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.

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

 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.

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

 

Purpose of this document

This document outlines the business framework of a successfully scaling startup.  When a company is first launched, some components may not exist, or may be very simple. Successful growth results in the evolution of the framework, with components being added and changing.

The 10 components of the business framework are all inter-related( e.g., every component requires talent):

1       What can only the CEO do?

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.

Many startups fail because:

• People are not aligned and working towards the purpose.
• Morals, values, and ethics vary, leading to inconsistent and dysfunctional behaviours and decision-making.

2       Company purpose

What is the purpose of the company? Why does the company exist? The description of the purpose of the company should be positive and outwardly focused on how you benefit customers and society.  For example, Nike’s “authentic athletic performance,” rather than “sell lots of shoes made in China.”  Is the purpose of the corporation to make as much money as possible? How should the company benefit society?  Or, should it?

Larry Fink, in his 2018 letter to CEOs, said “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate…..Without a sense of purpose, no company, either public or private, can achieve its full potential…..And ultimately, that company will provide subpar returns to the investors”[1]

3       What are the company’s values, morals, and ethics?

What are the company’s values, morals, and ethics?  These are often referred to as culture.

Values: Values are what someone thinks and feels internally and the rules by which they make decisions about what they should or should not do. Values have different importances, which are helpful when people need to trade off or balance one value versus other values.  You make a decision based on what you believe is “the right thing to do.”

Morals: You are judged by others as to whether or not your actions are moral or immoral.  Morals reflect external observable actions and behaviours. Morals are decisions, actions, and behaviours which people feel are right or wrong, good or bad.  Morals are actions and behaviours arising from one or more values.  Not all values are related to morals.  Morals are based on a broader perspective than just the individual.

Ethics: Ethical decisions, actions, and behaviours are based on following a documented set of standards or principles.   Many companies and professions have a Code of Ethics.

Values, morals, and ethics should also tie back to the purpose of the corporation. Is the sole purpose to make as much money as possible, constrained by laws, regulations, and company policies?

Some companies have published a set of decision-making principles.  A famous example is Bridgewater Capital (a $150 billion investment fund).  Ray Dalio, the founder, has published many of his beliefs in the book “Principles”.

4       Customer perceived value proposition

A value proposition is the customers’ perception of value.  This perception can be influenced by facts, emotions, family and 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 factors (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.).

You will only succeed if the customers believe your value proposition is better than the alternatives, which may include the status quo.

5       Business model

5.1      What is a business model?

A business model describes:

• The value the company enables its customers to achieve.
• The resources and capabilities to create, market, and deliver this value.
• How to generate profitable and sustainable revenue streams.

5.2      What are the 9 elements of a business model?

• Who are your target customer segments? Some segments may not provide any revenue. g. Google seeks to provide the best search experience, which enables Google to generate advertising revenue.
• What is the customer’s perceived value proposition of your solution? How are you different from, and better than, the competition?  The value proposition includes all of the customers’ costs and benefits associated with adopting your solution, which includes any transition costs from existing solutions.
• What are your customers’ expectations of their relationship with you? g., if it’s a software product, how often will there be updates with new features?  How easy will it be to install a new version?  Will customer service be a chatbot or a live person? Etc.
• What will be your channels to the customer?
  1. Communications channels with potential customers?
  2. Sales channels which result in a sales transaction?
  3. Logistics channels which deliver the product or service to the customer?
• Who are your key partners? A partner is more than a channel. A partner may be: enhancing your credibility due to their reputation; adding value to your solution due to their resources; or enabling you to close sales.
• What are the key activities? Which processes and actions are required to manage partners, channels, and resources in order to enable customers to achieve their value proposition.
• What are the key resources to enable customers to achieve their value proposition? These include: intellectual property, technology, people, contracts, financial and physical assets.
• What is the cost structure to create and deliver the value proposition?
• What are the revenue streams? These could include: subscription-based per person per month, free for a basic service, with multiple tiers of extra services with fees, etc.

6       Talent Management

Talent management is the foundation for success. Key processes include:

• Determining talent requirements;
• Being an attractive place to work for target talent;
• Acquiring, retaining, developing, and exiting talent;
• Compensating talent.

Only the CEO, and no one else, can hire the leadership team and ensure they work well together.

7       Capital and cash management

A monthly free cash flow forecast, with detailed assumptions is critical.  You need to understand, and model, what drives revenue and costs.  A rapidly scaling business will have negative cash flow, and likely negative accounting profits.  You need to be able to understand and describe this to both investors and employees.

8       Investor Management

You must define your target investors and how they will enable value creation within your company.  Start building relationships with investors before you need the capital.  Ask potential investors if it is alright to include them on your monthly investor update.  Shareholders will require additional detailed communications and meetings.

9       Exit Management

The founders will leave the company at some point, even if it’s by death.  You need to first establish founder expectations regarding exit and potential risks, such as unexpected death. Processes and legal frameworks should be in place to deal with the risks.  Planned exits, including selling stock as part of an IPO, need careful planning.  The founders need to take into account their personal family, tax, and financial situations.

10   Governance

• Governance is the set of relationships and the structure to set and achieve objectives, and monitor performance.[2] You need to be clear on how decisions are made.
• Begin with setting out the stakeholder(founders, shareholders, CEO, C-Suite) expectations and then producing the necessary legal, policy, and procedure documents.
• Governance will dramatically evolve from the early stage with only two founders, to a company with hundreds of staff.
• Governance documents may include:
  1. Articles of incorporation and bylaws;
  2. Shareholders agreement and shareholders voting trust;
  3. Board of directors mandate and board approved policies;
  4. Board of directors delegation of authority to CEO;
  5. CEO Management contract.

Your next steps

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

The startup business framework has 10 sets of components

Further reading

“Crafting your value proposition Workbook 1”, MaRS Entrepreneur Workbooks, https://learn.marsdd.com/wp-content/uploads/2012/12/Crafting-Your-Value-Proposition-WorkbookGuide.pdf

“Business model design Workbook 2”, MaRS Entrepreneur Workbooks, https://learn.marsdd.com/wp-content/uploads/2012/12/Business-Model-Design-WorkbookGuide.pdf

Footnotes

[1] https://corpgov.law.harvard.edu/2018/01/17/a-sense-of-purpose/

[2] Summary of  “G20/OECD Principles of Corporate Governance”, 2015  https://www.oecd.org/daf/ca/Corporate-Governance-Principles-ENG.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.