Why Corporate Skunk Works Need to Die

In the 20th century corporate skunk works® were used to develop disruptive innovation separate from the rest of the company. They were the hallmark of innovative corporations.

By the middle of the 21st century the only companies with skunk works will be the ones that have failed to master continuous innovation. Skunk works will be the signposts of companies that will be left behind.

 

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In the 20th century companies could be leaders in a market for decades by just focusing on their core product(s). Most companies incrementally improved their products with process innovation (better materials, cheaper, product line extensions) and/or through acquisitions. Building disruptive products were thought of as “risky” and a distraction since it was not “core” to the company and did not fit existing corporate structures. Why make big bets if no one was asking for them and competitors weren’t doing so.

a-12

CIA A-12 spy plane. Developed by Lockheed Skunkworks

A few innovative companies did push the envelope. The way they did so was to set up “skunk works” to develop their most advanced, disruptive products. (IBM used the process to develop the IBM PC.) But it was Lockheed, then an aircraft manufacturer that coined the term and perfected the art. The Lockheed Skunk Works® led by Kelly Johnson was responsible for its Advanced Development Projects – everything from the P-80, the first U.S. jet fighter plane, to the U-2 and A-12 spy planes.

Skunk works differed from advanced research groups in that they were more than just product development groups. They had direct interaction with customers and controlled a sales channel which allowed them to negotiate their own deals with customers.

Decades before we were able to articulate the value of “getting out of the building” and the Lean Startup, the value in having skunk works controlling their own distribution was starkly evident. Other companies with world-class R&D groups built radical innovations only to see their company fumble the future and others reap the rewards (think of Xerox and the personal computer, Fairchild and integrated circuits, Kodak and digital photography, etc.) Common themes in these failures were, 1) without a direct connection to the customer advanced R&D groups built products without understanding user needs, and 2) the core of the company was so focused on execution of current products that it couldn’t see that the future didn’t look like the past.

Kelly Johnson’s 14 rules about how to manage a disruptive project described how to remove a small innovative team from the politics, policies, procedures and processes a large company had built to support execution of its core business (and its military customers had developed to procure large numbers of standard aircraft.)

With the vantage point of the 21st century, we can now see that a successful skunk works – separated from its corporate parent, with its own culture, in control of its own R&D and distribution channel – looked much like a startup.

But as successful as skunks works were to the companies that executed them well, innovation and execution couldn’t co-exist in the same corporate structure. Skunk works were emblematic of corporate structures that focused on execution and devalued innovation.

Until now.

Continuous Disruption Requires Continuous Innovation
In the 21st century market share is ephemeral – ask General Motors, Blackberry, Nokia, Microsoft, Blockbuster, etc. –disruption is continual.

Therefore companies need to master continuous innovation – the art of executing on core products while continually inventing new products and new businesses. That means that somehow we need to take the innovation that a skunk works removed from the core of the company and integrate the two.

Here’s how.

We need to realize that skunk works epitomize innovation by exception. But to survive companies need innovation by design.

We now know how to do just that. We can get innovation and execution to work side-by-side.

To start it requires board support and CEO and executive staff agreement. And recognition that cultural, process and procedure changes are needed to embrace learning and experimentation alongside the existing culture of execution.

I’ll provide details on how companies can organize this way in a follow-on post.

Lessons Learned

  • Skunk were advanced/disruptive product groups organizational isolated from the rest of their company
  • Skunk works had control over their sales channel and had direct customer feedback
  • World-class R&D groups that didn’t control the channel often saw their innovation die internally
  • Skunk works looked much like a startup
  • Skunk works epitomized innovation by exception
  • Companies now need innovation by design – innovation and execution that work side-by-side
  • We now know how to do this

Born Global or Die Local – Building a Regional Startup Playbook

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

playbook

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

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

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

Bay of Fires Tasmania

Bay of Fires Tasmania

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

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

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

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

It doesn’t.

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

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

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

business model globals

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

bus model and value prop map

value prop map

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

Step 2 figure out what needs to be tested globallys

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

No one had written the playbook.

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

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

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

Lessons Learned

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

The Business Model Canvas Gets Even Better – Value Proposition Design

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

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

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

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

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

Value prop design

Product/Market fit

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

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

bus model and value prop mapvalue prop map

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

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

3_Value_Proposition_Design_Testing_Process

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

5_Value_Proposition_Design_Progress_Board

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

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

Lessons Learned

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

How We Used to Give Startups Very Bad Advice. 2 Minutes to See Why

If you can’t see the video click here

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

If you can’t see the video click here

Watching My Students Grow

“You cannot teach a man anything, you can only help him find it within himself.”
Galileo Galilei

One of the great things about teaching is that while some students pass by like mist in the night others remain connected forever. I get to watch them grow into their careers and cheer them on.

Its been three and a half years since I first designed and taught the Lean LaunchPad class and lots of water has gone under the bridge since then. I’ve taught hundreds of teams, the National Science Foundation Innovation Corps has taught close to 400 teams led by our nations top scientists, and the class is being taught around the world.

But I still remember a team from the first class, one which wanted to build a robotic lawnmower. It’s now been over 3 years since the team has left my classroom and I thought I’d share with you what the two founders, Jorge Heraud and Lee Redden, learned then and what they’re doing now.

The Autonomous Lawnmower
They called their company Autonomow. And they were absolutely convinced what the world needed was an auto-driving lawn mover for institutions with large green spaces.

You can see their first slide deck in class below (and here)

Like in all our Lean Launchpad classes we teach a combination of theory coupled with intense and immersive experiential learning outside the classroom. Students need to get out of the building and talk to 10-15 customers a week.

The next week they came back in class and presented this:

Each week we’d teach them about one more part of what makes up a business model. All teams struggle with finding product/market fit.

By week four their presentation looked like this:

Notice something different about the cover slide? Massive pivot. Like all great Silicon Valley companies they started with a technology and guessed who the customers will be. They’re almost always wrong. They could have never figured this out sitting inside a classroom writing a business plan.

At week five (see here) they were actually getting into farm fields wearing hip boots and overalls. Now they were figuring out how to create demand.

The Customer Development process, this relentless drive to turn hypotheses into facts is what makes this learning so rapid.

At week six they were trying to figure out their distribution channel (here) after another pivot. They got their minimal viable product (a machine vision platform) up and running in the lab.

At week seven (here) another pivot happened when farmers taught them about how to price their product. Instead of an of selling hardware they were selling a service.

BTW, notice that they were now dragging their machine vision platform through the farm fields!  If there was ever any question of whether a minimal viable product can work for hardware, see what they say in their video below.

By week eight they were learning who they needed to partner with (see here). Most importantly they found a customer who taught them while weeding carrots was nice, thinning lettuce was where the money was.

After 9 weeks their final presentation looked like this.

When I teach in universities I’m not running an incubator. What I’m trying to do is to get students to learn a way of thinking about new ventures that will stick with them for life. And I try to do by having them teach themselves, rather than us teaching at them. Whether they start a company or not, I don’t keep score.

But some teams remain connected forever. I get to watch them grow into their careers and cheer them on. This was one of those teams. After class they took this idea and formed a company – Blue River Technology.

Over the last three years they turned their vision and PowerPoint slides into real hardware that solves real customer problems. And with 3 rounds of funding, including a grant from the National Science Foundation, they’ve raised $13 million.

Take a look and see what they’ve done.

If you can’t see the video click here

“The customers had way more insights then we had. They had been thinking about their own problems for so long…If you just go out and try to sell maybe you’ll find some buyers, but you won’t be learning about what you should be doing.”

Lee Redden – Blue River Technology

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I’m off next week on the next great adventure. We’re going to launch the I-Corps @ NIH and change how our country commercializes life sciences.

How To Find the Right Co-Founders?

How do you figure out what’s the right mix of skills for the co-founders of your startup?

Surprisingly if you’ve filled out the business model canvas you already know who you need.

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I was having breakfast with Radhika, an ex-grad student of mine who wanted to share her Customer Discovery progress for her consumer hardware startup. She started by sketching her business model canvas on a napkin, but somehow the conversation quickly shifted to what was really on her mind. “After reading your post on Why Founders Should Know How to Code it looks like web/mobile startups have it easy. They seem to know the right mix of skills on their founding team is a hacker, hustler and designer. But what about for us, a consumer hardware hardware company? Trying to figure out what the right set of co-founders isn’t so clear. How do I decide who I need to have on board on day one?  Who can I hire later? And what can I outsource?”

Co-founders Skills are the First Derivative of the Business Model Canvas
I told Radhika this is a perennial question for startups. I had struggled with this one for years. And over time every venture capitalist develops their own gut feel for what makes up a great team in their industry. I said, “If you’ve filled out the business model canvas you already know who you need on your founding team, the answer is staring us in the face.”

She looked at bit puzzled, so I continued to explain…

One of the virtues of using the Business Model Canvas as part of a Lean Startup is that it helps you frame each one of your nine critical hypotheses.

While most of the early attention in a startup is paid to finding product market fit (the match between value proposition and customer segment on the right-side of the canvas) it’s the left side of the canvas that will tell you what your founding team should look like.

product market fit 2

Understanding Activities and Resources Will Help You Spec Your Team
I suggested to Radhika that we start by looking at the canvas box labeled “key activities”.  “Activities” is where you define the most important things your company must do to make the rest of your business model work. Activities define the unique expertise your company needs to deliver the value proposition, customers, channels, customer relationships and/or revenue. (If you’re a startup it’s easy to get confused on this step. We don’t need to know your activities for your five-year plan. Just list the Activities needed to get a major early milestone – i.e. cash flow positive, or first million users, regulatory submission/approval, etc.)

For example, if you’re building a mobile app, then the key activities are: app software development, user interface design and demand creation skills. Or if you’re building consumer electronics the key activities might be: low cost hardware design, high volume manufacturing, user interface design, consumer branding and retail distribution. For medical devices it might be mechanical engineering, clinical trials, regulatory approval, freedom to operate (intellectual property) and figuring out a reimbursement strategy.

Activities Resources Partners

So What Does this Have to Do With A Founding Team?
Once you establish what activities your company needs to do, the next question is, “how do these activities get accomplished?” i.e. what resources do I need to make the activities happen? The answer to that question is what goes in the “Resources” box on the canvas (and if third parties outside your company are going to provide it, in the Partners box.)

For example, in web and mobile apps most of the resources needed at first are people: a developer (the hacker), a user interface designer, and someone to lead the team and create customer demand and if needed raise capital (the hustler).

In medical device startups these resources are expertise in the basic science, industrial design, human factors, managing Contract Research Organizations, reimbursement, Intellectual Property, and someone to lead the team and raise capital and establish strategic partnerships.  Therefore the ideal medical device team might be a physician; engineer; operator; business development/financial analyst.

Are We Missing A Founder?
Once you’ve figured out the activities and resources, you can then ask, “If these activities are crucial in building our company and these resources are the critical people skills need to make them happen. Does anyone on the founding team have these skills? Are we missing a founder? Or can we outsource these activities to Partners?”

Radhika nodded. “I get it” she said, “understanding activities and resources help me identify and then prioritize the skill sets I’ll need, but what about the individual characteristics of the individuals – resilience? tenacity? agility? team work?  How much value should I put on co-founders I’ve worked with before?”

I smiled and said, “Figure out what you need first, then we can have another coffee.”

Lessons Learned

  • Figuring out the right founding team starts with listing the critical activities to make the startup successful in the first year or so
  • Next, what human resources are necessary to make those activities happen?
  • Can these skills be outsourced to partners or are they integral to the DNA of the company?
  • If they’re integral to the company’s success, they should be part of the founding team
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