Professors Talk Business at the Library

1. Professors Talk Business at the Library Minder Chen, Ph.D. Professor of MIS Martin V. Smith School of Business & Economics CSU Channel Islands minder.chen@csuci.eduFeb. 17, 2016, Wednesdays from 6-8 pm

2. Presentation Title Start Your Business Lean and Quick: The Lean Startup Approach This presentation will introduce an innovative method to build a new business in the context of lean startup approach. The application and cases of deploying the Build-Measure-Learn cycle to measure user feedbacks and to validate assumptions in a startup’s business model will be discussion.

3. Definition of Innovation An innovation is the application of creative ideas, knowledge, or new technology, to a product/service, process, or business model that is accepted by markets and society. • Adapted from OECD 2005 and Wikipedia.

4. The Lean Startup A startup is a temporary organization designed to search for a repeatable and scalable business model (under extreme uncertainty). - Steve Blank, The Startup Owner’s Manual

5. Product Development Model http://web.stanford.edu/group/e145/cgi-bin/winter/drupal/upload/handouts/Four_Steps.pdf Raised $393 M before IPO Webvan launched its first regional Webstore in June 1999 Get “big” fast (GBF) model The Product Development Model IPO 60 days later Raised $375 M Market cap $4.8b Webvan began to beta-test its grocery delivery service in May 1999 to approximately 1,100 people. Founded in December 1996 Bankrupted 18 months after IPO Webvan management followed the product development model religiously. Its failure to ask “Where Are the Customers?” illuminates how a tried-and-true model can lead even the best-funded, best-managed startup to disaster.  Burn through $800 million in 3 years.

6. 18 Instead of sticking to the idea of “go big, and do it quick”, they should have thought of “go, think, react” strategy.

7. Product Development vs. Customer Development

8. Customer Development Process http://www.spikelab.org/img/blog/4steps-f6b16b56.png Steve Blank video at http://www.youtube.com/watch?v=6t0t-CXPpyM

9. Lean Startup Cycle * * Legend: *Process * Outcome http://www.agileacademy.co/wp-content/uploads/2014/09/LeanStartupCycle.png

10. Food on the Table http://www.macworld.com/article/2109727/food-on-the-table-makes-meal-planning-and-grocery-shopping-a-piece-of-cake.html The Concierge Minimum Viable Product (MVP) http://mealplanning.food.com/ Food on the Table will ask you for your preferences—the types of foods you like and dishes you enjoy, and the grocery stores you shop at. Then it will recommend dishes for you for the week, helping you get out of food ruts or scrambling to figure out what to make for dinner. The app helps you save money by listing the items on sale each week at your chosen grocery stores and recipes based on those sale items. Add the recipes to your meal plan and the foods to your grocery list. The mobile app syncs up with your account on the website.

12. Lean Startup Food on the Table (FotT) began life with a single customer. Instead of supporting thousands of grocery stores around the country as it does today, FotT supported just one. How did the company choose which store to support? The founders didn’t—until they had their first customer. Similarly, they began life with no recipes whatsoever—until their first customer was ready to begin her meal planning. In fact, the company served its first customer without building any software, without signing any business development partnerships, and without hiring any chefs.

13. Case Study: Rent the Runway Minder Chen Professor of MIS California State University Channel Islands Minder.chen@csuci.edu Todd Heisler/The New York Times

14. Business Model Canvas https://fivewhys.files.wordpress.com/2012/02/canvas1.jpg (Video)

15. Business Plan Show **Rent the Runway: An inside look at the tech startup's success https://www.youtube.com/watch?v=cyvfsi3MX-M Fill out the Business Model Canvas based on the RTR case presented in the video Business Plan would identify the customer need, describe the product or service, estimate the size of the market, and estimate the revenues and profits based on projections of pricing, costs, and unit volume growth.

16. What Would Be Your Advice? Imagine that she came to you. What would be your advice? • It has been done by someone already. • Write a business plan first. • Finish your MBA program first. • Have you done the SWOT analysis? • Who are your target customers? • Nobody is willing to wear a rented high fashion dress. • What are your key assumptions? • Figure out a way to test your hypotheses. • That is a great idea and I will invest.

17. Videos about Rent the Runway • **Rent the Runway: An inside look at the tech startup's success https://www.youtube.com/watch?v=cyvfsi3MX-M • The Business of Rentable Fashion | Jennifer Hyman https://www.youtube.com/watch?v=8ZLYWDxDvQI • ***The Supply & Demand of Rent the Runway | Jennifer Hyman https://www.youtube.com/watch?v=JYFWpJvq6DU(testing business ideas) • Working with Venture Capitalists as a Fashion Company | Jennifer Hyman https://www.youtube.com/watch?v=AlL32GUOqmI • Open Q&A about Rent the Runway | Jennifer Hyman https://www.youtube.com/watch?v=xjmSDeK4_x4 • Rent the Runway at The Cosmopolitan Las Vegas https://www.youtube.com/watch?v=6rAYqPXWfgE Rent the Runway Announces New Business https://www.youtube.com/watch?v=hc0RdVK-qK0

18. References • Nathan Furr and Jeff Dyer, The Innovator’s Method: Beginning the Lean Startup into Your Organization, Harvard Business Review Press, 2014. (read this introduction (Rent the Runway case is an great example illustrating Lean Startup principles) and Chapter 1 at http://innovatorsdna.com/wp-content/uploads/2014/09/Innovators-Method-Sample.pdf • “Chapter 12: Rent the Runway: Entrepreneurs Expanding an Industry by Blending Tech with Fashion” in Information Systems: A Manager's Guide to Harnessing Technology, v. 4.0 • S. Bertoni, “How Mixing Data And Fashion Can Make Rent The Runway Tech's Next Billion Dollar Star,” Forbes, Sept. 8, 2014. • S. Bertoni, “The Secret Mojo Behind Rent The Runway's Rental Machine,” Forbes, August, 26, 2014. 

19. Competitors bluefly.com, outnet.com,  bagborroworsteal.com, ideeli.com, WearTodayGoneTomorrow.com has been doing this for almost a year! WTGT loans nationally at 5 – 10% retail values, has had amazing reviews from Teen Vogue, People, InStyle, The Today Show and many more. Items arrive in 2 – 3 days, and they carry over 125 of the top designers including 3.1 Phillip Lim, Herve Leger, Matthew Williamson and more. They’re amazing! A Netflix Model for Haute Couture http://www.nytimes.com/2009/11/09/technology/09runway.html

20. Observation: Friction / Inspiration In 2008, Jenn Hyman, a second- year MBA student at Harvard Business School noticed her sister struggling to decide what to wear to an upcoming wedding. “Becky desperately wanted to buy a $1,500 Marchesa dress and she felt compelled to buy a new dress— because she knew photos would soon appear on Facebook and she didn’t want to be seen twice in the same outfit.” As she watched her sister wrestle with the cost of the dress ($2,000) (i.e., the pain point/friction), her sister’s emotion was a clue to an important job-to-be done for young women: helping them feel special and confident.

21. Related Experiences and Hypothesis  Problem-Solution Fit Hyman realized that other fashion-oriented young women might have a similar challenge, an observation backed up by her years spent building a wedding event business at Starwood hotels and working in marketing and sales at Wedding.com Hyman’s insight led her to hypothesize a potential solution: instead of purchasing designer dresses, women might prefer the option of renting designer dresses online for special occasions.

22. Pitchable Sentence (Elevator Pitch)

23. Value Proposition Canvas Customer Profile Value Map http://www.businessmodelgeneration.com/downloads/value_proposition_canvas.pdf http://www.franciscopalao.com/english/value-proposition-canvas-get-to-know-your-customers-and-improve-your-value-proposition/

24. No Business Plan but a Business “We had an idea, we thought that it was fun, we decided to start working on it,” says Hyman. “We never had a business plan. We pretended that we had a business from the very beginning, as opposed to planning and strategizing as to whether it would work.”

25. First Experiment Hyman recruited classmate Jenny Fleiss to help her test their proposed solution. Hyman and Fleiss set up an experiment to answer two key questions: 1. Will middle- to upper-class young women rent a designer dress if it is available at one-tenth the retail price? 2. Will women who rent dresses return them in good condition? Then Hyman and Fleiss borrowed or bought 130 dresses from designers like Diane von Furstenberg, Calvin Klein, and Halston (according to the sizes of the two founders, just in case…) and set up an experiment to rent dresses to Harvard undergrads. They advertised around campus, rented a location, and invited young women. Of the 140 women who came in to view the dresses, 35 percent ended up renting one, and 51 of 53 mailed them back in good condition (the other two had stains that were easily removed).

26. Second Experiment But would women rent dresses they could not try on? To answer that question, Hyman and Fleiss set up another experiment, this time on the Yale campus, allowing women to see the dresses before renting but not allowing them to try them on. In the second trial they had more dress options, because the first pilot revealed that many women didn’t rent because they couldn’t find an option they liked. The Yale pilot showed two things: • women would rent dresses when they couldn’t try them on, and • the percentage of women who rented increased to more than 55 percent because they had more options.

27. Third Experiment Now Hyman and Fleiss were ready to test the big idea: Would women rent dresses they could not physically see? • The entrepreneurs took photos of each dress and ran a test in New York, where one thousand women in the target audience were given the option to rent a dress from PDF photos. • The final experiment showed that roughly 5 percent of women looking for special occasion dresses were willing to try the service — enough to demonstrate the viability of renting high fashion over the web.

28. Validation and Outside Funding https://www.youtube.com/watch?v=8ZLYWDxDvQI 8:00m http://www.harbus.org/2012/rent-the-runway/ The testing validated their hunch. “Women would put on a sparkly gold dress, twirl around in the mirror, say ‘Don’t I look hot?’ and strut their stuff in front of all of her friends,” says Fleiss. “For us that was real proof that there is a lot of tangibility to this concept, there’s a huge stickiness factor, an emotional connection. We decided to build the concept of Rent the Runway around that feeling that fantastic fashion gets to women.”

29. Use Experiments to Test Interest and Relevance Priorities and Preferences Willingness to Pay

30. MVP and Product/Market  Fit Minimum  Viable Product, or MVP, a bare-bones offering that allows the team to collect customer feedback and to validate concepts and assumptions that underlie the business idea. Product/Market Fit—the idea that they were crafting a solution the market wants, one that customers are willing to pay for, and one that’ll scale into a large, profitable business.  50% of clothing in your closet got worn for 3 times or less. The average American woman buys 64 pieces of clothing a year, and half of those items will be worn only once. Total size of the market: 1.7 trillion dollar global business.

31. Why Designers Should Never Go to a Meeting Without a Prototype Link a project with Sesame Workshop to develop Elmo’s Monster Maker—an iPhone app that leads young children through the process of designing their own monster friend. They had an idea for a new dance feature in which kids could guide Elmo through different dance moves in sync with a simple music track. 

32. Tina Seelig: The 6 Characteristics of Truly Creative People (video) starting 13:40 for a smart quick prototyping example

33. Beta Version With a small team in place, the typical advice would be to carefully develop a flawless website and service with broad appeal, adding features that might attract a wider set of customers. They didn’t do it. Rent the Runway quicklylaunched a beta version of its service for 5,000 invited members on November 2, 2009. RTR started with 800 dresses from 30 designers— a relatively small inventory. “We followed the minimum viable product (MVP) approach,” said Fleiss. “At the outset we just wanted to provide the capability to rent dresses. Nothing fancy.” But with the help of a New York Times article titled “A Netflix Model for Haute Couture,” initial demand for the small inventory proved almost overwhelming.

34. Obtain Capital without a Business Plan Now that Hyman and Fleiss had resolved concerns about whether there would be demand for their product— and what their initial solution might look like— they were ready to launch. But the change in business model meant they needed capital to purchase inventory. The typical advice when you’re going for capital is to make sure you have a top-notch business plan and get capital as cheaply as possible. They didn’t do it.

35. The Customer Development Process More startups fail from a lack of customers than from a failure of product development Try many times before you get it right. It is OK to fail so plan to learn from it. Only move to the next stage when you learn enough and reach the “escape velocity” http://www.ctinnovations.com/images/resources/Startup%20Owners%20Manual%20-%20BlankDorf.pdf

36. Channel Hypothesis: Renting via Designer’s Websites So Hyman and Fleiss gathered data on whether designers would go for their idea and whether they could use designers’ websites as their rental channel. Less than two weeks after conceiving the idea, the two women cold-called Diane von Furstenberg, an influential fashion designer and president of the Council of Fashion Designers of America. The initial idea Hyman proposed to von Furstenberg was to set up a rental option on the websites of existing designers. Hyman’s start- up would take care of fulfillment— taking the order, shipping the dress, and dry-cleaning the returns. Von Furstenberg was intrigued by the idea and helped Hyman and Fleiss set up meetings with more than twenty designers.

37. Pivot to the Netflix Model The initial response from most designers was extremely negative. “We were going to designers asking to buy their inventory so we could rent it at the same time it’s available at Saks Fifth Avenue and Niemen Marcus for 10 percent of the retail price,” said Hyman. “In the first meetings their response was basically, ‘over my dead body.’” Designers were worried about cannibalization. Renting dresses instead of selling them seemed like a bad idea. Hyman and Fleiss realized that to make their idea work, they would need to have their own website and inventory. So the idea of Rent the Runway— using the Netflix model to rent a wide variety of high- fashion dresses from multiple designers— was born.

38. Designer Reactions Rather than cannibalizing sales, Rent the Runway is now seen by many designers as a vital partner: an experiential marketing channel that introduces high-end designer brands to new customers. Rent the Runway clients are about a decade younger, on average, than the typical department store patron. 98 percent of Rent the Runway customers rent brands they’ve never bought before.  Some designers are now even testing new looks on Rent the Runway, while others are developing exclusive lines for the site.

39. Vital Partners: Fashion Designers Rent the Runway needed to buy from designers in bulk, and at a discount, in order for the model to work. Designers needed to be convinced it was worth taking a risk on two women with an unprofitable fledgling business and little direct domain experience. Some designers were initially concerned that rental would dilute their brand. Many also feared that rental would cannibalize retail sales.

40. Customer Development The process to scale the sales & operations. The process to search for the right business model! Search Execution Scaling

41. Link with videos http://youtu.be/iBptKACWNao Website demo

42. Push vs. Pull Technology Push Market Pull Start from a manifest customer job, pain, or gain for which you design a value proposition. In simple terms, this is a problem in search of a solution. Start from an invention, innovation, or (technological) resource for which you develop a value proposition that addresses a customer job, pain, and gain. In simple terms, this is a solution in search of a problem.

43. Lean Startup Cycle • Ideas/Business Model • Technologies • Social trends • Pains/Gains Think with your hands Pivot/ Persevere • Build • Prototyping • Minimum viable products (MVP) • Learn • Insights • Hypotheses • 5 Whys Minimize the total time & resource through the loop • Product/service • Address Job to be done • Fit (P-S, P-M) • Data • Innovation Accounting • Net Promoter Score • AARRR • Measure • Split tests • Observations • Click streams Find/get real customers

44. AARRR Model and Funnel Stage http://free-thinking-cap.blogspot.de/2011/11/aarrr.html

45. The NPS Calculation Calculate your Net Promoter Scores using the answer to a single question, using a 0-10 scale: “How likely is it that you would recommend [brand] to a friend or colleague?” This is called the Net Promoter Score question or the recommend question. Respondents are grouped as follows: • Promoters(score 9-10) are loyal enthusiasts who will keep buying and refer others, fueling growth • Passives(score 7-8) are satisfied but unenthusiastic customers who are vulnerable to competitive offerings. • Detractors (score 0-6) are unhappy customers who can damage your brand and impede growth through negative word-of-mouth. https://www.netpromoter.com/know/