How to Screen Startup Ideas in a Frontier Market
One of the most frequent questions I get from a founder is: “How do I get investment from Bangladesh Angels?” The second question I get over the course of a sit down is: “What do you think of my idea?”
On the former, we start with a screening process. The team reviews 100’s of applications on our site during a cycle, as well as referrals from both our network members and various ecosystem players we work with, in addition to outreach to start-ups that are gaining visibility within the greater ecosystem. I’ve found that as we’ve grown as a network, both the quantity and quality of the companies being referred improves, and that’s where the majority of our time is being spent. Once a company gets through our initial screening process, we draft internal reviews which are shared with the governing board. The board and I look to whittle this down to a list of 10 or so companies, with follow-up questions. For any given cycle, we try to limit the companies being showcased to our membership to 5 to 6 maximum. For those outside, for whatever reason, we make it a point to track and keep them in mind for the next one(s). In the future, I will write more in-depth articles on the reasons a start-up may be rejected from showcasing, what happens in the run-up to the showcases and the work done post-showcase, including due diligence, deal close and post-investment.
Going back to the latter question, though, I have a confession to make: I won’t tell you if an idea is bad or not. When I started this role I was very much focused on poking holes in an idea and/or business and figuring out ways in which either won’t work. As I’ve continued, and have spent more time with experienced angels and investors in our network and learning from different sources, I’ve had to undergo a mindset shift. In order to succeed with startups, as a founder, an investor or ecosystem actor, the fundamental trait you need is optimism. If you approach this with cynicism, you won’t get very far. The very act of starting or investing in a new company, particularly in a place like Bangladesh, beggars a certain wilful suspension of disbelief. The startup will have a million things going against it, and if you as part of that startup fall into the trap of cynicism, the company will succumb to those negative pressures. The second trait you need is humility. There have been companies and founders I was really excited about, that after more than a year, have not gotten off the ground. There have been other companies that I had fundamental questions about, that have gone onto raise capital, gain users and customers and grow. Evaluating startups and investing in them is often a crap shoot, and we are all learning, ideally together.
Having said that, it is important to have frameworks in which to evaluate startup ideas. One develops and hones that over time through experience, discussion and learning. One of the most useful sources I’ve found for learning is Startup School by Y Combinator, in particular this short presentation by Kevin Hale on “How to Pitch Your Startup.” I learned from him about not telling a founder if an idea is bad. I also learned from him and other experienced investors that a good investor uses a combination of optimism, vision and an internal repository of different models and strategies to see how an idea could win, and win quickly, and pitches that back to the entrepreneur. Usually two things happen: An entrepreneur nods their head and immediately vows to do what the investor said, or quickly tries to change the subject. Both are bad, because the former wants to tell the investor what he or she wants to hear, and the latter only wants funds and nothing else. But if they engage the investor by either telling the investor why the suggestion cannot work (ideally because they’ve tried it) or tries to build on that suggestion, then the entrepreneur has the makings of a potential partner.
Kevin’s presentation is excellent and I encourage you to watch it in entirety. I will try my best to distil that down into the most salient points for Bangladeshi entrepreneurs and angel investors for the former group to hone their pitch and for the latter group to hone their screening skills.
#1: Startups = Growth
To paraphrase jason, a legendary angel investor and founder of This Week in Startups, taking angel investments and venture capital is an unnatural act. It’s the equivalent of taking on jet fuel to grow, but not every company or founder is meant to or want to move at jet speed. The expectations for an angel investor should be to make 3–5 times their investment in as many years, at a minimum. This would mean a business has to ideally achieve double digit growth every month, whereas for normal businesses achieving double digit growth every year is a win. But the latter kind of growth won’t sufficiently compensate investors for the high risk of failure and the opportunity cost of not putting the money in other available assets, be it their own family business, stocks, land, bonds, fixed deposits, livestock or moving it abroad. And the former kind of growth isn’t just due to money — there are fundamentals to how a business is designed and built that allows it to scale so rapidly, often by leveraging data, automation and digital means of acquisition and delivery. It’s not just about having a website or an app on the front-end — it is about how the entrepreneur designs his or her entire processes and systems and constantly looks to standardise and automate as much as possible. Paul Graham, the founder of Y Combinator, outlines more clearly the differences between a startup and small business his article, Startup = Growth.
#2: Startup = Hypothesis
A startup is ultimately a hypothesis, predicated around a new way of doing things target users and customers are already used to doing in a certain way, behind which there are a whole host of incentive systems and power structures, and learned behaviour, that we seek to change. What are the elements of that hypothesis? According to Kevin, there are three: The Problem, or the initial conditions that has created the particular challenge or pain point(s) the startup seeks to alleviate, the Solution, or the experiment that the entrepreneur is running around the idea to solve that problem and the Insight, or the explanation(s) the entrepreneur has for why his or her experiment will be successful, and scale quickly.
#3: What Makes an Attractive Problem?
An attractive problem is:
- Popular — A lot of people or businesses have this problem. Ideally millions. And not just the upper class or upper middle class in the Tri-State, the DOHSs, Uttara and Bashundhara Residential Area, although they may be great initial markets.
- Growing — This is another way of talking about the market. Over time, more and more people are having this problem. Think about the problems Bangladesh faces over time as we industrialise, urbanise, get wealthier, connect more to the wider world and more young people enter both the greater population and workforce. Ideally, the market is growing by double digits every year.
- Urgent — Whenever someone gets this problem, it needs to be solved as soon as possible. He or she is looking for a painkiller that can immediately alleviate the problem.
- Expensive— In the current way, the problem costs 10’s if not 100’s of thousands of taka to solve, particularly over time. In aggregate, this is a multi-billion dollar opportunity. It also takes a lot of time and effort to solve.
- Mandatory — It is hard to avoid this problem, especially if this is something mandated by law and/or the law and policies have recently changed and individuals and companies have to react.
- Frequent — This is a recurring problem that occurs daily, weekly, monthly or quarterly.
An ideal problem has at least a few of these features. The last one, frequency, is the most important, as it means more opportunities to convert users. If a company is not growing, it could be they may be trying to solve the wrong problem.
#4: Don’t Start with Solutions
I get this a lot. A founder has seen a particular startup from another country, maybe while they were living or studying there, or maybe they read about it or even did some development work for it, and now wants to do something similar in Bangladesh. Or an engineer or a group of engineers have built a software, and now wants to build a business around it. Maybe they’re really excited about blockchain, or IoT or data automation or fintech or some other emerging area, and really want to do something in that realm. There is an inherent assumption that whatever they like or want to see in Bangladesh, is exactly what the rest of the country is clamouring for and will adapt. Kevin and Y Combinator call this a SISP — a Solution in Search of a Problem. It is important to ask which one does the founding team care more about — the problem and the people who face it, or the product/technology? Because solutions can and should evolve or even change, as founders and the company get smarter and more experienced. But the problem, and their fundamental motivation to solve it, should not.
#5: Insight = Unfair Advantages
Another way to think about insight is the unfair advantage the company and its founders have that allow them to grow, and grow quickly. They include:
Unfair Advantage #1 — Founders & Culture
Are the founders among the top 1% of the people in Bangladesh who are potentially capable of solving this problem? A lot of founders try to sell on their experience working for large corporates and MNCs in Bangladesh, even if the startup has nothing to do with what they did in their corporate careers. One assumption being it takes a lot of talent to get into corporates and move up the corporate ladder, and the fact that they are leaving their cushy roles and starting a startup should be one of the reasons behind their eventual success, and hence, lofty current valuation. I don’t think corporate experience in and of itself is a qualifier or disqualifier. Sure, someone may be 1 in 100 at their university if they land a coveted gig at a corporate and manage to move up to middle management, but that may also mean that they’re very good at playing by rules or managing organisational politics. They may also have become used to a certain pace at which to do things, and have developed a lifestyle and obligations that make it difficult for them to economise to a startup salary. To mitigate this, some founders choose to stay as part-time founders.
I think a prospective angel investor needs to take a holistic approach to assessing founders. I wrote about some of the negative traits to avoid last week. I will write about the positives to actively look for in another post.
Beyond founders, it helps to have well-respected and qualified people on side as investors and advisers. That’s also something we like to look for, especially if those investors and advisers are people we like and who refer the founders to us.
Culture is an underrated unfair advantage. Many Bangladeshi companies have a toxic culture, built around an imperious founder whose word is law, with restless underlings jockeying with each other to curry favour. That kind of culture works in traditional industries that are more or less running along on the same customer and finance relationships and business models going back decades, although that is becoming less certain every day (see: Ready Made Garments). But collaboration is absolutely key to innovation. If the entrepreneur can build a collaborative, performance-oriented culture, the startup is going to do well in making on-the-fly adjustments because employees will be empowered to suggest and carry them out.
Unfair Advantage #2 — Product & User Experience
As a rule, a product, and the experience built around it, should be ten times better than the incumbent solution to have wide adoption. It could be faster, cheaper or more durable, but it cannot be incremental if you want disruption. Think about ride-hailing companies like Pathao. Before, it used to take me at least 30 minutes every morning to get out of my house, get on a rikshaw, try to find a CNG taxi that would go to my office across town, negotiate a fare with them and get in. With an app, it takes me 3–5 minutes. I also save at least 50%, even without discounts, on the motorcycle fare compared to a CNG. Since I stopped using CNGs 4 years ago, I’m confident I’ve saved 100,000s of takas, not to mention all that time looking for CNGs and being stuck in traffic once I’m in one.
Unfair Advantage #3 —Acquisition
According to Kevin, “Marketing and advertising are a tax companies pay for not making something remarkable.” If the entrepreneur has to do a bunch of paid acquisition, often via facebook, then seasoned investors like Kevin would discount that channel of growth. That is because as the startup grows and better-funded and -connected rivals take notice, all it would take to crush the startup would be to spend more money on paid acquisition via ads and discounts. Startups have to find acquisition paths that cost little to no money, and there’s no better way than word of mouth. This comes in no small part from having a superior product that users love.
Unfair Advantage #4 —Monopoly Power
Having monopoly power means a company gets stronger and harder to dislodge as it gets bigger. It’s not just about money. In particular, there are four kinds of monopoly power:
- Network effects — as more users get on the platform, the more the platform becomes valuable to existing and new users. This is particularly true for market places. It is estimated that 70% of the value in technology is driven by network effects.
- Switching costs — the service becomes so integrated with customers lives or businesses that is is hard to use a different service or substitute. If the service were to somehow stop, their business or daily life would be a struggle. This could be accomplished through data or loyalty systems, among others.
- Economies of scale — as the company grows larger, it is able to spread fixed costs over a wider base of units or customers, and increase margins or pass that discount onto customers. But this will not be true if unit economics is negative. In that scenario, the company loses more money as it gets larger. I think unit economics is one of the most underrated elements that founders overlook — a subject of a future post.
- Intellectual property — it is hard to defend intellectual property, including copyright on trademarks, in Bangladesh. Patents take a long time to prove and to get. But a brand, once created, is hard to replicate, though it can be lost with poor service. The trust create with customers can be leveraged into new product and service lines.
Once again, a startup does not necessarily need to have all these unfair advantages, but the more they have, the more likely they will achieve product market fit and rapid growth. Marc Andreessen defines product market fit as:
“The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can.”
That’s the stuff investors and founders dream about.
#6: Zantrik — An Example from Bangladesh
Zantrik was our very first investment as a network. Originally begun as a AAA-type service to provide vehicle owners with access to road side services, the company had switched to a platform connecting consumers and businesses with certified repair shops by the time they pitched to our members. Since switching to that model in early 2019, the company has witnessed double digit month over month growth and have raised money from Bangladesh Angels, Accelerating Asia and Southeast Asian angel investors.
Zantrik and its founders’ grit and ingenuity merit a much longer future write-up, but with the benefit of hindsight and my own obvious bias, you can see some of the elements of both the problem and unfair advantages that this article talks about:
- Popular — As Bangladesh grows wealthier, its vehicle ownership and number of corporate fleets have skyrocketed. Because of high import duties, most vehicles are refurbished, creating a need for frequent services.
- Urgent — Since most households need their vehicle for daily commuting, any down time creates difficulties and coordination problems. Uber can be a short term fix but families may not trust random drivers with their elderly members or children. Businesses also need their vehicles in good shape.
- Expensive — For most families, a vehicle is the second most expensive asset they own, after land or apartment. Most are having to spend 10,000’s of takas every month on drivers, fuel and maintenance. Shubho has personal experience from being price gouged by both the workshop owner and his driver, often working in collusion with each other. This problem is even more expensive for companies with multi-vehicle fleets.
- Mandatory —Certain services that Zantrik is working to automate, such as insurance and registration, is mandated by the government.
- Frequent —If you ask a vehicle owner in Dhaka, chances are they’ll tell you that their vehicle is a source of almost daily annoyance. Something needs repair or mending every few weeks. You cannot fully trust your driver, so you have to track your car and also make sure they are not skimming off the fuel money.
- Founder & Culture— Shubho has spent decades building software, including a profitable software development firm on his own which he gave up to start Zantrik. He has had multiple opportunities to move into other verticals, but he remains steadfast in solving the vehicle service problem in Bangladesh. He and his co-founders spent the first year talking to and understanding the pain points of both vehicle owners and garage owners. His team has experience managing fleets for corporates. He has built a performance-oriented culture, with stock options for high-risers.
- Product & User Experience— I’ve seen few founders in Dhaka more user-obsessed than Shubho. To have a seamless user experience, the team is now moving into having Zantrik-branded workshops that adhere to quality and pricing standards. They have built a fleet management solution for corporates, allowing them to interface with Zantrik and track various services for their corporate fleets, creating transparency and lowering the chance for vendors and employees to gouge them.
- Acquisition —Zantrik has become a calling card for me whenever I sit down with anyone from the startup and angel community. They have done a great job of building word of mouth through attractive branding and advertising, which they have conscientiously managed and is looking to lower on a per capita basis over time, as well as a superior user experience. Now, they are working to make their franchised workshops and customers the referral sources, rather than the other way around.
- Monopoly —As more workshops come under the Zantrik network, the more valuable Zantrik becomes for customers, especially corporates that have vehicles all over Dhaka and the country. To increase switching costs, Zantrik is building solutions for fleet management and more frequent services such as refuelling.