Neal Cabage shares the key strategic lessons learned from his experience starting and running an online startup.

1. PREPARED FOR IDATE 2014
BY NEAL CABAGE
8 Insights for
Building a
Smarter Startup

2. INTRODUCTION
Author & Speaker
NEAL CABAGE
Digital Product Architect
• Product manager and entrepreneur.
• Founded ProductCamp.LA and PMA.LA.
• Built and sold two startups.
• Principal authored, The Smarter Startup.
neal@smarterstartup.org@NealCabage

3. THE SMARTER STARTUP
STRATEGY FOR STARTUPS
The Smarter Startup looks at why some
startups succeed while others fail. By taking a
more strategic approach to entrepreneurship,
founders can improve their own outcomes.
Written by Neal Cabage and Sonya Zhang, PhD,
and published by Pearsons/NewRiders.
INTRODUCTION
The Book

4. DEFINING THE PROBLEM
What’s the Key to Startup Success?
Diligence is the mother of good luck.
Benjamin Franklin
Okay, Hard Work ... But It’s Not the Full Story

5. Diligent Negligent
SuccessFailure
IS HARD WORK THE ANSWER?
Hard work alone is NOT a reliable
predictor of success. Hard working
people often fail and negligent people
sometimes succeed.
Conventional Wisdom
NOT ENTIRELY
DEFINING THE PROBLEM

6. DEFINING THE PROBLEM
What’s the Key to Startup Success?
8 Hard Lessons Learned From
Building an Online Dating Startup

7. Some People Are Lucky
F. Scott Fitzgerald
Author, Philosopher
Nothing is as obnoxious as
other people's luck.

8. Psychology of Luck
Gorillas In the Midst (D Simmons) and
Luck Factor (R Wiseman) detail Psychology
experiments that demonstrate Inattention
Blindness. Most people do not observe
opportunity when their mind is
occupied with another task.
SOME PEOPLE ARE LUCKY

9. TOO BUSY TO STEP BACK
TO SEE OPPORTUNITY
Inattention Blindness describes an unawareness of
broader patterns and opportunities because we are
too focused on solving another problem. A smarter
approach (and more effective) requires attention to
the big picture.
SOME PEOPLE ARE LUCKY
Opportunity Blindness

10. FOCUS ON CREATING VALUE
YOU’LL BE REWARDED
Focus on helping others and everything else
will fall into place. Find a need or desire that
is not yet sufficiently addressed, where the
customer is so passionate they’d happily pay
for a solution.
SOME PEOPLE ARE LUCKY
Focus on Helping People

11. Timing Is Everything
Anonymous
In the publishing business, you’re
either first, you’re fabulous,
or you’re f***’ed

12. Innovators
(2.5 %)
Early adopters
(13.5 %)
Early majority
(34 %)
Laggards
(16 %)
Late majority
(34 %)
Innovation Adoption Curve
Every market has a natural lifecycle driven by innovation and circumstance. Look for something that
wasn’t possible just a couple years ago & ramp up before the market capitulates (supply > demand).
TIMING CRITERIA
Innovation Life Cycle
The Golden Era The
Squeeze
ConsolidationEarly Movers
Capitulation
*

13. Opportunity to enter diminishes as the market matures. Geoff Moore suggests entering at “the
chasm” after demand is validated but still early enough to ramp before the market capitulates.
TIMING CRITERIA
Innovation Life Cycle
Innovators
(2.5 %)
Early adopters
(13.5 %)
Early majority
(34 %)
Laggards
(16 %)
Late majority
(34 %)
Chasm
Innovation Adoption Curve
New Entrant Opportunity
Ideal point to
enter a market
- Geoff Moore

14. Avoid Commoditization
It is difficult to imagine a more perfect
commodity than a byte of data. As information
technology’s power and ubiquity have grown,
it strategic importance has diminished.
Nicholas Carr
Harvard Business Review, 2003

15. What cost $5 million to accomplish
12 years ago can now be done with
less than $5,000. Mark Shuster
observed that commoditization and
availability of more building blocks
has radically reduced cost and risk of
developing a software product.
Commoditized
Technology
$5,000,000
$5,000
1999
2014
Hosting Commoditized
$500,0002005
Open Source Software
$50,0002009
Cloud Services (SaaS/PaaS)

16. As cost has fallen, so has the
competitive barrier to entry.
Competitive positioning is now the
key strategic issue, not
technological capability for most
consumer Internet products. How
do you cut through the noise?
Commonplace
Commodity
2000 2002 2004 2006 2008 2010 2012 2013
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#!$!!!$!!!"
%!!$!!!$!!!"
%#!$!!!$!!!"
&!!$!!!$!!!"
&#!$!!!$!!!"
!"#$%&'%()*+%)&
Data From NetCraft 2013 Web Server Survey
50x

17. Opportunity to enter diminishes as the market matures. Geoff Moore suggests entering at “the
chasm” after demand is validated but still early enough to ramp before the market capitulates.
TIMING CRITERIA
Innovation Life Cycle
Technology
Strategic
Advantage
Marke9ng
Strategic
Advantage

18. Be Weary of Network Effects
Robert Metcalfe
Professor, Engineer
Metcalfe’s Law
The value of a network is proportional
to the square of the number of
connected users of the system (n2).

19. THE VALUE OF A NETWORK
STRATEGY FOR STARTUPS
The value of any network increases exponentially as it
scales. A marketplace is a social network dedicated to
buying and selling and suffers/benefits from a similar
dynamic. Buyers are more likely to participate if more
sellers are present and vice versa. For this reason, it
is imperative to scale before your competitors do!
NETWORK EFFECTS
Social Network Effects

20. REACHING CRITICAL MASS
THE “CATCH 22”
Men won’t want come to the table
without a significant number of women.
Women will not join in without a
significant number of men. How do you
engage both parties in the beginning?
NETWORK EFFECTS
The Catch 22
Men
Women
required
required

21. Don’t Get Lost In the Noise
Shaffi Mather
I learnt the hard way about
positioning in business, about catering
to the right segments.
Social Entrepreneur

22. SEGMENTED FOCUS
AUTHENTIC CUSTOMER
LOW PRICE LEADERSHIP
VOLUME & COMMODITY
DIFFERENTIATED PRODUCT
DISRUPTIVE OR INNOVATIVE
HOW ARE YOU DIFFERENT?
WHAT MAKES YOU SPECIAL?
COMPETITIVE POSITIONING
3 Competitive Positions
In order to be a desirable signal that stands out against a background of noise, you need to have a
compelling value that your competitors do not. There are 3 viable positioning strategies.
Porter’s Generic Competitive Strategies

23. SEGMENTED FOCUS
CUSTOMER AUTHENTICITY
PRICE/VOLUME LEADER
VOLUME & COMMODITY
DIFFERENTIATED PRODUCT
DISRUPTIVE OR INNOVATIVE
COMPETITIVE POSITIONING
Industry Examples
Religion
Genera9on
Lifestyle?
Scien9fic
Matching
Gamifica9on
(So+Mo)
Extending
Social
Network
First
to
Reach
Cri9cal
Mass
Free
Leaders
Leaders
of
Free/Casual
Da9ng

24. Focus on Value Not Commodity
Howard Schultz
CEO, Starbucks
If I went to a group of consumers and
asked them if I should sell a $4 cup of
coffee, what would they have told me?

25. VALUE CREATION
Selling a Commodity
Why would you “waste money” buying a cup of coffee from Starbucks for $4
when a cup of the same commodity is available for a lot less?
Cup of
Coffee
Cup of
Coffee
Maxwell House Starbucks
Cost: $4.00Cost: $0.50

26. VALUE CREATION
Starbucks Use Cases
Starbucks has successfully created a complex of value around a simple commodity.
Comparing the coffee out of context misses the core of their value proposition.
Remote
Office
(desk/wifi)
Social
Des9na9on
(lounge/desert)
Take
a
Break
(convenience)
Morning
Caffeine
(coffee)
Morning
Caffeine
(coffee)
Maxwell House Starbucks
$0.50! $0.50! $1.00! $5.00! $5.00!

27. Starbucks repositioned their offering
by creating a value complex around
the coffee commodity. We’re paying
$4 for the entire experience, and the
commodity is only a component of
that. They innovated the value and
made it a more fulfilling experience.
Innovating
New Value
VALUE CREATION
Entertainment
(emotional desire)
Productivity
(logical need)
Innovation
(createnewvalue)
Monetization
(captureexistingvalue)
primary function
perceivedvalue
X"cheap
caffiene"
Starbucks
Lounge
(free Wifi, etc)
Desert &
Social
Destination

28. Entertainment
(emotional desire)
Productivity
(logical need)
Innovation
(createnewvalue)
Monetization
(captureexistingvalue)
primary function
perceivedvalue
Online Dating is inherently a
marketplace for efficient mate
sourcing. Eharmony innovated with
scientific personality matching.
HotOrNot turned it into entertainment.
Tinder introduced gamification and
applied it to a mobile user experience.
Dating Industry
Value Innovation
VALUE CREATION
XMatch.com
EHarmony
HotOrNot Tinder

29. Optimization Makes a Big Difference!
Avinash Kaushik
Google Evangelist
Never let your (ad) campaigns write
checks that your website cannot cash.

30. RISING CUSTOMER ACQUISITION COST
Online advertising has become much more
challenging. Google has made SEO difficult,
social doesn’t convert, and PPC costs are up,
reflecting cost margins of the largest
competitors. How can a startup compete?
OPTIMIZATION
The Problem
Cost of PPC CPC CAC
2005 $0.38 $10.18
2006 $0.32 $7.63
2007 $0.62 $6.41
2008 $0.71 $7.02
2008 $1.03 $12.60
2010 $1.24 $13.14
2011 $1.04 $19.74
2012 $0.84 $24.40

31. Fortunately you can increase profits to offset these costs. Increased competition now mandates
that you do. Use the correct ad channels, optimize your conversion funnel, and retain existing
customers and make significant improvements to your lifetime customer value.
OPTIMIZATION
The Solution
Traffic
Optimization
Conversion
Optimization
Customer
Retention
Original
Advertising
Plan
x x

32. RESULTS OF EFFORT
Increased ROAS by 500% and
went from -28% ROI, to a
healthy 67% ROI. We can now
buy meaningful traffic to grow
the business.
OPTIMIZATION
The Compounded Effect
Original
Traffic
(+100%)
Conversion
(+25%)
Reten8on
(+100%)
Traffic
quan9ty
100
200
200
200
CPC
$1.00
$0.50
$0.50
$0.50
Conversion
rate
2%
2%
2.50%
N/A
Adver9sing
cost
$100
$100
$100
$100
Units
sold
2
4
5
10
Unit
price
$50
$50
$50
$50
Unit
cost
$20
$20
$20
$20
Gross
revenue
(sold
*
price)
$100
$200
$250
$500
Total
cost
(units
+
ads)
($140)
($180)
($200)
($300)
Net
profit
($40)
$20
$50
$200
ROAS
(revenue/ad
spend)
100%
200%
250%
500%
ROI
([revenue-­‐costs]/ads)
-­‐28%
11%
25%
67%

33. Validate Before Building
Steve Blank
Entrepreneur, Author, Professor
No business plan survives first contact
with customers … Get out of the
building and talk to your customers.

34. Test Your Hypothesis
The Lean “build, learn, measure”
feedback look is fantastic for
optimizing a product concept, once a
customer or hypothesis is defined.
Lean Market Validation
Measure
Learn
Build
Ideas
Product
Data
LEAN METHODOLOGY

35. HYPOTHESIS VALIDATION
Test Early, Test Often
PROSPECT INTERVIEWS
Do They Like the Idea? Feedback?
TEST MARKETING
Do ‘Vaporware’ Campaigns Convert?
MINIMAL VIABLE PRODUCT
Users Engaging & Using Product?
Start testing an idea before there’s a product!
The goal is frequent feedback to minimize
sprints of off-target effort. Worse scenario is
building something huge that nobody wants.
VALIDATE YOUR HYPOTHESIS
BEFORE BUILDING ANYTHING!

36. Bringing It All Together …
James Carville
Political Strategist
It’s the economy STRATEGY, stupid!

37. x
Working hard is analogous to throwing a ball hard. The velocity is an important part of
reaching the target, but you cannot ignore other interactive forces like gravity and drag.
Gravity
(9ming)
Direc9on
(customer
need)
What Is the Whole Story?
Drag
(compe99on)
Velocity
(hard
work)
STARTUP STRATEGY

38. customer
product
compe99on
9ming
financial
team
The
6
Market
Dynamics
INTERACTIVE DYNAMICS
There are 6 fundamental dynamics that must be
considered when evaluating a startup
opportunity. Following a single maxim or a
hunch will give you biased insight about the
prospects of your idea. You need to objectively
consider all angles.
The 6 Startup Dynamics
STARTUP STRATEGY

39. The 18 Rules of Startup Strategy
Startup Heuristics
Finance
13. Low Sunk Costs
14. Working Capital Float
15. Economies of Scale
Timing
7. Recent Innovation Enabler
8. Demand Already Established
9. No Signs of Commoditization
Competition
10. Clear Market Inefficiency
11. Low Barriers to Entry
12. Differentiable Position
Team
16. Subject Matter Expertise
17. Functional Competence
18. Supplier Partnerships
Product
4. Customer Focused Solution
5. Low Barriers to Adoption
6. Clear Value Proposition
Customer
1. Unmet Need or Desire
2. Right Size Market or Segment
3. Reliable Access to Customers
© 2014 Cabage & Zhang
STARTUP STRATEGY

40. Evaluate your startup idea across the six
scorecard criteria and be mindful of the attributes
described in each one. Give yourself a letter
grade and then an overall score, for the idea. This
provides a structured approach to evaluating the
opportunity and helps to improve objectivity by
accounting for a full spectrum of important
criteria and reducing blind spots.
Evaluating a
Startup Idea
Startup Scorecard
Finance
• Low Capital Requirement
• Clear Profit Model
• Economies of Scale
Finance Score ______
Timing
• Recent Innovation Enabler
• Demand Already Established
• No Signs of Commoditization
Timing Score ______
Competition
• Clear Market Inefficiency
• Low Barriers to Entry
• Differentiable Position
Competition Score ______
Team
• Subject Matter Expertise
• Functional Competence
• Supplier Partnerships
Team Score ______
Product
• Customer Focused Solution
• Low Barriers to Adoption
• Clear Value Proposition
Product Score ______
Customer
• Unmet Need or Desire
• Right Size Market or Segment
• Reliable Customer Channels
Customer Score ______
Overall Score _______
SmarterStartup.org
Title _____________________________________________________________________
A A
B- B+
D A-
B
Real Estate IDX Integrated CRM

41. Startup Strategy Resources
We have posted in-depth articles,
diagrams, and downloadable references
and worksheets on our website.
Everything is free to use, so check it out.
www.SmarterStartup.org
STARTUP STRATEGY

42. CONCLUSION
Created By
NEAL CABAGE
Digital Product Architect
• Product manager and entrepreneur.
• Founded ProductCamp.LA and PMA.LA.
• Built and sold two startups.
• Co-author, The Smarter Startup.
neal@smarterstartup.org@NealCabage