Summary

Innovation = invention x commercialization. Start with personal comparative advantage, then take a customer-driven approach. A paying customer is the single necessary condition. Select a beachhead market, build an end user profile and an actual-person persona, and use bottom-up TAM analysis. Focus on JTBD, not features. Quantify measurable benefits, identify the next 10 customers, and define one core.

Map the Decision Making Unit and the process to acquire a paying customer. Balance capturing value with creating value through the business model and pricing. Account for lifetime value and the often-underestimated cost of acquisition; SaaS should aim for LTV/CAC 3:1. Test key assumptions with scrappy experiments. The Minimum Viable Business Product starts the customer feedback loop, but the most important test is that users will pay.

Key Takeaways

Chappy’s Review

All the basics for starting a business. Nothing novel, but a helpful guide for beginners.

Notes

Introduction

• 3 common myths:
  1. Individuals start companies → teams
  2. Charisma → effective communicators, recruiters, salespeople
  3. Genetics → skills for ↑ + product and deliver
• Why are MIT + Stanford so much more entrepreneurial?
  • Spirit + skills
  • Social herding mentality
• 2 types of entrepreneurship:
  1. SME: local, often family run and services / reselling
  2. Innovation-driven enterprise: well beyond local, teams, wealth > control, growth priority
• Innovation = invention x commercialization
• Eg. business model innovation

Six Themes of the 24 Steps

1. Who is your customer?
2. What can you do for your customer?
3. How does your customer acquire your product?
4. How do you make money off your product?
5. How do you design + build your product?
6. How do you scale your business?

0: Getting Started

• 3 reasons for entrepreneurship:
  1. Have an idea
  2. Have a technology
  3. Have a passion
• Customer pain point less important, instead ↓
• Q1: “What can I do well that I would love to do for an extended period of time?”
• Should be able to say in 1 sentence
• Personal comparative advantage: interests, strengths, skills
• Eg. knowledge, capability, connections, financial assets, name recognition, past work experience, passion for a particular market, commitment
• Team formation: The Founder’s Dilemmas
• Beach head market + target customer + TAM + specificity with a single user

1: Market Segmentation

• Single necessary condition: a paying customer
• Take a customer-driven approach
• Create a new market that you will dominate
• Don’t…
  1. Sell to anyone / everyone
  2. China syndrome (sliver of massive market - eg. toothbrushes in China)
• Primary + secondary customers (ie. buyers)
• Do market research
• Identity niches: eg. private grade school topic teacher + specific value props / JTBD / applications
• Evaluate:
  • Budget?
  • Direct access to buyer?
  • Willingness to pay?
  • Deliver whole product?
  • Entrenched competition?
  • Good first bowling pin Crossing the Chasm
  • Aligned with founder’s goals
• Primary market research
  1. You don’t have the answers
  2. They don’t have the answers
  3. Inquiry mode, not advocacy/sales mode
• Lighthouse customers
• 8 factors in market segmentation selection matrix*

2: Select a Beachhead Market

• Focus / saying no is hard
• Predictably Irrational: people try to preserve optionality even when EV of focusing on a single bet is higher
• Get data + iterate / pivot, don’t be a market analyst
• 3 properties of a market:
  1. All buy similar products
  2. Similar sales cycle
  3. Word of mouth

3: Build an End User Profile

• Define a target customer profile
• Potential characteristics: gender, age range, income, geographic, motivation, fears, heroes, meals, where for info, TV shows, savings? image? peer pressure? what is their story?
• Ideally hire a target end user onto your team

4: Calculate TAM for Beachhead Market

• Bottom-up / noses-first analysis is best
• Top-down secondary research based
• TAM: $5M → $20-$100M, $10B is a potential issue
• CAGR
• Assuming you can reach 100% market saturation

5: Profile Persona for Beachhead Market

• Composite → single person who best represents target customer
• Ideally, persona is an actual person
• Most important: purchasing criteria
• After guessing their profile fact sheet, actually interview them to finalize
• Make it visual
• Can have multiple personas for each side of the market (rare)
• Anti-personas
• Data center manager example persona*

6: Full Life Cycle Use Case

• How they’ll use the product
• How it fits into their value chain
• Barriers to adoption
• Acquisition + post-acquisition support
• Parts:
  1. How users will determine the have a need / opportunity to do something different
  2. How they’ll find out about your product
  3. Analyze “”
  4. acquire “”
  5. install “”
  6. Use “”
  7. Determine value gained “”
  8. Pay “”
  9. Support “”
  10. But more and/or spread awareness “”
• Create a visual representation of ↑

7: High-Level Product Specification

• Focus on JTBD, not features
• Don’t start building too early
• Start with a simple visual spec
• → product brochure
• A tool to focus the knowledge capture process
• Right fidelity to encourage the right type of feedback
• Then, storyboarding

8: Quantify the Value Proposition

• Measurable benefits
• Value props fall into:
  1. Better
  2. Faster
  3. Cheaper
• Keep it simple: 1 sentence
• Underpromise + over deliver, especially for B2B
• As-is state → quantified value prop

9: Identify Your Next 10 Customers

• Beyond current persona
• Contact, convey 6-8, ask if they’d express interest
• A lot of work, but very valuable

10: Define Your Core

• What is your secret sauce? What do you do better than everyone else?

1. Network effect
2. Customer service
3. Lowest cost
4. UX
5. IP - tends to be static while markets are dynamic

• ↑ so, 5 is more about team and culture
• Speed of innovation is unlikely to be a lasting core
• First-mover advantage is not a sustainable core (? weak argument)
• Only 1 core
• IP less likely core for venture backed cos
• ↑ first time you spend a lot of time looking internally

11: Chart Your Competitive Position

• Blue Ocean Strategy
  • Customers actually usually make on a comparison basis
• Far better to focus on “customer doing nothing” rather than beating other fellow fledgling startup
• XY chart with yourself top right

12: Determine the Customer's DMU

• DMU = Decision Making Unit
• Usually >1 decision-maker
  • Identify + convince all
• Roles:
  • Champion: advocate
  • End user: hopefully also ↑
  • Economic buyer:
  • Primary + secondary influencer: Can be external, eg. reviewers
  • Person with veto power:
  • Purchasing department: handles the logistics
• Decision unit analysis

13: Map the Process to Acquire a Paying Customer

• Show your customer you’ve mapped the process
• Also regulations, standards, etc.
• Know steps
• Budgeting authority (eg. <$5k)

14: Calculate TAM for Follow-on Markets

• Bowling pins
• At least 5+ additional with total TAM of $1B+ for venture-backed

15: Design a Business Model

• Eg. iTunes
• Business models are very hard to change
• Freemium are lottery tickets - doesn’t count until actual purchase
• Examples:
  1. One-time upfront + ongoing maintenance (most common)
  2. Cost plus (eg. gov’t contracts)
  3. Hourly rates
  4. Subscription / leasing
  5. Licensing (royalties)
  6. Consumables
  7. Upsell with high-margin products
  8. Advertising (“ability to attract and retain a desired demographic”)
  9. Re-selling collected data (eg. LinkedIn navigator)
  10. Transaction fee
  11. Usage based
  12. Usage plan
  13. Parking meter / penalty charges (eg. credit cards)
  14. Micro-transactions
  15. Shared savings (often brainstormed, rarely used - hard to tell)
      • Works for energy savings, finance (GP carry)
• ↑ balance capturing value with creating value

16: Set Your Pricing Framework

• Eg. a 1% cost can impact profits 11%
• Use quantified value prop (20%, leaving 80% for consumer)
  • To much higher risks gauging long-term relationship
• Understand cost of alternatives
• Crossing the Chasm 5 stages - cost will go down
• Be flexible for lighthouse customers - confidentiality
• Always easier to drop than raise price

17: Calculate LTV of an Acquired Customer

• LTV = Lifetime Value
• Attractive from a microeconomic standpoint?
• Upfront + recurring + upsell revenue
• Gross margin
• Retention rate, churn rate
• Life of product
• Next product purchase rate
• Cost of capital rate (35-75% per year for new companies)
• Present value at above cost of capital
• SaaS should aim for LTV/CAC 3:1

18: Map the Sales / Customer Acq Process

• Often overlooked: cost of sales staff and so much more
• Direct sales = BD

19: Calculate COCA

• COCA = Cost of Customer Acquisition
• Generally dramatically underestimated
• COCA = (TSME - IBSE) / NC
  • Total marketing + sales expenses
  • Install base support expense
  • Number of new customers
• ↑ over time / derivative
• NPS = best measure of word of mouth = most powerful lever

20: Identify Key Assumptions

• To validate product research

21: Test Key Assumptions

• Real-world data via scrappy experiments

22: Define the MVBP

• MVBP = Minimum Viable Business Product
• Most important: that users will pay
• Starts customer feedback loop
• Narrow to your most important assumptions

23: Show That “Dogs Will Eat Dog Food”

• Demonstrate MVBP with data
• “Test their wallet”
• Mine customer preferences
• Vitality coefficient

24: Develop a Product Plan

• “Plans are nothing, planning is everything”