The Startup Playbook
At Good Capital, we’ve seen companies like SolarSquare, Orange Health, Nuuk, Entri, Xhipment, and others go from pre-product to meaningful revenue scale.
They are all from different industries, have different products, and different business models. However, they all followed the same path. Of course, all of them had and will have their own journeys, but principally, it’s the same underlying path. My goal is to lay out the step-by-step process they’ve followed to reach where they are.
It all starts with a problem or opportunity where the founders have a unique point of view in solving it. They build a solution, and then give it to a small set of customers. Then, based on customer feedback and patterns in how they use it, they further build out the product. The goal at this stage is to build something that people want to use. Once that’s established, i.e. you know exactly who is using your product and for what, the next step is to figure out how to monetise.
Here, there are two problems to solve: what’s the right monetisation model, and what’s the right pricing (how much are users willing to pay). This requires a fair bit of experimentation to get right. When the focus is on revenue, most don’t pay a lot of attention to the cost side (as long as they’re broadly under control). However, once there’s certainty around revenue, the focus shifts to optimising costs.
For most startups, there are three major cost centres: COGS (cost of goods sold), acquisition costs, and team salaries. At an early stage, the focus is on the first two: reducing COGS and acquisition costs. This is important to work out the unit economics of the business. Salaries are mostly fixed costs and are handled much later.
This is essentially where a startup finds product-market fit. It’s proving, at a small scale, that the business works. Now, the right scale will be different for different businesses - it could be 10 customers or 10,000 users, depending on the industry and business model - but it’s the smallest scale at which you can validate your product, market and unit economics.
After early PMF, startups go through the first phase of growth. The goal now is to replicate the success on a larger scale. Mostly, it’s about taking the existing product to a larger user base. The product will still continue to get incrementally better but the more important thing is how many people are using it.
To do this, the most important thing is finding out the right channels for growth. Different channels come with different costs and revenue quality. It’s a fine balancing act between acquisition costs and revenue growth. While COGS get marginally lower as the business scales, the most important thing is arriving at a workable CAC. This process could also require finding out different monetisation models or improving the product. Again, the goal is to prove that the business works. From a P&L perspective, this means getting to positive contribution, which means your revenue is more than the sum of your COGS and acquisition costs.
There are other variable costs as well, which increase with revenue scale. However, most of them aren’t large enough to merit specific attention in reducing them. In my mind, the most important thing at this stage is finding scalable growth channels and revenue models. If a business is able to successfully reach this stage, I believe it’s more likely to survive than not. Most startups die before this point – either they fail to find a real value proposition, or they fail to make it scalable.
This is where the real growth stage starts. In terms of fundraising, it’s usually around the Series B mark. Seed rounds help validate the business at a small scale, post which you raise a Series A to validate the business at a larger scale, and build a scalable growth strategy.
Now, the business needs to progress on both fronts – expanding what they offer, i.e. products, and who they offer it to, i.e. customers. Practically, this looks like building deeper products, or even newer products, expanding to different geographies or markets, working out different price points, and monetisation models. This is also when the startup needs to start building institutional capabilities, the leadership team needs to evolve beyond just the founders, and business units and functions start to emerge more clearly.
The playbook here is to grow whatever exists to its maximum potential and simultaneously, keep introducing the new to scale the business. As things scale, marginal growth tends to slow down. At that stage, the focus becomes profitability. It’s the same formula of growing first, reducing costs later, and getting to profitability – now being applied at a business unit level, instead of a product unit level. This is also where operating leverage starts to kick in, and there’s a focus on not inflating fixed costs too much so that the business has a path to becoming fully profitable.
Here’s how some of our portfolio companies did it:
Orange Health started in Bangalore, then they expanded to Delhi NCR, Hyderabad and Mumbai. Bangalore was their largest market, and once they hit a sustainable growth rate, they focused on making it profitable. This also helped them plan the investment they need in other cities to hit a certain revenue scale. They also expanded to offline from being at-home, while strengthening their operations and supply chain.
SolarSquare had Madhya Pradesh as its primary market but also expanded to Maharashtra, Gujarat, and a few other states, one by one. They went deep into the older states while also setting up their business in the newer ones. On the product side, over time, they started to offer things such as fast installation and savings guarantees that no other competitor was able to offer at scale.
Entri started with test-prep courses, then moved to skilling courses, and then moved to live courses with placement support. With skilling and live courses, they expanded the subject areas that they taught. They introduced more valuable products, which were priced higher and enabled the business to scale. At the same time, they built replicable playbooks on acquiring customers and building and delivering courses.
Nuuk started with fans but quickly launched products across kitchen, heating, and home care. They launched on Amazon and the brand website, before moving to other marketplaces and quick commerce, and most recently, offline. As they scaled, they negotiated better terms on COGS and working capital, while also working towards a steady RoAS. Then, they built growth plans for each product, category and channel.
Xhipment started with just shipping services on the India to US corridor. Over time, they expanded their value prop to first-mile, last-mile, port operations, customs, and warehousing to offer the full-stack. They also expanded to Europe to US, China to US, and China to India corridors. All the while, they built a lot of tech products for internal use to help them improve margins.
Okay, now coming back to the playbook. Scaling a startup means treading the fine line between growth and profitability. Most see this as contradictory, but I think they are complementary. Time and again, we’ve seen growth to be the biggest driver of profitability. Practically, it’s a cycle of growth, then profitability, then growth, then profitability. You scale revenue, then you try to get as close to EBITDA profitability at that scale, then you again scale revenue and try to get close to EBITDA profitability at that scale. Each cycle can be 12-24 months long.
Finally, let me come to the most important thing in this entire journey: capital allocation. There are two parts to it. First, founders must recognise that their most important job is to ensure that the business is sufficiently capitalised at any given point in time. This means that they need to be able to raise the money that the business requires. I’ll go as far as to say that I deeply believe, when a startup is working, founders should do all they can to raise as much as they can, because that’s what disruption and transformation require.
Second, founders need to allocate capital to the right things, based on the stage and status of the business. The most common mistake is allocating capital towards growth when the value and economics haven’t been solved for. Here, the important thing is to set constraints around time and capital to achieve certain business goals, and recognising that if you aren’t able to achieve them, that requires some big change to the business and/or path forward.
Through all of this, the most important thing remains the founders’ awareness about where the startup is, being able to pick the most important problem to solve at any given time, and then moving on to the next one. That’s the way.