How start-ups learn to bounce back from failures

Many start-ups find that the original assumptions on which they base their businesses don't work. A few have picked up the early warning signals, re-worked their plan and got back to work. Here's how they learnt to bounce back

When an entrepreneur identifies a new market that has not been tapped before or a new business idea that has not been appropriated in an earlier attempt, you can safely assume one of the two things: either the market is difficult to crack or the idea doomed to failure.

It is therefore natural for an entrepreneur to jettison the idea at the first sign of trouble and look for new markets, new business models and, perhaps, newer sources of funding. That is, if he is still enamoured at the prospect of being his own boss.

This, if you think about it, could be his first real mistake. While there is no go-to playbook that contains the winning game plan, the trick, say analysts, is to learn from the false starts, make amends early and stay invested.

That's precisely what a bunch of new internet start-ups - such as iStream, VoiceTap and HealthcareMagic - are doing to equip themselves to make that leap from point A to point C.

Of course, this is easier done if you are an internet enterprise - the entry barriers are low and therefore the overheads and risks are lower than in a brick-and-mortar business.

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The biggest lesson that comes across from the experiences of these start-ups- whether you are iStream, which moved from being a content aggregator to being an online video streaming service on the lines of Youtube, or a VoiceTap that considered folding up when it started bleeding -is really very simple: that you need to be flexible.

Of course, you can't fail if you don't play the game, but it's better to play the game than watch from the sidelines.

Mind you, all these start-ups are in what is called the 'ramen profitable' phase in start-up parlance - they are self-sustaining and have bought enough time on their side to be able to slog it out till the business gains traction. One last prefatorial point: we decided to leave out the so-called poster boys of internet commerce from this study: their problems have been well-documented and blames assigned.

The cases studied here comprise a bunch of relatively new start-ups that are still trying to build the firewalls. And if we were to really pin it down, most of their problems stem from three broad areas: the business model, the choice of people and the investments needed to keep going.

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Threat to opportunity

Take iStream that was founded in 2007 as a video content aggregation service on the lines of Youtube and saw digital platforms like MSN India and DailyMotion as its ideal partners. "The company," says founder & CEO Radhakrishnan Rama-chandran, "was born out of a desire to build a 'cool' consumer media brand." The revenue, they reckoned, will flow from the advertising, as in the case of Youtube.

But while Youtube relies on user-generated content, Ramachandran and his team tried producing original content. They soon realised that the model wouldn't work since the production costs were prohibitive. Reaching out to content generators and convincing them to share content for the digital medium turned out to be a humungous task.

The solution: "We built a digital studio that took the responsibility of digitising the entire partner content including their archives. This meant that content partners did not have to spend any money or bandwidth on digitising their content. Their risks were reduced," says Ramachandran.

This, however, meant reworking the numbers all over again: the investment into the venture shot up - which was cobbled together by the original founders -but the team decided to go ahead because it was a way to secure the delivery pipeline. The founders invested Rs 30 lakh in the digital studio and added five employees.

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The whole initiative, born out of necessity, improved its revenue potential. Since the final content was generated by iStream, it had the liberty to place ads anywhere - as opposed to if and where the content owner wanted. iStream thus got to pocket the ad revenue instead of sharing it with the content partner.

Today, the company has close to 80 content partners and claims to have better understanding of what sort of content does well in the online space.

Why did the businessman in him feel the need to change the business model? "The Indian market presented some very interesting challenges - such as a whole range of languages and a wide range in the quality of internet connections. Unlike our bigger US-cousins, we are serving an audience that speaks many languages. Does that make our job more challenging? Yes, very much. Does that make it more exciting? An even bigger yes."

The change in business plan worked for iStream.com, which managed to raise $5 million from the global private equity fund SAIF Partners, its first investment in the online video space.

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Ramachandran, who has a bachelor's degree in engineering from Mysore University, and a masters in communication and journalism from the University of Kerala, adds, "One of the most encouraging metrics for us has been our user engagement pattern. An average user watches over 17 minutes of content every month, which is comparable with the likes of Hulu in the US."

Spot the error

Making some big mistakes was part of the learning process for entrepreneur Mrigank Tripathi who founded VoiceTap Technologies, a firm focused on mobile-education. It was conceptualised as a career counselling portal for students who could call in and speak to the experts.

The revenue, it was assumed, would come from the calls made by students. As it turned out, the revenue share was skewed in favour of the telecom operator.

The figure was huge - 70 per cent or more depending on the operator. Says Tripathi, "When you have to work with telecom partners in a model where the revenue share is skewed in favour of the operator you know you need volumes to tide over. If that does not happen, it means limited money to sustain business and even limited funds for future innovation," he explains.

The problem was simple: call revenues was never going to be enough. Tripathi needed more money and figured there were two ways of raising it. By bringing in a new co-founder, who would, in turn, bring in both new cash and new ideas, and by tweaking the business model so as to introduce new sources of revenue.

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The first problem was solved by roping in Vivek Khandelwal, who is in-charge of new product development, product life-cycle management and managing alliances and relationships with partners. For the second, the company reckoned it had to increase the user base.

VoiceTap did that by adding features like conference call facility and developing mobile apps complete with interactive videos, in-call note sharing etc right on the mobile devices. So, the scope of the offering increased - from offering consultation over phone it progressed to being an aggregator of educational content.

In the new model, the source of revenues wasn't limited to students who called in; the firm was now earning a bigger share from the apps it developed and marketed.

Tripathi's woes didn't end by tweaking the business model though. A big mistake he made early on was to hire professionals keeping in mind 'budgets' and not capabilities. "Two of my issues - the source of investments and the source of revenue - were structural and had to be fixed first. It's just like a new car - you can't change the design once it's in production. But the third issue I managed by going after the best guys and relentlessly recruiting," responds Tripathi.

Today the company works with partners such as Airtel and Tata Docomo and harbors plans to break into international markets such as Africa.

To fund its growth from here on, VoiceTap is set to raise $7 million from venture capital funds in the US, Singapore and India. It has already raised $1 million from CCube Angels, Frontline Strategy and angel investor Umesh Kumar Baveja. Tripathi insists that he's in no hurry to bring in new investors. "We need to understand what value possible investors will add to the project," he says.

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Identify the customer

Brant Cooper and Patrick Vlaskovits, authors of The Lean Entrepreneur, write in their book, 'Entrepreneurs carry market segments around in the back of their minds, relying on gut-feel to determine whether customers they are seeing are the "right" customers.

The problem is when you're chasing revenue any and all customers will seem like the right customer.' In other words, you can't be all things to all people, a lesson Kunal Sinha, founder, HealthcareMagic, a firm designed to help consumers make informed decisions about their healthcare needs, learnt the hard way.

"Things did not work out as planned the first few months and we had to change the revenue model within the first few months of operation," he says.

Initially, the founders saw their business as a lead generation tool for hospitals. In other words, the customer was the hospital and not the user traffic on its portal. "Soon, we realised this was not a revenue generating business model," says Sinha.

Sinha and his team decided to change the business plan along way and started by charging for the answers being given to the health-queries asked to experts (doctors, specialists, psychologists etc) onboard. Sinha admits, "The concept was new in the country.

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Our biggest challenge was to get quality doctors on board to respond to queries. Initially we used our personal contacts reaching out to 10-15 doctors assuring them that they will get recognition and get paid if they come on board. It was a chicken-and-egg situation. We did not know if we should promote ourselves to visitors or have 100 doctors on the portal first."

Things began to turn for the better once the initial batch of 10-15 doctors started responding on the site and visitors got their answers.

Today, HealthcareMagic gets an average 60,000 visitors on its portal every day, gets about 400-500 health queries a day, patients are promised replies within 24 hours, and charges vary between Rs 150 and Rs 600 per case. The revenue model is based on revenue sharing, which means taking a percentage from doctor's fee.

His advice? "Focus on profitability first and then increase the revenue. There is a tendency to spend money on online ads and see growth in the topline. We saw that as a big waste. We realise what we bring to the market is unique. It has not been tried before so we have to be conservative and grow organically," says Sinha.

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Paper goals versus reality

While every start-up and its founder(s) spend hours on getting the business PowerPoint presentations for investors right, they often don't have a plan to deal with surprises - pleasant or unpleasant. Soumya Banerjee, CEO, Attano, which creates digital education products, says, "Things almost never go as per the business plan on Excel or PowerPoint."

Attano.com's vision was to be India's first digital education marketplace. On paper, the model was simple: create compelling content for students to buy and the money will keep pouring in. Being in a virgin territory, Banerjee quickly found that he had to build the ecosystem - comprising publishers, content owners and device manufacturers - from scratch. In short, it meant a longer gestation period.

Attano revised its milestones as the business evolved. "We had to demonstrate success with our initial partners (Pratham Books, Turner International etc) which catalysed the next wave of partnerships (leading publishers like Pearson, Tata McGraw-Hill plus a dozen more leading publishers, device manufacturers like Samsung)," reveals Banerjee.

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As the ecosystem evolved, the company moved into educational applications for smartphones and tablets, over and above the PC, the original idea on which the business model was based.

The scope the business widened as it moved from one platform to the other. But unlike VoiceTap, Attano doesn't share revenue with a telecom operator as the content is pushed directly through mobile data. It only requires the customer to subscribe for mobile data from their operator. VoiceTap, on other hand, has its app established at the operator end and requires its customer to access it over an IVR-based voice platform.

A big lesson for the company's founders has been that no person, partner or product idea is too small to disregard. "We've had interns (who now work full-time with us) who have given us some of our most innovative solutions and helped define industry standards. Also, some of our best on-ground insights have come from startup partners who are hungry, nimble and adaptive," lists Banerjee.

Today, if he were to do it all over again, Banerjee says, he would start out by first building the partner ecosystem even before the product is ready.