Flow Ventures

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Category Archives: strategy

The Thinking Behind Starting Up: 10 Posts

July 20, 2009 by raymond

The Flow Ventures blog has been up and running for over six months and during that time it’s naturally gravitated towards topics for early-stage startups. Partly because that’s our focus at Flow and partly because people still overlook all the difficult work that happens right at the start of a startup. Things like idea screening, brainstorming, finding strategy, and finding competitors are all things entrepreneurs should be doing for themselves, not just when requested by outsiders.

I often tell people that the very first step in a startup is relatively risk free. You haven’t committed your time and money yet and you haven’t made promises to others that obligate you to a certain path. You have time to noodle around finding great ideas and discarding bad ones. This is the time to spend at whiteboards, in cafes debating your ideas, and doing research on the Web and in the real world. This is the time to assume your idea stinks and try to convince yourself that it doesn’t (not the other way around).

We’re going to keep focusing on the early stages of startups but here are 10 blog posts we’ve written so far that provide some practical ways to think about idea and business creation:

Writing this list makes it obvious that there are lots of gaps in our coverage. Hopefully, we’ll fill in some of those gaps over the rest of the year.

The Value Net as a Tool for Competitive Analysis

July 6, 2009 by raymond

Having talked about the goal of competitive analysis and being better, not just different, it’s time to talk about a framework for doing competitive analysis. The Value Net, developed by Adam Brandenburger and Barry Nalebuff, is inspired by Porter’s Five Forces. It’s easy to understand but includes a lot of depth that will allow you to more fully understand the competitive forces surrounding your startup.

Let’s take a look at the graphic above. It shows 4 sources of potential competition surrounding you: Partners (whose products and services complement yours), Rivals (who compete with you), Suppliers (whose “raw materials” you require), and Customers (and distributors) who are the destination for your products. The horizontal items are the players in your industry and the vertical items are your supply chain.

Rivals: More than direct competitors

Most new companies do everything they can to say “there is no competition”. I’ve already covered why this is tantamount to saying “I do not know what I am doing.” Just because there isn’t a company that looks exactly like you doesn’t mean you don’t have competition.

Rivals are all the people or forces competing against you for the dollars and attention of your customers. They include:

  • Direct competitors – if you’re a best-of-breed product, look for integrated solutions and vice versa
  • Indirect competitors – if you’re a product company, watch out for service companies
  • Alternatives - like doing nothing, in-house solutions
  • Changing standards and regulation – when standards change, everyone in your industry might suffer

Think of it from the customer’s perspective. If you want to improve employee communication you might build an employee portal, buy one, hire a consultant or put it off until next year. There are many alternatives competing for your time and money.

Partners: Wolves in sheep’s clothing?

Partners are your “friends” in the marketplace whose products or services complement your own. This could be someone who integrates your product into theirs or provides a value-add service, like consulting, that makes it easier for people to adopt your product. Why even consider partners in a competitive analysis?

The reason is because partners, like rivals, are also fighting for customers’ attention. Sure, in the beginning you may specifically go into a partnership to reach markets outside your immediate target. That may be your partner’s strategy too. But the more successful you are, the more your partner might realize that your market (or your business) is something worth emulating. They could become a direct competitor. This is especially true in the type of partnerships startups tend to enter into, i.e. David (you) vs. Goliath (them).

Here’s an example. You build the next great mobile enterprise app. You license a “lite” version to a major portal so they can market it to individuals and SMEs. It becomes a success and the portal decides not only to replace you with something they developed on their own, but to release an enterprise version that competes directly with you in your other markets. For them, you were just free R&D.

Yes, you can do things legally to protect yourself. The point is don’t forget how easily partners can turn into rivals.

Suppliers

How can a supplier be a threat to you? When they decide to work with a rival instead of you. This isn’t as rare as you might think. Exclusivity agreements could lock you out of a key technology. Or a bigger rival could simply eat up so much bandwidth that your supplier can’t pay any attention to you. Employees are “suppliers” too and competitors would like nothing more than robbing you of your stock of talent.

Don’t overlook the fact that the more volume you drive to a supplier the more they might think about competing with you. This is called forward integration and it’s especially acute when your supplier has leverage over you in the form of an exclusive resource, the best price, or some other unique advantage. Here’s an example: you build the next great mobile enterprise app that relies on you licensing a patented mobile synch technology from another firm. This is great for them because you drive sales and they don’t have to do any work. But, the more successful you are the more it’s tempting for them to move forward in the supply chain with their own branded product. Worse, if they cut you off from your supply of technology it will put you at a competitive disadvantage.

Customers (and distributors)

The area of the Value Net above you includes your customers as well as any resellers or distributors you use. Like with partners and suppliers, be aware when these people have power over you in some way. E.g. customers (and distributors) have power when there are a lot of rivals in any industry. Or there may be other industry practices that favor resellers: e.g. brokers in real estate and insurance.

Understanding how your customers buy (from you or from your resellers) is an important aspect to understanding competition. Again, look at it from their point of view. The customer might value on-site installation and customization. Your Web 2.0 SaaS model might be feature-rich and inexpensive but your competitor’s product is sold through local VARs who can provide consulting, installation and after-sales support on the customer’s premises. The point is that competition can occur between different types of sales channels, not only between firms.

Putting it all together

To summarize, here’s how you can use Value Net to do competitive analysis:

  1. Identify your key Rivals, Partners, Suppliers and Customers/Distributors – Be paranoid and build a long list that you pare down later
  2. Look at the red arrows to understand behind-the-scenes competitive dynamics
  3. Look at the grey lines to understand your power relative to your rivals, suppliers, partners and customers – any area where you have less power is a potential competitive threat

The nice thing about the Value Net is that it’s easy to fit onto one Powerpoint slide. Showing this level of depth for your Competition slide will be a huge improvement over what I normally see in startup pitch decks. I’ll post some examples of completed Value Nets in a later post.

Competitive Analysis for Startups: Being Better, Not Just Different

May 25, 2009 by raymond

In the last post I talked about the goal of competitive analysis. In this post I’ll talk about why (and when) it’s ok to compete head-on.

Let’s review why startups spend so much time showing they’re different. Anyone who’s read (and hopefully re-read) Crossing the Chasm knows that it’s important for startups to find a beachhead, i.e. a niche where they can get some traction without forcing bigger rivals to respond. This is a good strategy because it’s easier and cheaper to start generating results, and revenues, in a beachhead.

But what happens when you’re not the only player attacking a beachhead? Some investors pass on opportunities because there are already one or two funded startups in a space. Others only invest when they see that a space is heating up.

Don’t Be Afraid to Compete

You don’t convince someone you’re going to win a 100-yard sprint by talking about how you have a totally unique approach to running that involves your hands, not your feet. In other words, it’s ok to talk about areas where you and your competitor(s) will compete directly. Your job is to prove how your team, your structure and your approach will mean you’ll win. This is almost entirely overlooked in business plans (and business planning) because we’re all too busy showing why we’re Different, not why we’re Better.

Some examples:

  • Funding - I hate to say it as a believer in lean startups, but in some cases more money = more ability to compete. This is true in markets where you’re already competing on price or greenfield markets where there’s a rush to grab open real estate.
  • Focus - You may have the exact same product as a competitor but you may be focusing on a different aspect such as bundling/integration, customer service, ease of use etc. You need to prove how your focus translates into competitive advantage, e.g. the best buyers want the best customer service, not necessarily the most features.
  • Team - This is why recruiting will always be one of the top priorities of a CEO. In head to head competition the better team (e.g. more experience, more industry contacts, more skilled) will always have a competitive advantage. If you have an A team you should be talking about it front and center.
  • Speed - If your startup is built for speed then you don’t need to be first to market. Let your competitor invest in all the R&D and market education. Being a fast-follower is a great head-on competitive strategy and one that’s very well suited to lean startups. Plus it annoys the hell out of your competitors.
  • Best Practices – A great way to nullify the competitive advantage of a bigger rival is to adopt industry standards. Being close to the associations that set standards means that competitors cannot say that choosing your product is risky. You won’t have an advantage over competitors but you’ll level the playing field so you can compete in other areas.

I’d like to see more startups openly talk about direct competition and how they’re designed to win that kind of competition. When you think about it, saying you’re unique is just another way of saying your R&D and product development is better than your rivals. In the end there’s a lot more direct competition than startups like to think. It’s ok to compete head-on (assuming you’ve made sure that you have real competitive advantages of course).

Competitive Analysis for Startups: The Goal

May 22, 2009 by raymond

One of the hardest things for emerging companies to get a handle on is analyzing the competition. Investors grimace when we hear “there is no competition” because outside of the world of patents, it’s just not true. But on the other hand, what’s the point of starting a new company when there are lots of competitors, implying a crowded space? Entrepreneurs often get lost somewhere between “no competition” and “too much competition”. This leads to unconvincing business plans or, worse, a strategy that’s blind to real competitive threats.

What’s the goal of competitive analysis?

For most entrepreneurs trying to convince people about a new product, the goal seems to be to prove, at all costs, that what they have is unique. There’s a standard series of tricks to accomplish this, two of my favorites of which are:

 

 

 

 

 

 

and

 

 

 

 

It’s pretty easy to define your competitive analysis in such a way that you appear totally unique. The question is, are you defining criteria that your customers care about?

“Competitive Intelligence” vs. “Competitive Analysis”

Whether you’re preparing a VC pitch deck or just strategizing about your business, remember that your real goal isn’t to show that you have a competitive advantage. Why? Because you might not. The real goal is to be an expert about your competitive landscape (and a paranoid one at that). The real goal of the Competition section of your business plan is to impress the reader that you are a) an expert about your competition and b) more paranoid than the reader (since the reader isn’t the one running the business).

The bad news is that being a real expert about your competition takes more time than creating a 2X2 matrix. But the good news is that you’ll be much better prepared for conversations with customers and investors who love pointing out that “Product X already does that”.

Stop Being Afraid to Talk About Your Competition

The takeaway is that you shouldn’t be afraid to have a competitive analysis that seems to be full of competitors. Your job is to show that you have a sophisticated understanding of your industry and where you fit in. I’m always more interested in how a startup is going to compete rather than why they don’t have to.

Business Planning Without Business Plans

April 15, 2009 by raymond

I recently ran a couple of business planning seminars at the 5th Annual Inventing the Future Conference put on by Young Inventors. Since it was a no Powerpoint affair (yeah!) I have no slides to share but here is a quick summary:

Business Plans DO NOT EQUAL Business Planning

By The Scott (Creative Commons)

By The Scott (Creative Commons)

It’s amazing how much stock we put in business plans considering they are works of fiction. Few startups really know their precise target market, product, pricing or cost structure. How could they? I guess writing a business plan is a good exercise in research and discipline but only if it doesn’t distract you from real business planning. My personal favorite is figuring out the size of a market. Any time there is 3rd party research on market size your product is probably too late. You can’t really size a market you’re creating from scratch so don’t sweat the details. Just show an intelligent attempt and that will be impressive enough. A recent WSJ article claims that Business Plans Don’t Matter to VCs (though not all agree).

All Customers Are Not Created Equal

There’s not much I can write about targeting specific customers that hasn’t been covered by Geoffrey A. Moore in Crossing the Chasm. If you haven’t read it please stop reading this blog and buy the book! If you have, a re-read will remind you how it still holds true in so many cases. Startups should realize that there is no such thing as a generic customer. When you’re planning, it’s important to find a niche where you can find customers with specific pain points. Even within this niche you have to figure out how to target early adopters, i.e. people who are willing to take a risk on a startup. Targeting the early majority (i.e. more practically-minded people who need proof before they buy) is a waste of time until you have bona fides with early adopters.

From Wikimedia Commons

From Wikimedia Commons

Real-world planning tip: Create fictional caricatures of your customers (e.g. “Joe the plumber”, or more precisely “Joe the small residential plumber looking for ways to level the playing field against bigger rivals”). You should have one caricature for each of your customer types. Then keep these ‘people’ in mind every time you make a strategic decision in your company.

Find The Value

Business plans make us believe that commercializing new products is a linear progress of steps leading outwards from the original idea. Reality is a lot less linear. Sure you may have a breakthrough technology or a wonderful idea and have a great plan to push it to market, but it has to pass the “Who Cares?” test first. It’s easy to convince yourself that people (especially generic people…) will buy your product. It’s a lot harder to go out and talk to them. I always ask entrepreneurs if they’ve talked to 100 prospective customers of their products. This actually takes less time than writing a business plan!

Real-world planning tip: Get to the core of your idea by figuring out if you have a vitamin or a painkiller. The good news is that this early in the game it’s not expensive to start over.

Real-world planning tip: Since Frederick Winslow Taylor invented time and motion studies people have been measuring and analyzing user behavior. Though I’m not recommending startups take up cameras and stopwatches, I am recommending you quantify the value you purportedly add. Think your solution saves time? Detail exactly how much time, in minutes or seconds. This presumes you know what your customers were doing before they bought your product. Once you have a convincing argument bring it to a customer and try to convince them. Then on to 99 more.

Write Once, Don’t-Survive-Battlefield Everywhere

To summarize, I’m not saying that business plans are evil. Sometimes it’s good for entrepreneurs to work out ideas on paper before committing time and capital to them. Other times you have no choice, e.g. for banks or VCs. But don’t confuse writing a plan with real business planning. A plan is something you write, print, file away and celebrate with a pint. Business planning is a continuous discpline you’ll use throughout the life of your business.

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