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

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Killing Your Startup By Listening to Customers

The art of entrepreneurship and the science of Customer Development is not just getting out of the building and listening to prospective customers. It’s understanding who to listen to and why.

Five Cups of Coffee
I got a call from Satish, one of my ex-students last week. He got my attention when he said, “following your customer development stuff is making my company fail.” The rest of the conversation sounded too confusing for me to figure out over the phone, so I invited him out to the ranch to chat.

When he arrived, Satish sounded like he had 5 cups of coffee. Normally when I have students over, we’d sit in the house and we’d look at the fields trying to catch a glimpse of a bobcat hunting.  But in this case, I suggested we take a hike out to Potato Patch pond.

Potato Patch Pond
We took the trail behind the house down the hill, through the forest, and emerged into the bright sun in the lower valley. (Like many parts of the ranch this valley has its own micro-climate and today was one of those days when it was ten degrees warmer than up at the house.)

As we walked up the valley Satish kept up a running dialog catching me up on six years of family, classmates and how he started his consumer web company. It had recently rained and about every 50 feet we’d see another 3″ salamander ambling across the trail. When the valley dead-ended in the canyon, we climbed 30-foot up a set of stairs and emerged looking at the water. A “hanging pond” is always a surprise to visitors. All of a sudden Satish’s stream of words slowed to a trickle and just stopped. He stood at the end of the small dock for a while taking it all in. I dragged him away and we followed the trail through the woods, around the pond, through the shadows of the trees.

As we circled the pond I tried to both keep my eyes on the dirt trail while glancing sideways for pond turtles and red-legged frogs. When I’m out here alone it’s quiet enough to hear the wind through the trees, and after awhile the sound of your own heartbeat. We sat on the bench staring across the water, with the only noise coming from ducks tracing patterns on the flat water. Sitting there Satish described his experience.

We Did Everything Customers Asked For
“We did every thing you said, we got out of the building and talked to potential customers. We surveyed a ton of them online, ran A/B tests, brought a segment of those who used the product in-house for face-to-face meetings. ” Yep, sound good.

“Next, we built a minimum viable product.”  Ok, still sounds good.

“And then we built everything our prospective customers asked for.”  That took me aback. Everything?  I asked?  “Yes, we added all their feature requests and we priced the product just like they requested.  We had a ton of people come to our website and a healthy number actually activated.”  That’s great I said, “but what’s your pricing model?’  “Freemium,” came the reply.

Oh, oh. I bet I knew the answer to the next question, but I asked it anyway.  “So, what’s the problem?”

“Well everyone uses the product for awhile, but no one is upgrading to our paid product. We spent all this time building what customers asked for. And now most of the early users have stopped coming back.”

I looked at hard at Satish trying to remember where he had sat in my class.  Then I asked, “Satish, what’s your business model?

What’s your business model?
“Business model?  I guess I was just trying to get as many people to my site as I could and make them happy. Then I thought I could charge them for something later and sell advertising based on the users I had.”

I pushed a bit harder.

“Your strategy counted on a freemium-to-paid upgrade path. What experiments did you run that convinced you that this was the right pricing tactic? Your attrition numbers mean users weren’t engaged with the product. What did you do about it?”

“Did you think you were trying to get large networks of engaged users that can disrupt big markets? Large” is usually measured in millions of users. What experiments did you run that convinced you could get to that scale?”

I realized by the look in his eyes that none of this was making sense. “Well I got out of the building and listened to customers.”

The wind was picking up over the pond so I suggested we start walking.

We stopped at the overlook a top of the waterfall, after the recent rain I had to shout over the noise of the rushing water. I offered that it sounded like he had done a great job listening to customers. And better, he had translated what he had heard into experiments and tests to acquire more users and get a higher percentage of those to activate.

But he was missing the bigger picture. The idea of the tests he ran wasn’t just to get data – it was to get insight.  All of those activities – talking to customers, A/B testing, etc. needed to fit into his business model – how his company will find a repeatable and scalable business model and ultimately make money.  And this is the step he had missed.

Customer Development = The pursuit of customer understanding
Part of Customer Development is understanding which customers make sense for your business.  The goal of listening to customers is not please every one of them.  It’s to figure out which customer segment served his needs – both short and long term. And giving your product away, as he was discovering, is often a going out of business strategy.

The work he had done acquiring and activating customers were just one part of the entire buisness model.

As we started the long climb up the driveway, I suggested his fix might be simpler than he thought.  He needed to start thinking about what a repeatable and scalable business model looked like.

I offered that getting acquiring users and then making money by finding payers assumed a multi-sided market (users/payers). But a freemium model assumed a single-sided market – one where the users became the payers.

He really needed to think through his Revenue Model (the strategy his company uses to generate cash from each customer segment). And how was he going to use Pricing, (the tactics of what he charged in each customer segment) to achieve that Revenue Model.  Freemium was just one of many tactics. Single or multi-sided market? And which customers did he want to help him get there?

My guess was that he was going to end up firing a bunch of his customers – and that was OK.

As we sat back in the living room, I gave him a copy of The Startup Owners Manual and we watched a bobcat catch a gopher.

Lessons Learned

  • Getting out of the building is a great first step
  • Listening to potential customers is even better
  • Getting users to visit your site and try your product feels great
  • Your job is not to make every possible customer happy
  • Pick the customer segments and pricing tactics that drive your business model

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Who Dares Wins – The 2nd Annual International Business Model Competition

Alexander Osterwalder and I spent last week in Salt Lake City, Utah as judges at the 2nd Annual International Business Model Competition, hosted by Professor Nathan Furr, and his team at the BYU Center for Entrepreneurship.

The idea of a Business Model competition first emerged when I realized that Business Plan writing ought to be taught in English Departments – as they’re the best example of creative writing entrepreneurs will ever do.

The Business Plan 
- a roadmap for execution
When venture capital teamed up with technology entrepreneurs in the 1960’s they brought with them the canonical MBA planning tool – the business plan.

The business plan is a wonderful document for organizing and planning for existing companies to launch follow-on products. In an existing corporation, the business plan is the execution document for sustaining innovation.

The problem is that once a plan is written it’s static and assumes minimal new learning. This makes sense in a company where your customers, channel and competition are known. And your revenue plan is something more than a hallucination.  But for startups, business plans fail to match the chaotic reality they encounter in the real world. Yet year after year, decade after decade, VC’s would watch as no startup business plan survived first contact with customers. So what did the venture industry do? They kept insisting startups write business plans as the price of entry to venture funding.

Why?

VC’s thought of startups as smaller versions of large companies.  Large companies wrote business plans, so VC’s made startups write business plans.  Large companies had VP’s of Sales and Marketing, so VC’s made startups organize that way as well. Large companies executed plans well and when they didn’t work, they fired the executives who screwed up.  So VC’s assumed that startups should equally unfold per the plan – firing executives when reality intruded.

The reality is that startups needed a new class of management tools. Tools to help them manage the search for a repeatable and scalable business model. Startups needed tools to help them organize their hypotheses, and then needed a process to rapidly test those hypotheses. And they needed tools that recognized that most startups go from failure to failure as they searched for, and discovered, product/market fit. And that instead of firing executives to match a plan, it was the plan itself that needed to rapidly iterate.

Business Plan vs. Business Model + Customer Development
The term business model first appeared ~50 years ago, but the concept didn’t catch on until the 1990’s. It wasn’t until 2010 when Alexander Osterwalder published his book Business Model Generation that it became clear that this was the tool to organize startup hypotheses.

It wasn’t long before Alexander and I realized that organizing hypotheses with his canvas was just the first step in building a business. The next step was getting out of the building and testing the business model in a formal process – and that process is Customer Development.

We’ve blogged about the combined methodologies here and here.  Our Lean LaunchPad class at Stanford, Berkeley, Columbia and the National Science Foundation teach the combined Business Model Canvas + Customer Development tools.  My new book, The Startup Owners Manual integrates the two.

Three years ago, after watching my nth business plan competition I realized this was simply wrong.  Rather than having students invest months writing a 100-page tome and polishing slides that taught them almost nothing about what it was really like to build a company, I thought there had to be a better way.

I suggested that we hold competitions that actually emulated the real world (rather than what’s easy to grade) and hold competitions that emulate what entrepreneurs actually encounter – chaos, uncertainty and unknowns. A business model competition would emulate the “out of the building” experience of real entrepreneurs executing the customer development / business model / agile development stack.

You can write a business plan slide deck in your dorm or library.  But you can’t fake a business model/customer development presentation. It takes a ton of face-face customer interactions.

The International Business Model Competition
From the seed of this initial idea Professor Nathan Furr at BYU did the hard work and created a global business model competition, this year receiving over 100 submissions. The finals were held in the packed 1,000 seat BYU auditorium with lines of students outside unable to get in.

(I love walking around the BYU campus. It feels like being at a giant Eagle Scout convention.)

It was an eye-opener to see each of the teams take the stage to describe their journey in trying to validate each of the 9 parts of a business model, rather than the static theory of a business plan.

Each team used the business model canvas and customer development stack to go from initial hypotheses, getting outside the building to validate their ideas with customers, and going through multiple pivots to find a validated business model.

All of the Business Model finalists were pretty amazing.   Each one of these presentations moved the teams closer to building a real company.

This years winner were:

1. XoomPark, BYU

The XoomPark team spoke to over 300 people (customers and channel partners,) ended up with 2 partners, 30 parking lot customers, a working website and a validated revenue model.
If you can’t see the slide deck above, click here.
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3. AutoBid, BYU

AutoBid’s pivots were pure artistry.

If you can’t see the slide deck above, click here.

4. FlexLeg, BYU 

FlexLeg got to experience first-hand the complexity of a multi-sided market – something the Business Model Canvas illustrates with startling clarity.

If you can’t see the slide deck above, click here.

Business Plan competitions are for those want to write PowerPoint slides. Business Model competitions are for entrepreneurs who want to learn how to build companies. Harvard will be hosting the 2013 International Business Model Competition and Stanford in 2014.

Come join us.

Lessons Learned

  • Business Plan competitions offer VC’s a PowerPoint beauty contest.
  • They teach entrepreneurs little about how to build a company.
  • You can’t fake a Business Model/Customer Development presentation.
  • It tough, grueling and relentless, requiring a ton of face-face customer interactions.
  • It what winners do.

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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

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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Scientists Unleashed

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

George Bernard Shaw

We’re in the middle of our National Science Foundation Innovation Corps class – taking the most promising research projects in American university laboratories and teaching these scientists the basics of entrepreneurship. Our goal is to accelerate the commercialization of their inventions. Our Lean LaunchPad class teaches scientists and engineers that starting a company is another research project that can be solved by an iterative process of hypotheses testing and experimentation built around the business model / customer development / agile development solution stack. It’s “the scientific method” applied to startups.

Although I typically don’t write about a class while it’s going on, I had to share this extraordinary reflection that Satish Kandlikar, one of the National Science Foundation principal investigators, posted to our Lean LaunchPad class blog.

Satish Kandlikar – The Spirit of Entrepreneurship
Satish Kandlikar has been a professor in the mechanical engineering department at the Rochester Institute of Technology for the past twenty-one years. His research is focused in the areas of flow boiling, critical heat flux, contact line heat transfer, and advanced cooling techniques

His team, Akara Lighting, wants to build a device for LED lights that gets rid of heat 50% better than anything on the market. This would result in LED’s having a higher performance at a reduced cost.

Here’s what he had to say about his experience in the Lean LaunchPad class ….

“It is quite an eye-opening experience to transition from an academic “PI” (Principal Investigator) to someone who wants to run a technology start-up. The change in the mindset is perhaps the important factor on the path to success…

The teaching team is simply phenomenal in identifying the pitfalls in our path and guiding us in finding the solutions. They have shown us the other side of the equation from technology to market acceptability. We have been extremely fortunate in having this kind of guidance and support.

A key finding I would like to report is that we just had another “pivot” two days ago when our mentor brought to our attention that we can succeed as a heat pipe company providing thermal solutions to various LED products as well as other applications. I visited two companies, one providing data center cooling solutions, and other providing control panel cooling systems. Key alliances are expected to occur through these initial, very positive, contacts.

One fundamental change that I see in my approach going forward is that I am looking at the research in a totally different way. It is no longer, in my mind, a means to publishing papers and simply graduating students. It means now, to me, how the research can be applied to make products that are accepted in marketplace. Making students understand the entire process, to whatever extent I can influence them, and inspiring them to aspire for transferring their knowledge to products is becoming an important thrust in my classroom interactions.

Another eye-opener was on understanding communications. While making presentations in academic setting, it was more of a paper-based research with extension of knowledge, without too much understanding of its application. Knowing the audience was really not a factor. Now after making “cold-calls”, and seeing that there is a certain way to get them interested in just a few opening sentences, was simply amazing. Knowing what their needs are is a crucial step.

Now it is becoming clear what Steve meant when he said, “get out of the building”. It is clear that the building referred to our mindset more than the physical act of going out or simply contacting someone outside.

The purpose of this posting was to document my beginning of the transformation process from an academician to an entrepreneur. And I am definitely enjoying it.”

Scientists Unleashed
Over fifty years ago Silicon Valley was born in an era of applied experimentation driven by scientists and engineers. Fifty years from now, we’ll look back to this current decade as the beginning of another revolution, where scientific discoveries and technological breakthroughs were integrated into the fabric of society faster than they had ever been before, unleashing a new era for a new American economy built on entrepreneurship and innovation.

And scientists like Satish Kandlikar and the National Science Foundation will lead the way.
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Nokia as “He Who Must Not Be Named” and the Helsinki Spring

I was invited to Finland as part of Stanford’s Engineering Technology Venture Program partnership with Aalto University. (Thanks to Kristo Ovaska and team for the fabulous logistics!) I presented to 1,000’s of entrepreneurs, talked to 17 startups, gave 12 lectures, had 9 interviews, chatted with 8 VC’s, sat on 4 panels, talked policy with 2 government ministers, 2 members of parliament, 1 head of a public pension fund and was in 1 TV-documentary.  More details can be found at www.steveblank.fi

This is part 2 of 2 of what I found. Part 1 can be found here.

Toxic Business Press and Contradictory Government Incentives
Unique to Finland with its strong cultural emphasis on equality and the redistribution of wealth is a business press that doesn’t understand startups and is overtly hostile to their success. When MySQL was sold for $1B and the cleantech company the Switch got acquired for $250M, one would have expected the country to celebrate that they had built these world-class companies. Instead the business press dumped on the founders for “selling out.” In 2010 it got worse with an Act in parliament about the Monitoring of Foreigners’ Corporate Acquisitions. Many founders mentioned this as a reason not to incorporate or grow their companies in Finland.

While the government says they love startups, the first thing they did this year is raise the capital gains tax. While it might have been politically expedient, it was not a welcome sign for long-term investment. I suggested they consider an investment tax credit for pension funds that invest in Finnish based VC firms.

Nokia as “He Who Must Not Be Named”
I was in Finland three days before I realized that no one had mentioned the word “Nokia.”  After I brought it up in a meeting, you could have heard a pin drop.  Nokia was Finland’s symbol of national competence. Most Finns take their failure as a personal embarrassment. (Note to Finland – lighten up. Nokia was blind-sided in a classic disruptive innovation. 50% the fault of a Nokia management that didn’t see it coming, while 50% was due to brilliant Apple execution.) Ultimately, Nokia’s difficulties will turn out to be good news for Finnish entrepreneurs. They’ve stopped hiring the best talent, and startups are not looking so risky compared to large companies.

Nanny-Culture, Lack of Risk Taking, Not Sharing
What makes Finland such a wonderful place to live and raise a family may ultimately be what kills it as a startup hub. There’s a safety net in almost every part of one’s public and private life – health insurance, free college tuition, unions, collective bargaining, fixed work hours, etc. And what’s great for the mass of society – a government safety net verging on the ultimate nanny state – makes it impossible to fail. You find early stage employees expecting to work normal hours, to get paid a regular salary, and not asking or expecting equity. There isn’t much of a killer instinct among the masses.

It’s the rare region where risk equals experience. By nature Finns are not good at tolerating risk. This gets compounded by the cultural tendency not to share or talk in meetings, sometimes to the point of silence. This is a fundamental challenge in creating an entrepreneurial culture.  This extends to sharing among startups. The insular nature of the culture hasn’t yet created a “pay it forward” culture.

Summary
The young entrepreneurs I met are bringing impressive energy and intelligence to their goal of building one of Europe’s leading technology hubs in Helsinki. Finland itself has significant engineering talent, and is also attracting entrepreneurs from Russia and the former USSR. It will be fascinating to see if they can lead the cultural change and secure the political support (in a government run by an older generation) to support their vision.

Lessons Learned

  • Finland is trying to engineer an entrepreneurial cluster as a National policy to drive economic growth through entrepreneurial ventures
  • They’ve gotten off to a good start with a start around Aalto University with passionate students
  • Startup incubators, business angels and VCs are starting to emerge
  • The country needs to figure out a long term privatization strategy for Venture investing
  • Finnish culture makes risk-taking and sharing hard

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The Helsinki Spring

I spent the month of September lecturing, and interacting with (literally) thousands of entrepreneurs in two emerging startup markets, Finland and Russia. This is the first of two posts about Finland and entrepreneurship.

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I was invited to Finland as part of Stanford’s Engineering Technology Venture Program partnership with Aalto University. (Thanks to Kristo Ovaska and team for the fabulous logistics!) I presented to 1,000’s of entrepreneurs, talked to 17 startups, gave 12 lectures, had 9 interviews, chatted with 8 VC’s, sat on 4 panels, talked policy with 2 government ministers, 2 members of parliament, 1 head of a public pension fund and was in 1 TV-documentary.

What I found in Finland was:
  • a whole lot of smart, passionate entrepreneurs who want to build a startup hub in Helsinki
  • a government that’s trying to help, but gets in the way
  • a number of exciting startups, but most with a narrow, too-local view of the world
  • and the sense that, before too long, they may well get it right!

While a week is not enough time to understand a country this post – the first of two – looks at the Finnish entrepreneurial ecosystem and its strengths and weaknesses.

The Helsinki Spring
Entrepreneurship and innovation are bubbling around Helsinki and Aalto University. There are thousands of excited students, and Aalto university is working hard to become an outward facing institution. Having a critical mass of people who think startups are cool in the same location is a key indicator of whether a cluster can catch fire. Finnish startup successes on a global stage include MySQL, F-Secure, Rovio, Habbo, PlayfishThe Switch, TectiaTrulia and Linux. While it’s not clear yet whether the numbers of startups in Helsinki are sufficient to ignite, it feels like it’s getting there, (and given the risk-averse and paternal nature of Finland that by itself is a miracle.)

The good news is that for a 5 million person country, there’s an emerging entrepreneurial ecosystem that looks like something this:

9-to-5 Venture Capital
Ironically one of the things that’s holding back the Finnish cluster is Tekes, the government organization for financing research, development and innovation in Finland. It’s hard enough to pick which existing companies with known business models to aid. Yet Tekes does that and is trying to act like a government-run Venture Capital firm. At Tekes, government employees (and their hired consultants) – with no equity, no risk or reward, no startup or venture capital experience – try to pick startup winners and losers.

Tekes has ended up competing with and stifling the nascent VC industry, indiscriminately handing out checks to entrepreneurs like an entitlement. (To be fair this is an extension of the government’s role in almost all parts of Finnish life.)

In addition to Tekes, Vigo, the government’s attempt at funding private business accelerators, started with good intentions and got hijacked by government bureaucrats. The accelerators I met with (the ones the government pointed to as their success stories) said they were leaving the program.

Tekes lacks a long-term plan of what the Finnish government’s role should be in funding startups. I suggested that they might want to consider putting themselves out of the public funding business by using public capital to kick-start private venture capital firms, incubators and accelerators. And they should give themselves a 5-10 year plan to do so.  Instead they seem to be stuck in the twilight zone of not having a long-term vision of their role. (There has been tons of reports on what to do, all seemingly ignored by an entrenched bureaucracy.)

Lack of Business Experience
Direct government funding of startups has also delayed the maturation of business experience of local angels and VC’s. Finnish private investors don’t yet have enough time-in-grade to have developed good pattern recognition skills, and most lack operating backgrounds. I have no doubt they’ll get there by themselves, but in wouldn’t take much imagination to attempt to recruit some seasoned overseas investors to add to the mix.

Even a more serious challenge is the lack of global business competence. The number of serial entrepreneurs is very low and until recently most of the talented sales and marketing professionals choose to work for Nokia.

Part 2 with more observations about Finland and the Lessons Learned is here.
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How To Build a Web Startup – Lean LaunchPad Edition

If you’re an experienced coder and user interface designer you think nothing is easier than diving into Ruby on Rails, Node.js and Balsamiq and throwing together a web site. (Heck, in Silicon Valley even the waiters can do it.)

But for the rest of us mortals whose eyes glaze over at the buzzwords, the questions are, “How do I get my great idea on the web? What are the steps in building a web site?”  And the most important question is, “How do I use the business model canvas and Customer Development to test whether this is a real business?”

My first attempt at helping students answer these questions was by putting together the Startup Tools Page - a compilation of available web development tools. While it was a handy reference, it still didn’t help the novice.

So today, I offer my next attempt.

How To Build a Web Startup – The Lean LaunchPad Edition

Here’s the step-by-step process we suggest our students use in our Lean LaunchPad classes.

  1. Set up the logistics to manage your team
  2. Craft company hypotheses
  3. Write a value proposition statement that other people understand
  4. Set up the Website Logistics
  5. Build a “low-fidelity” web site
  6. Get customers to the site
  7. Add the backend code to make the site work
  8. Test the “problem” with customer data
  9. Test the “solution” by building the “high-fidelity” website
  10. Ask for money

(Use the Startup Tools Page as the resource for tool choices)

Step 1: Set Up Team Logistics

Step 2. Craft Your Company Hypotheses (use the Lean LaunchLab)

Step 3: Write a value proposition statement that other people understand

  • If you can’t easily explain why you exist, none of the subsequent steps matter.  A good format is “We help X do Y by doing Z”.
  • Once you have a statement in that format, find a few other people (doesn’t matter if they’re your target market) and ask them if it makes sense.
  • If not, give them a longer explanation and ask them to summarize that back to you.  Other people are often better than you at crafting an understandable value proposition.

Step 4: Website Logistics

  • Get a domain name for your company. To find an available domain quickly, try Domize or Domainr
  • Then use godaddy or namecheap to register the name. (RetailMeNot usually has ~ $8/year discount coupons for Godaddy You may want to register many different domains (different possible brand names, or different misspellings and variations of a brand name.)
  • Once you have a domain, set up Google Apps on that domain (for free!) to host your company name, email, calendar, etc
  • Read Learning how to code

 For coders: set up a web host

  • Use virtual private servers (VPS) like Slicehost or Linode (cheapest plans ~$20/month, and you can run multiple apps and websites)
  • You can install Apache or Nginx with virtual hosting, and run several sites plus other various tools of your choice (assuming you have the technical skills of course) like a MySQL database
  • If you are actually coding a real app, (rather than for class) use a “Platform As A Service” (PAAS) like Heroku, DotCloud or Amazon Web Services if your app development stack fits their offerings
  • BTW: You can see the hosting choices of YCombinator startups here

Customer Discovery for the Web

Step 5: Build a Low-Fidelity Web Site

  • Depending on your product, this may be as simple as a splash page with: your value proposition, benefits summary, and a call-to-action to learn more, answer a short survey, or pre-order.)
  • For surveys and pre-order forms, Wufoo and Google Forms can easily be embedded within your site with minimal coding.

 For non-coders:

For coders: build the User Interface

Step 6: Customer Engagement (drive traffic to your preliminary website)

  • Start showing the site to potential customers, testing customer segment and value proposition
  • Use Ads, textlinks or Google AdWords, Facebook ads and natural search to drive people to your Minimally Viable web site
  • Use your network to find target customers – ask your contacts, “Do you know someone with problem X? If so, can you forward this message on to them?” and provide a 2-3 sentence description
  • For B2B products, Twitter, Quora, and industry mailing lists are a good place to find target customers. Don’t spam these areas, but if you’re already an active participant you can sprinkle in some references to your site or you can ask a contact who is already an active participant to do outreach for you.
  • Use MailchimpPostmark or Google Groups to send out emails and create groups
  • Create online surveys with Wufoo or Zoomerang
  • Get feedback on your Minimum Viable Product (MVP) features and User Interface

Step 7: Build a more complete solution (Connect the User Interface to code)

Step 8: Test the “Customer Problem” by collecting Customer Data

  • Use Web Analytics to track hits, time on site, source.  For your initial site, Google Analytics provides adequate information with the fastest setup.  Once you’ve moved beyond your initial MVP, you’ll want to consider a more advanced analytic platform (Kissmetrics, Mixpanel, Kontagent, etc)
  • Create an account to measure user satisfaction (GetSatisfaction, UserVoice, etc.) from your product and get feedback and suggestions on new features
  • Specific questions, such as “Is there anything preventing you from signing up?” or “What else would you need to know to consider this solution?” tend to yield richer customer feedback than generic feedback requests.
  • If possible, collect email addresses so that you have a way to contact individuals for more in-depth conversations.

Step 9: Test the “Customer Solution” by building a full featured High Fidelity version of your website

  • Update the Website with information learned in Step 5-8
  • Remember that “High Fidelity” still does not mean “complete product”. You need to look professional and credible, while building the smallest possible product in order to continue to validate.
  • Keep collecting customer analytics
  • Hearing “This is great, but when are you going to add X?” is your goal!

Step 10: Ask for money

  • Put a “pre-order” form in place (collecting billing information) even before you’re ready to collect money or have a full product.
  • When you’re ready to start charging – which is probably earlier than you think – find a billing provider such as Recurly, Chargify, or PayPal to collect fees and subscriptions.

For all Steps: Monitor and record changes week by week using the Lean LaunchLab

For Class: Use the Lean LaunchLab to produce a 7-minute weekly progress presentation

  • Start by putting up your business model canvas
  • Changes from the prior week should be highlighted in red
  • Lessons Learned.  This informs the group of what you learned and changed week by week – Slides should describe:
  1. Here’s what we thought (going into the week)
  2. Here’s what we found (Customer Discovery during the week)
  3. Here’s what we’re going to do (for next week)
  4. Emphasis should be on the discovery done for that weeks assigned canvas component (channel, customer, revenue model) but include other things you learned about the business model.

———

If you’re Building a Company Rather Than a Class Project

———

Thanks for the comments, suggestions, corrections, and additions. Updates added.
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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.
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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.
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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.
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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 Lean LaunchPad at Stanford – The Final Presentations

The Stanford Lean LaunchPad class was an experiment in a new model of teaching startup entrepreneurship. This last post – part nine – highlights the final team presentations. Parts one through eight, the class lectures, are here, Guide for our mentors is here. Syllabus is here.

This is the End
Class lectures were over last week, but most teams kept up the mad rush to talk to even more customers and further refine their products. Now they were standing in front of us to give their final presentations. They had all worked hard. Teams spent an average of 50 to 100 hours a week on their companies, interviewed 50+ customers and surveyed hundreds (in some cases thousands) more.

While the slide presentations of each team are interesting to look at, that’s actually the sideshow. What really matters are the business model canvas diagrams in the body and appendix of each presentation. These diagrams are the visual representation of the how and the what a team learned in the class – how they tested their hypotheses by getting out of the building using the Customer Development process and what they learned about each part of their business model.

By comparing the changes the teams made week-to-week-week in their business model canvas diagrams, you’ll see the dynamics of entrepreneurship, as they iterate and Pivot over time. We believe these are the first visual representations of learning over time.

Team Agora

If you can’t see the Agora slides above, click here.

Team Autonomow

If you can’t see the Autonomow slides above, click here.
(p.s. they’re going to make a company out of this class project, and they’re hiring engineers.)

Team Blink Traffic

If you can’t see the Blink traffic slides above, click here.

Team D.C. Veritas

If you can’t see the D.C. Veritas slides above, click here.

Team Mammoptics

If you can’t see the Mammoptics slides above, click here.

Team OurCrave

If you can’t see the OurCrave slides above, click here.

Team PersonalLibraries

If you can’t see the PersonalLibraries slides above, click here.

Team PowerBlocks

If you can’t see the PowerBlocks slides above, click here.

Team Voci.us

If you can’t see the Voci.us slides above, click here.

———

Why Did We Teach This Class?
Many entrepreneurship courses focus on teaching students “how to write a business plan.” Others emphasize how to build a product. We believe the former is simply wrong and the later insufficient.

Business plans are fine for large companies where there is an existing market, existing product and existing customers, but in a startup all of these elements are unknown and the process of discovering them is filled with rapidly changing assumptions. Experienced entrepreneurs realize that no business plan survives first contact with customers. So our goal was to teach something actually useful in the lives of founders.

Building a product is a critical part of a startup, but just implementing build, measure, learn without a framework to understand customers, channel, pricing, etc. is just another engineering process, not building a business. In the real world a startup is about the search for a business model or more accurately, startups are a temporary organization designed to search for a scalable and repeatable business model. Therefore we developed a class to teach students how to think about all the parts of building a business, not just the product.

There was no single class to teach aspiring entrepreneurs all the skills involved in searching for a business model (business model design, customer and agile development, design thinking, etc.) in one quarter. The Lean LaunchPad was designed to fill that void.

What’s Different About the Class?
The Lean LaunchPad class was built around the business model / customer development / agile development solution stack. Students started by mapping their assumptions (their business model) and then each week they tested these hypotheses with customers and partners outside in the field (customer development) and used an iterative and incremental development methodology (agile development) to build the product.

The students were challenged to get users, orders, customers, etc. (and if a web-based product, a minimum feature set) all delivered in 8 weeks. Our goal was to get students out of the building to test each of the nine parts of their business model, understand which of their assumptions were wrong, make adjustments and continue to iterate based on what they learned.  They learned first-hand that faulty assumptions were not a crisis, but a learning event called a pivot —an opportunity to change the business model.

What Surprised Us?

  1. The combination of the Business Model Canvas and the Customer Development process was an extremely efficient template for the students to follow – even more than we expected.
  2. It drove a hyper-accelerated learning process which led the students to a “information dense” set of conclusions. (Translation: they learned a lot more, in a shorter period of time than in any other entrepreneurship course we’ve ever taught or seen.)
  3. The process worked for all types of startups – not just web software but from a diverse set of industries – wind turbines, autonomous vehicles and medical devices.
  4. Insisting that the students keep a weekly blog of their customer development activities gave us insight into their progress in powerful and unexpected ways. (Much more on this in subsequent blog posts.)

What Would We Change?

  1. In this first offering of the Lean Launchpad class we let students sign up without being part of a team. In hindsight this wasted at least a week of class time. Next year we’ll have the teams form before class starts. We’ll hold a mixer before the semester starts so students can meet each other and form teams. Then we’ll interview teams for admission to the class.
  2. Make Market Size estimates (TAM, SAM, addressable) part of Week 2 hypotheses
  3. Show examples of a multi-sided market (a la Google) in Week 3 or 4 lectures.
  4. Be more explicit about final deliverables; if you’re a physical product you must show us a costed bill of materials and a prototype. If you’re a web product you need to build it and have customers using it.
  5. Teach the channel lecture (currently week 5) before the demand creation lecture (currently week 4.)
  6. Have teams draw the diagram of “customer flow” in week 3 and payment flows in week 6.
  7. Have teams draw the diagram of a finance and operations timeline in week 9.
  8. Find a way to grade team dynamics – so we can really tell who works well together and who doesn’t.
  9. Video final presentations and post to the web. (We couldn’t get someone in time this year)

It Takes a Village
While I authored these blog posts, the class was truly a team project. Jon Feiber of Mohr Davidow Ventures and Ann Miura-Ko of Floodgate co-taught the class with me (with Alexander Osterwalder as a guest lecturer.) Thomas Haymore was our great teaching assistant. We were lucky to get a team of 25 mentors (VC’s and entrepreneurs) who selflessly volunteered their time to help coach the teams. Of course, a huge thanks to the 39 Stanford students who suffered through the 1.0 version of the class. And finally special thanks to the Stanford Technology Ventures Program; Tom Byers, Kathy Eisenhardt, Tina Selig for giving us the opportunity to experiment in course design.

E245, the Lean LaunchPad will be offered again next Winter.  See you there!
Listen to the post here:


Download the Podcast here

The LeanLaunch Pad at Stanford – Class 8: Key Resources, Activities and Expense Model

The Stanford Lean LaunchPad class was an experiment in a new model of teaching startup entrepreneurship. This post – part eight – was the last formal lecture. Parts one through seven of the lectures are here, Syllabus is here.

While this is the last lecture, the teams still have one more week to work on their companies, and then they have their final presentations – for 30% of their grade.  All the teams have crossed the Rubicon. 

Week 8 of the class.
Last week the teams tested their Revenue Models hypotheses: what are customers willing to pay for? This week they were testing their hypotheses about Partners. Partners are the external companies whose product or service combines with your Value Proposition to create a complete customer solution or “whole product” to satisfy customers. For example, Apple needed music from their record label partners to make the original iPod and iTunes experience complete. (The concept of Partners, took some explanation as some teams confused partners with the Distribution Channel.)

The Nine Teams Present
PersonalLibraries was now an on-line “social shopping system.” After a week of hectic customer discovery, the team further refined their new business model. Their minimum viable product would be “Trusted Advice on products tailored to your needs by people and groups relevant to you.” Their initial customer segment were upwardly mobile professionals with $2-10K discretionary purchases/year (excluding travel,) and their revenue model was affiliate program fees.

With the clock ticking down to the end of the class the team appeared to give up sleep for the remainder of the quarter. They contacted a dozen admissions consulting firms, ran three Usertesting.com video interviews on a social shopping tool, surveyed 40 Stanford students on their on-line shopping habits, and then did another survey of 700 Stanford MBA students (!) to find out what books they’d recommend for prospective students. They used that data as their first “trusted advice” for the new website they built in a week. http://insidely.com/books/

Within the week they were #6 in Google search results for “Stanford Admission Books.”

Amazingly it looked like the PersonalLibraries team had restarted the company and found a segment where customers wanted their product. They had another week to go until their final presentations. This looks like a race to the wire.

If you can’t see the slides above, click here.

Autonomow, the robotic farm weeder, spent part of the week investigating Partners that could help them build a more complete offering for farmers. The team talked to an agricultural sensor expert at U.C. Davis, a German applied Laser research group, a California organic farmer who wanted to be an Earlyvangelist, four service partners and three weed/pest management consultants.

On the technology front, last week they tested whether their Carrotbot (their research platform they built to gather data for machine vision/machine learning) could tell the difference between a carrot and a weed in a farm field versus the lab. This week the team started investigating whether the spectral reflectance curves of healthy green plants are different from weeds, and if so could an infrared Hyperspectral imaging camera be better suited than their current visible light camera for weed/plant recognition.

But what got our attention was when they told us they were investigating what it takes to kill a weed in the field. Their answer? With a laser. Way cool.

They spent the week sorting through some basic laser technical questions. How much energy does it take to kill a weed? Answer: About 5 Joules of energy. Next question: How much energy will the laser require? Answer: If the robotic weeder is traveling at 1.5 mph, the laser needs to kill the weed in about 10 milliseconds; therefore the laser needs to put out no more than 500 watts of energy. What wavelength of laser? Answer: The most cost effective wavelength is 800-900nm ~ $20/watt. But water (the main ingredient in a weed) best absorbs light at higher frequencies – think microwaves. Final question: Is the improved absorption efficiency worth the extra cost? Testing for all of these is required.

If you can’t see the slides above, click here.

The next team was D.C. Veritas, building a low cost wind turbine for cities. Last week the team did mass interviews of city officials across the United States to understand the project approval process inside a city. This week they broadened the discussion with interviews with the city planner in Mariposa, Texas and the city engineer from Rapid City, South Dakota.

They worked on understanding their partners. D.C. Veritas needs three types of partners: installers (to reduce their overhead,) certification authorities (who would provide credibility) and government and research labs (for testing facilities).

Of real interest was their evolving view of their revenue model. Instead of selling a city the wind turbine hardware, their revenue model moved to a Wind Power Purchase Agreement, a long term contract with a city to buy the electricity generated by the D.C. Veritas turbines.

If you can’t see the slides above, click here.

The Agora Cloud Services team was now making a tool set for managing Amazon Web Services cloud compute usage. They believed their tools could save customers 30% of their Amazon bill. Their value proposition was to provide service matching, capacity planning and usage monitoring & control.  They had another 3 interviews, this time with potential partners and integrators.

If you can’t see the slides above, click here.

The Week 8 Lecture: Q&A and Summing Up
Our lecture covered Key Resources and Cost Structure. The textbooks for this class were Alexander Osterwalder’s Business Model Generation (along with the Four Steps to the Epiphany). So who better to have as a surprise guest lecturer for our last class than Alexander Osterwalder himself.

His lecture covered: What resources do you need to build your business?  How many people? What kind? Any hardware or software you need to buy? Any IP you need to license?  How much money do you need to raise?  When?  Why? Importance of cash flows? When do you get paid vs. when do you pay others?

Our assignment for the teams during their final week: What’s your expense model? What are the key financials metrics for costs in your business model?  Costs vs. ramp vs. product iteration? Access to resources. Where is the best place for your business? Where is your cash flow break-even point? Assemble a resources assumptions spreadsheet.  Include people, hardware, software, prototypes, financing, etc.  When will you need these resources?  Roll up all the costs from partners, resources and activities in a spreadsheet by time.

The last part of their assignment is their final presentation – a “Lessons Learned” summary of their work over the entire quarter – which will count for 30% of their grade. To help them get ready for their final, one of our mentors plans to hold a mandatory “story-telling” workshop, to assist them in assembling their final presentation.

If you can’t see the slides above, click here.

———

Over the last few weeks as our students presented, we had a growing feeling that we were seeing something extraordinary. Our teaching objective was to take engineers (with a smattering of MBA’s) and give them an immersive hands-on experience of how an idea becomes a profitable business. We taught them theory, methodology, and practice using Customer Development and business model design.

Watching them we realized that we had found a way to increase the information density a student team could acquire in eight short weeks. But what was truly awe-inspiring was the breathtaking speed and tempo of the teams’ Pivots.

All teams had all accomplished something remarkable, but it won’t be clear what a singular achievement this was until we see their final presentations.

Stay tuned for the last post – the Final Presentations and Lessons Learned.
Listen to the post here:


Download the Podcast here

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