What is your business'value proposition - what investors want to know. This is a primer for entrepreneurs and, frankly, intrapreneurs on working out a solid value proposition and business model. Follow this structure for writing elevator pitches, business plans, or explaining what the heck you are doing to your grandma.
Text of Intro to value propositions for entrepreneurs
WHAT IS YOUR BUSINESS VALUE PROPOSITION? what investors want to know
if you are an entrepreneur, youve almost certainly heard the term, value proposition
but what does it actually mean?
take a moment to define it for yourself
come on.dont cheatdefine it before you skip to the next slide!
if youre like most entrepreneurs, you probably came up with something along the lines of
a value proposition is, the value your product/service has for the customer
this is a perfectly fine answer
it would get you an A in most marketing classes
however
that definition is not sufficient
actually, it is only 1/5 of what an entrepreneur needs to know
instead
think of a value proposition as built from 5 parts
1. valued
2. valuable
3. valunique
4. value chain
5. valuation
lets review them all.
PART ONE a value proposition is valued
before anything else
your product or service must solve a problem
some people say, address a customer pain point
the first mistake that many entrepreneurs make (especially the engineers)
is to build a cool product because it can be built
and only then, as an after thought, look for customers
this is obviously backwards
instead, every business must start by identifying a customer pain point
how do you identify one?
well you need to go and listen to customers in the wild (notice that I did not say talk to customers)
a bunch of them (In B-School, we call this Market Research because we need to sound fancy. Its not. Grab any book on surveys, focus groups, or anything that IDEO puts out for free on the web about Design Thinking)
and ask them why, why, why, why, why (5 times if you are from 6-sigma)
and then you need to watch them
so that you understand what, why, when, and how they buy
but
not all customer pain points are born equal
youll be looking for between 1-4 interrelated pain points that create a sense of motivation & urgency
in the mind of the customer (If you are a nerd, check out Maslows Hierarchy of Needs on wikipedia)
pains that are so dire that the need to solve them will provide enough motivation that the customers will get off their fat butts
and search for a solution
and then fork over money (that they earned in that job they totally hate)
remember
your biggest competitor is not another firm
it is your customers biological and psychological preference to do nothing
your biggest competitor is the status-quo
if you do not find the right set of pain points
youve got no hope of motivating the customer to buy (of course, there is always brainwashing, blackmail, monopolies, or violent force . Yay military-industrial complex!)
in other words, you need a product that will be valued by a customer
PART TWO a value proposition is valuable
unfortunately, were running a business here
so, while solving one persons pain points is noble
it does not make for a sustainable business (Well unless the 1 customer is the US government.of course these days, their accounts payable is sketchy)
what you need to do is find a set of interrelated pain points
that are shared by a large group of customers
who, as a group
have loads and loads of cash
that needs to be in your pocket
in fact, better yet
that large group should be growing over time (faster than the economy at large)
and the pain points should be something theyll need solving for many years to come
typically, when you are talking to someone else about the valuableness of your value proposition
youll explain valuable in steps that narrow your valuableness down to executable chunks
STEP ONE: TOTAL ADDRESSABLE MARKET Our Total Addressable Market (everyone who could ever buy) is made up of 100 million people, and annually worth $10 billion
STEP TWO: TARGET SEGMENT were targeting customers in SE Asia first. This segment includes 40 million customers and is annually worth $1 billion
STEP THREE: MARKET SHARE in SE Asia, well capture 5%, 15%, & 30% market share in years 1, 2, & 3. our expected revenue is $300 million by year 3 & 12 million customers using us (including market growth over time)
whatever the case, however you express it, a value proposition must show that you will be valuable over time
PART THREE a value proposition makes you valunique (Give me some vocabulary latitude in the name of alliteration, please!)
more often than not, entrepreneurs come to me and claim that they have no competitors
my response is to immediately file their plan in the circular file cabinet* * AKA, trash bin
it is a law of nature
Within 48 hours of the discovery of money in any nook or cranny of a market place
18 competitors will emerge
if no competitors emerge, it doesnt mean youre a visionary
it means that theres really no money there (the best way to identify competitors is to simply ask potential customers during market research who they think your competitors are)
so your fundamental assumption should be that youll need to ready your self for battle
and the battle will be fought on two fronts
first, the entrenched incumbents will put up entry barriers to try to stop you from entering
theyll do that with intellectual property, lock- ins at one, more, or all of the points in the value chain, government or industry partnerships, etc
so youll need a battle plan as to how youll get past the barriers
second, once you get some traction, followers will try to pull you down from behind
and that will happen from now until the end of time
so youll need to put up your own entry barriers to slow them down
youll do that with intellectual property, lock- ins at one, more, or all of the points in the value chain, government or industry partnerships, etc
finally, youll need to differentiate yourself from the competitors relative to the customer pain points
and then defend that differentiation sustainably
to do this, youll need to design a solution that is different from the other options
but
it is not just about being different, or even being better
you must be different/better vis--vis the customer pain points that are valued and valuable
it is the customer pain points that determine your product/service features
and not your engineers, or their technical prowess
the most basic & urgent of those pain points define your Minimum Viable Product (MVP)
and the rest of the pain points create the milestones in your R&D plan.
whatever the case, at the end of the day, youll need to be sustainably, and defensibly valunique
PART FOUR a value proposition must deliver through your value chain
of course, all of this is just a bunch of hot air
until you execute
so a value proposition needs to be executable
you need to know what capabilities are required to deliver the plan
and how youll organize and manage them
porter would call these core competencies
some refer to them as your value chain
it starts with the supply of raw materials into the system
goes through manufacturing where you transform supply into product
outputs through distribution where you sell and deliver finished goods
and ultimately ends with ongoing after-sales customer support
linking all these together are logistics, technology, processes, and your people
usually, all this is expressed as three separate, but linked, plans
1. The Organizational Plan (people & company) 2. The Marketing & Sales Plan 3. The Operations Plan
at the end of the day, your value proposition must be supported by a value chain that is setup to deliver all your strategic promises
PART FIVE a value proposition must address valuation
finally, we need to talk cash
a value proposition must address cash in three ways
first, youll need money to make money
bringing together all the other aspects of the value proposition costs money up front
and youll need to convince an investor to give that to you
for that, youll need to clearly explain how much you need (and why), and how much equity the investor will get in return
second, you need a financial plan that allows you to build your firm
so youll need to understand pro-forma P&L, Balance Sheet, Cash Flow Statement and accounts payable & receivable management
third, you and any investors that help fund the build-out, will want to take cash out ideally, lots more than you put in
and that means you need a clear and achievable exit plan (IPO, Trade Sale, Liquidation)
with a Return on Investment that justifies the original investment
and one final note about valuation
nobody goes to an investor
and brags, Ive got a loss- making plan!!!!
every plan an investor sees claims ROI
which means that it is not enough just to have a Net Present Value >0
you actually need an NPV higher than all other NPV- making competing investments
whatever the case, a good value proposition must include valuation
