1. Starting a Technology Business
Dave Litwiller
Executive in Residence
Communitech
November 1, 2012

2. Overview
• What makes or breaks the founding team and
product idea
• Drill down into specifics for B2B and B2C SaaS
– Constitutes 75% of start-ups in Waterloo Region
• Building a Business Model
• Intellectual Property
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3. Founding Team and
Product or Service
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4. Founding Team
• Two and three member founding teams considerably outperform both solo and
larger teams
– Sufficient camaraderie and division of responsibilities, without an unwieldy
number of viewpoints. Provides a built-in sounding board.
• Have at least one technical person on the founding team, and one business
person
• Doing so typically accelerates speed by three times, and likelihood of achieving
significant long-term success by four to five times
• Make sure that there is a strong basis for mutual respect, as evidenced by
communicating easily and no one person dominating
• Everyone needs to want the just-in-time learning of running an early-stage
business, and to be very hungry to go build something
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5. Tolerance to Rejection
• Cannot fear rejection
• Find motivation in small rejections on the path to success
• Get used to being out on a ledge
• Rejection Therapy: If you are not naturally tolerant to rejection,
force yourself to do something every day in a small matter which
is likely to provoke rejection, in order to build up your tolerance
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6. Product or Service (I)
• Best is a product or service for which you would be a passionate user,
and so would many others. This makes it easiest to love the business
• Next best is a product or service for which you are certain with
exceptional, privileged knowledge that others would be passionate
users
• Products or services more distant from the founders increase start-up
risk considerably; such removal overly relies upon other people
• Start by knowing the customer, knowing the customer’s needs and
serving them well as the basis for devising the product or service.
– Do not start with the product you’d like to build and then back into whether there are
customers
– Nothing interesting happens in the office (NIHITO). Get out and talk to 100 target
users to validate the opportunity
– If relevant and possible, be global from the outset
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7. Product or Service (II)
• Make sure that you are building something which not many
others can
• Better yet is if few people yet realize it is (going to be) a big deal
– Ask what will be in the future a known unmet need of today
• The key to having a great idea is to start by having many,
forming hypotheses fast to confirm or repudiate, and testing
them very quickly
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8. Always Be Closing
• Nothing happens without a sale, be it a to a customer, investor,
candidate employee, or partner
• Relentless, closing-driven sales needs to be woven into the
culture of the business from the earliest days
• Even at the start, spend 40% of time on customer acquisition
• Raise it to 70% once the business has achieved product-market
fit and is scaling up
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9. Pitching
• You will be constantly pitching yourself and your
business
• Nobody will sell you for you
• Be able to nail the pitch for yourself and your
business in three formats:
– 30 seconds, 3 minutes, 10 minutes
– What we do, who we do it to, and, why the audience should
care
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10. B2B and B2C SaaS
“Software is eating the world”
- Marc Andreesen, Wall St. Journal, August 20, 2011
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11. Conditions to Start-up Have
Never Been Better
• Start-up costs have never been lower
• Compared with ten years ago when the average start-up
needed millions of $’s and a year or two on the calendar to
reach first revenue with proprietary servers, software, high cost
marketing and much larger staff…
• Today, the combination of web hosting services, open source
software, social media and viral marketing, and, app stores,
combine to make the costs for most SaaS start-ups less than
$150K to reach product launch and first revenue
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12. The Need for Speed
• The SaaS companies which go on to do the best
typically launch a bare bones product very fast.
Speed trumps accuracy
• Manually bridge certain business process steps while
the essential value proposition is proven out
• Automate the bare minimum at first, and leverage
existing platforms to kludge a product offering as
much as possible
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13. How Fast?
• Typically
– Time from start to first launch: Two weeks to two months
– Evolutionary iteration cycle time thereafter: Two weeks
– Growth target cadence: Weekly
– Time from start to product-market fit (with satisfied, paying
customers, ready to scale): Eight to twelve months
– The value of prolonged secrecy in SaaS is greatly
outweighed by the value of real feedback from paying
customers to better inform subsequent product and service
investments
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14. Early User Experience Focus
• At first, focus on the intensity of user attachment, rather than number of users
– This is the key to building a business that can thrive beyond the start-up
phase
• The feedback of friends or close connections is not reliable; get further afield
• The true test is when arm’s length people of their own volition start inviting their
friends and colleagues to use what you’re offering
– They’re not doing it out of obligation to you
• Pay technical and personal attention to the most powerful, influential and
knowledgeable users
• Don’t just study web site or app metrics. Watch and talk to users
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15. Be Adaptable
• Successful start-ups typically perform transformational rework
on their product-service idea between two and three times on
the way to ultimate success
• One definition of an entrepreneur is someone who jumps off a
mountain and builds his or her aircraft on the way down
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16. Biggest Avoidable Risk
• Premature scaling
– Hiring staff, taking in excess investment capital, and
investing in the ramp-up of sales, before establishing
resounding product-market fit
• On average, start-ups take two to three times as long
to achieve a resounding product as the founders
expect at the outset
– Hold off on scaling until product-market fit is achieved
– The best performing businesses limit staff and management
to about five people prior to achieving this fit
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17. Hierarchy
• The hardware serves the software
• The software serves the UX
• The UX serves the emotion
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18. Building a Business Model
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19. Five Parts
• Revenue
• Gross Margin
• Operating Costs
• Working Capital
• Investment
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20. Revenue
• Who will buy
• What will they buy
• What pain is being solved or delight offered
• How soon
• At what price
• On what basis will they pay
• What is the cost and effort of delivering
• What proxies for demand exist today
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21. Gross Margin
• How much is left after the direct costs of each sale
– How low can the cost of goods sold go
– How high can the price go
and still have a customer buy
• How can your gross margin model confer a competitive
advantage
– Fixed costs <-> Variable costs
– Just in time
– Built in quality (jidoka)
– Eliminate waste
– Continuous improvement
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22. Operating Expense
• Go through every line of a typical OpEx chart of accounts for
vendors in your industry and figure out:
– What cost in absolute $ and % sales will the company incur in each
category
– Which of these costs can be reduced or eliminated
– Which should grow in line with revenue
• Look for competitive and benchmark companies with major
OpEx line items, and figure out how to eliminate them
• Look for where selectively increased costs can create outsized
increases in customer experience, especially faster gratification
• Figure out how to make the scarcest resources in your industry
more productive
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23. Working Capital
• The timing with which cash flows in and out of the
business
– How early can customers be encouraged to pay
– How long can supplier payment be delayed
• Improved working capital models sharply reduce
required gross margins, creating disruptive business
models
• Improved working capital lowers the amount of
capital required to run the business. This is
particularly important for start-ups which have a very
high cost of capital
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24. Investment
• How much cash must be spent before customers provide
enough business to cover operating costs
– Beg or borrow, but don’t pay
– Lease, don’t buy, at least at the outset (even if costs are
temporarily higher)
– Get somebody else to pay for it
– Make fixed costs variable, even if doing so lowers profit margins
temporarily
– Outsource rather than building from scratch
• These techniques all increase runway, buying you more
information before larger commitments need to be made
• They defer the need for as much capital until a time when the
cost of capital is much lower
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25. Business Model Dashboard
Don’t reinvent the Be Different Ask the Right
wheel Questions
Business Model Relevant Analogs and Relevant Antilogs Leaps of Faith around Hypotheses that will
Element the numbers they give which you will build your prove or refute your
you current dashboard leaps of faith
Revenue Model
Gross Margin Model
Operating Model
Working Capital Model
Investment Model
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26. Intellectual Property
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27. IP
• Clean break: Only take memories from your previous
employer
• Founder assignment of IP, including pre-
incorporation
• IP and moral waiver assignment by employees and
contractors
– Tough to fix retroactively
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28. IP
• If patent protection is desired, understand filing deadlines and
disclosure limitations
• Watch for challenging early licenses to customers and partners which
will restrict the business later
– Broad, exclusive, or no-better-deal clauses
• Know the license and recommitment terms of any incorporated or
augmented open source IP
• Establish corporate repositories and related policies for files and
documents, especially when employees are using their own devices
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29. Later Help or Questions
“It's not the strongest of the species which survive, nor the
most intelligent, but the ones most responsive to change.”
- Charles Darwin
dave [dot] litwiller [at] communitech.ca
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30. References
Building a Business Model
- “Getting to Plan B”, Komisar and Mullins
- “Business Model Generation”, Osterwalder & Pigneur
Playbooks for Achieving Product-Market Fit
- B2C SaaS: “The Lean Startup”, Ries
- B2B: “The Four Steps to the Epiphany”, Blank
Inception and Disciplined Scaling
- “Startup Genome Report”, Marmer et al
- “Competing Against Time”, Stalk & Hout
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