So far, we have explored the role of institutions, influencers, and internal factors from the 6I3C framework of the entrepreneurial ecosystem. In the fourth article of the series, we will focus on the role of the internal processes of the start-ups and how they contribute to the new venture’s success. Please explore the earlier issues of this magazine for the previous articles. The following internal processes influence the success of a start-up: Business model, start-up strategy, entrepreneurial education, venture creation, the timing of entry, growth, valuation and exit/IPO, and innovation.
The rationale for considering these internal processes as a part of the ecosystem is that these processes are tightly coupled and influenced by the ecosystem. These processes won’t work in isolation and can influence the ecosystem and other start-ups. The best example is the aggregation business model popularized by Uber and AirBnB. After their stellar success, every start-up wants to uberize something or the other. Similarly, all the other internal processes discussed here directly influence the ecosystem and are also influenced by the other elements of the ecosystem.
A Business model is a way a business delivers value and makes money. Many start-ups fail due to a weak, ill-conceived business model, with gaps and misunderstandings. Business model innovation has been identified as the missing link in improving the success of start-ups. The business model combines various ecosystem elements into a value delivery system in a scalable and sustainable manner. Developing and refining the business model is critical as it happens through a series of experiments with the product and market, incorporating the learning to improve the way business works. Business model canvas is a popular tool used by many start-ups worldwide, along with the value proposition canvas for developing business models. The business model is a critical success factor for start-up performance.
The start-up strategy is the following necessary process. Any strategy involves deciding both what to do and what not to do. Many founders miss this and end up doing many things, trying to be everything for everyone. Though it can be a great vision, it is not a great way to start. The strategy should bring a focus to execution. This would involve integrating various environmental and ecosystem aspects, along with changing customer needs.
Educating and building founder competencies is a critical need. The founder’s human capital, skills, experience, industry knowledge, and other necessary capabilities play a critical role in the success of a new venture. The process of building them becomes very important because of these reasons. The traditional thinking and myth have been that entrepreneurs are born. Prof. Saraswati busted this through her theory of effectuation, where she proposed an entrepreneurial method that can be taught and learned by budding entrepreneurs. This has given new energy to the founder training, and unless this is internalized by the top management team of a start-up, it would be detrimental to their success.
The process of venture creation comes next. Based on the theory of effectuation, entrepreneurs start with the resources they have and gather the rest as they move forward. This means that a start-up, its products, services, and business model are evolving till it attains a certain level of maturity and finds a repeatable success formula. Many founders ignore this process of continuous evolution at the first signs of failure and quit the venture. Founders need to understand this process and follow the same through continuous experimentation.
The next necessary process is deciding the timing of entry into the market. Finding the right time of entry has a lot to do with carefully observing the environmental changes and the ecosystem. Demonetization in India boosted the digital payment industry, paving the way for the introduction of digital currency. It can’t be too early to ensure alignment of other ecosystem elements, including consumer awareness, or too late to avoid excessive competition and a flooded market.
Growth is the next process where many start-ups fail due to excessive investments and diluted value propositions to chase revenues. Expanding into the right markets for the right reasons in the right way requires a well-thought strategy. Buying spree for inorganic growth or a hiring spree to achieve organic growth by spending VC money can only lead to more significant headaches and subsequent heartaches. However, well-managed growth can achieve stakeholder objectives.
Innovation is another critical success factor for start-ups. Beyond product and process innovations, business model innovation has been the most neglected and underrated. However, after the success of Uber and AirBnB, many founders have started exploring the possibilities of disrupting the markets with innovative business models. The growing influence of sharing economy has opened many opportunities and avenues for new start-ups to change the industry landscape.
Valuation and exit are the indicators of the success of a new venture that all the stakeholders celebrate. IPO is a preferred exit along with a merger or an acquisition. Some factors influencing the valuation and exit process are revenues, customer base, market potential, growth prospects, industry outlook, and competition. Achieving a unicorn status with a one billion USD valuation has become a coveted achievement for many start-ups.
These are the most prominent internal processes closely connected to the ecosystem and exert a significant influence on the ecosystem while being influenced by its elements.