Last fall I had the honor of speaking at State Engineering University of Armenia and Yerevan State University during my visit to Armenia. During my talk on entrepreneurship we went over the basics of creating a new startups and the process of financing. As I learned during my trip, I would have better served the students by discussing “Lean Startup” principles instead. As with many parts of the developing world, there is an acute shortage of investment capital in Armenia. Although during my trip the Armenian government announced a cooperation with the Granatus Fund, making $6 Million available as seed financing for high tech startups, the fact remains that Armenian founders will still face a difficult time in convincing investors (both foreign and domestic) to make a high risk bet on their startup.
While that will limit the number of potential “go big or go home” born-global startups coming out of the caucus region, it makes the funding decision for founder’s quite simple: keep your costs as low as possible for as long as possible and go for an immediate revenue model. The founder in this situation needs to find ways of generating money for his product or technology from day one. That lends itself to a project-based business plan, where some kind of service is sold and the entrepreneur’s innovation is how to reduce the costs of that service, typically through a new technology.
For example, a founder may be an expert on the logistics of import/export with Georgia and want to offer software for sale to companies that reduce their logistics costs or more effectively move their goods over the border by matching cargo needs to capacity. Instead of approaching large cargo companies and trying to sell the software (which likely has a long sales cycle), this founder could instead offer his services as a consultant. Then he uses his software himself, refines it and improves on it, and still has revenue coming in from the consulting project. This model is very slow growth, so most venture capitalists are against investing in such companies, but it has two huge advantages for frugal founders: i) the company can survive without outside financing based on the consulting revenues until the software is complete, and ii) the founder has excellent insight into the market he is trying to sell to, since he is working for them and knows what their problems are which need to be solved. Eventually, the software becomes effective enough that he can say to his customers “I’ve developed something very easy to use, which allows you to do what I have been doing but without needing to pay me to work for you as a consultant”. Now the founder is no longer receiving the consulting revenue, but can instead sell this finished software to the entire market of potential customers, bringing in much more profit (since the software is already complete he can sell it without incurring more costs per sale (as opposed to consulting where his time was a cost factor– each new project brought both more revenue as well as more costs). At this point the business model becomes scalable, meaning he can continue selling to ever larger numbers of customers without having his costs increase proportionally.
This model of course hinges on keeping the costs so incredible low in the beginning that the very small amount of revenue can cover them – so the company is profitable from day one as well. That doesn’t mean it is generating tons of money immediately, but rather that at the end of the month revenue ends up greater than costs, even if only by a few dram. If a founder is able to do that, and show that each month the profits grow, then he may have the makings of a successful and self-sustaining startup.
-Guest Post by Curtis MacDonald