lecture 7: architectural & VC strategy

value chain strategy

focusing on a particular stage/horizontal layer of VC process

tools for VC strategy

1) design stellar interdependent team
- co-founders & early employees should have shared understanding & incentives
- value of team > sum of indv team members

2) design firm boundaries that separate firm responsibility & other players responsibility
- how fluid/rigid they will be
- growth vs specialisation

3) make vs buy
- make in-house vs outsource (if cheaper or better quality)

4) establish strategic alliances
- alternative to firm boundaries
- creates formal but fluid r/s b/w two firms. collaboration at start.

5) rely only on trusting potential partners at first
- helps in understanding domain/value chain first hand

core choices VC strategy

cust:
- cust of larger partners need to be served by improving what partner firm does, or reducing costs borne by partner firm

tech:
- integrate emerging tech into current ops
- emerging tech extends, not replaces/disrupts, partners current tech s-cruve
- bridge gap b/w new & old tech (req knowledge of firms primary use cases & cust base)

comp:
- two forms: becoming preferred partner in particular domain, or getting the larger partner to give up some responsibility for a set of specific activities
- short run: other firms providing similar outsourcing in same industry
- long run: incumbents/larger partner firms

org:
- one that centers on identifying, developing & growing core competency

test for VC strategy

1) can they attract talent w scarce/unique capabilities (specific function of value chain = experts)
2) can they find cust that can be better served by startups expertise, tech, process imporvement or unique offerings
3) can they integrate idea without disclosing key knowledge that can be reverse engineered by incumbents

implementing VC

1) build team based on unique needs of startup
- slow to hire, fast to fire
- finding people who integrate into team & corp culture
- acquiring people w strong negotiating abilities

2) assess location
- proximity to sources of talent & access to existing firms

3) invest in business dev, build strong r/s w customers
- proving value to cust & giving them reason to support dev of prod as their preferred partner
- negotiations matter, need to have strong BP

challenges VC

- other actors in VC will try to surpress role of venture
- continuing mgmt
- interplay b/w established firm & startup

architectural strategy

build, control, and compete in an industry w entirely new value chain (can be driven by new business platform e.g. airbnb)
- opp to VC (one step in VC), architectural = entire new VC
- tech is not source of disruption

usually riskiest strategy (high level upfront commitment for an offering that competes within broader market context)
- if succesful, most potential to create value over long term

architectural vs disruption

architectural:
- upfront commitment to specific prod features or r/s to compete against established firms
- maintain control over underlying idea through new VC
- direct comp for most desirable cust in industry

disruption
- iterative discovery of prod features w/o upfront commitment
- no direct comp against established firms
- comp through rapid execution
- underserved/niche cust in industry

source of risk of architectural: competitors (imitation, reactions)
source of risk of disruption: selecting wrong technology for DD

tools of architectural strategy

1) achieve low-cost position through economies of scale & scope
- learn by doing

2) build sustainable differentiation
- higher WTP for core cust through unique/differentiated prod that cannot be easily imitated

3) have effective platform design
- direct & indirect network effects to achieve market lock-in (instagram, snapchat, tinder)
- coring:
no. of sides (how many, who)
platform design (unit of value e.g. airbnb reviews)
rev model (who sets the price, how much e.g. uber = algorithm designs, airbnb = property owners)
governance choices (who is allowed, rules, controls (safety, quality, engagement))

core choices architectural

cust:
- target most desirable cust in industry (ideally they have higher influence over other potential cust)
- cust choice can facilitate control bc by limiting access to cust groups, venture can experiment/learn w/o damaging ability to grow beyond that group

tech:
- new tech s-curve they can control

comp:
- anticipate incumbent firms’ response & prepare to safeguard against comp
- identify how many fronts to face comp on (resources, capabilities, tasks, functions)
- determine in house vs outsourced capabilities

org:
- inv to build new value chain around ideas that cust may not understand or even like before release
- commit to that vision upfront

testing architectural strategy

1) whether they can create defined value by architecting new VC in marketplace
2) whether they can secure sufficient, durable control to protect idea against comp

why entrepreneurs need strategy

1) alternative paths: more routes = more promising idea
2) limited resources
3) need for commitment, even to learn: reducing uncertainty req experimentation, but exp req commitment
4) designing effective tests: trade-offs (criticality, fidelity, opp cost)
5) exp & learning: use strategic process of learning & exp to assess whether idea is worth pursuing
6) clearly state what you want to learn: focus should be on formulating rather than conducting tests

entrepreneurial strategy canvas

12 elements, provide structured way to describe/state imp choices in ES
- helps compare b/w diff strategies

pre-strategy elements
putting it together overall
core choices
core hypotheses

entrepreneurial strategy canvas : pre-strategy elements

idea, passion, unfair adv
- core idea: fundamental opp & insight venture is built on
- passion: choices you deeply care about
- unfair adv: why you are in strong position to work on core idea

entrepreneurial strategy canvas : core hypotheses

describe what must be true for venture to succeed (need to confirm by designing tests)

- value creation: why do we believe that our product/service delivers some added value
- value capture: preventing imitation & comp

entrepreneurial strategy canvas : core choices

cust, tech, comp, org

cust: segments you plan to target, order of priority

entrepreneurial strategy canvas : putting together overall

venture name
overall strategy (ultimate goal)
business model (monetisation - how will you make money on ongoing basis)
- e.g. advertising BM (google), platform BM (airbnb), low-cost BM (ryanair), freemium BM (spotify)

entrepreneurial strategy learning & exp canvas

1) critical assumptions: if proven false, would make success in venture diff along that commercialisation path (experimentation)

2) develop quick & simple real actions to test critical assumptions (implementation)

3) step back, pause, assess viability of overall plan (opp to perservere, punt, pivot) (viability)

flop of google glasses

wrong focus: assuming that focusing immediately on consumer mass market is the right choice (focusing on uses immediately can be wrong)

price point: >$5000 per device - too high for WTP for many end users

wrong prediction: aimed for it to be cool as gucci bag but people wearing it became "weirdos"

privacy: privacy concerns raised and owners were negatively looked on

VC vs IP

two core similarities
1) structural: both B2B
2) behavioral: both rely on reputation & trust (firms must trust your prod/service to outsource to you)