How to Think like Startup

Brief summary notes and observations made by Artem Rumiantsev artem@roomian.org

and based on the brilliant Steve Blank’s course on Udacity.com

General Approach

If you know how to go from the idea to the business:

• Do some research and write business plan and you will know how to run your own business – this MBA-like advice is wrong! Startups are NOT just smaller versions of larger companies, and all MBA tools are irrelevant on a startup’s day one. This wrong belief is based on that we can start absolutely any company just by spending a lot of time on writing complicated operating plan and financial model and then hire people to execute this plans.

• BUT now we know that no plan survives first contact with customers! First days of startup are completely unpredictable.

• Business plans and financial forecasts are just silly as it was in the Soviet Union. This doesn’t mean we shouldn’t have any planning, but what we need is planning before plan. This means you need some real facts before we can do that. And you need to organize your facts in what is called Business Model Canvas.

• So, first you need to draft Business Model Canvas that helps you to organize your thinking and get out of the building to turn your hypothesis into facts and update canvas on regular basis. Canvas becomes a score card.

General Approach

Please, don’t be Soviet Planning adept. Or you’ll fail!

Startup Founder’s Education

Sure, if your startup will grow into a large company you’ll need all MBA set of skills to EXECUTE your company.

BUT for the first days of your startup you need a different set of skills that just never existed before to SEARCH:• Business Model Design – set of guesses• Customer Development – how to change guesses into facts• Startup Team Building• Entrepreneurial Finance• Agile Development• Marketing

What can happen to a Startup? It can grow into a company – I’m sure you want this with all your heart! It can pivot and iterate as it continues to search for a right business

model It can grow very slowly and barely break even It can run out of money and shutdown

What is a Startup?

• A temporary organization• Aims to become a company• Designed to SEARCH for something… that is…

Repeatable and Scalable

So, you’re searching for a Business Model…

Business Model is how company creates value for itself while delivering products or services to its clients.

So, to define the exact Business Model of your Startup you should draw a diagram named BUSINESS MODEL CANVAS and think about all pieces of business.

The 9 Building Blocks of Canvas*

The CANVAS is a SET OF GUESSES.* www.businessmodelgeneration.com

1. Value Proposition

It’s not about you idea or product, it’s about SOLVING A PROBLEM OR NEED for a customer.

Technology is only part of your Value Proposition. Customers don’t care about your technology. They are trying to solve problem or fulfill a need.

Example of problem:• Accounting problem or Word processing.Example of need:• Entertainment or Communication with friends.

Market for solving needs is HUGE comparing to solving specific problems.

Value Proposition works hand in hand with Customer Segments. This relationship is what makes Startup succeed of fail at Day 1. And we called that relationship PRODUCT MARKET FIT. This means that your product FITS needs of special customer segments.

Product Market Fit allows us to search and make iterations or doing PIVOTS to understand what customer really want without going out of the business.

Value Proposition Services

Which core services are part of your value proposition?• Consulting• Haircut• Investment advice

Which pre-sales or sales services?• Help finding right solution• Financing• Free delivery

Which after-sales services?• Free maintenance• Free disposal of something

Value Proposition Common Mistakes• It's just a feature of someone else's product• It's "nice to have" instead of "got to have" (don't forget to prioritize pains

and gains!)• Not enough customers care

Minimum Viable Product

In the Startup you're GUESSING and you could guessing LONG. Because customers didn't have input, many products were made that didn't satisfy customers' wants and needs. So rather than waste a lot of time and money, you should go outside the building before you build something and waste engineering efforts and cash!

MVP:1. Build the minimum features in order to get FEEDBACK2. Quickly and iteratively get customer feedback3. As you get more feedback you can ADD MORE FEATURES

But on a new market, of course, you can’t go outside the building to get customers feedback.

But in case of sitting in your office there is no way to understand your customers’ problems and needs.

2. Customer Segments

Your customers are not exist to buy, you exits for them.

And you need to go out of the building and figure out:• WHO are they (customers archetypes)

Geographic Social Demographics

• WHY would they buy

Jobs to be done:• What functional and social jobs are getting done?• What emotional jobs?• What basic needs are you helping your customers satisfy?

Spend day in the life of customer!

3. Channels

How does the product get from your company to the customer?• Physical channels• Virtual (web, mobile) channels

Web Distribution Channels:• Dedicated e-commerce• Platform app-store• Two-step distribution• Aggregator• Social Commerce• Flash Sales

Some observations:• You can’t afford multiple distribution channels at Day 1. Pick one.• You should pay attention to Channel economics.

4. Customer Relationships

How does a company GET, KEEP and GROW customers.

Customer archetypes:• What's their role• Who are they• How do they buy• What matters

GET (WEB):• Paid demand activities designed to FEED SALES FUNNEL: Public

relations; Advertising; Trade shows; Webinars; E-mail/Direct mail; SEM• Earned demand activities: Publications in Journals;

Conferences/Speeches; Blogging/Guest Articles; Social MediaKEEP (WEB):• Loyalty Programs; Contests/Events; Blogs/RSS/E-mail; Social MediaBe afraid or customer CHURN!GROW:• Just like in the physical channel: up-sell; next-sell; cross-sell; referrals.

Lifetime Value NEEDS to be greater then Customer Acquisition Costs!

5. Revenue Streams

• What value is the customer paying for. Price should be based on VALUE not just the cheapest product!

• Revenue models are the STRATEGY.• Pricing is the TACTICS.

Mistakes:• Revenue Stream is the PRICE I charge customers• I set the price based on how much it costs to make it• My price has to be less than my competitor's priceIt's important to understand how much are they currently paying for the same product?

Revenue streams possibilities:• Assets Sale (Ford, Walmart)• Usage Fee (Verizon Wireless, Amazon Web Services, FedEx, SunRun)• Subscription Fee (Salesforce.com, NetFlix)• Renting (Chegg, Borrowlenses.com)• Licensing (Microsoft, EA)• Intermediation Fee/Matchmaking Fee (Airbnb, Etsy)• Advertising (Google, Mint, Facebook)Different pricing tactics inside (fixed and dynamic)!

6. Key Resources

What are the MOST IMPORTANT ASSETS required to make the business model work?• Finance (raising money)• Physical (PCs, vehicles, manufacturing)• Intellectual (Patents, Customer lists or databases, People)• Human (Human Engineers, Scientists)

7. Partners

Who are the KEY PARTNERS AND SUPPLIERS needed to make the business model work?

And before sign the deal you need to understand:• What key resources are you acquiring from the partner?• What key activities do they perform and when?

Types of partners:• Strategic Alliance• Joint Venture• Traffic Partners• Coopetition• Joint Business Development• Suppliers

Find companies the same size as you. Remember, you're Startup!

8. Activities

What are the MOST IMPORTANT THINGS you need DO to make business model WORK.

Depending on the area of your expertise:• Production (fixed, variable costs)• Problem solving (consulting, engineering)• Supply chain management

9. Costs

What are the COSTS to operate the business model.• Most important costs• Most expensive resources• Most expensive activities

Customer Development

This is how you change GUESSES into FACTS!Get out of the building, start talk to customers, partners, vendors and test your hypothesis!

2 steps of SEARCH:• Customer discovery• Customer validation• Customer creation• Company building

So, instead of firing and hiring sales managers in the future you should right now get out of the building and test some primary assumptions! Usually if Sales didn’t match the sales plan we’re making changes simply by firing executives instead of having Founder engaged at Day 1. And that is the idea of getting the Founder outside of the building.

Customer Development should be done by FOUNDERS! Only Founder can:• Change the product• Make pivots• Hear customer feedback first hand

Pivot – initial steps that will save your job!

Pivot

What do you do when your GUESSES do not match REALITY?

• Pivots are the results of hypothesis and experimentation• Pivot is a substantive change to one or more business model components.

An iteration is a minor change. • You should anyway do those iterations to match better your guesses with

reality!

FIRE THE HYPOTHESIS not the FOUNDER!

Market Opportunity Analysis

Before you start do Market Opportunity Analysis:

• Identify a Customer and Market Need• Size the Market

Total Available Market and Served Available Market Target Market

• Define Competitors• Growth Potential

To understand Market Size:• Talk to customers and Sales Channels• Market Size by Competitive Approximation (Analyst Reports)• Market Research Firms (Forrester, Gartner)

Keep in mind that research data is wonderful on the size of markets in the PAST, but researchers are not good in predicting FUTURE (that is why they do not run hedge funds).

Market Types

Market type Customers Customer Needs

Competitors Risk Example

Existing Known Performance Many Lack of branding, sales, distribution

Google

Resegmented Possible Known

Better Fit Many if wrong, Few if right

Market and product re-definition

Southwest Airlines

New Unknown Transformational improvement

None Education and Evangelism, tons of money to create market

Groupon

Clone Possible Known

Local Version None Misjudge local needs

Baidu

Rank of markets due to the shortest time to profitability:1. Existing Market2. Clone Market3. Resegmented Market4. New Market

Points of Attention

• Building Business Model Canvas is a MUST for Startups!• Understanding of Market Types is ESSENTIAL for Startups!• Pre-mature spending is a KILLER for Startups!

Metrics that Matter:• Value Proposition• Market Type• Revenue Streams • Burn Rate• Operating Costs• Customer Relationships• Channel

Recommendations

If you’re a big fan of startup culture,If you’re a Startup or have just got a brilliant idea that needs implementation,If you are a company executive that appreciates new ideas and technologies and wants to benefit from open innovation

Please feel free to contact me artem@roomian.org

I strongly recommend Steve Blank’s course on Udacity.com

and book “Business Model Generation”www.businessmodelgeneration.com