Getting Lean in Education – By Getting Out of the Classroom

This week the National Science Foundation goes Lean on education by providing $1.2 million to educators who want to bring their classroom innovations to a wider audience.

shutterstock_157439453——–

The I-Corps program started when the U.S. National Science Foundation adopted my Lean LaunchPad class. Their goal was to train University scientists and researchers to use Lean Startup methods (business model design, customer development and agile engineering) to commercialize their science. Earlier this month the National Institutes of Health announced I-Corps @ NIH, to help scientists doing medical research take their innovations from the lab-bench to the bedside and accelerate translational medicine.

This week, the NSF is announcing the next step in the I-Corps program– I-Corps for Learning  (I-Corps L).  This version of I-Corps is for STEM educators – anyone  who teaches Science, Technology, Engineering and Math from kindergarten to graduate school, and wants to learn how to bring an innovative teaching strategy, technology, or set of curriculum materials to a wider audience. Following a successful pilot program, the NSF is backing the class with $1.2 million to fund the next 24 teams.

The Problem in the Classroom
A frustration common to both educators and policymakers is how difficult it has been to get new, innovative, education approaches into widespread use in classrooms where they can influence large numbers of students. While the federal government and corporations have dumped a ton of money into STEM education research, a disappointing few of these brave new ideas have made it into practice. These classroom innovations often remain effectively a secret – unknown to most STEM educators or the research community at large.

It turns out that on the whole educators are great innovators but have had a hard time translating their ideas into widespread adoption. What we had was a very slow classroom innovation diffusion rate.  Was there any was to speed this up?

A year ago Don Millard of the National Science Foundation (who in a previous life had been a STEM Educator) approached me with a hypothesis that possibly could solve this problem. Don observed that educators with innovative ideas who actively got out of their classrooms and tested their innovations with other educators/institutions/students had a much better adoption rate.

Up until now there was no formal way to replicate the skills of the educators who successfully evangelized their new concepts. Don’s insight was that the I-Corps model being rolled out for scientists might work equally well for educators/teachers. He pointed out that there was a close analogy between scientists trying to bring product discoveries to market and educators getting learning innovations into broad practice. Don thought that a formal Lean LaunchPad/I-Corps methodology might be exactly what educators needed to understand how their classroom innovations could be used, how to get other educators and institutions to adopt them, and how to articulate their value to potential investors .

Don then recruited Karl Smith from the University of Minnesota to pilot a class of 9 teams made up of STEM educators. Karl recruited a teaching team (Ann McKenna, Chris Swan, Russ Korte, Shawn Jordan, Micah Lande and Bob MacNeal) and Jerry Engel trained them. The team ran their first I-Corps for Learning class earlier this year.

Karl and his teaching team really nailed it. So much so that the NSF is now rolling out I-Corps for Learning on a larger scale.

I-Corps for Learning Details
NSF will provide up to $1.2 million to support 24 teams. The I-Corps L cohort teams will receive additional support — in the form of mentoring and funding — to accelerate innovation in learning that can be successfully scaled, in a sustainable manner.

To be eligible to pursue funding, applicants must have received a prior award from NSF (in a STEM education field relevant to the proposed innovation) that is currently active or that has been active within five years from the date of the proposal submission. Consideration will be given to projects that address K-12, undergraduate, graduate, and postdoctoral research, as well as learning in informal science education environments.

Each team will consist of:

  • The principal investigator (who received the prior award);
  • An entrepreneurial lead (who is committed to investigate the landscape surrounding the innovation); and
  • A mentor (who understands the evidence concerning promise, e.g., from an institutional education-focused center or commercial background that will help inform the efforts)

The outcomes of the pilot projects are expected to be threefold:

  • A clear go/no go decision concerning the viability and effectiveness of the learning-oriented resources/products, practices and services,
  • An implementation “product” and process for potential partners/adopters, and
  • A transition plan to move the effort forward and bring the innovation to scale

Proposals from potential I-Corps L teams will be accepted through September 30, 2014. Class starts January 2015.

Check out the I-Corps for Learning website here.

Lessons Learned

  • The diffusion of STEM classroom innovations is excruciatingly slow
  • The Lean LaunchPad/I-Corps model may accelerate that process
  • I-Corps for Learning is accepting applications

Validation: Be Sure Your Startup Vision Isn’t a Hallucination. 2 Minutes to See Why

If you can’t see the video click here

Customer Discovery: The Search for Product/Market Fit. 2 Minutes to See Why

If you can’t see the video click here

I-Corps @ NIH – Pivoting the Curriculum

We’ve pivoted our Lean LaunchPad / I-Corps curriculum. We’re changing the order in which we teach the business model canvas and customer development to better-fit therapeutics, diagnostics and medical devices.Udacity canvas and value prop

Over the last three years the Lean LaunchPad class has started to replace the last century’s “how to write a business plan” classes as the foundation for entrepreneurial education. The Lean LaunchPad class uses the three “Lean Startup” principles:

  • Alexander Osterwalders “business model canvas” to frame hypotheses
  • “Customer Development” to test the hypotheses outside the building and
  • “Agile Engineering” to have teams prototype, test, and iterate their idea while discovering if they have a profitable business model.

Teams talk to 10-15 customers a week and make a minimum of 100 customer visits. The Lean LaunchPad is now being taught in over 100 universities. Three years ago the class was adopted by the National Science Foundation and has become their standard for commercializing science. Today the National Institutes of Health announced their I-Corps @ NIH program.

The one constant in all versions of the Lean LaunchPad / I-Corps class has been the order in which we teach the business model canvas.

Value Propositions and Customer Segments are covered in weeks 1 and 2, emphasizing the search for problem/solution and then product/market fit. Next we teach Distribution Channels (how are you going to sell the product) and Customer Relationships (how do you Get/Keep/Grow customers) and Revenue Streams (what’s the Revenue Model strategy and pricing tactics.) Finally we move to the left side of the canvas to teach the supporting elements of Resources, Partners, Activities and Costs.

current teaching order

Teaching the class lectures in this order worked great, it helped the teams understand that the right-side of the canvas was where the action was. The left- hand side had the supporting elements of the business that you needed to test and validate, but only after you made sure the hypotheses on the right were correct.

This lecture order was embedded in the Udacity Lectures, the syllabi and educators guide I open-sourced. Hundreds of teams in the NSF, and my Stanford, Berkeley, Columbia, and UCSF classes learned to search for a repeatable and scalable business model in this way.

It’s consistency was the reason that the NSF was able to scale the I-Corps from 15 to 30 University sites.

So why change something that worked so well?

Rationale
Last fall at UCSF we taught 125 researchers and clinicians in therapeutics, diagnostics, medical devices and digital health in a Lean LaunchPad for Life Sciences class. While the teaching team made heroic efforts to adapt their lectures to our “standard” canvas teaching order, it was clear that for therapeutics, diagnostics and medical devices the order was wrong. Hypotheses about Intellectual Property, Reimbursement, Regulation and Clinical Trials found on the left side of canvas are as, or more important than those on the right side of the canvas.

I realized we were trying to conform to a lecture order optimized for web, mobile, hardware. We needed to cover Intellectual Property, Reimbursement, Regulation and Clinical Trials a month earlier in the class than in the current format.

The National Institutes of Health has adopted our class for its I-Corps @ NIH program starting this October. Most teams will be in therapeutics, diagnostics and medical devices. Therefore we’re going to teach the class in the following order:

1) value proposition, 2) customer segments, 3) activities, 4) resources, 5) partners, 6) channel, 7) customer relationships, 8) revenue/costs

LS Suggested Order simple

I-Corps @ NIH Lecture Order Details
Customer Segments change over time.  CROs or Payers may ultimately be a resource, a partner or a revenue source, but until you get them signed up they’re first a customer. Your potential exit partners are also a customer. And most importantly, who reimburses you is a customer. (You get an introduction to reimbursement early here, while the details are described later in the “Revenue” lecture.)

Activities are the key things you need to do to make the rest of the business model (value proposition, distribution channel, revenue) work. Activities cover clinical trials, FDA approvals, Freedom to Operate (IP, Licenses) software development, drug or device design, etc.

Activities are not the product/service described in the value prop, they are the unique expertise that the company needs to deliver the value proposition.  In this week we generally describe the business rationale of why you need these. The specifics of who they are and how to work with them are covered in the “Resource” and “Partners” lectures.

Resources - Once you establish what activities you need to do, the next question is, “how do these activities get accomplished?” I.e. what resources do I need to make the activities happen. The answer is what goes in the Resources box (and if necessary, the Partners box.) Resources may be CRO’s, CPT consultants, IP, Financial or Human resources (regardless of whether they’re consultants or employees.)

Partners are external resources necessary to execute the Activities. You’ve identified the “class of partner” in the Resources box. This lecture talks about specifics – who are they, what deals work with them, how to get them, how to work with them.

Customer Relationships is what we think of as traditional sales and marketing; assembling a SAB, getting the KOL’s, conferences, articles, etc.  Customer Relationships answers the question, “How will we create demand and drive it to our channel?”

Suggested Order

We think we now have a syllabus that will better fit a Life Science audience. Once the syllabus stops moving around we’ll open source it along with the educators guide this fall.

Lessons Learned

  • The Lean LaunchPad class has started to replace the last century’s “how to write a business plan” classes
  • The lecture order emphasizes testing the right-side of the canvas first
  • That works for almost all markets
  • However, for life sciences hypotheses about Intellectual Property, Reimbursement, Regulation and Clinical Trials are critical to test early
  • Therefore we created a more effective lecture order for Life Sciences

Why Lean May Save Your Life – The I-Corps @ NIH

Today the National Institutes of Health announced they are offering my Lean LaunchPad class (I-Corps @ NIH ) to commercialize Life Science.

There may come a day that one of these teams makes a drug, diagnostic or medical device that saves your life.

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Over the last two and a half years the National Science Foundation I-Corps has taught over 300 teams of scientists how to commercialize their technology and how to fail less, increasing their odds for commercial success.

After seeing the process work so well for scientists and engineers in the NSF, we hypothesized that we could increase productivity and stave the capital flight by helping Life Sciences startups build their companies more efficiently.

So last fall we taught 26 life science and health care teams at UCSF in therapeutics, diagnostics and medical devices. 110 researchers and clinicians, and Principal Investigators got out of the lab and hospital, and talked to 2,355 customers, tested 947 hypotheses and invalidated 423 of them. The class had 1,145 engagements with instructors and mentors.NIH I Corps logo

The results from the UCSF Lean LaunchPad Life Science class showed us that the future of commercialization in Life Sciences is 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.

Translational Medicine
In life sciences the process of moving commercializing research –moving it from the lab bench to the bedside – is called Translational Medicine.

The traditional model of how to turn scientific discovery into a business has been:
1) make a substantive discovery, 2) write a business plan/grant application, 3) raise funding, 4) execute the plan, 5) reap the financial reward.

For example, in therapeutics the implicit assumption has been that the primary focus of the venture was to validate the biological and clinical hypotheses(i.e. What buttons does this molecule push in target cells and what happens when these buttons are pushed? What biological pathways respond?) and then when these pathways are impacted, why do we believe it will matter to patients and physicians?

We assumed that for commercial hypotheses (clinical utility, who the customer is, data and quality of data, how reimbursement works, what parts of the product are valuable, roles of partners, etc.) if enough knowledge was gathered through proxies or research a positive outcome could be precomputed. And that with sufficient planning successful commercialization was simply an execution problem. This process built a false sense of certainty, in an environment that is fundamentally uncertain.Current tran med

We now know the traditional translational medicine model of commercialization is wrong.

The reality is that as you validate the commercial hypotheses (i.e. clinical utility, customer, quality of data, reimbursement, what parts of the product are valuable, roles of CRO’s, and partners, etc.,) you make substantive changes to one or more parts of your initial business model, and this new data affects your biological and clinical hypotheses.

We believe that a much more efficient commercialization process recognizes that 1) there needs to be a separate, parallel path to validate the commercial hypotheses and 2) the answers to the key commercialization questions are outside the lab and cannot be done by proxies. The key members of the team CEO, CTO, Principal investigator, need to be actively engaged talking to customers, partners, regulators, etc.

outward facing

And that’s just what we’re doing at the National Institutes of Health.

Join the I-Corps @ NIH
Today the National Institutes of Health announced the I-Corps at NIH.

It’s a collaboration with the National Science Foundation (NSF) to develop NIH-specific version of the Innovation-Corps. (Having these two federal research organizations working together is in itself a big deal.)  We’re taking the class we taught at UCSF and creating an even better version for the NIH.  (I’ll open source the syllabus and teaching guide later this year.)

The National Cancer Institute SBIR Development Center, is leading the pilot, with participation from the SBIR & STTR Programs at the National Heart, Lung and Blood Institute, the National Institute of Neurological Disorders and Stroke, and the National Center for Advancing Translational Sciences.

NIH Uncle Sam smallThe class provides real world, hands-on learning on how to reduce commercialization risk in early stage therapeutics, diagnostics and device ventures. We do this by helping teams rapidly:

  • define clinical utility now, before spending millions of dollars
  • understand the core customers and the sales and marketing process required for initial clinical sales and downstream commercialization
  • assess intellectual property and regulatory risk before they design and build
  • gather data essential to customer partnerships/collaboration/purchases before doing the science
  • identify financing vehicles before you need them

Like my Stanford/Berkeley and NSF classes, the I-Corps @ NIH  is a nine-week course. It’s open to NIH SBIR/STTR Phase 1 grantees.

The class is team based. To participate grantees assemble three-member teams that include:

  • C-Level Corporate Officer: A high-level company executive with decision-making authority;
  • Industry Expert: An individual with a prior business development background in the target industry; and
  • Program Director/Principal Investigator (PD/PI): The assigned PD/PI on the SBIR/STTR Phase I award.

Space is limited to 25 of the best teams with NIH Phase 1 grants. Application are due by August 7th (details are here.)

If you’re attending the BIO Conference join our teaching team (me, Karl Handelsman, Todd Morrill and Alan May) at the NIH Booth Wednesday June 25th at 2pm for more details. Or sign up for the webinar on July 2nd here.

This class takes a village: Michael Weingarten and Andrew Kurtz at the NIH, the teaching team: Karl Handelsman, Todd Morrill and Alan May, Babu DasGupat and Don Millard at the NSF, Erik Lium and Stephanie Marrus at UCSF, Jerry Engel and Abhas Gupta, Errol Arkilic at M34 Capital and our secret supporters; Congressman Dan Lipinski and Tom Kalil and Doug Rand at the OSTP and tons more.

Lessons Learned

  • There needs to be a separate, parallel path to validate the commercial hypotheses
  • The answers to commercialization questions are outside the lab
  • They cannot be done by proxies
  • Commercial validation affects biological and clinical hypotheses

Listen to the blog post here: 
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Innovating Municipal Government Culture

D.R. Widder is the Vice President of Innovation and holds the Steve Blank Innovation Chair at Philadelphia University. He’s helping city government in Philadelphia become more innovative by applying Lean startup methods and Philadelphia University’s innovation curriculum. I asked him to share an update on his work on teaching lean techniques to local governments.

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This February Philadelphia University and the City of Philadelphia founded the Academy for Municipal Innovation (AMI). Our goal is to foster innovation principles and practice in local government by changing the way government employees think about innovation and act on their ideas. We just graduated the inaugural class.  Here’s the story of our journey.

Inaugural Class Academy of Innovation Management

The Academy for Municipal Innovation has come out of collaboration between Philadelphia University and the City of Philadelphia. Soon after I came to PhilaU as the chief innovation officer, I met Adel Ebeid, who was newly appointed as Chief Innovation Officer for the City of Philadelphia. We bonded over our similar challenges, as Adel was only the second chief innovation officer in city government and I was one of the first chief innovation officers in higher education.

Building a Government Innovation Curriculum
The Academy for Municipal Innovation curriculum is built on Philadelphia University’s distinctive approach to innovation education – it’s collaborative, multidisciplinary, and engaged in the real world. The curriculum draws from Philadelphia University’s design, engineering, and business disciplines, as all are needed to make innovation relevant in the government.

Philadelphia University Undergraduate Curriculum

Philadelphia University Undergraduate Curriculum

The program is built around five core innovation practices that we teach:

  1. Integrated Design Processes – The process of opportunity finding, innovation and problem solving
  2. Business and Operations Models – How to describe, design, challenge, and evaluate innovation
  3. Systems Thinking – Methods for gathering and mapping out all stakeholders and influences surrounding an issue and solution
  4. Research Methods – How to find actionable insights and ask the right questions.
  5. Innovation Leadership – How to develop innovative teams and culture.

We took this these core innovation practices in the form that has worked at the undergraduate level, and adapted the processes and content for the working professional in the government.

The Academy for Municipal Innovation (AMI) curriculum
We deliver the class to government employees in an Executive Ed format comprised of seven 4-hour sessions.

Each class is a mix of theory and practice. A key design principle is that each session includes at least one tool that participants can use the very next day at work, so they can make it real immediately. For example, simple brainstorming techniques like “Yes, And” and “Silent Brainstorming” were put to use the same week they learned them.

We select one common theme that runs through all the classes for continuity, and they build upon it as they go. The theme for the pilot class was “How can the city better communicate and advance innovative ideas”. We built on this theme teaching the students opportunity finding, concept development, stakeholder mapping, systems dynamics, research, and business models perspective, culminating with a capstone workshop where they bring it all together.

The strategy is to take participants from across the full range of city organization chart to seed the culture change. The pilot class (we call them the Pioneers) learned innovation principles and tools, and will bring them back to their groups and spread the word. For example, a subset of the class self organized around how to better service businesses starting and operating in the city. They used the capstone to pilot a process that they plan to take back to their organizations and implement at scale.

Scaling the Academy for Municipal Innovation
We see the Academy for Municipal Innovation scaling in three dimensions:

  1. Culture – graduates become change agents in their home groups, and change their group culture locally, amplifying the impact of each graduate
  2. Depth – The certificate program can be expanded into courses for credit, and ultimate a master’s degree in innovation in government.
  3. Reach – As we move out of pilot, we will offer this program to other city governments (and other levels of government). Success in Philadelphia will make us a flagship for innovation at the city level.

Academy for Innovation Management scaling strategy

Lessons Learned

  • The bar is low but the need, and receptiveness is high for government innovation. The students in the Pioneer class have actively challenged ideas and assumptions, and are already applying what they have learned in their work. Today.
  • Creativity, collaboration, and critical thinking skills transcend context, age, and pre-existing knowledge. These skills are teachable/learnable and no matter how good you are, you can get better.
  • Leadership buy-in to innovation is that much more critical to success in government contexts.
  • Government doesn’t get to ‘opt-in’ to problem solving or choose which problems it will tackle. The government innovates with the hand it is dealt to a greater extent than the private sector.
  • The scale of a city as a building block is compelling for change and social impact. It is less complicated and with less inertia than the state and federal level, making the prospect of change more manageable.
  • “Municipal Innovation” might be an oxymoron to the cynic, but cities have scope, and levers of influence, that industry does not. Changes in policy, regulations, civic engagement, unique partnerships, social programs, and different funding mechanisms are all tools available for the municipal innovator.
  • The ‘boot camp’ experience creates a new communication network. Our pioneer class formed strong bonds learning new things together, in a new and intense environment. In addition to traditional communication, the closely bonded students can reach across the silos directly to each other, built on the relationships formed in class.

Working with the City of Philadelphia on Academy for Municipal Innovation has left me exhilarated. The city leadership, and members of this pioneer class, are committed to real innovation in government. They are taking on systems highly resistant to change, with diverse stakeholders in intricate relationships, under public scrutiny and political complexities. The magnitude of the challenge and their commitment is inspiring.

If you would like to find out more, click here

Download the podcast here

New Lessons Learned from Berkeley & Stanford Lean LaunchPad Classes

Our Stanford and Berkeley Lean LaunchPad classes are over for this year, and as usual we learned as much from teaching the teams as the teams did from us.

Here are a few of the Lessons Learned from these two classes.

Have each team talk to 10 customers before the class starts
Each year we learn how to move more of the Lean LaunchPad class logistics outside our classroom so teams have more time for in-class learning.

A few years ago, we moved the formation of teams’ to before the class started and in doing so, saved a week of what normally be an in-class time activity. To make this happen, we hold three “information sessions” two weeks apart before the class starts. In these “info sessions” we describe the purpose of the class, and then let students mix, meet and form teams. During this pre-class time we share a Google doc where students who have ideas can find other team members, and students without an idea can find a team that matches their skills and interests. Application and admission to the class is by interview with a fully formed team.

Info session announcement

Info session announcement

The next thing we learned is to make applying to the class an integral part of the learning process. Teams apply by filling out both a business model canvas and a “competitive petal slide.” Having the teams do this accomplishes three things.  First it forces the students to read and understand “what’s a business model canvasbefore they even come to class.

Freewire application

Team Application: Business Model Canvas

Second, the competitive slide enforces a modicum of due diligence on the product and market. (We got tired of knowing more about each team’s market by doing a Google search as they presented. Now it’s their job.)

Farmsense competive slide

Team Application: Competitive “Petal” Slide

Finally, having teams spend time on the canvas and competition as part of the application process saves weeks of what would normally be an in-class activity (and as a bonus gives the team a heads-up about the difficulty of the class and shows whether they’re serious about the class or just shopping.)

This year we learned to raise the bar once again.  Could we get the teams to come into class having already talked to 10 customers? Instead of using the first class to have teams just present their business model canvas, this time the team’s first presentation would be about what they learned outside the building about their value proposition. (We pointed them to our tutorials on customer discovery and how to conduct customer interviews but didn’t expect them to be experts on week 1.)

SignUP week 1

1st week team title slide – 11 interviews before class started

We did an A/B test by requiring our teams in one school do this while not requiring it for the teams in the other school. The result?  Teams that had to talk to customers before the class hit the ground running. There was a substantive difference in team trajectory and velocity that continued throughout the quarter. The amount of learning between the two felt quite different. While there may have been other factors (team selection bias, team make up, etc.), we’ll now make this an integral part of all the classes.

Have each team put the number of Mentor interactions on their weekly title slide
The second innovation this year involved mentors. Each team is assigned a mentor as a coach. We’ve been trying to figure out how to make mentor engagements with their teams a regular rather an adhoc activity. While we have required the teams to add a summary of any mentor interaction to their LaunchPad Central narrative, we felt we didn’t have sufficient high-level visibility for these essential interactions.

GiveModo Class 8

But this year, a seemingly minor change to the teams’ weekly cover slide had an important impact. As teams present each week, their cover slides show the number of customers interviewed for that week (>10) along with the cumulative customers interviewed. This year we added one more metric for their cover slides– the number of mentor interactions for that week (>1) along with the cumulative number of mentor interactions.

This enhanced the visibility of the teams interaction (or lack of) with their mentors and allowed us to proactively intervene early if there wasn’t sufficient interaction.

Here are a few of the Final Presentations (see here for all of them)

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

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

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

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

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

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Listen to the blog post here

Download the podcast here

Get the Heck Out of the Building in Founder’s School: Part 2

With a ~$2 billion endowment the Kauffman Foundation is the largest non-profit focused on entrepreneurship in the world. Giving away $80 million to every year (~$25 million to entrepreneurial causes) makes Kauffman the dominant player in the entrepreneurship space.

Kauffman launched Founders School - a new education series to help entrepreneurs develop their businesses during the startup stage by highlighting how startups are different from big companies.

In January 2014 Part 1 of the “Startups” section of Founders School went online.

Now you can watch Part 2 “The Lean Approach“.

Founders School

This group of six videos provides an overview of how to successfully do Customer Discovery. You’ll learn how to:

  • get to know your customers
  • devise ways to test your hypotheses
  • glean insights from what you learn outside the building
  • get, keep and grow customers

As in the first part of this series, I’m in good company – I’m joined in Founders School by Noam Wasserman of Harvard teaching Founder’s Dilemmas, Craig Wortmann University of Chicago covering Entrepreneurial Selling, Peter McDermott helping understand Intellectual Property, and Nathan Gold offering how to give Powerful Presentations.

These videos are not only great tutorials for founders but also provide educators with another source of well produced and curated resources.

These “Startup and The Lean Approach” videos are a great general purpose companion to my “How to Build a Startup” lectures on Udacity.

And you get a tour of my living room and office…

Introduction, for Part 2 is here

Module 1, The Lean Method

  • 0:50: There are No Facts Inside Your Building — Get Outside
  • 1:28: Using the Business Model Canvas
  • 1:49: Use Customer Development to Test Your Hypotheses
  • 2:44: What is a Pivot?
  • 4:24: No Business Plan Survives First Contact with Customers

Module 2, Getting Out of the Building: Customer Development

  • 0:24: What is Customer Development?
  • 1:09: How Do You Start the Customer Development Process?
  • 1:36: Customer Discovery is a Series of Conversations
  • 2:05: The Founder and Customer Development
  • 3:16: Real World Example of Customer Development

Module 3, Customer Development Data

  • 0:31: Designing Experiments to Test Hypotheses
  • 0:48: Doing Customer Discovery Without Collecting Data is a Sin
  • 1:06: Insight is Key
  • 1:49: Why Accountants Don’t Run Startups

Module 4, Minimum Viable Products

  • 0:18: What is a Minimum Viable Product?
  • 0:38: What to Test, Why to Test and How to Test
  • 2:05: You’re Not Building a Product … You’re Getting Customer Feedback
  • 2:53: Use MVPs to Run Experiments
  • 4:15: Real World Example of an MVP

Module 5, Customer Acquisition and Archetypes

  • 0:47: Get, Keep and Grow Customers
  • 1:00: Create Customer Demand
  • 1:46: Customer Archetypes: Getting to Know Your Customers
  • 3:35: Matching Archetypes to Acquisition
  • 5:28: Growing Customers: The Lifetime Value
  • 7:35: The Biggest Mistake in Customer Acquisition

Listen to the blog post here

Download the podcast here

Is This Startup Ready For Investment?

Since 2005 startup accelerators have provided cohorts of startups with mentoring, pitch practice and product focus. However, accelerator Demo Days are a combination of graduation ceremony and pitch contest, with the uncomfortable feel of a swimsuit competition. Other than “I’ll know it when I see it”, there’s no formal way for an investor attending Demo Day to assess project maturity or quantify risks. Other than measuring engineering progress, there’s no standard language to communicate progress.

Corporations running internal incubators face many of the same selection issues as startup investors, plus they must grapple with the issues of integrating new ideas into existing P&L-driven functions or business units.

What’s been missing for everyone is:

  • a common language for investors to communicate objectives to startups
  • a language corporate innovation groups can use to communicate to business units and finance
  • data that investors, accelerators and incubators can use to inform selection

While it doesn’t eliminate great investor judgment, pattern recognition skills and mentoring, we’ve developed an Investment Readiness Level tool that fills in these missing pieces.

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Investment Readiness Level (IRL) for Corporations and Investors
The startups in our Lean LaunchPad classes and the NSF I-Corps incubator use LaunchPad Central to collect a continuous stream of data across all the teams. Over 10 weeks each team gets out of the building talking to 100 customers to test their hypotheses across all 9 boxes in the business model canvas.

We track each team’s progress as they test their business model hypotheses. We collect the complete narrative of what they discovered talking to customers as well as aggregate interviews, hypotheses to test, invalidated hypotheses and mentor and instructor engagements. This data gives innovation managers and investors a feel for the evidence and trajectory of the cohort as a whole and a top-level view of each teams progress. The software rolls all the data into an Investment Readiness Level score.

(Take a quick read of the post on the Investment Readiness Level – it’s short. Or watch the video here.)

The Power of the Investment Readiness Level: Different Metrics for Different Industry Segments
Recently we ran a Lean LaunchPad for Life Sciences class with 26 teams of clinicians and researchers at UCSF.  The teams developed businesses in 4 different areas– therapeutics, diagnostics, medical devices and digital health.  To understand the power of this tool, look at how the VC overseeing each market segment modified the Investment Readiness Level so that it reflected metrics relevant to their particular industry.

Medical Devices
Allan May of Life Science Angels modified the standard Investment Readiness Level to include metrics that were specific for medical device startups. These included; identification of a compelling clinical need, large enough market, intellectual property, regulatory issues, and reimbursement, and whether there was a plausible exit.

In the pictures below, note that all the thermometers are visual proxies for the more detailed evaluation criteria that lie behind them.

Device IRL

Investment Readiness Level for Medical Devices

You can watch the entire presentation here

Therapeutics
Karl Handelsman of CMEA Capital modified the standard Investment Readiness Level (IRL) for teams developing therapeutics to include identifying clinical problems, and agreeing on a timeline to pre-clinical and clinical data, cost and value of data points, what quality data to deliver to a company, and building a Key Opinion Leader (KOL) network. The heart of the therapeutics IRL also required “Proof of relevance” – was there a path to revenues fully articulated, an operational plan defined. Finally, did the team understand the key therapeutic liabilities, have data proving on-target activity and evidence of a therapeutic effect.

Therapeutics IRL

You can see the entire presentation here

Digital Health
For teams developing Digital Health solutions, Abhas Gupta of MDV noted that the Investment Readiness Level was closest to the standard web/mobile/cloud model with the addition of reimbursement and technical validation.

Digital Health

Diagnostics
Todd Morrill wanted teams developing Diagnostics to have a reimbursement strategy fully documented, the necessary IP in place, regulation and technical validation (clinical trial) regime understood and described and the cost structure and financing needs well documented.

Diagnostics IRL

You can see the entire presentation here

For their final presentations, each team explained how they tested and validated their business model (value proposition, customer segment, channel, customer relationships, revenue, costs, activities, resources and partners.) But they also scored themselves using the Investment Readiness Level criteria for their  market. After the teams reported the results of their self-evaluation, the  VC’s then told them how they actually scored.  We were fascinated to see that the team scores and the VC scores were almost the same.

Lessons Learned

  • The Investment Readiness Level provides a “how are we doing” set of metrics
  • It also creates a common language and metrics that investors, corporate innovation groups and entrepreneurs can share
  • It’s flexible enough to be modified for industry-specific business models
  • It’s part of a much larger suite of tools for those who manage corporate innovation, accelerators and incubators

Listen to the blog post here

Download the podcast here

What I Learned by Flipping the MOOC

Two of the hot topics in education in the last few years have been Massive Open Online Courses (MOOC’s) and the flipped classroom. I’ve been experimenting with both of them.

What I’ve learned (besides being able to use the word “pedagogy” in a sentence) is
1) assigning students lectures as homework doesn’t guarantee the students will watch them and 2) in a flipped classroom you can become hostage to the pedagogy.

Here’s the story of what we tried and what we learned.

MOOC’s – Massive Open Online Courses
A MOOC is a complicated name for a simple idea – an online course accessible to everyone over the web. I created my MOOC by serendipity. Learning how to optimize it in my classes has been a more deliberate and iterative process.

If you can’t see the video above click here

When my Lean LaunchPad class was adopted by the National Science Foundation, we taught our original classes to scientists scattered across the U.S.  We adopted WebEx, a web video conferencing tool, to hold our classes remotely. Just like my students at Stanford, these NSF teams got out of the building and spoke to 10-15 customers a week. Back in their weekly class, the scientists would present their results in front of their peers – in this case via Webex, as the teaching team gave them critiques and “guidance”. When their presentations were over, it was my turn. I lectured to these remote students about the next week’s objectives.

Is it Live or Is It a MOOC?
After the first NSF class held via videoconference, it dawned on me that since I wasn’t physically in front of the students, they wouldn’t know if my lecture was live or recorded.

Embracing the “too dumb to know it can’t be done,” I worked with a friend from Stanford, Sebastian Thrun and his startup Udacity, to put my Lean LaunchPad lectures online. Rather than just have me drone on as a talking head, I hired an animator to help make the lectures interesting, and the Udacity team had the insight to suggest I break up my lecture material into small, 2-4 minute segments that matched students’ attention spans.

If you can’t see the video above click here

Over a few months we developed the online lectures, then tried it as a stand-in for me on the NSF videoconferences, and found that because of the animations and graphics the students were more engaged than if I were teaching it in person. Ouch.

Now the NSF teams were learning from these online lectures instead of video conferenced lectures – but the online lectures were still being played during class time.

I wondered if we could be more efficient with our classroom time.

Flipping
Back at Stanford and Berkeley, I realized that I could use my newly created Lean LaunchPad MOOC and “flip” the classroom.  It sounded easy, I had read the theory:
1) A flipped classroom moves lectures traditionally taught in class, and assigns them as homework. Therefore my  students will all eagerly watch the videos and come to class ready to apply their knowledge, 2) this would eliminate the need for any lecture time in class.  And as a wonderful consequence, 3) I could now admit more teams to the class because we’d now have more time for teams to present.

So much for theory. I was wrong on all three counts.

Theory Versus Practice
After each class, we’d survey the students and combine it with a detailed instructor post mortem of lessons learned.  (An example from our UCSF Lean LaunchPad for Life Sciences Class is here.)

Here’s what we found when we flipped the classroom:

  • More than half the students weren’t watching the lectures at home.
  • Without an automated tool to take an attendance, I had no idea who was or wasn’t watching.
  • Without lectures, my teaching team and I felt like observers. Although we were commenting and critiquing on students presentations, the flipped classroom meant we were no longer in the front of the room.
  • No lectures meant no flexibility to cover advanced topics or real time ideas past the MOOC lecture material.

We decided we needed to fix these issues, one at a time.

  • In subsequent classes we reduced class size from ten teams to eight. This freed up time to get lecture and teaching time back in the classroom.
  • We manually took attendance of who watched our MOOC (later this year this will be an automated part of the LaunchPad Central software we use to manage the classes.)
  • To get the teaching team front and center, I required students to submit questions about material covered in the MOOC lecture they watched the previous evening. I selected the best questions and used them to open the class with a discussion. I cold-called on students to ensure they all had understood the material.
  • We developed advanced lectures which combined a summary of the MOOC material with new material such as lectures focused on domain specific perspectives. For example, in our UCSF Life Sciences class the four VC’s who taught the class with me developed advanced business model lectures for therapeutics, diagnostics, medical devices and digital health. (These advanced lectures are now on-line and available to everyone who teaches the class.)

The class, now taught as hybrid flipped classroom, looks like this: Lean LaunchPad Class Organization

There’s still more to do.

  • While we use LaunchPad Central to have the teams provide feedback to each other, knowledge sharing across the teams still needs to be deeper and more robust.
  • While we try to give students tutorials for how to do Customer Discovery we need a better way to integrate these into the short time in quarter/semester.
  • While we insist that an MVP is part of the class, we need a more rigorous process for building the MVP in parallel with Customer Discovery

Outcomes
Besides finding the right balance in a flipped classroom, a few other good things have come from these experiments. The Udacity lectures now have over 250,000 students. They are not only used in my classes but are also part of other educators’ classes, as well as being viewed by aspiring entrepreneurs as stand-alone tutorials.

My experiments in how to teach the Lean LaunchPad class have led to a 2 ½ day class for 75 educators a quarter (information here.) And we’ve found a pretty remarkable way to use the Lean LaunchPad to organize corporate innovation/incubator groups. (We opened source our teaching guide we use in the classes here.)Educator's Program cover

Lessons Learned

  • Creating engaging MOOC’s are hard
  • Confirming that students watched the MOOC’s is even harder
  • The Flipped classroom needs to be balanced with:
    • Student accountability
    • Instructor time in front of the class
    • Advanced lectures

Listen to the blog post here

Download the podcast here

Sometimes It Pays to be a Jerk

That he which hath no stomach to this fight,
Let him depart; his passport shall be made
William Shakespeare Henry V | Act 4, Scene 3

band of brothers

The concepts in my Lean LaunchPad curriculum can be taught in a variety of classes–as an introduction to entrepreneurship all the way to a graduate level “capstone class.”

I recently learned being tough when you select teams for a capstone class pays off for all involved.

Here’s why.

—-

Our Lean LaunchPad class requires student teams to get out of the building and talk to 10-15 customers a week while they’re building the product.  And they do this while they are talking a full load of other classes.  To say it’s a tough class is an understatement.  The class is designed for students who said they want  a hands-on experience in what it takes to build a startup – not just writing a business plan or listening to lectures.

The class syllabus has all kinds of “black box” warnings about how difficult the class is, the amount of time required, etc.

Yet every year about 20% of teams melt down and/or drop the class because some of the team members weren’t really committed to the class or found they’ve overcommitted.

This year that drop out rate went to zero when I ran an accidental “be a jerk” experiment.

Here Are the Rules
We set up the Lean LaunchPad class so that teams hit the ground running in the first class. Before students are admitted, they formed teams, applied as a team with a business model canvas, had homework and were expected to be presenting their business model canvas hypotheses on day one of the class. Our first class session is definitely not a “meet and greet”.  The syllabus is clear that attendance was mandatory for the first class.

This year, at one of the universities where I teach in the engineering school, our quarter was going to start right after the New Year.  Some of the teams had students from the business school, law school and education school whose start dates were a few days later.

To remind everyone that attendance at the first class was required, we sent out an email to all the teams in December. We explained why attendance at the first class was essential and reminded them they agreed to be there when they were admitted to the class. The email let them know if they missed the first class, they weren’t going to be allowed to register.  And since teams required 4 members, unless their team found a replacement by the first week, the team would not be allowed to register either. (We made broad exceptions for family emergencies, events and a few creative excuses.)

I had assumed everyone had read the syllabus and had planned to be back in time for class.

Then the excuses started rolling in.

Be A Jerk
About 25% of the teams had team members who had purposely planned to miss the first class.  Most of the excuses were, “I thought I could make it up later.”

In past years I would have said, “sure.”  This year I decided to be a jerk.

I had a hypothesis that showing up for the first class might be a good indicator of commitment when the class got tough later in the quarter.  So this time, unless I heard a valid excuse for an absence I said, “too bad, you’ve dropped the class.”

You could hear the screaming around the world (this is in a school where the grading curve goes from A to A+.)  The best was an email from a postdoc who said “all his other professors had been accommodating his “flexible” schedule his entire time at the school and he expected I would be as well.“  Others complained that they had paid for plane tickets and it would cost them money to change, etc.

I stuck to my guns – pointing out that they had signed up for the class knowing this was the deal.

Half the students who said they couldn’t make it magically found a way to show up.  The others dropped the class.

The results of the experiment?  Instead of the typical 20% drop out rate during the quarter none left – 0.

We had a team of committed and passionate students who wanted to be in the class.  Everyone else failed the “I’m committed to making this happen” test.

Lessons Learned

  • Commitment is the first step in building a startup team.
  • It washes out the others
  • Setting a high bar saves a ton of grief later

Listen to the blog post here

Download the podcast here

Time For Founders School

Having a film crew in your living room for two days is something you want to put on your bucket list.

photo 2

photo 3-1

With a ~$2 billion endowment the Kauffman Foundation is the largest non-profit focused on entrepreneurship in the world. Giving away $80 million to every year (~$25 million to entrepreneurial causes) makes Kauffman the dominant player in the entrepreneurship space.

Kauffman just launched Founders School - a new education series to help entrepreneurs develop their businesses during the startup stage by highlighting how startups are different from big companies. After weeks honing the script and days of filming, I’m honored to present the “Startups” section of Founders School.

And I’m in good company – also in the series is Noam Wasserman of Harvard teaching Founder’s Dilemmas, Craig Wortmann University of Chicago covering Entrepreneurial Selling, Peter McDermott helping understand Intellectual Property, and Nathan Gold offering how to give Powerful Presentations.

These videos are not only great tutorials for founders but also provide educators another source of well produced and curated resources.

These “Startup” videos are a great general purpose companion to my “How to Build a Startup” lectures on Udacity.

And you get a tour of my living room…

Startups” introduction is here

Module 1, What We Know About Startups

  • 0:17: A Startup is not a smaller version of a large company
  • 0:45: The definition of a startup
  • 1:53: Types of Startups
  • 2:18: Startups in an Existing Market
  • 3:10: Startups in a New Market
  • 4:31: Startups in a Resegmented Market
  • 5:28: Startups in a Clone Market

Module 2, Startups Versus Big Companies

  • 0:43: Business Plans versus Business Models
  • 1:46: The Differences: Accounting, Engineering & Sales
  • 2:21: Accounting Metrics in a Large Company vs. Metrics that Matter in a Startup
  • 3:35: Job Titles in a Large Company can Sink a Startup
  • 6:07: Engineering: Waterfall Development in a Large Company vs. Minimum Viable Product in a Startup

Module 3, The Lean Method

  • 0:50: There are No Facts Inside Your Building — Get Outside
  • 1:28: Using the Business Model Canvas
  • 1:49: Use Customer Development to Test Your Hypotheses
  • 2:44: What is a Pivot?
  • 4:24: No Business Plan Survives First Contact with Customers

Module 4, Building Your Startup

  • 0:41: Don’t outsource Customer Discovery
  • 1:33: How to build your startup
  • 2:48: How to building your team
  • 3:15: Look for overlapping skill sets and complementary temperaments

Module 5, Pivot or Proceed, How to Decide

  • 0:33: Is there Product-Market Fit?
  • 1:00: Most startups fail
  • 1:20: Adopt a mindset of learning
  • 1:27: Proceed, pivot or restart

The second half of the “Startups” series is coming in March.

Go watch Founders School now.

Listen to the blog post here

Download the podcast here

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…

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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
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