StartUps Rushing for Investment –Do You Really Need Funds NOW ?

Dr. Shridhar Lolla

CVMark Consulting
lolla@cvmark.com

Early Draft , Needs Editing

Mar 2011,
Bangalore, INDIA

(This caselet belongs to ‘respecting the business’ series of CVMark. It is based on real life
experience at several startup companies, whom we have been handholding during last decade)

Key words: Funding, Investment, Startups, Business Model, entrepreneur, entrepreneurship, value flow,
Business Model Canvas, organizational thinking, simplicity, breakthrough performance, performance
Improvement, Core capabilities, Thinking Capabilities, focused execution, business rules, business
fundamentals, built to last, capacity building, entrepreneurial behavior, first generation entrepreneur, value
system, culture, focusing behavior

Definition: Prime Rule (n)= Non negotiable rules

Prime Rule #040:

For most of the StartUps, Funding is not an early leverage point.

#040.1
For most of the StartUps, availability of funds not necessary improves business
performance.

#040.2
Scarcity of funds does not often prevent organization from achieving its objective.

This is a sequel to following caselets:

0. The Saga of Startups

1. .Business Model Innovation for Startups in Software Development.
2. When sales Staff quit, Clients switch over
3. Sales is the prime responsibility of entrepreneurs
4. Not Succumbing to Pricing Pressure
5. Entrepreneur Agrees to do Sales
6. Temptation of taking large orders
7. Pitching Business Idea within 3 minutes
8. Startup Carnival
9. Taking Funds NOW or LATER
10. Not Succumbing to the temptation of every opportunity
11. When People Management is not a Prime Responsibility, Business Downfall is
Inevitable

Copyright © 2010, CVMark Consulting, All rights reserved. 1

________________________________________________________________________
The entrepreneurial ecosystem is quite abuzz with activities. When one talks about business,
one talks about achieving an objective and for which, one of the necessary conditions is that
the business must make money now as well as in the future.

The amount of money that is available today in the system is such that for a vast majority of
entrepreneurs and managers, making money means ‘making money from money’. No doubt
then, the moment one conceives an idea of the business; the immediate tendency is to run up
to the investors to seek funds. However, as we know, business is a system comprising of a
number of building blocks and Finance is just one of these building blocks. And since all
building blocks must ‘together’ work seamlessly to run the business; not in many cases,
funding is necessarily the dominant requirement to create or run a business effectively. It is
an important recognition that before an entrepreneur seeks funding, one must explore
possibility of improving the business by leveraging activities in other building blocks of the
business model. For most of the businesses, seeking funds must be preceded by exploiting
other opportunities and road testing of the business model.

This caselet, is a part of Respecting the Business series of CVMark. It provides an approach
to identify the next step an entrepreneur needs to take to improve performance of the
organization quickly and significantly, without exhausting key resources and without taking
real risk. It exhorts the entrepreneurs to be well prepared before seeking funds, so that
expectations are realistic for both investor and the entrepreneur.

Copyright © 2010, CVMark Consulting, All rights reserved. 2

Introduction

It is becoming increasingly clear to us, may it be businesses in the creation phase of a

startup or those in the operating stage of an incumbent, that they must know with a certainty,
what is their next move and which part of the organization needs attention. Lets explain this
here.

Improving Flow of Value is the Prime Objective of Business

A Business is a system comprising a number of building blocks, that together take it towards
a common objective. And together they must ensure that the value is seamlessly created,
delivered, captured and invested, NOW as well as in FUTURE. These four aspects of value
must flow in a close loop as shown below, Figure 1. This is also the loop for the flow of
money. It is the goal of the business to make this rotation of value (and therefore money), as
fast as possible and as thick as possible. An easy way to visualize this sine quo non logic of
the business is explained in our publications, which is based on Alex Osterwalder’s
Business Model Canvas. Look at the Value(Money) flow, when it is superimposed onto the
Business Model Canvas in Figure 2.

Figure 1 : The business model must facilitate in the seamless flow of value (and money)

Copyright © 2010, CVMark Consulting, All rights reserved. 3

Figure 2 : All building blocks of the business model contribute to the seamless flow of
value (and money)

On an ongoing basis, as this value-loop of business is operated, managers face obstacles.

These obstacles throttle the flow of value and money; and therefore, the business slows
down (business results show negative bias). While there are different types of disruptions to
flow, small and big, critical and simple, urgent and important etc; since business is a system,
there always will be one critical disruption that will have a defining impact on its growth (A
la, Weakest link of a chain). The same disruption will also be the leveraging point of the
organization because, unless this critical disruption is tackled the organization does not
make significant improvement or growth.

It therefore, behooves on the entrepreneurs and managers to identify such a key disruption
(weakest link) and focus their attention on it, to improve performance of the organization,
quickly and significantly.

Copyright © 2010, CVMark Consulting, All rights reserved. 4

Every Organization has a Unique Leverage Point

Now since different organizations have different business model and are at different stages
of maturity, it is natural that such leverage points are different for different organizations at
any given point of time. And it does not make sense to choose a leverage point based on
some other organization’s experience. It is important for entrepreneurs and managers to
recognize this difference, since the effective solution to improve organization performance
will be dependent on this realization.

Take for example, when we talked about EnggCons in our publication. Its revenue fell by
almost 30% even when its lead generation increased by 100%. A systematic analysis
revealed that its sales channel needed improvement. That is, for EnggCons, the leverage
point (constraint ), was in the building block of the business model, which represented
activities of its Sales block. The way it was handling sales process, its chances of growth
was not only throttled but even went negative. As soon as it opened up the constraint in
sales, and leveraged the simple solution; its revenue zoomed up within a quarter. All this
without exhausting resources and without taking any real risk.

Figure 3: EnggCons had leverage point in the Sales Building Block of its business model

Copyright © 2010, CVMark Consulting, All rights reserved. 5

Similarly, we talked about Indo-Soft in our earlier publication. For a startup company, Indo-
Soft understood the lopsided business model of existing software companies in India, and at
a given point in time innovated its business model specifically on the market side, and chose
Germany as the market; thus opening up its constraint in the market or Customer Segment.

Figure 4: InfoSolve had leverage point in the Market (Customer Segment) Block of its
business model

And in our publication about IndoFreshGarments, the constraint was in the supply chain. It
built a System of Supply based upon Consumption to dramatically improve its results and
achieve breakthrough performance.

Figure 5: IndoFreshGarments had leverage point in the Resources (SCM System) Block of
its business model

Copyright © 2010, CVMark Consulting, All rights reserved. 6

These examples tell us that while organizations are always resource constrained, whether it
is a startup or an incumbent; there is always an opportunity to obtain breakthrough
performance without exhausting resources and without taking real risk. And thus it is
possible to make the flow of value (and money) faster and thicker. And importantly, the
Business Model Canvas can help in clearly seeing the constraint within the business.

Funding is not Always the Leverage Point

For startup companies this may seem counter intuitive. It is so because, the current trend in
entrepreneurial environment is such that a vast majority of entrepreneurs tend to feel funds
as the prime constraint for their business (otherwise, why does every startup rush to prepare
a business plan for investment, even before it thinks through its business idea). However, in
reality, Funding (or Financial Block of the business model) is not the real constraint or
determining factor for the creation or growth of a business, most of the time. In most of the
cases, either several of the organizations do not need funds or that the time is not ripe for
them to seek funds. Not realizing this fact, only has bad ramification for both entrepreneurs
and investor (see our publication). Which also means that there are non-financial options
that must be explored and worked out before financial options are looked in to in order to
improve business.

Identify Your Leverage Point before you seek Funds

What it means is that in most of the cases, something other than funds, prevent growth of
the organization, and entrepreneur must be able to figure this out. It means that
entrepreneurs should be in a position to figure out activities of which block within its
business model choke its growth. And then they must have capacity of such choking block
‘opened up’. This means that they must first understand and establish high credential of
value flow in their business model. Conceptually, all blocks must logically line up and work
in sync seamlessly to reinforce flow of value. This could in most the cases be done through
boot strapping, prototyping, proof of concepts, mock ups, customer buy ins, minimum
viable products etc, which do not need significant investment. The validation of value flow
or road testing the idea, guarantees that the business is now waiting ONLY for funds and
rest of everything is taken care of or predictably under control.

Once the business model flow is road tested, it becomes easier to assess the need of
investment, which should mainly be to prime or reinforce flow of the business; and not to
run the business. The indication of ‘funds’ being constraint will be reflected in the Key Cost
block of the business model. It is here, that the business model requires a financial injection
to activate one or more elements of some other blocks.

When the constraint is so clearly identified, and when pitch is made for investment,
investors too gain confidence in the business as they clearly see the investment being
pumped in for very specific activities; which is to open up the weakest link in the
organization. They realize that this will in turn, quickly improve its performance of the
business and it is worth placing their bets.

Copyright © 2010, CVMark Consulting, All rights reserved. 7

Figure 6: Funding requirement is reflected in the Key Cost block of the business model,
only when no other block is the constraint

Have your Business Idea Road Tested before You Prepare Business Plan

We have been applying this method of identifying, ‘what prevents a business to move to the
next level’, now for a decade. Our results have been astoundingly clear. Increasingly, we
find that first generation entrepreneurs recognize funds as not necessarily the constraint of
the business (nor the leverage). During last quarters, sizeable number of entrepreneurs either
refused accepting funding from investors or reduced their funding requirements
dramatically, even when they worked hard to go through due diligence process of over a
quarter. This is just because they realized that the key to their business creation as well
execution is not funding but something else (one of the building blocks of the business
model) and that they better identify and leverage that aspect of the business, first.

Copyright © 2010, CVMark Consulting, All rights reserved. 8

Disclaimer:
CVMark Consulting is an independent business-innovation research agency based in Bangalore, INDIA. It
handholds entrepreneurs and promoters in road testing their business ideas and in delivering breakthrough
performance.

CVMark Consulting intends to serve business community through advisory, consulting and coaching
engagements. As a part of its engagements, it regularly brings out insights, perspectives, research reports,
newsletters, issue-oriented reports and other products.

This caselet captures description and direction of solution to generic problem faced by business owners. It is
intended to share experience of CVMark with a wider business community. This document in part or full can
be reproduced subject to a reference to CVMark Consulting and to this document.

Factual material contained herein is obtained from sources believed to be reliable, but the publisher is not
responsible for any errors or omissions contained herein. Opinions are those of CVMark and are based on
research conducted for this report. CVMark holds no responsibility for decisions made on the basis of content
of this report.

CVMark Consulting
Bangalore, INDIA

Clet:11-25

___________________________________________________________________
What do entrepreneurs and promoters do before they write business plan?
They get their business idea road tested by CVMark.

For developing, innovating and executing your business model, call Tel: +91 94480 70081 or Email details to : lolla@cvmark.com .
CVMark Consulting, #2304, Nandi Park, Gottegere, Bannergatta Road, Bangalore 560083, INDIA Web: http://www.cvmark.com

Copyright © 2010, CVMark Consulting, All rights reserved. 9