Category: Strategy

While the Simplified One Page Strategic Plan is my favorite planning document for startups, it’s a worksheet for the core elements of the business and certain near-term projects and metrics. After revisiting it at least quarterly to align everyone in the company, there still exists a need to do long-term planning. That’s where a three year vision plan comes in. Too often, entrepreneurs work in the business more than they work on the business.

Here’s an example three year vision plan outline.

• S.W.O.T. Analysis – Strengths, weaknesses, opportunities, and threats as they exist three years from now (e.g. strengths will change over time — what will they look like in three years?)
• Product – Core modules and functionality, much like a simple roadmap for the product
• Team – Outline all the departments, job titles, reporting structure, etc. (e.g. going from 10 people to 100 people is a major undertaking, and this exercise of going through all 100 positions is well worth it — see What Your First 100 Hires Will Look Like)
• Metrics – Include things like annual recurring revenue, customer count, renewal rates, cost of customer acquisition, marketing qualified leads, sales qualified leads, etc.
• Funding – Detail how many rounds of funding are required, dollar amounts, and any other pertinent information
• Miscellaneous – Anything else that’s relevant to the three year vision of the business

A three year vision is a great way to get team members, investors, advisors, and other key constituents thinking about the long road ahead, and not just the next quarter. Spend time on the big vision at least once a year and make it part of the annual routine.

What else? What are some more thoughts on building a three year vision?

TED has an interesting new talk up from Bill Gross, founder of Idealab. titled Bill Gross: The single biggest reason why startups succeed. Bill looked at 100 Idealab companies and 100 non-Idealab companies analyzing them across these six dimensions:

• Idea
• Team
• Execution
• Business model
• Funding
• Timing

From the talk:

So what I would say, in summary, is execution definitely matters a lot. The idea matters a lot. But timing might matter even more. And the best way to really assess timing is to really look at whether consumers are really ready for what you have to offer them. And to be really, really honest about it, not be in denial about any results that you see, because if you have something you love, you want to push it forward, but you have to be very, very honest about that factor on timing.

Personally, I favor team and execution more, but I believe timing plays a much bigger role than most people realize.

What else? Do you believe that timing is the most important consideration in startup success?

Strategyzer has a great blog post titled Why Some Business Models Are Better Than Others. 10 years ago I had a coffee meeting with one of the most successful tech entrepreneurs in town. At that meeting, he emphasized the importance of recurring revenue and suggested that I figure out how to build a business with a subscription element. I took it to heart and have been working on Software-as-a-Service companies ever since. Recurring revenue is one of the seven ideas for better business models.

Here are the seven ideas for better business models from the article:

1. Switching Costs – Higher switching costs decrease the chances of a customer leaving to go to a competitor
2. Recurring Revenues – More predictable cash flow and easier to grow the business (assuming good renewal rates)
3. Earning vs Spending – Models that collect payment before having to spend money to produce the goods or services are more desirable and valuable
4. Game-Changing Cost Structure – Something priced 5% less than established incumbents isn’t that compelling. Something that’s priced 95% less than the established incumbents, and also sustainable, is incredibly compelling.
5. Get Others to Do the Work – Think about the rise of the on-demand marketplaces and the ability to tap into under-utilized labor
6. Scalability – Global reach and distribution provide for greater opportunities
7. Protection from Competitors – Network effects, moats, and other strategies that make it difficult to enter the market

The next time you hear an entrepreneur’s pitch, run through these seven ideas and see how well it stacks up in each area.

What else? What are some other ideas for better business models?

April Dunford has an amazing post up titled A Startup Positioning Template. Effectively positioning a startup is incredibly difficult, and most entrepreneurs struggle with it. Over the years I’ve looked at dozens of Simplified One Page Strategic Plans, which has a number of positioning elements, and those are some of the most poorly-done sections.

Here’s the Startup Positioning Template:

• What is it?
  As short as possible statement that describes what you are
• Target Segment
  The specific target market you are targeting in the short term
• Market Category
  The market that you compete in
• Competitive Alternatives
  If your customers don’t use you, what do they use
• Primary Differentiation
  The one thing that sets you apart the most from the competitive alternatives
• Key Benefit
  The biggest benefit that your target market derives from your offering

Entrepreneurs would do well to use a methodology like the Startup Positioning Template and work through the different components. The next time the topic comes up, have everyone read A Startup Positioning Template.

What else? What are some more thoughts on the Startup Positioning Template?

Jon Birdsong, CEO of Rivalry, wrote a post last month titled SaaS Gratification. The idea with SaaS gratification is that some products are faster to get value from whereas others take more time. There’s a related idea that’s equally important: the wallet test. Simply, the wallet test is how tightly the product is associated with revenue. Put another way, how easily and quantifiably does the software help customers make money.

Here are a few examples of the wallet test:

• Products that directly generate revenue (e.g. ecommerce shopping cart software or lead generation marketplaces for taxi drivers), are undeniably tied to the wallet (e.g. a 10 on a scale of 1-10 with 10 being the best)
• Products that are closely tied to revenue, but don’t actually collect money (e.g. marketing automation software), are slightly lower on the wallet test (e.g. an 8 or 9)
• Products that help organize information, and clearly add value but are harder to quantify (e.g. a CRM), are a bit higher than middle of the road on the wallet test (e.g. a 6)
• Products that are a productivity tool, but aren’t in the revenue conversation (e.g. a screen capture app), are valuable yet low on the wallet test (e.g. a 3 or 4)

When thinking through startup ideas, or evaluating opportunities, include the wallet test as part of the analysis. New ideas that score high on the wallet test are often areas of interest.

What else? What are some more thoughts on the wallet test?

Earlier this month I was talking with an entrepreneur that needed to raise money. His startup was running out of money, and with almost no revenue, it was a matter of either raising more money or laying everyone off. As he went out to the market and pitched investors, there was some demand and a couple investors offered up term sheets. Only, the valuations came in much lower than desired.

While the entrepreneur had one valuation in mind, the market clearing price was something entirely different. Unfortunately, as an entrepreneur in that position, there aren’t any other options. Of course, more investors can be pitched in an attempt to get a higher valuation, but there’s limited time before things fall apart.

Entrepreneurs would do well to recognize that valuations offered by investors represent the market clearing price for the startup, and if time and money runs out, there aren’t any other options. Meeting with a large number of investors (100+) well in advance of needing the cash (e.g. > six months) is one of the best approaches (unfortunately this is a full-time job to create a competitive process).

What else? What are some other thoughts on the market clearing valuation for entrepreneur’s raising money?

Earlier this week I had the opportunity to talk with an entrepreneur who’s considering raising money. His company is doing well at a small scale and getting close to breakeven. Now, he’s in the process of building financial models and mapping out different scenarios regarding raising money vs growing organically.

Here are a few thoughts on raising money vs growing organically:

• Consider Quantifying the SaaS Valuation Growth Rate Multiplier to get a rough ballpark of the valuation for a competitive fundraising process with investors that understand SaaS and put an emphasis on growth
• Understand that SaaS Value Creation is Back-Loaded and that it’s the high growth rates at scale that create tremendous wealth
• Realize that if SaaS Growth Stalls, the valuation of the business plummets as well
• Analyze the potential outcomes and know that The Value Multiplier to Raise VC Money is 5, that is, the company needs to be five times more value to make the same amount of money personally as not raising money from institutional investors
• Decide on a goal for the business and know that some people shoot for a Billion or Bust
• Evaluate if it’s a Winner Take All Market and the corresponding outcomes
• Finally, think hard about being Rich or Royal as a personal goal

There’s no right or wrong answer when it comes to raising money or growing organically as every situation is different. What’s important is that it’s carefully thought through and that the decision is made intentionally.

What else? What are some more thoughts on raising money vs growing organically?