Foresight Valuation Group

Intellectual asset management, intellectual property valuation, strategy and litigation support

Month: May 2018

Lessons learned from 2 years of startup surveys: Key observations about founders and the companies that they build

Posted on Modified on by Efrat Kasznik

In 2016, we launched a startup assessment survey, aimed at analyzing startups that approach us for services and scoring them on the Product/Execution Quadrant map.  This analytical tool provides a useful framework for early stage startup assessment (Pre-Series-A) and for identifying areas of weakness on either the Product or Execution side that should be addressed in order to take the company to the next level.

More on the Product/Execution Quadrant map can be found in this article.

 With over 2 years of data, we have seen some interesting trends in the responses we get to our 20-Question assessment survey.  Below are a few observations that can shed light on early stage founders’ motivations, products, competitive advantages and other factors critical to success:

  1. Founders who are experts in their industries are often targeting problems based on personal pain

There is strong evidence in the market that in instances where entrepreneurs are addressing a personal pain in an industry they know well, they are more likely to succeed.  Our survey results show a high concentration of founders who fit this profile, and we believe that the two are actually correlated: the more experience you have in an industry, the more likely you are to stumble upon a problem that is rampant in that industry.  When asked about the problem they are trying to solve, 50% of respondents indicated that the ‘Idea came from personal frustration’, and 53% further responded that it is a ‘Problem in an industry where I know the customer needs’.  These answers bode well with the responses to another question about relevant industry experience, where 58% of respondents indicated that they have ‘Significant experience (over 5 years)’, and another 18% indicated ‘Some experience (under 5 years)’.

  1. Most founders in the software industry have self-funded a product to minimum viable product (MVP) and beyond

Software products are easier to self-fund to a relatively advanced stage of product development, as opposed to products in hardware, materials or life sciences which require large amounts of R&D and depend on grants or other type of early stage funding. This correlation is clearly supported by our survey results:

  • 76% of the respondents identified their product as ‘Software’ related, while close to 50% specifically identified a Software-related industry (Mobile, Social media, Enterprise software or FinTech).
  • 65% of the respondents characterized their stage of product development as MVP and beyond (31% at the ‘MVP/Proof of Concept built’ stage, 24% at the ‘Initial Release’ stage, and 10% have already released a product to the market).
  • Finally, 88% of respondents have self-funded their venture to-date (29% each also indicated Friends & Family or Angel Funding), and only 2% took in VC funding.
  1. While many founders have some form of patent protection, an overwhelming majority mention ‘Superior product features’ as their competitive advantage

While approaches to patent protection vary in our survey, there is almost a unanimous consensus about ‘Superior product features’ being the most important competitive advantage. This finding makes sense in light of the large concentration of software companies in our survey.  Software companies grow in valuation by gaining user traction, and user metrics are often the most important metrics analyzed by investors.  It is therefore no surprise that 92% of respondents indicated a user-facing metric such as ‘Superior product features’ as their competitive advantage (some of these may be overlapping since there was more than one possible answer to this question).  The next popular answer, at 50% of respondents, was ‘Intellectual property’.  When specifically asked about methods of protecting their idea, founders’ answers seem to be all over the place: about a third of respondents (34%) indicated having a pending patent, 27% of respondents indicated they have not protected their idea at all, 15% had a granted patent and 12% had a portfolio (more than one) patent (some of these may be overlapping since there was more than one possible answer to this question).

  1. First time entrepreneurs seem to overestimate their addressable market and/or underestimate the competition

As we have learned throughout our work with hundreds of startups around the world, many founders (especially if it is their first venture) are overly optimistic in that they overestimate the addressable market, and/or underestimate the competition.  Both of these biases are present in our survey results: when asked about the size of their addressable market, 67% of respondents indicated the market was larger than $2 billion, and another 17% indicated the market was between $500 million – $2 billion.  When asked about the state of competition, 68% responded that there was only ‘a handful of competing products’, and only 12% felt like they were entering a ‘crowded market’.  We expect these biases to be correlated with lack of experience, and indeed, when looking at the makeup of our survey respondents: 38% of respondents are first time entrepreneurs, only 19% have raised money before, and only 10% have had a previous exit.

  1. While most founders operate as a team, the definition of a ‘team’ is subject to interpretation

A strong team is a critical factor in our Execution score, and we collect a lot of information about the startup’s team and its makeup.  59% of our respondents reported having a full-time team working on this project, and 35% of them also reported that they have worked with key members of the team before.  This combination is highly sought after by investors, as past work experience is a factor likely to reduce personal frictions in the team, a problem that is considered one of the top growing pains of early stage ventures.  Having said that, perceptions of what constitutes a team varies among founders, and could be subject to interpretation: while 7% of our survey respondents reported that they have no team, 29% of them indicated in a different question that they are ‘Sole entrepreneurs’.  This seemingly conflicting answer is actually typical of startup founders, especially those with little experience, who sometimes include in the team people who are contractors (17% indicated their team is comprised of independent service providers) or advisors (38% reported that they have an advisory board).  While these two groups can fill in the gap in the early stage, they are often only a temporary substitute to a real, dedicated team.  Finally, while 43% of respondents indicated that they were looking to build their team, only 19% indicated ‘Access to talent’ as a major challenge to scaling the business in a different question.  We attribute this pattern to lack of experience, as seasoned entrepreneurs fully understand the challenges involved in putting a team together.

Conclusion

We will keep monitoring the trends as more startups take our survey.  As previously mentioned, our sample of survey respondents over the last 2 years constitutes primarily of early stage ventures developing software products.  We use this survey to map each company on a Product/Execution quadrant map to figure out their readiness for Series A funding. Founders in our survey often fall into the ‘Rookie’ quadrant (scoring low on both Product and Execution) or ‘Visionary’ quadrant (scoring high on Product and low on Execution). This seems consistent with both the industry they are in (Software) and their stage of funding (seed, pre-Series A).  Our goal is to move them to the ‘All Star’ quadrant (high on both Product and Execution) and get them ready for Series A funding.

IP Monetization: Realizing Hidden Value in Time of Decline

Posted on Modified on by Sebastian Custodia

Management teams of high-tech companies often overlook the additional shareholder value to be realized by developing strong IP portfolios, and are therefore ill-equipped to extract that value in times of decline in their companies’ life cycle.

The Business Life Cycle of high-tech companies has been a path well-traveled, and the management teams of most high-tech companies are guilty of missing an important fork in the road off that beaten path. Traditionally, the “Business Life Cycle” consists of 4 stages; Startup, Growth, Maturity, & Decline. Many companies fall under one of these broad categories, and furthermore, many management teams make key business decisions based on what the definition of their current stage tells them. The narrow focus of management seeking to move their company along the traditional Business Life Cycle results all-too-often in their untimely arrival to the Decline stage. We at Foresight believe that by implementing the right Intellectual Property (IP) strategies early in the Life Cycle, companies can extend their life cycle and generate additional shareholder value while managing to stave-off heading into a stage of Decline.

Management teams of a business in the Startup stage are focused on product development, developing sales strategies, and doing everything they can to stay afloat. Those fortunate enough to cross the chasm into the Growth phase begin solidifying their internal operations, investing heavily in client relations and new business development, and establishing their position in the market. After several years, the Maturity stage sets in, growth slows, and the business becomes far more predictable. It is at this point that many companies see themselves down one of two paths. The first is the path of reinvestment, under which the company essentially restarts its life cycle with a new product line or new target market or a new acquisition. The second path is one on which a company simply accepts its imminent decline and grinds to a halt. For companies on this path of Decline, management must recognize that there is another fork in the road.

Specifically, in the high-tech industries, it may be time to introduce a stage of the life cycle in between Maturity & Decline. That stage is IP Monetization. Too many high-tech firms live out their days in the Decline stage, winding down the business, losing key customers, and ultimately watching their remaining shareholder value dissipate. At the end, the company’s IP assets – which were once the foundation for years of cashflow –  are liquidated at an auction or through an asset “fire sale”, often at a steep discount. In these cases, the company’s shareholders are missing out on a potential return on investment on the assets that they financed, a return that could have been achieved through the execution of an IP monetization strategy.

Two notable examples of IP Monetization execution are companies such as BlackBerry and TiVo. These companies have successfully extended their life cycles, post-Maturity stage, and have found success in the IP Monetization stage of their corporate life cycle. Shareholder value has been retained as these companies pursue an IP licensing strategy for the technology that once made their operating business a success. For competitors that outlasted the company, or emerging players who are introducing next generation embodiments that leverage the technical innovations of Mature company offerings, the IP assets of post-Maturity stage companies are of extreme value. IP Monetization allows companies such as BlackBerry and TiVo to do 2 things: 1) extract value from their IP portfolio from competitors who may have been infringing during the peak of their competition, or 2) share in the profits of the next iteration of the company’s core technology as next generation companies seek to innovate on the platform of the existing technology. Look no further than TiVo’s recent financial performance for the huge potential to be realized in the IP Monetization stage of business. The company’s revenue grew 57% from 2015-2017, with over 95% of 2017 revenue attributed to “licensing, services and software.”

The key to introducing this new stage of the Business Life Cycle is educating entrepreneurs and managers on the importance of a solid IP strategy early on. Having an understanding of the value of intellectual property outside of a company’s current operating business will ensure that the shareholders who funded the creation of the IP portfolio are able to realize returns on its full value. However, to achieve the full value potential, management must develop a strategy early in the life of the company and endeavor to develop a forward-looking IP portfolio rather than taking the easy road of constructing a portfolio to narrowly protect its product (known as a “defensive” approach). Following a narrow defensive approach to IP management reinforces the traditional Business Life Cycle. It’s time for high-tech companies and their shareholders to take the fork towards IP Monetization and plan for it when they create their IP portfolio and strategy.

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