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Page 1: 8 Strategic Insights For Startups

PREPARED FOR IDATE 2014

BY NEAL CABAGE

8 Insights for Building a

Smarter Startup

Page 2: 8 Strategic Insights For Startups

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.

[email protected] @NealCabage

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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

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DEFINING THE PROBLEM

What’s the Key to Startup Success?

Diligence is the mother of good luck.

Benjamin Franklin

Okay, Hard Work ... But It ’s Not the Full Story

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Diligent Negligent

Success

Failure

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

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DEFINING THE PROBLEM

What’s the Key to Startup Success?

8 Hard Lessons Learned From Building an Online Dating Startup

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Some People Are Lucky

F. Scott Fitzgerald

Author, Philosopher

Nothing is as obnoxious as

other people's luck.

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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

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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

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FOCUS ON CREATING VALUE

YOU’LL BE REWARDED

Focus on helping others and everything else

will fall into place. Find a need or desire that

is not yet sufficiently addressed, where the

customer is so passionate they’d happily pay

for a solution.

SOME PEOPLE ARE LUCKY

Focus on Helping People

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Timing Is Everything

Anonymous

In the publishing business, you’re

either first, you’re fabulous,

or you’re f***’ed

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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

wasn’t possible just a couple years ago & ramp up before the market capitulates (supply > demand).

TIMING CRITERIA

Innovation Life Cycle

The Golden Era The  Squeeze  

Consolidation Early Movers

Capitulation

*

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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 %)

Chas

m

Innovation Adoption Curve

New Entrant Opportunity

Ideal point to enter a market

- Geoff Moore

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Avoid Commoditization

It is difficult to imagine a more perfect

commodity than a byte of data. As information

technology’s power and ubiquity have grown,

it strategic importance has diminished.

Nicholas Carr Harvard Business Review, 2003

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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

$500,000 2005

Open Source Software

$50,0002009

Cloud Services (SaaS/PaaS)

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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  

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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  

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Be Weary of Network Effects

Robert Metcalfe Professor, Engineer

Metcalfe’s Law

The value of a network is proportional

to the square of the number of

connected users of the system (n2).

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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/benefits 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

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REACHING CRITICAL MASS

THE “CATCH 22”

Men won’t want come to the table

without a significant number of women.

Women will not join in without a

significant number of men. How do you

engage both parties in the beginning?

NETWORK EFFECTS

The Catch 22

Men

Women

required

required

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Don’t Get Lost In the Noise

Shaffi Mather

I learnt the hard way about

positioning in business, about catering

to the right segments.

Social Entrepreneur

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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.

Porter’s Generic Competitive Strategies

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SEGMENTED FOCUS CUSTOMER AUTHENTICITY

PRICE/VOLUME LEADER VOLUME & COMMODITY

DIFFERENTIATED PRODUCT DISRUPTIVE OR INNOVATIVE

COMPETITIVE POSITIONING

Industry Examples

Religion  

Genera9on  

Lifestyle?  

Scien9fic    Matching  

Gamifica9on  (So+Mo)  

Extending  Social  Network  

First  to  Reach  Cri9cal  Mass  

Free  Leaders  Leaders  of  Free/Casual  

Da9ng  

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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?

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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

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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    Office    

(desk/wifi)  

Social      Des9na9on      (lounge/desert)  

Take  a  Break  

 (convenience)  

Morning  Caffeine  (coffee)  

Morning  Caffeine  (coffee)  

Maxwell House Starbucks

$0.50! $0.50! $1.00! $5.00! $5.00!

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Starbucks repositioned their offering

by creating a value complex around

the coffee commodity. We’re paying

$4 for the entire experience, and the

commodity is only a component of

that. They innovated the value and

made it a more fulfilling experience.

Innovating New Value

VALUE CREATION

Entertainment(emotional desire)

Productivity(logical need)

Innovation(create new

value)Mon

etiz

atio

n(c

aptu

re e

xist

ing

valu

e)

primary functionpe

rcei

ved

valu

e

X"cheap

caffiene"

Starbucks Lounge

(free Wifi, etc)

Desert & Social

Destination

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Entertainment(emotional desire)

Productivity(logical need)

Innovation(create new

value)Mon

etiz

atio

n(c

aptu

re e

xist

ing

valu

e)

primary functionpe

rcei

ved

valu

e

Online Dating is inherently a

marketplace for efficient mate

sourcing. Eharmony innovated with

scientific personality matching.

HotOrNot turned it into entertainment.

Tinder introduced gamification and

applied it to a mobile user experience.

Dating Industry Value Innovation

VALUE CREATION

XMatch.com

EHarmony

HotOrNot Tinder

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Optimization Makes a Big Difference!

Avinash Kaushik Google Evangelist

Never let your (ad) campaigns write

checks that your website cannot cash.

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RISING CUSTOMER ACQUISITION COST

Online advertising has become much more

challenging. Google has made SEO difficult,

social doesn’t convert, and PPC costs are up,

reflecting 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

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Fortunately you can increase profits 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 significant improvements to your lifetime customer value.

OPTIMIZATION

The Solution

TrafficOptimization

ConversionOptimization

CustomerRetention

OriginalAdvertisingPlan

x x

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RESULTS OF EFFORT

Increased ROAS by 500% and

went from -28% ROI, to a

healthy 67% ROI. We can now

buy meaningful traffic to grow

the business.

OPTIMIZATION

The Compounded Effect

    Original   Traffic    (+100%)  

Conversion    (+25%)  

Reten8on    (+100%)  

Traffic  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  profit   ($40)   $20     $50     $200    

ROAS  (revenue/ad  spend)   100%   200%   250%   500%  

ROI  ([revenue-­‐costs]/ads)   -­‐28%   11%   25%   67%  

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Validate Before Building

Steve Blank Entrepreneur, Author, Professor

No business plan survives first contact

with customers … Get out of the

building and talk to your customers.

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Test Your Hypothesis

The Lean “build, learn, measure”

feedback look is fantastic for

optimizing a product concept, once a

customer or hypothesis is defined.

Lean Market Validation

Measure

Learn

Build

Ideas

ProductData

LEAN METHODOLOGY

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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 there’s 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!

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Bringing It All Together …

James Carville Political Strategist

It’s the economy STRATEGY, stupid!

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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

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customer  

product  

compe99on  

9ming  

financial  

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

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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

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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

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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

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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.

[email protected] @NealCabage


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