Entrepreneur Round Table - Business Models

Jul 17, 2012

On July 16th, HYPE asked John Seiffer of Better CEO and the President of Angel Investor Forum to come and talk to our members about metric driven customer validation and lean startup business models. Over 20 members gathered at Downtown Yoga in Hartford to hear his expertise and engage him in discussions regarding their own startups. John began with a quote from Peter Drucker, asking the group what is the “one valid definition of business purpose?” He explained the answer is “to create a customer” or someone who pays you money. This simple concept spurred a discussing focusing on market risk.

John believes that market risk can be broken down into four quadrants. Low-tech and easy marketability; with the example of a pizza. Anyone can make a pizza and almost anyone will buy a slice. Also low-tech but harder to market is something like an app. People are creating them in droves but differentiating yourself from the rest is almost impossible. This is a tough segment of market risk for a business to compete in as it’s highly competitive. On the opposite end of the spectrum is high-tech and easy marketability, like a cure for cancer. If you are in this segment than your business will thrive with little marketing effort on your part, however you must watch other costs like R&D. Lastly, is a segment for high-tech and hard to market. John was unable to even think of a business in this category as it makes little sense to participate in outside of niche industries.

John also explained how customer development must be broken down into three constantly rotating categories: hypothesis, experiment, and data.
The hypothesis is essentially four different questions one must answer:
1)Some person
2)Will pay
3)For features
4)To solve problem

Or with the example he gave
1)A Juggler
2)Will pay $10
3)For green balls
4)That are easy to find in the snow

Next it’s time to conduct an experiment with your hypothesis. It is important to make your experiment hands on and interactive, doing much of the research yourself as you can get a feel for the subtleties of a situation or a respondent. John cautioned that surveys may not provide you with the best answers to how your product is perceived. He told us of restaurants he visits and rates highly in surveys but never goes again. Instead one must talk with their customers, ask them important questions like “do you even juggle in the snow?” A discussion can spur a better idea of what innovations the market needs, rather than more of the status-quo. Henry Ford was known to say “If I had asked my customers what they wanted, they would have said a faster horse."

The last step of customer development is data. One must write down and compare their data to the original hypothesis. Once they are able to tests their results against the hypothesis, a savvy entrepreneur can determine their businesses “minimum viable product” or the minimum features that someone will pay for. With that determined they can “pivot” and make any necessary changes toward capturing market share. At this point one can decide that jugglers, like the rest of us don’t like cold, so maybe red balls that can be seen in grass would actually sell.

John also talked about seeking investors, including venture capitalists. Out of the over 1 million companies started last year in this country, only 1,500 used financing from venture capitalists. The majority use their own financing or borrowed from friends, family, or other means. He explained that when investors evaluate a business, it’s “not a science, it’s more like dating… with an eye for marriage.” One formula he gave to help determine the money an investor can expect to see out of a business is:
(Lifetime value of a customer – Cost of obtaining a customer) X Number of customers = $
The investor then determines how much their investment will “time shift” the formula to expedite the process and hopefully increase profits.

We would like to thank John for his very informative and well-received lesson, to learn more about Better CEO and the Angel Investor Forum  please visit their websites.


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