ENG491 Technology Entrepreneurship

1. ENG491 Technology Entrepreneurship Fall 2011 – Fall 2012 Emre Oto Building a Lean, Scalable Startup www.eng491bu.org Follow on Twitter: @eng491

2. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» What is this course all about?#3 Customer Development • I wish we could be building products this semester, but it is not possible • So we will break the Lean Startup method into two and focus on the client facing part • We will get out of the building and practice Customer Development • We will study Agile Development in theory with examples

3. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» IfStartups Fail from aLack of customersnot Product Development Failure Then Why Do we have: • process to manage product development • no processto managecustomer development

4. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» An Inexpensive Fix Focus on Customers and Markets from Day One How?

5. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Build a Customer Development Process Product Development Concept/Seed Round Product Dev. Alpha/Beta Test Launch/ 1st Ship Customer Development ? ? ? ?

6. Concept/Bus. Plan Product Dev. Alpha/Beta Test Launch/ 1st Ship ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Customer Development is as important as Product Development Product Development CustomerDevelopment CustomerDiscovery Company Building CustomerValidation Customer Creation

7. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Customer Development: Big Ideas • Parallel process toProduct Development • Measurable Checkpoints • Notion of Market Types to represent reality • Emphasis is on learning & discovery before execution

8. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Customer Development Heuristics • There are no facts inside your building, so get outside • Develop for the Few, not the Many • Earlyvangelists make your company • The goal for release 1 is the minimum feature set for earlyvangelists

9. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Customer Discovery: Step 1 CustomerDiscovery CustomerValidation CustomerCreation Company Building • Stop selling, start listening • There are no facts inside your building, so get outside • Test your hypotheses • Two are fundamental: problem and product concept

10. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Customer Discovery: Exit Criteria • What are your customers top problems? • How much will they pay to solve them • Does your product concept solve them? • Do customers agree? • How much will they pay? • Draw a day-in-the-lifeof a customer • before & after your product • Draw the org chart of users & buyers

11. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Customer Validation: Step 2 CustomerDiscovery CustomerValidation Customer Creation Company Building • Develop a repeatable sales process • Only earlyvangelists are crazy enough to buy

12. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Customer Validation: Exit Criteria • Do you have a proven sales roadmap? • Org chart? Influence map? • Do you understand the sales cycle? • ASP, LTV, ROI, etc. • Do you have a set of orders ($’s) validating the roadmap? • Does the financial model make sense?

13. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Customer CreationStep 3 CustomerValidation CustomerDiscovery Customer Creation Company Building • Creation comes after proof of sales • Creation is where you “cross the chasm” • It is a strategy not a tactic

14. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Customer Creation Big Ideas • Big Idea 1: Grow customers from few to many • Big Idea 2: Four Customer Creation activities: • Year One objectives • Positioning • Launch • Demand creation • Big Idea 3: Creation is different for each of the three types of startups

15. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» New Product Conundrum • New Product Introduction methodologies sometimes work, yet sometimes fail • Why? • Is it the people that are different? • Is it the product that are different? • Perhaps there are different “types” of startups?

16. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Three Types of Markets

17. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Three Types of Markets • Who Cares? • Type of Market changes EVERYTHING • Sales, marketing and business development differ radically by market type • Details next week

18. Market Market Size Cost of Entry Launch Type Competitive Barriers Positioning Sales Sales Model Margins Sales Cycle Chasm Width ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Type of MarketChanges Everything • Customers • Needs • Adoption • Finance • Ongoing Capital • Time to Profitability

19. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Definitions: Three Types of Markets • Existing Market • Faster/Better = High end • Resegmented Market • Niche = marketing/branding driven • Cheaper = low end • New Market • Cheaper/good enough can create a new class of product/customer • Innovative/never existed before

20. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Company Building:Step 4 Company Building Customer Creation CustomerValidation CustomerDiscovery • (Re)build your company’s organization & management • Re look at your mission

21. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Company Building: Big Ideas • Big Idea 1: Management needs to change as the company grows • Founders are casualties • Development centric  • Mission-centric  • Process-centric • Big Idea 2: Sales Growth needs to match market type

22. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Company Building: Exit Criteria • Does sales growth plan match market type? • Does spending plan match market type? • Is your team right for the stage of company? • Have you built a mission-oriented culture?

23. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Customer Development: Summary • Parallel process toProduct Development • Hypothesis Testing • Measurable Checkpoints • Not tied to FCS, but to customer milestones • Notion of Market Types to represent reality • Emphasis is on learning & discovery before execution

24. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» What is this course all about?How to Build a Startup Idea Size of the Opportunity Business Model(s) Customer Discovery Customer Validation

25. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» What is this course all about?How to Build a Startup Idea Size of the Opportunity Business Model(s) Customer Discovery Customer Validation Theory Practice

26. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» What is this course all about?How to Build a Startup Idea Size of the Opportunity Business Model(s) Customer Discovery Customer Validation

27. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» New Lanchester Strategy

28. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» How should we, then, build startups? • New markets • or hybrid strategy New Market / Resegmentation • Disruptive Innovation • Primarily new market disruptions • Value Innovation + Blue Ocean Strategy • Making the competition irrelevant

29. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» How should we, then, build startups? • New markets • or hybrid strategy New Market / Resegmentation • Disruptive Innovation • Primarily new market disruptions • Value Innovation + Blue Ocean Strategy • Making the competition irrelevant

30. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation»

31. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Sustaining Innovation • May involve incremental refinements or radical breakthroughs • Improve the performance of established products and services along the dimensions that mainstream customers in major markets historically have valued. (e.g. Moore’s Law) • Targets demanding, high-end customers with better performance than previously available • Higher margins • Greater motivation to fight • Incumbents always win battles of sustaining innovation

32. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Up-market movement • Caused by the growth imperative • Companies must exceed the consensus forecast rate of growth to boost share price • Sustaining innovation to capture higher margin customers to sustain growth • Asymmetric motivation: • Incumbents are always motivated to go up-market • They are never motivated to defend the new or low-end markets • Fight vs. flight

33. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Disruptive Innovation • Doesn’t attempt to bring better products to established customers in existing markets • They redefine the trajectory by introducing products and services that are not as good as currently available products • Offer other benefits: Simpler, more convenient, less expensive etc. • Appeal to new or less-demanding customers

34. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Let us summarize with a video... • http://www.vimeo.com/5729898

35. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» You can’t stand still!

36. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation»

37. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Disruption is relative • An innovation must be disruptive with respect to all players in the target market to be called a true disruption

38. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Examples of Disruptive Innovation • Digital photography vs chemical photography • High speed CMOS video sensors vs photo. film • Downloadable digital media vsCD/DVD • Tablet vs Notebook • LED vsIncandescent light bulb • LCD vsCRT

39. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Two Types of Disruption • New market disruptions • Creates a new market by targeting non-consumers • Create a new value network • Low-end disruptions • Attack the least-profitable and most overserved customers at the low-end of an established market

40. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Two Types of Disruption

41. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» The Value Network Context within which a firm establishes a cost structure and operating processes and works with suppliers and channel partners in order to respond profitably to the common needs of a class of customers New value networks

42. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Disruptive Channels • Disruptive innovations almost always require disruptive distribution channels • Channels of the sustaining innovation are likely to make the disruptive innovation fail • There needs to be symmetry of motivation across the entire chain of entities that add value to the product • Disruptive products must enable the channel to disrupt its competitors • Channel must view the products as a fuel to move up-market

43. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» New-Market Disruptions • Compete with non consumption • Much more affordable to own / simpler to use • They enable a whole new population of people to begin owning and using the product • ..and possibly in a more convenient setting • New-market disruptions initially compete against nonconsumption in their unique value network • As their performance improves they become good enough to pull customers out of the original network into the new one, starting with the least demanding tier

44. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» New Market Disruptions • They don’t invade the mainstream market • They rather pull out customers out of the mainstream value network in to the new one • Incumbent leaders feel no threat or pain until the disruption is in its final stages • New Market Disruptions start stealing customers from the lower end, so the incumbent doesn’t mind due to upmarket movement • Compare with the idea of “making the competition irrelevant” in Blue Ocean Strategy

45. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Examples of New Market Disruptions Sony pioneered the use of transistors in consumer electronics Its portable radios and portable TVs disrupted firms such as RCA that made large TVs and radios using vaccuum tube technology

46. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Low-end Disruptions • Disruptions that take root at the low-end of the original or mainstream value network • They do not create new markets • Low-cost business models that grow by picking off the least attractive of the established firm’s customers • New market disruptions induce incumbents to ignore the attackers, low-end disruptions motivate the incumbents to flee

47. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Most disruptions are hybrids

48. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Litmus Test for New Market DisruptionsQuestion #1 • Is there a large population of people who.. • ..historically have not had the money, equipment, or skill to do this thing for themselves, • ..and as a result have gone without it altogether • ..or have needed to pay someone with more expertise to do it for them?

49. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Litmus Test for New Market DisruptionsQuestion #2 • To use the product or service, do customers need to go to an inconvenient, centralized location?

50. ENG491 Technology Entrepreneurship Week #2 «DisruptiveInnovation» Litmus Test for Low-end DisruptionsQuestion #1 • Are there customers at the low end of the market who would be happy to purchase a product with less (but good enough) performance if they could get it at a lower price?