How does any founder conclude that the company built today will yield lots of profits tomorrow? The framework for founders to assess if their company stands a chance to win keys to unlock fortune, the logic behind this is very simple. The Delta 4 theory was formulated by Kunal Shah back in 2016 to know if start-ups can work or not.
Who is Kunal Shah?
Kunal Shah was a student of philosophy who dropped out of MBA from Narsee Monjee to start and exit numerous ventures.
He started Freecharge a bills payout app back in 2010 with all the experience he had from his MBA. The company was later sold to Snapdeal, one of India’s biggest acquisitions to date. After his exit from the company, Kunal had many brainstorming sessions on start-ups, particularly on the reasons behind the success and failures. After much speculation, he formulated a concept called the delta 4.
Kunal’s delta 4 theory
Delta 4 theory states that “Every time the Delta of Efficiency is greater than 4, you unlock the pot of fortune”, i.e. Every time a consumer is stuck in an old model, say X, and you as a venture help them cross that state and bring them into a more efficient state, say Z, then the venture has a full potential to unlock pots of fortune. Let’s get this straight with the help of an example,
For instance, let’s compare travelling in a ridesharing auto from Ola and in a regular hired auto.
Back in time when people had to hire an auto they had to first reach the nearest auto stand, to enquire auto drivers if they were willing to take them to their destination or not? It was quite a task. But now, with a click of a few buttons on the phone, an auto arrives at your doorstep that takes you to your destination without any hustle. It’s also safe as it is being tracked during your entire journey. This was not achievable in the older models.
As the consumers get accustomed to the new model, there is no chance of going back. If we assume that the users would rate Ola auto’s 8 out of 10 and the old model around 3, the Ola model stands out by a difference of 5 points. If the same logic is applied to any venture that is still at its roots and scores a point more than 4 compared to the old model, none can stop it from growing to new heights.
The overtone of the theory:
- Ventures that create new efficiencies with delta 4 or more are the ones that find a great amount of wealth.
- With the implication of Delta 4, the venture can reach new heights without the help of Advertisements.
- The products or services will grow and sell by themselves, without advertising to state a few examples; truecaller, Instagram, etc..
- With time, the products or services would become a verb; for example, consumers usually say,” let’s take an uber to the party” instead of saying “let’s take a taxi to the party”.
Traits of delta 4 that are important for a start-up
If a product can make its consumer move from a point ‘X’ to a point ‘Y’ in the most efficient way possible, the product or service is bound to work. When this happens, it unlocks many features. To name a few:
1. It’s an irreversible trait
Let’s take the example of the railway booking system, earlier, people had to go to specific IRCTC booking counters spread across the city to get a confirmed ticket. They had to stand and wait for long hours to get their work done. But now times have changed, and one can get a confirmed ticket within their fingertips.
This technology has made the life of millions easy, and the consumers are so dependent on it that they prefer not to go back to the old model of booking tickets. The old model was replaced as the new model scored points on the delta scale above 4.
2. The willingness to keep using the new model is very high
Let’s take the example of Zomato. If Zomato is low due to maintenance-heavy traffic on the website, the consumers wait for the issue to be resolved rather than go back to the old school model finding the restaurant’s contact details to place an order.
3. Mouth-to-mouth advertising- the UBP: Unique Brag-worthy Proposition
It’s common for people to brag about the products they use when their near and dear ones are unaware of the existence of such a product. This becomes so prominent that it ends up being more important than its advertising.
The presupposition of the theory
Even if delta 4 is reached and the product or services are unaffordable, such an enterprise will not result in wealth. People in India, for example, travel by train despite the fact that aircraft are far more efficient because flights are prohibitively expensive for the average Indian household.
2. Market readiness:
Even if the enterprise has all of the characteristics of a delta 4, it may still lose money if the market’s ecosystem is present. For instance, in a country where cellphones are not widely used, introducing a cab booking app is an example. Until smartphones become more prevalent, a company can achieve Delta-4 in markets where SMS-based cab reservations are available.
3. Efforts to learn:
Wealth cannot be unlocked if the new business or method has a tough or lengthy learning curve. One example is new accounting software that can replace Tally. The product’s success may be jeopardised due to the new learning curve.
4. Branded verbs
It’s difficult to transfer individuals from their existing condition when the state changes from A to B and a brand or word is developed. “WhatsApp me!” or “Google it!” are some examples of expressions. Even if a better solution becomes available, onboarding people to the new system will be tough. This was also the primary reason for Signal’s failure when it was first introduced as a WhatsApp replacement.
Can Delta 4 be faked?
Delta 4 can be faked using influencers in the market. If an influencer, say an actor or a sports person pretends to follow certain products, people slowly adapt to those products. Let’s state an example of shampoos that are in the market which claims to get rid of dandruff or creams that claim to enhance the texture of the skin. These products were not a topic of discussion until FMCG companies created fake inefficiencies to promote their products, be it anti-dandruff shampoos or anti-ageing creams.
Figure out your delta 4 to evaluate your venture
Delta-4 Theory can be used by entrepreneurs while formulating ideas for start-ups or even existing products. It acts as a framework to self-evaluate whether the product or solutions create extraordinary value and wealth in the future. Problems are a subset of inefficiencies. The theory can also reverse-engineer existing inefficiencies to find a problem and, thereby, a product.
This blog is based on the talk given by Kunal Shah, founder of CRED, at the Seed to Scale program at Accel organized by Siddarth Ram who joined Accel in 2019 as a Founder in Residence.
Kunal’s Delta 4 theory is a great way to think about your product and how much it improves the customer experience over the alternative it provides, whether it be another product or an old way of doing things better.
Frequently Asked Questions (FAQs):
1. Who is Kunal Shah, and why did he develop the Delta 4 theory?
Kunal Shah is an Indian entrepreneur and investor who co-founded the mobile wallet company FreeCharge. He developed the Delta 4 theory as a framework for evaluating startup ideas and increasing the chances of success.
2. What are the four criteria of the Delta 4 theory, and why are they important for evaluating startup ideas?
The four criteria of the Delta 4 theory are Desirability, Feasibility, Viability, and Scalability. Desirability refers to the potential demand for the product or service being offered. Feasibility considers the resources needed to develop and launch the product, including technical expertise and funding. Viability evaluates the sustainability of the business model and the potential for generating revenue. Scalability assesses the potential for the business to grow and expand over time. These criteria are important for evaluating startup ideas because they help to ensure that the idea has a strong potential for success.
3. How can I apply the Delta 4 theory to evaluate my own startup idea?
To apply the Delta 4 theory to evaluate your own startup idea, you should assess each of the four criteria individually and determine how well your idea satisfies them. You may need to conduct market research, feasibility studies, and financial analysis to evaluate your idea fully.
4. What are some examples of successful startups that satisfy the Delta 4 criteria?
Some examples of successful startups that satisfy the Delta 4 criteria include Airbnb, Uber, and Dropbox. These companies all identified a strong market need and developed innovative solutions to meet that need while also being financially sustainable and scalable.
5. Can a startup succeed even if it doesn’t satisfy all four criteria of the Delta 4 theory?
Yes, a startup can still succeed even if it does not satisfy all four criteria of the Delta 4 theory. However, satisfying all four criteria increases the chances of success and may make it easier to attract funding and customers.
6. What are some common mistakes that founders make when evaluating their startup ideas?
Common mistakes that founders make when evaluating their startup ideas include overestimating demand, underestimating costs, and failing to adequately consider the competition.
7. How can I test whether my startup idea satisfies the Delta 4 criteria before launching it?
You can test whether your startup idea satisfies the Delta 4 criteria by conducting market research, developing a prototype or MVP, and getting feedback from potential customers and industry experts. This can help you identify any weaknesses in your idea and refine it accordingly.
8. How can I use the Delta 4 theory to refine my startup idea and improve my chances of success?
You can use the Delta 4 theory to refine your startup idea by addressing any weaknesses identified during testing and developing strategies to increase the potential for success. This may include refining the business model, improving the product or service offering, or targeting a different market segment.
9. How has the Delta 4 theory influenced the startup ecosystem and investment landscape?
The Delta 4 theory has influenced the startup ecosystem and investment landscape by providing a framework for evaluating startup ideas and increasing the likelihood of success. Investors may use the Delta 4 criteria as a way to assess the potential of a startup and make investment decisions accordingly.
10. What are some criticisms of the Delta 4 theory, and how valid are they?
Some criticisms of the Delta 4 theory include that it may not apply equally to all types of startups and that it does not account for the importance of factors such as team dynamics and execution. These criticisms are valid to some extent, but the Delta 4 theory can still be a useful tool for evaluating startup ideas and increasing the chances of success.