Well They “Should” be Our Customers

When scientists and engineers who’ve been working in the lab for years try to commercialize their technology they often get trapped by their own beliefs  - including who the customers are, what features are important, pricing etc.

I hear nothing

——–

One the key tenets of the Lean LaunchPad class is that every week each team gets out of the building and talks to 10+ customers/partners to validate a new part of their business model.  Back in class they present their findings to their peers and teaching team in a 10 minute Lessons Learned presentation. One of the benefits of the class is that the teams get immediate unvarnished feedback on their strategy.

For researchers and clinicians who’ve been working on a project in the lab for years, getting out of the building and talking to customers at times creates cognitive dissonance.  While they’ve been in the lab they had a target customer in mind. However when they leave the building and start talking to these  supposed customers there’s almost always a surprise when the customer is not interested in the product.

Often when they consistently hear that their expected customers aren’t interested the first reaction is “the customers just don’t get it yet.”  Rather than testing a new customer segment they keep on calling on the same group – somehow thinking that “we just need to explain it better.”

Some times it takes a nudge from the teaching team to suggest that perhaps looking at another customer segment might be in order.

They Should be Our Customers
The Mira Medicine Team is trying to accelerate the path to the right treatment for each patient in complex Central Nervous System diseases. They spent years building their first tool MS Bioscreen, which was developed for the physicians at the UCSF Dept of Neurology. So they naturally believed that their first customers would be neurologists.

This was a very smart team who ran into the same problem almost every smart researcher attempting to commercialize science faces.  Here’s what happened.

If you can’t see the video click here.

Listen for:

0:35 “Our primary customer we built this app for was neurologists…

1:00 “(but neurologists have told us) your prototype is interesting… and probably some features are nice to haves…

2:26 “What’s special about neurology?  Doesn’t cardiology and oncology have problems like this?

3:00 “Is neurology a key component of what you’re trying to do?

3:15 “I’ve worked on this for two years…”

3:24 “You’ve already done too much prototyping work. You’re hung up on the prototype.”

3:29 “You have a square peg you’er trying to jam in a round hole…”

3:43 “Don’t be afraid to think laterally”

Postscript: 70 customers later they no longer talking to neurologists.

Lessons Learned

  • Don’t get trapped by your own beliefs
  • When reality outside the building doesn’t match your hypotheses – test alternate hypotheses
  • Most of the time your vision is just a hallucination

Listen to the podcast here


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Lean LaunchPad for Life Sciences – Distribution Channels

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

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

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

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

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

Diagnostics

Week 3 Todd Morrill Instructor 

If you can’t see the presentation above click here

Digital Health

Week 3 Abhas Gupta Instructor 

If you can’t see the presentation above click here

Devices

Week 3 Allan May Instructor 

If you can’t see the presentation above click here

Therapeutics

Week 3 Karl Handelsman Instructor 

If you can’t see the presentation above click here

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

If you can’t see the video above click here

Medical Devices (Starting at 0:50)

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

Diagnostics (Starting at 5:16)

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

Digital Health (Starting at 7:25)

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

Therapeutics (Starting at 10:17)

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

Lessons Learned

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

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A New Way to Look at Competitors

Every startup I see invariably puts up a competitive analysis slide that plots performance on a X/Y graph with their company in the top right.

Competitive XY

The slide is a holdover from when existing companies launched products into crowded markets. Most of the time this graph is inappropriate for startups or existing companies creating new markets.

Here’s what you need to do instead.

——-

The X/Y axis competitive analysis slide is a used by existing companies who plan to enter into an existing market.  In this case the basis of competition on the X/Y axes are metrics defined by the users in the existing market.

This slide typically shows some price/performance advantage.  And in the days of battles for existing markets that may have sufficed.

But today most startups are trying to ressegment existing markets or create new markets. How do you diagram that? What if the basis of competition in market creation is really the intersection of multiple existing markets?  Or what if the markets may not exist and you are creating one?

We need a different way to represent the competitive landscape when you are creating a business that never existed or taking share away from incumbents by resegmenting an existing market.

Here’s how.

The Petal Diagram
I’ve always thought of my startups as the center of the universe. So I would begin by putting my company in the center of the slide like this.

Slide1In this example the startup is creating a new category –  a lifelong learning network for entrepreneurs. To indicate where their customers for this new market would come from they drew the 5 adjacent market segments: corporate, higher education, startup ecosystem, institutions, and adult learning skills that they believed their future customers were in today. So to illustrate this they drew these adjacent markets as a cloud surrounding their company. (Unlike the traditional X/Y graph you can draw as many adjacent market segments as you’d like.)

Slide2Then they filled in the market spaces with the names of the companies that are representative players in each of the adjacent markets.companies updated

Then they annotated the private companies with the amount of private capital they had raised. This lets potential investors understand that other investors were interested in the space and thought it was important enough to invest. (And plays on the “no VC wants to miss a hot space” mindset.)

Slide4

Finally, you could show the current and projected market sizes of the adjacent markets which allows the startups to have a “how big can our new market be?” conversation with investors.  (If you wanted to get fancy, you could scale the size of the “petals” relative to market size.)

Slide5

The Petal Diagram drives your business model canvas
What the chart is saying is, “we think our customers will come from these markets.”  That’s handy if you’re using a Lean Startup methodology because the Petal Chart helps you identify your first potential customer segments on the business model canvas.add the canvasYou use this chart to articulate your first hypotheses of who are customers segments you’re targeting.  If your hypotheses about the potential customers turn out to be incorrect, and they aren’t interested in your product, then you go back to this competitive diagram and revise it.

Lessons Learned

  • X/Y competitive graphs are appropriate in an existing market
  • Mapping potential competitors in new or resegmented markets require a different view – the Petal diagram
  • The competitive diagram is how develop your first hypotheses about who your customers are

Update: I’ve heard from a few entrepreneurs who used the diagram had investors tell them “”it looks like you’re being surrounded, how can you compete in that market?”

Those investors have a bright future in banking rather than venture capital.

Seriously, I would run away fast from a potential investor who doesn’t or can’t understand that visualizing the data doesn’t increase or decrease the likelihood of success. It only provides a better way to visualize potential customer segments.
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Lean LaunchPad for Life Sciences – Value Proposition and Customers

We’re deep into teaching a Lean LaunchPad class for Life Sciences and Health Care (therapeutics, diagnostics, devices and digital health) at UCSF with a team of veteran venture capitalists. (The class has talked to 1,440 customers to date.)shutterstock_81663952

One of the objectives of the class was to become a Life Science Center of Excellence for the National Science Foundation Innovation Corps. This meant capturing domain specific commercialization expertise for therapeutics, diagnostics, devices and digital health so others can teach this.

Part 1 of this post described the issues in the therapeutics drug discovery pipeline. Part 2 covered medical devices and digital health. Part 3 described what we’re going to do about it.  Part 4 gave a snapshot of what one our teams found the first week outside the building.

This is an update of our progress.

It Takes A Village
We’re teaching 110 students in 28 teams across therapeutics, diagnostics, devices and digital health. Teams are made up of clinicians, researchers, and post docs, (some of the team members include the Chief of  UCSF General Surgery, the inventor of Fetal Surgery, etc.)

Each of the four cohorts is taught by an experienced life science venture capitalist. Alan May for devices, Karl Handelsman for therapeutics Abhas Gupta for digital health and Todd Morrill for diagnostics.

Jerry Engel and Jim Hornthal, both who taught the National Science Foundation I-Corps classes, are the senior instructors. The UCSF Office of Innovation and Technology (Erik Lium and Stephanie Marrus) is the reason the program exists.

Each of the teams is assigned a mentor to match their domainv(Head of device R&D of Phillips, Genetech, Crescendo, CTO of UCSF, venture capitalists from Sofinnova, Burrill, Lightstone, M34, etc.)

Class Organization – Lots of Moving Parts
Our class meets weekly. We first meet as one group and then we break out the therapeutics, diagnostics, devices and digital health into their own cohorts. The teams present what they learned talking to 10-15 customer/week, and get comments, suggestions and critiques from their teaching team.  The instructor then presents  a cohort specific lecture explaining how the business model for their area (therapeutics, diagnostics, devices and digital health) builds on and/or differs from the canonical business model in the online Udacity lectures (which the students had to watch as homework.)

We get back together as one group and the instructors share what they learned as they compare and contrast the differences between therapeutics, diagnostics, devices and digital health.  We’ve recorded these panels for each part of the business model canvas.

The framework of the class looks like this:

Lean LaunchPad for Life Sciences

Life Science/Health Care is not a single Category
One of the reasons I teach is because of how much I learn. One of early surprises of this class for me is finding out that the broad category of “Life Sciences” fails to provide the important nuances of each category to entrepreneurs, investors, educators, policy makers, etc. It turns out that for commercialization, the business model (Customers, Channel, Revenue Model, etc.) for therapeutics, diagnostics, devices, bioinformatics and digital health have very little in common.

You can get a feel for how different by looking at the first two weeks of lectures – covering value proposition and customer segment – from each of the therapeutics, diagnostics, devices and digital health cohorts.

Then at the end of the lectures you can see a “compare and contrast” video and a summary of the differences.

Diagnostics

Week 1 Todd Morrill Instructor 

If you can’t see the presentation above click here

Week 2 Todd Morrill Instructor

If you can’t see the presentation above click here

Digital Health

Week 1 Abhas Gupta Instructor 

If you can’t see the presentation above click here

Week 2 Abhas Gupta Instructor

If you can’t see the presentation above click here

Devices

Week 1 Allan May Instructor 

If you can’t see the presentation above click here

Week 2 Allan May Instructor

If you can’t see the presentation above click here

Therapeutics

Week 1 Karl Handelsman Instructor 

If you can’t see the presentation above click here

Week 2 Karl Handelsman Instructor

If you can’t see the presentation above click here

Life Science and Health Care Differences

Once we realized that the four cohorts of therapeutics, diagnostics, devices and digital health were so different we decided to have the instructors compare and contrast how they’re different for each part of the business model. We’ll be posting these “compare and contrast” videos for every week of the class.

If you can’t see the video above click here

Therapeutics (Starting at 0:30)

  • Therapeutics customer = pharma and biotech companies
  • Therapeutics Pain & gain = be better than what these companies have in their own drug development pipeline
  • Therapeutics Validation =  18 months to a first deal with a potential customer – well before FDA trials, and even before preclinical stage

Digital Health (Starting at 2:40)

  • Digital Health Customer = typically consumer end users
  • Digital Health Pain & gain = product/market fit needs to be a need, and the value proposition must address it.  “Nice to have’s” do not equal a customer need.
  • Digital Health Validation = large scale adoption

Medical Devices (Starting at 6:00)

  • Medical Device customers = short term: physicians in private practice and hospital, long term: medical device companies
  • Medical Device Customer Goal – figure out the Minimal Viable Product.  No such thing as a perfect first generation product that targets a specific physician/customer segment.
  • Medical Device Validation= 95% of device startups are acquired by a medical device company, 5% build a large standalone company

Diagnostics (Starting at 10:45)

  • Diagnostic Customers = short term In vitro diagnostics are sold to a hospital laboratory or standalone lab, long-term you’ll be bought by Abbott, Roche, etc.

Lessons Learned

  • Each of these Life Science domains has a unique business model
  • Commercialization of therapeutics, diagnostics, devices and digital health all require the Principal Investigators / founders outside their building talking to customers, partners, regulators
  • Only the Principal Investigators / founders have the authority and insight to pivot when their hypotheses are incorrect
  • The Lean Startup process and the Lean LaunchPad class can save years in commercialization in these domains
  • This can be taught

Listen to the podcast here


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300 Teams in Two Years

This is the start of the third year teaching teams of scientists (professors and their graduate students) in the National Science Foundation Innovation Corps (I-Corps). This month we’ve crossed ~300 teams in the first two years through the program.

I-Corps is the  accelerator that helps scientists bridge the commercialization gap between their research in their labs and wide-scale commercial adoption and use.

I-Corps bridges the gap between public support of basic science and private capital funding of new commercial ventures. It’s a model for a government program that’s gotten the balance between public/private partnerships just right.

While a few of the I-Corps teams are in web/mobile/cloud, most are working on advanced technology projects that don’t make TechCrunch. You’re more likely to see their papers (in material science, robotics, diagnostics, medical devices, computer hardware, etc.) in Science or Nature. The program pays scientists $50,000 to attend the program and takes no equity.

Currently there are 11 U.S. universities teaching the Lean LaunchPad curriculum organized as I-Corps “nodes” across the U.S.  The nodes are now offering their own regional versions of the Lean LaunchPad class under I-Corps.

The NSF I-Corps uses everything we know about building Lean Startups and Evidence-based Entrepreneurship to connect innovation to entrepreneurship. It’s curriculum is built on a framework of business model design, customer development and agile engineering – and its emphasis on evidence, Lessons Learned versus demos, makes it the worlds most advanced accelerator. It’s success is measured not only by the technologies that leave the labs, but how many U.S. scientists and engineers we train as entrepreneurs and how many of them pass on their knowledge to students. I-Corps is our secret weapon to integrate American innovation and entrepreneurship into every U.S. university lab.

Every time I go to Washington and spend time at the National Science Foundation or National Institute of Health I’m reminded why the U.S. leads the world in support of basic and applied science.  It’s not just the money we pour into these programs (~$125 billion/year), but the people who have dedicated themselves to make the world a better place by advancing science and technology for the common good.

I thought it was worth sharing the progress report from the Bay Area (Berkeley, Stanford, UCSF) I-Corps node so you can see what just one of the nodes was accomplishing. Multiply this by the NSF regional nodes across the U.S. and you’ll have a feeling for the scale and breadth of the program.

If you can’t see the presentation above click here

Glad to a part of it.

Lessons Learned

  • The U.S. government has built an accelerator for scientists and engineers
  • It’s scaled across the U.S.
  • The program has taught ~300 teams
  • Balance between public/private partnerships

Listen to the podcast here


Download the podcast here
BTW, NCIIA is offering other accelerators and incubators a class to learn how to build their own versions of I-Corps here.

The Air Force Academy Gets Lean

I can always tell when one of my students has been in the military. They’re focused, they’re world-wise past their years, and they don’t break a sweat in the fast pace and chaotic nature of the class and entrepreneurship. Todd Branchflower took my Lean LaunchPad class having been entrepreneurial enough to convince the Air Force send him to Stanford to get his graduate engineering degree.

In class I teased Todd that while the Navy had me present my Secret History of Silicon Valley talk in front of 4,000 cadets at the Naval Post Graduate School, I had yet to hear from the Air Force Academy.  He promised that one day he would fix that.

True to his word, fast-forward three years and Todd is now Captain Todd Branchflower, teaching computer engineering at the Air Force Academy.  He extended an invitation to me to come out to the Air Force Academy to address the cadets and meet the faculty. Besides the talk I brainstormed with Todd and other faculty on how to integrate the Lean LaunchPad into the Air Force Academy Capstone engineering class (a Capstone class puts together all the pieces that a students has learned in his or her major.)

Here’s Todd’s story of how we got there and progress to date.

——-

Not That Long Ago
In 2007, I graduated United States Air Force Academy as a computer engineer and entered the Air Force’s acquisition corps, excited and confident about my ability to bring technology to bear for our airmen.

Graduation day with classmate Joseph Helton (right), killed in action in Iraq in 2009

Graduation day with classmate Joseph Helton (right), killed in action in Iraq in 2009

And I couldn’t have been put in a better place: testing the Air Force’s newest network security acquisitions. I was their technical man on the inside – making sure big defense contractors delivered on their promises. We were modernizing datacenters, buying vulnerability-scanning software, and adding intrusion detection appliances – all things typical of anyone running an enterprise-scale network..46th test sqd

I was in the thick of it – chairing telecons, tracking action items, and drafting test plans. I could recite requirements and concepts of operations from memory. I was jetsetting to team meetings and conferences across the country. I was busy.

Sure, I wasn’t working very closely with the airmen who were going to use the equipment.  But they called into the weekly telecons, right? And they were the ones who had given the program office the requirements from the outset. (Well, their bosses had.) And I’d distilled those requirements into system characteristics we could measure. Well, more measurable versions of the original requirements. And meeting the requirements was the most important thing, right?

Doing it Wrong
Here’s what I learned: I was doing it wrong. The way our process worked, customers were just a stakeholder that provided input – not drivers of the process. That meant that program offices were only accountable to a list of requirements, which were locked early. Success only consisted of passing tests against these requirements, not delighting our airmen. I began to wonder – how could we learn about user needs earlier?  How could we deliver them solutions more quickly?  More cheaply?

It was only after returning to Stanford and taking the Lean Launchpad class that I became convinced that a radically different, customer-centric approach was the solution. I returned to the Air Force Academy as an instructor in the Electrical and Computer Engineering Department, intent on spreading the gospel of Customer Development and Lean.academy ee

Our existing Capstone senior engineering design course followed the defense acquisition process; the focus of defense acquisition is to “nail down requirements” early and manage customer expectations to “avoid requirements creep”. I saw this as counter to the joint, iterative discovery process between entrepreneurs and customers I had experienced on my Lean Launchpad team.

I kept in touch with Steve as I started teaching. We discussed how the Lean Launchpad approach might find a place in our curriculum, and how it might be adapted to fit the unique Air Force Academy / military environment. We grew excited about how showing success here might prove a good model for how it could be done in the broader Air Force; how exposing future officers to the Lean philosophy might bring about change from within.

So when I invited Steve out to the Air Force Academy to speak last spring, there was more at stake than the talk.  We set up a meeting with our department head, Col Jeff Butler, and Capstone course director, LtCol Charlie Gaona, to pitch the idea.  They shared our enthusiasm about the impact it could have on our future design projects and how it might bring a change in perspective to our acquisition corps. They gave the go-ahead to send a pilot team through the program in the Fall semester, with the potential for it to be applied across the entire course if we delivered results.

I found a willing co-conspirator in Capt Ryan Silva, a star instructor who mentors a project named Neumimic, using technology to aid in the rehabilitation of patients with chronic loss of limb motion.  In the first year, they had developed a proof of concept around the Xbox Kinect – and Ryan had high hopes for the future. But he found some elements of the traditional systems engineering process cumbersome and frustrating to cadets. Ryan signed on to lead our test class.

V-Model of Systems Engineering
The current Capstone class follows the V-Model of Systems Engineering, with teams creating a detailed system design throughout the Fall semester and building their design in the Spring.

Vmodel

There are a series of formal reviews throughout the two semesters, in line with the Air Force acquisitions process.  Requirements and a concept of operations are presented at the first, the System Requirements Review.  Cadets receive instruction on the process in about a quarter of the course lessons.

What we decided to do instead was have semi-weekly informal reviews Lean Launchpad style, focusing on product hypotheses, customer interactions, learning, and validation / refinement.  We emphasize customer interaction via “getting out of the building” and rapid iteration through “cheap hacks”.  We’ve removed most of the structure and firm requirements from the original course in favor of a “whatever it takes” philosophy.  Instruction is presented in tandem with the reviews, focusing on areas we see as problematic.

Last year’s team meeting with Dr. Glen House at Penrose-St. Francis Hospital

Last year’s team meeting with Dr. Glen House at Penrose-St. Francis Hospital

Back to the Present
We’re about a quarter of the way through the fall semester. Team Neumimic consists of nine sharp cadets across multiple academic disciplines. Based on initial customer interactions, they divided themselves into two complementary but standalone teams. One will focus on design, execution, and measurement of therapy sessions – building on the original Xbox Kinect work.  The other will work on adjustable restriction of patient motion – forcing patients to use the proper muscles for each movement.

Here’s Ryan on the impact of the process change:

“Last year the team found themselves handcuffed to a process that required a 100% design solution on paper before we could even think about touching hardware…crazy right?! We spent the entire first semester nailing down requirements for a system that was supposed to meet the needs of stroke and traumatic brain injury patients as prescribed by their occupational therapists. For five months we slogged our way through the process emerged with a complete design for our system, custom-built to meet the needs of patients and doctors alike. Our design was flawless. We had nuts-and-bolts details all the way down to the schematic level. We were ready to build! The fact that we had yet to even see a patient or spend any real time with an occupational therapist had not even registered to us as a problem, until we were invited to watch a therapy session.

Our entire team walked out of the hospital ashen-faced and silent. We knew we had just wasted half the course designing a system that wouldn’t work. We were back to square one. The remainder of the course was spent in a frenzy of phone calls with doctors and therapists paired with many design reviews, but this time with our customers in the room. We were able to iterate a few solutions before we ran out of time, but the customers were thrilled with what they saw. I could only imagine what we could have accomplished if we didn’t waste the first half of the course on a solution that ultimately wasn’t what the customers wanted. I was fired up when Todd approached me with his idea to fundamentally change the way we did business.

So far the results have been incredible compared to last year. The team has learned more about the problem in a month than last year’s team learned in an entire semester. I’m not saying this year’s cadets are any more capable than last year’s; just that I believe this year’s team has been given a better chance to succeed.  They’re freed of a lot of stifling overhead and are embracing a process where requirements are derived from those who will actually use the system…imagine that! I’m excited to see what the team does with their remaining eight months.”

Current team members observing Dr. House conduct a therapy session

Current team members observing Dr. House conduct a therapy session

But we have experienced challenges in implementing this approach. Here’s what we’ve noticed so far:

In typical Lean Launchpad classes, students apply as teams with their own idea.  There’s also the potential for teams to pursue the opportunity beyond the class if they’re successful. In our Capstone, projects are predetermined and cadets are assigned based on preference and skill set.  Cadets will graduate and be commissioned as officers, doing various jobs throughout the Air Force. It’s highly unlikely they’ll be able to continue their project. These factors might make the initial motivation of our team less than that of other Lean Launchpad teams.  We found that early interactions with customers excited about their work went a long way to remedy this.

We’re offering cadets much less structure than they’re used to. Some cadets are uncomfortable with the ambiguity of the requirements (“What are you looking for?  What do I have to do to get an A?”).  I’d imagine this is typical of most high-performing students.

We’re trusting cadets with more freedom and less oversight than they’re used to.  There’s the potential for our trust to be abused.  I’m hopeful that our cadets rise to this challenge.  I think they’ll feel ownership of the project and empowerment, rather than see an opportunity to shirk responsibilities.

Since this course is a senior design experience, cadets expect to be “using their major”.  There’s the tendency for some to sit on the sideline if the pressing work isn’t directly related to their area of expertise.  It has taken some prodding for cadets to embrace the “hustler” mindset – to take any job necessary to move the team forward.

These are challenges we can overcome.  I know we’re moving in the right direction.  I know we have the right team and project to be successful.  I know our cadets will make us proud.

Up the hill!

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Why Real Learning is Outside the Building, Not Demo Day

Over the last three years our Lean LaunchPadNSF Innovation Corps classes have been teaching hundreds of entrepreneurial teams a year how to build their startups by getting out of the building and testing their hypotheses behind their business model.  While our teams have mentors, socialize a lot and give great demos, the goal of our class final presentations is “Lessons Learned”  – about product/market fit, pricing, acquisition/activation costs, pricing, partners, etc.  We think teaching teams a formal methodology around the Lean Framework (Business Model design, Customer Development and Agile Engineering) is a natural evolution of how successful incubators/accelerators will build startups.

Here’s the story of one such team; Jonathan Wylie, Lakshmi Shivalingaiah and the Evoke team.

—–

Imagine if, in the course of ten rollercoaster weeks, your customer segment changed from executives on corporate campuses to moms on playgrounds, a tool that was just part of your product turned into the killer product, and the value of the problem you were solving went from number 47 to customers trying to give you money when you demo’d.  Here’s how that happened.

We came to the Lean LaunchPad class wanting to build a mobile/web research management system aimed at helping qualitative researchers better manage the media they captured in the field. We were ready to learn, but pretty confident we would end the journey in the same market space in which we started.  We had a killer team and all the right skillsets.  I was a consultant and ethnographer, another teammate was a market researcher, and two others had the software engineering skills to build what the market needed.  And what the market needed would, of course, be exactly what we had envisioned. After all, there must be a huge number of researchers struggling with the exact same problems we had, right?  Not quite…

Out of the Building
In the first 4 weeks, our team got out of the building and spoke with employees at 42 different companies.  We spoke with people at all levels, from front line user experience researchers at large tech firms to the CMO of a fortune 500 consumer goods company. Discover X WorkflowFrom the first 10 interviews, we learned that video is a big problem for researchers who use that medium.  It takes an average of 4 hours to mine every hour of video for the relevant 10 seconds of insight that matters.  Thus, we focused our early minimum viable product on helping researchers save money and time in finding insight in market research videos.

Wireframes
We built wireframes as a Minimum Viable Product to elicit feedback and began showing them to customers during our interviews.  At this point, things got real…and a bit ugly.  Given something tangible, customers were able to start gauging their willingness to use and pay.  Discover X wireframeTurns out, researchers were “just not that into us.”  We heard consistently that the product looked good and solved a problem, but it was not an important problem.  It was number 47 on their list, and there was no way they could justify paying to solve that problem.

First Pivot
As disappointing as this was, we dug deeper with our questioning.  To our surprise, customers started offering ideas on where there might be a true need; one of which was the legal market, specifically the deposition process. We thought this would be perfect for our product. There is a lot of video being recorded, and attorneys need to be able to pull out the insights quickly. After a solid week of speaking with lawyers and attending webinars on real-time deposition software, we had mapped both the technology and the buying relationships.  What we learned was that, we would just be an incremental feature to the incumbents and would need to integrate our solution with theirs. This, combined with regulation from the courts, a 2-year sales cycle, and the realization that e-discovery groups are not early adopters, made this an unattractive market.

Technology in search of a market
By this point, we were a technology in search of a market…not a good place to be.   The next customer segment we tried was startup founders.  After all, they are just like us – researching their markets and needing a way to share insights and keep their teams connected to customers. However, we found that most just assume that what they are building will have a market. The few who did get it felt uncomfortable using video during the interview process.

Pivot Two
While at times we felt like we wanted to give up, we began to hear a positive signal in the noise of all the customer rejections.  Evoke BrainstormingAt first it was faint.  While customers in all three markets were lukewarm for use at work, they got visibly excited telling us that it would definitely solve a problem at home. Say what??  They told us “too bad we weren’t making a consumer product so they could document their kids… they would pay a lot of money for that product.”  Whoah…were customers telling us we are a consumer product rather than B-to-B??

We settled on a small-scale experiment to test the consumer market. We decided to speak with 10 parents over the course of a week. If 5 had a similar problem, we would dive deeper. What we got was a landslide of interest.  All 10 parents had the problem.  Even more amazing to us, 9 of them liked our solution!

We learned that parents capture moments with their families to:

  1. remember and relive later
  2. share with those closest to them
  3. pass along a memoir to their kids

To our surprise, it turns out that none of these are being accomplished well with existing products, and parents are stressed because they feel like they are failing in an important responsibility.

Eureka!
Since that initial experiment in class, we’ve validated these findings (and many others) during over 200 hour-long interviews.

1st evoke wireframes

We even partnered with the university on a 112-person design workshop to learn more about how photos and videos fit into people’s lives.  It’s always an incredible experience to be invited into someone’s home to learn about how they capture their most precious family moments.  Sometimes, the learning is immediate and conclusive. Other times, we have to do multiple rounds before we arrive at an answer to an important question.

The result of all this effort is that we have found a large and underserved market in hidden in plain sight, right in the middle of an area that gets a lot of attention – photos and videos!

Lessons Learned
There’s no way we would have learned any of this unless we were out of the building and in the trenches, with parents over an extended period.

Knowing our customers and their problems first hand has given us a huge head start and a competitive advantage. Most entrepreneurs seem to just make this stuff up for a pitch deck or to please stakeholders, but the validated learning that we gained through these interviews and other methods of business model experimentation is not something that can be easily replicated.

As for our current status, we are building the product, continuing customer development, exploring and validating other aspects of our business model, and…oh yeah…hitting the pavement to raise our first round of funding!  If you want to talk to us about that, or if you know parents that we should be speaking to, please feel free to reach out.

For all the parents out there, relief (and much more) is on its way… http://www.evokeapp.com

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Reinventing Life Science Startups – Evidence-based Entrepreneurship

What if we could increase productivity and stave the capital flight by helping Life Sciences startups build their companies more efficiently?

We’re going to test this hypothesis by teaching a Lean LaunchPad class for Life Sciences and Health Care (therapeutics, diagnostics, devices and digital health) this October at UCSF with a team of veteran venture capitalists.

Part 1 of this post described the issues in the drug discovery. Part 2 covered medical devices and digital health. This post describes what we’re going to do about it.  And why you ought to take this class.

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When I wrote Four Steps to the Epiphany and the Startup Owners Manual, I believed that Life Sciences startups didn’t need Customer Discovery. Heck how hard could it be?  You invent a cure for cancer and then figure out where to put the bags of money. (In fact, for oncology, with a successful clinical trial, this is the case.)

Pivots in life sciences companies

But I’ve learned that’s not how it really works. For the last two and a half years, we’ve taught hundreds of teams how to commercialize their science with a version of the Lean LaunchPad class called the National Science Foundation Innovation Corps.  Quite a few of the teams were building biotech, devices or digital health products.  What we found is that during the class almost all of them pivoted - making substantive changes to one or more of their business model canvas components.

In the real world a big pivot in life sciences far down the road of development is a very bad sign due to huge sunk costs.  But pivoting early, before you raise and spend millions or tens of millions means potential disaster avoided.

Some of these pivots included changing their product/service once the team had a better of understanding of customer needs or changing their position in the value chain (became an OEM supplier to hospital suppliers rather than selling to doctors directly.) Other pivots involved moving from a platform technology to become a product supplier, moving from a therapeutic drug to a diagnostic or moving from a device that required a PMA to one that required a 510(k).

Some of these teams made even more radical changes.  For example when one team found the right customer, they changed the core technology (the basis of their original idea!) used to serve those customers. Another team reordered their device’s feature set based on customer needs.

These findings convinced me that the class could transform how we thought about building life science startups.  But there was one more piece of data that blew me away.

Control versus Experiment – 18% versus 60%
For the last two and a half years, the teams that were part of the National Science Foundation Innovation Corps were those who wanted to learn how to commercialize their science, applied to join the program, fought to get in and went through a grueling three month program.  Other scientists attempting to commercialize their science were free to pursue their startups without having to take the class.

Both of these groups, those who took the Innovation Corps class and those who didn’t, applied for government peer-reviewed funding through the SBIR program. The teams that skipped the class and pursued traditional methods of starting a company had an 18% success rate in receiving SBIR Phase I funding.

The teams that took the Lean Launchpad class  – get ready for this – had a 60% success rate. And yes, while funding does not equal a successful company, it does mean these teams knew something about building a business the other teams did not.

The 3-person teams consisted of Principal Investigators (PI’s), mostly tenured professors (average age of 45,) whose NSF research the project was based on. The PI’s in turn selected one of their graduate students (average age of 30,) as the entrepreneurial lead. The PI and Entrepreneurial Lead were supported by a mentor (average age of 50,) with industry/startup experience.

This was most definitely not the hoodie and flip-flop crowd.

Obviously there’s lots of bias built into the data – those who volunteered might be the better teams, the peer reviewers might be selecting for what we taught, funding is no metric for successful science let alone successful companies, etc.  – but the difference in funding success is over 300%.

The funding criteria for these new ventures wasn’t solely whether they had a innovative technology. It was whether the teams understood how to take that idea/invention/patent and transform it into a company. It was whether after meeting with partners and regulators, they had a plan to deal with the intensifying regulatory environment. It was whether after talking to manufacturing partners and clinicians, they understood how they were going to reduce technology risk. And It was after they talked to patients, providers and payers whether they understood the customer segments to reduce market risk by having found product/market fit.

Scientists and researchers have spent their careers testing hypotheses inside their labs. This class teaches them how to test the critical hypotheses that turn their idea into a business as they deal with the real world of regulation, customers and funding.

So after the team at UCSF said they’d like to prototype a class for Life Sciences, I agreed.

Here’s what we’re going to offer.

The Lean LaunchPad Life Sciences and Health Care class

The goal of the Lean LaunchPad Life Sciences class at UCSF is to teach researchers how to move their technology from an academic lab into the commercial world.UCSF Logo

We’re going to help teams:

  • assess regulatory risk before they design and build
  • gather data essential to customer purchases before doing the science
  • define clinical utility now, before spending millions of dollars
  • identify financing vehicles before you need them

We’ve segmented the class into four cohorts: therapeutics, diagnostics, devices and digital health.  And we recruited a team of world class Venture Capitalists and entrepreneurs to teach and mentor the class including Alan May, Karl Handelsman, Abhas Gupta, and Todd Morrill.

The course is free to UCSF, Berkeley, and Stanford students; $100 for pre-revenue startups; and $300 for industry. – See more here

The syllabus is here.

Class starts Oct 1st and runs through Dec 10th.

Download the all three parts of the Life Science series here.

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Reinventing Life Science Startups – Medical Devices and Digital Health

What if we could increase productivity and stave the capital flight by helping Life Sciences startups build their companies more efficiently?

We’re going to test this hypothesis by teaching a Lean LaunchPad class for Life Sciences and Healthcare (therapeutics, diagnostics, devices and digital health) this October at UCSF with a team of veteran venture capitalists.

In this three post series, Part 1 described the challenges Life Science companies face in Therapeutics and Diagnostics. This post describes the issues in Medical Devices and Digital Health.  Part 3 will offer our hypothesis about how to change the dynamics of the Life Sciences industry with a different approach to commercialization of research and innovation.  And why you ought to take this class.

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Medical devices prevent, treat, mitigate, or cure disease by physical, mechanical, or thermal means (in contrast to drugs, which act on the body through pharmacological, metabolic or immunological means). They span they gamut from tongue depressors and bedpans to complex programmable pacemakers and laser surgical devices. They also diagnostic products, test kits, ultrasound products, x-ray machines and medical lasers.

Incremental advances are driven by the existing medical device companies, while truly innovative devices often come from doctors and academia. One would think that designing a medical device would be a simple engineering problem, and startups would be emerging right and left. The truth is that today it’s tough to get a medical device startup funded.

Life Sciences II – Medical Devices

Regulatory Issues
In the U.S. the FDA Center for Devices and Radiological Health (CDRH) regulates medical devices and puts them into three “classes” based on their risks.

Class I devices are low risk and have the least regulatory controls. For example, dental floss, tongue depressors, arm slings, and hand-held surgical instruments are classified as Class I devices. Most Class I devices are exempt Premarket Notification 510(k) (see below.)

Class II devices are higher risk devices and have more regulations to prove the device’s safety and effectiveness. For example, condoms, x-ray systems, gas analyzers, pumps, and surgical drapes are classified as Class II devices.FDA approvals

Manufacturers introducing Class II medical devices must submit what’s called a 510(k) to the FDA. The 510(k) identifies your medical device and compares it to an existing medical device (which the FDA calls a “predicate” device) to demonstrate that your device is substantially equivalent and at least as safe and effective.

Class III devices are generally the highest risk devices and must be approved by the FDA before they are marketed. For example, implantable devices (devices made to replace/support or enhance part of your body) such as defibrillators, pacemakers, artificial hips, knees, and replacement heart valves are classified as Class III devices. Class III medical devices that are high risk or novel devices for which no “predicate device” exist require clinical trials of the medical device a PMA  (Pre-Market Approval).Life Science Decline

  • The FDA is tougher about approving innovative new medical devices. The number of 510(k)s being required to supply additional information has doubled in the last decade.
  • The number of PMA’s that have received a major deficiency letter has also doubled.
  • An FDA delay or clinical challenge is increasingly fatal to Life Science startups, where investors now choose to walk away rather than escalate the effort required to reach approval.

med device pipeline

Business Model Issues

  • Cost pressures are unrelenting in every sector, with pressure on prices and margins continuing to increase.
  • Devices are a five-sided market: patient, physician, provider, payer and regulator. Startups need to understand all sides of the market long before they ever consider selling a product.
  • In the last decade, most device startups took their devices overseas for clinical trials and first getting EU versus FDA approval
  • Recently, the financing of innovation in medical devices has collapsed even further with most Class III devices simply unfundable.
  • Companies must pay a  medical device excise tax of 2.3% on medical device revenues, regardless of profitability delays or cash-flow breakeven.
  • The U.S. government is the leading payer for most of health care, and under ObamaCare the government’s role in reimbursing for medical technology will increase. Yet two-thirds of all requests for reimbursement are denied today, and what gets reimbursed, for how much, and in what timeframe, are big unknowns for new device companies.

Venture Capital Issues

  • Early stage Venture Capital for medical device startups has dried up. The amount of capital being invested in new device companies is at an 11 year low.
  • Because device IPOs are rare, and M&A is much tougher, liquidity for investors is hard to find.
  • Exits have remained within about the same, while the cost and time to exit have doubled.

Life Sciences III – The Rise of Digital Health
Over the last five years a series of applications that fall under the category of “Digital Health” has emerged. Examples of these applications include: remote patient monitoring, analytics/big data (aggregation and analysis of clinical, administrative or economic data), hospital administration (software tools to run a hospital), electronic health records (clinical data capture), and wellness (improve/monitor health of individuals). A good number of these applications are using Smartphones as their platform.digital health flow

Business Model Issues

  • A good percentage of these startups are founded by teams with strong technical experience but without healthcare experience. Yet healthcare has its own unique regulatory and reimbursement issues and business model issues that must be understood
  • Most of these startups are in a multisided market, and many have the same five-sided complexity as medical devices: patient, physician, provider, payer and regulator.  (Some are even more complex in an outpatient / nurse / physical therapy setting.)
  • Reimbursement for digital health interventions is still a work in progress
  • Some startups in this field are actually beginning with Customer Development while others struggle with the classic execution versus search problem

Regulatory Issues

  • Digital Health covers a broad spectrum of products, unless the founders have domain experience startups in this area usually discover the FDA and the 510(k) process later than they should. 

Venture Capital

  • Seed funding is still scarce for Digital Health, but a number of startups (particularly those making physical personal heath tracking devices) are turning to crowdfunding.
  • Moreover, the absence of recent IPOs and public companies benchmarks creates uncertainty for VCs evaluating later investments too

Try Something New
The fact that the status quo for Life Sciences is not working is not a new revelation. Lots of smart people are running experiments in search of ways to commercialize basic research  more efficiently.

Universities have set up translational R&D centers; (basically university/company partnerships to commercialize research).  The National Institute of Health (NIH) is also setting up translational centers through its NCATS program.  Drug companies have tried to take research directly out of university labs by licensing patents, but once inside Pharma’s research labs, these projects get lost in the bureaucracy.  Realizing that this is not optimal, drug companies are trying to incubate projects directly with universities and the researchers who invented the technology, such as the recent Janssen Labs program.

But while these are all great programs, they are likely to fail to deliver on their promise. The assumption that the pursuit of drugs, diagnostics, devices and digital health is all about the execution of the science is in most cases a mistake.

The gap between the development of intriguing but unproven innovations, and the investment to commercialize those innovations is characterized as “the Valley of Death.”valley of death

We believe we need a new model to attract private investment capital to fuel the commercialization of clinical solutions to todays major healthcare problems that is in many ways technology agnostic. We need a “Needs Driven/Business Model Driven” approach to solving the problems facing all  the stakeholders in the vast healthcare system.

We believe we can reduce the technological, regulatory and market risks for early-stage life science and healthcare ventures, and we can do it by teaching founding teams how to build new ventures with Evidence-Based Entrepreneurship.

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Part 3 in the next post will offer our hypothesis how to change the dynamics of the Life Sciences industry with a different approach to commercialization of research and innovation. And why you ought to take this class.

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Reinventing Life Science Startups–Therapeutics and Diagnostics

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.

Charles Dickens

Life Science (therapeutics- drugs to cure or manage diseases, diagnostics- tests and devices to find diseases, devices to cure and monitor diseases; and digital health –health care hardware, software and mobile devices and applications streamline and democratize the healthcare delivery system) is in the midst of a perfect storm of decreasing productivity, increasing regulation and the flight of venture capital.

But what if we could increase productivity and stave the capital flight by helping Life Sciences startups build their companies more efficiently?

We’re going to test this hypothesis by teaching a Lean LaunchPad class for Life Sciences and Healthcare (therapeutics, diagnostics, devices and digital health) this October at UCSF with a team of veteran venture capitalists and angels.

It was the best of times and the worst of times
The last 60 years has seen remarkable breakthroughs in what we know about the biology underlying diseases and the science and engineering of developing commercial drug development and medical devices that improve and save lives. Turning basic science discoveries into drugs and devices seemed to be occurring at an ever increasing rate.

Yet during those same 60 years, rather than decreasing, the cost of getting a new drug approved by the FDA has increased 80 fold.  Yep, it cost 80 times more to get a successful drug developed and approved today than it did 60 years ago.Overall efficiency

75% or more of all the funds needed by a Life Science startup will be spent on clinical trials and regulatory approval. Pharma companies are staggering under the costs.  And medical device innovation in the U.S. has gone offshore primarily due to the toughened regulatory environment.

At the same time, Venture Capital, which had viewed therapeutics, diagnostics and medical devices as hot places to invest, is fleeing the field. In the last six years half the VC’s in the space have disappeared, unable to raise new funds, and the number of biotech and device startups getting first round financing has dropped by half. For exits, acquisitions are the rule and IPOs the exception.

While the time, expense and difficulty to exit has soared in Life Sciences, all three critical factors have been cut by orders of magnitude in other investment sectors such as internet or social-local-mobile.  And while the vast majority of Life Science exits remain below $125M, other sectors have seen exit valuations soar.  It has gotten so bad that pension funds and other institutional investors in venture capital funds have told these funds to stay away from Life Science – or at the least, early stage Life Science.

WTF is going on?  And how can we change those numbers and reverse those trends?

We believe we have a small part of the answer.  And we are going to run an experiment to test it this fall at UCSF.

In this three post series, the first two posts are a short summary of the complex challenges Life Science companies face; in Therapeutics and Diagnostics in this post and in Medical Devices and Digital Health in Part 2.  Part 3 explains our hypothesis about how to change the dynamics of the Life Sciences industry with a different approach to commercialization of research and innovation.  And why you ought to take this class.

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Life Sciences I—Therapeutics and Diagnostics

It was the Age of Wisdom – Drug Discovery
There are two types of drugs. The first, called small molecules (also referred to as New Molecular Entities or NMEs), are the bases for classic drugs such as aspirin, statins or high blood pressure medicines. Small molecules are made by reactions between different organic and/or inorganic chemicals. In the last decade computers and synthesis methods in research laboratories enable chemists to test a series of reaction mixtures in parallel (with wet lab analyses still the gold standard.) Using high-throughput screening to search for small molecules, which can be a starting point (or lead compound) for a new drug, scientists can test thousands of candidate molecules against a database of millions in their libraries.

Ultimately the FDA Center for Drug Evaluation and Research (CDER) is responsible for the approval of small molecules drugs.Drug discovery pipeline

The second class of drugs created by biotechnology is called biologics (also referred to as New Biological Entities or NBEs.) In contrast to small molecule drugs that are chemically synthesized, most biologics are proteins, nucleic acids or cells and tissues. Biologics can be made from human, animal, or microorganisms – or produced by recombinant DNA technology. Examples of biologics include: vaccines, cell or gene therapies, therapeutic protein hormones, cytokines, tissue growth factors, and monoclonal antibodies.

The FDA Center for Biologics Evaluation and Research (CBER) is responsible for the approval of biologicals.

It was the Season of Light
The drug development pipeline for both small molecules and biologics can take 10-15 years and cost a billion dollars. The current process starts with testing thousands of compounds which will in the end, produce a single drug.

In the last few decades scientists searching for new drugs have had the benefit of new tools — DNA sequencing, 3D protein database for structure data, high throughput screening for “hits”, computational drug design, etc. — which have sped up their search dramatically.Drug funnel

The problem is that the probability that a small molecule drug gets through clinical trials is unchanged after 50 years. In spite of the substantial scientific advances and increased investment, over the last 20 years the FDA has approved an average of 23 new drugs a year. (To be fair, this is indication-dependent. For example, in oncology, things have gotten significantly better. In most other areas, particularly drugs for the central nervous system and metabolism, they have not.)

drugs approved

It was the Season of Despair
With the exception of targeted therapies, the science and tools haven’t made the drug discovery pipeline more efficient. Oops.

There are lots of reasons why this has happened.

Regulatory and Reimbursement Issues

  • Drug safety is a high priority for the FDA. To avoid problems like Vioxx, Bexxar etc., the regulatory barriers (i.e. proof of safety) are huge, expensive, and take lots of time. That means the FDA has gotten tougher, requiring more clinical trials, and the stack of regulatory paperwork has gotten higher.
  • Additional trials to demonstrate both clinical efficacy (if not superiority) and cost outcomes effectiveness are further driving up the cost, time and complexity of clinical trials.

Drug Discovery Pipeline Issues

Drug target Issues

  • In a perfect world the goal is to develop a drug that will go after a single target (a protein, enzyme, DNA/RNA, etc. that will undergo a specific interaction with chemicals or biological drugs) that is linked to a disease.
  • Unfortunately most diseases don’t work that simply. There are a few diseases that do, (i.e. insulin and diabetes, Gleevec -Philadelphia Chromosome and chronic myeloid leukemia), but most small molecule drugs rarely act on a single target (target-based therapy in oncology being the bright spot.)
  • To get FDA approval new drugs have to be proven better than existing ones.  Most of the low-hanging fruit of easy drugs to develop are already on the market.

Venture Capital Issues

  • For the last two decades, biotech venture capital and corporate R&D threw dollars into interesting science (find a new target, publish a paper in Science, Nature or Cell, get funded.) The belief was that once a new target was found, finding a drug was a technology execution problem.  And all the new tools would accelerate the process.  It often didn’t turn out that way, although there are important exceptions.
  • Moreover, the prospect of the FDA also evaluating drugs for their cost-effectiveness is adding another dimension of uncertainty as the market opportunity at the end of the funnel needs to be large enough to justify venture investment

drug dev pipeline fundedIn Part 2 of this series, we describe the challenges new Medical Device and Digital Health companies face.  Part 3 will offer our hypothesis how to change the dynamics of the Life Sciences industry with a different approach to commercialization of research and innovation in this sector.  And why you ought to take this class.
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The Lean LaunchPad Educators Class

There is nothing more powerful than an idea whose time has come

Victor Hugo

The Lean LaunchPad entrepreneurship curriculum has caught fire. This week 100 educators from around the world will come to Stanford to learn how to teach it.

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Life is full of unintended consequences.

Ten years ago I started thinking about why startups are different from existing companies.  I wondered if business plans and 5-year forecasts were the right way to plan a startup.  I asked, “Is execution all there is to starting a company?”

It dawned on me that the plans were a symptom of a larger problem: we were executing business plans when we should first be searching for business models. We were putting the plan before the planning.

So what would a search process for a business model look like? I read a ton of existing literature and came up with a formal methodology for search I called Customer Development. I wrote a book about this called the Four Steps to the Epiphany.

Teaching “Search versus Execution”
In 2003 U.C. Berkeley asked me to teach a class in Customer Development at Haas business school. In 2004 I funded IMVU, a startup by Will Harvey and Eric Ries. As a condition of my investment I insisted Will and Eric take my class at Berkeley. Having Eric in the class was the best investment I ever made. Eric’s insight was that traditional product management and Waterfall development should be replaced by Agile Development. While I had said startups were “Searching” for a business model, I had been a bit vague about what exactly a business model looked like. For the last two decades there was no standard definition. That is until Alexander Osterwalder wrote Business Model Generation.

Finally we had a definition of what it was startups were searching for. Business model design + customer development + agile development is the process that startups use to search for a business model. It’s called the Lean Startup. The sum of these parts is now the cover story of the May 2013 Harvard Business Review. Bob Dorf and I wrote a book, The Startup Owners Manual that put all these pieces together.

Idea who's time has come

But then I realized rather than just writing about it, or lecturing on Customer Development, we should have a hands-on experiential class. So my book and Berkeley class turned into the Lean LaunchPad class in the Stanford Engineering school. The class emphasizes experiential learning, a flipped classroom and immediate feedback as a way to engage students with real world entrepreneurship.

Students learn by proposing and immediately testing hypotheses. They get out of the classroom and talk to customers, partners and competitors and encounter the chaos and uncertainty of commercializing innovations and creating new ventures.

Then in July 2011, the National Science Foundation read my blog posts on the Lean LaunchPad class.  They said scientists had already made a career out of hypotheses testing, and the Lean LaunchPad was simply a scientific method for entrepreneurship. They asked if I could adapt the class to teach scientists who want to commercialize their basic research. The result was the NSF Innovation Corps, my Lean LaunchPad class now taught at 11 major universities to 400 teams/year. ARPA-E joined the program this year, and in the fall we’ll teach a Life Science version of the class at UCSF. And other countries are adopting the class to commercialize their nations scientific output.

Unexpected Consequences
One of the most surprising things that came out of the National Science Foundation classes was the reaction of the principal investigators (these were the tenured professors who leading their teams in commercializing their science.)  A sizable number of them went back to their schools and asked, “How come we don’t offer this class to our students?”

While I had open-sourced all my lectures and put them online via Udacity, I was getting requests to teach other educators how teach the class.  I wasn’t sure how to respond, until Jerry Engel, the National Faculty Director of the NSF Innovation Corps suggested we hold an educators class.  So we did. The Lean LaunchPad Educators program is a 3-day program designed for experienced entrepreneurship faculty.  It is a hands-on program where you experience the process, and be given the tools to create, a curriculum and course plan you can put to immediate use.

We offered the first class in August and had 50 attendees, the January class had 70, and the one being held this week we had to cap at 100.

As part of each of the classes we open source our educators guide here

and all our other tools for educators here.

Where are we in Entrepreneurial Education?
Entrepreneurial education is in the middle of a major transition.

Entrepreneurship educators are realizing that curricula oriented around business plans and “execution” fail to prepare students for the realities of building or working in startups. Startups are a fundamentally a different activity than managing a business and “search versus execute” require very different skills. Therefore entrepreneurial education must teach how to search the uncertainties and unknowns.

Educators are now beginning to build curricula that embrace startup management tools built around “searching for a business model” rather than the “execution of a business model” tools needed in larger companies.

But we’re just beginning the transition. Like other revolutionary changes there are the early adopters and others who adopt later. For the Lean LaunchPad classes we’ve seen adoption fall into five categories:

  1. Those who get how teaching students how to “search versus execute” changes our curriculum.
    • They say, “Here’s how we are going to add value to what you started.”
  2. Those who get how teaching students how to “search versus execute” changes our curriculum.
    • They say, “We’re teaching the Lean Launchpad class as is. Thanks!”
  3. Those who get that there is a major shift in entrepreneurial education occurring and we understand business model design + customer development + agile engineering is at it’s core
    • They say, “We are going to rename each of these components so we can take credit for them at our business school.”
  4. Those who are not changing anything
    • They say, “We don’t buy it.”
  5. Those who really don’t understand the key concepts but we need to be “buzzword compliant” to seem relevant
    • They say, “We’re throwing Lean on top of our “how to write a business plan” and other standard classes.”

The good news is that it’s the marketplace that will eventually drive all schools to adopt experiential classes that teach Lean principles. We’re incredibly proud of those educators who already have.
There is nothing more powerful than an idea whose time has come

The next Lean LaunchPad Educators Class will be held in New York, September 25-27th. Info here.

We’ll also offer a version for incubators and accelerators in New York, September 22-24th. info@kandsranch.com

Lessons Learned

  • Entrepreneurial education is in the middle of a major transition
  • Transition from startups are a smaller version of a large company, teaching execution
  • To teaching that startups search for a business model
  • Business model design + customer development + agile development is the process that startups use to search for a business model
  • Lean LaunchPad is an experiential class that teaches students how to search
    • It’s part of a broader new entrepreneurial curriculum
    • We teach this in the Lean LaunchPad Educators Class

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Who’s Doing the Learning?

In a startup instead of paying consultants to tell you what they learned you want to pay them to teach you how to learn.

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Roominate, one of my favorite Lean LaunchPad teams came out to the ranch last week for a strategy session. Alice and Bettina had taken an idea they had tested in the class – building toys for young girls to have fun with Science, Technology, Engineering, and Math, and started a company. The Roominate dollhouse building kits are being sold via their own website and soon, retail channels. They’ve shipped over 5,000 to enthusiastic parents and their daughters.

Roominate kit

As soon as they had designed the product, they found a contract manufacturer to build the product in China. Alice and Bettina are hands-on mechanical and electrical engineers, so instead of assuming everything would go smoothly, they wisely got on a plane to Dongguan China and worked with the factory directly. They learned a ton.

But we were meeting to talk about sales and marketing. They outlined their retail channel and PR strategy and told me about the type of consultants they wanted to hire.

Hiring Channel Sales
“So what would the retail channel consultant do?” I asked.  Alice looked at me like I was a bit slow, but went on to describe how this consultant was going to take their product around to buyers inside major retail chains like Target, Toys R Us, Walmart, and others to see if they could get them to buy their product. “That sounds great.” I said, “When are you leaving for the trip?”  They looked confused.  “We’re not going on any of these calls.  Our consultant is going and then he’s going to give us a report of how willing these stores are to carry our product.”  Oh…

I said, “Let me see if I understand this correctly. What if a buyer asks, can you make a custom version of your product? Can your consultant answer that question on the spot? What if a buyer said no? Will your consultant know what questions to ask right then to figure out how to get them to yes?”  I let this sink in and then offered, “Think about it for a minute. You’re going to pay someone else to learn and discover if your product fits this channel, and you’re are not going to do any of the learning yourself?  You didn’t skip the trip learning how to manufacture the product. You got on a plane yourself and went to China. Why doesn’t this sound like the right thing to do for channel sales?”  They thought about it for a moment and said, “Well we feel like we understand how to build things, but sales is something we thought we’d hire an expert to do.”

Hiring PR Agencies
We had an almost identical conversation when the subject turned to hiring a Public Relations agency.  Bettina said, “We want to drive customer demand into our channel.”  That’s smart I thought, a real clear charter for PR.  “What are they going to do for you?” I asked.  “Well all the agencies we interview tell us they can survey our customers and come up with our positioning and then help us target the right blogs, influencers and press.

This felt like déjà vu all over again.

I took a deep breath and said, “Look this is just like the channel consultant conversation. But in this case it’s even clearer.  Didn’t you get started by testing out every iteration with girls and watching firsthand what gets them excited? Don’t you have 5,000 existing customers? And haven’t you been telling me you’ve been talking to them continuously?”  They nodded in agreement.  I suggested, “Why don’t you guys take a first pass and draft a positioning brief with target messages, think through who you think the audiences are, and you take a first pass at who you think the press should be.  The team looked at me incredulously.  “You want us to do this? We don’t know the first thing about press, that’s why we want to hire the experts.”  It was the answer I expected.Roominate project

“Let me be clear,” I explained.  “At this moment you know more about your customers than any PR agency will.  You’ve spent the last six months testing positioning, messages, and talking to the press yourself.  What I want you to do is spend an hour in a conference room and write up all you learned.  What worked, what didn’t, etc.  Then summarize it in a brief – a one, max two-page document that you hand to prospective PR agencies.  And when you hand it to them say, “We know you can do better, but here’s what we’ve learned so far.”” They thought about it for a while and said, “We want to hire a PR agency so we don’t have to do this stuff. We’re too busy focusing on getting the product right.”

I pushed back, reminding them, “Look, half the agencies that see your brief are going to decline to work with you. They make most of their money doing the front-end work you already did.  You do need to hire a PR agency, but I’m suggesting that you start by raising the bar on where they need to start.”

You Need to Do the Learning
Thinking that founders hire domain experts to get them into places and do things they don’t have any clue about is a mistake most founding CEOs make.  It’s wrong. If you plan to be the CEO who runs the company, you need these resources teaching you how to do it, not reporting their results to you.  For Roominate I suggested that Alice and Bettina needed to try to find a channel consultant who would take them along on the sales calls and have the founders meet buyers directly.  Why?  Not to turn them into channel sales people but to hear customer objections unfiltered. To get data that they – and only they, not a consultant – could turn into insight about iterations and pivots about their business model.  And to see how the process works directly.

A year from now when they will be hiring their first VP of Channel Sales, they want the interview to go something like,  “Well we sold the first three channel partners ourselves – what can you do for us?”

The same is true for hiring the PR agency.  The conversation should be, “Here’s what we learned, but we know this is your expertise.  Tell us what we’re missing and how your firm can do better than our first pass.”

As a founder –  when you’re searching for a business model make sure that you’re the ones doing the learning… not the outsourced help.

There’s Not Enough Time
The biggest objections I get when I offer this advice is, “There’s not enough time in the day,” or “I need to be building the product,” or the more modern version is, “I’m focused on product/market fit right now.”

The reality is that they’re all excuses. Of course product and product/market fit are the first critical steps in a startup –  but outsourcing your learning about the other parts of the business model are the reasons why your investors will be hiring an operating executive as your replacement - once you done all the hard work.

Lessons Learned

  • You need to do the learning not your consultants
  • Most consultants will think that’s their secret sauce and not want your business
    • The smart ones will realize that’s how they’ll build a long-term relationship with you
    • Hire them
  • Not understanding the other parts of your business model is a reason investors hire an operating executive

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Free Reprints of “Why the Lean Startup Changes Everything”

The Harvard Business Review is offering free reprints of  the May 2013 cover article, “Why the Lean Startup Changes Everything

Available here

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Fly High

Todd Branchflower was one of my Lean LaunchPad students entrepreneurial enough to convince the Air Force send him to Stanford to get his graduate engineering degree. After watching my Secret History of Silicon Valley talk, he became fascinated by how serendipity created both weapon systems and entrepreneurship in World War II – and brought us federal support of science and Silicon Valley.

In class I would tease Todd that while the Navy had me present the Secret History talk in front of 4,000 cadets at the Naval Post Graduate School, I had yet to hear from the Air Force Academy.  He promised that one day he would fix that.

F-22Fast-forward three years and Todd is now Captain Todd Branchflower, teaching electrical engineering at the Air Force Academy.  He extended an invitation to me to come out to the Academy in Colorado Springs to address the cadets and meet the faculty.

Out of the airport the first stop was in Denver – an impromptu meetup at Galvanize and a fireside chat with a roomful of 200 great entrepreneurs.

U.S. Military Academies
Then it was on to Colorado Springs and the Air Force Academy. All officers in the U.S. military need a college degree. The Air Force Academy is one of the four U.S. military service academies (academy is a fancy word for 4-year college.) The oldest is the Army’s U.S. Military Academy at West Point in New York, founded in 1802 to educate Army officers. The next military college was the Naval Academy in Annapolis Maryland, set up in 1845 to train Navy officers. The Coast Guard Academy opened in New London Connecticut in 1876. The Air Force, originally part of the U.S. Army, wasn’t an independent military branch until 1947, set up their academy in 1955 in Colorado Springs. Only ~20% of officers go through a service academy. Over 40% get the military to pay for their college by joining via the Reserve Officers Training Corps (ROTC) program. The rest get their college degree in a civilian college or university and then join their branch of the military after a 10-week Officer Training School.

Secret History
Given my Air Force career I came thinking that sharing the Secret History of Silicon Valley talk with 1000 soon to be Air Force Officers would be the highpoint of the visit. And it was as much fun as I expected – a full auditorium – a standing ovation, great feedback and a trophy – but two other things, completely unexpected, made the visit even more interesting.Air Force Trophy

First, I got to meet the faculty in both electrical/computer engineering and management and share what I’ve learned about Lean and the Lean LaunchPad class. In their senior year all Air Force cadets on the electrical engineering track have a two-semester “Capstone” class project.  They specify, design and build a project that may be of use.  Unfortunately the class operates much like the military acquisition system: the project specification has minimal input from real world users, the product gets built with a waterfall engineering process, and there’s no input on whether the product actually meets real world needs until the product is delivered. This means students spend a ton of time and effort to deliver a “final” product release but it’s almost certain that it wouldn’t meet real world users’ needs without extensive rework and modification.

I was surprised how interested the faculty was in exploring whether the Capstone class could be modified to use the Customer Development process to get input from potential “customers” inside the Air Force.  And how the engineering process could be turned Agile. with the product built incrementally and iteratively, as students acquire more customer feedback. Success in the Capstone project would not only be measured on the technical basis of “did it work?” but also on how much they learned about the users and their needs.  I invited the faculty to attend the Lean LaunchPad educators’ course to learn how we teach the class.

We’ll see if I made a dent.

Table for 4000
In between faculty meetings I got a great tour of the Academy facilities and some of the classes.  As on any college campus there are dorms, great sports facilities (sports is not optional), classrooms, etc. The curriculum was definitely oriented to practical science and service. However not on too many other college campuses will you find dorms arranged in squadrons of 40 of 100 students each, where students have to make their beds and have full-time hall monitors, and simultaneously eat lunch with 4,000 other cadets in one dining room (an experience I got to participate in from the guest tower overlooking the dining hall.)  All the hierarchal rituals were on  display; freshman have to run on the main quad walking on narrow strips, carry their backpacks in their hands, daily room inspections, etc.

And I saw things that made this uniquely an Air Force college – they had their own airfield, flying clubs, the Aero Lab with three wind tunnels, heavy emphasis on engineering and aeronautics, etc. (And it was fun to play “what aircraft is that” with those on static display around the grounds.) But the second surprise for me was the one that made me feel very, very old – it was the Academy’s Cyber Warfare curriculum.

Cyber Warfare
I visited the Cyber 256 class and got a look at the syllabus. Imagine going to college not only to learn how to hack computers but also actually majoring in it. The class consisted of basic networking and administration, network mapping, remote exploits, denial of service, web vulnerabilities, social engineering, password vulnerabilities, wireless network exploitation, persistence, digital media analysis, and cyber mission operations. In addition to the class in Cyber Warfare, there was also a cadet Cyber Warfare Club and an annual National Security Agency Cyber Warfare competition. The Air Force competes with other military branches and National Guard units; the instructor proudly told me that the Air Force has won for the last two years.  I only wish I had taken a picture of the huge trophy in the back of the classroom.

We do what?
On the plane ride home I had time to process what I saw.

When I was in the military the battle was just ending between the National Security Agency (NSA) and the military branches over who owned signals and communications intelligence. Was it the military (Air Force, Navy) or was it our intelligence agencies?  In the end the NSA became the primary owner, the NRO (National Reconnaissance Office) owned and built the spacecraft that collected the intelligence and the military branches had organizations (Air Force Security Services, Army Security Agency or Naval Security Group) that manned the collection platforms (airplanes, listening posts, etc) which all fed back into the National Security Agency.

Cyber Warfare has been through the same battles. While each of the military branches have Cyber Warfare organizations reporting into a unified military Cyber Command, the head of the National Security Agency is its director, making the NSA the agency that owns Cyber Warfare for the U.S.  Cyber Warfare has three components:

1) Computer Network Attack (CNA) – shut down an enemies ability to command and control its weapon systems in a war (i.e. Chinese satellite and over the horizon radar systems targeting U.S. carriers) or prevent potential adversaries from creating weapons of mass destruction, (i.e. Stuxnet targeted at the Iranian nuclear weapons program),
2) Computer Network Defense (CND) – stop potential adversaries from doing the same to you.
3) Computer Network Espionage (CNE) – steal everything you can get your hands (China and RSA’s SecureID breach, hacks of Google and AWS.)

While the U.S. complains about the Chinese military hackers from the PLA’s GSD 3rd Department (the equivalent of our National Security Agency,) and their 2nd Bureau, Unit 61398 tasked euphemistically for “Computer Network Operations,” we’ve done the same.

Unfortunately, potential adversaries have much softer targets in the U.S. While the military is hardening its command and control systems, civilian computer systems are relatively unprotected. Financial institutions have successfully lobbied against the U.S. government forcing them to take responsibility in protecting your data/money.  Given our economy is just bits, the outcome of a successful attack will not be pretty.

Summary

  • Thanks to the Air Force Academy, it’s faculty, cadets and Captain Todd Branchflower for a great visit
  • The Lean LaunchPad class may find a place in the military
  • We should be glad that the military is taking Cyber Warfare seriously, you should wish your bank did the same

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When Hell Froze Over – in the Harvard Business Review

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“I refuse to join any club that would have me as a member.”

Groucho Marx

In my 21 years as an entrepreneur, I would come up for air once a month to religiously read the Harvard Business Review. It was not only my secret weapon in thinking about new startup strategies, it also gave me a view of the management issues my customers were dealing with. Through HBR I discovered the work of Peter Drucker and first read about management by objective. I learned about Michael Porters’s five forces. But the eye opener for me was reading Clayton Christensen HBR article on disruption in the mid 1990’s and then reading the Innovators Dilemma. Each of these authors (along with others too numerous to mention) profoundly changed my view of management and strategy. All of this in one magazine, with no hype, just a continual stream of great ideas.

HBR Differences

For decades this revered business magazine described management techniques that were developed in and were for large corporations –  offering more efficient and creative ways to execute existing business models. As much as I loved the magazine, there was little in it for startups (or new divisions in established companies) searching for a business model. (The articles about innovation and entrepreneurship, while insightful felt like they were variants of the existing processes and techniques developed for running existing businesses.) There was nothing suggesting that startups and new ventures needed their own tools and techniques, different from those written about in HBR or taught in business schools.

To fill this gap I wrote The Four Steps to the Epiphany, a book about the Customer Development process and how it changes the way startups are built. The Four Steps drew the distinction that “startups are not smaller versions of large companies.” It defined a startup as a “temporary organization designed to search for a repeatable and scalable business model.” Today its concepts of  “minimum viable product,” “iterate and pivot”, “get out of the building,” and “no business plan survives first contact with customers,” have become part of the entrepreneurial lexicon. My new book, The Startup Owners Manual, outlined the steps of building a startup or new division inside a company in far greater detail.

HBR Cust DevIn the last decade it’s become clear that companies are facing continuous disruption from globalization, technology shifts, rapidly changing consumer tastes, etc. Business-as-usual management techniques focused on efficiency and execution are no longer a credible response. The techniques invented in what has become the Lean Startup movement are now more than ever applicable to reinventing the modern corporation. Large companies like GE, Intuit, Merck, Panasonic, and Qualcomm are leading the charge to adopt the lean approach to drive corporate innovation. And  the National Science Foundation and ARPA-E adopted it to accelerate commercialization of new science.

Today, we’ve come full circle as Lean goes mainstream. 250,0000 copies of the May issue of Harvard Business Review go in the mail to corporate and startup executives and investors worldwide. In this month’s issue, I was honored to write the cover story article, “Why the Lean Startup Changes Everything.”  The article describes Lean as the search for a repeatable and scalable business model – and business model design, customer development and agile engineering – as the way you implement it.

I’m  proud to be called the “father” of the Lean Startup Movement. But I hope at least two—if not fifty—other catalysts of the movement are every bit as proud today. Eric Ries, who took my first Customer Development class at Berkeley, had the insight that Customer Development should be paired with Agile Development. He called the combination “The Lean Startup” and wrote a great book with that name.

HBR CanvasAlexander Osterwalder‘s inspired approach to defining the business model in his book Business Model Generation provide a framework for the Customer Development and the search for facts behind the hypotheses that make up a new venture. Osterwalder’s business model canvas is the starting point for Customer Development, and the “scorecard” that monitors startups’ progress as they turn their hypotheses about what customers want into actionable facts—all before a startup or new division has spent all or most of its capital.

The Harvard Business Review is providing free access to the cover story article, “Why the Lean Startup Changes Everything.  Go read it.

Then go do it.

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