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

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Trying to Raise Capital Too Early “Premature Pitching” <ul><li>Too early? </li></ul><ul><ul><li>Too many assumptions </li></ul></ul><ul><ul><li>Chasing money rather than “ de-risking ” </li></ul></ul><ul><li>Wasting time, energy & focus </li></ul><ul><li>Business is probably based on 3 – 7 key assumptions </li></ul>stevebarsh.com

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Stop Waving, Start Pointing! AKA “Show me, don’t tell me.” <ul><li>Stop waving your hands </li></ul><ul><li>Start showing data </li></ul><ul><ul><li>Market size </li></ul></ul><ul><ul><li>Demand </li></ul></ul><ul><ul><li>Pricing sensitivity </li></ul></ul><ul><ul><li>How compelling the value proposition / positioning is </li></ul></ul><ul><ul><li>How strong the differentiators are </li></ul></ul><ul><ul><li>Etc. </li></ul></ul>stevebarsh.com

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Risks? <ul><li>Risk </li></ul><ul><ul><li>Something in the future that you… </li></ul></ul><ul><ul><ul><li>Think </li></ul></ul></ul><ul><ul><ul><li>Predict </li></ul></ul></ul><ul><ul><ul><li>Estimate </li></ul></ul></ul><ul><ul><ul><li>Forecast </li></ul></ul></ul><ul><ul><ul><li>Hope </li></ul></ul></ul><ul><ul><li>… is going to happen, and you could be wrong </li></ul></ul><ul><li>“ Being wrong” could have very negative consequences </li></ul><ul><li>One large class of risks are numbers where you try to </li></ul><ul><ul><li>Assert a fact </li></ul></ul><ul><ul><li>But, it’s not a fact, it’s an assumption </li></ul></ul><ul><li>Assumptions = risks </li></ul><ul><li>NB: Risks can change over time. Keep on monitoring. SUV’s? </li></ul>stevebarsh.com

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

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Entrepreneur’s “Risk Dilemma” <ul><li>Don’t recognize the </li></ul><ul><ul><li>Risks taken </li></ul></ul><ul><ul><li>Assumptions being made </li></ul></ul><ul><li>Don’t think “outside the box” on how to “de-risk” </li></ul>stevebarsh.com

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How do you identify a risk? <ul><li>Many of your “documents” are littered with risks and assumptions </li></ul><ul><li>Look at your </li></ul><ul><ul><li>Plans </li></ul></ul><ul><ul><li>Presentations </li></ul></ul><ul><ul><li>Pitches </li></ul></ul><ul><ul><li>Financial models </li></ul></ul><ul><ul><li>Forecasts </li></ul></ul><ul><ul><li>Estimates </li></ul></ul><ul><ul><li>Things with numbers or graphs </li></ul></ul><ul><li>Underline / circle anything that you are not 100% sure of </li></ul><ul><li>What did you learn in your earliest science classes? </li></ul>stevebarsh.com

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Experiment / Test! stevebarsh.com <ul><li>What is the hypothesis you are trying to prove? </li></ul><ul><li>What is a valid experiment to prove or disprove your hypothesis? </li></ul><ul><li>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…” </li></ul>

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Now that I have identified my risks, what do you do about it? <ul><li>De-risk! </li></ul><ul><li>De-risk? </li></ul><ul><ul><li>The art, science, and skill of trying to figure out clever ways, experiments, and proxies to reduce the risk of what you are doing </li></ul></ul><ul><li>Goal </li></ul><ul><ul><li>Be “capital efficient” (in other words, try to spend little cash) </li></ul></ul><ul><ul><li>Think “outside the box” e.g., </li></ul></ul><ul><ul><ul><li>Set up “experiments” to lower risk and prove (or disprove!) your hypotheses </li></ul></ul></ul><ul><ul><ul><li>Buy vs build </li></ul></ul></ul>stevebarsh.com

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Risk Types & De-Risking Approaches - 1 stevebarsh.com Management / team VC’s: Team! Team! Team! <ul><li>Demonstrate through your actions that you are </li></ul><ul><ul><li>Thoughtful </li></ul></ul><ul><ul><li>Calculating </li></ul></ul><ul><ul><li>Creative in problem solving </li></ul></ul><ul><ul><li>Coachable </li></ul></ul><ul><ul><li>Willing to “build a team” to solve a problem </li></ul></ul><ul><ul><li>Willing to ask for help if outside your comfort area </li></ul></ul><ul><ul><li>Willing to learn </li></ul></ul><ul><ul><li>Can “bob and weave” </li></ul></ul><ul><ul><li>Able to deliver product </li></ul></ul><ul><ul><li>Able to sell, sell, sell! </li></ul></ul><ul><ul><li>Willing to take input </li></ul></ul><ul><ul><li>Flexible </li></ul></ul><ul><ul><li>Focused </li></ul></ul><ul><ul><li>Not defensive </li></ul></ul><ul><ul><li>Able to execute </li></ul></ul><ul><ul><li>Concerned with team DNA </li></ul></ul><ul><ul><li>A person with a PMA </li></ul></ul>

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

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

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

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

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

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

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

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

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

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

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

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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