1 + 1 = 0

The Summation Conundrum

My most dreaded words in the boardroom lately have been “We’ll do both”. The conversation with the founders usually starts like this:

We are doing A but are finding some difficulties. It seems it might be better to do B because X, Y, and Z did or said so. We’ll start experimenting with B because A and B have underlying synergies and 1 + 1 might just become 3.

As I see it, in such cases, 1 + 1 is unlikely to become 3 or even 2. It’s likely to sum up to 0 or at most 1. A startups’ resources, especially in the early stages, are limited. There is only one CEO, one COO, one CTO. There are a few techies building a product the way the founders tell them to, and the marketing team is trying its best to eke out every single dollar return from a penny spent. Does anyone really think this looks like a company or team that can afford to start doing two things at the same time?

Keeping our portfolio companies focused on doing a few things right is a big challenge. And I see myself spending a lot of time doing this more and more often these days. Entrepreneurs have a tendency to chase shiny objects, born out of their innate curious and dreamer minds. Even investors are likely to fall in a trap, myself included, where a new stream of business looks too lucrative to not be going after. We start drooling, and then mindlessly start steering the boat in two different, if not opposite, directions at the same time.

It doesn’t take a genius to figure out where the boat will go if the left oars paddle one way and the right oars paddle the other.

Every blogger VC from Fred Wilson to Brad Feld to Marc Andreesen has written at least one post on why you should do fewer things better. Fred Wilson says a company should take maximum three big bets each year. For me, even two are hard at a small scale, let alone three. And we have seen this play out again and again. One of our portfolio companies tried three different things at the same time, didn’t achieve much on any of them. After much convincing, they decided to finally focus on just one and even though everything is not hunky dory currently, at least there is growth in the core business.

I saw the same problem in another company that pitched to us recently. The pitch:

We do A and have significant IP there to make it defensible. But when we went out to sell A, customer X asked us whether we can do B for them. And we said, sure. Hence, now we run two lines of businesses A and B.

I wish there were a way to add a rolling eye emoji here.

Isn’t the need to focus obvious ?

Funnily enough, when you probe in a bit deeper, every entrepreneur mostly knows that pursuing two things at the same time is not the best strategy. They know it’s not good to divide your attention so early in the business, and then comes the dreaded “but”.

“I know it’s not good to do two things at the same time…

“But in our case it is different”.

“But, B helps strengthen A”

“But, A is not big enough and we need to do B to raise the next round”

“But, A is becoming competitive and B hasn’t seen much funding dollars yet”

Why are suddenly so many entrepreneurs going down this line of thinking? What has changed in the world to push them this way?

Enter “Ponzi scheme of Ambition”

Anand Sanwal from CBInsights wrote this great piece about the Ponzi scheme of Ambition with regard to Uber.

Uber

When Uber came out, it was going to disrupt the taxi industry.

And then it was taxis, last mile logistics, vehicle ownership and autonomous driving.

And then it was taxis, last mile logistics, vehicle ownership, autonomous driving and trucking (with Otto acquisition).

And then it was taxis, last mile logistics, vehicle ownership, autonomous driving, trucking (with Otto acquisition) and drones.

And now it’s all the above + flying cars.

I might have the order wrong but all are forays by Uber into markets that paint a picture of an ever larger total addressable market (TAM). This coupled with Uber’s uninhibited ambition gets investors excited.

And they, the investors, keep ponying up cash.

But the reality is that Uber doesn’t even dominate the first industry it attacked — taxis. Their playbook didn’t work in China. They don’t dominate in India and there are well capitalized competitors in southeast Asia, the Middle East, South America, etc.

Yet despite not owning their first market, they continue to paint a picture of their ambition with their efforts in various adjacent areas.

Ponzi Scheme or not, I do agree that this is not the way to build a company. And it’s easier to say now that Uber is struggling, it’s harder when every morning you wake up there is another news of the company raising hundreds of millions of dollars. But there the reality stands. At some point the results will have to catch up with the ambitions and the claims.

Go-Jek

Back in Asia, Go-Jek has played a similar game. It started with a simple bike taxi model, and then went into food deliveries, massages, and the next thing you know there are 15 different services on the app.

Each of these products has a significant TAM associated to it, which in effect helps Go-Jek raise more and more cash. But if you dig in one level deeper, Go-Jek has not really won any of these markets, except arguably food delivery in Jakarta. The company claims to own 50% of the ride hailing market (assuming it means bike hailing), but that’s a significant loss from the 100% market share that it possessed when it started. To an external eye, it seems to be losing ground every day to Grab and Uber. In such a case, when the core business model is not defensible, the only easy option to take is to increase the ambition and go after other bigger markets. Enter Payments. Nadiem has been quoted saying:

“Go-Jek never saw itself as a ride-hailing app. Maybe in the beginning, but we’re so beyond that now,” says Nadiem Makarim.

Oyo Rooms

The Ken had an in-depth article (paywall) on Oyo Rooms and exactly this same problem. Oyo started with providing standardized budget accommodation in India. The aim and vision was simple, brand the 1–2 star guest houses and hotels in India that comprise a significant share of the large fragmented market, put in some standard processes and ops in place, and aggregate the demand on a platform. As it moved on, it found that there were not too many barriers it could build, consumers were fickle, and big OTAs such as GoIbibo and MakeMyTrip jumped on to the same model. Thus started the Ponzi scheme of ambition, which pushed Oyo to go into managed properties and my gut tells me they’ll go into co-working spaces soon enough, just because it’s hot right now.

But one can argue, what about highly diversified businesses such as Amazon, Google, and even startups such as Airbnb? Well they started diversifying after winning in their core business first. It was not until Amazon had floated its books business on the public market that it started diversifying first into other retail categories and then into cloud. Google went public as a search business before diversifying its business into other adjacent cloud areas. Airbnb also first won the accommodation shared economy and has only now started diversifying into experiences and other travel related areas.

So how can a startup really tell when is it the right time to start expanding its core offering? While the easy answer is wait till you build a large company, you can infact start thinking of expanding as soon as you can start answering “yes” to the following questions:

1. Have we FINISHED what we set out to do?
   Starting is easy, finishing is hard. Make sure that you are proceeding every day on the path you originally set out on. And if you find the path is no longer walkable, switch over to another one which makes the most sense. But walking two paths at the same time in an early life stage is downright impossible. As pointed above, even late stage startups in Asia cannot really answer positively to this question. Not yet.
2. Is the new business a logical extension of my core business?
   This is where you need to really answer for yourself whether there are real synergies between your old and new business. There can be a potential case made for synergies between transport and payments business, but not a lot can be said about the logic of how a hyperlocal transport business can succeed in building a high scale and broad payments business.
3. Does knowledge from my core business put me at a significant advantage over competition to do this new business?
   This is quite self explanatory. In the case of Go-Jek, it tries to argue for the offline network of drivers acting as mobile ATMs allowing cash in and cash out for digital payments. I do agree it’s a competitive advantage.
4. Is the new business a highly competitive space already?
   Obviously, you don’t want to swim from one red sea to another. Again taking Go-Jek’s example, what is it that they can build that Grab cannot replicate is hard to say. And hence the advantage mentioned in point 3 is not really competitive enough.
5. Does my runway support opening a new line of business?
   This is something that most founders don’t realise. Starting a new business line eats into your already limited runway, and you have even less time to grow the business to the next stage or round.

There can be many other ways of looking at this, but in the end for me the answer is clear. Try not to move your boat in circles by going in two directions at the same time, but instead simply follow the stars.

Disclosure: GREE Ventures owns shares in Grab