Worl Domination

Many entrepreneurs find it easy to explain how their vision will work in version 5.0: it’s a fully built out product with all the bells and whistles (e.g. brings together 2 or 3 parties which conduct business over the platform) and has major advantages over existing solutions: you don’t need cable providers, big publishers, major telcos, or IBM anymore.

Version 5.0

V5.0 is the core of an ecosystem. Network effects build powerful barriers to entry and allow the business to scale significantly. The business idea often deals with disintermediation of the existing networks and the new platform will be better at targeting or distributing ads and content because it generates more data than other platforms.

All that is needed is a bigger team and some capital to really kick this off.

So what’s the problem with this?

• The empty disco problem: You build the greatest club (think platform) but DJs will only come if the audience is there and vice versa. Guys will only come when girls are there and the girls… you get the idea…
• While the idea is generally right, the anticipated solution doesn’t quite fit the actual customer need quite so well. Instead of running the greatest club in central London you are now in the suburbs 3 hours away from where all the fun is happening
• Competing head on with huge corporates who can typically mobilize x-times the amounts a startup can raise for funding if they see their core business threatened

Working out a way how value is created by Version 1.0 and even in Version 0.1 has several benefits:

• You are addressing a space which is probably too small for the big corps. So no heads on competition for now due to the Innovator’s Dilemma
• Because there is a path from 0.1 to 5.0 you have a clear idea on how to expand and tap into big markets later on
• You can show traction early on and are – very important – able to celebrate successes. Besides of the obvious boost to moral this will greatly ease hiring and talking to investors
• Insights discovered while progressing from v0.1 to v5.0 provide agility and will ultimately deliver a much more refined and product which delivers bigger value to customers

V5 should be the vision and V 0.1 your immediate goal (unless you like China-style 5 year plans) and a dashboard is a good tool to translate the vision into operational goals and financial plans:

Dashboard v0.1 to v5

A dashboard is basically an Excel or Google Docs Spreadsheet where keep track of your hypothesis, goals and how you are progressing towards them:

For example for a website:

• Hypothesis: Attract 1000 unique visitors per day to you site
  • Metric: unique visitors
  • Source
    • 1/3 advertisements
    • 2/3 content driven
• Hypothesis: Conversion of visits to RSS subscriptions will be 2%
  • Metrics: visits, RSS subscriptions
  • ….

The Dashboard aids building a coherent model around the business. It links operating results to derived metrics and ultimately to financial performance. This bottom up approach also helps raising red flags early in case something is going wrong.

A sample set of derived/2^nd level metrics could be:

• Churn / retention rate (how many users come back every month / year)
• Customer Lifetime
• Revenues / Customer per month
• Customer Lifetime Value
• Customer Acquisition Costs
• Viral referral rate
• Ranking of most popular device, most popular content / channel
• Re-engagement strategies & metrices (how you win a customer back)

It’s important to have aggregate views on these KPIs but it brings great advantages to do cohort based analysis.

Cohort analysis

For this you will need to keep the raw data separate per channel (e.g. AdWords, blog, Twitter, exhibition, …) and per time frame (e.g. November 2011, December 2011). This allows you to determine the actual value per channel because it might well be, that some channels tend to attract customers which are of more value (more revenues, less service intensive,…) than others.

Also, a comparison of time frames allows to easily measure the success of product improvements and get a good feeling that you are delivering the same value to your current customers as you did to early customers. For an example of cohort analysis you might want to have a look at Fred Wilsons’ analysis of his Twitter followers: http://www.avc.com/a_vc/2009/10/the-cohort-analysis.html