In this presentation I’ll walk you through a program we’ve been deploying with emerging companies called fastStart. It is based on the idea that the primary focus of the new venture is to get the right product to market at the right time.
Longer video version follows…
It is less about time-to-market pressure and more about using the invested capital wisely, especially now, where the problem tends to be one of “time-to-running-out-of-money” rather than simply time-to-market.
Most new ventures fail, in our experience, because they produce the wrong product--late. The wrong product because they are not close to the customer and late because they lack an “execution system” to focus the team.
We look at most problems from this simple construct; what, want and how… in this order. “What” defines the problem, “want” outlines the criteria by which you will solve it. These can also be called “objectives.” And “how” describes the methods and tactics used to arrive at the solution. Of course, some alternatives are better than others, which is why we use a decision model to prioritize these. More on this later.
Most problems can be broken down using this simple structure. For example, getting customer requirements; “what” is the broad statement of the customer’s problem your product is going to solve, “objectives” are the list of specific customer needs, and the “hows” are the ways to fulfill those needs, which are also called “product requirements.”
The problem lies when these three steps are done in reverse order. Especially in technology businesses, we see people leading with their “hows.” In other words, “here is my solution, what do you think?” To which I always ask, “solution to what problem?” To which I get blank looks from my presenters. The classic solution searching for a problem! Silicon Valley is loaded with these bright ideas!
This is a root cause of failure for new products. Not understanding the “what” and the “want” before executing the “how” is a risky game. Today, where “cash conservation is king” it becomes a life or death risk, because when the money runs out, the chances of getting another round of funding for an “almost done” product is marginal at best. We see many companies failing in Silicon Valley today in that “almost there” stage. When people lead with the “how” they tended to just forget about the rest, ignoring the “what” or the “problem” they are solving as well as the customer’s “wants.” They are often surprised when the product fails to get traction in the market. There is a reason 9 out of 10 new products fail.
So using this metric, lets look at the new venture problem from an investor’s perspective. In this example, I’ll take the point of view of a venture capital fund manager. Lets walk in his shoes and look at what he sees in today’s difficult economic environment.
Here is a quote from a recent discussion; “On the new investment front, the biggest challenge in this turbulent market is finding cash efficient business models (ideally with demonstrated traction!) that can survive a prolonged recession. Cash efficiency seems to be king right now as VC’s face a precarious fund-raising environment and don’t want to be shelling out millions in follow on rounds to a CAPEX heavy juggernaut (i.e., like lots of these late stage Greentech companies today with no revenues, seriously complicated by seized project finance markets). Equally important or tandem to this is also identifying business models that focus on industries or sectors that are counter cyclical to the current downturn (i.e., we love e-commerce, and see an increased migration to online bargain hunting driven by broadband explosion worldwide) or will be the first to rebound once consumer and corporate spending picks up. A quick ROI for a company product is also a key hurdle for us in this market. Can a business demonstrate a near term, tangible return to a customer?”
So I am able to convert this “customer voice” into the following “what” and “want” structure.
The “what” is to find cash efficient businesses that can survive a prolonged recession.
And the “wants” are a set of business objectives that help him evaluate new opportunities and rank his existing portfolio companies. This is a composite list of “wants” that came from talking with many investors about the problems they face in today’s technology markets. The bars represent priority. We use a decision model to do pairwise comparisons between each objective to determine which is most important to reaching the goal, or in this case solving the problem. Each business is different and this is just a composite view from many people to illustrate the concept.
We’ve defined the problem and a way to measure possible solution alternatives, so now lets move to he “hows” or ways to solve the problem. These same “what” and “wants” also provide a great framework for prioritizing a portfolio of potential investment candidates. In this case let’s drill down into four “intervention” techniques we’ve been successfully deploying with new ventures.
Deal Selection uses a decision modeling process to filter possible investment alternatives to find the best candidates that meet our problem statement. There are two filters in this case; a Strategic Filter which is a weighted criteria used to separate and filter candidates that best meet objectives. The second filter is Tactical.
The Tactical Filter speaks more specifically to the qualities that make the new venture attractive to the investment syndicate. These are also ranked using pairwise comparisons and the priority is based on this firm’s experience about what drives a successful venture. The process is not static and new opportunities continually feed the deal pipeline.
Eventually, investment opportunities make it though the filters to become investment candidates. Clearly, decision models only go so far. They provide another data point, but they are not the only data points. They help to organize information and provide structure, but at the end of the day intuition and experience factor in to influence the final selection. The resulting portfolio companies then represent the alternatives that fulfill the objectives, which drive goal attainment, and so on.
Following, are three other intervention options. 2) Feasibility, which is a deep assessment that is more extensive, yet faster, than a normal due-diligence process, 3) Quick-Start, to rapidly set a new venture on the right track, and 4) Turnaround, where a company has fallen behind schedule and may be running out of their finite resources. I’ll briefly speak to each.
Feasibility is a deep assessment designed to improve the quality of information with which to make an investment decision. We’ve seen companies get millions of dollars of funding after a typical due-diligence assessment, only to find shortly after, that they have not aligned their product with the customer and market needs and are also seriously late. What failed in the traditional due-diligence process then? Our approach goes much deeper. In just a few weeks, we get accurate answers to these questions, for real--not smoke and mirrors answers. Our process is effectively like a “flight simulator” is to the pilot, a way to put the team through a “mission” and see how they react. We know what the gap is between what they’ve promised and what they can deliver in terms of product and timing. It also gives us a good feel for the management team and their ability to function together to overcome the technical barriers.
Quick-Start assumes an investment has been made and is a way to put-in-place best practices from day-one, rather than having to fix it after it breaks. The idea behind this intervention is to accelerate the time-to-exit for the investor group. The faster the product gets in the market, the less cash the company will burn and the faster the company can get to break-even. In this “cash is king” world today, this is critical to survival and continued funding. The early warning system is the key to making this work, since this anticipates problems. Acting before-the-fact saves tremendous chunks of time, which translates to efficient use of finite capital. The faster the product gets into customer’s hands, the faster the continuous and iterative development process occurs, another key best practice in rapid product development.
Turnaround, used when there is a gap between what was expected and what is being achieved by the start-up team. Unfortunately, since most start-ups lack an early warning system, by the time they learn they are in trouble--it is too late to fix. This problem tends to take the form of the new product failing to meet performance or functionality goals within the target time frame. Typically, money is running low and time is rapidly evaporating. The techniques used in this environment are like the difference between practicing medicine in the Emergency Room versus a Doctor’s office. Turnarounds tend to be more like the ER. But the goal is the same, understand the gap and quickly take actions to close it, in terms of what minimum functionality is needed at the given point of market introduction. Seems simple, but it never is.