Recently, I read about how the founder of an Indian food delivery startup (now on the verge of closing down) got an idea to start his new venture. The story went like this:
It was some time in early 2012. He was on an early morning flight from Bangalore to Mumbai operated by a low-cost, no-frills airline. It was about 90 minutes flight. Once the flight took off, he realized that he felt hungry. He ordered a sandwich to an in-flight service. When he wanted to pay, he realized that his wallet did not have Rs. 250 cash that was to be paid. Luckily, he had a credit card and it was accepted.
As many entrepreneurial stories go, he saw a potential market need and opportunity there. He thought that there must be a huge number of people like him who may want to order food from anywhere and may want to pay by credit card or other means. It was a brilliant idea, he thought. He did some initial homework, prepared a business plan. He started a venture to deliver food to people at their chosen places, through different payment methods. He thought his idea really had some meat because he also got some quick funding. It was the period during 2012-14 when startups were very hot and funds were flowing in easily.
His startup took off greatly. It, too, made a lot of marketing noise. Flush with funds, they adopted growth hacking, luring customers with huge referral offers and discounts for new customer acquisition, burning crores of rupees. The venture rapidly got lakhs of App downloads. Thousands of restaurants got listed. People were ordering food through their service like crazy. It was a huge success. Or that is what it appeared.
But few months down the line, reality sank in. Customers were not returning after taking advantage of the initial discounts. They were switching to other similar, newer services who still had money in their pockets to burn for “hacking” growth. This company’s funds dried up. Growth could not really be hacked. The company went to the brink of being folded after about two years of unprecedented flurry of activity and hype. Realizing the lack of market potential, the initial investors are not willing now to put in more money in the company. It is counting days trying to avoid the final, inevitable declaration of death.
The founder realized that he did not validate his idea correctly. Almost all of his assumptions proved to be wrong:
- There were not many people like him (his basic assumption). Not too many people who traveled on no-frills airlines bought food on board. They knew better and had accepted what they were getting into on a 90-minute morning flight. Those who did buy were organized enough to carry cash.
- Most of the “customers” who had helped the sudden rise of App downloads and activations were teenagers who used multiple mobile numbers and email IDs to take advantage of various initial offers and then deleted the App soon. They were not the real customers who would buy again and again. The whole assumption of market size was baseless.
- Their promotional offers were amateurish and not properly thought through. Many restaurants themselves placed fake orders to the App and made a lot of money by exploiting the crazy discount offers.
For us, these are the learning lessons:
- Capital is very important. It must be spent wisely. Everyone is not lucky to get easy cash to burn. Don’t waste money thoughtlessly. Be very clear and sure about money being spent on customer acquisition.
- Validate the business idea and market size thoroughly, with the right kind of customers. Everybody is not like us.
- Things look very easy and rosy on Excel sheets on Powerpoint slides. Reality is more unpredictable than Microsoft Office.
- Test the idea through tough ground tests, before putting it to the market.
- Find out the real target customers and their needs and preferences.