The first step in planning your start-up involves thinking about the underlying assumptions involved in your entrepreneurial venture. Any entrepreneurial venture requires assumptions, because you haven’t built the thing yet. So you have to assume that certain things are true about the world for your startup to work. And there could be many different kinds of assumptions. You could assume that customers will operate in a particular way, your competitors will react in a particular way, that once people see the product they’ll understand the need for it, that they’ll tell their friends. These are the assumptions that your startup is based on. And many times, these assumptions are unspoken, and this can lead you into trouble because it means you haven’t actually thought through what things in your startup you know, and what things you’re assuming you know. And a failure to understand these underlying assumptions can lead to failure, or even missed opportunities. The picture that you seen on the screen is of ChargeItSpot. So ChargeItSpot is a startup that started in one of my classes. And the idea was to build a cell phone charging tower. So, you’d put this in various retail shops and when your cell phone was running low on batteries, you’d bring it to the charger spot and charge it for free while you shopped. And the idea is very good, the company’s been very successful so far and raised quite a bit of venture capital. But they have learned that some of their underlying assumptions are wrong. They thought the main benefit of the charging spot would be that if people would be charging their phone in it, and therefore they’d spend more time walking around the store, waiting for their phone to charge. And that indeed turns out to be a benefit. But one of the big sales factors for the charge it spot has been that registration screen that you see in the middle. So when you put your phone in to charge, you type in your email address in case you lose it. And you type in a secret code. And it turns out the ChargeItSpot is the most effective way of getting email addresses from people in store who are interested in potentially buying in the future. And that’s been one of the major values. And because they didn’t think to ask about that, it took them a while to recognize that there was actually a large growth opportunity that was missing. So these sorts of assumptions, can hobble your business, and thinking about them, becomes a really critical point of startup planning. There are a number of different ways that you can bring assumptions that are normally unspoken to the surface. And there really isn’t magic associated with one way or another. Essentially it’s, servicing assumptions is about asking a list of questions about your startup. And trying to get answers, and think hard with your co-founders if you have them about the underlying factors that are going to make your business successful. So, I’m going to give you one method base on the work of Tom Eisenmann of Harvard Business school, who grouped assumptions into four different categories, and I’m using a solely different version of this. But the basic idea is the same. So the four categories are, Customer Value, how you’re delivering value to the customers. How are the customers going to know that value is being delivered, how are you going to deal with competition. Technology and Operations. What do you actually have to do in your business to make it succeed. What kind of operational steps you need to take, what technology you need to develop. Who’s going to do what? Sales and marketing. How are people going to know about your product? How are they going to be able to buy it? And then finally, the financials and the profit formula. So how are you going to actually generate revenue for your business? What’s the underlying formula that’s going to make you profitable in the long run? So this is a very easy technique. You’re going to go through each of the categories, and we’ll talk about them more in a second, and you’re going to ask yourself key questions and figure out whether or not you can answer them. So what are these four key categories? The first is the customer value area. So you start off by thinking about your customer needs. And the most important question in some ways to ask for your entire entrepreneurial venture is do you know what customer needs you’re solving, and how do you know? If the answer is I’m one of those customers, that’s a great starting point, but do you know the market’s large enough, and how do you know this? What facts are you drawing from? Are there particular market segments that you’re addressing? And if you’ve seen Professor Wong’s talk on customer segments, this is a good way to think about the segmentation issue. Competition. How are different from other products and services? And how do you know that you are? If you are different, how do you keep your advantage, and how do you protect your intellectual property so other people don’t copy it? And, in the longer term, how do you sustain that advantage by dealing with competitors? So how do you think they’re going to react to you entering the market? Do you have any knowledge of this? How are you thinking about responding to that? On the pricing side, how are you going to price your product and service, there’s many different pricing techniques you could use. You could do fixed pricing. You could do bundled pricing. You could price by the month. You could do value based pricing, where you’re getting a percentage of the savings that people have. What’s your pricing method? And how are you figuring out what the right price point is? And who’s paying, is it a customer, or is it something insurance companies are paying for, or is something being done in hospitals, where the hospitals paying for it, and not the doctors? You need to understand who the payer is. And partners. Who do you need to work with to make you successful? Are there companies that need to cooperate with you, and how are you going to give them enough value to convince them to join you and partner with you as you go forward? So this is an exhaustive list, but if you can’t answer these sets of questions you have a major assumption that you need to deal with within your business. The second set of questions deal with technology and operations, how you’re actually going to run the business. So first these are about planning, what tasks need to actually be done in your business. So when you start this, what are you actually going to be doing? What jobs do people do every day? What jobs are people doing in the short term? And how will you structure your tasks so that you learn as much as possible as you move forward with the business. What drives your costs? Many times it’s the people involved with the company. But it could be outsourced technology. It could be hardware. It could be rent. How are you thinking about these sets of issues, and how do you know what your cost drivers are?
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How do you hire? So who’s going to do all the various tasks in your business? Is it just you? You and your co-founder’s? Are you using outside contractors, are you hiring people permanently. If you have that talent already how are you going to deploy it and how much does it cost. If you don’t have the talent how are you going to get it?
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Technology. So how will you develop and maintain your underlying technologies. Are you building things in house or outside? Do you need new technology at all to make this work? And then you need to think about the long term, which is something we’ll be discussing in upcoming classes, such as, because the issues that you raise now and the decisions you make in the very early days, your company will have long term effects across the entire lifespan of your organization. In fact, we have strong evidence that decisions made even hundred years ago, the founding of old companies affect their operations today. So thinking hard about how you’re going to make choices that have longterm positive impacts matter. How will you be able to start up ultimately that doesn’t need you so that you can walk away from it. And you don’t have to do every job in the company forever. Another set of questions is around marketing and sales. So think about your channels, how you’re reaching your customers. What type of sales channels are you going to be using to go to market? How will you actually get those channels to join you, and what kind of value do you need to give them? A 30% margin, 20% margin, a list of names and addresses, and investment in your company? How are they going to join you and come on board? Who’s handling what aspect of sales in your organization?
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Who’s handling prospecting? Who’s handling customer calls? Who’s handling returns or customer service? Those are all issues you need to address. Customer acquisition. How are you getting your new customers, and what is the cost of acquiring one? What is your customer acquisition cost? So how much are you paying to the marketers. How much are you paying in sales incentives? How much you paying in referral fees? And then optimization. How are you going to know if these sales methods are working or not? How are you going to learn as you go? And how are you going to measure success? What are your key metrics, another thing we’ll be talking about. The final set of questions is around financial and profit formulas. What are your financial projections and how do you justify them? What do you know about them? Something we’ll be talking a little bit more when we talk about discover [INAUDIBLE] planning in a couple lessons from now. Then, how will you improve and make your projections better as you move along? And then there’s question of investment, how much money do you need to make your product work or your venture work and how will you actually get that money and that’s, again, something we’ll be talking about a lot more as various fundraising techniques. And then how can you actually order your investments to maximize your value and maximize your learning. So, you spend as little as possible early on to figure out whether this is a good venture idea or not, to grow the value of your venture before you start raising larger amounts of funds. What you’ll notice is that I’ve just given you an exhausting list of questions and I think you’d probably love it if I could answer them for you. But this is about your venture, your business, so these are questions you need to answer for yourself. And I strongly recommend sitting down with your founding team. If you’re a lone founder that you figure out a couple people to join with and talk to about this. And spend a couple hours going through these sets of questions and thinking about what your answers are. And when you do this go through each question and tag them based on two numbers. Give them a number 1-5 based on the level of importance. So, if it turned out the most important part fo your organization, of your venture idea, is that you will find a particular partner who is willing to sell your product, say you need it to be sold for you at Walmart. So that becomes your most important, you’d rate that a five. And it might be that you also are, don’t know very much about how Walmart decides what kind of products to carry. So you’re very unconfident in that. You’d give that a five as well. So what you’ll do ultimately is have answers to every one of the questions I raised, and you’ll have a number between two and ten associated with each one. The highest numbers are those that are the most important and the most uncertain. Those are your key assumptions of your business. Those are the things you need to answer as soon as possible, to figure out whether your business is a good idea or not. Entrepreneurship is interesting because the cost associated with it are not just money. There’s actually three different costs you have to worry about. When you think about what assumptions you’re testing. So the first is cash, how much money your startup has, how much money you have. This is a overriding factor in many startups. It’s obviously a point that we’ll talk about. And we’ll talk much more about how you raise money, how you spend money, how you think about money, inside an entrepreneurial venture. But you also have other kinds of costs you’re spending. And so when I talk to startup founders, one of the issues that comes up continuously is time.
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That you’re racing against time before competitors enter the market or an opportunity disappears. So if it takes you three months to find an answer to a question, that’s three months of leader advantage that might be gone. And then something that founders often don’t talk about but ends up being a very important part of entrepreneurial adventures is the founders’ own reserves of effort and energy. So in an early-stage startup the person who does everything tends to be the founder. And the founder has to be everywhere, managing people, hiring people, selling. So, that takes a lot of energy. And thinking about how you structure this so you’re not expending your energy everywhere, but instead focusing on the things that are most important is a critical part of startup budgeting. So you’re budgeting money, you’re budgeting time, and you’re budgeting effort. So the goal of entrepreneurial planning is to learn as much as you can about your key assumption while minimizing these costs. So you want to focus on the assumptions that are most important and are most unknown. And get answer to those as soon as possible to figure out whether or not your start-up is heading in the right direction or whether you need to change direction or even move and do something else entirely.
