The reason for the high rate of failure in startups, particularly in the past few months, is that companies don’t pivot correctly — Sajan Pillai
The Covid-19 crisis has pushed entrepreneurs and businesses up against the wall and has been described as a black swan moment and the worst economic catastrophe since the Great Depression of 1929. The crisis has put founders in a stress-test for survival, and they haven’t left any stone unturned to pass the same. But perhaps one area they need to improve is in pivots, says Sajan Pillai, former CEO of UST Global, and CEO and managing partner of Season Two Ventures.
Pillai told Inc42 that whether it is Covid-19 or any other unforeseen crisis, the challenge is ‘pivot or panic’ — similar to how human beings fight or flight in a stressful situation. “Pivoting does not mean randomly finding new things, but pivoting is understanding the crisis changes— what is your marketing strategy, how have the customers changed, and are you changing your offering with the change of the customer,” he added.
As consumer behaviour changes, startups need to examine whether the business is in sync with this change and if not, they need to pivot smartly and deftly. Similarly, marketing trends are changing and businesses need to rely on digital channels. Businesses also need to be flexible— be able to quickly adapt to make decisions, and even help shift budgets and priorities as they are adapting to the consumer change.
Season Two Ventures, Pillai said, brings in the external as well as internal assessment to help do the right pivots. “Insights need to be given to these companies so that founders who are already burdened with the challenge of making a product don’t have to worry about pivots and changes that are happening in the market. If you don’t get the systems right it could be disastrous for them. They may still have a good product, but they may not have a product that is timely. You see the difference,” Pillai noted.
After having scripted a startup success story at UST Global, now a mid-size tech services firm, Sajan Pillai had retired as CEO of the company, and in October 2019, launched Season Two Ventures with a $100 Mn corpus. Season Two has so far chosen to focus on B2B startups exclusively and has invested in startups in banking and fintech, healthtech, utility & energy and retail and logistics sectors.
Consistency And Early Success Drives B2B Focus
As with the consumer startups, B2B investments can also be risky if the product-market fit is not right and startups have to go back to the drawing board. But Pillai thinks B2C companies are much more random in terms of success, whereas this can be easily controlled in B2B, it is more logical, analytical and market-based. Since B2B startups have a smaller target market in terms of volume, they can adapt to the buying and marketing trends faster. The predictability of success is much higher in the case of B2B, which is what has drawn Pillai and Season Two to these startups.
And unlike B2C, B2B businesses have to move away from valuation chasing and look at steady growth for proof of success. Pillai further emphasised that B2B businesses get feedback early and can adapt precisely. Also, at the same time, B2C can have substantial momentum with success and can benefit from first-mover advantage. But in B2B, they have to be vigilant consistently and first-mover advantage doesn’t mean much in B2B.
“If you are not making systematic progress in the B2B firms, you can recapitalize them; you can pivot them while B2C is a lot harder to do that.”
Season Two Ventures has been focused on bringing Indian startups to the global level. But amid the wave of hyper-nationalism in the Indian market today, where products are being adopted simply because they are Indian, Pillai said that a closed economy is not good for any country. Too much inward-looking leads to substantial degrowth or contraction in the economy, said the CEO, echoing the sentiments of many global investors. “However, there is a need for focusing on what each country has to focus on— nationalism is okay to the extent where you inspire confidence in people who didn’t have the confidence to succeed or take on problems, domestic problems which are right in your face. But beyond that, if it becomes exclusive and exclusionary, then it will cause serious issues,” he added.
Covid-19 Brings In Season Of Pivots
As startups set off to conquer the world in 2020, Covid-19 hit changed the entire narrative and landscape — the post-Covid19 era is dotted by ruins of past creations and startups laid-off employees by thousands. Addressing the change in the investment thesis with Covid-19, Pillai said that three factors need to be considered at this time — how companies are changing the spend; how they are converting products and services, and finally how the digital or remote workforce is operating.
Pillai believes that businesses looking to solve in these three areas have enormous potential. “Interestingly, many of the startups that we are looking at fall into this category. And this shift, in my view, with some selected criteria would be significantly beneficial for the new startups that are coming, who must incorporate at least one of these three, if not all three in their value proposition,” he added.
Going in a step further, companies that are focussed on operational technology— i.e solving for operational efficiency— are some of the most sought after today, according to plenty of VCs. Similarly, startups that are making digital interactions possible for businesses to solve workforce problems have also seen significant investor interest, as businesses and consumers look to work remotely in more creative ways.
How VCs Can Reinforce The Fight For Survival
Over the past few months, many have called for VCs to support portfolio companies by investing returns or carry, but startups also need to realise that they need a clear value proposition before investors risk more money at this time. This means the sales channels and process — how it will work with a remote workforce — and how the value proposition is presented to the consumer or customer, in a rapidly-changing market.
Startups that have the clearest ideas for the new world will get help from investors despite bad market conditions or a terrible economic climate.
“So the old model of doing 50 proofs of concept and figuring out the value proposition — that’s probably not going to work. They may have a product but the value proposition that offers— product versus offer distinction, as the product is okay, but the offer is not powerful. So we’ll have to help immediately pivot and make the change,” he added.
He also noted that if the business finds that the product alone cannot be a value proposition, it needs to look at the sales strategy or the sales process and double down on any improvements needed there to maximise reach — and allowing the product team enough time to rewrite any mistakes or shortcomings.
Season Two has decided not to invest in dozens of startups but be deliberate about its investments, influenced by the survival needs of its portfolio for the next one year. “So we are carefully looking at: Do they have dry powder to survive a year, even if no revenues come through the door? That’s the minimum effectiveness that you have to plan for. So with this type of planning our chat the portfolio companies that we invest should have a much higher chance of success than a regularly funded B2B startup,” he added.
Adaptability: The Common Theme In Successful Founders
While businesses struggle to generate momentum in a stagnant market, investors too are playing it safe. In the next few months, startups that have already secured major funding in the past year or so are best poised to get out of the rough spot. But among the early-stage startups, the trend has been to back new ventures by experienced entrepreneurs, rather than the merit of the idea. “Sometimes people give too much credence to repeat founders, but if you’re repeatedly failing, that’s not a good idea. Or you may have one-hit wonder, they may not be able to replicate that success because startups are somewhat random,” Pillai said.
As seen in the Inc42+ exclusive analysis of Sequoia Surge’s early-stage investments, seed-stage investors are making safe bets. For the Season Two CEO, there is clear reasoning behind this trend. “Obviously it’s not a zero-sum game, good founders usually have good ideas. But in general, the simple reason is, we believe that the founders who have high learnability— ability to learn quickly and adapt— have a much higher chance of being successful than people who may have a good idea, a one-shot wonder, but do not know how to change,” Pillai explained.
The Covid-19 crisis is a good example of this, as an idea which is good right now may not have scalability in the future. Good founders will identify these and plan ahead for the moment when there needs to be another pivot. But if the founders don’t have learnability, adaptability, then no matter how great the idea is, the company is bound to fail.
On being probing further about the Indian startup ecosystem’s bias towards IIT or IIM graduates, Pillai said that the top universities have had a history of producing founders and funders. Despite this, he said there are outliers like Paytm, BYJU’s, Freshworks or Pepperfry who haven’t depended on the tag.
“This is a very clear shift, because while economics is important practical entrepreneurship, that is on the street, being able to run the business is equally important. Now I have no problem with the people that go to these good schools. They are great, but there is a huge amount of entrepreneurship pool, which is a diamond in the rough that we can explore in India, but they just don’t need to have a label,” he added.