Entrepreneurship Notes

Table of Contents
1 – Introduction and finding entrepreneurship opportunities....................................................................2
How can we find entrepreneurial opportunities?................................................................................................3
Market opportunity navigator (Gruber et al., 2017): THREE PHASES....................................................................4
Step 1: Evaluate opportunity potential....................................................................................................................................5
Step 2: Evaluate opportunity challenges..................................................................................................................................6

2 – Hypotheses-driven (lean-start-up) approach, and market analysis......................................................7

Traditional approach vs Hypotheses-driven approach.........................................................................................8
Hypothesis-Driven Approach................................................................................................................................................... 8
MVP (Minimum Viable Product) features:...............................................................................................................................8
Value Proposition...............................................................................................................................................9
Customer segments............................................................................................................................................9
Market size.........................................................................................................................................................9
How to segment and choose your target market?.................................................................................................................10
Dynamic view of target market – for entrepreneurs..............................................................................................................10
Estimate the size of market segment – No golden rule..........................................................................................................11
Market Type...........................................................................................................................................................................11
Marketing Plan: Channels...................................................................................................................................................... 11
Marketing Plan: Customer Relationships...............................................................................................................................11
Operations: Key Resources and Partners...............................................................................................................................11
Financing: Revenue and Profit Sources..................................................................................................................................11
Tools for Testing the Hypothesis – Qualitative Approach...................................................................................12
Tools for Testing the Hypothesis – Quantitative Approach................................................................................13
Competitor analysis..........................................................................................................................................13
3 – Design Business Models....................................................................................................................15
Designing Business models...............................................................................................................................16
A menu of business models/commercialization plans.......................................................................................19
4 – Go to Market Strategy......................................................................................................................20
Go-to-market and Scaling-up Strategy..............................................................................................................20
STARTUPS need focused marketing plans.........................................................................................................21
5 – Financing..........................................................................................................................................24
Sources of financing..........................................................................................................................................24
Venture Capital.................................................................................................................................................24
VC investment cycle............................................................................................................................................................... 25
Angel Investors.................................................................................................................................................25
What do VCs/angels look for?...............................................................................................................................................26
Accelerators and incubators:............................................................................................................................26
Crowdfunding...................................................................................................................................................27
Government support........................................................................................................................................28
Commercial loans from banks...........................................................................................................................28
6 – Social Entrepreneurship....................................................................................................................28
 What is social entrepreneurship?......................................................................................................................29
Example: Zero Waste Club..................................................................................................................................................... 29
Who invests in social entrepreneurship?...........................................................................................................30
What do impact investors expect?.........................................................................................................................................30
How to make business models for social ventures?...........................................................................................30
How to pursue social entrepreneurship............................................................................................................31
Guest lecturer – Rishi Gupta (Co-founder, Zero Waste Club and Gomi Design)..................................................31
7 – Protection.........................................................................................................................................31
Protection.........................................................................................................................................................31
Different types of IP............................................................................................................................................................... 32
Why is IP important?..............................................................................................................................................................32
Patent..............................................................................................................................................................32
Copyright..........................................................................................................................................................33
Trademark........................................................................................................................................................34
Trade secret......................................................................................................................................................34
Design rights.....................................................................................................................................................34
Pros and cons of IP............................................................................................................................................35
Non-IP types of protection................................................................................................................................35
Complexity & tacit knowledge..............................................................................................................................................35
Speed to market/First-mover advantage..............................................................................................................................36
Reducing an incentive to imitate..........................................................................................................................................36
Examples of strategies for movies to protect against infringements:.................................................................37

1 – Entrepreneurship finding entrepreneurship opportunities

- What is entrepreneurship?
- Why do many become entrepreneurs?
- How can we find and evaluate entrepreneurial opportunities?

Entrepreneurs
Entrepreneurship: the process of identifying, evaluating and exploiting business opportunities (Shane,
2012)
- Exploiting refers to mobilising resources from your investor or your own capital to make your idea a reality
- What is the difference between entrepreneurship and innovation?
- Innovation is about commercialising a novel but useful idea; entrepreneurship is not always about a new idea; it
can be conducting the same thing in a different way.
- Innovation talks about a specific product or technology, entrepreneurship includes more than this – it’s about
setting up a company and commercialising the product with a business model which inherently involves a lot
more activity
Innovation – the process of creating something new and useful
- You can be both an entrepreneur and an inventor.
- Edison was an entrepreneur, but other people commercialised the idea.
- An entrepreneur can take an existing product and apply it to a new field (i.e., gramaphone applied to record
music instead of a Dictaphone to dictate speech to).

Entrepreneurship can
- Catalyse economic growth
- Advance technology
- Redefine industries
- Create new industries
- Create new jobs
 - Generate social mobility (apart from exceptions such as Amazon)

However, there are a number of risks and often it is not rewarding:

- Cut off in investors’ heads is 32 years old- after that they become sceptical – stereotype
o But data for the most successful start-ups have CEOs who are over 40 years old
o Due to work experience, learning from failure
- Very few entrepreneurial pursuits (<50%) survive past 5 years and very few also actually make money at the end
of the day (i.e. the money they have at the time they quit the company).
- More than 70% of founders do not earn anything – thinking about the opportunity cost, they are losing money.
- On average, you are more likely to earn more in a job as an employee than a self-employed person.
- Many entrepreneurs also end up divorced.

Entrepreneurs – Motivation
- Entrepreneurs care more about things like vision, independence, challenge & innovation than non-
entrepreneurs.

- Pushed entrepreneurs are people pushed to become entrepreneurs because there is no other option. The pulled
entrepreneurs become entrepreneurs because they want to become one.
- Other reasons to become an entrepreneur:
o Low opportunity cost with a small start-up
o Risk-preference
o Overconfidence
o Non-pecuniary benefits
o Option value of experimentation
- However, entrepreneurs need to focus on what they want i.e., making money at the beginning of the venture.
- Questions they need to ask themselves include:
o Where do I want to go?
 What are my personal aspirations?
 What kind of enterprise do I need to build?
 What risks and sacrifices does such an enterprise entail?
 Can I accept those risks and sacrifices?
o How do I get there?
 Is the strategy well-defined? Is it supported by hypothesis-testing?
 Can the strategy generate sufficient profits and growth?
 Is the strategy sustainable? Do you have a scaling option?
 Are my goals for growth too aggressive or conservative?
o Can I execute the strategy?
 Do I have the right resources and relationships? Financial or otherwise?
 How strong is the organisation? E.g. relationship with your co-founder
 Can I play my role?
- They also need to be clear and focus on what their customers want.
-
Lecture 2: Finding and Evaluating Entrepreneurial Opportunities
Where do business ideas come from?
- The vast majority (around 70%) come from previous employment, followed by serendipity
How can we find entrepreneurial opportunities?
Typology of entrepreneurial opportunities:
- The needs/problems of your market/customer matched to the solutions (your product/service)
o The more tightly linked this is, the better your offering is
- The idea is to identify the need/problem and define a solution (market opportunities)
- Technology push and market pull focus on linking markets with technology
- This can be thought of in different ways depending on what you start with:
o Technology Push
 When the solution or tech already exists and you start with this but you move it into a different
market/setting/product (i.e., a new technology but no set way to use it)
 I.e., there is no need in the market, but this proposes an alternative
 E.g., Post-it notes – the engineers tried to make an uber-sticky adhesive but ended up making
low-tech pressure-sensitive reusable adhesive and spent 5 years to figure out how to use this
adhesive as it was not as strong as they would have liked it and no one was looking at how to use
the reusable adhesive. They started with the solution and tried to find the best application for
it. (Developed a solution without a problem).
 E.g., Cycle VR – used VR to find a specific application for it.
o Market Pull
 Finding a specific problem that has not really been dealt with and then introducing a new
product/service.
 E.g. Proteus – sensor in the medication that emits an electrical signal and is detected by a patch
on the left ribcage once the pill comes into contact with stomach acid and then information is
sent to a mobile app to record the date and time a patient took their medication. It can help in
mental health conditions such as schizophrenia or depression where people do not regularly take
their medications as this information can be seen by family/HCPs. They started with the problem
that you have a pill box but cannot track when the medication is taken i.e. there are lots of
patients who currently aren’t taking their medication properly and then found a solution for it.
 E.g. Babylon Health (i.e. waiting times solved with GP @ Hand).
- Once you have an identified problem with a defined solution, this is the entrepreneurial/market opportunity and
you can get here through market pull or technology push.
o E.g. coffee cups in the workplace would be a demand pull?

Evaluation of entrepreneurial opportunities

- Necessary when you have found multiple different combinations of solutions and problems
- Evaluation of the opportunities is vital:
o Lots of new businesses fail, 57.3% of businesses started in 2014 failed by 2019.
o Many opportunities fail because of poor opportunity evaluation
 2/3 of failures avoidable (Birley and Niktari 1995)
 Due to weak business proposition and planning e.g. focussing on a problem that isn’t massively
important to a lot of people, or finding insufficient solutions
 Knowing when to walk away is a key strength
o Focusing on one opportunity but consciously keeping related market options open, can enhance new
venture flexibility and contribute to success (Tal et al., 2017)
Market opportunity navigator (Gruber et al., 2017): THREE PHASES
1. Search broadly - Generate market opportunities
2. Assess deeply (we will focus on this) - Evaluate them by attractiveness which consists of market potential and
degree of challenge
3. Strategise smartly - Make a choice - prioritise

Business example (Market pull)

- Saar (an acoustical engineer) and Gal (a software engineer) are friends.
- In 2011, Gal, a software engineer, went to business trip to India to diagnose machine on which the firm’s software
didn’t work properly.
- After a long trip, he walked into the room and heard that the machine was making strange sounds – it was a
hardware malfunction, not the software problem.
- Problem identified: Why can’t we develop something that will simply listen to machines, to diagnose their
problems?
- They eventually developed a small device that can be attached to any machine and an individual that listens to
the sounds made can identify and diagnose problems early so they can be fixed.

Business example (technology push)

- People sometimes need to work in spaces that are dangerous or inaccessible (e.g., emergency situations like
Fukushima)
- Co-founders of Flyability Adrien and Patrick, based in Switzerland, decided to tackle this problem using the drone
stabilization technology Patrick developed during his PhD at EPFL

Phase 1: Generate your market opportunity set

1) Think about the resource capability/technological

elements and skills you as a founding team have –
define your own skills and abilities
In terms of Flyability, these were the core abilities of
the technology they had:
 2) Then generate your market opportunity set > See
Flyability’s market opportunities that they have
identified.
3) Place these opportunities in the set and move onto
phase 2 for evaluation

Phase 2: Assess deeply

- The key criteria here is market potential and degree of challenge

Step 1: Evaluate opportunity/market potential
For each of the market opportunities, fill out the market potential and degree of challenge matrices
- Is there compelling reason to buy?
o Is there a real unmet need? – related to the hypothesis-driven approach and test it by talking to people
through e.g. surveys.
o Can we provide an effective solution to this need?
o Can we address it (much) better than current solutions?
- What is expected market volume?
o What is current market size? – not expected to solve 100 people’s problems, need to go beyond this.
o How much is it expected to grow? – determine the scale up of it.
- Is it economically viable?
o Can we have sizeable margins? (even if you solve a big problem, you might only make a bit of money
because the sales value is not greater than the costs– difference between a social entrepreneurship and
profit business). Need to see if there is economic sustainability.
o Can customers pay? – WTP
o How sticky will customers be? i.e. are customers likely to be loyal?

Flyability’s evaluation of opportunity potential

< This was done for power plants – thermal boilers

Compelling reason to buy is super high because there isn’t any other alternative
than getting someone to go into the boiler and look for the fault. There is
therefore a large market – not super high because the everyday consumer won’t
be purchasing this. The reason why economic viability is only high is because
there is no guarantee that you will have sticky customers. They will easily move
on to other solutions should the drone fail once purchased or are likely to only
purchase one drone.
Step 2: Evaluate opportunity challenges
- What are the implementation obstacles?
o How difficult is it to develop product?
o How difficult is it to access market? – convincing them to
even TRY your product/service, and distribute the product
effectively.
o How challenging is it to raise funding?
- What is expected time to revenue?
o What is estimated development time? – when is the
breakeven point?
o Is the market ready for our solution? – need to consider
timing.
o How long is expected sales cycle? i.e. how long it takes to
close a sale with a consumer
- What are the external risks? – country with higher political risk?
Covid-19?
o How threatening is the competition?
o How dependent are you on others?
o How susceptive are you to adoption barriers? i.e. how difficult is it to use the new product
- Mark on the potential/challenges sheet at which level each value proposition lies (on the map below)
o E.g. Is there a compelling reason to buy? Med/High estimate
- You then plot the final outcomes into the attractiveness map
 Moon shot – high challenge, high market potential
 Goldmine – low challenge, high market potential
 Quick win – low challenge, low market potential
 Questionable – high challenge, low market potential

Phase 3: Choose! Design your agile focus strategy

1) Choose your primary market opportunity
- Use attractiveness map to guide decision – is any option clearly
superior e.g. goldmine? If not, which best fits your and stakeholders’
preferences (moon-shot vs. quick win)? Or keep searching
- If you want to pursue moon shot, you might want to think about
bringing in new talent/expertise to decrease the level of challenge
2) Assess the product and market relatedness of your primary and
other opportunities
- Product relatedness: How much those products share technological
competences, required resources, and necessary networks? (more related to technology push)
- Market relatedness: How much the customers of these products share values and benefits, sales channels, and
word of mouth? (more related to demand pull) If relatedness is high, you might be able to target two sets of
customers at the same time
3) Choose backup and growth opportunities, and put rest in storage
- Backup options: opportunities that allow you to change direction if you’re not successful that should be placed in
storage. These should not share major risks or assumptions with primary opportunity. These options allow you to
pivot quicker later down the line if your initial strategy doesn’t pan out
- Growth options: opportunities that allow you to create additional value if you succeed. These should be closely
related to primary opportunity because if your primary opportunity succeeds, the hypothesis has been confirmed
which means that similar opportunities are likely to work out as well. Demonstrates to investor that you can grow
rapidly over time
Ultimately you end up with agile focus dashboard!

Does agile focus make a difference?

Most technology firms (72.3%) only consider one opportunity prior to first market entry (Gruber et al, 2008)
- Does it matter? Yes!
o Higher performance (revenues) for ventures that considered more than one market opportunity
 Because of cognitive flexibility and adaptability that this kind of brainstorming promotes
 Even if things don’t go well at first, you know where to look first for your next opportunity – the
back up options
o Initial opportunity set shapes diversification after entry (Gruber et al, 2013)
Agile Focus Strategy:

Wrap ups and key takeaways

- You can use demand pull or technology push approach to find your entrepreneurial opportunities
- By following three stage model, you can systematically generate, evaluate and choose the opportunities

Entrepreneurs – Key Questions (not in slides)

- Questions to ask yourself:
o What are my personal aspirations? – e.g. money, more control, job safety, etc.
o What kind of enterprise do I need to build?
o What risks and sacrifices does such an enterprise demand?
o Can I accept those risks and sacrifices?

- Time value of money and opportunity costs:

o Present value related to future value of money

FV
PV = n
(1+i)

o Reasons for time value of money existing = interest, inflation, cost of capital, deferred consumption
o Opportunity cost = value of the next best forgone alternative
 All economic decisions are made in the shadow of opportunity costs, not just actual costs

- More key questions about realistic outcomes:

o Do I have the right resources and relationships? – divorce rate amongst them is much higher
o How strong is the organisation?
o Can I play my role?

- Entrepreneurship outcomes:
o Entrepreneurship is about finding, evaluating, and exploiting opportunities
o Entrepreneurship is high-risk, high-return
o You need to ask the key questions to yourself before starting entrepreneurship journey
2 – Hypotheses-driven (lean-start-up) approach, and market analysis
Agenda for today
- What is the hypothesis-driven approach?
- What are the hypotheses?
- How to test your hypotheses (and markets)?

These are all features of the lean methodology: Should this product be built? MVP which stands for “Most valuable
product”, Learn-build-measure-cycle and validating and falsifying hypotheses.

Hypothesis-Driven Entrepreneurship = Lean start-up

The lean start up approach was developed by Eric Ries – reading: Why the lean start-up changes everything

Traditional approach vs Hypotheses-driven approach

- Traditional approach refers to build-it-and-they-will-come or waterfall planning approaches
o You learn from the market
- Hypotheses driven approach is taking a more scientific and systematic approach to the hypothesis testing
whether it will actually work rather than rushing to the market and learning from it.
- This enables you to have a fail but of a smaller scale and earlier. It involves repetition.
- E.g. Jaemin opened up a French restaurant in the rich part of Shanghai where there are many French immigrants:
o Traditional approach: had the idea of opening up a French restaurant and thought he found a gap in the
market  spoke to some people  built and launched the restaurant  was not successful as the
immigrants who lived there wanted to enjoy the local food and would cook their own French food.
o Then decided to change their target/concept  targeted the Shanghainese who can enjoy the French
food but in a particular spice e.g. created spicy version of Coq au vin  local people started to like it 
so introduced more food. He did some testing of assumptions e.g. the people living in Shanghai wanted
good, authentic French food.

Hypothesis-Driven Approach
Model and system (from the “Lean Start-up” – Eisenmann et al, 2013) – step by step:
1. Set Vision (e.g. problem you’re trying to solve or what tech are you building on and its application?)
2. Translate vision into ‘falsifiable’ hypotheses – falsifiable means that through science you can prove that your
hypothesis is wrong (can accept/reject based on your data). Who will be your target customer? Why will they use
your product/service?
3. Design tests for hypotheses
4. Prioritise tests for the hypotheses – which hypotheses are the most important?
5. Run tests, collect factual evidence and results
6. Either confirm hypothesis & move on to other hypotheses or pivot (i.e. revise the hypotheses) and go back to
step 4
7. If product-market fit is achieved, implement, then scale and/or optimise

MVP (Minimum Viable Product) features:

- The smallest possible set of key features sufficient to test hypotheses
- Experimenting using MVPs is needed to test the clear, falsifiable hypotheses about your target customers, their
preferences and behaviours
- Gets evidence from the actual behaviour of real people (to collect learning about your consumers)
- Can be through referrals, google AdWords, TEstbirds.com, UserTesting.com
- Can guide whether to persevere, pivot or perish – the hypothesis-driven approach helps reduce the costs of big
failures and the main idea is to remain flexible and revise your business model continuously (new competitors).
 - C.f. prototype–earlier version to test your proof of concept (e.g.,technical/design feasibility); often used for the
internal communicationor communication with early investors
o Pivot = major change to the business mode
 It is a change in element(s) of business plan without changing a key direction/vision (this isn’t a
failure; it’s a natural process of developing & improving your business model)
o Pivots are often needed as 99% of the time, either you’re wrong or you have cognitive biases
o Pivoting is universal:
 YouTube first launched as a dating website allowing user to upload videos, but founder soon
realised users uploaded any videos, not just about themselves, so is an unmet need.
 Burbn (check-in platform) changed into Instagram (identified people just uploaded pictures).
 Netflix changed their business model from posting DVDs to an online streaming service.
 This demonstrates how pivoting can be minor (Netflix) or major (YouTube or Instagram).

How to use MVPs:

 Design MVP that has the smallest possible set of key features, yetsufficient to test hypotheses of interest
 Develop MVP-Make MVP available for purchase/use
 Use suitable methods to collect and analyse data needed to test hypothesis

Hypothesis & Business Plan

- This paper needs to be brought in when you pitch to any investor.

- Shows how for each of the elements, they have their own hypotheses set up and to be tested.

Hypothesis on Product/Service offering - Value Proposition

 You must have a clear statement that explains:
- Key target needs – how the product solves the customers’ problems or improves their situation
- Key product offerings – what specific benefits does the product deliver?
- Key product uniqueness – why the target customer should buy from you and not from others solving the same
problems i.e. what is your USP?
o Should be delivered in a clear way in the coursework presentation
o E.g. Weebly: “A beautiful website starts here.”
 Offering: Platform to create websites
 USP: beautiful websites, better-looking templates
o E.g. Dropbox:
 Problem: unable to access files on different devices, other competitors cannot compress video &
audio files quickly
 Offering: cloud-based sharing and storage service of files
 USP: compress video and audio files instantly
- Value Proposition = a combination of the product-market mix and unique selling points

Hypothesis on Market: Customer segments

1. Typical customers “who” is your target customer – demographics, psychographics (a set of techniques which
segments the market according to personality, hobbies, values, lifestyles resulting in smaller ‘interest tribes’:
- ), buying habits (type of behavioural segmentation which refers to consumers’ price-sensitivity, usage frequency,
loyalty data)
- Their needs, problems or interests “why”
- These can be identified through observation, focus group study…
Hypothesis on Market: Market size
 To see if the target segment is large enough to sustain your business:
- Financial sustainability (whether you can fund the business from profits out of the business)
- You can have different versions with different sizes (TAM SAM SOM):
o TAM: the universe of your target market (based on the demand – e.g. global, multi-national, dream
market)
o SAM: the segment you can reach with your product/service (with regards to geographic
reach/distribution channel)
o SOM: the markets you can realistically obtain (initial target market)

- This involves a timeline.

- NOTE: you cannot penetrate into multiple different markets because there is a dilemma on going for ‘too big’ –
you will lose your focus/key offering to initial target market.
o For teens, the most important social networks are Instagram, Snapchat etc.
o Facebook use is decreasing because their mum is on it
For entrepreneurs: Pick the market segment that you can conquer
The main idea around this is to divide and conquer
As a start up, you need to focus in order to:
- Fully understand your target customers
- Pick the customers that your product/service can serve the best
- Devise the best go-to-market strategy to reach them
o Channel, price, marketing campaign
- Dominate them & create positive reputation
o Network effects: when benefits that each consumer gets increases as more people use the product e.g.
social platforms, e-commerce platforms such as ebay and amazon, data analytics & B2B. Can be harming
in luxury goods or those that rely on exclusivity/selection of users e.g. gyms. Therefore, need to
understand what kind of customer you are targeting.
o Word-of-mouth: When the current users’ view strongly influences whether new users will use your
product. Can have:
 Promotor – brand advocates
 Neutral – brand awareness
 Saboteur – brand detractors

How to segment and choose your target market?

- Market/customer segments: A set of actual or potential customers who:
o Have the same sets of needs
o Have similar characteristics (are homogenous but heterogenous between segments)
o Refer to each other for purchase decisions
- How to segment:
o Identify several market/customer segments
 Try to be creative
o Estimate the total size and growth rates of the segment
o Then, pick the segment that is large enough and is likely to be achievable!

Dynamic view of target market – for entrepreneurs

- Target the innovators and early adopters in the beginning (as they are the greatest risk takers) then move onto
the early majority (in which, pivoting may be needed) – target for network effect and word of mouth
- I.e. You must pick the customers you can serve best with a product/service and devise the best marketing strategy
to reach them (channel, price, campaign) and thus, dominate them and create a good reputation.
Exercise on finding market segments and estimating market size
Imagine that you’re developing a new smart speaker that is specialised for the elderly.

Who can be your target customers? – IMPORTANT TO DIFFERENTIATE BETWEEN YOUR ACTUAL USER & YOUR CUSTOMER
- Aimed at children/grandchildren buying it for grandparents (B2C approach)
- Care givers/hospitals (B2B approach)
- I.e. you can identify multiple different stakeholders and thus multiple different target customers.

What are the functions you want to add to target them?

- Diagnosis and monitoring
- Emergency
- Light treatment
- Reminders of the surroundings
CONSISTENCY IS KEY!

Estimate the size of market segment – No golden rule

1. Top-down analysis (look at previous research/data)
o Determine total size of your target market segment (previous formula)
o Use existing market research / any secondary source
o You may refer to comparable firms (in similar market segments)
2. Bottom-up analysis (i.e. having contact with your consumer/company) – estimate SOM
o Understand purchase patterns, frequencies, and price elasticity of your target customers
o Interview, survey, observations, focus group interview etc.
 E.g., from observations/survey, 50% of consumers in the target segment were purchasing the
similar product more than once in a week
o You may refer to sales of comparable products
3. You often need to use both to estimate TAM, SAM and SOM

Marketing Plan: Channels

- How will you deliver the product to your target customers?
- Direct or indirect channels? direct (indirect): producer ( intermediate e.g. Amazon or Argos)  customer
- Focus on the most promising channel

Marketing Plan: Customer Relationships – ask yourself:

- How you will draw the customer into your sales channel (creating demand), keep them (retention) and grow them
over time – most important stage is the initial one, to draw customers

Operations: Key Resources and Partners – ask yourself:

- What are you putting in place to produce your product?
- Will you produce the necessary parts, or buy them from others?
 - What’s your relationship with your suppliers?
- What will you do first and what next – make milestones and timelines that could include:
o Product launch (if applicable)
o Scale-up production
o Funding
o Marketing
o Business Development
o Team expansion

Financing: Revenue and Profit Sources – ask yourself:

- How will your business be funded over time? How long the specific funding source can last?
- What revenue/cost streams have you built into the forecast?
o Charities keep needing money to sustain themselves; social ventures do not
- At what price will you sell?
- What are the predictable financial and sales risks, and how will you address them?
- How and when will you exit?

NOTE: You don’t often have to do all the hypotheses, many of them are correlated and hence by testing and revising one,
you are automatically revising the others. By picking one and tackling it, you will learn about other hypotheses from it.

‘Lean’ business model canvas

Tools for Testing the Hypothesis – Qualitative Approach

Interview (GOTB Approach):
- Goals:
o Understand the problems and needs of your potential customers
o Learn about any competing solutions to the problem you’re looking to address
o Develop industry contacts and experience
- How to do this:
o Get Out of The Building (GOTB) approach – leave the office and go ask people
o Identify potential stakeholders (e.g., customers/industry informants – see preferential witnesses)
o Use/develop connections to make contact (or cold call)
o Make it clear you aren’t selling anything
o Don’t pitch at them
o Let them lead the conversation (listen to what they think)
o Ask about specifics, not generalities
- Talk to Preferential Witnesses (people that are involved in the target industry or segment with knowledge and
experience; able to give more insight)
o Identify several key PWs and develop and use networks to do this/contact them

Usability tests (test MVPs – key is to NOT intervene)

- Goals:
o Find out if prospective customers have problems with specifics of the current product design
 o Or you can Find out if there is no demand for the proposed solution, regardless of form
- How to do this:
o Find the prospective or current customers
o Ask them to use the MVP in a particular way
o Ask the subject to think aloud as they do this
o observe and record them (for apps/websites: usertesting.com), see if there is anything you can improve
on.

Focus groups
- Goals:
o Identify the key dimensions that people use to evaluate products like yours – this will help to determine
how your product stands compared to your competitors (see diagram below)
o Understand the competition (ask about other products and what aspects they consider most important)
o Develop points of parity and difference which will make up your value proposition
- How to do this:
o Consider hiring professional help
o Recruit small groups of selected users/non-users (randomly chosen)
o Describe how multiple products are similar or different
o Identify key dimensions along which participants perceive and evaluate products

Tools for Testing the Hypothesis – Quantitative Approach

Secondary sources/data
- Goal
o Get a broad idea of potential market size and trends
- How to do this:
o Look at the industry in detail (e.g. Statista) or market reports in archives such as Imperial College
databases
o Industry trade associations
o National statistics agencies
o National and financial press (use Factiva)
o Company websites & databases, such as Amadeus, FAME, and COMPUSTAT

Surveys
- Goal
o Get an idea of preferences of consumer groups
o figure out awareness or preferences for competitors
- How to do this:
o Draw random sample from population of target customers
o Develop informative and non-biased survey questions
o Keep it short and chase responses  analyse responses
- Margin of error: I.e. with a larger sample, your margin of error decreases
o Random sample of 100  95% of surveys are right within ±10%
o Random sample of 1000  95% of surveys are right within ±3.1%

Split tests
- Goal
o To identify key product and/or marketing factors influencing user behaviour
- How to do this:
 o Randomly assign new users to one of several versions of a product (i.e., existing version vs. version with a
new feature)
o Measure differences in behaviour between user groups
o Are there significant differences in behaviour between the groups and do these differences support your
hypotheses?
o Requires sizeable samples to draw statistically relevant conclusions
- Comparing a control to sequential e.g., a charity asking for donations. The control group had all the information
on one page (the credit card details etc.) whilst the sequential involved first asking how much people are willing
to donate and then the next steps came later. The latter led to 5% more donations.

Two below not in lecture slides

Net promotor score (NPS)
- Goal
o To test hypotheses about which customer segments will find products most appealing and to get early
indications of product performance via word of mouth
- How to do this:
o Ask customer questions “On a scale of 1-10, how likely is it that you would recommend this product to a
friend of colleague?”
o 9-10 = promoters, 7-8 = passives, 1-6 = detractors
o NPS = percentage of promotors – percentage of detractors

Market trials
- Goal
o To collect and measure conversion funnel metrics by actually selling your product at a certain price and
to validate demand and refine product features ± marketing messages
- How to do this:
o Consider potential reputational/competitive consequences
o Select relevant subsets of target customers
o Offer product at intended sales price
o Measure consumer behaviour and analyse conversion funnel metrics

Competitor hypothesis
Hypothesis on Industry - Market Type – ask the following questions:
- What are the general trends of the industry?
- Who are the key players and potential competitors? Use a perception map.
- What are their strengths and weaknesses?
- How important is your target market to the competitors?
- What are the substitutes to your product?

Competitor analysis overview

You need to consider THREE types of competitorsI.e. focus on customer’s needs:
- Direct competitors – Those serving same products/services
- Indirect competitors – Whose products/services can satisfy the same customer needs
- Future competitors – Those who may serve the same products and/or the needs

A tool for entrepreneurs’ competitor analysis – Adjacent markets

- Focus on what types of customers’ needs you’re filling in
- Categorise every stakeholder
- E.g. can see the enterprise lab as many things: an education for entrepreneurs, a start-up institution or even
corporate as whatever is developed in the enterprise lab,
need to sign a contract.
- Essentially first identify where your ‘new or re-segmented
idea’ is taking customers from (each of the petals)
 - Try to think about which stakeholders will be your friends or foes (future competitors)
- Identify current and potential players in each category. (who are the main competitors?) & annotate funding
raised or market value of each player
o Here you may think you cannot compete with Disney or McKinsey so focus on the other side of diagram

- Aggregate the market values or show the expected potential market size  To assess total market size of each
adjacent market based on sales, capital raised, market values

Most importantly, you need to carve out your USPs

- Research each competitor, and find the dimensions along which 1) you can compare with the competitors; and 2)
you can distinguish yourself from them
- Competitive grid approach – when there are several directly-comparable products/competitors, you can identify
the key dimensions along which your target customers in the segment evaluate products and visualise these on a
focus graph approach (bottom-right)
 - Now, look at what kind of product/solution you want to solve & what the competitors are currently doing

3 – Design Business Models

Business models
- Business model (Johnson, Christensen and Kagermann, 2008) = an overarching framework on how to create,
capture and deliver value.
o How to configure and integrate the firm’s diverse activities and products around a single
objective/problem.
- FOCUS IS THE KEY
- Some people may say
o A business model is a revenue generating model i.e. indicates JUST how to earn profits
 Subscription model (Spotify) vs. One-time payment model
o But a good business model is beyond the commercialisation plan!
 It’s about how you can synchronise all your activities.
- A good business model is a necessary condition for success – e.g.
o Personal urban transportation = Uber
o Payments and financial services = PayPal, Revolut
o Temporary accommodation = Airbnb (business model began with ‘authenticity’ of a place to stay)
- Therefore, any company’s potential worth will be determined by how good their business model is.
- Famous Example – Disposable Razors vs. Straight Razors (created the razor business model)
o Gillette took the straight razor (had to replace whole thing or sharpen it when it got blunt) and made a
separate replaceable blade on each razor.
o They priced the body very cheaply and the blades at a higher price with higher margins  high profits
o This meant that people who bought the razor body could only buy Gillette heads (subscription model).
o Vs. the initial model where it was a one-time purchase – the subscription model leads to continuous
revenue
- Famous Example – Apple iPod vs. Walkman (the reverse razor-blade model)
o Apple made it easy to buy songs for the iPod when it first came out as it provided the free software of
iTunes, but it was difficult to buy songs for the old Walkman as had to be done through a 3 rd party.
o Their song price was actually cheaper – the higher margin was for selling the iPod.

Designing Business models

- Business model canvas (Osterwalder)
o This is a template for demonstrating/describing your business model as it represents the different
elements of a business model
 o This business model canvas can be broken down characterising the business activities into 4 pillars of a
business model:
 Value creation
 Value proposition
 Value delivery
 Profit formula

- Strategy vs. business models

o Business model = a ‘snapshot’ of configuration for a firm’s operations at any one time
 As an entrepreneur, you may need to change to other business models as your company grows
or the environment changes (i.e. go-to-market strategy, or scaling-up plans) e.g.
 Facebook: went from just a platform for Harvard College students to communicate to
rapidly expanding and their main business model is now advertising.
 Babylon: Virtual health business model – provide remote GP appointments and are
using AI for diagnoses. This requires data to train the AI over time. This is their business
model but is not their overall goal. They need to be friendly to the doctors for the data
even though their aim is to replace the doctors. Thus, this is why it is important to look
into a company’s business model to find out what they are really trying to achieve.
 Scaling-up may be necessary in a company that has an easily replicable business model in order
to gain the market saturation quickly so other competition can’t take over
o Strategy = a plan about which business model to use according to contingency (e.g. competition and
macroeconomics). Your strategy will change depending on environmental factors. This refers to a
temporal dimension – various time dimensions.

- Key components of a business model:

o Value proposition – offering (product/service) that helps customers solve the specific problem(s). I.e.
what problem will you solve, and how, what is your USP and point of differentiation.
 Unmet need = Customers’ problem/jobs-to-be-done
 Offerings = your solution(s) to the unmet need
 USP
o Value creation
 Key activities = activities needed to create your solutions (e.g. working with intermediaries to
distribute your product to your customers)
 Key resources = resources (e.g. machinery, designer) needed for your solutions
 Key partners = from whom to acquire those resources
 o Value delivery – all about the customer
 Customer segments – For who are we creating value? Who are our most important customers?
 Channels – how will we reach our customers? How do they expect to be reached?
 Customer relationships – What relationships do our customers want and how much do they
cost? e.g. John Lewis vs. McDonalds
o Profit formula – your commercialisation plans
 Cost structure (e.g. subscription plans vs one-off product)
 Revenue streams
The key is the linkage to ensure there is consistency!

- Current concerns in the music industry:

o Download model was dominant in 2013; now the subscription/premium model is dominant
 Subscription (premium) vs downloads:
 2013: 19% vs 67%
 Now: 38% vs 16%
It is evident that there is a shift towards a subscription-based model for music.
 Physical sales are very low (30%)
 Others: (e.g., performance, digital radio services, digital form of performance rights): 16%
 Users can still not pay and listen to music, but with ads
o Many artists e.g. Taylor Swift believe that there should be an inherent value placed on art/music and with
companies such as Spotify, some artists do not perceive this is happening with the freemium model.
- EXAMPLE: Paid Music Download (Apple iTunes – LEFT) vs Streaming (Spotify – RIGHT)

- -
 - Therefore, now Apple is moving towards a subscription-based model and has created Apple music. There is some
indication that Apple may drop the download-based model of iTunes because:
o It is not making money.
o Apple Music will compete with customers from iTunes (known as self-cannibalisation)
- Spotify is now testing a new app that is just for listening to playlists – cheaper than Spotify to see who just wants
the recommended playlists rather than listening to a specific artist.
- Other examples of subscription-based music models: YouTube Red, SoundCloud, Tidal

- Another example: Zume Pizza

o Use robots and humans to make pizzas.
o Uses AI and ML to predict what orders customers will place and preloads this into the system, and the
pizza cooks during the delivery of the pizza so it means you do not need to use stabilisers to keep the
food warm when delivering it.
o Speed, quality and price is their focus comparing it to Dominoes.
o Based in San Fran because:
 Tech hub to help improve their tech (talent required) but also increases visibility of investors
 Student population so more deliveries
 Early adopters of technology so will adapt to use of robots

o Can see that this is a good model – they use their own delivery truck because it’s probably cheaper
o Everything they do i.e. all their activities are consistent with delivering better quality pizza
o However, have closed down this pizza model – many issues:
 Hired someone who just came directly from coding school
 There were issues of undercooked dough or cheese running everywhere as the truck hit a bump
o Now focusing on tech infrastructure to make food chain smarter, improve efficiency and reduce waste.
- Well established business models can disrupt the established industries – e.g.
o Uber
o Revolut
o Skype
o Airbnb

Case Study – Dropbox

- Value proposition
o Unmet needs: Large files couldn’t be shared through email, could not back up your files and access them
from multiple devices
o Key offerings: Synchronisation of files between many devices, compressing audio and music files instantly
so they can be shared, file back up
Dropbox was considered a late entrant in the market; the other platforms were offering one of the functionalities
but not all of them together. E.g. Carbonite: you have to back-up everything all together and you cannot access
each file once you back it up. Hence, there was a clear need for Dropbox.
- Value creation
o Focus: simple and reliable service
  Think about the My Documents folder and why they purposely did not implement this
 Usually listened to customer feedback but not here because they felt that the sync with my
documents folder would no longer create a simple and reliable service – their target market
o Big area of fixed costs is from the data centres to save all the files
 Dropbox worked with Amazon on this so that they would not have to do it themselves
 They could then focus on the product itself
- Value delivery
o Customer segments
 Could go B2B or B2C
 Decided to go B2C even though benefits of B2B: higher margins & fewer complaints to get
through.
o Channels:
 Go-to-market strategy was of Trojan horse – they directed Dropbox to B2C market hoping many
employees would use it personally and thus meant their IT system at work will need to certify it
o Customer relationships:
 Good customer involvement with developing their products however did not listen to them on
all feedback e.g. My Documents
- Profit formula
o Price structure
o Cost scheme
- Key words:
o Gatekeepers: to get the B2B deal and their belief, you need to show you have traction. But for start-up
companies you cannot do this.

Updates on Dropbox case

- Dropbox launched ‘Dropbox for Business’ in Nov 2013 and Dropbox Enterprise in Nov 2015 – because they
achieved maximum gross for B2C so their scaling involved moving to B2B market
- Dropbox stopped working with Amazon in 2016 – Dropbox is now so big that it is cheaper to buy data centres
themselves (fixed cost is still large but the variable cost per user is less than if they continued to pay Amazon for
this)
- Dropbox IPOed in 22 May 2018, still remained as number 1 player in a file-storage system industry
- Is targeting to be an enterprise software portal
- Now are attempting to become a platform to be used at work in which you can access different services e.g. Slack
or Google docs

Key take-aways
- Business model = an overarching framework that describes how a firm creates, delivers and captures value for
the customer
- Business model canvas can be understood as a tool for describing the essential parts of a business model
- Important to clearly identify jobs-to-be-done (unmet needs) & synchronise your overall activities around the
need
A menu of business models/commercialization plans

4 – Go to Market Strategy
Go-to-market and Scaling-up Strategy
- G2M plans: how to execute your business model (i.e. how you get to the market). A broad term that includes any
plan needed to get your business model implemented, including:
o Marketing plans/strategies – 4 Ps
 o Intermediary business model(s) – changing your business model later on
o Product development plan
o Roadmap plans and milestones (e.g. by when you would begin production, work with beta testers etc.)

- Scaling-up plans: where to go next.

o Growth option in the agile focus
o Investors will always ask where you are going to go next – in case of high demand, to get to their exit
strategy, to determine risks and the portfolio, to figure out how much they can allocate to the business
project (to determine its scale and growth) and to always consider the opportunity cost.

- G2M and scaling up plans are relative terms

o Often, you need to change part(s) of your business model over time
 E.g. in relation to the environment
o Or, you may need entirely new business models
o For example, if below ABC are all different types of business model and B is the business model you
believe will be most successful. Then you may use A to get your business there and C to expand once you
have become successful. I.e. new business model for a G2M strategy and scaling up plans.
o Or, if A becomes the main business model, then B and C are scaling up plans.

A B C

- E.g. Spotify
o Curation-centred streaming – this is their main business model based on freemium
o Curation-only streaming powered by AI? – this is a scaling option they are exploring (i.e. creating a
platform of just playlists)

- E.g. Babylon GP @ Hand – intermediary business model

o Using mobile technology, link GPs with patients remotely
o Using AI for diagnostic purposes (this is the ultimate plan, but they need to build up the information and
backing to be able to do this  so they need an intermediary G2M plan i.e. linking GPs with patients
remotely to access GP data)
o Pitch the mobile tech as their main business model and the AI as their scaling up strategy (can apply it in
different countries)

- E.g. Zume’s G2M and Scaling-Up plan:

o Half-baked, half-baking on delivery (intermediary business model – G2M plan)
o Full baking on the delivery (final business model)

STARTUPS need focused marketing plans

- As part of the go-to-market strategy, you also need your marketing plans on how to reach your TARGET market
o You need to truly understand the people – what kind of people you are targeting and the best way to
reach them, figure out what type of customers you need at the different times – are you testing the
product? Are you building the MVP?
o To get initial users, Dropbox posted a demo video on the site called “Digg” (the holy grail for computer
scientists/programmers) and were asking for beta testers.
o Was humorous and full of “Easter eggs” – e.g. Obama in a funny picture, mocking the Microsoft CEO. It
was all targeted to computer programmers who loves this sense of humour.
o +70,000 users (+1.4% up) overnight

- Other details to be included as the go-to-market plans

o How will you produce your product/service (e.g. licensing? OEM (original equipment manufacturer)?)?
With whom will you work with to do so?
 o Where will be your first target market? How will you deliver your product/service to the market (i.e.,
logistics)? Where will you locate your office?
 E.g. London – which borough and why?
o If you require a set of key employees, how will you get them?
 E.g. people you need to build the algorithm
o If you’re building an online platform, how will you get your first set of participants from each side?
o If you’re building something powered by AI, how will you develop it?
o DETAILS ARE IMPORTANT!

Differentiation approaches to design business models

If you need a different business model (other than technology push or demand pull) to enter the market,
consider:
- 4 different types of G2M plans
- Take others’ business models and revise/tweak them to establish yourself
- NOTE: you don’t need to enter a new market – what target markets are currently being underserved?

- E.g. New product in an old market: Re-segment. Can be:

o Low-cost focus
 E.g. Ryanair came in with a very low-cost alternative to travel
 E.g. ViaVan refer a friend plan (get free rides at first and then you start to use the service after
this even though you need to pay for it)
o Differentiation focus
 E.g. beer/alcohol industry
 Over the years, the number of beer companies is decreasing so fewer beer companies
have bigger market share/penetration. The larger beer companies were targeting the
average tastes (i.e., the average needs of many consumers) whilst the smaller
companies were outcompeted.
 New companies’ re-segment and target specific needs through market segmentation to
increase the number of sales of beer – this led to formation of microbreweries.
 E.g. Brew dog, Samuel Adams

 E.g. Newspaper industry

 The Guardian covered every section of the news topics and were market dominating.
 There were special newspapers that focused on a particular segment e.g. technology to
help start-ups that need to know specific demand.
The lesson is even for an old market you can find new needs – the problem of the people (a good
opportunity).
- Blue Ocean Strategy – new product, new market
o Can use ERRC (eliminate, reduce, raise, create) to renovate the existing business models and apply it to a
value curve (compare business models)
o Makes the competition irrelevant
o You can also design ‘cool’ marketing campaigns to get your target market on board – E.g. Dropbox video

- Blue Ocean Strategy – E.g. Nintendo Wii

o Apply ERRC to the value curve and visualise the blue ocean
o Not all aspects of ERRC need to be used
o Nintendo managed to simplify gaming and appeal to the tier 3 non-consumer and market a product
which appealed to them  huge profits early on

- Blue Ocean Strategy – E.g. Cirque Du Soleil

- Key assumptions (that need to be tested):

o Targeting a different customer group which we cannot be sure they are interested in the circus (instead
of targeting children, they are targeting an older audience)
o People do not want to watch animal shows anymore
o People would value the artistic elements
You need to justify the assumptions that you make & why you think the hypotheses work e.g. increasing
awareness of animal cruelty – Don’t bring this into investor pitch but need to show how your product is different.
Case Study – Handpresso
- Innovation: new ways of combining existing parts (recombination) – like in the case of Handpresso. i.e. nothing is
really new or ground-breaking – it is a new way to combine different elements from other products.
- The opportunity of Handpresso
o A portable espresso-making machine – is it an attractive opportunity?
 Single serve device
 Portability: useful for people out on the road all day e.g. campers, small households, travellers,
hikers, bikers, drivers etc.; but may be too heavy to carry around
 But small target market (in cities) – people can go to a shop, you can get coffee at work
 Also, instant coffee exists – people can just bring their own coffee already
o Novel features:
 Gets people involved in the process (so they enjoy it more – Ikea effect) – People have to hand-
pump the espresso maker
 Using an air compressor to get the optimal pressure requirement of 16 bars rather than water
pumping
 It is portable
o What roles did prototyping play?
 Confirmed that coffee could be made with air pressure and that this could work by integrating
an air pressure device with a normal espresso machine  prototype created enough pressure to
break the pod seal.
 Realised that aluminium absorbed all the heat which made the coffee cold so used plastic instead
 Were able to determine the optimal size of the infusion chamber of 55ml (to account for the
water needed for an espresso and the water absorbed by the pod)
 Came up with the idea of using one hole for pouring in water and then inserting the pod.
 Determined the right size and weight for the Handpresso
 Enabled them to form a partnership with Illy
o What options do Nielsen have for monetising this technology?
 Forming partnerships with Nespresso and Senseo
 Although Nespresso did not like the idea because they were so concerned about their
brand image (Handpresso is not an elegant way of making a coffee)
 Create their own business
o Value proposition:
 Key target needs: People who are e.g. drivers – long distance and need coffee
 Key target offerings: Portable machine that enables you to make good quality espressos
wherever you like
 Key product uniqueness: No need for hot water
o G2M Strategy I.e. what would you do to get this product to market:
 Target segment – campers, drivers, people in small houses/flats, ‘coffee-heads’,
environmentalists, bikers, skiers, boaters, fishers, hikers
 Marketing channel & campaign – road billboards, petrol stations, magazines, exhibition, test
bloggers, social media
 Distribution channel – sell at campsites / petrol stations, online, work with car mechanics/car
manufacturers by offering a free Handpresso if someone signs up with them.

Key takeaways
- Go-to-market strategy is your plans on how to implement your business model
- Scaling-up strategy is your plans on what you will do once your business model is successful
- These are relative terms, but essential parts of your business plan
5 – Entrepreneurial Financing and pitching
Sources of financing
- Internal
o Own income, savings
o Family, friends, fools (3 Fs)
o Cash flows – cash flow generated through your business and invest it back in your company
- External
o Equity (angel investors, VC funding)
o Incubators & accelerators
o Crowdfunding
o Government
o Bank loans

Venture Capital
- VCs are intermediaries providing advice and money in the exchange of equity and fees.
- Equity is invested in multiple rounds (These are relative terms as it depends on when you get the investment: pre-
seed, seed, series A, series B, …)
o Seed:
 To fine-tune business model & develop idea further
 E.g. initial market testing, hiring instrumental team members, develop prototypes & beta-testing
 Investors are rewarded with convertible notes (option to convert debt into equity), equity, or a
preferred stock option (why preferred? First to be paid if the company goes bankrupt).
 Angels, early-stage VCs, start-up accelerators
 £250k - £1.5M
o A:
 Once you are successful, achieve all the milestones you set up and are ready to go into the next
round of investment (i.e. A)
 Expected to grow FAST so need to have clear evidence of product-market fit and/or revenue
growth
 VCs, “super” angels
 Normally receive equity (Series A preferred shares)
 Increased prestige
 £1.5M - £5M
o B, C+:
 Grow RAPIDLY
 Large investments as explosive hires, expand into different market segments (scaling up),
experiment with different revenue streams, or M&As
 VCs, late-stage VCs
- Each round consists of multiple trenches (based on achievements)
o E.g. invest 10m into trench A (2m), B (5m) and C (3m) – given on milestones of what you achieve
- VCs almost always require a board seat to confer decision powers – you need to follow their advice
- Deal structures vary widely and often concealed

VC investment cycle
- Investors get investment money from elsewhere: investment banks, pension funds, individuals  invests into a
VC fund  this funds a start-up. Once the start-up reaches $1bn it is known as a unicorn. This investment can
redistributed in other ways e.g. as cash or shares (back to investors).
- The cycle you can see below shows how VCs collect income:
o Keeps 20% of carried interest and earnings
o Take 2% in management fees per year
Angel Investors
- Individuals NOT COMPANIES – usually the FIRST investor, invest before VCs
- Wealthy private investors (often experienced, serial entrepreneurs) that look for return, fun, and an opportunity
to help other entrepreneurs (usually want hands-on involvement).
- Often specialised in a few sectors and can invest between £10k-500k (angel syndicates may do more)
- Tend to rely on networks to spot opportunities
- UK list: www.ukbusinessangelsassociation.org.uk
- Expectations:
o Financial return c. 30-35% p/a
o Specialised sectors (will only invest if there is a ‘click’ with the entrepreneur, e.g. restaurant owner will
invest in restaurant entreprenuers as they will know what is a good idea and can help someone find the
right people and make the right investment)
o Invest in an early stage (more than VC), so will take a higher risk (hence require a higher return on their
investment)
o Consider themselves as part of the entrepreneurial team (i.e. become part of the founding team) but
they may be bad because they can then make decisions to fire you if you don’t learn quick enough!
 Provide guidance to founders
o Do NOT go for the biggest money (go for what you need) because you may not succeed in reaching the
tranches the investor sets and so you are more likely to get fired.

How VCs/Angels exit? i.e. how do we become bigger, how VCs make most of their money
- Initial Public Offering (IPO)
o Listing invested firms to publicly-traded stock market – market valuation will dramatically increase.
o Ideal, but not prevalent (<5%) because need to consider many factors to determine your valuation e.g.
market conditions, macro-economic environment.
- Trade sale
o Sale of a firm’s equity in its early stages to other financial investors
o I.e. being acquired by another company
- Bankruptcy / Liquidation: Selling every asset you have. “Nobody makes real money until the exit”

What do VCs/angels look for?

- The team & record: Especially positive if have worked together successfully in past. Team they can trust in.
- Clean IP portfolio: Especially in early stage tech firms. Patent is NOT perfect protection – can be detrimental in
20% of cases.
- Sector: Tend to invest in sectors that they know (check their investment portfolio)
- Large, growing markets: Looking for unicorns
- Financial indicators: e.g. gross margin, cash flow – can you produce profit in a relatively short time?
- Exit route: Can I get out? When? How?
- Due diligence: Any skeletons in the closet?

Deal killers (other side)

- Wrong personnel: Leave positions vacant rather than recruit wrong people e.g. CEO
- Insufficient market size: Best plans is to address huge opportunities
- Insufficient “critical mass” to technology: VCs will not back a one-shot wonder
- Problems with IP portfolio – if a competitor has a similar product with strong IP, it ain’t happening chief

Dilemma of growing fast

 - Wasserman, N. 2003. Founder-CEO succession and the paradox of entrepreneurial success. Organisational
Science 14(2): 149-172.
- If some entrepreneurial companies grow really fast, the chance of Founder-CEO’s success of achieving critical
milestones rises dramatically.
- If you negotiate down, i.e. ask for less investment than offered, then you are more likely to reach milestones.
- Sometimes, even if you reach the milestones, with a fast-growing company, the investor may think that you are
not suited for a bigger company and want someone who is experienced in this.
o Basically, if your company is growing too quick the investors will look for a better CEO.
- So, don’t want to be failing or growing too quick.

Accelerators and incubators:

- NOTE: Incubators often focus on earlier stage than accelerators (accelerators are after getting angel investment
but before getting VC investment)
- To get into accelerator/incubator programme you need to apply for it
- Provide early-stage businesses:
o Coaching & learning
o Office space
o Networking – meet other startup teams
o Financing
- Four characteristics:
o Fixed-period of time
o Cohort-based
o Mentorship-driven
o A demo-day – finalise cohort
- Types of support provided & conditions vary:
o Industry focus (few specific sectors)
o Equity requirement
o Residential requirement
- Examples: Y Combinator, techstars, Barclays Accelerator, SeedRocket, blueprint health, distill ventures, Imperial
College London Incubator
- Yet research suggests that only top programmes actually ‘accelerate’ and the most important benefit is intensive
learning (rather than credentials).
- “Accelerators "accelerate" growth of an existing company, while incubators "incubate" disruptive ideas with the
hope of building out a business model and company. So, accelerators focus on scaling a business
while incubators are often more focused on innovation.”
o Accelerators operate in cohorts with intensive mentoring offered to startups ovr a time-limited period
- “An incubator helps entrepreneurs flesh out business ideas while accelerators expedite growth of existing
companies with a minimum viable product (MVP). Incubators operate on a flexible time frame ending when a
business has an idea or product to pitch to investors or consumers. The timeline for accelerators is a set few
months during which the entrepreneur receives mentorship, funding, and networking help.”

Crowdfunding
- Funding a project by raising contributions from a large number of people
- NOT going for financial investment from wealthy person or intermediary, it is from the public!
o Crowdfunding is a way of raising money to finance projects and businesses. It enables fundraisers
to collect money from a large number of people via online platforms.
o Crowdfunding is most often used by startup companies or growing businesses as a way of accessing
alternative funds. It is an innovative way of sourcing funding for new projects, businesses or ideas.
o It can also be a way of cultivating a community around your offering. By using the power of the online
community, you can also gain useful market insights and access to new customers.
- Range of platforms – e.g. Kickstarter, Indiegogo, Funding Circle, Crowd Cube
- Diverse categories – art, comics, dance, design, film, food, games, music, theatre etc.
- Types:
o Donation-based – e.g. Kickstarter INTANGIBLE rewards (i.e. “Thanks” given)
 Individuals donate small amounts to meet the larger funding aim of a specific charitable project
while receiving no financial or material return – e.g., token, prestige, thank you card.
 E.g., pledge £25 or more = Bellingcat laptop stickers; pledge £30 or more = Bellingcat mug;
pledge £40 or more = Bellingcat t-shirt
 o Reward-based – e.g. Kickstarter TANGIBLE rewards (e.g. product such as a mug, first chance to try the
product)
 Individuals donate to a project or business with expectations of receiving in return a non-
financial reward, such as goods or services, at a later stage in exchange of their contribution.
 On top of intangible benefits
 E.g., donate $XXX and win type-c hub
o Credit-based (or P2P, peer to peer) lending – e.g. Funding Circle
 The crowd lends money to a company with the understanding that the money will be repaid with
interest. It is very similar to traditional borrowing from a bank, except that you borrow from lots
of investors.
o Equity-based (or convertible notes) – e.g. Crowd Cube  ordinary shares given
 Sale of a stake in a business to a number of investors in return for investment. The idea is similar
to how common stock is bought or sold on a stock exchange, or to a venture capital.

- Many successes from crowd-funding:

o Chilango – Mexican restaurant chain
o Brewdog
o Camden Town Brewery
o Star citizen
o Patch plants– startup company that delivers small/large size plants.

Many think crowdfunding is the best choice as don’t deal with asshole investors with Angel/VC investment
nor you cannot be kicked off as CEO. Also good if product is technologically simple and needs public
endorsement.

BUT, may not be the best choice because…

- They may not understand the technical difficulties
- Equity spreading thinly across many different individuals so many stakeholders – potential financial and control
loss
- Impatient
- High status VCs generally don’t appreicate it
- Cannot get (valuable) advice from public

Government support
- Varies widely across countries & regions
- Some common types
o Research grants – Imperial spin-off idea is that a research paper based on the research done at Imperial
o Co-investment with private investment partners
o Loan guarantees
o Fiscal measures (Grants, subsidies, tax breaks)
o Incubation structures

Commercial loans from banks

- No transfer of control/equity and no advising
- Loan decision criteria:
o Collateral – real estate, receivable, inventory, equipment
o Capital – debt ratio, risk evaluation
o Character of business – business plan (go through detail of business plan!)
o Capacity – cash flows, debt coverage ratio
- May or may not be applicable for entrepreneurs (depending on their history)
 o E.g. restaurants, small retail shops (bank is a good option)
o Depends on the company’s cash flow and collateral
- Generally do not ask for loan when building a new technological product; good that they are not asking for equity

You need to bootstrap

- Defined as building a company from the ground up with just internal funding and luck
- Try to minimise external funding by:
o Keeping costs as low as possible
o Making early sales
o Using cash from other sources e.g. consulting services
- But may slow down growth (must not hinder necessary investment)
- Why do we need to bootstrap? Investors are looking more into how you are spending your investment from the
VC/Angel so need to demonstrate that you are using the money for it’s stated purpose.

6 – Social Entrepreneurship
Today’s agenda
- What is social entrepreneurship?
- How do social entrepreneurs differ from other entrepreneurs?
- Guest lecturer: Alexandros Angelopoulos (Co-founder & Director, Elpis Solar)

What is social entrepreneurship?

- Social entrepreneurship is RELATIVELY new so there may be some variance in the definition.
- Social entrepreneurship is the hybrid between traditional charity and traditional business.
- It is someone who tries to combine social value with financial value (i.e. profit).
o These are usually seen as conflicting
o By combining social and financial value, there may be difficulties in determining the primary goal in what
are we actually trying to maximise/optimise.
- There are different versions/layers depending on how much you focus on the financial goal or social goal.
o But, even the least financially orientated companies are aiming to make at least >75% market revenue.
- Need to be clear on the definition:
o If 30% of your total revenue comes from profit (your core business revenue stream) and the rest from
charitable funding (e.g. grants, donations)  charity/NGO
o If ~100% of your total revenue comes from profit (your core business)  traditional business
o The bottom line is that in social entrepreneurship, more than 75% of your revenue should come from
your core business model.
- In social enterprise: your profit is reinvested into your social charitable aspect.
- In traditional business: your profit is reinvested into the core business functions.
- Thus, it is clear that the stakeholders/investors into the different enterprise types will vary.

Example: Zero Waste Club

- Make sustainable recycled household items.
 - They are initially B2C but have pivoted and are targeting B2B especially the boutique hotels who want to add a
sustainable appeal.
- This is more corporate compared to Elpis (see below).

- They reinvest 100% of their profits to social entrepreneurship (100% of profit into achieving the goal of zero
waste e.g., Research and Development into creating new truly sustainable products out of waste and super
sustainable materials or Producing more stock of our existing products to keep up with increase in demand

Who invests in social entrepreneurship?

An investment approach that intentionally seeks to create both financial and positive social or
environmental impact that is actively measured (WEF, 2013).
- Called impact investing.
- Examples:
o Acumen (based in NY)
o Triodos Investment Management, BlueOrchard and Vital (all based in Zurich, Switzerland) – Europe has
really shifted to having greater sustainability concerns

What do impact investors expect?

- Why do people invest in social entrepreneurships?
o Most of them are looking for just a reasonable market return
 66% of respondents state they are looking for risk-adjusted, market-rate returns (i.e., they are
not after huge returns that they could obtain from investing into the average stock return).
o They are not looking for unicorns – they don’t care about a billion-dollar company, they are looking at
small organisations who do relatively well.
o 19% of respondents are willing to take below-market-rate returns closer to market rate i.e., negative
returns when considering opportunity costs (LOWER THAN opportunity costs)
 They think making +ve impact for society and environment is more important
o 15% are willing to take below-market-rate returns close to capital preservation i.e., willing to take a low
return as long as the money they invested is saved.
- What are people looking for in social enterprises?
o Organisations that conduct business responsibly whilst still maintaining a good social impact.
o Unlike charities, social entrepreneurs still pursue financial goals.
How to make business models for social ventures?
Study of 91 social ventures indicates that changes of two aspects of the existing business models can lead
to successful social ventures:
1. Economic actors involved – two different sides (consumers and regulation)
o Enhancing customer awareness of the problem you are meeting (consumer)
o Facilitating effective regulation (government – regulation change can make way for opportunity for new
business model)
2. Technologies
o Replacing a key resource/technology with a more sustainable one e.g., Freitag bags changed their key
resource to recycled truck tarps to make their products (bags)
 They can sell this as their USPs: environmentally friendly, lower carbon impact, unique designs,
sell the story behind their material
o Creating a new enabling technology/repurposing the existing one e.g., Medic Mobile in which
community health workers use a mobile phone to track pregnancies in African villages far away from
clinics. This increases access to antenatal care for women and helps community health workers to
monitor pregnancies and remind pregnant women for check-ups. This increases births at clinics which
reduce unnecessary complications.

How to pursue social entrepreneurship

1. Define scope
o What are your minimum social and economic goals, rules of engagement, disqualifying conditions?
o How much weight are you giving to social or financial goals?
2. Attend to the socio-politics
o Who are your beneficiaries, potential allies, needed indifferent, meaningful opponents?
o Who are the stakeholders and how will you balance their goals?
3. Use a lean approach
o What are your hypothesised unit of business and unit of benefit? How can you best test these
hypotheses? What are the likely challenges of growth?
 E.g., people will pay a higher price for your sustainable product (due to higher manufacturing
costs of recycled materials rather than more readily available)
 Focus groups, experiments, survey etc.
o Need to consider all the stakeholders in all the value chain and the impact on each of these as
benefitting one group may be at the detriment to another/an investor.
4. Try to anticipate unintended consequences
o What unintended (second order) effects might you create?
 o E.g., AI models have been shown to have a negative impact on the carbon footprint.
o Mindful on transparency

7 – Protection
Agenda for today
How to protect your idea (3 methods)
- Intellectual Property (IP) Rights
o Patents, trademarks, copyrights, design rights, trade secret
- Non-IP related strategies
- Open-source strategy – you do not intentionally seek IP protection; you will share your product with other
companies for commercial purposes (e.g. Tesla)

Protection
Everything you put in place to prevent others from exploiting your ideas commercially.

How?
- Legal – Intellectual property (IP) rights
o Patents – exclusive rights to use and sell an invention
o Trademarks – e.g. Starbucks, sensory expression e.g. sign, design and expression that are tied into the
identity of the specific company/brand; makes it distinctive
o Design rights – e.g. Crocs, Apple design interface (containing the aesthetic and functional value)
o Copyright – e.g. painting, photograph, choreography, structure (original, creative literary, dramatic,
artistic and other works e.g. ballet, dance).
o Trade secret – e.g. Coca Cola formula is unknown
- Non-IP protection strategies (can consider alongside IP strategies or beyond this)
o Complexity & “tacit” knowledge
o Speed to market / first-mover advantage
o Reducing an incentive to imitate

Different types of IP

- The bottle shape itself is protected by the design rights

o Every other bottle was straight line
o This allows reduced product in the bottle and increased grip
- Pull tab (pull-ring level) was patented in 1963 and it belongs to Coca-Cola
- The Coca-Cola brand is protected by the trademark – distinctive
- The formula to make Coca-Cola is covered by the trade secret

Why is IP important?
- Ideas and knowledge are becoming more important than ever
o 80% of the market value of S&P 500 firms comes from ‘intangible assets’ – Ocean Tomo
- Provides a (temporal) monopoly to a creator
 o Facilitates the ex-ante incentive to create technology to creators
o Motivates competitors to develop the technology further
- I.e. with IP, more innovative technologies are being developed in order to capture greater market value

Patent
- A right to exclude others from making, using, and selling a product or a process based on the invention.
- IMPORTANT: The invention/innovation should be novel from the perspective of a person skilled in the relevant
areas/experts
o If you get a new way to get the similar effect with the patented innovation, you cannot patent it
o If someone in the area can easily imagine it, then it is not patented
- Typically lasts for 20 years (‘the term of a patent’)
- Territorial, application-based: need to fill in the application for a patent, need separate applications for different
countries.
o WIPO: World Intellectual Property Organisation – one of the specialised agencies of the UN which
provides the Patent Cooperation Treaty. This provides a common procedure for filing patent applications
across its contracting member countries.
o If you filed a patent in any PCT-country, you have 12 months to file applications in other PCT-countries.
But, need to pay translation and attorney fees.
- Application granted based on the originality of the ideas
o Application document needs to cite previous granted patents whose technology is similar or incorporated
into the focal idea – This is reviewed by ‘Examiners’ to ensure you are not missing anything
- Once granted, patent discloses ALL the details of your idea/technology to the public (e.g. how to make it so
other specialised people can make it)
- Can be challenged at any time until it expires – so can actually backfire in a start-up company.
- Costs between £2,000-£6,000 for a single application.

ANY BIG TECH GIANT ACTIVELY USES A PATENT – Acts as a reference market for patents

To be a patent, an invention, evaluated by examiners, should meet the following criteria:

- Novelty
o Potentially contribute to human knowledge
- Inventive step (non-obviousness)
o Not obvious to someone skilled in the area. NOTE: this is different from copyrights which is based on the
common individual.
- Capable of industrial application

Not to be a patent:
- Discoveries, scientific theories, mathematical methods
- Schemas, rules, and methods for performing mental acts, playing games or conducting business (e.g.
management or teaching methods)
o Not directly related to industry application
- Presentation of information ( copyright)
- Inventions that likely encourage offensive, immoral or anti-social behaviour (needs to be ethically acceptable)

Even if no one has come up with the invention, if someone in the area can easily imagine it, then it is not a
patent.

Purely artistic ones cannot be patented (e.g. movie, choreography) as it is not capable of industry
application

Differences across nations/regions

Biggest IP nations: China, US, Korea, India and European markets

Specificity in the US application: FIRST-TO-INVENT vs. FIRST-TO-FILE

- First-to-invent (US) – a patent is granted to the one who invented first and thus there are a lot of lawsuits around
this.
 - First-to-file (EU and most of other countries) – a patent is granted to the one who filed the application to the
patent first.
o Varying patent application pendency (days) – US much longer than UK. Thus, need to be careful with the
market you wish to file the patent, and you need to strategically time the release of the
technology/application.

Usually released during November

SIPO – Chinese / State Intellectual Property Office (SIPO)

Copyright
- Protects original literary, dramatic, artistic, and other works.
o Software (e.g., games), photographs, manuals, broadcasts, recordings, and public performance.
- Protect only original expression of ideas (typically recorded); not ideas themselves.
o E.g. two different films based on the same ideas but expressed in substantially different ways then it is
not a breach of copyright.
o Rule of “the substantial similarity” – An ordinary person would conclude the amounts of copy of
expression (not an expert).
o However, names or titles CANNOT be copyrighted as they may be duplicated coincidentally.
- Arises automatically – Need not be asserted or declared.
o Thus, is free and will apply regardless of a copyright notice or not.
o The © symbol is optional
- Usage is allowed for private, research or educational purposes, criticism, news reporting, parody, and helping
‘disabled’ people.
- Need good records of creation date and author
o Otherwise there can be some discrepancies on when something was created or written.
o Use © symbol to get a better legal protection during infringement suits (as signifies a clear commitment
to protection, can also deter infringement)
o “Poor man’s copyright”: You may post the work to yourself, a bank or solicitor by special delivery post
using the postmark to establish the date
 You must NOT open the envelope until the moment you are required to prove your authorship
 Yet still with limited effectiveness (esp. in the US)
o Otherwise, register your copyright
- Duration of protection
o Author’s life +50 ~ 100 years (I.e. lasts longer than the patent)
o 50 years after its creation (for performances or music)

Copyright vs patent:
- Expression vs effect
- Ordinary person vs industry experts
- No need to declare vs examiner & legal process

Under these circumstances, you can use someone else’s creation without getting permission

Trademark
- A protection of the distinctive sign (sensory image)
o Enables customers to identify and distinguish goods or services of a firm from those of others
- Must not conflict with existing registrations for similar goods or services
o E.g. EA and Energy Armor – EA filled a lawsuit in 2011 which resolved by negotiation
- Must be applied and registered in different countries
- Duration of protection – Indefinite, yet subject to renewal at 10-year intervals
- Different type of trademarks:
o House mark: About the parent company e.g. Toyota
o Product mark: About the brand e.g. Lexus
o Quality marks e.g. Soil Association Organic Standard
o Shape/packaging of products
o Sound-based trademarks e.g. potato sound for Harley Davidson motorcycles
 E.g. the company ICI have a house mark but a product mark on Dulux

Trade secret
An idea is the best protected as long as it remains secret (i.e. keeping it to yourself)
- Formula, practice, process, design, instrument, pattern, commercial method, or compilation of information
- Not generally known or reasonably ascertainable by others, by which a business can obtain an economic
advantage over competitors or customers
- Devices to protect secrecy:
o Confidentiality agreement for employees
o Non-Disclosure Agreements (NDAs) with manufacturers or investors
o Lock your cabinets or passwords on computers (better electronic protection)
o Accompany office visitors

“Under the right circumstances, though, a party that believes it owns a valuable recipe can use copyright law or trade
secret law to protect it. Which one of these protections it should rely on will depend on how the recipe will be
monetized. For example, a celebrity chef can publish a cookbook with his or her recipes and profit from the book
sales. Of course, this will require the chef to reveal the “secret” recipe to the world at-large. Alternatively, a
restaurant that believes it has a truly “secret” recipe for a popular dish that gives it a competitive advantage can use
trade secret protection to prevent its employees from stealing the recipe and using it in competition.”

Design rights
- Protects appearance of products (aesthetic value)
o Shape, colour, texture materials, ornamentation etc. or a combination of pattern and colour
o Designs must be “new and of individual character”
o Can be a part or the whole design
- Arises automatically; no need for declaration
o Yet, when registered, protected longer and stronger (esp. during the lawsuits)
- In Europe and US, application can be filed within a year after first marketed
- Protects an invention that offers a new technical solution to a problem BUT does NOT protect the technical or
functional features of the product
- Excluded from protection
o Methods or principles of construction
o Features without any design element
- Duration of protection
o Minimum: 10 yrs. from date of first sale or 15 yrs. from the date of creation
o 25 years from date of application
 Need to renew every 5 years (before its expiration after 25 years)
- Example of lawsuit: Dyson suing Vax over vacuum design

I.e. there is no perfect protection for a company in every market/every country so need to ensure good
execution. Take different approaches depending on your idea, be ready to keep moving forward and be
careful about claiming the possibility of IP rights.

Pros and cons of IP

Pros:
- Provides exclusive rights to exploit an idea or creation – Enables you to control your market
o Create an entry barrier
- Can generate income by licensing to others
o +$100bn per annum generated by licensing in US
- Higher chance of being invested
o VCs and angels love it

Cons:
- Costs for applying and defending can be substantial
o Litigations last about 2 years and costs ~$3 million (£2.4m)
 - May not earn anything from licensing
o Only 2% of patents are valuable
- May provide a ground for the other creations
- May slow down the growth of new market

Open source strategy – Tesla

They will not pursue any infringement lawsuits and will allow people to use their technology in good faith.
Why?
- To grow the entire market at the expense of substitutes – grow the pie before you cut it so every goes home
with a bigger slice.
- To drive down costs from suppliers – competitors can build up on Tesla’s tech through manufacturing which will
aid faster tech development.
- Allows your product to become the industry standard and gain market share.
- To get a positive publicity – e.g. Tesla was spoken about positively by Obama.

A few words to the entrepreneur

- If you’re developing a totally new and valuable product AND you’re not confident to be a leader – Consider IP
o Tesla once focused on IPs
- Once you become the market standard (or are likely to be), open your technology
- Again, no perfect way to protect your idea!

If you’re not going for IP

- Do your homework! Be absolutely sure that no one else holds rights to any aspect of your idea
o Name/signs: check Trademarks Register
o Do a patent search
o Begin with googling – Espacenet, USPTO, Google Patents
o Consult a legal expert if necessary
- Consider using non-IP types of protection

Non-IP types of protection

Complexity & tacit knowledge
- Make the technology complicated so harder to understand and copy.
- Based on complexity of ideas themselves or of relationship between components/technologies.
- Consists of interrelated parts of specialist knowledge held by different people/groups.
o I.e. no one single employee knows how the technology works – so even if your competitors hire them,
they cannot copy your ideas.
- Depends on highly developed processes and/or key implementation skills of employees
- Requires a lot of resources, time and talents to re-create or imitate
o So not best strategy for start-up

Speed to market/First-mover advantage

- Capture attention and market share before your competitors can react
- Be aggressive to be the first one in a market to build brand loyalty or technological leadership

- Requires lots of resources to reach required speed, before resource-rich incumbents can imitate you.
o So again, not the best strategy for start-up

Reducing an incentive to imitate

Co-work with others! – especially when you have traction.
 - Set up joint venture – especially for international expansion
- Sell some part of your technology/knowhow
o May sell other components essential for using it (more on the session on business model)
- If your competitors hold many IPs
o Control complementary assets/resources that are essential for using the IPs so that you become valuable
to them as well
o Even though this is a non-IP strategy, it works better if you have IP
o E.g. Samsung and Apple even though they are always suing each other!
o Search Results
o Mutual forbearance: a reduction of the intensity of the competition through familiarity and deterrence.
Trying to avoid a price war. Competitors, particularly if they have asymmetric positions, can have
interests to slow down their commercial behaviour on each other’s market.

Summaries

Example on potential copyright infringements – Memento vs Ghajini:

- Memento was released in 2000; Ghajini then released in 2008
- Both about a guy suffering from amnesia who is unable to make new memories and pursues his wife’s killer
- Movies just released in different countries
- Is this copyright infringement?
o No because they have the same basic idea, but the expression is different.
o No because duplications can arise coincidentally.
o No because it is based on the ordinary person’s perspective and whether this gives the same audience
experience.
o Lots more dancing and more musical in the Indian one – NOT substantial similarity.

Examples of strategies for movies to protect against infringements:

- Sue actively and get the reputation for doing it:
o Extreme aggression toward any copyright infringement e.g. Disney sued Deadmau5 for the similarity to
the Micky Mouse Ears (trademark) and settled in 2015.
o If done consistently, you can develop a reputation which discourages infringement (much lower than
other production companies).
- Lower price for legal copies (reducing an incentive to imitate):
o E.g. Microsoft create a lower price in countries known for making copies.
o Lower range of prices if the inflation and average living price or purchasing power parity is considered &
cheaper prices in countries with a higher likelihood of infringement. Thus, even though countries may
have the same PPP they may have different prices.
- Sell adaptation rights (reducing an incentive to imitate):
o Adaptation rights: copyright holders exclusive right to make derivative works based on the protected
work. E.g. if you wanted to make a film out of a book you need the author’s adaptation rights.
o E.g. House of Cards first originated in the UK.
 - Add hard to plagiarise elements (make it hard to imitate): e.g. Avatar and its 3D movies or the star performer
- Release sooner (speed)
o E.g. adoption of a global release date due to emerging markets
- Make a different experience (differentiate/business model): even for the same movie, the audience may get a
better benefit from it e.g. offering a dining experience as well.

Switching Costs:
Switching costs fall into three broad categories:
 Redundant Relationship-Specific Investments. Because their old and new vendors may have
different requirements, customers who change suppliers sometimes must invest in new
software/hardware or repeat certain activities they have already completed. For example, to switch
online stockbrokers, users incur the hassle of transferring funds and securities. For that reason
among others, customer retention rates for online stockbrokers have been high.
 Disruption Risks. When businesses outsource “mission critical” activities, changing vendors may
involve considerable risk. For example, some companies reduce their need for IT staff and
infrastructure by relying on cloud computing services. Switching from one cloud service to another
exposes a company to significant risk if customer records are lost or corrupted during the transfer.
 Contractual Penalties. Companies can impose penalties on customers if they end a contractual
relationship prematurely. For example, mobile phone carriers often charge an early termination fee
to customers who have signed multi-year contracts. In some cases, these contractual penalties
significantly exceed the true costs incurred by a firm due to customer attrition.

When its current customers confront high switching costs, a firm is well positioned to capture a portion of
the value it creates. Specifically, by raising its price just below the point where current customers are
indifferent between staying with a firm’s product and switching to a rival’s, a firm should be able to earn
above-normal profits equal to the sum of the switching costs confronting its customers (“above normal”
implies profits in excess of a competitive return on capital; see the technical appendix below for analysis of
the impact of switching costs on pricing and profitability).

Switching costs are important in securing a first mover’s position. In their absence, an entrant that offers a
superior product or a deep discount might quickly usurp the market lead.