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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14
15
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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