Capital doesn't build great companies, Great people do...

5:38 AM Suvir Sujan 3 Comments

There has been a lot of news recently on startups  raising a large sums of venture capital in technology and the internet . For some reason, a large capital round seems to be equated to the success of that startup. The fundamental assumption is that the investors must be smart if they are investing big cash into the company and this company is bound to succeed. Well, there is more to the success of a company than capital. 

The reason the investors are investing big monies is that they have seen strong traction in the company and are betting that with this large round, the company can accelerate growth, establish leadership and become profitable. However raising a large round does not guarantee success. In fact the onus is that much greater for the entrepreneurs to deploy the large pools of capital very effectively and strategically as missteps at this stage can prove fatal to a company.  This is what defines a good entrepreneur from a great entreprenuer. A great entrepreneur understands the revenue drivers and cost structures of the business deeply and think though what will it take to achieve a sustainable and profitable market leadership in the segment it is operating in. Sometimes  spending "habits" can creep into a fast growth company - for example, overhiring at the top, high compensation, large marketing spends, unweildly capex, large offices, high travel expenses, etc.  A great entrepreneur continously checks and challenges these spends. A great entrepreneur also understands that excessive marketing can hide the lack of  differentiation or defensibility in a product. He or she understands that marketing is temporary and the core value proposition and differentiation is what will eventually win and obsessively focuses on strengthening that core proposition - be it superior product, flawless customer service, etc.

Recent news on  Whatsapp, the worlds biggest venture backed company exit till date, mentions how the priority of the entrereneurs were to create a very simple product that had no bells and whistles so that adoption was viral acquistion costs could be close to nil. The company could have easily invested in features and consumer marketing after they raised their last large round given the hyper competition in this space. Full marks to the founders for keeping the discipline on superior product offering with an eye towards building a profitable and sustainable business. Many other messenger companies exist in the world have access to similar levels of capital and possibly even more than what Whatsapp had.. Yet, Whatsapp has achieved world domination.  Capital doesn't build great companies, great entrepreneurs do!

At Nexus, we are blessed to be able to work with some such great entrepreneurs who are on their way to building great market leading companies.

 

3 comments:

Indian said...

Capital is a necessary but not sufficient condition to build great companies.

Roshan said...

Good to see such thoughts Suvir. I agree that great entrepreneurs always remain focussed on the core and no distorting / diluting the same. Trust all is well.

WhatsApp indeed pulled-off a coup and got this eye-popping valuation. While I agree they keeping the product no-frills helped in making its adoption viral, I'm not sure it'd have helped the acquisition costs - after all a 19 billion pay-out would cover any quantum of unreasonable asset stock-pile (bells & whistles..) - IMHO where WhatsApp scored is on how it did not go after the formulaic 'Built to Sell' strategy and instead adhered to it’s probable original idea of 'Built to Solve/ Differentiate' - Let's not forget that most of us got attracted to WhatsApp primarily since it offered what FB mobile chat denied/ couldn’t assure viz., communication & data privacy.