The Maker's Manual: A Practical Guide to the New Industrial Revolution 1st Edition (2015)
Part II. Realizing an Idea
Chapter 7. Try, Fail, & Pick Yourself Up!
With a good idea in your hands, some well-written pages full of financial predictions, and the confidence that you can succeed, it is not difficult to convince someone to believe in you and finance your idea. In the blink of an eye, you can become an entrepreneur, abandon a boring and not so rewarding job in a small office, hand in your resignation--perhaps written a long time before--and leave, tasting your ex-colleagues’ envy.
How will your new company work? What are your hopes and expectations? Is it worth it for others to invest in the project? Those who are thinking about financing you--those who are thinking of becoming a stakeholder in your adventure--they want an answer to these and other questions, and they expect those answers presented as a document. This document is better known as a Business Plan. Here is a summary of the main sections of a business plan:
A business plan is a brief description of the product or the service you intend to create: basic concepts, costs and profits, some information on the market, and the potential and originality of the idea. All business plans must have at the front of the document a concise and clear abstract (also known as an executive summary), without too many technical terms, because it is the first section to be read--or more likely skimmed--when outsiders are evaluating your plan.
Product (or Service)
In this section the product is described in a complete and detailed way, highlighting the innovative aspects and the technologies used to create it, as well as showing similarities and differences to other products available on the market. When writing this part, try to avoid bragging along the lines of “We are so innovative that we won’t have any competitors” because those who read the document are going to immediately think:
§ you are not earnest. If a simple Google search shows other companies doing business similar to yours, the readers will get the message that you have not worked hard enough on your preparation;
§ there is no market, so your idea is not interesting.
And remember, even if there is no competition now, a few months after becoming widely known, there’ll be 10 other groups offering similar things.
The marketing plan describes the market you are going to operate in, which can be an already existing one (e.g. smartphone apps) or completely new (e.g. desktop 3D printers back in 2006). It describes direct and indirect competitors, actual or probable, in a more detailed way than the abstract does. To support your statements, you can also employ analyses which present some predictions on the market. (Unfortunately, even the most meticulously done study cannot guarantee its predictions.) The marketing plan also explains who your customers are, and why they are interested in your product. It explains how you are going to present the product to the marketplace, detailing which channels you we use, and why.
Now that you know what a Gantt diagram is (“The Gantt Chart”) it shouldn’t be difficult to summarize and divide the whole project into macro-activities for the forseeable future, focusing on the main milestones. The plan must also be explained in words, expressly indicating priorities and limitations.
Management and Organization
Behind every project there is always a team. Who is your team composed of? What are the major positions in the business, and what role do they play? All those questions must be answered in this section. Management and Organization is also where you would specify all your outsourced tasks: the company’s lawyers, outside designers, contract workers, and the like.
It is also good to indicate the company structure you intend to adopt: whether a sole proprietorship, an LLC (i.e. a limited liabilty company), a limited partnership, a cooperative company, or whatever other type. The best thing to do is to engage a business consultant to get a clearer idea of the structure you want your business to have.
This section explains where the assets for the project will come from, and how you intend to finance yourself. The possible investors will be also very interested in knowing how their funds will be used.
At the end of the business plan you need a neat series of charts with financial predictions for the next three or five years, in which all the costs and earnings, as well as prices and sales hypotheses, must be indicated. You can easily estimate the costs by researching the typical costs of companies similar to the one you intend to start; for everything else, it’s up to you to provide reasonably accurate figures. On the Internet it is possible to find many examples of financial plans, but if you are not experts, it is better to collaborate with someone who is good at numbers and who can give you some advice. Sometimes you may be asked for a variation of the financial plan, called EBITDA ([Link to Come]), which stands for Earnings Before Interest, Taxes, Depreciation and Amortization. In any case, you should “get your hands dirty” and understand what logic lies behind balance sheets and finance... You’ll get back to actually making things soon, don’t worry!
Have you got all you need? Are you ready to launch your start-up?
Ready for Success?
You have come up with a sensational idea for a business, you’ve prepared a very detailed business plan, you’ve convinced investors to give you startup funds. Now you are ready to start work! Find a prestigious building downtown (or an old abandoned factory, for that matter), buy the equipment you need, and recruit a team of experts to develop the product: engineers, designers, marketing experts, and sales people. Don’t forget the miniature golf and the ping-pong table, a must in the coolest offices!
The project managers make sure that the design and production departments work on the specifications you have provided them with, while the marketing department prepares its own plan, identifies possible customers, organizes focus groups, and prepares the documents on which your communications will be based. Meanwhile, sales managers and operators collaborate with the marketing department and prepare sales channels.
Everything goes on as it should, times and costs are respected, the first prototypes arrive: the product is definitely good, it’ll be a success. Everyone is waiting impatiently for the launch date, which has been widely publicized by the media, stimulated your promotional campaigns and your PR staff.
At last the long awaited moment has come: sales campaigns start... Uh oh… it looks like in the first month you have achieved only 30% of what you predicted in the business plan. Well, that’s normal, this product is really innovative, and it hasn’t been understood yet. So you change your communication strategy and proceed.
After the second month, sales have dropped to 10% of your predictions, and in the following month you are practically at a still point. Then goods are returned and sales decrease below zero, no new customers are to be seen.
In the meantime thousands of bills and invoices to pay arrive, suppliers complain, employees have the bad habit of demanding their salary, and investors lose their temper.
At this point, though, it is very difficult to get a second chance. Your glorious dreams have crashed against a smooth and extremely hard wall.
Why did this happen?
§ because you started work thinking only of your product;
§ because you ignored who your customers are;
§ because you don’t know what your customers’ problem is and how your product may solve it;
§ because you have no idea of what is going to happen next week, let alone in three years’ time;
§ because the whole approach we outlined above, despite being a well-trod path, is not suitable for a start-up.
The process we have just examined is called Product Development Model and it is typical of already established companies operating in a well- known market. Unfortunately, even for these companies, the launch of a new product is often unsuccessful. But for them it is easier to get over the failure because the associated costs can be absorbed and covered by their other existing activities.
It happens in the best of families: just think of Sony MiniDisks, a CD-quality recording medium, and Sony Betamax, which had superior quality to VHS tapes. Neither of these technologies ever made a big hit with the public, despite being released by a major company, and their technological superiority over their competition. For a start-up, an embryonic company without a track record, the situation is even more delicate. A single bad event can is sometimes more than the company can withstand. And yet, almost all start- ups keep on following this model, with unrealistic expectations.
It is very common for startup business plans to contain product adoption curves (Figure 7-1) showing the company’s customers in relation to time (these curves are described by Geoffrey A. Moore in his book Crossing the Chasm. The first customers startups usually get are the enthusiasts or dreamers. Then come the mass of people who join in when “everyone else” does, and finally there are the pragmatic, late adopters.
Figure 7-1. The product adoption curve (inspired by a work of Tom Fishburne)
Between the first customers and the mass there is the chasm, which gives the title to Moore’s book. This chasm is caused by the fact that the product--which is well-suited for the first customers--must adjust to the expectations and tastes of the mass market, too.
Another serious problem is that too many Steve Jobs wannabes believe that they can do product development all by themselves, in closed rooms, guided by no more than their intuitions, maybe with a little assistance from the folks in marketing. Since most of these people are not Steve Jobs, they fail because product development is not guided by the customer: the feedback from the customer--if any--comes only when the product is ready to be presented on the market. If any modification is required at this point of the project, it would be extremely expensive.
Many budding entrepreneurs believe in the motto “if you build it, they will come”. This philosophy is extremely dangerous, because it makes you enter a mental tunnel which you will exit only when you have finally created the product. While you’re thus occupied, the world continues around you, possibly changing every assumption you had when you began the project. By the time the product is ready, the world has moved on and no longer needs your product (if it ever did).
Success, For Real This Time
Who are your customers? What are their problems?
You have to ask how can you help your potential customers to solve their problems. How can you organize yourself to do that? To avoid the most common mistakes, the activities needed to find the answers to these questions should be carried out well before starting product development, not at the same time. This research process is called customer development, and it was created by Steve Blank, a university professor with very broad experience in the start-up field. Blank was awarded the title of Master of Innovation by the Harvard Business Review in 2012.
The starting point of customer development is represented by the hypotheses on which business is based. As we have seen, most of the time these hypotheses are nothing more than acts of faith. Building a business on faith risks a lot
A slightly more pondered and scientific approach includes the verification of the hypotheses before building a company on them. The most important assumptions, according to Eric Ries, entrepreneur and pioneer of the Lean Startup movement, are:
§ the hypothesis of value: has the product got a value for the customer?
§ the hypothesis of growth: how does the adoption of the product occur? How can you discover and acquire new customers?
In order to verify the hypotheses, you have to conceive and carry out some tests. If you haven’t got a product in your hands yet, it could be necessary to build one as soon as possible and with the lowest efforts in terms of capital and energies. It must not be a finished product: a prototype suffices, which could be completely fake, or just a product with very few functioning characteristics, as long as they are useful for the team to understand what your customers need and to avoid creating a product no one is interested in. Eric Ries, in his book The Lean Startup, speaks ofMinimum Viable Product (MVP).
The aim of the tests is to learn: the Build-Measure-Learn sequence (Figure 7-2) is a process that must be repeated continuously.
The figures you collect from the tests allow you to learn and adjust your plans, verifying and validating any decision on the basis of the actual consumer interest on the market.
That’s the essence of the scientific method applied to business.
Figure 7-2. The Build-Measure-Learn cycle.
The process of customer development is divided in four stages: customer discovery, customer validation, customer creation, and company building.
It is the customer who is at the center of the process, and not your product.
Each stage of the process is represented by a circle with an arrow, as shown in Figure 7-3, indicating the iterative nature: repeat each step until you reach the desired result.
Figure 7-3. The four steps of customer development.
With this step, you try to understand who your customers are. It is not enough to try to put yourself in their shoes. Steve Blank says that we must get out of the office to observe and meet people: this idea is also present in the principle of genchi gembutsu, meaning “go and see with your own eyes”, typical of Toyota’s production system. First of all, you have to determine whether the problem you have perceived really exists and is felt by other people too: you can do it by speaking with those people who you regard as potential customers, using all the methods you learned inChapter 5. In particular, you have to listen, though with some precautions: avoid asking what they would like from the product or what they need, because in this way you may divert them from their problem and that would lead them towards your preconceived solution. Instead, try to understand these potential customers, make hypotheses, and verify them to ensure that your solution has value for them. Sometimes such a survey also makes you understand that your real-life customer is different from the one you imagined, which will lead to an evolution of the product and how you develop it.
In this step, try to verify the business model you have hypothesized. The objective is to build a schedule that may be adopted by those who will deal with sales and marketing. Only when you have validated the different types of customers you’re reaching for, and a sales process suitable for them, can you think of growing, progressing, and presenting the product to the larger public.
Periodically the pivot/persevere phase intervenes, in which you ask yourself if it makes sense going on in the current direction or if a turn is necessary. Just as a pivot in basketball is made by keeping one foot still, a business pivot does not completely overturn the company; it simply modifies one or more of the fundamental hypotheses, (e.g. the market segment you aim at) and you go on from there.
Pivoting is a difficult task: you risk throwing away months of hard work to start again. It may be useful to set some deadlines, or to react to specific metrics and gather everyone, with figures and data in your hands, to decide if it is indeed time for a turn. Waiting too long increases the risk of being off the track, while doing it too often causes confusion and is not useful.
If customer validation fails, you must go back to the previous step, customer discovery. While you are learning, it is normal to turn back; for this reason you have to try to reduce waste as far as possible and always think of your tests so that they are able to teach you something and suggest to you the direction to follow.
It is time to grow and create the final demand in order to reach the “masses” and guide it to the sale channels. Usually, before passing to the mainstream customers, you will have to re-examine some concepts both in the product and in the business model, because these customers have characteristics and needs different from the early adopters you have dealt with so far. In this case too, it will be the tests that guide you.
At last it is possible to grow without problems, because you have already verified the product by considering market and customers.
Your start-up becomes “big” and restructures itself.
It’s time to create formal departments like sales, marketing, and research and development. Now you have got it!
In this approach, you, the entrepreneur must behave as a manager too. It may sound contradictory, as the two professions may seem poles apart: the manager is often seen as a rigorous controller, while the entrepreneur represents an eclectic and enlightened figure. In reality, a certain discipline and precision is needed to collect data, measure and make calculations. Even if it appears hard and tiring (and it is), this is the price to pay in order to succeed.
The Business Model Canvas
Entrepreneur and innovator Alexander Osterwalder has conceived, together with Professor Yves Pigneur, what they call the Business Model Canvas (Figure 7-4). It is a very effective tool to understand the essence of a business in a clear and immediate way. The canvas is a sheet divided in nine areas, one for each key point of a business.
Figure 7-4. The business model canvas in Italian.
SGC = Customer segments
PC = Key partners
AC = Key Actions
VO = Value propositions
RLC = Customer relationships
RSC = Key resources
CA = Channels
STC = Cost structure
FR = Revenue streams
The part concerning the Customer Segments, where you can include customers and companies you wish to reach with our product, is extremely important: if there were no customers there wouldn’t be any business. They are a very important factor and at first you know very little of them. You have to behave just like writers do with their characters: they know them and they put themselves in their shoes so much that they can even guess what they keep in their fridge.
The Value Propositions section represents the value you are offering to your customers. The exchange of value occurs because the product is the answer to a problem or an existing need, and the customer recognizes in the product an intrinsic value higher than that indicated on the price tag. Many companies don’t just sell a product or service: they sell an “experience” that their customers can live, which conveys value in a powerful and evocative way. For example, no one sells a car as a simple hydrocarbon or electric-based means of personal transport, but rather as a lifestyle statement.
Figure 7-5. A compiled canvas describing the business model of Apple iPod/iTunes.
The way in which a company communicates and reaches its customers is shown in the Channels section: you can have our own channels, partners’ channels, or a combination of these two possibilities; direct channels if the company has got a sales force of its own, or indirect if the company uses third party points of sale. A direct channel has the advantage of being controllable, compared to a channel with many mediators, but its implementation may be very expensive.
Once you have reached the customers, you have to establish and maintain Customer Relationships. You can choose a very personalized type of relationship or a completely automated one, managed with Internet sites and automatic exchanges, depending on the type of user experience you want to create. There are many possibilities: to get an idea, it’s enough to observe what other companies do. You will find sales assistants, personal assistants, account managers, self services, automatic services, users’ communities, users/partners directly involved in the product development, and many other things.
If you have done everything properly, your customers will be willing to pay you. But how much will they be willing to pay? And how will they do it?
You can think of different payment formula and set prices in any number of ways. There are companies that offer some of their products for free, or sell them at a discounted price, and make their money from the sale of accessories (also known as “Give away the printer, sell the ink”). Others, like Google and broadcast television, give away most of their product for free and make money through advertising. Some others, especially on the luxury goods level, deliberately increase the price to select the kind of customers who give a lot of importance to image and brand.
Figure 7-6. Until we validate them, our boxes remain mere hypotheses.
To do what we have discussed so far, you need some key resources: the human, physical, material, intellectual, and financial resources that allow a company to create and distribute value. In addition, you will have to do some key activities: to write software, create content, make machines work, build objects.
In the wild world of business you are never alone: in the key partners’ box, you will indicate the network of suppliers and collaborators that somehow help you make our business model work.
To study this topic more in depth, we recommend the book Business Model Generation by Alexander Osterwalder and Yves Pigneur.