From Idea to Business Model

Most broadly defined, an entrepreneur is anyone who starts their own business. In venture capital, we focus on a specific subset of entrepreneurs - scalable entrepreneurs - those who set out to start an “enterprise” rather than just a business.

What is an entrepreneur?

Scalable entrepreneurship is entrepreneurship designed to create a business that has the potential to grow to a significant size over a relatively short period of time (what we called an “enterprise” in the previous section).

What is a scalable business?

Building a scalabe business requires an idea, a team, a business plan and investment funding. The order in which you build these can vary.

How to build a scalable business

The most important question that you can ask yourself while considering whether a career in entrepreneurship is for you is this one: Do you want to do what you want to do or are you happy doing what someone else tells you to do?

Why become an entrepreneur?

There is some debate about whether entrepreneurship can or cannot be taught. As I have been teaching entrepreneurship for nearly 20 years, I obviously fall on the “can” side of this debate. . I would even go a step further to say: not only can entrepreneurship be taught, but learning entrepreneurial skills is key to entrepreneurial success.

Can entrepreneurship be taught?

When risk is defined as variance of return, risk and return are perfectly positively correlated. This correlation can be expressed as “High risk/high return; low risk/low return. These two statements may seem to be making the same point in two different ways; in fact they are not parallel at all, but are making two very different points about risk and return.

Risk and return

Many people seem to believe that luck plays an important role in entrepreneurial success (and in success in general). However, in most cases in the long run, luck plays only a small role in determining success.

Success and the role of luck

Not only does fear of failure deprive you of success, but fear of failure can actually guarantee that you achieve a result indistinguishable from failure. Fear of failure brings on the exact result that you began by fearing.

Overcoming the fear of failure

For entrepreneurs the best role models of successful failure must be Steve Jobs and Apple. That’s right: I did say Steve Jobs and Apple.

Success from failure

Investors tend to evaluate investments using some kind of decision tree. This method of evaluation has significant implications for entrepreneurs seeking to raise money from investors.

The investor's decision tree

Successful scalable startups tend to have innovative products that solve a painful problem for customers, in a fast-growing market, and an ability to create barriers to entry for followers.

Key elements for success

Sources of successful innovation include: alternative approaches, personal experience, de-commoditizing a commodity and several others

Generating innovation

Innovation is an essential element of entrepreneurship. Innovation is not just a driver of business growth, but also the key component of the creative destruction that drives economic development.

Defining innovation

Being able to come up with something that is truly innovative is no easy task. Many people ask the question, what is innovation, and their first answer to that question is that it is something new. While Innovations are indeed something new, this alone does not qualify it to be innovative.

Questions to ask

The most likely reason a start-up will fail is that there will be insufficient demand for its product. The most likely reason there will be insufficient demand for their product is that they are not solving a painful problem for customers.

Creating value propositions

Successful entrepreneurs are able to land themselves in the right market at the right time. This comes with an acute sense of judgement, to be able to identify and analyze markets with high potential.

Market identification and analysis

It is not enough for a startup to have the right idea; they have to have the right idea at the right time. Entering the market at the optimal time is impossible, so the real market timing choice that startups need to make is whether to enter too early or too late.

Industry life cycles and structures

Choosing the right entry segment is probably the most important marketing decision that a start-up will make in the early stage of their development. Get it right and the company is on the way to success; get it wrong and the company will likely die.

Determining who your customers are

Sizing the market for a new product, especially a potentially disruptive innovation, is a difficult and challenging task. Nevertheless, given the importance of the size of the market opportunity to investors, we are going to have to give it a try.

Revenue projections and forecasts

A start-up needs to have a differentiated product and must be able to explain clearly how their product is different from competitors' products. The two fundamental differentiation strategies are superior customer value, where the product is better and cost leadership, where the product is produced at a lower cost.

Product differentiation

A start-up needs to decide what competitive position they will occupy in the market when they enter. This is called positioning and it can be thought of as market selection plus product differentiation. It will also determine the image for the product that embodies its values.

Market positioning

A start-up needs to develop a marketing execution plan, including the pricing strategy, distribution strategy, advertising and promotion plan

4Ps

In traditional marketing strategy, companies need to choose between providing a higher value product for customers or being the low-cost producer. With a value innovation strategy, start-ups can do both at the same time.

Blue Ocean strategy

Entrepreneurs often believe they will succeed based on first-mover advantage, when actually most first-movers fail to capture the majority of the value in new markets during their exponential growth phase. This value is instead captured by last movers. Moving first by itself does not create advantage; converting first-mover status to last-mover advantage is the key.

First and last mover advantage

First or early movers with strong proprietary intellectual property can use their IP to create barriers to entry for followers, enabling them to convert their first-mover status to last-mover advantage.

IP strategy

In addition to using intellectual property to create entry barriers for followers, early movers can use competitive strategies which create barriers to entry to convert their first mover status to last mover advantage.

Competing with large companies