SmarterStartup.org  

STARTUP HEURISTICS

18 Rules of Startup Strategy

PROBLEM STATEMENT

The Great Mystery

8  in  10    Startups    Fail  in  the    First  5  yrs  

WHY DO SOME SUCCEED?

We’ve all met people who worked very

hard to make a business succeed and yet it

failed. We’ve also met people who did

seemingly everything wrong and yet they

succeeded. Hard work is a necessary

component but it is not the entire story.

WHY DO SOME NOT?

Diligent Negligent

Success

Failure

IS HARD WORK THE ANSWER?

Hard work alone is NOT a reliable

predictor of success. Hard working

people sometimes fail and negligent

people sometimes succeed.

There’s more to the story!

PROBLEM STATEMENT

Conventional Wisdom

NOT ENTIRELY

The 6 Market Dynamics

Timing

Customer Product

CompetitionStartup Opportunity

Finance Team

We cannot work simply work hard

and expect to have a desirable

outcome. There are many dynamics

at play that all determine whether

we’re likely to succeed. Some may

get lucky but they are the

exception not the rule.

STARTUP HEURISTICS

x  

Working hard is analogous to throwing a ball hard. The velocity is an important part of

reaching the target, but you cannot ignore other interactive forces like gravity and drag.

Gravity  (;ming)  

Direc;on  (customer  need)  

What Is the Whole Story? PROBLEM STATEMENT

Drag  (compe;;on)  

Velocity  (hard  work)  

STARTUP HEURISTICS

Introducing The Startup Heuristics

Startup Heuristics

Finance

13. Low Sunk Costs

14. Working Capital Float

15. Economies of Scale

Timing

7. Recent Innovation Enabler

8. Demand Already Established

9. No Signs of Commoditization

Competition

10. Clear Market Inefficiency

11. Low Barriers to Entry

12. Differentiable Position

Team

16. Subject Matter Expertise

17. Functional Competence

18. Supplier Partnerships

Product

4. Customer Focused Solution

5. Low Barriers to Adoption

6. Clear Value Proposition

Customer

1. Unmet Need or Desire

2. Right Size Market or Segment

3. Reliable Access to Customers

© 2014 Cabage & Zhang

WHAT’S A GOOD CUSTOMER?

The ideal customer has an unmet need or

desire. The size of this market should

match your ability to compete and ability

to deliver justify solving the problem.

Validate you can control means of

customer acquisition along the way.

STARTUP HEURISTICS

Customer Criteria

UNMET NEED OR DESIRE Unsatisfied Customer Desire

RIGHT-SIZE MARKET OR SEGMENT Need to Segment? Too Niche?

RELIABLE ACCESS TO CUSTOMERS Diversified Channels? Gatekeepers?

FOCUS ON HELPING OTHERS

FOCUS ON CREATING VALUE

Mom was right! Focus on helping others and

everything else will fall into place. Find a need

or desire that is not yet sufficiently addressed,

where the customer is so passionate they’d

happily pay for a solution. This approach is

much more likely to create real value than

copying an existing solution.

CUSTOMER CRITERIA

Unmet Need or Desire

CUSTOMER CRITERIA

Right-Size Market (or segment)

BIG FISH STRATEGY PURSUE QUIET NICHES

BIG MARKET STRATEGY PURSUE LARGE MARKETS

Select a market to service that meets your needs and abilities. You must have enough opportunity to warrant

the effort. Be weary of large markets however, if you do not have significant funds and plan to be aggressive.

MARKET MANIPULATION GOVERNMENT, MONOPOLIES

CHANNEL DEPENDENCE SINGLE POINT OF FAILURE

0

5000

10000

15000

20000

25000

30000

35000

March April May June July

CUSTOMER CRITERIA

Reliable Access to Customers

A sustainable business requires control over customer supply. Don’t rely on a single marketing channel (Google

SEO). Government or monopolistic manipulation of markets can also be challenging (Online Gambling).

WHAT’S A GOOD PRODUCT?

A good product will be a direct response to

a customer need or desire. If the value is

well articulated and the customer is

passionate about your new solution, the

reason to buy will be compelling. Consider

deterrents also – are their high switch

costs and is the solution easy to use and

understand?

STARTUP HEURISTICS

Product Criteria

CUSTOMER FOCUSED SOLUTION Solves Unmet Need or Desire?

LOW BARRIERS TO ADOPTION Low Switch Cost, Usability

CLEAR VALUE PROPOSITION Compelling Reason to Buy

PRODUCT CRITERIA

Customer Focused Solution (benefit)

ADDRESS NEED OR DESIRE FOCUS ON CLEAR GOAL

KEEP IT SIMPLE! DON’T AMBIGUATE THE VALUE

The purpose of your product is to create value by addressing a specific need or desire. Stay Zen focused.

Don’t ambiguate the value created with distracting features that aren’t aligned with the goal.

Albert Einstein Physicist, Professor

Any intelligent fool can make things bigger and more complex... It takes a

touch of genius - and a lot of courage to move in the opposite direction.

PRODUCT CRITERIA

Customer Focused Solution (benefit)

PRODUCT CRITERIA

Low Barriers to Adoption (cost)

LEARNING CURVE INVESTED TIME & NEW COSTS

FINANCIAL IMPACT PRIOR INVESTMENT & NEW COSTS

WORKFLOW INTEGRATION DOES IT EASILY INTEGRATE?

Even if you create new value, customers may hesitate to adopt your product if they’ve already invested

too much in an existing solution that is good enough, or if adopting your solution is too disruptive.

Easy Workflow Integration

Addt’l Benefits (value complex)

Solves My Problem

Existing Investments

Learning Curve

IS THE VALUE CLEAR?

VALUE = BENEFIT - COST

PRODUCT CRITERIA

Clear Value Proposition (value)

Perceived  value  must  exceed  cost.    If  you  can  clearly  describe  your  product  is  beneficial  and  a  compelling  

case  for  purchasing  it,  then  you  have  created  sufficient  value  to  overcome  cost.  

Theodore Levitt

People don’t want quarter-

inch drills. They want

quarter-inch holes. cost   benefit  

WHAT IS GOOD TIMING?

Every market has a natural lifecycle

driven by innovation and circumstance.

Look for new demand or interest in

something that wasn’t possible just a

couple years ago. Be a “fast follower”

into a validated emerging market rather

than speculating on new opportunity.

STARTUP HEURISTICS

Timing Criteria

RECENT INNOVATION ENABLER Was it Possible 2-5 Years Ago?

DEMAND ALREADY ESTABLISHED Build It & They Might Not Come!

NO SIGNS OF COMMODITZATION Shrinking Margins. More Products.

Every market has a natural lifecycle driven by innovation and circumstance. Look for something that

wasn’t possible just a couple years ago & ramp up before the market capitulates (supply > demand).

Innovation Life Cycle

Innovators(2.5 %)

Early adopters(13.5 %)

Early majority(34 %)

Laggards(16 %)

Late majority(34 %)

The Golden Era The  Squeeze  

Consolidation Early Movers

Capitulation

*

Innovation Adoption Curve

TIMING CRITERIA

Opportunity to enter diminishes as the market matures. Geoff Moore suggests entering at “the

chasm” after demand is validated but still early enough to ramp before the market capitulates.

TIMING CRITERIA

Innovation Life Cycle

Innovators(2.5 %)

Early adopters(13.5 %)

Early majority(34 %)

Laggards(16 %)

Late majority(34 %)

Chas

m

Innovation Adoption Curve

Ideal point to enter a market

- Geoff Moore

New Entrant Opportunity

Nicholas Carr

Harvard Business Review, 2003

TIMING CRITERIA

Commoditization of Technology

It is difficult to imagine a more perfect commodity than a byte of data.

As information technology’s power and ubiquity have grown, its

strategic importance has diminished.

$5,000,000

What cost $5 million to accomplish

12 years ago can now be done with

less than $5,000. Mark Suster

observed that commoditization and

availability of more building blocks

has radically reduced cost and risk

of developing a software product.

Commoditized Technology

Hosting Commoditized

Open Source Software

Cloud Services (SaaS/PaaS)

MLS  IDX/RETS  Feeds,    SendGrid  Email,  etc  

WordPress  Pla=orm,  Real  Estate  Themes,  RESO  &  Placester  IDX  Plugins,    

$500,000

$50,000

$5,000

A  Web/Mobile  App  

As cost has fallen, so has the

competitive barrier to entry.

Competitive positioning is now the

key strategic issue, not

technological capability for most

consumer Internet products. How

do you cut through the noise?

Commonplace Commodity

2000 2002 2004 2006 2008 2010 2012 2013

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Data From NetCraft 2013 Web Server Survey

50x  

GOOD COMPETITIVE LANDSCAPE?

Avoid being marginalized by excessive

undifferentiated competition. That

drives margin compression, commodi-

tization and market consolidation. Look

for inefficient markets where there’s

still ‘play’ and find ways to develop a

sustainable competitive advantage.

STARTUP HEURISTICS

Competition Criteria

CLEAR MARKET INEFFICIENCY Stagnant or Fragmented Market

LOW BARRIERS TO ENTRY Easy & Cheap to Compete?

DIFFERENTIABLE POSITION Something Special or Different?

COMPETITION CRITERIA

Inefficient Market

FRAGMENTED MARKET NO CLEAR MARKET LEADER

NEW MARKET DEMAND EXCEEDS SUPPLY

STAGNANT MARKET READY FOR DISRUPTION?

When a market is efficient, a single entity captures

all of the value of a market. Look instead for a

market that isn’t efficient either because it is new,

stagnant, or splintered (fragmented).

Sun Tzu

War Strategist, Wrote The Art of War

The general who makes many calculations before battle is wise. He who

knows when he can fight and when he cannot will be victorious.

COMPETITION CRITERIA

Low Barriers to Entry

Avoid a fight you cannot win! A market can be much harder to enter if a competitor already has a mature offering that you must catch up to.

THINGS TO AVOID

•  Existing Economies of Scale •  Existing Mature Product (feature set)

•  Well-Established Brand (halo)

•  Price Competition

COMPETITION CRITERIA

Low Barriers to Entry

SEGMENTED MARKET FOCUS ON SPECIFIC CUSTOMER

LOW PRICE LEADERSHIP FOCUS ON VOLUME & COMMODITY

DIFFERENTIATED PRODUCT DISRUPTIVE OR INNOVATIVE

HOW ARE YOU DIFFERENT?

WHAT MAKES YOU SPECIAL?

COMPETITION CRITERIA

Differentiable Position

In order to be a desirable signal that stands out against a background of noise, you need to have a

compelling value to some customers that others do not. There are 3 viable positioning strategies.

Porter’s Generic Competitive Strategies

GOOD FINANCIAL PROFILE?

Look for opportunities to maximize

returns without excess capital risk.

Look for opportunities to start cheap

and to realize higher margins through

focused efforts and economies of scale.

Avoid locking up too much capital.

STARTUP HEURISTICS

Financial Criteria

LOW SUNK COSTS Up Front Capital at Risk?

WORKING CAPITAL FLOAT Gap Between Payable/Receivables

ECONOMIES OF SCALE Margins Increase With Volume?

How much up-front capital must you commit to

develop this product or business? Sunk capital

represents risk since you don’t know if you’ll get it

back, as well as opportunity cost since that money

could be committed to other opportunities.

FINANCIAL CRITERIA

Low Sunk Costs

HOW MUCH CAPITAL RISK?

OPPORTUNITY COST

Some businesses require large cash

outlay every month and payment can

take 3-4 months to arrive. As a

result the business may need to have

cash or credit to cover the gap of 3-4

months of operating costs. This is

both a cost (interest) and a risk!

Working Capital Float

DO YOU NEED A LINE OF CREDIT?

WHAT’S THE COST & RISK?

Accounts Receivable

60 - 120 Day "Capital Float"Accounts

Payable

Look for opportunities where profits

increase with volume (scale). Supply,

development, and distribution costs all

diminish on a per-unit basis when working

in volume. As a result profit margins and

competitive advantage both increase.

Economies of Scale

Quantity

Profits

Marginal CostSca

lable

Profits

WHAT’S GOOD TEAM FIT?

Just because an opportunity exists, doesn’t

mean your team is likely to succeed. Are

you fit to compete? Does your team have a

competitive advantage? Do you possess

deep knowledge, technical skills to deliver,

& access to key partners and resources?

STARTUP HEURISTICS

Team Fit & Fitness Criteria

SUBJECT MATTER EXPERTISE Deep Knowledge of Market?

FUNCTIONAL COMPETENCE Technical Skills to Deliver

SUPPLIER PARTNERSHIPS Access to Materials at Good Cost

TEAM-FIT CRITERIA

The Hacker & The Hustler

“The Hacker”

Technical skills to design &

develop a well-crafted and

scalable solution.

“The Hustler”

Knowledge of customer or desire, and

understanding of market dynamics to

effectively position an offering.

A team needs deep subject matter expertise and technical skills to design a solution, in order to

succeed. It is difficult for a single person to be efficient at “heads up” and “heads down” work.

The Functional Expert Subject Matter Expert

TEAM-FIT CRITERIA

Supplier Partnerships

Preferred Sourcing

Are you able to procure

supplies at competitive prices?

If affiliate mktg, can you get

preferred commissions?

Available Data APIs

Are you able to access the data

or integration APIs needed to

build your product?

Outsourced Vendors

If planning to manufacture

physical products or software, do

you have a quality vendor you

can rely on?

Consider the dependencies you may have on external sources of materials, data, and services. Do

you have access to the necessary resources to deliver your product and to price competitively?

Finally, evaluate your startup idea across the six

market dynamics and be mindful of the heuristics

described in each one. Give yourself a letter grade

and then an overall score, for the idea. This

provides a structured approach to evaluating the

opportunity and helps to improve objectivity by

accounting for a full spectrum of important

criteria and reducing blind spots.

Evaluating a Startup Idea

Startup Scorecard

Finance

• Low Capital Requirement

• Clear Profit Model

• Economies of Scale

Finance Score ______

Timing

• Recent Innovation Enabler

• Demand Already Established

• No Signs of Commoditization

Timing Score ______

Competition

• Clear Market Inefficiency

• Low Barriers to Entry

• Differentiable Position

Competition Score ______

Team

• Subject Matter Expertise

• Functional Competence

• Supplier Partnerships

Team Score ______

Product

• Customer Focused Solution

• Low Barriers to Adoption

• Clear Value Proposition

Product Score ______

Customer

• Unmet Need or Desire

• Right Size Market or Segment

• Reliable Customer Channels

Customer Score ______

Overall Score _______SmarterStartup.org

Title _____________________________________________________________________

A A

B- B+

D A-B

Real Estate IDX Integrated CRM

THE SMARTER STARTUP

STRATEGY FOR STARTUPS

The Smarter Startup looks at why some

startups succeed while others fail. By taking a

more strategic approach to entrepreneurship,

founders can improve their own outcomes.

Written by Neal Cabage and Sonya Zhang,

PhD, and published by Pearsons/NewRiders.

SMARTER STARTUP

The Book

SMARTER STARTUP

SmarterStartup.org

The framework, including the part

described here, are posted on the

website, along with downloadable

worksheets and reference material.

Everything is free to use, so enjoy!.

www.SmarterStartup.org