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 stevebarsh.com

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

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 stevebarsh.com

Too early?

Too many assumptions

Chasing money rather than “ de-risking ”

Wasting time, energy & focus

Business is probably based on 3 – 7 key assumptions

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. stevebarsh.com

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.

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? stevebarsh.com

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?

Most investors are risk averse, and you should try to be too stevebarsh.com You want to take Smart Calculated Risks

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” stevebarsh.com

Don’t recognize the

Risks taken

Assumptions being made

Don’t think “outside the box” on how to “de-risk”

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? stevebarsh.com

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?

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…”

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 stevebarsh.com

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

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

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?)

Get something out there that includes at least some of your differentiators ASAP to get real market feedback

Confidence-based estimating (CBE)

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?

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?

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?”

Market comps

Test on Google Adwords

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

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

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)

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?

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

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!?

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

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!

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

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

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

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?

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

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?

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

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

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