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Sunday, 01 July 2012 14:34

Road to innovation filled with many questions

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GRAND RAPIDS — Chase Lee, a 21-year-old University of Michigan student from Grand Rapids, co-developed an ideas marketplace where entrepreneurs could buy and sell ideas. But he and his business partner Alex Schiff, 21, another U-M student, decided that their original concept wasn't working because everyone wanted to sell and no one wanted to buy.

So they began talking to people and discovered they had a hard time keeping track of their ideas. They took this customer information, iterated through several concepts, including having users email or text their ideas to them, which the business school students loaded manually into a Google Doc. When they automated the process, Fetchnotes.com was born. Now both
founders have taken a leave from Michigan to pursue their business full-time.

"The most important thing for us was getting out and talking to people about how they keep track of all the stuff in their lives," Lee said. "So after figuring out how they did this, we came up with a better way."

Lee represents a new group of innovators who create businesses based on what their customers want. No more developing a product or service and hoping it finds a market.

"Innovation is a startling process and usually a personal one," said Craig Hall, a serial entrepreneur and co-founder of Grand Angels. "It's often difficult for companies to change their thinking. Business wants to deliver a product or service as cheaply as they can. It's difficult to break out of this mold and develop something new."

Hall cited Clayton Christiansen's groundbreaking book, "The Innovators' Dilemma." Christiansen's thesis is that a successful company with established products will get pushed aside unless managers know when to abandon traditional business practices.

"His supposition was they couldn't break their companies and create the next new thing easily," Hall said. "Companies often don't want to kill the golden goose, the cash cow, to innovate."

Take Ryan Vaughn, who worked as a sports writer for the Grand Haven Tribune. He co-founded Varsity News Network after he experimented with a blog about the Detroit Lions. He quickly realized no one wanted to read what he wrote. Vaughn pivoted and created West Michigan All Star, a community news service to cover West Michigan high school sports.

"We found out that given the traditional journalistic business model, we had to cover football more than anything else," Vaughn said. "That's not what I wanted to do, so I kept my eyes open for something else. We had some conversations with school officials and created Varsity News Network to give every school the opportunity to not only promote their sports programs, but also to raise money from local sponsors."

Now Varsity News Network is in 35 Michigan school systems, and just opened an Indianapolis office to penetrate the Hoosier state. Vaughn also has raised a cool $500,000 from investors, including the Grand Angels and the Michigan Pre-Seed Capital Fund, to scale-up his business model.

Lean startups do something different than large companies: They search for the truth, Steve Blank told participants in the Lean Entrepreneur conference Start Garden hosted in Grand Rapids in May. Blank wrote the book, "How to Build a Great Company, Step by Step: An Intro to The Startup Owner's Manual." Blank is a professor at both U.C. Berkeley and Stanford University.

Blank said no business plan ever survives the first contact with the customer. That's why he recommends that business-plan writing be taught as a creative writing course.

"Business plan writing is great for professors," he said. "But they are the biggest waste of time. You could have spent your time better outside the building talking to perspective customers."

He said planning comes before the business plan.

"A business model is a hypothesis. A business model says this is what we need to know and we're probably guessing on day one. You don't know the customers' problem when you launch the plan. It's hard to understand what people need. More businesses fail from a lack of customers rather than lack of product development."

Blank said a startup company wants to develop a search strategy for the business model. The founders want to run a customer development team. Startups don't need titles on day one because they don't want to have execution people before they figure out what they need to execute. Only the founders can establish this.

Job one is to find out who your customers are, what products they want, and how to deliver those products to them efficiently, Blank said. His definition of a start-up: A temporary organization designed to search for something that is a repeatable and scalable business model.

The core of his business model lies in determining how a company creates value for itself while delivering products that are valuable to its customers. The boxes that fill out his business-model canvas include:

1) Value proposition: Solve a problem, fill a need.

2) Customer segment: Who are they and why would they buy?

3) Channels: How does your product get to your customers?

4) Customer relationships: How do you get, keep and grow customers?

5) Revenue model: How will you make money? Is pricing just a tactic?

6) Key resources: What is your most important asset required to make the business model work?

7) Key partners: Who are the key partners and suppliers needed to make the business model work?

8) Key activities: What are the most important things for your business model to work?

9) Cost structure: What are the costs to make the business model happen?

"In the end, they are just guesses," Blank said. "How do I turn hypotheses into facts? Search for the truth behind these hypotheses. When you understand enough of the building scale, spend end-user money and build a company. Try to run a series of experiments and keep score with the business model canvas."

He said gathering data is just the beginning. What founders are doing is looking for insight, the extraction of patterns coming from this data. Startups want to create a minimum viable product (MVP). The company needs to then build the product incrementally to get feedback, saving time and resources to make sure it is on the right track. He said this approach then tells the founders what key assumptions were wrong. The MVP allows the founders to iterate. When the assumptions are wrong, pivot and try a new approach.

"The pivot allows us to fire the hypothesis and not the sales person or CEO," he said. "We expect changes. We expect failures. We expect most of your assumptions to be wrong."

David Weaver, president of Great Lakes Angels, said entrepreneurs need to be careful with surrounding themselves with a very small sample size of the expected customer base. He encouraged businesses to talk to people who are outside their own region geographically to find out if the need and solution are the same as where they live.

Weaver said startups need to find out who makes the buying decision on their product. A user may not be the same person who has the power to make the purchase. Then your customer is quite different, he said.

Other tips from Weaver:

1) Welcome responses that criticize and show your shortcomings. Listen to them more than those that like your product. Those that don't like your product are the ones you have to overcome to get adoption.

2) When you're starting your company, you need to understand customer needs and how they are managing them right now — and whether your solution truly satisfies a pain or is just nice to have. If customers don't recognize the need, it doesn't matter how good your solution is, he said.

"One of the things you often see is when people come to raise money, they really understand their technology and their customer needs, but they don't recognize what's important to the investor," Weaver said. "They have to talk to the investor in layman language and sell them on the opportunity of what their investment can do for them personally."

Mike Brennan is senior technology writer at MiBiz. His day job is editor and publisher of MITechNews.com

Read 2347 times Last modified on Thursday, 30 August 2012 23:01

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