PREPARED FOR IDATE 2014 BY NEAL CABAGE 8 Insights for Building a Smarter Startup

INTRODUCTION Author & Speaker NEAL CABAGE Digital Product Architect Product manager and entrepreneur. Founded ProductCamp.LA and PMA.LA. Built and sold two startups. Principal authored, The Smarter Startup. neal@smarterstartup.org@NealCabage

THE SMARTER STARTUP STRATEGY FOR STARTUPS The Smarter Startup looks at why some startups succeed while others fail. By taking a more strategic approach to entrepreneurship, founders can improve their own outcomes. Written by Neal Cabage and Sonya Zhang, PhD, and published by Pearsons/NewRiders. INTRODUCTION The Book

DEFINING THE PROBLEM Whats the Key to Startup Success? Diligence is the mother of good luck. Benjamin Franklin Okay, Hard Work ... But Its Not the Full Story

Diligent Negligent SuccessFailure IS HARD WORK THE ANSWER? Hard work alone is NOT a reliable predictor of success. Hard working people often fail and negligent people sometimes succeed. Conventional Wisdom NOT ENTIRELY DEFINING THE PROBLEM

DEFINING THE PROBLEM Whats the Key to Startup Success? 8 Hard Lessons Learned From Building an Online Dating Startup

Some People Are Lucky F. Scott Fitzgerald Author, Philosopher Nothing is as obnoxious as other people's luck.

Psychology of Luck Gorillas In the Midst (D Simmons) and Luck Factor (R Wiseman) detail Psychology experiments that demonstrate Inattention Blindness. Most people do not observe opportunity when their mind is occupied with another task. SOME PEOPLE ARE LUCKY

TOO BUSY TO STEP BACK TO SEE OPPORTUNITY Inattention Blindness describes an unawareness of broader patterns and opportunities because we are too focused on solving another problem. A smarter approach (and more effective) requires attention to the big picture. SOME PEOPLE ARE LUCKY Opportunity Blindness

FOCUS ON CREATING VALUE YOULL BE REWARDED Focus on helping others and everything else will fall into place. Find a need or desire that is not yet sufciently addressed, where the customer is so passionate theyd happily pay for a solution. SOME PEOPLE ARE LUCKY Focus on Helping People

Timing Is Everything Anonymous In the publishing business, youre either rst, youre fabulous, or youre f***ed

Innovators (2.5 %) Early adopters (13.5 %) Early majority (34 %) Laggards (16 %) Late majority (34 %) Innovation Adoption Curve Every market has a natural lifecycle driven by innovation and circumstance. Look for something that wasnt possible just a couple years ago & ramp up before the market capitulates (supply > demand). TIMING CRITERIA Innovation Life Cycle The Golden Era The Squeeze ConsolidationEarly Movers Capitulation *

Opportunity to enter diminishes as the market matures. Geoff Moore suggests entering at the chasm after demand is validated but still early enough to ramp before the market capitulates. TIMING CRITERIA Innovation Life Cycle Innovators (2.5 %) Early adopters (13.5 %) Early majority (34 %) Laggards (16 %) Late majority (34 %) Chasm Innovation Adoption Curve New Entrant Opportunity Ideal point to enter a market - Geoff Moore

Avoid Commoditization It is difcult to imagine a more perfect commodity than a byte of data. As information technologys power and ubiquity have grown, it strategic importance has diminished. Nicholas Carr Harvard Business Review, 2003

What cost $5 million to accomplish 12 years ago can now be done with less than $5,000. Mark Shuster observed that commoditization and availability of more building blocks has radically reduced cost and risk of developing a software product. Commoditized Technology $5,000,000 $5,000 1999 2014 Hosting Commoditized $500,0002005 Open Source Software $50,0002009 Cloud Services (SaaS/PaaS)

As cost has fallen, so has the competitive barrier to entry. Competitive positioning is now the key strategic issue, not technological capability for most consumer Internet products. How do you cut through the noise? Commonplace Commodity 2000 2002 2004 2006 2008 2010 2012 2013 !" #!$!!!$!!!" %!!$!!!$!!!" %#!$!!!$!!!" &!!$!!!$!!!" !$!!!$!!!" !"#$%&'%()*+%)& Data From NetCraft 2013 Web Server Survey 50x

Opportunity to enter diminishes as the market matures. Geoff Moore suggests entering at the chasm after demand is validated but still early enough to ramp before the market capitulates. TIMING CRITERIA Innovation Life Cycle Technology Strategic Advantage Marke9ng Strategic Advantage

Be Weary of Network Effects Robert Metcalfe Professor, Engineer Metcalfes Law The value of a network is proportional to the square of the number of connected users of the system (n2).

THE VALUE OF A NETWORK STRATEGY FOR STARTUPS The value of any network increases exponentially as it scales. A marketplace is a social network dedicated to buying and selling and suffers/benets from a similar dynamic. Buyers are more likely to participate if more sellers are present and vice versa. For this reason, it is imperative to scale before your competitors do! NETWORK EFFECTS Social Network Effects

REACHING CRITICAL MASS THE CATCH 22 Men wont want come to the table without a signicant number of women. Women will not join in without a signicant number of men. How do you engage both parties in the beginning? NETWORK EFFECTS The Catch 22 Men Women required required

Dont Get Lost In the Noise Shaf Mather I learnt the hard way about positioning in business, about catering to the right segments. Social Entrepreneur

SEGMENTED FOCUS AUTHENTIC CUSTOMER LOW PRICE LEADERSHIP VOLUME & COMMODITY DIFFERENTIATED PRODUCT DISRUPTIVE OR INNOVATIVE HOW ARE YOU DIFFERENT? WHAT MAKES YOU SPECIAL? COMPETITIVE POSITIONING 3 Competitive Positions In order to be a desirable signal that stands out against a background of noise, you need to have a compelling value that your competitors do not. There are 3 viable positioning strategies. Porters Generic Competitive Strategies

SEGMENTED FOCUS CUSTOMER AUTHENTICITY PRICE/VOLUME LEADER VOLUME & COMMODITY DIFFERENTIATED PRODUCT DISRUPTIVE OR INNOVATIVE COMPETITIVE POSITIONING Industry Examples Religion Genera9on Lifestyle? Scien9c Matching Gamica9on (So+Mo) Extending Social Network First to Reach Cri9cal Mass Free Leaders Leaders of Free/Casual Da9ng

Focus on Value Not Commodity Howard Schultz CEO, Starbucks If I went to a group of consumers and asked them if I should sell a $4 cup of coffee, what would they have told me?

VALUE CREATION Selling a Commodity Why would you waste money buying a cup of coffee from Starbucks for $4 when a cup of the same commodity is available for a lot less? Cup of Coffee Cup of Coffee Maxwell House Starbucks Cost: $4.00Cost: $0.50

VALUE CREATION Starbucks Use Cases Starbucks has successfully created a complex of value around a simple commodity. Comparing the coffee out of context misses the core of their value proposition. Remote Oce (desk/wi) Social Des9na9on (lounge/desert) Take a Break (convenience) Morning Caeine (coee) Morning Caeine (coee) Maxwell House Starbucks $0.50! $0.50! $1.00! $5.00! $5.00!

Starbucks repositioned their offering by creating a value complex around the coffee commodity. Were paying $4 for the entire experience, and the commodity is only a component of that. They innovated the value and made it a more fullling experience. Innovating New Value VALUE CREATION Entertainment (emotional desire) Productivity (logical need) Innovation (createnewvalue) Monetization (captureexistingvalue) primary function perceivedvalue X"cheap caffiene" Starbucks Lounge (free Wifi, etc) Desert & Social Destination

Entertainment (emotional desire) Productivity (logical need) Innovation (createnewvalue) Monetization (captureexistingvalue) primary function perceivedvalue Online Dating is inherently a marketplace for efcient mate sourcing. Eharmony innovated with scientic personality matching. HotOrNot turned it into entertainment. Tinder introduced gamication and applied it to a mobile user experience. Dating Industry Value Innovation VALUE CREATION XMatch.com EHarmony HotOrNot Tinder

Optimization Makes a Big Difference! Avinash Kaushik Google Evangelist Never let your (ad) campaigns write checks that your website cannot cash.

RISING CUSTOMER ACQUISITION COST Online advertising has become much more challenging. Google has made SEO difcult, social doesnt convert, and PPC costs are up, reecting cost margins of the largest competitors. How can a startup compete? OPTIMIZATION The Problem Cost of PPC CPC CAC 2005 $0.38 $10.18 2006 $0.32 $7.63 2007 $0.62 $6.41 2008 $0.71 $7.02 2008 $1.03 $12.60 2010 $1.24 $13.14 2011 $1.04 $19.74 2012 $0.84 $24.40

Fortunately you can increase prots to offset these costs. Increased competition now mandates that you do. Use the correct ad channels, optimize your conversion funnel, and retain existing customers and make signicant improvements to your lifetime customer value. OPTIMIZATION The Solution Traffic Optimization Conversion Optimization Customer Retention Original Advertising Plan x x

RESULTS OF EFFORT Increased ROAS by 500% and went from -28% ROI, to a healthy 67% ROI. We can now buy meaningful trafc to grow the business. OPTIMIZATION The Compounded Effect Original Trac (+100%) Conversion (+25%) Reten8on (+100%) Trac quan9ty 100 200 200 200 CPC $1.00 $0.50 $0.50 $0.50 Conversion rate 2% 2% 2.50% N/A Adver9sing cost $100 $100 $100 $100 Units sold 2 4 5 10 Unit price $50 $50 $50 $50 Unit cost $20 $20 $20 $20 Gross revenue (sold * price) $100 $200 $250 $500 Total cost (units + ads) ($140) ($180) ($200) ($300) Net prot ($40) $20 $50 $200 ROAS (revenue/ad spend) 100% 200% 250% 500% ROI ([revenue-costs]/ads) -28% 11% 25% 67%

Validate Before Building Steve Blank Entrepreneur, Author, Professor No business plan survives rst contact with customers Get out of the building and talk to your customers.

Test Your Hypothesis The Lean build, learn, measure feedback look is fantastic for optimizing a product concept, once a customer or hypothesis is dened. Lean Market Validation Measure Learn Build Ideas Product Data LEAN METHODOLOGY

HYPOTHESIS VALIDATION Test Early, Test Often PROSPECT INTERVIEWS Do They Like the Idea? Feedback? TEST MARKETING Do Vaporware Campaigns Convert? MINIMAL VIABLE PRODUCT Users Engaging & Using Product? Start testing an idea before theres a product! The goal is frequent feedback to minimize sprints of off-target effort. Worse scenario is building something huge that nobody wants. VALIDATE YOUR HYPOTHESIS BEFORE BUILDING ANYTHING!

Bringing It All Together James Carville Political Strategist Its the economy STRATEGY, stupid!

x Working hard is analogous to throwing a ball hard. The velocity is an important part of reaching the target, but you cannot ignore other interactive forces like gravity and drag. Gravity (9ming) Direc9on (customer need) What Is the Whole Story? Drag (compe99on) Velocity (hard work) STARTUP STRATEGY

customer product compe99on 9ming nancial team The 6 Market Dynamics INTERACTIVE DYNAMICS There are 6 fundamental dynamics that must be considered when evaluating a startup opportunity. Following a single maxim or a hunch will give you biased insight about the prospects of your idea. You need to objectively consider all angles. The 6 Startup Dynamics STARTUP STRATEGY

The 18 Rules of Startup Strategy Startup Heuristics Finance 13. Low Sunk Costs 14. Working Capital Float 15. Economies of Scale Timing 7. Recent Innovation Enabler 8. Demand Already Established 9. No Signs of Commoditization Competition 10. Clear Market Inefficiency 11. Low Barriers to Entry 12. Differentiable Position Team 16. Subject Matter Expertise 17. Functional Competence 18. Supplier Partnerships Product 4. Customer Focused Solution 5. Low Barriers to Adoption 6. Clear Value Proposition Customer 1. Unmet Need or Desire 2. Right Size Market or Segment 3. Reliable Access to Customers 2014 Cabage & Zhang STARTUP STRATEGY

Evaluate your startup idea across the six scorecard criteria and be mindful of the attributes described in each one. Give yourself a letter grade and then an overall score, for the idea. This provides a structured approach to evaluating the opportunity and helps to improve objectivity by accounting for a full spectrum of important criteria and reducing blind spots. Evaluating a Startup Idea Startup Scorecard Finance Low Capital Requirement Clear Profit Model Economies of Scale Finance Score ______ Timing Recent Innovation Enabler Demand Already Established No Signs of Commoditization Timing Score ______ Competition Clear Market Inefficiency Low Barriers to Entry Differentiable Position Competition Score ______ Team Subject Matter Expertise Functional Competence Supplier Partnerships Team Score ______ Product Customer Focused Solution Low Barriers to Adoption Clear Value Proposition Product Score ______ Customer Unmet Need or Desire Right Size Market or Segment Reliable Customer Channels Customer Score ______ Overall Score _______ SmarterStartup.org Title _____________________________________________________________________ A A B- B+ D A- B Real Estate IDX Integrated CRM

Startup Strategy Resources We have posted in-depth articles, diagrams, and downloadable references and worksheets on our website. Everything is free to use, so check it out. www.SmarterStartup.org STARTUP STRATEGY

CONCLUSION Created By NEAL CABAGE Digital Product Architect Product manager and entrepreneur. Founded ProductCamp.LA and PMA.LA. Built and sold two startups. Co-author, The Smarter Startup. neal@smarterstartup.org@NealCabage