EPSE Module 3—Session 1

1. EPSE Module 3—Session 1 Ken Liu March 12, 2011

2. Setting the Stage

3. Who Am I? • 8 startups as principal since 1989 • HNC Software, Holographix, Virage, IPivot, InfoGation, AIRSIS, SciVee, ThreatSTOP • CEO, CMO, do whatever needed • 5 M&As worth $1.3 billion • Wide-ranging experience • Technologies/products • Business models • Stages & cultures • Early career: Motorola, BCG, Booz Allen • Real-world approach

4. Objectives of Module 3 • Basics of innovation & startups • Business plan • Financing • The Investor Pitch • Improving the odds of success • Funding & evaluating your projects at work • Your own startup • Think like a CEO/founder • Group project: The Investor Pitch of new business

5. Startup Creation Source, Startups 1977-2005, Business Dynamics Statistics (BDS) series compiled by the U.S. Census Bureau.

6. Job-Growth Engine Source: State of Entrepreneurship Address, Kauffman Foundation, 2011

7. 4 Innovation Types Business Model Product/Service Technology Process

8. Technology Product/ Process Business Service Model

9. Economic Basis of Innovation Innovation Differentiation Changing value proposition Customers buy more and pay more Otherwise market naturally drives towards commodity and lowest price. Do you want to duke out with the Chinese on cost?

10. Operating Margin Growth in Excess of Competitive Peers [Source: IBM, CEOs are expanding the innovation horizon: important implications for CIOs]

11. Reinvent—Do 1 Thing Well

12. Anatomy Of Disruption • Entrant introduces a product/service at a lower price with “good enough” attributes • Begins to win customers • Incumbent ignores the situation • Entrant keeps improving & growing • Entrant moves toward high-end or your core market • “Oh %$$&* #$!”

17. It’s a Cultural Problem Development times too long 32% Lack of coordination 28% Limited customer insight 26% Risk-adverse culture 25% Difficulty selecting right ideas 21% No good way to measure 20% A shortage of ideas 18% Not the problem Ineffective marketing 17% Culture & Implementation

18. Causes of Corporate Death

19. Apple vs. Microsoft

20. DJIA 1979 Allied Chemical Alcoa American Can AT&T American Tobacco Bethlehem Steel DupontExxonMobil Eastman Kodak General Foods GE GM Goodyear IBMInco Int’l Harvester Int’l Paper Johns Manville 3M MerckOwens-Illinois Glass P & G Sears Roebuck Socal Texaco Union Carbide US Steel United Technologies Westinghouse Woolworth Not in 2012 (20) Still in 2012 (10)

21. DJIA 2012

22. The Odds 3,000 100 10 2 1 Exploratory Projects Full development Projects Product Launch Success Ideas Source: Stevens, G A. and Burley, J. “3,000 Raw Ideas = 1Commercial Success

23. The Odds Source: SBA; Ctr. For Venture Research, Univ. of NH

24. Why So Hard?

25. The Business Plan • The pain • Value proposition • Market • Who’s the customer? • Barriers to adoption • Competition • Business model • Market entry plan • IP & entry barriers • Management • Financing • Exit strategy

26. That Was Just the Plan… We haven’t even begun to deal with execution yet! Or the economy Or the people Or regulations Success is 90% execution & adaptation, 10% planning.

27. Innovate or Die!

28. Business Plan Inspiration Needs Pain Value Proposition

29. It’s About Buying & Selling

30. Our Focus Focus Valuation $M 50 10 1 .1 Hobby Personal Angel VC Corporate >>>>>>>>>>

31. It’s Not Rocket Science Are there enough customers who are willing to pay you a price that gives you enough profit to build a business and yield a return for investors that’s worthwhile to invest in you?

32. The Idea—Where from? Your work Your hobby Why not? Observe trend Needs gap Customer IPivot Technology map

33. Where’s the Pain?

34. Market Research Primary • Customers • Resellers • “Experts” Listen for complaints: • Why is it…? • Why can’t I…? • Can you do this…? • What if? • I hate this… • This shouldn’t be so hard Secondary • Associations • Analysts • Government Good for general info & background • Often outdated • Not specific • Backward looking

35. Needs Analysis • What is the problem? • Who are the customers? • What is driving the need? • Under what circumstances does the need arise? • When does it arise? How often? Where? • How much does the customer care? • How satisfied is the customer with his current solutions? • How many customers have this same need & circumstances?

36. Pain—SSL Decryption with General-purpose Computers Customer: Payroll/benefits outsourcing firm Pain: 1. Every pay period >> peak demand 2. Servers strain/crash doing SSL transactions >> customers complain 3. “Sun rep wants me to buy $1M SPARC servers”

37. Value Proposition • Attributes of product that customers care about and willing to pay for at given price, place and time • Different for each demographic segment • Can change over time • Price • Competition • Product expectation • Etc. “A horse! My kingdom for a horse!”

38. Value Propositions • Feature/ performance • Cult • Convenience • Faster • Vanity • Saves money • Productivity • Financing

39. Business Plan Market Customers

40. Market • Primary, secondary, etc. • Size not as important as correct segmentation • Total vs. Served Available Market (TAM vs. SAM) • Retail vs. wholesale $$ • Bottom-up projection best • If new market, use best proxy • If all fails, use gut, “feel of market”, ROMA

41. Watch Out/Reject: • Excel magic—garbage in, hockey stick out • “30% CAGR from $100M to $2 billion from 2010-2015” • “conservative goal of 1% of Chinese consumers”

42. Market Segment A subgroup of consumers sharing characteristics that cause them to have similar product needs and values. • Respond similarly to market stimuli • Can be reached by market intervention • Different from other segments • Change over time • expectations • price • capabilities

43. Segmentation Financial Services • Money center • National • Superregional • Regional • Local • “Non-bank” banks • Credit unions Commercial Banks

44. Segmentation Purpose • Who are our most profitable customers? • Where can we find more of them? • How can we more effectively reach them? • How can we tailor our message to each segment? • What segments need our services most, at what cost? • How can we better allocate our sales/ marketing resources? • Who’s our competition?

45. Segmentation Criteria Geographic Nations, states, regions or cities Demographic Age, gender, family size and life cycle, or income Psychographic Social class, lifestyle, or personality Behavioral Occasions, benefits, uses, or responses

46. Mass Marketing Same product to all consumers (no segmentation) Segment Marketing Different products to one or more segments (some segmentation) Levels of Segmentation Niche Marketing Different products to subgroups within segments ( more segmentation) Micromarketing Products to suit the tastes of individuals or locations (complete segmentation)

47. What’s Wrong with This? Product Photo management product designed to assist Brand Marketers, Event organizers, and Sponsorship owners to take advantage of the power of event photos to assist in quantifying ROI for a given event or sponsorship. Market • Alternative advertising is a $26 billion business. • Branded entertainment spending increased to $52 billion annually.

48. Who’s Customer? YES • Male college student • Bank teller in credit union • Owner/sales mgr. of independent clothing stores • ER nurses NO • 15-40 yr. males • Financial services worker • Sales mgr. of retail stores • Medical/health workers

49. Who’s Customer? Time $$$ Effort Sales Cycle User Manager IT VP/Corporate CFO CEO BOD

50. IPivot Exercise Customer: Payroll/benefits outsourcing firm Pain: 1. Every pay period >> peak demand 2. Servers strain/crash doing SSL transactions >> customers complain 3. Sun rep wants me to buy $1M SPARC servers Solution: SSL accelerator appliances (3-10x faster) $25-45K New product category Questions: 1. Customer/Market 2. Value Proposition 3. ROI