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Who is Your Customer? Value Proposition Design for Deep Tech Startups | Deep Tech Catalyst

A chat with Gayathri Radhakrishnan, Partner @ Hitachi Ventures

Welcome back to Deep Tech Catalyst, the channel by

where science meets venture!

Aspiring Deep Tech founders often struggle to understand the crucial distinction between an invention and an innovative commercial product. This misunderstanding can hinder their progress toward becoming investable companies, ultimately leading to project failure.

To bridge this gap, I had the great pleasure of hosting Gayathri Radhakrishnan, Partner at Hitachi Ventures, and delving into the basics of Value Proposition Design in the B2B context.

Here are the key themes covered:

  • 🤔 What is the difference between inventions and innovations?

  • 🚀 Examples of Inventions Turned Innovations

  • 🎯 Customer Development Basics in B2B

  • 💡 Risks of Over-Customization

  • 📈 Why Designing for Multiple Customers Matters for Exit Strategies

  • 🏭 Engaging with Corporates


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KEY INSIGHTS FROM THE EPISODE

🤔 Invention ≠ Innovation

An invention is essentially a technical breakthrough. Innovation, however, is about the application of that invention in day-to-day life to improve outcomes. Let’s see why.

For example, consider the internet or email. Email evolved technically, but the innovative aspect was its application—changing from sending postal mail, which took days or weeks, to sending digital messages that are received almost instantaneously. That’s innovation.

In contrast, an invention provides the technology that enables such changes, like the development of the internet itself. In simple terms, an invention introduces something new, like the light bulb or electricity, which revolutionizes our lives.

However, the outcome they drive—that's the innovation. It transforms how we live, addressing unmet needs in profound ways.

🎯 Value Proposition in B2B

In the deep tech space, we often deal with B2B businesses.

It's important to remember that at the end of the day, whether in B2C or B2B, your customers are people.

The consumerization of IT around the early 2010s was driven by the desire for business applications to be as easy to use as consumer apps. This shift emphasizes the importance of understanding who your target customers are and identifying their unmet needs.

Often, when you achieve a technical breakthrough, the excitement about the technology itself might overshadow the clarity of its practical applications. This uncertainty is common and not inherently problematic.

Take the iPad as an example.

Upon its release, it faced mixed reviews with many questioning its practical uses and the value it brought. Critics wondered who would want to type or create documents on such a small device. Nevertheless, the iPad facilitated new applications, such as digital menus in restaurants and streamlined check-in processes in hotels and retail locations, demonstrating its usefulness beyond initial skepticism

Customer Development & Jobs to Be Done

An invention transforms into innovation when the first customer purchases a product that exploits technological capabilities to address a specific need. So, how can founders identify a target unmet need?

Here the "Jobs to Be Done" framework can be extremely useful.

This framework helps you to identify your target users and understand the specific tasks they need to accomplish. It shifts the focus from how they might use the technology to understanding their daily challenges and how your technology can solve these pain points.

Customers vs End Users

Moreover, it’s important to distinguish between the 'customer' and the 'end user'. The end user is the individual who actually uses the product, whereas the customer is often the one who makes the purchase decision and pays for it.

For example, in a marketing-oriented solution, the end user might be the marketing analyst, while the chief marketing officer (CMO) might be the buyer.

The analyst is primarily concerned with how the tool can enhance their productivity and simplify their tasks. When you engage with end users, you discuss how the product can enhance their work efficiency through its features and usability.

However, when you address the CMO, the conversation shifts away from features to the return on investment (ROI).

The CMO is interested in understanding the benefits for each dollar spent. You might explain how the product can speed up marketing campaigns or provide real-time marketing analytics, enabling more effective budget allocation.

This demonstrates how your product provides value in financial terms to the CMO, not just through its features.

The product needs to appeal to both the end user, who will use it, and the buyer, who will pay for it. This dual consideration is crucial when developing products. Ensuring that the product meets the needs of both the end user and the buyer is essential for success, especially in B2B contexts.

Who is Your Customer?

Continuing with the example of email, let’s discuss the concept of traction. The key advantage of email over traditional mail is speed, which simplifies communication. Similarly, when looking to validate traction for a new product like a battery or a rocket, where traditional customers might not yet exist, the challenge is significant.

For early-stage startups seeking to validate their niche and attract investment, identifying potential early adopters is crucial.

Quantum computing provides a relevant analogy. Though it might seem distant, companies are actively developing quantum computing hardware and software.

These developers are not targeting the broad market but are focusing on specific applications where quantum computing could revolutionize outcomes, such as enhancing security or solving complex computational problems that are intractable with current technology.

For instance, in the realm of security, the advent of quantum computing could render current encryption methods obsolete, prompting a need for quantum encryption solutions.

Similarly, quantum computing could significantly reduce drug discovery times by enabling pharmaceutical companies to rapidly analyze vast datasets to identify promising drug candidates.

Co-Design your Product with your Potential Early Adopters

The key is to engage with these potential early adopters who see the immediate value of the emerging technology. These initial clients can serve as design partners, collaborating on the development to ensure the product meets real-world needs.

However, it is crucial to avoid becoming too narrowly focused on the specifications of a single partner; otherwise, you risk turning your startup into merely an R&D department for one client.

Instead, aim to collaborate with multiple partners. This approach helps in creating a versatile product that can appeal to a broader market, thereby enhancing the potential for wider adoption.

📈 The Role of Multiple Customer Niches in Exit Strategies

From the perspective of a venture capitalist (VC), the importance of building a multi-niche, multi-platform technology cannot be overstated.

While it’s perfectly acceptable to operate a business that caters to a single client as a lifestyle choice, if your ambition is to build a significant enterprise like Google or Apple, your focus should be on scalability and the ability to serve a diverse range of businesses.

This scalability is critical not only for attracting VC investment but also for positioning the company for substantial growth, potentially leading to a multi-billion dollar valuation through an acquisition or an IPO.

IPO

An IPO, or Initial Public Offering, represents a critical transition for a company from private to public markets. To list on a stock exchange, a company must demonstrate significant growth and the potential for future expansion.

The stock price is influenced not only by current achievements but also by anticipated future value creation. In this case, the company itself continues its growth trajectory, now funded by public investors instead of private equity.

When a company goes public, the VCs typically sell their shares in the public market, capitalizing on the returns generated from their initial investments.

Acquisition

Another common exit strategy involves acquisition. Often, a startup's technology or service is so valuable that it attracts a larger company's interest for purchase. This happens more frequently in the startup world than IPOs. Many companies that aim for a public offering are instead acquired.

Design your Product for Multiple Customers

Consider the difference between a company that has tailored its product for a single client versus one that has diversified its client base.

In the acquisition scenario, if the product is highly customized for one client, that client may decide to purchase the startup. However, knowing the product's limited appeal to other buyers can drastically reduce the acquisition price. They might perceive limited competition for the purchase and thus offer a lower price.

On the other hand, if a startup has developed a product used and valued by multiple companies, it enhances its appeal and potential market value. This broader applicability can lead to a “bidding war” among several interested parties, potentially increasing the sale price significantly.

The strategic focus, therefore, should not be to function merely as the research and development (R&D) arm for one client but to expand the product's relevance to multiple businesses.

Creating a product with wide applicability maximizes exit options and increases the potential financial returns from either an IPO or an acquisition.

This approach not only enhances the company's value but also makes it a more attractive investment opportunity for VCs and other stakeholders.

🏭 Engaging with Corporates

Identifying the right point of contact within a corporation can be daunting, especially for scientists accustomed to the laboratory environment rather than corporate dynamics.

Corporations often have several entry points, but one effective route is through their Open Innovation arms. These departments are specifically designed to integrate external innovation into the company. They understand the needs of various business units and can guide newcomers toward the right contacts.

For example, Hitachi, a large conglomerate with over 700 business entities, presents a complex landscape for any external innovator trying to find a foothold.

In such cases, accessing the company through its Corporate Venturing Office, such as the Open Innovation team, can be invaluable.

This team can survey all the businesses and identify where a new technology or innovation might fit best.

In corporations without an Open Innovation function, the approach should be more direct. Targeting the end users and the buyers directly is advisable.

Again, it's crucial to have a clear narrative that appeals to both: the end user, who will benefit directly from the innovation, and the buyer, who needs to see the economic or strategic value of the investment.

If the goal is to establish a co-creation or design partnership, starting conversations with the end user can help in building that initial relationship while also keeping the broader benefits to the buyer in mind.

These early discussions with various corporate representatives are vital to pinpoint the appropriate use case and establish a foothold within the corporate structure.

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Disclaimer
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