What is a value map?
Preparing Your Value Map
Today’s venture capitalists look to market traction, or “referenceability,” as the single most important element before investing in a new business venture. Brooke Seawell, general partner of Palo Alto-based Technology Crossover Partners, which invests primarily in expansion and late-stage start-ups, says, “The most important thing is, can I go to four or five referenceable customers who can tell me why they like this company over competitors.”
In the old days, an entrepreneur could sit at the closing table in a venture capitalist’s office and point to a slide showing the cumulative number of years behind the sales force that will be coming from the corporate world to work for the new venture. This left the investor to guess what might happen on day one after the investment. Well no longer, as investors are not too comfortable with guessing today. The historical track record of the sales team alone is not enough to get a venture to the launching pad and get it fueled, especially in an environment of constrained capital expenditures across all sectors of buyers.
Today, in these uncertain times, it is imperative that you identify the marquee customers. Validation means you have placed betas and working hack models with customers who believe in what you intend to build out. You must have them lined up and ready to tell your potential investors, your strategic partners, and your competitors that your product is a “must-have.” Remember, the VCs do not want to be the first ones sold, they want to see traction.
The “Catch-22″ is the fact that marquee customers want to see traction too. Recall from discussions about the competitive advantage where the domain expertise and what Porter calls “advantaged relationships” come into play. Any customer worth having today got burned yesterday. Expect a comprehensive due diligence process, even from customers. They will be assessing your financial health, even to the extent of going over your financials with their accounting/finance experts. They will be asking tough questions about how much cash you have in the bank, how well funded you are, and who your investors/backers are.
Here’s questions that key buyers will ask you:
– For technology-related products, they’ll want to know how much you are investing in
R&D, whether you have a famous, well-known “mad scientist,” and who else is on your R&D team and what are their credentials.
– They will be conducting reference checks, checking up on current customers, and reviewing your client list.
– Is your client list growing?
– And who are considered your major accounts?
– Finally, they will be looking over your business partners. Who are they? Are they solid financially?
– And how much and what of the total solution will be outsourced by your venture?
Mapping Your Traction in an Emerging Market
Creating a strategy in an emerging marketplace can be quite tricky. In his book, Competitive Strategy: Techniques for Analyzing Industries and Competitors, Porter points out some challenges. There is technological uncertainty as to which platforms will be leading and which will die.
There is strategic uncertainty. Which approach to the market is best? Who will be the market leaders? And in which direction will they be taking the market? There is a very steep learning curve and there are high costs related to production. But once the product begins to move through the adoption curve, there are also steep cost reductions. There is great potential for spin-offs and product extensions as the fast followers and evolutionary products enter later.
In the absence of any market infrastructure, the “first-time” buyers must be informed, introduced, and convinced with expensive marketing and sales efforts. Most likely the early products will suffer from image and credibility problems, and from poor quality.
There is tremendous pressure to quickly develop new versions of the product in response to customers’ interests and suggestions. Although there are low barriers to entry, and the market might be unregulated, there is difficulty in finding the right suppliers and inputs.
For example, in the early days of the semiconductor industry, the pioneers had to literally invent the processes and work hand-in-hand with their suppliers, sharing daily discoveries and feedback on quality controls.
Outside the venture, the external environment that every organization must interact with must be clearly understood. Your value map is the schematic diagram for your business that helps you demonstrate a graphical representation of your complete business model and like a chessboard, helps you strategically manage the challenges listed above. It clearly demonstrates where, how, and with whom you create value, and how you intend to survive in an established ecosystem.
There are three general types of value:
– The first is delivered through tangible value, the goods, services, and money.
– The second is intangible value derived from branding, customer loyalty, customer ownership, and connections.
– The third is knowledge derived from strategic information about the markets, competition, technologies, processes, and ownership of customer behaviors and customer knowledge.
In order for the product to deliver value to the end-user, it must be sold or utilized in some way in the ecosystem. Most often it is combined with other products, solutions, services, or processes. In other words, it must be integrated and “utilized in conjunction with the services of other assets.”
There are five sets of these “complementary assets”
The first set is called “buyer complementaries.”
This set is not only the physical product that the customer “buys,” but it includes a number of other factors. For example, for the PC to be successful, it needed to be available, have operating and application software, and have peripherals available, such as printers and keyboards.
The second set is called “supplier complementaries.”
This set includes the other parts of the value chain that the innovators must organize, partner with or otherwise access, and in some cases assemble, in an acceptable and profitable order to ensure that the product is produced and delivered to the customer as promised.
The third and fourth sets are” technology-centric.”
“Complementary technologies” come from the combined potential of two or more technologies. For example, the processor chip needed a motherboard and stable operating software for it all to work together.
“Complementary innovations” are innovations that will occur down the road. The success of AOL depended on a system of complementary innovations that were outside the venture’s control, such as phone modems and e-mail, to help move the business along. Sometimes the complementary innovations may or may not be in the industry. In fact, they may be introduced by the innovators and enablers we described earlier. The key point is that “the impact of invention A will often depend upon invention B, and invention B may not yet exist.”
The fifth set of complementary assets are called “specific assets.”
For example, the suppliers to the semiconductor companies had to invent specific assets so that the industry as a whole could scale to meet the fast-growing demand. There can also be specialized assets on the buyer side. For example, Webvan, the home-delivery service for groceries, crashed hard because its business model required the building of a billion-dollar-plus national infrastructure before it could create any positive cash flow.
A value map is a snapshot of right now, which identifies the major flows of product, information, revenues, inputs, and outputs. It details the major benefits, roles, and relationships among your venture’s stakeholders: customers, alliances, and suppliers.
A value map provides a high-level view of your business, and the value it brings to particular markets. The resources that the venture consumes, or requires as inputs, are shown on the left. The outputs the venture generates—products and services—are shown on the right. Create a work-in-progress value map on the largest whiteboard in your office, so that you and your venture team can look at it everyday.
In a presentation, your value map on a PowerPoint slide helps your investors immediately understand your business model, and helps them see how familiar you are with your chosen market. It quickly leads them through a visual display of your current assumptions.