EPSE Module 3—Session 1

Ken LiuMarch 12, 2011

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Setting the Stage

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8 startups as principal since 1989◦ HNC Software, Holographix, Virage, IPivot,

InfoGation, AIRSIS, SciVee, ThreatSTOP CEO, CMO, do whatever needed 5 M&As worth $1.3 billion Wide-ranging experience

◦ Technologies/products◦ Business models◦ Stages & cultures

Early career: Motorola, BCG, Booz Allen Real-world approach

Who Am I?

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Basics of innovation & startups◦ Business plan◦ Financing◦ The Investor Pitch

Improving the odds of success◦ Funding & evaluating your projects at work◦ Your own startup◦ Think like a CEO/founder

Group project: The Investor Pitch of new business

Objectives of Module 3

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Startup Creation

Source, Startups 1977-2005, Business Dynamics Statistics (BDS) seriescompiled by the U.S. Census Bureau.

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Job-Growth Engine

<5 6 to 10 11 to 15 16 to 20 21 to 25 >260

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20

30

40

50

60

70

% of Job Creation by Age of Enterprise

Source: State of Entrepreneurship Address, Kauffman Foundation, 2011

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4 Innovation Types

Business Model Product/Service

TechnologyProcess

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Technology Product/ Process Business Service Model

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Economic Basis of InnovationInnovation

Differentiation

Changing value proposition

Customers buy more and pay more

Otherwise market naturally drives towards commodity and lowest price.

Do you want to duke out with the Chinese on cost?

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Operating Margin Growth in Excess of Competitive Peers

[Source: IBM, CEOs are expanding the innovation horizon: important implications for CIOs]

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Reinvent—Do 1 Thing Well

Entrant introduces a product/service at a lower price with “good enough” attributes

Begins to win customers Incumbent ignores the situation Entrant keeps improving & growing Entrant moves toward high-end or your core

market “Oh %$$&* #$!”

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Anatomy Of Disruption

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Development times too long 32%

Lack of coordination 28%

Limited customer insight 26%

Risk-adverse culture 25%

Difficulty selecting right ideas 21%

No good way to measure 20%

A shortage of ideas 18% Not the problem

Ineffective marketing 17%

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It’s a Cultural Problem

Culture &Implementation

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Causes of Corporate Death

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Apple vs. Microsoft

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DJIA 1979

Allied Chemical Alcoa American CanAT&T American Tobacco Bethlehem Steel Dupont ExxonMobil Eastman KodakGeneral Foods GE GMGoodyear IBM IncoInt’l Harvester Int’l Paper Johns Manville3M Merck Owens-Illinois GlassP & G Sears Roebuck SocalTexaco Union Carbide US Steel

United Technologies Westinghouse Woolworth

Not in 2012 (20) Still in 2012 (10)

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DJIA 2012

Survivors Replacements New Cos.Alcoa Amex CiscoAT & T Boeing Home DepotChevron Bank of America IntelDuPont Caterpillar MicrosoftExxonMobil Coca Cola VerizonGE DisneyIBM HP (5)Merck Johnson & Johnson

P & G JP Morgan Chase

United Tech. Kraft FoodsMcDonalds

(10) 3MPfizer

Travellers

Wal-mart

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The Odds

Ideas Full developmentProjects

ExploratoryProjects

ProductLaunch

Success

3,000

100 10 2 1

Source: Stevens, G A. and Burley, J. “3,000 Raw Ideas = 1Commercial Success

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The Odds50% of startups die within 5 years1/3 survive to 10 years

552,000 businesses created in 2009722,000 closed

40% of “exits” in 2009 are bankruptcies or shutdowns

Source: SBA; Ctr. For Venture Research, Univ. of NH

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Why So Hard?

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The Business Plan

The pain Value proposition Market Who’s the

customer? Barriers to adoption Competition

Business model Market entry plan IP & entry barriers Management Financing Exit strategy

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We haven’t even begun to deal with execution yet!

Or the economy

Or the people

Or regulations

Success is 90% execution & adaptation, 10% planning.

That Was Just the Plan…

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Innovate or Die!

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Business PlanInspirationNeedsPainValue Proposition

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It’s About Buying & Selling

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FocusOur Focus

HobbyCorporate >>>>>>>>>>

VCAngelPersonal

Valuation$M

1

50

10

.1

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Are there enough customers who are willing to pay you a price that gives you enough profit to build a business and yield a return for investors that’s worthwhile to invest in you?

It’s Not Rocket Science

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Your work

Your hobby

Why not?

Observe trend

Needs gap

Customer IPivot

Technology map

The Idea—Where from?

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Where’s the Pain?

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Market ResearchPrimary Customers Resellers “Experts”

Listen for complaints: Why is it…? Why can’t I…? Can you do this…? What if? I hate this… This shouldn’t be so hard

Secondary Associations Analysts Government

Good for general info &background Often outdated Not specific Backward looking

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What is the problem? Who are the customers? What is driving the need? Under what circumstances does the need arise? When does it arise? How often? Where? How much does the customer care? How satisfied is the customer with his current

solutions? How many customers have this same need &

circumstances?

Needs Analysis

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Customer: Payroll/benefits outsourcing firm

Pain: 1. Every pay period >> peak demand 2. Servers strain/crash doing SSL

transactions >> customers complain

3. “Sun rep wants me to buy $1M SPARC servers”

Pain—SSL Decryption with General-purpose Computers

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Attributes of product that customers care about and willing to pay for at given price, place and time

Different for each demographic segment

Can change over time◦ Price◦ Competition◦ Product expectation◦ Etc.

Value Proposition

“A horse! My kingdomfor a horse!”

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Value Propositions Feature/ performance

Cult

Convenience

Faster

Vanity

Saves money

Productivity

Financing

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Business PlanMarketCustomers

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Primary, secondary, etc.

Size not as important as correct segmentation

Total vs. Served Available Market (TAM vs. SAM)

Retail vs. wholesale $$

Bottom-up projection best

If new market, use best proxy

If all fails, use gut, “feel of market”, ROMA

Market

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Excel magic—garbage in, hockey stick out

“30% CAGR from $100M to $2 billion from 2010-2015”

“conservative goal of 1% of Chinese consumers”

Watch Out/Reject:

Market SegmentA subgroup of consumers sharing characteristics that cause them to have similar product needs and values.

Respond similarly to market stimuli Can be reached by market intervention Different from other segments Change over time

expectations price capabilities

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• Money center• National• Superregional• Regional• Local• “Non-bank” banks• Credit unions

FinancialServices

CommercialBanks

Segmentation

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Who are our most profitable customers? Where can we find more of them? How can we more effectively reach them? How can we tailor our message to each

segment? What segments need our services most, at

what cost? How can we better allocate our sales/

marketing resources? Who’s our competition?

Segmentation Purpose

Geographic

DemographicAge, gender, family size and life cycle, or income

PsychographicSocial class, lifestyle,

or personality

BehavioralOccasions, benefits, uses, or responses

Nations, states, regions or cities

Segmentation Criteria

Mass MarketingSame product to all consumers

(no segmentation)

Segment MarketingDifferent products to one or more segments

(some segmentation)

MicromarketingProducts to suit the tastes of individuals or locations

(complete segmentation)

Niche MarketingDifferent products to subgroups within segments

( more segmentation)

Levels of Segmentation

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What’s Wrong with This? Product

Photo management product designed to assist Brand Marketers, Event organizers, and Sponsorship owners to take advantage of the power of event photos to assist in quantifying ROI for a given event or sponsorship.

Market

Alternative advertising is a $26 billion business.

Branded entertainment spending increased to $52 billion annually.

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Who’s Customer?

YES Male college student Bank teller in credit

union Owner/sales mgr. of

independent clothing stores

ER nurses

NO 15-40 yr. males Financial services

worker Sales mgr. of retail

stores

Medical/health workers

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Who’s Customer?

User CFOVP/CorporateManager

Time

$$$

Effort

CEOIT BOD

Sales Cycle

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Customer: Payroll/benefits outsourcing firm

Pain: 1. Every pay period >> peak demand 2. Servers strain/crash doing SSL transactions >> customers

complain 3. Sun rep wants me to buy $1M SPARC servers

Solution: SSL accelerator appliances (3-10x faster) $25-45K New product category

Questions:

1. Customer/Market 2. Value Proposition 3. ROI

IPivot Exercise

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Business PlanMarket TimingBarriers to Adoption

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Barriers to AdoptionMacro Is market ready? Too

early?

Need adoption ecosystem to exist first?

Crossing the chasm?

Micro Too complicated

Doesn’t work or solve problem

Price

Cultural misfit

Changing habits

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There is a tide in the affairs of men which,Taken at the flood, leads on to fortune;Omitted, all the voyage of their lifeIs bound in shallows and miseries.On such a full sea are we now afloat,We must take the current when it servesOr lose our ventures.

--Julius CaesarShakespeare

Catch the Wave

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Idea/Prototype Adoption

Telematics mid-1960s2010sFaxes early 1960s 1980sVideo on demand mid 1990s2011+Internet late 1960s1995+PDAs early 1990s mid 2000sPoker on cable 1980s early 2000sRenewable energy 1970s ??

Market Incubation Period

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“Superior” product loses to ingrainedhabits & workflow

Need “10X” gain to switch

Switching Cost

Vs.

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1st Mover vs. Follower

Making the Pitch

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You can have the greatest idea,

but if you can’t convince enough people,

it doesn’t matter.

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Levels of Message

1 line 1 para. 5’ 15’ white paper

Tech Expert

Analyst

Trade Press

EconomicBuyer

Investor

Public

Engineering

Startup

What? Who? When? Where? Why? How? How big?

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Elevator Pitch—5W 2H

Get the follow-on meeting!

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Objective

It’s the message, not the facts! Great product Customer stories Big market Unique value Great team You can make $$$

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The Story

Don’t confuse message with facts!

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Afghan “Strategy”?

Simplicity is the ultimate

sophistication.–Steve Jobs

BIRD

10% 65%

Retention

Give Context to Numbers

5GB

or

“You can put 1,000songs in your pocket.”

Body LanguageVocal Tone

63%

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It’s About You!

What Are They Looking For? Integrity

Passion

Commitment

Vision

Reality

Leadership

Experience

Knowledge

Skills

Coachable/likable

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What It Comes Down To• Can I trust this person?

• Can I work with you?

• Do you have a chance of making $$ for me?

• Would I want to have beer with you?

• Are you worth my effort & risk?

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Why They Invest in You?

“VCs do not invest with their brains. They invest with companies that they fall in love with. Then they use their brains to rationalize their decision.

Reality Distortion Field!

“Some managers are uncomfortable with expressing emotion about their dreams, but it’s the passion and emotion that will attract and motivate others.” – Jim Collins, Built to Last

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Top 10 Lies Told to VCs1. Our projections are conservative2. Our target market is $56 billion3. We have a world class team4. Our average sales cycle is 90 days5. We have no direct competitor6. No one else can do what we do7. All we need is 2% of the market8. We’ll be cash positive in 12 months9. Our contract with [Big Company] will be signed in two weeks10. I’ll be happy to hand over the reins to a new CEO

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DiscussionsCONNECT Springboard IdeasYour ideas

Ken Liu 858-722-0912caranome@gmail.com