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Updated: December 19, 2009 17:05 IST

What to do when your first plan fails

D. Murali
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Is it possible to start a company with almost no investment? Just ask Niklas Zennström and Janus Friis, guides ‘Getting to Plan B: Breaking through to a better business model,’ a recent publication of Harvard Business Press by John Mullins and Randy Komisar (www.landmarkonthenet.com). As you may be aware, Skype, founded by Zennström and Friis, realised $2.6 billion when sold to eBay. (Recently, though, eBay sold 70 per cent of Skype for $1.9 billion to a consortium of investors including the original founder duo.)

The first lesson from the Skype story, as the authors outline, is that a dash of ingenuity and the right technology can enable some kinds of businesses to get started on almost nil investment. It is almost always better, as an entrepreneur, to have proven some leaps of faith before raising major money, because doing so cuts your and your investors’ risk, they advise. “In turn, that means you get to keep more of your company’s equity than you would if you need investors’ capital for the earliest tests.”

Another lesson is the manner in which Skype was able to acquire customers largely cost-free. The nature of their business gave their earliest customers powerful incentives to get their friends and families to become active Skype members, too, recount Mullins and Komisar. “If you can find a way in your proposed business to get the cost of customer acquisition down to little or nothing in the early days, that’s among the powerful things you can do in building a viable investment model.”

The best-laid plans often go astray, cautions Subroto Bagchi, in his foreword to the book. “So you must be willing to build a plan, test it, reject it, refine it, run it some length – and do it all over again… You, too, can be like the salmon that moves between fresh and salt water, through multiple rivers, to pursue your goals.” Bemoaning the fact that most start-ups fail within the first three years, with significant socioeconomic costs, he urges that the world simply cannot afford that failure rate. “We need jobs, not psychological setbacks.”

What separates the men from the boys is what they do when their first plan fails, the authors observe in the intro. “The entrepreneurs and other visionaries featured in this book tend to lick their wounds, get back on their feet, and morph their newly found insights into great businesses.”

They cite the findings of a research – that it takes 58 new product ideas to deliver a single successful new product! A common culprit of failure, the authors note, is cash. “When a new venture dies an early death, the reason often given for its demise is, ‘We ran out of cash.’ But running out of cash isn’t a cause, really. It’s a symptom. It’s a symptom or signal that the company’s business model didn’t work.”

Breaking through to get from Plan A to Plan B or Plan G is about discovering or developing a business model that really works, guide Mullins and Komisar. Four key building blocks of their iterative process are: Analogs, antilogs, leaps of faith, and dashboards.

Analogs to the idea are what can be found in successful predecessor companies worth mimicking in some way, the authors instruct. “There are many analogs out there, portions of which can be borrowed or adapted to help you understand the economics and various other facets of your proposed business and its business model.”

In contrast antilogs are about predecessor companies compared to which you explicitly choose to do things differently, perhaps because some of what they did has been unsuccessful. An example given in the book is of how Diamond Media Systems – which launched in 1998 the Rio, the first mass-marketed MP3 player – was an antilog for Apple’s iPod. “The Rio’s struggle in the marketplace confirmed for Jobs that there was no market for anaemic or complicated portable digital music players. If it wanted to enter the MP3 player game, Apple would need to solve the storage and user-interface problems that Rio presented.”

Imperative read during the holiday.

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