Akshay & Parag received a phone call that they thought would change their lives! A wealthy angel was willing to put in a hefty sum. After much deliberation, they decided not to go ahead because they did not know what to do with all that money. Yes, they could raise the money, sit on it and decide what to do with it later.
"Raise all you can, and then raise a little more. You need a good runway to sleep better at night."
Conventional wisdom told them to do the above. Whereas their own experience suggested otherwise.
A few years ago, during the startup boom in India, the duo was building another promising startup. The sour experience of raising, and later spending almost half a million dollars brought an insane reality check and deep learnings that will stay with them forever.
Capital chases the best ideas, teams, and execution. And this is where execution is so important. The duo raised money thinking it would help them propel their business. However, on the contrary, it led to many distractions during the most important time for their business.
In order to raise the round, the duo spent 12 weeks traveling across the country from Bangalore (their HQ) to Delhi, Bombay, Kolkata among other cities in order to "pitch" to investors, and managed to raise about $500,000. Once they banked the money, they went back to the drawing board in order to decide what to do!
They didn't have a working product, nor did they have any revenues, and since the cash was banked, the clock was ticking.
After raising the money, they ended up bloating their team to about 12 members. They hired business development people, developers, engineers, marketing staff, digital interns, and even an HR person to manage the team! They spent another 12-15 weeks designing job descriptions, and roles, conducting interviews, and onboarding people! All the while, at zero revenues.
It is difficult to see where you are going, and what you need to focus on when you dont have money by way of revenue, but by way of equity - staring at you!
The founders now realized that in order to show their investors "some progress" every month, they invariably did everything they shouldn't have. They grew the team thinking the product will finally click. Only if it works that way. A good product will fix everything else, but a non-existent product cant fix things on its own. It needs TLC!
Growing a team helps you scale something already present, but they did not have anything to scale in the first place. Employees look at the founders for direction, and the founders were flustered with that ticking clock. Also, a team of 12 plus founders with rent and admin and overheads quickly starts depleting the bank balance.
While there are many explanations of a product-market fit, we think of it in very simple terms. A product-market fit happens when you get more customer calls to inquire about your product, than you calling them to pitch your product. When this happens, the team focus shifts from reaching out to people, to managing the people. You need more customer service people than marketing people. More customer service means customer delight, leading to more retention, leading to lower customer acquisition costs, leading to scale!
And this is why having a product-market fit is essential. The business model develops after you achieve product-market fit.
The duo literally showered their team and developers in cash before realizing that:
A. The customer was not going to call because maybe no customer wanted their product
B. In an off-chance someone wanted their product, they did not have the resources to wait until that time
C. They did not have the numbers to even conjure up a bridge
And the company folded in 16 months.
They decided to shut shop before they ran out of money. To save face, credibility, and also investor capital. They managed to return some cash back to their investors. On their last day, they called every single investor who had backed them and apologized for a job not done well. Many were empathetic, some didn't respond, some were angry! They called for lunch from a local dhaba, sat across the deflated team, and thought about every single thing that they did wrong.
A. They raised without a product, on a hope
B. They diverted effort on vanity like team building, than sanity like product building
C. They spoke to investors before speaking to potential customers
"We later realized that if we could sell our vision to investors based on a PowerPoint, we sure could have sold the same vision to customers via an MVP or Prototype. We need not have waited for a final product to start selling, it was too late. Build only after customers Pay!"
And today, despite having some revenues in their current business, and a handful of customers, they are not going to raise cash until their customers start calling them. Until that day comes, they'll fund the company with revenues.
"Until those phone calls, there is no business model."