I have had the benefit of helping lead four business turnarounds – Valiant Entertainment, Housing.com, FreeCharge and Snapdeal. I’ve also been fortunate to work with visionaries like the founders and leadership of Softbank and Emaar Properties, the management team that turned around Marvel Entertainment, among others.
These experiences helped me see patterns and gain insights, including the seven golden pillars for the ideal business. Hardly ever does a business meet all these criteria, but it can be helpful to keep these in mind when considering a start-up idea or an early stage investment. However, don’t forget your passion is an important factor too!
1. LARGE AND GROWING MARKET SIZE:
Many brilliant entrepreneurs with compelling business ideas don’t attract resources because they are solving small problems that have niche markets. The problem here is even if you do everything right and ‘win’, the impact and rewards are still limited. But the years of time required, hard work, sacrifice and requisite risks are often similar to tackling larger problems.
So the ideal start-up focuses on bigger problems and markets knowing that even if they’re moderately successful, it’s still likely to create a larger and more impactful company. Also, a growing market can be important in the long run because a rising tide lifts all ships.
2. HIGH MARGIN:
A high-margin business can be seen as one with high unit economics. If you can consistently make a large profit per sale of your product or service, then naturally your business as an aggregation of many sales will have a relatively short and clear path to making profits and, eventually, large profits. Lowmargin businesses require large-scale to turn a business profitable and give you less margin of error to operate, which creates more risk.
A scalable business allows you to increase sales rapidly and at low cost and is a golden combination with high-margin businesses. Many technology companies are high gross margin and scalable businesses—as a result, they have created massive value relative to the capital they required and therefore the space continues to attract enormous investment.
4. PROVEN MANAGEMENT TEAM:
A proven management team is one that has done it before—maybe not exactly the same thing but as close to it as possible (and ideally together). This can dramatically reduce the execution risk. Business is a vast ocean and almost none of it is inherent knowledge; it’s learning by experience. So relevant experience can vastly change a business plan from being pure theory to a high probability reality.
5. LESS CAPITAL INTENSIVE:
A business that’s very capital intensive can dilute entrepreneurs’ and investors’ ownership (and control) significantly over time and requires a higher return to justify the higher capital requirement. A lot of investors prefer to stay away from these kinds of businesses, and they can become particularly challenging during economic downturns when capital is scarce.
6. SUSTAINABLE COMPETITIVE ADVANTAGE:
If a company is launched and is successful, it often motivates others to start similar competing businesses. Thinking ahead and understanding how you will sustain against this potential competition if you’re initially successful is important, as it can determine the difference between a flash in the pan success, versus building a business of enduring value.
7. ESTABLISHED BUSINESS MODEL:
Drawing on established business models can be critical in the probability of success of a venture. Creating new businesses and products or services is itself risky, so layering on top of that a novel business model further multiplies the risk. Of course, this is required sometimes if it’s something truly disruptive, but then it should be clear to all involved it is high risk. A long and rich history of successful and unsuccessful companies exists, so try and maximize your learning from this. History does repeat itself in different shapes and forms.