I have been reading the book “Crossing the Chasm” by Geoffrey A. Moore again. I highly recommend the book to anyone in a disruptive business. The book is an easy read and Section 4 sets up the stage for how to really market and sell disruptive technologies. The strategy is simple enough, the author states
The fundamental principle for crossing the chasm as to target a specific niche market as your point of attack and position all your resources on achieving the dominant leadership position in that segment. The approach is first you divide up the universe of possible customers into market segments. Then you evaluate each segment for its attractiveness. After the targets get narrowed down to a very small number, the “finalists”, then you develop estimates of such factors as the market niches’ size, their accessibility to distribution, and the degree to which they are well defended by competitors. Then you pick one and go after it. What’s so hard?
The hard is to the explanation that follows and I agree with that, the action or execution of this strategy is fraught with a low data decision i.e. you don’t know a lot of the prospects of allocating all your resources because you are not sure if this strategy is going to be successful.
Entrepreneurship is a low data decision activity. If the data is obvious and the risk are minimal, I define risk as a loose term, I think the risk is more opportunity cost ie. if you were not doing an entrepreneurial endeavor what else would you be doing and the pay off of that. It is a tough call, and I understand why many people don’t make that choice because we abhor Uncertainty. I used to but not since the financial collapse in 2008, where all my perceptions and biases and epistemological arrogance was turned in its head. Now I cherish uncertainty and randomness, and I wish that everyone gets to experience that feeling it is liberating and exhilarating.
I had planned to do a meetup this week and discuss the above topic. Never got around to it, but I thought the least I could do is write about it. Here is a Kauffman Sketchbook with the title “Where do Entrepreneurs get their money?”
Here are a couple of references on fund raising from some smart people who have done this before:
My 2 cents is that try to bootstrap as much as you can to eliminate most of the risks in your startup. Think of it this way, every risk you eliminate to build a business is value you are building into your company that is your equity. The equation becomes simpler when you don’t take money to eliminate or reduce the risk of starting a new venture. The biggest risk that startups have, I have said this many times and it is worth repeating, startups don’t fail because they have a bad idea… startups fail because they don’t have customers. Eliminate that risk first ie. go and get your customers first, solve their problem, get paid something for it then you have a product/service to market fit. Eliminating that risk really increases the value of your effort, even if you have to raise money the discussion is much different than when you talk to an investor when you have no customers and no revenue.
Obviously there are businesses that need capital to acquire customers or start out for example manufacturing businesses need machines, labor etc those cannot be bootstrapped, however software companies can be easily bootstrapped these days, all you need is a laptop a coffee shop that has WiFi and knowledge to use Cloud Computing infrastructure like GreenQloud or AWS or Rackspace or Azure. I encourage every entrepreneur to delay the fund raising exercise until the Product to Market fit has been achieved. Once you solve the Product/Service to market problem, raise capital if you are in the Land grab business. I wrote about organic growth vs grow fast a while back based on a talk by Joel Spolsky. The most important decision point for a startup to raise capital is based on deciding where is the business. If you are in a Ben&Jerry’s kind of business raising capital is a bad idea. If you are in Amazon Web Service kind of business then you need capital to do a land grab as fast as you can so not raising capital will spell certain doom.
I keep coming back to Clay M. Christensen’s work on The Innovator’s Dilemma. I think the wave of technological changes that is happening as I type this post is quite dramatic. It is interesting to note that HP and DELL both reported earnings where the PC market is declining worldwide at a dramatic phase. HP’s PC business fell by 8% actually all of the business line’s top line revenue fell but of course the headlines in the media reads “At Last, HP Beats Street in Q1 Earning Report“, it only takes a simple look at the year over year trend to see that HP beat the projections of Wall Street analysts by cutting costs and laying off people, I am not sure how you can call this a turn around? anyways, I digress… if you look at DELL’s earning report it is even more dramatic, 31% decline in profits and 24% decline in Consumer business. I really think both Michael Dell and Meg Whitman need to read the book by Clay Christensen, maybe they have and as it states in the book, good well managed companies fail precisely because they have well grounded, established management practices as Clay Christensen puts it
If good management practice drives the failure of successful firms faced with disruptive technological change, then the usual answers to companies’ problems-planning better, working harder, becoming more customer-driven, and taking a longer-term perspective-all exacerbate the problem. Sound execution, speed-to-market, total quality management, and process reengineering are similarly ineffective. Needless to say, this is disquieting news to people who teach future managers!
all the things that the leadership in DELL, HP and to a large extent in Microsoft are doing is futile because they continue to look at the world as a sustainable technological improvement which is incorrect. Maybe Microsoft is doing things a little differently and maybe so is DELL and HP, but the rhetoric coming out of the PR machines in these companies is so passe.
So what is this difference between Sustaining vs Disruptive Technology you ask?
Sustaining technologies improve the performance of established products, along the dimensions of performance that mainstream customers in major markets have historically valued. Most technological advances in a given industry are sustaining in character. On the other hand Disruptive technologies bring to a market a very different value proposition than had been available previously. Generally, disruptive technologies underperform established products in mainstream markets. But they have other features that a few fringe (and generally new) customers value. Products based on disruptive technologies are typically cheaper, simpler, and, frequently, more convenient to use.
We had a fantastic turnout today with over 40 people participating in Hotel Kex lobby in our 4th event related to the Lean Startup book discussion. Ari led the discussion about Validated Learning, once again the whole meeting was in Icelandic until I interrupted the flow with my 2 cents in English what can I say I am like that. Anyways, it was very exciting to see the level of participation and interest in this material. I think the most important element of the discussion was when Gunni gave examples of how traditional businesses can apply the Validated Learning concepts to established and functioning business models, and how one can improve on them. The whole premise of the Validated Learning concept is to treat every assumption we have about our business like a scientific hypothesis and build tests to validate those hypothesis. There were a bunch of references during the examples and talk to Steve Blank‘s book the four steps to Epiphany. I thought this video was very apt as it talks about the lost lessons of validated learning, I like the conclusion- “Lean Startup does not teach you to create value, that comes from within and from your value system. Use Lean Startup methodology to refine that.”
I have been getting a lot of questions related to How does one value Startups. The best reference for valuation goes all the way to Warren Buffet‘s teacher Benjamin Graham and his classic book Security Analysis, I believe the principles taught in those books are timeless ie. they don’t fundamentally change what does change is our perception of value. More recently, Aswath Damodaran‘s work on Valuation is quite impressive and it is used by many professionals. He actually has most of his work available online. Value is such a fluid word, what is valuable to a startup when it is getting out of the door is not as valuable when it is looking into the abyss of the valley of death. I have written about the challenges in valuing startups and the uncertainty that always stares at you when you want to do this exercise. I personally think this is the reason Banks or Warren Buffet do not want to even look at startups because they don’t understand the challenges of running a company that is creating value in an uncertain market climate. In some cases they actually create a market, it hard to calculate the size, market penetration etc.
I have been a student of looking at many of the prominent Venture Capital Investors like Fred Wilson, Brad Feld and Mark Suster, who share their thoughts and methods since I have become interested in investing in startups. Here is a list of blog posts that Fred wrote on Valuation, I have listed them in the order that I thought was relevant to me:
AVC.com : The Present Value of Future Cash Flows To all those Python hackers out there here is a link to code that was shared with everyone on this post by Chris Dixon. The code actually simulates equity payout values with anti-dilution preference etc, I have gone back to my roots of looking at code to learn a concept. I don’t prescribe it to everyone but works for me. If you have Python installed give it a twirl, I love this way of looking at valuation.
AVC.com: Determining Valuation Multiples, there is a link in the article that goes back to a Internet Market place business valuation. I recommend that as well to be considered. In the comments section there is a reference to the baseline data published by Damodaran is also very useful. Check it out here
Considering the above 4 posts and the links they refer to and using the basis of valuing any asset from the classic method one can develop a model. We have developed that model, no it is not in a shape that I can share, when I have time will make it available in this blog.
I was invited to speak at the annual meeting of SVEF the Association of the IcelandicWeb Masters. I was very impressed to see the Mayor of Reykjavik speaking about how he loves the Internet. Anyways, this was like the Oscars of Internet Web Page designers and implementors. I was impressed by the turnout and quite humbled to even be given a stage to talk about something that I believe in. I have written about it here “Iceland can create the next Google“. The quality and the sophistication in the implementation of the websites that were nominated was world class. I wish this work gets publicized to the rest of the world and I spoke about that during the event as well. Orkusalan a energy management company won the most accolades. The city of Reykjavik also had a couple of awards for its website betrireykjavik.is. Here is the full list of the awards (disclaimer: I used Google Translate for the categories, here is the link to the original website article) :
Had lunch with Dr. Kristinn R. Thórisson, and learnt a lot about the Icelandic Institute for Intelligent Machines (IIIM), fascinating stuff. The institutes mission is to accelerate adoption of academic work into the industry as it relates to Artificial Intelligence (A), Machine Learning (ML) etc. The institute is currently funded by Rannis, Reykjavik University and CCP Games. The institute is trying to enable a closer link between innovation and industry. The way it works is that if you are a sponsor of the institute you could technically “outsource” your R&D; project to the institute, which in turn will assemble the required resources i.e team and run the project. This is quite interesting because it enables better management of R&D; budget for companies and also makes for the institute to work on tangible real world problems that need solution. I think the biggest challenge facing this institute is that there are no large innovation companies in Iceland that can support or partner with this effort. I can see many startups that can participate in this effort but then again the startups are running on fumes anyways so they may not be able to sponsor or support the institute. We have a catch 22 situation here but I am confident there are very smart people and they will figure out a way to make this work. As a concept I think it is great, adds a lot of value and can facilitate innovation and make innovation sustainable. I want to push the envelop in looking at this institue and see if the Lean Principles can be applied in the modus operandi of the institute. I think similar institues have been successful in MIT, Stanford, UC Berkley and the like. I think the most prominent one is the Media Lab at MIT. Given the Dr. Kristinn used to be part of the MIT Media Lab, it is a good thing. We need to bring those big companies or capital to foster the relationship between Universities and Commercial Enterprises. This makes the partnership sustainable.
FacebookIPO S1 paper filing has given a lot of material for all the journalists, blogger(yours truly included) and everyone’s mom to take stabs at what Facebook is, can be or cannot be. In addition, every word of what Mark Zuckerberg says in the document is up for grabs. I saw this tweet “Reuters totally clueless about the meaning of hacking” in the @newsycombinator twitter feed. The article was actually written by a syndicated partner column of Reuters called theWrap.com. I have had this experience myself when I refer to the word Hackathon, everyone gets really nervous as if we are going to break into a computer system and do something illegal. Come on folks, get up to speed, don’t be like the elected representatives of Congress! See the Daily Shows excerpt here of what Congressmen think of “Experts” in the Internet technologies, you can skip to 3:43 in the video… it is hilarious. When did we all turn into Ogre?
I really think Mark is trying to re-define the word and bring it mainstream. I totally agree with his statement in the S1 filing “The word ‘hacker’ has an unfairly negative connotation from being portrayed in the media as people who break into computers, in reality, hacking just means building something quickly or testing the boundaries of what can be done. Like most things, it can be used for good or bad, but the vast majority of hackers I’ve met tend to be idealistic people who want to have a positive impact on the world.” Of course the Reuters article does the PR spin to make it sensational with the title “Facebook IPO: Mark Zuckerberg’s Bizarre Ode to Hackers”.
Toworkonsomething(typicallyaprogram).Inanimmediatesense:“Whatareyoudoing?”“I’mhackingTECO.”Inageneral(time-extended)sense:“Whatdoyoudoaroundhere?”“IhackTECO.”Moregenerally,“Ihack“foo”"isroughlyequivalentto“”foo”ismymajorinterest(orproject)”.“Ihacksolid-statephysics.”SeeHacking X for Y.
The third session for the grass root gathering of Entrepreneurs and learners of the Lean Startup book happened this evening in Cafe Solon @17:30. The topic of today’s discussion was the Business Model Canvas from the Business Model Generation, the popular book written by Alexander Osterwalder which came out in 2010. The canvas is used by Innovit the incubator in Iceland. Kristjan, the CEO of Innovit gave a good description of how to use the canvas but it was all in Icelandic. The author of the book stresses that the directions, methods and the canvas given in the book can be used to create new business models for established businesses as well. I think if we have to slap the Lean Startup principle on top of this, I would just add one single question to each and every box in the Canvas:
How do you know? for example in the Value proposition box, once we enter the value proposition that we believe is created by our solution we need to ask the question how do we know that it creates that value? We need to ask our potential customers the question so we can have a validated learning on each of the elements of building the business model. We have the tools, techniques and measurements that are available that enables every business to experiment, create a hypothesis, test if that is true and then iterate over the Build-Measure-Learn cycle.
But overall a good turn out, good questions and good discussions. I was encouraged to see a lot of new faces. I think we are starting a movement right here in Reykjavik. Lets build sustainable businesses by sharing and learning together.
Watch the video of Siggi Hilmarsson, an Icelander who took the concept of Icelandic “Skyr“, which is a healthier version of Yogurt and built a business for it. I have found another mentor for our Icelandic Startups. Just think about the first day when he started making Skyr at home in New York, what boldness should he have had to think that he can compete with large global brands, I am sure he was not thinking about that at all. He did not go to the large stores, but built it organically. I would love to meet him and understand how he got started or why he got started. He also says that he manufactures his products locally in upstate New York and now he is going national with Whole Foods Market. What a fantastic story for the Icelandic Entrepreneur. He has innovated in the most crowded market of them all especially starting in New York City. He has done it in a relatively short period of time as well, he started in 2004… here is his story. Couple of things I think needs to be highlighted:
He focused on finding the market by doing a validated learning i.e making it at home, going to the Green market and selling it first. Build-Measure-Learn
Had defined his niche as a healthy alternative to the existing products, not just in marketing but also in how he made the product
He started with the simpler version of the product, which he could build without a processing plant and scaled the business.
what can I say I am like that. Anyways, it was very exciting to see the level of participation and interest in this material. I think the most important element of the discussion was when Gunni gave examples of how traditional businesses can apply the Validated Learning concepts to established and functioning 
