The amount of money required for these companies to scale is immense as spend is split three-way –tech up-gradation, merchant acquisition, and customer acquisition across cities...
Over the past few months, there has been a clear trend in one tribe of companies either failing or finding it difficult to scale and raise capital. Models which were considered disruptive in bringing unorganized segments on a tech platform a couple of months back are shutting operations, scaling back, or starving for capital. “The concept is good but we will like to see some more traction” is the typical response by VCs to these companies trying to desperately raise capital to scale. These startups typically have a triangulation problem – They need to create a superior technology platform, build the supply side and at the same time create a demand for the services provided through the platform. A typical example of companies with triangulation problems is food ordering apps. They need to create a technology platform for ordering, build a strong merchant network to service customers as well as attract customers to download the app and start using the services. On-demand logistics, hyper-local delivery, coupon and discount apps, etc. are a few examples of segments that face the problem of triangulation.
Just the way ships and aircrafts mysteriously disappeared in the famous triangular region of North Atlantic, the TDS (Tech, Demand, Supply) triangle is killing more and more startups every day.
The point of failure is the difficulty in simultaneously building significant traction on all three corners of the triangle. One is nothing without the other. You cannot start expecting customers to order a meal on the app without having a significant restaurant network and an app with a cutting-edge user experience. At the same time, you cannot go and build a large network, to begin with as incremental onboarding will happen based on the business generated for the existing participants on the network. The amount of money required for these companies to scale is immense as spend is split three-way –tech up-gradation, merchant acquisition, and customer acquisition across cities.
Entrepreneurs face operational issues in building all three sides simultaneously. Even if a few become successful in building some preliminary traction, sustaining it due to the requirement of continuous burn on all three fronts becomes extremely difficult. The expectation of VCs to see greater traction before investing in such Bermuda Businesses is making the situation worse for entrepreneurs. Eventually, entrepreneurs downsize the spending on marketing which directly affects customer usage and eventually leads to failure.
How to escape the Bermuda Triangle of Startups is the question that many desperate entrepreneurs have been battling with.
One of the possible three-way solution to escape the death triangle is as follows:
a) Be prepared to put in more
Enter such businesses only if you have the ability to invest significant capital by yourself. The market reality is that VCs are going to expect huge traction and transactions and the only way to reach that milestone is to invest your own money till you reach that milestone. If entrepreneurs required to invest 1 dollar in such businesses 12 months back, today they might have to invest 3 dollars to achieve that extra mileage required for raising the next round.
b) Raise an Angel Round before going after the VCs
A small angel round can help entrepreneurs in further building the traction post-infusion of their own funds. This will give the company the ability to go for those additional miles which will excite the VCs. The companies might get a lower valuation and further dilution in subsequent rounds but nothing is more than the firepower that will ensure survival.
c) Build a monetization model from Day 1
Executing a revenue model from day 1 will support the burn in some way. One reason for startups in this triangulation tribe failing was monetization delayed to future and thin margins. Revenues will take some load of the costs and decrease the burden of capital infusion by promoters.
Originally published Dec 14, 2015
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