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Funding your #startup ep 7
Plenty of Fashionchat but No #Funding
Bobby P. was very keen on buying a new dress. But she desperately wanted the opinion of her friends. After all, buying a dress was a group activity. Her friend Kavita was a good person to check with she was a conservative dresser, and what she approved would probably pass muster with Bobby's parents. On the other hand, there was Jinx, who was super-fashionable and possessed great personal style. She had to be involved. And, of course. Salma-her best friend from school. And Geeta. And Preeti And Mohini. And, oh, how could she possibly forget her boyfriend Sammy (short for Samvardhananand-why anyone would shorten such a nice, simple name such as Sarvardhananand to Sammy, we don't know).
Now, as the astute reader would have observed, there was a teeny weeny problem. She couldn't possibly take all these people along with her when she went shopping. Some were preparing for their exams. Sammy was out of town. Kavita and Preeti were attending a wedding...
So Bobby was left to her own devices. And that set her thinking.
In today's day and age, why couldn't this be done online? Why
couldn't she visit a showroom, invite her friends to a chat session and
share photographs of the dresses available there? Or even photographsof Bobby herself wearing those dresses? And get feedback from her
friends on the spot? In fact, it could even set off an interesting debate
between the conservative Kavita and the highly innovative Jinx. A spark of an idea had been kindled, and Bobby was excited. Why not launch such a site? A kind of Facebook, specifically for fashion? As she warmed to the theme, she decided to go to her favourite café and treat herself to a chocolate fantasy. (For the uninitiated reader, a chocolate fantasy is a delightful pastry overflowing with an almost sinful amount of yummy, molten chocolate. As you might imagine. it was one of Bobby's many favourites. She claimed it helped her think.)
And so, in between mouthfuls of chocolate fantasy, the idea began to take shape. Why not have links from the site to fashion brands as well as outlets? So buyers could actually browse the site and discuss what was available in the market with their friends, even before going to the outlet? And then the site could point them to the + nearest outlet that sold these dresses. She could also get in experts who would answer questions on different kinds of fabrics. In fact, it could extend to handbags and belts and shoes and.... d
In short, a one-stop portal for anything to do with fashion. It was so exciting! Fashion was so close to Bobby's heart. This was a whole new world waiting to be created. Charged up by now, Bobby decided to name her venture Fashionchat (name changed). Yes, over her second chocolate fantasy, even the name had been decided. Bobby was a quick decision maker, you see.
So Bobby launched Fashionchat.com. To get fashion lovers together for what she called "group shopping. Fortunately, she had worked in a multinational for six years and had therefore saved up some money. This, along with some funds provided by her parents, formed the initial capital for the venture. With this put together a team to develop the site. And then, of course, there was the marketing-which was predominantly Google AdWords and some amount of SEO-search engine optimization for the uninitiated reader.Things moved slowly but surely. Bobby managed to get severd thousand registrations on her site. Unfortunately, by then, the m ran out and she needed funds. For two reasons. First of all, contem on the site had to be expanded and updated on a daily basis-after all, she was dealing with the highly volatile area of fashion. And secondly, this was a new concept and required significant marketing spend to rope in a large audience. e money
The long and short of it was that she needed money. And who better than angel investors to approach?
The Pitch
The hard-nosed angels seated around the table listened intently to Bobby. And they couldn't help being swayed by her enthusiasm. They realized that this was something different-perhaps something that hadn't been tried out in the country before. The potential clearly huge and, given the rising consumerism in India, this was the right time to launch it. Further, Bobby had done her homework well and had her facts on her fingertips, which the angels
clearly appreciated. 'How do you plan to increase your registrations? You'll need to go far, far beyond just a few thousand, asked one of the angels.
"We plan to spend heavily on both online marketing-essentially Google AdWords-and SEO. And we expect the concept to go viral in the age group we are targeting.'
That made sense, and the angels nodded. However, there was still one potentially explosive question left. What's your revenue model? At this point, we do not have any revenue. Even for the foreseeable future we have not planned for any revenue. Our focus is to build a large community with a common interest in fashion. 'But at some stage you would need to generate revenue. Is this
going to e advertisement-based?" "Well, yes, we do plan to monetize our venture through ads. But that's in the future. We haven't really thought of revenues yet.If you are looking at ad-based revenues, you'll need a much, much larger community. And that will require both time and lots of funding. Perhaps multiple rounds. With no sight of revenues, said one of the angels, and he looked around meaningfully at the others. As if on cuc, most of the angels nodded. They wanted to see revenues. Without revenues, they were not really willing to invest in the venture. And this seemed to be a long gestation project. Why don't you sell garments and accessories online? You'll at
We thought of that, replied Bobby, but we would like to maintain a neutral image. Selling on our site would kill that image and therefore kill the chances of building our community. Bobby seemed confident as she said this, but she had begun to realize that all was not well. She desperately needed a chocolate fantasy to pep her up again. Because the angels were obviously not happy. All except one, who kept repeating, 'Guys, this is like a specialized version of Facebook. When Facebook started, it had no revenue. The initial years were simply focused on building its huge community. And look at it now. Admittedly it will take time, but I believe it is worth investing in.
Unfortunately, this was a lone voice, and at the end of the presentation, a crestfallen Bobby realized that the deal had been dropped. A great idea, perhaps, but with no revenue in sight, there were no takers.
Analysis
The case of Fashionchat is somewhat unique. Let's start by analysing
it within our PERSISTENT framework. Undoubtedly there was a PROBLEM-or, rather, an opportunity. That of getting young people to shop along with their friends even though they might not be physically present. When combined with expert advice on the subject, it was a powerful socialmedia tool-something that did not exist at the time the presentation was made. However, if you look closely at our PERSISTENT model it is not enough to solve a problem or tap into an opportunity. People have to be willing to pay for it. And that was precisely the problem In today's day and age, no one pays for WhatsApp or Facebook. Ne one pays for searching the web through Google. In fact, no one pays for Gmail or Hotmail or any of the other commonly available mail services. Most of these highly successful businesses get their revenue through other means such as advertising. So why would anyone pay to use Fashionchat? No sir, revenues would need to come in through ads, in much the same manner as Google or Facebook.
However and this is a HUGE however-advertisers portals such as Facebook are willing to pay because of the very large community that Facebook has managed to build. By implication they might be willing to pay for ads on Fashionchat, but only if it community were large enough. Obviously not as large as Facebook but still large enough in the Indian context. And that, ladies and gentlemen, was the problem. Bobby needed hefty amounts of funding to build such a large community before she started getting revenues. And the angels wanted to see revenues reasonably early, before they parted with their money. Even if they did, the amounts would usually not be enough for Fashionchat to build the huge user base it needed to. A typical chicken-and-egg situation, sadly.
Now here's the twist in the story. Did you notice that one angel sitting in the corner of the room who was convinced? And was trying to convince the others in the room? That's right-we knew you'd notice him. It was even likely that he would have invested a few lakhs in Bobby's venture. Unfortunately, those few lakhs wouldn't have been enough to help Bobby, which is why the entire deal wis called off.
What was so different about this one particular angel? Remember, all investors are not alike. There are some who have a time horizon of three or four years, and would like to get returns on their investments within this period. These investors look at revenues. On the otherhand, there are those who recognize a great long-term opportunity and are willing to wait for revenues. The problem, of course, is that the former greatly outnumber the latter. Fortunately, however, investors of the second kind do exist. Many of these are the HNI angels-those who invest not Rs 3-5 lakh but perhaps Rs 50 lakh, Rs 1 crore or even more. Obviously they are finicky. They would analyse the business in terrific detail before putting in their money. But when they do decide to part with their money, it is usually large sums.
And therefore the solution to Bobby's problem emerges. Identify those few wealthy angels who are willing to take a long-term bet. You might need just three or four such investors-maybe even fewer. These are the investors who will not ask for quick revenues but would be willing to wait patiently for the community to build up. The kind of investors who would have invested in Facebook or Google or even Hotmail, when these ventures were launched. After all, that's why these investors are wealthy, in the first place!
By the way, it is interesting to compare Fashionchat with SQRRL from Chapter 4. SQRRL was in a very similar situation, where it had no immediate revenues and needed large amounts of funding to grow. The difference, of course, is that SQRRL did have a revenue model-but one that would be implemented in future. It would charge for transactions such as the purchase of insurance products. It's only that it had delayed charging till its customers were hooked. Fashionchat, on the other hand, did not have a revenue model at all. And therefore SQRRL was able to raise funding, whereas Fashionchat simply could not.
And that's a good note on which to end this story. In case you are in a B2C business without any immediate revenues, you will definitely need large funding. You may be able to get this kind of funding from angels, but it is more likely that you'll need to go to the larger ones, or even to VC funds. Of course, the caveat is that you should have put in a large amount yourself-which the founders of SQRRL had. Why else would anyone else invest?Of course, you must remember that, often, this is also a man of luck. Perhaps Bobby had made her pitch to the angels soon aft some other investments had bombed and the angels were licking their wounds. Or after a major stock market crash. Please remember getting funding is not based on a formula. You have guidelines, ba they are, after all, guidelines. They will work in many cases, but the will be those where they may not. And that's also true of much of life, isn't it?
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