Early Stage Analysis Framework

(ESAF)
Erol Toker
March 3rd, 2010
 ESAF
A framework to gather the data necessary to assess and
profile an early stage company

• Status Quo • Structure &

• Desired State Dynamic
• Frictions • ESAF Matrix

Customer Market

Company Product

• Achievements • Value Prop

• Business Model • Claims
• Marketing Mix
• Status Quo
• Desired State
•Assessing whether a company serves a need is a function of
• Frictions understanding the status quo, the desired state and the
switching costs that prevent a customer from making the
transition
Customer •For example, even though energy saving appliances have a
positive NPV due to cost savings, change frictions of initial
investment slow down main-stream adoption

Status Quo Desired State

The Problem
What Does the
What is the need being addressed?
Desired State Look Like?
Price Elasticity of Demand
Where does the need fall in the Change Frictions How do We Prove That there is
customer’s list of priorities ? Demand for the Desired State?
Primary/secondary research?
Customer Profile What is the current Existing market? Current
Identify the target customer consumption pattern? revenues?
specifically
What changes in
Customer Decision Process behavior are required
What is the current customer for product adoption?
decision process? (from need
realization to product search and
final evaluation of products)
 • Size
• Structure & •Understanding the attractiveness of a market is key when
Dynamic evaluating an early stage company’s strategy
•Market Structure and competitive dynamic provide insights
on the current state of the marketplace.
Market •The ESAF Matrix provides a key question to frame market
research, depending on market characteristics along two key
dimensions: market size and concentration of market share

ESAF Matrix
Market Structure & Concentrated Fragmented
Competitive Dynamic
Key Players

Large Market
Who are the key players in the industry
(market share, profits, infrastructure, etc) Can we Can we
Competitive Analysis
break in? aggregate?
What are the most/least successfully
companies? What are they doing wrong or
right? How can these lesson help build
competitive advantage?

Industry Analysis
Stay
Small Market

Market Sizing, Porter’s 5 Forces, Key Trends

Can we
dominate?
Politics of Execution
Who are the key active/passive stakeholders?
How do we partner with our allies and keep
Away
our enemies dormant?
 •The key to understanding a product’s potential is to:
Product
• Identify its value proposition and understand
specifically how it can be communicated to the end user
• Value Prop
• Marketing Mix •Verify the company’s claims on the product/IP
• IP •Understand the product strategy and marketing mix

Value Proposition Claims

Value Proposition Are the company’s claims about the product
Value -Quantifiable value accurate? (mystery shopping)
Positioning Budget propositions are easier
Proposition
to price and sell Does the product already exist? Why or why
-Non-quantifiable value not?
props require strong
marketing efforts to get
Innovation New Budget
spend from new Intellectual Property
Quantifiable consumer budgets How will we keep competitors from
Existing Positioning
Substitute replicating our product?
Budget
Product -Substitutes are easier
Existing to price and sell Patents, Trade Secrets, R&D Lead?
Substitute immediately because
Not Budget
they come out of
Quantifiable
Innovation New Budget
existing budgets Marketing Mix
-Innovations must start Product Strategy
at the beginning of the Vision and milestones
product lifecycle
Pricing Strategy
How to price and meet ROI targets
-Quantifiable Value Propositions should be a prerequisite Distribution Strategy
-Substitutes should be Market Breakers, shrinking an industry and Logistics
capturing market share. Promotion Strategy
Consumer perceptions & awareness
-Innovations present higher risks and need larger markets and ROI targets
 •Before doing any further analysis on the company it is
critical to understand where in the Early Stage Company
Company Lifecycle it is
• Achievements
•This will be helpful in better understanding risks and
• Business identifying key milestones for the company moving forward
Model
• Strategy

Early Stage Company Lifecycle

Team Prototype First

Alpha Test Scaling
Assembly Completion Customers
Idea person A relatively low A limited set of The company gets Company tries to
realizes the need cost prototype users are allowed its first customers scale, placing the
for very focused must be to interact with and the product/ key emphasis on
expertise and developed to the product and operations plans sales
recruits people on prove the initial stress test it are tested
the founding team concept.

Betting on the Betting on the Betting on the Betting on the Betting on Sales
Founding Team Industry Product Business Plan Team

Risk
 •An early stage company’s financial projections do not offer much
information, as they are backed with very little market/revenue data.
Company This leads to a great deal of subjective speculation on both the
creator’s /examiner's side of the table
• Achievements •Hence we will first try to disprove the null hypotheses that the
• Business company is not viable and that the desired ROI targets set by the
Model entrepreneur/investor cannot be met (without any scrutiny as to
• Strategy
whether the company has the talent to achieve those numbers)
Testing the Business Model

Identify Key Assumptions of •Build a unit economic model, accounting for all revenues and costs (Variable and OH)
Business Model and Build •Allow for scalability of business (ie: if building a P&L for a fast food restaurant, allow model to
scale to multiple outlets)
P&L

•Determine break-even revenues at the unit economic level. If break-even requires scale,
Break-Even Analysis determine the level of scale required for the company to break-even overall
•Key measure of viability is if break-even revenues fall below the market size. Since viability of
(Test Viability) break-even market share will depend on the industry, we are only concerned with trying to
disprove the null hypothesis that the business is not viable

•Use Crystal Ball analysis to determine sensitivity of inputs and forecast expected profit values
Sensitivity Analysis of model
•Investigate most sensitive drivers and attempt to de-risk model iteratively to see if expected
(Test Business Model) outcomes fall in the desired ROI target range with a high level of confidence
 •Having proven that the business model is viable and that
the company could achieve the desired ROI target given the
Company market size, we will now try to see whether the company is
• Achievements
capable of reaching the benchmarks we discovered
• Business previously
Model
• Strategy

Reaching the Next Milestone Long Term Strategy

Burn Rate Go To Market Strategy

• How do we reach the consumer and
Cash assets and desired investment vs. Burn Rate grow our user base?

Human Capital Reaching Scale

• How scalable is the business model?
Does the team have the experience and talent necessary for the company
to succeed? Can it retain its talent ? (Turnover, & Compensation Packages)

Short-Term Strategy Maintaining Competitive Adv.

Has the company identified the correct milestones and a realistic approach • How do we grow market share and
to reach them? keep competitors out?