I spoke about my personal experiences as a entrepreneur in a “3 Things” format: three things we did right and three things I did wrong. (It takes a team to do things right, but doing things wrong is a personal responsibility.)
This is all that gets posted about that on a public website.
Homework
Due Monday, March 29th
email me the name of the entrepreneur you will present about next week
For Tuesday, April 6th
“Learning From Others” – Individual Presentations
Interview or research an entrepreneur
Three things they did right*
Three things they did wrong*
First person sources!**
8 minutes (2 minute intro, 1 minute each ‘thing’)
* Not advice that they want to give you, but actual reasons for the lesson. If they say “don’t hesitate to fire a bad employee,” ask “Why not? What happened that made you learn that?”
**Best to talk to the person themselves. If you can not talk to them directly, use first person records. For example, quotes from an interview with the person is okay, but a reporter writing about that person is not okay.
Lawyers will do three things for you and your company: minimize risk, add value, and help you deal with “really bad problems.” They work pro-actively to help you set up policies, protection, and preparation for next steps. They work actively as opportunities and situations arise. And they work reactively when surprises happen.
This is an incomplete list of different specialties lawyers and law firms will have. The first three are the areas you will deal with the most in your early startup years. Let’s look at those more closely.
(click to make BIGGER!)
Congratulations! You have a bunch of Muppets working for you! Imagine the mayhem (or Electric Mayhem). This list is some of what you’ll want to deal with pro-actively. If you’re part of an accelerator program they may have legal resources available to you to help with much of this.
In class we talked about a few examples of bad things that happen when you don’t have agreements or policies in writing. Oral agreements are binding in court, but you have no actual proof that such an agreement exists or what the terms are. It’s easy up front to get agreements signed, and almost impossible later.
A lack of documentation for rights, ownership and obligations is known as bad hygiene. Without getting that cleaned up, you won’t be able to survive due-diligence with potential investors or significant business partners.
That independent contractor, employee, or co-founder that didn’t assign the IP they created to the company before they left? Yeah, they’re now a lurker. They have zero incentive to assign that work to you now, and it will be very expensive to entice them to do so later. Imagine how nice it would have been if you had just gotten it in writing up front.
If you do have this problem (or any other), deal with it. Now. It won’t get easier, or cheaper. Then. Move. On. (Easy advice, really hard to do.)
clicking will make that tiny type almost legible!
We talked about a few ways to find a law firm that will be a good match for your needs, and ways to work best with them. Be careful comparing billing rates between firms (or lawyers), it’s quite possible that the expensive lawyer will have experience that allows them to do the job in much less time (and do it better), making the actual cost of using them the most economical choice.
Two books and a website.
Expensive, but the resource you’ll need when you’re in business. It is imperative you understand what your lawyer is doing for you. The Entrepreneur’s Guide to Law and Strategy is where you’ll learn that.
cooleygo.com – from law firm Cooley LLP. Lots of articles and downloadable documents to help you get started, and to help you understand some of the legal requirements and issues you’ll face. Here’s a post to start off with: How To Choose A Lawyer For Your Startup.
The first 2/3 of class was about many of the options available for the legal structure of your company (not the organizational structure).
The final 1/3 of the class was about the basics of stock ownership in a C (or S) corporation. This was definitely not enough time to cover as much as I wanted, but we did get through the fundamentals.
Stock represents a piece of ownership of a corporation. The price of a share of stock is a relationship between the value of the company and the percent of the company the stock represents. Just knowing the price of a share of stock doesn’t tell you anything about the company – you need at least one other piece of information. This is especially important if part of your compensation is made up of stock options.
In individual team meetings we built a draft of the team’s financial model in Excel.
These are very simple models, meant to explore the basic assumptions around the revenue model for the product.
The goal of the exercise is to test if the revenue sources are adequate to create a sustainable company. To do this we look at a few factors. First, is the Lifetime Customer Value adequately greater than the Customer Acquisition Cost (LCV/CAV)? Second, can the company grow its customer base by using just a portion of revenue to attract new customers? A sustainable company must be able to operate profitably.
To test this out, we built a month to month simulation with three sections.
Customers – how many customers at the beginning of the month, the normal attrition of those customers (churn), and the addition of new customers through word of mouth and marketing.
Revenue – different revenue streams from the customer base. For these teams, the models included subscription fees, in app purchases, ad revenue, and product purchases.
Expenses – focused on customer acquisition costs.
For these models, teams are allowed to spend 25% of their revenue on marketing or other customer acquisition strategies. We do not build out a full expense model for the company.
Assumptions and Drivers – The models begin with a customer base and some cash in the bank. Inputs to the models are generally “rates” such as:
Customer lifetime (or churn rate)
% of customers who pay (especially for freemium models)
price paid
cost of sales (as a %)
CPM rates for advertising
conversion rates
etc.
These are the green items seen in the thumbnail image above. The rest of the numbers in the spreadsheet are created automatically by formulae.
At the end of each team meeting they were asked to continue refining their spreadsheet. They can add additional revenue streams, additional customer acquisition methods, etc., and they can adjust any of the numbers in green (the Drivers). All numbers entered have to be reasonable and justifiable. Reasonable – meaning within the realm of reality even if there isn’t hard data to support it (e.g. it might be reasonable that a user would pay $1.99 for your app, but not reasonable they would pay $49.95 for it). Justifiable – meaning there is data available to support your entry (e.g. you may be able to find a range of CPM rates for similar ads to yours).
The entire class was spent gathering information each team will need for their financial models. We did six passes in Miro. Each team started with a blank template, and we worked our way through in 15 minute steps. There was an additional template available with sample post-its in each category – the example ideas were not about a specific product or company, but rather examples of what might be in that area.
The template is based on the five customer phases.
Sample Template
The Process
Our goal is to define a much as possible about our product and customer pipeline on the revenue side. We didn’t dig into all the costs associated with the company, other than direct costs for the product. The model also starts with the assumption that your product is launched and you are selling to your initial customer base – perhaps a niche of a future larger audience.
0. Define your customer
Who is your product for? You may have multiple customers (users and advertisers).
1. Awareness
How and where will you reach your customers? What costs are associated and what are the drivers?
2. Evaluation
How and where will your potential customers evaluate your product/service? What costs are associated and what are the drivers?
3. Purchase
What is being paid for, and how much? What costs are associated and what are the drivers?
4. Delivery
This includes all aspects of the user experience, not just how they acquire the product. Any recurring costs should be included here.
5. After Sales
How do your support your customers? How do you leverage off that customer relationship to generate new customers? What costs are associated and what are the drivers?
Now that we have a feeling for basic financial statements, we looked into the information behind the numbers.
What can we learn from financial results about a company’s business model? We dove into some details in Zynga’s 2020 Q4 10k statement – the filing companies make with the SEC each quarter about their financial results.
Public financial statements include a trove of information other than just the numbers. We only looked at 11 of the 150 pages and learned:
Mission and Strengths – page 2: 4 items
Revenue explanations – page 3: 3.4% MUPs – metric! Important to have many free players for social draw. Top 3 games were 45% of rev. Ad rev primarily from Words with Friends.
Marketing and Distribution – page 4: Advertise primarily in-app and FB and Google. 49% rev through Apple 46% through Google.
Competition – page 5: Direct and Indirect!
Employees – page 6: Culture and values.
Risk Factors – page 8-30
Consumable vs. Durable virtual items – page 66
Acquisitions – page 36: Details under 2020 Highlights.
How we generate Revenue – page 38: Online games, advertising.
Other Metrics – page 40: ABPU/MUP – an actual ratio!
Breakdown of financials after that.
Modeling and Metrics
How can we use that kind of information to figure out more about how our company works? Building a model (rather than a plan) can help us understand how money flows through our company. We can test different scenarios to see if we have a sustainable model, and find where risks and unknowns might be. We do this by creating a simulation in a spreadsheet.
For a simulation we need to know:
Drivers – these are the knobs and levers we can adjust. These are usually “rates” of some sort (e.g. cost/unit, dollars/hour, price/subscription…) or percentages (e. g. interest rates, customer conversion rate, customer churn…).
Rules – the formulae we will build our simulation with. These can be simple (total revenue = units sold * price/unit) or more complex (e.g. how our ad dollars turn into website visits which convert into product evaluations, which convert into paying customers – each step with a cost and attrition rate).
Assumptions – starting values. Things like how many customers do we already have at the beginning of the simulation, and how much money is in the bank? They are also the initial values we put into our drivers.
And finally we need to define some metrics that we’ll use to evaluate the results. Metrics ideally should be a ratio – a number without units. Examples include growth rate, profit margin, and LCV/CAC (lifetime customer value / customer acquisition cost).
In our next class, we’ll start creating financial models for our companies.
More on Modeling
CMU Swartz Center for Entrepreneurship has a series of videos available on all sorts of startup issues. Here’s a recent talk by Phil Compton on his approach to financial modeling. It goes in greater depth that we do in class about what you would build both to help your company and to educate potential investors.
The Big 3: Balance Sheets, Income Statements and Cash Flow Statements.
We began with a blank Miro frame and posted examples of what we might take into consideration when managing our money, and reorganized those to create a Balance Sheet and Income Statement. From there we talked about why we use depreciation on assets to better reflect the reality of our business, and why that makes our cash flow different from our income statement.
We dug into a simple real-world example using actual financial statements from PDI right before DreamWorks came in. We spent time talking about how to recognize when revenue is billed vs. earned.
We finished by looking at a recent Zynga set of statements to see how large public companies show their financial results.
Everyone had to interview potential customers for their products and develop a strategy for each of the five channel phases as outlined in Business Model Generation. Without even building a prototype yet, the interviews provided valuable information that focused the products and changed potential revenue models. Presentations covered results of the interviews and the channel phases.
https://vimeo.com/518905514
Homework
Fill out the presentation survey (link emailed to you) by end of day Sunday.
We began class by visiting our customers on the Business Model Canvas again. Your business model may have one product, but that product may have multiple, and very different, customer segments. Those segments may have different value propositions, channels and relationships.
We started with a simple example of PDI’s markets for CG – broadcast graphics, advertising, and film effects. Each market had a different group of customers who needed to be approached and managed in unique ways. From there we looked at four other models (there are many others, too):
Ad supported businesses – If the user isn’t paying, you have more than one customer. For an ad supported business, you need to provide a product to the users (one customer segment), and provide the users’ attention to the advertisers (another customer segment). The value proposition, and the product itself, is very different for those two customers. And without a critical mass of users, you have no ad space to sell.
Marketplaces (eBay, Etsy, …) – Two symbiotic but unique customers: buyers and sellers. As the marketplace provider, you need to have a critical mass of each to attract the other. A good reason to start with a very niche product. In some niche markets, like collectables, the buyers and sellers may be the same group of people, making your job easier.
Platforms (mobile devices, game consoles, …) – Two types of users on your platform: the content creators and the users of that content. Platform providers will either develop initial content themselves or incentivize others to create it. Without enough content at launch, users may ignore the platform. Some platforms are fortunate to have “killer content” that is a strong enough single title to justify the purchase of the platform.
Distribution platforms (YouTube, Instagram, Twitter,…) – These platforms may have three or more types of customers. Creators provide the content for the platform (customer one) and viewers consume the content (customer two). The platform will incentivize creators through revenue sharing, exposure, or other models. The platform will generate revenue through advertising (customer three) or subscriptions. Viewers can also be segmented into participants (who contribute to the community through likes, comments, ratings, etc.) and lurkers (who just consume). Participants and lurkers also have different value propositions for using the platform. (Wikipedia has a nice breakdown on the 1% rule, and Tubular Labs shares some YouTube rules of thumb.)
And we made this in Miro, too.
The Left Side of the BMC
After a short break we rejoined to talk about the left side of the Business Model Canvas. This is where the work is actually done. In Miro we visited the three Key blocks and got a feel for the variety of different areas we would need to pay attention to as an entrepeneur. More details on these blocks are in the Business Model Generation book. We’ll talk more about the Cost Structure when we get into financials next week.
Thanks for all your contributions.
Accelerators
Luckily accelerators can give us a boost in this part of our business. They specialize in helping you get your product launched and finding you first round investors. As a part of that service, they help you with most of the items in the Key blocks – either by providing that service for you (like facilities) or connecting you to others who can help (lawyers for your IP and corporate governance, mentors, product area specialists, and the network of their prior alums). For all this help, they become a Key Partner for you, usually in the form of equity.
We talked about five specific examples in class. These organizations all have multiple programs running around the world, and there are many similar companies in almost every major urban area now. (Be careful, though. Be sure to do your homework and check backgrounds and reputations.)
We focused on customers as individuals rather than as a market segment. We used our own recent purchasing experiences to talk about Awareness, Evaluation, Purchase and Activation, Delivery and After Sales and Retention.
We started with in-class research about reasons we bought things, and the sorted into a few emergent categories. The resulting Miro board:
Our own experiences helped us understand the phases of customer relationships and channels.
Awareness – Startups do well to start with a very targeted or niche audience that they can reach out to directly. We talked about facebook, PDI and a few others.
Evaluation – Customers want to try out the product. It helps them reduce risk and feel comfortable with the decision. It is an important way for customers to compare products (or solutions to their problems). Evaluation of new products from new companies is especially hard. Demos, samples, trailers and word of mouth recommendations are valuable tools. Many products build evaluation into their model (free-to-play and “first month free” are examples).
Purchase – Shopping carts (real and virtual) get abandoned when it’s hard to pay. Make it easy for customers to give you their money!
Delivery – Plenty of opportunities to make a big impression on your customer, and potentially get new customers. We talked about packaging and unboxing, and how delivery is the whole product for some markets (like theme parks and movie theaters).
After Sales – Companies want to build a long term relationship with their customers. Even if they only sell you their product once, they want you to refer their product to others.
Homework for Tuesday, March 2nd.
Presentations about your customers
7 Minutes
Results from customer research
Talk to potential customers for your product. Some tips:
Evaluate how interested they would be in your product. Pay particular attention to suggestions they may have of how to improve it. Include that information in your presentation.
How much would they be willing to pay for it? You may have to be clever to figure out the answer to this. For example, you may want to ask what they’ve paid for similar items and if they think this is worth the same amount.
Present your customer plan
Who is your customer?
Awareness, Evaluation, Purchase and Activation, Delivery, After Sales: what would you do in each of these areas?
