Accelerators' Big Brother

I must say it's amazing. Accelerators has become a virus that spreads so quickly it's purely scarey. Don't get me wrong. I think accelerators is great for the startup eco-system and in general it elevates and promotes innovation and entrepreneurship like never before. It's the sheer numbers of them is mind boggling.

It feels as if there is one new accelerator that opens every single week. More and more brands join the party and it's fair play. The barrier to entry for accelerators is reasonably low. Take a brand like coca-cola for example. They opened a number of accelerators world-wide, with its local Israeli accelerator called "The Bridge" offering a 6-months program with no cash for equity deal. Coca Cola aims to focus on their core experties which are: Consumer Engagement, Consumer Retail, Supply Chain, Marketing Innovation and Health & Wellness.

Accelerators

Here are some of the accelerators opened in the last 12 months:

  1. The Bridge by Coca Cola
  2. WHLabs by William Hill
  3. Ingenuity Partner Program by Intel
  4. Runway by Samsung
  5. Cockpit by El Al + Microsoft Ventures
  6. SigmaLabs by Yahoo + Entree Capital (UK-Israel VC)
  7. 8200 The Social Program
  8. Inno-Negev in Beer Sheva
  9. ... and many more

* There are 2 more I'm aware of that are in the making as we speak and I'm sure many more will follow

The accelerators market is booming and ever-expanding. The brands are joining the game which creates tremendous opportunities for aspiring entrepreneurs. These models have also shifted from small cash for large equity plus services to cash w/o equity or no cash at all (e.g. Microsoft Ventures). I remember that with 5skills, my 2nd startup, I took too high of a risk by joining a local accelerator that gave $30k cash + services for 10% equity. The newer models have proven themselves to be far more successful and generate better deal-flow for the VCs involved.

The name of the game is to support startups until 'true value' is achieved and then deep-dive, invest, take equity and push the company past the 'chasm'.

Accelerators are considered to be lean, mean and very fast moving. Allow me to introduce you to their big brothers, the Incubators.

Incubators

In this post, however, I wanted to talk about this interesting beast called the OCS, or in long, The Office of the Chief Scientist. It's a government body that has been known by a few and misunderstand by many. I figured I'll share some of my learnings on the matter, especially in light of the recent increase in funding they provide.

The OCS is a government unit, funded by the Ministry of Economy. It has a whopping yearly budget of 1.2B NIS ($316m USD !!). It offers many support programs and grants to startups, entrepreneurs, businesses and corporates. The most interesting program I want to discuss is the 'Incubators Program'.

You see, the 'Incubators Program' provides a support framework for incubators and funds for the startups that join. They are also very generous. They can invest up to 85%! of the allowed budget. Now, despite the anticipated 2015 budget increase of $200m, which was canned, the OCS have announced a new tender for supporting the creation of 4 new incubators. 2 in Tel Aviv, 1 in Jerusalem and 1 in the West Bank.

Currently, there are 18 OCS incubators in the country. With the addition of these new 4, we would have 22. Each new incubator must bid for a license, given by the OCS, to operate an incubator for a period of 8 years.

The rules are simple:

  1. License is given for 8 years
  2. You need to have a team of 4 individuals: CEO, CTO, VP Business Development and COO
  3. The office provides up to 85% of the funding for each attending startup
  4. You must commit and prove you can provide the additional 15% funding to the startups you recruit
  5. Commit to recruit at least 4 companies in the 1st year and at least 8 companies in any consecutive year
  6. Each startup can stay for up to 3 years in 2 batches. The first batch will last up to 2 years and the 2nd for up to 1 year

When you start an incubator, you also need to prove you have enough cash to cover basic operational expenses. You are required to show that you have at least 1.2m NIS ($332k USD) in cash to fund the operations each year. You can get a grant from the OCS of up to 49% for these expenses if you build the incubator in a peripheral area. If you're a Biotechnology incubator, this minimum is double that amount and set at 2.7m NIS.

After getting the approval to build your incubator, you need to find the appropriate startups or entrepreneurs and apply for funding from the OCS for each startup (also called 'Projects').

Now, not all incubator are equal. There are 4 distinct types of incubators. Each has their own funding framework for the startups you incubate. The 4 types are:

  1. Technology - 2m NIS approved funding (85% grant = 1.7m)
  2. Cleantech or cyber - 2.2m NIS approved budget (85% grant = 1.87m)
  3. Medical devices or Health - 2.5m (85% grant = 2.125m)
  4. Biotechnology - 3m (85% grant = 2.55m)

* Incubators that are built in peripherial areas throughout the country, gets extra benefits, including an increase of up to $500k in the approved budget for each project.

Those startups that stay longer than the 2 years can apply for additional funding but they are then capped at 1m NIS for all types of incubators.

Once the budget had been approved for the project, both the entrepreneur and the incubator need to negotiate the company's holding structure. Here are the guidelines:

  1. The entrepreneur must have a minimum of 50% holding
  2. The incubator must have a minimum of 20% holding
  3. If the IP of the project was developed by a research institute, the institute has the right to obtain a portion of the entrepreneur's shares in the company (as long as the entrepreneur is left with no less than 15% of the overall holding)

* The institute can elect to convert some or all of their shares to a % from all future revenues of the company

Once the startup has successfully secured the desired funding, they kick the project off. They are then required to report progress on a regular basis, e.g. a project progress report must be generated every 6 months and a detailed financial report every 3 months.

Don't forget that the government grants are 'loan-based'. I.e., the startup will need to pay the 'loan' back. The good news is that the OCS grants are based on a 'success-only' formula. Once the startup starts generating revenue, a % of these revenues is paid back to the government. It is treated as 'tax'. The amount is determined by the Incubators' Committee.

The OCS and the incubators in Israel provide a worthy parallel funding avenue for upcoming startups. I know that an accelerator is the first thing that comes to most entrepreneurs, but I think the OCS has a solid value proposition and a 'reduced' risk in securing medium to long term funding with favorable conditions.

Anyone wants to join forces and take one of the 4 slots available? :-)

Tomer


-- References: ABCDE

The REAL Entrepreneurs

Feeling inspired... :-)

When I think of an entrepreneur, I either think of someone who made a big exit, a talked about IPO or is a real-estate investor. Don't know why, but that's the connotation I have.

Over the past few years, friends of mine, who have gone through various Tel Aviv accelerators, struggled, kicked, pushed and shoved their way through to a seed investment and a round A. I am humbled by their perseverance, tenacity and sheer will power to get it through. This includes 1 or 2 pivots, hustling their way through bridge investments or angel investors. Truly amazing.

But I'm not here to talk about that now. I'm here to talk about some other guys and gals. Every time I meet these people, I am at awe and yesterday was no different. These guys rock. They are the corner stone of entrepreneurship in my mind. These guys hustle and push through almost any barrier, political, physical, financial or whatever.

If they need something or a budget for something and don't get it, they get a sponsor for it. They GET STUFF DONE!

They run the programs we all like, they find those first-timer entrepreneurs, run those hackathons, run demo days, promote collaboration between cities, countries and organizations and do they do this with little to no budget. Truly amazing. Best Ops people around!

The REAL Entrepreneurs!

Yesterday I met Tair Kowalsky, Head of the Herzliya Accelerator Center (HAC). I was blown away by the sheer passion, energy and desire to create and grow a local entrepreneurship center in Herzliya. What a pleasure.

Herzliya is a beautiful small city in the northern part of the Tel Aviv district with approx. 110,000 people.

HAC and Me

I'm always looking for ways to help out with entrepreneurs and startups. I love working with them one-on-one and also share some of my passion re: startup business modeling and go-to-market strategy. There are so many things one needs to consider when starting or pushing through the early stages of a new venture. I am sure I can help them out.

I met with Tair, hoping to collaborate with the upcoming wave of entrepreneurs. Exciting times.

Entrepreneurship Starts at Home

Thinking about it now, this is just awesome. Israel is the 'Startup Nation' alright and now it finally hit me. There are SO MANY entrepreneurship programs, funding, classes, events, lectures, workshops etc. that it blows my mind. It's bound to generate many ventures and startups. On top of that you have all these accelerators, incubators and HUBs.

I mean think about it, there is so much support for people trying to create something valuable or actually trying to change the world. So much money is poured into these organizations. Actually, there are so many non-profit programs and institutions as well, so people can go ahead and start something from almost anywhere in Israel. This is just beautiful.

Now I was born in Haifa, which is the north of Israel. Not the far north, but north enough ;-), they too, have a Youth Centerhttp://www.haifa24.co.il/. Young individuals in Haifa are considered to be between the ages of 18 and 40. I now live in Ramat Gan with my wife and 2 year old dog. Just last month, they opened a new Youth Center as well called the 2nd Floor http://www.koma2.co.il/. Exciting times. I will follow up and see how we can start-up an entrepreneurship HUB or center in Ramat Gan as well.

Ramat Gan is another city bordering Tel Aviv to the east. It has approx. 150,000 people.

Ramat Gan skyline, with the Moshe Aviv Tower and Diamond Exchange District

Until next time...

What Would Uber's Business Model Look Like if Travis Used the Lean Canvas?

The story of Uber is an amazing one. Where experience and knowledge brings great success. Don't be fooled though, with great success, comes great changes along the way. Little did Travis Kalanick know, how this would turn out.

Source: Uber

In my latest lectures, I use Uber as an example to illustrate the lean canvas. I figured it's time to dig deep into Uber's written history and put things right.

So here goes.

First, a refresher of the Lean Canvas which I'll use as a guide for the break-down.

Source: http://perth.startupweekend.org/

Source: http://perth.startupweekend.org/

Back to the Future

Okay, so we have a Delorian and Marty McFly lives around the corner from our house. Perfect!

Let's turn the dial back to late 2008, reach 88 miles per hour (142 km an hour) :-) and watch the magic happen. Whenever I say this line in my head, I get a huge grin on my face... you know what I mean.

It's a cold and rainy night in Paris in the late 2008. Two entrepreneurs visiting the LeWeb digital innovation conference sat together until 5am bouncing ideas on what should be the next big thing. These guys were Garrett Camp and Travis KalanickGarret co-founded StumbleUpon - a website/content discovery platform, bought by Ebay in March 2007 for $75m dollars. Travis founded Red Swoosh - a P2P (peer to peer) client-side platform, whicwh was sold sold to Akamai in April 2007 for $20m.

Garrett's great idea was to try and fix the taxi problem in San Francisco.

Uber's FIRST Lean Canvas

1. Problem

Passengers

Getting stranded on the streets of San Francisco

Hailing a cab with your hand

You have to stand outside, rain, wind, snow, sleet

Calling a taxi dispatch requires waiting 20 minutes

Lots of friction and time wasted making a cab transaction (cash, no credit card etc)

Drivers

Drivers are often out of work

Relying on a centralized dispatch for customers

2. Customer Segments

Passengers

Passengers who likes to travel in style

Comfort is important

Convenience is critical

-- Early adopters --

Tech scene people (entrepreneurs, investors, advisors, start-up employees etc)

* Reasons: (1) Leverage the network effect in the launch city (San Francisco), (2) Fueling word of mouth growth through the Bay Area early adopting techset

Drivers

Average cab driver in the Bay Area

3. Unique Value Proposition (USP)

Passengers

Roll in style, comfort and convenience

Drivers

Additional source of income

Reliable ordering and transaction services

4. Solution

Passengers

A limo timeshare service called "UberBlacks"

An iPhone app for ordering limos

An Android app for ordering limos

An SMS ordering service

A Website

-- Top features --

Charging via CC

Driver rating

Mileage tracking

Trip history

Source: Yahoo

Drivers

An iPhone app for receiving orders and fullfilling them

An Android app for receiving orders and fullfilling them

5. Channels

Passengers

Founders friends

PR

Sponsoring tech events

Free rides for VC event attendees (they are highly likely to share their experience with tech friends)

Early adopter blogs

Early adopter social media

Drivers

Direct sales

Word of mouth

6. Revenue Streams

Passengers

Cost per ride ($8 base rate, $5 additional for every mile, $15 minimum)

Drives

% of fare

7. Cost Structure

Wages (GM, CEO)

Technology and infrastructure (App, web, SMS: maintenance)

8. Key Metrics

Daily active riders

Total daily rides made

Source: candydirectnews

9. Unfair Advantage

Founders are successful entrepreneurs (each had exited a company)

Access to immediate funds (via founders)

Conclusion

If we model Uber's idea using the Lean Canvas, we see a very simple solution to a very common need / problem. This first iteration of the canvas is of course the first version. What is required now is to continue drilling down deeper into specific niches and sub-segments and refine the solution and proposition accordingly. One additional thing to point out is that the canvas is a tool for modeling Business Models.

Obviously, there might be several business models, and if we look at uber.com today, we can see a variety of models addressing different needs for different segments. But you have to start somewhere.

Go-To-Market Strategy

Let's now reverse engineer the go-to-market strategy Uber followed to reach where it's at today. I'll start off with what I call "

From Phase 0 to Phase 1

". Phase 0 refers to day 0 of the creation of the start-up and phase 1 refers to the launch day of the newly tested and qualified product or service.

Phase 0 - Planning

In this phase, it's essential to truly test the following four building blocks. The pilot will only end when these 4 building blocks are determined.

1 - There is a real problem or need

2 - The product or service solves the problem or provides value to a need

3 - An attractive market exists (profitable, growing, big enough etc)

4 - Key business model components are proven (e.g. monetization / pricing etc)

Phase 0 - Testing (Pilots)

A key component of Phase 0 is the testing of multiple use cases. These tests are often called Pilots.

Pilots exist to define, develop and refine early-stage products or services to better understand their position in the given market and to mature the product towards the official launch of the product. These multiple pilots are often referred to as part of the Lean Startup method.

Test #1

The first test was conducted by both founders in San Francisco. They split the costs of a rented Mercedes S Class car with a driver and a parking spot in a garage. They drove around, 'faking' the real product.

The goal was to determine the probability of the main Hire a cab via your phone use case.

Test #2

This test was conducted on a tiny, controlled niche in New York city. The test included 3 cars cruising 3 areas in NY (SOHO, Chelsea and Union Square). Both the product's key features and the pricing were tested.

It is also important to note that Uber employs a fixed 6 weeks pilot period which they used consistently around the world before officially launching in a new city.

-- The test timeline --

- March 2009, Garrett Camp, the co-founder with the idea, started working on a prototype

- August, 2009, Travis joins as chief incubator - responsible for taking the idea from product to prototype

- January 2010, test run in New York: 3 cars cruising 3 areas (SOHO, Chelsea, Union Square)

Phase 1 - Launch

The launch was scheduled for May 31st in San Francisco. To manage the launch and the ongoing operations during phase 1, Travis hired a General Manager. During the launch, additional marketing tactics were tested and discoverd. They are outlined below.

Source: TheNextWeb

During the launch phase, acquisition metrics are carefully monitored as it's the most critical success factor for this phase. In Uber's case, they tracked the effects of WOM (word of mouth marketing channel) and found that every 7 rides generated 1 wom user (14.3% WOM acquisition).

In addition, they were able to categorize WOM 'accelerants' (as Travis calls them). These accelerants are based on specific life events and locations which accelrates standard WOM. Examples:

Restraurants and Nightlife - Hit the 'Uber' button at the end of dinner to get home safely

Weather Events - when you don't want to be outside (in heavy rain - 1 new rider for every 3 rides)

Sports Events - getting out of an event is impossible

-- The launch timeline --

- March 1st, first day of Ryan Graves, the newly hired GM (found through Craigslist)

- May 31st, 2010 - Official San Franciscolaunch

-- Launch stats --

December, 2010:

3,000 to 6,000 users

10,000 and 20,000 rides (Key Metric)

1,000 active riders (Key Metric)

Phases 2 Onwards - Growth

When a company successfully completes phase 1, which includes establishing the company in the target market with a defined product and a defined offering, the focus shifts towards growth. Uber's growth was focused on international expansion as quickly and effectively as possible. Here's their timeline:

Aug 2009* - $200k Angel investment by founders

Oct 2010* - $1.3m

Feb 2011* - $11m

Dec 2011* - $37m (international expansion)

Dec 2011 - Paris

Mar 2012 - Canada

July 2012 - London

Sep 2012 - Australia Pilot (6 weeks)

Nov 2012 - Australia

Jan 2013 - Singapore

Aug 2013* - $258m (thru Google Ventures - expedited international growth)

Aug 2013 - Seoul

Oct 2013 - Capetown Pilot Started (6 weeks)

Sep 2013 - First sports deal (NFL safe rides for players)

Sep 2013 - Johannesburg, SA

Oct 2013 - Capetown

Jun 2014* - $1.2b

July 2014 - Beijing

July 2014* - Nationwide UberX rollout in India

Aug 2014 - Bangalore, India

Aug 2014 - Warsaw, Poland

Oct 2014 - Montreal, Canada

Nov 2014 - Denmark

Dec 2014* - $1.2b (Qatar Investment Authority)

Dec 2014* - $600m (Baidu - Alibaba)

Jan 2015* - $1.6b (Goldman Sachs)

Jan 2015 - Nairobi, Kenya

Feb 2015* - $1b

Fascinating journey isn't it? :-)

Stay tuned for more insights.

5 mistakes everyone makes when building their Lean Canvas

I love running workshops. It's a passion of mine. You start off with setting the theme, or topic for discussion, and then you let the magic happen.

Last week, I was called in for a 2nd workshop on the Lean Canvas. The workshop was held in Nazareth which is in the north of Israel. Now, I live in the center of Israel, in a small city called Ramat Gan. Nazareth is about 100 km north of Ramat Gan and on a normal day, this shouldn't take longer than an hour and a half drive. But, as the workshop was scheduled to start at 6pm, I had to leave about 3 hours earlier to allow time for the heavy traffic. almost 3 hours!? That's crazy.

Photo: Downtown Nazareth. A beautiful place with G-R-E-A-T Shawarma!

For the past 2 years I've been giving back to the Israeli entrepreneurship eco-system by giving free lectures on Business Models and both the Business Model Canvas and the Lean Canvas. Did I already say that the Lean Canvas is my favorite? :-) I explained why in my previous post.

Lean Canvas first timers

Back on topic. Last week. I had a group of about 8 aspiring entrepreneurs who all have great embryonic ideas. I've met these guys before, about 2 weeks ago when I first exposed them to the Lean Canvas technique. This time, the plan was to go through their homework and together as a group, refine one canvas prepared by one of the entrepreneurs and drill down to a specific segment.

One of the guys, Maroon, had a great venture idea in the travel industry. Now there is another over saturated market, but nevertheless, a challenge. 

How do we niche an early idea? How do we make an idea into a compelling proposition?

In this post, I will address some of the misconceptions that came up during the workshop. This is important for anyone looking to describe their business model using the Lean Canvas.

Ok, a quick refresher on the Lean Canvas. The Canvas has 9 sections, each addresses key aspects of the business model.

In this post, I want to focus on the 5 main mistakes made while filling out this canvas.

1. Customer Segments contain real company names

It's natural to think about specific companies when you think about customer segments. However, this section includes only segments and sub-segments. A market segment is an identifiable group of individuals, families, businesses or organizations that share one or more characteristics or needs. The basic criteria of a market segment are:

* Homogeneity - common needs within the segment

* Distinction - unique from from other groups

* Reaction - similar response to marketing and promotional offers

In addition to the definition of a market segment, there is a process called market segmentation which is a strategic process whereby a broad market is divided into smaller, clearly defined market segments. It is important to distinguish a 5 main types of marketing segmentation practices:

A - Geographic Segmentation - a first step in international marketing and includes segmentation by countries, cities, states, religions, neighborhoods etc. This is normally followed by Demographic Psychographic Segmentations.

You should understand your geographic segmentation early on when defining your business model. As an example, if you're planning on developing a mobile app that uses geo-location features to discover or acquire users, you would be segmenting based on local neighborhoods. Take Gett (GetTaxi). Their core segmentation is based on major metropolitan cities where short distance daily commuters is in high proximity and demand. Tools such as Google Analytics or other analytical tools provide real-time and historic statistics on these stats out-of-the-box.

In your canvas, you might want to be as broad as San Francisco or as specific as within a 2km radius of local neighborhoods in large metropolitans.

B - Demographic Segmentation - the 2nd step in segmenting is by age, gender, occupation, educational level etc. Assuming your start-up addresses a specific local market, say San Francisco, you would then want to further segment this market into the various age groups, genders etc.

Taking the Gett example above, we could specify the segment as busy professionals, predominately males, aged 25-40 in large metropolitans, working in the city center or within a 3km radius of it.

C - Behavioral Segmentation - this practice divides consumers based on purchase patterns, frequency of purchase, usage patterns and brand loyalty. The best example here are the Apple loyal fans. Apple had created a strong consumer brand-loyalty which on its own represents a market segment. Another good example is a home-exchange network, a website such as homeexchange.com. This segment addresses people that are open to and familiar with exchanging their homes with others on a frequent basis. Yet another example are people that prefer and often choose to buy and eat organic food.

D - Psychographic Segmentation - segmentation based on lifestyle and personality. The perfect examples for this is the GoPro camera which primarily targets the Extreme sports lovers. These days, GoPro had diversified and now targets additional segments, such as party-gowers.

E - Segmentation by Benefits - segmentation by benefits sought after by consumers. Easier way to explain this is by thinking of what is important to you when you think about your car. Is energy efficiency important? safety? low consumption?

F - Cultural Segmentation - used to classify markets according to cultural origin. Cultural origins provide strong insights into consumer customs, perceptions and general behavior.

When writing your customer segments, keep these practices in mind, it will help you get a good start on your segments and a better understanding of your target audience.

2. The Solution section includes the product's benefits

The Solution section must include the specific solution components. For instance, if your end product is a mobile app, then "Mobile App" should be described in this section.

It's easy to get confused with the Value Proposition section as people tend to describe the solution by its benefits. This is not the case here. You should also try and include up to 3 of your top features of the product or service you're offering. This will help clarify what it is all about.

Let's use the Gett example from above. The Gett company offers a Mobile App solution which includes Taxi ordering from you mobile, Auto-receipt generation and forwarding by email and a rating system for drivers.

3. Unfair Advantage section contain weak advantages

This one is one of my favorites. The unfair advantage refers to something that will not only make you stand out from the crowd but also something that will be VERY hard to reproduce by existing or new competitors. It is very important to not confuse this section with I would call 'standard' advantages.

Example. If you're planning on creating a travel planning app that includes local guides providing content and selling travel packages in the app, you might consider adding "Local Guides" as your unfair advantage. However, this is not the case. Partnering up with local guides for your venture could be easily done for another. Getting local guides involves using effective business development activities.

The idea behind unfair advantage is that you need to specify something unique and solid that will keep your competition behind as long as possible. Here are some guidelines on what an unfair advantage could be:

* Official / Exclusive Distributor - normally achieved by signing an agreement with an overseas exporter to solely represent and sell its goods and services

* Patent - a patent is a great example of how to establish and maintain a competitive edge in the marketplace

* Domain knowledge expert - attracting and in some cases hiring a domain knowledge expert such as a professor in a particular field can provide solid competitive leverage. From personal experience, while operating my start-up 5skills, I was able to locate a professor who conducted a very extensive research in the field of matching job seekers to jobs. This would have been a great addition to the start-up as far as being competitive in the online recruiting industry. Unfortunately, the strict research implementation requirements proposed by the university, would have changed the product offering significantly. As a result, this partnership dissolved.

* Celebrity - last but most definitely not least, using a celebrity association to boost the brand awareness and credibility, is a sure way of getting ahead in the early days. A great example I love using is a start-up called Feex. Feex finds and reduces your retirement fees using crowd-sourced management fees comparisons. One of Feex's founders is Uri Levine who was one of the founders of Waze. During the early days of Feex, you could have seen many promotions on Facebook, mainly in Israel, with the title "Uri Levine's new start-up". This is a perfect example of utilizing a celebrity or another well known figure to boost the start-ups awareness in the marketplace.

 

4. Channels describe common channels

The Channels section must include specific channels that can attract the right segments with the proposed unique value proposition. Including only the common channels like social networks, blogs, online advertising is not enough and will make the business model weak.

You should really focus on finding niche-based channels, these have always proved to be the most effective in targeting the right audience (segments) with the right proposition. Example. Using the travel mobile app example mentioned earlier, let's assume that the start-up would like to attract 2 main segments, travelers and local guides.

Let's refine the travelers segment. Let's break-down the travelers into a primary segment of young (ages 25-35), single professionals that travel for long quick weekend getaways in major cities in Europe between 6-8 times a year. Now, you have to ask yourself, how do I reach this audience? If we're talking about young single professionals, we can assume they work in offices, perhaps some of them might work for big corporates? It would be fair to assume that some of these guys go to the gym 1-2 times a week, drink coffee in a cafe each morning and love going to the pub on Friday nights.

As you can see, we were able to narrow down the channels to very specific and effective ones very quickly. It'll be easy to extract channels such as gym billboard and newsletter, HR department in large corporates, coffee shops (using flyers and business cards), Pubs (billboards, beer coasters etc). You can also target specific web-sites, blogs and individuals to help promote the start-up idea. Use your imagination here and after trying a few options, you will be able to find solid channels you can use to reach your audience.

5. Key Metrics describe too broad metrics

The Key Metrics section is one of my favorites. This normally would require you to think carefully and decide what are the key 1 or 2 metrics you would need to track to ensure the business is growing. 

One common mistake many entrepreneurs make here, is describe a metric like Traffic or New Users. This on the surface is a valid metric to track, but I would always argue it's not one of the key metrics to track. Example. In the travel app example from before, instead of using the metric Traffic, you could use a metric such as Number of purchased guided tour packs.

This metric will cover both travelers and local guides preparing and selling guides. This metric will allow you to track the growth of the transactions of the business and in turn the growth in travelers and guides. You could refine this metric further and include the Unique number of purchased guided tour packs by unique monthly travelers. This metric includes the growth of new guided tour packs added into the system and sold to unique travelers that are active on a monthly basis (both new and existing travelers). See what I mean?

This is a very important metric to get right, but it might take you a bit of time and a few iterations until you land on the one best suited for your business.

Wrap up

I hope this was a useful summary of what NOT to do in some of the key Lean Canvas sections. Good luck with yours and feel free to contact me if you have any questions.

To get your Lean Canvas right, CONTACT ME HERE >

The Left Brain / Right Brain “Business Model” Theory

Raise your hand if you are an entrepreneur and at some point faced this question “What is your business model”?

We’ve all been there. You are passionate about your idea, you get excited about its potential, the product, its features, your co-founders… making the world a better place. Everything seems to be moving in the right direction and then, investors and other entrepreneurs ask you casually “and… how are you going to make money?”.

Your immediate point of call is Google naturally. Go ahead, type “Business Models” in Google, I dare you. Talk about losing your altitude - from excitement to ‘huh?’, ‘say what?’. It’s challenging enough creating a pitch deck, a 1-pager or an executive summary but trying to both understand what a business model is and how to write it down is almost considered a dark art.

Well, here are the good news, I’m going to give you the secret to deciphering what it is that you need to do to get your business model developed and documented in a way that is both easy to do and easier to understand.

I’m kidding about the ‘secret’ part of course :-) Allow me to introduce to my The Left Brain / Right Brain “Business Model” Theory.

My Left Brain / Right Brain “Business Model” Theory

Roger Wolcott Sperry, a neuropsychologist and a 1981 Nobel Prize Winner for his split-brain research. He coined the notion that the right-brain is best at expressive and creative tasks whereas the left brain is considered to be more responsible for logic, language and analytical thinking.

A Business Model can also be divided into two parts as well, the more creative and conceptual side, the right-brain and the more analytical and detailed side, the left brain.

The Right Brain Business Model

Similar to a top-down approach, defining a business model starts from the top, the more high-level and slightly conceptual level.

The best way to conceptualize and capture the thought process and iterative development of the business model is by using one of 2 best of breed tools. These tools are the Business Model Canvas and the Lean Canvas.

Business Model Canvas

The 1st model is called the Business Model Canvas or BMC for short and is based on the work done by Alex Osterwalder and Yves Pigneur. This canvas captures the key 9 essential components that make up the business model (see image below):

* Image from http://blog.bizzdesign.com/

The canvas provides a well thought through process for nailing the product / market fit. This is achieved by the unique structure of the canvas. If you draw a vertical line straight in the middle of the canvas, you will have 2 sides: the left side which addresses the Product components and the right side which addresses the Market components. The canvas is split right in the middle where the Value Proposition is formed.

Here is what every section in the canvas means:

  • Strategic Partners / Key Partners - Key partners, key suppliers, key resources acquired from partners and key activities partners perform
  • Key Activities - Key activities our value proposition, distribution channels, customer relationships and revenue streams require
  • Key Resources - value proposition, distribution channels, customer relationships and revenue streams require, e.g. intellectual, human, financial
  • Value Proposition - The actual value we deliver to our customer and the problem we’re solving, e.g. characteristics include newness, design, brand/status, price, cost reduction etc
  • Customer Relationships - The type of relationship each customer segment require, e.g. personal assistance, self service, communities, co-creation etc
  • Distribution Channels - How does the business plan to reach its customers
  • Customer Segments - What customer segments will receive the value we create and offer?
  • Cost - The most important costs in the business, the costs associated with the key resources and key activities
  • Revenues - For what value are our customers willing to pay? How would our customers prefer to pay?

Creating the canvas is done in a certain order, ensuring you build on top of more important components. Working this way allows you to focus and elaborate on each item separately.

  1. Value Proposition
  2. Customer Segments
  3. Channels
  4. Customer Relationships
  5. Key Activities
  6. Key Resources
  7. Key Partners
  8. Revenue Streams
  9. Cost Structure

Lean Model Canvas

This canvas was created by Ash Maurya, as a more problem-focused alternative. I personally have found that the Lean Canvas is easier to grasp for beginners and makes a bit more sense. Quite often, when working with entrepreneurs, I was told that the Business Model Canvas is a bit confusing and some of the content in a few sections appear to be overlapping.

Both canvases are great tools to get the process started. I recommend starting out with the Lean Canvas and working your way from there. This canvas replaces 4 sections with a more problem-solution theme as follows:

The new items that were swapped in are:

  • Problem - a clear definition of the problem this venture / idea is trying to solve
  • Solution - a clear statement of what the actual solution is. E.g. is it a website, a mobile app, an online call center etc
  • Key Metrics - this refers to the business’ top 1 or 2 KPIs (Key Performance Indicators). It’s critical to keep in mind that every business normally has 1 or 2 top-level KPIs. These are used on a regular basis (normally days, weeks, months, quarters and year, and at times on an hourly basis) to track the growth and sustainability of every business
  • Unfair Advantage - when entering a market, it’s critical to establish a unique unfair advantage. The obvious examples are IP-related assets, e.g. patents, scientists or professors who are part of the core team of the business. Other more modern examples include celebrity associations (see Feex as an example). These provide a hard-to-copy or compete advantage

The order in which to fill out this canvas was slightly changed as well. You first start off with the segments and work your way in through the problem statement as follows:

An iterative process

And last but not least - quite a few entrepreneurs don’t realize it - working with these canvases is an iterative process. You start off with a very high-level canvas that addresses multiple segments, and through the process of refinement, you end up with a small subset of canvases, each addresses a specific segment or sub-segment in your ideal market.

The Left Brain Business Model

The left brain business model drills down into the nitty gritty of an actual model you would expect to find in a business plan or when discussing it with an investor or a CFO.

But first, let’s revisit the definition of the phrase “Business Model” from the perspective of the left brain. In its pure form, a business model is "A scalable way to acquire customers and monetize these customers at a significantly higher level than your cost of acquisition". So a business model has really only 2 components, the Acquisition and the Monetization. We use the abbreviation CAC to describe the acquisition cost, i.e. Customer Acquisition Cost and we use LTV to describe the monetization component of the equation. LTV means Life Time Value. The LTV of a customer will give us a key metric for evaluating the effectiveness and success of the selected business model or models. More on this later.

David Skok, partner at Matrix Partners, visualized this formula perfectly. He also pointed to a very important goal when creating and monitoring a business model. One must achieve an imbalance between the two components, whereby the LTV is significantly higher than the CAC. This is the only way to build a successful and growing business. See illustration below:

* Image taken from http://www.forentrepreneurs.com/business-models/

CAC - Customer Acquisition Cost

Calculating the CAC is easy and is done by using this formula:

Definition of each parameter in the formula is below:

  • MCC = Total marketing campaign costs related to acquisition (Not retention)
  • W = Wages associated with marketing and sales
  • S = The cost of all marketing and sales software
  • PS = Any additional professional services used in marketing/Sales (Designers, Consultants etc)
  • O = Other overheads related to marketing and sales.
  • CA = Total customers acquired

What you will need to do now is create a spreadsheet (preferably a Google Sheet document so you can easily share it) and outline all the above costs in a single column. See example below. Note that in this post I will not drill-down into the mechanism and the specific example mentioned but I will dedicate a post for just that soon.

LTV - Life Time Value

Next, you will need to add in the LTV figures. The LTV figures are based on time and are normally calculated on a yearly basis. Keep in mind that for an early-stage start-up, you will most probably build out a monthly sheet first and focus on your first 6 months. It’s almost impossible to accurately predict and forecast your CAC and LTV beyond the 6 months mark at this stage.

Below is a simple example of putting both the CAC and the LTV together. The most important metric to track in this sheet is the CLTV/CAC ratio or multiplier (CLTV = Customer Life Time Value and is another way of describing LTV). This gives us the growth ratio of the business. The longer customers stay with the business and keep paying for receiving value, the stronger and more stable the business will be in the long run. In addition, if we are able to show a x3 CLTV/CAC multiplier by year 3 and a x5 to x10 multiplier by year 5, we enter the realm of the ‘Hocky Stick’ growth start-ups and are prime for VC investments or M&A and IPOs.

Conclusion

To conclude, a Business Model can be divided into 2 parts, the high-level and conceptual part and the detailed, spreadsheet-driven part. Every entrepreneur needs both and you should always start off with the right side - the canvas side.

As with the split-brain theory which was eventually debunked, the Business Model must have both parts to be whole.

Start-up Modeling @ Nazareth

Hey all,

I was fortunate enough to connect with Chen Weinstein, Head of Entrepreneurship and Incubation at StarTau who got me in touch with a Nazdiv, a Nazareth-based business incubation center. They run a program for entrepreneurs from Nazareth and the surrounding area and they needed someone to run a workshop on the Business Model Canvas.

How cool! I always love helping upcoming entrepreneurs get their business models in order and crystallize their go-to-market strategy. Nichenicheniche, that's what I always say. This time around, I got to work with awesome people from Nazareth, a beautiful city I don't remember ever visiting. It was a small group of about 9 guys, all with very interesting ideas, focusing primarily on the tourism and the transport industries.

Business Models

I split the workshop into two parts. The 1st part included a high-level overview of some basic marketing concepts followed by a drill-down of some common business models. This always sparks a discussion re: the meaning of a business model and the number of models known companies use.

The Lean Canvas Workshop

After the break, I used Uber as a test case for understanding the key concepts of the Lean Canvas. I populated a sample Lean Canvas together with the group.

I then gave the group 20 minutes to prepare their own canvas before picking one to discuss together with the group. I noticed one guy at the back who wasn't sure how to fill out the canvas. I decided to use his idea as the example for the group.

Finding The Niche

As I always say, niche, niche, niche, while guiding the group to expand their thinking, it became an easy task to extend the customer segments and the acquisition / marketing channels.

The next step from here is to create a few additional canvases, each covering a specific segment or sub-segment. The goal is to find the best niche to get started with. One should be careful to not create too many actors (dimensions) to the model, as this would increase the risk of providing a good quality product that fits the user's / customers' needs.

See you next time. I have scheduled another session on the 31st of March, 2015 to review the homework I gave the entrepreneurs. Their task was to identify the best niche to start with using the Lean Canvas as the guide.

T