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Startups Definition, phases and financing stages (part 2 of 2)

Startups are dynamic and have different development stages with different characteristics and requirements.

A.

First, an opportunity is identified, followed by the clear definition of the value proposition. It is equally important to determine the target market(s). Offering a solution for a market which is poised to grow is the best strategy. Never target a stagnant or shrinking market; and try to avoid markets with low profit margins. (This merits a detailed discussion, which is out of the scope of this article.)

Once this is determined you are past the first stage: ideation.

By the end of this stage the core idea exists to start forming a business plan (alternatively business map canvas) and marketing map.

B.

Second, milestones should be defined, as well as the ultimate vision of the startup. In other words, the previous step identified the land to be conquered, and this second step devises the plan and milestones to conquer the land. If you are going in a partnership to conquer this new land, your first and major step would be to clarify what each partner will gain if there are victories in the future. It is even more important to make sure your fair share of the land will be secured for you. Procurement strategy is also important in this phase. Similar to a war, you need to have a truthful definition of the required human and financial resources, you need to know how long it takes to capture and claim the land and the benefits that will materialize. I would also recommend you should think about a  surrender strategy. It is important to know when and how to retreat if risks materialize and cannot be mitigated.

At this point, you are past the second stage: Conception.

By the end of this stage, startup has a strategy. The business plan or the business map canvas are clearer. The four major elements, opportunity, people, context and deal are already thought of, and the first draft of the business plan can be prepared. (Further discussion about a business plan or business map canvas is out of the scope of this article). Partnership agreements as well as an article of association can be drafted out. These drafts may change and may be totally different as further discussions, research and investigation are conducted.

It should be noted that from financing perspective, the company is at seed stage at this point. Financing may be provided to entrepreneurs for the further research, assessment and initial development before actual implementation or even forming the startup.

C.

In third step, implementation begins. More than often, this step overlaps with steps two, and even one. It is difficult to find funders at this stage; even though financial resources are very important already.

People and contributors should  commit, and implementation starts. Finances need to be procured in one way or another to make a progress.

This is the third stage of a startup: commitment

By the end of this stage, the final partnership agreement and shareholder agreements are available. The most dedicated founders and teams will have an initial prototype or demo by the end of this phase.

From financing perspective, you are at startup stage, and busy with initial marketing research and the early development of the product.

Up to this stage, major investments are provided by founders themselves, angel investors, or the three f’s, families, friends and fools.

D.

This is when the market fit and product fit are being validated for the first time. Multiple rounds of validation and iteration and product refinement will be conducted. Initial approach to a small friendly market with the pilot product/service is usually the first step. Often, KPI (key performance indicators) are defined in the beginning or during this stage, and compared against targets as iterations continue.

This is the validation phase.

By the end of this stage, the startup has a decent product to offer to a well-defined market, and might have started generating revenue. Many startups never reach this stage, and many others realize that their product was not the right fit for the market.

From financing perspective, this is the early stage. At this stage the startup has completed product development and is ready (and requires capital) to commercialize its product in the next stage. Investments usually come from venture capitals, and in some cases from strategic alliances, mergers or acquisitions.

E.

Commercialization starts at this point. Startup is now past the initial product development and marketing activities, and is ready for growth. Company may stay at this stage for a long time, depending on the nature of the product, its target market, motives and skills of the founders, motives and priorities of investors, and prospective buyers.

This is the scaling phase.

By the end of this phase, a company is not a startup anymore. Revenue, number of customers as well as the team is expected to grow in this phase. Company may reach the breakeven point or even become profitable. Many startups never get to this stage and similar to the validation phase, many ventures fail at this stage.

From financing perspective, the company is in expansion. Financing is required for the faster growth of the company, and is vital to the survival and successful transitioning of the startup to the next phase. Multiple rounds of funding with the same or different investors may happen during this phase. More often venture capitals and investors provide the funding in multiple rounds to limit their risk. Details of preferences and considerations of investors and venture capitals are beyond the scope of the present article.

F.

Congratulations to all startups who are past all previous challenging phases. The company, however, is in growth and transitioning phase, which has its own characteristics and challenges.

This is the establishing stage. Attracting resources and investors is easier now, as the company has a decent and established product and a group of customers. It is important for the company to remain loyal to their vision and mission. But it is equally important to review and revise it if required for their further growth and the growth strategy of the company. New processes should be defined and adopted, even if the management team is determined to maintain and encourage the startup and entrepreneurial culture and spirit despite growth.

From financing perspective, this is bridge financing.   

At this stage a company may attract many more private and public investors (IPO), or major investors and buyers (Acquisitions/Mergers/Partnerships/Joint Ventures). Decision on how to proceed to the next level depends on many different factors, including the nature of the product, industry, economical environment, rivalry environment, motives of the initial investors, deals and contracts with venture capitals, motives and skills of the board members and the management team, etc.

 

Conclusion:

Startups are exciting, dynamic and eventful. Opportunities emerge. Visions shape. Startups are born and founders put not just their hopes, but their lives in them. Some survive, others sink, and many new ones surface. Being forward-looking, focused, and determined are the main elements of success, or as my two favourite quotes summarize it:

“I skate to where the puck is going to be, not where it has been.”  –Wayne Gretzy, Hockey Star

“If you’re going through hell, keep going.”  –Winston Churchill, British Prime Minister

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Startups Definition, phases and financing stages (part 1 of 2)

 

Many definitions are offered for a startup business by the most renown business people and researchers. I like many of those definitions but I, personally and for the purpose of this article, would like to define a startup in very simple terms, as an entity which is recently formed, to grasp a perceived -but yet to be proved- opportunity, with the hope of future growth.  

I, intentionally, try to avoid limiting the definition to the fancy world of technology and IT ventures in Bay Area and Silicon Valley, but expand the term to include all industries. It should however be noted that mature business models that have been tried many times do not qualify as startups, but as micro or small businesses. Their risks, rewards, market and product fit are known already, and their success, financing challenges, capital structures, development phases and exit strategies depend on factors that are different with those of startups.

Some elements are common among all startups, regardless of their product, purpose and location:

  1. They are newly formed; usually within the past three to five years.
  2. They are risky; the future of the company is uncertain, and the market and/or the product fit is to be tested and proven.
  3. Often, they are not profitable. Technically, a startup can be profitable. But in reality, as soon as a business generates profits, it begins its journey towards a more stable and secure standing which doesn’t fit the startup category.
  4. An opportunity is identified and addressed. Usually if an entrepreneur can not explain the opportunity (value-proposition of their solution) in 30 seconds in very understandable, meaningful and definitive terms, startup is less likely to be on the right track.
  5. Startups have less than 100 employees, and very often even less than a handful. Board members do not exceed five people, and up to a certain stage, there is no revenue. But of course revenue may even reach to as high as $100 million in the luckiest and most successful cases!

A careful review of the definition of a startup and the common characteristics of all startups shows that the following matters are critical and should be determined and well thought of in advance. The first and foremost, a startup should have a clear definition of the opportunity and the value proposition of the solution. Second, the target market should be well-defined. Third, required resources should be identified. That includes both human and financial resources. Fourth the expected return on investment, and the timeline for the return should be determined. Fifth the external risks and threats on which the startup will have little or no control or influence, should be identified. Sixth is the exit strategy; whether the founder(s team) is planning to grow the business organically, arrange an IPO offering,or sell it to a prospect buyer.

When the founder(s) bring all these information on paper, two documents as well as some ideas will emerge:

-a business plan (or alternatively, a business map canvas),

-an article of association, as well as

-thoughts and ideas of who and how to approach to fund the startup.  

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Verizon IoT ThingSpace vs. AT&T M2X

Verizon’s platform for IoT developers, the ThingSpace is now launched after being in development for two long years. This platform is supposed to ‘ease’ the developers’ job to create IoT solutions by providing them with the most commonly used set of APIs, and analytical tools to extract meaningful information from collected and stored data. In other words, Verizon is providing the end-to-end ecosystem to all stakeholders, including developers, customers and services/businesses. This is a remarkable opportunity, as Verizon claims that this scalable web-based platform can connect over ninety countries, and therefore the number of connections is poised to skyrocket in 2016 and after.

AT&T’, on the other hand, launched M2X, a cloud-based data storage, management and analysis tool, without providing a platform or APIs for the actual development of the application solution. M2X APIs, however, can be integrated with other AT&T APIs, such as Advertising, In-App Messaging, SMS, MMS, Speech, U-Verse, and more. I am not sure if Verizon’s platform APIs can be integrated with their other APIs. But I suspect integration will be implemented soon if it is not available already.

It is noteworthy that by nature, the machine to machine connections, which are very similar to the Internet of Things, do not require high-speed (or even real-time and synchronized) data throughput, except for specific use cases. Therefore the very great capabilities of the LTE network which are now optimized for Category 3 and higher devices -with high data throughput and low latency- will be unnecessary for IoT. Verizon is therefore aiming to launch a core network, LTE Category 1, optimized for the IoT for further efficiency. Other telecom companies are also following the same strategy, and standardization bodies are working on further definition and standardization of the network environment and characteristics for IoT.

In short, telecommunication companies have been fearing from two major issues for many years now; first the fact that penetration through mobile devices will be limited to the population and cannot go much further. Second, telecom companies were becoming only a data pipeline for consumers who were demanding more and more data throughput to support high-quality streaming video and multimedia solutions. Now the Internet of Things addresses both issues. AT&T, for example, added 1.6 million subscribers, including 1 million connected cars in their third quarter report. Verizon is launching an IoT core network, which is nothing more than an LTE category 1, to ensure the valuable network resources will be used efficiently. All telecom companies are now embracing IoT solutions, which means that they will be selling “solutions” and not just “bandwidths”.

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IoT: Trend of Acquisitions and Insights into Google’s Strategy

IoT-related acquisitions are on the rise with no sign of slowing down. By June 2015, buyers had spent close to $15 billion to purchase almost 40 IoT companies. This number totaled $14.3 billion for 62 companies in all 2014. So, if the trend continues, the total dollar value spent on the acquisition of these companies will be twice as big this year compared to last year. It is also important to notice that in average, target companies have been valued at $375 million in 2015 compared to only $231 million in 2014. This means that they have been valued by almost 60% higher than a year earlier. (We will talk about different ways of valuation in a future blog post)
The following diagram shows the trend from 2008 to the end of 2014:

Screen Shot 2015-10-15 at 6.38.58 PM

Most (if not all) of these deals are strategic acquisitions, for quick access to a solution that is well-aligned with the strategy of the buyer. In almost all cases, the buyer itself funds the startup and invests heavily in it, and has a representative on the board to control or influence the decisions, without becoming distracted from its core activities.
Google’s acquisition of Lab Nests in January 2014 was a very good example of a big opportunity being seized in a strategic and well-thought move. Other such examples include the Samsung acquisition of SmartThings, Facebook acquisition of Oculus, and Intel buying Basis Science. Google’s acquisition of Lab Nests is very interesting for many reasons, including and specifically because of perfect alignment to Google’s strategy. Google is very well positioned to benefit from the two major perspectives of the IoT: selling the solution itself, as well as gathering the data and monetizing it in different ways, especially advertisements. In fact, the four main verticals that Google is targeting including connected (driverless) cars, robotics, smart homes, and wearable devices target a wide-enough market to gather information about people’s habits, their daily lives, products and services they use, and even products and services that they need, but do not know of yet! An automated home solution, for example, will gather data about the appliances being used at home, trend of usage, the conditions of the appliances (if they need to be serviced or replaced), therefore consumer’s behavior, interest and consumption patterns. Information will be highly valuable for accurately targeted advertising. Wearable devices, on the other hand, will collect data about your body and your health. Data may be used in many different ways. Systems could alarm you well in advance if you are developing unhealthy conditions, which might lead to a stroke or Alzheimer’s (let’s say if you are misplacing and searching for the connected things more often than before, or show signs of unintelligence as you work on the internet and with the “connected devices”). On the other hand, insurance companies might use the same data to raise your insurance premiums, or insure people based on their family health background or habits! Insurance companies may track your driving style and routes to adjust your car insurance rates too. Possibilities are endless; so are the opportunities for Google as the owner of all the collected data, as a search engine, as an advertising channel, and as a solution provider. Now Google is again addressing one of its major flaws: Google didn’t own data initially and was merely a search engine. Now it owns loads of valuable data. Interestingly but not surprisingly, different companies may have different strategic approaches to IoT acquisitions, depending on the industry, their products and services, and where they are in the value chain. Samsung, Intel and Facebook for example are all interested in the IoT, but their strategies and their target companies to acquire are not exactly the same as Google. We will explain more in future posts.

So, in short, the trend in the acquisition of the IoT-related startups and small companies have accelerated, and will not stop any time soon. Sensors and their algorithms, RFID, small-size chips (MCUs), security solutions, data management, data mining and power management are becoming more exciting and attractive than ever. The more defined and clearer the strategy of giant companies across all industries are, the better they can target the right startups to purchase, and vice versa; startups and small businesses that have a clear strategy and know their target purchaser, may align their targets with those of the prospect acquirer, which will increase their chance of being acquired and at a higher value. This is one of the reasons, why many of the most successful and backed-up small and startup businesses are in fact founded by the ex-managers of the big companies, which will end up purchasing them back again.
Again, we will elaborate more on this subject this in future posts.

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Canada Federal Election: Summary of Platforms

If you have not yet voted in the advanced polls, or if you are interested to compare the three parties in their promises -regardless of how they will find enough funding to act on their promises-, this document could be very useful.

It would be also useful if one or several specific issues are of utmost importance to you, and would impact you or the people that you care for.

FederalElectionPlatforms

I hope this helps, especially for those who do not have enough time to investigate and research for themselves.

I, like many of you, hope for a brighter future for my family, Canadians, North Americans and many more in other countries which might be directly or indirectly affected by our choice on Monday Oct. 19th.

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Internet of Things: Growth Outlook and Cyber Security

Over 50 billion devices is anticipated to be connected by the end of this decade. Consider that there are almost 7.5 billion people on Earth. 25% of this population is under the age of 15, which typically do not carry (their own) wireless device –in the sense of generating direct revenue for wireless providers-. Therefore, 50 billion of connected devices simply means 9 connected devices per adult. Again, this shows the benefit of the Internet of Things solutions to wireless service providers, which extends the usage of wireless and mobile connections beyond human subscribers. Wireless providers will receive revenue if the service requires connection, or otherwise, they may generate revenue by acquiring and selling the (developers’) solutions to their (already) high number of subscribers.

One of the biggest challenges to the implementation and wide commercialization of IoT solutions is mobile security, and data privacy. Data is collected from people and things, about people’s daily lives, habits, families, friends, patterns, private interactions, finances and much more. People and things may each have a unique identifier, through which they can be searched and located, and their information can be accessed and used in many different ways including to control and manage them. It is obvious that the opportunity is not such that hackers, cyber criminals, and of course terrorists can easily overlook. A Linux worm emerged as early as November 2013, which is believed to have targeted the Internet of Things, specifically. Rate of mobile malware infection was as high as 40% in countries like Russia and China in 2014. Therefore, educating the end-users as well as securing the infrastructure is becoming increasingly essential to the successful implementation and utilization of IoT services. This is why there are initiatives to standardize and implement mobile security, including an initiative at CTIA.

CTIA represents carriers and other players in wireless telecommunication, and has over 100 members, including carrier, supplier and associate members. CTIA advocates on behalf of them at all levels of government, and coordinates the industry efforts, guidelines and programs to promote mobile devices and is most active in North America. Similar to GSMA (discussed in my previous blog post), CTIA has IoT initiatives, with cyber security as one of the most important ones.

Security is required in different levels, including on the connected module itself, the application, the (wireless) connection, as well as the cloud of data itself. Cyber security initiative covers the end-to-end security of the infrastructure. In fact, many of the same practices that were initially developed for M2M and mobile security, have been used as the basis for the development of the cyber security solutions for the Internet of Things. Items such as security audits, VPN, encryption, multiple air interface security, enhanced security features, software update distributions and immutable root of trust are some of the security solutions and technologies to be leveraged and developed by CTIA cyber security working group.

In addition, governmental data security laws and policies have been in place and enforced for several years now. But now these policies and regulations need to be revisited to ensure they are applicable to and sufficient for M2M and IoT solutions and infrastructures. To name some of these policies and regulations, we can mention FCC’s Customer Proprietary Network Information (CPNI) Rules, Children’s Online Privacy Protection Act (COPPA), Federal Information Security Management Act (FISMA), Health Insurance Portability and Accountability Act (HIPAA), and the Patient Safety and Quality Improvement Act (PSQIA, Patient Safety Rule).

Conclusion:

The magnitude of impact on our daily lives and different industries have been obvious. So is the fact that without the right privacy and security regulations, standards and implementation, convenience and benefit come at the very high expense of security and safety, and will leave us extremely vulnerable to issues such as identity theft, financial fraud, attacks and a lot more. Therefore, there is opportunity for advanced cyber security solution providers and educators including wireless providers, network suppliers, infrastructure providers, wireless device and chip manufacturers in a rather complex and interconnected value chain.

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Non-profits: their contribution to the economy and why their strategic planning is complicated.

Almost twenty percent of employees in Canada work for non-profits, including governmental organizations. A study conducted by Johns Hopkins University in 2013 shows that in eight countries, including Canada, US, Australia and Japan, the non-profit sector grew more than the total economy. In Canada, specifically, the nonprofit sector grew by 6.4% compared to 5.6% of total growth in GDP. The same study shows that non-profit (paid) employees contributed to 7.1% of total Canadian GDP. Volunteers included, contribution amounts to 8.1%.

Interestingly, setting goals and measuring them for businesses could be more straightforward than for non-profits. That is because the ultimate goals for businesses are selling more to target customers, and making the highest profits for shareholders. In addition, the same person who pays, receives the value, and the person who invests has the clear intention of profiting from his/her investment. In non-profits, interactions, transactions, and intentions are not as straightforward and clear.

In a non-profit, the person who pays for the service to be rendered is not necessarily the same person who receives the benefit. Non-profits do not have investors. The donors, who fund the non-profit, do not contribute in hopes of future gain and growth in their investment. They have other intentions; they might donate simply because they value the cause, because of taxing reasons, regulatory obligations, or sometimes for personal (political or other) interests. I would categorize the impact of these complexities on the strategic planning in two folds: 1) multitude of clients with different interests and priorities, and 2) loyalty to mission without being influenced by the interests of specific groups or individual donors. It should also be heavily considered that the less concerned a non-profit is with fundraising, the more it can focus on the fulfillment of its promise to the community.

Non-profits have a multitude of customers, who should all be kept satisfied at the same time, or else the organization cannot survive. These customers (or as they are called for non-profits, clients) include donors, program participants, volunteers (including staff who offer their services for free or at a considerable discount), and the public or –to be more specific- the beneficiaries.

Each customer group is a totally different demographic, with very different needs and priorities. So, goal congruence among the very different stakeholders is key to survive, while remaining legitimate, accountable and ethical. Non-profit leaders need to: 1) remain loyal to their mission by offering promised services to their beneficiaries, 2) keeping their participants involved by offering interesting, decent and engaging activities and services, 3) raise funds by determining the interests and priorities of their donors, and 4) retain the most valuable staff and volunteers to achieve their goals. This should all be conducted at the LOWEST COST, and in the most efficient way. Therefore, innovation, creativity and learning become the inseparable and inevitable elements to the successful orchestration and growth of a non-profit.

The common notion that strategic planning is not essential to non-profits, simply because they do not need to be profitable, is totally wrong. Quite the opposite, non-profits are in much more severe need to follow a very well-thought strategic plan. Such plan should reconcile the (sometimes conflicting) goals and objectives of very different stakeholders, establish the most innovative and keen methods of fundraising, offer the most efficient operational approaches, and attract and retain the most valuable, knowledgeable and dedicated resources. Yet, and to make the tasks even more arduous, all these contradicting assignments should be fulfilled without compromising the mission and objectives of the organization.

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What is GSMA, and its IoT initiatives.

GSMA (or Group Special Mobile) is a European association formed in 1995 and is one of the very few major institutions, responsible for standardization, deployment and promotion of GSM telephony system. The association currently represents the interests of over 800 mobile providers and 200 companies in over 220 countries. Its responsibility and mission is now much broader than the initial definition. With all the new services and advanced technologies, whose widespread adoption and standardization is key to the deployment and commercialization of the innovative services, GSMA has much more to do than just promoting the GSM telephony systems. Its initiatives and activities are now very diverse and include areas from spectrum for mobile broadband to public policy matters such as mYouth, sector regulation and child abuse contents, to mobile payment and transport services. Not surprisingly, IoT is also on this list.

GSMA IoT initiative is titled as “Connected Living” with the vision of enabling a world of IoT, where consumers and businesses enjoy access to rich services, through connection via an intelligent and secure mobile system. This is specifically to ensure operators will have a standardized environment, where all players collaborate in an efficiently-regulated environment, with a network optimized for IoT type of services; these services typically need low to moderate data throughput, and low power in most of the cases. Therefore the two major characteristics of a connected network –for the IoT- should be efficiency and security. In the next level, device management and billing models should be defined. Device management has been important, especially because of some use cases in remote areas, where provisioning, re-provisioning is done via wireless system and not manually. For one instance, M2M was one of the main use cases for embedded SIM several years ago.

Now, I would like to encourage you to think about M2M and the IoT from the perspective of a mobile operator. Without M2M, mobile operator’s potential market is heavily LIMITED TO the population, where each person will require one or may be two mobile devices (plans) in its best case. But M2M and IoT take the market to another level where a wireless operator is not limited by the population, but is offering value added services, and can make money not only through minutes and gigabytes and sometimes bundled plans, but by offering interesting and beneficial services. Think about all different sectors, including health care, manufacturing, retailers, mining, electronic appliances, environment, consumers, and all different targets including children, infants and seniors among many more. So, the opportunity would be enormous for operators who had become just a pipeline for the streaming data, where others were exploiting the value, with no extra or special benefit to mobile operators who just sold the data plans. This is why providers have been closely monitoring, capitalizing and purchasing the IoT startups for the past couple of years, and the wave continues, and should continue for another two to five years.

The M2M an IoT, therefore, could be important to operators, which explains why GSMA, that represents their interest, is now taking the steps, and is working with governments too, to ensure the required regulations and standardized secure environment will be in place for the deployment of consumer-focused and business-focused IoT services to fulfill (as they mark it really well) the ‘socio-economic’ benefits.

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Internet of Things; What about it?

If you have not yet heard about the Internet of Things, I promise you will hear about it frequently starting in a year or two.

To define it in very simple terms, the IoT enables a world of consumers and businesses enjoy rich new services, more efficient representation of old services, and a new lifestyle.

I would not consider the IoT a technology by itself. It is more of a concept than a technology. IoT is an ecosystem of technologies and connected devices, which can be leveraged to develop endless solutions, create intelligence, and improve lifestyles of individuals and profitability of businesses.

The idea is anything but new; for years now telemetry signals have been used to monitor and control pipelines, manage the fleet, monitor your houses as you are away, track businesses’ assets and more. M2M solutions have been around for over a decade now. So, what is the fuss all about?

Over 8 billion people are now connected worldwide. Even more devices are connected. In addition, cloud storage and cloud computing are now very mature. Math is simple; now you may gather data through sensors, connect those sensors to the network, put data on a cloud, process it, and find some meaningful information, or create a solution that makes people’s life easier, or creates value for businesses.

The ecosystem has never been so ready for an endless number of innovative ideas of all scales to enrich individuals, businesses, and social services lives in many different aspects. Certain risks, and at the top of them security and privacy are still a matter of concern, yet not big enough to obstacle the (sound) implementation of the IoT solutions.

Now more than ever, the world is waiting for innovative and creative ideas to exploit the unique opportunity of this very enabling and solid infrastructure.