Value Creation 102: Non Transactional Businesses

This is an extension to Value Creation 101. 

It’s often difficult to measure value from engagement or adoption led business models. I have been often asked in pitches that how do VCs look at such ventures. Or how should the entrepreneur even think about monetizing such businesses.

Time is money. So if consumers are spending time on your platform/product, there is definitely notional value to that time. Invoking our earlier analogy of increasing revenue or decreasing cost, the question you should answer here is ‘Where is the time coming from’. In other words, are you pulling time away from another activity eg NetFlix meant that people started substituting going to a movie hall or renting a DVD with NetFlixing a movie. Or are you creating a new time spend bucket eg Facebook meant that people suddenly started spending time on social media – a bucket which did not exist before that.

The first case is easier to predict – if you’re creating a product which helps better serve an existing need (in the above case it was watching a movie), it’s easy to understand how to value that time and consequently, also how to price that service. The second is much tougher as you’re not only inducing a new behavior in the consumer(which companies like Uber do) but also generating a new need (which a Pinterest does).

To explain the second case better, I like to use the much abused Facebook example. Facebook, over the last 6-10 years, has constantly created new behaviors. It started with a simple social network. Through very simple features like “Like”, “Share”, “Comment”, it created a new time bucket (I am on social media) . Then, through more advanced features like “Check In”, “Tag” and “Apps”, it created  new behaviors (Wow, let me check in with a picture of this view and tag my bff) . Today, even though the direct monetization method for Facebook is Ads, the root of that monetization is the massive engagement it generated by both creating this new time bucket and by creating new behaviors.

So if you’re building an engagement led product which doesn’t directly facilitate a goods or service transaction the 2 questions for you to answer when identifying value are:

A) Is my product replacing time spent on an existing activity through my product?
Common products which would fall in this category are games, music streaming apps, content platforms etc. All of these provide alternative ways to spend time for an existing, well understood behavior (gaming, listening to music, reading etc). The USP here could be a nuanced way of spending the same time (different games/content collections) or just a better product.

B) Is my product creating a new behavioral pattern?
Not surprisingly, it’s very tough to generalize such products since these are new behaviors. The best is to use examples from the past – Twitter, Pinterest, Facebook are some examples. The key here is identifying people who spend insane amounts of time on your product, figuring out exactly why they do so and then finding more such people.

Answering both these questions will help you easily identify the value your product is generating and consequently its monetization potential.

So you don’t have monetization figured out!

 This is an extension to Show me the Money. 

I realized I hadn’t covered  non-transactional businesses or transactional businesses which aren’t yet charging money to either side of the marketplace in much detail. So decided to add to special notes for entrepreneurs building such businesses.

Special Note 1: You don’t have a monetization model – Engagement FTW

This is trickier, but more common for consumer facing companies. If your venture falls into this bucket, I expect you to prove to me how people are spending insane amounts of time on your product i.e rigorous engagement which may tomorrow be monetized through some means. This may be through MAUs, DAUs, time spent on app/website/product etc.

Special Note 2: You have a monetization model figure but aren’t making money yet – Adoption FTW

This is becoming increasingly common these days as companies, despite having a commission/fee structure, choose to pass the same on to the supplier or the consumer in order to increase liquidity on the platform. In this case, be upfront and don’t increase your burden of proof by talking too much about Traction in the deck. But please do have some empirical evidence that the monetization switch, when it gets flipped on, won’t reduce liquidity on the platform.

Value Creation 101: Transactional Business Models

In my post on Show me the Money, I referred to the importance of identifying the ‘value’ that is being created through the business. A couple of people asked me to elaborate on this and hence I thought of writing a more detailed post on the same.

Value gets created in 2 basic ways – increasing revenues or decreasing costs. A proxy for either of these could be convenience (i.e. convenience might be equivalent to saving money or making more money depending on whether you are a consumer or a business)

Some of the more common ways to increase revenue are

• Increasing Fixed Asset Utilization
  A lot of businesses have fixed assets with huge sunk costs and relatively smaller variable costs. Increasing utilization of such assets is one of the most common ways of increasing revenue. A good example here is the cab market i.e Ola or Uber increasing utilization of the cab or Oyo rooms increasing budget-hotel utilization etc

• Expanding target market
  A lot of businesses, due to constraints of capital or geographies can focus only on a certain target market. Expanding the target market for such businesses helps increase revenue. A good example here is any product marketplace eg SnapDeal which enables a seller in Gurgaon to sell in Chennai or of a Zomato which allows restaurants to be discovered easily online.

• Providing better quality leads
  Often, the biggest barrier to a business’ expansion is lack of quality leads. Improving quality of leads or prioritizing them on the basis of relevance can help focus the business’ efforts and increase top-line. Many service marketplaces eg UrbanClap can be bucketed into this category. Many analytic companies also fall into this category.

• Better consumer targeting/Increasing lead conversion
  Enabling a business to better target their consumers or convert existing leads is another common value proposition as now with the same resources, they can increase their top-line. Many SaaS and marketing automation tools fall in this category.

• Enabling price discovery and convenience
  Most consumer businesses fall in this category – while time is not strictly “revenue”, guarantee of best prices with minimal effort through a transparent and unique product is equivalent to revenue for the customer (time is money and money saved is money earned!). Online booking sites eg ClearTrip or BookMyShow are examples of convenience led business models.

• Increasing price point by adding value to product
  This is a more conventional business model wherein you skillfully add sufficient value to a product or a service that enables you to charge a higher amount to the end consumer than the cost you spent on adding the value. Usually these businesses are one of scale. Examples of such businesses are conventional manufacturing and production. More recently, models like WeWork have used the same principle to provide better real estate offerings to the consumer by sprucing up the existing home/office set-ups.

The most common ways to decrease cost are:

• Remove middlemen to increase margins
  Directly connecting the buyer to the seller ensures maximum margins and hence cost reduction. The simplest example that comes to mind is Uber that removed middlemen by eliminating offline taxi aggregators thereby freeing up margin to be distributed between the driver and the rider. Young real-estate start-ups like NoBroker or GrabHouse are also examples of the same as they trying to remove brokers from the real-estate value chain.

• Reducing business opportunity cost by time reduction
  This could be seen as an equivalent of ‘convenience’ for businesses. I think a good example here is Shopify. It made opening an online store extremely easy thereby freeing up their time to work on selling stuff. Similarly, Wix made web development extremely straightforward allowing people to focus on their core business without worrying about the website.

• Increasing productivity/efficiency of manpower
  For most service oriented companies, decreasing manpower by replacing them with automated software for low variability, repeatable tasks is a major cost optimization lever. This not only increases productivity but also frees up valuable manpower. Manpower could also be freed up by simplifying complicated tasks. Examples which come to mind here are robotics companies like GreyOrange which provide automation solutions to repeatable shop floor tasks.

Note: Many businesses will use a combination of 2 or more of the above methods. Moreover they are not exhaustive, merely indicative of what the most common ways are.

Show me the Money!

This is the 4th in a series of posts illustrating how to pitch effectively to a Venture Capital Investor. The previous post in the series is here .The first post of the series is at Being Pitch Perfect .

Tom Cruise couldn’t have uttered truer words – even if it took an angry client to get him to say them!

So far in the pitch, you’ve established how relevant the problem is and how your product solves the same. Now’s time to talk about how you make money.  The only reason anyone will invest in you is if you can provide a large exit at some time in the future. And making money is pretty important along the way!

Do’s
1. Show me the value your business is creating and for whom
Value gets created in only 2 basic ways – increasing revenues or decreasing costs. An extension of both of these could be convenience. Make sure you are very clear on what value your business is creating and communicate it crisply.

2. Tell me who is paying
Clearly state who (or both) out of the consumer and the supplier is paying you. In other words, whose money are you taking to create your own revenues.

3. Tell me where is the money is coming from?
Generally, start-ups either pull a share of existing spend towards them or create a new wallet spend. Let me illustrate this a bit better:

• Pulling a share of existing spend
  This usually happens when you create a new, efficient process to replace an existing one thereby creating more value for one or more players. You can then command a share of the latent value unlocked through process efficiency. In this case, it is critical to illustrate clearly the reason for the efficiency of the new process. Also, give me empirical evidence that you’ll be able to pull the share of wallet that you say you can – either by traction or by anecdotal examples of your personal conversations with stakeholders or, if nothing else, by existing comparable models.

• Creating a new spend bucket
  Usually, this happens when you increase someone’s net wallet size. Here you need to tell me why is there so much value in what you are doing that a stakeholder will create a new bucket of spend in his wallet. Tell me the increased wallet size that you have created – is it because of increased revenues or decreased costs? Also, show me early indicators of what percentage of this new wallet you’ll be able to command. Like in the previous case, this could be either by traction or by anecdotal examples of your personal conversations with stakeholders or, if nothing else, by existing comparable models.

4. Tell me how the money is coming to you?
Walk me through the money flow – who pays whom and how do you get paid. This is probably the most important yet under-rated part of the business model. Innumerable businesses have failed due to poor invoice collection or non-trusted payment channels. I need to understand how your payment process is so smooth that delinquencies won’t happen. Ideally, I want to hear how you will route payments electronically through your platform.

Don’t’s
1. Make blanket statements like “money here is a no-brainer” without adequate data back-up
If money were a no-brainer, starting up wouldn’t have been this tough. Even if you aren’t commanding revenues right now, acknowledge the importance of figuring them out – today or later.

2. Put off the business model till the very end of the pitch
Remember this is probably the most critical part of your pitch. Don’t leave it for the last. VCs are bound to have questions for you around your business model. The only reason to leave it for the last is if you are very confident that the model is simple/already implemented in some company globally and hence the VCs will already know about it and you won’t be needing too much time for it. But if in doubt, err on the side of caution.

3. Tell me monetization will come with scale
While this is true for many businesses (including the $10 Bn valuation Pinterest), it’s important to have a path to monetization clearly laid out. Most VCs are fine with monetization kicking in later but need to have a visibility to the method early on.

Best Practice:
Create an info-graph depicting the path of money from the payer to you/payee clearly showing why the payer is paying (value being generated for him/her). If you don’t have a monetization model figured out, acknowledge the risk of the same and duly state that you will work with the VC (post funding) on figuring out one ASAP but without compromising on growth of the business.

Recommended time:
I would say spend 7-10 minutes on the business model. This seems less but if you have explained your problem statement and product well, this much time will be sufficient.

Disruptive Component Analysis: Zeroing in on the problem

This post illustrates in detail the concept of DCA introduced in “Houston, we have a problem”. I got a lot of queries to detail the concept and hence wrote this. 

Identifying potential disruptions is best done through an approach I like to call DCA or Disruption Component Analysis. DCA of a process is simple – write down each step of the process and then all the things that could go wrong i.e. pain-points at each step. Below each pain-point write down why that pain-point exists in the first place. Do this in first person i.e. put yourself in the feet of the consumer – usually works out better!

Let me illustrate this by digging deep into the “getting food at home” problem.

DCA for “Getting food at home”

Now, this process has 3 parts – knowing what all you can eat i.e. Discovery, choosing what you want i.e. Decisioning and finally getting what I want i.e. Fulfillment. Now let’s follow DCA:

1. Discovery:
   • I don’t have enough options
     • What specific meal do I lack options for? Is this my everyday lunch or my occasional gourmet dinner
     • Are you creating a new option or expanding the availability of a new option?
   • I don’t know what options I have
     • Are you creating new information or is it present but unavailable to me?
     • Are you presenting existing information in a easier to consume way?

2. Decisioning
   • I don’t have all the information I need to decide
     • What extra information are you providing me which enables easier decisioning?
     • Are you creating this information (eg ratings) or are you communicating an existing information (eg price)?
   • I don’t want to spend time deciding and want someone to do it for me
     • What data are you using to decide my food choice for me?
     • Are you creating or recording this data?

3. Fulfilment
   • I don’t have a good platform to communicate with the restaurant
     • Does the restaurant not have an easy mobile app/website to order?
     • Do the restaurant’s delivery partners not have an app/device to communicate effectively with the consumer?
   • The restaurant lacks the infrastructure to fulfil my order post communication
     • Does the restaurant lack a POS terminal capable of handling deliveries?
     • Does the restaurant not have enough delivery boys?
   • The delivery happens through the restaurant but the experience isn’t the best
     • Are the deliveries late?
     • Is the packaging not appropriate?
     • Does the delivery boy keep calling me to ask my exact location?
     • Do I want a cash-less transaction?

Now, as you can see each of the above leaf nodes is a potential disruption. This is by no means exhaustive but should be enough to give you a sense of the technique. Feel free to pick and choose your own favorite disruption(s)

Actions Speak Louder Than Words: Demo, Demo, Demo

This is the third of many articles in this series – the previous article is  at https://goo.gl/1ZogHC

Last week, I was meeting a young startup. Within 10 minutes the entrepreneur proactively jumped into his product. He took us through his entire tech and then moved to the “in-the-works” part of the product. His confidence, combined with his product’s brilliance was amazing. Whether or not we go on to fund him right now, there’s no doubt that his pitch went extremely well.

Bottom line? Nothing talks more about your product than the product itself. Moreover, there is nothing as pleasing as an entrepreneur who proactively shows the entire product – frontend and backend. It speaks volumes about his/her confidence. And a good demo is vital for investment. So, do a demo.

Do’s

1. Use a live version of the product, which is stable
The most important KPI of the demo is that it should work. There’s nothing more frustrating than a founder trying to show a dev version of the product which might potentially have more features but keeps crashing. If you do have significant new features in the works, show the dev version separately.

2. Make it real – the devil is in the details
A good practice to follow is to keep narrating in detail what would really happen as you walk through the demo. For example, if you are showing me a taxi hailing app, tell me what all machinery gets activated in your business when the customer initiates the request right from the request being sent to drivers to them turning up at the pick-up point

3. Focus on a before and after picture
The best way to show the value add of your product is to contrast what would have happened in absence of the product and how it is changing status quo. At every step in the demo, tell me how inconvenient life is today and how the feature you’re currently showing is making it easier.

4. Let me play with the product
Most VCs will want to play around with the product. This is a good sign and should be your cue that he/she is genuinely intrigued by the product and wants to know more. Your job should now be largely to voice-over the key USPs of what he’s experiencing with the product

5. Be slow, detailed and clear in communication
Remember, this is the most important part of your pitch. So take your time to explain in detail the features. A little bit of theatrics won’t go awry either. Just a note of caution, don’t belabor over all features – if you think some feature is routine and the VC seems to be getting it, don’t waste time talking about it. Like any other in person conversation, watch out for physical cues as to when the audience is losing interest!

Don’ts

1. Turn up at a meeting without provisioning for a demo
There’s one thing if you’re looking for seed funding and haven’t built out the product yet. But if the product is ready, there is absolutely NO reason to turn up without all that is required to demo eg an Android phone! The other day I met an entrepreneur who asked me to use my android phone for an app demo. Turns out I own an iOS device and I asked him to use his phone. Unfortunately, he himself had a windows phone!! Let’s just say the pitch wasn’t the best!

2. Dodge questions about the product
Most VCs are going to be a pain during the demo and ask you about all the boundary conditions for your product. Bear with us and tell what you feel is the best answer. Remember, it is OK to say that you haven’t thought about all of them. We understand that. But don’t try and bluff your way or discount any questions – at least not without adequate backing.

3. Fail to acknowledge the shortcomings of your product
EVERY product has shortcomings. The good Product Managers (PMs) accept them and have a plan and timeline to improve the same. The bad PMs dismiss them as being unimportant or keep giving excuses. Only good PMs get funded.

Best Practice:
Have a production version of the product ready on a demo device and rehearse the demo before-hand. Mentally note down the key features to show and what to voice over each of them. Don’t push any updates – at least not onto the demo device – immediately before the demo.

Recommended time:
I would say around 15 minutes. This also depends on how complex your product is and whether there is just one product or many. But 15 minutes is a good time to budget for.

Houston We Have a Problem

This is the second of many articles in this series – the previous article is  at https://goo.gl/YXJB8t.

I once had a food start-up pitch to me. The pain-point, they said, was that people weren’t being able to get food at home seamlessly, to solve which they were creating a platform to aggregate restaurants online. Seems legit? Not really. 

This seems trivial, but the level of specificity with which the problem and your solution is communicated to me is critical to a good pitch. The clarity helps me quickly evaluate your business model with the right lens and ask you relevant questions. The last thing you want is me thinking you’re trying to create an everyday meal service while what you’re really doing is aggregating gourmet restaurants. It also tells me how smartly, and the level of detail in which, you’ve thought about the problem.

Do’s

• Start off with stating explicitly the exact problem in 1 or 2 simple sentences
  Keep this simple. I personally recommend what I call the Disruption Component Analysis or DCA approach for identifying and communicating the pain point. DCA is simple – write down each step of the process and then all the things that could go wrong i.e. pain-points at each step, along with why they exist. Your solution will then match to one or more of these pain-points. It’s best to lay this out on a slide in the form of a process flow.
• Follow up by explaining where you/someone you know felt the key pain-point(s)
  The inspiration for you to solve this problem is important for me. A (short) anecdote here is helpful. This helps me connect with the problem better as I may have experienced something similar. This is also particularly important as it helps me visualize a problem I might not have faced ever.
• Tell me how this is a large enough pain-point
  Market size, is probably one of the most important factors in deciding the feasibility of investment. This is probably because market size can hugely limit or expand a VC’s returns. Recognize this and talk about the market size. However, please be cognizant of the relevant, addressable market size eg. If you’re trying to create a marketplace for gourmet food, don’t tell me the market size of then entire Indian food industry.
• Finally, tell me the businesses adjacent to yours
  A quick line to acknowledge, yet differentiate yourself from, competition is advisable upfront. As soon as I hear a pain-point, I immediately start thinking of business models trying to solve adjacent problems. Now it’s not advisable to get into competition this early on in your pitch. But, I saw one entrepreneur handle this very well. He proactively anticipated this and said “I know what you’re thinking – that X and Y do something very similar but while X focuses on solving A and Y on B, I focus solely on C. Let’s go deeper into that later on though” X, Y being adjacent businesses and A, B and C being pain-points he had identified very clearly early on.

Don’ts

• Make blanket statements like “Food delivery is a problem for everyone” or “It is almost impossible to get a cab today” without specifying why
• Spend more than 2 minutes on the anecdote – like I mentioned for the introduction – I will appreciate it but this will eat into your precious pitch time
• Overstate the market size by including the size of adjacent pain-points not core to your model
• Get into competitive analysis immediately – just stick to the one line

Best Practice
I recommend creating a process flow using DCA on a slide and then pointing out the exact problem statement using that as an anchor slide. In case of new processes being created, use adjacent processes to show the need for this new process.

Recommended time
For a 60 minute pitch I’d allocate 5-7 minutes for communicating the pain point which should include your anecdote and any follow up questions. I’d recommend another 3-5 minutes for walking me through the market size.

This is the second of many articles in this series. For complete series watch this space. All views are personal and in no way represent the view of any organization I am associated with.

Being Pitch Perfect: You know my name not my story

It’s D-Day! Your deck is ready, the meetings have been set up and you’re all ready to go pitch for your next billion dollar idea. Great! Hey, remember when you were going on the first date with that crush of yours but blanked out at the coffee shop? Wouldn’t want that to happen again would you? Sadly, I can’t help you get back with that crush. But what I CAN tell you is how to woo a VC with a phenomenal pitch!

I have interacted with and heard pitches from hundreds of entrepreneurs. Some have been good, some bad and some ugly. Some others have been phenomenal and a few of those have gone on to raise capital. In this series of articles, I try to present a sample structure and summarize some of the key things I personally – and I think many other VCs – look for in a pitch.  I like to think of the pitch to be made of 9 key parts: Introduction, Problem Statement, Product, Business Model, Traction, Competition, Defensibility, Fund Raise and Conclusion.

You know my name, not my story!

Exactly! So tell me!! One of the things I am always very interested to know is why did the founder become an entrepreneur in the first place. I once had an entrepreneur start off his pitch by saying, “Allow me to demo to you the messaging platform that will kill Whatsapp” post which he dived straight into the product. Needless to say, the only thing I remember of his pitch is that one sentence!

It is always good to start with a brief background of yourself and how you came about doing what you are doing. Tell me a bit about your professional history, what all jobs/ventures you dabbled in and what convinced you to do this current venture. And finally, state your role in the current startup i.e. do you look at Tech, Product, Business etc. The introduction helps me with three things:

1. It gives me some insight into your motivations as an entrepreneur
I want to gauge the reason behind the start-up and the aspiration for the same. Are you looking to create a $100Mn company or a Unicorn? Is this a lifestyle business or are you in it for the big game? How dedicated are you to your current startup?

2. It helps me gauge (to some extent) your potential as a successful entrepreneur
The only data point I will have to judge your potential as a great entrepreneur will be your past experience. Focus on the key things which demonstrate capabilities one would typically look for in a founder eg. Leadership, resourcefulness, grit, passion etc

3. I find nuggets to connect with you maybe a common alma mater, an interest/hobby etc
I try to find some connect to every entrepreneur I meet – it helps me associate with him or her better. If you are successful, I will remember you over the other hundreds of entrepreneurs and you are sure to come out with a good professional acquaintance at the very least.

Do’s

• Talk about key accomplishments in past jobs/ventures eg. Designing a product feature, leading a city launch etc
• Name successful people who you’ve worked with extensively –helps to have a reference
• Throw in a couple of personal facts eg. your alma mater, city of origin or a sport you follow
• Mention why you are apt for your current role in the venture

Don’ts

• Spin yarns about every single thing you’ve ever done – while I will patiently listen with interest, remember you’re wasting valuable time you have for the pitch
• Make blanket statements like “I created the entire back-end at SnapDeal” without adequate facts to back them up
• Mention positions you held in companies without telling what you did in those roles
• Throw names around without genuine basis – remember the VC community is very close knit and I will probably find out sooner or later that you were bluffing

Best Practice:

Practice the 5-6 lines each cofounder is going to say during their introduction. It will not take more than 5-10 minutes and will provide a seamless beginning to your pitch. You may not memorize the lines but atleast note down the points you will be highlighting.

Recommended time:

I would say anywhere between 5 and 10 minutes for a 60 minute pitch. Often, 2 or 3 founders will be present during the pitch – remember the 10 minutes is for all of you to give your introductions.

See the next article in the series Houston, We Have a Problem