Sim lssns B Y Qi Y Dy Jb!
7
StepS to a to a
SucceSSul Startup
Naeem Zaar University University o Caliornia Berkeley www.s-dvis.m
7 Stps t Succssul Sttup Sipl Lssns B Yu Yu Quit Yu Dy Jb!
Copyright © 2009 by Naeem Zaar. All rights reserved. No part o this book may be reproduced or transmitted in any orm or by any means, electronic or mechanical, including photocopying, recording or by any inormation storage and retrieval system, without written permission rom the author.
Published by :
i muntin Pss Cupertino Caliornia USA in
[email protected] www.FiveMountainPress.com
ISBN: 978-0-9823420-0-8 Printed in the United States o America
stinils: “Mny s biv h n dy w wi s wn mnis. B wh d y nd knw b y k h ivsib s qiing y jb? Nm Z’s Z’s 7 Steps to a Successful Startup is js wh h nw nn nds. pviding gidn bsd n knwdg gind by xin! I mmnd his bk wh nsid nhing hmsvs n his xiing jny. j ny.”” Jerome S. eNgeL excuti Dict, Lst Cnt entpnusip & Inntin Unisity Clini, Bly “Sin, ming, nd—his bk is invb wih n-h-mny dvi h wd hv bn iss whn I ws sing my s mny. I d k iim n wh Nm idy smmd in js w dzn gs. I’s ms d ny nn!” SLavIk ZorIN und nd Ceo Syncny Systs Nw Y, NY “I hv bn wih ss in my msy s Vp ngining nd I y s h hving wd Nm’s dvi wd hv hngd h hs mnis h I ws invvd wih—vy insigh nd i. exn!” D. BULeN erBILgIN vP eninin SS8 Ntws, Clini Clini “Nm hs dn n snding jb ining h ii ‘must do’s’ nd do’s’ nd ing hm his wn i vns. Tis is ms d nyn siing bm h ‘employee ‘employee number one.’ ” D. aUL kUmar vP SS optins Sn Stw Clini
7 SePS o a SUCCeSSUL SarUP
bl Cntnts Intductin—Naeem’s Story
2
Cpt : Portrait o an Entrepreneur—Are You You One?
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Cpt 2: Essential Preparation Steps or Every Entrepreneur
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Cpt 3: Te 7 Steps to a Successul New Venture Venture
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Cpt 4: Step Zero
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Cpt 5: Step 1—What is the Unmet Need?
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Cpt 6: Step 2—How Big is Tis Market?
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Cpt 7: Step 3—Can We Create Dierentiated Market Positioning?
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Cpt 8: Step 4—How Will I Make Money and Who Will Pay Me?
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Cpt 9: Step 5—Why Us?
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Cpt 0: Step 6–Why Now?
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Cpt : Te End—Or Is It the Beginning?
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Cpt 2: How Will I Know When I Am Ready?
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Cpt 3: Epilogue
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abut t aut
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IntductinN Intduc tinN’’s Sty a D C u u
I
nsomnia seemed to be hitting me hard. I tossed and turned throughout the night, too excited to slow my racing mind. omorrow I would be resigning rom my job as a principal engineer
at Honeywell Research Center—the rm at which, resh rom rom Brown University with a degree in electrical engineering, I had worked or ve years. My career so ar had been an exciting and ast-paced ride; I had received ve promotions and taken on more responsibility each year. I had made a great start in my proessional lie, but the idea o starting my own company was just too compelling. I wanted to create something new; besides, I had always coveted the title “Vice President o Engineering” and was desperate to see it on my business card. Now, at the ripe old age o 27, I was about to ulll my ambition. Five o us, all engineers at Honeywell and Sperry Univac, had been working together or six months. Te rozen tundra that is Minneapolis in midwinter oered the perect environment in which to hole up inside as we worked on our brainchild during the nights and weekends rom January through April. As engineers, the idea o developing customized computers that could streamline our jobs designing complex electronic circuits was exciting. Electronic design automation was a new industry—so new that it didn’t even have a name yet. Such programs were simply called computer aided design (CAD) tools. Te big day eventually arrived. On May 15, 1985 I became Employee Number One and VP o Engineering Engineer ing at XCA XCA, our new company. Six months o nighttime and weekend product development had led us to believe that we had a airly good idea o what we wanted to do and how the business would run. We even managed to attract an angel 7 Stps t Succssul Sttup
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INroDUCIoN—Naeem’S SorY
investor, who agreed to und us or ten months by providing $50,000 each month in return or a small equity stake. Te investor also agreed to let us use his abandoned warehouse as the startup’s headquarters. Within one month o our ocial ounding date, we had about ten people working in the warehouse. Te pace was everish! We worked seven days a week, and a 14-hour day was considered a short day. Colleagues looked at you strangely i you tried to leave by 10 p.m. Our extended hours and tireless eort, however, paid o. Loud cheers greeted the machine as it computed the correct outputs on the screen or the rst time. We could not have been more exhilarated. Te date was July 17, 1985.
WeLve reaSoNS WhY WeLve BUSINeSSeS aIL 1. Sving bm h ms
ss n wiing y sv y wy 2. Tinking h y n d i
by ys (wih nding m) 3. lking s mng m
mmbs—nd n ddssing h iss.
a D Sttd
4. Bing vndn dgmi
Fast orward two years. Tings were very dierent. By this time, there were 44 employees in all, and we had assembled en masse in the
5. lking is, sing
company’s large conerence room. Te purpose o our meeting: to announce the layo o all but six employees, the ring o most o the management team, and the installation by investors o a new CEO who knew nothing about the industry or the product on which we had worked so hard.
nd n qsining ys. s—ying b vyhing vyn. 6. Mking myi: n hving
h visin nii hngs in h mk. 7. cnsing hbby wih
bsinss. piing iny nd n 8. piing
We were divided into two groups and placed in two separate rooms. Ater a ew minutes, it was announced that everyone in Room One had been terminated. A very small team remained in Room wo; their sole job would be to sell the company’s assets. I was a member o this team. What had happened? How could a team o bright young entrepreneurs be shut down so unceremoniously? Ater all, we were aces in our eld and had worked assiduously to create a product that attract-
knwing y miin. iing y dn y 9. iing mk nd sms. 10.N hving ngh sh
nni ss vib. 11.sing n mk sgmn
sm ssin y nd h hs in i. 12.Sing bsinss h wng
sn sns
ed customers in a burgeoning industry. What had we done wrong?
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INroDUCIoN—Naeem’S SorY
ou mists In our excitement and enthusiasm—not to mention our naiveté—we made a ew basic mistakes, the same mistakes that many startups make: • We ocused on a product that we wanted and knew about, rather than one that potential customers wanted. • We neglected to speak to potential customers or users. • We We had no idea whether there was a market big enough to support our product. We had no grasp o marketing or sales, and our concerns about • We secrecy kept us rom seeking expert advice. • We did not validate any o our key assumptions in the market.
Lssns Lnd Tis book will examine these questions and oer to you the wisdom distilled rom the dozens o lessons I have learned in my years as an entrepreneur—lessons learned by working at another ve startups ater XCA, advising countless other startups, helping to start over a dozen more companies, and mentoring hundreds o ellow entrepreneurs. Te nuggets o wisdom I’ll share will help you avoid the mistakes I made and set you on a path much more likely to result in success than the one I ollowed early in my career. Just a ew weeks o homework could have saved the XCA team a lot o heartache, opening the door or us to become a successul company with long-term staying power. We were woeully uninormed; we had no idea how important it was to consult users and buyers, since we were users ourselves and thought we had an up-close-and-personal grasp o everything that the market wanted. We We never sought the advice and guidance o mentors or experienced businesspeople. In short, we made nearly all o the business mistakes possible—and we paid dearly or them. Tat is why I have written this short book: to help 7 Stps t Succssul Sttup
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INroDUCIoN—Naeem’S SorY
others avoid these very costly errors. Along the way, I will address the many issues and questions that beleaguer entrepreneurs looking to start their own business. Te cost o ailure or a startup business is high. You will invest both time and money into your business and, i your business ails, you
he CoS o aIL aILUre Ure
will have wasted all o it—unless you learn rom your mistakes and
p n d n iz hw xnsiv i is, in m wys hn n, s bsinss. b sinss. usy mmi nywh m n h ys hi ivs sing bsinss. T s bing ndmyd ding his id n sv hndd hsnd ds. T hd ss— h mnis h y wi snd n qimn, snn, nd s— signin, n mnin h “s ss”—h ss”—h h sing bsinss ks n y hh h h nd inshis. Ts ss ms n b ndsimd. his sn, I biv h vy nn shd k sisy wih his h vd ns nd sk hi s b diving in nw vn. T ss n b wh i, b i is vi h y d sm min b y s.
create a stronger business as a result. Tis ebook asks a ew basic questions that will signicantly increase your chances o success in business. Tese questions are what I call the “7 Steps to a Succesful Startup.” I you spend time answering these questions over the next ew weeks, you will jump to the ront o the line o entrepreneurs striving to set up a successul business. Te seven basic steps I outline in this book will prepare you or the realities o startup lie beore quit your day job and jeopardize your amily income. Most entrepreneurs are so excited about their business idea that they skip this essential preparation and are devastated when their business ails. Don’t be one o them! Tere will come a point when launching yoursel headlong into your venture and leaving behind your old income source will be inevitable. I you ollow my seven-step method, you will be able and ready to identiy that point precisely and seize your opportunity. opportunity. Tere are no two ways about it: starting star ting a company is challenging. But the huge mortality rate o business startups is linked, more than anything else, to a lack o clarity, clarity, planning, and preparation. In launching a business, planning and preparation are vital: they separate potential success rom potential ailure. Tis book enables you to gain that clarity and plan or success.
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INroDUCIoN—Naeem’S SorY
It’s Nt all D nd gl Te ailure statistics are rightening, and may well put you o the idea o being an entrepreneur and setting up your own business. Indeed, starting a business is scary and stressul! But the entrepreneurial lie oers huge benets. You make your own rules. You own your own company. You develop your own strategies and see them through. Most gratiying o all, you pursue the things you desire at your own speed. It is incredibly satisying to create something rom scratch and watch it transorm rom a startup to a successul business with hundreds o employees. rue entrepreneurs have a passion or making things happen. Let’s Let’s get to it!
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1 Ptit n entpnu a Yu on?
M
ost people think o an entrepreneur as a risk taker— someone who is reckless and impulsive, perhaps even
a gambler. Having been around thousands o entrepreneurs, and being one mysel, I have never considered entrepreneurs to be reckless risk takers—just the opposite, in act. a ct. A true entrepreneur works constantly and always does due diligence to maximize the odds o success. Entrepreneurship is a state o mind. It involves the ability to see around corners, to imagine and predict what is possible, and to organize these thoughts into an execution plan. A true entrepreneur will then act upon this plan to make things happen. Most people are
46% wks g mnis gd h hi jb ins wih sn nd miy nds; ny 31% sm-bsinss mys sid h sm. Harris Interactive, September 2006
able to perorm the rst two steps, but the majority all short when it comes to the third step, the execution phase.
T Cctistics n entpnu Having met many successul entrepreneurs, and having worked with or mentored many o them, I have noticed that they all share the ollowing characteristics:
) Ty ctbl “liin in .” Many people simply cannot live or make decisions without the clarity oered by empirical data. It is just too hard or them to make decisions based only on anecdotal data and a gut eeling. But this is oten exactly the type o move demanded o an entrepreneur. I call this approach “living in a 40-70 zone”—making decisions with at least 40% but usually no more than 70% o the data normally required or action. In a large corporation, it would be considered reckless to make decisions with so little inormation. Large com-
62% nns in h u.S. im “inn div” s h nmb n miv in sing hi bsinss. Northeastern University’s School of Technological Entrepreneurship, October 2006
panies are, as a result, oten slow to act, since they must collect
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PorraI o aN eNrePreNeUr—are YoU oNe?
a great deal o inormation beore making them and then create consensus around the decision.
2) Ty bl t ssbl t ppl t llw t. Very rarely does a solo ounder create something o value. Almost without exception, more than one person is behind a great company. I an entrepreneur’s vision cannot convince at least one other person to join him or her, then perhaps the vision is not so antastic.
a ids ms b hisd wy in d mk hm vib.
3) Ty sw psistnc nd dtintin. It takes persistence—a key quality in an entrepreneur—to make any idea stick. Persistence should not, however, be conused with stubbornness. Stubbornness is a ailing. It can make you dig in your heels and a nd cling to an idea that’s better released. Entrepreneurs are always listening or and using the data they receive to tweak their ideas until an idea morphs into something undable, something that gains traction.
4) Ty cnictin. rue entrepreneurs are good at paying attention to trends and adjusting their thought processes accordingly. Such fexibility is always balanced with a healthy dose o conviction; nothing is gained by bending your ideas to every conversation you have. Tat would be exhausting!
an nn is bi ik s wk; hy s wih w ih sb mb whih, w hih, v im, wih ski, ssin nd hd wk is shd in bi hing.
5) Ty pssin. Entrepreneurs have a passion or an idea and are not put o by the prospect o hard work. Without true passion, an entrepreneur would give up at the rst obstacle. Passion motivates the entrepreneur. entrepreneur. A true entrepreneur works constantly on ideas, chiseling away at them until they are working and undable. I have never seen an idea go to market as originally conceived; an entrepreneur’s entrepreneur’s ideas evolve, and he or she oten shapes them while speaking with customers, users, buyers, and infuencers. Tese in-process innovations may relate to the market, to technology, or to the chosen business model. Successully rening an idea requires that the entrepreneur remain open-minded, willing to amend ideas based on conversations with real-lie potential
Sss nns vy sbbn b hi visin, b xmy xib b hi xin.
users. We will talk more about how to collect this data later. 7 Stps t Succssul Sttup
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2 essntil Pptin Stps ey entpnu
I
you want to succeed, a certain amount o preparation must take place beore starting a new venture. Smart entrepreneurs
make these preparations beore quitting their day job because doing so reduces the risk inherent to the endeavors they are about to undertake. Your investors and employees will expect you to have completed this phase o planning and preparation, and you, more than anyone, must
M hn 70% y-sg nns dy myd wks. GEM, January 2006
nd the answers to certain questions beore taking the plunge and chasing your dream. I will walk you through these steps to your success—the planning that will clariy your thinking beore you dive headrst into a new idea. In my experience, less than 10 percent o the people who come to me proceed with their original idea ater completing these steps. I suggest that you start this seven-step preparation program while you are still employed, in school, or doing whatever else you usually
ake Noe:
do. You will only be ready to launch into the business properly ater you have completed these essential steps, which can take anywhere
a ming hs ss, y wi b in siin wi bsinss n. Y wn’, hwv, b dy nh y bsinss y. usy nh hs, n six mnhs ng, mmns h inii ins m. Ding his hs, y wi wi bsinss n nd is mny, nd ny hn nh h bsinss.
rom three to six months. Tey can be completed more quickly, but I have never seen them require less than two months—and it can take much longer than that. Don’t rush and do a sloppy job; each step is vital. Isn’t the uture success o your business worth spending some time to plan properly now? Tis period o preparation is, in my opinion, the most important part o any project you will undertake as an entrepreneur.
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3 T 7 Stps t Succssull Nw vntu Succssu vntu
M
y 7-Step program consists o seven basic questions that you must able to answer beore creating your business. I
will walk you through each question, showing you how to get the answers you need to move on to the next one. Let’s look at these seven basic questions that every would-be entrepreneur should ask. I have intentionally numbered the rst question Step Zero, since it is unique among the questions and is so undamental to your success. 0) Wy d I wnt t d tis? ) Wt is t unt nd? 2) hw bi is tis pptunity? 3) W ls is tyin t t tis nd? Wt but u ppc is difnt nd uniqu? 4) hw will I ny (w will py )? 5) Wy us? 6) Wy nw? Some o you may nd these seven questions very pedestrian. You may wonder how they Jibe with the business books you have read. ranslating these seven essential questions into MBA jargon might make them more meaningul to some o you: 0) a I cl but y psnl nd pssinl titins? ) Wt t sll w tt? 2) Wt is t t siz? 3) Wt is t cptiti cptiti lndscp nd wt is u difntitd t psitinin?
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he 7 SePS o a SUCCeSSUL NeW veNUre
4) D w sclbl businss dl? 5) D w t wit t it xpinc, isin, nd citnt? 6) Wt but t dynics s NoW d ti t ct? At the end o the day, in whatever orm you phrase these questions, they must be clearly xed in your mind. Answering these questions will require signicant preparation, including: • Research • Soul searching • Conversations with real potential customers and users (these groups may not be the same!) • Conversations and discussions with partners and your team Addressing each o these six topics (not including Step Zero, about which I will speak in the next chapter) requires conversations with real people, not just Internet research. Tat is why this process takes weeks to complete. You will nd, however, that it is worth every minute.
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4 Stp Z
here is a preamble to this preparation. I call it “Step Zero,” and it is a vital step i you really want to be an entrepreneur. entrepreneur. Entrepreneurship is not or everyone; you may nd out during Step Zero that such a lie is not really what you want. But it is better to nd out now, beore you lose money, time, and sleep over your business. In Chapter One, “Portrait of an Entrepreneur,” we discussed some o the attributes o an entrepreneur. Do you have these attributes? Tink careully. Being an entrepreneur is incredibly satisying, not just nancially (and not always nancially!), but also at a deep personal level. It is a liestyle and a mindset. Go back to Chapter One and a nd read it again. Look deeply into yoursel. Are you a true entrepreneur? Tink, too, about your amily. Will Will your wie/husband/partner be happy about this dramatic lie change? Don’t move on to Step 1 unless you are sure that being an entrepreneur is or you. Are you really ready or this journey? I strongly advise people who come to me to get away or a weekend so that they can think through this question without being interrupted by people or the noise o V, iPods, and mobile phones. ake a hike in the orest and think through the above issues one by one. I you come back still committed to the idea and the journey, journey, then get ready to start on the remaining six steps.
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5 Stp Wt is t Unt Nd?
E
very business venture should seek to satisy an unmet need, a “pain point” or customers. In other words, every business should oer something that prompts people to part with their hard-earned money, money, either to solve s olve a problem or to ulll a desire. Sometimes the need is not obvious; some entrepreneurs, like Steve Jobs o Apple, are able to see “around the corners” to ll a need people never knew they had. At other times, the need is staring everyone in the ace, but no one has been able to ulll it in a way that adequately meets the customer’s customer’s needs, that solves the problem probl em well enough. Te completeness o your solution is impor important tant to the viability o your idea. Innovation can occur in other aspects o a product than its technology: it can take place in a business model or purchasing method. Case in point: Sotware-as-aService (SaaS), in which customers can use sotware by logging onto the Web rather than storing all o a program’s data on their own computers or servers. Customers pay as they use these services, signicantly reducing the cost o installing and maintaining expensive sotware.
Te most successul startup businesses identiy a need and then provide a solution, rather than coming up with an idea and then trying to nd a market or it. A good example o a business idea that satises a preexisting need is one o the big search engines, such as Yahoo!, Alta Vista, or Google. When the Internet rst came into being, it seemed miraculous: there were tremendous tremendous amounts o inormation on it, and the world was quite literally at the user’s ngertips. Te problem was that it was hard to nd the right inormation. Search engines oered a solution to this pain and rustration, making it easy to nd the right inormation. Tey met a need with a solution. Furthermore, Furthermore, they created a compelling and eective model or advertising to users, as they knew precisely what these users were searching or. 7 Stps t Succssul Sttup
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SeP —Wha IS he UNme NeeD?
Entrepreneurs can usually identiy this unmet need through research. Observe people’s people’s behavior; think about and identiy what can be done to make their lie easier, simpler, more ecient, or more productive. Te best ideas usually come rom deep domain knowledge—expertise in a certain eld. Many entrepreneurs, however, make the key mistake o not talking to enough people to validate what they believe.
Dn’ mk ssmins. awys vid y bis.
Don’t make assumptions. Always validate your beliefs . Validation is an essential part o identiying this unmet need. Here are several techniques you can employ to this end:
) l t ppl—alk to several people (ideally several dozen people) and describe the area in which you seek eedback. Follow the method below to gather and document what you hear. You need to be sure that you really are homing in on an unmet need, so talk to enough people to satisy yoursel o this act. —All it takes is a 2) P sipl suy n t Intnt —All short survey o less than 10 questions. Several companies, including www.suyny.c ing www.suyny.c or www.zn.c or www.zn.c,, oer a ree account or two to our weeks. ake advantage o it!
3) eply s studnts lncs to talk to users or customers on your behal, once you have done a ew interviews and gured out a set o questions that will clariy the picture or you.
Dn’ ns ss nd sms. Ty n h sm , b smims hy n. In hh, xm, h ss d my b ds d s nss, b h sm (h n wh dids hs) is sy cIo (chi Inmin o) cto (chi thngy o) nh dminis. Y Y ms k bh ss nd sms nd ns h h sin y n f ms hi nm nd simis hi i in sm sm signin wy.
Do not delegate the rst ew interviews inter views to others, however; do these yoursel, because you need to get a personal eel or the market.
Wt dt yu sin? When you talk to people, don’t start by telling them what you are thinking about. Instead, ask how they are living without your invention. Ask them what alternatives they have considered and why they have not used one o these alternatives. Listen to their answers and ask probing questions in response. Tis second and third layer o clariying questions—I call it “peeling the onion”—will help you to 7 Stps t Succssul Sttup
Whn y k , dn’ s by ing hm wh y hinking b. Insd, sk hw hy iving wih y invnin.
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SeP —Wha IS he UNme NeeD?
understand their thought processes. It is essential that you dig deeply, burrowing beneath the rudimentary answers people usually give. Write down what you hear and systematically record your observations. Remember, your aim is to understand their need, NO to tell them about your idea. You can also ask some questions to learn about price points. Another clarication worth obtaining is how the solu-
rmmb, y im is ndsnd hi nd, Not hm b y id.
tion would be purchased. In other words, i you were oering the ideal solution to a particular problem: • Wh wd by i? • Wh is hi mny i? • Hw mh n h hs snd wih v m dmn hd bss? All o this data will be essential or you as you perorm market research and ormulate your product. Later, it will inorm your pricing and launch strategy. strategy. Every once in a while, I hear entrepreneurs saying, “What if my idea is
so unique and revolutionary that no one can give me any meaningful feedback on it?” I usually nd, ater I have helped the entrepreneur think through this question careully, that almost all ideas ll some need that is just waiting to be ound. A little digging will reveal almost any need, whether previously recognized or not. I you are having trouble with this question, think harder—or send me an email at n@ sttup-dis.c . I will be sure to include any exceptions to this claim in this book’s next edition.
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I n did his y “nin ing” hmwk nd disvd h h ni swih w w w dsigning wd b hsd by n It mng in Jn—n by cto (chi thni o) Vp (Vi psidn) engining, nd iny n by n ngin. W s disvd h his It mng d sy b snd $5,000 wih hving bin dmn vs. Gss wh w id d n i ws nh-dy, nh-dy, nd gss wd whm w gd mking mssgs? Y gssd y: w mkd h It mng, nd sd h swih i in $4,800.
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6 Stp 2 hw Bi is Tis mt?
W
hy should you chase big markets? How big is big enough? How do you even calculate the size o a mar-
ket, especially when it may not yet exist? Te entrepreneurs that I advise oten ask these questions, which I will address in
this section. Market size is the sum o all o the revenues o all o the companies serving your target market segment (“target market segment” simply means the portion o the market at which you are aiming your product or service). You must dene your market segment correctly in order to size it correctly.
mt Siz expls Let’s Let’s suppose that you have an idea or or developing an innovative supply chain management company that delivers medications more eciently to long-term care acilities. What is the size o your target market? Well, the overall healthcare market in the U.S.A. is in the trillions o dollars, and the medications market alone is almost $300 billion, but the long-term care segment in the medications market was about $14 billion in 2006 and is growing steadily. I you dive urther into this market segment, you may nd out that the medications being supplied by pharmacies to long-term care acilities still constitute a $7 billion-plus market (the rest may be supplied by mailorder companies or by clinics and hospitals). So the correct answer or your target market is $7 billion, growing at a rate o 15 percent due to the growth in the elderly population and the continuously increasing amount o medication being consumed.
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aNaLYZINg aNaL YZINg YoUr marke
a bm- nysis ss wih h d nd hn ks in n h nmb ss nd hw n hy by. by. a -dwn nysis ks h mk s nd hn wks dwn k y mk sgmn. I ng y s wih bm- nysis nd ny s -dwn nmbs sniy hk. I y bm- nmbs y h y n s 1.4 miin ss wihin ys nd hn y nd h ny 2 miin ss xis, y wi knw h y niky gin (1.4/2x100 =) 70% mk sh nyhing in ys. Ts nmbs shd snd y bk h b v y ssmins b h bm- nysis.
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SeP 2—hoW BIg IS hIS marke?
Let’s look at another example. What i you make sotware that helps truckers and logistics companies improve feet management? Well, the trucking industry overall is worth well over $400 billion in annual sales, but your segment is much narrower than that. Te sum o all sotware revenue to these companies may only be $2 billion. It is important to identiy what market you plan to target; it needs to be dened as specically as possible. Now, you may plan initially to make just one type o sotware, but you also plan to add additional modules and optimize the sotware or ecient feet management and backhaul optimization. You will need to estimate how much o this $2 billion is being spent on the types o problems you intend to address within two to our years. Tat will will provide your target market size. What i you are making instruments or let-handed dentists? Well, your total market size will be based on how many such dentists exist and, given your price point, how oten they replace these instruments. Knowing these answers will help you to gauge an annual market size. You should always do a “bottom-up analysis” to compute market size. Later, you can do a “top-down analysis” to make sure that your initial computation is reasonable. For example, i your bottom-up analysis on the market or your dental instrument yielded a number o $300 million per year, and you later discover that the total market or these instruments or all dentists in the USA is $500 million, then you know something is wrong with your calculation and analysis. Let-handed dentists are unlikely to make up 60% o all dentists in the U.S.!
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marke SIZe ma maerS! erS!
Hiing y g mk is js ik hiing d bd siind ss h m—y wi hv b vy is ( vy, vy, vy ky) hi i. B i smn skd y hi ny h w m ss h m, y’d b b d i wih y ys sd. Mk siz is js h sm. I y g sm mk, y wi hv b nd is in ms y disins in d hi h mk. I y g g nd gwing mk, y n b wng nmb ims nd si i h mk. Vn iiss (Vcs) ik invs in mnis ging mk hing $1 biin g, g, s-gwing mk h wi hiv h siz wihin h v ys. T sn his is sim: Vc wns d his h isk by invsing in mny wih g ikihd mking mny!
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SeP 2—hoW BIg IS hIS marke?
Plenty o opportunity exists to start companies that target smaller markets, but you either have to be very ver y accurate in your marketing or such a specialist in that market that others are put o rom entering it and competing with you. ypically, a billion dollars or more is a good-sized market that will enable you to attract a signicant number o investors. Tis doesn’t mean you shouldn’t aim at $200-million or $300-million markets; it just means that it may be harder or you to nd investors in those markets. Naturally, dierent rules and numbers will apply i you are starting a small business and you intend to serve the local market or a highly specialized niche market. Just know your target market and sizes, and be aware o your maximum revenue potential given the market size.
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marke SIZe
Mk siz is simy hw mh snd ( iky snd) vy y by h kind d y ing sv hi bm. rsh h i gwh in y hsn mk di is gwh , nss y n b idniy jsiy wh y gwh wi b bsd n nw nds dmghis, nw bying hbis, h hngs. awys ks “xis” “xis”—xms —xms hw h mnis in y g mk sdd—s h y n jsiy y ssssmns.
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7 Stp 3 Cn W Ct Dintitd mt Psitinin? W els is yin t mt Tis Nd nd Wt abut ou appc
is Dint nd Uniqu?
S
tep 3 is all about understanding your dierentiated market positioning—in other words, what makes you or your product or service dierent rom other companies oering similar
products or services within your target market. o understand the dynamics o your market, you must do thorough research. You You must consider who is serving ser ving your chosen need n eed already, already, today, day, and how you plan to meet and serve this need dierently. dierently. Research the current market, making note o your competitors, their products, and the like. o succeed, you must be dierent in some way, oering one or more o the ollowing: • B qiy • a h i • esi s • Nw biiis • a nw wy bying Something must dierentiate you rom other companies and provide a reason or people to buy rom you. Buyers and consumers need to be able to put you in a dierent compartment rom other providers o a similar solution to their unmet need. My least avorite attribute in the above list is price. I your only dierentiation is price, then you should be very worried. It is quite easy or a competitor c ompetitor to lower their
I y ny difniin difniin is i, hn y shd b vy wid.
price in order to put you out o business, and then raise their price again once you are out o the picture. You'd You'd be better served ser ved think o other, other, more compelling dierentiators. 7 Stps t Succssul Sttup
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SeP 3—CaN We Creae DIereNIaeD marke PoSIIoNINg?
Tis step is also a good time to nd out whether potential buyers even value your dierentiation. I your dierentiator is that you oer a product in multiple colors, you will be in trouble i your target market doesn’t doesn’t care about color choice! Whn skd, “At what age do you think it would be too late to start your own business?” 60% business?” 60% sndd, “Never too old.” Y! Sll Businss/his Intcti, apil 2006
rue, sometimes a product is so innovative and new that users cannot imagine it and so cannot provide any useul eedback. Tis does happen, but ar less oten than people think. When this happens, you must do something to ignite your user’s imagination so that you can gain some type o eedback. Why not write a press release or a product brochure so that you can show it to potential customers? You could even make a prototype, conduct a demonstration, or commission an artist’s rendition so that you can elicit a reaction rom potential buyers and users—anything to obtain eedback. Making a prototype or having a brochure printed will be ar cheaper than developing the product and launching it with the idea o surprising your market!
Mking y hving bh ind wi b h hn dving h d nd nhing i wih h id sising y mk!
When seeking eedback rom customers, don’t just listen to their words; watch their body language and observe their reactions. Figure out what they really mean by their answers, and use probing questions to nd out more.
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SeP 3—CaN We Creae DIereNIaeD marke PoSIIoNINg?
N Cptitin I always greet the claim “But we have no competition” with suspicion. Usually there is some type o competition. Put yoursel in your customer’s shoes and think about where they would presently go to have their need met. Tere is always an alternative to your product or service. And don’t orget: not buying and doing nothing are both viable—and common—alternatives or your customers! You You should also take into account the act that existing companies are always redeveloping products and creating new ones, so be aware that your competition may at this moment be working on a product that will compete with yours.
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he ar o PoSIIoNINg
psiining psiining is h s y wd ik y in y sm’s sm’s mind. Hw wi hy hink y? psiining ms b is nd nw, iy h mks mny nns vy nmb. Ty h bing nnd in sm sm nih, sin hy nvind h hy n b s mh m s mny m . Tis y hinking is dngs ! I ss nd sms nn y in idy mmn in hi bin, hy niky mmb y . B is. “We make pediatric surgical instruments for left-handed dentists” is is siining smn. “We do IT services,” is hib siining smn, s hsnds mnis n im h sm hing. “ We set up secure online stores for small booksellers” is mh b siining smn.
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8 Stp 4 hw Will I m mny nd W Will Py m?
his step o preparation deals with understanding your business model. You need to think about and clariy the ollowing:
• Wh is h sm? • o whs k is h mny m ny ming ? • Hw ds h mny g m hm m?
Tese questions are undamental, but they may not be simple to answer; I have come across many entrepreneurs who could not. But you most certainly need to know these answers beore you start. You You must question, research, and understand how people buy in your chosen industry. Consider the ollowing: ollowing: • Hw wi I h hs sms? • Wh is h s qiing nd sving h sm? • Wh wi b h s ining? • Wh is h s sviing h sm? Te answers to these questions should actor into your decisions and determine whether your chosen service or product is a good business or you. I it takes proessional service to serve each customer, your ability to scale rapidly will be greatly limited. For example, suppose that you were going to sell a device that required installation and training or each customer. How many people would you, as a small startup business, be able to train and support in a month? Wouldn't that limit your ability to scale? What i you used a channel partner
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SeP 4—h oW WILL I make moNeY aND Who WILL PaY PaY me?
trained by you, and they then supplied and trained the nal customer? Would that change your ability to scale? Yes, but consider what portion o your sales price the channel partner would command.
How do I know whether my business is scalable? you may ask. A business is scalable i the cost o serving the next ten customers is dramatically less than serving the rst ten customers. All o the above are the types o questions that must be researched beore you start. A ew phone calls and discussions with channel partners, as well as other companies who use such channels, will answer many o these questions or you. Each market has established esta blished methods or how people buy the product, and trying to change user behavior is not as easy as you may think. It is possible, but will require signicant resources—more resources than you may have. An example is Apple’s Apple’s iunes, iunes, which changed the business model or how music is purchased. Buying one new song at a time via one’s computer was a revolutionary concept—one that took hundreds o millions o dollars and the ull marketing muscle o Apple to convince people to adopt. Can you aord the time and money to convince people o such a groundbreaking business model?
Undstndin Cnnls: How the product travels rom you to the end user is important to understand. You You have three main choices:
) Dict Sls: Sing diy diy mns hiing ss nd diy hing sms mk ss. Tis h is yiy sd mx ds wh sm inimy is qid. I is n xnsiv wy s sing.
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USerS maY No Be CUSomerS:
Y Y s ms mmb h h nd s y d is n wys h sm sm . xm, i y sing hnds-, viivd mmniins dvis s h h nss nd ds d s n g h h wih hving hi hnds. T ss wi b nss nd ds b h bys sy h It dmn h cIo h hsi. Y Y wi hv hink b hw g bh hs gs n bd wih y id. N hving his iy n s y signin im nd bsinss.
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SeP 4—h oW WILL I make moNeY aND Who WILL PaY PaY me?
b) Indict Sls Distibutin: Tis h invvs ining disibs nd/ ss wh hn in diy wih sms. T n b sv ys invvd in his h, nd h indsy is difn. a CoSLY mISake—
c) Wb-Dict Sls: T Inn ns h ssibiiy gb mk, nd sing gds nd svis diy nsms hgh h Inn hs wd h s sing dmiy. Y si hv sm qisiin ss nd mking ss, b h Inn ds f ming m ing wy s y sms. A bigger issue is whether your business model is scalable. Why should you care about scalability? Because it will directly impact your ability to create a large and proftable company company.. For a law frm, frm, the cost o serving each customer requires additional bodies that limit scalability. However, or Youube, the cost o serving the next video poster is infnitesimally small when compared to the cost o serving the very frst video. Once the servers and inrastructure were in place, Youube could easily serve more and more customers without incurring a proportional amount o additional cost, making their business model potentially very scalable and proftable. Te same applies to other Internet companies such as eBay. eBay. On the other hand, a restaurant business or a barber shop is not so easy to scale: in the restaurant business, ood must be bought and cooked or each new customer, while a barber must spend the same amount o time cutting the hair o each new customer. Franchising Franchising can give the owners o such businesses the opportunity to scale, but these businesses are in general less easily scalable than Internet-based businesses.
No UNDerSaNDINg he BUSINeSS moDeL
In n my ss, w invnd h wd’s s siin ngin sns hi. Tis iny dvi n nw b sn n mny s; ss h i ( swi hi ng ss i) g in hi mhins. W nd h hd wy h mx sy hin ws invvd in bying his d nd ining i in . I ws n whm w shd s his dvi. W W w hing hing bnks nd nin is nd fing hm s wy ns bsinss nin, n vi. W did n iz h hs mnis d n by ngin snss m ss—hy by s nsin sin m mny ik IBM eDS, wh hn bys hniin sins m siy sins vid, wh in n bys m bimis hniin mny. W W ndd b sing sh bimis sin vid.
Sclbility = hi pftbility hi Pftbility Pftbility = Lss w, ny
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9 Stp 5 Wy Us?
his question will be on any venture capitalist or investor’s mind. It should also be on yours. Ask yoursel, “What is it
about us as a team that will allow us to succeed in this venture?”
Tis question is a very serious one, and you must be able to answer it properly. Pssibl nsws cn includ: • We have been working in this eld or seven years, so we really know where the treasure is buried and what customers want. We use competitors’ products every day, and we know what wha t to do better. Tis is not a bad answer. Domain knowledge (knowledge o your eld) is always very valuable. I oten see somebody who is not rom a particular eld come up with bright ideas about how to improve a product; the problem is that the person lacks domain knowledge. I am all or “outside-the-box” thinking, and sometimes you do see things in a new light when unburdened by insider knowledge. In general, however, it is always smart to respect somebody’s domain knowledge—so i you are not a domain expert, at least surround yoursel with people who have spent a air amount o time in your target product domain. ant nsw y b: • We have agreed to work with the proessor who invented this technology and wants us to commercialize it. or • We recruited two advisors advisor s with deep domain knowledge who will advise us. We also have youthul energy and are completely committed to seeing this idea through; as well, we have already invested over three months in researching it. 7 Stps t Succssul Sttup
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SeP 5—WhY US?
Tese are all possible good answers. How good they are will depend on the particular situation, but you must be able to tell investors why your team is uniquely qualied to pursue your chosen idea.
T Iptnc s Have you noticed that I have been using the term “team” and not “ounder” or “entrepreneur”? “entrepreneur”? Te reason or this is simple: ew, i any, examples exist o a single person starting a successul venture and scaling it. Such a task is just too big or one person to be able to do well. Also, i you cannot convince at least one other person (preerably two) o your vision, then perhaps you don’t have such a compelling vision—in other words, a vision that will successully attract investors and customers. Naturally, i you are starting a small business rather than a scalable venture, it is possible to do it alone with a single ounder (businesses such as a shop, a cleaning service, or some import or export businesses). I am ocusing my comments, however, on ventures intended to scale to millions in revenues within ve years, ventures intended to provide signicant returns to their investors. You may think that Microsot and Apple were started by solo entrepreneurs, but that’s not true. Microsot was started by Bill Gates AND Paul Allen, and Apple was started by Steve Jobs AND Steve Wozniak. You need someone, preerably more than one person, to share the load, to support you and work with you on this immense task. Always start your business by recruiting a team. Te joy o startups is in creating a unctional team composed o members who have diverse strengths and skills and unique experiences to draw rom. At least one member o the team should have deep domain knowledge (knowledge o the target market and its dynamics). Te old adage “two heads are better than one” is worth remembering. A team can bounce ideas o o and support one another. Fresh eyes looking at a problem or obstacle can oten provide a solution that no one else had thought o. 7 Stps t Succssul Sttup
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SeP 5—WhY US?
Yu t suld includ: • You • Other like-minded entrepreneurs who are also passionate about the product or service and join you as co-ounders • A board o advisors A team does need a leader. Tis leader may or may not be you. Te leadership may shit over time, or you may bring on another manager (or a CEO) i the company gets to such a stage.
If you don’t have a team, don’t start the business . You need to have two or three coounders beore you can get the show on the road. Working with like-minded people will be a satisying experience, make the work easier, and prime you to attract investors.
min undin What makes a good team? People who like each other, people who have been riends or years, people who have worked together in the past? No single denition denition applies to every case, but I have
oUr goaLIeS Do No make a eam
a m, by dniin, ms nin wih difn skis wh bing difn in viws h b. I hv bsvd h h bs ms hs in whih m mmbs hv d s h h’s mnis— s h sy ms m hving wkd gh b.
observed that the best teams are those in which team members have a deep respect or each other’s other’s core competencies—a respect that usually comes rom having worked together beore. At times there will be strong disagreements, and working in a team is not always easy, but deep respect or each other’s capabilities usually overcomes these types o issues. Complementary skills are essential to orming a good team; ideally, your team should contain people with expertise in selling, technology, nance and marketing, and business development. Not all team members have to be on board at the same time; they can be brought on over time when needed. And remember: the coounder title is an honorary one. Early employees are not necessarily automatic co-ounders.
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10 Stp 6 Wy Nw?
C
orrect timing timi ng is key. “Why now?” is a question that you must be able to answer. Perhaps a regulatory change has made
your product or service idea plausible now, or perhaps the price o a component or product has allen, enabling you to reach a new audience. Perhaps a new standard has been announced an nounced or agreed upon that makes the timing right. You may not have a clear answer, but you should strive or as much clarity as possible about why this idea makes sense at this moment and why somebody did not think o it two years ago. You may discover some new and revealing acts. I people have tried to create a business with your product or service in the past, what made them ail? Research this question, so that you can be sure either that 1) your idea is dierent, or 2) something about the market makes “now” “now” the right time. A couple o examples o changes that can make “now” “now” a good time or certain types o businesses are: the new WiMax deployment in certain countries, which has brought the cost o broadband access to under $10 a month; and the ormation o a new Homeland Security department, which allows security-related technologies access to unds.
WhY ImINg maerS:
Y ni invss wi hv his qsin n hi minds, s y ms sisy bh ys nd hm wih n nsw. Why NoW is gd im d his? Wh hngd? T nsw d b hngy vin, m nds, nsm snimn, sm bkhgh... bkhgh... B whv i is y ms hink b i nd b d sk i wih d.
Unless you consider the question “Why now?” you are likely to repeat mistakes that have already been made. Maybe there are serious technological, logistical, political, or regulatory hurdles that will make it hard or anyone to succeed, never mind a small startup company. Tat does not mean that you should not try, but you do need to prepare yoursel or challenges by asking this question and nding a satisactory answer to it.
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11 T end o Is It t Binnin?
W
e’ve reached the end o the seven steps o preparation that will give you and your startup a greater chance o
success. ry ry to work ve to teen hours a week on this preparation while you are still employed at your day job. Tis planning and preparation phase will take a ew weeks to complete (I have seen this process take anywhere rom one to six months), although it can be done more quickly i you work on it ull-time. Te output, your planning, may consist o a single page or each o these seven questions, or it may run several pages or each. Length
doesn’t matter, as long as you have satised yoursel and your team with your answers to the questions. Tis work orms the start o your business plan, which is the next step in your journey.
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WheN o orm a LegaL eNIY
I m n skd his qsin. Ms s by ming g niy sm kind, s h I is n m. Y Y nd sh m s ny n y dy invss’ mny b s sing smhing. I sggs h y sv y mny ni hn nd s signd wk nd sn mmnd dmn gmns. a hs n b mizd n y dy in; hn y n idniy h y g niy h is bs y bsinss. rd wbsis m y ’s Sy S nd Sm Bsinss adminisin B h iin n hs is.
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12 hw Will I knw Wn I a rdy?
Y
ou will be able to tell when you are ready to dive in and start the business once you have satisactory answers to the basic questions I have talked about in this book.
Tin but t llwin:
D I hv bning ssin? am I knwdgb b my id? D I knw why I wn d his? Is my id niq nd difn? Is h mk my id? a snding mny sv ddss h in/nd h I innd ddss? • Is h mk big ngh? • D I hv vidin my id? Hv I kd ngh ? • D I hv m ssmbd? • • • • •
Te above questions work like a lter, enabling you to analyze your ideas and identiy the good ones. Excellent ideas will pass through all o the lters, while bad or mediocre ideas will get stuck somewhere along the way and have to be thrown out. Tese ltering questions will save you precious time and resources. From past experience with many startups, I can guarantee that ollowing these steps will make you ar a r more prepared to start your new ventures. Your planning and preparation will shine through in your dealings with potential customers and investors, and your work will all pay o. You will have dierentiated yoursel rom the majority o startups, and the odds o success will be dramatically shited in your avor. 7 Stps t Succssul Sttup
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hoW WILL I kNoW WheN I am reaDY?
MANY IDEAS
Unmet Needs
Market Size
Differentiated Positioning
Scalable Biz Model
Why Us & Why Now
All rights reserved to Naeem Zafar.
GOOD IDEAS
Starting a company or your own business is a very satisying experience. It is so much more than just making money or pursuing a career; it is a journey o sel-discovery. sel-discovery. Bon voyage!
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13 epilu
I
hope that that this book serves as a useul checklist or you as you venture into starting a company or joining a startup. Start-
ing your own business is an exciting, enriching process: you will learn much about yoursel and it will be a very rewarding journey, whatever the end result. I plan to write several additional e-books to help you with other questions that will arise— questions about raising money, hiring and recruiting talent, go-to-market strategies, and managing your board and investors. Tis learning works best when it is shared, so I invite you to write to me and share your stories, advice, and ideas. In this way, way, others may benet rom your insight and experiences. n@sttup-dis.c.. I look orward Please write to me at n@sttup-dis.c to meeting you at one o my seminars or clinics very soon. Naeem Zaar
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abut t aut
N
AEEM ZAFAR is a member o the aculty o Haas Business School at the University o Caliornia, Berkeley,
where he teaches Entrepreneurship and Innovation as part o the MBA program. He has also lectured on business, innovation, and entrepreneurship at UCLA, Brown University, University, Dalian echnical University in China, and Lahore University o Management Sciences (LUMS) in Pakistan. Naeem is a serial entrepreneur, having started his own business at the age o 26 and gone on to start or work at six other startups. He has extensive experience as a mentor and coach to entrepreneurs and CEOs, and is the ounder o Concordia Ventures, a company that educates and advises entrepreneurs and startups on all aspects o startstar ting and running a business. Naeem most recently served as president and CEO o Pyxis echnolechnology Inc., a company specializing in advanced chip design sotware or nanometer technology. He has also been president and CEO o two other technology startups, Silicon Design Systems and Veridicom (a Bell Labs spino that invented the silicon ngerprint sensors today ound on most laptops). Naeem has held senior marketing and engineering positions at several companies, including Quickturn Design Systems, which had an IPO in 1993 and grew to $125M in revenues. Naeem obtained a Bachelor o Science degree ( magna cum laude ) in electrical engineering rom Brown University in Rhode Island, and he also has a master’s master’s degree in electrical engineering rom the University o Minnesota. 7 Stps t Succssul Sttup
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aBoU he aUhor
Naeem is a charter member o iE (Te Indus Entrepreneurs, www. Entrepreneurs, www. ie. ) and a charter member o OPEN ( www.oPeNSilicnvl www.oPeNSilicnvlly. ), ), where he serves as a member o the executive committee. Naeem also holds several other board positions, including Numetrics Ltd., Brainstorm Pvt. Ltd., and Aanukaa Inc., and enjoys serving on the advisory boards o ve other companies. As a part o his global entrepreneurial practice, Naeem is involved with micronance ventures and social entrepreneurship in Pakistan (Rural Asia) and Mexico (CREA). Naeem’s experience in starting his own businesses, as well as advising hundreds o entrepreneurs and dozens o startups, puts him in a unique position to help others succeed.
cntct N but tis b is ntin sic, il i t n@sttup-dis.c.. n@sttup-dis.c
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