Networking is key to value creation.

What is the purpose of this article?

Provide some insights into how networking can support value creation.

You can download a PDF of this article from:  Networking is key to value creation

What is networking?

Let’s focus on business networking.  The are other types of networking, such as finding a new job. The following article uses the example of why a CEO would network.

Business networking is creating and maintaining a group of relationships which can potentially help the success of the company and the CEO’s personal success.  The relationships are potentially of mutual benefit.  The group of relationships as a whole will be key to success, but not every single relationship will turn out to be valuable.  Relationships are based on trust and understanding.

 What are some of the potential networking benefits to the CEO?

Networking can provide value to the CEO, the CEO’s organization, and to society.  This can be part of the CEO’s life-long learning and un-learning.

  • Exchanging ideas and getting fresh ideas.
  • Sharing and gaining new knowledge.
  • Sharing and gaining different perspectives.
  • Figuring out and getting answers to a question.
  • Being able to find other people who can help e.g. if the CEO wants to learn about taking a private company public and wants to find other CEOs who have done this.
  • Benefits to the company e.g. a private company CEO staying in touch with potential strategic buyers.
  • Being broadly known and having a reputation in case the CEO needs to find a new job.
  • Developing a pool of potential board directors, C-Suite candidates, or CEO successors.
  • Meeting their purpose in life and values by helping others when there is no personal or company benefit e.g. mentoring MBA students.

Who might be in the CEO’s network?

This is based on the networking benefits the CEO wished to achieve. Networking members could include:

  • Leaders and advisors from a broad spectrum.
  • Leaders and advisors who have a deep knowledge of the company’s customers, marketplace, and ecosystem.
  • Ecosystem members such as: customers, investors, regulators, competitors, and journalists.
  • If doing MBA mentoring, then other mentors, university leaders involved in mentoring, etc.

What are the benefits to people for being in the CEO’s network?

These benefits are aligned with the benefits to the CEO.

  • Exchanging ideas and getting fresh ideas.
  • Sharing and gaining new knowledge.
  • Sharing and gaining different perspectives.
  • Figuring out and getting answers to a question.
  • Being able to find other people who can help.
  • Benefits to the company e.g. strategic buyers staying in touch with potential acquisition targets.
  • Board directors developing a pool of potential board directors, C-Suite candidates, or CEO successors.
  • Meeting their purpose in life and values by helping others when there is no personal or company financial benefit.

What is the greatest challenge to growing and maintaining your network?

Individuals are overwhelmed with electronic information.  2009 University of California, San Diego study estimated that the average American was receiving 100,000 words a day, about 34 gigabytes of data.1  A McKinsey Global Institute study in 2012 also estimated 100,000 words a day.2

People don’t have the time to:

  • respond to every email, text, LinkedIn msg, etc,
  • read all the articles
  • respond and connect with every connection request
  • have regular coffee or Zoom calls with everyone they know.
  • etc.

How do you maintain your network?

There are many ways to maintain your network of mutually beneficial relationships.

  • When you need some sort of help, advice, or discussion.
  • When you provide some sort of help, advice or discussion.

How do you grow your network?

  • Your network members proactively do introductions.
  • You ask your network members for introductions.
  • You do “cold call” requests for connecting.
  • You respond to “cold call” requests for connecting.

What are some approaches for maintaining your network?

  • One-on-one meetings: face-to-face, Zoom, phone.
  • Individual emails, LinkedIn messages, or texts.
  • Social media updates e.g. LinkedIn.
  • Broader emails, personal newsletter.

Your next steps

  • Define your personal value creation plan.
  • If you are a leader, define your plan to increase your company’s value.
  • Define your plan to increase your value to society.3
  • Determine how networking would impact the above three sets of values.
  • What are the kinds of people you need to network with over the coming years, based on the above value impact?
  • How much time will you allocate to networking?
  • Create a structured process for creating and maintaining a network of relationships. Your process will recognize that people will enter and leave your network and that the degree of closeness and engagement with individuals will change over time.

Footnotes:

1 University of California, San Diego  “UC San Diego Experts Calculate How Much Information Americans Consume” Dec 9, 2009

https://qi.ucsd.edu/news-article.php?id=1630

2 Daniel H. Pink ,To sell is human, (New York: Riverhead Books, 2012), page 159

3 Exhibit 6 on page 8 of this McKinsey article raised the questions of “What you can be paid for” and “What the world needs”  These questions apply to you and an individual and to your company.

https://www.mckinsey.com/business-functions/organization/our-insights/seven-essential-elements-of-a-lifelong-learning-mind-set

Further reading

If you’re going to ask someone to do an introduction

https://koorandassociates.org/creating-business-value/if-youre-going-to-ask-someone-to-do-an-introduction/

Transformation success depends upon human behaviour change.

What is the purpose of this article?

Enable founders, the board of directors, CEOs, and other leaders to discuss the role of human behaviour change in achieving transformation success.

You may download  a PDF of this article from: Transformation success depends upon human behaviour change

Why do transformation efforts often fail?

Individuals do not change their behaviour, actions and decision making to support success.  Individuals may resist the transformation and even actively try to make it fail.  These individuals include customers, employees, and other individuals within the company’s ecosystem. The success of digital transformation, outsourcing, and cost reductions ultimately still depends on individuals changing their behaviour.

Most individuals prefer stability to the uncertainty and lack of control associated with change, and see more reasons for “don’t do” rather than “must do”. People look for reasons that activities cannot or should not be done.   People don’t carry out activities or the activities are late.  The quality and intent of the change is not carried out – people focus on being able to “check off” that they did something, while the underlying objective of the change is not achieved.

The failure may be evident only far after implementation is complete.  This is often seen when companies undertake major mergers or acquisitions and the expected revenue increases and cost reductions do not occur, at which point observations are then made that the “company cultures” were not considered, which is fundamentally that the resistance and support of the internal individuals was not assessed and planned for during decision making, planning and implementation.

There are 5 ways individuals will respond to transformation.

  • Active resistance e.g. taking deliberate action to resist the transformation and to cause failure. Spreads destructive rumours and misinformation.
  • Passive resistance e.g voices opposition, allows failures to occur. I call this “malicious compliance”.
  • Apathy, compliance e.g Go along with the transformation. No negative or positive comments regarding the transformation. Show little interest in the transformation.
  • Agreement e.g. agrees with the change, tries to avoid failure, agree with transformation when asked
  • Enthusiastic support e.g. Champions the change, seeks ways to enable success

What determines how individuals respond to transformation?

Individual emotional and intellectual perception of the transformation is driven 5 factors

  • What will be the day-to-day changes to behaviour, decision making, and actions?(e.g. processes/procedures, how to interact and work with others inside or outside the organization).
  • What will change in the individual’s environment changes (e.g. salary, benefits, who they work for, who their colleagues are, the work space, the technology they use, etc.).
  • How is the individual’s perception of their identity, value, or their future is impacted (e.g. career path, chance for promotion, perceived status, value of their knowledge, skills and past experience).
  • How are the individual’s purpose, values, morals, and ethics impacted and the alignment with the company’s purpose, values, morals, and ethics?
  • How consistent is the transformation with the company’s purpose, values, morals, and ethics?

The perception of the personal impact of change is determined by the individual.  A change which company leaders believe is “minor” may be perceived as “massive” by individuals.

What is the one factor that ensures transformation failure?

If individuals do not trust their leaders and do not believe what they are being told, then there is no reason for their emotional and intellectual perception to be positive. The individuals’ personal ecosystem may be providing mis-information and false rumours.

What is the leadership challenge with transformation?

Transformation can be very different from leaders past experience.  Past experience may often have focused on using analysis and logic to enable change.  Formal authority (i.e. the “Manager” tells people to do things differently) may have been the basis for driving change.  Transformation requires a new set of leadership skills e.g. being able to put themselves into the heart and mind of others, understanding what causes emotional reactions, how to behave and communicate in order to manage emotional actions, etc.

If the leaders are unable to transform themselves, then the broader transformation will fail.

Your next steps

  • Determine which individuals in the company’s ecosystem must support the transformation to enable success.
  • Assess how those individuals will respond based on their perceptions of the transformation. You’ll initially make assumptions and then validate by engaging the individuals to understand what they perceive.
  • If the transformation is at risk due to negative perceptions, too much resistance, and too little support, what changes do the leaders need to make?
  • Assess the degree to which employees and the company’s ecosystem trust what leaders say.
  • Is there sufficient trust to enable transformation success? If not, what changes do the leaders need to make to themselves?

Further reading

What is business transformation?

https://koorandassociates.org/business-transformation/what-is-business-transformation/

How do you succeed with transformation?

https://koorandassociates.org/business-transformation/how-do-you-succeed-with-transformation/

Why is trust critical for transformation?

https://koorandassociates.org/business-transformation/why-is-trust-critical-for-transformation/

If you’re going to ask someone for an introduction.

The purpose of this article

Identify some things for you to think about before you ask someone to do an introduction for you.

You may download a PDF of this posting from: https://koorandassociates.files.wordpress.com/2021/04/if-youre-going-to-ask-someone-to-do-an-introduction.pdf

What made me wonder about the introduction process?

  • Recently a friend of mine asked me to do some introductions for his daughter, who has just finished 1st year university and is looking for a summer job. I asked some relevant people I know. Many of whom agreed for me to do an electronic introduction, leaving it to the daughter and the people I know to then connect directly.
  • But that made me wonder. Why did I do the introduction?  No financial benefit to me.  Why did people accept?  Each of them said there were no jobs available for the summer.  No financial benefit to them.

Who are the three people involved in the introduction process?

  • The seeker – the person seeking an introduction e.g. my friend’s daughter.
  • The introducer e.g. me .
  • The introducee e.g. the person or people I know.

Why is the seeker asking for an introduction?

  • Address a short-term financial need. g. need a job, need a sales lead.
  • Address an information need. g. learn how to find a job, learn how law firms recruit lawyers.
  • Build new relationships which might be of value in the future. Each individual relationship will not be of value but the pool will be. A relationship implies long-term communications and interaction.

Why does the introducer agree to do any introduction?

  • Knows the seekers and is will doing to do favour. May also believe that the seeker will then “owe a favour”.
  • Believes the introducee may be able to help the seeker in some way.
  • Believes the introducee might learn something.
  • Knows that the introducee has a current problem or issue for which the seeker might have insights or be able to solve.
  • Believes the introducee might have a future need for someone like the seeker.
  • Some seekers pay for introductions. E.g. sales leads.

Often there is not short-term value to the introducer.

Why does the introduceee agree to the introduction?

  • As a favour to the introducer.
  • Believes may be able to help the seeker in some way.
  • Believes might learn something.
  • Has a current problem or issue for which the seeker might have insights or be able to solve.
  • Might have a future need for someone like the seeker.
  • Some seekers pay for introductions. That is not my model.

Often there is not short-term value to the introducee.

Why will the introducer decline to make an introduction?

  • The relationship with the seeker is seen as too little value to warrant any effort.
  • Too busy.
  • Believes there is no value to the introducer or introducee.
  • Cannot think of a single potential introducee.
  • Does not want to help for a wide range of reasons.

Why will the introducee decline the introduction?

  • Too busy.
  • Believes there is no value to the introducee.
  • Perceives the introduction as a “sales call”.
  • Does not want to help for a wide range of reasons.

What might an introduction process look like?

  • The seeker determines why they are looking for an introduction, the type of introduction, the characteristics of a potential introduce, the potential value to the introducee, and potential introducers.
  • The seeker asks a potential introducer to make one introduction. It’s only one, in order to minimize the effort of the introducer.
  • The seeker prepares for the introducer, perhaps in an email:
    1. Why seeking an introduction and with whom;
    2. A few sentences about the seeker.
    3. A link to the seeker’s LinkedIn profile.
  • The introducer asks one introducee they know if open to an introduction. The information is point 3 above is shared with the introducee.
  • The introducer then sends one email to the seeker and introduce, thus allowing them to connect directly with no further effort on the part of the introducer. The introducer should include a sentence or two about the introducee.
  • The seeker needs to thank the introducer.

Not every introducer will make an introduction for you.  Not every potential introduce will tell the introducer that it’s ok for an introduction.

Your next steps.

Prepare your own introduction process.

Why is trust critical for transformation success? V2

What is the purpose of this article?

Illustrate some of the reasons why trust is critical for transformation success.  This article is appropriate for any size company undergoing major change.

You may download a PDF of this article from: Why is trust critical for transformation success V2

What does successful transformation require?

People within the company and its ecosystem need to change. These changes can include:

  • Learning new skills and unlearning old ones;
  • Gaining new knowledge and unlearning old knowledge and experience;
  • Learning new processes and techniques and unlearning old ones;
  • Learning new behaviours and unlearning old behaviours; and
  • Potentially new values and culture and dropping old values and culture.

Successful transformation requires individuals to transform themselves.

People may transform themselves when they:

  • Believe there is personal value to them and/or to those they care about;
  • Understand why the current situation is not viable in the long-term;
  • Understand what the future looks like and the path to the future;
  • Feel some sense of control over their future;
  • Believe the leaders have heard and understand individual concerns;

Why does transformation fail?

  • Individuals see no reason to transform because they don’t trust what their leaders are telling them.
  • Individuals don’t transform because they emotionally resist being told what to do without understanding.

Going from a slowly-changing business to transformation makes visible:

  • All the issues with lack of trust in management; and
  • Management’s inability to deal with all the emotional factors of trust and resistance to change.

Your next steps

  • Determine the degree to which your employees and others in your companies ecosystem trust and believe what you say.
  • Define what changes in you values, moral, ethics, behaviours, and actions are required to improve trust.

Further reading

Society’s trust in corporate leadership and political leadership is low.

https://koorandassociates.org/values-morals-and-ethics/societys-trust-in-corporate-leadership-and-political-leadership-is-low/

What is business transformation? V2

https://koorandassociates.org/business-transformation/what-is-business-transformation/

How do you succeed with transformation? V2

https://koorandassociates.org/business-transformation/how-do-you-succeed-with-transformation/

 

Is your early stage startup planning to fail? V2

Is your early stage startup planning to fail? V2

 Purpose of this article.

Help founders, their potential team members, and potential investors begin to understand whether or not they are planning to fail. The article is not intended to be comprehensive in breadth or depth.

You may download a PDF of this article from:  https://koorandassociates.files.wordpress.com/2021/03/is-your-early-stage-startup-planning-to-fail-v2.pdf

What are the 3 greatest contributors to startup failure?1

This research study analyzed 101 startup failures and identified the most frequently cited reasons for failure.  Usually there were several reasons for failure.

  • 42% of the time built a solution looking for a problem i.e. no market need.
  • 29% of the time running out of cash.
  • 23% of the time, not the right team.

How do you recognize you’re planning to fail?

How can you tell you are building a solution for which there may be little or no market demand

  • You’ve done few or no ongoing surveys and interviews of potential customers or cash paying customers.
  • You’ve done no ethnographic or thematic analysis of surveys and interviews.
  • You’ve done little or no analysis regarding the number of potential customers who believe they have a problem or need for which they are both willing and able to spend money to address.
  • Your estimate of potential market size is based on your personal opinion, or a one-page chart from a 3rd
  • You don’t have metrics for customer engagement at the pre-revenue stage.
  • You don’t have an ongoing process to validate market demand and market size.

How can you tell you are planning to run out of cash?

  • You don’t have a 24 month, by month cash flow forecast, with key milestones for each month.  Your milestones don’t include monthly customer engagement targets, even at the pre-revenue stage.  You don’t show the month in which the capital from your next fund-raising round is in the bank.  You’ve assumed that fundraising only takes a few months. The customer engagement milestones prior to planned beginning of your next fundraising will not persuade investors to part with their capital.
  • You assume that you can raise money from 3rd party investors when you have no revenue. Most startups obtain 3rd party funding (i.e. other than friends, family) once there is revenue. 27% of angel funded companies are pre-revenue.2
  • You assume that it will be easy to raise money from angel investing groups. 4% of Canadian startups that apply to angel groups receive funding. Only 9% are asked to present to an angel group.3
  • You assume that it will take little time to raise funds. The average seed stage round takes 12 ½ weeks. 20% of the startup require 20 weeks or longer. 20% of the startups require 6 weeks or less.4 A fund-raising round can take a long time. This research study examined 13,916 financing events.4 The average time between fundraising rounds was 20.6 months.  The time between rounds ranged from 6 months, to 35 months, 68% of the time.  e. 16% of the time less than 6 months and 16% of the time longer than 35 months.
  • Your cash flow plan has no scenarios e.g. what if customer growth is slower than expected, what if fundraising takes longer.
  • You don’t have a cap table, leading all the way to investor exit. The cap table assumptions are not related to your cash flow assumptions.

How can you tell don’t have the right team?

  • You haven’t recognized that your team includes: founders, employees, contractors, advisors, board directors, investors, and your network.
  • You haven’t identified the complete set of talent requirements and gaps for each stage of your startups evolution. Talent requirements include: ethnographic and thematic analysis, finance skills to create a cap table leading all the way to investor exit, monthly cash flow models and scenarios, presentation and communications skills, etc.
  • You don’t know what a startup is. A) A startup is a temporary organization designed to search out a repeatable, scalable, and profitable business model with lots of potential customers who are willing and able to pay to solve their problems and needs. B) Startups are not building a solution.  They are building a tool to learn what solution to build.6

Your next steps

As a startup founder:

  • Ask your advisors to do an assessment. As they compare your startup to others, are you planning to fail?

Footnotes

1 https://s3-us-west-2.amazonaws.com/cbi-content/research-reports/The-20-Reasons-Startups-Fail.pdf

2 Angel Capital Association and Hockeystick, “2019 ACA Angel Funders report “

3 A decade of deals, annual report on angel investing in Canada, June 2020, NACO (National Angel Capital Organization)

4“What we learned from 200 startups who raised $360 million”, Professor Tom Eisenmann, Harvard Business School, and DocSend

https://www.slideshare.net/DocSend/docsend-fundraising-research-49480890

5 https://medium.com/journal-of-empirical-entrepreneurship/how-much-runway-should-you-target-between-financing-rounds-478b1616cfb5

6 Lean Analytics – Use data to build a better startup faster (2013) by Alistair Croll, Benjamin Yoskovitz, O’Reilly Media, Sebastopol California Page 41

Startup terminology and metrics. V3

The purpose of this article

This article has a two-fold purpose:

  • Provide definitions of startup terminology and metrics. My various articles will refer to this article, which means that I don’t have to include definitions and metrics in each article.
  • Enable a startup to quickly create its own set of terminology and metrics.

There is no single set of commonly agreed upon definitions.  Many startup participants use the same words and acronyms to mean different things.  E.g. many founders I’ve met say that they have an MVP (Minimum Viable Product), when what actually exists is some partially written code.

This article is not intended to be comprehensive in breadth or depth nor to explain how to create and use the terminology and metrics.

You may download a PDF of this article from:  https://koorandassociates.files.wordpress.com/2021/03/startup-terminology-and-metrics-v3.pdf

How to read this article

Section 1 General concepts

Section 2 Finding a potentially repeatable, scalable, and profitable business model with lots of potential customers who might be willing and able to pay to solve their problems and needs.

Section 3 Customer and market metrics

Section 4 Some startup financial metrics

Section 5 Financing rounds

Section 6 Type of financing

Section 7 Investment fund reporting metrics to their investors of limited partners

Section 1 General concepts

What is a startup?

A startup is a temporary organization designed to search out a repeatable, scalable, and profitable business model with lots of potential customers who are willing and able to pay to solve their problems and needs.

Startups are not building a solution.  They are building a tool to learn what solution to build.  (Lean Analytics – Use data to build a better startup faster (2013) by Alistair Croll, Benjamin Yoskovitz, O’Reilly Media, Sebastopol California Page 41)

What is a business model?

A business model describes how a company creates value for itself while delivering products or services to customers.  Who are your target C&U (Customers and Users)? What C&U  problems are your solving? What C&U needs are you addressing?  What benefits and value are you enabling customers to achieve? What are the human and technology resources needed?  What are the channels and partnerships?

Customers are those who give the company cash.  Users are those who use and interact with the solution.  Google is an example.  I use Google but don’t pay cash to use it. Advertisers pay cash to Google.

Accelerators, Incubators, and Venture Studios

Accelerator

  • An Accelerator is a company or organization that puts a start-up company (which already has a Minimum Viable Product) through a very structured 3–4 month process. This process has the goal of quickly growing the size and value of the start-up to enable future funding.
  • The Accelerator puts companies through a vetting process so that higher likelihood of success companies are made available to investors. This reduces investors’ due diligence time and costs.
  • The Accelerator may take a small financial interest in the company in return for its assistance.
  • Mentorship is provided by experienced start-up executives, investors, and others.

Incubator

An Incubator helps take a start-up to the point where there is an MVP (Minimum Viable Product).

The characteristics of an Incubator include:

  • Co-located office space with other start-ups;
  • Links to investors;
  • Access to lawyers;
  • Provides coaching and mentoring, via successful start-up executives and consultants.
  • Networking, based on all of the above

University affiliated Incubators usually do not take an equity interest.  Investors may do so.  The process takes 12 to 24 months, with the pace set by the founders. Once there is an MVP, then an Accelerator may work with the start-up.

Venture Studio

A Venture Studio is an organization that creates startups, typically by identifying a market need, assembling the initial team, and providing the capital to launch.  The team must still persuade the venture studio to provide capital.

Section 2 Finding a potentially repeatable, scalable, and profitable business model with lots of potential customers who might be willing and able to pay to solve their problems and needs.

Understand the potential customers and users before building a solution.

The business model canvas

A business model canvas is a one-page document which easily defines and communicates the business model.  There are 9 components to the business model canvas: customer segments, customer value proposition, customer relationships, channels, key partners, key resources, key activities, cost structure, revenue streams.

Value proposition

This is the customers and users perception of value.  What are all the financial and non-financial benefits achieved? e.g. time savings, convenience, status, reducing negative emotions or risks, benefits achieved (financial and non-financial) achieved by the customers?  What are all the costs incurred by the customer (purchase costs, costs to switch to your company, other adoption costs, ongoing costs)?

Customer journey map

The customer journey map is a visual representation of the customers’ experiences with your company across all touchpoints. Customers interact with via social media, email, live chat or other channels, mapping the customer journey out visually helps ensure no customer slips through cracks. The journey also illustrates the customer interaction with influencers and other who impact the customer. The following are some examples of customer journey maps.

https://blog.uxeria.com/en/10-most-interesting-examples-of-customer-journey-maps/

Customer engagement

Customer engagement is the relationship and interactions  between customers (existing and potential) and the company.  Engagement may include: useful content on the website, newsletters, interviews, surveys, etc.  Engagement continues and improves throughout the life of the company.

Ethnographic research. 

Ethnography is the branch of anthropology that involves trying to understand how people live their lives. It outlines the context in which customers would use a new solution and the impact that solution might have on their lives.

Thematic Analysis

Thematic analysis is a method of analyzing qualitative data such as interview transcripts. The researcher closely examines the data to identify common themes – topics, ideas and patterns of meaning that come up repeatedly. There are two approaches:

  • Inductive – the data validates or invalidates assumptions
  • Deductive – the data identities the finding

Wireframe

Provide a visualization of the potential user/customer interface of what will the customers/users will perceive in the MVP (Minimum Viable Product).  Note that customer/user interfaces are evolving to include voice interaction, hand gestures, augmented reality, neural monitoring, etc.

The wire frame has no functionality.  It may even be a PowerPoint slide.

Proof of Concept

The purpose of the proof of concept is to gain customer/user and domain expert feedback to validate specific critical assumptions of the MVP.

The very limited functionality is intended to validate customer problems and needs.

 Functional Prototype

The hardware or software prototype is only the hardware or software components of the MVP. The prototype’s purpose is to enable learning from customers/users and support demonstrations to customers/users.

This functionality is intended to validate customer problems, needs and potential benefits.

 Pilot Solution

This is the MVP, including onboarding, customer support, and exiting.  The customer is not paying for the pilot.  The two-fold purpose of the pilot is to identify any issues which prevent customer/user problems and needs being solved and to identify any issues which prevent the customer/user from being delighted. The pilot is providing specific feedback on the value the customers/users are achieving. The pilot helps determine what price should be charged.

This begins the validation of the actual benefits a customer is achieving in addition to further validation of customer problems and needs.

 MVP

This should really be called Minimum Viable Solution. A product or service with just enough features to have delighted early cash paying customers by enabling them to solve some urgent problems or needs, and to provide customer/user feedback for future development.  The MVP includes the full solution, including onboarding, customer support, and exiting. What the customer does not see or interact with (i.e. all the behind the curtain resources and activities) will likely be inefficient, have manual components, technology that is temporary, etc.

Customers/users determine whether or not there is an MVP, NOT the startup team.  If the MVP does not solve some core customer/user problems, needs, and meet expectations, there isn’t an MVP.  The startup needs to learn from customers and users what needs to change to enable an MVP.  It may take several attempts before there is an MVP.

The MVP validates the overall customer journey with the solution, starting from onboard to exiting and including customer service.  What the customer perceives as fatal flaws at any point in the journey may result in the customer neither using nor recommending the solution.

Product market fit

You get to product/market fit by adding more features to the initial MVP until there are a large number of potential customers and users.

The facts and analysis show that:

  • There is a repeatable, scalable, and profitable business model.
  • There are a large number of potential customers who believe their problems are urgent enough to buy your solution, and they can also afford your solution.
  • The customers and users believe you have a better value proposition than the competitors.

You know you have product/market fit if:

  • Your customers are so delighted that they are recommending it to others.
  • Your customers would be extremely disappointed if your solution disappeared.
  • Your customers can describe the big problem they had and the big benefit they achieved from your solution.
  • There is clear demand in the market place for your solution.
  • You are clearly and obviously differentiated from competitors in terms of the value customers achieve.
  • There are a large number of potential customers who believe their problems are urgent enough to buy your solution, and they can also afford your solution.

You do not have product/market fit if:

  • Your customers are not recommending you to others.
  • Your customers would not be extremely disappointed if your solution disappeared.
  • You customers cannot describe the big problem they had and the big benefit they achieved from your solution.
  • The marketplace is not demanding your solution. You have to persuade/educate your customers that they have a big problem with a big opportunity.
  • You are not clearly and obviously differentiated from competitors in terms of the value customers achieve. Your only differentiation is price.
  • There are a not large number of potential customers who believe their problems are urgent enough to buy your solution, and they can also afford your solution.

Your metrics, facts and analysis show that:

  • There are a large number of potential customers who believe their problems and needs are urgent enough to buy your solution, and they can also afford your solution.
  • The customers and users believe you have a better value proposition than the competitors.
  • The Net Promoter Score is excellent.
  • Churn is low and retention is high.
  • There is a metric for new customer value achievement  (e.g. for Slack it was 2,000 team messages sent within 60 days).
  • Measuring and analyzing new customer value achievement metric (e.g. % of new customers achieving new customer value achievement indicator within 60-90 days).

Marc Andreessen’s definition of product/market fit:

“The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can.” From:  On product/market fit for startups

Section 3 Customer and market metrics

NPS (Net Promoter Score) The single most important question is asking  “Would you recommend our solution to others?”  (Follow on questions could be “If so, why?  If not, why not?”) This metric is known as NPS.  What is your NPS? Above 0 is good. Above 50 is excellent. Above 70 is world class. How do you compare to your industry and competitors? What has been your NPS trend?

The Net Promoter Score concept was initially developed by Bain.  The following is a link to the Bain website homepage for Net Promoter Score, which contains several short articles:

http://www.netpromotersystem.com/about/why-net-promoter.aspx

The following is a quick overview of using Net Promoter Scores:

https://www.forbes.com/sites/shephyken/2016/12/03/how-effective-is-net-promoter-score-nps/#1b1391b423e4

Customer metrics

New customer value achievement leading indicator. This measures the customer actions which are assumed to indicate that the customer is achieving value.  (e.g. for Slack it was 2,000 team messages sent within 60 days).

New customer success metric . This is the % of new customers that are assumed to be achieving value, based on their actions. E.g. The metric could be:  % of new customers achieving new customer value achievement leading indicator within 60 days).

Market Size Metrics

Market size = (The number people (or organizations) with an urgent problem or need that they are willing to spend money) times (the amount they are both willing and able to spend).

What is TAM (Total Addressable Market)?

  • What would be the startup’s revenues with their future solution if 100% of the customers demanding a solution to their problem bought startup’s solution? This assumes all potential geographies, distribution channels, and partners. The number of customers demanding a solution will be fewer than the number of customers that have a problem or need.
  • Is the startup’s TAM large enough to launch and grow the startup? For example, the global smart phone TAM is huge, but the global TAM for smart phones that have a keyboard is tiny.
  • The best way to calculate TAM is with a bottom-up calculation, starting with a clear description of the target customer segments, their problems and needs. Then quantify the subset of customers believe they have an urgent problem for which they are demanding a solution. What will be the revenue per customer? Recognize not everyone in every country will be able to afford the solution.

What is SAM (Serviceable Addressable Market)?

  • This is the portion of the TAM that is within the reach the startup’s current geographies, distribution channels, and partners, and the startup’s ability to deliver and support their solution. This still assumes 100% market share of those customers demanding a solution. SAM will change over time, as growth occurs in geographies, the number of distribution channels and partners, and the volumes from each distribution channel and partner.

What is SOM (Serviceable Obtainable Market or Share of Market)?

  • SOM will be lower than SAM for three reasons: there will be competitors, customers who are demanding a solution may not actually buy a solution, and there will be an adoption rate ranging from early innovators to laggards.

TAM, SAM, and SOM will vary at different points of the 5-year forecast.  TAM, SAM, and SOM will also change as the startup validates assumptions by progressing through: initial assumptions, customers interviews, feedback from prototype in customers hands, feedback from initial revenue producing customers, feedback from MVP, customer feedback as solution capabilities are enhanced to provide value to a greater set of customers, etc.

Section 4 Some startup financial metrics

Free Cash Flow

Free cash flow = EBITDA, subtracting all cash commitment, subtracting non-cash items, subtracting increases in working capital

EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization)

EBITDA = (Capital expenses + Net Interest Expenses + taxes + non-cash items + increase in working capital)

Burn Rate and Runway

The monthly burn rate is the amount of cash the startup is losing each month.  Burn rate = revenue – expenses.

Runway is the amount of time before you run out of cash.  There are multiple runway scenarios e.g. revenue and expenses remain constant; forecast revenue vs forecast expenses, etc..  There may be multiple forecasts.

CAC (Customer Acquisition Cost) includes all the costs to acquire a new customer:

  • Sales.
  • Marketing.
  • Onboarding.
  • Related compensation of the people.
  • Overhead associated with the people.
  • Technology to support CAC.
  • Legal expenses associated with sales and marketing.

LTV (Life Time customer Value)

What is the lifetime customer profit, after customer acquisition?  This will take into account churn.

A scalable business model is one in which LTV exceeds CAC.

Churn is the % of paying customers who leave each month.  Your target should be at most 2% per month churn.  5% per month means you are in trouble.  You must figure out and fix the churn problem if you hope to grow your company.

COGS (Cost of Goods Sold) What comprises cost of COGS? Everything required to meet the direct needs of current customers.  E.g.

  • Customer support people, and software.
  • Technology e.g. software, cloud services, communications costs.
  • Bug fix and minor enhancement to the software – after all you do need to retain current existing customers.

CAC is not part of COGS.

G&A (General and Administration) What comprises G&A?

  • Payroll administration.
  • Recruiting administration.
  • Finance
  • IT security.
  • Corporate development e.g. M&A.
  • CEO salary/benefits.
  • Legal expenses (both in house and external), other than those associated with sales contracts.

R&D/Engineering/new Development?

All of the costs associated with discovering major changes to the business model and enhancing the solution.

Gross Profit Margin

(Revenue minus COGS) divided by revenue.

Let’s use QuickBooks to illustrate the concept of the financial metrics.

There is a GL line item for salaries.

Then then there is a class i.e. where do parts of the salary belong?  (i.e. QuickBooks class)

  • CAC?
  • Cost of goods sold?
  • R&D/Engineering/New Development?
  • G&A?

Section 5 Financing Rounds

General concepts

  • The startup may bootstrap (i.e. no equity or debt financing other than friends and family) or go through one or more stages of raising external financing.
  • Cap table. The cap table tracks the equity ownership of all the company’s shareholders and security holders and the value assigned to this equity. Cap tables need to be comprehensive. They should include all elements of company ownership such as convertible debt, stock options and warrants in addition to common and preferred stock. The cap table also forecasts the future equity ownership, through various fundraising rounds leading up to exit. The cap table is more comprehensive than the balance sheet. Anything that may results in equity ownership is included e.g. SAFEs are a contract but may result in equity ownership.
  • Term sheet. The term sheet is a largely non-binding document. It enables the startup leadership and investors to focus on the important issues and helps to minimize misunderstanding or problems when the complex and legally binding closing documents are drafted. The term sheet may outline the due diligence process, the timetable for the transaction, the due diligence process, any conditions to be met before beginning to draft binding legal documents, key legal principles, and any binding terms e.g. confidentiality.  Elements of the term sheet may include: company details (including current shareholders and current directors), company valuation, how much money the company seeks to raise (number of shares and at what price), investor information rights, any rights for certain founders or investors to remain as directors or have certain decision rights, any rights investors will have regarding specific company decisions, what the funds will be used for, any restrictions on what the founders or company may do, what rights to sell or transfer shares, co-sale terms (e.g.  If one of the shareholders sold their shares, other investors could be included and dragged along able to sell their shares), what happens when the company is sold or wound up, what the pre-money valuation of the company is, size of the option pool, any anti-dilution privileges, board size and how directors are appointed or elected, founder vesting of shares, who pays for the legal expenses, any rights to future investment
  • Pooling Agreement (sometimes known as voting trust) The Canada Business Corporations Act defines pooling agreement as “written agreement between two or more shareholders may provide that in exercising voting rights the shares held by them shall be voted as provided in the agreement.”
  • Subscription Agreement. The subscription agreement is the agreement between the company and the investor in a private placement of debt or equity. The agreement sets out the terms and conditions of the investment, the purchase price, the representations and warranties of the parties and certain covenants. The company obtains relevant information from the investors to ensure they meet the criteria of the applicable exemptions from the prospectus requirements of Applicable Securities Laws.
  • USA (Unanimous Shareholders Agreement) The Canada Business Corporations Act defines a USA as “…written agreement among all the shareholders of a corporation, or among all the shareholders and one or more persons who are not shareholders, that restricts, in whole or in part, the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation.” All shareholders must sign and be part of the USA. The areas covered by a USA include: what decisions are made by shareholders, how do the shareholders make decisions, how are disputes resolved, what is the process and constraints regarding share transfers, how the shareholders extract value from their investment.

Five potential financial rounds

#1 Friends and family

Most early startups depend upon founders, friends and family for funding.

#2 Angel investors, pre-seed investors.

These are the first investors outside of friends and family

#3 Seed investors

These are the second round of investors, after pre-seed investors

#4 Series A, B etc. investors

These investors are funding the rapid growth of the company

#5 Longer term

  • Company is bought and merged into an existing company;
  • Long-term private equity investors; or
  • Public markets

Section 6 Types of financing

There are many types of financing:

  • Equity e.g. common stock, preferred stock.
  • Debt.
  • Convertible debt.
  • SAFEs (Simple Agreement for Future Equity). The SAFE is a contract which gives the investor the right to purchase stock in a future equity round (should there be one) subject to the terms and conditions in the SAFE contract.
  • Government grants, loans, tax credits.
  • Funding for research.
  • Paid pilots.
  • Profits and revenue sharing.
  • etc.

Section 7 Investment fund reporting metrics to their investors or limited partners

Investors should understand the funds reporting and forecasts, especially whether or not unrealized gains are included.

DPI (Distribution to Paid in capital):  Cumulative distribution to investors  /capital contributed by investors. Including management fees and expenses.

MOIC (Multiple On Invested Capital) Cumulative realized and unrealized value (an estimate)  of the investment / capital invested by the fund.

TVPI (Total Value Paid In capital): Cumulative distribution to investors + unrealized value (an estimate) /  capital contributed by investors. Including management fees and expenses.

Next steps

Create definitions and metrics for your startup.  This will help everyone (founders, employees, advisors, investors, etc.) have a common understanding about you actually mean when you use certain words.

Further Reading

What does the startup journey look like?

https://koorandassociates.org/the-startup-journey/what-does-the-startup-journey-look-like/

What does the startup journey look like? V3

The purpose of this article.

To illustrate the major milestones in the growth of a software startup focused on the general public as customers.  The startup journey will vary, depending upon the type of startup and customers.

You can download a PDF of this article from: What does the startup journey look like V3

How to read this article

Section 1 outlines some general concepts.

Section 2 outlines the journey from the perspective of obtaining customers.  There are 4 phases:

Phase 1 Find a potentially repeatable, scalable, and profitable business model with lots of potential customers who might be willing and able to pay to solve their problems and needs.

Phase 2 Create a repeatable, scalable, and profitable business model.

Phase 3 Scale and rapidly grow the company.

Phase 4 Continuously improve a mature company.

Section 3 outlines potential financing journeys.

You may download a PDF of this article from: https://koorandassociates.files.wordpress.com/2020/11/what-does-the-startup-journey-look-like-v2-2.pdf

Section 1 Some general concepts

 What is a startup?

A startup is a temporary organization designed to search out a repeatable, scalable, and profitable business model with lots of potential customers who are willing and able to pay to solve their problems and needs.

Startups are not building a solution.  They are building a tool to learn what solution to build.  (Lean Analytics – Use data to build a better startup faster (2013) by Alistair Croll, Benjamin Yoskovitz, O’Reilly Media, Sebastopol California Page 41)

What is a business model?

A business model describes how a company creates value for itself while delivering products or services to customers.  Who are your target C&U (Customers and Users)? What C&U  problems are your solving? What C&U needs are you addressing?  What benefits and value are you enabling customers to achieve? What are the human and technology resources needed?  What are the channels and partnership?

Incubators and accelerators

  • Many startups work with incubators and accelerators.
  • Some startups work with several incubators and accelerators.

Section 2 The journey from the perspective of obtaining customers.

 Phase 1 Find a potentially repeatable, scalable, and profitable business model with lots of potential customers who might be willing and able to pay to solve their problems and needs. 

Your journey is driven by your understanding of your potential cash paying customers. E.g. before building a beef ranch, you must understand whether or not your potential customers are vegetarians.

Phase 1 has 8 steps. Steps may be parallel and iterative.  Some steps may be combined.  You may have to go back some steps – your journey is not always moving forward.

Step #1 The founders have an idea

  • The founders have an idea. They first agree upon: equity split, their expectations regarding startup, how decisions will be made, the purpose of the company, and who has the title of CEO.
  • The never-ending process of interviewing and surveying potential customers and users begins.
  • Before building anything, 100 potential customers and users will be interviewed and 100’s more surveyed. This begins the never-ending process of understanding the problems of potential cash paying customers

Step #2 Understand the potential customers and users before building a solution.

A business model canvas is a one-page document which easily defines and communicates the business model.  There are 9 components to the business model canvas: customer segments, customer value proposition, customer relationships, channels, key partners, key resources, key activities, cost structure, revenue streams.

On day one, this canvas will be only assumptions.  The interviewing and surveying process will validate or invalidate assumptions and identify new assumptions.

Value proposition

This is the customers and users perception of value.  What are all the financial and non-financial benefits achieved? e.g. time savings, convenience, status, reducing negative emotions or risks, benefits achieved (financial and non-financial) achieved by the customers?  What are all the costs incurred by the customer (purchase costs, costs to switch to your company, other adoption costs, ongoing costs)?

Customer journey map

The customer journey map is a visual representation of the customers’ experiences with your company across all touchpoints. Customers interact via social media, email, live chat or other channels, mapping the customer journey out visually helps ensure no customer slips through cracks. The journey also illustrates the customer interaction with influencers and other who impact the customer. The following are some example of customer journey maps.

https://blog.uxeria.com/en/10-most-interesting-examples-of-customer-journey-maps/

The business model canvas, value proposition, and customer journey map are continuously validated and revised throughout the life of the company.

Customer engagement

Customer engagement is the relationship and interactions  between customers (existing and potential) and the company.  Engagement may include: useful content on the website, newsletters, interviews, surveys, etc.  Engagement continues and improves throughout the life of the company.

Step #3 Create a Wireframe

Provide a visualization of the potential user/customer interface of what will the customers/users will perceive in the MVP.  Note that customer/user interfaces are evolving to include voice interaction, hand gestures, augmented reality, neural monitoring, etc.

Step #4 Create Proof of Concept

The purpose of the proof of concept is to gain customer/user and domain expert feedback to validate specific critical assumptions of the future MVP.

Step #5 Create a Functional Prototype

The hardware or software prototype is only the hardware or software components of the MVP. The prototype’s purpose is to enable learning from customers/users and support demonstrations to customers/users.

Step #6 Pilot Solution

This is the MVP, including onboarding, customer support, and exiting.  The customer may not be paying for the pilot.  The two-fold purpose of the pilot is to identify any issues which prevent customer/user problems and needs being solved and to identify any issues which prevent the customer/user from being delighted. The pilot is providing specific feedback on the value the customers/users are achieving. The pilot helps determine what price should be charged.

Step #7 MVP (Minimum Viable Product)

This should really be called Minimum Viable Solution. A product or service with just enough features to have delighted early cash paying customers by enabling them to solve some urgent problems or needs, and to provide customer/user feedback for future development.  The MVP includes onboarding, customer support, and customer  exiting. What the customer does not see or interact with (i.e. all the behind the curtain resources and activities) will likely be inefficient, have manual components, technology that is temporary, etc.

Customers/users determine whether or not there is an MVP, not the startup team.  If the MVP does not solve some core customer/user problems and needs that the customer is willing to pay for there isn’t an MVP.  The startup needs to learn from customers and users what needs to change to enable an MVP.  It may take several attempts before there is an MVP.

The initial MVP will have a small number of customers and users.

Step #8 Evolve the MVP until there is product market fit

The MVP will be iterated and enhanced until there is product market fit.

You know you have product/market fit if:

  • Your customers are so delighted that they are recommending it to others.
  • Your customers would be extremely disappointed if your solution disappeared.
  • Your customers can describe the big problem they had and the big benefit they achieved from your solution.
  • There is clear demand in the market place for your solution.
  • You are clearly and obviously differentiated from competitors in terms of the value customers achieve.
  • There are a large number of potential customers who believe their problems are urgent enough to buy your solution, and they can also afford your solution.

You do not have product/market fit if:

  • Your customers are not recommending you to others.
  • Your customers would not be extremely disappointed if your solution disappeared.
  • You customers cannot describe the big problem they had and the big benefit they achieved from your solution.
  • The marketplace is not demanding your solution. You have to persuade/educate your customers that they have a big problem with a big opportunity.
  • You are not clearly and obviously differentiated from competitors in terms of the value customers achieve. Your only differentiation is price.
  • There are not a large number of potential customers who believe their problems are urgent enough to buy your solution, and they can also afford your solution.

Your metrics, facts and analysis show that:

  • There are a large number of potential customers who believe their problems and needs are urgent enough to buy your solution, and they can also afford your solution.
  • The customers and users believe you have a better value proposition than the competitors.
  • The Net Promoter Score is excellent.
  • Churn is low and retention is high.
  • There is a metric for new customer value achievement  (e.g. for Slack it was 2,000 team messages sent within 60 days).
  • Measuring and analyzing new customer value achievement metric (e.g. % of new customers achieving new customer value achievement indicator within 60-90 days).

Marc Andreessen’s definition of product/market fit:

“The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can.” The following is a link to the article with quote:  On product/market fit for startups

Conclusion of Phase 1

  • You have found a potentially repeatable, scalable, and profitable business model with lots of potential customers who might be willing and able to pay to solve their problems and needs.
  • The leadership may not be able to create and lead a company that can scale. e.g. A Chief Technology Officer who was a great coder many not have the skills to manage a team of coders.
  • The existing processes and technology may be inefficient and unable to scale cost efficiently.
  • Many processes to enable rapid growth will be missing e.g. the capability to recruit, onboard, and develop large numbers of employees, profitability analysis by customer segment, cohort, channel, and partner.
  • Customer acquisition costs may exceed the lifetime value of the customer.
  • Your metrics may show an unprofitable business with customer acquisition costs exceeding life time customer profitability. Your analysis will show the potential for a profitable business with life time customer profitability exceeding customer acquisition costs.,

Section 2 The journey from the perspective of obtaining customers.

Phase 2 Create a repeatable, scalable, and profitable business model.

  • Ensure the leadership able to create a company is in place.
  • Changes may be required at the board of directors, advisory board, CEO, C-Suite, advisors, and consultants.
  • Develop a plan to create the company. New and changed talent, processes, technology, channels, and partners are required.

Customer understanding continues

  • Interviews and surveys continue.
  • The solution is enhanced to enable the company to understand whether or not customers and users achieve value, and how many achieve that value.

Section 2 The journey from the perspective of obtaining customers.

Phase 3 Scale and rapidly grow the company.

  • Execute the plan from Phase 2
  • Add additional geographies, channel, partners, and customer segments. Drop unprofitable ones.
  • Add additional and different types of employees.
  • The customers and users are profitable (i.e. life time customer value is much larger than customer acquisition costs). The cash flow and accounting statements may show a loss because the customer acquisition costs are incurred upfront while the customer profits are achieved over the lifetime of the customer.
  • Continue to maintain or improve the value achieved by customers and users. Improvement actions are based on: Ongoing customer interviews surveys, and analysis of customers; Ongoing analysis of the competition, adjacent market, trends in the ecosystem including  technology and customer behaviour.

Section 2 The journey from the perspective of obtaining customers.

Phase 4 Continuously improve a mature company.

  • The company has now reached the point where all potential customers and users globally have been contacted and revenue growth has plateaued.
  • The company still needs to be continuously improved due to ongoing competition, changes in customers problems and needs, and trends in the ecosystem.
  • The company must continuously monitor the external world to determine if major changes are required. Blackberry and Nokia used to be leaders in phones.  Their leadership crumbled due to changing customer problems and needs combined with competitors focused on meeting those changes.

Section 3 Potential Financing journeys

Financing stages

The startup may bootstrap (i.e. no equity or debt financing other than friends and family) or go through one of more stages of raising external financing.

#1 Friends and family

Most early startups depend upon founders, friends and family for funding.

#2 Angel investors, pre-seed investors.

These are the first investors outside of friends and family

  • Only 24% of angel deals in the US in 2019 were for pre-revenue companies.

https://www.angelcapitalassociation.org/angel-funders-report-2020/

  • in 2019, only 2.4% of the applications to Canadian angel groups received funding

https://investorreadiness.ca/cdn/bba/NACO-AngelActivityReport.pdf

#3 Seed investors

These are the second round of investors, after pre-seed investors

#4 Series A, B etc. investors

These investors are funding the rapid growth of the company

#5 Longer term

  • Company is bought and merged into an existing company;
  • Long-term private equity investors; or
  • Public markets

Types of financing

There are many types of financing:

  • Equity e.g. common stock, preferred stock.
  • Debt.
  • Convertible debt.
  • SAFEs (Simple Agreement for Future Equity). The SAFE is a contract which gives the investor the right to purchase stock in a future equity round (should there be one) subject to the terms and conditions in the SAFE contract.
  • Government grants, loans, tax credits.
  • Funding for research.
  • Paid pilots.
  • Profits and revenue sharing.
  • etc.

 

Section 4 Potential leadership journeys

The skills, experience, and capabilities which leaders need to create value at each stage of the company are different.  Leaders need to learn and transform themselves, be replaced, or lead the company into failure.

  • The company starts out as a very small team, searching for a repeatable, scalable, and profitable business model. Efficiency, profitability, and scalability are not the day one objectives.
  • Then the company needs to create a business which has the potential to be repeatable, scalable and profitable..
  • The company then grows through rapid growth.
  • Finally, a mature company is reached – massive rapid growth has ended.

The types of board directors also change. The skills, experience, and capabilities needed to grow and preserve the value of the company change.

The role of the CEO changes. There are three things only the CEO can do, and no one else in the company:

  • Create and maintain alignment of people with the purpose of the company;
  • Nurture the company’s values, morals, and ethics (often referred to as culture);
  • Hire the leadership team and ensure they work well together. Up to 50% of the CEO’s time will go hiring and managing the leadership team. At least 1/3 of the leadership team hires will not work out and must be exited.

65% of the failures of high-potential start-ups are due to people problems: relationships, roles and decision-making, and splitting the income. More than 50% of founders are replaced as CEO by the C round of financing.  In 73% of these founder replacements, the CEO is fired rather than voluntarily stepping down.1

Footnotes

1 “The Founder’s Dilemmas”, by Noah Wasserman. Pages 299, 301 Noah was the Professor of Clinical Entrepreneurship at the University of Southern California and the director of USC’s Founders Central Initiative.  The book is based on his study of 10,000 founders from 3,500 startups.

Further Reading

“The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers” by Ben Horowitz.

Ben describes the incredibly tough challenges and experiences he went through in the process of his ultimately successful startup.  He then became a successful venture capitalist.

Who launches a successful startup?

Purpose of this article

  • To help you decide if you’re the type of person who should launch a startup.
  • Outline what you should do in the first two weeks if you are thinking of launching a startup.
  • Recommend some learning you should undertake, to help you make your decision.

You may download a PDF of this article from:  Who launches a successful startup

What is a startup?

  • A startup is a temporary organization designed to search out a repeatable and scalable business model. Lots of learning experiments are carried out. The focus is on getting some delighted cash paying customers.
  • A business model describes how a company creates value for itself while delivering products or services to customers. What are you building and for whom? What urgent problems and needs are you solving?

Week one

I recommend that you read the following two books.  They are a fact-based portrayal of the challenges founders face, and what the characteristics are of successful founders. Movies, TV, books, and founders often paint a picture of how easy startup success is.

“The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers” by Ben Horowitz.

  • Ben describes the incredibly tough challenges and experiences he went through in the process of his ultimately successful startup. He then became a successful venture capitalist. Most startups fail.
  • As you read the book, think about your own ability to deal with the challenges than Ben went through and that you would be going through. Not only do you need perseverance and ingenuity,  you also need an emotional and mental support network.

“The founder’s dilemmas – anticipating and avoiding the pitfalls that can sink a startup” by Noam Wasserman.

  • He was the Professor of Clinical Entrepreneurship at the University of Southern California and the director of USC’s Founders Central Initiative. The book is based on his study of 10,000 founders from 3,500 startups.
  • As you are reading the book, think about whether you are the type of person who would succeed as a founder. You are more likely to make more money as an employee rather than launching your own company.

Week two

  • Are you driven by having a great idea OR are you driven by wanting to solve an urgent problem or need for a large number of people?
  • What’s your ability to quickly learn new things and transform yourself?
  • Take the free video course “How to build a startup”

https://www.udacity.com/course/how-to-build-a-startup–ep245

Take detailed notes. There is little value in passively watching without taking notes.

Your next steps

You need to make a decision on whether or not to continue.  This could take days or weeks, especially as you involve your life partner and support network. Some of the factors to consider include:

  • Do you recognize that you are launching a search for a business, which is much different from launching a business?
  • How will you, your life partner, family, and friends feel at the end of several years when your startup fails? Few startups succeed.
  • Are you passionate and driven to succeed?
  • Launching a startup to make a lot of money is the wrong reason.
  • Are you focused on solving a problem, meeting the need of a large number of people OR do you just want to build something?
  • Are you able to learn the problems and needs of a large number of people and then change your startups focus to meet those needs?
  • Do you have the cash (personally, from family and friends) to grow the startup until there is revenue. Few startups are able to raise cash without revenue.  What would be the impact on you, your life partner, family, friends when your startup loses all the investment – which is the most likely outcome?
  • Do you have a co-founder with a different set of skills? Most startups have 2-4 co-founders to provide a range of skills and provide backup if a founder suddenly exits due to health or personal reasons.

Footnootes

1 https://s3-us-west-2.amazonaws.com/cbi-content/research-reports/The-20-Reasons-Startups-Fail.pdf

 

 

What is a business model canvas? V2

What is a Business Model Canvas? V2

 You can download a PDF of this article from:  What is a business model canvas V2

The purpose of this article:

This article outlines what should be in your BMC (Business Model Canvas). The BMC is the story of who your customer is, why they buy from you, and how you make a profit. The story consists of both narrative text and numbers.

The BMC is valuable because it helps:

  • Founders figure out how to create a successful startup.
  • Leaders of successful companies focus all the employees on success by communicating what makes the company successful.
  • Leaders figure out why and how to change their company for continued success.

Execution plans are derived from the BMC.

You will have more than one BMC, representing different points in time.  An early stage startup may have a revised BMC every day.

A What is a business model canvas?

A business model describes how a company creates value for itself while delivering products or services to customers.  What are you building and for whom.  What customer problems are your solving? What customer needs are you addressing?  What benefits and value are you enabling customers to achieve?

A BMC is a one-page document which easily defines and communicates the business model.  There are 9 components to the business model canvas: customer segments, customer value proposition, customer relationships, channels, key partners, key resources, key activities, cost structure, revenue streams.

How does a BMC evolve?

On day 1 the BMC may be 100% assumptions. Assumptions are validated by meeting with potential customers, users, channel, partners, etc.

B The business model canvas has nine components.

How do you read this section?

  • There is a definition of each of the nine components.
  • Then there are a series of questions you need to answer for each component.

 

#1 Customer Segments

Definition

These are the target customers and users.  Each customer and user segment will have its own value proposition.

Questions to answer include:

  • Who exactly will you be creating value for?
  • Who are the cash paying customers? Who are the users? g. Google has users who pay no cash to do searches.  Google has advertisers who pay cash.  Without users, Google. would have no customers.
  • What are the geographic, social, and demographic characteristics of your customer segments?
  • Are you building a market place?

#2 Customer Value Proposition

Definition

A value proposition is the customers perception of value.

This perception can be influenced by: facts, emotions, family & friends, social media, etc.

The value proposition = (All the customer achieved benefits) / (All the customer incurred costs)

All the customer achieved benefits can include both financial and non-financial (e.g. time savings, convenience, status, etc.)

All the customer incurred costs can include financial (purchase costs, costs to switch to your company, other adoption costs, and ongoing costs) and non-financial (time, inconvenience, loss of status, etc.)

The value proposition also needs to be competitively differentiated.

Questions to answer include:

  • What value does each customer segment expect to receive from your solution?
  • What’s the customer need or problem that they will open up their wallet for?
  • Do people agree that you are solving a high value problem or need?
  • What does the customer believe will be the impact of your solution? E.g. 10 times improvement in something?
  • What are the customers wanting and able to pay for?

#3 Customer Relationships

Definition

What type of customer relationship do your customers expect to have with you?

Questions to answer include:

  • How will you get, keep, and grow customers?
  • Why type of relationship does each customer segment expect you to establish and maintain?
  • What types of relationships have you already established?
  • What is the cost of each type of customer relationship?

#4 Channels

Definition

Channels are how to connect the value proposition to the target customer.  There are three different types of channels:

  • Communications – used to communicate with potential customers. There may be many communications channels.
  • Sales – where customers and sellers agree on the transaction. Usually there are fewer sales channels than communications channels.
  • Logistics – how to deliver the solution to the customers.

Questions to answer include:

  • How does the value proposition get to the customers and users?
  • How will you be selling and distributing?
  • Through what types of channels do the customers want to be reached? In other words, what channels are most effective? E.g. website, app, social media, face-to-face, marketplaces, etc.
  • What channels already exist?
  • Which channels are most cost efficient?
  • Which channels are integrated with customer processes?

#5 Key Partners

Definition

A partner may also be a channel, if the answer is “yes” to one of the following questions:

  • Who are the key partners and suppliers?
  • What exactly are you acquiring from them?
  • What are they going to do and when?
  • Is the partner a leading entity with a brand and market position that adds to your credibility?
  • Does the partner add expertise and resources to your product solution in a way that increases the value of the product for the end customer?
  • Is the partner (and their brand/expertise/resources) required to land contract with the key target customers?

Questions to answer include:

  • Who are the key partners?
  • Who are the key suppliers?
  • What key activities, supporting your value propositions, do your partners perform?
  • How effective are your current partners and suppliers?
  • What types of partners and suppliers do you need?

#6 Key Resources

Definition

Key resources mean any relevant intellectual property (IP), technical expertise, human resources, financial and physical assets, key contracts and relationships. In other words, resources refer to anything within your control that can be leveraged to create and market your value proposition (e.g., a patent pertaining to your value proposition, key contacts within the industry).

Questions to answer include:

  • What resources are necessary to:
    1. Enable the customer to achieve their value proposition?
    2. Maintain channels and partnerships?
    3. Build relationships with customers?
    4. Build revenue?
  • What resources exist today?
  • How effective are they?

#7 Key Activities

Definition

The key processes that are required to weave together your resources with those offered by your partners to deliver the value proposition, manage channels and relationships, and generate revenue. Examples of key activities include R&D, production, marketing, sales and customer service.

Questions to answer include:

  • What are the most important things you need to do to make the business model work? What key activities are necessary to:
    1. Enable the customer to achieve their value proposition?
    2. Maintain channels and partnerships?
    3. Build relationships with customers?
    4. Build revenue?
  • What activities exist today?
  • How effective are the current activities?

#8 Cost structure

Definition

The cost of delivering the value proposition, including the resources needed and key activities involved. We want to answer the following key question

Questions to answer include:

  • What are the most important costs in the business model?
  • What are the largest costs?
  • What are the fixed costs and variable costs?

The financial cost details will be in the monthly cash flow forecast, summarized into a one-page cash flow forecast.

The following is a link to a cash flow forecast template, from Futurepreneur.  If you decide to use this template, you will need to customize it.

https://www.futurpreneur.ca/en/resources/operational-and-financial-planning/financial-templates/the-cash-flow-basics/

#9 Revenue Streams

Definition

How will you charge your customers and what will you charge?

Questions to answer include:

  • What is the specific value the customers are willing to pay for?
  • What is the revenue strategy for each customer segment e.g. How will the customer be paying – usage, subscription, one-time, freemium, etc.
  • How much are they paying today?
  • What is the pricing model? How will you set the price for each customer segment and revenue strategy?
  • How are they paying today? i.e. the customers current revenue strategies and pricing.

The revenue cost details will be in the monthly cash flow forecast, summarized into a one-page cash flow forecast.

What does a BMC look like?

I’ve attached a link to examples of a Business Model Canvas from Steve Blank’s Stanford University 5-day course. I recommend looking at the BMC for “Cratiso”, which illustrates the BMC changing every day and even during the course of a day.

https://drive.google.com/drive/folders/1stUQmVtKaFQUeHZtwZuu09RcbHorUHcb

How do you manage the creation and evolution of the BMC?

The BMC is the central hub for everything the startups is learning.  All the facts, analysis, and assumptions in the pitch decks are from the BMC.  All the supporting information is linked to the BMC.

You manage the point-form information in the BMC:

  • All assumptions in italics. On day one of launching the startup, it’s likely that all of the entries will be assumptions.
  • When assumptions are invalidated, due to input from customers, users, and other fact-based analysis, the assumption is crossed out, with a footnote referencing the document which contains the rationale for invalidation.
  • When an assumption is validated, there is a footnote referencing the document which contains the rationale for validation.

There will be multiple versions of the BMC over time.  Initially there will be a new version every day, and perhaps mid-way through a day.

  • You won’t be able to show all of the invalidated assumptions. New assumptions will be made.  Only the most important validations will remain on the BMC. Less important validations will be dropped from the one-page BMC.  You may decide to keep an appendix which contains all the of the invalidations and validations.

BMC PowerPoint template

The following is just one of many PowerPoint and word BMC templates on the web.

https://neoschronos.com/download/business-model-canvas/ppt/

Your next steps

  • Take the free video course “How to build a startup”

https://www.udacity.com/course/how-to-build-a-startup–ep245

Take detailed notes. There is little value in passively watching without taking notes.

  • Start to build your BMC.
  • The bulk of the information you collect and analyze will not fit into the one-page BMC. But the BMC must link to all the supporting material.

What does the Toronto startup ecosystem look like? V5

This document focuses on the high-tech and software startup ecosystem, and outlines the different types of organizations comprising the ecosystem, whose scope is global.  This is not a detailed listing of every ecosystem member. I have identified 23 different types of organizations.

You may download a PDF of this article from: What does the Toronto startup ecosystem look like (V5)

#1 Accelerators and incubators

There are a broad range of incubators and accelerators and almost every one is different. As a startup evolves, it may move among several different types of incubators and accelerators.  Incubators and accelerators focus on startups where they  can have maximum impact by utilizing admittance criteria and processes. Common characteristics of incubators and startups are:

  • Links to investors.
  • Access to lawyers.
  • Access to mentors and advisors
  • Networking with other startups.
  • Financing is sometimes provided.

Incubators

The goal of an incubator is to help take a start-up to the point where there is a MVP (Minimum Viable Product). The process takes 12 to 24 months.  The founders decide what incubator resources to draw upon and at what time.

The key characteristic of an incubator is co-located office space with other start-ups.

Accelerator

The goal of an accelerator is to quickly grow the size and value of the startup to enable future funding. The key characteristic of an incubator is taking a start-up company (which already has a Minimum Viable Product) through a very structured 3-4 month process. Actions and outcomes are required every 1-2 weeks.

As of June 13, 2020 Toronto has:1

  • 29 pre-incubators.
  • 63 incubators.
  • 56 accelerators.

#2 Venture studios

A venture studio comes up with an idea, assembles a team of founders, and provides capital for the Startup. A venture studio has some combination the of the following 6 characteristics:1

  • The Guild: The internal resources of a venture studio. Includes a strong core team of startup operators, financial capital, space, connections, and infrastructure.
  • The Idea: venture studio either generates ideas internally or sources them externally.
  • The Structure: venture studio either operates as a holding company or has a holding company and VC fund.
  • The Funding: venture studio provides the financial capital to source, test, and validate the idea but then have the option to continue funding in-house or seek outside investment.
  • The Volume: The number of startups to work on at any one time is a differentiating factor among venture studios.
  • The Focus: venture studios either operate as generalists or specialists within an industry, technology, or region

As of June 13, 2020, Toronto has 216 investor organizations and companies.2

HockeyStick has 229 active funders as of June 13, 2020 3

#3 Angel investors

There are individual angel investors as well as angel investor groups. Angel investor groups have government supported infrastructure (e.g. staff, office space), but the government does not provide capital to startups applying to the angel investor groups.  The capital comes from the angel investors.

#4 Funding platforms

  • Non-equity. This may only be a donation, the investor may receive some type of tangible award, or the investor receives a future product once it is available. g. Kickstarter
  • Equity and debt. The investor does get equity or debt. The OSC (Ontario Securities Commission) has several prospectus exemptions which a crowding platform may utilize.  Depending upon the legal structure of the platform, and investor characteristics, an investor may be able to invest any amount.   g. AngelList, Gust.
  • Private placement e.g. DealSquare.

#5 Equity Investment Funds

  • There are a large number based in Toronto. There are many funds outside of Toronto and outside of Canada that also invest in Toronto startups.
  • Most have specific investment criteria e.g. where is company headquarters, type of customers or market, type of technology, whether or not the startup has a specific social purpose.

#6 Corporate Venture Capital

A large established company (not an investment fund)  takes an equity stake in a small but innovative or specialist firm, to which it may also provide management and marketing expertise; the objective is to gain a specific competitive advantage.

#7 Debt Investment Funds

  • Traditional bank loans, line of credit, etc.
  • Venture debt for startups and companies that don’t have significant assets or positive cash flows and therefore often don’t have access to traditional bank loans r material amounts of bank financing.

#8 Income revenue sharing funds

The capital is repaid from a percentage of the startups cash flow. E.g. Clearbanc.

#9 Investment dealers/underwriters

Sartups can raise equity by listing on the CSE (Canadian Securities Exchange), or on the TSX Venture Exchange.

#10 Organizations to buy or sell your company

These organizations will help you sell your startup, once it’s achieved some success.  They can also help you buy other companies.

#11 Organizations to meet your talent requirements

  • Outsourced or offshore talent providers. These provide contact resources.
  • Talent acquisition. There may acquire employees for the startup, from around the world.
  • Talent development. These aim to improve the capabilities of your existing talent.

#12 Associations

There are associations focused on specific types of members e.g. startup CEOs, startup CTOs, etc.

#13 Advisors – legal, financial, functional

Every startup requires a range of advisors.  For example, financial software can collect and report on a board range of information.  An accountant can advise on how to set the software up.  Lawyers are key to providing advice on the range of legal and regulatory requirements, and how best to meet them.

#14 Tools and services for startups

These address a range of issues including:

  • Understanding customers and users
  • Creating prototypes
  • Building and maintaining the solution
  • Marketing and sales
  • Customer onboard and ongoing
  • Billing, payment processing, payroll, financial reporting, etc.

#15 Reviews of startup companies

Some companies are focused on reviewing startup solutions.  Other companies enable reviews of startups as a sideline to their main business (e.g. job boards enable employee reviews of the CEO).

#16 Conferences

Conference organizers manage Toronto conferences focused on startups.  Many of the organizations in the Toronto ecosystem also host events.

#17 Regulators

Every startup needs to be aware of regulatory requirements as soon as they start raising capital.  Financial Services startups must be compliant with many more regulatory requirements.

#18 Federal government programs

Startups can benefit from tax credits, financing, and advisory support. When going global, Canadian trade commissioners are based in 160 global cities.  The startup Visa program enables a foreign employee with a job offer to quickly obtain a visa to work in Canada.

#19 Ontario government programs

The Ontario government has numerous programs, including the funding of the infrastructure for angel groups.

#20 Municipal programs

Toronto has the Startup Here program and other programs.

#21 Ecosystem research

  • Some individuals and organizations analyze and publish research regarding the ecosystem e.g. Charles Plant
  • A variety of databases have collected different types of information regarding the ecosystem e.g. Crunchbase, HockeyStick, etc.

#22 Startup charities

The Upside Foundation focuses on startup companies donating stock options.

#23 Coworking space companies

Once the startup leaves the founders’ homes (or accelerator) they move to a coworking space. These companies also enable a startup to quickly establish a global physical presence.

Footnotes

1 https://medium.com/datadriveninvestor/how-to-differentiate-startup-studios-d3cb394e3ecf

2 Startup Here Toronto   https://startupheretoronto.com/startup-support/

3 https://about.hockeystick.co/active-funders-canada