Creating a Model for Successful Generation of New Ventures (Part Two)
(This is Part Two of my multi-part series on models for new venture generation. You can find Part One here.)
After they have begun to address the fundamental questions that plague a new business, most startup founders create a pitch deck. Many use some version of the 10 slide pitch made popular by Guy Kawasaki in his “Art of the Start” or any one of a dozen variations on this model (from TechStars to Y combinator to 500 Startups). If you’ve had any experience with startups, you’ve seen this model before. (Some of us have seen thousands of examples.) Each slide in the pitch deck addresses itself to some variation of these elements, usually in an order that goes something like this: problem, solution, value proposition, market opportunity, target market segment, unfair advantage, revenue model, competitive assessment, team, progress to date, capital sources/uses.
The pitch deck became the dominant model — replacing the business plan – because it mapped well to what investors most needed and the approach they take to both opportunity and risk — including the investor due diligence process. (I’ve written elsewhere about the Founder’s due diligence process — which is a different thing altogether.) If a founder or group of co-founders hasn’t thought through these things and developed answers to key questions, the red flags go up pretty quickly. So founders tend to think that their job, in the early stages of venture formation, is the development of a pitch deck and supporting materials that will answer key questions about opportunity and risk to the satisfaction of would-be investors.
This isn’t a crazy approach if the initial “end” of the venture formation game is about securing investor capital. But what happens before this? How do startup founders identify suitable opportunities? Where do you start? How do you pick opportunities? What about market selection? How should you approach product/service/solution? Is there a better way to identify founding team members?
Where should a startup founder begin? Is there a proven, efficient and effective model for the creation of a new venture? Let’s look at each of the core elements that matter to entrepreneurs and investors alike.
If the new venture does not work for the founder, it does not work at all. Start with founder / opportunity fit. What matters to you? What matters to the market? Does your product or service live in the overlapping area of the Venn diagram that describes your interests and the market’s interests? If not, start something else. Don’t waste your time, your money or your life on anything that would fail to hold your enthusiastic attention for the next 5 years. To know whether this future opportunity is the right one for you, you actually need to know a lot about yourself. Too many entrepreneurs start with an idea. The right place to start is with you. Who are you? What do you care about? To quote a friend, Andrew Hyde: “What gets you angry? What pisses you off?”
This is about what you are building and why. You express this vision in a way that matters to those within your venture (founding team, employees, contractors) and to those who are not (investors, customers, partners). If you can’t do this yet, you aren’t ready to start a company. You will need to share this vision thousands of times. Thousands.
This is a combination of the market’s problem and your solution. Problems and opportunities are two very different ways of seeing and thinking about the same thing. If you fail to see the opportunity presented by a particular problem, its probably not your problem (or your company’s problem) to solve. If you fail to see the problem (often a cluster of problems) that represents the path to a specific opportunity, you will almost surely fail to reach the success that is your goal.
This is your product or service offering, your value proposition, your unfair advantage, your business and revenue model. This is almost always something about which you care deeply. If you aren’t passionate about what you are offering and committed to making it real – even before you’ve started to build it – go back to the drawing board.
This is where you discover the need for your product or service, those who are willing to purchase your product or service for themselves or for others. (Every one of your Google searches, for example, is paid for through companies that wish to advertise or promote a message.) Consider starting with a market that is big enough to matter and small enough to own.
Barriers to entry came down well over a decade ago. You once needed to raise $1 million to start a venture-backed business. Then you could do the same thing for $250K. Then for $100K, $50K, or much less. This means that whatever your product, service, revenue model or unfair advantage, someone has probably been working to develop something similar. You know of 3 or 4 viable competitors? There are probably 300. Or more. So the question you need to be able to answer (for yourself and your future investors) is this one: how will you win? (No, this is not about focusing on your competition; it is much more about understanding how and why you are different in a way that matters to you and to the market.)
This is someone who needs what you intend to provide. And they either need it so badly they are willing to pay for it, or this customer is so important to someone else that this “someone else” is willing to pay you to provide the product/service. Steve Blank has created an entire industry focused on helping early stage startups understand that they haven’t yet figured out who the customer is. Please understand that this is not about doing surveys to figure out what you should build. Some of the biggest businesses in the world offer a product that no customer would have asked for – because they didn’t have enough understanding about what was possible to think they might need or want the product. (Facebook, Twitter, Instagram, and Apple’s iPod, iPad and iPhone are among a dozen or so products that come to mind.)
What has to go right for your venture to succeed? And how many things can go wrong along the way? What is your market risk? Your technology risk? Your risk related to team and talent? What can you do from the beginning to identify, mitigate and even eliminate the biggest risks to the business? Experienced founders understand that business value is built in two dimensions, simultaneously: (1) by identifying the best opportunities and making them real; and (2) by identifying and eliminating/mitigating risk. Business risks are the dragons you must train yourself to watch for and to slay.
This can be your Mom or Dad. Your well-appointed friends. An angel investor or two. An established early-stage investor — e.g., a venture firm. A company that badly needs the thing you are planning to build and does not mind that you’ll probably sell to their competitors as well. (If they do mind, and you create their solution, you’ve become their custom development shop; good luck with that.) Can you bootstrap? Should you bootstrap? Is the market “winner take all?” If it is, you’re probably going to need some fuel and an engine that responds when you put your foot down on the accelerator.
If you’ve never done this before, you may find it difficult to understand that “success” means very different things to different people. If you’re a serial entrepreneur, you already know something about this. Take some time to think about this. Now. What does “success” actually look like for this new venture of yours? The answer you give at this point in your life may be very different than the answer you’d have given for your first rodeo. It might also be very different than the answer your co-founder would give. And neither of your answers may be consistent with the answers given by members of your senior team, your employees, investors, partners and customers.
Here’s a suggestion: think about what success would mean for each of the relevant stakeholders: you, co-founders, employees, investors, partners, customers. Fast forward five or ten years. What would each stakeholder have had to give to create this success? And what value would they have gained?
Let me conclude by introducing the notion of “telos” – the Greek word for objective, goal or end. Does it matter if you start with the end in mind? If a founder or group of co-founders were building a venture that was designed from the start to deliver value over time to each of its key stakeholders, what would they need to do differently? What could they be doing from the very beginning to ensure that at some point in the future — e.g., 5–10 years — every one of their stakeholders received more value from the relationship than the value they gave? If you know your stakeholders would be happy to take that deal every single time, you know you’ve built a sustainable model.
This concludes Part Two in the multipart series “Creating a Model for Successful Venture Generation. Again, you can find Part One in the series here. Next up: a look at the things some founders do and the tools they use as they begin to think about their next venture.
From October 16–26, 2017, 10.10.10 will host its Cities program in Denver. This 10.10.10 Cities program will focus on “wicked problems” 2 key areas: water and infrastructure. If you’d like to be involved in some way, this is the place to sign up. We are particularly interested in participation by those in other cities who may wish to bring a 10.10.10 Cities program to their city in 2018 or 2019.
You should know that we invite just 10 prospective CEOs to participate in each program. (You’ll find our most recent cohort of prospective CEOs here.) If you are a successful serial entrepreneur and plan to start a new venture, you may request an invitation here by filling out the form. We also partner with Validators (organizations and institutions with deep domain knowledge) and Ninjas (individuals with the specific skills — finance, marketing, design, product management, data analysis, etc.) to support our prospective CEOs during the program.