the least attractive segments in the existing market.

This is not so difficult in an emerging economy such as India where several sectors resemble an iceberg — the addressed markets are only the tip and what lies below is several times bigger but not found viable for the conventional business models.

The make-or-break is one of scalability. A start-up has to achieve revenue growth with lower fixed and operating costs, compared with already existing business models.

“The issue often is that founders do not give much thought on the scalability aspect. Many have a good idea that solves a critical problem; it can also be operated profitably. But when you scale revenue to 10x, the costs may increase 9.5x. This is not justified from the point of view of RoI for investors,” says Vish. A founder must come up with ways to combine technology with the business potential inherent in many sectors and create a capital efficient enterprise.

All these proofs may seem like a lot of work, but the operating word is ‘minimum’. There is no need to go all-out or prove nice-to-have items — all you need is minimum comfort in critical aspects before plunging deeper and seeking growth capital from investors.

The framework is great for founders in the early stages of business to hash out their business plan to establish the required proofs.

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