Venture Capital | Steve Blank

How Scientists and Engineers Got It Right, and VC’s Got It Wrong

Posted on July 25, 2011 by steveblank

Scientists and engineers as founders and startup CEOs is one of the least celebrated contributions of Silicon Valley.

It might be its most important.
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ESL, the first company I worked for in Silicon Valley, was founded by a PhD in Math and six other scientists and engineers. Since it was my first job, I just took for granted that scientists and engineers started and ran companies. It took me a long time to realize that this was one of Silicon Valley’s best contributions to innovation.

Cold War Spin Outs
In the 1950’s the groundwork for a culture and environment of entrepreneurship were taking shape on the east and west coasts of the United States. Each region had two of the finest research universities in the United States, Stanford and MIT, which were building on the technology breakthroughs of World War II and graduating a generation of engineers into a consumer and cold war economy that seemed limitless. Each region already had the beginnings of a high-tech culture, Boston with Raytheon, Silicon Valley with Hewlett Packard.

However, the majority of engineers graduating from these schools went to work in existing companies. But in the mid 1950’s the culture around these two universities began to change.

Stanford – 1950’s Innovation
At Stanford, Dean of Engineering/Provost Fred Terman wanted companies outside of the university to take Stanford’s prototype microwave tubes and electronic intelligence systems and build production volumes for the military. While existing companies took some of the business, often it was a graduate student or professor who started a new company. The motivation in the mid 1950’s for these new startups was a crisis – we were in the midst of the cold war, and the United States military and intelligence agencies were rearming as fast as they could.

Why It’s “Silicon” Valley
In 1956 entrepreneurship as we know it would change forever. At the time it didn’t appear earthshaking or momentous. Shockley Semiconductor Laboratory, the first semiconductor company in the valley, set up shop in Mountain View. Fifteen months later eight of Shockley’s employees (three physicists, an electrical engineer, an industrial engineer, a mechanical engineer, a metallurgist and a physical chemist) founded Fairchild Semiconductor. (Every chip company in Silicon Valley can trace their lineage from Fairchild.)

The history of Fairchild was one of applied experimentation. It wasn’t pure research, but rather a culture of taking sufficient risks to get to market. It was learning, discovery, iteration and execution. The goal was commercial products, but as scientists and engineers the company’s founders realized that at times the cost of experimentation was failure. And just as they don’t punish failure in a research lab, they didn’t fire scientists whose experiments didn’t work. Instead the company built a culture where when you hit a wall, you backed up and tried a different path. (In 21^st century parlance we say that innovation in the early semiconductor business was all about “pivoting” while aiming for salable products.)

The Fairchild approach would shape Silicon Valley’s entrepreneurial ethos: In startups, failure was treated as experience (until you ran out of money.)

Scientists and Engineers as Founders
In the late 1950’s Silicon Valley’s first three IPO’s were companies that were founded and run by scientists and engineers: Varian (founded by Stanford engineering professors and graduate students,) Hewlett Packard (founded by two Stanford engineering graduate students) and Ampex (founded by a mechanical/electrical engineer.) While this signaled that investments in technology companies could be very lucrative, both Shockley and Fairchild could only be funded through corporate partners – there was no venture capital industry. But by the early 1960′s the tidal wave of semiconductor startup spinouts from Fairchild would find a valley with a growing number of U.S. government backed venture firms and limited partnerships.

A wave of innovation was about to meet a pile of risk capital.

For the next two decades venture capital invested in things that ran on electrons: hardware, software and silicon. Yet the companies were anomalies in the big picture in the U.S. – there were almost no MBA’s. In 1960’s and ‘70’s few MBA’s would give up a lucrative career in management, finance or Wall Street to join a bunch of technical lunatics. So the engineers taught themselves how to become marketers, sales people and CEO’s. And the venture capital community became comfortable in funding them.

Medical Researchers Get Entrepreneurial
In the 60’s and 70’s, while engineers were founding companies, medical researchers and academics were skeptical about the blurring of the lines between academia and commerce. This all changed in 1980 with the Genentech IPO.

In 1973, two scientists, Stanley Cohen at Stanford and Herbert Boyer at UCSF, discovered recombinant DNA, and Boyer went on to found Genentech. In 1980 Genentech became the first IPO of a venture funded biotech company. The fact that serious money could be made in companies investing in life sciences wasn’t lost on other researchers and the venture capital community.

Over the next decade, medical graduate students saw their professors start companies, other professors saw their peers and entrepreneurial colleagues start companies, and VC’s started calling on academics and researchers and speaking their language.

Scientists and Engineers = Innovation and Entrepreneurship
Yet when venture capital got involved they brought all the processes to administer existing companies they learned in business school – how to write a business plan, accounting, organizational behavior, managerial skills, marketing, operations, etc. This set up a conflict with the learning, discovery and experimentation style of the original valley founders.

Yet because of the Golden Rule, the VC’s got to set how startups were built and managed (those who have the gold set the rules.)

Fifty years later we now know the engineers were right. Business plans are fine for large companies where there is an existing market, product and customers, but in a startup all of these elements are unknown and the process of discovering them is filled with rapidly changing assumptions.

Startups are not smaller versions of large companies. Large companies execute known business models. In the real world a startup is about the search for a business model or more accurately, startups are a temporary organization designed to search for a scalable and repeatable business model.

Yet for the last 40 years, while technical founders knew that no business plan survived first contact with customers, they lacked a management tool set for learning, discovery and experimentation.

Earlier this year we developed a class in the Stanford Technology Ventures Program , (the entrepreneurship center at Stanford’s School of Engineering), to provide scientists and engineers just those tools – how to think about all the parts of building a business, not just the product. The Stanford class introduced the first management tools for entrepreneurs built around the business model / customer development / agile development solution stack. (You can read about the class here.)

So what?

Starting this Thursday, scientists and engineers across the United States will once again set the rules.

Stay tuned for the next post.

Filed under: Lean LaunchPad, Teaching, Venture Capital | 30 Comments »

The $10 million Photo and other VC Stories

Posted on July 19, 2011 by steveblank

While on vacation I had a phone interview with Kevin Ohannessian of Fast Company who wanted a few “funding stories.” Here are two of them. Apologies for the rambling stream of consciousness. The original interview in Fast Company can be seen here.

Throw in the Photo and You Have a Deal
When we were trying to raise money for E.piphany, my last startup, I was negotiating with a venture capital firm called Infinity Capital. They really wanted to invest, but it was the beginning of the bubble, and I wanted (what was then) an absurd valuation. All we had were six slides, and I wanted a $10 million post-money valuation. But it was my eighth startup and my partner Ben was even more experienced: ex VC, ex Harvard Computer Science professor, genius at building products and teams. I had sat on a board of an Electronic Design Automation company with this VC, and we had gotten to know each other. So when I wanted to start a company he wanted to fund us. We had gone back and forth with them on valuation, but this was a new firm and they wanted to close a deal with us.

After about our fifth meeting I’m in their conference room. I say, “Why can’t you guys do a $10 million post money valuation?” Picking the biggest number I could think of for three founders without a product a semi-coherent idea and badly written slides. Finally they admitted, “Steve, we’re a new fund; everybody will think we are idiots if we do that.” I said, “All right. Can you do some other number close to my number?” So I stepped out of the room as they caucused, and they called me back in 10 minutes later and said, “So listen. We can do $9.99 million.” I’m trying to play poker with the deal, and one of the partners at the time was a great photographer–the firm had big prints of his on the walls. I was really in love with the one in the boardroom. So without thinking, when they made me that offer, trying to keep a straight face, I reached behind me, grabbed the photo off the wall and slammed it on the desk, and said, “If you throw this photo in, you got the deal!”

The $10 Million Photo

The look on their face was utter astonishment. I was thinking it was because I was being creative by throwing the photo in, but then I noticed that this cloud of dust was settling around me. I turn around and looked at the wall and it turned out the photo had been bolted into the drywall. And there was now a hole–I literally ripped a part of their boardroom wall off as I was accepting the offer. Without missing a beat they said, “Yes, you can have the photo. But we’re going to have to deduct $500 to repair our wall.” And I said, “Deal.” And that’s how E.piphany got its Series A.

Invest in the Team
Before we closed our Series A with Infinity, I had called on Mohr, Davidow Ventures, the firm which had funded my last company, Rocket Science. The senior partner at the time was Bill Davidow, a marketing legend and a hero of mine who had also funded other Enterprise software companies. I went in and pitched Bill the idea about how to automate the marketing domain. He gave me 15 minutes, then as politely as he could do it, walked me out the door and said, “Stupidest idea I ever heard, Steve. Enterprise software means across the Enterprise. Marketing is just one very small department.” As he was walking me out, I remember as I physically crossed the threshold of the door that: A. He was right, and B. I figured out how to solve the problem of making our product useful across the entire enterprise. So E.piphany went from a bad idea to a good idea by being thrown out by a VC who gave me advice that made the company. He has reminded me since, “Sometimes you invest in the idea, but you should always be investing in the people. If I would’ve remembered who you were, I would’ve known you would figure it out.”

(Kleiner Perkins would do the Series B round for E.piphany. After our IPO Infinity’s and Kleiner Perkins’ investment in Epiphany would be worth $1 billion dollars to each of them.)

I still have the photo.

Back from vacation soon.

Filed under: E.piphany, Venture Capital | 12 Comments »

The Internet Might Kill Us All

Posted on June 22, 2011 by steveblank

My friend Ben Horowitz and I debated the tech bubble in The Economist. An abridged version of this post was the “closing” statement to Ben’s rebuttal comments. Part 1 is here and Part 2 here. The full version is below.

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It’s been fun debating the question, “Are we in a tech bubble?” with my colleague Ben Horowitz. Ben and his partner Marc Andreessen (the founder of Netscape and author of the first commercial web browser on the Internet) are the definition of Smart Money. Their firm, Andreessen/Horowtiz, has been prescient enough to invest in social networks, consumer and mobile applications and the cloud long before others. They understood the ubiquity, pervasiveness and ultimate profitability of these startups and doubled-down on their investments.

My closing arguments are below. I’ve followed them with a few observations about the Internet that may help frame the scope of the debate.

Are we in the beginnings of a tech bubble – yes.
Prices for both private and public tech valuations exceed any rational valuation to their current worth. In 5 to 10 years most of them will be worth a fraction of their IPO price. A few will be worth much, much more.

Is this tech bubble as broad as the 1995-2000 dot.com bubble – no.
While labeled the “dot.com” bubble, valuations went crazy across a wide range of technology sectors including telecommunications, enterprise software and biotech, not just the Internet.

Are tech bubbles necessarily bad – no.
A bubble is simply the redistribution of wealth from Marks to the Smart Money and Promoters. I hypothesize that unlike bubbles in other sectors – tulips, Florida land prices, housing, financial – tech bubbles create lasting value. They finance companies that invest in new technologies, new ideas and new products. And it appears that at least in Silicon Valley, a larger percentage of money made in the last tech bubble is recirculated back into investments into the next generation of tech startups.

While most of the social networks, cloud computing, web and mobile app companies we see today will fail, a few will literally remake our lives.

Here are two views how.

The Internet May Liberate Us
In the last year, we’ve seen Social Networks enable new forms of peaceful revolution. To date, the results of Twitter and Facebook are more visible on the Arab Street than Wall Street.

One of the most effective weapons in the Cold War was the mimeograph machine and the VCR. The ability to copy and disseminate banned ideas undermined repressive regimes from Poland to Iran to the Soviet Union.

In the 21^st century, authoritarian governments still fear their own people talking to each other and asking questions. When governments shut down Google, Twitter, Facebook, et al, they are building the 21^st century equivalent of the Berlin Wall. They are admitting to the world that the forces of oppression can’t stand up to 140 characters of the truth.

When these governments build “homegrown” versions of these apps, the Orwellian prophecy of the Ministry of the Truth lives in each distorted or missing search result. Absent war, these regimes eventually collapse under their own weight. We can help accelerate their demise by building tools which allow people in these denied areas access to the truth.

Yet the same set of tools that will free hundreds of millions of people may end their lives in minutes.

The Internet May Kill Us
The next war will more than likely occur via the Internet. It may be over in minutes. We may be watching the first skirmishes.

In the 20^th century, the economies of first-world countries became dependent on a reliable supply of food, water, electricity, transportation and telephone. Part of waging war was destroying that physical infrastructure. (The Combined Bomber Offensive of Germany and occupied Europe during WWII was designed to do just that.)

In the last few years, most first world countries have become dependent on the Internet as one of those critical parts of our infrastructure. We use the net in four different ways: 1) to control the physical infrastructure we built in the 20^th century (food, water, electricity, transportation and communications); 2) as the network for our military interconnecting all our warfighting assets, from the mundane of logistics to command and control systems, weapons systems and targeting systems; 3) as commercial assets that exist or can operate only if the net exists including communication tools (email, Facebook, Twitter, etc.) and corporate infrastructure (Cloud storage and apps); 4) for our banking and financial systems.

Every day hackers demonstrate how weak the security of our corporate and government resources are. Stealing millions of credit cards occurs on a regular basis. Yet all of these are simply crimes not acts of war.

The ultimate in asymmetric warfare
In the 20^th century, the United States was continually unprepared for an adversary using asymmetric warfare — the Japanese attack on Pearl Harbor, Soviet Anthrax warheads on their ICBMs during the cold war, Vietnam and guerilla warfare, and the 9/11 attacks.

While hacker attacks against banks and commercial institutions make good press, the most troubling portents of the next war were the Stuxnet attack on the Iranian centrifuge facilities, the compromise of the RSA security system and the penetration of American defense contractors. These weren’t Lulz or Anonymous hackers, these were attacks by government military projects with thousands of programmers coordinating their efforts. All had a single goal in mind: to prepare to use the internet to destroy a country without physically killing its people.

Our financial systems (banks, stock market, credit cards, mortgages, etc.) exist as bits. Your net worth and mine exists because there are financial records that tell us how many “dollars” (or Euros, Yen, etc.) we own. We don’t physically have all that money. It’s simply the sum of the bits in a variety of institutions.

An attack on the United States could begin with the destruction of all those financial records. (A financial institution that can’t stop criminal hackers would have no chance against a military attack to destroy the customer data in their systems. Because security is expensive, hard, and at times not user friendly, the financial services companies have fought any attempt to mandate hardened systems.) Logic bombs planted on those systems will delete all the backups once they’re brought on-line. All of it gone. Forever.

At the same time, all cloud-based assets, all companies applications and customer data will be attacked and deleted. All of it gone. Forever.

Major power generating turbines will be attacked the same way Stuxnet worked– over and under-speeding the turbines and rapidly cycling the switching systems until they burn out. A major portion of our electrical generation capacity will be off-line until replacements can be built. (They are currently built in China.)

Our transportation infrastructure– air traffic control systems, airline reservations, package delivery companies– will be hacked and our GPS infrastructure will be taken down (hacked, jammed or physically attacked.)

While some of our own military systems are hardened, attackers will shut down the soft parts of the military logistics and communications systems. Since our defense contractors have been the targets of some of the latest hacks, our newest weapons systems may not work, or worse if used, may have been reprogrammed to destroy our own assets.

An attacker may try to mask its identity by making the attack appear to come from a different source. With our nation in an unprecedented economic collapse, our ability to retaliate militarily against a nuclear-armed opponent claiming innocence and threatening a response while we face them with unreliable weapons systems could make for a bad day. Our attacker might even offer economic assistance as part of the surrender terms.

These scenarios make the question, “Are we in a tech bubble?” seem a bit ironic.

It Doesn’t Have to Happen
During the Cold War the United States and the Soviet Union faced off with an arsenal of strategic and tactical nuclear weapons large enough to directly kill hundreds of millions of people and plunge the planet in a “Nuclear Winter,” which could have killed billions more. But we didn’t do it. Instead, today the McDonalds in plazas labeled “Revolutionary Square” has been the victory parade for democracy and capitalism.

It may be that we will survive the threat of a Net War like we did the Cold War and that the Internet turns out to be the birth of a new spring for us all.

Filed under: Family/Career/Culture, Secret History of Silicon Valley, Venture Capital | 15 Comments »

Are You the Fool at The Table?

Posted on June 17, 2011 by steveblank

My friend Ben Horowitz and I debate the tech bubble in The Economist. This post is the “rebuttal” statement to Ben’s opening comments.
An edited version of this post originally appeared as part 2 of 3. Part 1 is here.
———————————————————————————–

You’ve got to know when to hold ‘em
Know when to fold them
Know when to walk away
Know when to run
Kenny Rogers – The Gambler

My esteemed colleague Ben Horowitz essentially makes four arguments: 1) look at how relatively cheap Apple, Google and Amazon stock is compared to their growth; 2) Major technology cycles tend to be around 25 years long with the bulk of the purchases occurring in the last five-to-ten years. The major adoption wave for the Internet technology platform will hit in the next 8 years; 3) the economics of building Internet businesses has changed; 4) the markets are much bigger.

Therefore Ben concludes that boom is coming…and do you want to miss it because it has the possibility of becoming a bubble?

If this were a magic act, we’d suggest that Ben’s arguments are misdirection. To answer the question before the house, “Are we in a tech bubble?” Ben offers that as Apple, Google and Amazon survived the dot.com crash, we can ignore the fate of the thousands of failed public and private dot.com companies when the bubble burst in March of 2000. I believe the issue isn’t whether we’re on a 25-year tech cycle or that the next 8 years are really going to be great. The issue is whether the next 100+ tech IPO’s carried by this bubble will be worth their offering price in 8 years.

One of the least understood parts of a bubble is that there are five types of participants: Smart Money, the Shills, the Marks, the True Believers and the Promoters. Understanding the motivations of these different groups help make sense out of the bubble chart below.

Smart Money are prescient angel investors and Venture Capitalists who started investing in social networks, consumer and mobile applications and the cloud 3, 4 or 5 years ago. They helped build these struggling ventures into the Facebooks’, Twitters’, and Zyngas’ before anyone else appreciated these companies could have hundreds of millions of users with off-the-chart revenue and profits.

In a bubble the smart money doubles down on their investment in the awareness phase, but when it starts becoming a mania – the smart money cashes out. (Really smart money recognizes it’s a bubble and bets against it.) They manage this all with knowledge of the game they’re playing, but they don’t hype it, talk about it or fan the flames. They know others will.

The Shills are the middlemen in a bubble. They profit from the boom times. They’re the mortgage brokers and real estate agents in the housing bubble, the investment bankers and technology press in the dot.com bubble. Since it’s in their interest to keep the bubble going, they’ll tell you that housing always goes up, that these bonds are guaranteed by a big bank, and that this tech stock is worth its opening price. All the stories peddled by Shills have at their heart why “it’s a new age” and why “all the old ways of measuring value are obsolete.” And why “you’ll be an idiot if you don’t jump in and reap the rewards and cash out.”

The Marks are your neighbors or parents or grandparents. They’re not domain experts. They know nothing about real estate, financial markets or tech stocks, but they don’t want to miss the ”investment opportunity of a lifetime”. They hear reassurance from the Shills and take their advice at face value, never asking or questioning the Shills financial incentives to sell you this house/mortgage/tech stock. They see others making extraordinary amounts of money at the start of the mania (just buy a condo or two and you can sell them in six months.) What no one tells the Marks is that as they’re buying, the smart money and institutional investors are quietly pulling out and selling their assets.

The True Believers don’t financially participate in the bubble like the Marks (lack of assets, timidity, or time) but they could if they would. They have no rational evidence to believe, but for them it’s a “faith-based” belief. By their numbers they give comfort to the Mark’s around them.

The Promoters are the ones who keep the bubbles inflated even when they know that the asset exceeds its fundamental value by a large margin. While Shills have no credibility, Promoters have “brand-name” credibility that makes the Marks trust them. What makes the role of the Promoter egregious is that they are a small subset of the Smart Money. They loudly tell the Marks and Shills that everything is just fine, enticing them to buy into the bubble, even as the Promoters are liquidating their own positions.

Investment banks who sold CDO’s (synthetic collateralized debt obligations,) in the financial meltdown and the mortgage lenders in the housing bubble are just two examples. Some investment banks actually bet that the very investments they were selling their customers would fail. There’s a special place in hell waiting for these guys (only because our political and financial regulatory system won’t deal with them while they’re on earth.)

To support his position Ben used a quote from Warren Buffett I wish I had found, “The only way you get a bubble is when a very high percentage of the population buys into some originally sound premise…that becomes distorted as time passes and people forget the original sound premise and start focusing solely on the price action…

The “facts” that Ben raises, “the size and scale of these new markets have never been seen before; some of these applications and companies will reach billions of customers, generate unprecedented revenues and profits,” are likely true. But they don’t support his justification of the bubble valuations we are seeing for companies filing for IPO’s (Pandora Media just priced its IPO at $2.6 billion dollars while admitting it will have operating losses through the end of fiscal 2012.) But to support his position for future valuations Ben lists the low price/earnings ratios of Apple, Amazon, Google, Salesforce.com. He argues that if we are in a bubble these companies ought to have their prices inflated as well.

It turns out that’s not how a bubble works. Bubbles attract Marks and Shills to new shiny toys, not existing ones…, Apple, Amazon, et al are not the current objects of desire of this bubble. The question is, are we in a new tech bubble? Do the new wave of social/web/mobile/cloud companies going public have valuations which exceeds their fundamental value by a large margin? (today and in the foreseeable future.)

In other words, “would you want your mother to buy these stocks to hold them – or flip them?”

Every bubble is a big-stakes game – played for keeps. In it the usual cast of characters appear; the Smart Money, the Shills, the Marks and the Promoters.

There’s a saying in Poker, “If you can’t figure out who the Mark is at the table, it’s you.”

Filed under: Venture Capital | 16 Comments »

The Next Bubble – Don’t Get Fooled Again

Posted on June 15, 2011 by steveblank

My friend, Ben Horowitz, and I debate the tech bubble in The Economist.
This post originally appeared as part 1 of 3
———————————————————————————–

We won’t get fooled again
We don’t get fooled again
Don’t get fooled again
 No, no! 

The Who 1971

First, let us start with a definition of a tech bubble.

A tech bubble is the rapid inflation in the valuation of public and private technology companies that exceeds their fundamental value by a large margin. It is accompanied by the rationalisation of the new pricing, and then followed by a spectacular crash in value. (It also has the “smart money” investing early and taking profits before the crash.)

Bubbles are not new; we have had them for hundreds of years (the Tulip Mania, South Sea Company, Mississippi Company, etc.). And in the last decade, we have had the dot.com bust and the housing bubble. This tech bubble is unfolding just like all the other bubbles before it.

Today, the signs of the new bubble are the Linked-In initial public offering (IPO), Facebook’s stratospheric valuation and the rapid rise of early-stage startup valuation. Hiring technology talent in Silicon Valley is getting difficult, and the time it takes to drive across Palo Alto has tripled—all signs of the impending apocalypse.

Dr Jean-Paul Rodrigue, in the Department of Global Studies & Geography at Hofstra University, observed that bubbles have four phases; stealth, awareness, mania and blow-off. I contend that we are approaching the early part of the mania phase.

In the stealth phase, prescient angel investors and Venture Capitalists (VCs) start investing in an industry or market segment that others have not yet found. In the case of this bubble, it was social networks, consumer and mobile applications, and the cloud. VCs who understood the ubiquity, pervasiveness and ultimate profitability of these startups doubled-down on their investments. Long before others, they saw that these applications could have hundreds of millions of users with “off the chart” revenue and profits.

The awareness phase is where other later-stage investors start to notice the momentum, bringing additional money in and pushing prices higher. The Russian investment group, DST, is an example, with their $200 million investment in Facebook, at a $10 billion valuation, in 2009. This was followed by another $500 million investment (along with Goldman Sachs) in 2011, at a $50 billion valuation. Meanwhile, the bubble for “seed stage” startups began when Ron Conway’s Silicon Valley Angels and DST guaranteed every startup out of a YCombinator $150,000. And it was hammered home with Color—a startup without a product—raising $40 million, at a reputed $100 million valuation, from brand name VCs who should have known better. When they did launch their product, it was compared to boo.com, and entered the dot.com bubble hall of infamy. Meanwhile, smart VCs continue to invest in this segment and increase their ownership of existing companies. The technology blogs (TechCrunch, et al.) start cheerleading, and the general business press/blogs start paying attention. And all of the investors trot out explanations of “why—this time—everything is different”.

We have just entered the mania phase. The Linked-in IPO valued the company at $8.9 billion at the end of the first day of trading. It sent a signal that there is an irrational demand for tech IPOs. Silicon Valley startups are falling over each other to file their S-1 documents to go public.

Some precursors to the bubble happened when Chinese Internet companies listed on United States stock exchanges. In December 2010, Youku—the YouTube of China—went public, with a valuation of $4.4 billion at the end of the first day (on $58.9 million in 2010 sales). In May 2011, RenRen—the Facebook of China—had a first day valuation of $7.4 billion (on $76.5 million in 2010 sales).

Dr Rodrigue’s description of what happens next sounds familiar: “the public jumps in for this ‘investment opportunity of a lifetime’. The expectation of future appreciation becomes a ‘no brainer’…Floods of money come in creating even greater expectations and pushing prices to stratospheric levels. The higher the price, the more investments pour in. Unnoticed from the general public, the smart money as well as many institutional investors are quietly pulling out and selling their assets…Unbiased opinion about the fundamentals becomes increasingly difficult to find as many players are heavily invested and have every interest to keep asset inflation going.”

“The market gradually becomes more exuberant as ‘paper fortunes’ are made and greed sets in. Everyone tries to jump in and new investors have absolutely no understanding of the market, its dynamic and fundamentals…statements are made about entirely new fundamentals implying that a ‘permanent high plateau’ has been reached to justify future price increases.”

We are seeing this bubble unfold by the book.

No one doubts that social networks and web and mobile applications are reinventing commerce. Obviously, some of these companies will have hundreds of millions of customers, unprecedented revenue growth and great profits. Yet none of these companies have earned the valuations that they are receiving.

For all of these reasons, I believe this House should vote in favor of the motion before it.

Filed under: Venture Capital | 32 Comments »

The Democratization of Entrepreneurship

Posted on June 8, 2011 by steveblank

Last week I had 15 Finnish entrepreneurs out to the ranch (Aalto University has a partnership with Stanford’s Technology Ventures Program.) Monday we hosted 40 Danish entrepreneurs for dinner and today its graduate students from Chalmers University in Sweden.

Looks like the ice is melting in Scandinavia.

Welcome to the democratization of entrepreneurship.

Hermione Way of TheNextWeb grabbed me for a short interview below that covers the challenges and opportunities of startups outside of Silicon Valley and the never ending discussion of the “new bubble.” (Skip the first minute.)

If you have trouble seeing/playing the video click here.

Filed under: Technology, Venture Capital | 2 Comments »

Reinventing the Board Meeting – Part 2 of 2 – Virtual Valley Ventures

Posted on June 2, 2011 by steveblank

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

When The Boardroom is Bits
A revolution has taken hold as customer development and agile engineering reinvent the Startup process. It’s time to ask why startup board governance has failed to keep pace with innovation. Board meetings that guide startups haven’t changed since the early 1900’s.

It’s time for a change.

Reinventing the board meeting may allow venture-backed startups a more efficient, productive way to direct and measure their search for a profitable business model.

Reinventing the board meeting may offer angel-funded startups that don’t have formal boards or directors (because of geography or size of investment) to attract experienced advice and investment outside of technology clusters (i.e. Silicon Valley, New York).

Here’s how.

A Hypothesis – The Boardroom As Bits
Startups now understand what they should be doing in their early formative days is search for a business model. The process they use to guide their search is customer development. And to track their progress startups now have a scorecard to document their week-by-week changes – the business model canvas.

Yet even with all these tools, early stage startups still need to physically meet with advisors and investors. That’s great if you can get it. But what if you can’t?

What’s missing is a way to communicate all this complex information and get feedback and guidance for startups who cannot get advice in a formal board meeting.

We propose that early stage startups communicate in a way that didn’t exist in the 20^th century – online – collaboratively through blogs.

We suggest that the founders/CEO invest 1 hour a week providing advisors and investors with “Continuous Information Access” by blogging and discussing their progress online in their startup’s search for a business model. They would:

Blog their Customer Development progress as a narrative
Keep score of the strategy changes with the Business Model Canvas
Comment/Dialog with advisors and investors on a near-realtime basis

What Does this Change?
1) Structure. Founders operate in a chaotic regime. So it’s helpful to have a structure that helps “search”  for a business model. The “boardroom as bits” uses C ustomer Development as the process for the search, and the business model canvas as the scorecard to keep track of the progress, while providing a common language for the discussion.

This approach offers VC’s and Angels a semi-formal framework for measuring progress and offering their guidance in the “search”  for a business model. It turns ad hoc startups into strategy-driven startups.

2) Asynchronous Updates. Interaction with advisors and board members can now be decoupled from the – once every six weeks, “big event” – board meeting. Now, as soon as the founders post an update, everyone is notified. Comments, help, suggestions and conversation can happen 24/7. For startups with formal boards, it makes it easy to implement, track, and follow-up board meeting outcomes.

Monitoring and guiding a small angel investment no longer requires the calculus to decide whether the investment is worth a board commitment. It potentially encourages investors who would invest only if they had more visibility but where the small number of dollars doesn’t justify the time commitment.

A board as bits ends the repetition of multiple investor coffees. It’s highly time-efficient for investor and founder alike.

3) Coaching. This approach allows real-time monitoring of a startup’s progress and zero-lag for coaching and course-correction. It’s not just a way to see how they’re doing. It also provides visibility for a deep look at their data over time and facilitates delivery of feedback and advice.

4) Geography. When the boardroom is bits, angel-funded startups can get experienced advice – independent of geography. An angel investor or VC can multiply their reach and/or depth. In the process it reduces some of the constraints of distance as a barrier to investment.

Imagine if a VC took $4 million (an average Series A investment) and instead spread it across 40 deals at $100K each in a city with a great outward-facing technology university outside of Silicon Valley. In the past they had no way to monitor and manage these investments. Now they can. The result – an instant technology cluster – with equity at a fraction of Silicon Valley prices. It might be possible to create Virtual Valley Ventures.

We Ran the Experiment
At Stanford our Lean Launchpad class ran an experiment that showed when “the boardroom is bits” can make a radical difference in the outcome of an early stage startup.

Our students used Customer Development as the process to search for a business model. The used a blog to record their customer learning, and their progress and issues. The blog became a narrative of the search by posting customer interviews, surveys, videos, and prototypes. They used the Business Model Canvas as a scorekeeping device to chart their progress. The result invited comment from their “board” of the teaching team.

Here are some examples of how rich the interaction can become when a management team embraces the approach.

We were able to give them near real-time feedback as they posted their results. If we had been a board rather than a teaching team we would have added physical reality checks with Skype and/or face-to-face meetings.

Show Me the Money
While this worked in the classroom, would it work in the real world? I thought this idea was crazy enough to bounce off a five experienced Silicon Valley VC’s. I was surprised at the reaction – all of them want to experiment with it. Jon Feiber at MDV is going to try investing in startups emerging from Universities with great engineering schools outside of Silicon Valley that have entrepreneurship programs, but minimal venture capital infrastructure. (The University of Michigan is a possible first test.) Kathryn Gould of Foundation Capital and Ann Miura-Ko of Floodgate also want to try it.

Shawn Carolan of Menlo Ventures not only thought the idea had merit but seed-funded the LeanLaunchLab, a startup building software to automate and structure this process. (More than 700 startups signed up for the LeanLaunchLab software the day it was first demo’d.) Other entrepreneurs think this is an idea whose time has come and are also building software to manage this process including Alexander Osterwalder, Groupiter, and Angelsoft. Citrix thought this was such a good idea that their Startup Accelerator has offered to provide GoToMeeting and GoToMeeting HD Faces free to participating VC’s and startups. Contact them here.

Summary
For startups with traditional boards, I am not suggesting replacing the board meeting – just augmenting it with a more formal, interactive and responsive structure to help guide the search for the business model. There’s immense value in face-to-face interaction. You can’t replace body language.

But for Angel-funded companies I am proposing that a “board meeting in bits” can dramatically change the odds of success. Not only does this approach provide a way for founders to “show your work” to potential and current investors and advisors, but also it helps expand opportunities to attract investors from outside the local area.

Lessons Learned

Startups are a search for a business model

Startups can share their progress/get feedback in the search

Weekly blog of the customer development narrative

Weekly summary of the business model canvas

Interactive comments and questions

Skype and face-to-face when needed

This may be a way to augment traditional board meetings

This might be a way to rethink our notion of geography as a barrier to investments

Or watch the video here.

Filed under: Big Companies versus Startups: Durant versus Sloan, Business Model versus Business Plan, Lean LaunchPad, Teaching, Venture Capital | 34 Comments »

Why Board Meetings Suck – Part 1 of 2

Posted on June 1, 2011 by steveblank

There are none so blind as those who will not see.
Jonathan Swift

What’s Wrong With Today’s Board Meetings
As customer and agile development reinvent the Startup, it’s time to ask why startup board governance has not kept up with the pace of innovation. Board meetings that guide startups haven’t changed since the early 1900’s.

It’s time.

Reinventing the board meeting may offer venture-backed startups a more efficient, productive way to direct and measure their search for a profitable business model.

Reinventing the board meeting may offer angel-funded startups – which because of geography or size of investment typically don’t have formal boards or directors – to attract experienced advice and investment outside of technology clusters (i.e. Silicon Valley, New York).

Here’s how.

Because We’ve Always Done It This Way
The combination of Venture Capital and technology startups is only about 50 years old. Rather than invent a new form of corporate governance, venture investors adopted the traditional board meeting structure from large corporations. Yet boards of large companies exist to monitor efficient strategy and execution of a known business model. While startups eventually get into execution mode, their initial stages are devoted to a non-linear, chaotic search for a business model: finding product/market fit to identify a product or service people will buy in droves at a sustainable, profitable pace.

In the last few years, our understanding that startups are not smaller versions of large companies, made us recognize that startups need their own tools, different from those used in existing companies: Customer Development – the process to search for a Business Model, the Business Model Canvas – the scorecard to measure progress in the search, and Agile Engineering – the tools to physically construct the product.

Yet while we’ve reinvented how startups build their companies, startup investors are still having board meetings like it’s the 19^th century.

Why Have a Board Meeting?
From a VC’s point of view there are two reasons for board meetings.

1) It’s their fiduciary responsibility. Once a startup gets going, it has asymmetric information. Investors get board seats to assure themselves and their limited partners that they are duly informed about their investment.

2) Investors believe that their experience and guidance can maximize their return. Here it’s the board that has asymmetric knowledge. A veteran board can bring 50-100x more experience into a board meeting than a first time founder. (VC’s sit on 6 – 12 boards at a time. Assume an average tenure of 4 years per board. Assume two veteran VC’s per board. = 50-100x more experience.)

From a founder’s point of view there are three reasons for board meetings.

1) It’s an obligation that came with the check.

2) Founders who have a great board do recognize the uncanny pattern recognition skills that good VC’s bring.

3) An experienced board brings an extensive network of customers, partners, help in recruiting, follow-on financing, etc.

What’s Wrong With a Board Meeting?
The Wrong Metrics. Traditional startup board meetings spend an insane amount of wasted time using Fortune 100 company metrics like income statements, cash flow, balance sheet, waterfall charts. The only numbers in those documents that are important in the first year of a startup’s life are burn rate and cash balance. Most board meetings never get past big company metrics to focus on the crucial startup numbers. That’s simply a failure of a startup board’s fiduciary responsibility.

The Wrong Discussions. The most important advice/guidance that should come from investors in a board meeting is about a startup’s search for a business model: What are the business model hypotheses? What are the most important hypotheses to test now? How are we progressing validating each hypothesis? What do those numbers/metrics look like? What are the iterations and Pivots – and why?

Not Real-time. Startup board meetings occur every 4-6 weeks. While that’s great when you showed up in your horse and buggy, the strategy-to-tactic-to implementation lag is painful at Internet speeds. And unless there’s rigor in the process, because there is no formal structure for follow up, tracking what happened as a result of meeting recommendations and action items gets lost in the daily demands of everyone’s work. (Of course great VC’s mix in coffees, phone calls, coaching and other non-board meeting interactions but it’s ad hoc and not always done.)

Wastes Founders Time. For the founders, “the get ready for the board meeting” drill is often a performance rather than a snapshot. Powerpoints, spreadsheets and rehearsals consume time for materials that are used once and discarded. There are no standards for what each side (board versus management) does. What is the entrepreneur supposed to be doing? What are the board members supposed to be contributing?

The Wrong Structure. If you read advice on how to run a board meeting you’ll get advice that would have felt comfortable to Andrew Carnegie or John D. Rockefeller.

In the age of the Internet why do we need to get together in one room on a fixed schedule? Why do we need to wait a month to six weeks to see progress? Why don’t we have standards for what metrics VC’s want to see from their early stage startup teams?

Angels In America
For angel-funded startups, life is even tougher. Data from the Startup Genome project shows that startups that have helpful mentors, listen to customers, and learn from startup thought leaders raise 7x more money and have 3.5x better user growth. If you’re in a technology cluster like Silicon Valley you may be able to attract ad hoc advice from experienced investors. But very little of it is formal, and almost none of it approaches the 50-100x experience level of professional investors.

As there’s no formal board, most of these angel/investors meetings are over coffees. And lacking a board meeting there’s no formal mechanism to get investor advice. Angel investments in mobile and web apps today are approaching the “throw it against the wall and see if it sticks” strategy.

And for startups outside of technology clusters, there’s almost no chance of attracting Silicon Valley VC’s or angels. Geography is a barrier to investment.

So given all this, the million dollar question is: Why in the age of the Internet haven’t we adopted the tools we build/sell to solve these problems?

In the next post – Reinventing the Board Meeting.

Lessons Learned

Early stage board meetings are often clones of large company board meetings

That’s very, very wrong

Angel-funded startups have no formal mechanism for experienced advice

There’s a better way

Filed under: Big Companies versus Startups: Durant versus Sloan, Business Model versus Business Plan, Lean LaunchPad, Teaching, Venture Capital | 19 Comments »

Tune In, Turn On, Drop Out – The Startup Genome Project

Posted on May 29, 2011 by steveblank

In April 2010 I received an email that said, “I’m an incoming Stanford student in the fall and working on a project that a number of people suggested I get in touch with you about.”

Ok, I get a lot of these. Is this some grad student or post doc who wanted to do some independent study?

The email continued, ”The problem I’m working on is that many founders are either making uninformed decisions or inefficiently learning the new skills they need. The solution I’m exploring is a just in time learning methodology that accelerates founders’ learning curve by aggregating relevant content, peers and mentors.”

Hmm, now I’m getting intrigued. This sounded like one heck of an interesting guy and it’s a subject I care about. I wondered where he got his MBA from?

The email closed by saying, “The project is a hybrid between academic and entrepreneurial circles and I’d really love to begin a dialogue with people in the academic world also interested in solving this problem. Your name has come up a lot in that regard. Let me know if this interests you and if you have any time to speak.”

It was signed Max Marmer.

I set up a meeting and at Cafe Borrone some kid who looked 18-years old came up to me and introduced himself as Max. “How old are you? I asked. “18,” he replied.

Holy sx!t.

When I asked Max why he was interested in solving entrepreneurial education problems he replied, “I was always interested in big picture trends for where the world is headed. I spent time with organizations like the Institute for the Future and Singularity University. My conjecture became that the world’s biggest problem isn’t poverty or disease or any oft-stated major problem, but that we don’t have enough people engaged in trying to solve these problems. A big piece of the solution lies in the scalable impact of entrepreneurship and an increase of successful entrepreneurs. But potential impact consistently fails to be realized because of self-destruction.”

I don’t think I touched my sandwich. I tried to remember what I was doing at 18 and whatever it was I wasn’t this. Max continued, “That’s why I’m really interested in ways of optimizing the entrepreneurship ecosystem to allow more entrepreneurs to go from idea to reality. To do this requires: a methodology, tools and systematically reducing friction.”

I was feeling pretty old. Max set the record for smarts divided by age.

Tune In, Turn On, Drop Out
Max entered Stanford in the fall of 2010 as a freshman, took as many of the engineering entrepreneurship classes as he could and independent study with me. (He was part of the Sandbox network - a group of incredibly smart under 30 year olds.)

Max dropped out of Stanford after his first quarter.

But he left to work on what he told me he came to do - crack the innovation code of Silicon Valley and share it with the rest of the world. He set up Blackbox.vc, a seed accelerator for technology startups (and one of the tour stops for entrepreneurs from around the world.) They went to work gathering deep knowledege of what makes successful Internet startups.

Max and his partners interviewed and analyzed over 650 early-stage Internet startups. Today they released the first Startup Genome Report— a 67 page in-depth analysis on what makes early-stage Internet startups successful.

Startup Genome Report
Some of their key findings:

1. Founders that learn are more successful: Startups that have helpful mentors, track metrics effectively, and learn from startup thought leaders raise 7x more money and have 3.5x better user growth.

2. Startups that pivot once or twice times raise 2.5x more money, have 3.6x better user growth, and are 52% less likely to scale prematurely than startups that pivot more than 2 times or not at all.

3. Many investors invest 2-3x more capital than necessary in startups that haven’t reached problem solution fit yet. They also over-invest in solo founders and founding teams without technical cofounders despite indicators that show that these teams have a much lower probability of success.

4. Investors who provide hands-on help have little or no effect on the company’s operational performance. But the right mentors significantly influence a company’s performance and ability to raise money. (However, this does not mean that investors don’t have a significant effect on valuations and M&A)

5. Solo founders take 3.6x longer to reach scale stage compared to a founding team of 2 and they are 2.3x less likely to pivot.

6. Business-heavy founding teams are 6.2x more likely to successfully scale with sales driven startups than with product centric startups.

7. Technical-heavy founding teams are 3.3x more likely to successfully scale with product-centric startups with no network effects than with product-centric startups that have network effects.

8. Balanced teams with one technical founder and one business founder raise 30% more money, have 2.9x more user growth and are 19% less likely to scale prematurely than technical or business-heavy founding teams.

9. Most successful founders are driven by impact rather than experience or money.

10. Founders overestimate the value of IP before product market fit by 255%.

11. Startups need 2-3 times longer to validate their market than most founders expect. This underestimation creates the pressure to scale prematurely.

12. Startups that haven’t raised money over-estimate their market size by 100x and often misinterpret their market as new.

13. Premature scaling is the most common reason for startups to perform worse. They tend to lose the battle early on by getting ahead of themselves.

14. B2C vs. B2B is not a meaningful segmentation of Internet startups anymore because the Internet has changed the rules of business. We found 4 different major groups of startups that all have very different behavior regarding customer acquisition, time, product, market and team.

———

I’m not sure I believe every one of the report conclusions – it just covers very early stage web startups, and the methodology is still shaky – but this is a landmark study. I think these guys have gone a long way to turn hypotheses about early-stage Internet startups into facts. And they’re just getting started.

Congratulations. A+

Download the full Startup Genome report here.

——-

I can’t wait to see what Max does by the time he’s 21.

Filed under: Customer Development, Teaching, Venture Capital | 23 Comments »

Greatest Hits – The Gigaom Interview

Posted on May 27, 2011 by steveblank

Om Malik runs Gigaom, probably the most interesting and technically accurate sites on the blogosphere.

He had me in for an interview. We covered a wide range of topics.

0:22 – the Entrepreneurial explosion
1:45 – Are we in a Bubble?
3:20 - The Last Bubble
6:30 – Rules for the New Bubble
8:05 – Metrics for Success
10:10 – Total Available Market in the Billions
11:45 – Is this a Really a Bubble – the greater fool theory
13:00 – VC’s – The Pact With the Devil
14:10 – What to Use VC’s $’s for?
15:36 – How to Get Customer Centric – an unnatural act
17:00 – The Secrets to Social Networks – Bowling Alone
17:45 – Who Are the Best Entrepreneurs?
18:45 – Entrepreneurs are Artists
21:39 – What Makes Silicon Valley Special?
22:50 – Risk and Culture in Silicon Valley

Filed under: Customer Development, Teaching, Venture Capital | 4 Comments »

Risk and Culture in Silicon Valley

Posted on April 12, 2011 by steveblank

Om Malik runs Gigaom, probably the most interesting and accurate site on the blogosphere.

Om was kind enough to have me in for an interview. We covered a wide range of topics. This talk on Risk and Culture in Silicon Valley is a small 1 minute snippet of a longer interview on his blog.

Filed under: Family/Career/Culture, Teaching, Technology, Venture Capital | 11 Comments »

Flowery Words – True Ventures Founders Camp

Posted on April 8, 2011 by steveblank

The team at True Ventures was kind enough to invite me to speak at their Founders Camp. They pull in the founders of all their startups for 24 hours of activities, speakers, and discussions. I was blown away by the raw talent of these teams.

They had someone translating my words into a diagram as I spoke. (Click on it for the full effect.)

Filed under: Venture Capital | 3 Comments »

One Hand Clapping – Entrepreneurship In Ann Arbor, Michigan

Posted on April 7, 2011 by steveblank

I spent a few days in March in Ann Arbor Michigan as a guest of Professor Thomas Zurbuchen, Associate Dean for Entrepreneurial Programs, and Doug Neal, Director of Center for Entrepreneurship in the Engineering School at the University of Michigan.

I gave a keynote on entrepreneurship to MPowered, the student Entrepreneurship Organization, spoke on a panel on Entrepreneurship and the Aerospace Industry, and gave another keynote at the Ann Arbor New Tech Meetup and A2Geeks, the regional startup network.

I got smarter about engineering and innovation in “flyover country”, met some wonderful people and shared some thoughts about what it might take to spark an innovation cluster in Ann Arbor.

This post is a personal view of what I saw in Ann Arbor — in no way does it represent the views of the fine institutions I teach at. Read this with all the usual caveats: visiting a place for a few days doesn’t make you an expert, I’m not an economist, and the odds are I misunderstood or misinterpreted what I saw or just didn’t see enough.

One Hand Clapping - Creating an Innovation Cluster – The Ann Arbor Experiment
In my short time in Ann Arbor, I spent time meeting with:

Faculty; I met with the Dean of Engineering, held faculty lunches and roundtables in the Engineering School, and met one-on-one with several engineering and med school faculty who wanted to turn their research into a company.
Students; presented to entrepreneurship classes teaching technology-driven Scalable startups as well as students interested in Social Entrepreneurship. Held office hours and met lots of passionate students with great ideas.
Business School, met with the entrepreneurship center in the Business School,
Entrepreneurs; presented to MPowered the University of Michigan student Entrepreneurship Organization, the Ann Arbor New Tech Meetup and A2Geeks, the regional startup network (talk here.)
Venture Capital; met with the local hardware/software venture capital firm.
Incubators: toured the TechArb, the engineering student accelerator, and the Michigan Venture Center in the University’s Tech Transfer Office

The good news:
Entrepreneurship and innovation has been embraced big time at U of M. The Engineering School has 5,600 undergrads and 3,000 graduate students. It’ s probably no coincidence that the Dean of the Engineering School founded a company and gets what “startup” means first hand. The Center for Entrepreneurship in the Engineering School is akin to Stanford’s STVP program. It offers 35 entrepreneurship courses.

Everyone I met in this program “gets” the principles of Agile, Lean and Customer Development big time. The TechArb is the engineering student accelerator/incubator (cofounded by the local VC) and also embraces these ideas. Finally, I was impressed to find a robust local entrepreneurial community centered around A2Geeks and the Tech Brewery (after I met Dug Song I understood why.)

(I didn’t have enough time to connect with the entrepreneurial groups working on medical devices and life sciences, but they are another big component of the startup pool coming out of the University.)

What needs work:
It’s been 33 years since I was last in Ann Arbor. (I call it the best school I was ever thrown out of.) I was incredibly impressed with how far the University has inculcated innovation into the fabric of the Engineering School. However the challenges that still needed to be addressed were pretty apparent.

You Can’t Start a Fire Without A Spark – A Lack of Venture Capital
For an Engineering School so focused on innovation and startups the lack of sufficient numbers of venture capitalists in the local community for Cleantech, hardware, Web/Mobile apps and aerospace was noticeable. Given the interesting things going on in the engineering labs I visited and the startups I met, one would have thought the school would have been crawling with VC’s fighting over deals. Instead it seems that students who graduate simply pick up a plane ticket with their diploma. (Of course, some do stay. The spin-outs from Center of Entrepreneurship are impressive. Many of those companies are still Ann Arbor, but the ecosystem is a limiting factor.)

While one can’t recreate all the happy accidents that made Silicon Valley, it doesn’t take a rocket scientist to realize that it’s the combination of technology entrepreneurs and risk capital that are two of the essential ingredients in any cluster. (I list some of the others in the diagram below.)

Innovation Cluster - What's Missing in Ann Arbor

Therefore the lack of critical mass in Venture Investors in Ann Arbor was palpable – and incomprehensible. This place could support at least one or two seed funds like 500 Startups, and a couple of True Venture/Floodgate-type of VC’s as well as more Cleantech investors. Getting them in Ann Arbor would solve the other missing piece; the lack of a startup culture.

A Lack of a Startup Culture in the Community
Visiting Silicon Valley you can’t mistake that its primary business is innovation. In Ann Arbor and southeast Michigan entrepreneurship is a small part of a more diverse business culture. One of the characteristics of a cluster is that it isn’t hard to find other like-minded individuals. In Ann Arbor, they’re scattered in between the auto industry, biotech, hospital workers, etc. As a consequence Ann Arbor lacks the culture of risk-taking and respect for failure critical in an innovation cluster. You see it in the existing angel groups and VC’s. They feel more like banks than risk capital. And that lack of tolerance for failure and comfort with the status quo gets fed back to the entrepreneurs. Getting a few experienced super-angels and/or VC’s seeding 5-10 Lean Startup deals here a year, with a couple of Cleantech/energy deals as well, could kickstart the culture.

Not My Problem
The interesting thing is that no one seems to own the problem. The University of Michigan tech transfer office has an incubator but 1) mixes software, hardware, med devices and life sciences deals in the same program, and 2) takes no ownership of figuring out how to get a risk capital ecosystem in place. Surprisingly, the same with the entrepreneurship center in the Business School. I would have thought they’d be leading the charge.

The new governor of Michigan, Rick Snyder was a venture capitalist in Ann Arbor, so I’m surprised he hasn’t jawboned some combination of Michigan alumni working in venture capital in Silicon Valley to return, and paired them with the old-school money from the Auto industry, that’s hiding under mattresses.

—-

The real test of a cluster “catching fire” is not when it provides local employment, but when people from outside the area start coming to work and invest there.

These guys are this close to making it happen. It would be a shame if it didn’t.

Lessons Learned

U of M has a College of Engineering dean who “gets it”

He’s turned the school into an outward facing school, fostering an entrepreneurial and innovation culture

The Center for Entrepreneurship is on board with passionate faculty, innovative curriculum and excited students

The area has almost no experienced Angel, super Angel or Venture Capital (as we know it in Silicon Valley) for web/mobile apps, hardware and software

The lack of experienced risk capital means a lack of experienced mentors, coaches, and infrastructure.

Filed under: Teaching, Venture Capital | 28 Comments »

New Rules for the New Internet Bubble

Posted on March 18, 2011 by steveblank

Carpe Diem

We’re now in the second Internet bubble. The signals are loud and clear: seed and late stage valuations are getting frothy and wacky, and hiring talent in Silicon Valley is the toughest it has been since the dot.com bubble. The rules for making money are different in a bubble than in normal times. What are they, how do they differ and what can a startup do to take advantage of them?

First, to understand where we’re going, it’s important to know where we’ve been.

Paths to Liquidity: a quick history of the four waves of startup investing.

The Golden Age (1970 – 1995): Build a growing business with a consistently profitable track record (after at least 5 quarters,) and go public when it’s time.
Dot.com Bubble (1995-2000): “Anything goes” as public markets clamor for ideas, vague promises of future growth, and IPOs happen absent regard for history or profitability.
Lean Startups/Back to Basics (2000-2010): No IPO’s, limited VC cash, lack of confidence and funding fuels “lean startup” era with limited M&A and even less IPO activity.
The New Bubble: (2011 – 2014): Here we go again….

(If you can’t see the slide presentation above, click here.)

If you “saw the movie” or know your startup history, and want to skip ahead click here.

1970 – 1995: The Golden Age
VC’s worked with entrepreneurs to build profitable and scalable businesses, with increasing revenue and consistent profitability – quarter after quarter. They taught you about customers, markets and profits. The reward for doing so was a liquidity event via an Initial Public Offering.

Startups needed millions of dollars of funding just to get their first product out the door to customers. Software companies had to buy specialized computers and license expensive software. A hardware startup had to equip a factory to manufacture the product. Startups built every possible feature the founding team envisioned (using “Waterfall development,”) into a monolithic “release” of the product taking months or years to build a first product release.

The Business Plan (Concept-Alpha-Beta-FCS) became the playbook for startups. There was no repeatable methodology, startups and their VC’s still operated like startups were simply a smaller version of a large company.

The world of building profitable startups ended in 1995.

August 1995 – March 2000: The Dot.Com Bubble
With Netscape’s IPO, there was suddenly a public market for companies with limited revenue and no profit. Underwriters realized that as long as the public was happy snapping up shares, they could make huge profits from the inflated valuations. Thus began the 5-year dot-com bubble. For VC’s and entrepreneurs the gold rush to liquidity was on. The old rules of sustainable revenue and consistent profitability went out the window. VC’s engineered financial transactions, working with entrepreneurs to brand, hype and take public unprofitable companies with grand promises of the future. The goals were “first mover advantage,” “grab market share” and “get big fast.” Like all bubbles, this was a game of musical chairs, where the last one standing looked dumb and everyone else got absurdly rich.

Startups still required millions of dollars of funding. But the bubble mantra of get “big fast” and “first mover advantage” demanded tens of millions more to create a “brand.” The goal was to get your firm public as soon as possible using whatever it took including hype, spin, expand, and grab market share – because the sooner you got your billion dollar market cap, the sooner the VC firm could sell their shares and distribute their profits.

Just like the previous 25 years, startups still built every possible feature the founding team envisioned into a monolithic “release” of the product using “Waterfall development.” But in the bubble, startups got creative and shortened the time needed to get a product to the customer by releasing “beta’s” (buggy products still needing testing) and having the customers act as their Quality Assurance group.

The IPO offering document became the playbook for startups. With the bubble mantra of “get big fast,” the repeatable methodology became “brand, hype, flip or IPO”.

2001 – 2010: Back to Basics: The Lean Startup
After the dot.com bubble collapsed, venture investors spent the next three years doing triage, sorting through the rubble to find companies that weren’t bleeding cash and could actually be turned into businesses. Tech IPOs were a receding memory, and mergers and acquisitions became the only path to liquidity for startups. VC’s went back to basics, to focus on building companies while their founders worked on building customers.

Over time, open source software, the rise of the next wave of web startups, and the embrace of Agile Engineering meant that startups no longer needed millions of dollars to buy specialized computers and license expensive software – they could start a company on their credit cards. Customer Development, Agile Engineering and the Lean methodology enforced a process of incremental and iterative development. Startups could now get a first version of a product out to customers in weeks/months rather than months/years. This next wave of web startups; Social Networks and Mobile Applications, now reached 100’s of millions of customers.

Startups began to recognize that they weren’t merely a smaller version of a large company. Rather they understood that a startup is a temporary organization designed to search for a repeatable and scalable business model. This meant that startups needed their own tools, techniques and methodologies distinct from those used in large companies. The concepts of Minimum Viable Product and the Pivot entered the lexicon along with Customer Discovery and Validation.

The playbook for startups became the Agile + Customer Development methodology with The Four Steps to the Epiphany and Agile engineering textbooks.

Rules For the New Bubble: 2011 -2014
The signs of a new bubble have been appearing over the last year – seed and late stage valuations are rapidly inflating, hiring talent in Silicon Valley is the toughest since the last bubble and investors are starting to openly wonder how this one will end.

Breathtaking Scale
The bubble is being driven by market forces on a scale never seen in the history of commerce. For the first time, startups can today think about a Total Available Market in the billions of users (smart phones, tablets, PC’s, etc.) and aim for hundreds of millions of customers. And those customers may be using their devices/apps continuously. The revenue, profits and speed of scale of the winning companies can be breathtaking.

The New Exits
Rules for building a company in 2011 are different than they were in 2008 or 1998. Startup exits in the next three years will include IPO’s as well as acquisitions. And unlike the last bubble, this bubble’s first wave of IPO’s will be companies showing “real” revenue, profits and customers in massive numbers. (Think Facebook, Zynga, Twitter, LinkedIn, Groupon, etc.) But like all bubbles, these initial IPO’s will attract companies with less stellar financials, the quality IPO pipeline will diminish rapidly, and the bubble will pop. At the same time, acquisition opportunities will expand as large existing companies, unable to keep up with the pace of innovation in these emerging Internet markets, will “innovate” by buying startups. Finally, new forms of liquidity are emerging such as private-market stock exchanges for buying and selling illiquid assets (i.e. SecondMarket, SharesPost, etc.)

Tools in the New Bubble
Today’s startups have all the tools needed for a short development cycle and rapid customer adoption – Agile and Customer Development plus Business Model Design.

The Four Steps to the Epiphany, Business Model Generation and the Lean Startup movement have become the playbook for startups. The payoff: in this bubble, a startup can actively “engineer for an acquisition.” Here’s how:

Order of Battle
Each market has a finite number of acquirers, and a finite number of deal makers, each looking to fill specific product/market holes. So determining who specifically to target and talk to is not an incalculable problem. For a specific startup this list is probably a few hundred names.

Wide Adoption
Startups that win in the bubble will be those that get wide adoption (using freemium, viral growth, low costs, etc) and massive distribution (i.e. Facebook, Android/Apple App store.) They will focus on getting massive user bases first, and let the revenue follow later.

Visibility
During the the Lean Startup era, the advice was clear; focus on building the company and avoid hype. Now that advice has changed. Like every bubble this is a game of musical chairs. While you still need irrational focus on customers for your product, you and your company now need to be everywhere and look larger than life. Show and talk at conferences, be on lots of blogs, use social networks and build a brand. In the new bubble PR may be your new best friend, so invest in it.

Lessons Learned

We’re in a new wave of startup investing – it’s the beginning of another bubble

Rules for liquidity for startups and investors are different in bubbles

Pay attenton to what those rules are and how to play by them

Unlike the last bubble this one is not about selling “vision” or concepts.

You have to deliver. That requires building a company using Agile and Customer Development

Startups that master speed, tempo and Pivot cycle time will win

Filed under: Technology, Venture Capital | 51 Comments »

A Visitors Guide to Silicon Valley

Posted on February 22, 2011 by steveblank

If you’re a visiting dignitary whose country has a Gross National Product equal to or greater than the State of California, your visit to Silicon Valley consists of a lunch/dinner with some combination of the founders of Google, Facebook, Apple and Twitter and several brand name venture capitalists. If you have time, the President of Stanford will throw in a tour, and then you can drive by Intel or some Clean Tech firm for a photo op standing in front of an impressive looking piece of equipment.

The “official dignitary” tour of Silicon Valley is like taking the jungle cruise at Disneyland and saying you’ve been to Africa. Because you and your entourage don’t know the difference between large innovative companies who once were startups (Google, Facebook, et al) and a real startup, you never really get to see what makes the valley tick.

If you didn’t come in your own 747, here’s a guide to what to see in the valley (which for the sake of this post, extends from Santa Clara to San Francisco.) This post offers things to see/do for two types of visitors: I’m just visiting and want a “tourist experience” (i.e. a drive by the Facebook / Google / Zynga / Apple building) or “I want to work in the valley” visitor who wants to understand what’s going on inside those buildings.

I’m leaving out all the traditional stops that you can get from the guidebooks.

Hackers’ Guide to Silicon Valley
Silicon Valley is more of a state of mind than a physical location. It has no large monuments, magnificent buildings or ancient heritage. There are no tours of companies or venture capital firms. From Santa Clara to South San Francisco it’s 45 miles of one bedroom community after another. Yet what’s been occurring for the last 50 years within this tight cluster of suburban towns is nothing short of an “entrepreneurial explosion” on par with classic Athens, renaissance Florence or 1920’s Paris.

California Dreaming
On your flight out, read Paul Graham’s essays and Jessica Livingston’s Founders at Work. Then watch the Secret History of Silicon Valley and learn what the natives don’t know.

Palo Alto – The Beating Heart 1
Start your tour in Palo Alto. Stand on the corner of Emerson and Channing Street in front of the plaque where the triode vacuum tube was developed. Walk to 367 Addison Avenue, and take a look at the HP Garage. Extra credit if you can explain the significance of both of these spots and why the HP PR machine won the rewrite of Valley history.

Walk to downtown Palo Alto at lunchtime, and see the excited engineers ranting to one another on their way to lunch. Cram into Coupa Café full of startup founders going through team formation and fundraising discussions. (Noise and cramped quarters basically force you to listen in on conversations) or University Café or the Peninsula Creamery to see engineers working on a startup or have breakfast in Il Fornaio to see the VC’s/Recruiters at work.

Stanford – The Brains
Drive down University Avenue into Stanford University as it turns into Palm Drive. Park on the circle and take a walking tour of the campus and then head to the science and engineering quad. Notice the names of the buildings; Gates, Allen, Moore, Varian, Hewlett, Packard, Clark, Plattner, Yang, Huang, etc. Extra points if you know who they all are and how they started their companies. You too can name a building after your IPO (and $30 million.) Walk by the Terman Engineering building to stand next to ground zero of technology entrepreneurship. See if you can find a class being taught by Tom Byers, Kathy Eisenhardt, Tina Seelig or one of the other entrepreneurship faculty in engineering.

Attend one of the free Entrepreneurial Thought Leader Lectures in the Engineering School. Check the Stanford Entrepreneurship Network calendar or the BASES calendar for free events. Stop by the Stanford Student Startup Lab and check out the events at the Computer Forum. If you have time, head to the back of campus and hike up to the Stanford Dish and thank the CIA for its funding.

Mountain View – The Beating Heart 2
Head to Mountain View and drive down Amphitheater Parkway behind Google, admiring all the buildings and realize that they were built by an extinct company, Silicon Graphics, once one of the hottest companies in the valley (Shelley’s poem Ozymandias should be the ode to the cycle of creative destruction in the valley.) Next stop down the block is the Computer History Museum. Small but important, this museum is the real deal with almost every artifact of the computing and pre-computing age (make sure you check out their events calendar.) On leaving you’re close enough to Moffett Field to take a Zeppelin ride over the valley. If it’s a clear day and you have the money after a liquidity event, it’s a mind-blowing trip.

Next to Moffett Field is Lockheed Missiles and Space, the center of the dark side of the Valley. Lockheed came to the valley in 1956 and grew from 0 to 20,000 engineers in four years. They built three generations of submarine launched ballistic missiles and spy satellites for the CIA, NSA and NRO on assembly lines in Sunnyvale and Palo Alto. They don’t give tours.

While in Mountain View drive by the site of Shockley Semiconductor and realize that from this one failed company, founded the same year Lockheed set up shop, came every other chip company in Silicon Valley.

Lunch time on Castro Street in downtown Mountain View is another slice of startup Silicon Valley. Hang out at the Red Rock Café at night to watch the coders at work trying to stay caffeinated. If you’re still into museums and semiconductors, drive down to Santa Clara and visit the Intel Museum.

Sand Hill Road – Adventure Capital
While we celebrate Silicon Valley as a center of technology innovation, that’s only half of the story. Startups and innovation have exploded here because of the rise of venture capital. Think of VC’s as the other equally crazy half of the startup ecosystem.

You can see VC’s at work over breakfast at Bucks in Woodside, listen to them complain about deals over lunch at Village Pub or see them rattle their silverware at Madera. Or you can eat in the heart of old “VC central” in the Sundeck at 3000 Sand Hill Road. While you’re there, walk around 3000 Sand Hill looking at all the names of the VC’s on the building directories and be disappointed how incredibly boring the outside of these buildings look. (Some VC’s have left the Sand Hill Road womb and have opened offices in downtown Palo Alto and San Francisco to be closer to the action.) For extra credit, stand outside one of the 3000 Sand Hill Road buildings wearing a sandwich-board saying “Will work for equity” and hand out copies of your executive summary and PowerPoint presentations.

Drive by the Palo Alto house where Facebook started (yes, just like the movie) and the house in Menlo Park that was Google’s first home. Drive down to Cupertino and circle Apple’s campus. No tours but they do have an Apple company store which doesn’t sell computers but is the only Apple store that sells logo’d T-shirts and hats.

San Francisco – Startups with a Lifestyle
Drive an hour up to San Francisco and park next to South Park in the South of Market area. South of Market (SoMa) is the home address and the epicenter of Web 2.0 startups. If you’re single, living in San Francisco and walking/biking to work to your startup definitely has some advantages/tradeoffs over the rest of the valley. Café Centro is South Park’s version of Coupa Café. Or eat at the American Grilled Cheese Kitchen. (You’re just a few blocks from the S.F. Giants ballpark. If it’s baseball season take in a game in a beautiful stadium on the bay.) And four blocks north is Moscone Center, the main San Francisco convention center. Go to a trade show even if it’s not in your industry.

The Valley is about the Interactions Not the Buildings
Like the great centers of innovation, Silicon Valley is about the people and their interactions. It’s something you really can’t get a feel of from inside your car or even walking down the street. You need to get inside of those building and deeper inside those conversations. Here’s a few suggestions of how to do so.

If you want the ultimate startup experience, see if you can talk yourself into carrying someone’s bags as they give a pitch to a VC. Be a fly on the wall and soak it in.

If you’re trying to get a real feel of the culture, apply and interview for jobs in three Silicon Valley companies even if you don’t want any of them. The interview will teach your more about Silicon Valley company culture and the valley than any tour.

Go to at least three tech-oriented Meetups or Plancast events in the Valley or San Francisco (Meetup is a deep list. Search for “startup” meetup’s in San Francisco, Palo Alto and Santa Clara.)

Find a real 3-10 person startup, working from a small crammed co-working space and sit with them for an afternoon. Offer to code for free. San Francisco has many co-working spaces (shared offices for startups). They’re great to get a feel of what it’s like to start when there’s just a few founders and you don’t have your own garage.Visit Founders Den, Sandbox Suites, Citizenspace, pariSoma Innovation, the Hub, NextSpace, RocketSpace, and DogPatch Labs. Driving down the valley see Studio G in Redwood City, Hacker Dojo in Mountain View, the Plug & Play Tech Center in Sunnyvale, Semantic Seed in San Jose.

Get invited to an event at Blackbox.vc and the Sandbox Network. See if there’s a Startup Weekend or SVASE event going on in the Bay Area.

If you’re visiting to raise money or to get to know “angels” use AngelList to get connected to seed investors before you arrive.

Use your entrepreneurial skill and get yourself into a Y-Combinator dinner or demo day, a 500 Startups or Harrsion Metal event. Go to a Techcrunch event. And of course go to a Lean Startup Meetup.

Talk yourself into a job.

Never leave.

Filed under: Family/Career/Culture, Technology, Venture Capital | 39 Comments »

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Tune In, Turn On, Drop Out – The Startup Genome Project

Greatest Hits – The Gigaom Interview

Risk and Culture in Silicon Valley

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One Hand Clapping – Entrepreneurship In Ann Arbor, Michigan

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What’s Wrong With Today’s Board Meetings
As customer and agile development reinvent the Startup, it’s time to ask why startup board governance has not kept up with the pace of innovation. Board meetings that guide startups haven’t changed since the early 1900’s.