Lean Testing Kabob Platter

As I mentioned in previous posts, I have been focusing on testing customer profiles and appetite for professional services in social innovation sector for a while. And here is a brief summary of what I have learnt so far, including some "yes" and of course some "no" (which I believe are more valuable).

Wharton Game Simulation Sirloin

In the Wharton Startup Game Simulation, I was a employee (an Executive, to be specific) and I was end up with being hired by BioBand with 30% equity share and $200,000 annual salary.

Money Money

Marketing Mesclun Salad

The marketing and client development campaign of BetterPartners is primarily conducted online and through word-of-mouth.

Currently, we have three major online channels: 
a. website 
b. official account on WeChat
c. Facebook 

Scaling My Venture Plate

As BetterPartners is a service-based firm, it is asset-light, meaning we don't need much asset, especially fixed asset, to be up and running. Therefore, unlike a tech startup which requires millions of dollars to iterate product, hire programmers, promote and market online & offline, and rent working space, we deliberately keep a lean startup style where in most time, we work remotely and utilize resources we already have, such as personal laptops. However, we do need a small amount of initial fund to get things going and we plan to start by our founding partners.

Including me, BetterPartners has 4 founding partners. In an order of seniority, the first founding partner has 40% equity share, the second and third partners each has 22.5%, and I have 15%. We aim to raise 100K RMB initially to get things going. The initial fund will be used to register company, develop business & client relationship, subscribe data service, and recruitment.

In the future, we do plan to attract external investment to facilitate our business growth. Considering the nature of our business, I don't think angel and venture capital investment match our purpose as we will not be a fast-growing business with potential millions of users. In contrary, we consider to attract donation or "patient investment" from foundations who share our vision and mission. According to my past experience, the following foundations in China might be interested in our business and also, can use our partnership to grow their business as well.

YouChange China Social Entrepreneur Foundation
One Foundation
SANY Foundation
Chi Heng Foundation
Gingko Foundation

In my personal or professional experience, I have talked with some of these foundations regarding partnership with a professional service firm. They all seem very interested in financial cooperation. One concern I have is to approach donation or investment. Donation is more flexible for us because donation might have less constraint on the usage of the money, whereas investment might put more pressure on the our growth. Additionally, in the case of investment, we will lose certain amount of control but have more "right" to leverage investor's resources. Considering the trade-off in the case of investment, I would preliminarily focus on Economic Terms and Control Terms.

Economic Terms
1. Price: I plan to cap the postmoney equity share the foundations can have. (I am curious about their methodology of valuation.)
2. Liquidity Preference: I would focus on participating perference and will not allow mutiple preference. "Kick-outs" is actually a good term for us because it motivates us to generate certain level of return for our investors and gives us preferred liquidity position after achieveing the return requirement.
In addition, I would also include other terms such as pay-to-play, vesting, employee pool and antidilution.

Control Terms
1. Board of Directors: first of all, I prefer not to have a board observer as I don't see value of this position, especially in the case of BetterPartners. Second, I plan to form the initial board with Founder, CEO, Foundation, a second Foundation and an outside board member.
2. Protective Provisions: from my perspective, protective provisions are reasonable for both investors and investees. Therefore, we are open to include protective provisions in the term sheet. And according to Feld and Mendelson's Venture Deals, these clauses have become standardized. One point I shall pay special attention is when future financing or investment occur, I should negotiate with future investors to have them vote as a single class.
Additionally, I would also include other key terms such as drag-along agreement and conversion.

Venture Link Luau

I have been followed Paul Graham's blog for a while. Even though most of his posts are more "philosophical" than "practical", I find this post regarding "relentlessly resourceful" particularly interesting.

Paul Graham, Venture Capitalist & Co-founder of Y Combinator

The basic idea of this blog post is that being "relentlessly resourceful" is the key recipe of of being a successful startup founder. I think it is true for the startup itself as well. So I started thinking about how to build  a startup (BetterPartners) that is relentlessly resourceful in a way that solves problems by connecting different stakeholders in different sectors together. In order to achieve that, I deliberately designed the service offerings of BetterPartners to be extensile and expandable. We started from one point at the value chain of social impact, which is business advisory, and are planning to enter into the downstream, capital service, of the value chain in the future. Not only in the diversity of offerings, but also in the customer base are we trying to be "resourceful" in a sense that we relentlessly partner with different palyers in the impact community and view them not as customers, but as partners that can facilitate us to solve problems in projects, workshops, fund raisings and more.

I should say it sounds weird that I view Paul's post as an explanation of the success of a startup or an organization, not merely of a founder of the startup. But I do think they both work in the same way. How do you, as the founder, design your organization to be resourceful, tough and resilient? In the process of answering this question, I have gradually understand what I love about & what I should do about BetterPartners.

Human Capital Creme Brulee

Understanding customer needs in China's impact community is not easy. First, I am far away from the battle field. Second, professional service is a relatively new concept for people in the community. People either don't know about it or have misunderstanding about the nature and benefit of the work. Therefore, I try to make the most of the resources here at Harvard Kennedy School by interviewing some Chinese students who previously worked at, founded, and/or led a NGO/NPO/social enterprise in China. Here are what I have found:

1. Articulating your problems is not easy.

- I observed that it was hard for some people to articulate their organizations' problems and needs. The most common feedback I have heard was that "we don't know how to do XYZ" or "we don't have enough people". They are the result of problems, not problem themselves. Until knowing the problems can you solve them. Therefore, I conclude that it might require a long period of time to educate customers and have conversations with them to help them understand their problems and needs before developing any solutions.

2. They don't know what they are willing to pay for professional service.

- A derivative of symptom 1 is that customers have not recognized the value of professional service and thus can't project their partnership with BetterPartners, let alone paying for services. Therefore, I conclude that the fixed-fee model in my original financial model should be changed to a more flexible one which is tailored to each customer's annual budget.

3. Customers in the growth stage are more willing to talk. 

- Mission-driven ventures in China grow faster than I expected. So they are more willing to engage in conversations in the growth stage as they have more things to think about. Some of their general concerns are entering new market, tapping into a new customer category, and securing more fundings. Therefore, I conclude that targeting this type of customer might generate more business leads.

In addition to interviews, I created an online group (on WeChat) to include some of my close friends who are either the founder or the leader of mission-driven ventures. We started by randomly sharing experience, but I plan to hold regular conference call (on WeChat) with certain topics of organizational management to understand their perspectives and probe their willingness of partnering with a professional service firm like BetterPartners.

Back to my findings. These preliminary conclusions have led me to think again about my assumptions regarding customer and market. First, I might need to lower the market growth rate, especially for initial years. Second, I might need to modify fee model from fixed fee to flexible fee (to be decided). Third, I might need to fine-tune customer profile we target.

Finally, in terms of internal human capital management, I am thinking of building a talent team consisting of both university students and young professionals. In this way, I can have a broader recruitment base and a flexible team structure. However, a diverse recruitment base may increase the cost of talent process of recruitment, development and retention because we need to develop two sets of plan for two different profile types. 

Hypotheses & Testing

As one of my previous post mentioned, the journey of start-up is all about making hypotheses and assumptions and finding ways to test them. Testing hypotheses at the initial stage and in a small scale provides us some evidence about the feasibiliy of our business plans. Here I outline my testing plan for top 5 hypotheses of my start-up: BetterPartners.

"Get Tested"

Hypothesis 1: NGO/NPO/social enterprise have the awareness of the benefit from professional services and they are willing to pay for them.
Testing plan: I will use the method of focus group to interview a group of leaders and managers of NGO/NPO/social enterprise in China to understand their past experience with professional services and their willingness to pay. Some priliminary questions are listed below and I aim to measure their experience and willingness by figures like year, ranking and score.
Preliminary questions (examples):
1. Have you worked in a professional service firm such as consulting, accounting, law, advertising & public relation, investment, incubator, etc.? If so, how many years have you worked there before joining the current NGO/NPO/social enterprise?
2. On a scale of 1-5 with 1 as the least willing and 5 as the most willing, how would you rank your willingness to hire a professional service firm to help your organization, without considering the professional service fee you need to pay?
3. On a scale of 1-5 with 1 as the least effective and 5 as the most effective, how would you think the effectiveness of professional service firms in helping your organization solve problems?

Hypothesis 2: our expertise and experience in private sector are transferrable to solve organizational and managerial problems NGO/NPO/social enterprise are facing in China.
Testing plan: In a similar manner, I would like to interview our potential clients to ask them to list & describe their most concerned organizational and managerial problems. After collecting these questions, I would categorize them into different buckets and match them with similar problems in private sector.

Hypothesis 3: our clients have approximately homogeneous price appetite towards professional services fee.
Testing plan: This time, I would talk with "chief financial officer" at these organizations to understand their budget philosophy. I would try to understand by asking questions like 
1. What is your annual budget?
2. How would you estimate the growth of annual budget in the next 3-5 years?
3. What is the range (in terms of %) of your annual budget would be used for outside vendors such as professional service firms?
I understand that it is difficult to estimate a number specifically for professional services, but starting from total budget, I would have a better sense about their appetite about vendor service.

Hypothesis 4: we are able to build a growing base of professional talents who are committed to our vision & mission.
Testing plan: in order to test this hypothesis, I would design a questionnaire for our existing members to ask their expectation before joining BetterPartners and their current rating. In this way, we can know what our (potential) members were looking for before joing and how we fulfilled their expectation. This is similar to what we do to understand customer's pain points and unmet needs.

Hypothesis 5: we are able to further diversify our service offering (such as impact investing) in the future in order to better build & serve social impact sector in China.
Testing plan: this assumption is about our future business plan in which we lay out our next step into impact investing sector where we could actually invest in mission-driven ventures and provide advisory and consulting service as well. To test our ability to expand offering and customer's readiness, I would conduct interviews to 3 categories of people: internal management, selected clients, and similar players in the United States. Though I am not sure what exactly I would ask during interviews, I will focus on three aspects,
1. Timing: when the market is ready for such service? any key drivers such as legal infrastructure?
2. KSF: key success factors of players in this field
3. Internal gaps: in which parts do we have the widest gap according to answers of question (2) 

Long Tail or Short Leash?

The idea of "long tail" in business is that the sale of a large number of products, each selling a low volumes. One example of long tail in modern business is Amazon.com, which uses an Internet platform to (originally) sell books. Benefiting the power of Internet, books (now including music, movies, TV shows, etc.) that are not a hit to the general public but are interesting to certain group of people can find their genuine audience. Authors, publishers, and of course Amazon.com all benefit from such business model. Similar to Amazon.com, business models of online retailers such as Alibaba and Netflix are all derivatives of the "long tail" concept.

Amazon's Long Tail Business Model

On the contrary, traditional retailers such as Macy's are generating revenue based on the "short leash" concept, which means selling "hit" products that have short inventory time and short turnover time.

Does BetterPartners have a "long tail" or "short leash"? If you are familiar with fashion industry, then you can think of our model "sort of" like that in fashion industry: we catch people's eyes and sell our design pieces in the form of reports and/or workshops. The same as fashion industry (especailly think about fast fashion brand such as GAP and Zara), we have short inventory period and always look for the next "hit" product to sell. Sometimes, we even want to create the next "hit" products ourselves. I would argue that in an industry powered by knowledge and innovation, it is rare to see a "long tail" business model. And we are not an exception.

One question that popped up in my head when thinking about this blog post is: Is it possible for a business to have both a long tail and a short leash? The idea of "long tail" is to mobilize resources and match them, and the advantage of "short leash" is fast turnover. Can a business have both? If can, can BetterPartners have both? What is the verion of "long tail" concept in professional services (and fashion) industry? Honestly, I don't have a clear answer yet.

"I don't know."

Capital Cone

As BetterPartners’ business is growing, several types of asset will be built. Here come the categories and the rationale behind their growth.

1. Cash & cash equivalent: the fee structure of our project requires our clients to deposit certain amount of service fee up front. This up-front fee goes into the “cash & cash equivalent” category and as we start more projects, the total size of up-front fee will grow as well.

2. Accounts receivable: accounts receivable in our business is the service fee excluding up-front fee. This type of asset will grow as we start and complete more projects.

Since we are a service provider, we do not have many tangible assets such as property, plants and equipment. We do have certain equipment such as printers and laptops which are regarded as one-time investment at the very beginning of the business and whose value does not fluctuate along with our business.

Both cash & cash equivalent and accounts receivable tie closely with the single most important metric of our business: number of projects. They are both indicators of the health of our business in terms of both current status and growth potential. Therefore, both of them factor into our working capital line of credit. Nevertheless, I would argue that cash and cash equivalent serves worse as a business indicator than accounts receivable because other elements, for example retained earnings and owner’s equity, also influence this item, diluting its ability to directly reflect business’ health.