How to Build and Finance Great Start Ups the coming

10 years ( 1 )

The number of start ups succeeding in their objectives are only a small

fraction ( less than 10 % ) . The main reason is that the most of the start

ups do not have process to test faster their business model , competition is

becoming global and the traditional product creation process offers no real

feedback till working prototypes are available . With the acceleration of

Innovation due to faster digital networks , exponentially growing new

technologies( Cloud computing , Data Analytics , 3D printing , Smart Sensors ,

Mobile , Social networking ,… ) and proliferation of information the

business environment became even faster and more competitive . The old

product creation process starting with customer requirements followed

from design and rigid implementation is not agile and is inadequate for the

faster and faster changing market . The main issue is that the current

process does not involve the customers and community early and iteratively

enough although the tools available have never been better ( social

networking , Blogging , on line communities and Platforms , You Tube ,

Kickstarter like Companies , tools for fast prototyping … ) .

In this article my focus will be for Start Ups with physical Consumer products

, focus on the crucial customer development process and the company has got

seed / angel money to start operating . There will be a few articles to

complete the subject .

To be able to change the above mentioned old paradigm we need to adopt

different thinking and mindset on how we build , run and finance start ups .For

this the following principles are key :

0. Define a company purpose ( think big is vital in the 21st

century as well as a purpose that resonates with the society )

1. Plan a product or system/platform at least 10 X better than the

status quo . A product / system easy to experience and/or

frequently used .

2. Start by targeting a small initial market segment and establish

from day one a process of Interaction with the targeted early

adopter customers and relevant on line communities that are

vital for innovation .

3. Match flexible interaction with customers/community with

agile development process

4. Failure is an integral part of the process

5. Business plans are flexible and changing often. The focus is on

Business model attributes especially finding as fast as possible

a profitable and scalable go to market strategy among others.

6. Design iterative experiments with prototypes and customers ,

community to validate various hypotheses as well as improve

and expand the User Experience .

7. Leverage as much as possible 3rd party assets . There are so

many third party companies to help to implement fast

prototypes , web assets , networking ,…..

8. The market type ( existing , new , niche ,.. ) is vital as it needs

different approaches .

9. In early stages the success metrics are not the traditional big

company metrics ( revenue , gross margin , profit ) but hit

product creation milestones , monthly cash burn rate , how

many early adopters customers we want to experiment with ,

how many community suggestions are implemented , ….

10. Passion for quality , fast decision making and speed

11. Choose people that are comfortable with uncertainty , chaos

and change.

12. Ensure frequent Communication with the whole team to share

learning

13. Apply modern financing techniques after the stage of seed ,

angel capital

The new process is involving the customer iteratively within the process , is

rapidly testing assumptions and makes corrections fast . It involves a

number of phases which will be described below and solves the old product

creation issues .

The new process is searching for a repeatable , scalable and profitable

business model based on a number of steps , iterations and major changes

when we find out that our hypotheses is wrong .

The customer development process phases in more detail :

A. Customer Discovery

1. Business Model hypothesis

The founders have expressed and written their vision , company purpose and designed the

business model. A few informal talks with potential customers and partners took place in

advance or in parallel .

The description of the business model is using the Business model Canvas ( available in

the Internet) in relative good detail level . The focus is on specifying the following

business model attributes

1. Value proposition

2. Customer segments

3. Customer relationships

4. Distribution channels

5. Key partners

6. Key resources

7. Key activities

8. Revenue streams

9. Cost structure

Key partnerships Key activities Value propositions Customer relationships Customer segments

Key resources Channels

Cost structure Revenue streams

The Business Model Canvas Company: Date:

Who are our Key Partners? Who are

our key suppliers?

Which Key Resources are we

acquiring from partners? Which Key

Activities do partners perform?

motivations for partnerships:

Optimization and economy Reduction

of risk and uncertainty

Acquisition of particular resources

and activities

What Key Activities do our Value

Propositions require? Our

Distribution Channels?

Customer Relationships? Revenue

streams?

categories Production Problem

Solving Platform/Network

What are the most important costs inherent in our business model?

Which Key Resources are most expensive?

Which Key Activities are most expensive?

is your business more:

Cost Driven (leanest cost structure, low price value proposition,

maximum automation, extensive outsourcing) Value Driven ( focused

on value creation, premium value proposition)

For what value are our customers really willing to pay? For what do they

currently pay?

How are they currently paying? How would they prefer to pay?

How much does each Revenue Stream contribute to overall revenues?

Through which Channels do our Customer Segments

want to be reached?

How are we reaching them now? How are our Channels

integrated? Which ones work best?

Which ones are most cost-efficient?

How are we integrating them with customer routines?

channel phases:

1.Awareness

How do we raise awareness about our company’s

products and services?

2.Evaluation

How do we help customers evaluate our organization’s

Value Proposition?

3.Purchase

How do we allow customers to purchase specific

products and services?

4.Delivery

How do we deliver a Value Proposition to customers?

5.After sales

How do we provide post-purchase customer support?

What type of relationship does each of our

Customer Segments expect us to establish

and maintain with them? Which ones have

we established?

How are they integrated with the rest of our

business model? How costly are they?

examples

Personal assistance

Dedicated Personal Assistance Self-Service

Automated Services Communities

Co-creation

What value do we deliver to the customer?

Which one of our customer’s problems are we

helping to solve?

What bundles of products and services are we

offering to each Customer Segment? Which

customer needs are we satisfying?

What Key Resources do our

Value Propositions require? Our

Distribution Channels?

Customer Relationships?

Revenue Streams?

types of resources

Physical

Intellectual (brand patents,

copyrights, data) Human

Financial

For whom are we creating value?Who are our most important customers?

Mass Market Niche Market Segmented DiversifiedMulti-sided Platform

characteristics Newness Performance Customization

“Getting the Job Done” Desi

Brand/Status Price

Cost Reduction Risk Reduction Accessibility

Convenience/Usability

An important consideration is the type of market our business will focus.

For the various market types see attached the following table describing the different

approaches for Customer needs , product performance , competition and risks .

Existing Market Resegmented Market (niche or low cost)

New Market Clone Market

Customers Existing Existing New/New usage New

Customer Needs

Performance 1.Cost 2.Perceived need/ problem

Simplicity & Convenience

New idea already proved overseas

Product Performance

Better / Faster 1.Good enough at the low end 2.Good enough for new niche

Low in “traditional attributes,” improved by new customer metrics

Good enough for local market

Competition Existing Incumbents Existing Incumbents Non-consumption/ Other startups

None, Foreign originators

Risks Existing Incumbents 1.Existing Incumbents 2.Niche Strategy fails

Market adoption Cultural adoption

In this phase we build a low fidelity minimum viable prototype ( this can be a basic

power point or a basic website or a video ) to explain the problem to get the first

feedback from the chosen early adopter customers.

2. Get out of the Building to test the problem

Getting out of the building means that we want to test mainly the problem and find out

about other aspects of the business model . This includes of course the customer

segments , customer relationships and channels . In this stage we are not yet interested

to find the exact best customers as we are testing the problem first so we need a broader

spectrum of customers to be able to find product market/fit . But we are looking for

early adopters in this stage (Influential and more innovative customers that want to test

new products/systems/business models ) . If we cannot sell to early adopters will be

almost impossible to sell to the early majority ( main stream customers ) .

The Key characteristics of Early Adopters are :

1. Have a problem or need

2. They understand they have a problem

3. They are actively searching for a solution

4. Sometimes they are trying to find a solution themselves

5. They have or can quickly acquire a budget

In this phase we need to answer 3 key questions :

1. Do we really understand the customer’s problem or need ? or

Have we found a need that even the customers do not know

they have ?

2. Do enough people really care enough about the problem for this

to become a huge business ?

3. Will they care enough to tell their friends ?

If all 3 questions are answered with a sounding yes then Product/market fit is

achieved .

To answer these questions we need to execute the following key steps :

1. Design experiments for customer tests

2. Experience the customers at work where they really spend time

3. Prepare for customer contacts

4. Testing customer understanding of the problem and assess its importance for the

customers including face to face as a must . People often lie on the web !

5. Gain understanding about the customers

6. Capture competition and market knowledge.

7. Take competitors to lunch

As in this stage we want to understand if people care about the problem and listen to

customers so we do not need to have working prototypes really . Instead a basic picture

or a simple power point or a video or a basic website simulation ( sometimes testing

various options with a wireframe prototyping tool ) can be used for the purpose .

A few rules apply for this part of the process :

1. Need enough number of customers to be able to draw conclusions

2. Use various tools to find the customers (peer intro is the best , own and team

connections , social networks lists , qualified lists , favors from friends , family ,

lawyers , investors , accountants ).

3. The problem presentation is designed to elicit info from customers !

4. We present a written list of problems , a list of current solutions and our

proposed new solution . 3 Columns . Then we let the customers talk ! and we

listen !!

5. A few clever questions to learn a lot more are :

- What do you think the problems are ?

- Do you miss any problems ?

- How do they rank the problems?

- Which problems are MUST to SOLVE instead of nice to solve ?

- What is the biggest pain in how you work ?

- If you could change 1 thing what would it be ?

- What are the 3 other smart people like you I should talk to ?

- Any other important question I should have asked you ?

- What are the most important blogs , journals do you read ?

Based on a matrix with customers , with all responses and after establishing priority

criteria we need to draw a conclusion if there is problem and if people care !

3. Get out of the Building and test the

product/system solution

In this stage first we :

- Update the whole team in details about the outcomes of phase 2 ( present

learnings , meaning and insights )

- Decide if we change or proceed

- Decide the minimum feature list based on the input of the early adopter

Potential customers

- Eventually update other business model attributes

After that the next steps are to adapt ( this will take some time ) our solution (

prototype , demo unit with higher fidelity minimum viable product ) ) and prepare to

visit the customers that are qualified and have heard/seen the problem presentation (

early adopters) to show them the solution to the problem and receive their response .

Expanding to more potential customers that have not participated in phase 2 lay the

ground work for selling something in the next phase of Customer Validation .

During and after presenting the solution it is vital to record customer responses for

questions like the following ( This is not a complete list ) :

- What our product solve for customer and what not

- How do they solve the problem today ?

- Key features needed / not needed ?

- Do they think it is different ?

- Do they think it is creating a new market ?

- Is it better version of an existing product ?

- What would be the ideal solution ?

- what do customers think about the proposed revenue model and pricing ?

- Key decision maker / who else to see ?

- or are they bored ?....

Prepare in advance a list of questions covering all important parts of the Business model

and ask the customers . A few useful tips for conducting the interview are :

- Opt for one to one discussions instead of large groups

- The main purpose is to delete unnecessary

features instead to add new ones - Do not attempt to ask all the questions to all customers as some customers

know more about certain aspects.

Measure Enthusiasm is the most important !! There are a

few options :

1. Customers love the product and no changes are needed 2. Customers like the product but they want this or that additional feature at launch ( for

this case we need to balance customer wants with development time ) . Normal

people believe if it is not broken it does not need to be

fixed . Engineers believe if it is not broken it does not have

enough features yet…………….

Customer discovery is to get the minimum Viable

product (overall functionality and not only design )

into paying customer hands as quickly as possible.

Here the entrepreneurial experience and the gut

feeling guide the go/no go decision . 3. Customers do not see much of a need for the product

For web / mobile products the enthusiasm is reflected through :

1. Customers willingness to register

2. How often the customers come back after the first visit

3. How long do they stay

4. How many visitors refer their friends

5. Conversion rates from acquired visitors to activated and from activated to active users .

In general for technology products lukewarm response

indicates a problem usually characterized from lack of

product/market fit : Not enough market for the product or

lack of demand for a product in a vast market . In such

case the issue is mainly value proposition and customer

segmentation .

In any case depending on results based on facts ( not only intuition ) there

is a need to decide to change drastically (option 3 above ) or update the

business model and move to the next phase . The next phase will answer

this question .

4. Verify the business model and change or proceed

This is a very critical stage for a new start up development . To decide about change

or proceed there are 3 critical questions to be answered :

If we answer yes to the 3 questions ( for which we need a board meeting) then we

proceed to the stage of the customer validation phase where we develop the

product/system/solution , start sales and see if the business model can scale e.g 10

times or more .

A .Have we found Product market fit ?

1. Are we attacking a serious problem or filling a compelling need ?

2. Does our product solve the problem or fill the need for your

customers ?

3. Are there enough customers to deliver a sizable business

space/opportunity ?

B. Who are our customers and how to reach them ?

1. Can we describe the customer profile ?

2. Do you know the customer well enough to know how to pitch the

product to him ?

3. Are there any market segments that are different ( bigger , faster ,

better , totally new ) than others ?

4. Do we know how the product/system moves from our start up to

the end user along with costs and marketing ?

C. Can we make money and grow the company ?

Based on customer report cards ( market size , price/revenues , costs ,

competition ,… ) create a basic 2-3 year revenue , cost and cashflow plan to

evaluate our financial situation and if the business model is scalable .

Based on all above if we have a positive answer to the question :

“ Does the customer discovery findings pointing to a big enough

market that is hungry for our product and we can do it in a

repeatable , scalable and profitable way “ ? then we proceed to the

next phase ( customer validation >> first test of sales as part of

Business Development ) otherwise we need to change.

B . Customer Validation

The 4 phases described so far is about customer discovery where we test with a

small group of customers their views/opinions / thoughts about our hypotheses of the

business model . We talk about opinions not yet orders !

In the coming 3 phases we are testing if our product/market fit can be

validated with orders !! so we start selling and in parallel we validate the business

model !

So now we have developed a better / more complete system ( based

on inputs from phases 1-4 ) and together with marketing plans and materials we

visit customers and validate our business model by asking for orders !!

Customer Validation turns hypotheses into facts about questions like this :

- Are the customers enthusiastic about our value proposition ?

- Do we understand the sales /user acquisition process ?

- Are there enough customers to make this a real business

- Is the process repeatable ?

- Can we get these orders with the current product or do we need to change ?

- Do we understand our customer segments and their needs ?

- Have we tested sales and distribution channels ?

- Are we confident we can scale orders into a profitable business ?

- Have we correctly positioned the product/system ?

In the customer discovery phase we tested some of the hypotheses of the business

model ( VP , customer segments , customer relationships , channel , revenue model )

In the customer validation phase based on what we have learned from customer

discovery we focus to create a sales roadmap who answers questions like :

- What are the key customer problems ?

- What is the profile of the visionary or early adopter buyers ?

- Who influences a sale ?

- Who is the decision maker ? who is sabotaging the sale ?

- How many sales calls are needed to make 1 sale ?

- What is the selling strategy ? Product or solution sale?

- How long does the sales process take ?

So we need to prioritize the key business model elements and focus to build

a sales roadmap to figure out how to get repeatable sales . This is vital and

it is done from the founders or CEO . Once that is done successfully then we

build a sales organization .

The most of the start ups die from premature

scaling of sales organizations without a validated

sales roadmap !

When customer validation is complete ? When the company answers the 3

questions :

1 Can the Business scale profitably ? 1 $ spent on customer acquisition delivers

enough incremental revenue and margin to generate profit .

2 Is there a repeatable and scalable sales roadmap ? Does the company knows

the right customers and how to approach them consistently

3 Is the sales funnel predictable ? Do the sales programs and tactics

consistently deliver a profitable flow of customers .

5.Financing the start up R&D and sales

Growth

This is the start up stage that normally the seed and angel money are almost used up and

the company needs to start preparing for the next round of financing . Normally the

founders need first to prove the demand through some orders ( see next 2 chapters , Get

ready to Sell and Get out of the building to Sell ) before are ready for series A mainly

through VCs .

But the last 3 years there is a much better method ( especially for founders with some

experience . VCs are still valuable depending on experience and level of financing needs )

that not only gives capital to finance the first serious product development but also

valuable customer ( mainly early adopters) validation.

It is called Reward Crowdfunding through companies like Kickstarter or Indiegogo . It is

about preselling and validating a product or service . With this process in fact you are

getting payed in advance by promising to deliver a product to potential customers within a

number of months . It is not only about financing your R&D and start of the go to market

process but it is about validation of the Product/system/service concept in a very direct

and cheap way . There are so many examples of successful projects e.g through Kickstarter

raising tens of thousands USD up to 17 million USD ( 2015 Pebble TIME watch ) by

preselling products . In case the project receives low/medium response the process

described in this article helps you to revise the business model and try again .

In case you are successful you not only get financing to continue the start up growth but

gives you entry to the next stage of growth financing through Equity Crowdfunding or a VC

. With Equity Crowdfunding investors are buying equity from a company than buying the

company’s product . A product/system/service proven from the customers’ demand

though Kickstarter or Indiegogo or other equivalent platform will be much easier accepted

through an equity crowdfunding platform or a VC .

Examples of equity crowdfunding companies are Crowdfunder.com , Wefunder.com ,…. .

The investors that participate in Crowdfunding platforms are accredited investors and can

invest individually from 5000 USD ups to millions as there is no max limit . As the industry is

new there is a lot of innovation in the space and there are No or minimum regulatory

requirements in various countries .

This is a great opportunity for entrepreneurs to experiment with the powerful combination

of Reward and Equity based Crowd funding as tools to first validate a concept/product and

then raise the growth capital to implement and finance sales growth . As there are more

experts for the subject I leave this intro here.

6 . Get ready to sell In this phase we focus our efforts to develop the first serious products ,

prepare sales materials and develop sales roadmap in order to be able to sell

and test the business model by asking for orders .

6.1 Product/system positioning statement . The first step is about preparation

of an updated product/system positioning statement based on what we

have learned from the first 4 phases .

The positioning statement should include :

- For which customers the product is meant

- What is the main reason to buy

- The key benefits

- The key product differentiator versus competition

6.2 Marketing and sales materials/activities .This step is about creation of

marketing and sales materials with focus the early adopters/technology

gatekeepers we target with focus on all 4 areas of the consumption chain

: Awareness , Interest , consideration and Purchase. In this description we

focus on Physical channel products and whenever is different for Web/

Mobile we become explicit of the differences . The table below shows a

summary of the key materials and collaterals we need for each of the 4

phases .

Awareness Interest Consideration Sales

Early Adopter Buyers

Website brochure , Video Participation in Influential blogs website Direct email to qualified list of potential customers and partners Social Networking sharing SEO , ADwords Exhibition Word of mouth

General sales presentation(s)/video White paper Product Press release Product brochure Product/system Video Demo or demo Own blog Viral marketing/email campaigns and social networking sharing Encourage early adopters to promote product/company through materials ( like , email links , video , presentation)

Tailor presentations to each customer Analyst report on business ROI demonstration Follow-up-email Product/system demo Pricing quote form

Contracts Price list Thank-you note/email After sales follow up

Technology Gatekeeper

Influential Bloggers Tech websites

Tech presentation Product/system demo Tech white paper Analyst report on technical problem

Tech presentation on specific customer issues and demo Tech white paper Tech overview data sheets with architecture diagrams

Thank-you note

6.3 Hire a sales closer . This is not a sales VP who wants to build a large sales

organization . Good sales closers have the following characteristics :

- Love early markets

- Are aggressive

- Want compensation for success

- Are good listeners

- Have great pattern recognition and collaboration skills

- Love finding new markets and closing deals

While the closer is an integral part of the customer validation the founders and

CEO still need to actively lead the process . Closer is valuable for setting up the

meetings , pushing for follow up and closing the deal .

6.4 Develop Sales Channel Roadmap .

To get ready to sell we need to create a visual representation of the channel chain and

all links , responsibilities and financials( margins , costs ) involved . We cannot start

selling and create scalable , repeatable and profitable business without good

understanding of the channel structure .Especially for multisided markets ( users and

payers are different e g social networking and medical devices/insurance ) the chain has

to be analyzed from all sides of the chain . Moreover do not assume that the channel

partners will invest in customer demand .

6.5 Develop the sales Roadmap

A sales roadmap details every step from the first call to a prospective buyer

till the contract is signed . This is the task of the founders team or CEO . The

goal is to determine who your true customers are and how they will buy

the product . The idea is when we hire a sales force by following the

sales roadmap they will be able to focus on actual sales instead of

developing the process . We build a sales team only when we understand the

process that transforms a prospect into a purchaser and know you can sell

the product at a price that supports the business model. The sales roadmap

should include :

- A description of the key functions and their influence on sales

- Depending on the type of company which function is most suitable to get foot

in the door ( e .g for corporate sales purchasing is the worst to start with )?

- At what level is the best to enter the account ( executives or operational staff ) ?

- How many and which people need to approve the sale ?

- Order of calling on these people

- Who is the saboteur ?

- Do we need board approval ?

- Does the customer need to get financing ?

- Must other vendors need to pre install any other systems or components first

?

7 Get out of the building and sell (focus early adopters)

In this phase we focus on the following activities :

1. Find the Early adopters and sell . In the customer

discovery we have identified the characteristics of the

early adopters

- Have a problem or need

- They understand they have a problem

- They are actively searching for a solution

- Sometimes they are trying to find a solution themselves

- They have or can quickly acquire a budget

and we have a list of potential customers to visit .

The sales process ( which many entrepreneurs hate ) follows the following steps :

1.1 Research the companies and individuals we plan to call on

1.2 Use the first meeting to understand the company problems , needs ,

business goals and the potential “fit” between our solution and their

problem

1.3 Know where to enter the organization . ( which department to call on

first especially for bigger companies )

1.4 Visualize the “ Before and After “ Understand how the company solves

the problem today and explain well how our product/system would

solve it better .

1.5 Customize presentations

1.6 Create and present a purchase action plan . Presenting a plan with

dates that it makes the purchase feel inevitable .

1.7 Engage senior management at every opportunity

1.8 Present a proposal and get it signed .

The most important questions we want to answer in this stage are:

- Is purchase order in hand or on the way ?

- How many units or dollars will the customer purchase ?

- What is needed to get a deal signed ?

- When might the deal be signed ?

- In case the customer said “No” understanding why is very important

Of course we should never forget to send a Thank you note.

In case after a lot of sales calls we have minimal or no success there are 2 main reasons:

1. We have not found the right early adopter customers

2. Some parts of the business model are not compelling enough ( e g product

benefits , price , partners ,… )

In case we have such an issue we need to go back to the Business model canvas which

provides a visual way to diagnose what went wrong and what we can change and re test.

2 Refine sales roadmap

Based on all sales calls we should update what we have learned additionally about the

potential or current customers organizations . We do need 2 tables :

1. An Influence map ( where we state who is influential for sales )

2. An access map describing where we describe : who should we call on first , who

else we should call on , at what order we should call on various influencers , who

needs to approve the sale , what are the purchase authority levels ,... ) like in the

previous phase 5.

The main aim of this exercise is to prepare a detailed sales

roadmap of how to get repeatable orders that you the founder or

CEO hand later to the professional VP of sales !. This is the

PLAYBOOK of the repeatable , scalable sales process

3. Test sell channel partners

Selling through an indirect sales channel now it is the right time to validate the

channel strategy we assembled in phase 6 . Validation means an order or a firm

commitment from the partners. Meeting the partners we need to learn the

following :

- Will they buy and sell the product based on the current VP , price ,….?

- Do they have any sense of the potential sales volume ?

- How can the channel be influenced to sell more ( bonus , training , product

demonstrations , social event , golf tournament ,.. ) ?

- Will the channel stock the products ?

- What is the best pricing strategy ?

- Does the channel partner creates demand or just fulfill when the customer

wants ?

8. Company Positioning / Pivot/Change or Proceed

In this last stage based on what we have learned we finalize and update the company and

product positioning first and then we make full review if the business model is

profitable , scalable and repeatable .

To answer that we do the following :

- Create simple 2-3 years financials (revenues , costs , margins , cash burn and

cash remaining )

- Review the last updated Business model canvas and make sure the business

model is right .Look one last time with the whole team if all parts are in line

with the experience and if we can still make any last moment change

And now it is the time to say together with the Management team or board we proceed

or change before we invest heavily to scale our resources ( e g sales and /or R&D )

It is YES >> PROCEED and build up the company if :

- Early adopters have been found

- The company has delivered a product/system/solution

our customers want to buy

- We have developed a repeatable and scalable sales

process

- Demonstrated a profitable business model

9. The Summary on how to create successful start ups

1. Clear vision , purpose , passion and speed

2. Team effort and hire people better than you.

3. Iterative process with customers / community involvement .

4. Failure is integral part of the process

5. Positive , determined , persistent and curious attitude .

6. Leverage 3rd party assets and preserve cash till business model validation

7. Validate the business model before you scale

8. Communicate and share learning with the whole team.