trendpreneur

While the concept of teaching entrepreneurship may seem contradictory, School for Startups has at its core an admirable goal: effectively, to help fledgling businesses learn the stuff that they’ll wish they had known if they hadn’t learnt it beforehand. Don’t worry, that makes perfect sense.

The one-day workshop managed to efficiently condense a lot of the principles around starting a new business into six clear questions, focusing on the large and small aspects of three broader dimensions:

• Markets: How attractive is my product to my customer? How attractive is the market to me?
• Industries: Can I sustain my competitive advantage? How attractive is my industry?
• People: Do we have the skills and experience? How connected are we?

Some of the things picked up from the workshop include, on the market side, a focus on customer benefits not product features. You don’t really know what your customers care about until you have a customer, and you might find that their definition of your products’ benefits might vary wildly from what’s on your business plan. (Interesting to see that Doug Richard seems to subcribe to Yossi Vardi’s “business plans are science fiction” view!)

A product’s price depends on the benefit it provides to customers, but prices are discovered rather than invented. Be prepared to play until you hit the sweet spot — an example given was Starbucks, where coffee is comparatively expensive but the main customer benefit, a comfortable place to hang out, makes the price paid worth it.

While generally a successful product is aimed at scratching a customer’s itch, an interesting point raised was ‘what happens if the customer doesn’t have a need or want’, i.e. you’re solving a problem they don’t know they have. The immediate response to that was ‘you don’t have a market’, but if you can convince the customer that they have a problem first — or maybe make your product shiny enough that they buy it on pure lust alone — perhaps all is not lost.

The most important point about a product is its benefit, and your ability to support that benefit. An example given was a Dragons’ Den pitch from an online style guide, which claimed to act as an impartial advisor but was in reality biased due to getting a lot of its information from PR companies and reviewing locations on press junkets. Understandable given the bootstrapping nature of the company, but unfortunately completely contradicting the product’s “impartial” position.

Following on from product, we have the customer. Who is the customer? Can you describe one? Why would they buy your product? Time to drag out “Joe the Plumber” or, ideally, a real customer that’s expressed interest in your product. Then look wider, at groups of customers — the market. A set of customers with common attributes is a market segment, but it’s interesting to look at the dividing lines here. It’s a lot easier to market to “18-25 year old males in London who own motorbikes” than “people who get hungry while they’re at work”.

For a startup, the market size doesn’t particularly matter, as it’s going to be a lot bigger than you are. What does matter is its growth rate — a growing market with new customers entering all the time means you are on an equal footing to grab those customers, whereas an established market may have entrenched competitors that it’ll be hard to drag custom from. By dividing your market into segments and looking at growth, you can identify a good prospect, but it can be hard to have the willpower to stay within one particular segment.

Knowing your market is important. Doug outlined six trends to be aware of: demographic, socio-cultural, economic, technological, regulatory and natural. If your market demographic is multicultural, cater to that; if the prevailing socio-cultural winds include a growing desire for organic, locally-sourced produce, be aware of it. The current economic climate has a far-reaching impact on spending and even eating habits. Technological trends are more likely to impact service, such as a coffee bar offering wi-fi; regulatory trends mean you need to be aware of what your duties are and what you might get sued for in future. Finally natural trends such as global warming also affect your business.

The industry is separate from the market. The market is your customers, whereas the industry is people filling those customers’ needs — i.e. your competition! When considering an industry, there are five things to be aware of and if all five of them look bad, then you probably want to have second thoughts about the industry.

• What are the barriers to entry? Is it easy for competitors to set up, or are you going to have difficulties entering the industry yourself?
• What is the buyer power? If you’re supplying one large customer who effectively holds your purse strings, your profit is going to be in their hands (and it’s in their interests to reduce it!).
• What’s the supplier power? Are you bound to one specific supplier’s whim? If you’re held by suppliers and buyers, your profit margins in the middle will quickly erode.
• What is the threat of substitutes? Not competitors, but different industries serving the same need, such as (for an airline) a train company serving the same route, or (for satellite TV) cable and freeview services.
• What’s the level of competitive rivalry? The competitive picture varies by industry; some are easier to prosper in than others.

Even if there’s competition in your industry, a good advantage can offset it (for example, nCipher’s product offering a 30-fold speed increase). Some advantages are disruptive and change the entire picture of the market — various technology shifts have caused us to change the way we do things.

On the subject of competition: especially for software businesses, the threat of a large player coming along and creating a similar product is very real. You’ve already done all the hard work, made a lot of design decisions and even proved they were sane by attracting a customer base, so what’s to stop Microsoft or Google from ‘borrowing’ your idea? Fortunately, a couple of things. One was touched on at the Expo last week — having a devoted user base (or, in Web 2.0 terms, having unique hard-to-recreate data). Would a Microsoft Twitter-clone take off? Given the volume of Twitter users, unlikely. Also, the cost to the large company of entering your market may be pretty high. If they have to enter from scratch, just like you did, there’s a real possibility of failure for them — but if your product would go alongside their existing offerings just perfectly, such as adding another product to Microsoft Office, you’re in more danger. One way to counter this is to make it easier for them to partner with you or buy you than develop their own product.

So what is a sustainable advantage? Your company’s core competency falls into one of three categories: product, process or service. With a proprietary, protected product you’ve got an advantage; better processes and you have an advantage. Better service and people will choose you over someone else (hopefully) despite inferior or equal products and delivery. However, having one of these alone isn’t enough — you need to constantly be evolving to maintain that advantage. Plus, of course, you need a viable model.

A viable model involves having enough revenue, in relation to investment, to cover costs and then some; having a profit of £10k when you have £10m invested won’t cut it. You need to ensure customer acquisition costs aren’t too high and that you can afford to, and work to, retain customers — it’s always cheaper to keep an existing customer than to recruit a new one, and the cost of finding new ones can be vastly underestimated. The sales cycle needs to be sufficiently short, and the margins from individual products and services need to be fully understood (if one is making a huge profit but another a loss, it helps to untangle the company). Finally you need to ensure your cash cycle is solid — it’s rare, but not unheard-of, for companies to enjoy interest on others’ cash as customers pay upfront but their suppliers are paid in arrears!

Sadly I missed the ‘team’ presentation but I’d imagine questions like “can you do it”, “can you scale”, “what is your personal goal and aspiration”, etc; why you start a business does matter, as you need to want it to survive! However, don’t follow what others do — it usually won’t work for you. The decisions you make will shape your success, or lack thereof, and being aware of industry and market factors, plus being, knowing and working with the right people, all add up to a positive outcome.

Overall some really solid questions to ask your business and some interesting dimensions to pursue thought along — if I change my market to *this* segment, is it better? If my product has *this* benefit, would it sell more easily? Lots of food for development.