Nesheim Online

HOW DO START-UPS MEASURE A MARKET THAT DOES NOT YET EXIST? Tips that work for serial entreprneurs

"How do I measure the size of the market my start-up will be competing in?

I received that question yesterday from a first-timer. It's an important question.

Here are responsive tips from serial entrepreneurs (who do it with little effort).

EXAMPLE

Let's assume you are going to sell an app to consumers. Specifically, it would help people monitor calories eaten daily by scanning the dish of food they eat, using their smartphone. The company business model (how it makes money) is 90 percent sales, plus 10 percent from advertising.

The numbers you will be generating will be Units and Price per Unit. The mulitiplicant is the economic size of your market.

• Top down: TAM = Total Available Market
  
  1. How many end users have an over-weight problem?
  2. How many have an under-weight problem?
  3. For (1.) and (2.) how many are
     1. In the U.S.
     2. Europe
     3. S. America
     4. China
     5. India
     6. Rest of World
  4. What portion of them own a smartphone?
  5. What portion are
     1. Obese
     2. Over weight by 30 pounds or more
     3. Think of themselves as "over-weight"
     4. Have serious (doctor treated) health problems related to excess weight
  6. What portion are
     1. Seriously under-weight
     2. Chronically under-weight
     3. Psychologically under-weight
  7. The total of the above equals TAM
     1. Units
     2. Price per Unit
     3. Dollars
• Focus: Ideal Customer = SAM = Served Available Market
  
  1. Which segments of TAM is your product most appealing to (pick 6)?
     1. Which segment is most eager to use your product?
     2. What 2 related segments are next as measured by product appeal?
  2. In what year will you offer products for each of those 3 market segments?
  3. Line up these 3 segments like Bowling Pins
  4. The total of the above equals SAM
  •  
    1. Units
    2. Price per Unit
    3. Dollars
    4. Calculate % of TAM
       
       
• Sales: Customer Adoption = SOM = Share of Market
  1. For each of the 3 Bowling Pins:
     1. At what rate (% of each of the 3 market segments in SAM) will customers purchase your product, each year, for five years.
        1. Units
        2. Price per Unit
        3. Dollars
     2. Add the 3 sets of numbers to get your Sales.
        1. Total Units
        2. Total Dollars
        3. Average Selling Price
        4. % of SAM

• Boundaries:
  • SAM in early years should be less than 25% of TAM, rarely over 50%.
  • SAM below 10% is too small, or TAM is too large, not focused enough, lacks meaning.
  • SOM over 30% of SAM is rare. Gorillas of new markets settle in around 30%
    • SOM below 10% is too small.
    • Your adoption rare may be too conservative.
    • Or your product is rather boring, not appealing.

Once you start to follow this example for your start-up, you'll get a feel for how it is done. Avoid looking for other people to measure the market for you. Serial entrepreneurs never do. Instead, they focus on exactly what they are offering to their Ideal Customer, find them in various related markets, and figure out a plan for selling to them, including modifying the first product to appeal to each market segment.

BOTTOM LINE: You can forecast something from nothing. New markets just forming in people's heads is where great start-ups begin. Facebook before Facebook. Google before Google. Even more modest new enterprises think the same way. First-timers can learn it. MBAs can learn it. Giant corporation people can learn it. So can you! Do it and add it to the elements you are using to build your unfair advantage.

I wish you The Best on your Adventure!

CAN STARTUP CEOS BUY "GOING VIRAL" OR DOES IT OCCUR NATURALLY?

"That startup is boosting users by buying traffic for its app!" is what a serial entrepreneur observed this weekend during our discussion.

He meant that a related new enterprise had recorded rising numbers of users. That suggested a sign that the app was staging to go viral. But after some research the findings revealed the growth numbers emanated from hundreds of thousands of dollars spent to purchase traffic and users.

That reminded me of a trustworthy adage from wise serial entrepreneurs:

"You can't win a race running on crutches."

Neither can startups.

Unless you are competing in the Special Olympics, your crutches are a sign of a fundamentally weakness: you are in an undesirable position, unable to compete to win.

In other words, if your app is not compelling to end users, all the extra things you to to try to get users to get excited and use it are doomed to flop. A dead horse is a dead horse.

All the PR and blogging and shouting will not produce something insanely great if it is not insanely great.

If it is insanely great, you'll find users quickly raving about your app, spreading the word "Gotta have it!" to friends around the planet, all at no cost or effort to you.

After that it's up to you to reenforce their enthusiasm, contribute to the viral momentum (by continuing to deliver what your Ideal Customers eagerly are seeking), and enjoy the fruits of your hard, creative work with the users. That's what "marcom" pros, marketing communications professionals, are skilled at.

I don't mean that the app/product/service will sell itself. You'll have to put in a ton of hard work, be very creative and execute with skill and great effort.

I do mean that dressing up a dog in a beautiful gown does not overcome reality: it's still a dog.

This is why serial founding CEOs focus on making an app/product/service so "insanely great" that end users rave about it and can't wait to Tweet, Facebook Like, email, blog and spread the word around the planet. The startup winners avoid artificial traffic generation efforts, pushy PR work, and blog influencing because they have their hands full keeping the servers from crashing as thousands of end users/customers make accelerating purchases by the hour.

BOTTOM LINE: Going viral is a natural phenomenon. Trying to artificially boost traffic and end users only produces a brief rise in the inevitable curve of a mediocre app/product/service. As founder CEO, it's your job to morph what you have into what the end users rave about. Then your startup will "go viral" naturally. That will be the sign eagerly sought for by experienced startup employees, strategic partners and investors, as well as eager bloggers and reporters. When you can produce products like that, you are onto the path of the winners. It's a key part of how serial entrepreneurs build their unfair advantages.

I wish you The Best on your Adventure!

HOW CAN MY START-UP CUT THROUGH THE NOISE? Tips from the serial entrepreneurs

So you've got a great start-up started but feel like you are lost in the crowd? Can't get attention or respect? Lost in the herd of start-ups in your space?

How does a serial entrepreneur "cut through the noise?"

Here are some practical tips I've learned from the best (and worst) of the bunch (of start-ups) over my too-many years of working with ambitious entrepreneurs like you:

• Start-ups fall into two categories: LIFE or DEATH
• LIFE start-ups give birth and succeed.
  
  • DEATH start-ups are dead-on-arrival and should be quickly buried.
• LIFE start-ups do something never been done before.
  • DEATH start-ups do "me-too, better" things already done by someone else.
• LIFE start-ups start a new category (social networking, location-based-services).
  • DEATH start-ups enter an established category that everyone knows about.
• LIFE start-ups enter a fresh market not yet dominated by one company.
  • DEATH start-ups attack an established market dominated by a Gorilla (Facebook, FourSquare).
• LIFE start-ups think global, world-class, all over the planet, from the day they are conceived.
  • DEATH start-ups think "local", small.
• LIFE start-ups create "WOW!" in their product/service that thrills end users, customers and bloggers.
  
  • DEATH start-ups are undistinguished copy-cats that bore everyone.
• LIFE start-ups are so exciting that they "go viral" because people cannot wait to spread the word around the planet.
  
  • DEATH start-ups are so boring they think they have to advertise or do shocking things to get attention.
• LIFE start-ups have assembled the elements that produce an UNFAIR ADVANTAGE.
  • DEATH start-ups have no competitive advantage.

BOTTOM LINE: Life or death, the choice is yours. You'll "cut through the noise" when you are a LIFE start-up. If not, quickly dig a trench, bury your start-up and go on to do a LIFE start-up next. This is not rocket science. It is essential for you to learn. It is what it takes to thrive (not die). When you "get it", you'll understand how to build an unfair advantage. You WILL stand out in the crowd, cut through the noise.

I wish you The Best on your Adventure!

 

SMART STARTUP REVENUE MODELS LEAVE COMPETITORS IN THE DUST: Tips from serial entrepreneurs

How does a startup founder add more power to propel faster growth than competing enterprises?

One source that may surprise you is to build a smart revenue model.

It will open your mind to see opportunities to add fresh sources of revenue, move strategic focus to uncontested markets and alter tactics for execution of operations.

Serial entrepreneurs have learned to employ smart revenue models with great effectiveness. Today I have some tips to share with you from their schools of hard knocks.

Let’s start with some basics and begin to drill down to what is important to investors (and experienced startup employees).

• Financial forecasts are valuable. You may have heard that venture investors ignore forecasts of financial statements of startups. My experience is that VCs expect you to know all the details about a financial forecast of our new enterprise, starting with revenue and how it is derived. Investors are more interested in what is behind the numbers than the numbers themselves. For instance, what is the average selling price of your first product, and how will it change over time (supersedes $ of Revenue in importance).
• Power rises from information generated by the components of the revenue forecast and their sub-components. I’ve seen VCs stall a founder’s presentation by peppering her with a barrage of questions about the revenue components. What composes the mix of products/services that determine your average selling price? How is each product of the family (product lines) priced and why? If you are unable to respond instantly, the questioning becomes unmerciful and often terminates the unfinished presentation.
• Modifications over multiple years of time reflect an unfolding story about competitive behavior. What sequence of sub-products will be introduced over the first years and why? How do you expect the competition to react to those introductions (e.g. price discount war, or copying the products)? How will your startup react to their reaction? Serial entrepreneurs have learned the best story tellers get the money. So learn to tell your story with color using your financial forecast over years of growth.

Now let’s turn to some modeling tips and see how to boost power beginning with a simple forecast of revenue and expand it from there.

Model Building Tips

• Use an Excel spreadsheet to build your revenue model. Obvious.
• Use one sheet for the Revenue model. It will feed your Income Statement on a different sheet.
• Start with revenue by year in columns. Begin with 5 years. Start revenue the first year of launch, hopefully not later than Year 2 (life science excepted).
• Use rows for input and output. Units are input.Price per unit is input. Price times units equals Revenue as output. Simple.
• Never put formulas into cells. If your price per unit is to decline each year by X%, then use a separate row for X. Then it is easy to make changes to X and begin sensitivity analysis to learn more about your business. “What happens if the price declines by 10% per year? What will happen if we hit a price war that crushes prices by 40% or more?” Show all inputs separately, each in one row.
• Color inputs with one loud color. It keeps you from going crazy as your model grows in complexity (it will).

Revenue Model Tips

• Forecast $ of Revenue using one simple set of units times one ASP (Average Selling Price) for 5 years. Guess if you have to.
• Return and divide units into specific products/services and add an ASP for each. Average now has more meaning. The model reveals more about product plans each year over the march to IPO. This will cause you to pause and develop a product marketing plan.
• If you are relying on advertising revenue, you must now break up Customers into segments. Use frequency of users to get started. What percentage will be most frequent users? That will be important to advertisers. How many clicks will be done daily, weekly, monthly by Frequent Users, how much by Other Users? I think you can see how this is modeled. One byproduct will be your list of visitors and the click rates and volumes each month. You will certainly be asked about that by VCs anytime during your presentation.
• Now add a mix of advertisers. For instance, you will need to know how much the automobile ads pay per click compared with beauty products or mortgage refinancers. You’ll need to forecast the mix of those classes of customers (who send you cash) so your ASP per click has meaning. This will get your brain working overtime.
• Now you can see a mini revenue model for each of your products. This will reveal which products are generating the most revenue and trigger thoughts about what to modify with marketing in the face of competition in order to gain market share. Each product needs its own market segment forecast (Total Available Market, Served Available Market and Share of Market: TAM, SAM, SOM).
• Return and alter the ASPs over time. They typically decline but some may be expected to increase (e.g. if you began with a deeply discounted initial price to do a Beta Launch). This gets you thinking about the traditional pricing behavior in your industry (e.g. semiconductors rapidly reduce in price per year) and in your new market (e.g. advertising paid per click jumps up and down depending on the advertising market [cars pay more than lipstick]).
• Now you have a lot more information and are growing smarter and more competitive. You know how your business economics respond to small shifts in each input. You are already smarter than the VCs and sharp potential employees. And you are most likely smarter than your competitors who are too lazy or arrogant or naïve to go to all this hard, time-consuming work.
• Let’s dive deeper and build more smart power.
• Return and add seasonality to the first two years of products launched. You will need to create a 24 month model by year. That’s easy.  Do not do a quarterly forecast because tht will slow down your work, become very messy, and besides, people want the monthly numbers anyway, especially investors.
• Then add seasonality. Consider the effects on your business of big holidays and four seasons of weather. How will the monthly forecasts be modified: units sold, ASP (pre and post holiday)? This is especially important for ecommerce web businesses selling consumers retail products. This is often a head-snapper for fast thinking entrepreneurs doing their first startup.
• By now you have a ton of insight to your business. You are getting very smart. So is your model.
• Return and divide into countries of the world. Asia is too big for one forecast group. Use Japan, China and so on. Europe might be singular. Other regions can be collections of countries (e.g. South America, Africa).  North America can work (Canada plus U.S.).
• Now you can see how much thinking you are going to be doing. Country forecasts reveal where you’ll need to be doing business each year and what you’ll need for employees there. It also will have deep implications for how you incorporate your startup. If you are going to get a lot of revenue from a lot of big countries, then you should consider incorporating the parent organization outside the United States (e.g. Cayman Ilands) and operating subsidiaries in each country (e.g. U.S., England, Japan). It will also get you thinking about time, for instance, it takes many months to plan and complete the construction of a corporation to do business from within China.

Some Game and Social Networking Smart Model Tips

• Game and SNW startups have a lot of revenue complexity from the get-go because they are so creative. Some sell virtual goods paid for by cash. Others sell virtual goods payable by points earned. Affinity clubs earn points exchangeable for points that are exchangeable or for other virtual goods that are exchangeable. See how complex things are getting? All of it impacts $Revenue for the startup. How such things are linked to real Revenue recorded by accountants is important, it is central to your learning by building a smart revenue model. The more you dive into the details, the more you will be driven to address complex issues that can either hinder or improve your competitiveness and revenue generation abilities.
• What drives gamers and SNWers to your business so your Revenue rises? “We’ll go viral!” does not cut it anymore. There is too much competition out there already. You have to have a game plan that is creative and clever, attractive and compelling to end users so you generate the traffic (mix, demographics, volume) sought by advertisers. As mentioned above, the more you can drill down with an advertising model, the more you will learn about your business.
• Games come and go like movies. Start forecasting the rate of rise and fall for each game over time. This will trigger ideas about comparable games by competitors that you can use as benchmarks. Then you can do some sensitivity analysis: Should we plan on a few large winners or a mix of good but not great games to go IPO? How many medium successes do you need? What happens if you have one large winner?

I have seen great serial entrepreneurs present to VCs without showing a single number. But when asked all the questions related to a revenue forecast, they had the numbers ready to verbalize. They were that familiar with their financial forecasts, particularly the Revenue forecast. I was always amazed by their fluency and fluidity with the numbers. As for me, I need to see the model on the screen to explain it. But they got their money. They did their (hard) homework. It’s one aspect of how they became serial entrepreneurs. VCs open doors for them, seek them out, every day.

BOTTOM LINE:  You add huge power to your startup when you build a smart revenue model. As you add to it, you think about deeper and deeper details. Your story begins to become colorful. It adds knowledge that directs strategy and tactics. It guides incorporation and tax planning. Most of all, it gives you intimate understanding of how your startup will behave. Like a parent who understands her child intimately, you will be able to anticipate how your enterprise will behave when it is birthed and grows. Yes, it takes time and work (both four letter words). But the investment will be worth it. Serial entrepreneurs know its impact. When you can build a smart revenue model, you will be well ahead of your competition. It will be a key element in the power of your unfair advantage.

I wish you The Best on your Adventure!

 

FORECAST STARTUP REVENUE: How serial entrepreneurs do it

Wondering how to forecast sales for your startup?

How do you predict an outcome for a business that does not yet exist? For sales in a market that has not yet been born?

As the old saying goes(I think it is Japanese): "It is easy -- once you have learned the first time."

Here are tips for you to use that I've learned watching how serial entrepreneurs forecast sales:

First: Two things to remember when forecasting numbers:

• This is not a prediction. It is a forecast of what sales could be (depending on all the other factors turning out as you assume they will in your business plan). Investors understand that. Accountants and giant corporate executives don't (they are locked into the annual predicting with accuracy game).
• This is part of a story in financial terms. You tell your story with words, numbers and emotions. This is the numbers portion. It is part of the financial story -- in financial terms -- about how your plan could turn out if all goes according to plan (which of course it will not -- but investors know that). This adds to the words you will write and speak as you tell your story to investors and future employees and bloggers.

Now for the tips on sales/revenue forecasting:

1. Start with TAM: Total Available Market. For instance, all the television viewers in the world.
2. Focus on SAM: Served Available Market. For instance, all the TAM that are also connected to the Internet at broadband speeds and that are in the age bracket 25-35 years of age. These are your "Ideal Customers" that you are focused on ("targeting").
3. Put layers into SAM: Perhaps you will start with your home country (U.S) then go to China, then to Europe (starting with the U.K.). Or you start with 25-35 ages, then 35-55 and then 55 plus. Pick the years each of the layers (market segments) starts and add them together to become your SAM. Each will have a different growth rate.
4. Choose a rate of adoption of your first product/service offering. You might begin with a modest rate sales in the first year after launch. But if you are a gaming or social networking service, you'll expect to get a rocket ride of popularity during the first 18 months after launch.
5. Compare your launch adoption rate to similar products/services. Cousins or similar startups will give you an indication of reality. The numbers are relatively easy to find on someone's blog on the Internet. Recently public companies have the details in their IPO prospectuses (find them on EDGAR database, free).
6. Pick your share of market in Year 5. Gorilla's own 30% share of market, 3% is for starving monkeys, the range between them is for two chimpanzees with half the share of the gorilla. You want to be the gorilla. Anchor your sales in Year 5 at the share of market for a gorilla.
7. Choose sales between your first year of sales and Year 5. The rule of thumb is to double sales each year. Start in Year 5, cut the number in half for Year 4 and smooth down to your starting year. Yes, it is a hockey stick curve. There are exceptions, as noted above for intense game and social networking startups.
8. Ask your friends what they think of the numbers. They will spot unreal figures and keep you from looking stupid.
9. Aim to get the right number of zeros in the forecast of revenue for Year 5, the number in the first digit does not matter.
10. Go back to Step 1 and repeat until you run out of time.
    

BOTTOM LINE: Serial entrepreneurs work in that level of detail when they do their forecasts of revenue for a new enterprise. The marketing work comes first (Marketing's job) followed by the selling work (Business Development's job). Who are your Ideal Customers? How many are there, where? What will be the early rate of sales ("customer adoption")? Note carefully: There are no industry reports to rely on. Your market does not exist, is only a guess by any of the pudits, the bloggers. You are as smart as they are (maybe more so) about the new market. Also, you will aim for the gold (become THE gorilla of a new market category), settle for nothing less. That is how it is done. It is one of the skills that contribute to building an unfair competitive advantage.

WHEN SALES IS FRUSTRATED: Look to Marketing for relief

The email was hot, sizzling with frustration. The VP Sales ranted that me-too competitors were copying words and claims from the web site of his company. The me-too startups were gaining ground at his expense. He highlighted many words from a competitor's recent press release. He was right, the words were nearly identical to those his company was using. So what should he and his CEO do?

This is a common situation with startups. It occurs when a new market segment does not yet have a leader. The leader will emerge when that company decides to focus on doing something extraordinary and then creates proprietary names for the otherwise general words that are claims to fame, such as special features, outstanding benefits to customers, and so on.

Each new market frequently begins by acting as if all the competitors all are selling a commodity, a thing that cannot be identified or separated, one from another. Then one company gets smart, perhaps from listening to customers and seeing how gorillas emerged from other new markets. The CEO calls in the VP of Marketing, says "Get us distinguished, proprietary names for what we are selling, then the copy cats will be out of the copying business."

That CEO is right. When your names stand for proprietary things, you have begun the march (it is not instant) toward becoming a brand. A brand stands for something. Competitors cannot also say "Hey, we also have 'Intel Inside'!" Or "We too are a Porsche." That is the magic that separates the world-class thinkers from the me-too copy cats. It starts the process of becoming a gorilla. It boosts competitive advantage so high that it becomes unfair.

Marketing people are brilliant at creating something to stand for and giving it a name. The consumer packaged goods professionals in America are amazingly skilled at it. Asians are few and far behind in gaining this powerful skill.

That is what the VP of Sales needs inn order to stop feeling frustrated. "Hey, our PrimeOne(tm) all organic, non-smelling, plant fertilizer works wonders because it has Hexaclorophine(tm). No one else does. And that is what you need to grow the most beautiful house plants." That is the specialness that the customer needs to hear. The other choice is to just buy stinky fertilizer (from your six other competitors).

BOTTOM LINE: When your Sales department is moaning, call in the Marketing doctors for a cure. Their job is to convert a commodity of me-too features into an exciting, differentiated product that can become a brand. When that is done, the groans turn into cheers. Serial entrepreneurs are aces at doing that.

INDEPENDENT SALES CONTRACTORS: When do they make startup sense?

"What are your thoughts on the wisdom of Independent Contractors on the sales side?" read the email today. Fred had asked a frequently posed question, an important one for startup CEOs to address.

Sales people are hired after marketing people. Because if they don't have a product to sell, they'll start selling anything on your desk, and the desk will go next. They have to sell, be active, get to customers or else they go crazy and drive the rest of the company nuts while waiting. They are very independent thinkers and report only to a VP of Sales who reports to the CEO. Marketing is an alien function, one to be tolerated at best, according to veteran sales professionals I have interviewed.

Many different channels of selling exist. Each calls for a different kind of sales person. Direct sales means you hire experienced sales people and build a powerful sales force. Ellison did that brilliantly at Oracle. Telesales (on the phone) calls for a very different kind of sales person, people brilliant at selling to strangers on the telephone. Not many can do that well.

In either case, direct or tele sales, startups can use independent sales people, typically more to supplement employees than instead of them. The semiconductor industry made that a way of life for startups. They do it with independent sales representative firms, each organized into a group of experts that dominate big accounts in a tight geographical region (e.g. General Motors or the U.S. Army).

The hard part is getting the independent reps or sales people to pay enough attention to the startup's products. Small sales generate small efforts on behalf of any new product. "It is hard to get enough 'unfair share of mind' from rep firms" said one CEO I talked to.

The good news is that if your product is hot and so is your company, the reps will sell with gusto, push hard and support you eagerly. Some CEOs have even used independent sales people to help get a seed round of funding. Successful sales people are often independent and have a lot of money to invest.

BOTTOM LINE: Do not rule out independent sales people for your startup. They have a role in some new enterprises. If you can get their attention, they can accelerate your sales plan and get you into key accounts.