Some crazy ideas do work.

The truth is, there is nothing great about just starting up. It’s hard work, sometimes adventurism, many of the startups end up doing no business. Some people just do better in life when they are working for others, with an employer to harness their productive ability. Indeed, many people build great careers that involve no adventurism.
Nonetheless, there are people who want to work with startups, maybe for the thrill of building a business on their own, for the simple joy of giving shape to your own dreams and ideas, or maybe for the money making possibility. In any case, the startup is no fun unless it finds success – in terms of money, achievements, networking or career progression.

In my opinion, even a startup that fails in terms of pure economic success or sustainability can be valuable for a founder or an employee. How? Read the last line of the previous paragraph again.

A startup which is progressing in the right way generates immense value for the people who work in it, with it – not only economic value, but in terms of learning new skills, having hands on experience with respect to ground reality, network with super-connectors, bloggers, influential people, experience of building a team and running an organisation. It all helps in the long term, even if the company fails in getting enough traction to sustain, at least if one recognises what have been gained in the process and how it can be used to chase further targets.

Except for that, what are the ways in which one can evaluate a startup? I faced this question for the first time when a third year student of IIT KGP asked me how he should choose between various startups, the correct place for him to intern. It is not just the interns who face this dilemma – it is a perennial question of all co-founders, founders, startup employees – is the risk, is the hard work on this project worth it? Once the startup fails – things become clear. Is there are some measures that can be used when the venture is being set up?

I think the following criteria should kind of help in finding a good direction:
Vision and impact: what is the startup looking to achieve? Is the vision great enough, inspiring enough? If it succeeds if everything goes well, will there be a grand impact on how things are done? Great companies start out with great vision. Companies with narrow vision may achieve their narrow objective, but they can never reach great success unless someone with a great vision comes along and takes charge, which is very rare to happen.
Basically if the company succeeds in what it sets out to do, and still doesn’t change how people think, work, have fun, live, read, travel or something similarly important, it may not be worth working for, and there is little chance that it will actually succeed.

Team: right at the beginning, the startup is as valuable as its team is. The value is not to be calculated by what salary the team could command elsewhere though that is what many people look at. It is not even what college the people have gone to though that could be some sort of indicator. Look at the leader of the team. Look at the determination and obsession. Do they have a vision? Do they know how to have fun? Are they networking well? What do people think about them? Are they always looking for improving their skills and abilities? Are they practical? Most important of all, do they have goals and strategies? Do they have a plan to keep the team focused and disciplined?

The cost of client acquisition: What is the model of client acquisition? Do they have existing clients? Do they take too much time to find one client? DO they rely on advertising to find clients? Any startup that relies on advertising is kind of doomed – it just does not work at that scale. The existing clients, their spending patterns tell a lot about the chance of success of the startup. But most important is the cost of client acquisition. If clients are found quickly and easily in the model, it is kind of failsafe. Like Facebook – its client acquisition cost is zero. People invite their friends because they want them to be on facebook.

Similarly, many businesses are able to transfer the cost of acquisition on existing clients through innovative models – like all franchise businesses, such as eBiz, would do. If this is done well, that is again a recipe for success. On the other hand, a lot of outsourcing service provider companies fail because of high search cost of clients.

Operating and transactional costs: many businesses will be very good businesses only if the transactional costs didn’t exist. Maybe the ultimate service or product provided is good on a prototype level, and people are out there who will buy it if available at a reasonable price. Still, a startup can fail if the cost of organising a team, keeping them together, training the team, managing etc is very costly. This is the prime consideration for service based companies, especially outsourcing companies.

Proof of concept/model on a small scale: If the company has developed something already, or it has a model, it should have taken steps to test it on a small scale. If it is successful on a small scale, only then it makes sense to invest more into it to take it to the next level. Can the concept/model be tested? If yes, was it tested with success? This is a crucial point of decision.

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