In his second column written exclusively for LTW, consultant Bill Warner talks about key questions that must be answered before starting a new business.Whether you are starting a new company, launching a new business initiative or spinning out a company, the first and most important thing you must do is know your business.
I think there are two constituencies that you have to convince, other than yourself. First, you have to know your business concisely enough so that you can quickly explain it to your grandmother; so that she understands it. The second is you have to comprehensively explain it to sophisticated investors so that they are convinced it’s an attractive investment. If you can do this successfully, you understand the business.
Understand the overall landscape picture
Before you commit an investor’s money or your own money, you need to do some research to assess what you are buying. This does not mean that you merely go to the market research library and read some important statistics that loosely relate to your market. It means that you have to really know specifics about the breadth and depth of the market segment that your company plans to pursue.
I refer to this task as understanding the industry landscape. Others call it market research or market analysis. Intel calls it understanding the ecosystem. Others call it understanding the food chain. You can draw a picture of the industry landscape. Image boxes named with companies, organizations, customers, suppliers, distributors, wholesales, integrators, resellers, competitors and investors, all interconnected with arrows describing their relationships. Within the landscape picture you then can focus on the area where your business will exist. By whatever name or means of describing the market, it all comes down to understanding the dynamics of your business environment.
What market are you in?
The first step is to describe the market landscape, including its size and growth trends, segmented into revenue categories. This requires some extensive research, although sometimes there are research reports that will provide most of the information you need. I am an advocate of the top-down approach. Start with a broad description of the landscape.
Examples of this step are: describing the need for a high bandwidth switch, the self-service segment of the online service market, the importance of a drug that lowers cholesterol, or the need for security encryption for business data. At this point, you are simply trying to describe what the forest looks like and the kinds of trees that grow in it.
You are not ready to describe the leaves on the trees, the weeds that grow on the forest floor or the moss on the tree bark. After explaining what the landscape looks like, you are ready to isolate the market segment that you are pursuing, in the context of the overall picture you just described. The size and growth of the market can be determined with a simple analysis of market demographics like number of businesses of certain sizes, the size of the installed base of certain equipment, census data and others.
Often, if you are making a new market, and you will have to build it bottoms-up by looking at the market participation of similar companies and what their revenue is. Of course, you have to put the time dimension on this data, and show that your market segment is sizable enough to go after and that the opportunity is still growing. Investors need to be convinced there is an attractive market.
What problem are you solving?
Next, determine and explain the compelling business problem that you intend to solve. In today’s economy, with constrained budgets, companies are not spending money on nice things to have. They are strictly prioritizing their needs and making tough decisions to buy only what they need to succeed. In the context of your industry landscape picture, explain what problem you solve and how solving it will bring tremendous value to the buyer. Give some details about near term cost savings, new revenue achieved, or new businesses that can be spawned, and in quantifiable terms that demonstrate a very attractive return on the investment in your product or service. It’s important to any investor to know that the problem is worth solving.
Who are the buyers, and who feeds them?
Now we have the overall industry landscape. The next step is to go deeper and describe who the buyers, suppliers and distributors are, and what drives them. This is the food chain that some researchers refer to.
Start with the buyer; your customer. Within a company, who is the buyer? Is it a CIO? Is it a VP of service? Is it the purchasing manager? Is it the buyer for a retail store? Is it the VP of development? Whoever it is, describe the buyer’s recognition of the problem you solve, the criteria that will be used to determine the purchase, the likely availability of resources to support the purchase, and the decision process that you will be confronted with.
Take time to understand the real economics that the buyer is facing, which will determine how they evaluate a purchase decision. This will later become the foundation of your value proposition. Describe how the buyer is reached. Who do they buy from: for example, direct sales people, distributors, value added resellers, stores, product integrators, OEM suppliers? Add these distribution channels to your landscape picture and describe who they are and how they operate. Depict their business drivers and who feeds them as well. This will give you a complete food chain view from the manufacturer to the user of the product or service. Understanding how this food chain works gives you background necessary to establish your channel strategy.
Who are you up against?
Don’t be fooled, there is always a competitor to worry about. A competitor could be simply another company offering a similar product or service. A competitor is also a company that offers a different approach to solving the problem or solves the problem in the context of others. Either way, you have to know who the major competitors are and how you compare. Add to your industry landscape picture, each relevant competitor, categorized by their approaches to the market. As in Sun-tzu’s book, “The Art of War”, you have to know your enemy. For each major competitor, describe their product line and how you compare, feature by feature. Add to the description an analysis that includes their distribution strategy, value proposition, financial condition, recent successes, distinctive executives, partnerships, and funding sources. All this adds to your landscape picture the information needed to determine what you are up against, so you can then define a winning strategy.
Where’s the money?
Special attention should be paid to the sources of money in your landscape picture. Insert into your picture the major investors who are in your market segment. They fund your competitors, but it’s important to also understand the mindset of the firms that are investing, and how they are performing. Describe the key stakeholders in your market, their investment strategy, expectations and performance. This understanding gives evidence that there is interest in solving the problem you are solving. It also helps you identify potential investors in your company.
How do you win?
With the landscape fully depicted, you now have to explain how you are going to win. That is, how are you going to convince the buyers that you have the best solution, get them to use your product or service, get money for it, and do this repetitively so that your company quickly becomes cash flow positive and profitable?
At this point, you simply have to describe your strategy, and not all the nuances of your product or service. Explain what is better about your solution. Your secret sauce has to be clear and convincing. It could be a new innovation, a technology with differentiating features, a lower cost structure, a price advantage, a new distribution approach, a new form of integration, or expert service and support. Keep this description in the context of the problem you are solving and address all the relevant aspects of the landscape that affect the purchase decision for your product or service.
You will be showing how you will overcome all the barriers to success and how you will be differentiated from all the other competitors. This explanation cannot be obtuse. It has to be clear, direct, convincing, compelling, sensible and realistic. If you cannot convince yourself, and later others, that you can win, you should not embark on the business. If you are convinced, go for it with incredible energy and excellence.
With a complete understanding of your business, you can confidently approach any customer, potential partner or investor knowing that you have a well thought out business proposition. Your chances of getting help are improved and your likelihood of success is much greater.
Bill Warner is managing partner of Paladin and Associates. You can reach him via e-mail (email@example.com) or phone (919 570-1023).