7

Steve Blank

• On Blog Vacation 15 March, 2010, 7:00 am
  I’m off the web for the next week or so.  I’m in a place with no cell or internet coverage. Back blogging by the end of March. steve Filed under: Uncategorized
• Why Accountants Don’t Run Startups 15 April, 2010, 6:00 am
  This week I’m at the California Coastal Commission hearing in Ventura California wearing my other hat as a public official for the State of California.  After the hearing I drove up to Santa Barbara to give a talk to a Lean Startup Meetup. The talk, “Why Accountants Don’t Run Startups” summarized my current thinking about startups, how and why they’re different than large companies and for good measure threw in a few thoughts about entrepreneurial education. It was a dry run of a talk I’ll be giving at Eric Ries’ Startup Lessons Learned conference April 23 2010 in San Francisco (streaming and simulcast across the world.)  I’m a small part of what’s shaping up to be a spectacular conference and an all-star cast. The talk is below. BTW, “Fishbon” in the title slide is the name of the artists/engineers/writers collective that hosted the talk. Filed under: California Coastal Commission, Customer Development, Customer Development Manifesto, Durant versus Sloan: Startups Verus Companies
• Teaching Entrepreneurship – Logistics 29 March, 2010, 6:00 am
  Back from a family humanitarian trip/vacation to one of the last bastions of Communism where “marketing” isn’t even a profession and entrepreneurship is a crime.  The irony is that the “Revolutionary Square” in all these Communist countries will be the the first place the McDonald’s go when the system collapses. ——————- In my last post I described my approach to one of the three classes I teach at Stanford in the engineering school: Fundamentals of Technology Entrepreneurship.  The key things I want students to take from the class are: Understand that a startup is a temporary organization designed to search for a profitable business model Learn how to put together a business model, not a business plan Understand that a business model is only a series of hypotheses that need to be validated outside the building Class Logistics As described in the previous post, this is a hands-on class. The 55 students formed 11 teams, and each team had to come up with an original idea, size the opportunity, propose a Business Model, get out of the building and test their hypotheses and analyze and explain each of the parts of their model. The class wouldn’t have been possible without lots of hands other than mine. Teaching Team Having a teaching partner makes life a lot easier and the class improves. A partner allows me the flexibility to miss a session or two (my job as a California Coastal Commissioner meets three days every month up and down the coast of California.)  But the best benefit is bringing a second set of eyeballs to the curriculum which always makes it better. This was the year I finally got the “business model versus business plan” concept nailed down. In previous classes I had experimented with moving away from the traditional focus on writing a business plan to a hands-on approach to building a business model. But it wasn’t until Ann Miura-Ko joined me as a teaching partner that this “teach the model not the plan” idea jelled. Ann who had been my Teaching Assistant while she had finished her PhD at Stanford felt the same frustration about teaching entrepreneurs to assemble a business plan that we knew in the real world wouldn’t survive first contact with customers. After Stanford, Ann joined Mike Maples’ Venture Capital firm Floodgate as a partner. Over the summer we had both been impressed with Alexander Osterwalder’s Business Model Template work. At first we thought of adopting his template for the class, but found that an even more simplified version of a canonical business model that Ann developed worked better. Teaching Assistants Teaching at both Stanford and Berkeley I get to see the difference between the resources in a private university and those of a state university. (For the first 5 years at Berkeley, I taught 60 students by myself with no teaching partner or teaching assistant.) As the Stanford entrepreneurship program for the engineering school sits in the Management Science and Engineering Department, most of our TA’s are students in the MS&E PhD program. For this class Daisy Chung and David Hutton were our Teaching Assistants (TA’s.) TA’s make managing 60 students working on cases and team projects manageable. They set up and keep the class web site updated.  They provide logistical support for guest speakers. They answer enumerable emails about logistics as well as substantive questions about class content. In addition to Ann and my office hours, Daisy and David held their own office hours to provide student support. Most importantly, while Ann I reviewed all the grades, the TA’s managed the logistics of grading: grading the homework (in this class the case study summaries) and the business model written summary, keeping track of class participation and rolling up all the grades from the formal presentation. And they gave us feedback after each class session letting us know if we were particularly incoherent and kept us abreast of the usual student and team dynamics/crisis. Finally our TA’s managed the mentors we had supporting the students. Mentors One part of Silicon Valley culture that doesn’t get enough credit is the generosity of entrepreneurs and VC’s who are willing to share their time with students. Ann and I recruited VC’s and entrepreneurs to be mentors for each team. (We’ve never had a problem in getting help for these classes.) Typically we have a mix of new mentors and those who have volunteered their time before.)  I wrote a handbook for the mentors to explain their roles (here.) Essentially mentors support and coach each team. They typically met once or twice in person with the team, help them network outside the building, answer emails, provide critiques, etc. On average, mentors spent about 6 to 8 hours of time over the quarter with students. Some even came into to class to cheer on their team for their final business model presentations. Guest Speakers Two important things I learned early on in teaching are: 1) regardless of how good you are, students get sick of hearing you drone on week after week, and 2) hearing a guest make a point you’ve been trying to get across often makes it stick.  So we tried to break up our lectures with guest speakers. Ideally we attempt to match the guests with the case or class session subject. For example, when we taught the value of getting out of the building and agile development, we had Eric Ries talk about the Lean Startup. When we covered partnerships with the WebTV case, we had Spencer Tall who negotiated the deal with Sony for WebTV come in and explain to the class what really happened. (Ann also kept me in the 21st century by making sure we had several woman entrepreneurs as guest speakers.) Results In the last decade, entrepreneurship has become faddish, particularly in college. It’s now “cool” to be an entrepreneur, and every school wants some type of entrepreneurship course. While that’s gratifying, the fact is that most people are ill suited to survive in the wild as founders or early employees. I taught this introductory undergraduate class without many compromises. If you want to know what being an entrepreneur is going to be like you didn’t get to sit in a classroom listening to lectures for a quarter and then write a business plan. (I also teach a less intense introduction class for engineers called the Spirit of Entrepreneurship and the Customer Development Class at Berkeley which I’ll describe in a future post.) I actually hoped that some students who were curious about entrepreneurship would discover that it is definitely not for them. Better to find it out in a classroom than as a career choice. While that did happen to a few (some are still in shock that I “cold-call” in class, others can’t handle the team dynamics or complain that there is no “right” answer, or were disoriented that the mentors, professors and customers all had different answers) the class seems to have had the opposite effect on an interesting segment. Sometimes you get emails like this at the end of class: “Just want to say thank you for the “big ideas” you brought to us. Thanks to your class, I have been thinking thoroughly about my future career and have decided that I would become an entrepreneur rather than anything else. Actually I made up my mind just on my plane to my final round of interview with the Boston Consulting Group. I flew there and told the partner that I would become an entrepreneur instead.” Oh, oh. ——– Coming Soon In the fall Ann and I are going to develop a new graduate-level class for Stanford that will take this one to the next level. Students will not only have to assemble a team, come up with the idea and leave the classroom to test the business model – they’ll need to come back with real customer orders.  (And if it’s a web-based product, they’ll have to build it.) I wonder if we can fill the class. ———– A few more of the final class presentations are here (click on the thumbnails to enlarge): One last presentation here: Filed under: Customer Development Manifesto, Durant versus Sloan: Startups Verus Companies
• Death By Competitive Analysis 1 March, 2010, 7:00 am
  Trading emails with a startup CEO building an iPhone app, I asked him why potential customers would buy his product.  In response he sent me a competitive analysis. It looked like every competitive analysis I had done for 20 years, (ok maybe better.) And it made me sad. Looking at the spreadsheet, I realized that competitive analysis tables are one of the ways professional marketers screw up startups from day one. And I had done my share. Here’s why. Prove What I Already Believe Most competitive analyses are: 1) sales documents for investors and/or 2) an attempt to rationalize the founders assumptions. It’s Part of the Plan Most investors require you to write a business plan which includes a section called a “competitive analysis” in which you tell potential investors how your product compares to products other companies trying to develop and sell to the same customers. While most investors don’t actually read your business plan for a first meeting, a summary of your competitive analysis usually ends up as a slide or two in your PowerPoint presentation. Your goal in this slide is to tell investors: 1) you understand the market you are selling to, 2) you understand the other companies selling in your market, and 3) you understand how and why you are better than any of the products currently in the market. You are also implicitly telling potential investors, “These features on our competitive slide mean we will sell a lot of what we are planning to build so invest in us.” Death by Analysis I looked at the competitive analysis this startup CEO sent to me. This guy was experienced, he worked at lots of large companies, so the table was thorough, it had lots of rows and mentioned all the competitors. Not only was it wrong, it would set his company back months and possibly even kill them. Why? Competitive Analysis Drives Feature Sprawl In most startups the competitive analysis feature comparison ends up morphing into the Marketing Requirements Document that gets handed to engineering. The mandate becomes; “Our competitors have these features so our startup needs them too. Get to work and add all of these for first customer ship.” Product development salutes and gets to work building the product. Only after the product ships does the company find out that customers couldn’t have cared less about most of the bells and whistles. Instead of optimizing for a minimum feature set (that had been defined by customers) a competitive analysis drives a maximum feature set. This is not good. Where Are the Customers? Here’s the problem: How did the founder know which features to choose on the competitive analysis table? When I was running marketing, the answer usually was, “We’ll put up whatever axes or feature comparisons that make us look best in this segment to potential investors. What else would you choose?” At its best a competitive analysis assumes that you know why customers are going to buy your product.  At its worst it exists to rationalize the founder’s assumptions about what they are building. This is a mistake – and it is a contributing factor (if not a root cause) of why most startups get their initial feature set wrong. If you are building a competitive analysis table, do so only after you understand that the features you are listing matter to customers. Most marketers are happy to build feature comparisons. But customers don’t buy features, they usually buy something that solves a real or perceived need. That’s the comparison you and your investors should be looking at -  what do customers say they need or want? The answer to that question is almost never in your building. How to Make A Competitive Analysis Useful A competitive analysis makes sense when your startup is entering an Existing market –  where the competitors are known, the customers are known, and most importantly – the basis of competition is known. (The basis of competition are the features that customers in an existing market have said, “Yes, this is what is extremely important to me. I will dump my current supplier/manufacturer for your new product because yours is smaller/faster/easier to buy/get to/tastes better, etc.) You win in an existing market when you are better or faster on those metrics that customers have told you are the basis of competition. Your competitive analysis must be around those metrics. But most startups are not entering an Existing market. They may be trying to: Take a segment of an existing market by offering a product that 1) costs less (trading fewer features for a lower price) or 2) addresses the specific needs of a customer segment that the existing suppliers have failed to address Or they may be creating an entirely new market with a disruptive innovation that never existed before. In a Resegmented market, a competitive analysis starts with the hypothesis of “Here’s the problem we are solving for customers.” The competitive analysis chart highlights the product features that differentiate your startup from the existing market incumbents because of your understanding of specific customer needs (not your opinion) in this niche. In a New market a competitive analysis starts with the hypothesis of “We are creating something that never existed before for customers.” The competitive analysis table highlights the product features that show what customers could never do before. It compares your company to groups of products or services. I asked the CEO to go back to the competitive analysis and tell me whether he really knew what features matter most to potential customers. If not, he should get out of the building and find out. Lessons Learned Too often competitive analysis drives product requirements in startups. This can lead engineering to build the maximum feature set rather than minimum feature set. You need to get outside the building and figure out what features matter to most customers. No feature lists without facts. Filed under: Customer Development, Market Types, Uncategorized
• Turning on your Reality Distortion Field 22 April, 2010, 6:00 am
  I was catching up over coffee and a muffin with a student I hadn’t seen for years who’s now CEO of his own struggling startup.  As I listened to him present the problems of matching lithium-ion battery packs to EV powertrains and direct drive motors, I realized that he had a built a product for a segment of the electric vehicle market that possibly could put his company on the right side of a major industry discontinuity. But he was explaining it like it was his PhD dissertation defense. Our product is really complicated After hearing more details about the features of the product (I think he was heading to the level of Quantum electrodynamics) I asked if he could explain to me why I should care. His response was to describe even more features. When I called for a time-out the reaction was one I hear a lot. “Our product is really complicated I need to tell you all about it so you get it.” I told him I disagreed and pointed out that anyone can make a complicated idea sound complicated. The art is making it sound simple, compelling and inevitable. Turning on your Reality Distortion Field The ability to deliver a persuasive elevator pitch and follow it up with a substantive presentation is the difference between a funded entrepreneur and those having coffee complaining that they’re out of cash. It’s a litmus test of how you will behave in front of customers, employees and investors. 30-seconds The common wisdom is that you need to be able to describe your product/company in 30-seconds. The 30 second elevator pitch is such a common euphemism that people forget its not about the time, it’s about the impact and the objective.  The goal is not to pack in every technical detail about the product. You don’t even need to mention the product. The objective is to get the listener to stop whatever they had planned to do next and instead say, “Tell me more.” How do you put together a 30-second pitch? Envision how the world will be different five years after people started using your product. Tell me. Explain to me why it’s a logical conclusion. Quickly show me that it’s possible. And do this in less than 100 words. The CEOs reaction over his half- finished muffin was, “An elevator pitch is hype. I’m not a sales guy I’m an engineer.” The reality is that if you are going to be a founding CEO, investors want to understand that you have a vision big enough to address a major opportunity and an investment. Potential employees need to understand your vision of the future to decide whether against all other choices they will join you. Customers need to stop being satisfied with the status quo and queue up for whatever you are going to deliver. Your elevator pitch is a proxy for all of these things. While my ex student had been describing the detailed architecture of middleware of electric vehicles I realized what I wanted to understand was how this company was going to change the world. All he had to say was, “The electric vehicle business is like the automobile business in 1898.  We’re on the cusp of a major transformation. If you believe electric vehicles are going to have a significant share of the truck business in 10 years, we are going to be on the right side of the fault zone.  The heart of these vehicles will be a powertrain controller and propulsion system. We’ve designed, built and installed them. Every electric truck will have to have a product like ours.” 75 words. That would have been enough to have me say, “Tell me more.” Lessons Learned Complex products need a simple summary Tell me why I should quit my job to join you Tell me why I should invest in you rather than the line outside my door Tell me why I should buy from you rather than the existing suppliers Do it in 100 words or less. Filed under: Marketing
• Entrepreneurial Finishing School 10 May, 2010, 6:00 am
  I usually hear the “Should I get my MBA?” question at least once a month. If you’re an entrepreneur, the glib answer is “no.”  It’s also the wrong answer. Should I Get My MBA? Last week I was having coffee with an ex engineering student of mine now on his second startup (and for a change it wasn’t a Web 2.0 startup) who wanted to chat about career choices.  “I’m thinking of going back to school to get my MBA.”  It was said less as a clear declaration than a question. It was six years since he had left school and three and a half years ago he had joined an 8-person startup as a product manager. The company was now 4-years old and 70+ people, profitable and growing fast. I didn’t say anything as he continued, “I’m now director of product management, but I think I’m missing stuff I ought to know; finance, marketing, and operations management. We’re starting to hire senior execs as VP’s and all the jobs specs have “MBA” as a requirement.  What should I do?’ The easy answer would have been, “Yes, go back and get an MBA. You fit the perfect profile; you have an engineering background, work experience in two startups and you’ll be limited in your career growth without one.”  But the answer I gave him was a bit different. Where Do You Fit? In between the coffee and breakfast I drew this diagram: I explained that as startups grow, they go from the box on the left to the box on the right and the skills people need at each step of a company’s growth evolve and change. The skills required when they were an 8-person startup trying to “search for the business model” wasn’t the same set of skills needed now that they were  a 70-person company “executing the business model.”  I offered that it sounded to me as if his company was going through the transition (the box in the middle) where it was starting to put in place the processes needed to build and execute the business model. Who Are You? I suggested that perhaps his first question shouldn’t be whether he needed an MBA. Rather the question he should be thinking of was: in which part of a company’s lifecycle did he think he wanted to spend the rest of his career?  Did he enjoy the early chaotic stage of the startup?  Was he fondly telling stories of how much better it was when the company was smaller? After the rocketship ride of this successful startup, did he now want to be a founder of his own startup? Or was he more comfortable now that there was more structure, repeatability and he was managing a staff? Was his goal to be a large company executive managing large groups of people?  And if a larger company was his destination, did he want to manage complex technology projects or did he see himself in more general management in sales, marketing or finance? His vision about the trajectory of his career would answer what type of education he should get – and where he might get it. MBA or Engineering Management? I pointed out that if he wanted to work in a larger company he actually had two choices – go to business school for an MBA degree or go back to a graduate school of engineering for a Engineering Management degree.  (I find a disconcerting number of my MBA students with engineering backgrounds realized too late that they ought to have been in an engineering management program. They had picked the MBA route because it was trendy or they hadn’t thought through that managing engineering projects was what really excited them.) Why Yes I Am an Entrepreneur I could see I was having an effect when he blurted out, “You know my happiest times in these startups were when we were a small team figuring out the business model. The chaos and camaraderie gave me an adrenalin rush and incredible satisfaction. While I’m really good at managing the process, this phase of the company feels like a job. I’ve been bouncing some ideas about a company with some fellow employees who feel the same way. Maybe I do want to do startups as a career.” Then he asked me the real hard question. “So what type of graduate school do I go to get the skills to be a great entrepreneur?” Entrepreneurial Apprenticeship I congratulated him.  “You already have started your apprenticeship. You have two startups under your belt as one of the first 10 employees. If you decide that you want to be a founder of a startup you’ve made a good start.”  “But where do I learn all the things a founder needs to know, not just an early employee? Team building? Creativity and innovation? Entrepreneurial finance? Agile Development? This Lean startup stuff?  Where’s the school for that?” I said, “Welcome to the wondeful world of entreprenurial education.  It’s everywhere and nowhere.” E-School versus B-School Almost all business schools now have entrepreneurship programs or departments. (At U.C. Berkeley that’s exactly the program I teach in.) But you can also find entrepreneurship programs in most engineering schools. (At Stanford that’s the program I teach in as well.) And startup “accelerators” like Y-Combinator, Techstars, etc. also offer a crash course in Darwinian education. I also pointed out, “If your passion is starting your own company, learning by doing is an equally viable choice.” MBA? Engineering Management program? Startup accelerators? Just do it?  He had more choices than most.  But first… Who was he? And who did he want to be? Lessons Learned Where do you want to work: startups, mid-size or large companies? If large companies, what do you want do: engineering management or corporate management? If you find yourself debating the “startup versus large company” choice you’ve already chosen the big company.  Entrepreneurship isn’t a career choice it’s a passion and obsession. Filed under: Uncategorized
• Airman Roachclip, Ashley P. 1 April, 2010, 7:00 am
  I thought today was an appropriate time to tell this story. I’m hoping the Statute of Limitations has run out. ————- As I’ve gotten older, I realized that one of the skills I have is pattern recognition across large data sets.  When I was young, I didn’t have much data. So back then I constructed “what if…” scenarios in my head to amuse myself. The first time I did this I created havoc on an Air Force base by convincing everyone that gravity would be turned off. This time what was meant as a private joke accidentally ended up involving the entire U.S. Air Force Pacific Command in the middle of the Vietnam War. The Night Shift I was 20 years old in Thailand repairing electronic countermeasures receivers on the “graveyard” shift (midnight-to-eight in the morning.) Outside our air-conditioned shop, the nights were still warm and muggy as other maintenance technicians were also working through the night repairing all the broken parts of fighter planes; navigation, radar, jet engines, etc. The fighters would sit in their protective revetments until morning slowly being reassembled for the next days shift over North Vietnam. As the early morning sun was lighting up the flightline I could hear the rumble of the fighters taking off. I’d get off work with the sun still low in the morning sky and watch them taxi to the ready line, arm their weapons and roar down the runway. Access Since I was responsible for my tiny part of the 150+ person shop, I had the keys to the electronic warfare administrative office. Giving a 20-year old with an active imagination and a history of large scale pranks access to an administrative office was a bad idea. The office had file cabinets with personnel records, training records, administrative records, etc.  And with time on my hands I went through everybody’s files, and while there was nothing particularly interesting, it kept me busy reading for weeks. As I looked at all these personnel records, I thought it would be funny to create an entirely new person who didn’t exist.  To amuse myself, my project over the next few months would be to create all the records for this fictional persona. But what to name him?  Cheech and Chong, a comedy team in the early 1970’s, had come up with a character whose name I had found laugh-out-loud funny (remember I was 20) – Ashley Roachclip. That’s who I was going to have join the war effort –  Airman Ashley P. Roachclip. Airman Ashley P. Roachclip Reporting For Duty Each evening after I finished repairing microwave warning receivers that hopefully would allow our fighter planes to see the North Vietnamese Surface to Air Missiles before they launched, I sat and typed away. I spent weeks copying all the personnel and training forms, assembling a complete dossier for Airman Roachclip. This was my first attempt at creative writing, and I gave him a very interesting career (he was a very bad airman.) When I was done, there must have been 70 pages in Airman Ashley P. Roachclip’s personal file. Airman Roachclip was now part of the Vietnam war effort. Feeling fulfilled, I put his records back in the files and never had a second thought. Formation Fast forward a few months. Most of the time my only interaction with our shop’s military hierarchy was getting briefed by the swing shift which preceded me, and me briefing the day shift which followed me. We’d discuss transition issues about equipment problems or talk about parts needed to fix the remaining equipment, etc. But one day as I came into work, the swing shift said, “There is a mandatory military formation (meeting) at 0900.” And the meeting wasn’t just for me, it was for the entire 150+ people in the shop. At 0900 we stepped out into the bright Thai sunlight and formed up. And I realized that it’s not just our shop, but it looks like it’s most of the 500 person avionics squadron. On the Record A few captains surrounded the assistant base commander. For an enlisted man sighting of an officer other than the flight crews was never a good sign. I managed to work my way to the back row. Stacked on a long table in front of the officers were boxes of personnel records. As we formed up, we’re all asking each other, “What’s going on?” Finally someone calls us all to attention, and the assistant base commander announced, “We’re here today because of a personnel matter. This base submitted the total number of airmen we have to Pacific Headquarters in Hawaii.  According to USAF records, 123,912 airmen were sent to Southeast Asia, but they have records showing that are 123,913 airmen here. That means there is one extra airman we can’t account for. Headquarters has traced that one extra airman in the entire Pacific theatre down to this avionics squadron.” “When we call your name come up to the table, report in to your shop chief and pick up your personnel record. We’ll start with the radar shop,” a captain announced. At this moment I realized the personnel record I created had somehow gotten reported as being a real member of our shop and had screwed up the system. I’m in a war zone, and I’m probably going to be shot for this. The captain read names alphabetically through each shop. When he called out, “Airman Jones,” you went up, saluted and picked up your records. They looked at it, they looked at you, and then you were dismissed.  I died a bit at each time they called a name. They called all the names in radar shop, then the nav shop and now they were down to the electronic warfare shop. He’s A Mythical Character Sir The names became a blur, “Airman Johnson, yes, sir, Airman Potts, yes sir…” I couldn’t tell if I was sweating from standing in the Thai sunlight or out sheer terror. How did this happen? Unlike my previous prank I had no intention of this one becoming public. Now I was wondering if they’d arrest me in front of my entire shop. And I wondered what kind of prison the military had. Finally the captain calls out, “Airman Roachclip,” … Silence.  They call again, this time louder, “Airman Roachclip front and center.” People began to snicker, as they yell again, “Airman Ashley P. Roachclip front and center.”  And all of a sudden all the young guys started to laugh out loud. The assistant base commander who had been irritated at the start of this process was now really mad. He walked out from behind the table and put his face right in front of one of my shop mates who had been laughing the loudest. “What’s so funny, airman?” He shouted. The startled airmen replied, “Sir, Ashley P. Roachclip is a mythical character, sir.” This time it was the major’s turn to be surprised, “What did you say, son?”  My shop mate managed to stammer out, “Sir, Ashley Roachclip is in a Cheech and Chong album and he’s the President of the United Heads For Hemp.”  The base commander started to turn red, but before he could say anything else someone else volunteered, “I have the album in my barracks, sir. I can get it for you.” Finally the base commander asks, “Are you telling me Ashley P. Roachclip is not an airman in the United States Air Force?” The airman replied, “ Yes, sir, no he’s not, sir.” You can just imagine the fur ball of activity this revelation created among the officers and shop chiefs. All I could think is: “Why did I do this again?  It was the same chaos that happened the last time I pulled a prank in the military. I promised myself that if I somehow got out of this one without being caught, I was never going to do another practical joke again. After 15 minutes of further discussion, (and after review of the clearly fantastic accomplishments in Airman Roachclip’s personnel record) they dismissed us. For the next three months I thought they would dust the personnel record for fingerprints, find out it was me, and send me to jail. And then one day air war was over the North was over. We were all going home. I never did do another prank… Until 20 years later when I put the Moon Rock in the Rocket Science lobby. Filed under: Air Force
• It Must Be A Marketing Problem 11 February, 2010, 7:00 am
  The Customer Development process is the way startups quickly iterate and test each element of their business model, reducing customer and market risk. The first step of Customer Development is called Customer Discovery. In Discovery startups take all their hypotheses about the business model: product, market, customers, channel, etc. outside the building and test them in front of customers. At least that’s the theory. Helping out some friends I got to see firsthand the consequence of skipping Customer Discovery. It’s A Marketing Problem After I retired I would get calls from VC’s to help with “marketing problems” in their portfolio companies. The phone call would sound something like: “We have a company with great technology and a hot product but at the last board meeting we determined that they have a marketing problem. Can you take a look and tell us what you think?” A week later I was in the conference room of the company having a meeting with the CEO. We Have a Marketing Problem “So VC x says you guys have a marketing problem. How can I help?” CEO – “Well, we’ve missed our sales numbers for the last six months.”  Me – “I’m confused. I thought you guys have a marketing problem.  What does this have to do with missing your sales plan? CEO – “Well our VP of Sales isn’t making the sales plan and he says it’s a marketing problem, and he’s a really senior guy.” Now, I’m intrigued. The CEO asks the VP of Sales to join us in the conference room. (Note that most VP of Sales’ have world-class antenna for career danger. Being invited to chat with the CEO and an outside consultant that a board member brought in creates enough tension in a room to create static discharge.) No One is Buying Our Product “Tell me about the marketing problem.” VP of Sales – “Marketing’s positioning and strategy is all wrong.” Me – “How’s that?” VP of Sales – “No one is interested in buying our product.” If you’ve been in marketing long enough you recognize the beginning of the sales versus marketing finger pointing.  (It usually ends up bad for all concerned.) Sales’ is on the hook for making the numbers and things aren’t looking good. Six is a Proxy for Burn Rate “How many salespeople do you have?” VP of Sales – “Six in the field, plus me.”  Later I realized six salespeople without revenue to match was a proxy for an out of control burn rate that now had the boards serious attention. There’s Always One in Boston “Is there a salesperson in Boston?” VP of Sales – “Sure.”  Me – “What sales presentation is he using? VP of Sales – “The corporate presentation. What else do you think he’d be using?”  Me – “Let’s get him on the phone and ask.” Sure enough we’d get the sales person on the phone and find out that he stopped using the corporate presentation months ago. Why?  The standard corporate presentation wasn’t working, so the Boston sales rep made up his own. (I asked for the Boston sales rep because in the U.S. they’re furthest from the Silicon Valley corporate office and any oversight.) We call the five other sales people and find that they are also “winging it.” Early Orders Were a Detriment I learned that the founders received their initial product orders from their friends in the industry and through board members personal connections. These “friends and family orders” made the first nine months of their revenue plan. With that initial sales “success” they began to hire and staff the sales department per the ”plan.”  That’s how they ended up with seven people in sales (plus three more in marketing.) But now the bill had come due. It turned out that these “friends and family orders” meant the company really hadn’t understood how and why customers would buy their product. There was no deep corporate understanding about customers or their needs. The company had designed and built their product and assumed it was going to sell well based on their initial early orders. Marketing was writing presentations and data sheets without having a clue what real problems customers had.  And without that knowledge, sales essentially was selling blind. Advice You Don’t Want to Hear My report back to the VC?  Missing the sales numbers had nothing to do with marketing. The problem was much, much worse. The company had failed to do any Customer Discovery. Neither the CEO, VP of Sales or VP of Marketing had any idea what a repeatable sales model would look like before they scaled the sales force. Now they had a sales force in Brownian motion in the field, and a marketing department changing strategy and the corporate slide deck weekly. Cash was flowing out of the company and the VP of Sales was still hiring. I suggested they cut the burn rate back by firing all the salespeople in the field, (keeping one in Silicon Valley,) and get rid of all of marketing. The CEO needed to get back to basics and personally get out of the building in front of customers to learn and discover what problems customers had and why the company’s product solved them. The VC’s response?  “Nah, it can’t be that bad, it’s a marketing problem.” I’ll leave it to you to guess what the VC’s did six months later. Lessons Learned Premature Scaling of sales and marketing is the leading cause of hemorrhaging cash in a startup. Scale sales and marketing after the founders and a small team have found a repeatable sales model. Early sales from board members or friends are great for morale and cash but may not be indicative of learning and discovering a business model. Filed under: Customer Development, Durant versus Sloan: Startups Verus Companies, Venture Capital
• Incentives and Legends 1 February, 2010, 7:00 am
  Entrepreneurs and the early startup team all need to be motivated by a shared vision, passion and desire to build a large company.  Yet it’s the company legends that live on. Fund Raising Our little startup was less than a year-old.  We had been busy assembling our team and had just hired the last member of our exec staff.  We had also just closed our Series B financing with a major overseas partner.  The financing felt like a real validation of our strategy. In truth, it was only proof that our reality distortion field worked in Asia as well. My Wife Thinks I Deserve a Bonus One of the new hires was Bob, my VP of Business Development.  He knew so little about technology that I used to say he needed a manual to operate a light switch, but I hired him because a small voice said, “He’ll do extraordinary things.” He did.  And still does. Bob, among other things ran the fundraising for us in Asia and worked with an outside firm that had great connections in Japan to drag us around Tokyo and get the deal closed.  As in raising $10Million dollars kind of closed. Everyone at our startup was working on startup starvation salaries, and Bob had taken a large pay cut to join us. When the Japanese partner deal was done, Bob said,  “Steve, I deserve at least a $10,000 bonus.  I haven’t been home in weeks, and I pulled off a financing even you admit was unbelievable.” I patiently explained that this type of miraculous event was the norm for startups. The engineers were pulling off miracles on a daily basis, we were all taking fumes for salaries, but our payoff will be when our stock is worth something.  Until then, tell your wife you’ll get $10,000 when hell freezes over. No bonuses in a startup. To his credit Bob said while he understood, he was going to hear about it at home for not being appreciated. Dinner Since our management team hadn’t met each others’ spouses, I thought the financing would be a great reason to get everyone together for a low key celebratory dinner.  We picked a restaurant in Palo Alto down the street from the company and got a private room. We drank lots of wine, had a nice dinner and after the dinner plates had been cleared I made a speech about teamwork, startup, passion, commitment, blah, blah. I then congratulated the outside firm that Bob had used in Japan. I had invited their CEO and his wife and handed him a check for their retainer bonus for their help in the deal. Bob kept glancing at his wife who was giving him frosty looks and was very clearly not happy. The New Briefcase I then announced that it was unfair that Bob shouldn’t go unrecognized for his hard work so I had an award for him as well. The atmosphere around Bob’s wife began to thaw.  I said, “Bob had carried the same old beat up leather briefcase he had since law school and I knew he wouldn’t trade it for anything but I think its time he had something more professional looking.  So Bob, on behalf of the company, we bought you a new briefcase.” The look on both Bob’s face and his wife’s went from happy to disbelief, to “I can’t believe you’re working for this idiot” on his wife’s face to “I can’t believe I work for this idiot” on Bob’s face. I said, “Your new briefcase is under the table by your feet.  Why don’t you just put it on the table.”  Bob rooted around a bit and found the briefcase and put it on the table. It was the ugliest and cheapest briefcase you will ever see. Everyone was now looking slightly embarrassed, all thinking that perhaps they had the most obtuse CEO in Silicon Valley. I thought Bob’s wife was going to throw a steak knife across the table.  I made another speech about how great Bob was and then sat down and said, “Lets get the waiter for coffee and desert.” The ugly briefcase with its implicit statement sat on the table virtually steaming. Legend “Oh, one more thing,” I said.  “Bob, can you open up the briefcase and dump the papers on the table. We should clear out the stuffing so you can put your papers from your old briefcase in it.” With almost an audible sigh, Bob unlatched the briefcase, held it upside down over the table and dumped out the contents. In slow motion, dollar bills began to tumble out of the new briefcase.  And they kept coming out.  And they started making a pile of bills in front of Bob and his wife and the rest of the executive staff. 15,000 dollars in dollar bills. Bob’s wife started crying. I said, “Extraordinary work in a startup is the norm, but you performed even beyond my expectations. In my startups that’s worth recognizing.” Rewards for extraordinary effort became part of the company’s legend. Epilogue Lest you think only salespeople are motivated by cash in a startup, over the life of the company we sprung the same surprise on engineers who did deliver the impossible. And at Christmas we gave out hundred dollar bills to each employee. While this small token of appreciation would have been dismissed if it had been a check, it had our engineers showing these bills to their friends in other companies. In three or so years these cash incentives added up to no more than $50K. While everyone understood the theory that we were working to make the stock valuable (and we did,) the cash reminded them that we cared and noticed. Lessons Learned Cash has a much greater affect than a check. Awards for critical contributions can make a lasting impact. Small amounts spread through the company can be a great motivator. Done correctly it turns incentives into legends. Filed under: Family/Career
• What’s A Startup? First Principles. 25 January, 2010, 7:00 am
  Success consists of going from failure to failure without loss of enthusiasm. Winston Churchill Everyone knows what a startup is for – don’t they? In this post we’re going to offer a new definition of why startups exist: a startup is an organization formed to search for a repeatable and scalable business model. A Business Model Ok, but what is a business model? A business model describes how your company creates, delivers and captures value. Or in English: A business model describes how your company makes money. (Or depending on your metrics for success, get users, grow traffic, etc.) Think of a business model as a drawing that shows all the flows between the different parts of your company.  A business model diagram also shows how the product gets distributed to your customers and how money flows back into your company.  And it shows your company’s cost structures, how each department interacts with the others and where your company fits with other companies or partners to implement your business. While this is a mouthful, it’s a lot easier to draw. Drawing A Business Model Lots of people have been working on how to diagram and draw a business. I had my students drawing theirs for years, but Alexander Osterwalder’s work on business models is the clearest description I’ve read in the last decade. The diagram below is his Business Model template. In your startup’s business model, the boxes will have specific details of your company’s strategy. Alexander Osterwalder's Business Model Template (At Stanford, Ann Miura-Ko and I have been working on a simplified Silicon Valley version of this model. Ann will be guest posting more on business models soon.) But What Does a Business Model Have to Do With My Startup? Your startup is essentially an organization built to search for a repeatable and scalable business model.  As a founder you start out with: 1) a vision of a product with a set of features, 2) a series of hypotheses about all the pieces of the business model: Who are the customers/users? What’s the distribution channel. How do we price and position the product? How do we create end user demand? Who are our partners? Where/how do we build the product? How do we finance the company, etc. Your job as a founder is to quickly validate whether the model is correct by seeing if customers behave as your model predicts. Most of the time the darn customers don’t behave as you predicted. How Does Customer Development, Agile Development and Lean Startups Fit? The Customer Development process is the way startups quickly iterate and test each element of their business model. Agile Development is the way startups quickly iterate their product as they learn. A Lean Startup is Eric Ries’s description of the intersection of Customer Development, Agile Development and if available, open platforms and open source. (This methodology does for startups what the Toyota Lean Production System did for cars.) Business Plan Versus Business Model Wait a minute, isn’t the Business Model the same thing as my Business Plan?  Sort of…but better.  A business plan is useful place for you to collect your hypotheses about your business, sales, marketing, customers, market size, etc. (Your investors make you write one, but they never read it.)  A Business Model is how all the pieces in your business plan interconnect. The Pivot How do you know your business model is the right one? When revenue, users, traffic, etc., start increasing in a repeatable way you predicted and make your investors happy. The irony is the first time this happens, you may not have found your company’s optimal model.  Most startups change their business model at least once if not several times.  How do you know when reached the one to scale? Stay tuned. More in future posts. Lessons Learned A startup is an organization formed to search for a repeatable and scalable business model. The goal of your early business model can be revenue, or profits, or users, or click-throughs – whatever you and your investors have agreed upon. Customer and Agile Development is the way for startups to quickly iterate and test their hypotheses about their business model Most startups change their business model multiple times. Posted in Durant versus Sloan: Startups Verus Companies