epse module 3—session 1

EPSE Module 3—Session 1

Ken LiuMarch 11, 2013

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8 startups as principal since 1989◦ HNC Software, Holographix, Virage, IPivot, InfoGation,

AIRSIS, SciVee, ThreatSTOP CEO, BD, sales/marketing, do whatever needed 5 M&As worth $1.3 billion Wide-ranging experience

◦ Technologies/products◦ Business models◦ Stages & cultures

Early career: Motorola, BCG, Booz Allen Real-world approach

Who Am I?

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Basics of innovation & startups◦ Business plan◦ Financing◦ The Investor Pitch

Improving the odds of success◦ Funding & evaluating your projects at work◦ Your own startup◦ Think like a CEO/GM/founder

Not a “how-to” guide

Group project: The Investor Pitch of new business

Objectives of Module 3

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Setting the Stage

What is Innovation?

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Innovation MatrixBusinessModel

Process

Technology

Features

Cost Access Fast/Easy Better/Diff. New Value

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Operating Margin Growth in Excess of Competitive Peers

[Source: IBM, CEOs are expanding the innovation horizon: important implications for CIOs]

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Most Innovative--It’s Not the MoneyInnovation Rank

R & D Spend 2011

Amount Rank % Sales1 Apple $2.4B 53 2.2%2 Google 5.2 26 13.63 3M 1.6 86 5.34 Samsung 9.0 6 6.05 GE 4.6 30 3.26 MicroSoft 9.0 5 12.97 Toyota 9.9 1 4.28 P & G 2.0 72 2.49 IBM 6.3 17 5.910 Amazon 2.9 48 6.1

Source: Bloomberg, Booz & Co.

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Innovators vs. Spenders

Source: Bloomberg, Booz & Co.

Top Innovators

Top R & D Spenders

Revenue Growth EBITDA % Market Cap Growth5-Yr. CAGR 5-Yr. 5-Yr. CAGR

NormalizedIndustry50

54

68

62

40

65

45

10

11

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Ideation vs. Conversion

Good

Bad

IdeaConversion

Bad GoodIdea Generation

Source: Booz & Co. Global 1000 Innovation

11%

18%

25%

46%

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Idea Generation Impact

Source: Bloomberg, Booz & Co.

Good

Bad

Revenue Growth EBITDA % Market Cap Growth5-Yr. CAGR 5-Yr. 5-Yr. CAGR

NormalizedIndustry50 46

65

52

4550

54

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Idea Conversion Impact

Source: Bloomberg, Booz & Co.

Good

Bad

Revenue Growth EBITDA % Market Cap Growth5-Yr. CAGR 5-Yr. 5-Yr. CAGR

NormalizedIndustry50 50

60

50

42

56

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Development times too long 32%

Lack of coordination 28%

Limited customer insight 26%

Risk-adverse culture 25%

Difficulty selecting right ideas 21%

No good way to measure 20%

A shortage of ideas 18%

Ineffective marketing 17%

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It’s a Cultural Problem

Culture &Process

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Innovation Pre/Post IPO

Study Result

1,500 tech firms that IPO’d or intended to in 1985-2003

40,000 patents 13,000 inventors Normalized for size,

age, R&D $$

40% less citations per patent

18% more inventors leave

Reasons: Product/revenue

focused Less creative/entre-

preneurial people stay

Source: Shai Bernstein, Stanford Business School

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Why Innovate?Innovation

Differentiation

Changing value proposition

Customers buy more and pay more

Otherwise competition naturally drives race to the bottom:

Commodity

Lowest price

Lowest profits

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Innovation Value

Source: Yahoo Finance, 3/3/13

$404 Billion

$234 Billion

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Adapt or Die!

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Why Companies Die

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DJIA 1979

Allied Chemical Alcoa American CanAT&T American Tobacco Bethlehem Steel Dupont ExxonMobil Eastman KodakGeneral Foods GE GMGoodyear IBM IncoInt’l Harvester Int’l Paper Johns Manville3M Merck Owens-Illinois GlassP & G Sears Roebuck Socal (Chevron)Texaco Union Carbide US Steel

United Technologies Westinghouse Woolworth

Not in 2012 (20) Still in 2012 (10)

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DJIA 2012

Survivors (10)

Replacements (14)

New Cos. (6)

Alcoa American Express CiscoAT & T Boeing Home DepotChevron Bank of America IntelDuPont Caterpillar MicrosoftExxonMobil Coca Cola VerizonGE Disney United HealthIBM HPMerck Johnson & Johnson

P & G JP Morgan Chase

United Technology McDonalds3MPfizerTravellers

Wal-mart

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The Odds

Ideas Full developmentProjects

ExploratoryProjects

ProductLaunch

Success

3,000

100 10 2 1

Source: Stevens, G A. and Burley, J. “3,000 Raw Ideas = 1Commercial Success

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The Odds

Source: SBA; Ctr. For Venture Research, Univ. of NH

50% of startups die within 5 years

1/3 survive to 10 years

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Why So Hard?

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The Business Plan

The pain Value proposition Market Who’s the

customer? IP & entry barriers Competition

Business model Go-to-Market plan Management Financing Exit strategy

The Idea—Where from?

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Idea—Personal Need/InterestChecking out girls at Harvard

Selling girlfriend’s junk

Doesn’t like sweat

Needed marker for choir score

Needed lighter running shoes

Hassle booking rooms for SF conference

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Idea—Work/Customer

Wrong/missing/stolen meds in hospital

Manual configuration of firewalls

Empty JAL cargo planes westbound

Sun servers crashing on paydays

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Idea—Needs GapE-commerce has no online payment system

Inefficiencies in small office stores

Old process stupid

No stores in small towns

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Idea—ObserveMost popular search item in mid-1990s

Junk bond default rates lower than priced

Biggest cost is in sorting logistics

Small business works on cashflow, not accounting

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Idea—Others

Technology roadmap—Density, clock speed, heat

Why need to wait days for processing?

Making beer the 16th century way

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Business PlanMarketCustomersValue Proposition

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It’s About Buying & Selling

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Are there enough customers who are willing to pay you a price that gives you enough profit to build a business and yield a return for investors that’s worthwhile to invest in you?

It’s Not Rocket Science

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FocusOur Focus

HobbyCorporate >>>>>>>>>>

VCAngelLifestyle

Valuation($M)

1

50

10

.1

This is the most important part of the plan.

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Market & Customer

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Market ResearchPrimary Customers Target users Resellers

Listen for complaints: Why is it…? Why can’t I…? Can you do this…? What if? I hate this… This shouldn’t be so hard

Secondary Associations Analysts Government “Experts”

Good for general info &background Outdated Not specific Backward looking

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What is the problem? How painful is it? Who are the customers? What is driving the need? Under what circumstances does the need arise? When does it arise? How often? Where? How does the pain hurt the customer? How satisfied is the customer with current solutions? How many customers have this same need &

circumstances?

Needs Analysis

“If you asked the horse buggy owner what he wanted, he’ll say a faster one.”

--Steve Jobs

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Be Prepared to Make the Leap

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Primary, secondary, etc.

Size not as important as correct segmentation

Total vs. Served Available Market (TAM vs. SAM)

Retail vs. wholesale $$

Bottom-up projection best (not “1% of Chinese”)

If new market, use best proxy

If all fails, use gut, “feel of market”, ROMA

Market

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“50% CAGR from $100M to $2 billion from 2013-2018”

Watch Out/Reject:

Market SegmentA subgroup of consumers sharing characteristics that cause them to have similar product needs and values.

Respond similarly to market stimuli Can be reached by market intervention Different from other segments Change over time

expectations price capabilities

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• Money center• National• Superregional• Regional• Local• “Non-bank” banks• Credit unions

FinancialServices

CommercialBanks

Segmentation

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Who are our most profitable customers? Where can we find more of them? How can we more effectively reach them? How can we tailor our message to each

segment? What segments need our services most, at

what cost? How can we better allocate our sales/

marketing resources? Who’s our competition?

Segmentation Purpose

Geographic

DemographicAge, gender, family size and life cycle, or income

PsychographicSocial class, lifestyle,

or personality

BehavioralOccasions, benefits, uses, or responses

Nations, states, regions or cities

Segmentation Criteria

Mass MarketingSame product to all consumers

(no segmentation)

Segment MarketingDifferent products to one or more segments

(some segmentation)

MicromarketingProducts to suit the tastes of individuals or locations

(complete segmentation)

Niche MarketingDifferent products to subgroups within segments

( more segmentation)

Levels of Segmentation

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What’s Wrong with This? Product

Photo management product designed to assist Brand Marketers, Event organizers, and Sponsorship owners to take advantage of the power of event photos to assist in quantifying ROI for a given event or sponsorship.

Market

Alternative advertising is a $26 billion business.

Branded entertainment spending increased to $52 billion annually.

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Who’s Customer?

User CFOVP/CorporateManager

Time

$$$

Effort

CEOIT BOD

Sales CycleAcquisition CostLifetime Value

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Who’s Customer?

YES Male college student

Bank teller in credit union

Owner/sales mgr. of independent clothing stores

ER nurses

NO 15-40 yr. males

Financial services worker

Retail stores

Medical/health workers

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FOCUS, FOCUS, FOCUS!

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What’s the Pain?

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Attributes of product that customers care about and willing to pay for at given price, place and time

Different for each demographic segment

Will change over time◦ Price◦ Competition◦ Product expectation◦ Etc.

Value Proposition

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Value Propositions Feature/ performance

Cult

Convenience

Faster

Vanity

Saves money

Productivity

Financing

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Customer: Payroll/benefits outsourcing firm

Pain: 1. Every pay period >> peak demand 2. Servers strain/crash doing SSL

transactions >> customers complain

3. “Sun rep wants me to buy $1M SPARC servers”

Pain—SSL Decryption

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SSL accelerator appliances 3-10x faster $25-45K New product category

Questions:

1. What markets?2. Who’s the customer?3. Value Proposition4. ROI

Solution

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“A horse! A horse! My kingdom for a horse!

--Richard IIIShakespeare

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Business PlanMarket TimingBarriers to Adoption

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Barriers to AdoptionMacro Is market ready? Too

early?

Need adoption ecosystem to exist first?

Crossing the chasm?

Product/Micro Too complicated

Not enough difference

No pain

Price

Cultural misfit

Changing habits

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Idea/Prototype Adoption

Telematics mid-1960s2010sFaxes early 1960s 1980sVideo on demand mid 1990s2011Internet late 1960s1995+PDAs early 1990s mid 2000sPoker on cable 1980s 2003Renewable energy 1970s ??

Market Incubation Period

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“Superior” product loses to ingrainedhabits & workflow

Need “10X” gain to switch

Switching Cost

Vs.

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1st Mover vs. Follower

Clones

Clones

WIN

LOSE

1st Follower

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There is a tide in the affairs of men which,Taken at the flood, leads on to fortune;Omitted, all the voyage of their lifeIs bound in shallows and miseries.On such a full sea are we now afloat,We must take the current when it servesOr lose our ventures.

--Julius CaesarShakespeare

Catch the Wave

Making the Pitch

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You can have the greatest idea,

but if you can’t convince enough people,

it doesn’t matter.

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Message Types

1 line 1 para. 5’ 15’ white paper

Tech Expert

Analyst

Trade Press

Customer

Investor

Public

Engineering

Startup

What? Who? When? Where? Why? How? How big?

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Elevator Pitch—5W 2H

Get the follow-on meeting!

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Objective

It’s the message, not the facts! Great product Customer stories Big market Unique value Great team You can make $$$

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The Story

Don’t confuse message with facts!

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Afghan “Strategy”?

Simplicity is the ultimate

sophistication.–Steve Jobs

BIRD

10% 65%

Retention

Give Context to Numbers

5GB?

“You can put 1,000songs in your pocket.”

Body LanguageVocal Tone

63%

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It’s About You!

What Are They Looking For? Integrity

Passion

Commitment

Vision

Reality

Leadership

Experience

Knowledge

Skills

Coachable/likable

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What It Comes Down To• Can I trust this person?

• Can I work with you?

• Do you have a chance of making $$ for me?

• Would I want to have beer with you?

• Are you worth my effort & risk?

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Why They Invest in You?

“VCs do not invest with their brains. They invest with companies that they fall in love with. Then they use their brains to rationalize their decision.

“Some managers are uncomfortable with expressing emotion about their dreams, but it’s the passion and emotion that will attract and motivate others.” – Jim Collins, Built to Last

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Top 10 Lies Told to VCs1. Our projections are conservative2. Our target market is $56 billion3. We have a world class team4. Our average sales cycle is 90 days5. We have no direct competitor6. No one else can do what we do7. All we need is 2% of the market8. We’ll be cash positive in 12 months9. Our contract with [Big Company] will be signed in two weeks10. I’ll be happy to hand over the reins to a new CEO

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