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• Ideas and beyond• Products• Markets• Financial• Others
Acknowledgment: A/P Wong Poh Kam, Director CET, has kindly granted permission to use his materials for putting together this presentation.
The Venturing Process“The process of attracting, organizing
and rewarding resources to turn an idea into a market reality”
Process involves:• Creating and growing a new enterprise to execute the
tasks needed to launch and grow a new product or service in the market
• Structuring a system for rewarding participants who enter at different stages
Typical Stages in the New Venture Creation Process (Nesheim, 2000)• Idea
• Kitchen Table• Founders’ commitment• Pullout from employer• Business plan creation• Filling management team• Raising seed capital• Closing capital and incorporation• Finding a home• Start-Up• Secondary capital rounds• Launch first product• Raise working capital• IPO or other means of exit
Key Elements of the Venturing Process: Entrepreneur’s Perspective
• Get Idea• Make Commitment• Prepare Business Plan• Raise Capital• Build Team• Execute• Plan Exit
Getting Started: Some FAQs
• Which comes first: Whether or what? When?• Getting advice: When, from whom, and how
much do I reveal?• What should I know about intellectual property?• Getting a clean pullout from current employer• Picking partners: who, what role, when, with
what reward? (co-founders vs. advisors, shareholders vs. management, fees, stocks and stock options)
• Plan for business vs. Business plan
Purpose of Business Plan
• As a plan for action
• As a process for clarifying your thoughts and soliciting feedback and advice
• As a document for fund raising, staff recruitment and partnership development
• As a statement of intended outcome against which actual performance will be judged
Essence of Business Plan
• Defining your Value Proposition
• Execution Strategy to Realize the Value Proposition
• Management Team best positioned to Execute
• Projected Financial Performance
• Resource Requirements to achieve the projected results
Outline of a Business Plan
• Executive Summary• Customer Need and Business Opportunity• Market and Competitive Analysis• Business Strategy and Key Milestones• Product Development Plan• Marketing Plan• Operation Plan• Management and Key Personnel• Financial Projection• Risk Factors and Key Assumptions• The Proposed Offering
• 3Cs for Venture Success: A Framework for Assessing the Viability of Business Venture Idea
Defining Value Proposition: Understanding the Three C’s for New Venture Success
• Creating Value
• Communicating Value
• Capturing Value
Value Proposition: Specifying the 3Cs• What Customer Values are you creating?• With what product and/or service offerings?• In what ways that give you distinctive competitive
advantage over others?
You should be able to define the essence of your value proposition in one short sentence or short paragraph (the shorter, the better)
Creating Value
• What are you offering?
• To which customers?
• What customer problems does it solve?
• What customer needs does it satisfy?
• How much will it cost, Who will pay for it and for how much?
Communicating Value
• How do you reach your customers, partners and financiers?
• How do you capture their attention?
• How do you convince them of the usefulness of your product/service and viability of your business?
• How do you build trust?
Capturing Value• How strong are the 5 competitive forces you are
up against?– Existing Rivals offering similar products– Potential New Entrants– Close Substitutes– Powerful Buyers– Powerful Suppliers
• What critical factors do you have to counter these competitive forces?
The Five Competitive Forces (Porter, 1985)
Creating Value: Customer Needs &
Sources of Innovative Ideas
Creating Value • What is your offering?• What is unique/innovative in your offering?• To which customers?• What customer problems does it solve?• What customer needs does it satisfy?• How much will it cost, how many will pay
for it and for how much?
An Innovative Business Idea must be translated into a Better Offering to some Customers
What is innovative about your offering?• Improving Existing Product/Process
– better quality/performance– reduce cost
• Changing the existing rule of competition– disruptive technologies– new business model
• Serving new market segments/customer needs– Creating a whole new industry– Creating new market segmentation
Opportunities for Business Innovation
• Technological Innovation (product/process)• Underserved/Inefficient Markets• Latent or Newly Emerging Customer Needs• Changing Enabling Conditions (legal, political,
social, cultural, infrastructural)• Under-utilized or New Sources of Information
Routes to Innovative Business Idea:• Product-focused (Product/service in search of
improvement)• Technology-push (Solution in search of a problem)• Customer-driven (Problem in search of a solution)• Competitor-targeted (Find and attack competitor
weaknesses)• Market anticipation (Bet on new emerging needs)
• Information-leverage (Information in search of new uses)
Customer-Driven Approach to Business Innovation:
Who is the Customer? How does the Innovation solve his Needs or Problems?
• Defining customer value• Segmenting the market• Decision on which segments to Focus• Identifying Lead-User…• But avoid the “Christensen Lock-in” effect...• ...and understand the need for “Crossing the
Chasm” from lead-user to mass customers
Changing the Rule of Competition through Disruptive technologies: the Abernathy-Clark model
• Four Types of technological innovation: regular, niche, revolutionary, architectural
• Choose a form of innovation that disrupts existing competencies of industry incumbents
• Capitalize on the “Defender Dilemma” of incumbent industry leaders
Niche Creation Architectural
Regular Revolutionaryconserve/entrenchexisting linkages
disrupt existing/createnew linkages
Technology/Production
Mar
kets
/Cus
tom
er L
inka
ge
Conserve/entrenchexisting competence
disrupt obsoleteexisting competence
MAPPING THE IMPACT OF TECHNOLOGICAL CHANGE
Changing the Rule of Competition through New Business Model: the “Meta-intermediary” Model
• “Unglue” the physical and information value chain in the existing business model
• Exploit the new information and communications technologies (ICT) to “glue back” the value chains with a new “navigator” that transforms the old reach vs. richness trade-off and shifts navigator affiliation from seller to buyer, dis-intermediating the old navigators in the process
Anticipating “New Market Space” • analyze latent, unarticulated customer
needs• project technological trends and scenarios• forecast changing enabling conditions
(e.g. deregulation, demographic trends, diffusion of enabling infrastructure, etc.)
• goal is to identify unserved, emerging market needs
Leveraging information in new ways • Extract information from existing
operational information chains
• Apply information to new domains to create new businesses
• Overcome “imprisonment” of information
• Need to manage privacy concerns carefully
Business Innovation:The Example of American Airlines
• Computer Reservation System• Customer loyalty program (Frequent Flyer System)• Cross-sharing of loyalty programs with other hospitality
businesses• Co-Branding with credit cards • Yield Management System• Internet Portal for travel (Travelocity)• Mining of Database on Passengers• Procurement Portal
What are the sources and impacts of these innovations?
Facilitating the Generation of Innovative Business Ideas
• Try Multiple Approaches• Look out for Serendipity• Promote diversity• Encourage Creative Tensions• Iterate through divergence vs.
convergence phases
Whatever the approaches used to generate Innovative Business Ideas,
• need to meet Reality Test – customer value creation– value capture against competition
• need iteration to refine idea
Capturing Value: Market &
Competitive Analysis
Capturing Value• How strong are the 5 competitive forces you are
up against?– Existing Rivals offering similar products– Potential New Entrants– Close Substitutes– Powerful Buyers– Powerful Suppliers
• What critical factors do you have to counter these competitive forces?
How does your business idea provide “Unfair Competitive Advantages”?
• Establishing First Mover Advantages– first to recognize opportunity– speed of execution– establish dominant design, set de facto standards– first to critical mass of users
• Erecting Barriers to Entry– technology/other forms of proprietary intellectual capital– disruptive effects on incumbents– lock in major customers with high switching cost– rapid pace of continuous innovation, market expansion– strategic partnership to build largest coalition
Sustaining innovative advantage is hard• First-to-Market is insufficient; “There is no existing
competitor” does NOT mean there will be no competitor in the future– especially where IP protection is inadequate
• First Mover Disadvantages?– “pioneer gets arrows in the back”– fast followers can learn from mistake of pioneer, reap
staff training and customer education benefits – potential technological leapfrogging opportunities by
later entrants• Supplier/buyer power may block innovation and buy time
for their own forward/backward integration entry
Positioning against incumbent competitors
• Avoiding direct competition
• Attack blind spot or area of weaknesses of incumbents
• Changing the rule of competition
• Build strategic alliances with key partners
• Focus, focus
Capturing value from customers
• Working with lead-users
• Betting on small customers with high-growth potential
• Multiple Revenue models
• “Penetration Pricing” vs. “Skimming” strategy
Communicating Value:
Marketing the Venture
Communicating Value
• How do you reach your customers, partners and financiers?
• How do you capture their attentions?
• How do you convince them of the usefulness of your product/service nd viability of your business?
• How do you build trust?
Communicating Value is more than Marketing (as conventionally defined)
• Marketing of your products/services vs. marketing of your venture itself– New, unproven products or underlying
technologies/processes, standards – New, unknown organization
– Will the business last? Can it be trusted? • Marketing to Customers vs. Gaining Entry into a
Business “Ecological System”– Developing relationships with Buyers, Sellers,
Competitors, Distributors, Supporting Services, Strategic Alliance Partners
Marketing your products/services
• Marketing: creating and keeping customers• Marketing vs. Selling vs. Business Development• Sensing: Identifying customers, their needs and
(dis-)satisfaction• Offering: Product positioning (branding, product
features, pricing, packaging vs. competitive offers)
• Selling: Reach customers with your offering (advertising, promotion, direct vs. channels)
• Fulfillment: Get customer orders fulfilled • Customer Care: After Sales Support/Services
Marketing Strategic Consideration
• Market Segmentation and Choice of Focus• Targeting Your First Customers • Promotion, Pricing, Partnership & PR to Gain Initial Entry• Anticipating and Countering Competitive Reaction• Brand Development and Other Entry Barrier Building Mechanisms
to Defend Position• Market Growth/Diversification/Internationalization Strategy• Expansion of Partnership, Affiliation and JV Strategies to Sustain
Growth/Diversification• Maintaining & Exploiting Options for Multiple Revenue Models• Building Market Sensing Mechanisms to Learn and Adapt
Generic Market Growth/Diversification Strategies
• Backward Integration
• Forward Integration
• Product Line Expansion
• Customer Development
• Diversification (combination of the last two)
Marketing your Venture
• Brand Building– defining your product positioning – choose an appropriate name and brand image
• Promoting your Venture– Targeting your message to the right audience – PR more important than advertising initially– Guerrilla marketing methods– Networking
• Selling your Innovative Edge– Underdog vs. Establishment – Innovative attacker vs. Defender– Educational leadership in promoting the new industry
Growing your Venture: The Bowling Pin Analogy
• first target
• sequencing
• leverage
Business Models and Financial Projection
Quantifying the Attractiveness and Financing Requirements of the Business
• Key Business Milestones• Projection of Revenue Growth• Cost Analysis & Projection• Projection of Profit and Loss• Cash Flow Analysis• Projection of Financing Requirements• Risk/Sensitivity & Key Success Factors
Analysis
Financial Projection Process for Start-Up Plan
FinancingRequirements
CashflowProjection
Start-upBalance
BalanceSheet
Projection
P / LProjection
RevenueProjection
CostProjection
KeyMilestones
Key Business RatiosBenchmarks vs
Comparable companies& industries“Off-Balance Sheet”
Accounting for IntellectualCapital Acquisition
Key IC indicators
Key Business Milestones
• Timeline of deliverables from start-up to exit– completion of product prototype– establishment of production facilities,
marketing channels, partnership, etc.– product launches– market entry for each major market– etc.
Revenue Projection Model
• Sources of revenue– customer sales, advertising, licensing fees, affiliate
programs, etc.
• Base year revenue assumptions– size of potential market, % market share captured,
unit price, etc.
• Growth assumptions– total market growth rate, % market share change,
new vs. retained customers, price trend, etc.
Basis for Revenue Assumptions
• market research (your own, others) on market size & growth, customer behaviour, purchase propensity, price sensitivity etc.
• competitive intelligence on competitor pricing, market share, customer base etc.
• benchmark vs. comparable companies and industries, why superior performance
Cost Projection Model
• Product development cost– R&D, patenting, product development, etc.
• Sales and marketing cost– business development, advertising,
promotion, sales, etc.• Production/operation cost
– raw materials/inputs, operations, logistics, etc.• General & Admin Cost
– admin overheads, rentals & utilities, etc.
Basis for Cost Projection Assumptions
• Macro-economic and industry trends affecting cost (inflation rate, interest rate, rental rate etc.)
• cost engineering estimates, supplier data • competitive intelligence on cost
performance of key competitors• benchmark vs. comparable companies
and industry averages, why superior performance
Key Business Ratios
Conventional Financial Ratios• Revenue growth rate• Profitability ratios
– gross margins, ROS, ROA, ROE
• Activity ratios– AR turnover, collection turnover, inventory turnover, etc.
• Debt & Liquidity ratios– Debt to net worth, current ratio, quick ratio, etc.
…but Start Ups are often evaluated using other “Non-conventional” performance measures as well
Non-Conventional Measures (“Intellectual Capital” Acquisition)
• “Customer capital”: user base, market leadership, brand, customer profile database, etc.
• “Innovation capital”: proprietary technology/know-how, patent portfolio
• “Process capital”: difficult to imitate or replicate business processes, systems
• “Human capital”: quality of key personnel, execution track-record
Risk/Sensitivity Analysis and Identification of Key Success Factors
• Key sources of risks and sensitivity of financial projection to those risks– technical performance– execution delay– market readiness– earlier competitive entry– disruptive technological threats– financing risk, etc.
• Identification of Key Success Factors– key drivers of financial performance projection– key milestones and indicators to monitor
Common Pitfalls
• Under-estimation of cost– cost of acquisition of customer often higher than assumed – obsolescence of inventory and equipment
– many hidden costs unanticipated • Over-optimistic estimation of revenue
– “potential market” usually < assumed– “crossing the chasm” problem– new entries, competitor reaction usually ==> faster price erosion,
smaller market share captured than assumed– customer retention (churn) problem
• Inadequate provision against risks
Financing Requirements
• Capital requirement = long term fixed asset acquisition + working capital
• Fast growth (“high burn rate”) ==> high capital requirements
• Capital requirement can be met by:– operating surplus (“bootstraps”)– borrowings (bank loans, supplier credits etc.)– equity investment (founders, external investors)
• Equity capital most important for start-up
High Tech Start-Up Business Models
• Conventional model: fast revenue growth with profitability track records for IPO
• “Internet Boom” model: fast customer acquisition and market leadership for IPO & use market cap to grow through acquisition; or fast customer growth for acquisition by larger firms
• The New Wisdom: fast growth with P2P (Path to Profitability) for IPO, or fast growth with attractive intellectual property for acquisition
SUMMARY
People is your most important asset • Building the Management Team
– Bringing on-board people with experience, connection– At least one person should have a sales/marketing background
• Assemblying an Advisory Board• Choosing Value-Adding Investors
– Angel investors– Venture Capitalists– Corporate Investors
• Teaming up with Strategic partners• Securing Key First Customers• Leveraging Former Employers
Idea: The Starting Point of It All
From Idea to Value Proposition
• 100-word summary of idea
• Elaboration/clarification of Idea
• Generation of related Ideas
• Critique of Idea
• Drafting of Value Proposition
• Make Elevator Pitch
Summing Up: Crystalizing your
Value Proposition
Condensing your Idea into Value Proposition
• The product/service idea
• The target customers
• Your distinctive competitive advantages
Presenting your Idea• The elevator pitch
• The executive summary (< 2 pages)
• The short powerpoint presentation (< 8 slides)
• The long powerpoint presentation
• The detailed Business Plan
Refining your Idea • Solicit feedback• Further Market Research/Competitor Analysis • Potential customer reality check• Team-work in presentation session• Get a coach/mentor• Practice, practice• Approach Multiple Sources of Funding
Others
Handling of Sensitive Information• where possible, protect your Intellectual
Property before Public Disclosure • Non-Disclosure Agreement (NDA)• Strategic use of trade-marking and
branding• “Block diagram” approach • Do not put negotiable details in writing
