THE STRATEGIC IMPERATIVES FOR STARTUPS

In 2022 I had the opportunity to review several regional start-ups for my clients, which gave me a peek into the investment trends and the pipeline of products and services on the anvil. I am generally impressed by the quality of the teams, their ideas, and the ability to pitch confidently for investments. It's great to see so many young people pursuing their dream instead of becoming a part of someone else's dream.

“For me the greatest beauty lies in the greatest clarity.” (Gotthold Ephraim Lessing). When I think about a start-up, the need to be clear on strategy is even more pronounced for it than for a mature business. For sure, every business, old or new, must make the best-integrated choices that give it a competitive advantage over its competitors. Doing so will create a moat for itself and ensure a superior value for its shareholders by providing superior value to its consumers and customers. I am pointing out that start-ups have relatively lesser resources, and the challenge is bigger to carve a space for themselves in the market. Statistics show that only 1% of start-ups become unicorns like Uber, Airbnb, Slack, Stripe, and Docker (source: CBS insight). According to the Small Business Administration, 1 out of 10 start-ups survives in the market. Given the low probability of success, it becomes even more important for the founders of start-ups to make the right strategic choices.

When we think about strategy and strategic choices, the first name that comes to mind is Michael Porter, an authority on strategy. His famous book Competitive Advantage mentions, "Competitive advantage grows fundamentally out of value a firm is able to create for its buyers that exceed the firm's cost of creating it." He defines two basic types of competitive advantage: cost leadership and differentiation. If we look around, most successful companies win on one of the two metrics. IKEA, Ryan Air, McDonald’s, Walmart, and Amazon are examples of companies winning by cost leadership. Cost leadership can be achieved through high asset utilization, scale, better control of the supply chain, and low costs. LUSH, Airstream, Apple, Hermes, Tesla, Harley-Davidson, and Tiffany are companies leveraging the differentiation strategy to win in the market. Differentiation can be an image, product, price, service, channel, etc. Generally, you find companies positioning themselves at different points on the grid of differentiation and cost leadership.

Companies are successful for a reason. It is their offering that gives them an edge over the competition. As a result, they attract more customers, who enable the company to build a leading position in the market. There can be various reasons for preferring a company. It can be prestige, technology, superior quality, assortment, convenience, experience, or value. However, the important point is to be clear on creating a sustainable competitive advantage behind cost or differentiation.

Now, coming back to start-ups. My observation is that start-ups would be well served if they had a strong story or narrative that touches the human cords beyond functional benefits, an ecosystem of early supporters to incubate their brands before expanding, and a clear differentiation (e.g., functional: technology or psychological: sustainability) to make the new product or service stand out in the minds of its customers.

1. A Compelling Narrative. Let's look at Tata Harper Skincare, which launched in 2010 and is now a leading global skincare brand. The story of Tata Harper is excellent and appeals to our nobler motives. The story, as presented on their website, goes like this.

Tata and Henry Harper founded Tata Harper Skincare on their 1,200-acre organic farm in the Champlain Valley of Vermont in 2010. Both born in Barranquilla, Colombia, Tata and Henry met at Tata's high school reunion. After stints in Miami and NYC, they relocated to Vermont to raise their children and peaceful escape from the busy city life. Shortly after the move, Tata's stepfather was diagnosed with cancer. Tata and Henry worked together to help him change his lifestyle following his diagnosis. In doing so, they learned that many toxic and harmful ingredients were lurking in their everyday products – even those that were luxury and claimed to be all-natural. They recognized the ultimate irony in this –after all, isn't health the ultimate luxury?

The two struck out on a journey to solve this problem and spent five years researching and developing what would become the very first Tata Harper product that delivered efficacious results and a luxury experience without compromising your health. Since its inception, Tata and Henry have never wavered from their mission to create a brand that epitomizes beauty made without compromise.

Powerful, inspiring lines like 'health the ultimate luxury,' 'all-natural,' and 'luxury experience with no compromise on health' talk not only about the product but the story of the founders and their passion for not compromising on health in providing luxury experience in skincare. Product quality is the point of entry in skincare, and therefore, I did not delve into it. However, the angle of production on their own farm under their supervision is a differentiation. The message appeals to the millennials and all health-conscious people concerned about sustainability.

Why is the story that appeals to our higher motive or makes us feel good so important? When we buy not for just the functional benefit but for a higher purpose, we have a higher perceived value of the product or service and therefore we are willing to pay more. We are connected through the story with the brand. We see ourselves in the brand or the characteristics of the brand imbibing us. We feel contributing to sustainability, saying yes to health, and thinking of the purchase to offer gratitude for the life and health that has been bestowed on us.

2. Developing a community. Communities are a big thing, and start-ups recognize their importance. Carrie Jones, in his articles of July 2017, shared the statistic that over 60 percent of start-ups valued over $1 billion have a community in common. They either employ a community team, or collaboration is fundamental to their business model. Think Airbnb, Lyft, Xiaomi, Pinterest, Dropbox, DocuSign, Instacart—the list goes on. They all invest in the community.

Community is the support network of users to feel part of the company and suggest ideas for product developments. It's about building a community of enthusiastic customers. The strategy converts the customers from passive observers to active contributors. For example, Duolingo, the world's leading language learning app, has adopted a community-led strategy that has enabled the company to scale to 90 courses and 300 million users. How did they do it? They implemented a community-first strategy that allows people to shape their desired courses and clear up doubts through discussion forums.

Some examples of brands with the community are (data taken from the tribe blog):

·?Airbnb: Airbnb is only possible thanks to its community of hosts. The company has an online community that provides them with all the help they need to be successful.

·?Lululemon: The athletic wear company's ambassador program helps local exercise leaders create exercise communities.

·?YouTube: YouTube has become more community-focused recently thanks to features like comments and community posts.

·?Product Hunt's software discovery platform provides huge value to both makers—who get their products in front of a large audience, and users—who get access to new apps.

Start-ups should consider communities as a better approach to growing their businesses and getting a higher ROI than traditional marketing alone.

3. Strategic Focus. Focus is the ability to keep the enterprise's mission clearly in mind while designing the product or service, developing winning strategies, or establishing the processes and systems. Clarifying the positioning (cost-leadership or differentiation) is critical for me. Will your product or service have cost leadership as a predominant strategy or differentiation? The question will determine how you organize yourself around strategies, organization structure, workflow, and processes. For example, an FMCG distribution company should have cost leadership in service as its foundational strategy focusing on asset utilization, low overheads, scale, and service. Best service at the best cost must be its core. Then it can find areas of differentiation to charge more and make higher profitability. For example, a different menu of services with different prices ranging from base logistics to shelving, 3PL services, temperature control for certain items, strict hygiene, etc. Own brands can be another profit pool.

?When starting something new, you need to adjust as you move along the growth cycle. At times you need to revisit the drawing board to adjust as new data about consumer preferences, functionalities, ease of use, or any other important consideration emerges. First, it is important to be clear on how the business will be organized: cost leadership or differentiation.

?Focus is important for Tech start-ups as these are making their way into every aspect of our lives and there are many start-ups in FinTech, InsurTech, Health Tech, AdTech, etc. Some of the biggest unicorns in the recent past have been in tech. As per Statista, most of the world's unicorns, as of November 2022, were active in the software industry. Over 760 privately owned start-ups with a valuation of over one billion U.S. dollars were active in this industry. As of July 2022, Douyin, the Chinese tech company which owns TikTok, was valued at about 200 billion U.S. dollars, which made it the highest-valued unicorn globally.

According to CBRE, tech companies tracked by this database raised an impressive $212.5B in V.C. funding in 2021. The tech sector is the most heavily invested industry and made up 77% of V.C. funding in 2021. Given all the activity in the space, the start-up success rate is in line with the overall average of 10-15%. EduTech (40%) and Gaming (50%) have better success rates.

In the software arena, many companies offer their Apps or SaaS for free and then sell value-added services for a price. In this case, differentiation is key, as the technology in many e-commerce spaces is similar. I have seen several start-ups competing for the same space with the same benefits with slightly different executions. Their strategy is to win the game of attrition to take a majority share of the market through their ability to bear the losses as they grow through attrition. Better if there is a focus on the targeted segment to penetrate, learn and expand.

Conclusion The principles of investing in new or mature companies remain the same. It is always to look for a sustainable competitive advantage that can lead to superior returns for the shareholders. However, start-up investing is an art, and instead of participating to be part of the trend, it is better to do due diligence to understand the story behind the brand or service, how differentiated the offering is, how powerful the proposition is, it is simply functional, or it inspires our nobler motives. Are the founders focused, and are they building a community that involves its customers in evolving the product or service and becoming its advocates? In short, does it have a lasting competitive advantage?

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?About the Author:Waqi Munim is the founder of Courageous Minds, a Value Creation Consultancy with a mission to enable small and mid-sized companies to think of possibilities for growth by embedding value creation in their strategies and workflow. Waqi is an ex-P&G leader who served P&G for 25 years. He has a proven track record of growing businesses and organizations with a breadth of experience (+30 years) spanning North America, Western, Central, and Eastern Europe, and the Middle East and Africa. It’s his passion to serve people (especially the younger generation) by sharing his knowledge and ideas to trigger thoughts for growth through value creation. ?