Even More On The Business Canvas

Let’s take a minute to expand on the business model canvas from yesterday’s entry.  There are some useful consequences of the business model canvas which are worthwhile to explore.  This is especially true regarding the bottom of the business model where we review costs and revenue streams.  Usually, when I have prepared one of these with start up teams, we will determine the costs and revenue on a monthly basis.  This is a useful technique to help determine initial seed funding required to give the business an adequate runway.  Here I will list some truisms I have learned from experience and that are typically taught in business schools.  I wont cite or point you to specific resources on the web but I have found these rules of thumb to be useful:

 

First, new startups need approximately at least a five month runway to determine whether they are viable or not.  The concept of runway is an important one.  Here, runway means the amount of time until the business is able to cover its own costs of existence.  When a business can cover its own costs the airplane has sort of taken off. It is useful to get a sense of how much cash is required for this runway.  For that reason, cash burn rate is a key concept in startups and new processes.  The cash burn rate as you may have guessed intuitively is the amount of speed with with your business utilizes its cash resource.  Cash flow is a key concept in any business and this is even more true for startups.  So, the business model enables us to solve for approximately how much we think a business will need on a monthly basis.  With more startup experience certain costs become more known quantities.  How much does a bookkeeper cost? Do we even need a bookkeeper? How much are bank fees? How much are lawyer fees? Do we even need a lawyer? Over time and with different startup experience we learn how much and what type of resources are necessary to make the startup go effectively.

 

So, if we calculate this on a monthly basis we get a sense of our cash burn rate.  One typical technique is to make all of these costs a worst case cost scenario.  That is, how much can the costs be if the worst case arises.  This is also part of how we evaluate whether a business model is worth our time and effort.  If the cost loaded business model can’t fly we consider carefully before progressing.  However, even with worst case cost loading many businesses can and do survive.  Keep in mind the overall attrition rate for businesses is more than 60% in the start up field.  Some of the tools we discussed so far are pointed towards lessening that risk of failure. With each start up we learn not only more quantifiable tools to decrease our risk but we also learn more of the philosophic approaches to startups, such as the importance of flexible tools like the business model canvas instead of more rigid and lengthy investments of time like traditional business plans.  So some unique consequences of the business model canvas include the ones we have talked about.  Specifically the cost and revenue projections at the bottom of the business model canvas are especially useful.  We usually use post it notes on a business model canvas to represent the different costs we expect.  Again, we often calculate these on a monthly basis.  There are some fixed costs which must be incurred upfront and we add these into part of the initial capital investment to get the business off the ground.

 

So there are those interesting consequences of the business model canvas that allows us to quickly calculate an approximate cash burn rate and runway for the business given a certain amount of capital investment.  Interestingly we have found usually 5-7 months to be the amount of initial runway necessary to get the business up and running to where we have a sense for whether it is worthwhile to continue as a going concern or not.

 

In subsequent blogs we will talk about other unique tools in addition to the business model canvas that are really worthwhile for startups, whether that be a central line service in your hospital, new medical practice, or other unique opportunities that arise.

The Business Model Canvas

 

 

Business Plans Are Sometimes Replaced By Business Model Canvas

Stanford, and other business schools, has a strong focus on entrepreneurship.  I’m impressed by how things like business plans have been replaced with more modern tools like the business model canvas.  If you’ve never seen a business model canvas, let me invite you to go to wikipedia or a similar location and investigate.  A low-res sample of the setup is included above.

 

Canvas Is Less Cumbersome Than Business Plan & Easier To Prepare

The business model canvas is one of the current tools used to design and startup new business models.  It’s much less cumbersome to prepare and, perhaps more importantly, is a graphic representation of a business model that is easy to review owing to the fact it’s exactly one page long.

 

Canvas Serves As Visual Record Of Business As It Evolves

This tool often serves as a visual record of the business as it evolves.  For example, when a startup team meets and chooses to adapt its business model, a new or modified business model canvas serves as a visual record for where that model is at that time.  These are easy to review later as a history of the startup.

 

Even Most Well-Constructed Business Plan Rarely Survives First Contact With Real World

Why focus on a flexible plan to this degree?  Well, as any startup team member will tell you:  even the most elegant business plan rarely survives first contact with the real world.  For those of us who have done this before, and likely you if you’ve had startup experience, we recall a famous quote by none other than Mike Tyson (which is one of my personal favorites):  “Everyone has a plan until they get punched in the face.”

 

Flexible Decision Making Strategies Are Useful For Fluid Situations

 

So it is with startups.  For that reason, modern emphasis is placed on more evolved decision making techniques such as decision trees, Boyd’s OODA loop, and similar modern methodologies for decision making in fluid situations where uncertainty abounds.  Here, of course, this is uncertainty in the sense that there are multiple paths a situation could take, and these branch points introduce probabilities we can try to quantify in order to make the best possible choice given the expected type of outcome.

 

These newer, effective tools can be utilized by us whether we are business people or surgeons.  They can line up the probabilities so that we have the greatest chance of success.  In later posts, we’ll discuss some of the tools for addressing a fundamental issue we face every day:  decision making in uncertain situations.

Santa Should Have Done A Lean Startup

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For Mr. Kringle, starting up a global manufacturing and distribution network in 2013 would be challenging.  Looking back on his success, a nice instance of where success is not defined by income by the way, it is easy to imagine that Santa’s service emerged fully formed and streamlined.  (If by streamlined we mean hand-delivering all toys from house to house the world over while relying on flying reindeer who are, no doubt, apt to get sick and / or just not fly.) Lean startups leverage a sophisticated understanding of how to start a company in order to get things done.  Nowadays, no doubt, Santa would startup Lean.

 

Although Santa’s team has deep roots in history, the lean startup does not.  The lean startup is a relatively recent phenomenon that conjures thoughts on a certain attitude, philosophy and tool set for how to start a business both effectively and quickly. Three of the most important tools of the lean start up include the business model canvas, the minimum viable product and an iterative approach to the business model along with number 4, customer development.  These modern tools would have helped Santa quickly determine whether people liked his service & products.  He would have learned quickly what to focus on even if his market changed.

 

Santa may have used the business model canvas and the concept of the minimum viable product.  We spoke before about the business model canvas and we have also described the concept of the minimum viable product (which is a product offer that has the least amount of features a customer will purchase). Perhaps, for example, children would have accepted receiving gifts over two, three, or seven days instead of all in one night.  This may or may not have made life easier for Santa.  Again, do children need Santa to deliver everything himself?  Who knows now, yet at the beginning Santa could have learned what people would accept and what he could create most easily.

 

Let’s focus on the idea of the minimum viable product (MVP) more closely.  The MVP is a useful concept because it allows you to iterate the product quickly, it is usually more straightforward to build or create as it has less features, and it helps you test the market in a rapid fashion.  Santa could have learned a great deal from his Lean experiment.

 

Before Santa built toys to spec and delivered them all in one night via reindeer (and often chimney), what child could have even imagined such a thing?  There is a classic line from Henry Ford that is if he had “asked their customers what they wanted they would have said a faster horse.”  This indicates that, sometimes, the market doesn’t know exactly what it wants until it sees it.  Santa could have developed the demand for his service and perhaps spread across the world more quickly.

 

It is just that customers in the market have points of pain, issues, or other things they need satisfied.  They will tell you soon enough if your product  helps ease their pain.  One of the functions of our team of angel investors is to give some guidance on some other unique tools that can really lean the process for you to get your business. We have a series of several steps that are changed depending on your unique business idea and model.  We have both established and new businesses benefit from these steps, and we have mapped out certain tools that can also eliminate completely sources of overhead that can be barrier to your startup.  Who knows if our experience could have helped Santa–after all he did very well on his own if we measure by market share alone.

 

In the end, Santa may have been able to utilize modern tools of the startup to great effect.  Using a business canvas and MVP, he may have been able to learn that there is no need to push his reindeer so throughout one night once per year.  Perhaps he would have used another service or independent contractors to help make deliveries.  However, as historians will tell us, it is often unfair to use modern knowledge to criticize the ancients–after all they did very well with what they had.  So it is with Santa:  even though he may have a different model if he had used the Lean startup tools, he’s done very well for us all.

Happy Holidays.

 

To read more about Lean startup tools:  on the main home page, click the plus sign and select from the archives.  If you have a moment and interest, go back and review the first blog entry in the series that highlights the business model canvas as an effective way to create and iterate your business model.

Takt Time and Value Added Time in Surgery and Healthcare Processes

By:  David M. Kashmer, MD MBA MBB

 

These Tools Are Valuable

Two of the most undervalued tool sets in healthcare are the Lean and Six Sigma tool set.  We hear the common refrain from physicians, nurses, and healthcare workers that Lean and Six Sigma tools, along with other statistical process control tools, are not useful in service industries–particularly not in healthcare.  In our experience, this isn’t correct.

 

It’s A Matter Of Training

Often, healthcare workers are not trained in these tools and therefore find little value in them.  However, in our experience, with training and understanding healthcare workers find these tools just as useful as the broader audience that uses them frequently.  In fact, many of the tools for which healthcare workers are looking to articulate certain words or ideas are already worked out in the well-know tools of statistical process control.  These can be quite valuable in healthcare and other service lines.

 

Sometimes We Use “Stealth Sigma”

Our team has experience with turnarounds and realignments in more than five trauma centers where we have found the Lean and Six sigma toolset to be invaluable.  We often have to change the moniker associated with this set of tools so as to avoid being too off-putting towards our healthcare colleagues.  Sometimes we call them “statistical process control” so that there’s less pushback caused by use of the term “Lean” or “Six Sigma”.  In fact, some colleagues have a term for the type of deployment where we avoid “Lean” and “Six Sigma”–those deployments get called “stealth sigma”.

 

Many of us on the team were trained in healthcare and currently practice clinically.  We understand the skepticism of our colleagues as we initially had it ourselves before we were trained in the tools.  Healthcare colleagues, here’s an important headline:  many of the tools you are currently re-inventing in your various fields have been worked out.  There’s even processes to use them.  They’re called Lean and Six Sigma.  Ok, stepping down off soapbox…

 

It’s only natural for us to be biased and a little evangelical.  After all, several of us are Master Black Belts (degrees of Six Sigma education have names that sound like karate belts) in Lean and Six Sigma.  We are accredited by various bodies throughout the United States.  Until we learned these things, we didn’t understand that they yield an ability to improve healthcare.  Here, allow me to stop testifying and to start telling you some of our experience as we focus on two useful Lean tools.

Let’s Talk About A Case

 

A healthcare system was having issues with stressed workers and backlog.  The concept of takt time was easily applied to demonstrate issues with the system.  Takt time represents the drum beat of a service line.  Another way to describe it, and one we often use with healthcare workers, is as the heartbeat of their patient.  The takt time is the time required to produce one unit of whatever the service line is producing.  This can be a patient admission, a surgical procedure, or something similar.  Takt time is an average and of course there is variability of the rates of production in practice.  However, takt time gives us an idea of what the drumbeat of the situation should be based on customer demand.

 

Definition of Takt Time

Takt time can be determined as the total available time to work divided by the demand for a situation.  That is, if, after breaks and other issues there is one hour available available in a day to actually do work and there are three patients that usually show up to the hospital (the demand on that system) in that hour to be admitted, the takt time for admissions is one third of an hour per every admission.  Said differently, it’s 1 hour available to do admissions / 3 admissions to be done.  This is one third of 60 minutes or approximately 20 minutes per admission.  Concepts like these give us an idea of what the drumbeat of the system needs to be.

 

We can use takt time in many ways.  One of the most useful ways is to pair it with a visual diagram of the process.  This type of diagram is called a value stream map.  Value stream mapping is very useful to better understand processes and services.  We can get a sense of what the drumbeat is in our organization and, based on mapping out the times associated with different portions of our value stream map, we can figure out how long it actually takes us to produce one unit of whatever we are trying to accomplish.  We can compare the two.  A value stream map gives us an idea of how the speed at which the process usually performs compares to takt time.  If takt time is 20 minutes per 1 admission, yet it usually takes us 40 minutes per 1 admission, we probably need to look for where we can cut wasted time and improve the process speed to be closer to takt time.

 

We can then see if there are discrepancies between our takt time, which is the drumbeat required, and our actual time to produce what we are trying to produce.

Focus On Value Added Time (VAT)

 

Another useful consequence of the value stream map is something called value-added time.  A troubling statistic often taught in Lean and Six sigma courses is that, in most systems, only approximately 1% of time used in the system is spent adding value to a product, service or patient. The “what adds value” is defined as that benefit or item for which the customer will pay.

 

In healthcare there are some special issues in application of this definition.  For example, who is the payer in the situation?  When we say value-added time as anything for which the customer will pay, who is the customer? We usually use a third party payer’s perspective as the answer for “who is the customer” because they are usually the ones actually paying for the services and systems.  Rather than talk about who should be paying for services in American healthcare we, instead, focus on who does.  In this respect we treat the third party payer, the source of funds, as the actual entity paying for use of services.

 

This also has some interesting consequences.  The third party payer, in fact, bases their payment on physician, surgeon or healthcare provider notation.  In fact what they actually are paying for is the tangible product they see which is the note.  Again, the note the physician, advanced practitioner, or healthcare provider supplies is what the third party payer reimburses.  In fact, they also use that as a rational to decline payment.  Consider how, if we gave a service but didn’t write it down, we would not be reimbursed.  This is part of how third party payers control costs whether they mean to or not.  We may have done several procedures, yet it is unlikely we would be reimbursed if we didn’t write down exactly what we did with clear and often exact documentation.  The note is the product for which the provider is paid.  Of course, without rendering the service there can be no note.

 

We feel strongly that it is improper (to say the least) to write a note based on the services or procedures that were not performed.  This is likely fraud in most cases and we are concerned about this.  We do not suggest writing notes on patients for procedures or care that was not delivered.  However, we acknowledge, in fact, a strong focus on the value chain for healthcare needs to be on the production of a medicolegally compliant, provider-protective, and exact note that satisfies the ever-increasing regulatory requirements of third party payers. That said, at the end of the day, what third party payers pay for is the services given as represented by the note.

 Apply VAT Concept To Everyday Processes

 

Let’s return to this concept that only 1% of time in most systems is spent adding value to a patient, process or other entity.  Experientially, this seems to be true.  When we have mapped out value streams in healthcare we have determined that again, that only approximately 1% of the time is used to actually add something that the third party payer will eventually reimburse.  A 4 day hospital stay related to cholecystitis is reimbursed with one global payment based on service as represented by the note.  Are there any opportunities to streamline note-writing, patient care, and cholecystectomy performance to decrease the amount of time spent in non-value added activities?  (You may be laughing, because the answer is clear to anyone who has worked in healthcare:  yes of course–there is a great deal of waste and re-work.)

 

The fact that only about 1% of time in a system is value-added time is often interesting and counterintuitive to the project group until they see the numbers. Once the amount of non-value added time is established and made tangible it becomes much more straightforward to reduce this time.  It is useful to reduce non value added time because much of non value added time is waste.  There are exceptions as you can imagine.  (Sometimes one process has to be completed in preparation to allow a value added step later.)  However, making the amount of non value added time crystal clear, tangible, and visible on a value stream map greatly improves processes and consensus building among healthcare providers, nurses and other allied health practitioners.

 

Use These Two Tools Together

We suggest, in our practice, to focus on these two tools as important adjuncts to process development. Again, takt time gives us a sense of our patient’s heart rhythm and we can often see how our processes are functioning relative to this concept of takt time.  For more information regarding takt time, value stream mapping, and value added time we invite you to visit Wikipedia or a Lean Six Sigma site after a google search.

 

Remember, to all our friends in healthcare:  we’ve been there and feel your pain.  We are surgeons, advanced practitioners, and nurses too.  Let us tell you:  the tools for which you are looking, or the ones you are re-inventing, have already been worked out and are called Lean and Six Sigma.  Feel free to borrow our wheel anytime rather than working out how to build your own.

A Military Take On Competitive Stategy

 

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from OODA loop Wikipedia Article

There have been multiple military thinkers through the ages who have greatly influenced modern thought on strategy in warfare. In this entry we do not discuss the competitive nature of the firm in industry as if it is war; however, we, instead, turn towards some of the greatest thinkers of military strategy to try to learn some useful lessons for how we compete and form strategy as a business or new startup business in the modern day.  Our investment team has found these ideas particularly useful as we evaluate the ability with which a firm can compete amidst the uncertainty of changing markets.

 

One of the most classic military thinkers is von Clausewitz, who eventually became a Prussian General.  Prior to becoming a general he wrote a classic treatise named On War. Von Clausewitz clearly described several things that deviate significantly from thinkers prior his time.  Many thinkers prior to von Clausewitz had espoused more of a technical, almost proscribed approach to war-fighting.  Von Clausewitz, among other things, introduced many important tenants of war-fighting that have made it to the modern day.  One thing that was very different is what von Clausewitz did not do:  he did not seek to make a cook book for how to fight successfully.  Rather, he described over-arching philosophic and process-type issues that allowed for effective war-fighting.  Perhaps von Clausewitz’s most often-cited ideas include war as a continuation of politics, and the idea that it is (in general) easier to defend a position than to attack one.

 

From von Clausewitz, we take several important lessons:  first, it is challenging to adopt a new position.  Once a team has a position in a market, however, it is easier to defend than to “attack” a new one.  This does NOT mean a firm should never change its position, yet indicates it should evolve carefully when it feels it is time.  (We feel first should be looking for innovative changes that give long-term returns.) Please realize, however, that easy does not always equate with successful or desirable.

 

Also, von Clausewitz helps remind us that healthcare startups, and others, must have a good reason to be bothered starting up.  Going for a new position in a market will be challenging, and the effort to do so must always be subservient to some plan just as the horrors of war serve the end of politics.  In any event, von Clausewitz helps us remember that the “getting there” is challenging and must serve some higher purpose.  Once a team gets there, it will be easier to defend territory, although again we caution against complacency.

 

Now, let’s transition toward more modern war-fighting theory such as that described by John Boyd.  John Boyd was a United States Air Force pilot who helped contribute to a manner of approach in dog fighting and other conflicts that lead to a great amount of success with the F series of fighters.  In short, per my rudimentary understanding, the F series of fighters was, in many ways, felt to be technically inferior to the Russian MiG owing to certain characteristics of the F series itself.  However, with Boyd’s direction this concept of being able to ‘turn under power’ had been designed into the F series and became key in the United States Air Force designs and implementation.  Although the F series may have lagged in classic measurements of fighters, its ability to maintain thrust and TURN to adopt the best attack angle made it highly effective in combat.

 

This idea of turning under power directly affects our thoughts on firms and industry.  A firm must continue going forward and yet be nimble enough to take the best angle of attack.  A team must be able to pivot.  This is key in startups:  turning while remaining moving forward, or turning under power, is a key characteristic.

 

John Boyd, however, went one step further and described what has been called the OODA loop. The OODA loop describes a light, flexible pattern of war-fighting in which first a participant must Observe a situation obtaining observations accurately.  Then, these must be passed through filters including education, cultural background, and the different elements that compose that person’s background as the person or entity Orients to the situation.  That means they must understand where and how they fit into a given the situation as individuals.  Next, they must appropriately and quickly come to an effective Decision.  It is not enough to come to a decision quickly; the decision must also be as accurate as possible given the background of the situation.  Last, the person must be able to implement this decision in a rapid tempo fashion so as to effect the other participant in the struggle, conflict or market.  In short that person must Act.  Results of the action and the updated situation then feedback to the beginning of the loop.

 

In our angel investment practice, we found that using the OODA loop as a shared mental model for certain aspects of competition to be very key.  We talked in an early blog entry about Blue Ocean strategy.  Here, however, we describe the importance that is to be allotted to this concept of a decision cycle.  The Boyd loop tells us several important things.

 

First, the Boyd loop is a useful mental model to describe the importance of the decision cycle as a means of competitive advantage.  When another firm, an enemy, or another participant makes decisions more slowly than our team this can be a source of advantage for our team.  That is, when we ‘operate inside the decision loop’ of the other side we find this is very effective in competitive strategy.

 

Making decisions more quickly is not the only source of competitive advantage. However,  it can be done to great effect as the opposite side or sides feel like we are the tempo setter for an industry and that they are rushing to catch up.  Eventually they may feel like they are following in our wake no matter which direction they turn as we operate inside their loop.

 

Besides simply decision time we also focus on accuracy in decisions.  It is not enough to make a poor decision quickly.  Instead, we focus on making the best decision we can amidst uncertainty.  This uncertainty is a key feature of the process and has been described by military thinkers such as Marine General AM Gray in Warfighting as the ‘fog of war’.  The fog of war is a useful term that describes uncertainty in fluid, unique situations that arise as part of competitive strategy.

 

Beyond the fog of war we focus on the concept of friction.  Friction, here, refers to those small impediments that, when summed, make it more challenging for us to impose our will on a situation.  The minimization of friction, coupled with effective decision making in uncertainty, is a hallmark of high-performing teams in our estimation.  In fact, we found that teams that actually need to communicate verbally or in a written manner to be less than the most effective.  Communication based on the team’s intent, or so-called implicate communication is a hallmark, in our opinion, of high functioning teams.  Each team member knows what plans can be executed in different situations because they know the team’s intent.  Rather than over-communicate about each small item, only large items are communicated and even those are minimized.  Everyone knows which way to row and doesn’t have to make decision cycle time longer by stopping to ask questions about each ripple in the water.  Given that, team members need to say very little to be very effective because they share the same mental model and are on the same team.

 

In short, we have much to learn from some of the classic military thinkers regarding competitive strategy in our market.  We have chosen several distinct elements from some of the great military thinkers that describe modern war-fighting, decision cycle, and friction amidst uncertainty.  One of the most important things on which we focused in our practice is this concept of decision making amidst uncertainty.  The ability to make high quality decisions in a rapid, effective manner, despite red herrings and other fog of war is key for success with your new business model whether that be in surgery, healthcare, or another field.

Don’t Start A Business With Your Family

Many times, startup entrepreneurs consider drawing the startup team from their friends and family.  This is only natural because these are close contacts in their social circle.  However, we recommend, based on our experience: don’t start a business with your family.


There are many reasons for this that we have seen in our practice as investors and as members of startup teams ourselves.  One of the most common is that it is very difficult for family members to keep their relationships separate and distinct. What we mean by this is that it is very challenging to compartmentalize family issues and keep these completely separate from the business.  When the business goes well it may positively affect families, and when the business goes poorly this may also affect families.  Further team dysfunctions related to long held family grudges, issues that are bygone / don’t relate to the business, and other social considerations may make the business go poorly. 

 

 

If you remember, we claimed previously that approximately 65% of businesses that do poorly do so because of team dynamics.  In our experience this percentage is higher in businesses started by families.  Team dysfunctions seem to be magnified and can be challenging.  This end of the spectrum includes the fact that sometimes teams composed of relatives have too much baggage to discuss and so may be mired in both old family politics and history.

 

On the opposite of the spectrum, it can be difficult for teams of relatives to discuss those unmentionable issues that affect the business.  If one family member has an alcohol issue or another family member has childcare issues, or if someone just isn’t putting the time in that is required, these things can become hard to discuss and may go unmentioned.  The same difficulties with discussing things beyond the scope of the business can arise from not discussing certain topics that do relate to the business because of family dynamic issues.

 

Starting a business with family seems to decrease the probability that the business will take off. Importantly, most startups do, in fact, not succeed.  Approximately two thirds of startups don’t go on to be successful going considerations.  Given the fact that two thirds of startups don’t make it, and two thirds of the ones that fail do so for team considerations, I would say it is setting up both family and business for failure when we attempt to start a business with family as doing so seems to only increase the risk of failure overall.  Of course, as with all things, there are exceptions to these broad rules. However, I would say those should be recognized as exceptions.  It is worthwhile to think carefully, at the very least, before moving ahead with family.

 

How did we learn this lesson?  Well I will share with you that we made the mistake of starting business with family members early on.  Worst of all, we knew the data about starting a business with family members and we did it anyway thinking that our family was somehow the exception.  We were wrong.  We did this on two occasions and, as usual, we invite you to learn from our experience with this blog rather that having to repeat our experience yourself.  This saves you time, energy and capital.

 

Have you ever started a business with family?  How did it turn out?  We are always interested to have lively discussions about your experiences with startups and innovative business models particularly as they related to startup teams.   Let us know more in the comments field.

The Nature of Competitive Advantage In Your Business

 

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Our last post talked mostly about premium positioning and its influence on the probability of success for your business model.  One of the sidelights included the fact that you need to justify your premium positioning.  Specifically, you need to be able to demonstrate value to your consumer.  Part of the way you can bring this increased value to your consumer and maintain a substantial lead on competition is finding a source of competitive advantage.  There are lots of different types of competitive advantage, and some of these have been alluded to earlier.  Competitive advantage is what you do that gives your business a unique, sustainable, non-obvious, and slightly opaque perspective.

 

Let me describe exactly what I mean.  First, we talked in an early blog post about the fact that, as investors, our team looks for a non-consensus opinion on whatever market you are in. This is similar to when we focus on competitive advantage.  You need a unique business take on the value stream you are describing.  We described Porter’s Value Stream in an early blog entry, and for now, it suffices to say that you must have some unique spin on the value stream for your firm in your industry.

 

This can be competitive advantage coming from how discreet elements in the value stream interlock.  That means you may focus on how your inbound logistics and operations go together. There may be opportunities as you bring a new substrate into your system to position it for eventual easy outflow from your system.  You may be able to eliminate inventory etc., altogether.  These are ways to look for competitive advantage in how the pieces of your business fit together.  That said, and I can’t suggest this strongly enough, you should focus on a unique take on your business model.  Meaning it is not simply how the discreet activities fit together but rather what discreet activities you are performing in what proportion, and in what way, to what final effect.  This represents the portion of competitive advantage that focuses on having a unique position in your industry or field.

 

Once you have a unique position carved out, this position needs to be non-obvious. That means the more simple and straightforward this seems the more likely everyone is to do it.  Also, the more obvious the advantage is, the more easy it is to discern and copy.  So, one of the categories on which we recommend you evaluate your competitive advantage is just how obvious an idea this would be to everyone else in your field with a similar amount of knowledge.

 

After the non-obvious criteria we recommend that your competitive advantage be slightly opaque.  That means there is no need to share with your competitors exactly how you do what you do.  Further it should be not easy to discover with merely casual contact with the company.  This means that whether you are able to process data and information more quickly, you are able to compete with data analytics to a greater degree than other companies, or you are able to speed up your decision cycle to make accurate, clear decisions based on the data you obtain from customers and other sources,  people contacting your business should be unable to tell how you do it.

 

Competing on data, for example, is one focus for current, modern businesses.  Sometimes, owing to the sheer volume of data and the processing power required to interpret the data, this methodology is called Big Data.  Big data can be a powerful source of insight but it is not typically used in small businesses or brand new startups owing to the significant time, intellectual capital investment, or possible need for massive data warehouses etc.  Also there may be challenges in implementing insights from Big Data into the frontlines of your company.  So, again, we recommend that whatever the competitive advantage you create, you make it a semi-opaque one that other competitors in your field are not easily able to discern from a casual interaction with your company.

 

Next, we recommend several other important characteristics of your competitive advantage.  For example, we recommend that it be sustainable.  That is, those things on which you choose to compete must be expected to persist, must be able to be replenished, and must be able to make for an effective going concern. You need to be able to have the elements that contributed to your competitive advantage persist and have reasonable expectation that you can sustain those things on which you have chosen to compete.  This is no easy task, yet sustainability is one of the hallmarks of a good competitive advantage.

 

However, you should note that competitive advantage is very different than a strategy in the market.  As Michael Porter has described in his previous work, and as we have referenced earlier in the blog, competitive strategy and competitive advantage are truly distinct.  The manner and market architecture in which we compete relates to our competitive strategy and the characteristics of our business model including its specific resources, modes of delivery, etc, are some of the sources of that competitive advantage which may influence our strategy.  How you run the race is strategy, and the body you bring to run represents your unique advantage.

 

Competitive advantage can even come, in part, from the market you have chosen to enter.  Some startup texts recommend that you start a business in a field in which is feels like you are running downhill.  Meaning that you should open your business in a field in which it seems that you have an unfair advantage owing to either certain expertise, an extensive contact network, information about where the market is going, or some similar impressive advantage.  Starting off with a good selection upfront about which market to enter can translate into a higher likelihood of success in your chosen field.  (Notice, however, that by choosing wisely which market to enter, you may have made it more likely that your business will succeed but as we have described earlier it is by no means a sure fire prospect simply because you have chosen so wisely.)

 

So we have discussed briefly some of the key elements of competitive advantage.  We recommend that you focus on building a sustainable competitive advantage that is non-obvious, slightly opaque, and can be translated into a unique strategy and a unique position for your business.  Rather than compete in everyone else’s game which has often been ironed out early on and years prior to your starting your business, we often recommend that you evolve a game changing take on the market.  This is in line with blue ocean strategy as we described earlier on in the blog.

 

Whatever you choose to do, we recommend a premium positioning paired with a sustainable, non-obvious, unique source of competitive advantage.  This will prevent you from difficult errands we have seen created by startup owners including:  strategies that are focused on competing based upon price, strategies that are focused on competing in a manner in which the business is not built to compete, or focusing on a source of competitive advantage which is easily extinguished with the next technological leap or slight fluctuation in the market.

 

My colleagues and I hope that you found this brief description of the nature of competitive advantage useful.  These are some lessons that are textbook level from such books as Understanding Michael Porter.  However, as is usual, once we have read the lesson in the text book we must go live it several times before it sinks into us and becomes part of our practice. Here, we continue to hope that you are able to use this blog entry and others to avoid issues we have seen and experienced with new startup companies.  Please, use this to learn from our mistakes rather than having to make them yourself.

Premium Positioning Is A Good Option For Your New Business Model

Did you know that there is evidence that positioning your brand as “premium” is significantly associated with improving your startup’s outcome?  It turns out that positioning your brand as premium or a value-added proposition for customers is associated improving your outcomes.  This is because, in part, early on in a startup a premium positioning allows a substantially increased margin on what would be relatively low sales at the onset.  This makes it more important than ever to focus on how your brand adds value to your customers above and beyond what other brands may perform.  You need to focus on reasons why your comparatively new product or service is worth the premium price.  Our experience resonates with this teaching.  Premium positioning works and makes startups, all else constant, more likely to be successful.

 

Take a moment to think about an important point:  it is incredibly challenging to compete on price versus existing players in the market.  That is, choosing to compete on price is usually a recipe for disaster for startups owing to the fact that they will lack the volume to obtain substantial profit and they lack the economies of scale of larger competitors.  They also lack negotiating power to bring down the costs from suppliers.  Thus, competing on cost versus large competitors is a recipe for failure.

 

Consider how it would it would look versus a company such as Walmart, Target, or similar large distributor based on price alone.  They are able to negotiate substantially lower prices from their suppliers owing to their expected volume of sales and positioning. These, and other economies of scale present in larger retailers, make competing with retailers in that vein almost impossible.  Thus, we frequently recommend to new startups that they not focus on competing on price and instead compete on value.  Again, competing on price decreases the probability that your startup will take off.

 

We usually support an innovative, sustainable, UNIQUE viewpoint as represented by the business model.  If you can’t answer what your unique take on the business is, how this translates to a value-added situation for clients, and therefore why your product is a premium product, well, in our experience you are less likely to achieve the type of break-out success for which teams often look.

 

This and other interesting facts about startups and positioning will be discussed in future blog entries.  I invite you to review Understanding Michael Porter, or a similar text, for thoughts on premium positioning and competition.  It can be counter-intuitive for a startup to create, and work to maintain, a premium product.  That said, it remains:  premium positioning in startups seems to be associated with success.

 

For a nice example of a premium-positioned startup that has enjoyed considerable success, visit www.emergencysurgicalstaffing.com.  This team focused on premium positioning compared to traditional locum tenens staffing models in Surgery.  The positioning and value they add has allowed considerable success in their field.

 

Do you think premium positioning is worthwhile for your startup?  Let us know in the comments field beneath.  We’re always interested in a lively discussion about positioning in new startups.

Dynamic Ownership Equity & Other Alignment Techniques

 

 

 

Racing Toward Change - Speedometer

 

We discussed, in an early post, some of the importance of alignment to the startup team.  As the business progresses, peoples’ interests can become misaligned owing to various factors. For example, liquidation preferences may make investors be very content to sell a company at a much lower price than the initial startup team would. This can be because, as mentioned before, the liquidation preferences at the time of their initial investment set the stage for this situation.  This is one of the many emergent properties of the business as it grows.  Individuals from the initial startup team may become misaligned.  Changes in their personal lives, and other business issues, may make misalignment into an increasingly important factor.  In this post I will discuss some of the techniques our team uses to try to help the team continue to grow in the same direction.

Dynamic Ownership Equity

 

One of these techniques is dynamic ownership equity.  As discussed previously, the concept of dynamic ownership equity is very clearly discussed in Noam Wasserman’s The Founder’s Dilemmas.  This concept has been very useful for us in our angel investment practice. Dynamic ownership equity means that equity ownership changes as the business reaches different milestones.  For example, when the investors have their initial investment returned to them plus a certain margin, the portion of the business they own may change.

Take, for example, a business that has three entities owning it.  We will call them entity A, B and C.  We will say that entity A had the initial idea for the business and has a 35% ownership equity owing to the “idea premium”.  The idea premium is the concept that the person who has the idea may have more ownership equity especially at the beginning of the company.  Let’s say entity B has 15% ownership equity and entity C has 50% ownership equity at time 0 or when the business starts. Let’s say entity C is the investor who brings capital to the business, entity A brings the idea and certain technical expertise, and that entity B brings both a managerial style and personal connection network to the business.

The team can and should negotiate out ahead of time different milestones at which ownership equity changes.  Over time the idea premium may erode and entity A’s ownership equity, for example, could decrease.  The entity C could decrease their ownership equity with time once they have been returned their initial investment.  Over time, perhaps, entity B’s managerial skills may be come more important.  Multiple milestones can occur, and the milestones we often use are revenue-based.  That is, at the final stage of equity balance maturation the final ownership equities for each entity usually come about when the business reaches some certain gross revenue milestone.  This is because, we would rather, as investors, have a passive source of income which is 10% of $2 million rather than 80% of a $20 thousand dollar company.  We feel dynamic ownership equity gets us there and keeps the team alive as we get there.  This concept of a smaller % and yet higher return is easily understood once we run the numbers. There are many different techniques and ideas on how to balance ownership equity.  However, the idea that it changes over time as different stages of the business are achieved and that different talents are more important at each stage is clearly useful.

Regular Meetings

 

In addition to dynamic ownership equity there are other techniques we utilize to help keep the team growing in the same direction.  One of these is regular meetings.  Regular meetings with a focused agenda on key metrics to which the team has agreed ahead of time helps keep us growing in the same direction.  If we can understand our business in numbers, as mentioned in an earlier blog post, we can really get a feel for our business in different lenses which are objective.  People are less likely to get their feelings hurt in this manner.  A focus on metrics in which we believe is key.

 

Making A Business Canvas (And Updating It!)

 

One of the other things we perform in meetings is recreating our business model canvas and updating it.  This gives us a snapshot of our business over time. We then place the metrics on what we feel the key portions of our business are and follow these.  Having these updated business model canvas allows us to have a snapshot of our business over time and get a sense for what our revenue streams etc. should look like.  As we mentioned in an earlier blog post a formal business plan often does not persist beyond first contact with the real world.  That’s why, in many cases, being able to create business model canvas is much more useful.

Direct Conversations…& Avoid Founding With Family(!)

 

An additional technique we utilize to keep everyone moving in the same direction is having direct conversations.  What I mean by this is we really try to focus from the beginning of the company on the idea that there are some things we must discuss for the good of the company even when the issues, or we, are uncomfortable.  This is one of the barriers to founding a business with family.  Often founding businesses with a family member can put certain constraints on what can and cant be talked about in the business.  It is harder to discuss the elephant in the room when family is in the room also.  This makes us feel that, in line with Noam Wasserman’s description in The Founder’s Dilemmas, founding a business with family is akin to playing with fire. (For more on that, click here.) If the business does not go well, and keep in mind more than 60% of new business ‘fail’, this may leave family members with a bad taste in their mouths, blame, and much finger pointing at each other.

In conclusion, the team alignment in the new business model is an important key to success.  We need to take care to use special techniques to promote team alignment through every stage of the business.  Some of these techniques include dynamic ownership equity, updating the business model canvas, focusing on metrics with which everyone has agreed, and the avoidance of founding a company with family.  We hope that you may find these techniques useful in your practice and again I recommend, as always, that you read more about the concepts of dynamic ownership equity and some the importance of metrics via online search.

The Importance Of The Team

Some famous venture capitalists have estimated that 65% of new startup businesses fail because of team dynamics and team-related issues.  This really highlights how important it is that the team be functional and that the team members be able to perform on an individual basis as well. In our experience this is one of the most challenging portions of the startups:  how do we decide if the team is right and if the team is adequate to make the business go?

 

We use several techniques to try to determine if the team is ok before investing, or before starting up the new venture as an initial member of the startup team.  First, simply, there needs to be a team.  Sometimes we have excellent, star performers come to us with fantastic business ideas which seem a sure-fire win.  However, there needs to be a team presented as part of the business idea.  As we have said before a great business idea is only a portion of the battle when it comes to making a great business model. We often ask, at the first meeting, about who the team members are and their backgrounds.  Let me share with you that there is evidence that a team size of approximately 3-4 is statistically significantly associated with improved outcomes for the business model.  And this is per an online Stanford business course that was given on coursera.org. (That same course, Technology Entrepreneurship by Chuck Eesley, is also on novoed.com.) This course is available to everyone and is given on an intermittent basis.

 

Whether you agree that the ideal team size is 3-4, there are some important considerations beyond simply team size.  The team members need to have some background in the idea they are describing.  Industry experience and an extensive set of network contacts adds to and enhances the legitimacy of the business idea.

 

 

Venture capitalists have estimated that it takes approximately 6-7 million dollars in capital expenditure to train a VC capitalist. That has been an interesting statistic to me, whether you feel it is overly broad or not.  It is interesting to me that one way to measure venture capitalist learning and growth is in the total amount of the deals they have performed as evidenced by the amount of capital they’ve run through in getting there.

 

In our experience as Angel investors, we have learned a great deal from trial and error despite trying to do all the book learning, background work, and other issues.  I can’t say strongly enough that we have learned a lot, as expected, by actually doing the work.  One of the lessons learned has been just how easy it is to miscalibrate the team.  We have had several incidences now of startups in which we have participated where we were very confident that the team performance, background, and structure was adequate and we found out later that we were quite incorrect.  We take these experiences as paying-for-education-type experiences.  We take the lessons learned from these and try to not make the same mistakes in the future. However, that said, there are other important topics such as alignment.

 

We will discuss alignment in a separate blog entry.  Here, let me tell you that alignment issues occur when the startup teams interests are no longer completely aligned.  These may emerge as the business grows and different people expect different things from the business.  These may arise from a non-recognition of one startup team member by another startup team member.  Alignment issues are very common and there are multiple techniques to keep the team in alignment as it moves forward together. In our experience, despite adequate ideas and margins, the most common reason for failure of a business model is in fact team dynamics.

 

Please, recognize that I don’t mean that a business is doing poorly or failing and then team alignment becomes an issue. Rather team alignment issues and team performance issues come first and then the businesses do poorly afterwards.  The team dynamic issues I am describing here are usually seen before issues with the business and are seen in that first 4-5 months necessary to get a sense for whether the business model works.  I cant say strongly enough that our experience substantiates that at least 65% of business ideas and innovative business model canvass do not work because of team dynamics.  In our experience it is probably more like 75% that the causal reason is probably the team rather than the idea, regulatory issues, or other significant issues.  Check in on later blog entries where we will discuss different issues such as team alignment and ways to keep the startup team aligned in healthcare and beyond.