Notes on Disciplined Entrepreneurship by Bill Aulet

A while ago, I heard a fellow founder recommend ​Disciplined Entrepreneurship: 24 Steps to a Successful Startup by Bill Aulet, and I just finished reading it. The author teaches entrepreneurship at MIT and wrote a no-nonsense, direct, clear book about the exact process that helps go from 0 to 1 and de-risk a new venture. It built on and referenced many other classic books on the subject and reminded me of Steve Blank's Startup Owner's Manual.

I recommend it as a great starting point when considering and researching a new idea as it will provide a great structure and many relevant points to research and hone from the beginning. Below are some of my main notes and takeaways.

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​I’m Preface
Concrete steps

Introduction
3 common myths broken
Teams not individuals
Not about charisma
Not genetic
Innovation = invention x commercialization
6 themes and 24 steps
Who is your customer?
Market segmentation 
Beachhead customer
Build an end user profile
Calculate the tam sizd for beachhead
Profile the persona for beachhead
Identify your next 10 customers
Full life cycle use case
High level product specification 
Quantify the value prop
Define your core
Chart your competitive position
How does customer acquire your product
Determine customers decision making unit
Map the process to acquire a paying customer
Map the sales process
How do you make money
Design a business model
Set your pricing framework
Calculate lifetime value
Calculate the cost of acquisition 
How do you design and build product
Record assumptions
Test assumptions 
Define minimum viable business product
Show that the dogs will eat the dog food
How do you scale your business
Calculate tam size for follow on markets
Develop product plan

Step 0 getting started
Three ways
Have an idea
Have a technology
Have a passion
Knowledge
Capabilities
Connections 
Assets
Past experience
Name recognition 
What can I do well that I would love to do for an extended period of time
Finding a founding team
Multiple founders more successful
References in book for how to find and select
First five steps is search for holy grail of specificity

Step 1: market segmentation 
Brainstorm wide array of potential customers 
Choose 6-12 and do in-depth primary research on each interviewing people in those markets
Single necessary condition: paying customer
China syndrome (illusion of small percent of big market or fun with spreadsheets)
End user vs economic buyer
7 criteria for selecting market
Target customer well funded
Target customer directly accessible to sales force
Target customer has compelling reason to buy
Can you with partners deliver a whole product
Is there intense competition that could block you
If you win this segment, can you use it to get to other markets (bowling pin strategy)
Is the market consistent with goals, passions, and values of founding team
Primary market research
Talk directly to customers
Don’t try to sell
Understand pain points
Watch them as they work
Talk with as many as possible 
Inquiry mode, not advocacy/salws
Who is end user, who is economic buyer
Make a matrix of all opportunities considered
Allow a few weeks for the research

Step 2: select a beachhead market
Analyze top opportunities and select one
Further segment it to select beachhead
Focus is key and deselecting markets
Keep segmenting and narrowing market u too you reach 3 criteria of market
Customers within the market all buy similar products
All have similar sales cycle and expect products to provide value in similar ways and salespeople can shift from selling to one to another without loss of productivity 
There is word of mouth between customers and can serve as references for each other (same professional orgs, same region, etc.)

Step 3: build an end user profile
End user different from economic buyer and decision making unit
Narrowly defined demographic and subset of end users
Build through primary research and talking to them
Their stories, goals, media they consume, reasons for buying product
Does founding team have someone who fits end user profile

Step 4: calculate total addressable market size for beachhead market
Bottom up from primary research count of end users meeting profile times revenue from each 
Bottom up analysis
Customer lists
Trade show lists
Counting noses
Top down analysis
Secondary market research from analyst reports
Inverted pyramid
Counting dollars
How much revenue per customer
How much do they spend on similar tools
How much do they spend to solve this problem now
How much value would our product create for them
Want beachhead TAM to be at least 5M/year. 20-100 even better

Step 5: profile persona for beachhead market
Choose 1 concrete end user from 1 customer and build detailed description
Make it super specific
Put cutout on wall as reminder

Step 6: full lifecycle use case
How persona finds out about product, acquires it, uses it, pays for it, buys more of it, tells others about it, gets support
How did they realize current products aren’t enough, how did they discover your product
Visual diagram
How did they determine value they got from it

Step 7; high level product specification 
Visual representation of product
Focus on benefits features provide and not just features
Drawing
Share with customers for feedback
Make product brochure with benefits
Focus on lifecycle points

Step 8: quantify the value proposition 
Tangible metric that aligns with priorities
Three categories: better, faster, cheaper
Make simple diagram comparing as is state and improved state with your product

Step 9: identify your next 10 customers
Explicitly identify those fitting persona
Contact them to validate all info so far
List more than 10 contacts who are homogenous
Contact all and present lifecycle use case
Inquiry not sales mode
Validate persona’s top purchasing priorities
Ask for LOI. Still in inquiry mode. If a company were to sell this product, would you buy it?
If enthusiastic can even ask them to prepay for it
End goal is list of 10 customers excited about your product
Dealing with negative feedback
Valuable info

Step 10: define your core
Explain what your business can do better that others cannot
What can you do that others cannot
Examples 
Network effect
Customer service
Lowest cost
User experience
How to define
Internal introspection
First mover advantage not a sustainable core
Lock up outsiders with exclusivity
Code should be stable for always 

Step 11: chart your competitive position
Show how well your product meets persona’s top priorities
Show how well other products meet their priorities
Competitive positioning chart
Toughest competitor: status quo
Don’t focus too much time on competitors
Matrix with 2 axes of top priorities of customer
Left or bottom side is bad state of priority and top or right is good state
Plot competitors and you and status quo on on graph
You should be at top right of graph

Step 12: determine customer decision making unit
Influencers and decision makers
Primary roles
Champion who wants it and often end user 
End user who will use it
Primary economic buyer decision maker and controls budget
Primary and secondary influencers
People with veto power (IT dept)
Purchasing dept 
How to determine
Operate in inquiry mode
If you end up liking this product, how would your team go about bringing it in? 
Who besides you would be involved in the process?
Who would have the power to block it?
Whose budget would it come out of and who else do they need to get approval from?
Who will feel threatened by this and how will they react?
Build fact sheet for each role and figure out what influences them
Plot out map visually

Step 13: map the process to acquire a paying customer
Understand length of sales cycle
Map our elements from previous life cycle work (how customers find out about product all the way through sale)
Internal purchasing mechanisms inside customer
Regulatory issues
Temporal sequence, budget, authority
Budget and purchase authority limits

Step 14: calculate the total addressable size of follow on markets
What will be next markets and how big will they be
Brief validation of scalability of business 
Selling to adjacent markets
Bowling pin strategy
Small effort and time on this step
First conquer beachhead market 
Broader tam for VC should be above 1 billion 

Step 15: design a business model 
Figure out how to capture value 
Innovate on business model
Business model not just pricing but framework by which you extract portion of value from customers
Customer, value creation and capture, competition, distribution 
Free is not a business model
Figure it out later is not a business model
Categories
One time upfront charge plus maintenance
Cost plus
Hourly rates
Subscription or leasing
Licensing
Consumables
Upsell with high margin add on products 
Advertising 
Reselling user data
Transaction fee
Usage fees
Cell phone Base plus overage charges
Parking meter (low initial fee but very high late fees)
Microtransactions
Shared savings
Franchise
Operating and maintenance

Step 16 set your pricing framework 
Use quantified business value and business model
First pass strategy
Costs shouldn’t be a factor in deciding. Price based on value. 
20% to company and 80% to customer
Don’t give out cost info to anyone including your sales team
Use DMU and budget thresholds to figure out pricing
Understand prices of alternatives for customer
Different types of customers will pay different amounts
Tech enthusiasts and early adopters will pay more
Be flexible on pricing with early supporters
Do not give away for free or discount ongoing revenue 
Easier to discount hardware than software because customers understand hardware value so later easier to raise price
Always easier to drop prices later so start high and discount if needed

Step 17: calculate lifetime value of customer
Calculate lifetime revenue and discount to present
One time revenue streams
Recurring revenue streams
Upsells
Gross margin for each revenue stream
Retention rate (assume some multiyear deals will fail to follow through)
Life of product
Next product purchase rate
Cost of capital rate (35-75%)
5 year projection
For SaaS, want LTV:CAC ratio of at least 3
LTV is about profit not revenue

Step 18: map the sales process to acquire a customer 
Cost of customer acquisition
Map out expected sales process
Cost of salespeople, marketing, brochures, conferences, etc.
Short term sales process, direct contact with customers, missionary stage, demand creation
Medium term, client management, upselling, value added resellers, distributors 
Long term, fulfilling customer orders
Use of sales channels changes over time

Step 19: calculate cost of customer acquisition
Ideally decreases over time
Initially might exceed LTV
Don’t calculate bottom up trying to attribute costs to a single customer
Aggregate all sales and marketing expenses over a time period and Subtract cost of supporting existing customers and divide by number of new customers closed 
Three time periods: year 1, years 2-3, years 4-5
Include piece of executive time on sales
How to reduce cost of acquisition
Automate as much as possible
Use telemarketing, social media, other mechanisms that aren’t direct sales
Growth incentive schemes
Improve conversion rates
Decrease cost of leads and improve quality of leads
Speed through sales cycle
Choose business model with COCA in mind
Word of mouth, net promoter score
Stay focused on target market

Step 20: identify key assumptions
List top 5 untested assumptions

Step 21: test key assumptions
Design empirical tests to check each assumption
Send informal RFQ
Check if customers will sign LOI or prepay

Step 22: define minimum viable business product
Launch mvp that customer will pay for
Customer gets value, customer pays for it, customer can give meaningful feedback on it

Step 23: show that the dogs will eat the dog food
Check that users will pay for it
Check that users will use it
Humans often irrational
Measure magnitude of vitality coefficient 

Step 24: develop a product plan
Which features to build for beachhead
Which adjacent markets to go for after beachhead
Validate for quality constantly
Plans are nothing. Planning is everything. 

Postlude
Still lots to learn 
Company culture
Founding team
HR processes
Customer services
Financials and managing cash
Fundraising
Governance
Bias towards action 

References
Inbound Marketing
Running Lean
The founders dilemmas