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EP245 Lecture 8


Resources Activities Costs

Today, we're going to talk about resources, activities, and costs, and congratulations, this is your last lecture.  By now, you're intimately familiar with the business model canvass. We've talked about value props, customer segments, channels, customer relationships, revenue streams.  We jumped ahead and talked about partners, and right now, we're going to talk about key resources. And for key resources, the real question is what are your most important assets to make your business model happen? Let see what are some most important assets? What are the most important things that are required to make your business model work? For every startup, the thing you're always worried about is money, finance. How do you get the company started? Can you do that on your credit cards? Can you line a credit to a small business loan or then physical resources.  You need a manufacturing line. You need machines.  You need cars.  You need vehicles.  And, how about intellectual property? Or pets? Critical to defending your position or is it customerless? Or should people? And then that kind of get us into what are the key human resources you need to make this happen? Is it the world's best scientists? Or programmers? Or engineers? Is there a specific area in the country that has a concentration of them.  And, so when you think about resources some of these are just kind of natural.  All you have will hire a bunch of engineers and we'll have a building, etc. But actually, you could think about the strategic way.  She is impossible to have headquarters in one place like Silicon Valley, but great engineers back in our country somewhere in Finland or Chile or Russia or these are physical manufacturing plant that is located in the United States or do we need to put it in a place for lower cost manufacturer.  And, so all these resources are the things that you really need to think through even though what they want they might not seem important.  It just gets to be a bigger and bigger problem overtime.  If you have an actual approach to this dose of strategy at least giving it a couple of cycles when you start your company.

Four Critical Resources

So they are four critical resources you need to think about as we just we talk about their physical resources, final resources, human resources, and intellectual resources. Let's take a look at each one. For physical resources, this might seem at first kind of the obvious is your company facilities and that is office base, company location are you in downtown ??? or are you in Ann Arbor Michigan or you were in Delft in the Netherlands or ???. Where the best place to locate your companies headquarters and where are you going to do most of the work. The second part of physical resources where are you going to get the supply for your product and services. So for example you're making silk and whose going to be your silk and weaver supplier in the value chain or your making still, where are we going to get the iron ore or are you going to need a thousands of square feet of warehouse space if you're going to setup a distribution center and what's really interesting is this kindly obviously a fact where you going to put your company facility. Maybe you want to have your manufacturing facility next to the city supplier or you might say, okay we understand their distant and we can manage that remotely but you need to actually think through not only this relationship but as you'll see the relationship between resources and the partners part of the business model campus because some of this supplies and services required deep relationships. Not just ordering out of a catalogue but true partnerships. Now the other thing to just remember is many physical goods if they are in a physical channel are capital intensive which is a fancy word for saying doing a start up like ??? space ads is very different than doing a IOS or android. The amount of resources your going to need for physical goods just are dramatically different and when your thinking about the finance component, you have to really think about what happens after year 1, year 2. etc. How do you scale this business?--And in the 2nd decade of the 21th century a good number clean text startups like scientist startups are now encountering this phenomenon. Does this work great as a startup but there is a value of death for a capital and scam.

Financial Resources

And that brings us to financial resources, is how are we going to get this start-up off the ground? If you're doing a web, mobile, ??? seem quite possible that you could get the company started with your credit cards, friends and family, crowdfunding like quick starter, local angels that is investors who are not professional venture capitalists, but might make some small investments. Again, if all you need is a laptop and Amazon Web Services account, you could be up and running developing an app but just keep in mind that when you're asked to do the financial calculations, there might be great to actually code the app but how are you going to create customer relationships and get, keep, and grow your business, and so financial resources actually gets you back to thinking about other demand creation activities in customer relationships and the cost of your channel as well, so while you could get started here, it's interesting to start pre-computing what other amounts of capital I will need later on in the life cycle of my company. If if you have something in a physical channel or something in the enterprise that requires millions of dollars, I just thought, you're more than likely to approach venture capital firms or corporate partners, so not only can you get money from corporate partners, from the United States, there's some government financing that's available that ??? coming from a university, the first place I would ??? what are called, SBIR or STTR grants and later be as large as half a million dollars to commercialize your company or your technology. Also, the small business administration in the United States offers grants to small businesses to start their companies. In your country, there might be the equivalent of government fund. Now, once your start-up is up and running and you're generating orders and revenue, there are some other alternatives, so for example, you might be able to go to a bank and hand them finance, the lease of expensive physical equipment. You're buying tons of computers or vehicles or manufacturing a ???. You might actually be able to get what's called the lease lines, so you don't have to pay cash for them. The second is if you actually have purchase orders from customers, but these customers don't pay for an extended period of time, to keep what's called factors and factors make a business out of kind of lending you money on that purchase order at a discount. And so if you need cash, factoring is a normal part of financing in certain industries ??? And then finally, if you're buying expensive component, typically hardware in building your system, the vendor clearly wants to sell that equipment to you but you might not have that cash upfront or cash is more important than your mother right now and your start-up, and so you're trying to conserve it. You sometimes can actually get a venture to finance or defer or loan you the money to buy their own ??? and that's another way to kind of preserve your financial resources.

Financial Resources Quiz

So take a look at this list of financial resources, friends, crowd funding, angels, venture, etc., which of these would you use for funding resources and which would you approach when you have an existing company and you need operating capital. So put the right ones that matched into the appropriate column.

Financial Resources Quiz Solution

So it's pretty clear that if you were raising around to capital, going to friends and family or crowdfunding like Kickstarter or angel capital or venture capital or corporate partners, all kind of make sense for financing. Also, going to the small business administration or getting SBIR grants also fit into the financing column. But for operating capital that is money you need when your company is an ongoing concern in generating revenue--well, lease lines make sense, factoring, vendor financing. And what's really interesting is you might also get operating capital from government grants as well and corporate partners that are also fit there. So there's two actually went into the correct category. Well, surprisingly of course venture capital always does follow on rounds so this was kind of a trick question. You could always get more operating capital in subsequent rounds from venture capitalist, not on the corporate partners. Just remember that VCs will invest more money to get more ownership of your company.

Human Resources

Another key resource are people. We sometimes use the fancy word of human resources or HR and I kind of think of people in a start up as two separate categories. One is finding qualified employees. The other is for you to find them. How do you find mentors or teachers or coaches or advisers for you. What's the difference between all of these? Well let me start with the last first. Mentors, teachers, and coaches advance your personal career. If you want to learn a specific subject you find a teacher but if you want to hone specific skills or reach an exact goal, I suggest you hire a coach. That is a specific subject as a teacher, specific skills as a coach. So for example if you want to learn something more about ??? architectures, You can bring in a teacher or take a class but if you want to hone specific skills like how to create great presentation or how to manage people, you hire a coach but the one that sometimes founders forget is that you want to get smarter, better over your career. You want to find someone who cares enough about you to be a mentor. Mentors are very different from teachers and coaches. Mentors are actually a two way street. The only people who tend to want to help you are those who personally think they could actually learn something from you and then they simply liking you. So most of you in your career would have to go on to be mentors but think about the type of people who you've encountered in your career. Implicitly you have been giving something to them while they have been giving something to you. The last category in mentors, coaches, teachers are advisers. Now advisers are people you need to help advance your company success. Mentors, teachers, and coaches know about your personal success as a founder but advisers really kind of bring generic advise. Sometimes to you but also to your VPs and your staff etc. So what you want to have is experienced advise to help you figure out whether your vision is a hallucination but getting specific you want to put together as early as possible an advise report and that's really the idea of expanding your circle of accumulated wisdom as just your investment. A mistake that founders make the first time is thinking that ??? or ??? investors ???. Yes they are your advisers but they are also your boss and so you want to be very careful about limiting your advise to just that circle and they may not have this specific domain expertise you need. So make sure you're expanding your series of advisers available to your company and typically that's done by offering them a small percentage of equity in exchange for some of their time.

Qualified Employees And Culture

The last part about human resources are qualified employees and the culture you set for your company. Qualified employees are the difference between a good idea that never went anywhere and a billion dollar firm. It gets a million times but it's very true. A employees in a B market will always win over B employees in an A market. Hopefully, your A employees in an A market and you'll be figuring out where to put the bags of money, but you want to always hire people better than you, and if that's threatening to you as a founder or if that's threatening to any of your employees, the system kind of collapses from there. You want people who actually can see farther than you or have skills deeper than you, and that's the sign of a world-class founder.

Intellectual Property Overview

The last piece I want to talk about for research is intellectualy property. There are great law firms who can give you tutorials. There is plenty of stuff on the web. But the types of intellectual property, shorthand IP, you want to think about are these. There are 5. One is trademark. Trademark means what can you protect as branding. Like the Nike swoosh. The examples could be marks or logos or slogans. Other type of intellectual property could be copyright. An example is creative or authored works and expressions. You can't copyright ideas, but you can copyright software or songs or movies or website content. The other one is trade secrets. Well I don't want to patent this because someone is going to read the patent. They'll figure it out. So you might have decided that you're going to protect it in a vault. Just like the Coca Cola recipe is supposedly kept in a vault in Atlanta, and it's non-public technology. Also your customer lists might kind of fit in this category, or some secret formulas necessary for our final element in your product. Two things that startups run into all of the time are contracts or NDAs, which stands for non-disclosure agreements. You know what's protectable is in the contract, that is you specify it or somebody making you sign it or offering you a contract or an NDA specifies it. Examples are technology and business information. By the way before we go forward, this is one point I want to mention. Founders sometimes naively believe that they can protect their technology from investors or potential investors by making investors sign a non-disclosure agreement. That just doesn't happen, and it's a naive view of how to protect your technology. My suggestion is, by the way, don't put your source code, your firmware, or your deep insight in the first presentation. Because you're never going to have somebody push a bag of money at you across the table over a series of Powerpoint slides. In fact if an investor is interested, and you are now in meeting 2, 3, or 4, and they say listen for us to really proceed we need to have you open the hood and let us or a consultant take a look, the next question to ask is well if we do that, and it meets these following criteria, is there an investment or not? If the answer is yes then you can make them, or at least require an NDA, because they have gone down the path of interest with you and are serious. The last piece of intellectual property is patent. U.S. patent law has changed in some important ways in the last year. If you were familiar with it it's nice to get updated with it again. What's protectable are inventions. Typical examples are new technologies. You've invented something new. Some hardware, or algorithm, or software, etc. Getting a patent is kind of important.

Intellectual Property Detailed

Just to recap, trademark protects branding and marks. It gives you the right to prevent others from using confusingly similar marks and logos. It lasts as long as you use the mark. The more you use it, the stronger your protection. And there are country-by-country laws that define trademark, and it's optional to register it, but it has significant advantages if it's approved. Copyright just gives you the right to prevent others from copying or distributing or making derivatives of your work. And you could copyright more than just technology. It's what we do for songs, books, movies, etc. It lasts practically forever but doesn't prevent independent development. Someone else could do something independently and come up with something quite similar. You could register it. It's optional but is required to sue for infringement, and sometimes you see copyright labeled on the bottom of something with a little c with a circle. That means somebody is claiming that this is their original work and suggesting that you need their license or permission to make a copy. Trade secrets as we talked about, you want to keep that a secret, and it has economic value. No registration is required. It's basically how safe do you think your idea is going to be inside your company protected with armed guards and a vault. It can last for as long as you take reasonable steps. Contracts--again, it's everything that's in the contract, no registration process. You have whatever protection is defined in the contract. Now patents are interesting. A patent is a government is giving you a monopoly by preventing others from making, using, or selling your invention, even if the other's infringement was innocent or accidental. And this has to be a non-obvious invention. It has to last--the protection lasts for about 15 to 20 years. And there's a whole application and examination process, and it's worth you getting up to date and understanding about patents early on. A very rough rule of thumb is if you're in web 2.0, you probably shouldn't be spending a lot of time on patents, though there are exceptions. If you're in life sciences, in the other extreme, you shouldn't leave your bedroom without a patent counsel walking you out. There are some rules of thumb for each industry and each market, and you really need to spend at least an hour before you start your company understanding what rules apply.

Intellectual Property

Let's take a look at the types of intellectual property. What I'd like you to do is help me understand if we look at the column on the left, trademark, copyright, trade secrets, contracts and NDA, and patent, and match up what's in the protectable column and the example columns to the correct type of intellectual property.

Intellectual Property Solution

Let's take a look at the answer about which intellectual property matched what is protectable in examples. For trademark, what is protectable is branding. Examples are marks and logos and slogans. For copyright, it's creative, authored works and expressions. Not ideas. The examples could be software, songs, movies, website content. For trade secrets, what's protectable is anything. Secrets that you think have economic value. Examples are non-public technology like the Coke secret recipe, or your proprietary customer list, or some kind of algorithm or formula you didn't want to patent. For contract and non-disclosure agreements, what is protectable is whatever you and the person who is going to do the deal with you have defined in the contract and is enforceable in the law. You could have technology, business information, etc. as examples. Finally patents. So what's protectable are non-obvious inventions. Examples are new technology that haven't been previously patented or applied for, and you have to be first.


Now we finally come to the last part of the business model canvas. We've talked about value props, customer segments, channels, customer relationships, revenue streams, partners, resources, and activities, and now we get to cost structure. It's kind of ironic we're getting to the last part of the business model canvas that could actually put us out of business. Because remember costs need to be less than the revenue stream. At least if not on day 1, over time, or else you haven't built a profitable and sustainable business. Let's take a look at cost. If you really think about it, there are two general types of cost. One called fixed cost, that is how much does my building costs? How much are my employee costs going to show up every month, month to month, that don't move. The other things are, what are my most important costs? Are there resources from the resoures part of the business model canvas? Are there activities that are most expensive? Did I have to do something with my suppliers? I really want to understand what's the cost structure to operate the business. What are my fixed costs? What are my variable costs? What are my most expensive resources? What are my most expensive activities? I want to add them all up and make sure that the interaction between cost and revenue has costs less than my revenue. Again on day 1 you could say no we're not going to make money for the next year, 2, or 3, and as long as your investors agree and you eventually make money and can prove to yourself and them you can make money, it's okay to have costs being a little more expensive. But you and your investors need to be in sync about costs versus revenue from day 1. This is something you don't want to surprise investors about.

Metrics That Matter

One of the interesting thing about costs is that in the old days costs and revenue, the minute you started your company, your investors said oh, we know how to track all this. We want you to fill out an income statement, a balance sheet, and cash flow, and we want you to do accounting from day 1 which gives us visibility and forecast, etc. The problem is these were execution metrics. Existing companies execute known plans. You could in fact do all the spreadsheets you want for every board meeting, but in fact they're not worth the paper they're printed on. But you and your maybe rent-a-CFO or accountant have spent a lot of time. Now understand that your VCs or investors, if their professionals, need them for their investors. But what you really need to be doing is working with your investors and your management team is to derive the metrics that matter. If your investors really want to see income statements, balance sheet, client referral, great you could give them fantasy documents all they want. But what your really interested in is trying to understand, what are the metrics that matter for your business? I'll give you some examples. In value proposition, what was the product cost? What was the market size? What share could you take? What is the competition? What are they charging? In customer relationships all the get-keep-grow metrics, some of which we talked about, some of which you'll discover, what were the customer acquistion costs? What were the conversion rates? What was the lifetime value? These are key metrics. This is a lot more important than what is revenue in year 4, because you're just guessing about that. But these are numbers you're going to be living with every day. By the way, what market type are you in? If you remember from our earlier lectures, if you're an existing market, that's a different type of revenue curve than being in a new market. Do your investors still agree? What are your operating costs? What are the basic fixed and variable costs of the business? What's the cost of your channel? What's the margin, the channel needs? How much are you going to have to spend on channel promotion, shelf space, any other channel extra charges? Then again for your revenue stream. Do you now know with certainty the average selling price, the number of customers per year, achievable revenue, how long it takes to close a sell? Here's the number that actually intersects with one of the ones that your investors are worrying about all the time. How much money are you spending per month? Often called burn rate. Not only how are you burning per month, but when we just calculate that out, when will you run out of money? All these numbers are ones that you as founders need to have on the top of your head. No startup has 300 numbers. There's probably somewhere between 5-15 that matter. Maybe you could be the exception, but you as the founder need to know all these parameters. In fact the exercises, see if you could go up to a white board and list them. If you can't, understand that that's your job in searching for the business model. When you know these numbers, the spreadsheets fall out of these. But trying to do it ab initio from some guessing spreadsheet just is some fantasy. You need to get these metrics that matter known, searched, understood, and don't worry, they will change, but the whole game of the business model canvas and the customer development process was for you to find them out firsthand and to experience them, not to have them happen to you.

JerseySquare Revenue

Let's take a look and see how our Jersey Square team is doing in figuring out their revenue streams. That is, how much money each segment is willing to pay, and how would they like to pay this amount? What they discovered, as we found out earlier, is that they have 2 customer segments, sport jersey owners and single game attendees. As you would think that the single game attendees would actually like to pay per rental. That is, you were going to rent a jersery for one time use from Jersey Square, but the people who already own sport jerseys kind of like the idea of an annual subscription. Now getting out of the building, they actually talked to enough customers and have enough data to realize that these sports jersey owners would pay $200 a year to get a clean, pressed, dry cleaned jersey for each game. It isn't clear yet, in their customer discovery process, how much the single game attendees will pay, but they intend to talk to more customers and fill in that data.

JerseySquare PartnersResourcesActivitiesCosts

So, if we take a look at the Jersey² team was worrying about, it's what most start-ups worry about on day 1, is does my value prop match my customer segment, and do I have product market fit? You tend to worry about channels and customer relationships and whether I can make money. You also are worrying about market size, etc. We kind of call this the right side of the canvas, or kind of the front stage. But the back end is equally important. In fact, in the Jersey² team, it's probably critical to get the partners and the activities and the resources correct because if they don't have jersey suppliers or their cleaning costs or UPS costs correct, their expenses could be higher than their profits, so they really needed to nail down partners, and they needed to understand what they needed to be good at. Rental tracking, they needed a good rental system to be able to figure out where the jerseys are. They needed to be experts at shipping and dry cleaning and marketing and customer service, and they spent a lot of time actually thinking about what they had to become good at. So, if you take a look at their key resources, they really needed to actually become good at a series of things. They needed to become great at inventory management because they didn't want a warehouse of costly jerseys sitting around just costing them money if they weren't moving through and being turned. They needed some type of warehouse and logistics system, and the question they started asking even now was, "Is this something we should be running out of our own garage?" "Is this something we could outsource?" "Is this going to become a center of excellence for us and a competitive advantage, or is this something that someone else could do?" All this kind of added up to the left-hand side of this canvas, which is equivalent to revenue streams, but it's the cost. What are the costs of jerseys and warehousing and shipping and cleaning, logistic tracking,, website development, maintenance, customer service, employees, etc, and how does that match revenue streams? Eventually, the right-hand side of the canvas down here needs to be bigger than the left-hand side, not necessarily during the first year, but if it's not, then that tells you how much money you need to raise and how much cash you need before you go cash-flow positive. So, all these pieces kind of add up to the calculus of doing a start-up.

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Whats next

Now that your done with the lectures, it's not the end. One of the things you might consider doing is putting together a lessons learned presentation. This summarizes everything you learned week to week either by watching the lectures or hopefully getting out of the building and talking to customers. What to do with that presentation? Well number 1 is you could post it to the forums, and we'll select the best presentations and put them on Steve's blog. The second is you might use this as a prototype for actually thinking about how to talk to investors and how to talk to other customers. But what do you do next after this class really depends on you. One is, it could have been a good exercise for you to decide whether entrepreneurship is for you or not. Next could have been is you've decided whether your idea is worth pursuing or not. Third is, if you have and you still like your team members after getting out of the building and working hard, you could decide that the next step might actually be to pursue this idea either in an incubator, an accelorator, trying to raise some funds, or trying to take the company to the next step. What I hope is this class gave you a small taste of what entrepreneurship feels like, and what are the things you need to do. There is a ton more to learn. Take a look at the rest of the Udacity courses. Take a look at steveblank.com and Alexander Osterwalder's website, businessmodelgeneration.com. I also recommend checking out startupweekend.org for other events and other courses, and we'll see you when you're a public company.