Lean Principles and Fractal Modeling in 4D

©2013 Fractal River LLC.
Roberto Moctezuma
roberto@fractalriver.com
@rmoctezuma
Lean Principles
Fractal Modeling in 4D

Roberto Moctezuma
@rmoctezuma
roberto@fractalriver.com
Lean Principles

What is Lean?
Lean eliminates waste: 無駄 (muda)

Waste kills startups
“Achieving failure”

Ideas
Business
Plan
Investors /
Incorporate
Product
Planning
Form teams
Build
Feature 1
Build
Feature 2
Build
Feature 3
Build
Feature 4
Build
Feature 5
Deploy
User
Testing
Market
Press
Releases
Sell
Customers
& Users
Measure Learn
From this...

Ideas
Business
Plan
Investors /
Incorporate
Product
Planning
Form teams
Build
Feature 1
Build
Feature 2
Build
Feature 3
Build
Feature 4
Build
Feature 5
Deploy
User
Testing
Market
Press
Releases
Sell
Customers
& Users
Measure Learn
… to this.

Build – Measure - Learn
Minimize total time through the loop
Build
Measure
Learn
Ideas
Data Code

Value is what benefits the customer.
Everything else is waste.
Can this product be built?
Should this product be built?

Time
ValueCreation
Learning reduces risk
Risk

Time
Series A Series B or
Early Exit
ValueCreation
Bootstrap
capital
Seed funding Angel round
Learning reduces risk
Risk drives inflection points
Inflection
points
Ideal funding events
Risk

The goal:
Iterate quickly to the next inflection point before cash runs out
(or opportunity closes)
“The goal of a startup is to figure out the right thing to build – the thing
customers want and will pay for – as quickly as possible.”
– Eric Ries

Build – Measure - Learn
Minimize total time through the loop
Build
Measure
Learn
Data Code
Plan

Learn: Start with the end in mind
What are the riskiest assumptions of your business?
What is your value hypothesis?
What is your growth hypothesis?
the purchasing process is a key
pain point for midsize companies.
People are willing to trade their used goods online.
50% of Customers will tell their
friends about my product

Measure: science vs. alchemy
Make a hypothesis.
Establish a baseline.
Test it to prove/disprove it.
Metrics define actions.

Build: The MVP
Get it in front of customers.
If possible, try to sell it.
“Genchi gembutsu”: See for yourself.
“If we don’t know who the customer is,
we don’t know what quality is.” - Ries

Extreme MVP
The video: Dropbox.
The concierge: Food on the Table.
Wizard of Oz: Aardvark.
“Remove every feature, process or effort that does not
contribute to the learning you seek.” – Eric Ries

Optimizing vs. pivoting
If you are building the wrong thing,
optimizing is not good enough
(tweaking does not deliver 10x)

Pivot or persevere
What parts of your strategy are brilliant?
Which ones you need to throw away?
“A pivot requires that we keep one foot rooted in what
we’ve learned so far, while making a fundamental
change in strategy.” – Eric Ries

Product
Strategy
(Business Model)
Vision
Optimization
Pivot
*Source: “The Lean Startup” – Eric Ries
Definition Hierarchy

Vanity vs. actionable metrics
How do you measure your business?
How do you know you are setting the right priorities?
Vanity Metrics
Look at the results of the engine.
Example: sales, customers, etc.
Actionable Metrics
Look at drivers to improve the engine.
Example: referrals, conversion, etc.
Use cohort metrics and split testing to
pinpoint precisely what’s happening

Votizen
Product: A social network for causes
Customer: political activists
Hypothesis:
1. Customers are interested enough to sign up (Registration)
2. The site would be able to verify them as voters (Activation)
3. Verified customers would engage with the site’s tools over time (Retention)
4. Engaged customers would enroll their friends in their causes (Referral)
Split testing Split testing

Votizen @2Gov
Product: A network for causes social lobbying platform
Customer: political activists
Learning:
Customers interested in voter registration technology, not in the social part.
Change:
Use the site to bridge high-tech to low-tech world (printed letters/petitions)

@2Gov
Product: A social lobbying platform
Customer: political activists large companies
Learning:
Revenues were still minimal – political activists willing to pay were <1%.
Change:
Focus on large companies who want to lobby for changes.

@2Gov
Customer: large companies individual self-serve model
Learning:
Large companies signed letters of intent, but didn’t actually purchase.
Change:
Focus on self-serve model for individuals, @2Gov helps you find new people.

@2Gov
Customer: individual self-serve model
Outcome:
• Raised $1.3M from Peter Thiel.
• Expanded to process voter identity in real time for 47 states, delivered
thousands of messages to Congress.
• Was acquired by Causes on January 10th, 2013 (Sean Parker + Joe Green).
• At the time, it had over 200 million voters registered and had rallied over 5,000
campaigns.
“A startup’s runway is the number of pivots it can still
make…get to each pivot faster!” – Eric Ries

Types of Pivots
• Zoom-in: A feature becomes the product.
• Zoom-out: The whole product becomes a feature.
• Customer segment: same need, different customers.
• Customer need: different needs, same customers.
• Platform: application to platform or vice-versa.
• Business model: high margin/low volume or reverse.
• Value capture: different revenue streams/monetization.
• Engine of growth: paid, sticky, viral.
• Channel: sales and distribution.
• Technology: same solution, different product/technology

Exercise
1. What defines your next inflection point?
2. What are the riskiest assumptions you have?
3. What do you need to do to test them?
4. When and how are you going to measure them?

Product
Vision
Definition Hierarchy
Strategy
(Business Model)
Business
Modeling

Business Modeling – Why?
My Startup
The
Investors
The
Customers

The Wrong Approach
Can I Show You My
Huge Business Plan?

The Right Approach: Fractal Style!
start simple
always consider the
complete model
validate critical
points first
add complexity
gradually

CustomersInvestors
Internal: Employees & Partners
Process/Go-to-market
View
Structural/Capabilities
View
Modeling your startup in 4D
Value Prop
View
Financial
View

Business Modeling – Why?
1. A holistic view to identify potential problems early.
2. Ensures coherency across different perspectives.
3. Enables “4D” strategy planning and pivoting.
4. Is easy to communicate internally and externally.

The 4D Model
Customer View:
Value Proposition
(or, “what?”)
Process View:
Go-To-Market
(or, “how?”)
Financial View:
The Money View
(or, “$$$!”)
Structural View:
Capabilities
(or, “who?”)

Customer View
Value Proposition
What?
what is the
solution?
how do they
solve it today?
what is
the need?
who has
this problem?
why you?
what’s unique?
market:
customer
segments
competition:
existing
solutions
your unique
solution
differentiator:
unique value
problem

Start with needs
Are you a solution looking for a problem?

Needs vs. Wants

The Need Scale
If nobody’s too hot on your product… well…

What is your market size?
“If we only get 1% of the market…”

What market are we talking about?
Total market
Potential
Available
Addressable
Target
Market
Have common interest
(“and”, not “or”)
Can buy your product
Reachable by your GTM
Actively pursued

Adoption curve
The MVP
MVP Target
Tolerance

Target Market Penetration
What is your target after 3-5 years?

Target Market Penetration
What is reasonable?
Too Small!
Why not Focus??
Too Big!
Why not Expand??

Adoption curve
Sub-segments & versions
Single offering Fragmentation Consolidation

What is your competition?
How are your customers addressing the need today?
“You DO have competition,… including the Status Quo”

Your Solution
Your Product
Features
Customer Need
Factual characteristics

Your Solution
Your Product
Features
Benefits
Customer Need
How features help solve
the customer’s problem
Can be subjective but
better if quantifiable

Your Solution
Your Product
Value
Features
Benefits
Customer Need
Customer viewpoint:
“I bought this
because…”, or,
“By using this I will…”
Ties directly to the need
Can normally be
quantified by savings,
revenue, speed, risk,
quality, etc.

Your Solution
Your Product
Value
Features
Benefits
Customer Need
Factual characteristics
Customer viewpoint:
“I bought this
because…”, or,
“By using this I will…”
Ties directly to the need
Can normally be
quantified by savings,
revenue, speed, risk,
quality, etc.
How features help solve
the customer’s problem
Different features/benefits can be useful to different audiences
Can be subjective but
better if quantifiable

How are you different?
How do you win?

Shooting ahead of the duck
Competing against what WILL be

Differentiators vs. Competitive barriers
What is your unfair advantage?

Validating your value hypothesis
How do you know your customers’ need is real?
How do you know your solution is valuable to them?
Have you considered switching costs?

Lean Canvas
market:
customer
segments
competition:
existing
solution
solution
unique value
proposition
differentiator:
unfair
advantage
problem
PROBLEM
List your top 1-3 problems.
SOLUTION
Describe your solution.
UNIQUE VALUE PROPOSITION
Single, clear, compelling
message that turns an unaware
visitor into an interested
prospect.
UNFAIR ADVANTAGE
Something that can’t be easily
copied or bought.
CUSTOMER SEGMENTS
List your target customers and
users.
EXISTING ALTERNATIVES
List how these problems are
solved today.
HIGH-LEVEL CONCEPT
List your X for Y analogy (e.g.
YouTube = Flickr for videos).
CHANNELS
List your path to customers.
EARLY ADOPTERS
List the characteristics of your
ideal customers
COST STRUCTURE
List your fixed and variable costs.
REVENUE STREAMS
List your sources of revenue.
KEY METRICS
List the key metrics that tell you
how your business is doing.
MVP targetX for Y

Process View
Go-To-Market
How?
key drivers?
friction sources?
how do we make
money?
how do we
generate
demand?
how do we
sell &
deliver?
how do we
make the
product?
key metrics
customer
acquisition
strategy
revenue
streams
sales and
distribution
model
MVP key
feature list

“If you build it, they will come…?”
The web’s siren song

How do you generate demand?
Paid model: focus on cost of acquisition
2,500 visitors =1 customer
What is your demand funnel?

Sticky model: focus on attrition
Attrition limits the total size of the customer base

Viral model: focus on referrals
Viral coefficient

Indirect model: focus on channel share
Manage conflict, mix and profit pools
Mitigate risk of customer relationship

How do you close sales?
Impact of sales complexity

What are your revenue streams?
Source:
• Direct: from your customers
• Indirect: from other sources (i.e. ads)
Recurrence:
• Percentage of revenue from earlier sales
• Customer Lifetime Value
Metrics:
• Sensitivity analysis
• Key drivers and key assumptions

Friction slows down growth
Product:
• High: services or custom products
• Low: standard products
• Frictionless: downloadable software
Sales:
• High: direct sales force with a complex product
• Low: marketing-driven or indirect sales
• Frictionless: viral sales driven by your customers
Capital:
• High: requires expensive infrastructure upfront
• Low: inventory/capital needs grow with sales
• Frictionless: positive cash cycle, virtual goods

Lean Canvas
market:
customer
segments
competition:
existing
solution
solution
unique value
proposition
key
metrics
fixed and
variable costs
differentiator:
unfair
advantage
problem
customer
acquisition
strategy
sales model
revenue
streams
PROBLEM
List your top 1-3 problems.
SOLUTION
Describe your solution.
UNIQUE VALUE PROPOSITION
Single, clear, compelling
message that turns an unaware
visitor into an interested
prospect.
UNFAIR ADVANTAGE
Something that can’t be easily
copied or bought.
CUSTOMER SEGMENTS
List your target customers and
users.
EXISTING ALTERNATIVES
List how these problems are
solved today.
HIGH-LEVEL CONCEPT
List your X for Y analogy (e.g.
YouTube = Flickr for videos).
CHANNELS
List your path to customers.
EARLY ADOPTERS
List the characteristics of your
ideal customers
COST STRUCTURE
List your fixed and variable costs.
REVENUE STREAMS
List your sources of revenue.
KEY METRICS
List the key metrics that tell you
how your business is doing.

Financial View
Financial View
$$$!
inflection points
and capital
strategy?
what is the cash
flow
plan?
what are the key
financial drivers?
what is the
revenue plan &
projected p&l?
what is the IP
strategy?
projected
p&l
key metrics
projected
cash flow &
burn rate
unique
advantage
funding
strategy

The basic equation
Customer acquisition cost $X
Customer lifetime value $Y
If X>=Y, it’s bad.
If X<Y, it’s good.

Cash flow projections and burn rate
Search for
product/market fit
Search for repeatable &
scalable sales model
Scale the business
Conserve cash Invest aggressively
Q: “What’s my marketing budget?”
A: “If it makes sense, infinite. Otherwise, a learning budget.”

What is your target P&L structure?
The financial X-Ray of your business
Gross revenue 100
Contra-revenue -10
Net revenue 90
Direct costs (COGS) -20
Gross margin 70
Indirect costs (SG&A)
- Marketing programs -5
- Sales -10
- R&D -5
- Admin -10
Total SG&A -30
Operating profit 40

Financial View
• What is our funding strategy?
– Debt
– Equity
– Royalty Capital
– Cash cycle: vendors and/or customers
– Partners
• What is our asset/IP protection strategy?
– What can we protect?
– Will this add value to our company?

The Back of the Lean Canvas
VALUE CHAIN
List key value chain partners and
service providers.
THE TEAM
List key members of the team
and their roles.
CAP TABLE
Describe ownership structure of
the company.
SKILLS
List any key missing skills and
your “next hire”.
GOVERNANCE
List how key decisions are made.
CORE COMPETENCIES
List strategic competencies (i.e.
what cannot be outsourced).
Financial View
KEY FINANCIAL DOCUMENTS
projected
p&l
key financial
drivers
projected
cash flow &
burn rate
funding
strategy

Structural View
Capabilities View
Who?
what skills are
missing or
needed?
what is the right
organizational
structure?
what is the
ecosystem value
chain?
what
competencies
are core?
infrastructure
requirements?
org chart
value chain
map
strategic
competency
list
capital
expense plan
hiring plan
partner plan
training plan
cap table
governance
model

What is your value chain map?
Map product, revenue and information flows.
Identify profit pools.
Highlight strategic strengths & weaknesses.
Map upstream as well as downstream partners.

What does your team look like?
Create an org chart and assign roles.
What are your core competencies?
What skills are you missing?
Who is your next hire? Do you have a candidate?
How do you reward and motivate the team?
Don’t waste equity: bonuses vs. stock.
Use variable comp to increase revenue resilience.

Establish clear governance
Directors vs. Advisors vs. Staff vs. Shareholders

The Back of the Lean Canvas
org chart
value chain
map
strategic
competency
list
hiring plan
partner plan
training plan
cap table
VALUE CHAIN
List key value chain partners and
service providers.
THE TEAM
List key members of the team
and their roles.
CAP TABLE
Describe ownership structure of
the company.
SKILLS
List any key missing skills and
your “next hire”.
GOVERNANCE
List how key decisions are made.
governance
model
CORE COMPETENCIES
List strategic competencies (i.e.
what cannot be outsourced).
Financial View
KEY FINANCIAL DOCUMENTS
projected
p&l
key financial
drivers
projected
cash flow &
burn rate
funding
strategy

Think in 4D.
Value Proposition
What?
what is the
solution?
how do they
solve it
today?
what is
the need?
who has
this problem?
why you?
what’s
unique?
market
competition
solution
differentiator:
unique value
problem
Go-To-Market
How?
key drivers?
friction
sources?
how do we
make money?
how do we
generate
demand?
how do we
sell &
deliver?
key metrics
revenue streams
customer
acquisition
Structural View
Who?
needed skills?
organizational
structure?
what is the
value chain?
core
competencies?
infrastructure
requirements?
cap ex plan
team & partners
cap table &
governance
value map
core capabilities
Financial View
$$$!
inflection points
capital plan?
cash flow
plan?
key financial
drivers?
revenue plan &
projected p&l?
what is the IP
strategy?
key metrics
profit & loss
cash flow
funding strategy
unique advantage
org chart
sales model
how do we
make the
product?

Iterate through each view
Customer View:
Value Proposition
(or, “what?”)
Process View:
Go-To-Market
(or, “how?”)
Financial View:
The Money View
(or, “$$$!”)
Structural View:
Capabilities
(or, “who?”)

Thinking in 4D: Examples
1.Enterprise to SMB
2.Viral to paid engine
3.Add a service offering

The 4D Model
Value Proposition
What?
what is the
solution?
how do they
solve it
today?
what is
the need?
who has
this problem?
why you?
what’s
unique?
market
competition
solution
differentiator:
unique value
problem
Go-To-Market
How?
key drivers?
friction
sources?
how do we
make money?
how do we
generate
demand?
how do we
sell &
deliver?
key metrics
revenue streams
customer
acquisition
Structural View
Who?
needed skills?
organizational
structure?
what is the
value chain?
core
competencies?
infrastructure
requirements?
cap ex plan
team & partners
cap table &
governance
value map
core capabilities
Financial View
$$$!
inflection points
capital plan?
cash flow
plan?
key financial
drivers?
revenue plan &
projected p&l?
what is the IP
strategy?
key metrics
profit & loss
cash flow
funding strategy
unique advantage
org chart
sales model
how do we
make the
product?

The Lean Canvas
Customer View:
Value Proposition
(or, “what?”)
Process View:
Go-To-Market
(or, “how?”)
Financial View:
The Money View
(or, “$$$!”)
Structural View:
Capabilities
(or, “who?”)

The Back of The Lean Canvas
Customer View:
Value Proposition
(or, “what?”)
Process View:
Go-To-Market
(or, “how?”)
Financial View:
The Money View
(or, “$$$!”)
Structural View:
Capabilities
(or, “who?”)

It’s
Your
Turn!

Lean Principles and Fractal Modeling in 4D

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