Large Scale Problem
The common pitfalls that first generation entrepreneurs face are –
First generation entrepreneurs tend to make larger-than-required investment at onset in anticipation of overoptimistic sales e.g. overstocking, purchasing higher-than-needed capacity machines, going for bulk discount deals etc. If investment is made through Term Loan, working capital gets squeezed up in paying back instalment. Business runs out of capital before achieving stability
- High running cost in initial months
First generation entrepreneurs tend to make larger-than-required expenditure on fixed costs in initial months in anticipation of overoptimistic sales e.g. like dispensable labor, renting larger-than-required space for shop or factory etc.
- Focus on product rather than market
There is a mind block in first generation entrepreneurs to focus on product rather than market. In majority of cases, they tend to limit themselves to product and operations, while leaving sales and marketing to some other person.
- Obsession with ‘large’ loans to start ‘big’ businesses
‘Finance’ is quoted as biggest problem for not attempting to start a new business. Well, it is not just logically wrong, it is against the principles of entrepreneurship. No successful first generation entrepreneur starts with everything served on the plate. Unless one learns to make best use of scarcely available resources – in other words, unless one starts up lean, there is high probability that the entrepreneur will soon be outclassed by a street-smart entrepreneur.
- Lack of appreciation of market research
Due to herd behavior, the ‘me-too’ businesses crop as soon as the first one in village becomes successful. In spite of best efforts to orient first generation applicants about market research, they skip the step altogether. Lack of appreciation of customer needs is also rampant. The norm is to base the startup decisions on what one can produce, and not what the customer wants. First generation entrepreneurs, therefore, end up risking their life savings & business by not doing market research.
- Sheer neglect of cash flow management
The first generation entrepreneurs give least priority to book-keeping and cash flow management. And nowhere else is the need of cashflow management more profound than in case of under privileged entrepreneurs and poor families. One large cash outflow has potential to bust their long running enterprise. Moreover, due to lack of appreciation of book-keeping and cash flow management, rural entrepreneurs fail to make best use of high season, when the market is at peak.
Lack of business acumen
A big challenge facing enterprise promoters today is assessment of the required investment size for a particular enterprise. Issue is compounded because the entrepreneur either willfully or ignorantly misestimates the capital required to set up one’s business [Need magnification].
In the willful case, entrepreneur tends to overestimate the requirement to get access to loan, which can then be used for extraneous purposes. On the other hand sometimes the entrepreneur, lacking knowledge or skills to estimate finances, overestimates or underestimates the investment required to set up the business. In addition, entrepreneurs have a notion that bigger the investment bigger the returns will be. Hoping for bigger returns, many entrepreneurs end up in losses, owing to a lack of proper market fit, at a size that they started. In addition to all these problems, first generation rural entrepreneurs have very little exposure to business activity, prior to setting up of their business – this leads to failures. Although a class room/ on-the-ground mentoring may be in place, it is not a replacement for first-hand experience in running the business and without it, entrepreneurs can fail. Owing to this, many businesses fail in their infancy (in the gestation period i.e., before attaining stability in the business). For poor entrepreneurs, failure on a full-scale can capitulate them back into poverty, and some cases force them to lose all their life-saving and more. It can be too big a risk for many entrepreneurs. Owing to the risk posed in the above point, generally risk averse rural people are less likely to take up businesses as a livelihood option, unless the said risk can be minimized. Although many of these challenges can be addressed by field level MVC, by assessing the investment required for the business (market potential assessment) and adjudging the right size for an enterprise, it becomes a tedious and time consuming process to be taken up manually. Human instinct fails when complex calculations or numerous options are involved.
How the problem can be addressed
These two issues can be addressed by an innovative process that is borrowed from the process innovations of the corporate/ organized sector – Lean startup. Lean startup in the organized sector allows companies/ entrepreneurs to reduce market risks, while being able to start up with small amounts of investments. Lean start-up methodology has changed how start-ups are growing all across the globe. The methodology that has propelled many companies to success, has a great relevance in the rural poor entrepreneurial context.
- Lean Startup methodology, customized to rural micro-enterprise contexts, mitigates the risk involved with the inexperience of first generation entrepreneurs, their unique situation and the market dynamics.
- Following the Lean Startup methodology, first generation entrepreneurs can start the businesses with very small investment, an investment that will not hurt them badly even in failure. Starting with such a small investment, entrepreneur experience first-hand the nuances doing one’s own business in one’s own market, thus gaining immense knowledge on market dynamics, competition structures, supply-chain stakeholders, and consumer demands.
- Entrepreneurs can start at a conservative scale, understand the business nuances, learn about the potential pitfalls and stakeholders in business, and finally grow to a desired scale. This approach renders strong stability to business, while mitigating risk.
Phasing the investments and growth of the business has the following benefits.
- Lean startup methodology minimizes the risk associated with failure of enterprises, and allows the micro entrepreneurs to bounce back from losses. In a traditional setup, failure of an enterprise is not an option for the rural poor, as it would unequivocally leave them a debt too big for their income levels. Through this approach, this challenge can be addressed.
- It allows micro entrepreneurs to learn nuances of their business, in their own market, their competitor, and consumer settings, rather than in a hypothetical classroom setting. It enables the entrepreneurs to make more informed decisions about their growth plans.
- It enhances the stability of the enterprise, by allowing the entrepreneur to form concrete relations with the consumers, thereby essentially catering to their demands, even before launching the enterprise.
- It forces entrepreneur to keep full control of meagre cashflows. Due to small scale of operations, cash flow projection becomes manageable
- This low risk model encourages more poor to take up enterprise as a livelihood option.
- Once the entrepreneur goes through the process of Appraisal, an ideal investment size to start the desired business in a desired location can be arrived at. It’s based on gestation period, seasonality, risk appetite, market potential and nature of business.
- Key to starting a business lean is to setting up the business one notch below the ideal market potential: if there is a market potential for a Medium sized enterprise, to mitigate initial risks, the business can be set up as a Small enterprise and over a small gestation period, it can grow into a Medium
3. Business plan is then developed to grow to next stage of business –
- Capabilities (skill, equipment, time etc)
- Cost & profit
- Environment (license, statutory compliance etc)