Starting a Technology Business

Dave LitwillerExecutive in Residence

Communitech

November 1, 2012

Overview

• What makes or breaks the founding team and product idea

• Drill down into specifics for B2B and B2C SaaS – Constitutes 75% of start-ups in Waterloo Region

• Building a Business Model

• Intellectual Property

2

Founding Team and Product or Service

3

Founding Team

• Two and three member founding teams considerably outperform both solo and larger teams– Sufficient camaraderie and division of responsibilities, without an unwieldy

number of viewpoints. Provides a built-in sounding board.

• Have at least one technical person on the founding team, and one business person

• Doing so typically accelerates speed by three times, and likelihood of achieving significant long-term success by four to five times

• Make sure that there is a strong basis for mutual respect, as evidenced by communicating easily and no one person dominating

• Everyone needs to want the just-in-time learning of running an early-stage business, and to be very hungry to go build something

4

Tolerance to Rejection

• Cannot fear rejection

• Find motivation in small rejections on the path to success

• Get used to being out on a ledge

• Rejection Therapy: If you are not naturally tolerant to rejection, force yourself to do something every day in a small matter which is likely to provoke rejection, in order to build up your tolerance

5

Product or Service (I)

• Best is a product or service for which you would be a passionate user, and so would many others. This makes it easiest to love the business

• Next best is a product or service for which you are certain with exceptional, privileged knowledge that others would be passionate users

• Products or services more distant from the founders increase start-up risk considerably; such removal overly relies upon other people

• Start by knowing the customer, knowing the customer’s needs and serving them well as the basis for devising the product or service. – Do not start with the product you’d like to build and then back into whether there are

customers– Nothing interesting happens in the office (NIHITO). Get out and talk to 100 target

users to validate the opportunity– If relevant and possible, be global from the outset

6

Product or Service (II)

• Make sure that you are building something which not many others can

• Better yet is if few people yet realize it is (going to be) a big deal– Ask what will be in the future a known unmet need of today

• The key to having a great idea is to start by having many, forming hypotheses fast to confirm or repudiate, and testing them very quickly

7

Always Be Closing

• Nothing happens without a sale, be it a to a customer, investor, candidate employee, or partner

• Relentless, closing-driven sales needs to be woven into the culture of the business from the earliest days

• Even at the start, spend 40% of time on customer acquisition

• Raise it to 70% once the business has achieved product-market fit and is scaling up

8

Pitching

• You will be constantly pitching yourself and your business

• Nobody will sell you for you

• Be able to nail the pitch for yourself and your business in three formats:– 30 seconds, 3 minutes, 10 minutes– What we do, who we do it to, and, why the audience should

care

9

B2B and B2C SaaS

“Software is eating the world”- Marc Andreesen, Wall St. Journal, August 20, 2011

10

Conditions to Start-up Have Never Been Better

• Start-up costs have never been lower

• Compared with ten years ago when the average start-up needed millions of $’s and a year or two on the calendar to reach first revenue with proprietary servers, software, high cost marketing and much larger staff…

• Today, the combination of web hosting services, open source software, social media and viral marketing, and, app stores, combine to make the costs for most SaaS start-ups less than $150K to reach product launch and first revenue

11

The Need for Speed

• The SaaS companies which go on to do the best typically launch a bare bones product very fast. Speed trumps accuracy

• Manually bridge certain business process steps while the essential value proposition is proven out

• Automate the bare minimum at first, and leverage existing platforms to kludge a product offering as much as possible

12

How Fast?

• Typically – Time from start to first launch: Two weeks to two months

– Evolutionary iteration cycle time thereafter: Two weeks

– Growth target cadence: Weekly

– Time from start to product-market fit (with satisfied, paying customers, ready to scale): Eight to twelve months

– The value of prolonged secrecy in SaaS is greatly outweighed by the value of real feedback from paying customers to better inform subsequent product and service investments

13

Early User Experience Focus

• At first, focus on the intensity of user attachment, rather than number of users – This is the key to building a business that can thrive beyond the start-up

phase

• The feedback of friends or close connections is not reliable; get further afield

• The true test is when arm’s length people of their own volition start inviting their friends and colleagues to use what you’re offering– They’re not doing it out of obligation to you

• Pay technical and personal attention to the most powerful, influential and knowledgeable users

• Don’t just study web site or app metrics. Watch and talk to users

14

Be Adaptable

• Successful start-ups typically perform transformational rework on their product-service idea between two and three times on the way to ultimate success

• One definition of an entrepreneur is someone who jumps off a mountain and builds his or her aircraft on the way down

15

Biggest Avoidable Risk

• Premature scaling– Hiring staff, taking in excess investment capital, and

investing in the ramp-up of sales, before establishing resounding product-market fit

• On average, start-ups take two to three times as long to achieve a resounding product as the founders expect at the outset– Hold off on scaling until product-market fit is achieved– The best performing businesses limit staff and management

to about five people prior to achieving this fit

16

Hierarchy

• The hardware serves the software

• The software serves the UX

• The UX serves the emotion

17

Building a Business Model

18

Five Parts

• Revenue• Gross Margin• Operating Costs• Working Capital• Investment

19

Revenue

• Who will buy• What will they buy• What pain is being solved or delight offered• How soon• At what price• On what basis will they pay• What is the cost and effort of delivering• What proxies for demand exist today

20

Gross Margin

• How much is left after the direct costs of each sale– How low can the cost of goods sold go– How high can the price go

and still have a customer buy

• How can your gross margin model confer a competitive advantage– Fixed costs <-> Variable costs– Just in time– Built in quality (jidoka)– Eliminate waste– Continuous improvement

21

Operating Expense

• Go through every line of a typical OpEx chart of accounts for vendors in your industry and figure out:– What cost in absolute $ and % sales will the company incur in each

category– Which of these costs can be reduced or eliminated– Which should grow in line with revenue

• Look for competitive and benchmark companies with major OpEx line items, and figure out how to eliminate them

• Look for where selectively increased costs can create outsized increases in customer experience, especially faster gratification

• Figure out how to make the scarcest resources in your industry more productive

22

Working Capital

• The timing with which cash flows in and out of the business– How early can customers be encouraged to pay– How long can supplier payment be delayed

• Improved working capital models sharply reduce required gross margins, creating disruptive business models

• Improved working capital lowers the amount of capital required to run the business. This is particularly important for start-ups which have a very high cost of capital

23

Investment

• How much cash must be spent before customers provide enough business to cover operating costs– Beg or borrow, but don’t pay– Lease, don’t buy, at least at the outset (even if costs are temporarily

higher)– Get somebody else to pay for it– Make fixed costs variable, even if doing so lowers profit margins

temporarily– Outsource rather than building from scratch

• These techniques all increase runway, buying you more information before larger commitments need to be made

• They defer the need for as much capital until a time when the cost of capital is much lower

24

Business Model Dashboard

25

  Don’t reinvent the wheel

Be Different Ask the Right Questions

 

Business Model Element

Relevant Analogs and the numbers they give you

Relevant Antilogs Leaps of Faith around which you will build your current dashboard

Hypotheses that will prove or refute your leaps of faith

Revenue Model        

Gross Margin Model        

Operating Model        

Working Capital Model        

Investment Model        

Intellectual Property

26

IP

• Clean break: Only take memories from your previous employer

• Founder assignment of IP, including pre-incorporation

• IP and moral waiver assignment by employees and contractors– Tough to fix retroactively

27

IP

• If patent protection is desired, understand filing deadlines and disclosure limitations

• Watch for challenging early licenses to customers and partners which will restrict the business later– Broad, exclusive, or no-better-deal clauses

• Know the license and recommitment terms of any incorporated or augmented open source IP

• Establish corporate repositories and related policies for files and documents, especially when employees are using their own devices

28

Later Help or Questions

“It's not the strongest of the species which survive, nor the

most intelligent, but the ones most responsive to change.”

- Charles Darwin

dave [dot] litwiller [at] communitech.ca

29

References

Building a Business Model- “Getting to Plan B”, Komisar and Mullins- “Business Model Generation”, Osterwalder & Pigneur

Playbooks for Achieving Product-Market Fit- B2C SaaS: “The Lean Startup”, Ries- B2B: “The Four Steps to the Epiphany”, Blank

Inception and Disciplined Scaling- “Startup Genome Report”, Marmer et al- “Competing Against Time”, Stalk & Hout

30