Derisking Your Business Model Dream It July 2008 V2.1

De-Risking Your Business Model: A Brief “How To” Guide v2.1 July 2008 Steve Barsh www.stevebarsh.com  blog.stevebarsh.com steve@barsh.com  +1.215.888.2101  twitter: sbarsh

Premises
Many entrepreneurs are “pitching prematurely”
Seem to be looking for “validation” by convincing someone to make an investment
Should be spending more time “de-risking” the idea “as much as possible” before pitching
Sometimes entrepreneurs have trouble
Identifying risks
Coming up with “out of box” ideas on how to de-risk the risks
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Trying to Raise Capital Too Early “Premature Pitching”
Too early?
Too many assumptions
Chasing money rather than “ de-risking ”
Wasting time, energy & focus
Business is probably based on 3 – 7 key assumptions
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Stop Waving, Start Pointing! AKA “Show me, don’t tell me.”
Stop waving your hands
Start showing data
Market size
Demand
Pricing sensitivity
How compelling the value proposition / positioning is
How strong the differentiators are
Etc.
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Risks?
Risk
Something in the future that you…
Think
Predict
Estimate
Forecast
Hope
… is going to happen, and you could be wrong
“ Being wrong” could have very negative consequences
One large class of risks are numbers where you try to
Assert a fact
But, it’s not a fact, it’s an assumption
Assumptions = risks
NB: Risks can change over time. Keep on monitoring. SUV’s?
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Most investors are risk averse, and you should try to be too stevebarsh.com
You want to take
Smart
Calculated
Risks

Entrepreneur’s “Risk Dilemma”
Don’t recognize the
Risks taken
Assumptions being made
Don’t think “outside the box” on how to “de-risk”
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How do you identify a risk?
Many of your “documents” are littered with risks and assumptions
Look at your
Plans
Presentations
Pitches
Financial models
Forecasts
Estimates
Things with numbers or graphs
Underline / circle anything that you are not 100% sure of
What did you learn in your earliest science classes?
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Experiment / Test! stevebarsh.com
What is the hypothesis you are trying to prove?
What is a valid experiment to prove or disprove your hypothesis?
If you can’t do a direct experiment, is there a valid “ proxy ” you can use (So, it’s just like ____) – and be ready to defend your proxy of how “we are just like…”

Now that I have identified my risks, what do you do about it?
De-risk!
De-risk?
The art, science, and skill of trying to figure out clever ways, experiments, and proxies to reduce the risk of what you are doing
Goal
Be “capital efficient” (in other words, try to spend little cash)
Think “outside the box” e.g.,
Set up “experiments” to lower risk and prove (or disprove!) your hypotheses
Buy vs build
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Risk Types & De-Risking Approaches - 1 stevebarsh.com Management / team VC’s: Team! Team! Team!
Demonstrate through your actions that you are
Thoughtful
Calculating
Creative in problem solving
Coachable
Willing to “build a team” to solve a problem
Willing to ask for help if outside your comfort area
Willing to learn
Can “bob and weave”
Able to deliver product
Able to sell, sell, sell!
Willing to take input
Flexible
Focused
Not defensive
Able to execute
Concerned with team DNA
A person with a PMA

Risk Types & De-Risking Approaches - 2 stevebarsh.com Product development
Get something out there that includes at least some of your differentiators ASAP to get real market feedback
Confidence-based estimating (CBE)
Competition
Know & monitor the competitive landscape
Talk to past “failures”
Do good SWOT’s (QuickMBA.com)
For your competitors and market space
Track on Google Alerts (N|B|W|V|G)
Track on Twitter/Summize (RSS)
Google “Advanced Search” on FileType XLS, PPT, DOC and include the word “confidential”
Search on slideshare.net
Know your answer for what you will do when competitors emerge (how will you respond?)

Risk Types & De-Risking Approaches - 3 stevebarsh.com Market size
Understand your total addressable market (and geographic region)
Carefully define your market segment (or segmentation)
Cite your data!
Calculate bottom up, not top down (e.g, “if only 1% of $xxx million, we are sitting on a $___ opportunity)
Is the market “big enough” to warrant VC investment?
Customer / market demand
Test on Google Adwords
Sell / talk to potential customers EARLY!
CHEAT! -- LinkedIn. Your University!
Find out their REAL problems
Find out how important YOUR problem is – URGENCY!
How are they addressing the “problem” today?
Learn the definition of a “qualified lead”
Ask them what they are willing to pay
Confirm your features, benefits, and differentiation are aligned with what will motivate them to buy or use
Figure out the OBSTACLES TO SALE (so if you had it today, would they buy it immediately and start using it? How would that work? CBE it!)
BTW, potential funding source?

Risk Types & De-Risking Approaches - 4 stevebarsh.com Pricing
Market comps
Test on Google Adwords
Sales cycle
Break out the “step by step” and go through it bottom up. “Walk me through that.”
Sell / talk to potential customers EARLY!
Learn how long sales will take
Figure out what process may work
Figure out how much a sale will cost
Capital plan
Think through your first few rounds, valuation, and what drives your valuation. Bake that into your plans and talk about it.
Careful about “pricing yourself out” by setting too high a valuation too early!
Are you “VC fundable?” Do you hit their “magic ratios?”

Risk Types & De-Risking Approaches - 5 stevebarsh.com Exit value
Think through – what will drive your company’s value?
Revenue $?
Net $?
Users?
Customers?
Uniques?
Engagement?
Slope of the curve?
Comps, and why they serve as a proxy for you
Public company comps (if applicable)
Execution
Plans / goals / milestones
Show previous
Think through “alignment”
Show your real grade (hey, MS is late!)
Show how you are getting better

Risk Types & De-Risking Approaches - 6 stevebarsh.com Marketing
Can you get to your market efficiently?
Test on Adwords
Find out if / how your positioning works
Tune your positioning
Find out if your differentiation is really compelling
Find out your conversion rates
Figure out your costs
If “crowd sourcing”, think Amazon Mechanical Turk.
“ Survey Monkey”
What will be your cost of customer acquisition?
What will your customer churn be like? How do you know?
Other thoughts
Blogs
PR (key messages, outlets, etc.)
Tradeshows
Advertisements (online | offline) – did you test?

Release Early, Release Often
Get something in your users / target customers hands early
Make sure sales and marketing are able to get quick feedback to dev team (be a marketing-driven product development company!)
Use early prototypes / releases in lieu of market research
Aim for “good enough” software
Stable
Limited feature set
Enough features to show your differentiators
Needs to be a “whole product” but does not need all of the bells and whistles
Make sure that your target user/customers' expectations are accurately set
Think about a rentacoder.com approach
Track metrics!?
stevebarsh.com

Collect Metrics As detailed and early as possible
What will you and investors find of most interest?
E.g.,
New members / subscribers this week
Number of potential customers you are speaking with
Sales calls per week and number of demos
Unique visitors / traffic stats
Time on site / level of engagement?
Revenue!
stevebarsh.com

Estimates = Expectations
To get more accurate estimates, try confidence-based estimating (CBE)
How to
Take any estimate
Break down the tasks into small chunks
Estimate each chunk “in the small” (not the aggregate)
Ask “what’s your/my level of confidence in the number on a scale of 0 – 100%?”
Try to get yourself to 95%
Constantly ask “what assumptions am I making?”
BTW, assumptions = risks
stevebarsh.com

Risk, VC’s, and Pitching
Don’t wave your hands, point!
Don’t be a “know it all”
Have humility
Show what you know, and that you have tried to de-risk
Ask VC’s for risks that they see
Ask the VC: What would I need to do / show you to get you to invest?
stevebarsh.com

DreamIt De-Risking Advantage
Brainstorm with other teams and mentors (who are un-biased and it’s not their “baby”)
Have other ask / challenge you…
Hey, wait, how do you really know that to be true ?
What are some out-of-box ways that you COULD find out if that’s true?
stevebarsh.com

Premises
Many entrepreneurs are “pitching prematurely”
Seem to be looking for “validation” by convincing someone to make an investment
Should be spending more time “de-risking” the idea “as much as possible” before pitching
Sometimes entrepreneurs have trouble
Identifying risks
Coming up with “out of box” ideas on how to de-risk the risks
stevebarsh.com

De-Risking Your Business Model: A Brief “How To” Guide v2.1 July 2008 Steve Barsh www.stevebarsh.com  blog.stevebarsh.com steve@barsh.com  +1.215.888.2101  twitter: sbarsh

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Derisking Your Business Model Dream It July 2008 V2.1

by Steve Barsh on Jul 25, 2008

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