ESADE Business School Commencement Speech

President Bieto, Dean Sauquet, members of the faculty, distinguished guests, and ladies and gentlemen….Thank you for the kind introduction. I’m honored to be at a university noted for knowledge, and in a city with 2000 years of history –  home of Gaudí one of the 20th century’s greatest innovators.ESADE quote

I’d like to start with a request.

Everyone, hold your phone up in the air like this.

Now look around.  In this sea of phones do you see any Blackberries? How about any Nokia phones?

Ok you can put your phones down now but let’s keep exploring this a bit. Raise your hand if you rented a VHS tape last night? Or if you used a paper map to find your way here?

These questions and your answers lie at the heart of what I’d like to talk about with you today: the changing face of innovation and your role in it.

Let’s start with Joseph Schumpeter. I’m sure many of you have heard his name. Schumpeter was an economist who taught at Harvard in the 1930’s and 40’s.  I like the guy because he’s credited with coining the word entrepreneur. But you probably remember him as the one who proposed the theory of creative destruction.  According to Schumpeter, capitalism is an evolutionary process where new industries and new companies continually emerge to knock out the old.

Fifty years later another Harvard professor, Clayton Christensen, developed his theory of disruptive innovation, which actually described how creative destruction worked.

Disruptive innovation leads to the creative destruction of businesses that once seemed pre-eminent and secure.

Which brings me back to your mobile phones.

Think about this; 7 years ago Nokia owned 50% of the handset market. Apple owned 0%.  In fact, it was only 7 years ago that Apple shipped its first iPhone and Google introduced its Android operating system.

Fast-forward to today—Apple is the most profitable Smartphone company in the world and in Spain Android commands a market share of more than 90%.  And Nokia?  Its worldwide market share of Smartphones has dwindled to 5%.

You’re witnessing creative destruction and disruptive innovation at work. It’s the paradox of progress in a capitalist economy.

So congratulations graduates – as you move forward in your careers, you’ll be face to face with innovation that’s relentless.

And that’s what I’d like to talk about today—how innovation will shape the business world of the next 50 years—and what it means for you.

——-

The Perfect Storm
Your time at ESADE has trained you to become a global business leader.

But the world you lead will be much different from the one your professors knew or your predecessors managed.

Just look at the disruptive challenges that businesses face today– globalization, China as a manufacturer, China as a consumer, the Internet, and a steady stream of new startups. Today’s workforce has radically different expectations, brands are losing their power, physical channels are being destroyed by virtual ones, market share is less important than market creation, and software is eating world.

Industries that we all grew up with, industries that enjoyed decades of market dominance – like newspapers, bookstores, video rentals, personal computers — are being swept away.

The convergence of digital trends along with the rise of China and globalization has upended the rules for almost every business in every corner of the globe. It’s worth noting that everything from the Internet, to electric cars, genomic sequencing, mobile apps, and social media — were pioneered by startups, not existing companies.

Perhaps that’s because where established companies might see risks or threats, startups see opportunity. As the venture capital business has come roaring back in the last 5 years, startups are awash in available capital. As a consequence, existing companies confront a tidal wave of competitors 100 times what they saw 25 years ago.

Efficiency over innovation
Yet in the face of all this change, traditional firms continue to embrace a management ethos that values efficiency over innovation. Companies horde cash and squeeze the most revenue and margin from the money they use. Instead of measuring success in dollars of profit, …firms focus on measuring capital efficiency. Metrics like Return on Net Assets, Return on Capital and Internal Rate of Return are the guiding stars of the board and CEO.

Cheered on by finance professors, Wall Street analysts, investors and hedge funds, companies have learned how to make metrics like Internal Rate of Return look great by one; outsourcing everything, two, getting assets off their balance sheet, and three only investing in things that pay off fast.

As Harvard professor Clayton Christensen noted, these efficiency metrics provided wise guidance for times when capital was scarce and raising money was hard. But they have also stacked the deck against investment in long-term innovation.

Since the financial crisis of 2008, policy makers have kept interest rates at near zero, flooding the market with cheap money in an attempt to restart growth. In spite of this, private equity funds have used the rallying cry of efficiency to hijack corporate strategy and loot the profits that historically would have been reinvested into research and development and new products. We legalized robbing the corporate treasury. Today billions of dollars that companies could have invested in innovation are sitting in the hands of private equity funds.

Unfortunately as we’ve learned from recent experience, using Return on Net Assets and IRR as proxies for efficiency and execution won’t save a company when their industry encounters creative disruption. Ask Sony about Samsung, ask any retailer about Amazon, any car company about Tesla, and any newspaper company about the web.

The stock market clearly values companies that can deliver disruptive innovation. Look at the valuations of companies like Tesla, Illumina, and Twitter.

In fact, I predict that over the next few decades, we will see two classes of public companies. The first will be commodity businesses that are valued for their ability to execute their current business model. Their lifetime as a market leader will be measured in years. The second class will be firms with a demonstrated ability to continually innovate and reinvent their business models. The companies that can show “startup-like” growth rates of 50% plus per year will get stratospheric market valuations.

So I hope you are thinking—“hey how can I lead a business with startup growth?” At least I hope you’re thinking that, rather than “oops I joined the wrong company.”The question for all of you is … “What will it take to inspire and manage this kind of innovation?”

Innovation
Before I answer that question, let’s take a minute to establish a common definition of innovation. At its most basic, innovation means to introduce something new. But in a business context, the meaning gets more nuanced. I’d like to describe the four types of innovation you can build inside a corporation:

The first type of corporate innovation is individual initiative. It’s exactly as it sounds – you build a corporate culture where anyone can suggest an idea and start a project. Some companies use a suggestion box, others like Google give employees 20% of their time to work on their own projects.

The second type of business innovation is called process improvement. This is the kind most of us are familiar with. Car companies introduce new models each year, running shoes grow ever lighter and more flexible, Coca-Cola offers a new version of Coke. Smart companies are always looking to make their current products better – and there are many ways to do this. For example they can reduce component cost, introduce a line extension or create new versions of the existing product. These innovations do not require change in a company’s existing business model.

This is what companies typically do to secure and defend their core business.

The third type of business innovation – continuous innovation – is much harder. Continuous innovation builds on a strength of the company’s current business model but requires that new elements be created. For example, Coke added snack foods, which could be distributed through its existing distribution channels. The Amazon Kindle played on Amazon’s strengths as a distributor of content but required developing expertise in electronics and manufacturing.

Fourth and finally is disruptive innovation – this is the innovation we associate with startups. This type of innovation creates new products or new services that did not exist before. It’s the automobile in the 1910’s, radio in the 1920’s, television in the 1950’s, the integrated circuit in the 1960’s, the fax machine in the 1970’s, personal computers in the 1980’s, the Internet in the 1990’s, and the Smartphone, human genome sequencing, and even fracking in this decade. These innovations are exactly what Schumpeter and Christensen were talking about. They create new industries and destroy existing ones. And interestingly, in spite of all their resources, large companies are responsible for very, very few disruptive innovations.

The first two types of innovation—individual and process innovation– are what good companies do well.  The third type—continuous innovation—is a hallmark of great companies like GE and Procter and Gamble.  But the fourth type of innovation – creating disruptive innovation– and doing it on a repeatable basis– is what extraordinary companies do. Apple with the iPod, iPhone and iPad; Amazon with Amazon Web Services and Kindle; Toyota with the Prius… these companies are extraordinary because, like startups, they create entirely new products and services.

ESADE and other great business schools have provided decades of advice and strategy for the first three types of innovation. But leading an existing firm to innovate like a startup is not business as usual.

Building Innovation Internally is Hard
Paradoxically, in spite of the seemingly endless resources, innovation inside of an existing company is much harder than inside a startup.  That’s because existing companies face a conundrum: Every policy and procedure that makes them efficient execution machines stifles innovation.

Think about this.  When it comes to innovation, public companies have two strikes against them.  First the markets favor capital efficiency over R&D.  And secondly, their sole purpose is to focus resources on the execution of their business model.

As a consequence, companies are optimized for execution over innovation. And to keep executing large organizations hire employees with a range of skills and competencies. To manage these employees companies create metrics to control, measure and reward execution.  But remember—in public companies financial metrics take precedence. As a result, staff functions and business units develop their own performance indicators and processes to ensure that every part of the organization marches in lock step to the corporate numbers.

These Key Performance Indicators and processes are what make a company efficient —but they are also the root cause of its inability to be agile and innovative. Every time another execution process is added, corporate innovation dies a little more.

Act Like a Startup
So how does a company act like a startup in search of new business models while still continuing to successfully execute?

First, management must understand that innovation happens not by exception but is integral to all parts of the firm. If they don’t, then the management team has simply become caretakers of the founders’ legacy. This never ends well.

Second and maybe the most difficult is the recognition that innovation is chaotic, messy and uncertain. Not everything will work out, but failure in innovation is not cause for firing but for learning. Managers need radically different tools to control and measure innovation. A company needs innovation policies, innovation processes and innovation incentives to match those it already has for execution. These will enable firms to embrace innovation by design not by exception.

Third, smart companies manage an innovation portfolio where they can pursue potential disruption in a variety of ways. To build innovation internally companies can adopt the practices of startups and accelerators.  To buy innovation companies can buy intellectual property, acquire great teams, buy-out another company’s product line or even buy entire companies. And if they’re particularly challenged in a market they can acquire and integrate disruptive innovation.  My favorite example is Exxon’s $35 billion purchase of XTO Energy in large part to get their fracking expertise.

Other smart companies are learning how to use Open Innovation pioneered by Henry Chesbrough who teaches here at ESADE. They can partner with suppliers, co-create with consumers, open-source key technologies, open their application programming interfaces, or run open incubators for customer ideas.

Everything I’ve been talking about smart companies have already figured out.  Many firms are creating the new role of Chief Innovation Officer to lead and manage these innovation activities. Ultimately this is not just another staff function. The Chief Innovation Officer is a c-level executive who runs the company’s entire innovation portfolio and oversees the integration of innovation metrics and initiatives across the entire organization.

Looking forward, all of you will play a role in the future of business innovation, whether you help to accelerate it or discourage it.
How can you kill innovation? Some companies have so lost the DNA for innovation they become “rent seekers”. Rent seekers fight to keep the status quo. Instead of offering better products or superior service, rent seekers hire lawyers and lobbyists to influence politicians to pass laws that block competition. The bad news here is that countries where bribes and corruption are the cost of doing business or that are dominated by organized interest groups, tend to be the economic losers. And as rent-seeking becomes more attractive than innovation, the economy falls into decline.

I know that’s not the path most of you want to take. Instead I think you want to be part of the innovation team.  And if you do you are in luck. Companies need your help.

They need your help in creating new metrics to manage measure disruptive innovation.  They need your help in creating new innovation incentive systems that reward creative innovation.

And they need your help as leaders who can run companies that can both execute and innovate.

Finally, remember Innovation won’t come from plans or people outside your company  – it will be found in the people you already have inside who understand your company’s strengths and its vulnerabilities.

So in closing, let me leave you with this final thought:

A pessimist sees danger in every opportunity but an optimist.. an optimist sees opportunity in every danger.

In the last 150 years only a few generations have had the opportunity to reshape the nature of business.

Be an optimist.

Congratulations class of 2014:

Embrace change and lead the way.

—-

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How Do You Want to Spend Your Next 4 Years of Your Life?

As our Lean LaunchPad for Life Sciences class winds down, a good number of the 26 teams are trying to figure out whether they should go forward to turn their class project into a business.

Given that we’ve been emphasizing Evidence-based entrepreneurship and the Investment Readiness Level, I guess I shouldn’t have been surprised when someone asked, “After we figure all this data out, should we pursue our idea based on the numbers?”

Ouch.

I pointed out that the “data” you gather in 10 weeks (talking to 100+ customers, partners, payers, etc.,) are not the first thing you should look at. There are three more important things you should worry about.

(see 0:30 in the video below)

turning point

——–

1. Do you want to spend the next 3 or 4 years of your life doing this?

(See 1:03 in the video below)

Now that you’ve gotten to know your potential channel and customers, regardless of how much money you’re going to make, will you enjoy working with these customers for the next 3 or 4 years?

One of the largest mistakes in my career was getting this wrong. I used to be in startups where I was dealing with engineers designing our microprocessors or selling supercomputers to research scientists solving really interesting technical problems. But in my next to last company, I got into the video game business.

My customers were 14-year old boys. (see 1:30 in the video)  I hated them. It was a lifelong lesson that taught me to never start a business where you hate your customers. It never goes well. You don’t want to talk to them. You don’t want to do Customer Development with them. You just want them to go away.  And in my case they did – they didn’t buy anything.

So you and your team need to feel comfortable being in this business with these customers.

2. Is this a scalable business?  And if not, are you Ok with something small?

(See 2:03 in the video below)

Is it a lifestyle business while you’re keeping your other job?  Is it a small business that hits $4 million in revenue in four years and $8 million in ten years?  Or is it something that can grow to a size that will result in an acquisition or some liquidity event?

You need to decide what your personal goal is and how it matches what you think this business can grow into.  And you and your cofounders need to have that discussion to make sure that all the co-founders’ interests are aligned – before you make any decision to start the company.  If one of you are happy making $500K/year and the other has visions of selling the company to Roche for a billion dollars, you have very different goals. Without clear alignment, one or both of you will be really unhappy later when you try to make decisions.

3. If I Didn’t Make Any Money After 4 Years, Did I Still Have A Great Time?

(See 4:36 in the video below)

If your company fails, would you still say you had one hell of a ride? Founders don’t do startups because they’re searching for a huge financial windfall. They do it because it’s the greatest invention they can imagine. Most of the time you will fail. So if you’re not going to have a great time with your team and learn and build something you are truly excited about – don’t do it.

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

Lessons Learned

  • Do you want to spend the next 3 or 4 years of your life doing this business?
  • Is this a scalable business?  And if not, are you Ok with something small?
  • If you didn’t make any money after 4 years, did you have a great time?

Listen to the podcast here

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How to get meetings with people too busy to see you

Asking, “Can I have coffee with you to pick your brain?” is probably the worst possible way to get a meeting with someone with a busy schedule.  Here’s a better approach.

——

Jason, an entrepreneur I’ve known for over a decade, came out to the ranch today. He was celebrating selling his company and just beginning to think through his next moves. Since he wasn’t from Silicon Valley, he decided to use his time up here networking with other meetings with VC’s and company executives.

I get several hundred emails a day, and a good number of them are “I want to have coffee with you to bounce an idea off.” Or, “I just want to pick your brain.” I now have a filter for which emails get my attention, so I was curious in hearing what Jason, who I think of as pretty good at networking, was asking for when he was trying to set up meetings.

“Oh, I ask them if I can have coffee to bounce an idea off of them.”…Sigh.foot in the door

I realized most entrepreneurs don’t know how to get meetings with people too busy to see you.

Perfect World
Silicon Valley has a “pay-it-forward” culture where we try to help each other without asking for anything in return. It’s a culture that emerged in the 60’s semiconductor business when competitors would help each other solve bugs in their chip fabrication process. It continued in the 1970’s with the emergence of the Homebrew Computer Club, and it continues today.  Since I teach, I tend to prioritize my list of meetings with first my current students, then ex-students, then referrals from VC firms I’ve invested in, and then others.  But still with that list, and now with a thousand plus ex-students, I have more meeting requests than I possibly can handle. (One of the filters I thought would keep down the meetings is have meetings at the ranch; an hour from Stanford on the coast, but that hasn’t helped.)

So I’ve come up with is a method to sort out who I take meetings with.

What are you offering?
I’m not an investor, and I’m really not looking for meetings with entrepreneurs for deal flow. I’m having these meetings because someone is asking for something from me – my time – and they think I can offer them advice.

If I’d had infinite time I’d take every one of these “can I have coffee” meetings. But I don’t.  So I now prioritize meetings with a new filter: Who is offering me something in return.

No, not offering me money.  Not for stock.  But who is offering to teach me something I don’t know.

The meeting requests that now jump to the top of my list are the few, very smart entrepreneurs who say, “I’d like to have coffee to bounce an idea off of you and in exchange I’ll tell you all about what we learned about xx.”

get into my head

This offer of teaching me something changes the agenda of the meeting from a one-way, you’re learning from me, to a two-way, we’re learning from each other.

It has another interesting consequence for those who are asking for the meeting – it forces them to think about what is it they know and what is it they have learned – and whether they can explain it to others in a way that’s both coherent and compelling.

Irony – it’s Customer Discovery
While this might sound like a, “how to get a meeting with Steve” post, the irony is that this “ask for a two-way meeting” is how we teach entrepreneurs to get their first customer discovery meetings; don’t just ask for a potential customers time, instead offer to share what you’ve learned about a technology, market or industry.

It will increase your odds in any situation you’re asking for time from very busy people – whether they are VC’s, company executives or retired entrepreneurs.

  • Lessons Learned
  • Wanting to have coffee is an ask for a favor
  • Offering to share knowledge is a different game
  • Try it, your odds of getting a meeting will increase
  • And the meetings will be more productive

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Building Great Founding Teams

There’s been a lot written about the individual characteristics of what makes a great founder, but a lot less about what makes a great founding team and how that’s different from a great founding  CEO

founders

I think we’ve been imprecise in defining three different roles. In doing so we’ve failed to help founders understand what it takes to build a great founding team.

Here are my definitions.

Founders – the idea
A Founder is the one with the original idea, scientific discovery, technical breakthrough, insight, problem description, passion, etc. A founder typically recruits co-founders and then becomes part of the founding team involved in day-to-day company operations. (However, in some industries such as life sciences, founders may be tenured professors who are not going to give up their faculty positions, so they often become the head of a startup’s scientific advisory board, but aren’t part of the founding team.)

A couple of caveats about founders with “ideas.”  It’s important to differentiate between ideas that have been or can be patented and ideas thought up late night in a dorm-room. One of the hardest concepts for my students to grasp is that “an idea is not a company.”  The reality is that in most cases, without the company to commercialize it, the idea is worthless (except to a patent troll.)

Even if they become part of the founding team, it’s not a given that the founder, having come up with the idea has a “guaranteed” leadership role (CEO or VP) in the new company. For some entrepreneurs this idea that the founder is not necessarily the CEO, is a surprise. When I hear, “What do you mean I’m not CEO? It’s my idea!” I get nervous that the founder is clueless about what makes the founding CEO special, and what else it actually takes to build a company. (Read on to see the difference in the roles.)

Founding Team – the rock on which to build the company
The founding team includes the founder and a few other co-founders with complementary skills to the founder. This is the group who will build the company. Its goal is to take the original idea and search for a repeatable and scalable business model– first by finding product/market fit, then by testing all the parts of the business model (pricing, channel, acquisition/activation, partners, costs, etc.)

In web/mobile startups the canonical view is the founding team consists of a hacker, a hustler, and a designer. In other domains, the skill sets differ, but the key idea is that you want a team with complementary skills.Band of Brothers

There’s no magic number about the “right” number of founders for a founding team, but two to four seems to be the sweet spot. One of the biggest mistakes in assembling a founding team is not thinking through the need for skills but instead settling for who’s around. The two tests of whether someone belongs on a founding team are: “Do we have a company without them?” and, “Can we find someone else just like them?” If both answers are no, you’ve identified a co-founder.  If any of the answers are “Yes,” then hire them a bit later as an early employee.

Key attributes of an entrepreneur on a founding team are passion, determination, resilience, tenacity, agility and curiosity. It helps if the team has had a history of working together, but what is essential is mutual respect. And what is critical is trust. You need to be able to trust your co-founders to perform, to do what they say they will, and to have your back.

Most startups that fail over team issues fail because co-founders hadn’t dated first, (spent time together in a Startup Weekend, worked together in an incubator, etc.) but instead jumped into bed to start a company.

Everyone has ideas. It’s the courage, passion and tenacity of the founding team that turn ideas into businesses.

Founding CEO – Reality Distortion Field and Comfort in Chaos
Idealistic founders trying to run a venture with collective leadership, without a single person in charge, find that’s the fastest way to go out of business. Speed, tempo and fearless decision-making are a startups strategic advantage. More often than not, conditions on the ground will change so rapidly that the need for immediate decisions overwhelms a collective decision process.

The founding team CEO is the first among equals in the founding team. Ironically they are almost never the most intelligent or technically astute person on the team. What sets them apart from the rest of the team is that they can project a fearless reality distortion field that they use to recruit, fund raise, pivot and position the company. They are the ultimate true believers in the company and have the vision, passion and skill to communicate why this seemingly crazy idea will work and change the world.

In addition, the founding CEO thrives operating in chaos and uncertainty. They deal with the daily crisis of product development and acquiring early customers.  And as the reality of product development and customer input collide, the facts change so rapidly that the original well-thought-out product plan becomes irrelevant. While the rest of the team is focused on their specific jobs, the founding CEO is trying to solve a complicated equation where almost all the variables are unknown – unknown customers, unknown features that will make those customers buy, unknown pricing, unknown demand creation activities that will get them into your sales channel, etc.

They’re biased for action and they don’t wait around for someone else to tell them what to do. Great founding CEO’s live for these moments.

Henry V

FIgure out who you are
Many founding teams fail because they’ve never had the conversation about founder, founding team and founding CEO.  Spend the time and take stock of who’s on the journey with you.

Lessons Learned

  • Founder, Founding team, Founding CEO all have word “founder” in them but have different roles
  • Founder has the initial idea. May or may not be on the founding team or have a leadership role
  • Founding team – complementary skills – builds the company
  • Founding CEO – reality distortion field and comfort in chaos – leads the company

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University of Minnesota Commencement speech – May 10th 2013

Steve at PodiumI am honored to be with you as we gather to celebrate your graduation.

This school has a distinguished roster of graduates… Earl Bakken, the founder of Medtronic, was an Electrical Engineering grad, and Bob Gore of Gortex, and your current president are both alums of your Chemical Engineering program.

In fact, I feel very connected to another one your grads. I’m sure you’ve heard of Seymour Cray, he built a supercomputer company in Chippewa Falls that made the fastest computers in the world. These were very expensive supercomputers. They cost 10’s of millions of dollars and filled two tractor-trailers worth of space.

Back in Silicon Valley I co-founded a company that built desktop workstations powerful enough to compete against Cray. We bid against them in a sale to the Pittsburgh Supercomputer Center… and lost. I never forgot that loss because instead of buying hundreds of our small computers they spent $35 Million on that Cray. My startup never recovered and soon after went out of business.

Fast-forward 15 years, Now retired I noticed that the Pittsburg Supercomputer Center had put their Cray for sale on Ebay.  Yep – the $35 Million machine was now for sale for $35,000 dollars.

I bought that Cray, … Honest… you can Google “Cray on eBay” and there I am… I had it shipped to my ranch and kept it in the barn next to the cows and manure.

It was closure.

But the story about Cray is also a story about success and failure.  If I can keep you awake, I’m going to tell you why – while you may have thought today was the end of your education – it’s really only the beginning. And while you might be moaning about that thought, pay attention because what I’m about to share could make a few of you very, very successful.

First day of your life
For most of you, college was the first day of your own life – the morning you stepped onto campus you were no longer just a child of your parents – college was the first place you could taste the freedom of making your own decisions – and in some of those mornings-after – learn the price of indulgence and the value of moderation.

Here at school you had your first years of taking responsibility for yourself. While it may not be obvious to you yet, your college years were a transition from having your parents make decisions for you to making decisions for yourself.  But now you face a new chapter that -– if you’re not careful – could result in having companies make decisions for you.

UofM Commencement

Career Choices
It might turn out that graduating from college and getting a job may be just an illusion of independence. If you’re not careful you’ll simply end up having others tell you what to work on, how to spend your time, when to show up and when to go home.  In fact, working in a company could be the adult version of listening to your parents tell you what to do… Only the pay is usually a whole lot better than your allowance.

For some of you, that may be exactly what you are looking for. Many of you are going to take what you learned here, get a good job, get married, buy a house, have a family, be a great parent, serve your community and country, hang with friends and live a good life. And that’s great. Minnesota is a wonderful place to hunt, fish, canoe, raise kids, and pursue lots of interests other than just your job.

All of you will ultimately make a choice… a choice about whether you “work to live” or you “live to work.” This should be a conscious choice. Don’t get trapped into the daily routine of showing up and just getting by.

Diverging Interests
While you’re excited about your first “real” job, recognize that your interests and those of your employer are probably not the same. Having your employer tell you what a great job you’re doing and rewarding you for it is not the same as discovering your passion, and figuring out who you are, and what’s rewarding for you.

What I am saying is, “Don’t let a career just happen to you.”  And as much you love, respect and honor your parents, don’t live their lives. Your obligations to meet their expectations ended the day you became an adult.

At the end of the day, you can decide whether you want to be an employee with a great attendance record, getting promoted to ever better titles and working on interesting projects – or whether you want to attempt to do something spectacular – this be or do should be a question you never stop asking yourself — for the next 20 years, and beyond. Be? or Do?

Let me share with you the day I faced the Be or Do question.

Big Company versus Startup
Out of the military, my first job in Silicon Valley was with one of the most exciting companies you never heard of. By the time I joined it was a decade old, and no longer a startup. Our customers were the CIA, NSA, and National Reconnaissance Office. Our CEO, Bill Perry eventually became the Secretary of Defense.

In the 1970’s and ‘80’s the U.S. military realized that our advantage over the Soviet Union was in silicon, software and systems. These technologies allowed the U.S. to build weapons previously thought impossible or impractical.  The technology was amazing, and somehow in my 20’s I found myself in the middle of all of it.

Building these systems required resources way beyond the scope of a single company. A complete system had spacecraft and rockets and the resources of ten’s of thousands of people from multiple companies.

If you love technology, these projects are hard to walk away from. It was geek heaven.

While I worked on these incredibly interesting intelligence systems, my friends in startups worked on new things called microprocessors.  They’d run around saying, “Hey look, I can program this chip to make this speaker go beep.” I’d roll my eyes, comparing the toy-like microprocessors to what I was working on – which was so advanced you would have thought we acquired it from aliens.

But before long I realized that at my company, I was just a cog in a very big wheel. A small team had already figured out how to solve the problem and ten’s of thousands of us worked to build the solution. Given where I was in the hierarchy, I calculated that the odds of me being in on those decisions didn’t look so hot.

In contrast, my friends at startups were living in their garages fueled with an energy and passion to use their talents to pursue their own ideas, however unexpected or crazy they sounded. “Really, you’re building a computer I can have in my house?”

For me, the light bulb went off when I realized that punching a time clock is not the way to change the world. I chose the path of entrepreneurship and never looked back.

Engineers Run the World
Engineers used to be the people who made other peoples ideas work. Today, they change the world.  We live in a time where scientists and engineers are synonymous with continuous innovation. We don’t think twice as our phones shrink, our computers fit in our pockets, our cars run on batteries, and our lives are extended as new medical devices are implanted in our bodies. Scientists and engineers no longer work anonymously in backrooms. Today we celebrate them for improving the quality of peoples’ lives.

George Bernard Shaw once said, Some men see things as they are and ask why. Others dream things that never were and ask why not.” Engineers like you have the capacity to move the world forward by continually asking “why not?” It’s your special “doing” gene that empowers us to do better.

You invent. You imagine. You see things that others don’t. Where others see blank canvases, you’ll see finished paintings. You hear the music that’s not written, you see the bridges that have yet to be built.  You envision the products and companies that don’t exist yet.

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Only In America
University of Minnesota Science and Engineering alumni have founded more than 4,000 active companies, employing over ½ million people and generating annual revenues of $90 billion. These alums chose not to take the safe road but instead to push beyond their boundaries and DO.

At some time you might decide that you want to become the master of your own destiny – that you want to take an idea – and start your own company. And all of you sitting here just earned a degree that gives you choices that very few other professions have.

Entrepreneurship is not something foreign – it’s built into the DNA of this country. America was built by those who left the old behind. Not too many generations ago your family packed up what they had, got on boat and came to America. They struck out across the country and ended up here in Minnesota.

And what’s great about the United States… No other country embraces innovation and entrepreneurship quite like we do. You don’t have to stay in one job, and it’s really, really hard to starve to death.

Passion
I predict that 78% of all commencement speeches this year will have advice about “pursuing your passion and doing stuff you love.” But they don’t tell you why.  Well here’s the secret – if you’re going to spend your career in a company, doing stuff you enjoy will help you keep showing up..

But if you want to do something, something entrepreneurial, just loving what you do is isn’t enough. You’re pursuing ideas you can’t get out of your head. Ideas that you obsess about. That you work on in your spare time.

Because that fearless vision and relentless passion are what it takes to sustain an entrepreneur through the inevitable bad times – the times your co-founder quits, or when no one buys, or the product doesn’t work. The time when everyone you know thinks that what your doing is wrong and a waste of time. The time when people tell you that you ought to get a “real” job.

By the way, every year I remind my students that great grades and successful entrepreneurs have at best a zero correlation – and anecdotal evidence suggests that the correlation may actually be negative. There’s a big difference between being an employee at a great company and having the guts to start one.

You don’t get grades for resiliency, curiosity, agility, resourcefulness, pattern recognition and tenacity.

You just get successful.

Failure
The downside of starting something new is that’s it’s tough, because unlike the movies – you fail a lot. For every Facebook and Google, thousands never make it.

Like Rocket Science Games, which was my biggest failure. 90 days after showing up on the cover of Wired Magazine I knew the game company where I raised 35 million dollars was headed for disaster.

We’d believed our own press, inhaled our own fumes and built lousy games. Customers voted with their wallets and didn’t buy our products. The company went out of business. Given the press we had garnered, it was a very public failure.

We let our customers, our investors, and our employees down. I thought my career and my life were over. But I learned that in Silicon Valley, honest failure is a badge of experience.

All of you will fail at some time in your career…or in love, or in life.

No one ever sets out to fail.

But being afraid to fail means you’ll be afraid to try.  Playing it safe will get you nowhere.

As it turned out, rather than run me out of town, the two venture capital firms that had lost $12 million in my failed startup actually asked me to work with them again.

During the next couple years…and much humbler… I raised more money and started another company that we were ultimately able to take public, and those patient investors more than made up for their earlier loss – many times over.

Hypothesis Testing
As scientists and engineers, you know about failure. You know that virtually no experiment works the first time.  And in a new company all you have is a series of untested hypotheses. You learned something vital in school — to test your hypotheses by designing experiments, getting accurate data, analyzing the results, and then modifying your initial hypotheses based on those results. This is the scientific method, and surprisingly we found the exact same method works for startups.

Because failure is a part of the startup process. In Silicon Valley, we have a special word for a failed entrepreneur – it’s called experiencedOur country and our entrepreneurial culture is one of second and third chances. It’s what makes us great. You don’t have to change your name or leave town. Entrepreneurs in America know that they get multiple shots at the goal.

Be or Do
Someday several of you in this graduating class will be worth a $100 million dollars. And a few of you might change the way the world works.

I want you to look around you.  …Go ahead.  Take a few seconds and give it a look…

While most of you were looking around wondering who this was going to be, I hope a few of you were feeling sorry for the rest of your classmates, knowing that the most successful person in the audience is going to be you.

These days I write a blog about entrepreneurship.  At the end of each post, I conclude with “lessons learned”—a kind of Cliff Notes of my key takeaways.  So that’s how I’ll finish up today.

Here are the two lessons that I’d like to pass on to you

Your science or engineering degree gives you tremendous choices – you, and no one else gets to decide two things:

  • whether you choose to be or you choose to do
  • whether you “work to live” or whether you “live to work”

Remember… live your life with no regrets. There’s no undo button.

And Congratulations  — you’ve earned it!

Thank you very much.

Listen to the post here or download the podcast here

Failure and Redemption

“What’s gone and what’s past help
Should be past grief.”

William Shakespeare – The Winter’s Tale

We give abundant advice to founders about how to make startups succeed yet we offer few models about dealing with failure.

So here’s mine.
——–

In my experience, living through failure has 6 stages:

  • Stage 1: Shock and Surprise
  • Stage 2: Denial
  • Stage 3: Anger and Blame
  • Stage 4: Depression
  • Stage 5: Acceptance
  • Stage 6: Insight and Change

While I had been part of a few failed startups, none of them had fallen squarely on my shoulders until Rocket Science Games where my business card said CEO. It was there that I lived through all 6 stages and came out the other side a changed man.

Failure

Stage 1: Shock and Surprise
We raised $35 million and after 18 months made the cover of Wired magazine. Wired 2.11 CoverThe press called Rocket Science one of the hottest companies in Silicon Valley and predicted that our games would be great because the storyboards and trailers were spectacular. 90 days later, I found out our games are terrible, no one is buying them, our best engineers started leaving, and with 120 people and a huge burn rate, we’re running out of money and about to crash. This can’t be happening to me.

Stage 2: Deny any of it was your fault
In my mind, I had done everything the investors asked me to do. I raised a ton of money and got a ton of press. We hired everyone according to our plan. It was everyone else who screwed up. I did everything right.

Stage 3: Get angry and blame everyone else
This was the fault of my cofounder since he was in charge of game development, it was the engineers who bailed on me, it was the sales and marketing people who didn’t tell me how bad the games were, it was the VC’s who refused to put any more money in the company, it was Sega’s fault for making a bad gaming platform…

State 4: Get depressed
When the inevitability and magnitude of the failure sunk in, I slept in a lot. There were days I’d get up late and go to bed again at 5 pm. I lost interest in anything associated with my past industry. (To this day I still can’t play a video game.)

Redemption

Step 5: Gradually accept your role in the failure
A few weeks after leaving, I began to think about what I should have done, could have done and pondered why I didn’t do it. (I didn’t listen, I didn’t act, I didn’t own my role as CEO, I wasn’t prepared to do what was right or leave.) This was hard and didn’t happen overnight. My wife was a great partner here. I often reverted to Stages 2 and 3, but over time I took ownership of my primary role in the debacle.

Stage 6: Gain insight and change your behavior
This was the hardest part. While I stopped blaming others, understanding what I could change in my behavior took long months. It would have been much easier to just move on, but I was looking for the lessons that would make my next startup successful. I looked at the patterns of behavior, not just at my last company but also across my entire career. I learned how to dial back the hubris, get other smart people to work with me – rather than just for me, listen better, and act and do what was right – regardless of what others thought I should do.

Epilogue
For my next startup I parked the behaviors that drove Rocket Science off the cliff. We established a team of founders who worked collaboratively. When my co-founders and I got the company scalable and repeatable, we hired an operating executive as the CEO and returned a billion dollars to each of our two lead investors.

Now when I listen to entrepreneurs who’ve cratered a company, I listen for their stories of failure and redemption.

Lessons Learned

  • Six stages of failure and redemption
  • Don’t get stuck in Stages 2, 3 or 4  – move forward
  • Don’t skip acceptance of your role
  • Get to insight so you can change your behavior—then commit to the challenge of doing it differently the next time

Listen to the post here or download the podcast here

Завзятість – Tenacity: How I Spent A Year One Night in Kiev

This July I thought I had set the record for tenacity in my age group. Go ahead and take a moment to read the post, it’s short. I reminded my Startup Owners Manual co-author Bob Dorf this is how entrepreneurs played the game, blah, blah, blah.

As usual Bob did one better. Here’s a guest post on what happened to him in the Ukraine.

—–

Usually when you teach entrepreneurship, one of the key things you teach is tenacity, a vital characteristic of great entrepreneurs.  Only rarely does the teaching itself require tenacity, as it did late last month in Kiev, Ukraine.

Following two days with a dozen startups at a brand-new incubator in Kiev called “Happy Farm,” it was time to head to my next stop: Skolkovo, the private Moscow business school formed to bring Silicon Valley-quality training to young Russian entrepreneurs.  I was headed to my second Lean LaunchPad launch, excited that the first one in June had led to four funded startups raising some $2-million from Russian VC’s.

Ukraine was magnificent. Kiev is a beautiful city and Happy Farm Training Director Elena Kalibaba led me on a walking tour. Then it was on to a series of workshops and one-on-one coaching sessions with ten terrific startup teams, plus a press conference with Forbes Ukraine and others. When it was over, Happy Farm CEO and founder (and serial entrepreneur) Anna Degtereva drove me to the airport and–for some strange reason–escorted me to the gate.

I Spent A Year One Night in Kiev
As I approached the check-in desk, a very gruff Ukrainian customs official looked at my visa to Russia and said, “You cannot travel.  Your visa to Russia has already been used.  No exceptions.” He said nothing else in English, and waved me out of the line.

A mad scramble uncovered the problem:  when I had changed planes for Kiev back in Moscow they stamped my visa as “entered” so that counted as “visiting” Russia. As far as Ukrainian customs was concerned I didn’t have a valid visa to enter Russia therefore I couldn’t get on my plane. No charm or magic worked at all with airport customs, and we were told in no uncertain terms that Bob Dorf would be living in Kiev for two weeks, absent miracles that seldom happen in government bureaucracies, at home or in Ukraine, for sure.

The problem was that I had 25 founders from all over the Russian republics expecting me to teach a Lean LaunchPad class 12 hours later in Moscow. And then I was heading to Paris and Bogota to teach as well.  Oops. Not if I had to spend two weeks in the Ukraine applying for a new Russian visa!

We dashed off from the Kiev airport to the Russian consulate in hopes of sorting it out in two hours rather than two weeks. While on the way, we called the embassy at 12:55 and found out that the Embassy closes at 13:00 on Fridays, and we were 30 minutes away. And I don’t even like borscht, a prime Ukrainian delicacy, nor did I know how the “Bob Dorf world tour” would continue.

Four entrepreneurs in a car
Was this time to give up?  Of course not. Four entrepreneurs in a car in Kiev means three cell phones buzzing in different directions in Russian and me as the non Russian-speaker on my iPad looking at travel sites for the next flight, just in case I could get a visa. We went to the consulate anyway, where two armed guards right out of your favorite spy movie (fat, grumpy, unshaven and did I say grumpy?) barred the door. After rapid-fire begging in Russian, a phone finally call got a functionary out to basically shoo us away. “Visa processing takes two weeks, and that would start Monday, since the visa office is now closed. The Professor can go home to America, but can not go from here to Russia.” Visions of stealth border crossings or—perhaps even worse—a ten-hour Skype talk with my Moscow students—played over and over again.Cossack Attack

While the thoughts of going back to the U.S. for a weekend at home with my long-lost wife Fran were lovely, the thought of disappointing 25 students the next day and 50 more two days later in Bogota weren’t fun. I immensely enjoyed my last lectures at Skolkovo and was eager to do it again. 

So we started an international incident of sorts
First, the truly entrepreneurial and unstoppable Happy Farmer, Anna, somehow in five phone calls got through to the Foreign Minister of Ukraine, told him the story, begged for his help. She did this through a friend (how everything happens in Ukraine, of course) who served as one of his deputies. “I will talk to him at four pm and he will call the Russians,” she said, which offered only nominal relief: the last flight out was at 7 pm, and there was no firm commitment that anything good would happen.

At the same time, on the Russian side of the border, Skolkovo’s equally tenacious Startups Project Director, Lawrence Wright, went to work, calling the Russian foreign office and imploring them to call the Ukrainian embassy and tell them “let Dorf out.” When they agreed to consider breaking every rule in the 40-pound Russian rulebook, the fun began.

The Ukrainian solution to all this, while we paced for two hours to see if anybody heard our cries: “lets go to lunch and have a drink.” In perhaps one of four times in my entire life, I was actually unable to eat. The thought of jumping barbed wire fences, pursued by Cossacks, was quickly looming as my only choice for an on-time performance launching the LaunchPad.  Meanwhile, something clicked. Somebody got to somebody, and suddenly the Russian Consul himself, boss of the entire place, headed back to—or was sent back to–the office himself to personally produce a visa for Bob Dorf in one hour, not two weeks.

We were given less than an hour to find wifi and download the 20-page visa application in the backseat of an SUV.  Needed to have the original, not a copy, of the new Skolkovo “invitation letter” physically in my hand. Scrambled to get a passport photo and a printer to print out the application. Done, back to the Consulate at Indy 500 speed!

Somehow it worked. If Anna and her team are as good at running over hot coals and through brick walls with their startups as they were with my visa, watch for lots of great companies emerging from the Happy Farm.  As for me, I was sure I was headed to the funny farm.  By nine I was heading to Moscow. Six hours of fun aggravation, five and a half of which had me absolutely sure we were opening a branch of K&S Ranch in Kiev.

But the best part of the adventure is that I now had a better tenacity story than Steve.  Beat this one!
Listen to the post here: Download the Podcast here

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