The Harvard Business Review is offering free reprints of the May 2013 cover article, “Why the Lean Startup Changes Everything“
Available here
Filed under: Big Companies versus Startups: Durant versus Sloan, Business Model versus Business Plan, Customer Development, Customer Development Manifesto, Lean LaunchPad, Teaching, Venture Capital | 11 Comments »
Todd Branchflower was one of my Lean LaunchPad students entrepreneurial enough to convince the Air Force send him to Stanford to get his graduate engineering degree. After watching my Secret History of Silicon Valley talk, he became fascinated by how serendipity created both weapon systems and entrepreneurship in World War II – and brought us federal support of science and Silicon Valley.
In class I would tease Todd that while the Navy had me present the Secret History talk in front of 4,000 cadets at the Naval Post Graduate School, I had yet to hear from the Air Force Academy. He promised that one day he would fix that.
Fast-forward three years and Todd is now Captain Todd Branchflower, teaching electrical engineering at the Air Force Academy. He extended an invitation to me to come out to the Academy in Colorado Springs to address the cadets and meet the faculty.
Out of the airport the first stop was in Denver – an impromptu meetup at Galvanize and a fireside chat with a roomful of 200 great entrepreneurs.
U.S. Military Academies
Then it was on to Colorado Springs and the Air Force Academy. All officers in the U.S. military need a college degree. The Air Force Academy is one of the four U.S. military service academies (academy is a fancy word for 4-year college.) The oldest is the Army’s U.S. Military Academy at West Point in New York, founded in 1802 to educate Army officers. The next military college was the Naval Academy in Annapolis Maryland, set up in 1845 to train Navy officers. The Coast Guard Academy opened in New London Connecticut in 1876. The Air Force, originally part of the U.S. Army, wasn’t an independent military branch until 1947, set up their academy in 1955 in Colorado Springs. Only ~20% of officers go through a service academy. Over 40% get the military to pay for their college by joining via the Reserve Officers Training Corps (ROTC) program. The rest get their college degree in a civilian college or university and then join their branch of the military after a 10-week Officer Training School.
Secret History
Given my Air Force career I came thinking that sharing the Secret History of Silicon Valley talk with 1000 soon to be Air Force Officers would be the highpoint of the visit. And it was as much fun as I expected – a full auditorium – a standing ovation, great feedback and a trophy – but two other things, completely unexpected, made the visit even more interesting.
First, I got to meet the faculty in both electrical/computer engineering and management and share what I’ve learned about Lean and the Lean LaunchPad class. In their senior year all Air Force cadets on the electrical engineering track have a two-semester “Capstone” class project. They specify, design and build a project that may be of use. Unfortunately the class operates much like the military acquisition system: the project specification has minimal input from real world users, the product gets built with a waterfall engineering process, and there’s no input on whether the product actually meets real world needs until the product is delivered. This means students spend a ton of time and effort to deliver a “final” product release but it’s almost certain that it wouldn’t meet real world users’ needs without extensive rework and modification.
I was surprised how interested the faculty was in exploring whether the Capstone class could be modified to use the Customer Development process to get input from potential “customers” inside the Air Force. And how the engineering process could be turned Agile. with the product built incrementally and iteratively, as students acquire more customer feedback. Success in the Capstone project would not only be measured on the technical basis of “did it work?” but also on how much they learned about the users and their needs. I invited the faculty to attend the Lean LaunchPad educators’ course to learn how we teach the class.
We’ll see if I made a dent.
Table for 4000
In between faculty meetings I got a great tour of the Academy facilities and some of the classes. As on any college campus there are dorms, great sports facilities (sports is not optional), classrooms, etc. The curriculum was definitely oriented to practical science and service. However not on too many other college campuses will you find dorms arranged in squadrons of 40 of 100 students each, where students have to make their beds and have full-time hall monitors, and simultaneously eat lunch with 4,000 other cadets in one dining room (an experience I got to participate in from the guest tower overlooking the dining hall.) All the hierarchal rituals were on display; freshman have to run on the main quad walking on narrow strips, carry their backpacks in their hands, daily room inspections, etc.
And I saw things that made this uniquely an Air Force college – they had their own airfield, flying clubs, the Aero Lab with three wind tunnels, heavy emphasis on engineering and aeronautics, etc. (And it was fun to play “what aircraft is that” with those on static display around the grounds.) But the second surprise for me was the one that made me feel very, very old – it was the Academy’s Cyber Warfare curriculum.
Cyber Warfare
I visited the Cyber 256 class and got a look at the syllabus. Imagine going to college not only to learn how to hack computers but also actually majoring in it. The class consisted of basic networking and administration, network mapping, remote exploits, denial of service, web vulnerabilities, social engineering, password vulnerabilities, wireless network exploitation, persistence, digital media analysis, and cyber mission operations. In addition to the class in Cyber Warfare, there was also a cadet Cyber Warfare Club and an annual National Security Agency Cyber Warfare competition. The Air Force competes with other military branches and National Guard units; the instructor proudly told me that the Air Force has won for the last two years. I only wish I had taken a picture of the huge trophy in the back of the classroom.
We do what?
On the plane ride home I had time to process what I saw.
When I was in the military the battle was just ending between the National Security Agency (NSA) and the military branches over who owned signals and communications intelligence. Was it the military (Air Force, Navy) or was it our intelligence agencies? In the end the NSA became the primary owner, the NRO (National Reconnaissance Office) owned and built the spacecraft that collected the intelligence and the military branches had organizations (Air Force Security Services, Army Security Agency or Naval Security Group) that manned the collection platforms (airplanes, listening posts, etc) which all fed back into the National Security Agency.
Cyber Warfare has been through the same battles. While each of the military branches have Cyber Warfare organizations reporting into a unified military Cyber Command, the head of the National Security Agency is its director, making the NSA the agency that owns Cyber Warfare for the U.S. Cyber Warfare has three components:
1) Computer Network Attack (CNA) – shut down an enemies ability to command and control its weapon systems in a war (i.e. Chinese satellite and over the horizon radar systems targeting U.S. carriers) or prevent potential adversaries from creating weapons of mass destruction, (i.e. Stuxnet targeted at the Iranian nuclear weapons program),
2) Computer Network Defense (CND) – stop potential adversaries from doing the same to you.
3) Computer Network Espionage (CNE) – steal everything you can get your hands (China and RSA’s SecureID breach, hacks of Google and AWS.)
While the U.S. complains about the Chinese military hackers from the PLA’s GSD 3rd Department (the equivalent of our National Security Agency,) and their 2nd Bureau, Unit 61398 tasked euphemistically for “Computer Network Operations,” we’ve done the same.
Unfortunately, potential adversaries have much softer targets in the U.S. While the military is hardening its command and control systems, civilian computer systems are relatively unprotected. Financial institutions have successfully lobbied against the U.S. government forcing them to take responsibility in protecting your data/money. Given our economy is just bits, the outcome of a successful attack will not be pretty.
Summary
Filed under: Air Force, Customer Development, Lean LaunchPad, Teaching | 8 Comments »
“I refuse to join any club that would have me as a member.”
Groucho Marx
In my 21 years as an entrepreneur, I would come up for air once a month to religiously read the Harvard Business Review. It was not only my secret weapon in thinking about new startup strategies, it also gave me a view of the management issues my customers were dealing with. Through HBR I discovered the work of Peter Drucker and first read about management by objective. I learned about Michael Porters’s five forces. But the eye opener for me was reading Clayton Christensen HBR article on disruption in the mid 1990’s and then reading the Innovators Dilemma. Each of these authors (along with others too numerous to mention) profoundly changed my view of management and strategy. All of this in one magazine, with no hype, just a continual stream of great ideas.
For decades this revered business magazine described management techniques that were developed in and were for large corporations – offering more efficient and creative ways to execute existing business models. As much as I loved the magazine, there was little in it for startups (or new divisions in established companies) searching for a business model. (The articles about innovation and entrepreneurship, while insightful felt like they were variants of the existing processes and techniques developed for running existing businesses.) There was nothing suggesting that startups and new ventures needed their own tools and techniques, different from those written about in HBR or taught in business schools.
To fill this gap I wrote The Four Steps to the Epiphany, a book about the Customer Development process and how it changes the way startups are built. The Four Steps drew the distinction that “startups are not smaller versions of large companies.” It defined a startup as a “temporary organization designed to search for a repeatable and scalable business model.” Today its concepts of “minimum viable product,” “iterate and pivot”, “get out of the building,” and “no business plan survives first contact with customers,” have become part of the entrepreneurial lexicon. My new book, The Startup Owners Manual, outlined the steps of building a startup or new division inside a company in far greater detail.
In the last decade it’s become clear that companies are facing continuous disruption from globalization, technology shifts, rapidly changing consumer tastes, etc. Business-as-usual management techniques focused on efficiency and execution are no longer a credible response. The techniques invented in what has become the Lean Startup movement are now more than ever applicable to reinventing the modern corporation. Large companies like GE, Intuit, Merck, Panasonic, and Qualcomm are leading the charge to adopt the lean approach to drive corporate innovation. And the National Science Foundation and ARPA-E adopted it to accelerate commercialization of new science.
Today, we’ve come full circle as Lean goes mainstream. 250,0000 copies of the May issue of Harvard Business Review go in the mail to corporate and startup executives and investors worldwide. In this month’s issue, I was honored to write the cover story article, “Why the Lean Startup Changes Everything.” The article describes Lean as the search for a repeatable and scalable business model – and business model design, customer development and agile engineering – as the way you implement it.
I’m proud to be called the “father” of the Lean Startup Movement. But I hope at least two—if not fifty—other catalysts of the movement are every bit as proud today. Eric Ries, who took my first Customer Development class at Berkeley, had the insight that Customer Development should be paired with Agile Development. He called the combination “The Lean Startup” and wrote a great book with that name.
Alexander Osterwalder‘s inspired approach to defining the business model in his book Business Model Generation provide a framework for the Customer Development and the search for facts behind the hypotheses that make up a new venture. Osterwalder’s business model canvas is the starting point for Customer Development, and the “scorecard” that monitors startups’ progress as they turn their hypotheses about what customers want into actionable facts—all before a startup or new division has spent all or most of its capital.
The Harvard Business Review is providing free access to the cover story article, “Why the Lean Startup Changes Everything. Go read it.
Then go do it.
Filed under: Big Companies versus Startups: Durant versus Sloan, Business Model versus Business Plan, Customer Development, Customer Development Manifesto, Lean LaunchPad, Teaching, Venture Capital | 20 Comments »
I just spent a few weeks in Japan and China on a book tour for the Japanese and Chinese versions of the Startup Owners Manual. In these series of 5 posts, I thought I’d share what I learned in China. All the usual caveats apply. I was only in China for a week so this a cursory view. Thanks to Kai-Fu Lee of Innovation Works, David Lin of Microsoft Accelerator, Kevin Dewalt and Frank Hawke of the Stanford Center in Beijing, and my publisher China Machine Press.
The previous post, part 4, was about Beijing’s entrepreneurial ecosystem these are my final observations.
Land Rush
For the last 10 years China essentially closed its search, media and social network software market to foreign companies with the result that Google, Facebook, Twitter, YouTube, Dropbox, and 30,000 other websites were not accessible from China. This left an open playing field for Chinese software startups as they “copy to China” existing U.S. business models. Of course “copy” is too strong a word. Adapt, adopt and extend is probably a better description. But for the last decade “innovation” in Chinese software meant something different than it did in Silicon Valley.
The Chinese Social Media Landscape diagram below from Resonance does a great job of illustrating the players in the Chinese market. (Note that the inner ring shows their global equivalents.)
The downside is that with so much venture and angel capital available, investors have been willing to fund the 10th Groupon clone. For the last few years, there really hasn’t been a demand to innovate on top of the ecosystem that’s been built.
New Rules for China
Not only is the Chinese ecosystem completely different but also the consumer demographics and user expectations are equally unique. 70% of Chinese Internet users are under 30. Instead of email, they’ve grown up with QQ instant messages. They’re used to using the web and increasingly the mobile web for everything, commerce, communication, games, etc. (They also probably haven’t seen a phone that isn’t mobile.) By the end of 2012, there were 85 million iOS and 160 million Android devices in China. And they were increasing at an aggregate 33 million IOS and Android activations per month.
It was interesting to learn about China’s digital divide – the gap between East China and Midwest China, and between urban and rural areas. Internet penetration in Beijing is greater than 70% while it’s less than 25% in Yunnan, Jiangxi, Guizhou and other provinces. While there are 564 million web users with 420 million having mobile web access, 74% of Chinese Internet users make less than $500/month and are students, blue-collar workers or jobless.
Unlike U.S. websites that are sparse and slick, Chinese users currently expect complicated, crowded and busy web pages. However, there’s a growing belief that the “design preferences” of Chinese consumers are just bad design. TenCents WeChat, (designed for an international market) is the first incredibly popular app in China to dramatically raise the bar for what a good user interface and user experience looks and feels like. WeChat may change the game for Chinese U/I and U/X experience. The one caveat about online commerce is that while Chinese users will buy physical goods online (Taobao is huge), they seem to hate to pay for music or software, and the model for games seems to be moving to free play with in-app-purchases for accessories and powers. An interesting consequence of the rigid censoring and control of mainstream media is that blogging – reading and writing – is much higher than U.S.
My guess is the current wave of “copy to China” will burn itself out in the next few years as the smart money starts to move to “innovate in China” (i.e. like WeChat.)
Competition
If you’re a software startup competing in China, the words that come to mind are “ruthless and relentless.” The not so polite ones I’ve heard from others are “vicious, unethical and illegal.” Intellectual property protection is great on paper and “limited” in practice. The large players like Alibaba, Baidu and Tencent historically would be more likely to simply copy a startup’s features than to hire their talent. The large companies strategy seems to be to cover every possible market niche by copying successful models from others.
The slide below from the Zhen Fund shows the breadth of business coverage of each of the Chinese Internet incumbents. Each column represents a company (QQ, Sina, Baidu, Netease, Sohu etc.) and the rows indicates their offerings in open platform, group buying, online games, microblogging, Instant Messaging, BBS, Q&A and E-commerce.
Small startups act the same way, simply cloning each other’s products. Sharing and cooperation is not yet part of the ethos. I can’t imagine a U.S. company setting up some subsidiary here and expecting them to compete while they were following U.S. rules. In some ways, the best description of the market dynamics would be “imagine you were competing with 100 companies who are as rapacious as Microsoft was in the 1980’s and 1990’s.” Eventually, China’s innovation-driven economy needs intellectual property rights and anti-trust laws that are enforced.
Sea Turtles and VPN – the connections to the rest of the world
Entrepreneurs in Beijing were knowledgeable about Silicon Valley, entrepreneurship and the state of software and tools available for two reasons. First, there are continuous stream of “sea turtles”—Chinese who have studied or worked abroad—returning home. (The Chinese government must be laughing hysterically over U.S. immigration policy that’s forcing Chinese grad students out of the U.S.) Many of these returnees have worked in Silicon Valley and startups or went to school at MIT and Stanford. (There is a huge difference between the Chinese who have never left and those who went to school abroad, even for a few months – at least a difference in their ability to relate to me and have a conversation on the same wavelength. It’s clear why families try so hard to send their children abroad. It changes everything for them.)
Second, most websites that a non-Chinese would use are blocked including Facebook, Twitter, Youtube, Google Docs, Scribd, Blogspot, Dropbox, New York Times, etc. Almost every entrepreneur I met was using VPN to circumvent the Great Firewall. When the Chinese government censors (run by their propaganda department) shutdown access to yet another U.S. web site, they create another 100,000 VPN users. And when the government tools to detect encrypted VPN’s get more sophisticated, (as it did last year), Chinese users just use stealthier tools. It’s an amazing cat and mouse system.
(Note to Chinese Communist party – the best name for your propaganda department should probably not be the “Propaganda Department.”)
Beijing’s Academic Hub
Right next door to Zhongguancun are China’s top two universities, Peking University and Tsinghua University. Northwest of Beijing is also home to other universities, including technical universities like USTB, BIT, BUPT, and Beihang. Like Silicon Valley, Zhongguancun also has a critical mass of people who are crazy enough to do startups. Equally of interest is a good number of them end up in the PLA’s GSD 3rd Department (the equivalent of our National Security Agency. ) And some of their best and brightest have ended up in the organizations like the 2nd Bureau, Unit 61398 tasked euphemistically for “Computer Network Operations.”
While I didn’t get much time with the academic community, in talking to students, education seems to still be one of China’s bottlenecks – rote lectures, passive learning, follow the process, exam-based performance, etc. And while startups and entrepreneurship courses are now being added to the curriculum, “How to write a business plan” seems to be the state of the art. China’s education system needs to give more attention to fostering students’ innovative thinking, creativity and entrepreneurship.
Entrepreneurial Culture
Fear of Failure
Though they’re familiar with technology in the valley, I picked up some important cultural difference from students and startup engineers I talked to. Even though they’re next to Zhongguancun, the hottest place for startups in China, there seems to be a lower appetite for risk, a lack of interest in equity (instead optimizing for a high salary) and very little loyalty to any one company. The overall culture still has a fear of failure. Most of their parents still tell them to work for the government or a big company.
Talent
I heard from a few investors that as the startup ecosystem is relatively new, there’s a battle for experienced engineering talent and lack of experienced C-level execs. The lack of a previous generation of successful startup CEOs means the current pool of mentors to coach this generation is almost non-existent.
Because salaries are cheap, startups seem to try to solve every problem by throwing bodies at it. Startup teams feel like they are 2-5x the size of American teams. There seems to be little appreciation or interest in multi-skilled people.
Turnover of employees in capital in Beijing is very high. Employees work here for a few months and are suddenly gone. There’s a noticeable lack of tenacity in young, new entrepreneurs. They start a project, and if it isn’t a home run, they’re gone. Perhaps it’s the weather. Silicon Valley has great weather and lifestyle, and nobody wants to leave. Beijing has awful weather and pollution, it’s a temporary place to get rich and then leave.
Management 101
The board/CEO relationship still isn’t clearly understood by either party. I’ve talked to entrepreneurs who view the investors as a “boss.” A good number of startups in Beijing seem driven by the VCs – and not the founders. This might also be a hangover from the command and control system of a state-driven planned economy. Ironically investors told me that the reverse has been true as well. Some startups acted like the VC was a bank. They took the money and then ignored their board. Over time, as investors add more value than writing checks, this relationship will mature.
Creativity
I was surprised that startup teams ask what seems like the kind of questions Americans learn at their first jobs.
Team: ”We keep spending money trying to get people to our web site but they don’t come back. We are almost out of money.”
Me: ”Ok. Why are you still spending money?”
Team: “long…silence…we need people to come to the website.”
On the other hand, for most of them it probably is their first job. And the educational system hasn’t prepared them for executing anything other than a plan. Iterations and pivots are a tough concept if you’ve never been taught to think for yourself. And challenging the system is not something that’s actually encouraged in China.
They also ask questions I just don’t know how to answer. “How do you know how to be creative? What do we have to do to be creative?” ”You Americans just seem to know how to do things even if you’ve never done them – can you show us how to do that?” This seems to be an artifact of the Chinese rote educational system and its current system of government.
Innovation Ecosystem
On the plane ride home I started to think about the similarities and differences between the innovation ecosystems of Silicon Valley and the TMT segment I saw in Beijing. The motivations are the same – profit – driven by entrepreneurs and venture finance. And the infrastructure is close to the same – research universities, predictable economic system, a path to liquidity, a stable legal system and 24/7 utilities. But the differences are worth noting – it’s a young ecosystem, so startup management tools are nearly non-existent. But there’s a difference in the culture of failure and risk taking – the current cultural pressure is to “work for a big company or the government.” Outward facing Universities are just starting to appear, and while there’s a free flow of information inside China, it suffers from the constraints of the Great Firewall.
But there are two striking differences. The first is the lack of creativity. The Beijing software ecosystem I saw has spent the last decade in a protected market copying successful U.S. business models. ”Copying, adopting and adapting,” is not the same as ”competing, innovating and creating” in a global market. Perhaps products like WeChat, designed for an international market, might be the beginning of real innovation.
The second difference in ecosystems – the lack of freedom to dissent – goes deeper to the difference between the two systems. In the U.S. entrepreneurs are encouraged to “Think Different.” Our touchstone for creativity is the Apple ad that said, “Here’s to the crazy ones, the misfits, the rebels, the troublemakers,… the ones who see things differently — they’re not fond of rules… You can quote them, disagree with them, glorify or vilify them, but the only thing you can’t do is ignore them because they change things….” This spirit of rebellion against the status quo got us Steve Jobs. In China the same attitude is likely to get you jail time. Unless you can speak truth to power, you’ll never have an innovation economy.
Conclusion
China is astonishing. The country has risen. Their economy is the envy of the world. The entrepreneurial and “can do” spirit reminds me of what the U.S. was known for. Chinese citizens are proud of their country and believe the world is theirs in the way Americans did in the 1950’s. Their leadership has shown incredible foresight in engineering an amazing economic engine and formidable military. They come so far, and yet…
To take nothing away from what China has accomplished, a visit to Beijing had all the subtle reminders that this version of capitalism has come without democracy or justice; the guards in the Forbidden City armed with fire extinguishers in case more protestors try to set themselves on fire, the security around Tiananmen Square to prevent protestors from gathering, and the “black jails” to keep rural petitioners out of Beijing. And of course the “great firewall,” attempting to keep information about the outside world from reaching inside China.
The bet the government is making is that if they can keep the economy cooking and distract the masses with ever increasing consumer goods and foreign adventures, maybe it can survive.
All of these are signs of a weak China not a strong one. They are the signs of a leadership frightened not by external enemies but by their own people.
It usually doesn’t end well.
——
all five China blog posts available as a download here
Filed under: China, Customer Development, Technology, Venture Capital | 25 Comments »
I just spent a few weeks in Japan and China on a book tour for the Japanese and Chinese versions of the Startup Owners Manual. In these series of 5 posts, I thought I’d share what I learned in China. All the usual caveats apply. I was only in China for a week so this a cursory view. Thanks to Kai-Fu Lee of Innovation Works, David Lin of Microsoft Accelerator, Frank Hawke of the Stanford Center in Beijing, and my publisher China Machine Press.
The previous post described the evolution of the Chinese Venture Capital system. The next two posts are about what I saw and learned in my short stay exploring Beijing’s entrepreneurial ecosystem.
Entrepreneurship in Beijing
In the few days I was in China I met with several VC’s, angel investors, business press and spoke to hundreds of entrepreneurs. I was blown away by what I saw in Beijing. First, I was amazed by the physical impact of the city itself. This was a modern city in a hurry to make a first impression – think of what Rome looked like in the time of the empire or New York in the 1920’s – now it’s Beijing announcing that China has arrived.
However if you scratch the surface, you can still find a bit of the old Beijing in the hutongs. Drive 50 miles outside the city into the surrounding villages and you see the distance China has to travel to bring the rural areas into the 21st century. In Beijing we hadn’t seen air so badly polluted since we had been in Agra in India in the winter where I swear there was a day you could wave your hand in front of you and see traces of it in the air (and their excuse was they burn dung for heat.)
David Lin and the Microsoft China Accelerator was gracious enough to host two wonderful days of events for me. I trained the Startup Weekend Next Beijing mentors and instructors, presented to several hundred entrepreneurs, and had a great fireside chat with Zhen Fund founding partner Xu Xiaoping in front of another roomful of entrepreneurs.
Kai-fu Lee of Innovation Works was equally generous with his time. We had a fireside chat with a room full of eager entrepreneurs. And he was generous in sharing his insights about the current state of entrepreneurship and investment in China. And through it all Louis Yuan my patient and wonderful publisher from China Machine Press kept me moving through the events.
But what made the overwhelming impression for me was finding an entrepreneurial software cluster on par with the Internet software portion of Silicon Valley. The physical heart of the Beijing startups is in Zhongguancun in the Haidian District, located in the northwest side of Beijing. Startups here are primarily in what they call the TMT (Technology, Media and Telecommunications) segment. Not only does Zhongguancun have Chinese startups, but global technology companies (Nokia, Ericsson, Motorola, Sony Ericsson, Microsoft, IBM, Sun, Oracle, BEA, Alcatel Lucent, Google) all have offices here or elsewhere in Beijing.
If there ever was any question about the value of China’s Torch Program walk around Zhongguancun. It was the first of the 54 Science and Technology Industrial Parks.
China Venture Capital
An entrepreneurial ecosystem is driven one of two ways; either by a crisis (i.e. innovation in the U.S. during World War II,) or during peacetime by profit.
If it’s driven by profit then the ecosystem needs both entrepreneurs as well as Venture Finance.
China now has plenty of both.
China has the biggest Venture Capital industry outside the U.S. To compare the two, in 2011 U.S. venture capitalists invested $26.5 billion in all deals. Out of that total, they funded 967 Internet deals with $6.7 billion.
By comparison, in 2011 Chinese VC’s invested $13 billion in all deals. Out of that total, they funded 268 Internet deals with $3.2 billion. About 1/3 of all China’s Venture Capital investment is made in Beijing and the majority of those investments are in the Technology, Media and Telecommunications (TMT) sector I’ll describe shortly.
As vibrant as the China venture business has been, 2012 was a different story. VC’s pulled back and only invested $3.7 billion in all deals, funding just only 43 deals with $563 million.
Closed for You, Open For Us
First a bit of context in what the VC’s in Beijing are investing in. China has essentially closed its internal search, media and social network software market to foreign companies who wouldn’t play with the government rules on the Great Firewall. (China blocks “objectionable” website content and monitors everyone’s Internet access.)
Google retreated to Hong Kong and Baidu took its place. Facebook was too frightening to Chinese censors, so Renren is the leading social media player. Email? Working professionals/white collar use emails, but most users grew up instant messaging on TenCent’s QQ and most are moving to Weixin/WeChat. Twitter? No, it’s Sina Weibo, and if you want games with your chat – TenCent. Amazon and Ebay? Nope in China it’s Alibaba’s Taobao or 360buy.com. If you’re outside of China, you never hear about these companies or interact with them because they’re geared to serve only Chinese users.
This closed but very large market means that greater than 90% of Chinese software startups focus exclusively on the Chinese market. (The <10% that decide to go global early do so by starting outside of China. Another 10% may try to go global when they’re larger and have the resources for two languages, cultures and regulations. )
This has resulted in a completely different consumer software ecosystem than found elsewhere in the world. Given the closed market to U.S. Internet companies, VC’s in China have guided startups to execute the “copy to China” model. Thinking, if it worked in the U.S., copying a known model is less risky than trying something new and untested. The problem is that this space is getting really crowded – from the bottom up as everyone tries the 200th clone – and from the top down, as the major incumbents try to fill every possible market niche.
The table below maps the type of software in China to their global equivalents in each product category in the Technology, Media and Telecommunications (TMT) sector.
A Huge Market Is Finally Real
For a hundred years the fantasy of global marketers was, “ if only everyone in China would buy one…” That day is final here. The numbers of mobile subscribers are staggering – 1.18 billon, 260 million are 3G. Chinese Internet companies live in a large closed, self-contained ecosystem with 564 million web users with 420 million having mobile web access. 309 million use microblogs and 242 million shop online. (BTW, market research, financial and other statistical information are usually unreliable in China, but even taken with a grain of salt these are staggering numbers.)
The table below from web2asia.com shows the number of users of online social networks as of 2009. Did I mention this is a huge market.
Investment in the Technology, Media and Telecommunications (TMT) sector
The charts below from David Lin, Microsoft Accelerator detail investments in the Technology, Media and Telecommunications (TMT) sector – almost all of it is centered in Beijing. (Note that these numbers differ from the Zhen Fund data -welcome to statistics in China – but they both provide an overall sense of the market size and direction.)
45% of all Venture Capital Investment in China went into the Technology, Media and Telecommunications (TMT) sector.
The number of deals in Technology, Media and Telecommunications more than doubled in 2011 over the previous five years and slowed back down dramatically in 2012. More than 1,600 VC investments in TMT have been made since 2007, with a record high of 436 in 2011.
Internet investments makes up more than 50% of all the deals in Technology, Media and Telecommunications made since 2011, while, E-commerce investments, in turn, accounts for nearly 50% of the investment deals in Internet. Investments in Mobile Internet makes up roughly 11% of all the deals in Technology, Media and Telecommunications, and have been on the rise since 2011.
Series-A round investments dominates Technology, Media and Telecommunications (TMT) deals, making up 60% of all.
Beijing, Guangdong (including Shenzhen) and Shanghai came out as the most dynamic spots for Technology, Media and Telecommunications (TMT) investments.
Beijing Venture/Angel Ecosystem
While Beijing has VC’s and Angel investors happy to write a check there aren’t as many angels/VCs in China versus US per capita. Several VC’s mentioned that there’s a funding gap for seed stage investments. The Angel/Seed network in Beijing feels fragmented and mostly inexperienced (as are a good number of the China VC’s). Kind of reminded me of the drivers in Beijing – they were all driving in a way that made me think they all just got their drivers license – until I remembered that they did. Car sales in China went from 1 million in 2001 to 14 million in 2011.
Other Beijing ecosystem issues I heard about were the things we take for granted: the lack of knowledge sharing (“pay it forward” isn’t part of the culture,) limited mentoring (few experienced mentors,) and a lack of open source education, and no AngelList model. In the U.S. it’s easy to share and browse ideas and deals, but in China there’s a long legacy of guarding knowledge as power, and the justifiable paranoia of someone copying your idea prevents sharing.
Liquidity
Unlike the U.S. there are almost no mergers or acquisitions in this market segment. It’s much easier to just steal their ideas and hire their employees. So big companies rarely acquire startups. Liquidity for most Internet startups happens via IPO’s. 70% of exits in China are via IPO (in the U.S. on NASDAQ or the NYSE or on ChiNext, China’s equivalent of NASDAQ) compared to the 90% of exits in US via mergers or acquisitions. Alibaba (commerce), Tencent (games/chat) and Baidu (search) all have market caps over $40 billion.
The next post, the Gold Rush and Fire Extinguishers – Beijing entrepreneurs, startup culture and some conclusions.
Lessons Learned
Filed under: China, Customer Development, Technology, Venture Capital | 12 Comments »
I just spent a few weeks in Japan and China on a book tour for the Japanese and Chinese versions of the Startup Owners Manual. In these series of 5 posts, I thought I’d share what I learned in China. All the usual caveats apply. I was only in China for a week so this a cursory view. Thanks to Kai-Fu Lee of Innovation Works, David Lin of Microsoft Accelerator, Frank Hawke of the Stanford Center in Beijing, and my publisher China Machine Press.
The first post described how China built a science and technology infrastructure to support advanced weapons systems development. The previous post described how the Torch program built China’s innovation clusters. This post is about the rise of Chinese venture capital and how it helped build the countries entrepreneurial ecosystem.
The Rise of Chinese Venture Capital
China’s move away from a state system that solely depended on a command and control economy started in the 1990s. The first wave of startups began when R&D centers and universities began to provide the technology and seed capital for new startups that were spin-outs or spin-offs. This could be a group of individuals leaving a university or research center or an entire department leaving. For example, in the 1990’s 85% of the start-up funds of the new technology companies founded in Beijing came from the research center or university they left.
The second wave of technology investors were Chinese banks, who provided the majority of the later stage investments in the Torch Program. By 1991, 70% of the Torch funded startups were getting bank financing for expansion and later stages of the new ventures, with local governments acting as guarantors. Like the U.S. SBIR and STTR programs, the Torch Program’s funding for new ventures was limited to seed funding the front end. Being designated as a Torch Program startup gave banks comfort to provide loans to these ventures for technology commercialization.
Technology zones with Science and Technology Industrial Parks were the third source of support for new ventures. Inside the zones were Torch Technology Business Incubators with startups licensed by the local governments. These local governments financially supported the startups because, by locating in these zones, the new ventures were seen as contributing to local economic development. This helped the startups qualify for funding from banks and venture capital firms.
By the mid-1990s, Chinese leaders realized that the Torch program couldn’t be the source of all capital for startups. At the same time neither banks nor local governments had the cash to finance startups on the scale the country needed. The problem was that in China the government didn’t recognize venture capital firms as a legitimate organizational type. The founding of domestic VC firms began with the establishment of local government-financed venture capital firms (GVCFs), followed by university-backed VC firms (UVCFs). (The State Science and Technology Commission and the Ministry of Finance formed the China New Technology Venture Investment Corporation in 1986, but it was a government agency supporting national technology venture policy objectives, rather than a profit-oriented private enterprise. It went bankrupt in 1997.)
A few foreign VC firms like IDG Capital Partners entered China in the early 1990s. Gradually, from the mid-1990s, the perception of venture capital shifted from its being a type of government funding to being a commercial activity necessary to support the commercialization of new technology. But it wasn’t until 1998 that corporate-backed VC firms could be established, and that started a wave of VC funds backed by government, corporate and foreign capital.
A great summary diagram below from OECD’s Report on China’s Innovation Policy traces the evolution of China’s Innovation Ecosystem.
Investing in China Today
Fast forward a decade, today the Private Equity and Venture Capital business is booming in China with over 1000 firms actively investing. Most of the early deals were done by offshore venture funds – with their fund registered in countries outside China and using dollars. The latest trends are as Renminbi (“RMB”) funds (the Renminbi is the official currency in China.) In the past foreign funds who wanted to invest in China had to set up funds using dollars with complicated offshore structures with exits through offshore listings. The Renminbi funds have fewer restrictions on what industries the fund can invest in, less regulatory oversight and access to listing a portfolio company in China. There are two types of Renminbi funds: domestic funds and foreign-invested funds. Domestic Renminbi funds are fully owned by Chinese investors, while foreign-invested Renminbi funds may be partially or fully owned by non-Chinese investors. Both types of funds are organized under Chinese law and use Renminbi to invest in Chinese companies.
The other big change was the creation of ChiNext, China’s equivalent of NASDAQ stock exchange for start-ups, in 2009. The market was created to provide startups and their investors liquidity. Over 100 startups were listed on ChiNext the first year of its launch at sky-high valuations (average of 66 times earnings.) About 60% of the startups listed on ChiNext were backed by Renminbi funds, making the investors of these funds one of the main beneficiaries of the exchange.
The next posts Part 4 Zhongguancun in Beijing – China’s Silicon Valley and part 5, the Gold Rush and Fire Extinguishers describe the Beijing entrepreneurship ecosystem.
Lessons Learned
Filed under: China, Customer Development, Technology, Venture Capital | 9 Comments »
I just spent a few weeks in Japan and China on a book tour for the Japanese and Chinese versions of the Startup Owners Manual. In these series of 5 posts, I thought I’d share what I learned in China. All the usual caveats apply. I was only in China for a week so this a cursory view.Thanks to Kai-Fu Lee of Innovation Works, David Lin of Microsoft Accelerator, Frank Hawke of the Stanford Center in Beijing, and my publisher China Machine Press.
The previous post described how China built its science and technology infrastructure. This post is about the how the Chinese government engineered technology clusters.
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The Torch Program
In size, scale and commercial results China’s Torch Program from MOST (the Ministry of Science and Technology) is the most successful entrepreneurial program in the world. Of all the Chinese government programs, the Torch Program is the one program that kick-started Chinese high-tech innovation and startups.
In the last decade Torch managed to break free of China’s state central planning bureaucracies. Of all the Chinese innovation programs, Torch is the one that was run like a startup – iterating and pivoting as it learned and discovered. This enabled Torch to evolve with China’s rapidly global economy.
Torch has four major parts: Innovation Clusters, Technology Business Incubators (TBIs), Seed Funding (Innofund) and Venture Guiding Fund.
Innovation Clusters
Industries have a competitive advantage when related companies cluster in a geographical location. Examples are Hollywood for movies, Milan for fashion, New York for finance and today, Silicon Valley for technology entrepreneurship. The early clusters occurred by happenstance of geography or history. But the theory is that you can artificially create a cluster by concentrating resources, finance and competences to a critical threshold, giving the cluster a decisive sustainable competitive advantage over other places. Israel, Singapore and now China are the three countries that have successfully put that theory into practice.
The Torch program created Innovation Clusters by creating national Science and Technology Industrial Parks (STIPs), Software Parks, and Productivity Promotion Centers.
The first Science and Technology Industrial Park was Zhongguancun Science Park in Beijing. It has become China’s Silicon Valley. (This was the area I visited in this trip to China.) In addition to the one in Beijing, China has set up 53 additional industrial parks and in them are ~60,000 companies with 8 million employees. Industry or technology specific versions of these clusters have been set up; for example Donghu in Wuhan – specializing in optoelectronics, Zhangjiang in Shanghai – focusing on integrated circuits and pharmaceuticals, Tianjin – biotech and new energy, Shenzhen – telecommunications and Zhongshan – medical devices and electronics.
The Science and Technology Industrial Parks contributed 7% of China’s GDP and close to 50% of all of China’s R&D spending.
In addition to the 54 Science and Technology Industrial Parks, the Torch program also set up an additional 32 Torch Program Software Parks.
Another key part of China’s cluster strategy was collaboration between research and business, as well as between large enterprises and tech-based small and medium enterprises. It did so by building a national network of a 1,000+ Productivity Promotion Centers. They provide consulting, promotion, product testing, hiring, training and incubation services to startups.
Technology Business Incubators (TBIs)
While the Innovation Clusters designated specific areas of the countries where high tech was to occur, it’s the Technology Business incubators located inside these clusters where the startup companies physically reside. Much like incubators worldwide, they provide startups with office space, free rent, access to university technology transfer, etc.
By 2011, there were a total of 1034 Technology Business Incubators across China, including 336 as National incubators, hosting nearly 60,000 companies. (20% of the National Incubators were privately-run and their percentage is steadily increasing.) In recent years Business Incubators have developed into diverse models. For example, the Ministry of Education and the Ministry of Science and Technology teamed up to put 45 incubators in universities. There are close to 100 specialized incubators for companies founded by returned overseas Chinese scientists and engineers. There are a dozen sector-specific incubators (a Biomedicine Incubator in Shanghai, Advanced Material Incubator in Beijing, a Marine Technology Incubator in Tianjin, etc.) These incubators are mostly clustered in the eastern coastal regions, and disproportionately target TMT (Technology Media and Telecom) and Biotech.
Some of the startups coming out of these incubators have become large international companies including Lenovo, Huawai, Suntech Power, etc.
Seed Funding (Innofund).
The best analog for China’s InnoFund is the U.S. government’s SBIR and STTR programs. Set up in 1999, Innofund offers grants ($150 – $250K), loan interest subsidies and equity investment. Innofund is designed to bridge early stage technology companies that have innovative technology and good market potential but are too early for commercial funding (banks or VCs.) Innofund applicants have to be in high-tech R&D, have less than 500 people, at least 30% of the employees have to be technical and the majority of the company owned by Chinese. The ultimate goal of Innofund is to get the startups far enough along in technology and market validation so other sources of financial capital (banks, VC’s, corporate partners) will invest.
Since its establishment, there’s been over 35,000 applications with 9,000 projects approved and close to a $1 billion allocated.
Most Venture Capitalists in China viewed the Innofund the same way most U.S. VC’s treat the SBIR and STTR programs – they never heard of it, or they think it takes too much time to apply for too little money. And with the same complaints; tedious, relationship driven application process, bureaucratic reporting requirements, and outcomes often measured in quantity and not quality. However, for startups who have gotten an Innofund grant, it does provide the same positive cachet as an SBIR and STTR grant – the government has reviewed your technology and thought it was worthy.
Venture Guiding Fund
In 2007 the Ministries of Science and Finance raised the stakes to get VC’s focused on funneling more VC money into growing startups – they set up a Venture Guiding Fund. The Venture Guiding Fund invests directly into VC funds, co-invests with VC’s, and covers some VC bets. It does this with four programs: 1) A fund of funds, holding < 25% equity in VC firms, requiring only a fixed rate return; 2) the fund will co-invest with other VC firms matching up to 50% of other VC firm’s equity investment or a maximum of $500K; 3) Risk subsidies for VC firms, where the fund will be compensated for the cost and loss of VC firms which have made investments in technology-based startups; and 4) Grants for portfolio reserves, where the fund will provide grants for technology-based startups which are being incubated and coached by VC firms.
Part 3, the next post describes the rise of Chinese venture capital.
Lessons Learned
Filed under: China, Customer Development, Technology, Venture Capital | 8 Comments »
I just spent a few weeks in Japan and China on a book tour for the Japanese 
and 
Chinese versions of the Startup Owners Manual. In these series of 5 posts, I thought I’d share what I learned in China. My post about Japan will follow. All the usual caveats apply. I was only in China for a week so this a cursory view. Thanks to Kai-Fu Lee of Innovation Works, David Lin of Microsoft Accelerator, Frank Hawke of the Stanford Center in Beijing, and my publisher China Machine Press.
Summary: I’ve lived in Silicon Valley for 35 years, I’ve taught in entrepreneurial clusters in New York, Boston, Helsinki, Santiago Chile, St. Petersburg, Moscow, Prague, and Tokyo, but the visit to the heart of the Beijing startup world Zhongguancun has truly blown me away.
Each of these clusters has wondered how to become the next Silicon Valley. Beijing is already there.
———-
What a long strange trip China has been through. After the creation of the Peoples Republic of China in 1949, all industry was nationalized, agriculture was collectivized, and the private sector was eliminated. All companies were owned by the state, all planning was centralized, and the state determined the allocation of resources. This was the China I grew up with – the one where private enterprise was a crime and marketing wasn’t a profession.
To say China has transformed itself is perhaps the biggest understatement one can make. China has embraced state capitalism in a way Wall Street can only dream about.
Startups, Venture Capital and the Communist Party: how did this happen in China?
The best analogy to describe the relationship of science and technology and the Chinese startup scene is to understand its parallels with the United States during the Cold War with the Soviet Union. During World War II, the U.S. mobilized scientists in a way no other country had. For 45 years – post World War II until the fall of the Soviet Union – the U.S. viewed science and technology as a strategic asset. We made major investments in it, understanding that establishing basic and applied science leadership was necessary for us to build advanced weapons systems to defend our country and deter and if necessary, wage and win a war with the Soviet Union.
These investments took the form of building national research organizations, several for basic science (NSF, NIH) and others for applied weapons research (DOD, DARPA, DOE, etc.) Research universities also became an integral part of the military ecosystem as the federal government pumped billions into supporting science.
Startups, entrepreneurship and commercial applications are happy byproducts of those military investments. For example, as the semiconductor business started, the largest customers for Fairchild’s and Texas Instruments new integrated circuits were the Apollo Guidance Computer and the guidance system for the Minuteman II ICBM.
China is following the same path...
Over the last three decades, to achieve strategic parity with the United States and to construct a modern military, the Chinese have made massive investments in building their science and technology infrastructure. China has gone from a land-based army to one that can support its territorial claims to the South China Sea and Taiwan with anti-access/area-denial weapons. This evolution required a transition, moving from a reliance on the numerical superiority of its land army toward a force boasting sophisticated aircraft and naval platforms, precision- strike weapons, and modern C4SIR (Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance) capabilities. Its Second Artillery Corps not only controls China’s ICBMs, but also its short range missiles pointed at Taiwan, Vietnam, Philippines, and U.S. bases in Guam and Okinawa. And its new terminally guided ICBMs have put U.S. aircraft carriers in harms way in any regional confrontation. Its air force and navy have gone from a self-defense force to one that can project regional power effectively to the first island chain and beyond.
China’s military modernization depends heavily on investments in China’s science and technology infrastructure, reform of its defense industry, and overt and covert procurement of advanced technology and weapons from abroad.
Building China’s Science and Technology infrastructure
Science and startups have come a long way since the 1980’s when the Chinese government owned everything and controlled it through a central planning system. But before startups could happen, China’s basic science, technology and finance infrastructure and ecosystem needed to be built. Here’s how a national policy for science and technology emerged.
Beginning in the 1982, China started a series of science and technology programs in five areas: support of basic research, high technology R&D, technology innovation and commercialization, construction of scientific research infrastructure, and development of human resources in science and technology.
The majority of the science and technology programs are driven by MOST (Ministry of Science and Technology) and NSFC (National Natural Science Foundation). As we’ll see later, the MOF (Ministry of Finance) also has had a hand in funding new ventures.
The diagram below from OECD’s Report on China’s Innovation Policy puts the ministries involved in science in context. (Note that it does not show the military technology ministries.)
Part two the next post, describes China’s Torch Program, the largest government-run entrepreneurial program in the world.
Lessons Learned
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“Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma – which is living with the results of other people’s thinking. Don’t let the noise of other’s opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.“
Steve Jobs, Stanford University commencement speech, 2005
Last week one of our mentors abruptly resigned from coaching one of the Lean LaunchPad student teams after claiming the students were ignoring his practical advice and years of expertise in the field.
His reaction reminded me one more time why entrepreneurship is an art, why VC’s manage portfolios of companies and why new ideas come from those who don’t respect the status quo.
I’m a Domain Expert Damn It
We always assign experienced mentors to our student teams. In this class this seemed like a perfect fit – a driven (irrational?) founder paired with a mentor who had two operating companies in this space, who had developed and sold vertical market software to companies in this space, and had studied the field as an academic specialty. A match made in heaven? Not exactly.
The mentor tried his best to get the team to look at the actual operating data that exists for this kind of service and the likely regulatory hurdles they will find. He was very negative about the concept and strongly suggested the team do a pivot, but the founder was very determined to make a go of his concept.
He finally quit in frustration.
And here’s the conundrum – given a wise mentor (or VC) with years of experience telling you it’s a bad idea – what should you as the founder do?
Are You Crazy Enough?
What we suggest to teams in the classroom is the same as I suggest to teams in real world startups – after customers and experienced people are telling you it won’t work –
If so, ignore the other voices. The world moves forward on those who are dissidents. Because without dissent there is no creativity. A healthy disrespect for the status quo coupled with passion, persistence and agility trumps everything else.
Filed under: Customer Development, Teaching | 34 Comments »
In 2012, in partnership with Stanford University, U.C. Berkeley and NCIIA, Jerry Engel and I first offered the Lean LaunchPad Educators Class. The class was designed to teach educators (and the adjunct entrepreneurs that support them) the Lean LaunchPad approach (Business Model Design, Customer Development and Agile Engineering) for teaching entrepreneurship. In addition the class offers a suggested “Lean Entrepreneurship” curriculum and the details of how to teach the capstone Lean LaunchPad class.
Matthew Terrell attended our latest Lean LaunchPad Educators Class. Matthew is an Adjunct Professor of Entrepreneurship at the University of Delaware where he teaches Introduction to Entrepreneurship in course called Entrepreneurs Experience.
He’s the Founder of Vision Creations & Founders Films. Matt asked some of the toughest questions in the class.
—–
I came to the Lean LaunchPad Educators Program 2 ½ day workshop to learn from the best in the business of entrepreneurship education. My fellow attendees were an accomplished collection of international entrepreneurs, investors, educators and in most cases, comprised all three disciplines. I had posed many questions during the three-day workshop, but I was struggling to accept the answer Steve now provided.
During the last session of the program I raised my hand and asked Steve, “Based on what we were learning about the Customer Discovery process, would my students develop a better understanding of entrepreneurship by learning Customer Discovery methods, or by launching a business during the semester generating as much as $50K in sales.” Steve’s answer to my question made me physically and emotionally uncomfortable.
Steve replied, “You have to decide if you’re running an incubator whose goal is revenue or teaching students a methodology that will last them the rest of their lives. The students would be better served if they passed on the cash if it meant they developed a better grasp of the key skills needed to be successful entrepreneurs.” I awkwardly shifted the weight around in my chair, my body tensed up, and I could not believe my ears. Steve said I was welcome to disagree with him, but in the long term, the students would be better off in their careers learning Customer Discovery skills. (To be fair Steve did point out that he did have teams that did both in class. Krave Jerky started in his Berkeley class and showed up with a $500K check from Safeway in the middle of course.) Far be it from me to disagree with a legend, but I struggled to digest his advice.
Take the Money First?
I am a founder first and an adjunct professor second. I am opportunity-obsessed, and I believe the advice I received from Babson President, Len Schlesinger: “Action Trumps Everything.” I love entrepreneurship because it is a full contact sport, requiring complete commitment. New ventures favor the hard-working hustler over the naturally gifted individual. I love teaching entrepreneurship because it sparks a fire in students. As with many educators in this field, I evaluate my success based on the number of new ventures that emerge from our class. Starting a business is a hands-on endeavor, and I am thrilled when my students take action and execute.
Admittedly I have traditionally taught my course with an emphasis on the business plan as the students’ culminating final project. Last year in recognizing the power of the business model canvas, I changed the final project to an Entrepreneurs Action Plan that required two pages of text on each of the nine canvas blocks, and students were required to create an Advisory Board. I felt this was an effective approach but during the Lean LaunchPad workshop, I came to accept the death of the business plan. Steve explained (smiling) that the business plan was most appropriate in a University’s English department, specifically in its creative writing courses as they were all fiction. (What he really said, was that an operating plan comes after you have some facts.)
During the break between sessions at the Lean LaunchPad workshop, I could not resist the opportunity to delve further into this topic with Steve. I explained my position: theories and models are useful learning tools, but nothing beats actual business development experience. We agreed, then, the question remains: What is the goal and desired outcome of the class? My goal is to teach the key skills needed to become a successful founder. Steve said that if this was my goal, then indeed, the Customer Discovery approach is best.
What’s the Goal of Teaching Entrepreneurship?
This concept has consumed me since I returned from the workshop. In trying to accept Steve’s perspective, I surmise that perhaps the customer interview process is not a theoretical feedback survey or focus group, but in fact, it is as dirty as direct sales. I continue to grapple with the issue and will see it firsthand in my class this semester, as my students dive deeper searching during the interview process.
Steve’s second piece of advice I struggle with is the removal of guest speakers. As part of my course, I created Founders Forum, where I host entrepreneurs to come share their early work experiences, their stories building their businesses, their lessons learned, and their advice to aspiring entrepreneurs. I find the firsthand accounts to be extraordinary learning tools for both my students and for me. I discourage PowerPoints and recommend the speakers candidly share experiences from the front lines. Additionally, meeting with speakers grants students an opportunity to develop networking skills. Furthermore, I find the Founders Forum to be a helpful tool in creating a more vibrant local entrepreneurial ecosystem. Steve said, “guest speakers are a wonderful addition to the entrepreneurship curriculum, (and ought to be part of every program as in Stanford’s ecorner speaker series) but they are a distraction in this class. The purpose of the Lean LaunchPad class is full immersion in customer discovery – everything else is a distraction.”
Changes
Since returning from the workshop I rewrote my curriculum and started class last night. It may best be described as Lean LaunchPad Light. We are using much of the Lean methodology for our curriculum, but I also include key career development skills.
Alexander Osterwalder’s Business Model Generation and Steve’s Udacity Lean LaunchPad Lectures are required reading/viewing. Additionally I recommend but I do not require: Startup Owner’s Manual, Founders at Work and the Founders Films clips. I also recommend students keep a personal journal for mind-mapping and brainstorming business ideas. The first exercise we do in class is Dave McClure’s Half-Baked game (but students also have to use the Value Proposition & the Customer Segment.) This exercise demonstrates the need to be flexible in business.
Additional outside readings includes a number of excellent book summaries ranging from Tina Seelig’s InGenius, Tom Kelley’s 10 Faces of Innovation, Anthony Tjan’s Hearts, Smarts Guts and Luck and Dan Pink’s To Sell is Human.
Steve’s insight and inspiration during the Lean LaunchPad Educators Program was extraordinary. I am enormously grateful for the opportunity to learn from the legend and exchange ideas with the best in the field. I appreciate Steve’s continued advice as I do my best to carry the Lean LaunchPad flag in Delaware.
Filed under: Customer Development, Lean LaunchPad, Teaching | 13 Comments »
I ran into Ricardo Dos Santos and his amazing Qualcomm Venture Fest a few years ago and was astonished with its breath and depth. From that day on, when I got asked about which corporate innovation program had the best process for idea selection, I started my list with Qualcomm.
This is part 2 of Ricardo’s “post mortem” of the life and death of Qualcomm’s corporate entrepreneurship program. Part 1 outlining the program is here. Read it first.
———
What Qualcomm corporate innovation challenges remained?
Ironically, our very success in creating radically new product and business ideas ran headlong into cultural and structural issues as well as our entrenched R&D driven innovation model:
With hindsight we should have had “proof of concepts” tested in a corporate center (think ‘pop-up incubator’) where they would do extensive Customer Discovery. We should had done this before assigning the teams to a particular business unit (or had the ability to create a new business unit, or spin the team out of the company).
The last year of the program, we tried to solve this problem by requiring that the top 20 teams first seek a business unit sponsor before being admitted into the bootcamp (and we raised a $5 million fund from the BUs earmarked for initial implementation ($250K/team.) Ironically this drew criticism from some execs fearing we might have missed the more radical, out-of-the box ideas!
We were asking the company’s R&D leads, the de-facto innovation leaders, who had an existing R&D process that served the company extremely well, to adopt our odd-ball projects. Doing so meant they would have to take risks for IP acquisition and customer/market risks outside their experience or comfort zone. So when we asked them to embrace these new product ideas, we ran into a wall of (justified) skepticism. Therefore a major error in setting up our corporate innovation program was our lack of understanding how disruptive it would be to the current innovation model and to the executives who ran the R&D Labs.
What could have been done differently?
We had relative success flowing a good portion of ideas from the bootcamp into the business and R&D units for full adoption, partial implementation or strategic learning purposes, but it was a turbulent affair. With hindsight, there were four strategic errors and several tactical ones:
1) We should have recruited high level executive champions for the program (besides the CEO). They could have helped us anticipate and solve organizational challenges and agree on how we planned to manage the risks.
2) We should have had buy-in about the value of disruptive new business models, design and open innovation thinking.
3) We unknowingly set up an organizational conflict on day one. We were prematurely pushing some of the teams in the business units. The ‘elephant in the room’ was that the Venture Fest program didn’t fit smoothly with the BU’s readiness for dealing with unexpected ‘bottoms up’ innovation, in a quarterly- centric, execution environment.
4) Our largest customer should have been the R&D units, but the reality was that we never sold them that the company could benefit by exploring multiple innovation models to reduce the risks of disruption – we had taken this for granted and met resistance we were unprepared to handle.
Qualcomm Lessons Learned
Epilogue
The program became large enough that it came time to choose between expanding the program or making it more technology focused and closely tied to corporate R&D. In the end my time in the sun eventually ran out.
I had the greatest learning experience of my life running Qualcomm’s corporate entrepreneurship program and met amazingly brave and gracious employees with whom I’ve made a lifetime connection. I earnestly believe that large corporations should emulate Lean Startups (Business model design, Customer Development and Agile Engineering.) I am now eager to share and discuss the insights with other practitioners of innovation – I can be reached at ricardo_dossantos@alum.mit.edu
Lessons Learned
Filed under: Big Companies versus Startups: Durant versus Sloan, Business Model versus Business Plan, Customer Development, Lean LaunchPad, Teaching | 10 Comments »
I ran into Ricardo Dos Santos and his amazing Qualcomm Venture Fest a few years ago and was astonished with its breath and depth. From that day on, when I got asked about which corporate innovation program had the best process for idea selection, I started my list with Qualcomm.
This is Ricardo’s “post mortem” account of the life and death of a corporate entrepreneurship program. Part 1 outlining the program is here. Part 2 describing the challenges and “lessons learned” will follow.
———-
The origin
In 2006, as a new employee of the Fortune 100 provider of wireless technology and services, San Diego’s Qualcomm, I volunteered to salvage a fledging idea management system (fancy term for an online suggestion box) by turning into a comprehensive corporate entrepreneurship program.
Qualcomm’s visionary CEO, Paul Jacobs, wanted to use internal Qualcomm ideas to find breakthrough innovation that could be turned into products, (not simply a suggestion box for creative thoughts or improving sustaining innovation.) He gave my innovation team free reign on designing a new employee innovation program. His only request was that we keep two of the original program’s goals:
1. The program had to remain fully open to employees from all divisions.
2. The ideas were to be implemented by existing business or R&D units – i.e., no need to create new permanent infrastructures for innovation.
And he added a third goal that would ensure his greater involvement and support going forward.
3. The program had to have an efficient mechanism to bubble-up the best ideas (and their champions) to the timely attention of the top executive team.
The design challenge
We wanted to transform our simple online suggestion box into a program that encouraged employees to behave like intrapreneurs (and their managers and executives as enablers). Our challenge was to design a program that could:
All while keeping in mind that employees, managers and executives have day jobs – so how could we ask them to spend significant time on new ideas while not sacrificing their present obligations?
Thus began our search for a program that would properly balance the focus on the present with the need to increase our options for the future.
Qualcomm Innovation Process
Qualcomm’s Corporate Entrepreneurship Program – Venture Fest
In 2006 we searched outside of Qualcomm for other similar entrepreneurship programs where participants also had to balance other obligations. We realized this mechanism had been occurring for years at University’s startup competitions, such as the MIT 100K Accelerate Contest. In these competitions, multidisciplinary self-forming teams of students work part time to pitch new companies. The program we implemented inside of Qualcomm ended up being very similar. We dubbed the program Qualcomm’s Venture Fest and the process, “Collective Entrepreneurship”, a three-phase program combining crowdsourcing with entrepreneurial techniques for startup creation.
The first phase of the program leveraged the idea management system to collect a large number of competing entries then ultimately down-selected to the top 10-20 concepts with the most breakthrough potential, according to peer and expert reviews.
Qualcomm Venture Fest
The second phase, and heart of the program, was a three-month, part time bootcamp that would prepare idea champions for the internal funding battle that followed. The bootcamp requested that participants do what entrepreneurs do before requesting seed funding – Discover, Network and Accelerate. (In hindsight we were having our employees get out of the building to talk to customers, build prototypes and generate partner interest – essentially doing Customer Discovery years before Steve Blank taught his Lean LaunchPad class at Stanford and the National Science Foundation!). Our employees faced the typical impediments to corporate entrepreneurship – lack of employee time, skills, connections, pre-seed money, and official sources to discuss and manage the risk/rewards tradeoffs of sticking your neck-out. So our program staff built a support system of contextual education, mentorship, micro-funding, and hands-on coaching.
Finally, the third phase of the program, implementation, began with the top team’s pitches to the C-level executive team, which determined the competition winners, prize money and directed other promising teams to target business unit sponsors. Our program staff facilitated the handoff and disseminated the value extracted from any funded experiments, including future option, strategic and exit value.
In retrospect we designed something akin to a startup accelerator, the Lean LaunchPad classes or the National Science Foundation’s Innovation Corps, although none of these existed in 2006.
What went right?
We had C-level support. The CEO of the company embraced the program and supported the process, especially since it brought novel and thought provoking ideas to his executive team’s attention.
The program steadily generated healthy interest from Qualcomm employees – submissions grew from 82 in the first year to over 500 in its fifth and final year. Several ideas were fully or partially implemented, (with hundreds of millions of USD invested), with a couple of genuine breakthrough successes, and hundreds of related patents were filed. Employees reported noticeable gains in entrepreneurial skills and attitude, and the CEO seemed happy with how his baby was being raised.
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Part 2 – challenges and lessons learned – is here.
Filed under: Big Companies versus Startups: Durant versus Sloan, Business Model versus Business Plan, Customer Development, Teaching | 8 Comments »
Thanks to: Alexis Finch, Sketchnotes / UX Research Consultant @agentfin
Filed under: Customer Development | 8 Comments »
Almost every large company understands it needs to build an organization that deals with the ever-increasing external forces of continuous disruption, the need for continuous innovation, globalization and regulation.
But there is no standard strategy and structure for creating corporate innovation.
We outline the strategy problem in this post and will propose some specific organizational suggestions in follow-on posts.
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I’m sitting at the ranch with Alexander Osterwalder, Henry Chesbrough and Andre Marquis listening to them recount their lessons-learned consulting for some of the world’s largest corporations. I offered what I just learned from spending a day at the ranch with the R&D group of a $100 billion corporation along with the insights my Startup Owners Manual co-author Bob Dorf who has several Fortune 100 clients.
(Full disclosure. I’m recovering from a reading spree of Chandlers Strategy and Structure, Gary Hamel’s The Future of Management and The Other Side of Innovation by Trimble and Govindarajan, Henry Chesbrough’s Open Innovation, as well as The Innovator’s DNA from Dyer, Gregersen and Christensen. So some or most of this post might be that I’ve overdosed on business books for the month.)
Collectively we’re beginning to see a pattern and we want to offer some concrete suggestions about Corporate Management and Innovation strategy and the structural (i.e. organizational) changes corporations need to make.
If we’re right, it will give 21st companies a way to deal with innovation – both sustaining and disruptive – as a normal course of business rather than by exception or crisis. Companies will be organized around Continuous Innovation.
Strategy and Structure in the 21st Century
While companies have existed for the last 400 years, their modern form is less than 150 years old. In the U.S. the growth of railroads, telegraph, meat packers, steel and industrial equipment forced companies to deal with the strategies of how to organize a complex organization. In turn, these new strategies drove the need for companies to be structured around functions (manufacturing, purchasing, sales, etc.)
90 years ago companies faced new strategic pressures as physical distances in the United States limited the reach of day-to-day hands-on management. In addition, firms found themselves now managing diverse product lines. In response, another structural shift in corporate organization occurred. In the 1920’s companies restructured from monolithic functional organizations (sales, marketing, manufacturing, purchasing, etc.) and reorganized into operating divisions (by product, territory, brand, etc.) each with its own profit and loss responsibility. This strategy-to-structure shift from functional organizations to operating divisions was led by DuPont and popularized by General Motors and quickly followed by Standard Oil and Sears.
General Motors Organization Chart ~1925
In each case, whether it was organizing by functions or organizing by operating divisions, the diagram we drew for management was an organization chart. Invented in 1854 by Daniel McCallum, superintendent of the New York and Erie railroad, the org chart became the organizing tool for how to think about strategy and structure. It allowed companies to visually show command and control hierarchies – who’s responsible, what they are responsible for and who they manage underneath them, and report to above them. (The irony is that while the org chart may have been new for companies, the hierarchies it described paralleled military organization and had been around since the Roman Legion.)
While org charts provided the “who” of a business, companies were missing a way to visualize the “how” of a business. In the 1990’s Strategy Maps provided the “How.” Evolved from Balanced Scorecards by Kaplan and Norton, Strategy Maps are a visual representation of an organization’s strategy. Strategy Maps are a tool to translate the strategy into specific actions and objectives to measure the progress of how the strategy gets implemented (but offer no help on how to create new strategies.).
Strategy Maps from Robert Kaplan
By the 21st century, organizations still lacked a tool to create and formulate new strategies. Enter the Business Model Canvas. The canvas describes the rationale of how an organization creates, delivers, and captures value (economic, social, or other forms of value). The canvas ties together the “who and how” and provides the “why”. External to the canvas are the environmental influences (industry forces, market forces, key trends and macro-economic forces.) With the business model canvas in hand, we can now approach rethinking corporate innovation strategy and structure.
Management Innovation in the 21st Corporation
Existing companies and their operating divisions implement known business models. Using the business model canvas, they can draw how their organization is creating, delivering, and capturing value. A business model for an existing company or division is not filled with hypotheses, it is filled with a series of facts. Operating divisions execute the known business model. Plans and processes are in place, and rules, job specifications, revenue, profit and margin goals have been set. Forecasts can be based on a series of known conditions.
Inside existing companies and divisions, the business model canvas is used as a tool to implement and continuously improve existing business models incrementally. This might include new products, markets or acquisitions.
A New Strategy for Entrepreneurship in the 21st Corporation
Yet, simply focusing on improving existing business models is not enough anymore. To assure their survival and produce satisfying growth, corporations need to invent new business models. This challenge requires entirely new organizational structures and skills.
This is not unlike the challenges corporations were facing in the 1920′s. Companies then found that their existing strategy and structures (organizations) were inadequate to respond to a changing world. We believe that the solution for companies today is to realize that what they are facing is a strategy and structure problem, common to all companies.
The video below (from Strategyzer.com) emphasizes that companies will need to have an organization that can do two things at the same time: executing and improving existing models and inventing - new and disruptive – business models.
We propose that corporations equipped for the challenges of the 21st century think of innovation as a sliding scale between execution and search.
In future blog posts we’ll propose a specific structure for Entrepreneurship and Continuous Innovation in the 21st Corporation.
Lessons Learned
- Continuous disruption will be the norm for corporations in the 21st century
- Continuous innovation – in the form of new businesses- will be the path for long term corporate survival
- Current corporate organizational models are inadequate for the task
- We will propose some alternatives
Filed under: Big Companies versus Startups: Durant versus Sloan, Business Model versus Business Plan, Customer Development | 31 Comments »
One of the great things about being a retired entrepreneur is that I get to give back to the community that helped me. I assembled this collection of free and almost free tools, class syllabi, presentations, books, lectures, videos in the hope that it can make your path as an entrepreneur or educator easier.
Startup Tools
If you’re building a startup, the Startup Tools tab on the top of this page has curated links to hundreds of startup resources. Specific links are:
Updates and suggestions for tools I’ve missed are welcomed on the Startup Tools comments page.
The Lean LaunchPad course online
I teach potential founders a hands-on, experiential class called the Lean LaunchPad at Berkeley, Stanford, Columbia and Caltech. The class teaches the three basic skills all entrepreneurs need to know:
For my Innovation Corps class for the National Science Foundation it made sense to record the lectures and put them on-line. In my regular classes I now “flip” the classroom and have my students watch these online lectures as homework and we use the class time for discussion.
The free on-line class, hosted at Udacity is here.
Class Syllabi, My Lecture Slides and Student Presentations
The Slides/Video tab on the top of this page has all the open source course material for my classes. Specific links are:
The Entreprenuers Checklist
The good folks at Udemy have taken a few of my lectures at Stanford and put them together in a series online.
The free on-line lectures, hosted at Udemy are here.
Online Guide to How to Build a Startup: The Lean LaunchPad
Startupplays.com, publisher of online entrepreneurs processes guides, drew from my Udacity course and The Startup Owner’s Manual to create a free step-by-step guide to understanding your customers and creating your value proposition. Called “How to Build a Startup: The Lean LaunchPad,” it walks you through the Business Model Canvas and an overview of the customer development process.
Find it here.
Videos
The Slides/Video tab on the top of this page has a number of my talks on entrepreneurship, customer development and startup, some short, some long, and a few interesting.
Find them here.
Recommended Reading
The Books for startups tab on the top of this page is my recommended reading list. These books have influenced my thinking. There’s a short synopsis of why I like each book.
Updates and suggestions for books that I’ve missed are welcomed on the books comment page.
Visitors Guide to Silicon Valley
The Guide tab on the top of this page? I got tired watching dignitaries fly into Silicon Valley, visit Google, Facebook, Apple, and Stanford and then say they understand startups and entrepreneurship.
So for the rest of us I put together this Visitors Guide to Silicon Valley.
Updates and suggestions for places to see that I’ve missed are welcomed on the Guide comments page.
Secret History of Silicon Valley
What began as a hobby of mine – research in the intersection of my military, intelligence and Silicon Valley careers combined with my interest in the history of Silicon Valley and technology entrepreneurship – ended up in this video and PowerPoint presentation. I first gave the Secret History of Silicon Valley presentation as an invited talk at Google, then at the Computer History Museum.
When I gave the talk to audience of CIA staffers they asked how I came up with the talk, so I wrote a series of posts as the back-story that can be found here.
I still love giving this talk to people who lived it and people curious about it.
Startup Weekend Next
Startup Weekend Next is a three-week version of the Lean LaunchPad class with hands-on instructors and mentors – offered in hundreds of cities around the world.
They don’t ask for equity and charge just enough to cover the costs of pizza and the room rental.
Sign up here.
The Lean LaunchPad Educators Course
Hosted by NCIIA, Stanford University and U.C. Berkeley, Jerry Engel and I teach a course for educators interested in learning how to update and revise their entrepreneurship curriculum for the 21st century as well as learning how to teach the Lean LaunchPad class.
The Lean LaunchPad Educators Training Guide here is part of this course.
Next class is Jan 30th. Click here for more information.
The Startup Owner’s Manual
The Startup Owners Manual written with Bob Dorf, has become the step-by-step reference manual for anyone even thinking about a startup. Each section offers detailed guidance and how-to’s, helping you make your way through the Customer Development process using MVP’s and Pivots as you search for a Business Model.
Last month we added a Kindle version, reorganized to make it easier to follow on a tablet and incorporating hundreds of links to websites, blog posts, and presentations.
The Founder’s Workbook
Zoomstra, the publisher of online workbooks offers The Founders Workbook to help you track and monitor your progress through every step of the Customer Development process. It takes the static 57 checklists from The Startup Owner’s Manual and makes them dynamic and accessible by putting them online as an interactive checklist. Use it to keep your team on track and ensure you have completed each critical task as you search for a scalable business model.
Click here for more information.
The Four Steps to The Epiphany
The Four Steps to the Epiphany has been described as the book that launched the Lean Startup movement. The book is still relevant today as when it was written. The last two chapters deal with scale and management of growing startups.
Now get out of the building and make something happen!
Filed under: Customer Development, Lean LaunchPad, Teaching | 30 Comments »
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Now In Print! Steve Blank's 30 years of Silicon Valley startup advice.
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