It is imagination and not capital which will define a start-up’s success

“Companies tend to grow at a pace which is not expected when aspirations exceed resources” — Mr. KV Kamath

I was reading a very interesting interview of Mr. KV Kamath in one of the business dailies and this one line that he said during the course of the interview really got me thinking about the world of startups and funding which I currently “inhabit”.

I could easily rephrase this and say that startups tend to grow at extraordinary speeds when “imagination exceeds capital”. In fact as I see more and more business plans during the course of my work I am convinced that a lot of people try and raise money as they are “lazy” in thought process or feel that raising money defines success in business. In fact raising money is almost taken as an end in the start up journey and the quantum of the amount pretty much defines the pecking order!

Let us examine a bit of business history to get a clearer idea of why capital came to assume the “power” that it does now in a startups journey.

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The origins of the modern day ‘company’ or “organized enterprise” with clear shareholders or “providers” of capital and “managers” or “users” of this capital to create profit can be traced back to the 2 East India companies (Dutch and English) which started in the 1600s.

Both of these companies’ required fairly large investments as for them to “deliver” they needed to travel long distances across months (and even years) and transport lots of “tangible” goods that obviously required big physical spaces to store and was expensive to “create”.

The “building” of this space (large sailing vessels) and long gestation period for “consumption” of the goods (as the journeys involved several moths) required these companies to raise fairly large amounts of capital to be able to sustain this business (which we all know was trading in food items and commodities).

The key to the business was in being able to create strong sailing vessels, employ sufficient manpower (as the mortality rates of sailing in those years were pretty high) and in some cases invest in “weapons” to ward of competition in the high seas. This “unit” of business (defined as the single output which generates capital) required huge upfront investments to create and only people with deep pockets could sustain a business like this. This was the reason why the governments of these countries also had to be involved as ‘shareholders” as only they had the capacity to also borrow from the public and invest in these enterprises.

This era was clearly a capital game although it still required imagination and risk taking (the earliest maritime explorers were probably the biggest risk takes in our history) in some measure to succeed. The competitive advantage however clearly belonged to the company that could raise ‘cheap” and “large” amounts of capital at fairly quick pace to “scale” their business.

Post the industrial revolution the “pure trading” business model got supplemented by “making” or “manufacturing” as another possible “company”.

In this model the need for a long journey to satisfy customers was not there but it required the creation of a ‘factory” to ‘create” output/products which could then be sold. This again required fairly large capital to set up (lesser than building ships for sure!) and the supremacy of capital over imagination remained even in this era but the gap had been reduced and this is clearly demonstrated by ‘first generation” entrepreneurs tasting success (specially in the USA) in the latter part of the 19th century and early parts of 1900s.

The next era of “services led business” which actually didn’t “make” any tangible products brought down the “supremacy“ of capital a bit more.

Now one did not need expensive “creators” of product (the early sailing vessels or the factories) as one could “sell” the “experience” which was consumed in real time. This also coincided with the growth of a large consumer class in the west which was ready to pay for “non tangible” goods. This was also the time when information technology started proliferating in the west which led to increase in productivity and further fuelling the “disposable income” of consumers and their ability/desire to pay for an “experience” or ‘service”.

However even in this era the access to customers needed investments (which was directly proportional to the size of the market that one wanted to address) so while people could start with fairly small capital but access to larger markets needed setting up of offices and hiring manpower which needed money. However the good part was that if one was patient and profitable one could get by with a small initial investment and then plough back the profits earned in the business for further growth.

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The current digital era has changed the access to market rule completely. The need for capital to ‘create’ which went down with the earlier services era has now been dealt a further blow by the complete collapse of distance where customers can “consume” in real time over VERY large geographical areas with very low ‘market reach’ costs. This was unthinkable a decade ago and now with exponential growth in connectivity this ‘reach cost’ will only come down in the years to come.

So what does this mean for a start up company? It means that the barriers to customer access are going to “tend to zero” in the years to come. Therefore the “laziness” which one could display on “thought” if one had money (which built the barriers) is decreasingly at an alarming pace.

The need today is to think of creating “repeat trials” as the cost of one-time trials (or initial reach) has come down. This also means that the pace at which new companies will get set up, specially in countries like India which are growing at natural rates of 7–9% and represent favorable demographics for the next 2 decades is also going to further quicken.

As human beings by nature tend to think the fastest and innovate the most when faced with adversity (see the series “I shouldn’t be alive” on Discovery channel to get a better idea of what I am saying) the lack of start up capital will force the promoter to “out-imagine” his competition rather than try and “out-fund” him.

This will give the startup the “forced” push towards success as the key ingredient ie “thinking” will now be “by default” available with the company. This will give the startup the necessary “thought bank” which is far more useful than the “money bank” in today’s business world.