Category Archives: Assumptions

6 Reasons You Should Never Start a Company

Do Not EnterIf you are looking for reasons why you should not start a company, read on!

1. You Could Lose All Your Savings

As a founder, you are investing in your startup. You’re investing your time and your energy; you’re investing yourself. In addition to that, it’s also wise to invest financially in every round if you can. That way when you are raising money and potential investors ask “do you have skin in the game?” you can honestly answer “yes,” and when they ask or “if I say yes, will I be the first investor?” you can honestly answer “no.”

Putting you own money into the company demonstrates commitment. If this requires you to take out a second mortgage or a personal loan, so be it.

If you can’t commit to losing your savings, how can you expect others to put their assets at risk?

2. You Could Lose Other People’s Money

I thought that losing my own money was painful, but that was before I lost other people’s money. Now that’s painful! After all, when investors give you their cash in return for equity in a company you have founded and are leading, they are making a loud and clear statement that they believe in your idea and they believe in you.

Even when you involve your stakeholders and keep shareholders informed of all decisions being made, even when the vast majority of investors bear no hard feelings whatsoever, you spend considerable time looking back at past decisions wondering “what if I had done things differently?”

Bottom line: When you accept other people’s investment dollars, be prepared for the possibility that pain might follow if you fail. That pain might be self-induced, or might come from the investors.

3. You Could Hire the Wrong People

You can’t do it all yourself. You need to hire others to help make the dream come true. If you make the wrong hires, quality will be compromised, too much money will be spent, customer service will go down the tubes, the morale of the “good hires” will suffer, and so on.

4. You Could Lose Control

You like control. After all, the company you are envisioning is “your baby.” You want to control it. When you need to raise cash, you will be telling potential investors how much cash you need and what you plan to do with it. The percent of the company they get for that investment will be up for discussion.

Let’s say you need $500,000. You want to maintain control so you have no intent to sell more than 49% of the company. But the investors value your company at just $800,000. That means if you want their $500,000, you’ll need to sell them 5/8 of the company.

5. You Could Build the Wrong Product

You raise $500,000 from investors and build the “perfect product” for the market. You execute an expensive product launch with a major media presence. And nobody buys the product. The product is a total flop. You either misunderstood the needs of the market, you were too early or too late in the market window, or the competition outsmarted you with an even more impressive product.

6. Your Customer Acquisition Cost Could Be Much Higher than Expected

You did extensive financial planning, and that included modeling the sales process. Only one problem: you think it will cost you $250 to acquire each new customer. What happens if it actually costs you $750 to acquire each one? Now everything in your financial plan falls apart.

In summary

If the above situations scare you, you have an easy way to avoid them: Don’t start a company. Starting a company is not for the pessimist or for the risk-adverse. Nor is starting a company for those who want to get rich quickly and live on a beach.

Starting a company takes courage and optimism.  It requires stubbornness and the ability to rewind and clinically assess mistakes. It tolerates failure but demands success. As crazy as it may sound, if that excites you, you might be about to take your great idea and start your own company!

Let me close by sharing with you three of my favorite quotes:

 “Far better to dare mighty things, to win glorious triumphs, even though checkered by failure, than to rank with those poor spirits who neither enjoy much nor suffer much.  [They] know not victory, nor defeat.”

Theodore Roosevelt

“It is good to have an end to journey toward; but it is the journey that matters, in the end.”

Ursula K. Le Guin

“First, say to yourself what you would be; then do what you have to do.”

Epictetus

ABOUT THE AUTHOR:

Dr. Al Davis has published 100+ articles in journals, conferences and trade press, and lectured 2,000+ times in 28 countries. He is the author of 6 books, including the latest, Will Your New Start Up Make Money? He is co-founder and CEO of Offtoa, Inc., an internet company that assists entrepreneurs in crafting their business strategies to optimize financial return for themselves and their investors. Formerly, he was founding member of the board of directors of Requisite, Inc., acquired by Rational Software Corporation in 1997, and subsequently acquired by IBM in 2003; co-founder, chairman and CEO of Omni-Vista, Inc.; and vice president at BTG, Inc., a Virginia-based company that went public in 1995, acquired by Titan in 2001, and subsequently acquired by L-3 Communications in 2003.

If you’d like to learn if your great business idea will make money, take a look at Will Your New Start Up Make Money?

Four Ways to Validate Your Great Startup Idea

You have a great idea for a start-up company.

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Validate your idea by answering four simple questions:

  • Is the market right?
  • Is the industry right?
  • Will it make money?
  • Will it need money?

Let’s explore these one at a time.

1. Is the market right?

Determining if the market is right means demonstrating that enough people exist who will purchase the product or solution you have developed, you can find them, and you can turn them into customers. For this you need to understand the size of your market and the characteristics of the buyers that personify your market.

Size of market

How large is your target market? You want your potential market (called the total available market, or TAM) to be quite large. But you want your initial target vertical market to be relatively small. By being focused, you can align your product features and marketing messaging with the unique pains/needs of this unique market.

And then you can claim you “penetrated 25% of your target market” instead of having to claim that you “penetrated .02% of your target market.” Sure sounds better to future investors!

You can measure the size of both your TAM and your initial target vertical market in terms of:

  • Number of customers
  • Dollars spent on products like yours
  • Units sold

Targeting Customers

NeedleHow easily can you find potential customers? Will they find you? Or will you find them? In either case, how? It is very easy to say “oh, we’ll just use Google AdWords and we’ll get tens of thousands of visitors every day.”

It is much harder to actually attract qualified leads. If you plan on finding the leads, how will you reach them and engage with them until they become customers?

Converting Customers

Catheter Solution 2Converting customers is not only influenced by the severity of pain your product is addressing. It is also influenced by how you position your solution and your messaging. Your target market must be able to identify with what pain your product resolves. The three bullets shown above demonstrate how one company, Adapta Medical, has honed their message to align perfectly with their target markets, C6-C7 quadriplegics and hospitals.

I like to use the words “clear and compelling” to describe the right message, i.e., when a lead hears or reads the message, they can relate immediately to the pain they are feeling and see clearly how your product will alleviate that pain.

2. Is the industry right?

If you want to do a thorough analysis of whether the industry is “right,” check out Porter’s Five Forces. But as a start, make sure you have a thorough understanding of your competitors, your potential partners, and your differentiators.

Competition

Few things turn off investors more than hearing entrepreneurs claim that they have no competitors. Every new company has competitors. If you really are the first to do something, then how are your target customers surviving currently? Here are some examples:

  • You’re “first” to provide on-line retail sales of gourmet food. Your indirect competitors include storefront retailers and catalog retailers of gourmet food. And your future competitors include on-line retailers of non-gourmet food (because they have all the logistics in place to add SKUs for gourmet food and thus become direct competitors).
  • You’re first to provide regular helicopter service from Denver to Colorado’s ski resorts. Your competitors include airlines, van shuttle services, rental car companies, and so on, all of which satisfy your target market with this capability using different means.

The way to determine if a company is a competitor is to imagine being a potential customer. If the customer could make a list of companies (including yours) and evaluate the pros and cons of each alternative (including price, convenience, safety, etc.), then those companies are competitors.

Partners

Look upstream and downstream on your supply chain. Who will you need to work with? Have you established those relationships yet? How easily will it be to establish? Can they control you (e.g., with price changes)? Or can you control them?

Differentiators

Think again about that list of competitors that a potential customer could create. What makes you special? Nobody cares about what you think makes you special! What will a potential customer think make you special when compared with the alternatives?

3. Will it make money?

In his February 20 article, Martin Zwilling explained how critical it is for you to use a financial model to determine if your company will be financially successful given the assumptions you currently believe to be true. I couldn’t agree with him more.

After creating such financial models for many dozens of startups, I would add that it takes many precious hours to create and debug such a model.

I would recommend that you use an online tool that has already considered and built in all the elements you must consider to be successful. Such tools allow you to enter your key assumptions one time, and they create your entire financial model. Then when any of your assumptions change, you just have to change one number, and your new financials are instantly created for you.


 

Offtoa Screen1


Martin provides 5 great examples of such “assumption changes” that are typical:

  • What if customers don’t want to pay the price for your product that you though they would?
  • What if the market size ends up being different than you expected?
  • What if your sales growth is different than expected?
  • What if your investors offer you an investment amount different than your expected?
  • What if your customer acquisition cost changes?

In reality, there are hundreds of such assumptions that could change.

4. Will it need money?

Another benefit of assumptions-based financial modeling is the automatic creation of monthly pro forma cash flow statements. You can easily scan the bottom row of these statements to determine exactly how much investment money you will need and when.

In summary

To prepare yourself for investors, you should thoroughly validate your business before you enter the shark tank. This article summarizes the key elements of such a validation. To summarize, here is the checklist:

☐ Is your total available market large enough?

☐ Is your initial target vertical market focused enough?

☐ Is it easy to find leads?

☐ Is it easy to convert leads into customers?

☐ Do you know your competition?

☐ Have you lined up your business partners (suppliers and distributors)?

☐ Are your differentiators unique and compelling?

☐ Will your startup make money?

☐ When your assumptions change, can you instantly see the financial effects?

☐ How much money do you need?

ABOUT THE AUTHOR:

Alan DavisDr. Al Davis has published 100+ articles in journals, conferences and trade press, and lectured 2,000+ times in 28 countries. He is the author of 6 books, including the latest, Will Your New Start Up Make Money? He is co-founder and CEO of Offtoa, Inc., an internet company that assists entrepreneurs in crafting their business strategies to optimize financial return for themselves and their investors. Formerly, he was founding member of the board of directors of Requisite, Inc., acquired by Rational Software Corporation in 1997, and subsequently acquired by IBM in 2003; co-founder, chairman and CEO of Omni-Vista, Inc.; and vice president at BTG, Inc., a Virginia-based company that went public in 1995, acquired by Titan in 2001, and subsequently acquired by L-3 Communications in 2003.

ABOUT OFFTOA

Offtoa is a subscription-based SaaS that leads you, the entrepreneur, through a series of questions and transforms the assumptions you provide into a complete set of pro forma financial statements, including even a capitalization table and expected internal rates of return for the investors. Armed with this intelligence, you and your team are able to demonstrate to investors that you know your finances, understand your market, and have a winning proposition.

If you decide to subscribe to Offtoa because you read this blog, send me an email at adavis@offtoa.com and I’ll email you a coupon good for 50% off your first month’s subscription. This offer good only until May 31, 2015.

Needle in a Haystack photo by James Lumb (Creative Commons).

 

To Plan or not to Plan: That is the Question!

SignsI have been an executive in startups since the mid-1980’s, and still am. I have always proactively planned every business in detail, but the last “business plan” document per se I wrote was in 2001. How is this possible?

I want to address some basic questions:

  • What is the difference between planning a business and writing a business plan?
  • What should you include in your planning?
  • In what format should you document your plan?
  • How much detail? What is the right time horizon for business planning?
  • Why do you need to plan your business?

What is the difference between planning a business and writing a business plan?

A business plan is a polished, organized, physical document that describes every aspect of your proposed business and its environment. It usually cover 5-7 years from inception, ramp-up, through to exit. Although occasionally requested by investors, these days it is usually requested only by academics in “business plan competitions.”

Business planning, on the other hand, is the activity of lowering your risk by studying and understanding every aspect of your proposed business and its environment.

What should you include in your planning?

At a minimum, you need to thoroughly understand:

  • The macro market, that is, demographics of the general market you are aiming for. If you are creating a fast food restaurant for diabetics, how many diabetics are there? And are their numbers growing or shrinking?If you are creating a company to provide assistance to early-age retirees, how many individuals are retiring early? And are their numbers growing or shrinking?When tracking dimensions of a macro market, you could measure it in terms of number of customers, number of dollars spent for products like yours per year, or number of products like yours sold per year.

    Great demographics for your macro market are helpful to the success of your start-up. However they are neither necessary (after all, Starbucks succeeded quite well in its North America expansion efforts in the early 1990’s even without a dramatic increase in the number of coffee drinkers) nor sufficient (even terrific growth of a market cannot compensate for sheer management incompetence).

  • The micro market. As an entrepreneur, you need to focus on a specific target market that you can penetrate successfully. By aiming for a specific (usually narrow) target market, you can create a marketing campaign aimed directly at that market and its unique pains.Members of that market then quickly see how your solution addresses their pains and become easy converts and thus customers. On the other hand, if you aim for a more general market, your marketing campaign will have to address more general pains by necessity, and will then be successful at converting a lower percentage of leads. You want all odds in your favor when you start a company.Meanwhile, start with just one target market; if you start with two, you’ll double your marketing costs (or you’ll halve the effectiveness of your marketing by watering down the message).

    The research you need to do concerning possible micro (aka target) markets includes characteristics such as size, growth rate, accessibility (i.e., how easily can you find potential customers?), ease of conversion (i.e., do potential customers “feel the pain” vs. do you have to first convince them that they have a pain? how easily can you convince them that your solution to their pain is by far the best solution available?), and so on.

    As a general rule, having an unfavorable micro market is considered by most experts to be a showstopper. If your target market is not already focused on trying to solve the problem that your product solves, you are fighting an uphill battle.

  • Your competition. Almost every prospective entrepreneur I have come across understands the need to identify “the competition,” but many limit themselves to direct competition, i.e., those companies providing products similar to the start-up’s, which address the market’s needs in a similar fashion.Don’t ignore substitute competition, which customers can choose to address their need in an entirely different fashion. For example, in the electronic note taking industry, over 200 small companies compete with 2-3 very large companies for customers. They are all direct competitors.But this industry suffers from substitute competition from at least two sources: (a) pen and paper, and (b) standard word processors on tablets. Business planning for a start-up in the electronic note taking industry must acknowledge the reality that a very large percentage of the total available market will not be purchasing any company’s electronic note taking software product.
  • Threat of entry. Ideally, (a) you want it to be easy for your start-up to enter the industry, and then (b) once you enter, you want it to be incredibly difficult for others to enter and subsequently compete against you.Concerning point b, when planning your business strategy, what can you do now to make it more difficult for others to copy you? For example, do you have intellectual property that you can protect with patents, copyrights, trademarks, and trade secrets?Can you enter the market quickly enough so that your large market penetration deters others?

    Can you establish contractual relationships with either suppliers or distributors that make it impossible for them to work with competitors?

    Can you provide such good service that no customer would want to change to a competitor?

  • Your Differentiators. What makes you special? Why is your product better than the competition? Saying that you will have a “better user interface” will not cut it; everybody says that. What specific value does your product provide that the market will appreciate and that the competition does not already provide?Here are some examples:
    • We are the only e-tailer that provides restaurant chef-quality gourmet ingredients to the home chef.
    • We are the only manufacturer of a catheter that C4-C5 quadriplegics can use for self-catheterization.
    • We enable online purchasers to donate to their favorite non-profit at no cost to them.
    • We deliver products to your door using drones within 4-hours of ordering.
    • We provide Wal-Mart prices without the long check-out lines.
  • Your Marketing and Sales Strategy. If you haven’t already done so, read Eric Ries’ The Lean Startup. In it, you will discover only three ways to create revenue:
    • You can pay for new customers. So, how do you plan to make the market aware of your products? How will you convert leads into customers? What will you do explicitly to retain customers?
    • Current customers can refer new customers? So, what will you do to encourage referrals?
    • Current customers can buy more. So, what will you do to encourage customers to increase their purchasing?
  • Pro Forma Financials. Income statement, cash flow statement, and balance sheet. Maintain all your assumptions that drive these financials in a list.
  • Cap Table. Only needed if you are interested in investors.

In what format should you document your plan?

This is a matter of taste. I strongly recommend against printing all your plans, polishing them, adding an introduction, table of contents, etc., and binding the document. The problem with this approach is that every one of the planning components is constantly evolving. If you polish and print it, it will be out of date by the following week. This is why I say I am against business plans, although I am for business planning.

Personally, I maintain a series of electronic company folders; each has a corresponding physical notebook containing selected key excerpts. Each folder contains all information I have collected on one aspect of the business. They combine “plan” and “actual” and are:

  • Market and Industry. This folder contains all my macro and micro market analyses and competitive analyses (old as well as latest in chronological order). It also contains copies of any related articles or reports others have written.
  • Marketing and Sales. This contains copies of marketing and sales plans (strategic and tactical). [Once the company starts, I add ad copy, brochures, web page designs, and so on.]
  • Equity. Initially, this contains just the projected cap table. [Once the company launches, it will also have copies of private placement memoranda, investor subscription agreements, accredited investor questionnaire forms, the stock option plan, all stock options granted, updated versions of the cap table, and so on.]
  • Board. Initially, this contains articles of incorporation and the bylaws. [Once the company launches, it will also include updated bylaws, board meeting minutes, and actions by written consent.]
  • Organization. Initially, this contains the organization chart and hiring plan. [Once the company launches, it will also contain employment contracts and updated organization charts and hiring plans.]
  • Financials. This contains pro formas by month and year for 5 years. At the front, I maintain a list of all assumptions, including all expenses (by year and by category), customer acquisition cost, sales cycle, average order size, periodicity (how often each customer will purchase), retention rate, viral coefficient, viral cycle length, and many of the items from the above folders. [Once the company launches, I add actuals.]

I also maintain a 10-minute slide presentation that captures the essence of some of the above.

How much detail? What is the right time horizon for business planning?

You should be as lean as possible without being irresponsible. Here are my thoughts on the specific parts of planning:

  • Analysis of Market. I believe that you must understand your market as thoroughly as possible or you are being foolhardy. The lean community might argue that truly revolutionary products create their own markets and it is impossible to understand the market until you test its behavior with your minimally viable product (MVP) in hand. The right answer lies somewhere between these two extremes.For example, let’s say your idea is to create fast food restaurants for diabetics. I would argue that it is important to fully understand both the demographics and the dietetic needs of diabetics before endeavoring down this path.On the other hand, you will not be able to determine exact recipes or menu items until test marketing (i.e., creating MVPs), and you won’t understand the risks associated with attracting diabetics to your restaurants when their family members are not diabetics without experimenting.
  • Analysis of Competition. Absolutely essential.
  • Threat of Entry. It is never too early to start planning for how you will protect yourself. If you delay, it may be too late.
  • Differentiators. Here, time horizon is important. You have to perform a delicate balancing act between what you believe are long-term differentiators for the majority of the market and what you believe are short-term differentiators for early adopters.The only sensible approach is to build a series of successively larger MVPs, learning as you go, adapting to what the market is telling you. All the time, however, you must acknowledge that you may not know if you are accommodating the needs of just early adopters or if they are indeed representative of the market majority.For planning purposes, do two things:

    (1) define what you believe are long-term differentiators. After all, without these, it is unclear why you should even be in business.

    (2) define a series of experiments to validate which features, delivery mechanisms, prices, promotions, marketing mechanisms, sales techniques, suppliers, and so on (collectively called differentiators), are most effective with the market.

  • Marketing and Sales Strategy. As stated above, you will have three components of your marketing and sales strategy: paid, referrals, and organic. As part of your plan, you should calibrate all three of these components with your goals. See Five Steps to Get and Keep Your Startup on Track. Once the company starts, you will revise these goals with actuals.
  • Financials. You are lean and are taking one step at a time. However, you still have a responsibility to verify that you are stepping in a direction that could yield great financial results. Create your pro forma income statement, cash flow statement, and balance sheet annually for at least 5 years, and monthly for at least the first two years.

Why do you need to plan your business?

The reality is that investors place their bets on startups less than 3% of the time[1]. The other 97% of their money goes to businesses that have already been through rounds of funding and have demonstrated that a market is willing to buy their product.

But when they bet on a startup, they demand a detailed plan for the business.

They won’t necessarily ask for a business plan per se, but they will perform due diligence. And when they do due diligence, they will be asking every possible question about your market, industry, product, marketing and sales, financials, governance, equity structure, intellectual property, and so on, so you need to have all this information somewhere.

If you are not planning on having investor money, why would you do anything less? After all, you are an investor in your own company, with time and money.

ABOUT THE AUTHOR:

Dr. Al Davis has published 100+ articles in journals, conferences and trade press, and lectured 2,000+ times in 28 countries. He is the author of 6 books, including the latest, Will You New Start Up Make Money? He is co-founder and CEO of Offtoa, Inc., an internet company that assists entrepreneurs in crafting their business strategies to optimize financial return for themselves and their investors. Formerly, he was founding member of the board of directors of Requisite, Inc., acquired by Rational Software Corporation in 1997, and subsequently acquired by IBM in 2003; co-founder, chairman and CEO of Omni-Vista, Inc.; and vice president at BTG, Inc., a Virginia-based company that went public in 1995, acquired by Titan in 2001, and subsequently acquired by L-3 Communications in 2003.

If you’d like to learn if your great business idea will make money, take a look at Will Your New Start Up Make Money?

[1] http://www.forbes.com/sites/dileeprao/2013/07/22/why-99-95-of-entrepreneurs-should-stop-wasting-time-seeking-venture-capital/

Seven Things an Income Statement Tells You

Photo for income statementWhen you plan to start a company, you need pro forma financial statementsPro forma financial statements include an income statement, cash flow statement and balance sheet.

Your pro forma income statement (also called profit and loss statement, or P&L statement) is the tool used by businesspeople and investors to determine if a company is profitable (or not) over a period of time.

It shows what the revenues, cost of goods sold, expenses, and profits of a company would be, based on a set of given assumptions.

The income statement answers seven questions for you and your potential investors:

  1. Are revenues growing fast enough to make it an attractive investment?
  2. Are revenues growing so fast that your credibility will be questioned?
  3. Is your gross profit margin (i.e., gross profit divided by revenues) within acceptable limits for the industry? If higher than the rest of your industry, have you explained what specific strategies you will be implementing to make that happen? It won’t happen by accident!
  4. Are expenses within acceptable limits for your industry? Or are you predicting significant revenue growth without the corresponding expenditures incurred by others in your industry?
  5. Are EBITDA/Revenues and Net income/Revenues within acceptable limits for your industry? If higher than the rest of your industry, have you explained what specific strategies you will be implementing to make that happen? One does not achieve such higher performance levels by just being “good.”
  6. Is the first year profitable? For most start-ups, EBITDA for the first year will be negative . . . and that’s okay!
  7. Is the company predicted to “dig itself out of the hole.” Although the first year will almost always exhibit negative profit (aka a loss), cum net tells you how long it will take for the cumulative profits to compensate for the early losses.

Let’s take a look at an income statement to understand how these seven questions get answered.

The figure below shows an income statement for the first five years of a company.

Sample IS

All income statements are organized into 4 horizontal sections:

Revenues

The first section shows all primary revenue sources.

Cost of goods sold (aka COGS)

The second section shows costs associated with actually creating products that were responsible for revenues. This includes the cost of raw materials, shipping products to customers, and labor associated with manufacturing and maintaining inventory.

Just below this section, COGS are subtracted from revenues to calculate gross profit. It is used to determine how efficiently your company produces its products. It is most meaningful when compared to other companies in your industry.

Expenses

The third section lists all expenses incurred by the company categorized by corporate division: General and Administration, Manufacturing and Production, Marketing and Sales, and Research and Development.

Summary lines on income statement

The fourth section is a series of totals and summaries that help you understand the company. They include:

  • EBITDA. Literally, earnings before interest, (income) tax, depreciation, and amortization. This is calculated by subtracting expenses from gross profit.
    –  This is the value that most investors look at when they are trying to determine how well the company is predicted to do. Also, for most industries, it will be one of the primary determinants for valuing the company in the case of an acquisition.
  • Depreciation. This is calculated from the depreciation schedules and useful lives of major purchases (i.e., fixed assets) you have made. Specifically, it is the sum of all depreciations for major purchases made prior to or during this period.
  • EBIT. Earnings before interest and (income) tax. Calculated by subtracting depreciation from EBITDA.
  • Interest. Any interest earned by the company from its assets, or any interest paid by the company.
  • Provision for income taxes. This is calculated by multiplying your income tax rate by EBIT.
    – However, if you had previous years of accumulated losses, they will be subtracted from the current year’s EBIT first. Notice, for example, in the company shown in the figure, no income tax is shown for fiscal year 3, even though it was profitable; losses from its earlier years were subtracted from its profits of year 3.
  • Net income (loss) after tax. Calculated by subtracting interest and income tax from EBIT.
  • Cum net. Cumulative net earnings. The sum of all net incomes for all periods up to and including the current period.

Except in very unusual circumstances, revenue is terrific, but revenue without gross profit is not sufficient. Similarly, gross profit is terrific, but gross profit without positive EBITDA is not sufficient.

Read Four Things a Cash Flow Statement Tells You to learn more about the pro forma cash flow statement.  At that point, we’ll also see that positive EBITDA is great, but positive EBITDA without positive cash flow is also not sufficient.

Using your income statement is the best way to find out exactly how much revenue and profit (or loss) your company is generating; and how efficient it is in generating that profit from the sales.  These are imperatives for launching and running a viable business.

Other articles you may find helpful in the series:

Al Davis is a Serial Entrepreneur, Angel Investor and Author of six books. He is CEO of Offtoa, Inc., his fifth startup.

Photo courtesy of Jessica Wilson (Creative Commons).

3 Steps for Micro-Pivoting in Startups

Steering wheel of old sailing vesselThanks to Eric Ries, we now understand the term pivoting a company. That is, when we determine that a major assumption we previously made about our company, whether it be about the product, the market, or the competitors, is wrong, we redirect the company making different assumptions.

However, when leading a company, as when steering a ship, there is also a need to implement hundreds of small micro-corrections (micro-pivots) to the path.

Step 1: Determine “Planning” Values for Your Key Measurements

The ability to grow a company is determined by seven key variables (see 5 Steps to Get Your Startup on Track and Stay on Track to learn about them):

  1. Customer Acquisition Cost (CAC)
  2. Sales Cycle (SC)
  3. Average Order Size (AOS)
  4. Periodicity (P)
  5. Retention Rate (RR)
  6. Viral Coefficient (VC)
  7. Viral Cycle Length (VCL)

Let’s assume that you have decided that financial success will be determined by the internal rates of return (IRR) to external investors. The best indicators of whether they will receive those IRRs are if the company achieves its revenue, EBITDA, and EAT (earnings after tax) goals of $22M, $11M, and $8M.

Plan

During the planning stage, you will determine the values for the seven key drivers of company growth that are both feasible and drive the company to financial success as defined in the previous paragraph.  Use software to verify the relationship between values for these variables and financial results.

Step 2: Analyze Your Results Frequently

Each month, calculate the actual values for the seven key drivers of company growth.

  1. Customer Acquisition Cost (CAC). Determine how many new customers were acquired in the past month as the result of your direct marketing and sales efforts (eliminate, for example, referrals; but include new acquisitions through search engines). Divide the money you spent on marketing and sales this month by the number of newly acquired customers.If you have not yet determined a value for SC, but assume it is between 1 and 3 months, you could instead use the rolling average expenditures for marketing and sales over the past 3 months and divide that by the number of newly acquired customers for the most recent month. 
  2. Sales Cycle (SC). For some businesses, SC will be easy to determine; for others not so easy. For example, if you are using a direct sales force, you will be able to calculate fairly easily how long it takes from lead generation to closing a sale.On the other hand, if your sales are more passive, such as online sales, you will only be able to determine SC by plotting changes in budgets and actual sales over a period of many months. 
  3. Average Order Size (AOS). The actual for this is easy to calculate for all businesses. If your customers purchase more often than once per month, just aggregate their purchases and record their average purchases per month.
  4. Periodicity (P). The actual for this is also easy to calculate for all businesses. Just keep track of how often customers return to purchase again.
  5. Retention Rate (RR). When you first start your business, this will be very difficult to compute because a few lost customers could have drastic effects. By the time 1-2 years have passed, you should be able to have a pretty good idea of how loyal your customers will be.
  6. Viral Coefficient (VC). Only two ways exist to compute this:
    • Create a rewards-based referral program so you can keep track of exactly how many new customers are being referred by existing customers.
    • Ask all new customers how they heard about you (this is much less accurate).

Until you do one of these, you will have to assume that VC is zero or you can be optimistic, and keep entering it as a guess every month.

7.  Viral Cycle Length (VCL). Same comments apply here as for VC.

Enter these actual values and see whether they lead to financial results as good as the original results. If you are like most startups, you will find early results disappointing, and will have to decide how long you will wait before executing changes.

Actual

Use software designed for fast and easy financial reporting to identify that the new (actual) values for these variables have created quite different financial results and thus determine whether or not to pivot.

Step 3: Execute a Pivot or a Micro-Pivot

A pivot is executed when:

  • The actuals portend a poor financial outcome
  • You believe that the actuals reflect the best the company can do

In such a case, you may need to change the product, change the target market, change the way you sell the product, find new channel partners, and so on. These are significant pivots.

A micro-pivot is executed when:

  • The actuals portend a poorer financial outcome than you planned
  • You believe that the actuals can be improved by changing tactics, not through major company redirection

In such a case, examine each key driver of company growth and determine what actions you can perform to improve its specific value. Here are some examples:

  1. To decrease CAC:  Change the content or vehicles for advertisements. Change your messaging. Offer better pricing or better promotions.
  2. To decrease SC:  Offer better incentives to the salesforce.
  3. To increase AOS:  Offer quantity discounts.
  4. To increase P:  Offer frequent buyer programs.
  5. To increase RR:  Improve your product’s stickiness. This is the most difficult to improve in the short term.
  6. To increase VC and decrease VCL:  Offer referral programs.
  7. It might be that all the values are sound; you just need to spend more money on marketing and sales during the early stages of the company to “prime the growth engine.”

When you implement a series of micro-pivots, use graphs.as shown below.

 Graph 1
 Graph 2
 Graph 3

These will show how your incremental improvements to actual values for the seven key drivers of company growth are driving the company increasingly toward the predicted fifth-year revenues, EBITDA, and earnings after tax, as a function of time.

These seemingly small but very important adjustments have the power to right the ship and set your business back on the course for success.

Alan DavisDavis is a serial entrepreneur currently in his fifth startup. He is also an angel investor and the author of six books.

Why Every Startup Needs a Financial Plan

Assumptions are Important

money-down-the-drainHaving a financial plan for your startup is based on a simple concept. It says “If these assumptions prove true, then these financial results will occur.”

In other words, a financial plan is the place where you determine whether or not your business idea could possibly result in financial success.

To start a business without a financial plan would be like sailing out of port in a sailboat with no navigational tools and no idea where you are going. In the case of the sailboat, your life would be at risk. In the case of a startup company, any money or time you are about to invest is likely to go down the drain.

Notice that I am not saying you need to have all the facts before you launch your company. But you need to at least document the assumptions you are making about the business and verify that if those assumptions end up being valid you have a viable business.

In The Lean Startup, Eric Ries provides us with sound advice for starting a company: State your assumptions and then make many small iterations. For each iteration,

  • Invest as little as possible
  • Build a minimally viable product (MVP), i.e., build something you can show your customers
  • Learn which assumptions are valid
  • Pivot and repeat

Innovation Accounting

As a metric for determining that you are making progress, Ries recommends using innovation accounting (IA). IA is basically checking that assumptions are being verified, the product is progressing toward viability, and the startup is learning – all good things.

Traditional Accounting

I would add just two steps to his advice:

  1. Before you launch, build a financial plan based on your assumptions to verify that financial success is at least possible.
  2. At the end of each iteration, repeat the financial plan to verify that the revised assumptions are still sufficient to support financial success.
 Iteration Ia

A company following the traditional lean startup approach is iterating and “making progress” but it is unclear if it is heading in a financially viable direction.

No Financial Plan;
No Knowledge

 Iteration II

By creating a financial plan, you can learn that the path you are considering cannot result in a great financial result.

Financial Plan Shows Poor Results

 Iteration III

By recreating the financial plan with different assumptions, you can determine that charting an alternative path could result in a far better financial outcome.

Change Path & Financial Plan
Shows Good Results

My advice makes sense only if creating a financial plan is not overly time consuming. The secret is to use a tool that supports automatic generation of financial statements directly from your business assumptions. By doing so, financial planning costs you little but saves you a lot.

???????????????????????????????Davis is a serial entrepreneur currently in his fifth startup. He is also an angel investor and author of six books.

Pivoting Without Blinders: Advice for Startups

HorseBy their very nature, startups are full of unknowns. These unknowns are not the blinders in your startup.  Failing to acknowledge these unknowns and give them a value are the blinders.  It is this that hampers success and slows down your horse.

Entrepreneurs have an obligation to their stakeholders to ensure that assumptions they are making about these unknowns could possibly lead to financial success.

For example, a classic unknown for most startups is the price that customers would be willing to pay for your product.  Your startup needs to document some believable price and then demonstrate that if sufficient customers purchase the product at that price, then your company would be viable.

After you’ve launched your company, many of the assumptions you used will be proven false. You have three choices.  Here are those choices with their advantages and drawbacks:

Stick to your original plan   If the assumption proven incorrect was relatively minor, this is a valid alternative. Otherwise, it is somewhat foolish.

If customers aren’t buying at the assumed price, change the price or change the sales method or change the product.  Do something!  Don’t just decide that persistence is always a virtue.

The advantage of sticking to your original plan is that it is what your original investors expected you to do. The drawback is they would much rather have you pivot than lose their money.

Pivot   In my startup #3, we had always envisioned ourselves to be a product company (and gave many of our services free to our paying customers).

After two years without success, we pivoted to become a services company (and gave our products free to our paying customers). That move made us profitable.

The advantage of pivoting is you explore all viable options for your company. The drawback is that, without discipline, you could explore options forever. One secret is to spend as few resources as possible between iterations.

Learn quickly.  Pivot intelligently.  Determine that each pivot has at least the possibility of a sound financial outcome.

Abandon your startup   This is the most extreme case of a pivot. It comes in two flavors: personal and company.  I did a personal abandonment in one of my startups because I had assumed my business partner was ethical; he wasn’t, and I was out of there!

Company closure is the right move when you have seriously considered every possible direction and each one is either impossible to execute or leads to an outcome without financial success.

The advantage of abandoning your startup is it makes no sense to throw good money (or time) after bad. The drawback however is with a bit of tweaking you might have a perfectly viable company.

Wise entrepreneurs pivot. They modify disproven assumptions, once again assess whether the plan could possibly lead to financial success for all stakeholders, and if not, adjust other assumptions until they are once again headed in a direction toward a lucrative financial state.

As you assess your startup, consider how to pivot your business intelligently:

  • Spend as few resources as possible between pivots
  • Compare alternative directions for your next pivot and select the most viable
  • Do a financial analysis to ensure the new direction could result in financial success

Also consider the benefits:

  • Lowers the risk to you
  • Lowers the risk to investors
  • Raises the likelihood that your company will be successful

Assessing the terrain and making adjustments is the essence of pivoting and of responsible entrepreneurship.

???????????????????????????????Al Davis is a serial entrepreneur currently in his fifth startup. He is also an angel investor and author of six books.

‘Running beauty’ photo courtesy of Tambako the Jaguar (Creative Commons)

 

Pivoting Wisely: What Every Startup Needs to Know

Blog - CompassPivoting is a term introduced by Eric Ries in The Lean Startup to describe the controlled process that entrepreneurs execute when they determine that their current business assumptions are incorrect and they must change course.

Let’s look at an example. Say I have conceived of a smart-phone based product that greatly enhances the playing experience for a golfer (See https://www.iwanamaker.com/ for an example of such a company, although the following scenario doesn’t describe this company).

I develop a plan that (a) spends $D to develop the product over 6 months, and then (b) sells it to golf tournament organizers for a price of $P per tournament.

I expect to sell U1 and U2 units of the product during the first and second years using marketing and sales techniques that will cost $M1 and $M2 per year respectively, starting immediately after product development completes.

After analysis, these assumptions seem to indicate that, if proven valid, we will have a financial win for all stakeholders.

My next step is to raise money to support the development effort. During the next 8 months, we build a series of iterative products. After each is deployed, we learn valuable information from golfers and tournament organizers.

As a result, we adapt product features to accommodate our newly gained knowledge of their needs.

After 8 months, we discover that everybody likes the product, but they are adopting it at a far slower rate than we had anticipated. We are quickly running out of cash. Our original assumptions have proven false in at least two ways:

  1. Development took 8, not 6, months
  2. Product adoption is not going as well as planned.

When we enter these new realities into our financial plan, we see we are no longer headed in the direction of financial success. What do we do? We have a number of strategic alternatives:

Fold   We could abandon the company.  This is likely a bad, or at least premature, choice.

Pivot Strategy #1   We could try again to adapt the features.

Pivot Strategy #2    We could lower the price $P hoping to increase sales. When we lower the price and increase volumes in our assumptions, the company once again returns to the direction of a financial success (at least on paper).

This is what Wal-Mart has done for years; by lowering its prices, it has increased its market share, and thus increased its total profit in dollars.  To read about the strategy Wal-Mart uses to keep its prices so low, click here.

Pivot Strategy #3   We could raise the price $P hoping to increase margins on sales, without significantly decreasing volume. When we raise the price and slightly decrease volumes in our assumptions, the company once again returns to the direction of a financial success.

This is what GoGo did in 2013 by raising its prices.  It decreased its market share, but provided better quality service to its remaining customers, and increased its total revenues and total profit in percent and total dollars. To read more about what happened when GoGo raised its prices, click here.

Pivot Strategy #4   Instead of selling to golf tournament organizers, we could sell to golf courses, or to retail sporting goods stores, or using television spot ads or via 30-minute infomercials to reach golfers directly.

Pivot Strategy #5   Instead of selling the product, we can give it away for free. We accrue revenue by selling advertisements to companies wanting to target golfers.

Pivot Strategy #6   We could raise more money via loans or investments so we will have sufficient cash to see us through to the time when sales are great enough to generate enough cash. That might be necessary in combination with pivot strategies 1, 4, or 5.

Ignore the facts   We could simply decide the original assumptions must be true, and if we just wait long enough, they will become true.  This is probably a bad choice.

In summary, pivoting makes sense when you:

  • State your business assumptions upfront
  • Validate the business could succeed financially if the assumptions are correct
  • Spend as few resources as possible to determine if key assumptions are valid
  • Change surrounding assumptions to accommodate a disproven assumption
  • Compare alternative pivoting directions

Changing course is inevitable.  Use this methodology to stay away from the rocks.

???????????????????????????????This article is an edited excerpt from the book Will Your New Startup Make Money? by Al Davis. Davis is a serial entrepreneur currently in his fifth startup. He is also an angel investor and the author of six books.

 

‘Map and Compass’ photo courtesy of Jamie Dobson (Creative Commons)

Startups Gone Bad: Financial flaws limit possibilities

Startups Gone Bad

I have examined hundreds of small businesses over the past 30 years. Many possessed basic financial flaws: flaws that if caught and corrected early might have resulted in highly successful companies.

Blog - Out of BizIn many cases, the entrepreneurs lacked proper advice or adequate tools. The flaws remained unnoticed until they were so embedded in the company that it was no longer possible to undo the harm they caused. Let me give you some examples:

Gross margins with no margin at all   A company planned to manufacture industrial lubricants with very unique properties. They intended to capture a large percentage of the market by (a) marketing unique properties that were the result of unique raw materials, and (b) price the products well below competition. That sounded like a great value proposition for all stakeholders.

A careful financial analysis revealed that the unique raw materials drove the cost of goods sold up to around 85% of the planned price. This left just a 15% gross margin, far too low to support infrastructure costs.

Unrealistic revenue projections   A company proposed to be “the next Facebook®” by creating a social networking site with a few unique but easily mimicked features.

The founders had no software experience. To make matters worse, the company was also using unrealistic financial assumptions:

  • First year projected revenues of $5,000,000, which were unattainable
  • Second year projected revenues of $15,000,000, which were even more unattainable
  • Combined marketing and sales expenses of just $100,000 for the first two years
  • 80% projected profit in their first year, rising to 90% profit in the second year
  • Investment goals of $2,000,000 to $4,000,000 in their first round, while their cash flow statement showed no need for any more than $300,000 in cash.

Investors would identify the business and financial strategy flaws immediately and walk away.

High risk and low return   The founders of a company providing support to independent insurance agents were offering to sell 25% of the company for $1,000,000.

Assuming that the company met all goals and ended up being acquired in five years, the likely company valuation would be around $6,000,000. The 25% stake would thus be worth $1,500,000 at acquisition time, yielding an 8% internal rate of return for the investors.

Very few investors are interested in such a low return for such high risk.

This is why a financial plan before you launch your company is so important. You don’t want to waste your time or your investors’ money on a business that makes no sense.

But even more importantly, a financial plan that uses expected pricing, sales volumes, and expenses to predict outcomes such as profits and cash flow can give you the insights necessary so you can alter your strategy up front to achieve much bigger success with significantly lower risk.

???????????????????????????????This article is an edited excerpt from the book Will Your New Startup Make Money? by Al Davis. Davis is a serial entrepreneur currently in his fifth startup. He is also an angel investor and the author of six books.

‘Going Out of Business’ Photo courtesy of Marius Watz (Creative Commons)

 

Using Assumptions for Pivoting in Lean Startups

Using Assumptions for Intelligent Pivoting

In an earlier blog post, I talked about the types of key business assumptions that you want to define as part of your business planning (see https://www.offtoa.com/wp/?p=218). However, as shown in the figure below, those assumptions play just as critical a role for you once you launch the company. Here’s why. As you lead your company, you will at the same time be verifying the validity of your assumptions. In some cases you will do this in response to an explicitly designed experiment (as suggested by Eric Ries in The Lean Startup). In other cases you will do this as the result of simply running the business. Regardless of origin, every time you determine a correct value for a key assumption, the risk associated with your company decreases. However, when you refute a key assumption, an alternative plan of action is called for. Before we explore what these actions might look like, let’s take a quick look at some examples of what refuting an assumption might look like:

Refuting an Assumption

  • You build an minimal viable product (MVP). You learn more about what the market really needs. This changes the number of units you expect to sell.
  • While interacting with potential customers, you learn about a target market you had not previously envisaged that needs your product even more than the market you originally were aiming for. This causes you to redefine your original market as your secondary market, and define the new market as your primary market.
  • You had originally guessed that customers would be willing to pay $5 for your product. You ran some experiments offering the product at $4, $5, and $7 to three geographic regions. In all three cases, 5% of those receiving an advertising email from you ended up purchasing. Therefore, you have decided that $7 will work as well as $5.
  • Your product development effort took 2 months longer than expected. You may need to lower your burn rate (by changing the number of employees) and add an additional investment round.
  • Your first year product demand far exceeds your wildest dreams. You cannot just enjoy the ride. Instead you need to build infrastructure, hire employees, purchase raw materials, and on and on, all in a manner that keeps your cash positive. The only way to do that is by changing many of the assumptions and verifying that you are still heading for financial success.

Plan Perform Pivot

Plan Perform Pivot (click to enlarge)

At first glance, the situation in each of the above cases looks different, but your response should be identical. Although Ries defines eight types of pivots in The Lean Startup, they are all just instances of the same general pivot process, as shown in the Pivot box in the above figure:

  1. Change the key assumption that you just refuted.
  2. Analyze the pro forma financials to see if the company’s future is still financially sound (it likely will not be).
  3. Alter other assumptions to accommodate until you are back on the right path.
  4. Redirect the company toward the new strategy, i.e., the strategy defined by the newly defined assumptions.

Pivot Types

Here is a summary of Ries’ eight specific pivot instances and how they affect assumptions:

  1. Zoom-in pivot. After use by customers, we learn that a subset of features is a more ideal product for the customer than the full product. Immediate changes to assumptions are:
    • Name of the product might change.
    • Price of the product might change. It might be lower because the product is smaller, or it might be higher because the product is better targeted to a customer pain.

Once the decision is made to focus the product, we need to maintain consistency across all assumptions, and thus we should adjust:

    • Units sold should remain the same or increase. One’s initial reaction might be to lower expectations because of a smaller product, but more than likely the reason we decided to zoom in is because customers want this smaller product more than they want the broader product. As a result, the product is better targeted to market needs and the marketing organization can focus its campaign on more specific pains. Thus, units sold likely would increase, not decrease.
  1. Zoom-out pivot. After use by customers, we learn that features we are providing are insufficient to sustain the customer base and we must expand features considerably. Immediate changes to assumptions are:
    • Name of the product might change.
    • Price of the product might change.

 Once the decision is made to expand the product, we need to maintain consistency across all assumptions, and thus we should adjust:

    • Units sold should remain the same or increase. More than likely the reason we decided to expand the product is because customers were not interested in buying the product in quantities we had originally envisioned. By expan­ding the product, it is better targeted to market needs and marketing can focus its campaign on more generalized pains. Although we would like units sold to increase, in most cases where I have seen zoom-out pivots, it has been to get “back on track,” so units sold often decrease, at least in the short term.
  1. Customer segment pivot. We learn that we want to target a new market either because (a) we were targeting the wrong market, or (b) we want to now expand the market. The immediate changes to assumptions are:
    • Name(s) of the market will change.
    • Size(s) of the market will change.
    • Growth rate(s) of the market will change.
    • Price of the product might change because this new market might feel the pain differently or may have different economics. 

Once the decision is made to retarget the product to a new market, we need to maintain consistency across all assumptions, and thus we should adjust:

    •  Units sold should remain the same or increase. The most likely reason we decided to redirect the product toward a new market is because we found a market containing customers who were more excited (or as excited) as our current target markets. On the other hand, the customer segment pivot could also be a down-pivot from an originally targeted market that was not meeting our expectations to another market that we expect to perform better but still not meet our original assumptions . . . in which case our new units sold assumptions would actually decrease.
  1. Customer need pivot. We learn that customers in our target market have a pain, our current product does not address it, but we could build a business based on a new product. This likely requires an entirely new financial model with a new set of assump­tions; perhaps the characteristics of the market are salvageable. Based on the specifics of the business and the pivot, some other parts of the financial model could be salvageable, e.g., the loans and investments might be; the sales model might be.
  2. Platform pivot. Ries differentiates between two kinds of products: those that are sold to end users vs. products that are sold to companies (or other intermediaries) who tailor your product or build atop your product to create products for end users. The pivot is changing from either one to the other. From a business perspective, we believe it is just a specialized case of a customer segment pivot. The platform pivot is simply one techno­logy-specific way to reposition a product or refine a product’s features in response to the recognition that a particular target market (in this case, platform tailors or application builders) have a need for a different product.
  3. Business architecture pivot. Many dozens of basic strategies exist for start-ups to follow; these include product strategies (see blog post https://www.offtoa.com/wp/?p=164), pricing strategies (see blog post https://www.offtoa.com/wp/?p=213),  personnel strategies (see blog post https://www.offtoa.com/wp/?p=192), target market strategies (see blog post https://www.offtoa.com/wp/?p=176), and so on (see blog post https://www.offtoa.com/wp/?p=158). What Ries calls a business architecture pivot is what most business leaders call a “change in basic corporate strategy,” so we would prefer to call it something like a corporate strategy pivot. Although Ries discusses only size of market and margin, our past blogs have pointed out that strategy spans every aspect of a business. And thus the deci­sion to execute this type of pivot could affect all assumptions drastically. The most important consideration when performing this pivot is to ensure that all assumptions remain consistent with the new strategic direction; very few will remain unchanged.
  4. Engine of growth pivot.  Fundamental to the philosophy of The Lean Startup is the notion of maintaining a sustainable engine of growth while running the business. In essence, this means that the company can grow organically, from actions performed by current customers. Ries isolates the three basic ways for a start-up to sustain its growth: viral (see blog post https://www.offtoa.com/wp/?p=185), sticky (see blog post https://www.offtoa.com/wp/?p=182) and paid (see blog post https://www.offtoa.com/wp/?p=179).  

Although Ries seems to stress that successful start-ups emphasize just one engine of growth, and of course the most famous billion dollar e-business success stories have emphasized just one engine, our experience has been that most successful start-ups use a combination of paid and sticky or paid and viral to sustain their growth.

As an entrepreneur, you execute an engine of growth pivot when your current engines of growth are not providing you with sufficient growth to achieve your goals, or when other engines of growth will provide you with even better growth. To execute this pivot, you change the way it will grow (and the way it will measure its growth) from a combination of these 3 ways to another. The immediate change to assumptions is:

    • If changing to a primarily viral growth engine, you would focus your corporate energies on implementing the viral spread of the product and you would focus your goal-setting on the following sales model assumptions: viral coefficient and length of viral cycle.
    • If changing to a primarily sticky growth engine, you would focus your corporate energies on retaining customers and you would focus your goal-setting on the following sales model assumptions: average order size and annual retention rate.
    • If changing to a primarily paid growth engine, you would focus your corporate energies on attracting new customers at the lowest cost per customer and you would focus your goal-setting on the following sales model assumptions: customer acquisition cost, sales cycle, ratio of dollars spent to units sold, ratio of employees to units sold, and ramp up.
  1. Channel pivot.  Ries describes a channel pivot as changing the mechanism used to reach the end user, e.g., selling direct to end users vs. using a distributor vs. using a whole­saler. In our experience here at Offtoa, every sale involves multiple levels of “customers.” Every sale must accommodate needs of individuals who pay the check, who physically use the product, who need information produced by the product, who acquire (whether pur­chased or not) the product from individuals who pay for it. The decision to sell your product to a wholesaler vs. distributor vs. retailer vs. the end user is both fundamental to strategy and nontrivial; but it is identical to the decision to sell to one target market vs. another. Thus, we consider a channel pivot to be just a specialized case of a customer segment pivot.

Start-ups can detect the invalidity of any assumption, not only the ones implied by the above eight. Although we prefer the concept of a generalized pivot, you may prefer to assign names to specific types of pivots. If so, we offer the following list (this is just a small sample of the possibilities). These are all easily derivable be simply assigning a name to the refutation of each assumption:

  1. Renegotiate payment terms pivot. This pivot is executed upon either of two events: either we discover that customers are not paying us as quickly (or as slowly) as we had planned, or we take the initiative to renegotiate payment terms with our suppliers. The immediate changes to assumptions are:
    • Customer payments to you will change.
    • Your payments to vendors/suppliers will change.
  1. Financing pivot. When we initially plan a company, we have expectations for certain cash needs and where that cash will come from. Typically it is some combination of loans and investments for certain amounts at certain times. Many events occur that make reality different than the plan: we spend more (or less) than anticipated, our revenues exceed (or fall short of) plan, an investment round is not completely sold, a bank does not approve the full amount of a loan, and on and on. Whenever any of these events occur, we must pivot; we must replan our company and devise a new strategy that enables the company to reach its next milestone on existing resources, or, alternatively, accelerate the next cash infusion step. The immediate changes to assumptions are a subset of:
    • Expenses should change if expenses differ from plan.
    • Units sold should change if revenues differ from plan.
    • Investment amount if investment round fell short.
    • Loan amount if lower than anticipated.
  1. Price pivot. We determine we have the right product for the right market, but the price point is wrong.
  2. Sales cycle pivot. We determine we have the right product for the right market, at the right price but it takes 90 days to convert a lead into a customer instead of the anticipated 30 days.
  3. And so on 

The above is extracted from my latest book, Will Your New Start Up Make Money? Buy your copy in Kindle at http://www.amazon.com/Will-Your-Start-Make-Money-ebook/dp/B00JOOZQNE or paperback format http://www.amazon.com/Will-Your-Start-Make-Money/dp/0996028307