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.org/wp-content/uploads/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 3^rd
• 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 3^rd party investors when you have no revenue. Most startups obtain 3^rd 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

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.org/wp-content/uploads/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/

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

 

 

The purpose of this article.

Outline what an early stage startup requires to understand the potential customers, users and the competition. Too many startups fail because:

• They start to build something (e.g. “a cattle ranch”) and then discover there is no significant market demand (e.g. discover that the potential customers are “vegetarians” and will not every buy, regardless of the changes they make to the sales pitch.)
• They don’t realize the breadth of skills, experience, networks, and tools required to understand customers and users.

You may download a PDF of this article from: Education skills and tools for an early stage startup V1

What is a startup?

A startup is a temporary organization designed to search out a repeatable, scalable, and profitable business model.

A startup needs to organize its knowledge and resources. The founders need to have, learn, or get access to skills, experience, tools, and networks.

There are 12 sets of education, skills, and tool to enable understanding of customers.

#1 Find people to guide and advise you in your journey

The critical action is for the founders to create relationships with people they can learn from.  These may include: coaches, mentors, advisors, incubators, accelerators, etc.  The challenge for the founders is to find those people who can truly enable success.  There is a shortage of talent that can help founders learn how to succeed.

#2 Education and Learning – courses and books

I recommend the Udacity free course “How to build a startup”. This will provide founders with an overall framework on how to organize their knowledge and actions for launching a startup. Take notes.  If you don’t take notes, there is limited value in taking the course.  https://www.udacity.com/course/how-to-build-a-startup–ep245

#3 Business Model Canvas

The BMC (Business Model Canvas) is the foundation of your startup.  The BMC describes the value a startup can offers its customers, why they buy from you and illustrates the capabilities and resources required to create, market, and deliver this value and to generate profitable, sustainable revenue streams. What customer problems are your solving? What customer needs are you addressing?  What benefits and value are you enabling customers to achieve?

The BMC is a one-page document. The Udacity course will guide you with creating the BMC and has many examples of the one-page document. The following is a template you may use.

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

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.  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.

#4 Interviewing customers and users.

• The Udacity course makes clear the need to interview customers and users right from the start up the launch. The need to interview customers is also outlined in this article:
  1. Talk to 100 customers before you launch https://medium.com/build-something-cool/yes-you-should-talk-to-100-customers-before-launch-afa1962f5c7
• Some ideas on how to structure interviews and an interview guide are in the following book:
  1. Chapter 15 “Stage One: Empathy” from “Lean Analytics – Use data to build better startups faster” by Eric Ries. Available on Amazon
• Some thoughts on how to analyze interviews:
  1. You must do a thematic analysis and code the interview response.
  2. https://uxplanet.org/how-to-analyze-user-interviews-250fddb1e8d7
• Possible software to help with interview analysis
  1. Excel pivot table can analyze the coded interview responses. This should be sufficient in the early days of the startup.
  2. There are also software packages.
  3. https://blog.hubspot.com/service/qualitative-data-analysis-software
• The team needs to have or learn the skills needed to:
  1. Plan for an interview. The objective is to validate or invalidate assumptions.
  2. Conduct an interview. Not everyone has the skills and personality to conduct interviews. Two people should be in an interview.  One person is taking detailed notes.
  3. Produce a one-page summary analysis

#5 Surveying customers and users

• The team needs to have or learn the skills needed to survey large number of potential customers and users.
  1. Planning for the survey.
  2. Conducting the survey
  3. Analysing the survey
• Survey software is helpful to reach out to and analyze responses from a large number of potential customers and users.
• The final outcome will be a one-page summary analysis

#6 Managing the large number of relationships

You will be interviewing, surveying and meeting hundreds of potential customers, users, and others.

You need a process and tool to keep track of these relationships and help you manage them.

• A CRM (Customer Relationship Management) software tool is very helpful.

#7 One-page Gannt chart, showing critical milestones

• You need to have a timeline, showing the future milestones of your startup journey. A one-page Gannt chart should show these milestones. The following is a link to some example one-page charts.   https://blog.hubspot.com/marketing/gantt-chart-example
• The following is a link to my article regarding the startup journey. This may give you some ideas regarding milestones, as well as the Udacity course. https://koorandassociates.org/the-startup-journey/what-does-the-startup-journey-look-like/
• The milestones and time frames may well change often, as the startup validates the BMC.

#8 Your startup is a project.

Project management processes and software may be helpful. When there are just a few founders, the very early project management may consist of:

• The one-page Gantt chart with milestones, likely done in a tool like PowerPoint.
• One page showing key tasks for the next 7 days.
• A meeting at the beginning of each day to outline what will be done that day.
• A meeting at the end of the day to discuss learning and issues.

#9 Collaboration is needed, especially with teams not in one physical location.

• Collaboration may include: working together on documents and sharing them, messaging, team meetings (phone and video), virtual whiteboards, etc.
• Collaboration may occur among the startup team, advisors, and others.

#10 Monthly cash flow forecast

• The cash flow forecast helps the startup identify what is being done with cash, where revenue will come from and when additional cash is required from the founders, friends and family, governments, or 3^rd party investors. The founders need to ensure the startup manages its cash to survive.
• The monthly cash flow forecast will be detailed. It will be summarized in one page.

#11 Virtual data room

• The startup will be generating a variety of documents with many versions.
• These need to be organized into a single data room, shared among the startup and 3^rd
• It’s crucial that each document’s file name contain the date the document was created or last modified. The content of each document must also contain the date and page number, to enable discussion among the startup team and 3^rd
• The data room must also be backed up.

#12 Creating presentations, documents and videos

The startup will be creating presentations, and videos.  A single set of integrated tools is helpful.

Your next steps

• Find people to and advise you in your journey. They could be mentors, incubators, accelerators, etc.
• Create your plan to understand your potential customers.
• Determine and acquire the necessary education, skills, and tools.
• You are focused on creating five one-page documents:
  1. The business model canvas, which describes what you will build to solve customer and user problems.
  2. One-page summary of customer and user interviews – identifying and validating customer and user problems.
  3. One-page summary of customer and user surveys – validate or invalidate of the assumptions regarding customer and user problems.
  4. One-page Gannt chart illustrating what you will accomplish and by when.
  5. One-page cash flow summary illustrating the cash needed to accomplish the milestones in the one-page Gantt chart.
• It’s likely that you may replace many of the tools as your startup grows and transitions to a business. It is not appropriate to have the tools needed to run a billion-dollar global company on the first day that you launch your startup.

The three-fold purpose of this article:

• Help startup CEOs and founders understand themselves and identify potential fatal flaws.
• Help investors, and others, assess startup CEOs and founders.
• Help assess the CEO’s of traditional established companies.

The following is focused on software and high-tech startups.  Many of the concepts apply to other situations.  CEO failure results from an inter-related set of experience, skills, character, personality, values, morals, ethics, and luck.

You may download a PDF of this article from: Why do startup CEOs fail V4

Research regarding the most critical traits of successful founders.¹

Founders with complementary skills sets tend to be successful. “The best founders know their strengths and weaknesses and recruit a complementary team.” Founders of all ages can be successful.  Age is not a predictor of success.”

There are three archetypes of successful founders:

• Humble Operator: Exceptional at execution, extremely humble while confident in themselves. They are resourceful and gritty. People who worked with them before tend to follow them.
• Agile Visionary: Usually first-time founders, they are young, visionary, and driven by a desire for greatness. They have a unique perspective on the market they’re going after and an intuitive sense of what their customers want. They test and iterate quickly to incorporate market signals.
• Seasoned Executive: Experienced older founders, they often have 5+ years of management experience and deep industry expertise. They are intrinsically motivated to build a company. They may have started a company before.

There are three archetypes of unsuccessful founders:

• Passionate Outsider: Usually first-time founders, they are humble and hard-working. However, they don’t have good founder-market fit and don’t have a complementary cofounder to rectify this gap.
• Overconfident Storyteller: Charismatic, compelling, and have high confidence. They are likely to be solo founders and they are often not humble.
• Stubborn Individualist: Slow to adapt to learnings from the market and not empathetic to what the customers want. They are not good at articulating a convincing narrative.

Successful founders have four superpowers:

• Running her company effectively day-to-day, learning and adapting quickly
• Results driven i.e. exploring many solutions to quickly finding the best one.
• Customer empathy, which enables finding product-market fit.
• Agile thinking i.e. able to iterate quickly based on market feedback, but at the same time persistently focused on the vision.

Successful CEOs have founder-market fit.

Founders with a deep understanding of the market have founder-market fit.  There are 4 signs of founder-market fit:

• The founders are obsessed with the market. They are obsessed with market knowledge.  This results in them knowing everything about the market, what a day-in-the life of a customer looks like, the customer’s urgent problems, the competitors, et.
• The founders’ personal stories. Customers are excited by personal stories which explain why the founders are obsessed.
• Personality is the ability to build a network in the market and the market’s ecosystem.
• Experience but not so much experience that the founders are constrained in their ability to disrupt, and to be able to see new and innovative ways of doing things. The degree of appropriate historical market/industry experience varies by market. e.g. Developing a new drug requires a degree of past experience.

The first point-of-failure is when the CEO is thinking of founding a company and becoming CEO.  Examine yourself.  Do you already have the characteristics of someone who is likely to fail?

• Not able to clearly communicate on why starting the company and what the idea is.
• Not having a very broad set of knowledge or being able to quickly learn a broad set. A startup CEO does it all without the infrastructure of a large company to support her.
• Not relentless and able to overcome all obstacles.
• Not able to do things quickly.
• Not able to quickly learn from mistakes.
• Not able to work long hours for many years. The average time for a SaaS startup to exit or IPO is 9 years.  But the vast majority fail.
• Not willing to take risks. The majority of startup CEOs are forced to leave the company at some stage of funding.
• Not able to minimize cash spending.
• Not having the funds (personal savings, family, and friends) to live for a significant period of time without income from your company.
• Not able to ruthlessly prioritize time e.g. who to meet vs who not to meet; problems which must be solved vs can be ignored.
• Not having the personality and skills to build a broad set of trusted relationships with potential customers, suppliers, employees, advisors, investors, etc.
• Not able to attract appropriate coaches, mentors and advisors. There are major differences between star athletes and star coaches.  The same person is rarely a star in both fields.
• Not able to listen, and clearly understand what the other person intends to communicate.
• Not willing to go all-in
• Not extremely intelligent.

The second-point-of failure is when the CEO makes a poor selection of co-founder(s) and is not able to manage co-founder(s).

• Not able to select co-founders with the range of experience and skills necessary for short-term team success. Co-founders should bring diverse experience and skills, resulting in the pool of capabilities necessary to create and launch the company.
• Not selecting co-founders with similar objectives, character, values, morals, ethics, and time lines.
• Not picking founders who have the personal financial resources to live until the company can afford to pay them or third-party investors can provide financial support.
• Not having a common understanding of what each co-founder will contribute e.g. # of hours, capital, finding capital, creating the product or service.
• Doesn’t have the skills to make the founders work well together.
• Not being clear on how decisions are made, and who makes them.
• Doesn’t ensure that the founders are physically located together and working together.
• Unable to articulate and help the all the co-founders understand and support the higher purpose of the company. If the only purpose is to make money, the chances of long-term success are low.
• Not having a common understanding of how much of the company the founders are willing to give up in return for capital.
• Not documenting expectations and assumptions. This leads to future confusion and disagreements. “People forget 40%-80% of what they hear immediately.   Half the information people do recall, is recalled incorrectly”²

 Your next steps

Regardless of the situation, the CEO or founders need the capabilities to be successful in the next 24 months and to be competitively differentiated from the CEOs/founders of competitors.

• If you are a startup CEO or founder: Assess your self and compare that to how others view you.
• If you are an investor, advisor, someone planning to join the startup CEO: Review the above criteria and prepare your own list of criteria. Identify the deal-killers or fatal flaws and the criteria that are important. Assess the CEO or founders. You don’t want to be associated with a CEO or founders who will likely fail.
• If you are the board of directors or major investor in a traditional established company: Prepare you own list of criteria. Identity the deal-killer criteria i.e. whether to terminate existing CEO, not to appoint a candidate as CEO or not to invest in the company.  Identify the criteria that are important. Assess the CEO. Boards should not a have a CEO who is likely to fail.  Investors should not deploy capital to CEOs who are likely to fail.

 Footnote

¹ Basis Set Ventures, a San Francisco early stage fund, surveyed other funds to understand their opinion of the traits of successful vs unsuccessful founders.  https://www.basisset.ventures/founder-superpowers

² Lindsay Wizowski, Theresa Harper, and Tracy Hutchings, Writing Health Information for Patients and Families 4^th Edition (Hamilton Health Sciences, 2014), Page 5

Further Reading

How do  venture capitalists assess teams https://koorandassociates.org/selling-a-company-or-raising-capital/how-do-venture-capitalists-assess-teams/

 

How do you know you have product/market fit?

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 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.

 How do you measure product/market fit?

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 (Net Promoter Score).  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?  You can find links to more information about NPS in the Further Reading section at the end of this document.

A more detailed question for customers would be (Sean Ellis developed this). “How would you feel if you could no longer use our product or service?”

• Very disappointed.
• Somewhat disappointed.
• Not disappointed – it’s not really that useful.
• I no longer use.

At least 40% of your target customers must say “very disappointed”.  If it’s less than 40% you need to reposition/change your product.  One approach can be to segment the answers to find a customer segment where the response is above 40%.

You must understand the group above 40%.  The five questions to ask them are:

1) who are you (demographically)?

2) why did you seek out our product/service?

3) how are you using our product/service?

4) what is the key benefit you’ve achieved?

5) why is that benefit important?

How large is your TAM, SAM, and SOM?

Having the facts to demonstrate that you have product/market fit is not enough to make the decision to invest capital to grow your business.  You need to have facts regarding your TAM, SAM, and SOM.

What is TAM (Total Addressable Market)?

What would be your company’s revenues with your current solution if 100% of the global customers demanding a solution to their problem bought your solution? You would have no competitors.  The focus here is on your current solution, not the solution you might have in five years time.  Note the phrase “demanding a solution”.  You must not include in TAM ghost customers who are not demanding a solution.

Is your TAM large enough consider growing your business? For example, the global smart phone TAM is huge, but the global TAM for smart phones that have a keyboard is tiny.

What is SAM (Serviceable Addressable Market)?

This is the portion of the TAM that is within the reach of your distribution channels and partners, and your ability to deliver and support your solution. Geography may be a constraint.  This still assumes 100% market share of those customers demanding a solution.

How will your customers connect with you?  If they are seeking a solution, how will they find you?  How will you make customers aware of your solution?  How will your customers and you connect?

What is SOM (Serviceable Attainable Market)?

SOM will be lower than SAM for two reasons: you may have competitors, and every customer who is demanding a solution may not actually buy a solution.

How do your customers perceive your competitively differentiated value proposition?  How hard is it for a competitor to copy your solution or to provide a better value proposition to your potential customers?  What is your retention rate and your churn?

Will you company make money?

You must now build a cash flow financial model for your company, to determine if your business will make money. Some of the components of the model include:

• Current results and future targets for TAM, SAM, and SOM.
• LCV (Lifetime Customer Value).
• CAC (Customer Acquisition Costs).
• Costs to deliver and enhance the solution. Many startups overlook the ongoing need to enhance the solution by fixing bugs, keeping pace with evolving customer needs, and staying ahead of the competition.
• Financial costs and investor exits.
• The costs of acquiring, retaining, developing, and exiting. Talent is the greatest challenge.  Unlimited capital is available for a successfully growing business.  Quality talent is the scarcest resource.

My Observations:

• Most startups don’t actually achieve product/market fit with a large TAT, SAM, and SOM.
• Many startups are not able to successfully scale, because the founders are unable to transform the company and themselves.
• Many existing large companies have lost product/market fit and are in a fight to survive, often with declining TAT, SAM, and SOM. These companies don’t recognise they are in this situation and devote the bulk of their resources to resolving secondary issues, leading to decline.

Your next steps, regardless if you’re a startup or a long established company:

• Document the facts and assumptions regarding product/market fit, TAM, SAM, and SOM.
• Validate assumptions, resulting in facts. It is critical that product/market fit is based on facts rather than dreams and hopes.
• Build your cash flow model.
• Do all of the above in the context of a documented value proposition and business model. The further reading section contains links to workbooks from MaRS, which will guide you through the documentation.

Further reading

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

Business Model Design Workbook from MaRS:

https://learn.marsdd.com/wp-content/uploads/2012/12/Business-Model-Design-WorkbookGuide.pdf

Crafting your value proposition Workbook from MaRS:

https://learn.marsdd.com/wp-content/uploads/2012/12/Crafting-Your-Value-Proposition-WorkbookGuide.pdf

 

There is some debate regarding the relative importance of the idea vs talent.  Talent is the most critical.  It is the talent which: comes up with the idea, changes the idea as learning more about the customers, and successfully grows a profitable company.  Lots of people have ideas.  Few people can successfully achieve results.

 Founders are often the cause of start-up failures:¹

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 third round of financing.  In 73% of these founder replacements, the CEO is fired rather than voluntarily stepping down. The founder’s passion, confidence, and attachment to the start-up is initially a great strength. Founders often refuse to revise their strategy and business model, underestimate and misjudge the need for additional skills, and make decisions that don’t reflect the current situation.

 The top nine reasons for start-up failures were identified by CB Insight:²

⁽ I’ve shown below my point-of-view as to why leaders and leadership were the root cause.)

• 42% no market need – not obtaining facts as to customers and their needs.
• 29% ran out of cash – poor management of cash flow and poor reputations with investors.
• 23% not the right team – unable or unwilling to assemble the right team.
• 19% get outcompeted – not aware of the competition and customer needs.
• 18% pricing/cost issues – not aware of customer needs and the competition.
• 17% poor product – poor ability to design and build a product meeting customer needs.
• 17% need/lack business model – not understanding a business model is needed, or unable to define one.
• 14% poor marketing – poor marketing skills.
• 14% ignore customers – clearly a leadership problem.

 Why do companies find themselves in crisis?

“The assumptions on which the company has been built and is being run no longer fit reality.”³

 Major business changes almost always fail:⁴

• Major changes almost always fail. 12% of change programs succeed.
• 38% produced less than half the expected results.
• 50% diluted the value of the company.

Most venture capital backed start-ups will fail⁵.

• Three quarters of VC backed firms in the U.S. don’t even return all the investors capital..

Your next steps

To enable discussion with your board of directors, C-Suite, and advisory board, download the following one-page slide:

Leadership talent is the underlying cause of startup failure

Footnotes:

¹ “The venture capital secret: 3 out of 4 start-ups fail”, Deborah Gage, Wall Street Journal Small Business, September 19, 2012  discusses research by Shikhar Ghosh, Harvard Business School

² “Top 20 reasons start-ups fail”, CB Insights, Oct 7, 2014

³ Peter Drucker, Harvard Business Review, November 2009, Page 90

⁴ “It’s 8-to-1 against Your Change Program”, Bain website, Managing Change Blog, 2017 June 23

⁵ “The Founder’s Dilemmas”, by Noah Wasserman

Startups often fail in the transition from product/market fit to successful scaling, because the talent requirements are different.  The problems faced by leaders in those two situations are very different.  Many leaders are not able to transition.

Getting to product/market fit requires a small team making constant changes to build a product which delightfully solves urgent customer problems:

• CEO focus on building a delightful product.
• Everyone does everything. There are no full-time managers.
• Doing things that don’t scale and are inefficient.
• Limited management processes.
• Key metric is customer satisfaction.
• Heavy investment in engineering.
• With an engineering team of less than 6 people, the CTO (Chief Technology Officer) spends most of their time coding.
• There are lots of coding, technical, architectural issues and decisions.

 Being ready to scale requires an architected business and suite of with supporting processes and technology, able to efficient roll out an evolving solutions which will change the world:

• CEO focus on building talent and a company.
• Management structure in place. Roles and responsibilities defined.  Fewer generalists, and more specialists.  Full-time managers.
• Focus on efficiency in order to profitably scale.
• Management processes and supporting technology in place, especially for talent acquisition, development, and retention.
• Decision-making drive by several key metrics.
• Heavy investment in marketing and sales.
• CTO no longer coding most of the time – may be a full-time manager.
• Broad set of issues and decisions.

The CEO must do what only the CEO can do, and must not delegate:

• Creating and maintaining purpose and alignment.
• Hiring a leadership team and making sure they work well together.
• Nurturing the company culture.

 Your next steps

To enable discussion with your board of directors, C-Suite, and advisory board, download the following one-page slide.

https://koorandassociates.org/points-of-view/startups-often-fail-in-the-transition-to-scaling/

I observe major differences between long established public companies and successfully scaling startups.  The two major things that strike me are:  the startups have an in depth understanding of the customer; and the startups are incredibly focused on having the right talent: talent in management, on the board, on the advisory board, as well as talented investors.

This version 2 of my document includes 3 key concepts:

• Startup board of directors are focused on creating value. Public company boards often focus on “oversight”
• Startups make 5-10 minute “pitches” for investments, focused on “What is the customer problem” and “What is the solution the customer will pay for” Public companies often have very long presentations regarding “business cases”.
• Startups are constantly re-inventing themselves and transforming. Public companies often view transformation as a one time event and create temporary organizations such as “The Transformation Office” and “The Chief Transformation Officer”.

Successfully scaling startups	Long established public company
Planning driven by: what is the customer problem or need; how does the customer perceive that the solution is significantly differentiated.	Planning driven by vision and mission statements.  Often little differentiation among competitors.
Often clarity as to the beneficial impacts on society.	Beneficial impact on society is not a consideration.
Focus on meeting the needs of customers	Focus on growing shareholder value
Every member of the board of director is focused on growing company value.  They have previous experience in growing value.	Board of directors has an “oversight” role.  There often the concept of “noses in, fingers out”.
Investors make decisions based on talent: talent of the founders and management team, talent on the board, talent on the advisory board, and talent of the other investors.	Talent does not play a major role in deciding on whether to invest or divest.
Most things are broken most of the time.  The focus is on solving the daily issues which arise from scaling and meeting evolving customer needs.	Risk management and Enterprise Risk Management play a major role.  Focus on “mitigating risk”.
Transformation is an ongoing and integral part of the business. As the company grows from a few co-founders to 10 people to 50 people to 150 people to 500 people, the company re-invents itself every 6 months.  Everything changes: the role of the CEO, who you hire and how you hire, how internal meetings are structured and organized, the technology, the business processes, etc. There are no such things are “Chief Pivot Officer” or “The Pivot Office”.	Companies launch stand-alone transformation initiatives. The is a Chief Transformation Officer and a Transformation Office. Transformation is views as a focused one-time event,
The start-up is the disrupter due to deep understanding of the customer and providing solutions which the customer sees as very superior and different.	Companies are “disrupted” because they no longer understand customer problems, needs, and why the customer should buy from them.
Uses advisors and experts who can help invent (and re-invent) and create what will be successful in a future which is very different from what was successful in the past.	Use advisors and experts who understand in detail what has been successful in the past in the industry, with other companies.  The phrase “best practices” is often used.
Pitches to justify investments are often 5-10 minutes long.  The focus is on: One-on-one interviews with potential customers have validated that there is a problem and customers would consider for a solution. Minimum Viable Products are piloted until the there’s validation that customers will actually pay for the solution. Then major investors are made in growth	Business cases to justify  are built, with long and detailed presentations. Often years pass in building a solution before launching to initial customers.

 

 

You can use this framework to enable startup stakeholders establish a common understanding of the current status of the startup, which stage it is in (pre-seed, seed, or Series-A), and the next milestones in its evolution. This framework is not intended to be a cast-in-concrete structure for every single situation.  The start-up stakeholders may adapt this to their specific situation.

Version 2 of the framework includes:

• An illustration of how to complete the framework.
• A description of why it is critical to have documented interviews of potential customers.

The simplest way to use the framework is:

• Go through the framework, component by component.
• Clearly and simply describe where the startup and place the description in the appropriate stage.
• Outline the key milestone, to get to the next stage and identify who is accountable for each milestone.
• State any critical issues.

The facts and assumptions you assemble will feed into the startup’s monthly cash flow forecast.

The framework reflects technology enabled services startups intended to grow into businesses with a valuation of at least $100 million. You can adapt this to other situations. This framework does not address fundraising.

You can download the complete template from my website:

What is the status of your startup (V2)

The column headings refer to where the startup is at the beginning of that stage. The following is the defined framework.  You will use this to position your company, state the future milestones and outline any critical issues.

Component	Pre-seed	Seed	Series A
Product/Service	Idea	MVP (Minimum Viable Product) – A product or service with just enough features to have satisfied early customers, and to have obtained customer feedback for future development.	MVP has been revised until market/product fit is proven. Product/service ready to scale.
Value proposition: This is the customers perception.  What are all the 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)?	Not validated with customers.	Customers have validated the value proposition. Have documented experience with customers to prove satisfaction with MVP.  Alpha launch completed and customers in place for Beta launch.	Completed Beta launch. Start to grow, month by month.
Revenue	0$ to < $5K/month	>$5k/month	>$100k/month
Market Traction -Customer/Revenue growth	None. Might be a pilot customer.	Starting to generate revenue, increasing month by month	6+ months of 10% growth per month
Distribution channels i.e. how are you going to get it into the customers hands.	None	Initial identification and discussion with distribution channels.	Distribution channels in place, with low volume.
Profitable?	No	No	No.  May be profitable 18-36 months in the future
Scalable?	No	No	Technology enables scaling at low marginal cost. Processes in place to enable growing talent.
Intellectual property	Maybe	Maybe	Must have legal or other protection in place
Co-Founders team	1-4 co-founders, could be part time.	2-4 full time co-founders	2-4 full time co-founders
Overall team	Co-Founders with relevant skills and experience.	Co-founders + 1-5 people with relevant skills and experience?	Co-founders plus 5-20 people with relevant skills and experience.
How long until run out of money	Personal cash flow plus friends and family will sustain co-founders.	6-18 months	6-18 months
Advisory board, with regular communications processes in place.	1-2 industry credible experts	3-6 successful entrepreneurs, industry experts	6+ successful entrepreneurs, investors, industry experts
Board of Directors	None	1-2 co-founders	1-2 co-founders, 1 successful entrepreneur, prominent investor or industry leader
Corporate governance: decision making, etc.	Informal	Clear decision-making roles. Incorporation results in legal, financial, reporting requirements and policies.	Decision making roles clear for investors, shareholders, board, and management. Having employees drives requirement for talent policies and processes.
Is the business viable	Unknown	Unknown	Yes. The question is, can the business scale successfully?
Source of funds	Personal, family, friend, fans, incubators, accelerators, government	Angel investors, lead investor.	Investors with deep pockets who can fund future rounds. Startup debt providers.
Financial ask	<$50K – $250K	$500K – $2 million	$2 million to $10 million
Market place communications	Little or none	Website, newsletter, and social media begun.	Enhanced website, newsletter, and social media processes.
Investor engagement and relationship management	Little or none	Defined the characteristics of target investors and investor introduction approach.	CRM technology and processes in place to manage investor and investor ecosystem relationships.
Cash Flow Forecast	Likely none	Monthly cash flow forecast and tracking.	Monthly cash flow forecast and tracking.  Ties to key milestones.
Financial and operational metrics	Likely none	Know what the metrics should be. Initial targets set.	6+ months historical reporting of financial and operational metrics.