I have been in the startup space for quite some time.
I have worked in startups like Exotel, Practo, Instamojo, and Razorpay.
I have observed them closely. Working in marketing helped me understand the cost of customer acquisitions and the ROI that each customer brought in.
I was shocked to see that most of these businesses were not profitable.
They do not intend to make a profit anytime soon. They are driven by a narrative. The narrative is that if you are an early mover, and become the most dominant player in the market (almost a monopoly), then you can charge whatever you want and the company will be worth a lot.
But in most of the cases, this story doesn’t play out as expected. The narrative dies down.
I understood that startups do not raise money because the opportunity is so lucrative. They raise money because there is a lot of capital waiting to find some place to deploy itself and a percentage of those come into venture capital investments. The venture capital companies are looking to invest in narratives such as Fintech, Ed-Tech, AI, and so on.
Because they believe in the narratives, but it is not needed that the narrative has to play out as expected in the end. As long as they are sure that the narrative is going to hold for a while, they will always find an exit from a bigger whale who will buy their shares.
Unfortunately, the last person is the retail investor. The public markers give exit liquidity to the last investors in the private market and we have seen what happened with a bunch of celebrated startups that went public in India around 2021 and 2022. The stock price fell rapidly and initial public investors lost money.
If that’s going to be the end game of narrative-driven, loss-making startups, I do not want to play that game.
So that’s not the game to play, then what is?
How about a profitable micro-startup?
I call it a Micro Startup because anyone who is building a startup, at least at the initial phases, is not looking to raise multi-million dollar venture capital. They are looking just to get started with a business so that they can get out of the rat race of having to grind in a 9-to-5 job. That’s how I got into startups.
When you are not looking to raise funds immediately, your startup must be profitable otherwise you will not have any money to take home. And there is no point in working to build a startup if you are not taking any money home.
In such cases, building a SaaS, Platform, AI, or deep-tech startup doesn’t usually make sense. Cash flow is best generated with education and services. That means coaching and agency.
For most people, a combination of education and services is needed. Because through coaching you can find and create talent. With services, you can deliver results for your clients and hire from your coaching program to scale your services.
Coaching and service startups are usually not very investable for two major reasons. One, with the coaching, the entire business depends on a single person. We call them the key person of influence. You cannot buy equity in a personal brand. Unless the coaching business scales to remove the dependency on the founder, the ed-tech business cannot be invested and scaled.
Service-based startups usually have a cap on growth. As a service-based business, you can only handle so many clients and the big clients will need to involvement of a key person of influence. Also, as service businesses scale, it has a heavy dependency on talent and it’s hard to hire, manage, and retain clients. Most important of all, a service-based business doesn’t need investments in the first place because you generate the required cash flow needed for expenses through client invoices.
Software businesses need funding because you need to invest copious amounts of capital in building solid software. App developers and designers do not come cheap. Apps for different platforms, brand identity, UI / UX, support and update systems need to be built before the app can onboard customers and start making recurring revenues.
Platform businesses combine the demand side and supply side (Such as Ola, Zomato, PayTM) and so on. And until they build a critical mass of people on both sides, the business will not make money. That also needs funding.
If you want to build software or platform businesses, you need to first build an education or service business. Teaching people not only helps you build a distribution, but it also helps you understand the challenges and pain points of your customers. And the initial investment that you need to build software will come from your education and services.
There are many examples of people who used to do education and services and then pivoted to software. For example, Sam Ovens used to train people under the brand Consulting .com and then understood that people need a good platform to build a community and host their courses. He used the profits from his coaching business as a seed investment in Skool. After almost 6 years of building Skool, he is raising money from big names in the industry like Alex Hormozi.
We have an Indian example for this as well. Saurabh Bhatnagar was a digital marketing and funnel coach. He used the profits from his coaching to invest in building FlexiFunnels, a landing page software for digital marketers. He used the distribution from his coaching business to get the initial sales of his software. Then he reached out to partners like me who will promote FlexiFunnels to their audience for a commission.
So unless you have a background in tech and development, or have a ready investor who will do an angel or seed investment, do not start your startup with software or platforms. Start with education and services. Build the distribution. Build the community. Build an understanding of the market. Earn some money. Invest for your future. Once you do all this, you will have the perfect launchpad to get into software and services.
And keep the startup profitable. Worst case, break even. But do not run a loss-making startup in the education/services category.