Fear of Failure and Lack of Speed In a Large Corporation

I just spent a day working with Bob, the Chief Innovation Officer of a very smart large company I’ll call Acme Widgets.

Bob summarized Acme’s impediments to innovation. “At our company we have a culture that fears failure. A failed project is considered a negative to a corporate career. As a result, few people want to start a project that might not succeed. And worse, even if someone does manage to start something new, our management structure has so many financial, legal and HR hurdles that every initiative needs to match our existing business financial metrics, processes and procedures. So we end up in “paralysis by analysis” – moving slowly to ensure we don’t make mistakes and that everyone signs off on every idea (so we can spread the collective blame if it fails). And when we do make bets, they’re small bets on incremental products or acquisitions that simply add to the bottom line.”

Bob looked wistful, “Our founders built a company known for taking risks and moving fast. Now we’re known for “making the numbers,” living on our past successes. More agile competitors are starting to eat into our business. How can we restart our innovation culture?”

—-

What Drives Innovation?
I pointed out to Bob the irony – in a large company “fear of failure” inhibits speed and risk taking while in a startup “fear of failure” drives speed and urgency.

If we could understand the root cause of that difference, I said, we could help Acme build a system for continuous innovation.

I suggested the best place to start the conversation is with the 21st century definition of a startup: A startup is a temporary organization designed to search for a repeatable and scalable business model.

Startups have finite time and resources to find product/market fit before they run out of money. Therefore startups trade off certainty for speed, adopting “good enough decision making” and iterating and pivoting as they fail, learn, and discover their business model.

The corollary for a large company is: A company is a permanent organization designed to execute a repeatable and scalable business model.

That means in their core business, large companies have a series of knowns. They’ve found product/market fit (what products customers want to buy). They’ve learned the best distribution channel to get the product from their company to the customer. They’ve figured out the revenue model (subscription, license, direct sale, etc.) and how to price the product. They know the activities, resources and partners (manufacturing, regulation, IP, supply chain, etc.) – and the costs to deliver the product/service and have well defined product development and product management tools that emphasize the linear nature of shipping products to existing customers. There are financial metrics (Return on Investment, Hurdle Rate, etc.) for new product development that emphasize immediate returns. And everyone has job titles and job descriptions that describe their role in execution.

Why Execution and Innovation Need Different Tools, Cultures and Organizations
Talking to Bob I realized that at Acme Widgets (and in most large companies) the word “failure” was being used to describe two very different events:

  • failure in execution of a known product in known market
  • failure in searching for innovation when there are many unknowns

Therefore, in a large company, failure to meet a goal – revenue, product delivery, service, etc.– is a failure in execution of an individual and/or organization to perform to a known set of success criteria. In corporations the penalty for repeated failure on known tasks is being reassigned to other tasks or asked to leave the company.

As I sat with Bob and his innovation team, I realized that all of Acme’s new product innovation initiatives were being held to the same standard as those of existing products. Acme was approaching innovation and disruptive product ideas using the same processes, procedures, schedules, and incentives within the same organizational structure and culture as its existing businesses.

No wonder innovation at Acme had stalled.

The Ambidextrous Organization – Execution and Innovation
That companies should be simultaneously executing and innovating isn’t a new insight. For decades others have observed that companies needed to be ambidextrous. So while we did not lack the insight that execution and innovation need to be separate, we did lack the processes, tools, culture and organizational structures to implement it. Corporate innovation initiatives have spent decades looking at other corporate structures as models for innovation when in fact we should have been looking at startups for innovation models – and adapting and adopting them for corporate use.

That’s now changed. The strategy and structure for 21st corporate innovation will come from emulating the speed, urgency, agility and low-cost, rapid experimentation of startups.

What We Now Know about Corporate Innovation
In the last five years, as the need for continuous innovation in companies has become critical, Lean innovation methodologies (Lean LaunchPad/I-Corps) have also emerged. These methods allow rapid experimentation – at startup speed – with the same rigor and discipline as traditional execution processes. Adopted by the National Science Foundation and large companies, over 1000 teams have used the process, and the resulting commercialization success speaks for itself.

But running a Lean Startup inside an organization designed for execution is an exercise in futility. Working with large corporations we’ve learned that innovation groups need their own structure, culture, tools (Lean, Design Thinking, etc.), metrics (validated/invalidated hypotheses, Investment Readiness Level) and processes. And both organizations – execution and innovation – need to understand that the success of the company rests on how well they can cooperate.

Bob’s eyes lit up as he said, “Now I understand why innovation seemed beyond our reach. We were missing four ideas:

  1. Accepting failure and running at speed are part of an innovation culture.
  2. We need to separate out innovation risks from execution risks.
  3. There are now proven Lean innovation methodologies (Lean LaunchPad/I-Corps) that we can use off the shelf in building an innovation culture without inventing our own.
  4. We need to make sure that management no longer uses execution metrics to manage and judge our innovation teams.

Lessons Learned

  • In a startup “fear of failure” drives speed and urgency
  • In a large company “fear of failure” inhibits speed and risk
  • Innovation means experimentation in searching for a business model. Often failure is the norm not the exception.
  • Innovation processes and metrics need to be different from those of the execution organizations
  • There are proven Lean innovation methodologies that work in large existing companies

I’m on the Air – On Sirius XM Channel 111

Starting this Monday, March 9th 4-6pm Pacific Time I’ll be on the radio hosting the Bay Area Ventures program on Sirius XM radio Channel 111 – the Wharton Business Radio Channel.Untitled

Over this program I’ll be talking to entrepreneurs, financial experts and academic leaders in the tech and biotech industries. And if the past is prologue I guarantee you that this will be radio worth listening to.

On our first show, Monday March 9th 4-6pm Pacific Time join me, as I chat with Alexander Osterwalder – inventor of the Business Model Canvas, and Oren Jacob, ex-CTO of Pixar and now CEO of ToyTalk on Sirius XM Radio Channel 111.

Oren Jacob - CEO ToyTalk

Oren Jacob – CEO ToyTalk

Alex Osterwalder - Business Models

Alex Osterwalder – Business Models

On Monday’s show we’ll be talking about a range of entrepreneurship topics: what’s a Business Model Canvas, how to build startups efficiently, the 9 deadly sins of a startup, the life of a startup CEO, how large companies can innovate at startup speeds. But it won’t just be us talking; we’ll be taking your questions live and on the air by phone, email or Twitter.

On April 27th, on my next program, my guest will be Eric Ries the author of the Lean Startup. Future guests include Marc Pincus, founder of Zynga, and other interesting founders and investors.

Is there anyone you’d like to hear on the air on future shows? Any specific topics you’d like discussed? Leave me a comment.

Mark your calendar for 4-6pm Pacific Time on Sirius XM Radio Channel 111:

  • March 9th
  • April 27th
  • May 11th
  • June 29th
  • July 13th
  • Aug 24th in NY

Blowing up the Business Plan at U.C. Berkeley Haas Business School

During the Cold War with the Soviet Union, science and engineering at both Stanford and U.C. Berkeley were heavily funded to develop Cold War weapon systems. Stanford’s focus was Electronic Intelligence and those advanced microwave components and systems were useful in a variety of weapons systems. Starting in the 1950’s, Stanford’s engineering department became “outward facing” and developed a culture of spinouts and active faculty support and participation in the first wave of Silicon Valley startups.

At the same time Berkeley was also developing Cold War weapons systems. However its focus was nuclear weapons – not something you wanted to be spinning out. nuclearSo Berkeley started a half century history of “inward facing innovation” focused on the Lawrence Livermore nuclear weapons lab. (See the presentation here.)

Given its inward focus, Berkeley has always been the neglected sibling in Silicon Valley entrepreneurship. That has changed in the last few years.

Today the U.C. Berkeley Haas Business School is a leader in entrepreneurship education. It has replaced how to write a business plan with hands-on Lean Startup methods. It’s teaching the LaunchPad® and the I-Corps for the National Science Foundation and National Institutes of Health, as well as corporate entrepreneurship courses.haas logo

Here’s the story from Andre Marquis, Executive Director of Berkeley’s Lester Center for Entrepreneurship.

—–

When I came to U.C. Berkeley in 2010 to run the Lester Center for Entrepreneurship in the Haas School of Business we were teaching entrepreneurship the same way as when I was a student back in 1995. Our core MBA class used the seminal textbook New Venture Creation by Jeffrey Timmons of Babson College that was first published in 1977. The final deliverable for that class was a 30-page business plan. We had multiple business plan competitions. As I looked around at other schools, I saw pretty much the same landscape – business plan classes, business plan competitions and loosely coupled accelerators that focused primarily on mentoring.

Over my career as a serial entrepreneur I observed that since the late 1990s, no early-stage Silicon Valley investor had used business plans to screen investments. Even those who asked for them never read them. Traction and evidence from customers were what investors were looking for – even in “slow” sectors like healthcare and energy. There had been tectonic shifts in the startup world, but our business school curriculum had barely moved.

There was a big gap in our educational paradigm. To create great entrepreneurs, we had to give our students the experience of navigating the chaos and uncertainty of running a lean startup while providing the same kind of rigorous framework the business plan did in its day. The advantage of following New Venture Creation is that it had a deep pedagogical infrastructure that students took away after they left school. The disadvantage is that its methodology was based on the old waterfall model of product development and not the agile and lean methods that startups use today.

As I began my search to increase the relevance of our entrepreneurship curriculum with the same rigor as Timmons and New Venture Creation, I found the answer right here at Berkeley, in Steve Blank’s Lean LaunchPad class.

(Our founding Executive Director Jerry Engel, recently retired to become dean of faculty for the National Science Foundation I-Corps, had a tradition of incorporating leading practioners, like Steve. These ‘pracademics’ proved to be some of the biggest innovators in entrepreneurship education.)

Seeing Is Believing
The Lean LaunchPad class was completely different from a traditional entrepreneurship class. It taught lean theory (business model design, customer development and agile engineering) and practice.

Every week, each student team stood in front of the class and presented their business model hypotheses, what they had learned from talking to customers, demo’d their minimal viable products and had to explain what they were going to do next. Steve and the venture capitalists at the back of the room relentlessly peppered them with questions and pushed them to get out of the building and call on the real decision-makers instead of talking to people they already knew. Some teams stepped down from the podium proud that they had made real progress that week while others were chastised because they stuck to their comfort zone, were not doing the tough work required by entrepreneurs and on the road to failure.

I realized this class was teaching students exactly what it felt like to be an entrepreneur! Great entrepreneurs are on a search for the truth, no matter how wrong their initial conception is. Being an entrepreneur is about starting out with no idea whether you are working on the next big thing or something no one wants and certainly no one will pay for. It’s struggling to find the right path forward through chaos and uncertainty. Killing bad ideas quickly and moving on. Staring at the phone while mentally wrestling to pick it up to make that next cold call. It’s having investors tell you that you’re dead wrong and, perhaps with enough customer traction, showing them the path to a new future neither of you could see at the time.

And there it was. The Lean LaunchPad was unlike any class I’d ever seen.

As a Silicon Valley entrepreneur I had lived the lean approach, yet I had never seen it taught. Done informally as part of an accelerator, yes, but not with a framework based on a clear process and clear pedagogy. The Lean LaunchPad was teaching students concepts and a process that they took away from the class and could use again for their next startup. I realized I was looking at a paradigm shift in entrepreneurial education – away from the business plan-focused model to a Lean Startup model. (The irony is that once you’ve gone through the lean cycle, you have all the information that goes in a business plan: customers, sales strategy, product features, and financial metrics. It’s just that they are validated instead of made up.)

The Business Plan is Dead
Now, 4 years after I arrived at BerkeleyHaas, we don’t teach business plan writing in any of our entrepreneurship classes or in any of our dozens of programs and competitions. We use Customer Development and the Lean LaunchPad to train and accelerate teams U.C. Berkeley-wide.

We’ve gone global as well. In the past year alone, we’ve taught over 250 teams, over 1,000 entrepreneurs and their mentors in dozens of countries how to create scalable startups in domains from software and hardware to healthcare and energy.

Haas global footprint

Haas global footprint

The international teams watch the lectures online, get out of the building, present to us each week via WebEx and get the same brand of relentless and direct feedback their U.C. Berkeley peers got in Steve’s class. For example, our Intel Technology To Market Accelerator took 22 teams from 11 countries across 15 time zones, from northern Russia to southern Chile and from Saudi Arabia to the U.S. (Chicago) through the Lean LaunchPad process. Clearly, lean works globally.

And we’ve been part of the U.S. effort to use the Lean LaunchPad to accelerate commercialization for the country’s best research spinouts from the National Science Foundation and National Institutes of Health. We do this by running classes for the NSF Innovation Corps and The I-Corps at the NIH. And the same lean techniques work just as well in the corporate innovation programs we run such as the Intel Make It Wearable Challenge.

An important distinction is that these programs are accelerators. The teams in them start with an idea or product, meet with customers, build prototypes and search for a scalable business model. All declare their startup a “go” or “no go” at the end. They learn it’s all about building to scale, pivoting or declaring failure, and moving on using a hypothesis-driven search for the truth.

Even our venerable 15-year old business plan competition, once dubbed “bplan,” has transformed into LAUNCH, a multi-month accelerator with a rigorous process combining the Lean LaunchPad, agile product development and a focus on measurable Lean Analytics. Ironically, LAUNCH has turned out to be much more rigorous than the prior business plan competition because we immerse every entrepreneur and their mentors in conquering the chaos and uncertainty that is normal for startups. We expect them to come out with specific knowledge of their markets and business ecosystem, verified metrics, a product and a plan for moving forward based on interacting with their actual customers – not honing the teams for a beauty pageant-like pitch fest or making them produce a business plan that’s fundamentally speculative. As educators, we are having a deep impact on these entrepreneurs and their startups.

Lean LaunchPad Works Across Industries
I often hear the concern that the Lean LaunchPad only works for software. After 700 teams in robotics, materials, hardware, therapeutics, diagnostics, medical devices, and enterprise software, it’s clear that Lean Startup methods work across all industries. We’ve taught versions of the Lean LaunchPad for life sciences at UCSF and as part of the National Institutes of Health, for hardware-focused startups making wearable devices as part of the Intel Make It Wearable Challenge, for teams working on nanotechnology and in education (STEMKids and Build and Imagine). Two of our BerkeleyHaas Faculty, Jorge Calderon and Will Rosenzweig, created a Social Lean LaunchPad class that embraces the mission and stakeholders central to social ventures.

Whether it’s making iPhone apps or medical devices, every startup is looking for a repeatable and scalable business model. Focusing on finding customer needs, figuring out how they buy and how to scale up product delivery are universal.

Where We Are Going From Here
At U.C. Berkeley we’ve undergone a complete transformation in just four years. But the longer journey is to continue to build new lean-tools and classes separate from the 40 year-old, business plan-based tradition.

We continue to ask ourselves, “What can we do to get our students out of the classroom, in cross-functional teams, building for specific customers and having the experience of making hard decisions under conditions of uncertainty? What can we do to expand and deepen the rigor of the Lean Startup methodologies and fully elaborate our curriculum?”

At BerkeleyHaas we are sharing what we are learning (see below). By embracing lean, you can be assured you will be giving your students essential innovation skills they will use for the rest of their lives. You will see great startups focused on solving real customer problems emerge as well. This is an exciting journey and we are all right at the start.

Some resources for shifting the paradigm in your organization:

Lessons Learned

  • Early-stage investors don’t read business plans
  • We are in the middle of a shift in entrepreneurship education from teaching the waterfall model of startup development (enshrined in business plans) to teaching the lean startup model
  • The Lean LaunchPad process works across a wide range of domains – from science and engineering to healthcare, energy, government, the social sector and for corporate innovation
  • Customer Development works outside Silicon Valley. In fact, it works globally
  • The Lean LaunchPad is a business process that teaches entrepreneurs and innovators to make business-focused, evidence-based decisions under conditions of chaos and uncertainty. It’s a big idea

Born Global or Die Local – Building a Regional Startup Playbook

Entrepreneurship is everywhere, but everywhere isn’t a level playing field. What’s the playbook for your region or country to make it so?

playbook

———-

Scalable startups are on a trajectory for a billion dollar market cap. They grow into companies that define an industry and create jobs.  Not all start ups want to go in that direction – some will opt instead to become a small business. There’s nothing wrong with a business that supports you and perhaps an extended family. But if you want to build a scalable startup you need to be asking how you can you get enough customers/users/payers to build a business that can grow revenues past several $100M/year.

With 317 million people the U.S. has a large enough market that most U.S. startups ignore the rest of the world until they scale in their own country. Outside the U.S. a rough rule of thumb for scale is a local population greater than 100 million (and language, cultural and/or regulatory barriers to delay or keep out U.S. entrants.) China, Russia, Brazil, India, Indonesia all meet those criteria. (Obviously this depends on industry and application.) However, most countries don’t have sufficient population to support scale with just their local market and ultimately need to be global players – from day one.

Regional Ecosystems
I’m in Australia and just spent time with some great entrepreneurs in Melbourne.

Bay of Fires Tasmania

Bay of Fires Tasmania

One of the groups I spoke to was the Australian Sports Technology Network. This group realized that Australia has a great reputation as one of the world’s best sporting nations. They realized if they could develop and promote a well-coordinated sports technologies industry, they could capture their unfair share of the $300 billon sports consumer market. So they put together a sports technology ecosystem – gathering sports startups in apparel and footwear, protective wear, equipment, nutrition, wearable devices, data and video analytics, and web and mobile solutions and brought them together with investors, retailers and distributors, universities, research centers and national sporting organizations.

Creating a vertically oriented regional ecosystem is a pretty amazing accomplishment for any country or industry.

However, in meeting some of the sports startups one of the things that struck me is that most of the founders who said they wanted to grow big hadn’t given much thought about how they would go about building size and scale.

The trap most of them fell into (common almost everywhere): they were reading the blog posts and advice of Silicon Valley-based companies and believing that it uniformly applied to them.

It doesn’t.

Born Global or Die Local
The biggest mistake for most of these startups was not understanding that optimizing their business model for the 24 million people in the Australian market would not prepare them for the size and scale they needed to get to big.

Instead of beginning with just a focus on Australia, these startups needed to use the business model canvas and articulate which of their hypotheses should be tested locally and what would require getting on an airplane to test by watching someone’s pupils dilate face-to-face.

For example, one of the critical business model hypotheses they could test locally is Product/Market fit – the connection between their Value Proposition (what product or service they were building) and the Customer Segment (who they were building it for.)

business model globals

Further refinement of Product/Market fit could be done locally by using Value Proposition Design.

bus model and value prop map

value prop map

But other critical hypotheses such as activities, resources, partners, channels needed testing offshore. For example, many of the Australian sports tech business models shared common elements. They intended to get scale for their business by growing in the U.S. while building their products in China. And their branding and demand creation activities were going to occur primarily outside of Australia. This meant they would need U.S. channel partners and Chinese manufacturers and customer acquisition and activation programs outside their home country. And as good as the Australian angel investors have been, there still is dearth of serious follow-on funding in Australia. This means that most follow-on rounds of tens of millions of dollars, if needed will likely come from outside the country.

Step 2 figure out what needs to be tested globallys

While the network was very helpful getting these startups together and introduced to investors, it wasn’t clear how and when these startups tested their “going global” hypotheses.

No one had written the playbook.

Building a Regional Startup Playbook
What’s been missing from regions outside of Silicon Valley is a “playbook.” In American football a playbook contains a sports team’s strategies and plays. It struck me that every region needs its own industry playbook on how to compete globally. For Australian sports startups, a playbook might lay out in detail the following steps:

  • Build minimal viable products and test product/market fit in Australia
  • Identify activities/resources/partners locally and then globally
  • Get seed funding in Australia
  • Trip 1 to China to understand manufacturing landscape, potential partners and rough cost of goods
  • Trip 2 to the U.S. to understand distribution channel landscape, potential partners and rough cost of customer acquisition
  • Test product/market fit in the U.S.
  • Trip 3 to China, pick manufacturing partner, start low volume production
  • Test channel and demand creation activities in the U.S.
  • Trip 4 to the U.S. Establish U.S. sales office
  • Trip 5 to the U.S. to get Series A funding in the U.S.

Each industry in a region should develop a playbook that expands and details the strategy and tactics of how to build a scalable startup. When a playbook is shared through regional collaborations (like the Australian Sports Techn Network,) entrepreneurs can jumpstart their efforts by sharing experience instead of inventing the wheel each time a new startup is launched. Now all they need is a playbook. As markets mature, and investors and the ecosystem become collectively smarter, the playbook will change over time.

Lessons Learned

  • A scalable startup typically requires a local population >100 million people
  • If your country doesn’t have that you need to be born global
  • Your country/industry needs a “go global” playbook

The Business Model Canvas Gets Even Better – Value Proposition Design

Product/Market fit now has its own book. Alexander Osterwalder wrote it. Buy it.

——

The Lean Startup process builds new ventures more efficiently. It has three parts: a business model canvas to frame hypotheses, customer development to get out of the building to test those hypotheses and agile engineering to build minimum viable products.

This week the author of the business model canvas, my friend Alexander Osterwalder, launched his new book Value Proposition Design, the sequel to his million copy best seller, Business Model Generation.

His new book does three things:
1. Introduces the Value Proposition Canvas
2. Tells you how to design new ventures with it
3. Teaches you how to use Customer Development to test it.

Value Proposition Design is a “must have” for anyone creating a new venture. It captures the core issues around understanding and finding  customer problems and designing and validating potential solutions.

Value prop design

Product/Market fit

Product/Market Fit
If you’re familiar with the Lean Startup you know that the Business Model Canvas is the tool to frame all the hypotheses of your startup. Of all the 9 boxes of the canvas, the two most important parts of the business model are the relationship between the Value Proposition (what you’re building) and the Customer Segment. These two components of the business model are so important we give them their own name, “Product/Market Fit.”

The Value Proposition Canvas functions like a plug-in to the Business Model Canvas and zooms into the value proposition and customer segment to describe the interactions between customers and product more explicitly and in more detail. This keeps things simple by giving you the big picture at the business model level and the detailed picture at the “product/market fit” level.

bus model and value prop mapvalue prop map

Integration with Customer Development and Lean Startup
Alexander and I met after he published Business Model Generation. We both realized that we had each invented one of the two parts that define the Lean Startup. In his new book he’s integrated Customer Development with the Business Model and Value Proposition Canvas and added some new tools to the mix.

Now an integral part of Value Proposition Design, several of his new tools help with testing and validation of hypotheses. These testing tools match the first two of the four steps of Customer Development. The diagram below is one of my favorites of the book and provides a simple overview of how to conduct customer discovery and customer validation in combination with the Business Model and Value Proposition Canvas. You start by extracting and prioritizing your hypotheses, then design your tests with Test Cards and finally, you conduct your tests and capture your learning. To make this all actionable Osterwalder added an Experiment Library to the book that equips you with ideas on how to test your assumptions.

3_Value_Proposition_Design_Testing_Process

Tracking Customer Development with the Value Proposition Canvas
With Customer Development you’re constantly talking to customers and partners and conducting a ton of experiments to validate and invalidate your hypotheses. All these activities, the evidence of what works and what doesn’t, and your progress towards finding a successful value proposition and business model need to be tracked. In Value Proposition Design Osterwalder shows how to do this with the Progress Board, a tool that includes a version of my investment readiness level thermometer to track progress.

5_Value_Proposition_Design_Progress_Board

Online Tools
Doing all the above together with your team is not easy when you “just” use poster-sized Canvases, sticky notes, and PowerPoint. There are simply too many Canvases you will design and trash (after rejecting and pivoting from your early tested ones), too many experiments you will conduct, and too much evidence you will produce. Keeping track of all this requires software support.

So the Value Proposition Design comes with a series of exercises that you can complete online with assessment tools that show you how you are using the Value Proposition Canvas. And last, but not least, you get access to a whole series of checklists, templates, and incredibly awesome posters that you can immediately use in your work.

Lessons Learned

  • The Value Proposition Canvas describes the details of how the value proposition and customer segments interact
  • It integrates the Customer Development process in the book
  • Product/Market fit now has its own book. Buy it

No Business Plan Survives First Contact With Customers. 2 Minutes to See Why

If you can’t see the video click here

Validation: Be Sure Your Startup Vision Isn’t a Hallucination. 2 Minutes to See Why

If you can’t see the video click here

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