New Venture Creation Turning Ideas into Revenue Workshop with Dr Rob Adams SODA Inc, Hamilton, 8 July 2013 Rob Adams Slide 1
Dr Rob Adams Director of Texas Venture Labs, Lecturer, IC2 Fellow at The University of Texas Former Software Executive Entrepreneur Venture Capitalist Author of: A Good Hard Kick in the Ass: Basic Training for Entrepreneurs and If You Build It Will They Come? Three Steps to Test and Validate Any Market Opportunity Rob Adams Slide 2
Agenda Module 1: Market Validation Module 2: Business Models Rob Adams Slide 3
Module 1 Market Validation Rob Adams Slide 4
Introduction and goals Name Company What you want to accomplish The product or service you will be working on Rob Adams Slide 5
Market Validation Overview Rob Adams Slide 6
Market Validation The facts The optimistic view 10% of all start-up businesses succeed 20% of all venture-backed start-ups succeed 35% of new products from existing companies succeed The pessimistic view 90% of all start-up businesses fail 80% of all venture backed start-ups fail 65% of new products from existing companies fail Extrapolate this to the US economy Annual R&D investment in successful products is $140 billion Annual R&D investment in failed products is $260 billion Rob Adams Slide 7
Market Validation Why is the failure rate so high? Not technology Not manufacturing Not accounting Not operations Not. Rob Adams Slide 8
Market Validation Why is the failure rate so high? Companies focus on operational issues Business education focuses on managing, not creating Humans like data, firm conclusions and the world of the tangible Humans dislike ambiguity and conflicting information Management systems value task completion which is different from results Companies don t focus on markets early Products fail because they don t sell, not because they can t be built 85% of product failure can be traced to market related issues Marketing is not classically treated as a process driven effort If you want a successful product environment Treat marketing and engineering as equivalent, not opposing functions Put as much time and attention into marketing as you do engineering Rob Adams Slide 9
Market Validation Case Study: Iridium Case Study: Apple ipod Released October, 2001 5 GB, 10 hour battery, 1,000 songs, $ 400 retail Stock price October 2001: $ 8.78 Stock price April 2003: $7.11 Rob Adams Slide 10
Market Validation How can this be addressed? Market Validation Market Validation is a process applied to the unstructured, serendipitous task of doing a complete evaluation of the market for a product before the product is built. Market Validation is a series of standard business practices applied using an objective, market oriented and fact based data collection process. A complete Market Validation process takes 60 days and has a budget of roughly 5% of the expected cost of developing the product. Rob Adams Slide 11
Market Validation Market Validation The philosophy behind Market Validation is that success is achieved through a series of fast failures. Rob Adams Slide 12
Market Validation The three steps of Market Validation Ready A fast triage of your idea to understand if more time and effort should be invested Time investment of 2 days Aim A deep dive into the target market using primary research techniques to develop a product with unique, differentiable features that are compelling to your target audience Time investment of 60 days Fire The art of converting market data into product features and getting a product out the door quickly Time investment is management diligence from the end of the Aim process until the product ships Rob Adams Slide 13
Section 1 - Ready Rob Adams Slide 14
Market Validation The Ready Step Domain knowledge Market size and growth rate Lifecycles and trends Competitive analysis Outside data sources Rob Adams Slide 15
Market Validation The Ready Step Domain knowledge Where does your idea come from? Is it part of your work experience? Is it part of your consumer experience? Examples Consumer: margins are tight, marketing is expensive Medical: Large volumes of money do not mean success China: Big markets do not mean easy money Real Estate: Lots of diffuse transactions are hard to standardize Rob Adams Slide 16
Market Validation The Ready Step Market size and growth rate What is the size of the overall market? What are the submarkets? What are the sizes of the submarkets? What are the growth rates? What is the growth rate of the economy? What is the growth of your market relative to the economy? Above Same rate Below Examples Beverage industry Life sciences Rob Adams Slide 17
Market Validation The Ready Step Lifecycles and trends What is the lifecycle of your market? What are the trends affecting your market? Population Expanding and contracting industry sectors Technology adoption Competitive rivalry What business model does your industry use? Consumer, manufacturing, life sciences, technology, services Examples Baby boomers Wifi Rob Adams Slide 18
Market Validation The Ready Step Competitive analysis Who are your competitors? Why are they successful? What do their customers think of them? What are substitutes for your product? What are the economics of your product? How much competition is the customer keeping their money? Examples What is the current substitute for a new car? What is the current substitute for a classic 4 year undergraduate degree? Rob Adams Slide 19
Market Validation The Ready Step Outside data sources Is your market established enough to have analyst firms? What other sources of data can give your market data credibility? What analyst firms follow your market? What are the names of the analysts? How big do they say the market is? What do they say the trends are? How do you get your hand on their reports? Examples Why you need someone else to make your points for you Rob Adams Slide 20
Market Validation Examples Internet sources Statistical abstract of the United States Marketresearch.com Firstresearch.com Finance.Yahoo.com Generalized searches Size of bicycle industry ipod accessory market Analysts covering Time Warner Airline industry statistics Size of the beverage industry Jdpowers market research Rob Adams Slide 21
Market Validation Workshop questions to answer Domain knowledge Market size and growth rate How big is the market and how fast is it growing? What are the affects of current lifecycles and trends? Competitive analysis What is the source of the domain knowledge for your product or service? Who are your competitors? What are your substitutes? Outside data sources What are your sources of information? Presentation Review your answers with the group Rob Adams Slide 22
Section 2 - Aim Rob Adams Slide 23
Market Validation The Aim Step Primary market research Who to interview Interviewing, interpreting the data and analyzing the results Using outside firms Getting the market ready for your product Rob Adams Slide 24
Market Validation The Aim Step Primary market research What kind of data we re after Types of surveys Types of questions Developing and conducting interviews Initial interviews Mid-stage interviews Late-stage interviews Who to interview Sourcing names Rob Adams Slide 25
Market Validation The Aim Step Who to interview Sources Commercial databases Trade organizations Specialized magazines Doing the math on the available listings How many names to get one interview? How long before you run out of names? Similarity to the sales process Which sources of names produce the best results? Rob Adams Slide 26
Market Validation The Aim Step Interviewing, interpreting the data and analyzing the results Conducting the interviews Analyzing the data Interpreting the data Using the data to target your market Using the data to design your product Rob Adams Slide 27
Market Validation The Aim Step Using outside firms Multifaceted process Assembling questionnaires Conducting interviews Crunching data Analyzing data Objectivity You can t outsource the whole process Rob Adams Slide 28
Market Validation The Aim Step Getting the market ready for your product Similarity to the sales process Target market Suspects Prospects Closing Customer use and success stories Case studies References Credibility Press, industry analysts and pundits included Up to speed on your product Know the approach you ve taken in evaluating the market Rob Adams Slide 29
Market Validation Examples Internet sources Allconferences.com Tradeevents.com Hoovers.com Freetrademagazines.com Surveymonkey.com Generalized searches Trade events Marketing lists Rob Adams Slide 30
Market Validation Workshop questions to answer Who to interview What will be your sources for names to interview Interviewing, interpreting the data and analyzing the results Build an interview guide Using outside firms Will you do this work internally or use outside resources What will you do internally versus externally Presentation Review your answers with the group Provide details on name sourcing Develop a complete questionnaire Rob Adams Slide 31
Section 3 - Fire Rob Adams Slide 32
Market Validation The Fire Step How to get a market oriented product out quickly Written product specifications and schedules Design Partner Programs, Advisory Board Programs Launch Sustained sales and marketing efforts Rob Adams Slide 33
Market Validation The Fire Step How to get a market oriented product out quickly Tightly targeted, narrow markets Minimally acceptable feature sets Fast product iterations Why quality doesn t always matter Rob Adams Slide 34
Market Validation The Fire Step Written product specifications and schedules Market Validation team of engineering and marketing talent Written product specs Written schedules Killing features early in the development process The product manager Rob Adams Slide 35
Market Validation The Fire Step Design Partner Programs Drawn from target market Product usage and design 10-20% of your primary research base Complete understanding of usability usage, and support issues Early sales pipeline Case studies for launch efforts Advisory Board Programs Drawn from target market and analysts Executives in your buying chain Economic buyer, user buyer, installer, supporter, budget owner, Sales pipeline Case studies for launch efforts Rob Adams Slide 36
Market Validation The Fire Step Launch Been through it before with Ready and Aim steps of Market Validation process Large amount of supporting content Ready step data Aim step data Early users, analysts and executive Fact based approach to product development should be emphasized Budget is a critical universal benchmark for success Rob Adams Slide 37
Market Validation The Fire Step Sustained sales and marketing efforts Budget for first year sales and marketing needs to equal the budget for development No excuses; this is the only way to assure the market is made aware of what you re offering Rob Adams Slide 38
Market Validation Workshop questions to answer Participant examples Anticipated cultural issues in the process of implementing Market Validation Presentation Review of above points Rob Adams Slide 39
Module 2 Business Models Rob Adams Slide 40
Business Models Where are we? Performed market validation After several attempts, we have found an interesting market We have a thorough understanding of; How customers currently solve the problem and how much they spend each year solving it The size and growth rate of the market for our product What adjacent markets are available The competitors and substitute products What is our next step? Rob Adams Slide 41
Business Models What s the next step? The Business Model Outline What is a Business Model? Developing your Business Model Categorizing your business Sales and Marketing Models Rob Adams Slide 42
Business Models What is in a Business Model? An analysis of the financial dynamics of a company The CEO s view of the financial leverage points of the business Used for Explaining the business to outside constituents Conversations with the board Presenting the business to investors Rob Adams Slide 43
Business Models What is in a Business Model? Focuses on the unit economics of the core product or service Explains the head room available in the market Shows the % penetration required to meet the company revenue goal Rob Adams Slide 44
Business Models What is in a Business Model? Gives an outline of the company s sales and marketing model Covers the amount of money that must be spent to generate each dollar of sales Rob Adams Slide 45
Business Models Where does this information come from? An analysis of the financial dynamics of a company, starting with the unit economics of the core product or service Competitive analysis Market validation Operating history or projections Rob Adams Slide 46
Business Models Where does this information come from? An evaluation of the size of the market that is being served, and knowing the % penetration required to meet the company revenue goal Market definition and sizing Competitive analysis An assessment of the company s sales and marketing, and the amount that must be spent to generate each dollar of sales Market validation Competitive analysis Rob Adams Slide 47
Business Models How do you present a business model? A stylized representation of the financials of the business A common sized, stylized income statement A financial description of how the business works Revenues Expenses across 4 major categories Ratios of expenses as a % of revenues Rob Adams Slide 48
Business Models How do you present a business model? And, more importantly, an understanding of how the money is generated Profitability Cash flow Sales and marketing investment How investors (if any) can be paid back This differs across business categories, so it needs to be analyzed in the context of your business category Rob Adams Slide 49
Business Model Development What will we know by developing a business model? Market validation has established high demand for a $10 widget If it can be delivered to market for $8.00 we have an interesting company If it the best price we can get it into the market for is $12, no amount of volume will get us profitable Rob Adams Slide 50
Business Model Development What will we know by developing a business model? A major component of the business model is the Sales and Marketing line This is typically the largest dollar investment It is the most misunderstood and underbudgeted line item A common pitfall: a company spends $1.00 in sales and marketing to generate $1.00 in revenue Rob Adams Slide 51
Business Model Development What will we know by developing a business model? Sales productivity Cash conversion cycle of the sales process High growth means low cash flow Want to avoid the following all-to-frequent problem: A high growth company is profitable. The company runs out of cash. Rob Adams Slide 52
Business Model Development What will we know by developing a business model? Market head-room How much market share the company needs to attain to meet its revenue goals Want to avoid a frequent problem where to reach its revenue goals, a company needs to capture 110% of its available market Rob Adams Slide 53
Business Models Outline What is a Business Model? Developing your Business Model Categorizing your business Sales and Marketing Models Exercises Rob Adams Slide 54
Business Models Type of offering divided into two major categories; Product Characterized by high fixed costs High R&D, manufacturing, and COGS Service Characterized by low fixed costs High variable costs Low COGS Rob Adams Slide 55
Business Models Cost of offerings Product Research and development costs Cost of manufacturing facility Costs of goods and labor Expected number of units built Forecast needs to be accurate given high fixed costs that must be amortized Fixed costs (tend to be high) Variable costs (tend to be low) Rob Adams Slide 56
Business Models Cost of offerings Service Research and development costs Cost of manufacturing facility (zero) Cost of goods and labor Expected number of units to be built Forecast does not need to be as accurate as product forecasts Fixed costs (tend to be low) Variable costs (tend to be high) Rob Adams Slide 57
Business Models Outline What is a Business Model? Developing your Business Model Categorizing your business Sales and Marketing Models Exercises Rob Adams Slide 58
Business Models How categories are developed Based on major differences in financial dynamics Categories of business models Consumer Manufacturing Medical Technology Services Rob Adams Slide 59
Business Models Sections within financial statements to focus on when developing business models; Revenue Sales and marketing costs ( S&M ) Manufacturing costs (including Research and Development) COGS (cost of goods sold) Profit (treated as an expense) Rob Adams Slide 60
Business Models How do these blend together? We need to be able to categorize each major business model category Consumer Manufacturing Medical Technology Services By its financial drivers Revenue S&M Manu COGS Profit Rob Adams Slide 61
Business Models How does this tie together? Consumer Rob Adams Slide 62
Business Models How does this tie together? Consumer Revenue S&M Manu COGS Profit Rob Adams Slide 63
Business Models How does this tie together? Consumer Revenue 100% S&M 60% Manu 35% COGS 5% Profit 1% Rob Adams Slide 64
Business Models How does this tie together? Manu Revenue 100% S&M 15% Manu 40% COGS 40% Profit 5% Rob Adams Slide 65
Business Models How does this tie together? Medical Revenue 100% S&M 35% Manu 35% COGS 10% Profit 20% Rob Adams Slide 66
Business Models How does this tie together? Tech Revenue 100% S&M 60% Manu 15% COGS 5% Profit 20% Rob Adams Slide 67
Business Models How does this tie together? Services Revenue 100% S&M 35% Manu 0% COGS 35% Profit 30% Rob Adams Slide 68
Business Models Consumer Manu Medical Tech Services Revenue 100% 100% 100% 100% 100% S&M 60% 15% 35% 60% 35% Manu 35% 40% 35% 15% 0% COGS 5% 40% 10% 5% 35% Profit 1% 5% 20% 20% 30% Rob Adams Slide 69
Business Model Development What doesn t this chart show? Segment growth rates relative to GNP Operating leverage of the segments Scalability of the segments Rob Adams Slide 70
Business Model Development Why does a business model matter? By developing these we can understand the financial dynamics of our business We can understand what our profitability is like We know what the major leverage points of the business are We can understand how much money, if any, we need to borrow to successfully grow the business Answers how we will pay back our investors Rob Adams Slide 71
Business Models Some Business Models Challenges What are Business Models for the following companies; GM, Ford and Chrysler What is their most profitable business segment? IBM American Airlines, Delta and Southwest Airlines Starbucks Rob Adams Slide 72
Business Model Development What will we know by developing a business model? Market validation has established high demand for a $10 widget If it can be delivered to market for $8.00 we have an interesting company If it the best price we can get it into the market for is $12, no amount of volume will get us profitable. Rob Adams Slide 73
Business Models Outline What is a Business Model? Developing your Business Model Categorizing your business Sales and Marketing Models Exercises Rob Adams Slide 74
Business Model Development Sales and Marketing Models Market head room primary and ancillary market What % market share do you need to get your first year s revenue? Second, third years? By year five, what % of your target market do you need to have captured? What is the size of your most attractive ancillary market? At what point does it make sense to move to it? Rob Adams Slide 75
Business Model Development Sales and Marketing Models Sales cash conversion cycle The time it takes to find a customer, close the deal, and collect the cash The time it takes to find a sale representative, train them, and make them productive Rob Adams Slide 76
Business Model Development Sales and Marketing Models Sales model Direct Indirect Telesales OEM Marketing model Public relations Advertising Marketing programs Active Passive Rob Adams Slide 77
Business Model Development Sales and Marketing Models Focus Broad based Mid-range reach Narrow cast Timing Timeline to close sales force investment Timeline to install product and services investment Timeline to pay Accounts receivable investment Rob Adams Slide 78
Business Models Outline What is a Business Model? Developing your Business Model Categorizing your business Sales and Marketing Models Exercises Rob Adams Slide 79
Business Models - Exercises Applying Business Models to your business Define yourself in one business category Develop your base business model Refine your business model How and why is your model different from the base case presented here? Rob Adams Slide 80
Business Models - Exercises Applying Business Models to your business Develop a sales model for your company Type of sales Productivity of your newly trained sales representatives Sales cycle cash conversion cycle How much capital investment will your sales model require? Rob Adams Slide 81
Business Models - Exercises Applying Business Models to your business Develop a marketing model for your company What market penetration do you need to reach your revenue goals? How much capital investment will your sales model require? Rob Adams Slide 82
Questions? Rob Adams Slide 83
Please complete the feedback forms! Rob Adams Slide 84
Thanks for coming and see you again soon! Rob Adams Slide 85