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Pitching

Progress Report | #TNYSCM Minimum Viable Launch – Building A Supply Chain Community

November 19, 2017 by Brian Laung Aoaeh

Design by: Lisa Morales-Hellebo

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch November 16, 2017

On November 16, The New York Supply Chain Meetup reached an important milestone – we held our first event.

This blog post will trace how we got here, and share some pictures from our minimum viable launch. We hope you’ll join us in our bid to bring the global supply chain community together, starting with this small step in New York City.

This is the story of how we got here.

On August 23, I arrived at my desk at KEC Ventures and while drinking my cup of coffee, I thought to myself; “I really should go to the supply chain meetup in New York.” I have been thinking about value chains and supply chains since 2014. Evidence of that is documented below;

  1. Why Tech Startups Can Gain Competitive Advantage from Operations – August 2014
  2. Industry Study: Freight Trucking (#Startups) – November 2016
  3. Updates – Industry Study: Freight Trucking (#Startups) – December 2016
  4. Industry Study: Ocean Freight Shipping (#Startups) – February 2017
  5. Cargo Drones and Data Swarms: Experts Weigh In on Digital Transformation in Shipping & Maritime – March 2017
  6. Updates – Industry Study: Ocean Freight Shipping (#Startups) – June 2017
  7. White Paper | Towards A Supply Chain Operating System – August 2017
  8. #UnderConstruction | Why A Supply Chain Meetup in New York? – September 2017
  9. #UnderConstruction | Towards A MarineTech Innovation Hub in New York City – October 2017
  10. Update #01: White Paper | Towards A Supply Chain Operating System – October 2017

So, on August 23, I ran a query on Meetup.com for a supply chain meetup in NYC. I was surprised to see that there wasn’t one. Without thinking, I took out my credit card and registered The New York Supply Chain Meetup. After realizing what had just happened, I thought “Fuck! Now what?”

I figured I’d take my time and figure out what to do. I wrote a post on my Facebook page, about what I’d done. Thinking, there’s no rush . . . I can let this sit for a while.

Don’t Wait, Just Do it

The following morning I got a message from someone on LinkedIn . . . I am connected to more than 14,000 people on LinkedIn, so one of them sent me a message; Hi Brian! I saw your post in Mattermark Daily, looking forward to it. Great idea!

I panicked; “What? I did not send a submission to Mattermark yesterday. What is he talking about? I should go check.”

As I had started to fear, somehow my Facebook post had been flagged by Mattermark and they’d included it in the roundup of notable posts from venture capitalists.

So, what’s the problem? Well, Mattermark Daily goes out to 100,000 – 150,000 people daily – possibly more, I have not checked the numbers in a while. Basically . . . Tens of thousands of people had now been told that I was going to do this. I couldn’t turn around and say . . . “Ha ha ha . . . Nevermind, I was just kidding.”

So, I called Lisa Morales-Hellebo when I got home on August 24, and asked if she’d help me. I did that because she and I have been talking about supply chains in fashion and retail since May 2016. She knows more about the intersection of supply chain, technology, fashion, and retail than anyone else I know personally, and she’s been working on those issues since 1996. She agreed to become a co-organizer.

Also, on August 24, Brian Lindquist sent me a message through Meetup.com because my friend, Ed Sim, at BoldStart Ventures had told him to come chat with me. Brian has 10+ years of experience in operations / supply chain and spent the past 4 with A.T. Kearney in their Strategic Operations Practice leading COO-level engagements with various F1000 CPG companies. We chatted in person in early September and he too agreed to join me and to become a co-organizer.

Also, on August 24, Allie Felix from Work-Bench reached out to me. They’d seen the Facebook and she wanted to speak with me about how Work-Bench might help me get the meetup off the ground. Given what Work-Bench has accomplished in building The New York Enterprise Technology Meetup . . . I felt that was a good sign. I felt bad about my conversation with Allie a few days later, because I did not yet have any answers . . . I had no clue what was going to happen. But she was very patient and supportive, and told me that Work-bench would be happy to host us once we got going.

Not long after my meeting with Allie, Tina Kang, Daniel James, Paula Cadman-Mendoza, Santosh Sankar, and Joy Fan also agreed to join the team of organizers to try to bring The New York Supply Chain Meetup to life. We met later in September to create a plan and decided we’d have a kick-off on November 16. We then set to work.

Our goals;

  • To create a multidisciplinary community of practice around building 21st Century supply chains and value chains,
  •  To create a forum that brings together big corporations, small and midsize companies, and startup to enable them do business and partner with one-another,
  • To explore the latest research in the area of supply chain, and industrial transformation through digital technologies.

Building on the unique characteristics of New York City, #TNYSCM will become the world’s foremost multi-disciplinary community of practice for individuals and organisations committed to investigating and developing solutions for problems in global supply chain networks at startups, large corporations, academic institutions, and everything in between. A particular area of interest is the use of distributed ledger technologies, and other cutting edge technologies, as a foundation for innovation in supply chain networks.

#TNYSCM | The past ran on supply chains. The present runs on supply chains. The future will run on supply chains. The world is a supply chain.

Below, some stats on our progress so far, and pictures from our minimum viable launch on November 16, 2017 at Work-Bench.

Members: 350

RSVPs for November 16: 214

Attendance (Approx): 150, about 100 stayed till the very end.

Presentations: 7, one presenter could not make it at the last moment, due to an unexpected illness.

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch | Work-Bench was empty at first, though a few people showed up 30 minutes early, around 5:00 PM.
Photo Credit: Andrew Williams (@aswilliams73)

 

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch | Before things got hectic – showing off a little bit with John, and Tina.
Photo Credit: Andrew Williams (@aswilliams73)

 

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch | Esma’s enthusiasm for her new favorite shirt is a good sign. She’s a supply chain engineer.
Photo Credit: Andrew Williams (@aswilliams73)

 

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch | It’s time to show our work, and we are happy to do so – Daniel James and I show off for the camera. Daniel works at IHS Markit, and is one of the 8 people who worked to make this possible.
Photo Credit: Andrew Williams (@aswilliams73)

 

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch | John Azubuike mans the sign-in desk as Marc Held from Armada arrives. March came from Boston, MA. He was one of the presenters for the evening.
Photo Credit: Andrew Williams (@aswilliams73)

 

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch | Lisa Morales-Hellebo is the first person I called after I realized there could be no turning back. That was on August 24, 2017.
Photo Credit: Andrew Williams (@aswilliams73)

 

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch | Hyder is visiting from Dynamo in Chattanooga, TN. Dynamo invests in Logistics, Supply Chain, and Transportation. He seems suitably impressed so far.
Photo Credit: Andrew Williams (@aswilliams73)

 

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch | Lisa Morales-Hellebo, Daniel James, and Tina Kang . . . all members of #TNYSCM leadership team, and all meeting for the first time.
In the background, Ryan Smith, founder of FTSY.
Photo Credit: Andrew Williams (@aswilliams73)

 

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch | NIcole Gibbons met Michelle and Kimberly at the sign-in desk and they got to talking about supply chain logistics . . . Michelle and Kimberly work at UPS.
Photo Credit: Andrew Williams (@aswilliams73)

 

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch | I manned the sign-in desk all evening, with intermittent help from the other organizers. I wanted to be able to say “Thank you for coming.” to every single person who came to the event.
Photo Credit: Andrew Williams (@aswilliams73)

 

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch | #TNYSCM “The world is a supply chain.”
Photo Credit: Andrew Williams (@aswilliams73)

 

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch | This would not have been possible without the leadership team. From R – L; Lisa Morales-Hellebo, Tina Kang, Daniel James, Santosh Sankar, Paula Cadman-Mendoza, Brian Lindquist, Brian Laung Aoaeh, and John Azubuike – my teammate from KEC Ventures who gave us a hand for the launch. Joy Fan could not make it.
Photo Credit: Andrew Williams (@aswilliams73)

 

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch | Lisa Morales-Hellebo, our MC for the night.
Photo Credit: Andrew Williams (@aswilliams73)

 

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch | Allie Felix and the rest of the crew at Work-Bench believed in the idea of #TNYSCM even before I had a clear idea what it should be. I can’t thank them enough.
Photo Credit: Andrew Williams (@aswilliams73)

 

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch | Veronika Harbick from Thursday Finest got the ball rolling for this showcase. Thursday Finest does custom and on-demand 3D knitting.
Photo Credit: Andrew Williams (@aswilliams73)

 

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch | Fauad Shariff from CoLoadX talks about building the digital platform for ocean logistics – a massive undertaking in a massive market.
Photo Credit: Andrew Williams (@aswilliams73)

 

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch
Photo Credit: Andrew Williams (@aswilliams73)

 

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch | Marleen Vogelaar from Ziel talks about digital fabrication, and on-demand, environmentally responsible clothing manufacturing.
Photo Credit: Andrew Williams (@aswilliams73)

 

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch | Rodney Manzo from Anvyl explains what Anvyl is doing to remove friction in supply chain so that anyone can make products.
Photo Credit: Andrew Williams (@aswilliams73)

 

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch | Marc Held from Armada talks about bringing true global transparency to supply chain with intelligent visibility and predictive analytics.
Photo Credit: Andrew Williams (@aswilliams73)

 

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch | Benita Singh from Le Souk talks about building a platform that enables designers to search, sample, and source quality materials direct from original suppliers.
Photo Credit: Andrew Williams (@aswilliams73)

 

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch | Suuchi Ramesh from Suuchi, Inc. talks about building and scaling the apparel manufacturing supply chain of the future.
Photo Credit: Andrew Williams (@aswilliams73)

 

The New York #SupplyChain Meetup #01 – The Minimum Viable Launch | Lisa, our MC for the night, wraps things up.
Photo Credit: Andrew Williams (@aswilliams73)

Some of the comments since the event;

Fauad Shariff, co-founder & ceo of CoLoadX says;

Once again, great job pulling together the meetup last night Brian & Lisa.  The turnout exceeded expectations, and I’m sure at least a few customer and biz dev relationships came out of it for us and some of the other companies. I also wound up connecting with some folks from the industry whom I hadn’t seen in a while, or only knew of from social media. Looking forward to more chances to get together with the community.

Esma Hamandi, a supply chain engineer who recently moved to NYC says;
I moved here to NYC recently and I didn’t know where or how to connect with people in the same professional field as me until you let it happen.

This would not have been possible without the support of our sponsors;

  • Work-Bench – believed in what this could become even before it was clear that there is a need for a community like this. They offered us use of their space for free.
  • CustomInk – Gave us a steep discount on t-shirts and hoodies. Use the discount code: TNYSCMCI for your own orders from their website. You’ll get 10% off for orders of 6 or more items.
  • UPS – is helping us cover the cost of food and refreshments.

We’re in the process of gathering data to help us plan for 2018. We should have a tentative plan before the end of 2017. We hope you’ll join us.

Update #1: Wednesday, November 22, 2017 at 18:54 EST.

  • Minor edit – punctuation mark.
  • Add #TNYSCM Header image.

Filed Under: #TNYSCM, Communities, Entrepreneurship, Innovation, Startups, Supply Chain, Technology, Venture Capital Tagged With: #TNYSCM, Digital Transformation, Early Stage Startups, Entrepreneurship, Innovation, Logistics & Supply Chain, Logistics and Supply Chain, Ocean Freight Shipping, Pitching, Startups, Teamwork, Technology, The New York Supply Chain Meetup, Venture Capital

User Manual: The Early Stage Startups I Want To Hear About Most in 2017 and 2018

December 25, 2016 by Brian Laung Aoaeh

Source Unknown

About KEC Ventures

We are a team of early-stage investors based in New York City. We invest in information technology startups that are pursuing business models with the potential to transform the way business is done in their market. In such startups, we invest in the first institutional Seed Round. Often, but not always, we act as the lead investor. On rare occasions, we might invest earlier than this when we meet a founder pursuing a vision that we believe in. Currently, we focus on investing in startups based in the United States or Canada. Very rarely, we may invest in a startup based in Israel, but that is in the process of establishing a presence in the United States.

On our team at KEC Ventures, I have been largely focused on finding and meeting the founders that we can become most excited about. I will continue to maintain that focus over the course of 2017 and 2018.

Here are some notes for the founders of the startups I am most eager to meet.

Why I Love What I Do

My mom and dad have been running small businesses since 1981 when my mom quit her job as a teacher in Kano, Nigeria. She started a school in 1986 which they have been growing since under conditions of high uncertainty. I am intimately familiar with the pressures entrepreneurs face. I wake up every day trying to be the kind of investor my mom would have loved to have at her side.

I am most content when I am thinking about and trying to solve ill-defined problems – the types of problems other people may describe as being too difficult and not worth the trouble. I am abnormally enthusiastic about the research process that leads me to develop answers to such problems. I think of myself first and foremost as a research analyst. I embrace uncertainty. I am not afraid to be different.

Connecting With Me

If you know someone who knows me, an introduction would help. If you do not, never hesitate to communicate with me directly. I am easy to reach on the major social networking platforms. Also, I hold regular and frequent office hours at various co-working spaces in New York City. Some allow non-members to sign-up and attend.

The best time to start communicating with me is at least 6–9 months before you believe you will raise a round in which KEC Ventures might invest because I believe it is important to build trust before entering into the kind of working relationship that exists between startup founders and their early stage investors.

That also gives me sufficient time to understand the problem you are solving, so that if we invest, we are doing so with conviction. Time enables me to become a more effective advocate on the startup’s behalf when my colleagues and I have discussions about making an investment.

Communicating With Me

If we are not meeting through an introduction, I will respond quickest to founders who get straight to the point, and explain why we should meet in 250–400 words in their first email to me. Founders do not need a warm intro in order to communicate with me in order to start a dialogue.

I try my best to respond. However, depending on what else I have going on, I may not respond if I feel the startup is outside KEC Ventures’ areas of interest and that the founder could have easily found that out before emailing me. Please follow up with me once or twice if you believe I have made a mistake.

If you are not connecting with me or anyone else at KEC ventures through a warm intro, you can email me at: brian@kecventures.com. For your subject line use; Pitch: {insert name of your startup}. This way I can easily filter my inbox for these emails when I review them each week.

Characteristics I Look For in Founders, and Teams

I look for teams in which the founders have known one another for a considerable amount of time prior to launching their startup. I look for teams in which the level of trust and respect between the co-founders is high. I look for teams that will not have difficulty attracting other great people to join the startup. I look for founders who inspire confidence and loyalty from others because they are good at what they do, the kind of people I could picture myself working for.

I look for founders for whom solving the problem that their startup is solving has become their life’s mission and they plan to solve that problem with or without help from outside investors. I look for founders who have an unconventional opinion about the market opportunity they are pursuing, and can explain why their position is correct with evidence which investors can analyze independently.

At the outset I look for teams that can focus on building a simple product that their initial customers love, and who can focus on a niche within which to launch their product. I look for teams that are judicious and frugal in how they deploy the startup’s resources.

I look for founders who value teamwork, and who can become great leaders if they desire to do so. I value transparency, honesty, and openness. I value self-awareness. I like people who are determined and tenacious, who do not give up just because the going gets uncomfortable and things seem bleak.

I look for founders who have a hard time doing something simply because it is what someone else expects them to do. I look for founders who are not afraid to be different.

I like founders who marry a strong technical background with a deep understanding of  the important role marketing and sales will play in determining the success of their startup. I like founders who demonstrate a singular focus on creating value for their customers/users.

Characteristics I Look For In Markets

I look for large markets that could ultimately be served by the startup’s product, even though the initial target might be a small portion of the whole. I look for customers capable of and willing to pay for the product, and who are looking for and eager to find a solution to their problem.

I look for markets in which the pain is acute because the problem suppresses customers’ profits significantly, or because the problem makes users less happy than they could be.

If currently the addressable market is between $1B and $10B, I want to see evidence that it is growing quickly enough to support the startup’s future goals, and the competition that I assume will quickly follow if the team is successful.

In certain markets where I believe there are invisible barriers to innovation, I look for industry expertise on the founding team.

If your team is based outside one of the first- or second-tier cities for startups, it helps a lot if I can drive, take a train, or take a direct flight from NYC or Newark to come and meet you.

Characteristics I look For In Business Models

I look for products and business models that:

  • will benefit from network effects as time progresses,
  • can scale efficiently and quickly, and
  • can eventually benefit from an economic moat.

If you have the time you can read my work on economic moats here in order to understand what I will be thinking about as I conduct my independent analysis of your startup.

My Philosophy

I believe my primary responsibility as a seed stage investor is to discover founders solving problems in a manner that has the potential to positively transform industries and markets before other investors have heard of them.

We help founders focus on finding product-market fit by creating an environment in which they can focus on 4 things;

  1. Keep existing customers/users as happy as possible so that they stay and use the product more often over time,
  2. Improve product features that create and deliver additional value to existing customers/users,
  3. Hire new teammates in order to enable the team improve the product in order to deliver increasing value to existing customers/users, and finally,
  4. Attract new customers and users in order to grow the startup into a company.

I think if our founders do those 4 things well, at an increasing cadence, and with increasing efficiency and productivity, we greatly raise the odds of success of the startups in our portfolio. We strive to be good thought-partners as our founders make this journey.

The Themes I Am Focused On

Notes:

  1. My mental model of how our team functions is akin to how a soccer team functions, or how an athletic relay team functions. We take a team-first approach – it matters more that you communicate with one of us, and less on who specifically you communicate with. In turn, we will make sure that the right people on our team collaborate with a startup’s founders as we conduct our due diligence.
  2. These themes cut across different industries and sectors. That is a deliberate choice. Once you meet one of us, you’ll understand how we think about this.
  3. The technology sector evolves constantly. Accordingly, our team’s interests might ebb and flow in response. The themes I have described below should serve as a rough guide to how I think about the universe of startups in which we wish to invest.
  4. A startup raising its first institutional seed round should have raised less than $1.5M  or so prior to the round in which KEC Ventures would be investing. I personally prefer that the startup has raised $1.0M or less prior to the round in which we would invest.

I am currently interested in hearing about:

  • Marketplaces: Platforms that enable the participants in large, global markets to interact with one another in ways that reduce waste or create new, untapped opportunities.
  • Interconnectivity: Platforms that enable large numbers of different types of connected devices, machines, apps, and websites to communicate with one another seamlessly, and with the people managing or using them, within a secure environment.
  • Data & Analytics: Platforms or applications that help people or other machines to manage, analyze, interpret, make decisions, and take actions based on vast and growing troves of centralized or decentralized data.
  • Effectiveness & Happiness: Products that enable people to accomplish more at work, or to become happier outside work. Products that help large enterprises and other types of businesses and organizations to grow or function more effectively.
  • Distribution: Products that make it easier to create, manage, distribute, and consume existing and emerging forms of digital media and content.
  • Asset Management: Technologies for managing different forms of enterprise, business, or individual assets. Technologies for managing different forms of enterprise, business, or individual risk.
  • Other: New, and as-yet unknown technologies and innovations founders are building to solve problems that exist only because no one else has developed a solution.

Some, but not all, of the markets that fall within these themes include artificial intelligence – including all its existing and potential applications in different industries, software-as-a-service for enterprises – I am especially interested in products that help SMBs accomplish much more for a relatively small investment, virtual and augmented reality, distributed ledgers and other distributed computing systems, financial technology, insurance technology, educational technology and healthcare technology – where the founders discover a business model that addresses the concerns venture capitalists typically express about those markets.

Note: Starting in July 2017 I will function as the subject matter specialist on our team for investments in seed-stage startups building Internet Infrastructure, Supply Chain, and Transportation Services software.

Internet Infrastructure Software is; The software that connects computers, machines, devices, and people on the internet. Hardware is an important component of internet infrastructure, so I am willing to speak with founders who are developing a product that combines software and hardware.

Supply Chain and Transportation Software is; The software that enables networks of organizations, people, and information involved in moving products and services from one part of the world to another. This includes; Supply Chain Management, Supply Chain Logistics, and Supply Chain Finance. I have a particular interest in the application of artificial intelligence (e.g. computational stochastic optimization and learning), connected devices, and distributed ledger technologies, to the solution of problems in global supply chain networks.

Think of my focus as the union of Digital/Virtual Supply Chains and Physical Supply Chains. Virtual Supply Chains enable the movement of information within a network. Physical Supply Chains enable the movement of goods, services, and people within a network.

Things I am Not Interested In

  1. Exploding rounds: An exploding round comes with a caveat like “Seed round in ground-breaking tech startup closing in 1 week!” I do not like exploding rounds, not even exploding rounds that are being led by a name-brand VC. I need time to do my own homework.
  2. Meetings led by an advisor: I prefer my first few interactions with a startup to be with the team of co-founders, not with an advisor. It is okay for an introduction to come from an advisor, but I do not like to have advisors or mentors micro-manage my interactions with startup founders. That does not inspire confidence.
  3. Lack of control over core technologies: I try to avoid situations in which the startup has a product that has launched to the public, but the startup’s team has no primary responsibility for actually building the core product.
  4. Founders who will not share bad news: I only want to work with founders who will not hide bad news until it is too late for investors to do anything that might help the startup make a course-correction. I absolutely want to hear about difficulties, challenges, and problems. I expect the good news, but I think we have an obligation to try to fix the bad stuff before it becomes unfixable.
  5. Buzzwords: I do not believe in buzzword investing. I focus first on understanding the problem the startup has set out to solve. Only after I understand that do I concern myself with the specific technology or business model being employed to accomplish the founders’ goals.
  6. Obfuscation: “Trust me. Our algorithm is so complex and sophisticated that there’s no way you could possibly understand it.” Don’t say that. I’m willing to teach myself what I need to learn in order to understand what you do, and I need to understand the basics of how you will accomplish your vision before I can develop enough conviction to recommend an investment by our team.

My Commitment to Startup Founders

  1. I believe in Gil Dibner’s VC Code of Conduct, and will adhere to it in my interactions with founders.
  2. Given that we approach conversations with founders from the perspective of a potential lead investor, we always try to move as fast as we can to get to an answer without being sloppy about our due diligence. I wrote this guide so that founders can help us speed the due diligence process along.
  3. Other founders tell us they appreciate our team’s transparency about our due diligence process. We know founders’ time is invaluable, and we do not want to waste it if the probability that we’ll make an investment is nonexistent.

Update #1: Sunday, July 2, 2017 at 22:55 EST.

  • To reflect ongoing subject matter specialization on Internet Infrastructure and Supply Chain software.
  • To reflect institutional seed-stage focus.
  • To clarify approach to investments in Israeli startups.

Update #2: Thursday, August 17, 2017 at 08:47 EST.

  • To add Transportation.
  • To clarify that supply chain finance and supply chain management are part of our areas of interest.

Update #3: Thursday, October 26, 2017 at 09:30 EST.

  • Clarifications to themes I am focused on, and investment stage.
  • Add “Why I Love What I Do” section.

Filed Under: Deal Flow, Investment Themes, Investment Thesis, Operations, Pitching, Startups, Strategy, Venture Capital Tagged With: Dealflow, Due Diligence, Early Stage Startups, Entrepreneurship, Fundraising, Pitching, Venture Capital

#NotesOnTactics: Relationship Management Hacks For First-Time Early Stage Tech Startup Founders – Connecting The Dots

July 25, 2016 by Brian Laung Aoaeh

Source Unknown
Source Unknown

The post in which I offered some suggestions about how a first-time founder might make the fundraising process more efficient and less frustrating raised some follow-up questions that were sent to me via email by a handful of founders who read the post over the weekend.

We went back-and-forth over email, but I think it is worth sharing a paraphrased form of those conversations, as well as those I had back in 2014 which inspired the original post to begin with.

For appropriate context, read #NotesOnTactics: Relationship Management Hacks For First-Time Early Stage Tech Startup Founders before you read the rest of this article.

Founders Ask: My knee-jerk reaction is to permanently cut off investors who pass on our seed round. I may not completely cut off investors who pass on our seed round even though they have stated publicly that they are well-aligned with our mission and vision, and invest in our market. However, I do not think I will keep them updated, and I probably will not include them in my next round.

My Answer: The key is to stay focused on the long game, and not to lose sight of how things might change. An investor who passes on your seed round, but could lead your Series A is probably worth the effort to keep updated . . . if there’s mutual interest in doing so. Keeping an investor updated does not give you an obligation to let them into your next round. Founders will always retain the option to select which investors they let into their startup’s next round. That’s a source of power and control founders will always have, if things go well. In this context, I would try to avoid cutting off my nose just to spite my face.

Founders Ask: What of my instincts? What if my instincts say I should stop dealing with this investor?

My Answer: Always listen to your instincts. Our subconscious picks up information that our conscious mind can overlook, or miss entirely for any number of reasons. I am assuming that the parties involved are each acting in good faith; so investors are not taking meetings with founders for some ulterior motive, for example. To that end, I assume that founders would have done some due diligence on an investor before they meet for the first time.

Founders Ask: This does not work for founders who are; women, or under-represented minorities, or LGBTQ . . . or frankly, all of the above. Isn’t early-stage venture investing about investing in the team/founder(s) more so than in the idea/market/traction? If an investor whose primary function is to see the value in a team/founder(s) doesn’t see the value in me, frankly, I don’t think they’re that smart/wise. Why should I want them to ever profit from my endeavors ? We have to disrupt the status quo or nothing will change!

My Answer: I understand that sentiment. I won’t debate with founders who feel that way except to say that feeling that way risks leading them to sub-optimal decisions about how they engage with investors. This is especially true in situations where founders do not have a 360-degree view of the decision-making process as it unfolded. “Shooting the messenger” might be satisfying in the short-run, but is probably strategically unadvantageous in the long-run. If I were a cynical founder I might keep investors who passed in my previous round updated if only for the potential that they could function as a stalking horse in my next round. My comments about this probably do not apply for a fund that is run by one person, or that is run by two people.

Founders Ask: I’m sick and tired of hearing about other founders getting a term sheet signed same-day/same-meeting. If the EXACT same deal; same back story, same circumstances, same company, same traction, were presented….with a team made up of white/Asian men….the outcome is almost ALWAYS different.

My Response: I believe that life is fundamentally unfair, so I personally try not to let issues like this get to me emotionally. That said, I think I understand the frustrations you are expressing. I have faced such frustrations myself at various times in the past – most notably while I was growing up in Ghana and Nigeria. I believe that it is important to separate fact from myth. In the years since our team started investing in early stage startups, I have not seen a single startup get a term sheet “same-day/same-meeting” . . . I would question how committed an investor who commits that quickly is going to be when things get tough or even how engaged they will be in general as time progresses. I also wonder if there’s more of a back-story that is often left out of the breathless reports by the tech press. Hyperbole has a way of distorting reality. I have tracked a few startups for as long as 18 months before I was ready to recommend that we make an investment. It is more common for me to track a startup for between 3 and 6 months while I try to figure things out. I can’t dispute the reports that you allude to, but I would caution that they are the exception rather than the rule. In one extreme example, Tim Westergren pitched investors 347 times before he persuaded Walden Venture Capital to say “yes” at his 348th attempt. The team went without a salary for 2 years. Fundraising is a long, and arduous undertaking . . . for anyone. People who tell any founder the opposite are doing that founder an enormous disservice. That being said, I am not trying to imply that there’s no bias in the system. I just don’t think it’s what a founder of any background should focus on the most, assuming that founder decided to go down this path independently.

Founders Ask: Your suggestion about preparation beforehand seems disjointed from the reality founders encounter . . . Isn’t each investor different? For example; the conversation I had with you vs. Nnamdi Okike vs. Ben Horowitz vs. Hunter Walk vs. Mitch Kapor . . . Sure, there were a few commonalities; maybe 30 percent? But the other 70 percent of each conversation was so unique to each individual’s priorities, each person’s disposition the day we met, the individual personalities, their placement on the autism spectrum, etc. Isn’t that hard to prepare for?

My Response: I agree. It’s hard to prepare to raise capital from external investors. Now imagine if you do not absolutely nail your answers to the 30 percent of questions that are common to all the investors you will meet. Surely, your chances of success do not improve over time if you go in without thorough preparation for those questions. I assume those questions are ones you fully expect will get asked. As such, they are questions whose answers you can rehearse beforehand. Some of the best conversations I have had with founders have occurred when the founder has kept a running list of FAQs that is updated after each meeting with an investor. Over time, the probability that the founder will encounter a completely new question from an investor reduces to a minimum while the chances that the next pitch will lead to “yes” increases to a maximum. I’m hoping that is an appealing way to think about this. A practical advantage of this approach is that it frees you up mentally to focus on doing a great job answering the 70% of questions you did not expect . . . But, again, that proportion should decrease as you keep pitching investors.

Founders Ask: But keeping investors and other people updated takes so much time and effort. Why should I bother with investors who have passed on making an investment?

My Response: Absolutely. Focus on your current investors. My suggestion to use email as a way to keep other people in the loop is meant to cut down on the effort it takes to update people who are not current investors. Send a mass email to everyone who is not an investor in your startup but who you want to keep “in the loop” about your progress, use software to track engagement. Only meet one-on-one when it makes sense to do so. I tried to convey that idea in the article. The idea is to minimize the effort that is expended on keeping anyone who is not a current investor updated.

View Over The Manhattan Bridge
View Over The Manhattan Bridge

Filed Under: Entrepreneurship, Startups, Strategy, Tactics, Technology, Venture Capital Tagged With: Early Stage Startups, Fundraising, Investor Relations, Persuasion, Pitching

#NotesOnTactics: Relationship Management Hacks For First-Time Early Stage Tech Startup Founders

July 23, 2016 by Brian Laung Aoaeh

View Over The Manhattan Bridge
View Over The Manhattan Bridge

Note: I published a post titled “Relationship Management for Your Startup” on January 13, 2014 at Tekedia.com. This post is inspired by that one, and portions of this post are exactly identical to the original. It appears the post at Tekedia is no longer online. This post updates that one, with lessons I have learned since that time and advice I share with first-time founders with whom I have the privilege of meeting as they embark on trying to build their startups.

How should an entrepreneur manage the relationship with investors who say “no” to that entrepreneur’s pitch for capital? As I have noted above, I first tried to tackle this question in a post in 2014.

Before I suggest an answer to that question, I will propose some assumptions.

  1. The interaction between the entrepreneur and the prospective investors has been one of respect, and professional courtesy. In other words, you have not been treated badly or insulted by any of the investors you have met.
  2. The investors you have met are honest people, who would tell you if there is absolutely no instance under which they would invest in your startup. They do not have to tell you why, although it would be great if they did.
  3. Irrespective of how things play out now, there is every possibility that you will speak with investors at a subsequent stage of the current project you are working on, or, Insha’Allah, you will become a serial entrepreneur who seeks funding for a new startup in the future.

If my assumptions hold true, then it does not work to your advantage to “cut-off” an investor just because that investor did not fund your startup during your current round of financing. This is especially the case if that same investor might be able to invest in your next round of financing – for example, a venture fund which makes institutional seed-stage and series A investments, but which passed on your seed-stage round of financing.

Every venture capital fund’s primary responsibility is to make money for its limited partners. Venture capitalists do not invest because they like an entrepreneur or an idea, or because they feel obligated to provide capital. No. Venture capitalists invest in entrepreneurs and startups that they believe will make them money, lots of money . . . enabling them to fulfil the obligations they have made to the LPs in their fund.

It is your responsibility as the entrepreneur to connect the dots, and to help the investor understand how they will achieve that aim by investing in your startup. That is a very difficult task. Dealing with the inevitable rejection that comes with fund-raising for an early stage startup is jarring, for anyone . . . and it is especially so for first-time founders.

Are there any hacks that a first-time startup founder can use to make the journey less fraught with frustration? I think there are. Below, I share some suggestions.

Preparation is key; It is better to be over-prepared than it is to be under-prepared.

It is easy to assume that one will be able to tell one’s story in a way that makes sense to one’s audience. That’s a fatal mistake. If fundraising is important for the startup’s survival then founders should practice the pitch . . . Fundraising is about narrative and storytelling. Founders must practice telling the story until it becomes second nature.

This involves both qualitative and quantitative aspects of the startup’s story. It is important to note that this kind of storytelling differs from others in the sense that a startup founder seeks to persuade the listening audience to take a specific action that will work to the startup’s benefit. Write a check. Become a user. Become a customer. Spread the news about the startup’s product. I do not know if there’s a recommended amount of time that one should devote to preparing for something of this sort. When founders ask me privately for help preparing for a do-or-die pitch that is a few months away in the future, I recommend 80 – 100 hours of preparation; something like 1 or 2 hours of daily preparation devoted to making sure they know the story inside-and-out and that telling it is as normal as breathing. I also recommend that they practice delivering the pitch to different types of audiences to get input on the delivery from different points of view.

When founders ask me privately for help preparing for a do-or-die pitch that is a few months away in the future, I recommend 80 – 100 hours of preparation; something like 1 or 2 hours of daily preparation devoted to making sure they know the story inside-and-out and that telling it is as normal as breathing. I also recommend that they practice delivering the pitch to different types of audiences to get input on the delivery from different points of view. Toastmasters International is a useful resource for this, but founders will need more than Toastmasters offers.

Research is key; Know who you should be talking to.

It is easy for a first-time founder to get suckered into thinking it’s imperative to speak with “every investor known to mankind” . . . Meeting lots and lots of investors can really give a founder’s ego the kind of massage that market realities aren’t willing to dish out without herculean effort from the startup. Also, an investor’s willingness to “meet for coffee to discuss your feedback on our model and your perspective on the opportunity” can seem like positive confirmation that the founder did not make a huge mistake by pursuing this goal of creating something from nothing.

Here’s the thing; That is not always true. Often an investor might just want to find out what’s happening in a given market, and coffee with a founder who has initiated the meeting is a low-cost way of getting educated by someone who’s currently and actively solving problems in that area.

Obviously, the opportunity cost of such a meeting is far higher for the startup founder than it is for the investor.

What is a founder to do? Think carefully about which investors have the highest propensity to invest in the startup; at this stage, given its current levels of traction . . . within the timeframe in which the startup must raise capital. Create a short-list and focus primarily on those investors who fit the bill. This is easier said than done since investors do not often state their investment parameters publicly.

That said, for founders in the United States there are a few tools one can use. Shai Goldman, currently a managing director at Silicon Valley Bank, has created an open-source GoogleSheet’s document that is a good starting point. Samir Kaji, currently a managing director at First Republic Bank, has also created a body of research on micro-vc that is another great starting point.

These two pieces of work complement one another quite well, and should be every first-time founder’s BFF every weekend after the decision to build a startup has been made. There are other pieces of information that a first-time founder should use. These two are especially key . . . but also most likely to be unknown to most first-time founders. I maintain an email I send the founders I encounter who evidently could benefit from having these resources at their fingertips. I will post links to those resources at Hack Your Startup: Pitch.

I spent some time explaining why this matters in The Path To Disaster: A Startup Is Not A Small Version of A Big Company – The Office Hours Remix.

It’s nothing personal, it’s just business; Manage your investor relations with email.

After every meeting with a potential investor, or quite frankly, with anyone who could be helpful to your startup in any way, I think it makes sense to ask if they would be willing to be added to a “Friends of Awesome Early Stage Technology Startup” email distribution list. The most common response will be “Yes. Please add me to your distribution list for updates.” These updates will be very general in nature and should be a stripped-down version of the email updates that investors in the startup get. No confidential information should be included in this email – only information you do not mind being in the public eye.

While the periodic updates are interesting on their own, to my mind they are not the point of this exercise. The primary purpose of this exercise is to split the universe of so-called “Friends of Awesome Early Stage Technology Startup” into three categories.

First; the people who unsubscribe from the updates. I do not know a more explicit signal that they have no interest in what the startup is doing but simply did not have the courage to tell the founder so directly. There’s no point devoting much more energy pursuing these people.

Second; the people who have not unsubscribed but have never engaged directly based on a prompt in any of the periodic updates. It is probably worth sending people in this group an email saying you are going out to raise a financing round for which they might have interest based on developments since the previous round . . . If they do not respond after two or three attempts . . . Move on.

Third; the people who have engaged with the founders after an update was sent. Perhaps the startup needed to hire an engineer and they responded with a recommendation or offered to share the job description with their network . . . They have demonstrated some interest in what you are doing. Even if they do not invest themselves, they are likely to be a positive reference to someone else for whom there’s a better fit. Focus on these folks.

These 3 suggestions are the big ones. I make other suggestions to founders I meet in person. Those are minor in comparison. For example, don’t let a friendly investor who passed on investing in a prior round for a specific reason find out about a new round in which they might still be able to invest with only a week left before your anticipated close. It’s unlikely they can conclude their due diligence that quickly.

It’s not personal Sonny. It’s strictly business.                                          – Michael Corleone, The Godfather

Financing a startup’s operations is a crucial part of every founder’s responsibilities . . . In fact, it might be the most important. If financing from external investors is part of the plan, then founders need to find ways to make it less of a hit-or-miss affair. I hope these suggestions provide some food for thought about how to do that effectively without spending an inordinate amount of time.

Source Unknown
Source Unknown

Further Reading

  1. When The VC Says “No” – a great discussion by Marc Andreessen. You must read this.
  2. Dear Dumb VC – a post by Andy Dunn, the founder of Bonobos and Red Swan Ventures.
  3. As Populist As it May Seem, 98% of VCs Aren’t Dumb – a rebuttal by Mark Suster of Upfront Ventures.
  4. How LinkedIn First Raised Money (and Endured Rejection) – a post by Lee Hower.

Filed Under: Entrepreneurship, Funding, How and Why, Innovation, Operations, Pitching, Startups, Venture Capital Tagged With: #NotesOnTactics, #Remix, Early Stage Startups, Investor meeting, Investor Relations, Persuasion, Pitching, Venture Capital

A Note on Startup Business Model Hypotheses

March 29, 2015 by Brian Laung Aoaeh

Light bulbs on Staircase

One of the observations I have arrived at over the course of meeting founders of early stage startups is that often it is not clear during our conversations if they have spent time examining the hypotheses that underlie the business model for the startup they are building.

This post ((Any mistakes in quoting from my sources are entirely mine. This post is an updated and adapted version of my posts The Startup Customer Development Model and Customer Discovery Phase I: State Your Business Model Hypotheses? which were published at Tekedia.com on September 3rd, 2012 and January 21, 2013 respectively. Large portions of this update are identical to the originals.)) is my attempt to outline some of the areas that I consider as I try to understand an early stage startup’s business model and the hypotheses that are the foundation on which its success must rest. ((I have adapted portions of: Chapter 2 and Chapter 4 of The Startup Owner’s Manual Vol. 1: The Step –by-step Guide for Building a Great Company, Steve Blank and Bob Dorf, Pub. March 2012 by K and S Ranch Publishing Division.))

To ensure we are on the same page, first some definitions;

Definition #1: What is a startup? A startup is a temporary organization built to search for the solution to a problem, and in the process to find a repeatable, scalable and profitable business model that is designed for incredibly fast growth. The defining characteristic of a startup is that of experimentation – in order to have a chance of survival every startup has to be good at performing the experiments that are necessary for the discovery of a successful business model. ((I am paraphrasing Steve Blank and Bob Dorf, and the definition they provide in their book The Startup Owner’s Manual: The Step-by-Step Guide for Building a Great Company. I have modified their definition with an element from a discussion in which Paul Graham, founder of Y Combinator discusses the startups that Y Combinator supports.))

Definition #2: What is a business model? A business model is the description of how a startup will create, deliver and capture value. Alex Osterwalder’s Business Model Canvas is one framework for describing and documenting the elements of a startup’s business model.

Definition #3: What is Customer Development? Customer Development is a 4-step process by which a startup answers the questions it needs to answer in order to find a business model that is repeatable, scalable, and profitable. Step 1 and step 2 of Customer Development cover the “search” phase of a startup’s life-cycle. Step 1 is Customer Discovery. Step 2 is Customer Validation. More on those a little later.

Definition #4 What is a hypothesis? A hypothesis is a statement, or a group of statements, that proposes an answer to a question, or a solution to a problem, in a manner that is testable through experimentation. The goal of experimentation and testing is to determine if the hypothesis is correct, and to inform the subsequent actions that the startup should take on the basis of that evidence.

Step 1 in the Customer Development Process: Customer Discovery – this involves translating the initial vision behind the startup into a set of hypotheses about each component of the business model. This allows experiments to be performed that either validate or invalidate each proposed hypothesis. In my experience the exercise of testing hypotheses about the business model with prospective customers accomplishes at least two things. First the startup entrepreneur gets to hear directly from customers about the elements of the business model’s value proposition that are most critical from the point of view of the startup’s customers or partners. Second it jump-starts the sales process even before the startup has invested much time or money into building a product. The founders of a hardware startup discussed their idea for an innovative new product with a potential partner. The partner’s input proved crucial in determining the direction they followed with regard to product design – it evolved from a product with one offering to one with three distinct but complementary offerings.

The revenue model also changed based on those discussions. Even better, the partner agreed to work with this startup to bring the product to market when it is ready. Obviously, there’s still a lot to be done – product design, product development and manufacturing for example. Yet those initial discussions have been critical in conferring the kind of credibility that has made it possible for the startup to seek an audience with other potential partners. Customer discovery for this startup also involved market research to determine the priority of features from the perspective of individual end-use customers – the men and women who might actually decide to purchase the startup’s offering once it becomes available to consumers.

Step 2 in the Customer Development Process: Customer Validation – this step proves that the work done in step 1 is easily repeatable, scalable, and capable of delivering the customer volume required to build a profitable company. The startup I described above is now building prototypes based on all the information it gathered during the Customer Discovery process. Eventually we will test our ability to deploy the product in the field – a few hundred first, then a few thousand, and barring any major setbacks, tens-of-thousands, then hundreds of thousands.

During that process we will test how well the back-end software works with the hardware that we have designed and manufactured once people are actually using the device. At each step I expect we will go back to the drawing board on several aspects of the product and the business model. For example, our pricing model may not reflect reality since our market research confirmed the hypothesis that our potential customers have never encountered a device like the one we are developing. We may discover that customers will gladly pay more for the value proposition we offer than we currently plan to charge. It is important to note that we have gone through a number of product pivots during Customer Discovery. For one, we made an incorrect hypothesis about the amount of space our partners would be willing to devote to this new device, never mind all the assurances they gave us during early conversations.

We also made a number of pivots in terms of the user experience and the interface through which users will interact with the device because we realized that a number of hypotheses we had made about certain design, engineering, and manufacturing issues related to the product were just flat out wrong. The product we will soon show to our partners satisfies the desires individual end-use customers told us they seek in a product like ours ((Market research involved nothing more than a description of the device. In other words, we relied on potential customers’ ability to imagine a future in which they could use the device we were setting out to develop.)), in a manner that accounts for the constraints our partners expressed they would eventually have to contend with in deploying the devices when they come to market. Moreover, this exchange of information led us to develop a product with performance characteristics far superior to what we would have achieved within the parameters of our previous vision. We expect to make a few more pivots before all is said and done.

Developing Hypotheses During Customer Discovery

The first step in customer discovery is developing a rough estimate of market size and sketching an initial business model for your startup using the business model canvas, which I have discussed in some detail in What is Your Business Model? Using the business model as a guide, develop a hypothesis brief for each component of the business model canvas. A hypothesis brief should contain a succinct statement of the hypothesis itself as well as a sufficiently detailed but brief outline of the information that makes the hypothesis a reasonable and valid one for that business model component.

The market size hypothesis is probably the most critical, even though it does not correspond directly to any of the business model canvas components. Investors like to back companies that target potentially large markets. At the same time, be careful to differentiate the total addressable market opportunity, the serviced addressable market, and your target market. Needless to say, your initial target market will be the smallest of these three. In most cases a bottom-up estimate is better than a top-down estimate because it is relatively easy for an investor who wishes to do so to replicate a bottom-up estimate. Whereas, a top-down estimate could be viewed as “hand-waving” with no basis in reality.

The value proposition hypothesis should discuss the problem your startup solves for its customers. A segment of this brief should capture product features, and a minimum set of initial product features that early customers would be willing to pay for. This is the minimum viable product, a bare-bones version of your product that solves the “core” problem your customers face. Put another way, your minimum viable product is the least developed product that you can create in order to validate your most important hypotheses about the problem you are solving and what your customers or users will accept.

The customer segments hypothesis forces you to answer the questions “Who are my customers?” and “What problems do my customers face?” The hypothesis brief should discuss customer problems, types, and archetypes respectively. Understanding “a day in the life” of your typical customer is a powerful way to understand your startup’s customers. Finally, Steve and Bob suggest you develop a customer influence map. There is an important aspect finding customers that can be overlooked. What is the smallest group of customers that is experiencing the pain or problem you are solving most acutely? Perhaps they do not have enough money to be attractive to incumbents. Or, perhaps they are a niche that is considered weird and unprofitable by your competitors. Start your experiments there. Why? If your product indeed solves their problem, they will adopt it quickly. On the basis of broad adoption within that niche, you can plot a path to other communities of customers who are facing the same problem. In other words, find the groups of people who will be your “Innovators” and “Early Adopters” and focus your early efforts on those groups.

The channels hypothesis should differentiate between physical, web, and mobile channels. An important consideration during the development of this brief is whether your product fits the channel. At this stage it is important to pick the channel with the most potential and to focus on gaining customers and cultivating sales through that channel to the near exclusion of every other alternative. With very few exceptions, since you are still testing your hypotheses, developing your business model, and determining what product is best positioned to solve your customers problems avoid the temptation to launch via multiple channels.

I was having lunch with the founder of an early-stage startup on Thursday, last week. She was giving me an update – the struggle to raise seed capital from investors, what she’s learning about building a team, and so on. We got to talking about how she would distribute her startup’s MVP. Her initial plan would have cost her a lot of money – capital she can’t afford to spend and a significant portion of the round she’s trying to raise, because she was thinking about traditional channels – the most obvious route to the customers she thinks she needs to get to. I pointed out that without further testing, she was taking a very risky gamble whose most likely outcomes do not favor her startup. Instead I suggested she spend the least amount of money she can to test non-traditional channels, and maximize the yield from those avenues before she does anything big and splashy through traditional channels. In this example, her hypothesis was poorly formed because it failed to take her startup’s capital constraints into full consideration.

The market-type and competitive hypothesis discusses the nature of the market into which your startup is entering and tries to anticipate the competitive landscape of the market that you will be attacking. You might consider it the second half of the value proposition hypothesis – your product solves a product for a group of customers, or a market. In broad terms a market already exists, or your startup is creating a completely new market where none existed previously. Your market entry strategy will depend on the market type you identify, as will your cost of entry into that market. In an existing market, your startup will have to position itself against the competition in a manner that ensures it can win given the basis upon which you have chosen to compete.

The customer relationships hypothesis describes how you get, keep and grow your customers. It is similar to the LBGUPS model, which I discussed in What Is Your Business Model? There’s no need to emphasize that this is an important hypothesis brief – without customers or users your startup will die a not premature death. How you get, grow and keep customers is very channel dependent. Your analysis should take that into account, and should also factor in related costs.

The key resources hypothesis discusses how you’ll obtain resources that are critical to your startup’s operations but that you do not have within the startup. These resources might be physical resources, financial capital, human capital, or intellectual property. In each case it is important to list the resource and an outline of how it will be secured to enable the startup run its operations. For example, servers can be rented in the cloud at a cost that is lower than managing your own server. Another example, a first-time founder who does not yet have a technical co-founder might partner with an outsourced software development shop to build and MVP with which to run some experiments. Often the devshop will remain as a service provider till the startup becomes self-sufficient enough to bring that work in-house. I have a bias for startups that control their intellectual property.

The key-partners hypothesis describes the partners that are essential to enabling your startup to succeed. It also describes the value-exchange that keeps the partnership alive. For example, a startup might have all its development and design work done by a software engineering consulting firm established for that specific purpose. In this case the startup pays the software engineer money in exchange for software engineering related to its product. Key-partner relationships might take the form of a strategic alliance, a joint new business development effort, a key supplier relationship, or co-opetition. Certain of these are more common early in the startup lifecycle, and others are more common late in the startup lifecycle. It is important to realize that a partner should not have control over anything that is critical to your startup’s ability to exist and do business.

The key activities hypothesis summarizes your startup team’s understanding and assumptions about where its energies should be most focused in order to create the most value for its customers. These are those activities that you feel cannot be left to one of your startup’s key partners. For example, a hardware startup might view design as a key activity, while assembly is left to a manufacturing partner in a low-cost manufacturing jurisdiction.

The revenue and pricing hypothesis brief is important because it ensures that the startup can extract value for itself and its investors. It asks a number of simple questions all related to revenue. The nature of the specific questions asked depends on the channel, but the essence of those questions remains the same. Together they should enable you determine if there’s a business worth pursuing along the path you have chosen for your startup.

The cost structure hypothesis brief forms the second half of the value extraction hypotheses – the first being the revenue and pricing hypothesis. Your startup’s cost structure must ensure that it can effectively deliver on the value proposition it has promised customers, and keep a portion of the revenues that the startup cultivates in the form of profits. Here too the questions asked will be relatively simple, and will reflect the channel and the market type. For example, a startup whose only channel is the web will have a lower cost structure than one with a physical channel.

Once your hypothesis briefs are complete, your entire startup team should discuss the output. Seek contradictions, conflicts and inconsistencies. The most important reason for developing these hypotheses is to ensure that the actions that your startup is taking have the highest probability of yielding success that is possible.

During my conversations with founders I listen carefully to determine if the startup has thought about these issues, or is thinking about them – it depends on the stage. I become concerned when I get the sense that important questions have been left unasked and unanswered.

Filed Under: Business Models, Customer Development, Entrepreneurship, Funding, How and Why, Innovation, Lean Startup, Long Read, Startups, Venture Capital Tagged With: Business Model Canvas, Business Models, Due Diligence, Early Stage Startups, Persuasion, Pitching, Venture Capital

What Is Your Business Model?

February 1, 2015 by Brian Laung Aoaeh

“It is a B2B2C business model.” is generally not what I am hoping to hear when I ask “What is your business model?” #BusinessModelGeneration

— Brian Laung Aoaeh (@brianlaungaoaeh) February 2, 2015

Invariably, when I am meeting the founder of a startup for the first time to discuss the possibility that KEC Ventures might invest in their startup I ask this question; “What is your business Model?” ((This post is an updated version of 4 separate posts authored by me, and first published at Tekedia between Sept. 18th, 2011 and Oct. 30th, 2011. Any similarities between this article and those posts is deliberate.))

Typically, the response I get is unsatisfactory. In this post I will discuss what I expect startup founders to include in their answer.

To ensure we are on the same page about what a startup is, I will begin with a definition; A startup is a temporary organization built to search for the solution to a problem, and in the process to find a repeatable, scalable and profitable business model that is designed for incredibly fast growth. The defining characteristic of a startup is that of experimentation – in order to have a chance of survival every startup has to be good at performing the experiments that are necessary for the discovery of a successful business model. ((I am paraphrasing Steve Blank and Bob Dorf, and the definition they provide in their book The Startup Owner’s Manual: The Step-by-Step Guide for Building a Great Company. I have modified their definition with an element from a discussion in which Paul Graham, founder of Y Combinator discusses the startups that Y Combinator supports.)) As an investor, I hope that each early stage startup in which I have made an investment matures into a company.

That leads to another question; What is a business model According to Michael Rappa; “In the most basic sense, a business model is the method of doing business by which a company can sustain itself – that is, generate revenue. The business model spells-out how a company makes money by specifying where it is positioned in the value chain.” Alex Osterwalder and Yves Pigneur say that; “A business model describes the rationale of how an organization creates, delivers and captures value.”

Other definitions exist, but taken together, these two statements provide us with enough basis for understanding what we should expect to learn from an adequately developed business model.

The business model should tell us how the entrepreneur expects to create value. To do this, the entrepreneur must decide what activities are core to the business the entrepreneur wishes to start. The question of how the entrepreneur creates value is also important because the answer to that question will often contribute to an understanding of the customer base that the business can expect to rely on.  This might seem trivial at its face. It is not. Understanding the customer base for which the business expects to create value is central to many other decisions that the business will have to make as it matures and approaches the launch of its product or service on the market.

Our definition of a business model raises a second question; how does the startup deliver value? I expect the startup founders I meet with to have started thinking about the process by which the value that the startup creates will be delivered to its target customers.

Given a reasonably well defined customer value proposition, our entrepreneur must now decide how that value is going to “be put in the hands” of the people that will become customers of the startup. The process of delivering the product or service that the entrepreneur has developed involves several distinct phases; Learn, Buy, Get, Use, Pay and Support. Employees of AT&T are believed to have developed the acronym LBGUPS (pronounced ELBEEGUPS) as a means of remembering the phases of this process as it relates to AT&T’s products. It is most effective to think of LBGUPS as a continuous, circular, and repetitive process.

  • Learn – when new customers first become aware of the product or service and acquire information and knowledge about how they may benefit from its use. Typically the startup accomplishes this through some sort of marketing, sales and public relations activity.
  • Buy – when customers decide to make a purchase after having learned about the new offering and communicate the desire to act on their decision to someone in a position to initiate the next phase of the process.
  • Get – when customers actually take delivery of the new product. This might happen in a physical or virtual store. It might involve shipping the product to the customer. If the customer is buying a service then this typically happens in person, or the service could be delivered remotely.
  • Use – when customers actually use or consume the product, or benefit from the service.
  • Pay – when customers pay for the product. This might happen simultaneously with buy. Sometimes there’s a time-lag between buy and pay – for example, in a fine dining restaurant a guest dines before before paying for the meal.
  • Support – when customers are provided with additional information that is aimed at resolving any problems they may have encountered during any of the preceding phases. Support should serve as an opportunity to encourage customers to remain, or to come back the next time they need to purchase a similar product or service. This is the role of technical support, customer service and customer relations. Done well, support should lead right back to learn.
How will your startup deliver value?
How will your startup deliver value?

Every startup must ask, and find answers to a number of questions while going through the process of delivering value to customers. What is the most effective channel for marketing, advertising, public relations, and sales? Where should we place our product or service in order to enable evaluation by potential customers as they make the buy decision? How do we put the product or service in a customer’s hands once that customer has made a purchase? What do we need to do to ensure that the customer uses our product after they have bought it and we have delivered it? How do we ensure that our customers are paying us, in full and on time? What is the mechanism by which we get paid by our customers? What problems might our customers encounter, and how should we help them resolve those problems in order to ensure that they come back to learn more about our other offerings and buy more from us in the future?

Often, each question that the startup seeks to answer will give rise to other questions that must be answered as well. This process requires trade-offs. It might be too costly to attempt to exploit every possible marketing channel and so the entrepreneur must choose only a few out of many. An over elaborate support structure might prove too expensive to maintain over the long term. Also, that might create bad-habits that the startup’s revenue structure has not been designed to carry without tipping the company into a position where it is experiencing difficulties, this touches on the issue of pricing.

Next, let’s examine the third question that our definition of a business model raises; How does the business capture value? A startup founder should be able to describe how the startup will create value, deliver that value to its customers and in-turn capture some value for itself and its investors.

Michael Rappa’s statement about business models emphasizes the importance of revenue streams. Revenues comprise the cash that a startup’s customers exchange for the product or service that the startup provides. In the process of this exchange, a transfer of ownership or usage rights takes place – in an outright sale, the customer assumes ownership. In a lease, licensing or rental agreement ownership remains with the seller, but the buyer is granted usage rights for a contractually agreed period. Revenue streams can be one-off or recurring.

I have no argument against the suggestion that startups should focus keenly on developing and growing revenue streams. However, my experience has taught me that startups must focus equal attention on profit, and on the related issue of costs.

Why?

In order to reach self-sustaining growth, a maturing start-up must quickly put itself in a position to invest in areas that are critical to its ability to create and deliver value to its customers – it has to invest in those assets that make its revenue streams possible. Costs represent the price the company pays to obtain the resources it must bring together in order to create and deliver value to its customers. A business earns a profit when its total revenues exceed its total costs. A successful business model should lead to an outcome in which customers perceive the entrepreneur as adding value. They demonstrate this by paying more for the product than it cost the entrepreneur to produce it – leading to a profit for the entrepreneur.

Earning a profit makes it possible for the startup to invest in the assets that are most critical to its ability to create and deliver value. Controlling and managing costs effectively while growing revenues will ensure that the startup maximizes its profit.

How will your startup capture value? You should be able to describe how your startup will grow revenues, manage costs, invest for growth, and maximize profits. This is not a static process. It should be dynamic and ongoing. Your startup will not be operating in a stagnant market. Therefore, your product and pricing strategies will need to adapt from time to time in response to competition as well as other market forces.

Also, depending on the stage at which KEC Ventures is considering an investment, it might not yet be clear which revenue model will work best for the startup. A seed stage startup might not yet have settled on a revenue model. A startup to which we are speaking about a series A financing should have some well formulated ideas about its revenue model, and in fact should be running some experiments to validate its hypotheses. An existing startup in our portfolio in which we are contemplating making a follow-on series B investment should most certainly have settled on a revenue model, and be in the process of scaling the business model in a repeatable, and profitable way.

I will end this discussion with some related observations;

First; It is often tempting to assume that one startup can simply copy or imitate the business model of one of its competitors. That may work in the short-term. In my opinion that is not an approach that confers a lasting competitive edge, certainly not in fledgling markets and industries, and often not in mature industries either. An important aspect of business model development is the deliberate and conscious selection among a number of alternative choices regarding product design, customer development, revenue models and cost structure; the wholesale copying of a business model simply because it has worked for another startup suggests the entrepreneur has abdicated responsibility for understanding the dynamics at play in each of those critical areas. That is a recipe for a failed startup adventure in which I am not eager participate.

While I oppose the wholesale copying of a business model that someone else has developed, I am a strong proponent of learning from the experience of other startups – the successes and the failures. There is real value in knowing what has ensured that some startups thrive. There is even more value in knowing what has proved fatal to others.

Second; It might take several attempts before a startup discovers the business model that works best – reflecting an industry in its earliest stage of development. Even then, the business model must evolve with the passage of time. Technology changes. Labor markets shift. National economies expand and contract. Opportunities not present in the past will present themselves in the future. Competitive threats that did not exist at the time the startup was formed appear as soon as other individuals notice a new chance to earn economic profits. Regulations emerge as a result of changes in political mood. A business model that does not adapt and evolve reflects a startup founder who does not grasp the nature, extent and complexity of the numerous challenges that lie ahead. Such founders, and the startups they are building, are bound to fail.

Third; The business model is not the business plan. Your business plan should certainly discuss your business model, yet the two are distinct and different. The business model is a framework within which the startup’s activities occur. The business plan is a document whose main purpose is to serve as a record of the startup’s goals, the reasons why those goals make sense and can be achieved, the manner in which the goals will be accomplished and the timeline within which the startup expects to implement its plan – presumably the plan is to become profitable as soon as possible within the tenets of the business model.

I am a fan of The Business Model Canvas. In fact, I use it each time I sit down to study a startup in which I believe KEC Ventures should invest. Using it ensures that I understand the business model, that I understand the risks that might lie ahead, and that I am comfortable that the startup indeed has found an opportunity to create, deliver, and capture value.

Filed Under: Business Models, Entrepreneurship, How and Why, Innovation, Long Read, Pitching, Uncategorized, Venture Capital Tagged With: Business Model Canvas, Business Models, Due Diligence, Early Stage Startups, Investor meeting, Long Read, Pitching, Value Creation, Venture Capital

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