Assessing early stage startups and the Investment Readiness Level

I was reading Steve Blank’s post here and it got me thinking about how do you really assess an early stage startup to in order to make business decision (ie invest, buy out, integrate etc)?  What tools or methods are used that offer a common process and consistency?   We can use the Business Model Canvas and assess each of the 9 boxes or use something like VC Fred Wilson’s simple litmus test of 5 drivers (I’ve used Snapchat to illustrate):

  1. Right Person: Who are the people running the startup? Why are they passionate about this idea?  What past experience do they have? Do they have some special competitive advantage or domain expertise? Are they willing to leave their full-time work today to pursue their startup? With Snapchat for example it was Evan Spiegel and Bobby Murphy in 2011 both from Stanford university, who where working on a startup called Future Freshman designed to help high school kids get advice on colleges, career etc.  They later pivoted realizing kids key concern was over their life being recorded permanently and how this would hinder their career prospects.
  2. Right Idea: Is the idea solving a real problem?  Is the solution a vitamin (solving a trivial problem) or drug (solving a serious problem)? With Snapchat it was a big problem amongst teenage: teens don’t want their daily lives permanently recorded
  3. Right Product: Is the product designed well enough to consider the target customers usage and behavior?  Is it simple to use or apply? With Snapchat users can control who and how long any communications was sent. Best of all, it was all on their mobile –  target customer’s prime communication method
  4. Right Time: What market, government or social trends suggest it is the right time to launch such a product? With Snapchat, as more and more teens record their life digitally using social media, they needed another way to communicate freely and safely without permanence.
  5. Right Market: What is the market being targeted? Is the market growing?  Who are the competitors? With Snapchat,  the product centered around mobile-native teens and social media activity  –  both trends expanding rapidly with limited alternatives.

The point I’m trying to make here is there no common language when assessing early stage startups.  This is why I like Steve Blank’s Investment Readiness Level (IRL).   I would like to devote more time on this because its a relatively new concept taken from a relatively establish method.

 

The IRL is based on the Technology Readiness Level (TRL) which is a measure to assess the maturity of an evolving technologies.   The TRL was used in 1980’s by NASA as a  way to describe the maturity and state of “flight” readiness of their technology projects and to help track projects (and budgets).  Steve has adapted this method (similar to that he did with the Business Model Canvas when Alexander Osterwalder created it in his book Business Model Generation) to assess early stage startups.  Providing more of an evidence-based way to determine where the startup is.

 

Here is the NASA  “thermometer” version to assess readiness of their projects:

 

NASA's Technology Readiness Level

NASA’s Technology Readiness Level

 

With the IRL, for the first time, you have common language to describe the reading this level for early-stage ventures.  This method can not only be used by VCs or Accelerators etc, but also inside large companies to help convince an existing business unit its worth integrating or clarity over making it a spin-out.

 

The following slides have been take from Steve Blank’s presentation found here, but here are the key points:

 

  • Level 1 and 2:  Is the main (riskiest assumption) hypotheses understood?  Are all the hypotheses on the business model canvas listed/determined? Have is the startup articulating their customer value proposition?  Is this clear?
 Investment Readiness Level: 1 & 2

Investment Readiness Level: 1 & 2

  • Level 3 and 4:   Have the startup discovered a real problem worth solving and is the solution going to deliver on the customer value proposition they promised?  Does the startup have valid MVP that proves there is a strong Problem/Solution Fit?
Investment Readiness Level: 3 & 4

Investment Readiness Level: 3 & 4

  • Level 5 and 6:  Has the MVP been validated to determine Product/Market Fit? Is the right side of the business model canvas validated?  That is, does the solution delivering on the promise to the target customers?
Investment Readiness Level: 5 & 6

Investment Readiness Level: 5 & 6

  • Level 7 and 8: Is the left side of the business model validated? That is, have they got the right business partners to help them deliver the customer value proposition?
Investment Readiness Level: 7 & 8

Investment Readiness Level: 7 & 8

  • Level 9:  Do they have any investable metrics that matter? These including acquisition rate, activation rate, retention rate, referral rates or revenue?  That is can we assess their A.A.A.R.R?  You can learn more about AAARR here
Investment Readiness Level: 9

Investment Readiness Level: 9

 

Here is a summary of the Investment Readiness Level:

 

Investment Readiness Level

Investment Readiness Level

 

Here is an example of an early startup being assessed using IRL.  You can see this assessment in action in this video here.

 

Assessing a StartUp via IRL

Assessing a StartUp via IRL

Below is a quick summary of things to consider when setting up a partnership such as joint development agreement or licensing.

 

  1. First determine the “Principles of  our partnership”  – who brings what, why and expectations?
  2. Determine what structure is the business to proceed with (i.e. Joint spinout vs licensee agreement)
  3. Determine the business terms (i.e. Term sheet) we would like to operate under
  4. Determine the commercial terms based on terms sheet.

With #2, determine the business terms, you need to determine few things such as.

 

1. Key business terms over IP:

  1. Right to manufacture the product as we see fit
  2. Right to distribute in x geographic territory
  3. Right to use the IP in x field of use
  4. Right to  negotiate licensee at time x and time z
  5. Right to use IP over x time/years
  6. Right to access documentation, service and support for the IP from licenser
  7. Right to sublicense IP to x partners (i.e.  manufacture and design firms)
  8. Right to future versions of the IP (i.e. Any updates or advancements)
  9. Agree to a non-compete provision
  10. Others –  what else do we need to consider ???

Granted, the MORE you add these “exclusive terms” to the license, the more expensive the royalty fee becomes.

You can either therefore:

  • Limit above terms to when we have “achieve certain minimum” product sales only
  • Limit the time to a shorter time period
  • Limit the field of use or  geographic territory etc.

2. Financials

If you agree on the above terms, you than need to consider the financial aspect of your agreement such as:

  1. Upfront fee:  How much should you provide as upfront (if any). For example, shall pay you $X US dollars upon execution of our agreement or is it once you release a beta version or if sales reach a minimum etc? Or others?  What is best for us?
  2. Royalty fee:  For example, should royalties be paid based on X % of “adjusted gross sales” or is it “net prices” or “revenues”?  You need to consider your partner’s  affiliates and sublicensees too.   What minimums on royalties (if any) do you propose? Should put a caps these royalties once sales reach x?  If cap, and they agree, when is it ideally do we to renew it? Annually or at milestone?
  3. Non-sale based fees on income:  what about things that are not directly related to sales, like data cloud usage and storage for your product  If you do, what additional x% do you pay for all non-sale based income?  Again do you cap this?  Is it a step scale?
  4. Minimum royalties:  do you need to be proactive and suggest an annual minimum commitment?  For example, you shall pay annual minimum royalties according a schedule:  2013 x%, 2014 x%, 2015 x% etc. A royalty may begin at say 2% (of the average sales price), but decrease to 0.5 percent over the life of the agreement.

3. Milestones

  1. Payment milestones triggers: Need to consider key milestones from when royalties are made (i.e.  When certain minimum average monthly sales are met or instalments may be timed to coincide with development milestones a beta release??)
  2. Working milestones triggers:  When MVP testing is completed successfully or we have submit a formal business plan, release a beta version or commencement of manufacturing or first 50,000 sale.

4. Questions

  • What leverage do you have that can be used to negotiate a desirable outcome?
  • Is there anything else you can use to leverage your position to get a “good deal”?
  • What specifically do you want to licensee? What aspect of the IP do you want to license?
  • How much should you pay for the IP licensee?  This will again depend on number of exclusivity you set, but need to consider:
    • How much can I afford to pay for this license?
    • What is the maximum % realistically can you pay to make reasonable profit if your product sells for $50?
    • What will our market bear?
  • What data and documents do we need from your business partner to help you develop your product and provide to marketing, manufacturing etc
  • What are performance/warranties/indemnities?  What happens if their is IP defect? Or legal action/claim against your IP partner?
  • What is our exist strategy should we decide, after 1 or 5 years its not meeting business objectives?

I recently purchased a Fitbit One to experience the product and how one sets things up.  Below is screen by screen shot of this experience. Overall, it was an easy and very much guided process (which I like)

I was reading this story entitled  Apple’s hidden threat to Fitbit, Jawbone UP, and Nike Fuel and two 2 things dawn on me.

jawbone vs fitbit

1.  Need to define a segment better. 

As these health devices become more readily available and common, new more sophisticated measures that address more niche customer segments. The line below summaries this point well:

Certain niche groups, like serious athletes, wearable fashionistas or hardcore quantified selfers might continue to monetize for dedicated trackers, but most users will likely migrate to cheaper applications on their phones

 

2.  Differentiation and new capabilities.

In order to compete in the future, devices need to measure and track data not invisible but impacts how lives. Data that is from the body itself .

The startup companies that survive this dramatic change will be the ones that leverage these new capabilities, become smarter and making sense of the explosion of new data and provide insights to end users, insurance companies, health exchanges and providers

 Some interesting observations on wearable form factor design from the video entitle “Gadi Amit on the future of wearable technology”.

 

 

Fitbit jelly bean style

Fitbit jelly bean style

1. Symbiotic design

Wearable devices are no longer an “add on” or just consider the form and function, its a symbiotic relationship.

 

2. Dont make me think.

How might we leverage basic “human gestures” and apply them to our product and interactive designs? For example in the video with the camera product, they used the Kaleidoscope gestures which is known behaviour so you dont need to think on how to use the product.

 

3. Mocks up to firm up

Use simple very low tech mocks to get feedback quickly to seek refinement and opportunity in design. In the video, they used block form, tape and piece of cardboard to create their final product.

 

4. Design to feel.

Design is one thing, you also need to feel the product and quality of materials used. If you hold it, it need to reassure you that its a sold and durable product. Something that will last and that you trust.

 

Garmin wearable masculine style

Garmin wearable masculine style

5. Colour our sensors

World was full of clunky, ugly and masculine.  looking pedometers that didn’t inspire or make people feel good about the exercise they did. Fitbit’s design now use a lot of “jelly bean” style colours which makes they product more desirable and sense of fun and cool. Again it taps into our existing psyche and builds rapport instantly with product- who does like jelly beans?

 

 

Other links

http://www.newdealdesign.com/projects/fitbit-fitness-tracker 

 

My top 10 things to consider when you talk to customers to help you validate your idea

 

1. Starting position. Before you start, have a few starting assumptions. Try to phase them as “falsable statement” (e.g. “Tigers have the largest roar on land ”). This will help you validate your ideas and learn.

 

2. Stop pitching. That’s right – you are not conducting a ”pitch” rather you are conducting an interview to validate and learn. Your in a fact searching for answers, not selling.

 

3. Problem first. Before you talk about your idea with customers, make sure you you get a wider perspective. At least initially, focus on problem rather your proposed solution, this way you can discover other opportunities you’d never consider.

Solution interviews are important once you understand and validated that the problem does exist and you can solve it in commercially viable way.

 

4. Script it.  Create a script to ensures consistency and repeatability in the delivery of your engagement (so you don’t bias your results). However, be open to refine it as you go. I often use my first few interviews as a way to “draft up” my script. Ash Maurya has a great structure below:

 

Credit: Ash Maurya, Running Lean

Credit: Ash Maurya, Running Lean

 

5. Extreme users. Find your early adopters. Be picky about who you talk to. Conducting interviews can be costly. It takes time to find, book, attend so you want to make it worth your while. Typically I look for those that feel the pain the most. I often called these the “extreme users” coined from the guys at IDEO. Its also good idea to start with the people you know. This not only helps you practice and refine your script, it’s a great way to get warm leads to interview other people.

 

6. Validate learning. During the interview you are trying to determine whether the problem exist? How do they solve it today? How big of a problem is it?  You also want to know who else has this problem or who else you should go and talk to?

 

7. Have a partner.  Have someone with you. Typically one asks the questions, while the other notes down the key points as well as list any questions. I often suggest at the end, ask your partner if they have any questions.

 

8. Those silent moments. During you interview, don’t try to “fill in those silence moments” with more questions. After you ask a question, be silent and just listen.

 

9. Be consistent.  Remember to use a constant tone and mannerism. You don’t want to bias the results by introducing your excitement on certain answers and disinterest in other answers.

 

10.  Record quickly.   After you have done your interviews (and you start to get repeated answers from your customers); that’s when you know you have reached a point to stop.  Record your thoughts, insight, ideas, pain points or observations straight after!

 

Here is Slideshare version:

  • Cota uses wifi signals to supply wireless power. Meaning it can power your device (from phone to fire alarm) remotely and wireless.
  • The plan is to integrate the solution into existing form factors so devices are self powered using wifi
  • It transmits on the SAME signal as wifi
  • You can configure the system to recognize only a specific set of devices, or open if you want to power all Cota-tech enabled devices just like wifi with password.
  • Up to 30 feet and does need to be in “line sight” –  similar to wifi can go though walls.

cota_wireless_power

 

 

cota_wireless_power1

 

Read more

http://techcrunch.com/2013/09/09/cota-by-ossia-wireless-power/

http://www.ossiainc.com/

  • Regalis is a mobile payments system targeted towards Latin America that allows users to send money back home for the purposes of paying bills or buying groceries using mobile gift card platform.
  • They have found a way “to hack the mobile gift card,” De la Cruz, cofounder. It effectively this means that Regalii taps into the infrastructure that is already in place as a way of delivering the sum of money to recipients, with cash never coming into the equation.
  • Regalii provides its service for a $3 flat fee, as compared to many other services that work on a combination of fees and/or commissions. The company claims to offer 60% cost savings for typical remittances.
  • In Latin America alone, this is a $69 billion opportunity annually.
  • The key of this start up is tapping into 7,000 retailers (ie mum and pop stores). They did this via leveraging the asset of their finance packer – second largest bank in South America.

Regalii_pincode Regalii_pincodew

Read more:

http://techcrunch.com/2013/09/09/regalii-is-changing-the-way-people-send-money-to-family-abroad-using-mobile-and-gift-cards/

 

  • Check out this start-up, Soil IQ, they have a soil sensors that transmits soil data like temperature, PH level, light and fertility back to a paired app along with a platform for data analysis (e.g. algorithm that assess the data points as well as social data)
  • It also allows you to see who else is growing similar things giving it a social element.
  • Users receive SMS or twitter-based alerts when their plants need attention, and can buy/sell/trade their crops (or share data) with their friends and neighbors.
  • It collects the data about plants, soil and the environment and than recommends what plant you should plant and how you should plant say tomatoes or onions etc.
  • Its like Nest but for home and garden.
  • The plan is to integrate with things like the water systems and automatically water your plants.
  • It will also, in the long term able to determine plant diseases.
  • Its targeted for small farms and homes and powered by solar power so its consistently monitoring.
  • The guys are using Industrial Design firm FuseProject which is owned by Yves Behar.
  • Its estimated that there is 100 Million US households with a lawn or garden with on average spend of $120 per year on their garden with tools and related items.  With this being a $21 billion market.

 

soiliq_mapsoiliq_id

 

 

 

 

 

 

 

 

 

 

Read more:

http://techcrunch.com/2013/09/10/soil-iq/

http://www.soiliq.co

 

I posted a blog called “Its so cool to be a Reverse Innovator” which I talk about Reverse Innovation – the process by which a company discovers new growth streams by utilizing its natural strengths to develop new products and services in developing countries and transposing it in developed countries with new competitive advantages.

 

I came across this social health innovation, called Embrace; where students at Stanford worked on a design challenge to create a baby incubator that would cost less than 1% of the price of a traditional, $20,000 incubator.

 

 

According to Jane Chen, CEO and Founder of Embrace; about 4 million low-birth weight babies die within the first 28 days of life because their bodies don’t have enough fat to regulate their body temperature. The problem was that traditional incubators are high in cost and require a constant supply of electricity.  Many people that live in rural villages in India for instance have low incomes and limited access to electricity.


 

Chen and her team developed (after much iteration), a miniature sleeping bag that can stays at a constant temperature for up to 6 hours by using an innovative wax-like material with tubes of hot water running through the sleeping bag.   With the baby’s natural heat and the wax-like tubes, the sleeping bag is able to maintain a constant temperature of 37 degrees Celsius (or 98 Fahrenheit).

 

 

Now, if it costs $20,000 for a traditional incubator, how competitive would this product be if it was sold in developed countries like USA? 

 

 

Embrace essentially created a new business model what will not necessarily impact the traditional incubator market.

 

Here is a video explaining the concept and the challenge by Jane Chen: