Engineering a Regional Tech Cluster-part 3 of 3 of Bigger in Bend

Dino Vendetti a VC at Bay Partners, moved up to Bend, Oregon on a mission to engineer Bend into a regional technology cluster.  Over the years Dino and I brainstormed about how Lean entrepreneurship would affect regional development.

I visited Bend last year and caught up with his progress.

Today with every city, state, country trying to build out a technology cluster, following Dino’s progress can provide others with a roadmap of what’s worked and didn’t.

Here’s Part 3 of Dino’s story…


As a transplanted Silicon Valley VC and now a regional investor, I often get asked, “How do we go about building up our local tech ecosystem?”

The short answer is, “One step at a time.”

In the beginning in Bend, “necessity was the mother of invention.” Local entrepreneurs just made it up as they went. But today we are intentionally engineering six distinct activities to support this tech cluster: entrepreneurial density, university, transportation, capital, accelerator, and business community.

Let’s look at each of these six elements in more detail and I’ll explain what we have been doing in Bend to accelerate each of these.

1. Entrepreneurial Density:
Density – the connection of like-minded firms and their support services – is a critical component of a cluster. The most fertile source of entrepreneurs is the population of existing entrepreneurial companies. But for clusters without sufficient firms you first need to attract companies to your region. However, it’s difficult to create density overnight. Entrepreneurs need to understand and believe the reasons why they should want to cluster in your region given there are other alternatives (nationally Silicon Valley or New York; regionally Seattle and Bellevue, Portland and Bend).

In addition to technical and entrepreneurial talent, a region also needs experienced executive talent with industry appropriate backgrounds and personal networks. The goal of this talent is to help mentor startups as they scale and navigate the myriad of issues they will face in growing their business.

Bend’s economic development agency (EDCO) and city leaders (Visit Bend, City of Bend) get it – and have started communicating that Bend welcomes and is friendly to entrepreneurs and startups. Word is spreading and there are lots of people up and down the West Coast who know of and have been to Bend. But it’s easy to get drowned out by the noise from Silicon Valley and other cities in Washington and Oregon. That means that in regional communities like Bend, everyone needs to turn up the volume to consistently sing praises that will not only put the community on the map but also ensure it doesn’t slip.

2. University
Almost every successful tech cluster has a local technical university. This provides a source of technical talent, research, etc. It’s extremely difficult to import enough talent to fuel a rapidly growing tech cluster, so a university is critical to organically generate and retain talent within the region. In particular it’s critical to offer technical degrees that train the talent pool needed to drive the local tech cluster

OSU-Cascades is a new four-year university in Bend that is beginning the build out of its new campus in Bend and offer computer science and user design courses. This effort was over a decade in the making and something that the local community fought hard for.

3. Transportation
Direct flights to the San Francisco Bay Area and other major metro areas (depending on location of the region) are vital to reduce the friction of conducting business, encourage talent to test drive your community, and attract investors and other ecosystem partners to the region.

Bend’s economic development agency (EDCO) has worked very hard to establish direct flights to major West Coast cities including San Francisco, Los Angeles, Seattle, Portland, and Denver. At times this required rallying local business leaders to make advance purchases of flights to ensure enough passenger volume for the airlines.

4. Local Early-Stage Risk Capital
Early stage venture funds are more important than your mother. If this doesn’t exist your regional cluster is dead-on-arrival.  Organize risk-capital in the form of angel funds or venture funds, particularly at the early stage where the largest capital gap exists. This should be a strategic initiative within your state to close the capital gap with in-region capital sources.

Bend is now home to Seven Peaks Ventures and Cascade Angels, both born over the past year in response to the opportunity in the region. The state of Oregon is also making funds available to invest in and support the formation of venture funds within the state.

bvc-winner

Bend Venture Conference Winner

5. Local Entrepreneurial Community Entrepreneurial-driven Events
The local entrepreneurial community has been active in running Startup Weekends, launching the FoundersPad accelerator, running hackathons and Ruby on Rails conferences (Ruby on Ales), building out shared tech space, offering incentives (The Big Bend Theory) for startups to relocate to Bend from the Valley, and building up the state’s largest tech/venture conference, the Bend Venture Conference which is now going on its 11th year. There are many more efforts underway to build upon what has worked and continue the process of evolving and learning.

6. Business Community Support
One of the most difficult things to do is technically the easiest – a dispassionate self-assessment to understand what assets your community has and what you lack.

First, what is your value proposition to a family or business to locate in your region? Recognize that a big part of your job is to remove friction, drive awareness, and amplify the efforts of your local entrepreneurs. Successful entrepreneurs attract other entrepreneurs, so it’s vital to kick start the cycle.

Next, identify your goal. Is it creating a job works program? Stopping brain drain in the region? Attracting and building some key core competency in the region? Ideally your existing talent base and ecosystem naturally support the “core competency magnet” you want to develop.

Finally, put your money where your mouth is – help fund the events and programs in the early years. Once the tech cluster forms, these activities will become self-funding. The ROI won’t be obvious for some early on, but will pay dividends in time.

Regional Cluster Ecosystem

Regional Cluster Ecosystem

Summary: Bend Is a Global Entrepreneurship Experiment
There are about 25,000 economic development agencies in regional markets across the U.S., all trying to expand the number of businesses that create products and services sold outside their region. These regional businesses create primary jobs that lead to the creation of local secondary jobs.

The Bend experiment is a model to consciously engineer an entrepreneurial cluster in a regional market to spur economic development and job creation.

In the past most regional growth strategies have focused on attracting established companies looking to expand or open a new plant. While it may be strategic for the region to recruit some of these established businesses, those deals usually involve huge tax subsidies and typically create a small finite number of jobs. What isn’t part of most regional growth plans is the organic growth of an entrepreneurial tech cluster in the region. If successful, sewing the seeds of entrepreneurship can lead to a more rapid and sustainable job growth for the region.

By engineering a regional tech cluster, we can impact the trajectory of growth in the region and:

  • Slow and even reverse the historical migration of tech talent and capital out of the region/state
  • Locally grow successful tech companies to become amazing primary job creators
  • Recycle the wealth that is created by re-investing in the region versus transferring wealth to Silicon Valley
  • Help local successful entrepreneurial and technical talent stay local – by creating their next startup in the region versus emigrating to Silicon Valley
  • Create a more diversified and healthy economic base that includes tech entrepreneurs

The democratization of entrepreneurship has created a huge opportunity for any region with the right characteristics to create its own sustainable tech cluster. But, as with any true democracy, it won’t happen without the combined participation of the community and desire of entrepreneurs to lead the movement. This is happening in Bend, and I look forward to hearing from others about your own experiments.

Lessons Learned:

  • Regional tech clusters can be engineered if …
    • the region has key attributes and a focused effort from the entrepreneurial and business community
  •  Opportunity exists for economic development in regions where tech clusters can be formed
    • potential to dramatically increase the growth of entrepreneurship and job creation in the region.
  • Entrepreneurs are the path to job creation and growth…
    • attract them, reduce the friction to growth, and do everything possible to cause the wealth created to recycle locally

Listen to the blog post here

Download the podcast here

Early-stage Regional Venture Funds–part 2 of 3 of Bigger in Bend

Dino Vendetti a VC at Bay Partners, moved up to Bend, Oregon on a mission to engineer Bend into a regional technology cluster.  Over the years Dino and I brainstormed about how Lean entrepreneurship would affect regional development.

I visited Bend last year and caught up with his progress.

Mt-Bachelor-Ski-Resort

Today with every city, state and country trying to build out a technology cluster, following Dino’s progress can provide others with a roadmap of what’s worked and what has not.

Here’s Part 2 of Dino’s story…

——-

Tech investing is risky. Success depends on finding startups that have identified acute customer pains in large markets where conditions are ripe for a new entrant. Few entrepreneurs find this scalable and repeatable business model because it’s not easy. However, four critical advances over the past decade (cloud, accelerators, Lean, and Angels) not only changed the math for tech investing but made regional tech clusters possible.

  • The cloud, open-source development tools and web 2.0 as a distribution channel have vastly reduced the amount of capital a startup needs at the early stage when the risk is greatest. (Startups still need capital to scale once they find good product-market fit and a repeatable-scalable business model.)
  • Accelerators, which became mechanisms for focused entrepreneurship mentoring and delivery of best practices to startups. This was valuable to startups in the Valley and has been vital to startups in regions where the ecosystem is less developed.
  • The Lean Movement, led by Steve Blank (and others,) created a set of methodologies that ushered in the era of Evidence Based Entrepreneurship. This has changed the way entrepreneurs think about building their startups and how investors should look at them.
  • Angels & Crowdfunding: Coincident with the capital efficient movement came the current wave of angel investors, this time armed with the ability to collectively fund startups to the point of meaningful value creation on modest amounts of capital. Sites like AngelList have only amplified the collective reach of individual and grouped angel investors.

These four developments, while important to Silicon Valley, are vital to developing regional tech clusters. While the density of Silicon Valley startups can’t be replicated in regions, the barriers of money and resources have disappeared. These changes make entrepreneurship possible anywhere.

What’s Missing Is Early Stage Capital
While the technology gap is closing, what’s still missing in local regions is early stage capital.

Three types of regional venture funds exist today:

  • Regionally located funds, such as Foundry Group in Boulder, are located outside of Silicon Valley or NY but their investments are primarily in the Valley or NY… they are not a regional fund per this discussion.
  • Regional Angel funds that pool investors capital and typically make a one time investment in a startup, sometimes at an early stage but often at a slightly later stage.
  • Late stage large regionally based funds that invest in late stage or mezzanine deals.

Large regionally based early stage funds have mostly failed.  They failed due to:

  1. the dearth of deals in the region that have IPO potential and
  2. most of those funds were also raised and invested prior to the huge capital efficient wave of the past 6-8 years. These regional funds invested in capital-intensive startups that required large initial investments. The result was too much money in too few deals. The inevitable failures then damaged returns.

The Oregon startup scene today looks very different from what it did 10 years ago. Today it’s dominated by capital efficient software, web and mobile startups whereas 10 years ago it was dominated by semiconductor and hardware startups that consumed huge amounts of capital before their first dollar in revenue.

So a regional fund must do three things:

  • focus on early stage investments
  • “right sized” for the exit environment;
    • if it’s too big you won’t be able to intelligently deploy capital;
    • too small and you won’t be able to follow on and protect your investments or make enough investments to ensure you have enough “at bats.”
  • find and focus on the entrepreneurs and deals that want to build scalable startups

We believe that regional funds need to walk a delicate balance…but it doesn’t take huge IPOs to return multiples of capital on a small fund.

Why Valley Rules Don’t Work in Regional Economies
A typical VC fund in Silicon Valley might raise $200 -$400 million.  And over a 10-year life of a fund only one out of five deals will deliver all the returns.  A good return to your investors is 20% per year. That means over 10 years investors expect ~6x return on their investment. This means that those winning deals have to make a ~30x return to provide the venture capital fund that 20% compound return (the 6x).

The Valley strategy is to get as much money to work in the high flying deals that are going to pop….It’s an educated/calculated swing-for-the-fences model and it can work and be extremely lucrative if you can consistently get in those deals.

The problem for a regionally based investor is that there will be a limited number of startups in your region that have a realistic chance at an IPO. The percentage of VC backed startups that go public is very small, so counting on those exits in a regional fund would not be prudent (nice if it happens but don’t build the model to rely on it).

The reality is that the super vast majority of liquidity events are M&A and the majority of those are in the under $100M range. As a result, large multi-hundred million-dollar funds focused on early stage investing in the region can be challenging. There just aren’t enough “right” regional startups to invest in.

Regional Moneyball
Bend playing Moneyball makes a lot of sense. In fact, it’s the only game that investors in a regional cluster can play.  Regional investors need a way of improving their odds of getting base hits and minimize strikeouts.

Playing Moneyball in venture capital means making smaller, smarter bets focused on companies and deals that the big teams, the Silicon Valley heavyweight investors, pass up; because the deals are too far from Silicon Valley, not yet known to them, not in their comfort zone, or not the fad of the month.

Playing Moneyball also means playing with the money you have.  The reality for a regional investor is that you have to match the capital you raise to the deal/exit environment you are in.

Specifically this means that a regional fund should be $10-30M. (With a portfolio of at least 20 investments, or you are at risk of the adverse selection problem.) And the fund should be looking at startups that can provide $20M to $100M exits – almost certainly as M&A deals.

The chart below diagrams our regional fund strategy.

Funds for Regional Markets

The good news for regional investors is that these factors allow you to play Moneyball if (and that’s a big IF) you are investing in entrepreneurs who are living and breathing evidence-based entrepreneurship and who are building scalable startups. This is true whether the company is concept stage or ramping revenue. I’ve found a lot of companies in the region that have found a way to get to some level of revenue traction but haven’t broken out. When you dig in, the reasons are usually easily discoverable and observable.

The Bend Experience
One of the fundamental benefits of being so active in building the FoundersPad accelerator (a 12-week, Lean Startup program focused on customer development) is working with the cohort participants on refining their business models. This experience has provided me a whole new set of pattern matching filters as an investor.

The business model canvas and the customer development process provide investors an incredible opportunity to evaluate how deeply an entrepreneur has engaged with their target customers and, more importantly, what they have learned about the problem-solution space they are going after. This learning and the measurements and metrics that surround it is what evidence based entrepreneurship is all about and what makes it a powerful tool for entrepreneurs, investors and accelerators.

If you are a regional accelerator or investor and would like to talk and compare notes please feel free to email me.

Lessons Learned

  • Regions are missing early-stage capital.
  • Valley-sized VC funds don’t work.
  • Build $10-30M funds.
  • Look for $20-100M exits.
  • Focus on capital efficient, scalable startups and founders

Listen to the blog post here

Download the podcast here

Bigger in Bend – Building a Regional Startup Cluster–part 1 of 3

When Customer Development and the Lean Startup were just a sketch on the napkin, Dino Vendetti, a VC at Bay Partners, was one of the first venture capitalists I shared my ideas with.

Dino and I kept in touch as he moved up to Bend, Oregon on a mission to engineer Bend into a regional technology cluster.  Over the years we brainstormed about how Lean entrepreneurship would affect regional development.

I visited Bend last year and caught up with his progress.

This post and the two that follow highlight what Dino has learned about the characteristics of the startup and investing landscape in a regional market, and what it takes to intentionally engineer a thriving regional tech cluster.

Today, with every city, state and country trying to build out a technology cluster, following Dino’s progress can provide others with a roadmap of what’s worked and what has not. Bend, Oregon is an ideal case study because of its size, location and entrepreneurial characteristics.

Here’s Part 1 of Dino’s story…

———

Let’s get right to the point… I fell in love with Bend, Oregon, once a sleepy logging town, now population 79,000. If you like skiing, hiking, biking, rafting, golfing, camping, fishing, picnicking, rock climbing, and startups – you’d like Bend.1_BalloonsOverBend_2

Before moving to Bend last year, my career took me from engineering development roles at defense contractors in the 80’s to product management and executive marketing roles in companies like Qualcomm in the 90’s, to the world of venture capital at several firms including Bay Partners, Formative Ventures and Vulcan Ventures.

After several visits skiing here, I had become smitten with the “mojo” of Bend – its superb quality of life, recreational opportunities and proximity to the San Francisco Bay Area. The vibe of Bend is appealing, unique and unpretentious given the number of successful business, tech and professional athlete transplants who call it home. It’s home to a small but growing tech community that has been developing over the past decade, and that’s what piqued my interest.

What’s Different
The differences between the Bend, Oregon region and Silicon Valley are obvious. The sheer density of talent, companies, capital and universities that exist in the Valley are second to none. It truly is the epicenter of the startup world and it’s the regional cluster for innovation and entrepreneurship. Working in the Valley, I took for granted the constant and real time networking opportunities, the volume of deals, and the ability to access nearly every corner of the tech industry – no surprise to anyone who has spent any time in the Valley.

However, what I found in Bend was a deeply entrepreneurial community that is leaps and bounds beyond just a destination resort town. Bend fights way above its weight class and is professional scale for its size. Its ability to do so is tied to the deep entrepreneurial DNA that permeates the region (a very similar characteristic to Silicon Valley), originally out of necessity and now out of strategy.

Job creation in Bend is everyone’s business.   People who make the move typically need to start a business to have a job. Bend is the 16th largest metro area in the country for high-tech startup density. Pretty amazing for a town with fewer than 100,000 people.

Startups in Bend
So what types of entrepreneurs and startups exist in Bend?  There’s a concentration around several sectors: software, hardware, medical-technology, aviation, and a specialty of Oregon – craft beer brewing. The chart below shows the clustering of startups around these sectors.

Bend Startup Ecosystem

Bend Startup Ecosystem

In addition to the four major data centers that include Facebook and Apple, Bend currently boasts 95 startups across multiple technologynsectors: 47 software, 26 hardware/semi and 22 med tech related startups. Nearby Portland Oregon (just 160 miles away) is home to over 300 startups; between the two markets, nearly 80 new startups are forming each year.

Silicon Valley Transplants
In addition to local entrepreneurs building startups, I found something else I wasn’t expecting in Bend: a deep pool of talented Valley transplants who’ve made their way to Bend – either during their careers or after. There are retired Fortune 500 CEOs, senior execs from Valley startups and public companies as well as successful entrepreneurs who exited their companies. These smart, successful transplants have gotten involved with the local business community as mentors, advisors, entrepreneurs, or investors.

But the real surprise was learning that for some Bend is a Silicon Valley bedroom community. A daily direct flight on United can have you in your Bay Area office by 8 a.m. Monday. Every week I meet someone new who just moved to Bend and commutes to work for Google, Facebook, Salesforce, Oracle, Marketo, Workday, and on and on….These people are important and useful in the engineering of a tech cluster; as startup coaches, angel investors and advocates for the community. They communicate and pass on the DNA of how Silicon Valley operates and what level of performance is needed to compete on a global scale.

Entrepreneurs in Bend
Within the Bend tech startup community I found three kinds of startups/entrepreneurs:

  • Scalable entrepreneurs similar to those you would find in Silicon Valley (although a smaller concentration exists in Bend). These entrepreneurs want to build a big company. They’re typically Silicon Valley transplants who had enough success and experience to know what they were getting themselves into, what it means to raise capital from investors, what it means to scale a company, and how to engineer an exit.
  • Viable entrepreneurs who think they are building scalable startups but lack either a key element of their business model and/or lack the right team DNA to “go for it..” In this region, these are the majority of new startups I see. They have two limitations, which I help coach to see if they have the capability and desire to become scalable.
    • They go after a market opportunity that’s too limited to result in a truly scalable business (still might be an M&A candidate, but at the lower end of the range).
    • Most teams have a reluctance and willingness to “go for it” when they finally do have a scalable business and have validated the key aspects of their business model. This “small business” mindset is a holdover of how capital starved early stage startups are/were in Oregon. Entrepreneurs (and angel investors) prioritize profitability over growth (this is OK for lifestyle startups, but not for scalable startups where capturing market share and thought leadership is vital).
  • Lifestyle entrepreneurs who are just building a business to make a profit and support their awesome lifestyle (Bend has a lot of these). There is nothing wrong with lifestyle entrepreneurs as they are providing valuable products and services to the local/regional economy, but these do not make for good venture or angel investments under the traditional equity based venture model.

Regional entrepreneurs are at an inherent disadvantage in getting the attention of customers and late stage VCs.  Therefore they need to focus on building the most efficiently scalable business model possible. Without focus, it’s difficult to create enough signal to noise ratio to become relevant in their market segment. The good news is that whether you are an investor or accelerator, if your startup is located in an advantageous regional market (defined below) and if you apply lean methodologies, you can improve your on-base and slugging percentage.

The opportunity and challenge in regional markets is to:

  • Educate the ecosystem about the differences between the three kinds of startups/entrepreneurs
  • Find, nurture and invest in the truly scalable startups and entrepreneurs, as they will be the ones that have the potential to deliver outsized returns

Fixing the Missing Pieces of Infrastructure
The evolution of very capital efficient business models and Lean Startup methodologies has led to easier paths to funding, launching and growing businesses. With a tech cluster developing in Bend, it was clear that there were four missing pieces in its infrastructure.

I decided to fix each of them.

Bend needed a startup accelerator.  While entrepreneurship in Bend was talked about, and everyone read the same blogs, there was no central place founders could get focused and intense coaching and mentorship. So I co-founded the FoundersPad accelerator, a 12-week, Lean Startup program focused on customer development that helps founders develop, refine and grow their business.

Founders Pad

Founders Pad

Bend needed its own venture firm. While Silicon Valley and New York are magnets for great startups, our bet is that awesome startups exist in (or can be attracted to) Oregon and Northern California. So I launched Seven Peaks Ventures with a team of investors that includes some of the region’s most active angel investors. We help Oregon-based startups build and scale their businesses by providing highly relevant mentoring and leveraging our deep network in Silicon Valley and beyond.

Bend needs to attract more entrepreneurs. So I launched The Big Bend Theory with Bruce Cleveland.  We’ll fly founders and their spouses/significant others along with a team member to Bend to meet local startup executives and community leaders and experience the lifestyle. If they choose to relocate in Bend we’ll offer free temporary office space and help get them funded.

Oregon State University’s new Bend campus didn’t have a Computer Science or User Experience design program.  So I helped develop the Computer Science program at Oregon State. (We’re looking for Computer Science professors, so email me if you want to live and teach in Bend!)

Lessons Learned

  • Bend is a bet on a regional tech cluster
  • To build a successful regional cluster, look for an eco-system with:
    • experienced professionals willing to mentor
    • entrepreneurs with the energy and drive to build businesses
    • viable startups under development
  • We are engineering the infrastructure that lacks: accelerator, venture firm, outreach, university and training.
  • It is critical to understand the types of startups and entrepreneurs in your region and for venture funding
  • Seek out the truly scalable startups.

Listen to the blog post here
Download the podcast here

Do Pivots Matter?

There’s a sign on the wall but she wants to be sure
’
Cause you know sometimes words have two meanings
Led Zeppelin – Stairway to Heaven

In late 2013 Cowboy Ventures did an analysis of U.S.-based tech companies started in the last 10 years, now valued at $1 billion. They found 39 of these companies.  They called them the “Unicorn Club.”

Charlie

The article summarized 10 key learnings from the Unicorn club. Surprisingly one of the “learnings” said that, “…the “big pivot” after starting with a different initial product is an outlier. Nearly 90 percent of companies are working on their original product vision. The four “pivots” after a different initial product were all in consumer companies (Groupon, Instagram, Pinterest and Fab).”

One of my students sent me the article and asked, “What does this mean?”  Good question.

Since the Pivot is one of the core concepts of the Lean Startup I was puzzled. Could I be wrong? Is it possible Pivots really don’t matter if you want to be a Unicorn?

Short answer – almost all the Unicorns pivoted. The authors of the article didn’t understand what a Pivot was.

What’s a pivot?
A pivot is a fundamental insight of the Lean Startup. It says on day one, all you have in your new venture is a series of untested hypothesis. Therefore you need to get outside of your building and rapidly test all your assumptions. The odds are that one or more of your hypotheses will be wrong. When you you discovery your error, rather than firing executives and/or creating a crisis, you simply change the hypotheses.

What was lacking in the article was a clear definition of a Pivot.  A Pivot is not just changing the product. A pivot can change any of nine different things in your business model. A pivot may mean you changed your customer segment, your channel, revenue model/pricing, resources, activities, costs, partners, customer acquisition – lots of other things than just the product.

Definition: “A pivot is a substantive change to one or more of the 9 business model canvas components.”

Business Model
Ok, but what is a business model?

Think of a business model as a drawing that shows all the flows between the different parts of your company’s strategy. Unlike an organization chart, which is a diagram of how  job positions and  functions of a company are related, a business model diagrams how a company makes money – without having to go into the complex details of all its strategy, processes, units, rules, hierarchies, workflows, and systems.

Alexander Osterwalder’s  Business Model canvas puts all the complicated strategies of your business in one simple diagram. Each of the 9 boxes in the canvas specifies details of your company’s strategy.  (The Business Model Canvas is one of the three components of the Lean Startup. See the HBR article here.)HBR Canvas

So to answer to my students question, I pointed out that the author of the article had too narrow a definition of what a pivot meant. If you went back and analyzed how many Unicorns pivoted on any of the 9 business model components you’d likely find that the majority did so.

UnicornsTake a look at the Unicorn club and think about the changes in customer segments, revenue, pricing, channels, all those companies have made since they began: Facebook, LinkedIn – new customer segments, Meraki – new revenue models, new customer segments, Yelp – product pivot, etc. – then you’ll understand the power of the Pivot.

Lessons Learned

  • A Pivot is not just when you change the product
  • A pivot is a substantive change to one or more of the 9 business model canvascomponents
  • Almost all startups pivot on some part of their business model after founding
  • Startups focused on just product Pivots will limited their strategic choices – it’s like bringing a knife to a gunfight

Listen to the blog post here

Download the podcast here

Tesla and Adobe: Why Continuous Deployment May Mean Continuous Customer Disappointment

For the last 75 years products (both durable goods and software) were built via Waterfall development. This process forced companies to release and launch products by model years, and market new and “improved” versions.

In the last few years Agile and “Continuous Deployment” has replaced Waterfall and transformed how companies big and small build products. Agile is a tremendous advance in reducing time, money and wasted product development effort – and in having products better match customer needs.

But businesses are finding that Continuous Deployment not only changes engineering but has ripple effects on the rest of its business model. And these changes may have unintended consequences leading to customer dissatisfaction and confusion.

Smart companies will figure out how to educate their customers and communicate these changes.

—-

The Old Days – Waterfall Product Development
(skip this part of you’re conversant in Waterfall and Lean.)

Waterfall

In the past both hardware and software were engineered using Waterfall development, a process that moves through new product development one-step-at-a-time.

  • Marketing delivers a “requirements” document to engineering.
  • Then engineering develops a functional specification and designs the product.
  • Next comes the work of actually building the product – implementation.
  • Then validation ensures the product was built to spec.
  • After the product ships, it’s maintained by fixing flaws/bugs.

Customers would get their hands on a product only after it had gone through a lengthy cycle that could take years – enterprise software 1-2 years, new microprocessors 2-4 years, automobiles 3-5 years, aircraft a decade.

Waterfall – The Customer View
When customers purchased a product they understood that they were buying this year’s model.  When next year’s model arrived, they did not expect that  the Ford station wagon or Maytag washer they purchased last year would be updated to match all the features in the new model. (Software at times had an upgrade path, often it required a new purchase.)

Waterfall allowed marketers to sell incremental upgrades to products as new models. First starting in the fashion business, then adopted by General Motors in the 1920’s annual model year changeovers turned into national events. (The same strategy would be embraced 75 years later by Microsoft for Windows and then Apple for the iPhone.)

As the press speculated about new features, companies added to the mystique by guarding the new designs with military secrecy. Consumers counted the days until the new models were “unveiled”.

With its punctuated and delineated release cycles, waterfall development led consumers to understand the limited rights they had to future product upgrades and enhancements (typically none.) In other words, consumer expectations were bounded.

Waterfall Releases

At the same time, manufacturers used new model changeovers to generate excitement over new features/versions convincing consumers to obsolete perfectly functional products and buy new ones.

Agile Development: Continuous Delivery and Deployment
In contrast to Waterfall development, Agile Development delivers incremental and iterative changes on an ongoing basis.

Agile Dev

Agile development has upended the familiar consumer expectations and company revenue models designed around the release cycles of Waterfall engineering. In a startup this enables deployment of Minimum Viable products at a rapid pace. For companies already in production, Continuous Deployment can eliminate months or years in between major releases or models. Companies can deliver product improvements via the cloud so that all customers get a better product over time.

While continuous delivery is truly a better development process for engineering, it has profound impacts on a company’s business model and customer expectations.

Continuous Delivery/Deployment – The Marketers View
Cloud based products has offered companies an opportunity to rethink how new business models would work. Adobe and Tesla offer two examples.

Tesla
While most of the literature talks about continuous Delivery/Deployment as a software innovation for web/mobile/cloud apps, Tesla is using it for durable goods – $100,000 cars – in both hardware and software.

Tesla Model S on the road

First, Tesla’s Model S sedan downloads firmware updates on a regular basis. These software changes go much further than simply changing user interface elements on the dashboard. Instead, they may modify major elements of the car from its suspension to its acceleration and handling characteristics.

Secondly, in a break from traditional automobile practices, rather than waiting a year to roll out annual improvements to its Model S, Tesla has been continuously improving its product each quarter on the assembly line.  There are no model years to differentiate a Tesla Model S built in 2012 from one built this year. (The last time this happened in auto manufacturing was the Ford Model T.)

Adobe
Adobe, which for decades sold newer versions of its products – Photoshop, Illustrator, etc. – has now moved all those products to the cloud and labeled them the Adobe Creative Cloud. Instead of paying for new products, customers now buy an annual subscription.

Photoshop package

The move to the cloud allowed Adobe to implement continuous delivery and deployment. But more importantly the change from a product sale into a subscription turned their revenue model into a predictable annuity. From an accounting/Wall Street perspective it was a seemingly smart move.

Continuous Delivery/Deployment – The Customer View
But this shift had some surprises for consumers, not all of them good.

As many companies are discovering, incremental improvement doesn’t have the same cachet to a consumer as new and better. While it may seem irrational, inefficient and illogical, the reality is that people like shiny new toys. They want newer things. Often. And they want to be the ones who own them, control them and decide when they want to change them.

Adobe
While creating a predictable revenue stream from high-end users, Adobe has created two problems. First, not all Adobe customers believe that Adobe’s new subscription business model is an improvement for them. If customers stop paying their monthly subscription they don’t just lose access to the Adobe Creative Suite software (Photoshop, Illustrator, etc.) used to create their work, they may lose access to the work they created.

Second, they unintentionally overshot the needs of students, small business and casual users, driving them to “good-enough” replacements like Pixelmator, Acorn, GIMP for PhotoShop and Sketch, iDraw, and ArtBoard for Illustrator.

The consequence of discarding low margin customers and optimizing revenue and margin in the short-term, Adobe risks enabling future competitors. In fact, this revenue model feels awfully close to the strategy of the U.S. integrated steel business when they abandoned their low margin business to the mini-mills.

Tesla
What could go wrong with making a car incrementally better over time? First, Tesla’s unilateral elimination of features already paid for without consumers consent is a troubling precedent for cloud connected durable goods.

Second, Telsa’s elimination of model years and its aggressive marketing of the benefits of continuous development of hardware and software have set its current customers expectations unreasonably high. Some feel entitled to every new hardware feature rolled into manufacturing, even if the feature (i.e. faster charging, new parking sensors,) was not available when they bought their cars – and even if their car isn’t backwards compatible.

Model years gave consumers an explicit bound of what to expect. This lack of boundaries results in some customer disappointment.

Lessons Learned

  • Continuous Delivery/Deployment is a major engineering advance
  • It enables new business models
  • Customers don’t care about your business model, just it’s effect on them
  • While irrational, inefficient and illogical, people like shiny new toys
  • Subscription revenue models versus new purchases require consumer education
  • If your subscription revenue model “fires” a portion of your customers, it may enable new competitors
  • Companies need to clearly communicate customer entitlements to future features

Listen to the blog post here
Download the podcast here

Lessons Learned in Diagnostics

This post is part of our series on the National Science Foundation I-Corps Lean LaunchPad class in Life Science and Health Care at UCSF. Doctors, researchers and Principal Investigators in this class got out of the lab and hospital talked to 2,355 customers, tested 947 hypotheses and invalidated 423 of them. The class had 1,145 engagements with instructors and mentors. (We kept track of all this data by instrumenting the teams with LaunchPad Central software.)

Mira Medicine is one of the 26 teams in the class. The team members are:
  • Pierre-Antoine Gourraud – PhD, MPH UCSF neuroscientist and c0-leader of the MS BioScreen project
  • Jason Crane – PhD UCSF Manager Scientific Software Development
  • Raphaelle Loren – Managing Director – Health Practice at the Innovation Management Institute

Todd Morrill was the diagnostics cohort instructor. Matt Cooper CEO of Carmenta BioSciences was the Mira Medicine team mentor.

Multiple Sclerosis – MS
Multiple Sclerosis – MS – is an immune system disease that attacks the myelin, the fatty sheath that surrounds and protects nerve fibers of the central nervous system (brain, spinal cord, and optic nerve). T-cells, (a type of white blood cell in the immune system,) become sensitized to myelin and cross the blood-brain barrier into the central nervous system (CNS). Once in the CNS, these T-cells injure myelin, and secrete chemicals that damage nerve fibers (axons) and recruit more damaging immune cells to the site of inflammation. multiple sclerosis and therapeutic targets

There are currently ten FDA approved MS medications for use in relapsing forms of MS. None of these drugs is a cure, and no drug is approved to treat the type of MS that shows steady progression at onset. MS disease management decisions are complex and requires a patients neurologist to figure out what drugs to use.

Mira Medicine and Multiple Sclerosis
The team came to class with the thought of commercializing the UCSF Multiple Sclerosis BioScreen Project a Precision Medicine application that integrates a patients medical records with the latest population-based data from hundreds of other Multiple Sclerosis patients, (including their 3D MRI scans,) and using predictive algorithms makes it possible to chart a unique course of treatment for each patient. (Mira Medicine team member Pierre-Antoine Gourraud was the project co-leader.) MS BioScreen

Mira wanted to commercialize the UCSF Multiple Sclerosis Bioscreen project and to add additional neurological diseases which require multiple types of data  (including biomarkers, clinical, and imaging). They wanted to help medical centers and large providers assess disease progression to guide therapeutic decision-making.  Over the course of the class Mira Medicine team spoke to over 80 customers, partners and payers.

Here’s their 2 minute video summary

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

Then reality hit. First, the team found that their Multiple Sclerosis Bioscreen application (which they used as their MVP) was just a “nice-to-have”, not a “must-have”. In fact, the “must have features” were their future predictive algorithms. Next, they found that if their tool can enable a diagnosis, (even without claiming it could) then it was likely that the FDA would require a  510(k) medical device clearance. Then they found to get reimbursed they need a CPT code (and they had to decide whether to code stack – using multiple codes for “one” diagnosis, and thereby getting multiple reimbursements for one test. (The rules have changed so that code stacking is hard or impossible), Or get a new CPT code, or use miscellaneous code.) To get a new CPT and a 510(k) they would have to perform a some sort of clinical study. At a minimum a 1-year prospective study (a study to see if the neurologists using the application had patients with a better outcome then those who didn’t have access to the app). Getting approval to use an existing (aka old) CPT code means showing equivalence to an existing dx process or test, and the requirements are code-specific. Finally, to get access to data sources of other MS patients they would need to have HIPPA Business Associate Agreement.

Watch their Lessons Learned video below and find out how they pivoted and what happened.

If you can’t see the video above click here

Look at their Lesson Learned slides below If you can’t see the presentation above, click here

Lessons Learned

  • Researchers and PI’s come in believing “My science/project/data are so good that people will immediately see the value and be willing to pay for it.  It will “sell itself”.
  • A business is much more than just good science: it is about customers seeing value and being willing to pay and proper validation and reimbursement coding and
  • A successful business is the sum (and integration!) of all the parts of the business model canvas.
    • It includes reimbursement, regulation, IP, validation, channel access, etc.

Listen to the blog post here

Download the podcast here

Lessons Learned in Therapeutics

This post is part of our series on the National Science Foundation I-Corps Lean LaunchPad class in Life Science and Health Care at UCSF. Doctors, researchers and Principal Investigators in this class got out of the lab and hospital talked to 2,355 customers, tested 947 hypotheses and invalidated 423 of them. The class had 1,145 engagements with instructors and mentors. (We kept track of all this data by instrumenting the teams with LaunchPad Central software.)

We are redefining how translational medicine is practiced.

Traditional view of translational medicineWe’ve learned that translational medicine is not just about the science.

More on this in future blog posts.

Lean view of translational medicine

Vitruvian Therapeutics is one of the 26 teams in the class. The team members are:
  • Dr. Hobart Harris  Chief of  General Surgery, Vice-Chair of the Department of Surgery, and a Professor of Surgery at  UCSF.
  • Dr. David Young,  Professor of Plastic Surgery at UCSF. His area of expertise includes wound healing, microsurgery, and reconstruction after burns and trauma. 
  • Cindy Chang is a Enzymologist investigating novel enzymes involved in biofuel and chemical synthesis in microbes at LS9

Karl Handelsman was the therapeutics cohort instructor. Julie Cherrington CEO of Pathway Therapeutics was the team mentor.

Vitruvian Therapeutics is trying to solve the Incisional hernia problem. An incisional hernia happens in open abdominal surgery when the area of the wound doesnt heal properly and bulges outward. This requires a second operation to fix the hernia.Ventral Herniaincisional hernia

Hobart Harris’s insight was what was needed wasn’t one more new surgical technique or device to repair the hernias, but something to prevent the hernia from occurring in the first place. Vitruvian Therapeutics first product, MyoSeal, does just that. It promotes wound repair via biocompatible microparticles plus a fibrin tissue sealant. So far in 300 rats it’s been shown to prevent incisional hernias through enhanced wound healing.

Here’s their 2 minute video summary

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

Two weeks into the class and interviews with 14 of their potential customers (surgeons) reality intruded on their vision of how the world should work. We happened to catch that moment in class in this 90 second clip.

Watch  and find out how talking to just the first 14 customers in the Lean LaunchPad class saved Hobart Harris and the Vitruvian Therapeutics team years.

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

The Vitruvian Therapeutics Lessons Learned Presentation is a real-eyeopener. Given that this product could solve the incisional hernia problem, Hobart and his team naturally assumed that insurance companies would embrace this and their fellow surgeons viewed the problem as they did and would leap at using the product. Boy were they in for a surprise. After talking to 74 surgeons, insurance companies and partners appeared that no one – insurance companies or surgeons – owned the problem. Listen to their conclusions 8-weeks after the first video.

Watch the video and find out how they pivoted and what happened.

Don’t miss Karl Handelsman comments on their Investment Readiness Level at the end. Vitruvian is a good example of a great early stage therapeutics idea with animal data missing and many key components of the business model still needed to verify.

If you can’t see the video above click here

Look at their Lesson Learned slides below

If you can’t see the presentation above, click here

Market Type
During the class the Vitruvian Therapeutics class struggled with the classic question of visionaries: are we creating a New Market (one which doesn’t exist and has no customers)? In Vitruvian’s case preventive measures to stop incisional hernias before they happen.  Or should we position our product as one that’s Resegmenting an Existing Market? i.e. reducing leakage rates.  Or is there a way to get proof that the vision of the New Market is the correct path.

When Hobart Harris of Viturvian asked, “… what if you’re a visionary, and no one but you sees the right solution to a problem” we had a great in-class dialog. Karl Handelsman‘s comments at 3:15 and 4:16 and Allan May at 4:35 were incredibly valuable. See the video below for the dialog.

If you can’t see the video above, click here

Further Reading

Lessons Learned

  • Principal Investigators, scientists and engineers can’t figure out commercialization sitting in their labs
  • You can’t outsource commercialization to a proxy (consultants, market researchers, etc.)
  • Experiential Learning is integral to commercialization
  • You may be the smartest person in your lab, but your are not smarter than the collective intelligence of your potential customers, partners, payers and regulators

Listen to the blog post here

Download the podcast here

Moneyball and the Investment Readiness Level-video

Eric Ries was kind enough to invite me to speak at his Lean Startup Conference.

In the talk I reviewed the basic components of the Lean Startup and described how we teach it. I observed that now that we’ve built software to instrument and monitor the progress of new ventures (using LaunchPad Central), that we are entering the world of evidence-based entrepreneurship and the Investment Readiness Level.

This video is a companion to the blog post here. Read it for context.

If you can’t see the video above, click here

You can follow the talk along using the slides below

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

Additional videos here

Startup Tools here

Listen the blog post here

Download the podcast here

Lessons Learned in Medical Devices

This post is part of our series on the National Science Foundation I-Corps Lean LaunchPad class in Life Science and Health Care at UCSF. Doctors, researchers and Principal Investigators in this class got out of the lab and hospital talked to 2,355 customers, tested 947 hypotheses and invalidated 423 of them.  The class had 1,145 engagements with instructors and mentors. (We kept track of all this data by instrumenting the teams with LaunchPad Central software.)

We are redefining how translational medicine is practiced. It’s Lean, it’s fast, it works and it’s unlike anything else ever done.

—–

Sometimes teams win when they fail.

Knox Medical Devices was building a Spacer which contained a remote monitoring device to allow for intervention for children with Asthma . (A Spacer is a tube between a container of Asthma medicine (in an inhaler) and a patient’s mouth.The tube turns the Asthma medicine into an aerosol.)Asthma

Knox’s spacer had sensors for basic spirometry measurements (the amount of air and how fast it’s inhaled and exhaled) to see how well the lung is working. It also had a Nitrous Oxide sensor to provide data on whether the lungs airways are inflamed, an inhaler attachment and a GPS tracking device.

Knox SpacerThe Spacer hardware was paired with data analysis software for tracking multiple facets of asthma patients.

The Knox team members are:

Allan May founder of Life Science Angels was the Medical Device cohort instructor. Alex DiNello CEO at Relievant Medsystems was their mentor.

The Knox team was a great mix of hands-on device engineers and business development. They used agile engineering perfectly to continually test variants of their Minimum Viable Product (MVP’s) in front of customers often and early to get immediate feedback.

Knox was relentless about understanding whether their device was a business or whether it was technology in search of a market. In 10 weeks they had face-to-face meetings with 117 customers, tested 33 hypotheses, invalidated 19 of them and 53 instructor and mentor interactions.

Here’s Knox Medical’s 2 minute video summary

If you can’t see the video above, click here

Knox was a great example of having a technology in search of a customer. The initial hypothesis of who would pay for the device – parents of children with asthma – was wrong and resulted in Knox’s first pivot in week 4. By week 6 they had discovered that; 1) Peak Flow Meters are not as heavily prescribed as they thought, 2) Insurance company reimbursement is necessary for anything upwards of $15, 3) Nitrous Oxide testing isn’t currently used to measure asthma conditions.

After the pivot they the found that the most likely users of their device would be low income Asthma patients who are treated at Asthma clinics funded by federal, state or county dollars. These clinics reduce hospitalization but Insurers weren’t paying to cover clinic costs nor would they cover the use of the Knox device. The irony was that those who most needed the Knox device were those who could least afford it and wouldn’t be able get it.

Watch their Lesson Learned presentation below. Listen to the comments from Allan May the Device instructor at the end.

If you can’t see the video above, click here

In the end Knox, like a lot of startups in Life Science and Health Care, discovered that they had a multi-sided market.  They realized late in the class the patients (and their families) were not their payers – their payers were the insurance companies (and the patients were the users.)  If they didn’t have a compelling value proposition for the insurers (cost savings, increased revenue, etc.) it didn’t matter how great the technology was or how much the patients would benefit.

The Knox Medical Device presentation slides are below. Don’t miss the evolution of their business model canvas in the appendix. It’s a film strip of the entrepreneurial process in action.

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

Knox is a great example of how the Lean LaunchPad allows teams to continually test hypotheses and fail fast and inexpensively. They learned a ton. And saved millions.

Lessons Learned

  • In medical devices, understanding reimbursement, regulation and IP is critical
  • Sometimes teams win when they fail
Download the podcast here

Lessons Learned in Digital Health

This post is part of our series on the National Science Foundation I-Corps Lean LaunchPad class in Life Science and Health Care at UCSF.

Our Lean LaunchPad for Life Science class talked to 2,355 customers, tested 947 hypotheses and invalidated 423 of them.  They had 1,145 engagements with instructors and mentors. (We kept track of all this data by instrumenting the teams with LaunchPad Central software.)

This post is one of a series of the “Lessons Learned” presentations and videos from our class.

Sometimes a startup results from a technical innovation. Or from a change in regulation, declining costs, changes in consumers needs or an insight about customer needs. Resultcare, one of the 26 teams in the class started when a resident in clinical medicine at UCSF watched her mother die of breast cancer and her husband get critically injured.

The team members are:

  • Dr. Mima Geere  Clinical Medicine at UCSF.
  • Dr. Arman Jahangiri HHMI medical fellow at UCSF, Department of Neurological Surgery
  • Dr. Brandi Castro in Neuroscience at UCSF
  • Mitchell Geere product design
  • Kristen Bova MBA, MHS
  • Nima Anari PhD in Data Science

Abhas Gupta was the Digital Health cohort instructor. Richard Caro was their mentor.

ResultCare is a mobile app that helps physicians take the guesswork out of medicine. It enables physicians to practice precision medicine while reducing costs.precision medicine

Here’s Resultcare’s 2 minute video summary

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

Watch their Lesson Learned presentation below. The first few minutes of the talk is quite personal and describes the experiences that motivated Dr. Geere to address this problem.

If you can’t see the video above, click here

The Resultcare presentation slides are below.

If you can’t see the presentation above, click here

Listen to the blog post here

Download the podcast here

We’ve seen the Future of Translational Medicine and it’s Disruptive

A team of 110 researchers and clinicians, in therapeutics, diagnostics, devices and digital health in 25 teams at UCSF, has just shown us the future of translational medicine.  It’s Lean, it’s fast, it works and it’s unlike anything else ever done.

It’s going to get research from the lab to the bedside cheaper and faster.

Welcome to the Lean LaunchPad for Life Sciences and Healthcare (part of the National Science Foundation I-Corps).

This post is part of our series on the Lean Startup in Life Science and Health Care.

——–

Our class talked to 2,355 customers, tested 947 hypotheses and invalidated 423 of them.  They had 1,145 engagements with instructors and mentors. (We kept track of all this data by instrumenting the teams with LaunchPad Central software.)

In a packed auditorium in Genentech Hall at UCSF, the teams summarized what they learned after 10 weeks of getting out of the building. This was our version of Demo Day – we call it “Lessons Learned” Day. Each team make two presentations:

  • 2 minutes YouTube Video: General story of what they learned from the class
  • 8 minute Lessons Learned Presentation: Very specific story about what they learned in 10 weeks about their business model

In the next few posts I’m going to share a few of the final “Lessons Learned” presentations and videos and then summarize lessons learned from the teaching team.

Magnamosis
Magnamosis is a medical device company that has a new way to create a magnetic compression anastomosis (a surgical connection between two tubular structures like the bowel) with improved outcomes.

anastomosis

Team Members were: Michael Harrison (the father of fetal surgery), Michael Danty, Dillon Kwiat, Elisabeth Leeflang, Matt Clark.  Jay Watkins was the team mentor. Allan May and George Taylor were the medical device cohort instructors.

Their initial idea was that making an anastomosis that’s better, faster and cheaper will have surgeons fighting to the death to get a hold of their device.  magnamosisThey quickly found out that wasn’t the case.  Leak rates turned out to a bigger issue with surgeons and a much larger market.

Here’s their 2 minute video summary

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

Watch their Lessons Learned video below and see how a team of doctors learned about product/market fit, channels and pricing.

If you can’t see the video above, click here

Their slide deck is below. Don’t miss the evolution of their business model in the Appendix.

If you can’t see the presentation above, click here

The best summary of why Scientists, Engineers and Principal Investigators need to get out of the building was summarized by Dr. Harrison below. After working on his product for a decade listen to how 10 weeks of the Lean LaunchPad class radically changed his value proposition and business model.

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

For further reading:

Listen to the blog post here

Download the podcast here

When Customers Make You Smarter

We talk a lot about Customer Development, but there’s nothing like seeing it in action to understand its power. Here’s what happened when an extraordinary Digital Health team gained several critical insights about their business model. The first was reducing what they thought was a five-sided market to a simpler two-sided one.

But the big payoff came when their discussions with medical device customers revealed an entirely new way to think about pricing —potentially tripling their revenue.

——

We’re into week 9 of teaching a Lean LaunchPad class for Life Sciences and Health Care (therapeutics, diagnostics, devices and digital health) at UCSF teaching with a team of veteran venture capitalists. The class has talked to ~2,200 customers to date. (Our final – not to be missed – Lessons Learned presentations are coming up December 10th.)

Among the 28 startups in the Digital Health cohort is Tidepool. They began the class believing they were selling an open data and software platform for people with Type 1 Diabetes into a multi-sided market comprised of patients, providers, device makers, app builders and researchers.

tidepool website

The Tidepool team members are:

  • Aaron Neinstein MD  Assistant Professor of Clinical Medicine, Endocrinology and Assistant Director of Informatics at UCSF. He’s an expert in the intersection between technological innovations and system improvement in healthcare. His goal is to make health information easier to access and understand.
  • Howard Look, CEO of Tidepool, was VP of Software and User Experience at TiVo. He was also VP of Software at Pixar, developing Pixar’s film-making system, and at Amazon where he ran a cloud services project. At Linden Lab, delivered the open-sourced Second Life Viewer 2.0 project. His teenage daughter has Type 1 diabetes.
  • Brandon Arbiter was a VP at FreshDirect where he built the company’s data management and analytics practices. He was diagnosed at age 27 with Type 1 Diabetes. He developed a new generation diabetes app, “nutshell,” that gives patients the information they need to make the right decisions about their dosing strategies.
  • Kent Quirk was director of engineering at Playdom and director of engineering at Linden Labs.

A Five-sided Market
In Week 1 the Tidepool team diagramed its customer segment relationships like this:

Tidepool ecosystem

Using the business model canvas they started with their value proposition hypotheses, articulating the products and services they offered for each of the five customer segments. Then they summarized what they thought would be the gain creators and pain relievers for each of these segments.

Tide pool value prop week 1

Next, they then did the same for the Customer Segment portion of the canvas. They listed the Customer Jobs to be done and the Pains and Gains they believed their Value Proposition would solve for each of their five customer segments.

Tide pool cust week 1

It’s Much Simpler
Having a multisided market with five segments is a pretty complicated business model. In some industries such as medical devices its just a fact of life. But after talking to dozens of customers by week 3, Tidepool discovered that in fact they had a much simpler business model – it was a two-sided market.

tidepool simplification

They discovered that the only thing that mattered in the first year or two of their business was building the patient-device maker relationship. Everything else was secondary. This dramatically simplified their value proposition and customer segment canvas.

So they came up with a New Week 3 Value Proposition Canvas:

Tide pool value prop week 3

And that simplified their New Week 3 Customer Segment Canvas

Tide pool cust week 3

Cost-based Pricing versus Value-based Pricing
While simplifying their customer segments was a pretty big payoff for 3 weeks into the class, the best was yet to come.

As part of the revenue streams portion of the business model canvas, each team has to diagram the payment flows.

Tide pool market pricing

The Tidepool team originally believed they were going charge their device partners “market prices” for access to their platform. They estimated their Average Revenue per User (ARPU) would be about $36 per year.

Tide pool market pricing ARPU

But by week 6 they had spoken to over 70 patients and device makers. And what they found raised their average revenue per user from $36 to $90.

When talking to device makers they learned how the device makers get, keep and grow their customers.  And they discovered that:

  • device makers were spending $500-$800 in Customer Acquisition Cost (CAC) to acquire a customer
  • device makers own customers would stay their customers for 10 years (i.e. the Customer Life Time (CLT))
  • and the Life Time Value (LTV) of one customer over those 10 years to a device maker is $10,000

Tide pool market pricing device cac

These customer conversations led the Tidepool team to further refine their understanding of the device makers’ economics.  They found out that the device makers sales and marketing teams were both spending money to acquire customers.  ($500 per sales rep per device + $800 marketing discounts offered to competitors’ customers.)

Tide pool device economics

Once they understood their device customers’ economics, they realized they could help these device companies reduce their marketing spend by moving some of those dollars to Tidepool. And they realized that the use of the Tidepool software could reduce the device companies’ customer churn rate by at least 1%.

This meant that Tidepool could price their product based on the $1,800 they were going to save their medical device customers.  Read the previous sentence again. This is a really big idea.

Tide pool value pricing big idea

The Tidepool team went from cost-based pricing to value-based pricing. Raising their average revenue per user from $36 to $90.

Tide pool value pricing $90 ARPU

There is no possible way that any team, regardless of how smart they are could figure this out from inside their building.

If you want to understand how Customer Discovery works and what it can do in the hands of a smart team, watch the video below. The team ruthlessly dissects their learning and builds value-pricing from what they learned.

This short video is a classic in Customer Discovery.

If you can’t see the video click here.

Lessons Learned

  • Most startups begin by pricing their product based on cost or competition
  • Smart startups price their product based on value to the customer
  • You can’t guess how your product is valued by customers
  • Customer Development allows you to discover the economics needed for value pricing your product

Listen to the podcast here

Download the podcast here

It’s Time to Play Moneyball: The Investment Readiness Level

Investors sitting through Incubator or Accelerator demo days have three metrics to judge fledgling startups – 1) great looking product demos, 2) compelling PowerPoint slides, and 3) a world-class team.

We think we can do better.

We now have the tools, technology and data to take incubators and accelerators to the next level. Teams can prove their competence and validate their ideas by showing investors evidence that there’s a repeatable and scalable business model. And we can offer investors metrics to play Moneyball – with the Investment Readiness Level.

Here’s how.

————–

We’ve spent the last 3 years building a methodology, classes, an accelerator and software tools and we’ve tested them on ~500 startups teams.

  • A Lean Startup methodology offers entrepreneurs a framework to focus on what’s important: Business Model Discovery. Teams use the Lean Startup toolkit: the Business Model Canvas + Customer Development process + Agile Engineering. These three tools allow startups to focus on the parts of an early stage venture that matter the most: the product, product/market fit, customer acquisition, revenue and cost model, channels and partners.

Lean moneyball

  • An Evidence-based Curriculum (currently taught in the Lean LaunchPad classes and NSF Innovation Corps accelerator). In it we emphasize that a) the data needed exists outside the building, b) teams use the scientific method of hypothesis testing c) teams keep a continual weekly cadence of:
    • Hypothesis – Here’s What We Thought
    • Experiments – Here’s What We Did
    • Data – Here’s What We Learned
    • Insights and Action – Here’s What We Are Going to Do Next

Evidence moneyball

  • LaunchPad Central software is used to track the business model canvas and customer discovery progress of each team. We can see each teams hypotheses, look at the experiments they’re running to test the hypotheses, see their customer interviews, analyze the data and watch as they iterate and pivot.

LPC

We focus on evidence and trajectory across the business model. Flashy demo days are great theater, but it’s not clear there’s a correlation between giving a great PowerPoint presentation and a two minute demo and building a successful business model. Rather than a product demo – we believe in a “Learning Demo”. We’ve found that “Lessons Learned” day showing what the teams learned along with the “metrics that matter” is a better fit than a Demo Day.

“Lessons Learned” day allows us to directly assess the ability of the team to learn, pivot and move forward. Based on the “lessons learned” we generate an Investment Readiness Level metric that we can use as part of our “go” or “no-go” decision for funding.

Some background.

NASA and the Technology Readiness Level (TRL)
In the 1970’s/80’s NASA needed a common way to describe the maturity and state of flight readiness of their technology projects.  They invented a 9-step description of how ready a technology project was.  They then mapped those 9-levels to a thermometer.NASA TRL

What’s important to note is that the TRL is imperfect. It’s subjective. It’s incomplete.  But it’s a major leap over what was being used before.  Before there was no common language to compare projects.

The TRL solved a huge problem – it was a simple and visual way to share a common understanding of technology status.  The U.S. Air Force, then the Army and then the entire U.S. Department of Defense along with the European Space Agency (ESA) all have adopted the TRL to manage their complex projects. As simple as it is, the TRL is used to manage funding and go/no decisions for complex programs worldwide.

We propose we can do the same for new ventures – provide a simple and visual way to share a common understanding of startup readiness status. We call this the Investment Readiness Level . 

The Investment Readiness Level (IRL)
The collective wisdom of venture investors (including angel investors, and venture capitalists) over the past decades has been mostly subjective. Investment decisions made on the basis of “awesome presentation”, “the demo blew us away”, or “great team” is used to measure startups. These are 20th century relics of the lack of data available from each team and the lack of comparative data across a cohort and portfolio.

Those days are over.

Hypotheses testing and data collection
We’ve instrumented our startups in our Lean LaunchPad classes and the NSF I-Corps incubator using LaunchPad Central to collect a continuous stream of data across all the teams.  Over 10 weeks each team gets out and talks to 100 customers. And they are testing hypotheses across all 9 boxes in the business model canvas.

We collect this data into a Leaderboard (shown in the figure below) giving the incubator/accelerator manager a single dashboard to see the collective progress of the cohort. Metrics visible at a glance are number of customer interviews in the current week as well as aggregate interviews, hypotheses to test, invalidated hypotheses, mentor and instructor engagements. This data gives a feel for the evidence and trajectory of the cohort as a whole and a top-level of view of each teams progress.

leaderboard moneyball

Next, we have each team update their Business Model Canvas weekly based on the 10+ customer interviews they’ve completed.

canvas updates moneyball

The canvas updates are driven by the 10+ customer interviews a week each team is doing. Teams document each and every customer interaction in a Discovery Narrative. These interactions provide feedback and validate or invalidate each hypothesis.

disovery 10 moneyball

Underlying the canvas is an Activity Map which shows the hypotheses tested and which have been validated or invalidated.

activty updates moneyball

All this data is rolled into a Scorecard, essentially a Kanban board which allows the teams to visualize the work to do, the work in progress and the work done for all nine business model canvas components.

scorecard update moneyball

Finally the software rolls all the data into an Investment Readiness Level score.

IRL

MoneyBall
At first glance this process seems ludicrous. Startup success is all about the team. Or the founder, or the product, or the market – no metrics can measure those intangibles.

Baseball used to believe that as well. Until 2002 – when the Oakland A’s’ baseball team took advantage of analytical metrics of player performance to field a team that competed successfully against much richer competitors.

Statistical analysis demonstrated that on-base percentage and slugging percentage were better indicators of offensive success, and the A’s became convinced that these qualities were cheaper to obtain on the open market than more historically valued qualities such as speed and contact. These observations often flew in the face of conventional baseball wisdom and the beliefs of many baseball scouts and executives.

By re-evaluating the strategies that produce wins on the field, the 2002 Oakland A’s spent $41 million in salary, and were competitive with the New York Yankees, who spent $125 million.

Our contention is that the Lean Startup + Evidence based Entrepreneurship + LaunchPad Central Software now allows incubators and accelerators to have a robust and consistent data set across teams. While it doesn’t eliminate great investor judgement, pattern recognitions skills and mentoring – it does provide them the option to play Moneyball.

if you can’t see the video above click here

Last September Andy Sack, Jerry Engel and I taught our first stealth class for incubator/accelerator managers who wanted to learn how to play Moneyball.

We’re offering one again this January here.

Lessons Learned

  • It’s not clear there’s a correlation between a great PowerPoint presentation and two minute demo and building a successful business
  • We now have the tools and technology to take incubators and accelerators to the next step
  • We focus on evidence and trajectory across the business model
  • The data gathered can generate an Investment Readiness Level score for each team
  • the Lean Startup + Evidence based Entrepreneurship + LaunchPad Central Software now allows incubators and accelerators to play Moneyball

Listen to the podcast here

Download the podcast here

Lean LaunchPad for Life Sciences – Revenue Streams

We’re teaching a Lean LaunchPad class for Life Sciences and Health Care (therapeutics, diagnostics, devices and digital health) at UCSF with a team of veteran venture capitalists. The class has talked to 2,056 customers to date.

This post is an update of what we learned about life science revenue models.

Life Science/Health Care revenue streams differ by Category
For commercialization, the business model (Customers, Channel, Revenue Model, etc.) for therapeutics, diagnostics, devices, bioinformatics and digital health have very little in common.

This weeks topic was revenue streams – how much cash the company can generate from each customer segment. Revenue streams have two parts: the revenue strategy and the pricing tactics.

Figuring out revenue strategy starts by gaining a deep understanding of the target customer(s). Setting a revenue strategy starts with understanding the basics about the customer segments:

  • who’s the user, the recommender, buyer, and payer
  • How the target customer currently purchases goods and services and how much they currently pay for equivalent products
  • Their willingness to pay for value versus lowest cost?
  • How much budget they have for your type of product?

Revenue strategy asks questions like, “Should we offer cost-based or value-based pricing.  How about demand-based pricing? Freemium? Do we price based on hardware sales or do we offer hardware plus consumables (parts that need to be disposed or replaced regularly)? Do we sell a single software package or a subscription?  These strategy hypotheses are tested against the target customer segment(s).

Once you’ve established a revenue strategy the pricing tactics follow. Pricing is simply “how much can I charge for the product using the selected revenue strategy?”  Pricing may be as simple as setting a dollar value for hardware or software, or as complicated as setting a high price and skimming the market or setting a low price as a loss leader.

You can get a feel for how each of the cohorts address the Revenue Streams by looking at the Revenue lectures below – covering the therapeutics, diagnostics, devices and digital health cohorts.

At the end of the lectures you can see a “compare and contrast” video and a summary of the differences in distribution channels.

Diagnostics

Week 5 Todd Morrill Instructor 

If you can’t see the presentation above click here

Digital Health

Week 5 Abhas Gupta Instructor 

If you can’t see the presentation above click here

Devices

Week 5 Allan May Instructor 

If you can’t see the presentation above click here

Therapeutics

Week 5 Karl Handelsman Instructor 

If you can’t see the presentation above click here

Life Science and Health Care Differences in Revenue Streams
”
This weeks lecture and panel was on Revenue; how much cash the company can generate from each customer segment – and the strategy and tactics to do so. Therapeutics, diagnostics, devices and digital health use different Revenue Strategies and Pricing Tactics, in the video and the summary that follows the instructors compare and contrast how they differ.

If you can’t see the video above click here

Therapeutics (Starting at 0:30)

  • Therapeutics revenue is from drug companies not end users
  • 18 months to first revenue from a deal
  • Predicated on delivering quality data to a company
  • Deal can be front-end or back-end loaded
  • Quality of the data has to be extremely high for a deal

Diagnostics (Starting at 4:10)

  • Diagnostic revenue is from end users: a hospital or clinical lab
  • You need to figure out value of your product but…
  • Pricing is capped by your reimbursement (CPT) code limits
  • Reimbursement strategy is paramount, design to good codes avoid bad ones
  • Find a reimbursement code consultant
  • Don’t do cost-based pricing… go for value-based pricing

Medical Devices (Starting at 8:23)

  • There really is no such thing as a perfect First Generation Medical Device
    • So Medical Device companies often start with a Volkswagen product and then build to the Ferrari product
  • Revenue models are typically direct product sales
  • Don’t do cost-based pricing… go for value-based pricing, especially where your device lowers the treatment costs of the patient
  • In most cases, pricing is capped by your reimbursement (CPT) code limits
    • Or pricing can be capped by what competitors offer, unless you can demonstrate superior cost savings
    • In a new market there is no reimbursement code but if you show high cost-savings you can get a high reimbursement rate
  • A risk in device hardware is getting trapped in low-volume manufacturing with low margins and run out of cash

Digital Health (Starting at 10:35)

  • Digital Health revenue models are often subscription models to a company per month across a large number of users
    • Intermediation fees – where you broker a transaction – are another source of revenue (i.e. HealthTap)
    • Advertising is another digital health revenue model, but requires at least 10 million users to have a meaningful model, but can be lower if you have higher value uses like specialist physicians because  you can charge dollars not cents
  • Don’t do cost-based pricing… go for value-based pricing
    • Value-based pricing is based on the needs you’ve learned from the customer segment and the strength of your product/market fit
      • the sum of customer needs + product/market fit = the pricing you can achieve

Lessons Learned

  • Each of these Life Science domains has a unique revenue strategy and pricing tactic
  • In therapeutics revenue comes in lump milestone payments from drug companies based on quality data
  • Diagnostics revenue comes value pricing to hospital or clinical lab
    • capped by reimbursement (CPT) code limits
  • Device pricing starts by offering an initial value-priced base product and then following up with a fully featured product
    • capped by reimbursement (CPT) code limits
  • Digital health products use subscription value pricing. Alternatively may use advertising revenue model

Listen to the podcast here

Download the podcast here

Lean LaunchPad for Life Sciences – Distribution Channels

We’re teaching a Lean LaunchPad class for Life Sciences and Health Care (therapeutics, diagnostics, devices and digital health) at UCSF with a team of veteran venture capitalists. The class has talked to 1,780 customers to date.

This post is an update of what we learned about life science distribution channels.

Life Science/Health Care distribution channels differ by Category
It turns out that for commercialization, the business model (Customers, Channel, Revenue Model, etc.) for therapeutics, diagnostics, devices, bioinformatics and digital health have very little in common.

This weeks topic was distribution channels; how your product gets from your company to your potential customer segments. You can get a feel for how each of the cohorts address the channel by looking at the distribution channel lectures below – covering the therapeutics, diagnostics, devices and digital health cohorts.

At the end of the lectures you can see a “compare and contrast” video and a summary of the differences in distribution channels.

Diagnostics

Week 3 Todd Morrill Instructor 

If you can’t see the presentation above click here

Digital Health

Week 3 Abhas Gupta Instructor 

If you can’t see the presentation above click here

Devices

Week 3 Allan May Instructor 

If you can’t see the presentation above click here

Therapeutics

Week 3 Karl Handelsman Instructor 

If you can’t see the presentation above click here

Life Science and Health Care Differences in Distribution Channels
This weeks lecture and panel was on distribution channels; how your product gets from your company to your potential customer segments. Therapeutics, diagnostics, devices and digital health use different different channels, in the video and the summary that follows the instructors compare and contrast how they differ.

If you can’t see the video above click here

Medical Devices (Starting at 0:50)

  • Medical Device Distribution Channels in general are a sales team hired directly by the company.
    • A sales team typically includes a sales person and clinical applications specialists.
    •  The specialists help train and educate physician users. They assist with the sale and work with marketing to create demand.
  • Some device industries are controlled by distributors (indirect sales.)
    • Distributors tend to resell commodity products from multiple suppliers.
  • Channel Cost =  $350-400,000 per sales team. On average there’s 1 clinical applications specialist to 2 salespeople.  A lean rollout for a startup would be 4-5 sales people plus 2-3 clinical applications specialists at a cost of ~$2.5 million/year
    • Increasing the number of sales people much past 4-5 for a rollout does not proportionally increase revenue in most cases, because you are on the front end of early adopters and wrestling to overcome and reduce the sales learning curve
    • Travel and Entertainment is a big part of the sales budget since they are all flying weekly to cover accounts
  • 90-180 days for salespeople to become effective
  • Expect little or no revenue for 2- 3 quarters after they start
  • Major reason for failure = hiring sales and marketing staff too quickly
  • Generally an Educational Sale – Hire sales and clinical people first to help early adopters, such as Key Opinion Leaders (KOL’s), master the learning curve with your device so they can write and present papers to influence their peers 

Diagnostics (Starting at 5:16)

  • Diagnostic Channels = Direct sales in the US, with limited Distributor options
    • Many Distributors in Europe and in Asia
    • Sold to hospital laboratories, reference laboratories, or performed in CLIA labs
  • Channel Cost = $350,000+ per supported salesperson
  • Direct to consumer is a (rapidly) growing channel

Digital Health (Starting at 7:25)

  • Digital Health Channels = Direct Sales but you’re selling software to both end users and enterprises
  • Can use existing tech channels and new emerging channels such as Wellness platforms. (Audax Health, Humana Vitality, ShapeUp, Redbrick Health, Limeade)
  • Cloud-based Electronic Medical Records (EMR) are quickly becoming another distribution platform
  • App Stores, and Box are also channels for consumers and enterprise customers, respectively

Therapeutics (Starting at 10:17)

  • Therapeutics Channel = what you’re selling in the early stage is data and Intellectual Property to the pharmaceutical and biotech companies
  • Complicated Sales process – takes 18 months
  • Led by the CEO with a dedicated business development person and your science team
  • You need to define the data they need – this is influenced by how they view their pipeline, and how your technology can fill gaps in their pipeline
  • Pharmaceutical and biotech companies have therapeutics heads, technology scouts and business development people all searching for technology deals to fill their pipeline
  • This is a bound problem – there’s probably 80 people you need to know that make up your channel

Lessons Learned

  • Each of these Life Science domains has a unique distribution channel
  • In Devices innovative products require hiring direct sales people
    • but for commodity device products you may use a distributor
  • Diagnostics requires a direct sales force in the U.S.
    • Distributors in Europe and in Asia
  • In Digital Health direct sales is a possible channel, as are traditional software channels (App Stores, Box, etc.)
    • other DHealth channels such as Wellness Platforms, and cloud-based EMR’s are also emerging
  • In therapeutics it’s a direct sale of data and Intellectual property
    • led by the CEO with a dedicated business development person and your science team

Listen to the podcast here

Download the podcast here

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