So You Have A Great Entrepreneurial Business

Idea:Now What?

Dennis J. Garritan, PhD, CFA, SPHRGlobal Academic Dean, Mountbatten Institute

Adjunct Professor of Management, Harvard Business School

Visiting Professor, University of Chester, UKManaging Director, Palmer Hill Capital, LLC.

Invited Presentation on Startup Best Practices, Entrepreneurship Club Harvard Business School

January 21th, 2015

It’s Time to “PIVOT”Answer the Six Questions Critical to the Success for Every Business:

Who Is Your Customer?What Can You Do For Them?How Do They Acquire Your Product or Service?How Do You Make Money From Your Product or Service?How Do You Design and Build Your Product or Service?How Do You Scale to Widen and Diversify Your Revenue Stream?

Pivot OneHow Do You Develop the Idea, Technology and

Passion Necessary To Get Started?Do an internal audit – identify all of your skills, talents and work experiences.Do an external audit – identify all of your connections, financial assets including credit card limits and loan potential.How can you focus all of the above to solve a serious recurring problem that you and many other people are having.How can you make money by solving that problem?

Pivot TwoMarket Segmentation

Use divergent thinking to brainstormDefine industry, specific type of user and location. Example: 25-35 year-old men in Paris who eat in restaurants four nights a week.Identify six to twelve different potential markets based on:

Customers who have money and are willing to spent it on this product/service.Can you access this market and beat the competition?Will this market open up any other future markets?Do you have any interest in these future markets?

Pivot TwoMarket Segmentation

Smaller new markets are better than larger existing marketsDo the future market segments opened up buy similar products or services?Do any of the targeted market segments talk to each other via social media? Research all targeted markets by talking to customers and suppliers to insure these targeted markets are open to new information and new potential solutions (don’t sell your solution – wait until your research is completed)Select one “beachhead” market and focus on that market alone – ignore the others (for now).

Pivot ThreeBuild a Profile of Your Targeted Customer

The targeted customer may not necessarily be the end-user of the product/service.Completely describe the demographic – age, location, income, habits, motivations, history in the marketplace – it would be ideal if this demographic describes either a “founder” or an employee.Evolve this profile into a real potential customer – including, but not limited to:

a description picture job salary history in the marketplace purchasing criteria how to position your product/service how to sell to these potential customers.

Pivot FourEstimate Total Accessible Market (TAM)

Revenue for Beachhead MarketTAM Revenue is the amount of annual revenue you could earn if you achieved 100% of market share – TAM Revenue estimates market potential.TAM Revenue = number of total users X cost per unitTAM Revenue calculations should research and use existing customer lists, trade association estimates and market reports.Factor into TAM Revenue calculations what your targeted customers already spend on similar products/services – and any additional margin you could expect based on the extra value you are providing.A desirable TAM Revenue target is $20-100 million – if it is larger you need to segment the market further.

Pivot FiveWhat is the Lifecycle of Your

Product/Service?How does your targeted customer use your product/service?How do they discover a need for it?How do they find out about it?How do they analyze it up to the point of sale?How do they acquire it?

Pivot FiveWhat is the Lifecycle of Your

Product/Service?How do they install it?How do they get value from it?How do they pay for it?How do they get support for it?How long does it last?How do they buy more of it?How do they tell others about it?

Pivot SixHow Do You Create an Overarching Design for Your Product/Service?Build a visual representation of your product/service – use prototypes, models betas, diagrams – focus on design, simplicity, elegance, functionality and ease of use.Use storyboards, wireframes or Pinterest for your website.Create a brochure that focuses on features and more importantly, benefits to the customer.DESIGN is Your Core – your “Secret Sauce”!!!

Pivot SevenValue Proposition and Value Chain

Create and quantify the value proposition and the (client) value chain for your product/service. Create a diagram showing the problem that the customer has without your product/service AND the qualitative AND QUANTITATIVE benefits that your customer gets out of your product/serviceIn this diagram include benefit items like time, money, market share, productivity – USE REAL NUMBERS even though you are estimating – you should ALWAYS keep your estimates realistic.Remember – under-promise (under-estimate) and over-deliver

Pivot EightDefine, Identify and Explain Your

Core Your Core is your “secret sauce” which your competition can not easily duplicate.It is the primary focus of your efforts and it shouldn’t change that much. Although designs change, your obsession with elegant design should never change.Typically, Your Core is NOT your special contract with your suppliers, your first-mover advantage or your innovation speed.Typically, it IS THE PRE-EMINENCE OF DESIGN IN EVERYTHING YOU CREATE: intellectual property, user networks, low cost supply-chain, exceptional customer service and exceptional customer experience.Typically, it is the ONE thing that your customers would miss the MOST if you went out of business.

Pivot NineChart Your Competitive PositionDevelop a competitive positioning chart by putting your customer’s FIRST TOP PRIORITY on the x-axis and your customer’s SECOND TOP PRIORITY on the y-axis.Include your competitors in this competitive positioning chart.You should be in the top right corner of this positioning chart – and if your Core does not satisfy either of your customer’s top two priorities, YOU WILL NEED TO FIND A DIFFERENT MARKET AND/OR A DIFFERENT CORE, VALUE PROPOSITION AND VALUE CHAIN.As painful as this discovery might be – it will save you cash, sweat equity and the pain of failure later on.

First Top Priority

Competitor 1

Competitor 2

Competitor 3

Second Top Priority

Your firm

Competitive Position Chart

Pivot TenDiscover Who Other Than Your Targeted Customer You Will Meet At the Point of

SaleWho else has the power to influence your customer at the point of sale?Map out all of the people who have potential influence the purchasing decision.In your map include people who can be champions of your product/service, those with veto power, purchasing departments, primary pass-through customers, end-user customers, thought leaders in a business or industry, social media sites.You have to either neutralize or learn to sell to those players who influence the purchase decision in your customer’s purchase decision-making unit.

Pivot ElevenCreate The Process For Acquiring

A Targeted CustomerDevelop a step-by-step process and timeline for how a targeted customer will do the following:

Determine a need for your product/serviceBecome aware of the existence of your product/serviceAnalyze the value of your product/serviceUse your product/servicePay for your product/serviceMap the sales cycle including target datesOn this sales cycle map also identify expected obstacles to sales and how to overcome them

Pivot Twelve Calculate Estimate of COCACalculate cost of customer acquisition (COCA):

Estimating your overall sales and marketing costs over a fixed period DIVIDED by the number of customers acquired during that same period.COCA that is too high burns cash and will kill your businessReduce COCA by:• Reducing direct sales costs• Increasing conversion rates• Shortening the sales cycle• Using social media to generate “word of mouth” sales

Pivot Thirteen Design a Business ModelBusiness Models show how you extract value from the customer

Examine existing business modelsRevenue Models, Pricing Models, Packaging Models, Payer Models, Componentization Models, Value Integration Models, Value Integration Models, Value Extension Models (Refer to last year’s presentation on Business Model Innovations – Entrepreneur’s Club, HBS, 2014).Create your own innovative business model combination, if you can.Remember “We’ll figure it out later”and “Let’s just try it and hope for the best” are not business models

Pivot Fourteen Set Your Pricing Framework

Estimate a price based not on your costs but on the value your product/service creates A good price estimate would be 20% of that valueBenchmark the prices of your competitorsConsider offering different prices to different customers (Ex. congestion pricing)Offer discounts to initial customers and social media influencersIt is easier to lower a high price than to raise a low price

Pivot Fifteen Calculate The Lifetime Value (LTV) of An

Acquired CustomerCalculate LTV based on revenue streams, gross margins, customer retention rates, product lifecycle, product/service repurchasing rate and the cost of raising capital.Start-Ups spend a lot of equity and compromise management control in order to raise capital.Gross margins, customer retention rates and ability to cross-sell or up-sell (sell the premium product/service) has a big impact on LTV

Pivot Sixteen Calculate The Total Addressable Market

(TAM) Size For Follow-Up MarketsMake a list of at least five new markets to enter after your “beach-head” market.These new markets can involve selling different products/services to the same market or to adjacent markets (with appropriate customization).Estimate the size of these new markets using the same methodology (TAM) as you did in Pivot Four.You should consider no more than ten follow-up markets at any time.To get the attention of investors (venture capital or private equity) the overall TAM of your “beach-head” market + follow-on markets should equal over $1 billion.

Pivot SeventeenDefine the Minimum Viable Business

Product (MVBP)MVBP is the core product/service that the customer will:Feel creates unprecedented value BUY Report on via social media channels Be engaged byRecommend to others

Track Metrics on all of the above

Pivot Eighteen Attract Investment PoolsDemonstrate to angel investors, first, second and third stage venture capitalists and private equity fund managers that your targeted customers in “beach-head” markets and “follow-on” markets, will buy your product/service. Present metrics (tracked in Pivot Seventeen) that CLEARLY demonstrate that “the dogs will eat the dog food”.

Pivot NineteenIdentify and Stress Test Key Assumptions

Market SegmentationTarget Customer ProfileEstimate of Total Accessible Market (TAM)Product/Service LifecycleProduct Service DesignValue Proposition and Value ChainCompany CoreCompetitive Position in Industry

• Power Influencers at Point of Sale

Pivot Nineteen (Continued)Identify and Stress Test Key Assumptions• Process for Acquiring a Targeted Customer• Cost of Customer Acquisition (COCA)• Company Business Model• Company Pricing Framework• Lifetime Value (LTV) of an Acquired Customer• TAM for Follow-Up Markets• Minimum Viable Business Product (MVBP)• Company Attractiveness to Investor Pool• Scaling Quickly• Pivoting to Exploit Opportunities and Avoid Risks• Exiting Unsuccessful Businesses with Minimal Cost and

Disruption

Pivot TwentyCreate Strategy for Scaling Quickly, Product/Service Pivoting or Exiting with Minimal Cost and Disruption

• Create A Business Proposal Including All of the Items From Pivot Nineteen and Pivot Twenty for:– Future Stakeholders– Future Investors– Future Staff– Future Expansion (IPO)– Future Pivoting To New Business Ideas– Future M&A Possibilities