Why Innovation Dies

Faced with disruptive innovation, you can be sure any possibility for innovation dies when a company forms a committee for an “overarching strategy.”

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I was reminded how innovation dies when the email below arrived in my inbox. It was well written, thoughtful and had a clearly articulated sense of purpose. You may have seen one like it in your school or company.

Skim it and take a guess why I first thought it was a parody. It’s a classic mistake large organizations make in dealing with disruption.

The Strategy Committee

Faculty and Staff:

We believe online education will become increasingly important at all levels of the educational experience. If our school is to retain its current standards in terms of access and excellence we think it is of paramount importance that we develop an overarching campus strategy that enables and supports online innovation.

We believe our Departments play an essential leadership role in the design and implementation of online offerings. However, we also want to provide guidance and support and ensure that campus goals are met, specifically ensuring that our online education efforts align with our mission, values and operational requirements.

To this end, we are convening a Strategy Committee that is charged with overseeing our efforts and accelerating implementation. The responsibilities of the group will be to provide overall direction to campus, make decisions concerning strategic priorities and allocate additional resources to help realize these priorities. Because we anticipate that most of the innovation in this area will occur at the school/unit level we underscore that the purpose of the Strategy Committee is to provide campus-level guidance and coordination, and to enable innovation. The Strategy Committee will also be responsible for reaching out to and receiving input from the Presidents Staff and the Faculty Senate.

The Strategy Committee will be comprised of Mark Time, Nick Danger, Ralph Spoilsport, Ray Hamberger, Audrey Farber, Rocky Rococo, George Papoon, Fred Flamm, Susan Farber, and Clark Cable.

A Policy Team, which is charged with coordinating with the schools/unit to develop detailed implementation plans for specific projects, will report to the Strategy Committee. The role of the Policy Team will be to develop a detailed strategic framework for the campus, oversee the development of shared resources, disseminate best practices, create an administrative infrastructure that provides consistent financial and legal expertise, and consult with relevant campus groups: and the the Budget Office. The Policy Team will be led by two senior campus leaders, one from the academic side and one from the administration side.

We are extremely pleased that Dean TIrebiter has accepted the administrative lead role of the Policy Team. Dean Tirebiter brings to this position a deep knowledge of the online environment.  He will be helping to identify a member of our Faculty to serve as the academic lead of the Policy Team.

The Strategy Committee will be meeting for a half-day retreat at Morse Science Hall in the coming weeks to begin work. We will be sending out an update to faculty and following this retreat, so stay tuned for further updates.

Sincerely,

President Peter Bergman

We Can Figure it Out in A Meeting
The memo sounds thoughtful and helpful. It’s an attempt to get all the “right” stakeholders in the room and think through the problem.

One useful purpose a university committee could have had was figuring out what the goal of going online was.  It could have said “the world expects us to lead so lets get together and figure out how we deal with online education.”  Our goal(s) could be:

  • Looking good
  • Doing good for all [or at least citizens of California]
  • Doing well by our enrolled students
  • Fixing our business model to fix our budget crisis
  • Having a good football team – or at least filling the stadium
  • Attracting donations
  • Attracting faculty
  • Oh and yes – building an efficient, high quality education machine
But the minute the memo started talking about a Policy Team developing detailed implementation plans, it was all over.

The problem is that the path to implementing online education is not known. In fact, it’s not a solvable problem by committee, regardless of how many smart people in the room. It is a “NP complete” problem – it is so complex that figuring out the one possible path to a correct solution is computationally incalculable. (See the diagram below.)

If you can’t see the diagram above click here.

Innovation Dies in Conference Rooms
The “lets put together a committee” strategy fails for four reasons:

  1. Online education is not an existing market. There just isn’t enough data to pick what is the correct “overarching strategy”.
  2. Making a single bet on a single strategy, plan or company in a new market is a sure way to fail. After 50-years even the smartest VC firms haven’t figured out how to pick one company as the winner.  That’s why they invest in a portfolio.
  3. Committees protect the status quo. Everyone who has a reason to say “No” is represented.
  4. Dealing with disruption is not solved by committee. New market problems call for visionary founders, not consensus committee members.
My bet is that there will be more people involved in this schools Strategy Committee then in the startups that find the solution.

In a perfect world, the right solution would be a one page memo encouraging maximum experimentation with the bare minimum of rules (protecting the schools brand and the applicable laws.)

 Lessons Learned

  • Innovation in New Markets do not come from “overarching strategies”
  • It comes out of opportunity, chaos and rapid experimentation
  • Solutions are found by betting on a portfolio of low-cost experiments
    • With a minimum number of constraints
  • The road for innovation does not go through committee

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Search versus Execute

One of the confusing things to entrepreneurs, investors and educators is the relationship between customer development and business model design and business planning and execution.

When does a new venture focus on customer development and business models? And when do business planning and execution come into play?

Here’s an attempt to put this all in context.

Don’t Throw the Tomatoes
I was in Washington D.C. last week presenting at the ARPA-E conference. I spent the next day working with the National Science Foundation on the Innovation Corps, and talking to congressional staffs about how entrepreneurial educational programs can reshape our economy. (And I even found time to go to the Spy Museum.)

One of the issues that came up is whether the new lexicon of entrepreneurial ideas – Customer Development, Business Model Design, Lean, Lean LaunchPad class, etc. – replace all the tools and classes that are currently being taught in entrepreneurship curriculums and business schools.  I was a bit surprised since most of what I’ve been advocating is complementary to existing courses. However, I realize I’ve primarily written about business model design and customer development. Given that I’m speaking this month in front of entrepreneurship educators at the NCIIA conference, I thought I should put it in context before they throw tomatoes at me.

Search Versus Execution
One of the things startups have lacked is a definition of who they were. For years we’ve treated startups like they are just smaller versions of a large company. However, we now know that a startup is a temporary organization designed to search for a repeatable and scalable business modelWithin this definition, a startup can be a new venture or it can be a new division or business unit in an existing company.

If your business model is unknown – that is just a set of untested hypotheses- you are a startup searching for a repeatable business model. Once your business model (market, customers, features, channels, pricing, Get/Keep/Grow strategy, etc.) is known, you will be executing it. Search versus execution is what differentiates a new venture from an existing business unit.

Strategy


The primary objective of a startup is to validate its business model hypotheses (and iterate and pivot until it does.) Then it moves into execution mode. It’s at this point the business needs an operating plan, financial forecasts and other well-understood management tools.

Process

The processes used to organize and implement the search for the business model are Customer Development and Agile Development. A search for a business model can be in any new business – in a brand new startup new or in a new division of an existing company.

In search, you want a process designed to be dynamic, so you work with a rough business model description knowing it will change. The model changes because startups use customer development to run experiments to test the hypotheses that make up the model. And most of the time these experiments fail. Search embraces failure as a natural part of the startup process. Unlike existing companies that fire executives when they fail to match a plan, we keep the founders and change the model.

Once a company has found a business model (it knows its market, customers, product/service, channel, pricing, etc.), the organization moves from search to execution.

The product execution process – managing the lifecycle of existing products and the launch of follow-on products – is the job of the product management and engineering organizations. It results in a linear process where you make a plan and refine it into detail. The more granularity you add to a plan, the better people can execute it: a Business Requirement document (BRD) leads to a Market Requirements Document (MRD) and then gets handed off to engineering as a Functional Specifications Document (FSD) implemented via Agile or Waterfall development.

Organization

Searching for a business model requires a different organization than the one used to execute a plan. Searching requires the company to be organized around a customer development team led by the founders. In contrast, execution, (which follows search) requires the company to be organized by function (product management, sales, marketing, business development, etc.)

Companies in execution suffer from a “fear of failure culture“, (quite understandable since they were hired to execute a known job spec.) Startups with Customer Development Teams have a “learning and discovery” culture for search. The fear of making a move before the last detail is nailed down is one of the biggest problems existing companies have when they need to learn how to search.

The idea of not having a functional organization until the organization has found a proven business model is one of the hardest things for new startups to grasp. There are no sales, marketing or business development departments when you are searching for a business model.  If you’ve organized your startup with those departments, you are not really doing customer development.  (It’s like trying to implement a startup using Waterfall engineering.)

Education
Entrepreneurship curriculums are only a few decades old. First taught as electives and now part of core business school curriculums, the field is still struggling to escape from the bounds of the business plan-centric view that startups are “smaller versions of a large company.” VC’s who’ve watched as no startup business plan survived first contact with customers continue to insist that startups write business plans as the price of entry to venture funding. Even as many of the best VCs understand that the business ‘planning’ and not the ‘plan’ itself, are what is important.

The trouble is that over time – this key message has gotten lost. As business school professors, many of whom lack venture experience, studied how VCs made decisions, they observed the apparently central role of the business plan and proceeded to make the plan [not the planning], the central framework for teaching entrepreneurship. As new generations of VCs with MBA’s came into the business, they compounded the problem (“that’s how we always done it” or “that’s what I learned (or the senior partners learned) in business school.”)

Entrepreneurship educators have realized that plan-centric curriculum may get by for teaching incremental innovation but they’re not turning out students prepared for the realities of building new ventures. Educators are now beginning to build their own E-School curriculum with a new class of management tools built around “search and discovery.” Business Model Design, Product/Service Development, Customer Development, Startup Team-Building, Entrepreneurial Finance, Marketing, Founder Transition, etc. all provide the startup equivalent of the management tools MBAs learn for execution.

Instructional Strategy

Entrepreneurial education is also changing the focus of the class experience from case method to hands-on experience. Invented at Harvard, the case method approach assumes that knowledge is gained when students actively participate in a discussion of a situation that may be faced by decision makers.

The search for a repeatable business model for a new product or service is not a predictable pattern. An entrepreneur must start with the belief that all her assumptions are simply hypotheses that will undoubtedly be challenged by what she learns from customers. Analyzing a case in the classroom removed from the realities of chaos and conflicting customer responses adds little to an entrepreneur’s knowledge. Cases can’t be replicated because the world of a startup too chaotic and complicated. The case method is the antithesis of how entrepreneurs build startups – it teaches pattern recognition tools for the wrong patterns –  and therefore has limited value as an entrepreneurship teaching tool.

The replacement for cases are not better cases written for startups. Instead, it would be business model design – using the business model canvas as a way to 1) capture and visualize the evolution of business learning in a company, and 2) see what patterns match real world iterations and pivots. It is a tool that better matches the real-world search for the business model.

An entrepreneurial curriculum obviously will have some core classes based on theory, lecture and mentorship. There’s embarrassing little research on entrepreneurship education and outcomes, but we do know that students learn best when they can connect with the material in a hands-on way – personally making the mistakes and learning from them directly.

As much as possible the emphasis ought to be on experiential, learner-centric and inquiry-based classes that help to develop the mindset, reflexes, agility and resilience an entrepreneur needs to search for certainty in a chaotic world.

Lessons Learned

  • The search for the business model is the front end of the startup process
  • This is true in the smallest startup or largest company
  • The goal is to find a repeatable/scalable model, and then execute
  • Execution requires operating plans and financial forecasts
  • Customer and Agile Development are the processes to search and build the model
  • Product management is the process for executing the model
  • Entrepreneurial education needs to develop its own management stack
    • Starting with how to design and search for a business model
    • Adding all the other skills startups needs
    • The case-method is the antitheses of an entrepreneurial teaching method

Listen to the post here: Download the Podcast here

Two Giant Steps Forward For Entrepreneurs

While entrepreneurship is in the news fairly regularly, I seldom make news myself.  Today, however there are two important updates for entrepreneurs everywhere.  Let me be brief…

The “Startup Owner’s Manual” goes On Press Tuesday 2/14
Two years in the making and literally ten years in development, I’m proud to announce that my new book, The Startup Owners Manual, goes onto the printing press next Tuesday.  This 608-page work is, as its subtitle says, “the step-by-step guide for building a great company.”  It’s the result of a decade of me learning from 1,000’s of entrepreneurs, corporate partners, students and scientists the best practices of what wins in startups. I’ve spent the last two years cramming knowledge into this new book.

In brief, the The Startup Owners Manual is far more detailed and more readable than Four Steps to the Epiphany, (most of the sentences are even finished!).  In fact, you could say that all that remains from my last book are the four steps of Customer Development.  Briefly, the new book:

  • Integrates Alexander Osterwalders “Business Model Canvas” as the front-end and “scorecard” for the customer discovery process.
  • Provides separate paths and advice for web/mobile products versus physical products
  • Offers a ton of detail and great tips on how to get, keep, and grow customers, recognizing that this happens very differently between web and physical channels.
  • and finally it teaches a “new math” for startups: “metrics that matter.”
While MBA’s have had a stack of texts to help them “execute” a business model, this book joins the growing library of books for practitioners for the “search” for the business model.

The Lean LaunchPad Online Class
My online Lean LaunchPad class has created a lot of buzz this week. As you may have heard, I was deep into the production of the lectures when I realized I was producing the wrong class.  The online class was originally based on my book The Four Steps to the Epiphany.

Only when I held the draft of my latest book, The Startup Owners Manual, in my hands, did it dawn on me that my online students deserved all the latest best practices of entrepreneurship and Customer Development. Not the stuff I taught a decade ago, but all that I’ve learned teaching the Lean LaunchPad in front of students at Stanford, Berkeley, Columbia and the National Science Foundation in the last year.  And I particularly wanted to incorporate everything I’ve spent two years integrating into The Startup Owners Manual into the class.

So apologies to all of you who were expecting the class this month.  I hope to get the updated version online in the next 60 days.  I’ll keep you updated on this blog as we record our lectures.

In the meantime, if you want to prepare for the class…or get a jump on your startup competition, you can start reading the “recommended text” for the online class right now by ordering my new book.  It is recommended—not required—reading for the free online course, and I believe it will be immensely helpful to the startup community at large.

Lessons Learned

  • Startups search for business models, exisitng companies execute them
  • There are tons of texts about execution, but a paucity of practical ones for founders on how to search
  • The Startup Owners Manual is the definitive reference book for founders, investors and everyone interested in startups
  • The Lean Launchpad on-line class will be based on the new book

Why The Movie Industry Can’t Innovate and the Result is SOPA

This year the movie industry made $30 billion (1/3 in the U.S.) from box-office revenue.

But the total movie industry revenue was $87 billion. Where did the other $57 billion come from?

From sources that the studios at one time claimed would put them out of business: Pay-per view TV, cable and satellite channels, video rentals, DVD sales, online subscriptions and digital downloads.

The Movie Industry and Technology Progress
The music and movie business has been consistently wrong in its claims that new platforms and channels would be the end of its businesses. In each case, the new technology produced a new market far larger than the impact it had on the existing market.

  • 1920’s – the record business complained about radio. The argument was because radio is free, you can’t compete with free. No one was ever going to buy music again.
  • 1940’s – movie studios had to divest their distribution channel – they owned over 50% of the movie theaters in the U.S. “It’s all over,” complained the studios. In fact, the number of screens went from 17,000 in 1948 to 38,000 today.
  • 1950’s – broadcast television was free; the threat was cable television. Studios argued that their free TV content couldn’t compete with paid.
  • 1970’s – Video Cassette Recorders (VCR’s) were going to be the end of the movie business. The movie businesses and its lobbying arm MPAA fought it with “end of the world” hyperbole. The reality? After the VCR was introduced, studio revenues took off like a rocket.  With a new channel of distribution, home movie rentals surpassed movie theater tickets.
  • 1998 – the MPAA got congress to pass the Digital Millennium Copyright Act (DMCA), making it illegal for you to make a digital copy of a DVD that you actually purchased.
  • 2000 – Digital Video Recorders (DVR) like TiVo allowing consumer to skip commercials was going to be the end of the TV business. DVR’s reignite interest in TV.
  • 2006 – broadcasters sued Cablevision (and lost) to prevent the launch of a cloud-based DVR to its customers.
  • Today it’s the Internet that’s going to put the studios out of business. Sound familiar?
Why was the movie industry consistently wrong? And why do they continue to fight new technology?

Technology Innovation
The movie industry was born with a single technical standard – 35mm film, and for decades had a single way to distribute its content – movie theaters (which until 1948 the studios owned.) It was 75 years until studios had to deal with technology changing their platform and distribution channel. And when it happened (cable, VCR’s, DVD’s, DVR’s, the Internet,) it was a relentless onslaught. The studios responded by trying to shut down the new technology and/or distribution channels through legislation and the courts.

Regulation/Legislation
But why does the movie business think their solution is in Washington and legislation?

History and success.

In the 1920’s individual states were beginning to censor movies and the federal government was threatening to do so as well. The studios set up their own self censorship and rating system keeping most sex and politics off the screen for 40 years. Never again wanting to be at the losing side of a political battle they created the movie industry’s lobbying arm, MPAA.

By the 1960’s, the MPPA achieved regulatory capture (where an industry co-opts the very people who are regulating it,) when they hired Jack Valenti, who ran the studios’ lobbying efforts for the next 38-years. Ironically, it was Valenti’s skill in hobbling competitive innovation that negated any need for studios to develop agility, vision and technology leadership.

Management of Innovation
The introduction of new technology is always disruptive to existing markets, particularly to content/copyright owners whose sell through well-established distribution channels. The incumbents tend to have short-sighted goals and often fail to recognize that more money can be made on new platforms and new distribution channels.

In an industry facing constant technology shifts the exec staff and boards of the studios have lawyers, MBAs and financial managers, but no management skill in dealing with disruption. So they rely on lobbying ($110 million a year,) lawsuits, campaign contributions (wonder why the President won’t be vetoing SOPA?) and Public Relations.

Ironically, the six major movie studios have a great technology lab in Silicon Valley with projects in streaming rights, Video On Demand, Ultraviolet, etc. But lacking the support from the studio CEOs or boards, the lab languishes in the backwaters of the studios’ strategy.  Instead of leading with new technology, the studios lead with litigation, legislation and lobbying. (Imagine if the $110 million/year spent on lobbying went to disruptive innovation.)

Piracy
One of the claims that studios make is that they need legislation to stop piracy. The fact is piracy is rampant in all forms of commerce. Video games and software have been targets since their inception. Grocery and retail stores euphemistically call it shrinkage. Credit card companies call it fraud.  But none use regulation as often as the movie studios to solve a business problem. And none are so willing to do collateral damage to other innovative industries (VCRs, DVRs, cloud storage and now the Internet itself.)

The studios don’t even pretend that this legislation benefits consumers. It’s all about protecting short-term profit.

SOPA
When lawyers, MBAs and financial managers run your industry and your lobbyists are ex-Senators, understanding technology and innovation is not one of your core capabilities.

The SOPA bill (and DNS blocking) is what happens when someone with the title of anti-piracy or copyright lawyer has greater clout than your head of new technology. SOPA gives corporations unprecedented power to censor almost any site on the Internet. It’s as if someone shoplifts in your store, SOPA allows the government to shut down your store.

History has shown that time and market forces provide equilibrium in balancing interests, whether the new technology is a video recorder, a personal computer, an MP3 player or now the Net. It’s prudent for courts and congress to exercise caution before restructuring liability theories for the purpose of addressing specific market abuses, despite their apparent present magnitude.

What the music and movie industry should be doing in Washington is promoting legislation to adapt copyright law to new technology — and then leading the transition to the new platforms.

The U.S. State Department has been championing the Internet Freedom initiative across the world. Secretary of State Clinton said, “…when ideas are blocked, information deleted, conversations stifled, and people constrained in their choices, the Internet is diminished for all of us.”

It’s too bad the head of the MPAA – an ex Senator – made a mockery of her words when he wondered “why our online censorship can’t be like China?”

We wonder, “Why can’t the film industry innovate like Silicon Valley?”

Lessons Learned

  • Studios are run by financial managers who lack the skills to exploit disruptive innovation
  • Studio anti-piracy/copyright lawyers trump their technologists
  • Studios have no concern about collateral damage as long as it optimizes their revenue
  • Studios $110M/year lobbying and political donations trump consumer objections
  • Politicians votes will follow the money unless it will cost them an election

Listen to the post here: Download the Podcast here

American Entrepreneur Radio Interview

I was lucky enough to get interviewed by Ron Morris of American Entrepreneur Radio.

Ron Morris has a great “radio voice,” and actually seemed to understand what the heck I was talking about.  It made for a fun interview.

Click here to listen to the interview: Steve Blank American Entrepreneur Radio interview

The following week Ron Morris interviewed Regis McKenna, who for decades was the “gold standard” for high tech Public Relations in Silicon Valley. Click here to listen to the Regis interview.

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How the iPhone Got Tail Fins – Part 2 of 2

Read part 1 of this post for background.

By the early 1920’s General Motors realized that Ford, which was now selling the Model T for $290, had an unbeatable monopoly on low-cost automobile manufacturing. Other manufacturers had experimented with selling cars based on an image and brand. (The most notable was an ad by the Jordan Car company.) But General Motors was about to take consumer marketing of cars to an entirely new level.

Market Segmentation General Motors had turned the independent car companies acquired by its founder Billy Durant into product divisions. But in a stroke of genius GM transformed these divisions into a weapon that Ford couldn’t match. With the rallying cry “a car for every purse and purpose,” GM positioned its car divisions (Chevrolet, Pontiac, Oldsmobile, Buick and Cadillac) so they would cover five price segments – from low-price to luxury. It targeted each of its brands (and models inside those brands) to a distinct economic segment of the population. Chevy was directly aimed at Ford – the volume car for the working masses. Pontiac came next, then Oldsmobile, then Buick. The top-of- the-line Cadillac offered luxury and prestige announcing you had finally arrived at the top of the conspicuous consumption heap. Consumers could announce their status and lives had improved by upgrading their brands.

GM had one more trick to make this happen. Within each brand, the top of the line was just a bit less expensive than the lowest priced model of the next expensive brand. The goal was to convince the consumer to spend a little more to trade up to a more prestigious brand.

Market segmentation by price was something no other automotive manufacturer had ever done. While other car companies could compete with one of GM’s divisions, few had GM’s capital and resources to compete simultaneously with the onslaught of car models from all five divisions.

Planned Obsolescence While market segmentation allowed GM to use its divisions to reach a wider market than Ford or Chrysler, this didn’t solve the problem of market saturation. By the late 1920’s, most everyone in the U.S. had a car. And cars lasted 6 to 8 years. Even worse, the market was now filled with used cars that provided even lower cost basic transportation. Sloan, the General Motors CEO, faced two seemingly unsolvable challenges:

  • How do you get consumers to abandon their perfectly fine cars and buy a new one?
  • How do you turn a product that competed on price and features into a need?

In another stroke of genius, GM invented the annual model change. Sloan borrowed this idea from fashion where styles changed every year and applied it to automobiles starting in the 1920s. General Motors would change the external appearance of cars every year. Sloan preferred to call it “dynamic obsolescence.”

Styling and design became an integral part of GM’s strategy. Sloan hired Harley Earl to set up GM’s in-house styling staff. Earl would run it from 1927 to 1958.

Before Earl, cars were designed by in-house body-engineers who focused on practical issues like function, costs, features, etc. Each exterior component was designed separately to be functional – radiator, bumpers, hood, passenger compartment, etc. Some companies used 3rd party bodymakers to set the style , but GM was the first to take car design away from the engineers and give it to the stylists.

The concept of yearly “improvements”, whether styling or incremental technology improvements, every model year gave GM an unbeatable edge in the market. (Henry Ford hated the idea. He had built Ford on economies of scale – the Ford Model T lasted for 19 years.) Smaller car makers could not afford the constant engineering and styling changes they had to make to keep competitive. GM would shut down all their manufacturing plants for a few months and literally rip out the tooling, jigs and dies in every plant and replace them with the equipment needed to make the next year’s model.

GM had figured out how to take a product which solved a problem – cheap transportation – and transform it into a need. It was marketing magic that wasn’t to be equaled until the next century.

By the mid-1950’s every other car company was struggling to keep up.

Mass Marketing Starting in the 1920’s and continuing for the next half century, automobile advertising hit its stride. Ads emphasized brand identification and appealed to consumers’ hunger for prestige and status. Advertising agencies created catchy slogans and jingles, and celebrities endorsed their favorite brands. General Motors turned market segmentation and the annual model year changeovers into national events. As the press speculated about new features, the company’s added to the mystique by guarding the new designs with military secrecy. Consumers counted the days until the new models were “unveiled” at their dealers.

Results
For fifty years, until the Japanese imports of the 1970’s, Americans talked about the brand and model year of your car – was it a ’58 Chevy, ’65 Mustang, or 58 Eldorado?  Each had its particular cachet, status and admirers. People had heated arguments about who made the best brand.

The car had become part of your personal identity while it became a symbol of 20th Century America.

After Sloan took over General Motors its share of U.S cars sold skyrocketed from 12 per cent in 1920, until it passed Ford in 1930, and when Sloan retired as GM’s CEO in 1956 half the cars sold in the U.S. were made by GM. It would keep that 50% share for another 10 years. (Today GM’s share of cars total sold in the U.S. has declined to 19%.)

How the iPhone Got Tail Fins
Over the last five years Apple has adopted the GM playbook from the 1920’s – take a product, which originally solved a problem – cheap communication – and turn it into a need.

In doing so Apple did to Nokia and RIM what General Motors did to Ford. In both cases, innovation in marketing completely negated these firms’ strengths in reducing costs. The iPhone transformed the cell phone  from a device for cheap communication into a touchstone about the user’s image. Just like cars in the 20th century, the iPhone connected with its customers emotionally and viscerally as it became a symbol of who you are.

—-

The desire to line up to buy the newest iPhone when your old one works just fine was just one more part of Steve Jobs’ genius – it’s how the iPhone got tail fins.

It’s one more reason why Steve Jobs will be remembered as the 21st century version of Alfred P. Sloan.

Listen to the post here: Download the Podcast here

How the iPhone Got Tail Fins – Part 1 of 2

It was the most advanced consumer product of the century. The industry started with its innovators located in different cities over a wide region. But within 20 years it would be concentrated in a single entrepreneurial startup cluster. At first it was a craft business, then it was driven by relentless technology innovation and then a price war as economies of scale drove efficiencies in production. When the market was finally saturated the industry reinvented itself again – one company discovered how to turn commodity products into “needs.”

They opened retail outlets across the country and figured out how to convince consumers to flock to buy the newest “gotta have it” version and abandon the perfectly functional last year’s model.

No, it’s not Apple and the iPhone.

It was General Motors and the auto industry.

In the Beginning
At the beginning of the 20th century the auto industry was still a small hand-crafted manufacturing business. Cars were assembled from outsourced components by crews of skilled mechanics and unskilled helpers. They were sold at high prices and profits through nonexclusive distributors for cash on delivery. But by 1901, Ransom Olds invented the basic concept of the assembly line and in the next decade was quickly followed by other innovators who opened large scale manufacturing plants in Detroit – Henry Packard, Henry Leland’s Cadillac, and Henry Ford with the Model A.

The Detroit area quickly became the place to be if you were making cars, parts for cars, or were a skilled machinist. By 1913 Ford’s first conveyor belt-driven moving assembly line and standardized interchangeable parts forever cemented Detroit as the home of 20th century auto manufacturing.

Feature Wars
The automobile industry was founded and run by technologists: Henry Ford, James Packard, Charles Kettering, Henry Leland, the Dodge Brothers, Ransom Olds. The first twenty-five years of the century were a blur of technology innovation – moving assembly line, steel bodies, quick dry paint, electric starters, etc. These men built a product that solved a problem – private transportation first for the elite, and then (Ford’s inspiration) – transportation for the masses.

Market Saturation
Ford tried to escape the never-ending technology feature wars by becoming the low cost manufacturer. Fords River Rouge manufacturing complex – 93 buildings in a 1 by 1.5 mile manufacturing complex, with 100,000 workers – vertically integrated and optimized mass production.

By 1923, through a series of continuous process improvements, Ford had used the cost advantages of economies of scale to drive down the price of the Model T automobile to $290.

When the 1920’s began there were close to a 100 car manufacturers, but the relentless drive for low cost production forced most of them out of business as they lacked capital to scale. For a brief moment, half the cars in the world were now Fords. To make matters worse, the long service life of Ford and GM cars (8 years for Fords Model T, 6 years for everyone else) retarded sales of new cars. In 20 years, U.S. car ownership had risen from 0 to 80% of American families – the market was approaching saturation.

Now cars would have to be sold almost entirely to people who already owned a car.

The Crazy Entrepreneur
After success as a leading manufacturer of horse-drawn carriages, Billy Durant was one of the few who saw the writing on the wall and got into the car business. Although he wasn’t a technologist, he was an entrepreneur with a great eye for acquiring car companies run by technologists. His keen insight was that several carmakers combined under one company umbrella would have more growth potential than one brand on its own. Like most founders, he was great at searching for a business model but terrible at in large company execution. When his board fired him, Durant bought a competing company called Chevrolet, built it larger than his last company, and used Chevy stock to buy out his old company – General Motors – and threw out the board. Yet a few years later under his brilliant but reckless leadership GM was again on the brink of financial disaster and his new board fired him. (Durant would die penniless managing a bowling alley.)

Durant’s ultimate replacement – an accountant named Alfred P. Sloan – would turn GM into the leading and most admired company in the U.S.

Relentless
Over the next decade Sloan would implement a series of innovations which would last for over half a century. And catapult General Motors from the number 2 car company (with a ¼ of Ford’s sales) into the market leader for the next 100 years. Here’s what he did:

Distributed Accounting Unlike Ford, GM was originally a collection of separate companies. Distributed Accounting turned those fiefdoms into product divisions each of which, could be focused like Ford’s mass-produced lines. But Sloan went further. He figured out how to centralize financial oversight of decentralized product lines. His CFO created standardized division sales reports and flexible accounting, and allocated resources and bonuses to the GM divisions by a uniform set of rules. It allowed GM to be ruthlessly efficient internally as well with its dealers and suppliers. It got the division general managers to fall in line with corporate goals but allowed them to run their divisions freely. GM became the prototype of the modern multidivisional company.

Car Financing. Realizing that Ford would only accept cash for car purchases, in 1919 GM formed GMAC to provide new car buyers a way to finance their purchases through debt.

Consumer Research. Every since his days at Hyatt Roller Bearing, Sloan, and by extension GM, was relentless about getting out of the building – they had an entire department that studied consumers, dealers, suppliers. More importantly, Sloan led by example. He visited dealers and suppliers, listened to customers and was tied tightly to his head of R&D Charles Kettering.

All this would have made General Motors a well-run and well-managed company.  But what they did next would make them the dominant company in the U.S. and eventually put tail-fins on the iPhone.

Part 2 explains it all.

Listen to the post here: Download the Podcast here

Why Governments Don’t Get Startups

Not understanding and agreeing what “Entrepreneur” and “Startup” mean can sink an entire country’s entrepreneurial ecosystem.

———

I’m getting ready to go overseas to teach, and I’ve spent the last week reviewing several countries’ ambitious attempts to kick-start entrepreneurship.  After poring through stacks of reports, white papers and position papers, I’ve come to a couple of conclusions.

1) They sure killed a ton of trees

2) With one noticeable exception, governmental entrepreneurship policies and initiatives appear to be less than optimal, with capital deployed inefficiently (read “They would have done better throwing the money in the street.”) Why? Because they haven’t defined the basics:

What’s a startup?  Who’s an entrepreneur? How do the ecosystems differ for each one? What’s the role of public versus private funding?

Six Types of Startups – Pick One
There are six distinct organizational paths for entrepreneurs: lifestyle business, small business, scalable startup, buyable startup, large company, and social entrepreneur. All of the individuals who start these organizations are “entrepreneurs” yet not understanding their differences screws up public policy because the ecosystem in supporting each type is radically different.

For policy makers, the first order of business is to methodically think through which of these entrepreneurial paths they want to help and grow.

Lifestyle Startups: Work to Live their Passion
On the California coast where I live, we see lifestyle entrepreneurs like surfers and divers who own small surf or dive shop or teach surfing and diving lessons to pay the bills so they can surf and dive some more.  A lifestyle entrepreneur is living the life they love, works for no one but themselves, while pursuing their personal passion. In Silicon Valley the equivalent is the journeyman coder or web designer who loves the technology, and takes coding and U/I jobs because it’s a passion.

Small Business Startups: Work to Feed the Family
Today, the overwhelming number of entrepreneurs and startups in the United States are still small businesses. There are 5.7 million small businesses in the U.S. They make up 99.7% of all companies and employ 50% of all non-governmental workers.

Small businesses are grocery stores, hairdressers, consultants, travel agents, Internet commerce storefronts, carpenters, plumbers, electricians, etc. They are anyone who runs his/her own business.

They work as hard as any Silicon Valley entrepreneur. They hire local employees or family. Most are barely profitable. Small business entrepreneurship is not designed for scale, the owners want to own their own business and “feed the family.” The only capital available to them is their own savings, bank and small business loans and what they can borrow from relatives. Small business entrepreneurs don’t become billionaires and (not coincidentally) don’t make many appearances on magazine covers. But in sheer numbers, they are infinitely more representative of “entrepreneurship” than entrepreneurs in other categories—and their enterprises create local jobs.

Scalable Startups: Born to Be Big
Scalable startups are what Silicon Valley entrepreneurs and their venture investors aspire to build. Google, Skype, Facebook, Twitter are just the latest examples. From day one, the founders believe that their vision can change the world. Unlike small business entrepreneurs, their interest is not in earning a living but rather in creating equity in a company that eventually will become publicly traded or acquired, generating a multi-million-dollar payoff.

Scalable startups require risk capital to fund their search for a business model, and they attract investment from equally crazy financial investors – venture capitalists. They hire the best and the brightest. Their job is to search for a repeatable and scalable business model.  When they find it, their focus on scale requires even more venture capital to fuel rapid expansion.

Scalable startups tend to group together in innovation clusters (Silicon Valley, Shanghai, New York, Boston, Israel, etc.) They make up a small percentage of the six types of startups, but because of the outsize returns, attract all the risk capital (and press.)

Just in the last few years we’ve come to see that we had been building scalable startups inefficiently. Investors (and educators) treated startups as smaller versions of large companies. We now understand that’s just not true.  While large companies execute known business models, startups are temporary organizations designed to search for a scalable and repeatable business model.

This insight has begun to change how we teach entrepreneurship, incubate startups and fund them.

Buyable Startups: Born to Flip
In the last five years, web and mobile app startups that are founded to be sold to larger companies have become popular. The plummeting cost required to build a product, the radically reduced time to bring a product to market and the availability of angel capital willing to invest less than a traditional VCs– $100K – $1M versus $4M on up – has allowed these companies to proliferate – and their investors to make money. Their goal is not to build a billion dollar business, but to be sold to a larger company for $5-$50M.

Large Company Startups: Innovate or Evaporate
Large companies have finite life cycles. And over the last decade those cycles have grown shorter. Most grow through sustaining innovation, offering new products that are variants around their core products. Changes in customer tastes, new technologies, legislation, new competitors, etc. can create pressure for more disruptive innovation – requiring large companies to create entirely new products sold to new customers in new markets. (i.e. Google and Android.) Existing companies do this by either acquiring innovative companies (see Buyable Startups above) or attempting to build a disruptive product internally. Ironically, large company size and culture make disruptive innovation extremely difficult to execute.

Social Startups: Driven to Make a Difference
Social entrepreneurs are no less ambitious, passionate, or driven to make an impact than any other type of founder. But unlike scalable startups, their goal is to make the world a better place, not to take market share or to create to wealth for the founders. They may be organized as a nonprofit, a for-profit, or hybrid.

So What?
When I read policy papers by government organizations trying to replicate the lessons from the valley, I’m struck how they seem to miss some basic lessons.

  • Each of these six very different startups requires very different ecosystems, unique educational tools, economic incentives (tax breaks, paperwork/regulation reduction, incentives), incubators and risk capital.
  • Regions building a cluster around scalable startups fail to understand that a government agency simply giving money to entrepreneurs who want it is an exercise in failure. It is not a “jobs program” for the local populace. Any attempt to make it so dooms it to failure.
  • A scalable startup ecosystems is the ultimate capitalist exercise. It is not an exercise in “fairness” or patronage. While it’s a meritocracy, it takes equal parts of risk, greed, vision and obscene financial returns. And those can only thrive in a regional or national culture that supports an equal mix of all those.
  • Building an scalable startup innovation cluster requires an ecosystem of private not government-run incubators and venture capital firms, outward-facing universities, and a rigorous startup selection process.
  • Any government that starts public financing entrepreneurship better have a plan to get out of it by building a private VC industry. If they’re still publically funding startups after five to ten years they’ve failed.

To date, Israel is only country that has engineered a successful entrepreneurship cluster from the ground up. It’s Yozma program kick-started a private venture capital industry with government funds, (emulating the U.S. lesson of using SBIC funds.), but then the government got out of the way.

In addition, the Israeli government originally funded 23 early stage incubators but turned them over to the VC’s to own and manage. They’re run by business professionals (not real-estate managers looking to rent out excess office space) and entry is not for life-style entrepreneurs, but is a bootcamp for VC funding.

Unless the people who actually make policy understand the difference between the types of startups and the ecosystem necessary to support their growth, the chance that any government policies will have a substantive effect on innovation, jobs or the gross domestic product is low.
Listen to the post here: Download the Podcast here

It’s Not How Big It Is – It’s How Well It Performs: The Startup Genome Compass

What makes startups succeed or fail? More than 90% of startups fail, due primarily to self-destruction rather than competition. For the less than 10% of startups that do succeed, most encounter several near death experiences along the way. Simply put, while we now have some good theory, we just are not very good at creating startups yet. After 50 years of technology entrepreneurship it’s still an art.

Three months ago I wrote about my ex-student Max Marmer and the Startup Genome Project. They’ve been attempting to quantify the art. They believe that they can crack the code of innovation and turn entrepreneurship into a science if they had hard data rather than speculation of why startups succeed or fail. Max and his partners had interviewed and analyzed over 650 early-stage Internet startups. In May they released the first Startup Genome Report— an in-depth analysis on what makes early-stage Internet startups successful.

Now 90 days later Max and his team have gathered data on 3200 startups and they believe they’ve discovered the most common reason startups fail.

Today you’re invited to benchmark your own internet startup and see how you compare to the winners.

———

Benchmarking Your Startup
I hadn’t heard from Max for awhile so I thought he took the summer off. I should have known better, it turned out he was hard at work.

Max and his team built a website called the Startup Genome Compass (their benchmarking web site) that allows an Internet startup to evaluate their business performance. The Startup Genome Compass uses a hybrid “Stage and Type” model that describes how startups progress through their business development lifecycle.

The benchmark takes 20 or so minutes to go through as series of questions, and in the end it spits out an analysis of how you are doing.

The benchmark is not perfect, it may even be flawed, but it is head and shoulders above what we have now – which is nothing – for giving Internet startups founders specific advice on best practices.  If you have a few world-class VC’s on your board you’re probably getting this advice in person. If you’re like thousands of other startups struggling to get started, it’s worth a look.

It’s Not How Big It Is – It’s How Well It Performs
If you’re interested (and you should be) in how you compare to other early stage ventures, they summarized their results in a report “Startup Genome Report Extra: Premature Scaling.”

One of the biggest surprises is that success isn’t about size – of team or funding. It turns out Premature Scaling is the leading cause of hemorrhaging cash in a startup – and death. In fact:

  • The team size of startups that scale prematurely is 3 times bigger than the consistent startups at the same stage
  • 74% of high growth Internet startups fail due to premature scaling
  • Startups that scale properly grow about 20 times faster than startups that scale prematurely
  • 93% of startups that scale prematurely never break the $100k revenue per month threshold

The last time I wrote about Max I said, “I can’t wait to see what Max does by the time he’s 21.” Turns out his birthday is in a week, September 7th.

Happy birthday Max.
Listen to the post here: Download the Podcast here

Hiring – Easy as Pie

Over the last few weeks I’ve gotten involved in hiring for two startups, a public agency and a non profit.  Part of each conversation was getting asked to help them put together a “job spec.”

I had them leave with a pie chart.

——–

There must be something in the air. In the last week I had four separate groups through the ranch all wanting to talk either about hiring a senior exec or a senior exec looking for a new job. Having sat through these job discussions as an entrepreneur, board member, and now an interested observer, here’s what I concluded:

  1. Decide whether you’re hiring someone to help search for the business model or to help execute a business model you’ve already found (same is true is you’re looking for a job – are you going to be searching or executing?) Are you looking for a visionary or an operating executive?
  2. The job spec’s for the same title differ wildly depending on whether the job requires search versus execution skills. Founders search, operating executives execute.

If you’re hiring an operating executive (CEO, VP, Executive Director, etc.)

  • Don’t start with the candidate (board member x has a great VP of sales he knows, founder y wants this CEO he met at a conference, etc.)
  • Don’t even start with the job spec

Since I’ve always been a visual guy, job specs with their long lists of job requirements always left me cold. My eyes would glaze over at these recruiter/board wish lists. I wished there was a way to see them at a glance. (Just to be clear this isn’t the entire hiring process, just a way to visually begin the discussion.) So here’s my suggestion: Start with a Pie Chart.

  1. Draw a pie chart.
  2. List all the job specs as slices
  3. Adjust the width of the pie segments by importance. (Extra credit if you get the current CEO or internal candidate to help you write/draw the slices and weight their importance. Everyone involved in the hire gets to have an opinion on the slices and weights, but the person/group making the hiring decision gets to decide which ones to include.)
  4. Now that you have this spec, evaluate each candidate by showing his/her competence in each slice by length
  5. Compare candidates
  6. Easy as pie!

Lessons Learned

  • Are you hiring for search or execution skills?
  • Show the job requirements visually as a pie chart
  • Prioritize each requirement by the width of the pie
  • Show your assessment of each candidate’s competencies by the length of the slices
  • Now with the data in front of you, the conversation about hiring can start

Listen to the post here: Download the Podcast here

Reinventing the Board Meeting – Part 2 of 2 – Virtual Valley Ventures

There is nothing more powerful than an idea whose time has come
Victor Hugo

When The Boardroom is Bits
A revolution has taken hold as customer development and agile engineering reinvent the Startup process. It’s time to ask why startup board governance has failed to keep pace with innovation. Board meetings that guide startups haven’t changed since the early 1900’s.

It’s time for a change.

Reinventing the board meeting may allow venture-backed startups a more efficient, productive way to direct and measure their search for a profitable business model.

Reinventing the board meeting may offer angel-funded startups that don’t have formal boards or directors (because of geography or size of investment) to attract experienced advice and investment outside of technology clusters (i.e. Silicon Valley, New York).

Here’s how.

A Hypothesis – The Boardroom As Bits
Startups now understand what they should be doing in their early formative days is search for a business model. The process they use to guide their search is customer development. And to track their progress startups now have a scorecard to document their week-by-week changes – the business model canvas.

Yet even with all these tools, early stage startups still need to physically meet with advisors and investors. That’s great if you can get it.  But what if you can’t?

What’s missing is a way to communicate all this complex information and get feedback and guidance for startups who cannot get advice in a formal board meeting.

We propose that early stage startups communicate in a way that didn’t exist in the 20th century – online – collaboratively through blogs.

We suggest that the founders/CEO invest 1 hour a week providing advisors and investors with “Continuous Information Access” by blogging and discussing their progress online in their startup’s search for a business model. They would:

What Does this Change?
1) Structure. Founders operate in a chaotic regime. So it’s helpful to have a structure that helps “search”
 for a business model. The “boardroom as bits” uses Customer Development as the process for the search, and the business model canvas as the scorecard to keep track of the progress, while providing a common language for the discussion.

This approach offers VC’s and Angels a semi-formal framework for measuring progress and offering their guidance in the “search”
 for a business model. It turns ad hoc startups into strategy-driven startups.

2) Asynchronous Updates. Interaction with advisors and board members can now be decoupled from the – once every six weeks, “big event” – board meeting. Now, as soon as the founders post an update, everyone is notified. Comments, help, suggestions and conversation can happen 24/7. For startups with formal boards, it makes it easy to implement, track, and follow-up board meeting outcomes.

Monitoring and guiding a small angel investment no longer requires the calculus to decide whether the investment is worth a board commitment. It potentially encourages investors who would invest only if they had more visibility but where the small number of dollars doesn’t justify the time commitment.

A board as bits ends the repetition of multiple investor coffees. It’s highly time-efficient for investor and founder alike.

3) Coaching. This approach allows real-time monitoring of a startup’s progress and zero-lag for coaching and course-correction.  It’s not just a way to see how they’re doing. It also provides visibility for a deep look at their data over time and facilitates delivery of feedback and advice.

4) Geography. When the boardroom is bits, angel-funded startups can get experienced advice – independent of geography. An angel investor or VC can multiply their reach and/or depth. In the process it reduces some of the constraints of distance as a barrier to investment.

Imagine if a VC took $4 million (an average Series A investment) and instead spread it across 40 deals at $100K each in a city with a great outward-facing technology university outside of Silicon Valley. In the past they had no way to monitor and manage these investments. Now they can. The result – an instant technology cluster – with equity at a fraction of Silicon Valley prices.  It might be possible to create Virtual Valley Ventures.

We Ran the Experiment
At Stanford our Lean Launchpad class ran an experiment that showed when “the boardroom is bits” can make a radical difference in the outcome of an early stage startup.

Our students used Customer Development as the process to search for a business model. The used a blog to record their customer learning, and their progress and issues. The blog became a narrative of the search by posting customer interviews, surveys, videos, and prototypes. They used the Business Model Canvas as a scorekeeping device to chart their progress. The result invited comment from their “board” of the teaching team.

Here are some examples of how rich the interaction can become when a management team embraces the approach.

We were able to give them near real-time feedback as they posted their results. If we had been a board rather than a teaching team we would have added physical reality checks with Skype and/or face-to-face meetings.

Show Me the Money
While this worked in the classroom, would it work in the real world? I thought this idea was crazy enough to bounce off a five experienced Silicon Valley VC’s. I was surprised at the reaction – all of them want to experiment with it. Jon Feiber at MDV is going to try investing in startups emerging from Universities with great engineering schools outside of Silicon Valley that have entrepreneurship programs, but minimal venture capital infrastructure. (The University of Michigan is a possible first test.) Kathryn Gould of Foundation Capital and Ann Miura-Ko of Floodgate also want to try it.

Shawn Carolan of Menlo Ventures not only thought the idea had merit but seed-funded the LeanLaunchLab, a startup building software to automate and structure this process. (More than 700 startups signed up for the LeanLaunchLab software the day it was first demo’d.) Other entrepreneurs think this is an idea whose time has come and are also building software to manage this process including Alexander Osterwalder, Groupiter, and Angelsoft. Citrix thought this was such a good idea that their Startup Accelerator has offered to provide GoToMeeting and GoToMeeting HD Faces free to participating VC’s and startups. Contact them here.

Summary
For startups with traditional boards, I am not suggesting replacing the board meeting – just augmenting it with a more formal, interactive and responsive structure to help guide the search for the business model. There’s immense value in face-to-face interaction. You can’t replace body language.

But for Angel-funded companies I am proposing that a “board meeting in bits” can dramatically change the odds of success. Not only does this approach provide a way for founders to “show your work” to potential and current investors and advisors, but also it helps expand opportunities to attract investors from outside the local area.

Lessons Learned

  • Startups are a search for a business model
  • Startups can share their progress/get feedback in the search
  • Weekly blog of the customer development narrative
  • Weekly summary of the business model canvas
  • Interactive comments and questions
  • Skype and face-to-face when needed
  • This may be a way to augment traditional board meetings
  • This might be a way to rethink our notion of geography as a barrier to investments

Or watch the video here.
Listen to the post here: Download the Podcast here

Why Board Meetings Suck – Part 1 of 2

There are none so blind as those who will not see.
Jonathan Swift

What’s Wrong With Today’s Board Meetings
As customer and agile development reinvent the Startup, it’s time to ask why startup board governance has not kept up with the pace of innovation. Board meetings that guide startups haven’t changed since the early 1900’s.

It’s time.

Reinventing the board meeting may offer venture-backed startups a more efficient, productive way to direct and measure their search for a profitable business model.

Reinventing the board meeting may offer angel-funded startups – which because of geography or size of investment typically don’t have formal boards or directors – to attract experienced advice and investment outside of technology clusters (i.e. Silicon Valley, New York).

Here’s how.

Because We’ve Always Done It This Way
The combination of Venture Capital and technology startups is only about 50 years old. Rather than invent a new form of corporate governance, venture investors adopted the traditional board meeting structure from large corporations. Yet boards of large companies exist to monitor efficient strategy and execution of a known business model. While startups eventually get into execution mode, their initial stages are devoted to a non-linear, chaotic search for a business model: finding product/market fit to identify a product or service people will buy in droves at a sustainable, profitable pace.

In the last few years, our understanding that startups are not smaller versions of large companies, made us recognize that startups need their own tools, different from those used in existing companies: Customer Development – the process to search for a Business Model, the Business Model Canvas – the scorecard to measure progress in the search, and Agile Engineering – the tools to physically construct the product.

Yet while we’ve reinvented how startups build their companies, startup investors are still having board meetings like it’s the 19th century.

Why Have a Board Meeting?
From a VC’s point of view there are two reasons for board meetings.

1) It’s their fiduciary responsibility. Once a startup gets going, it has asymmetric information. Investors get board seats to assure themselves and their limited partners that they are duly informed about their investment.

2) Investors believe that their experience and guidance can maximize their return. Here it’s the board that has asymmetric knowledge. A veteran board can bring 50-100x more experience into a board meeting than a first time founder. (VC’s sit on 6 – 12 boards at a time. Assume an average tenure of 4 years per board. Assume two veteran VC’s per board.
=
50-100x more experience.)

From a founder’s point of view there are three reasons for board meetings.

1) It’s an obligation that came with the check.

2) Founders who have a great board do recognize the uncanny pattern recognition skills that good VC’s bring.

3) An experienced board brings an extensive network of customers, partners, help in recruiting, follow-on financing, etc.

What’s Wrong With a Board Meeting?
The Wrong Metrics. Traditional startup board meetings spend an insane amount of wasted time using Fortune 100 company metrics like income statements, cash flow, balance sheet, waterfall charts. The only numbers in those documents that are important in the first year of a startup’s life are burn rate and cash balance. Most board meetings never get past big company metrics to focus on the crucial startup numbers. That’s simply a failure of a startup board’s fiduciary responsibility.

The Wrong Discussions. The most important advice/guidance that should come from investors in a board meeting is about a startup’s search for a business model: What are the business model hypotheses? What are the most important hypotheses to test now? How are we progressing validating each hypothesis? What do those numbers/metrics look like? What are the iterations and Pivots – and why?

Not Real-time.  Startup board meetings occur every 4-6 weeks. While that’s great when you showed up in your horse and buggy, the strategy-to-tactic-to implementation lag is painful at Internet speeds. And unless there’s rigor in the process, because there is no formal structure for follow up, tracking what happened as a result of meeting recommendations and action items gets lost in the daily demands of everyone’s work. (Of course great VC’s mix in coffees, phone calls, coaching and other non-board meeting interactions but it’s ad hoc and not always done.)

Wastes Founders Time. For the founders, “the get ready for the board meeting” drill is often a performance rather than a snapshot. Powerpoints, spreadsheets and rehearsals consume time for materials that are used once and discarded. There are no standards for what each side (board versus management) does. What is the entrepreneur supposed to be doing? What are the board members supposed to be contributing?

The Wrong Structure. If you read advice on how to run a board meeting you’ll get advice that would have felt comfortable to Andrew Carnegie or John D. Rockefeller.

In the age of the Internet why do we need to get together in one room on a fixed schedule? Why do we need to wait a month to six weeks to see progress? Why don’t we have standards for what metrics VC’s want to see from their early stage startup teams?

Angels In America
For angel-funded startups, life is even tougher. Data from the Startup Genome project shows that startups that have helpful mentors, listen to customers, and learn from startup thought leaders raise 7x more money and have 3.5x better user growth. If you’re in a technology cluster like Silicon Valley you may be able to attract ad hoc advice from experienced investors. But very little of it is formal, and almost none of it approaches the 50-100x experience level of professional investors.

As there’s no formal board, most of these angel/investors meetings are over coffees. And lacking a board meeting there’s no formal mechanism to get investor advice. Angel investments in mobile and web apps today are approaching the “throw it against the wall and see if it sticks” strategy.

And for startups outside of technology clusters, there’s almost no chance of attracting Silicon Valley VC’s or angels. Geography is a barrier to investment.

So given all this, the million dollar question is: Why in the age of the Internet haven’t we adopted the tools we build/sell to solve these problems?

In the next post – Reinventing the Board Meeting.

Lessons Learned

  • Early stage board meetings are often clones of large company board meetings
  • That’s very, very wrong
  • Angel-funded startups have no formal mechanism for experienced advice
  • There’s a better way

Listen to the post here: Download the Podcast here

The Apprentice – Entrepreneur Version

We are all apprentices in a craft where no one ever becomes a master
Ernest Hemingway

Silicon Valley is built on simple myths – one of the most pervasive is that all winning startups are founded straight out of school by 20 year olds from Stanford or Harvard. The reality is these are the exceptions not the rule.

Too Old at 30?
I was having coffee with an ex-student at the ranch, watching our bobcat hunt in the front lawn. This student had called and said he had to meet  – “I’m having a career crisis,” was how he described it. I invited him to make the drive down.

As the story unfolded, it turned out that he just turned 30 and realized that he hadn’t founded a company yet. “Everyone now starts a company out of school. All my classmates who were interested in entrepreneurship have started their own companies. I’ve just been working my way up the ladder.” He explained that he had a progressively set of better jobs at companies that were in the “build” phase. These ex-startups had found a repeatable business model and were putting the processes in place to grow into a large company. They had hired operating executives and were starting to scale.

“Well what’s wrong with what you’ve been doing?” I asked. “Oh, I’ve learned a ton,” he replied. “If I had started a company out of school I would have made all kind of stupid mistakes.”

Ok I wondered, the problem is what? “So how have your friends done?” We watched as the bobcat patiently stalked a gopher. “Hmm” he said,  “A few did ok, but most of them cratered their startups. For the amount of money they made most of them would have been better off working at Walmart.”

Slow Learner
I told him he wasn’t alone. Early in my career I apprenticed at companies that had recently been startups, hadn’t yet gone public and were still innovative. My career was a slow 20-year progression from training instructor to product marketing manager to VP of Marketing. It wasn’t until my 7th startup that I was a CEO in a startup I co-founded (and its failure left a crater so deep it had it’s own Iridium layer.)

Perhaps the most important part of this non-metoric career trajectory was the mentoring I received. I managed to work for, with, and around people who were truly skilled at what they did. Some of them consciously taught and shared their skills. For others I tried my best to suck out every bit of what they knew and emulate the best of their skills. (At times the learning was painful, but it was never forgotten.)

While the Silicon Valley myth is that all winning startups are founded straight out of school it’s just not true.

No Longer a Startup
In raw numbers, most engineers and MBA’s aren’t founding companies, they’re going to work for others who have; Facebook, Google, Zynga, Four Square, Twitter, etc. While the jobs at these companies are still incredibly challenging, and passion and innovation may still pervade their company cultures, the startup risk (“will we run out of money before we find our customers?”) is gone. As great as these companies may be, they are no longer startups. (A startup is a temporary organization searching for a repeatable and scalable business model.)

But employees in these ex-startups are getting the best hands-on education for entrepreneurship there is – as apprentices.

Apprentice
As we watched the bobcat make a meal out of the gopher I offered that his career was proceeding just fine. Someday, he’ll hear a calling, pull his head out of his computer, look around and say, “I can do this myself.”

And the cycle of creative destruction will begin anew.

Lessons Learned

  • Not all startups are founded by 20-somthings straight out of college
  • Working for companies that were recently startups is a great way to apprentice
  • These companies can you give a lifetime of mentorship hard to achieve in other ways
  • When you’re ready you’ll hear a calling, and it won’t be a job

Listen to the post here: Download the Podcast here

Entrepreneurs Are Artists

I wrote about entrepreneurs as artists in a previous post.

The FounderLy team interviewed me and got me to give a better explanation of what I was trying to say in this 2 minute video clip.

If you can’t see the video click here.

Entrepreneurship is an Art not a Job

Some men see things as they are and ask why.
Others dream things that never were and ask why not.
George Bernard Shaw

Over the last decade we assumed that once we found repeatable methodologies (Agile and Customer Development, Business Model Design) to build early stage ventures, entrepreneurship would become a “science,” and anyone could do it.

I’m beginning to suspect this assumption may be wrong.

Where Did We Go Wrong?
It’s not that the tools are wrong, I think the entrepreneurship management stack is correct and has made a major contribution to reducing startup failures. Where I think we have gone wrong is the belief that anyone can use these tools equally well.

Entrepreneurship is an Art not a Job
For the sake of this analogy, think of two types of artists: composers and performers (think music composer versus members of the orchestra, playwright versus actor etc.)

Founders fit the definition of a composer: they see something no one else does. And to help them create it from nothing, they surround themselves with world-class performers. This concept of creating something that few others see – and the reality distortion field necessary to recruit the team to build it – is at the heart of what startup founders do. It is a very different skill than science, engineering, or management.

Entrepreneurial employees are the talented performers who hear the siren song of a founder’s vision. Joining a startup while it is still searching for a business model, they too see the promise of what can be and join the founder to bring the vision to life.

Founders then put in play every skill which makes them unique – tenacity, passion, agility, rapid pivots, curiosity, learning and discovery, improvisation, ability to bring order out of chaos, resilience, leadership, a reality distortion field, and a relentless focus on execution – to lead the relentless process of refining their vision and making it a reality.

Both founders and entrepreneurial employees prefer to build something from the ground up rather than join an existing company. Like jazz musicians or improv actors, they prefer to operate in a chaotic environment with multiple unknowns. They sense the general direction they’re headed in, OK with uncertainty and surprises, using the tools at hand, along with their instinct to achieve their vision. These types of people are rare, unique and crazy. They’re artists.

Tools Do Not Make The Artist
When page-layout programs came out with the Macintosh in 1984, everyone thought it was going to be the end of graphic artists and designers. “Now everyone can do design,” was the mantra. Users quickly learned how hard it was do design well (yes. it is an art) and again hired professionals. The same thing happened with the first bit-mapped word processors. We didn’t get more or better authors. Instead we ended up with poorly written documents that looked like ransom notes. Today’s equivalent is Apple’s “Garageband”. Not everyone who uses composition tools can actually write music that anyone wants to listen to.

“Well If it’s Not the Tools Then it Must Be…”
The argument goes, “Well if it’s not tools then it must be…” But examples from teaching other creative arts are not promising. Music composition has been around since the dawn of civilization yet even today the argument of what “makes” a great composer is still unsettled. Is it the process (the compositional strategies used in the compositional process?) Is it the person (achievement, musical aptitude, informal musical experiences, formal musical experiences, music self-esteem, academic grades, IQ, and gender?)  Is it the environment (parents, teachers, friends, siblings, school, society, or cultural values?) Or is it constant practice (apprenticeship, 10,000 hours of practice?)

It may be we can increase the number of founders and entrepreneurial employees, with better tools, more money, and greater education. But it’s more likely that until we truly understand how to teach creativity, their numbers are limited.

Lessons Learned

  • Founders fit the definition of an artist: they see – and create– something that no one else does
  • To help them move their vision to reality, they surround themselves with world-class performers
  • Founders and entrepreneurial employees prefer operating in a chaotic environment with multiple unknowns
  • These type of people are rare, unique and crazy
  • Not everyone is an artist

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