Strategy and the High-Tech Startup Firm

Mohan Sawhney Kellogg School of Management February 2010

Ingredients of a successful high-tech startup

Big

Idea

Sufficient

Money

Relentless

Competent

Execution

Team

Good

Plan
And a generous helping of luck…
1

What I will talk about
• What makes for a winning idea? • What makes for a winning team? • What makes for a winning plan? • How do you raise money? • What are the challenges in execution?

2

The Idea “Technology is the solution. Now.Anonymous . what was your problem?” .

Start with a customer problem: Examples Linksys – How can I use the Internet everywhere in my home? Akamai – How can we reduce congestion on the Internet? Facebook – How can I stay connected with my classmates? Blue Nile – How can I buy diamonds for my significant other without looking foolish? Open Table – How can I find what restaurants have open tables and how can I make reservations easily? Craigslist – How can I find stuff and services within my city? eHarmony – How do I find my life partner? 4 .

com Solve an obvious problem Mozy versus Motorola Envoy Solve a complete problem Virgin Airlines versus British Airways Solve a worsening problem Google versus Blockbuster Video 5 .Do you have a winning problem to solve? Seven Tests Solve a real problem Lotus Notes versus Microsoft OneNote Solve a focused problem Tablet PC versus BlackBerry Solve a big problem Juniper Networks versus Flip (Pure Digital) Solve a hard problem Ciena versus eToys.

Key questions to ask • Who are the audiences you are addressing with your idea? • What pain points you are addressing for these audiences? • What evidence do you have that these pain points are real? • What are the current solution approaches? • What’s lacking in these approaches? • What solution are you proposing? • How is your solution approach better than current workarounds? • How big is this difference and what is it worth to customers? • What’s in it for other stakeholders besides end-customers? • Why hasn’t someone else thought of your idea yet? • Are you sure nobody has thought of your idea yet? • What is proprietary about your idea? • What makes your team uniquely qualified to implement your idea? 6 .Winning ideas .

The Team .

Finance & Administration) 8 .What should a founding team look like? Engineering/ Technology (VP Engineering) Seven deadly hiring sins: • Hiring based on convenience • Hiring without due diligence • Hiring big-company stars • Hiring the wrong attitude • Hiring poor listeners • Hiring a high-powered CFO • Hiring VP sales without a product Team Leader (President & CEO) Marketing/Sales (VP Sales & Marketing) Finance/ Administration (VP.

Questions investors ask about the team • Is the team leader strong and passionate? • Will leader and team attract “A” players? • Is the management team appropriate for the stage of the company? • Has the team worked together before? • What are the team’s values and what type of culture will they create? • Is there a strong technical leader? • Is there a strong business development leader? • Does the team have deep domain or technical expertise? • Does the team listen and take criticism in a positive way? • Does team have a good blend of “thinkers” and “doers”? • If current plan doesn’t work out. will team adapt to other ideas? • Will the founders give up control if that is what the venture demands? 9 .

” Delegation – Building a team and delegating Communication – Strong communicator. and good listener Risk-taker – Ability to place risky bets and live with them Humility – Lack of ego and self-promotion Extra points for humor 10 . inspirational.Characteristics of great startup CEOs Passion and energy – Desire to win and infectious enthusiasm Integrity – Intellectually honest and values-driven Openness – “Best idea wins.

respect. look for industry experience •Don’t over-hire 11 .People •Don’t hire everyone in your image •Start with people you know. and have proven successful •A first time entrepreneur should consider having a partner/mentor •Look for people with both large and small company experience •All employees should be preferably “full time” so interests are aligned •Consider deferring some salary for additional stock incentive •Don’t hire too many academics.

good place to get experts who cannot commit to BOD Should serve specific roles – Credibility – Strategic advice – Investor and Customer contacts – Money 12 .Board of Directors and Board of Advisors Board of Directors Three types of directors – Management – Investors – Independent outsiders (usually come later) Roles and responsibilities – Provide strategic direction and advice to management – Represent shareholders – Select president and other officers – Set management compensation – Decide major issues like acquisitions and key partnerships – Decide fundraising strategy – Approve budgets Board of Advisors Very important in early stages. more than BOD No fiduciary responsibility.

The Plan .

Midwest likes . but startups are a movie The planning is more important than the plan The assumptions are more important than the forecasts Things will never turn out as planned How long should it be? Short enough to read Long enough to be rigorous West Coast prefers .DOC.PPT.XLS! 14 . Truths about a business plan A plan is a snapshot. East Coast prefers .The Business Plan Why do you need a business plan? You need it as a roadmap You need it to clarify priorities You need it to attract funding It is used as a guide when speed bumps happen It is your company & your personal scorecard.

but it’s easy to read. 15 . but also for 3-5 years out It’s a formal Plan. It’s for today. but flexible. but logical. It’s creative.The paradoxes in writing a business plan It’s visionary. but it follows The Rules. It’s financially perfect.

24 and 36 months out • Describe how you propose to take your product to market • Make bottom-up as well as top-down projections • Know what 4 to 5 assumptions your plan pivots on • Discuss the key risk factors • State how much money you will need. • Define exactly how the funds will be used • State your possible exit strategies 16 .Tips for writing a good business plan • Be brief and direct • Get to the bottom line quickly • Identify what the business is immediately • Define the customers quickly • Define the customer problem clearly • Define what’s compelling • Define what’s unique • Describe how you will make money • Provide a phased snapshot of your company 12.

proofread & proofread! 17 .What you should NOT do in a business plan Forget about your audience and what they want Forget what makes your plan different Focus only on you & your technology Use highly technical buzz words and jargon Forget about objective customer research Base your forecasts on Forrester or Gartner Research Make unsubstantiated statements or claims Include detailed budgets and forecasts Define valuations in the actual plan Attempt to write the business plan alone Extend the process more than two months Forget to proofread.

What’s included in a business plan? Executive Summary The Business Products & Services Market and Competition Customers and Value Proposition Engineering and Product Development Sales and Marketing Management Team Pro Forma financials Risks and open issues Brief appendices if necessary 18 .

g. Regional VC (e. It should include a brief description of: Your Idea Your markets Your customers and your value proposition Your competitive advantages Your revenue model Your management team Your economics. Madison Dearborn Partners) – 9... 19 . First Analysis) – 400 plans per year. National VC (e. A good executive summary provides investors basic information about the company and serves as a “hook” to get them to read further. Charles River Partners.. Kleiner Perkins) – 10.g.g.Executive Summary The executive summary is a snapshot of the business plan. profitability. Local VC (e.000+ plans per year.600 plans per year. and exit potential The executive summary may be the only section potential investors read.

The Business The business opportunity The markets The customers and their needs The value proposition The technology The products 20 .

The Products/Services What is the product/service you propose to create? What is the current state of development for the product/service? How unique is the product/service? Has the product/service generated any revenue? How strong is the intellectual property surrounding the product/service? How hard is it to develop? Do you know how it will be taken to market and priced? 21 .

The Market How do you define the market? What is the size of the market? What are the major factors influencing the growth in the market? What are the key trends in the evolution of the market? Who are the intended customers for the company’s product/service? How will the company reach the intended customers? Who are the major competitors in the market? 22 .

Customers and Value Proposition What are the customer segments in the market? What segments will you target in the initial stages? What are the pain points for these customers? What are they currently doing about the problem? Why will they buy from you? How will you gain entry into customer accounts (for B2B startups)? 23 .

What is your development status? Describe your primary milestones. Assume development will be late. but not numbing.Engineering and Development What are your core technologies? Provide sufficient. Be conservative. detail. What is proprietary about your technology or solution? Intellectual property? Unique background or skills? Detail the technical team’s background. 24 .

Sales & Marketing What are your revenue streams? How will you price your products? What channels will you use to go to market? What partnerships and alliances will you create? How will you promote and build awareness about your products? What tactics will you use to penetrate the market? What is your hiring plan for a sales force and business development? 25 .

Experience counts first Dedication counts second Ability to rapidly learn is third Too strong an ego is a negative 26 .Management Team The team (or lack thereof) is the #1 reason that investors do not invest.

Your business and sales models must tie in. Your market growth objectives must tie in.The Pro Forma Financials Are the Pro Forma financial statements reasonable? Do the pro forma statements correlate with each other? Is the projected growth rate achievable? Is the projected burn rate reasonable? Can investors get the desired return on investment? The Rule: Everything Must Hang Together Your vision and strategies in text must tie in. Your margin percentages must tie in. Don’t forget… Key assumptions Primary categories for the use of the funds Spreadsheets can lie very elegantly! 27 . Your cost of goods must tie in. Your expenses must reflect standard percentages.

etc.). Has the management team identified the critical risks? Are the critical risks addressed in the proper order with the least amount of capital? Startup Risk R is k Time 28 .Critical Risks Every startup faces risks (technology. operational. market. finance.

The Money .

Tips on raising money Typical sequence F&F (Friends and Family) Angel Investors Venture Investors (Series A and onwards) Strategic Investors Late-Stage and Mezzanine Funds Public Markets Things I have learned about raising money Put some of your skin in the game Size of the pie wins every time over share of the pie Getting a high valuation may be a fatal mistake Don’t value the company in the angel round Tap smart angels and make them advisors Smart money is worth a huge valuation discount More startups die of indigestion than of starvation Once you get a VC in the game. not when you need it It will take twice as long and thrice as much work as you think to raise money 30 . the clock is ticking Raise money when you can.

Growing Pains .

Six key dilemmas for startup firms Flexibility versus focus – Keeping strategic options open to be responsive to signals from the environment. organization. and processes) that is built for speed. versus creating a value capture mechanism that generates profits Service versus product – Creating a service-intensive offering that generates revenues and provides complete customer solutions. to a productized offering that generates increasing returns and can be scaled Speed versus scalability – Choosing a business architecture (including technology. versus a scalable architecture that is built to last. versus committing to a strategy and executing on it Growth versus profit – Creating a compelling value proposition that generates growth. Opportunism versus deliberation – Building partnerships and customer base opportunistically to gain traction versus carefully choosing customers and partners with cumulative logic Vertical integration versus virtual integration – Forward integrating to capture downstream rents versus partnering to reduce capital intensity 32 .

gain deliberation – Define cumulative logic for partnering Vertical versus virtual integration – Vertically integrate in vertical markets.Dealing with the dilemmas Flexibility versus focus – Keep fixity in vision. but flexibility in pathways to vision – Choose pivot points for business model migration in response to external shocks Service versus product – Servicize to learn. and preserve right to play – Mix-n-match modular components for speed as well as scalability Opportunism versus deliberation – Start opportunistically. virtually integrate in horizontal markets 33 . then productize to earn Growth versus profit – Create dual engines for growth and profitability Speed versus scalability – Modularize the business.

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