2. Ingredients
► Product / Service
► Market
► Factor Markets
► Team
► Capital
► Business Model
► Personal Fit
► Risk Analysis
► Business Plan
3. Product – just a place to start
► The world will NOT beat a path to the door of the inventor of the
better mousetrap
► Idea itself does not have value
► Contrary to popular belief, entrepreneurial ideas are rarely “stolen”
(All the other entrepreneurs think they are the smartest)
It is all about execution
► Even “being first” is over-rated – many successes were from “follower”
companies
IBM vs. Univac
Excel vs. Lotus 123 vs. Visi-Calc
Google vs. Yahoo vs. Alta Vista
iPod vs. MP3 players
iPhone vs. Nokia?
► It is one among many, many relevant variable factors
► An idea is “just a place to start”.
4. Product – Look for the
Discontinuities
► What are some examples
Microprocessors
Telecom de-regulation
Internet
GPS
Berlin Wall
Cloud Computing
Mobile Computing (smart handsets)
► Discontinuities kill older companies that do not adapt,
create opportunities for many new ones
Rapidly changing market = opportunity
► What does Andy Grove’s famous saying “only the
paranoid survive” really Mean?
5. Product – Current discontinuities
► Technological?
Silicon speed doubles every 18 months
Storage capacity doubles every 12 months
Communication Bandwidth doubles every 6 months
Wireless revolution
Web 2.0
Internet is “Always On”
► Cloud Computing
► SaaS business models
► Other?
Sept 11 terrorist attack
Linux
Human Genome Sequencing
911 GPS cell phones
6. Product – key questions
► Radicalness of product
“Faster / Better / Cheaper”
Innovation
► Incremental change
Brave New World
► Change the way people do things; or
► Is it feasible?
How much time
What special skills
What is the risk
Similar project been done before?
► How much R, how much D
r & D
R&d
7. Product – key questions
► Barriers to Entry
IP
► Can the IP be protected
► Is it sufficiently difficult (not trivial)
► Is it too difficult?
Network Effect (i.e., e-Bay)
► This is VERY, VERY hard to do
Business Model (i.e. Dell vs. Compaq)
► This is even harder to do
Is it non-obvious
► Veritas created the segment “storage management software”
► Starting in 1999 there have been over 500 startup companies
in the “storage space”
8. Demand for Product – TALK TO
CUSTOMERS!!!!!!!
► Who?
Actual user
Actual buyer
All the points of influence
► Why?
What is the pain
How does this solve that pain
► Good signal is lots of homegrown custom solutions
Aspirin v. Vitamin?
► How Much?
What is the cost of not doing
What are their alternatives
9. Demand for Product – TALK TO
CUSTOMERS!!!!!!!
► Convince them
Make the pitch
Do the demo
Show all the cool features
► Then convince them not to buy
Explain what is missing
How expensive
How long to implement
Risks (including start up company risks)
Convince them they will not buy…
► Only when they argue you to the ground do you know you
MIGHT actually have something.
10. Market
► Market size
TAM / SAM
Where can you get market data?
► Market growth rate
► Market structure
Maturity
In state of flux or established
Market of big players, established products and
prices
► Vertical Markets
11. Market
► Product price and cost vs. market (gross
margin)
► Market willingness to work with startup
May not stay in business
May not be able to support the customer
► How many can you sell, how quickly?
► How big is the ultimate market?
►How big to be interesting as
venture backed deal?
► Can the company become a market leader?
12. Market – Competition
► Are you entering an existing market?
How will the leader’s react?
How quickly?
Why can’t they simply do the same and put you out of
business?
► Competitive Alliances?
► Are there other startups
How many?
How well financed, quality of team, etc?
Why do you believe that you are different – uniquely
qualified to win the competitive race?
►Why do each of your competitors believe the same
thing?
13. Market: Time to Build the Business
► Most High Value Businesses Take Time to Build, e.g. HP,
Veritas, Intel
► Does Market Allow Bootstrapping? E.g., Pure Software,
Microsoft, Integrated Systems/Wind River, etc.
► Interestingly, many of the most successful businesses
raised little capital (and some took a long time to ramp up)
Cisco = $2.5M
Sun = $4M
Veritas = $4M
VMware = $3M
Microsoft <$2M
Oracle < $2M
eBay < $1M
Google < $5M
etc. etc.
► Excessive capital raised can have disasterous results:
Webvan, Next, Momenta, maybe Better Place??
14. Bootstrapping: Conditions for
Success
►Market Segment is Small with No Gorillas
or Gorilla Has Little Traction
►Market Growth is Not Explosive
►You’ve Created a New Market
►Management Has Time to Learn the
Business
►Examples: Microsoft, Oracle, Wind River
15. Team
► Exec
Big company /entrepreneurial success
Domain experts
Worked together / Navigated difficult situation
Unquestioned Integrity / Intellectual honesty
Successful recruiting track record
Able to raise capital
► Technical
Technical leadership
Demonstrated ability to develop Products
► Other
No Trainees – “Done it before”
16. Capital
► How much time and money does it take to build
the product?
► How much time and money does it take to launch,
market and sell and support?
How much to “scale up” the business?
► Will the capital markets finance a project of this
size and duration?
► Is the investment commensurate with the market
opportunity?
► How do you stage the capitalization to get the
most money for the least cost? (topic for another
presentation)
17. Economic Model
► Business Model (steady state “operating stack”)
Revenue, COGS, COS, ongoing R&D, profit?
►For example, what is the fully loaded cost of one sales person,
and what is that person’s productivity?
►Cost of customer acquisition?
Are there examples of similar business models
What is the path to get to steady state?
► What is the ROI for the investors, entrepreneurs
► How long to cash flow break even
► What does gross margin tell about a company
► Room for error
19. Risks
►What are they?
This is usually a very, very long list – makes you
kind of wonder why anything ever gets started
►Why do you believe they can be overcome?
Response for each item listed above
20. The Business Plan
►Where all the issues come together
►Requires everything to be in synch
►Exec Summary -- Write it early and often!!!
►Financials
Five year Income Statement, Balance Sheet and
Cash Flow
First two years are “Bottoms Up”
Fifth year should be compared to industry proxy
for sanity
21. The Business Plan
►Capitalization Plan
How much to raise
On what milestones
Returns to each stage of investor
Not part of external plan
►FINANCIALS ARE THE CRUCIBLE
Forces you to make and validate all
assumptions
Forces you to Ask and Answer all the questions
22. The Business Plan
►It is the Process, not the Product that
counts
►All the issues in one place
►Generally, all the things you need to know
are “outside” (the building, campus, etc.)
You need to talk to people in the real world
►Once completed you KNOW what you are
doing
►Fully integrated into your mind
24. McAfee
► Product Idea
Industry in transition
► Market
Clear market need
No competitors
► Team
Unique entrepreneurial background
High degree of Authenticity to entrepreneur
► Capital
Bootstrapped on bulletin board business
► Business Model
Network effect
Pioneered free to get massive distribution
► Risk
Lots of visible risks
25. Veritas –the early idea
► Product Idea
Unix was transitioning to a commercial
environment, but was not “ready for prime time”.
Tolerant (predecessor company) had done a lot of
the work already -- We knew the issues and knew
the solutions.
This was “hard to do” but not impossible. Good
IP, good barriers to entry
► Customer Market
We knew the customers
ATT agreement gave us “special” access to the
market
26. Veritas –the early idea
► Team
We had the team of engineers to implement
Completed the management team
► Capital
We had some money from wind-down of old
business
“some” investor commitment
Almost impossible to raise new money for a
“restart”.
► Competition
Competition at system OEMs would be “make vs.
buy”
Very little to no merchant market competition
27. Veritas –the early idea
► Economic Model
OEM model like ATT (Microsoft) – source license
plus per-copy royalty
Limited account upside – for more than $2 - $3
million per year, OEM could design us out.
Highly profitable business with extremely high
gross margin
► Risk Analysis
Reliability of ATT as partner
Software OEM model not proven
Limited overall upside for company
28. Apple – iPod
► Create a network effect marketplace for music, sell MP3 players
► Music - old
Controlled by “labels”
Sold on hard media (records / CDs)
Distributed via retail
► Music - new
Replace distribution channel to internet
Break the “Album” packaging – sell by the song
Create high concept design player
► Business model = network effect marketplace
Create a VERY reasonable / profitable deal for the publishers to distribute
electronically
Apple has all the music
So all the buyers go there
So all the publishers go there
And it only works on an iPod – Apple sells a lot of iPods
► It wasn’t about the iPod – it was all about iTunes!!
► So whatever happened to Tower Records?
► So whatever happened to Zune?
29. Apple - iPhone
► It is the iPod all over again
► Instead of the publishers it is the carriers
ATT agreed to cede great control over content over the network to get the
iphone (everyone else turned them down…)
► Business model = network effect marketplace
Create a VERY reasonable / profitable deal for the app developer (70% for
the developer)
Apple has all the apps
So the app users (smart phone customers) go there
So all the app developers go there
And it only works on an iPhone – so Apple sells a lot of iPhones
► It wasn’t about the iPhone – it was all about the App
Store!!
► So whatever happened to Microsoft Windows Mobile
► So whatever happened to Nokia and Ericson?
30. WebVan
► Product Idea
Disintermediate the supermarket supply chain
Old
► Producer to warehouse
► Pack and ship to supermarket
► Supermarket every couple of miles – land, building and ~100
employees
► Unpack and stock shelves
► Customer drives in to pick up goods…
New
► Producer to warehouse
► Pick and pack (high tech)
► Deliver directly to consumer
Trucks and drivers instead of buildings and clerks
31. WebVan
► Market
Established very large market
► Team
World class
► Capital
“infinite” capital available
► Economic Model
Unproven model
Not enough customer density for efficient routes
► Increased delivery charges
► Reduced produce quality
Rolled out in five cities before proven in one
► Consumed their cash
► Capital markets closed down
► Risk
Much more than they thought…
32. Microsoft
► Product Idea
Home computer “revolution”
BASIC compiler for “Altair 8080”
Six years later, still the same old business…
► Market
IBM changed market from hobbyist to business
► Team
Experienced in technology, but
Inexperienced in business
► Capital
Very humble start up – no real capital needed
But also none available
► Economic Model
Pioneered OEM OS model – created a monopoly
Made the rules
Not First Mover in Any Market
► Risk
It was really a lucky break – no one home at Digital Research
► But then they knew how to leverage the business!!!!
33. Opportunity Check List
► Product, Market and Industry
Demand
Market size
Growth Rate
Market Capacity
Attainable market share
Cost structure
► Factor Markets
Resources required
Market structure
► Economics
Profit potential
Time to breakeven
ROI potential
Capital requirements
IRR
Free Cash Flow
Gross Margins
Time to Break-Even
► Competitive Advantage
Variable / fixed cost
Degree of control
Entry barriers
Protectable IP
Positional Advantage
► Personal
Personal goals
Personal fit
Upside vs downside
Opportunity Cost
Stress Tolerance
► Sustainable Advantage
► Opportunities for Extension
► Management Team
► Harvest