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Derisking Your Business Model Dream It July 2008 V2.1

This presentation was made at DreamIt Ventures in July 2008. It discusses approaches entrepreneurs can use to "de-risk" their business plan, idea, service, or product before raising substantial sums of money (e.g, VC investment). Many entrepreneurs don't realize that there are many "out of box" ideas and techniques they can use to reduce risk in their business idea without spending or seeking significant capital investment. Finally, by applying the techniques and checklists included in this presentation, entrepreneurs will be much more likely to secure angel or venture capital investments. Written and presented by Steve Barsh.

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Derisking Your Business Model Dream It July 2008 V2.1

  1. 1. De-Risking Your Business Model: A Brief “How To” Guide v2.1 July 2008 Steve Barsh   +1.215.888.2101  twitter: sbarsh
  2. 2. 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>
  3. 3. 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>
  4. 4. 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>
  5. 5. 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>
  6. 6. Most investors are risk averse, and you should try to be too <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>
  7. 7. 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>
  8. 8. 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>
  9. 9. Experiment / Test! <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>
  10. 10. 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>
  11. 11. Risk Types & De-Risking Approaches - 1 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>
  12. 12. Risk Types & De-Risking Approaches - 2 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 ( </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 </li></ul></ul><ul><li>Know your answer for what you will do when competitors emerge (how will you respond?) </li></ul>
  13. 13. Risk Types & De-Risking Approaches - 3 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>
  14. 14. Risk Types & De-Risking Approaches - 4 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>
  15. 15. Risk Types & De-Risking Approaches - 5 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>
  16. 16. Risk Types & De-Risking Approaches - 6 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>
  17. 17. 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 approach </li></ul><ul><li>Track metrics!? </li></ul>
  18. 18. 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>
  19. 19. 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>
  20. 20. 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>
  21. 21. 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>
  22. 22. 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>
  23. 23. De-Risking Your Business Model: A Brief “How To” Guide v2.1 July 2008 Steve Barsh   +1.215.888.2101  twitter: sbarsh