Monday, October 28, 2013

Profit Driver #1: RISK

“To get profit without risk, experience without danger, and reward without work, is as impossible as it is to live without being born.”
― A.P. Gouthe

This first profit driver is a no-brainer for everybody and common wisdom is full of references about risk as an important way of accruing future gains in business.

In particular, start-ups are, by their nature, extremely risky undertakings. If you ever doubt this, try getting a bank loan based on a start-up business plan. Ok, I'm glad we've cleared that up :)

In a start-up, uncertainty is the only well-known attribute: you don't know exactly who is your customer, you don't know what is the actual need of that customer, you don't know how will you satisfy that need, you don't know if your product will ever work, you don't know if your team will hold during the runway phase, you don't know how long your runway really is.

Let's take the possible risk responses according to the T-A-R-A framework:
- Transfer - can you really transfer the start-up risk? Not really. I'm not aware of any insurance policy for this, other than the normal practice of ringfencing the start-up from other profitable endeavours you might have (if possible, protect your personal assets in the same way).
- Avoid - sure, you can simply cop out and forget we ever talked.
- Reduce - you can share the risk by going through seed rounds and accept contributions (cash and advice) from other VC's or investors. Since you know this will dilute your equity, you know then that reducing risk means also reducing possible future benefits.
- Accept - and that's the only interesting scenario that I want to bring up in this blog entry.

Once you've chosen to accept the risk of entrepreneurship, you might as well just manage it!

Strictly from that point of view, the lean start-up methodology is just that: a very smart risk management methodology for start-ups.

Let's just look at the main chapters of Ash Maurya's excellent book, Running Lean:
1. Document your plan A
2. Identify the riskiest parts of your business model
3. Systematically test your business model

If you want to build a low-burn start-up (and who wouldn't?), you have to read Ash's book. This is one book that compels you to take notes as you read it :)

The lean start-up methodology is grounded in the scientific method: you formulate falsifiable hypotheses (i.e. formulate them in a way they can be explicitly negated as a result of experiments), continuously test them (if possible, in caeteris paribus conditions), learn about customer responses from those experiments and seamlessly incorporate them in your next product iteration.

The more you can rinse and repeat this learning cycle, the less risk and waste will be incorporated in your start-ups early life. The lean start-up methodology teaches you to systematically navigate through the start-up's unknowns, discover them and translate them into your unique advantages in the newly discovered marketplace. Your assets.

On Assets (as Profit Driver #2), next week.

Tuesday, October 22, 2013

A Lean Start-up Perspective On Profit Drivers

Profitability is what makes a company real.
~Elon Musk

When I was still a relatively junior Finance Manager, I have learned from my dearest mentor that, for a business to be profitable, it must have a combination of three key drivers:

Any business needs to venture in the unknown. There is no money left where the markets have already priced in all the information, opportunities and events. Conceptually, the more risk you take, the greater the return you should expect.

By definition, an asset is something of a long-term value that is held by a business with an implied expectation that the asset will accrue future benefits to the business. Again, theoretically, the more assets you can leverage (and think of assets in the broadest way possible), the more profits you should expect as an entrepreneur.

It also matters what type of activities the business undertakes. The more sophisticated the activities, the greater the likely return. For example - engaging in basic web design will earn you far less than creating a web platform with an embedded network effect.

I will tackle, in the next few posts, some opinions on how to maximize the combination of the three drivers to reach profit as a lean start-up.

By the way, the 3-driver concept is now a major methodology used in international tax planning.

Monday, October 14, 2013

Process Re-design, Challenge #03

Re-design Around Roles, Not Persons

Democracy is the process by which people choose the man who'll get the blame.
~Bertrand Russell 

In many business process re-design projects, there is a strong temptation to start re-thinking the processes while having an eye at your current employees as process actors, in terms of capabilities, possible performance considerations, possible conflicts of interest, possible personality clashes etc.

This is the wrong way to go, because you will be designing your new process around specific people or personality traits and this kind of structure is guaranteed to be unstable.

Rather, once the ideal process sequence is established, think hard about the ideal roles that should perform the process activities: how does information flow most naturally (i.e. with the least waste) to their role? how do they get the authority to perform those steps? how are their organizational objectives aligned with the process objectives?

In a smart process, work must occur where it makes most sense.

Sunday, October 6, 2013

Process Re-design, Challenge #02

Always an art, never a science?

Art and science have their meeting point in method.
~Robert Bulwer-Lytton

What makes BPM different than scientific management approaches (like project management, six sigma etc)?

1. There is no global optimum
There is no best way to execute a process, it all depends on availability of resources (time, money, talent) for execution. It is an illusion to think that one may ever reach a global optimum in any process.

2. BPM is a continuous deployment framework
There is no best time to improve / change / upgrade a process. Or rather, the best time to do that is "as soon as possible". A business process must be agile, i.e. must be able to adapt to new conditions (shift in strategy, legislative changes etc). Therefore on-the-go tweaking should be part of the process design philosophy.

Hey, this sounds a lot like the lean start-up philosophy!
1/ start small with a minimum viable process and with a few process metrics that matter,
2/ continuously test your model's falsifiable hypotheses along the way until you get it right and avoid local optima,
3/ tweak it on-the-go based on the learnings above.

Actually, there are at least two major differences:

1. Approach on customer problem
A lean start-up defines how a new product solves an existing / emerging customer problem.
A business process redefines how an existing organization addresses entire classes of existing problems (effectiveness, efficiency, segregation of duties, activity cost, information distribution, asset / function redundancy etc).

2. Build-Measure-Learn cycle
A lean start-up iterates the product. One product iteration may be deployed almost instantaneously. Customer reaction can measured reliably in direct relation with that specific iteration.
A business process iteration manages the change to the process (employee education, transition, organizational feedback, integration into an existing business model). Therefore, a business process iteration needs a significant soak period before it starts to perform as intended.

So... how do we reconcile this?...

More to come :-)