Intro to value propositions for entrepreneurs


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What is your business'value proposition - what investors want to know.

This is a primer for entrepreneurs and, frankly, intrapreneurs on working out a solid value proposition and business model. Follow this structure for writing elevator pitches, business plans, or explaining what the heck you are doing to your grandma.

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Intro to value propositions for entrepreneurs

  1. WHAT IS YOUR BUSINESS’ VALUE PROPOSITION? what investors want to know
  2. if you are an entrepreneur, you’ve almost certainly heard the term, “value proposition”
  3. but what does it actually mean?
  4. take a moment to define it for yourself
  5. come on….don’t cheat…define it before you skip to the next slide!
  6. if you’re like most entrepreneurs, you probably came up with something along the lines of…
  7. a value proposition is, “the value your product/service has for the customer”
  8. this is a perfectly fine answer
  9. it would get you an “A” in most marketing classes
  10. however
  11. that definition is not sufficient
  12. actually, it is only 1/5 of what an entrepreneur needs to know
  13. instead
  14. think of a value proposition as built from 5 parts
  15. 1. valued
  16. 2. valuable
  17. 3. valunique
  18. 4. value chain
  19. 5. valuation
  20. let’s review them all….
  21. PART ONE a value proposition is valued
  22. before anything else
  23. your product or service must solve a problem
  24. some people say, “address a customer pain point”
  25. the first mistake that many entrepreneurs make (especially the engineers)
  26. is to build a cool product because it can be built
  27. and only then, as an after thought, look for customers
  28. this is obviously backwards
  29. instead, every business must start by identifying a customer pain point
  30. how do you identify one?
  31. well you need to go and listen to customers in the wild (notice that I did not say ‘talk to customers’)
  32. a bunch of them (In B-School, we call this Market Research because we need to sound fancy. It’s not. Grab any book on surveys, focus groups, or anything that IDEO puts out for free on the web about Design Thinking)
  33. and ask them why, why, why, why, why (5 times if you are from 6-sigma)
  34. and then you need to watch them
  35. so that you understand what, why, when, and how they buy
  36. but
  37. not all customer pain points are born equal
  38. you’ll be looking for between 1-4 interrelated pain points that create a sense of motivation & urgency
  39. in the mind of the customer (If you are a nerd, check out Maslow’s Hierarchy of Needs on wikipedia)
  40. pains that are so dire that the need to solve them will provide enough motivation that the customers will get off their fat butts
  41. and search for a solution
  42. and then fork over money (that they earned in that job they totally hate)
  43. remember
  44. your biggest competitor is not another firm
  45. it is your customer’s biological and psychological preference to do nothing
  46. your biggest competitor is the status-quo
  47. if you do not find the right set of pain points
  48. you’ve got no hope of motivating the customer to buy (of course, there is always brainwashing, blackmail, monopolies, or violent force . Yay military-industrial complex!)
  49. in other words, you need a product that will be valued by a customer
  50. PART TWO a value proposition is valuable
  51. unfortunately, we’re running a business here
  52. so, while solving one person’s pain points is noble
  53. it does not make for a sustainable business (Well unless the 1 customer is the US government….of course these days, their accounts payable is sketchy)
  54. what you need to do is find a set of interrelated pain points
  55. that are shared by a large group of customers
  56. who, as a group
  57. have loads and loads of cash
  58. that needs to be in your pocket
  59. in fact, better yet
  60. that large group should be growing over time (faster than the economy at large)
  61. and the pain points should be something they’ll need solving for many years to come
  62. typically, when you are talking to someone else about the valuableness of your value proposition
  63. you’ll explain valuable in steps that narrow your valuableness down to executable chunks
  64. STEP ONE: TOTAL ADDRESSABLE MARKET “Our Total Addressable Market (everyone who could ever buy) is made up of 100 million people, and annually worth $10 billion”
  65. STEP TWO: TARGET SEGMENT “we’re targeting customers in SE Asia first. This segment includes 40 million customers and is annually worth $1 billion”
  66. STEP THREE: MARKET SHARE “in SE Asia, we’ll capture 5%, 15%, & 30% market share in years 1, 2, & 3. our expected revenue is $300 million by year 3 & 12 million customers using us” (including market growth over time)
  67. whatever the case, however you express it, a value proposition must show that you will be valuable over time
  68. PART THREE a value proposition makes you valunique (Give me some vocabulary latitude in the name of alliteration, please!)
  69. more often than not, entrepreneurs come to me and claim that they have no competitors
  70. my response is to immediately file their plan in the circular file cabinet* * AKA, “trash bin”
  71. it is a law of nature
  72. Within 48 hours of the discovery of money in any nook or cranny of a market place
  73. 18 competitors will emerge
  74. if no competitors emerge, it doesn’t mean you’re a visionary
  75. it means that there’s really no money there (the best way to identify competitors is to simply ask potential customers during market research who they think your competitors are)
  76. so your fundamental assumption should be that you’ll need to ready your self for battle
  77. and the battle will be fought on two fronts
  78. first, the entrenched incumbents will put up entry barriers to try to stop you from entering
  79. they’ll do that with intellectual property, lock- ins at one, more, or all of the points in the value chain, government or industry partnerships, etc
  80. so you’ll need a battle plan as to how you’ll get past the barriers
  81. second, once you get some traction, followers will try to pull you down from behind
  82. and that will happen from now until the end of time
  83. so you’ll need to put up your own entry barriers to slow them down
  84. you’ll do that with intellectual property, lock- ins at one, more, or all of the points in the value chain, government or industry partnerships, etc
  85. finally, you’ll need to differentiate yourself from the competitors relative to the customer pain points
  86. and then defend that differentiation sustainably
  87. to do this, you’ll need to design a solution that is different from the other options
  88. but
  89. it is not just about being different, or even being better
  90. you must be different/better vis-à-vis the customer pain points that are valued and valuable
  91. it is the customer pain points that determine your product/service features
  92. and not your engineers, or their technical prowess
  93. the most basic & urgent of those pain points define your Minimum Viable Product (MVP)
  94. and the rest of the pain points create the milestones in your R&D plan.
  95. whatever the case, at the end of the day, you’ll need to be sustainably, and defensibly valunique
  96. PART FOUR a value proposition must deliver through your value chain
  97. of course, all of this is just a bunch of hot air
  98. until you execute
  99. so a value proposition needs to be executable
  100. you need to know what capabilities are required to deliver the plan
  101. and how you’ll organize and manage them
  102. porter would call these core competencies
  103. some refer to them as your value chain
  104. it starts with the supply of raw materials into the system
  105. goes through manufacturing where you transform supply into product
  106. outputs through distribution where you sell and deliver finished goods
  107. and ultimately ends with ongoing after-sales customer support
  108. linking all these together are logistics, technology, processes, and your people
  109. usually, all this is expressed as three separate, but linked, plans
  110. 1. The Organizational Plan (people & company) 2. The Marketing & Sales Plan 3. The Operations Plan
  111. at the end of the day, your value proposition must be supported by a value chain that is setup to deliver all your strategic promises
  112. PART FIVE a value proposition must address valuation
  113. finally, we need to talk cash
  114. a value proposition must address cash in three ways
  115. first, you’ll need money to make money
  116. bringing together all the other aspects of the value proposition costs money up front
  117. and you’ll need to convince an investor to give that to you
  118. for that, you’ll need to clearly explain how much you need (and why), and how much equity the investor will get in return
  119. second, you need a financial plan that allows you to build your firm
  120. so you’ll need to understand pro-forma P&L, Balance Sheet, Cash Flow Statement and accounts payable & receivable management
  121. third, you and any investors that help fund the build-out, will want to take cash out – ideally, lot’s more than you put in
  122. and that means you need a clear and achievable exit plan (IPO, Trade Sale, Liquidation)
  123. with a Return on Investment that justifies the original investment
  124. and one final note about valuation
  125. nobody goes to an investor
  126. and brags, “I’ve got a loss- making plan!!!!”
  127. every plan an investor sees claims ROI
  128. which means that it is not enough just to have a Net Present Value >0
  129. you actually need an NPV higher than all other NPV- making competing investments
  130. whatever the case, a good value proposition must include valuation
  131. PART SIX afterword
  132. so remember
  133. a good value proposition
  134. should cover
  135. valued valuable valunique value chain valuation
  136. SHARE THIS DECK & FOLLOW ME(please-oh-please-oh-please-oh-please) stay up to date with my future slideshare posts