What’s your real business, seriously?
Piece of advice for every startup operator.
Welcome to the 201st edition of the GrowthX Newsletter. Every week I write 2 pieces on startups & business growth. Today’s piece is going to 95,300+ operators & leaders from startups like Google, Stripe, Swiggy, Razorpay, CRED & more
Most people lack imagination with products, careers, life & even relationships.
Builders thrive on imagination.
Most original thinkers have insights that people around them take years to understand. Also, most product builders are so close to their problem statement that they miss out on the “real” business they are in.
Let’s take the classic example of McDonalds.
It took a financial accountant to get Ray Kroc (the First CEO of McDonalds’) to understand the real business he was in - it wasn’t burgers but owning the real estate and leasing it at a premium. History was made after that insight.
You need to find that insight about your business.
And, more often than not, founders & investors look for what’s making money today for the business = largest value being created, which may not be true.
Take the example of Amazon.
One of the most important companies in the world right now. The largest value the business creates may not be the e-commerce vertical that it has but the Amazon web services division it has that just spins profits like hotcakes.
But that insight did not come on Day 1.
It took some time for the founder to arrive at the insight and fairly enough, it came from truth-seeking. The truth-seeking came when the Amazon team was trying to reduce the cost of maintaining the website in the form of server costs. Amazon was spending millions of $$$ on server costs in renting/ leasing them from other vendors.
This cost optimization is what led the way for AWS in its early days.
Providing scalable server infrastructure to multiple companies going online was the biggest business Amazon could/did/will build. You will have one question popping in your head -
How do I identify what’s the real business I am in?”
That’s exactly what we will try to answer & build a mental model. First, we need to really nail down the biggest value creation your product does and for whom. This could be plotted as shown below.
Most builders will look at “what makes money for the company right now” as the biggest value creation. But, it’s untrue for many reasons.
First, not every value that your product creates might be getting communicated to a set of potential target users or second, the target audience might not have the use case/ be ready for it (early to market). But that does not mean value creation does not exist today.
And, this is the reason why a lot of products early on focus too much on making “what makes money today” as the core business model - this is a lost opportunity.
Let’s take an example of the tax filing platform ClearTax.com.
When ClearTax started, it focused on consumer businesses to help salaried professionals file income taxes, but as it kept on building this business it realized the value it created for helping business owners file their taxes. This eventually changed the ballgame & ClearTax makes most of its profit margin from B2B.
So how do you figure out the real business you are in?
Value creation is the only leading indicator you can chase. Here are 5 questions to understand value creation for every type of user &find the real business you are in.
Q.1 → What use cases of your product make up a huge portion of overall revenue?
A quick example, If you were to breakdown ClearTax again, the most revenue generating use case is GST compliance for B2B small and medium customers. Now, write down the revenue sources from your last MIS/quarterly/annual revenue report.
Ask yourself - Is this something that is creating the largest value for end customers? If the yes, ask a followup - Will this create either huge value per user or create little value for a large set of users?
You can’t build a high average revenue per user business with a small value creation per user. This also means you will always be constrained by any good margins per sale. If you really want to create a large business, create large value for a specific segment of users who can pay a high price to solve a specific use case rather than creating little value per user.
Q.2 → What are some users/vendors/partners for whom you create large value but don’t capture it, yet?
I always take the classic example - McDonalds. When Ray Croc understood the real business he was in wasn't burgers but the real estate - particularly leasing land to its franchise. This changed the ballgame for McDonald's size of business.
Now create a list of users/vendors/ partners for your business. Try to understand the amount of value you are creating for each of them. Now, understand if you can capture that value by either buying them out/ owning majority stake or replacing their services with in-house teams. This is harsh but building a capitalistic business is hard.
Q.3 → What are some things you built ground up to run your business that can be sold off as a service to other non-competing businesses?
I always take the classic example - Amazon Web Services. When Amazon was buying servers left right and center during the initial days, it soon realized the amount of money it would have to spend every year just on server costs - that’s when AWS was born. Today, AWS owns 32% of the cloud infra market share.
Now create a list of things you build to run your business today. What are some of the things that require high upfront capital/ specific niche talent/ a really long time to build if someone had to start today? Also, the stuff you built to solve your business problem, is that a widely faced problem by other businesses? If yes, will it be a large business to make it a service/subscription offering?
Q.4 → Where all you spend the most of your raw material or service cost?
A simple example of this is technology startups. Their biggest cost centers are hiring people especially engineering & marketing spends. Can you point me a technology business with engineering outsourced? - they are doomed either in the short or longer term. You can’t outsource something that’s core to creating value for your users.
Now, think of the money outward of your business. What are some of the places you spend a considerable portion of money buying raw material or work with a services agency? Is there a huge margin that you are missing out on (especially you operate in a price sensitive category)? You need to really nail down places where you are giving out the margin to players who make more margins that you.
Take an example of an educational platform, content production is going to be the most expensive thing they do as part of their P&L and has really large margins. Content also creates the largest value for their customers - this piece of the business can not be outsourced.
Q.5 → Where all your organization spends a lot of time and that contributes nothing to either value being created for users/ reducing cost / growing revenues?
These are all places where you don’t really create user value. These are the places where it’s not a core part of the business and you shouldn't waste energy and time investing in. Outsourcing these pieces helps you focus on the “real business” you are in. Small but extremely powerful way to think through in-house/ outsourcing decisions.
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We have been writing deeper pieces in the last few weeks. If you liked this article, I would recommend reading this piece about how to understand why your product isn’t ready for growth.
And, if you are focusing on building a compounding career, we wrote this last week and got tremendous love from newsletter readers. I would highly recommend reading this piece (4 mins read time).
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