———–

Whether your venture is a new pizza parlor or the hottest new software product, beware: These nine flawed assumptions are toxic.

1. Assuming you know what the customer wants

First and deadliest of all is a founder’s unwavering belief that he or she understands who the customers will be, what they need, and how to sell it to them. Any dispassionate observer would recognize that on Day One, a start-up has no customers, and unless the founder is a true domain expert, he or she can only guess about the customer, problem, and business model. On Day One, a start-up is a faith-based initiative built on guesses. 

To succeed, founders need to turn these guesses into facts as soon as possible by getting out of the building, asking customers if the hypotheses are correct, and quickly changing those that are wrong.

2. The “I know what features to build” flaw

The second flawed assumption is implicitly driven by the first. Founders, presuming they know their customers, assume they know all the features customers need.

These founders specify, design, and build a fully featured product using classic product development methods without ever leaving their building. Yet without direct and continuous customer contact, it’s unknown whether the features will hold any appeal to customers.

3. Focusing on the launch date

Traditionally, engineering, sales, and marketing have all focused on the immovable launch date. Marketing tries to pick an “event” (trade show, conference, blog, etc.) where they can “launch” the product. Executives look at that date and the calendar, working backward to ignite fireworks on the day the product is launched. Neither management nor investors tolerate “wrong turns” that result in delays.

The product launch and first customer ship dates are merely the dates when a product development team thinks the product’s first release is “finished.” It doesn’t mean the company understands its customers or how to market or sell to them, yet in almost every start-up, ready or not, departmental clocks are set irrevocably to “first customer ship.” Even worse, a start-up’s investors are managing their financial expectations by this date as well.

4. Emphasizing execution instead of testing, learning, and iteration

Established companies execute business models where customers, problems, and necessary product features are all knowns; start-ups, on the other hand, need to operate in a “search” mode as they test and prove every one of their initial hypotheses.

They learn from the results of each test, refine the hypothesis, and test again—all in search of a repeatable, scalable, and profitable business model. In practice, start-ups begin with a set of initial guesses, most of which will end up being wrong. Therefore, focusing on execution and delivering a product or service based on those initial, untested hypotheses is a going-out-of-business strategy.

5. Writing a business plan that doesn’t allow for trial and error

Traditional business plans and product development models have one great advantage: They provide boards and founders an unambiguous path with clearly defined milestones the board presumes will be achieved. Financial progress is tracked using metrics like income statement, balance sheet, and cash flow. The problem is, none of these metrics are very useful because they don’t track progress against your start-up’s only goal: to find a repeatable and scalable business model.  

6. Confusing traditional job titles with a startup’s needs

Most startups simply borrow job titles from established companies. But remember, these are jobs in an organization that’s executing a known business model. The term “Sales” at an existing company refers to a team that repeatedly sells a known product to a well-understood group of customers with standard presentations, prices, terms, and conditions. Start-ups by definition have few, if any, of these. In fact, they’re out searching for them!

The demands of customer discovery require people who are comfortable with change, chaos, and learning from failure and are at ease working in risky, unstable situations without a roadmap. 

7. Executing on a sales and marketing plan

Hiring VPs and execs with the right titles but the wrong skills leads to further trouble as high-powered sales and marketing people arrive on the payroll to execute the “plan.” Executives and board members accustomed to measurable signs of progress will focus on these execution activities because this is what they know how to do (and what they believe they were hired to do). Of course, in established companies with known customers and markets, this focus makes sense.

And even in some start-ups in “existing markets,” where customers and markets are known, it might work. But in a majority of startups, measuring progress against a product launch or revenue plan is simply false progress, since it transpires in a vacuum absent real customer feedback and rife with assumptions that might be wrong.

8. Prematurely scaling your company based on a presumption of success

The business plan, its revenue forecast, and the product introduction model assume that every step a start-up takes proceeds flawlessly and smoothly to the next.

The model leaves little room for error, learning, iteration, or customer feedback.

Even the most experienced executives are pressured to hire and staff per the plan regardless of progress. This leads to the next startup disaster: premature scaling. 

9. Management by crisis, which leads to a death spiral

The consequences of most start-up mistakes begin to show by the time of first customer ship, when sales aren’t happening according to “the plan.” Shortly thereafter, the sales VP is probably terminated as part of the “solution.”

A new sales VP is hired and quickly concludes that the company just didn’t understand its customers or how to sell them. Since the new sales VP was hired to “fix” sales, the marketing department must now respond to a sales manager who believes that whatever was created earlier in the company was wrong. (After all, it got the old VP fired, right?)

Here’s the real problem: No business plan survives first contact with customers. The assumptions in a business plan are simply a series of untested  hypotheses. When real results come in, the smart startups pivot or change their business model based on the results. It’s not a crisis, it’s part of the road to success.

—–

I was reminded how innovation dies when the email below arrived in my inbox. It was well written, thoughtful and had a clearly articulated sense of purpose. You may have seen one like it in your school or company.

Skim it and take a guess why I first thought it was a parody. It’s a classic mistake large organizations make in dealing with disruption.

The Strategy Committee

Faculty and Staff:

We believe online education will become increasingly important at all levels of the educational experience. If our school is to retain its current standards in terms of access and excellence we think it is of paramount importance that we develop an overarching campus strategy that enables and supports online innovation.

We believe our Departments play an essential leadership role in the design and implementation of online offerings. However, we also want to provide guidance and support and ensure that campus goals are met, specifically ensuring that our online education efforts align with our mission, values and operational requirements.

To this end, we are convening a Strategy Committee that is charged with overseeing our efforts and accelerating implementation. The responsibilities of the group will be to provide overall direction to campus, make decisions concerning strategic priorities and allocate additional resources to help realize these priorities. Because we anticipate that most of the innovation in this area will occur at the school/unit level we underscore that the purpose of the Strategy Committee is to provide campus-level guidance and coordination, and to enable innovation. The Strategy Committee will also be responsible for reaching out to and receiving input from the Presidents Staff and the Faculty Senate.

The Strategy Committee will be comprised of Mark Time, Nick Danger, Ralph Spoilsport, Ray Hamberger, Audrey Farber, Rocky Rococo, George Papoon, Fred Flamm, Susan Farber, and Clark Cable.

A Policy Team, which is charged with coordinating with the schools/unit to develop detailed implementation plans for specific projects, will report to the Strategy Committee. The role of the Policy Team will be to develop a detailed strategic framework for the campus, oversee the development of shared resources, disseminate best practices, create an administrative infrastructure that provides consistent financial and legal expertise, and consult with relevant campus groups: and the the Budget Office. The Policy Team will be led by two senior campus leaders, one from the academic side and one from the administration side.

We are extremely pleased that Dean TIrebiter has accepted the administrative lead role of the Policy Team. Dean Tirebiter brings to this position a deep knowledge of the online environment.  He will be helping to identify a member of our Faculty to serve as the academic lead of the Policy Team.

The Strategy Committee will be meeting for a half-day retreat at Morse Science Hall in the coming weeks to begin work. We will be sending out an update to faculty and following this retreat, so stay tuned for further updates.

Sincerely,

President Peter Bergman

We Can Figure it Out in A Meeting
The memo sounds thoughtful and helpful. It’s an attempt to get all the “right” stakeholders in the room and think through the problem.

One useful purpose a university committee could have had was figuring out what the goal of going online was.  It could have said “the world expects us to lead so lets get together and figure out how we deal with online education.”  Our goal(s) could be:

The problem is that the path to implementing online education is not known. In fact, it’s not a solvable problem by committee, regardless of how many smart people in the room. It is a “NP complete” problem – it is so complex that figuring out the one possible path to a correct solution is computationally incalculable. (See the diagram below.)

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

Innovation Dies in Conference Rooms
The “lets put together a committee” strategy fails for four reasons:

1. Online education is not an existing market. There just isn’t enough data to pick what is the correct “overarching strategy”.
2. Making a single bet on a single strategy, plan or company in a new market is a sure way to fail. After 50-years even the smartest VC firms haven’t figured out how to pick one company as the winner.  That’s why they invest in a portfolio.
3. Committees protect the status quo. Everyone who has a reason to say “No” is represented.
4. Dealing with disruption is not solved by committee. New market problems call for visionary founders, not consensus committee members.

In a perfect world, the right solution would be a one page memo encouraging maximum experimentation with the bare minimum of rules (protecting the schools brand and the applicable laws.)

 Lessons Learned

• Innovation in New Markets do not come from “overarching strategies”
• It comes out of opportunity, chaos and rapid experimentation
• Solutions are found by betting on a portfolio of low-cost experiments
  • With a minimum number of constraints
• The road for innovation does not go through committee

Could students get value out of a 5-day version of the class?

The Setup
At the invitation of Murray Low at the Entrepreneurship Center in the Columbia Business School, we went to New York to find out.  We were going to teach the Lean LaunchPad class in 5-days.   I was joined by my Startup Owners Manual co-author Bob Dorf, Alexander Osterwalder (author of Business Model Generation) and Fred Wilson of Union Square Ventures.

As we’ve done in previous classes, the students form teams and come up with an idea before the class.

Potential students watched an on-line video of Osterwalder explaining the Business Model Canvas and then applied for admission to the class with a fully completed business model canvas. Here are two examples:

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

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

The Class
We had 69 students in 13 teams. Instead of going around the room introducing themselves, each group hit the ground running by presenting their canvas.

The class organization was pretty simple:

• textbooks were The Startup Owners Manual and Business Model Generation
• team presentations 9-12:30 (with continual instructor critiques)
• working lunch 12:30-1:30 (with office hours)
• lecture 1:30-3:00
• get out of the building 3:00-on
• repeat for 5-days

Resources
The 5-day syllabus is here.

All 13 teams Day 1 presentations are here.
Day 2 presentations here.
Day 3 presentations here.
Day 4 presentations here.
Day 5 presentations here.

The Outcome
After 5 days the teams collectively had ~1,200 face-to-face customer interviews, with another 1,000+ potential customers surveyed on-line.

Take a look at the same two teams presentations (compare it to their slides above):

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

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

Lessons Learned:

• A five day Lean Launchpad Class is definitely worth doing.
• The Business Model Canvas + Customer Development works even in this short amount of time
  • However we were in NYC where customer density was high.
• As we’ve already found, this class needs to be taught as a joint engineering/mba class
• Next time we teach we will complete the transition to a flipped classroom:
  • Have no lectures during class. We’ll offer video lectures, and use the time for class labs built around detailed analysis of 2 or 3 canvas pivots
  • Make teams use Salesforce, or some similar package, to track all contacts/customer calls

(Look at the first wave of the web/mobile/cloud startups that have done just that:  Facebook, Twitter, Instagram, Match.com, Pandora, Zynga, WordPress, LinkedIn.)

It’s your turn.

Hard-wired
This week I’m in New York teaching a 5-day version of my Lean LaunchPad class at Columbia University.  While the class teaches a process to search and validate a business model, it does not offer any hints on how to create a killer startup idea.  So after teaching several hundred teams in the last few years, one of my students finally asked this question – “So how do we come up with an idea for the next billion dollar company?”

Is It a Problem or a Need?
I’ve now come to believe that the value proposition in a business model (value proposition is the fancy name for your product or service) fits into either one of two categories:

We now know how to teach entrepreneurs how to think about business models and use customer development to turn hypotheses into facts. But there is no process to teach how to get an epiphany. We can only try to create the conditions where this might occur.

————-

“I’m kind of embarrassed to tell you, but we dumped the entire business idea and are doing something else” he said, avoiding eye contact.  “Oh, you pivoted when your team analyzed customer feedback?” I said as I grabbed some coffee.  He looked uncomfortable. “No, I was standing in the shower when it just hit me that our nano-materials technology should be used for something completely different. I didn’t change a few business model components, I changed all of them.”

I guess my jaw dropped a bit because Luis just continued. “I’m feeling guilty because I was using Customer Development and the Startup Owners Manual until I had that insight. But there was nothing in your book that prepared me for what just clicked in my head. I just saw our entire new business model in a flash, all of it at once. I’m now having the company execute on what came to me in the shower. A small part of me is confused whether I’m doing the right thing, but mostly I’m just convinced it’s as right as anything I’ve ever done. But there’s no chapter in your book or anyone else’s on this.”

Realizing what I was hearing, I pulled Luis outside the conference room into the quiet of the hall. “Luis, did this ever happen to you before?” I asked.  “Well no, not in a startup, this stuff is new to me.” “No, I replied. “I mean in your lab. Did you ever have this feeling where it all just came to you? He thought for a bit as he stared in the distance and then responded, “Yeah, I never thought about that until now, but in fact I did. It felt a lot like when I was writing my thesis five years ago.  I had struggled with the data for two years. Then one weekend I went for a walk by the ocean to clear my head — and I had an insight that won me the fellowship. I had to spend six more months checking the data and working my tail off, but my thesis was awarded best paper of the year.”

I tried to stay calm as I realized what I was hearing.  “Luis, you need to pay attention to me very carefully. You just had an epiphany. If you’re lucky you may have a few more in your career. But while epiphanies are extremely rare, they are immensely important and need to be listened to. What you had was no accident. You were collecting enormous amounts of data on one side of your brain, but it was the other side that recognized the pattern. No one knows if epiphanies are always right, but people who follow them tend to get rich, famous or both.”

Epiphany Equals Insight
For thousands of years, every culture has had words to describe what happened to Luis: a flash of insight, an epiphany, strategic intuition, a revelation, etc. An epiphany is a different way of solving problems than the problem solving we do every day. In an epiphany, you see the entire answer to a complex problem without realizing you were even consciously thinking about it (very different from a snap answer or a quick response.)  We hear stories in almost every field, in art, science and business, about how “the idea just came to me.”

The Customer Development process was a result of an Epiphany I had when writing my memoirs. After 80 pages, I realized in one instant that the stories I had been recounting weren’t of interest (at least to anyone besides me), but the pattern behind the stories had much deeper meaning. Years later, the key ideas in the Startup Owners Manual came to me in the same way – realizing that startups are a search for a Business Model, and that the Business Model Canvas was the organizing principle for Customer Development. All of these insights came fully formed.

Getting Ready For the Epiphany
While we can describe an epiphany, we don’t know how to teach it or make it happen. But we do know how to set up the conditions for it to occur.

First interact with lots of people — the more they are different from you with different ideas, and different perspectives the better. (Getting out of the building in the Customer Development process guarantees you’ll do just that.) Next, attack whatever problem you’re working on head-on. In Customer Development that means building a set of business model hypotheses, and running customer discovery to test those hypotheses.  Most of the time you’ll be slogging through a ton of data operating in chaos trying to figure out what direction to take your company.

Here’s the part that’s counterintuitive – on a regular basis make time to take an hour, or even a day to do something completely different. Go for a hike or a drive. Walk around the city. Don’t distract yourself with something that makes you focus (the movies, TV, email or the net.)  Instead, shut it all down and do something that’s relaxing and gives the problem solving part of your brain a rest – let the pattern recognition side take over.

It can be challenging for an entrepreneur to slow down, disengage from the relentless pace and smell the roses.  But making this kind of time for your right brain to process what your left-brain has learned can bring you insights you’d never uncover otherwise.  You can’t force an epiphany but when it comes, you’ll know it.

You’ll be blinded by the light.

Lesson Learned

• An Epiphany is a moment of sudden revelation or insight
• Epiphanies cannot be planned or scheduled
• They require a constant stream of data, from multiple sources
• An Epiphany is a pattern recognition moment
• Often they match a pattern from a different industry or field
• They happen when you disengage from execution

A Startup Is a Temporary Organization Designed to Search
for A Repeatable and Scalable Business Model

1. There Are No Facts Inside Your Building, So Get Outside
2. Pair Customer Development with Agile Development
3. Failure is an Integral Part of the Search for the Business Model
4. If You’re Afraid to Fail You’re Destined to Do So
5. Iterations and Pivots are Driven by Insight
6. Validate Your Hypotheses with Experiments
7. Success Begins with Buy-In from Investors and Co-Founders
8. No Business Plan Survives First Contact with Customers
9. Not All Startups Are Alike
10. Startup Metrics are Different from Existing Companies
11. Agree on Market Type – It Changes Everything
12. Fast, Fearless Decision-Making, Cycle Time, Speed and Tempo
13. If it’s not About Passion, You’re Dead the Day You Opened your Doors
14. Startup Titles and Functions Are Very Different from a Company’s
15. Preserve Cash While Searching. After It’s Found, Spend
16. Communicate and Share Learning
17. Startups Demand Comfort with Chaos and Uncertainty

Nail the Manifesto to your Wall
Get your own Poster here: http://sblank.com/HpwmuN

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.

Part one of the posts on the NSF Innovation Corps is here, part two here. Syllabus for the class is here.  Textbook is here.

Here are some of the final Lessons Learned presentations and team videos:

Akara Solutions: Flexible, Low Cost Cooling Technology for LED Lighting
Principal Investigator: Satish Kandlikar Rochester Institute of Technology

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

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

Semiconductor-Based Hydrogen and Hydrocarbon Sensors
Principal Investigator: Lisa Porter Carnegie-Mellon University

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

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

Pilot Production Of Large Area Uniform Single-Crystal Graphene Films
Principal Investigator: Alan Johnson University of Pennsylvania

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

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

Radiotracer Synthesis Commercialization
Principal Investigator: Stephen DiMagno University of Nebraska-Lincoln

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

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

Commercialization of an Engineered Pyrolysis Blanket for the Conversion of Forestry Residues to Soil Amendments and Energy Products
Principal Investigator: Daniel Schwartz University of Washington

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

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

Photocatalysts for water remediation
Principal Investigator: Pelagia Gouma SUNY at Stony Brook

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

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

The other teams were equally interesting. Here are links to their Lessons Learned presentations.

IDecideFast – A web-based application for effective decision making for the layperson
Principal Investigator: Ali Abbas University of Illinois at Urbana-Champaign

Silicon Terahertz Electronics
Principal Investigator: Michael Shur  Rensselaer Polytechnic Institute

Standoff detection of explosives using novel signal-amplifying nanocomposite and hand-held UV light
Principal Investigator: Yu Lei University of Connecticut

MEMS-based drug infusion pumps
Principal Investigator: Ellis Meng University of Southern California

TexCone – Laser-Generated Surface Textures for Anti-Icing and Sun-Light-Trapping Applications
Principal Investigator: Mool Gupta University of Virginia

Concentric Technology
Principal Investigator: Walter Besio University of Rhode Island

Hand-Held Tonometer for Transpalpebral Intraocular Pressure Measurement
Principal Investigator:  Eniko Enikov University of Arizona

Artificial Membrane-based Ion Channel Screening
Principal Investigator: Jacob Schmidt University of California-Los Angeles

Privacy-Preserving Location Based Services
Principal Investigator: Nan Zhang   George Washington University

MySkinTone: A breakthrough technology and product for skin melanin evaluation
Principal Investigator: Michael Silevitch Northeastern University

Mobidemics: Using Mobile Gaming for Healthcare
Principal Investigator: Nilanjan Banerjee University of Arkansas

SmartMenu
Principal Investigator: Elizabeth Mynatt (mynatt@cc.gatech.edu); Georgia Tech Research Corporation

Sweet Sensors – Portable sensors using widely available personal glucose monitor
Principal Investigator: Yi Lu University of Illinois at Urbana-Champaign

SwiftVax – A Green Manufacturing Platform for Faster, Cheaper, and Scalable Vaccine Manufacturing
Principal Investigator: Karen McDonald University of California-Davis

Lessons Learned

• Yes, entrepreneurship can be taught
• No, there’s no age limit
• We now know how to reduce customer and market risk for new ventures
• The combination of government, researchers in academia and risk capital make a powerful accelerator for technology commercialization
• There’s at least one congressman who understands it

Team ParkPoint Capital
This team spoke face-to-face with 326 customers. As often happens, this team came into class convinced that their market research proved that their business was providing credit to underbanked customers.  8 weeks later they ended up as a financial service provider for immigrants.  Lots of learning and pivots on the way.

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

The ParkPoint Capital customer discovery narrative blog is here.

We thought the team summarized their lessons learned well:

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

Team DentalOptics
Team DentalOptics spoke face-to-face with 72 customers.  Their journey was from a lighting solution for dentists to an automated way to test for periodontal disease. How they got to their destination was truly amazing.

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

The DentalOptics customer discovery narrative blog is here.

Team MiCasa
They spoke to 105 customers and surveyed 98 more.

You can watch as this team pivots through Customer Segments by clicking through their business model canvases at the end of presentation. It is the first film-strip of entrepreneurship in action.

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

The MiCasa customer discovery narrative blog is here

Team ZiiLion
Interviewed 154 customers in China plus surveyed another 48.

This team was trying to do something extremely difficult. Create an app for Renren (a Chinese version of Facebook) for event planning.  And do it while in school in the U.S.  Lots of learning and Pivots here.

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

The Ziilion customer discovery narrative blog is here.

———

Congratulations to all the teams.  They taught us a lot.

Stanford e245 2012 class photo

Next week the Lean LaunchPad class will be taught to 25 teams for the National Science Foundation Innovation Corps. And later in the week we’ll be sharing what we learned with other entrepreneurial educators it at the NCIIA conference. Then in April we’ll be teaching Corporate Entrepreneurship at Columbia University.

Lessons Learned

• Class is a mix of engineering students and MBA’s
• Students apply as preformed teams
• Application to the class is the teams business model canvas
• Curriculum = business model canvas + customer development
• Minimal lecture, maximum experiential immersion
• Relentless customer visits (10-20 a week)
• On-line journal to document their customer discovery narrative
• One mentor (VC or experienced entrepreneur) per team
• Mandatory office hours
• Weekly in-class presentations for all teams
• Weekly critiques of team customer discovery progress
• Workshop on how to present a story-arc and narrative
• Lean LaunchPad teaching guide

It Feels Like 20 Years Ago Today
It’s hard to believe it’s only been a year since we taught the first 10 teams in the Stanford Lean LaunchPad class. To share what we learned, we blogged each of those class sessions, (all the slides can be found here.)  Since then we’ve taught an additional 50 Lean LaunchPad teams: 21 teams for the National Science Foundation (NSF) Innovation Corps, 11 teams for a joint Berkeley/Columbia MBA class, another 9 for a Berkeley MBA/Engineering class, and now 9 more teams in this Stanford Engineering Lean LaunchPad Class class.

Later this month, the next 25 National Science Foundation Innovation Corps teams will show up – but this time with reinforcements. The NSF has selected the best entrepreneurship teaching teams from two major universities and they will be joining the class. The goal is for them is to observe this class, then host and teach the next round of 50 NSF Innovation Corps scientist/engineer teams in July.  The process will repeat itself, quarter by quarter – new students, new University entrepreneurship teaching teams.

We’ll teach over 175 NSF Innovation Corps teams in the Lean LaunchPad course in 2012. While at the same time spreading the Lean LaunchPad entrepreneurship curriculum to campuses across the United States.

The 2012 Stanford Lean LaunchPad Presentations
The class is intensely and deliberately experiential to develop the mindset, reflexes, agility and resilience an entrepreneur needs to search for certainty in a chaotic world. Students were going to get a hands-on experience in how to start a new company. The premise of the class is that startups, are not about executing a plan where the product, customers, channel are known. Startups are in fact only temporary organizations, organized to search–not execute–for a scalable and repeatable business model.

Yet this isn’t an incubator. We trying to teach students a methodology that combines customer development, agile development, business models and pivots. (The slides and syllabus here describe the details of the class.) Our goal is to teach them the art, science and strategy of entrepreneurship that will forever change how they view early stage ventures.

And do it in 8 weeks.

Team EngineKites
A kite-boarding startup? Only in California! This team spoke face-to-face with 50+ end users, 3 manufacturers, 25 potential partners, 22 domain experts and surveyed an additional 115 customers. And they got to the beach a lot. Don’t miss their video of the product below.

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

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

The EngineKites customer discovery narrative blog is here.

Team Sync
Team Sync spoke face-to-face with 74 customers, 10 experts and surveyed another 103 customers.

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

The Sync customer discovery narrative blog is here.

Team Nudge/Dynamo
This team won the award for the most pivots in the class. They had face-to-face interviews with 252 customers + 10 partner interviews + 76 surveyed.

Loved the “evolution” slide.

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

The Nudge/Dyanmo customer discovery narrative blog is here

Team GameSpeed
These guys hold the record for the number of customers touched 4,000!  147 face-to-face or phone interviews.

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

The GameSpeed customer discovery narrative blog is here.

Team ColorWheels
This team was trying to solve a hard problem – getting girls engaged in science and engineering. They spoke to 294 people: 69 parents, 110 kids, 6 high school girls 32 experts, 6 manufacturers, and surveyed an addtional 68 parents.

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

The ColorWheels customer discovery narrative blog is here.

We Got Smarter Too
One of the great things about the class is that the curriculum is evolving as fast as the teams are learning. As a teaching team we’ve learned a ton of how to best select teams, so we now insist that they come in as preformed teams. We hold mixers a month or two in advance to help facilitate the process. It has made a dramatic difference in team efficiency and cohesion. 

We have the students formally apply for the class by filling out a business model canvas. And at the first class they introduce themselves and their teams by presenting the canvas. This moved the learning up by one entire class session since we can now hit the ground running.

Given how important the students work in customer discovery outside the building was, we made each team keep an online journal on each step of their progress. Since the teaching team read each of their narrative before class and office hours, it made their in-class presentations short and efficient.

We realized that students needed help turning all that they were learning from customers into a coherent and crisp presentation. So we offered a special evening workshop on how to present a story-arc and narrative.

We’ve been experimenting in other ways – trying to figure out how to “bubble-up” some of the customer discovery data onto the canvas with red/yellow/green dots you see on some of the business model canvas slides. We suggested that teams talk about their hypothesis tests, draw diagrams of product flows through the channel and let us know who the customer segment is with a “customer archetype” slide.

We’re about to move our class text to The Startup Owners Manual and put together a draft of a standard Lean LaunchPad teaching guide.

Finally, we’ve been paring the lectures back to the absolute minimum to impart the information necessary for the teams to move forward, but leaving more time for us to provide feedback and critique of their weekly presentations. We’re actively considering running an experiment of making the lectures an on-line homework requirement (with on-line quizzes to make sure they view the material.)

None of this would be possible without the two VC’s who volunteer their time to teach this Stanford class with me: Jon Feiber of Mohr Davidow Ventures and Ann Miura-ko of Floodgate,

And we had the help of Lisa Forssell, director of technical artists from Pixar, who taught the “how to present class” and Thomas Haymore our indefatigable Teaching Assistant and our team of mentors.

And hats off to Kathy Eisenhardt and Tom Byers of the Stanford Technology Ventures Program who gave us the freedom to invent and teach the class.

—–

The rest of the teams present next week.  We’ll post their slides in part 2.

When does a new venture focus on customer development and business models? And when do business planning and execution come into play?

Here’s an attempt to put this all in context.

Don’t Throw the Tomatoes
I was in Washington D.C. last week presenting at the ARPA-E conference. I spent the next day working with the National Science Foundation on the Innovation Corps, and talking to congressional staffs about how entrepreneurial educational programs can reshape our economy. (And I even found time to go to the Spy Museum.)

One of the issues that came up is whether the new lexicon of entrepreneurial ideas – Customer Development, Business Model Design, Lean, Lean LaunchPad class, etc. – replace all the tools and classes that are currently being taught in entrepreneurship curriculums and business schools.  I was a bit surprised since most of what I’ve been advocating is complementary to existing courses. However, I realize I’ve primarily written about business model design and customer development. Given that I’m speaking this month in front of entrepreneurship educators at the NCIIA conference, I thought I should put it in context before they throw tomatoes at me.

Search Versus Execution
One of the things startups have lacked is a definition of who they were. For years we’ve treated startups like they are just smaller versions of a large company. However, we now know that a startup is a temporary organization designed to search for a repeatable and scalable business model.  Within this definition, a startup can be a new venture or it can be a new division or business unit in an existing company.

If your business model is unknown – that is just a set of untested hypotheses- you are a startup searching for a repeatable business model. Once your business model (market, customers, features, channels, pricing, Get/Keep/Grow strategy, etc.) is known, you will be executing it. Search versus execution is what differentiates a new venture from an existing business unit.

Strategy

The primary objective of a startup is to validate its business model hypotheses (and iterate and pivot until it does.) Then it moves into execution mode. It’s at this point the business needs an operating plan, financial forecasts and other well-understood management tools.

Process

The processes used to organize and implement the search for the business model are Customer Development and Agile Development. A search for a business model can be in any new business – in a brand new startup new or in a new division of an existing company.

In search, you want a process designed to be dynamic, so you work with a rough business model description knowing it will change. The model changes because startups use customer development to run experiments to test the hypotheses that make up the model. And most of the time these experiments fail. Search embraces failure as a natural part of the startup process. Unlike existing companies that fire executives when they fail to match a plan, we keep the founders and change the model.

Once a company has found a business model (it knows its market, customers, product/service, channel, pricing, etc.), the organization moves from search to execution.

The product execution process – managing the lifecycle of existing products and the launch of follow-on products – is the job of the product management and engineering organizations. It results in a linear process where you make a plan and refine it into detail. The more granularity you add to a plan, the better people can execute it: a Business Requirement document (BRD) leads to a Market Requirements Document (MRD) and then gets handed off to engineering as a Functional Specifications Document (FSD) implemented via Agile or Waterfall development.

Organization

Searching for a business model requires a different organization than the one used to execute a plan. Searching requires the company to be organized around a customer development team led by the founders. In contrast, execution, (which follows search) requires the company to be organized by function (product management, sales, marketing, business development, etc.)

Companies in execution suffer from a “fear of failure culture“, (quite understandable since they were hired to execute a known job spec.) Startups with Customer Development Teams have a “learning and discovery” culture for search. The fear of making a move before the last detail is nailed down is one of the biggest problems existing companies have when they need to learn how to search.

The idea of not having a functional organization until the organization has found a proven business model is one of the hardest things for new startups to grasp. There are no sales, marketing or business development departments when you are searching for a business model.  If you’ve organized your startup with those departments, you are not really doing customer development.  (It’s like trying to implement a startup using Waterfall engineering.)

Education
Entrepreneurship curriculums are only a few decades old. First taught as electives and now part of core business school curriculums, the field is still struggling to escape from the bounds of the business plan-centric view that startups are “smaller versions of a large company.” VC’s who’ve watched as no startup business plan survived first contact with customers continue to insist that startups write business plans as the price of entry to venture funding. Even as many of the best VCs understand that the business ‘planning’ and not the ‘plan’ itself, are what is important.

The trouble is that over time – this key message has gotten lost. As business school professors, many of whom lack venture experience, studied how VCs made decisions, they observed the apparently central role of the business plan and proceeded to make the plan [not the planning], the central framework for teaching entrepreneurship. As new generations of VCs with MBA’s came into the business, they compounded the problem (“that’s how we always done it” or “that’s what I learned (or the senior partners learned) in business school.”)

Entrepreneurship educators have realized that plan-centric curriculum may get by for teaching incremental innovation but they’re not turning out students prepared for the realities of building new ventures. Educators are now beginning to build their own E-School curriculum with a new class of management tools built around “search and discovery.” Business Model Design, Product/Service Development, Customer Development, Startup Team-Building, Entrepreneurial Finance, Marketing, Founder Transition, etc. all provide the startup equivalent of the management tools MBAs learn for execution.

Instructional Strategy

Entrepreneurial education is also changing the focus of the class experience from case method to hands-on experience. Invented at Harvard, the case method approach assumes that knowledge is gained when students actively participate in a discussion of a situation that may be faced by decision makers.

The search for a repeatable business model for a new product or service is not a predictable pattern. An entrepreneur must start with the belief that all her assumptions are simply hypotheses that will undoubtedly be challenged by what she learns from customers. Analyzing a case in the classroom removed from the realities of chaos and conflicting customer responses adds little to an entrepreneur’s knowledge. Cases can’t be replicated because the world of a startup too chaotic and complicated. The case method is the antithesis of how entrepreneurs build startups – it teaches pattern recognition tools for the wrong patterns –  and therefore has limited value as an entrepreneurship teaching tool.

The replacement for cases are not better cases written for startups. Instead, it would be business model design – using the business model canvas as a way to 1) capture and visualize the evolution of business learning in a company, and 2) see what patterns match real world iterations and pivots. It is a tool that better matches the real-world search for the business model.

An entrepreneurial curriculum obviously will have some core classes based on theory, lecture and mentorship. There’s embarrassing little research on entrepreneurship education and outcomes, but we do know that students learn best when they can connect with the material in a hands-on way – personally making the mistakes and learning from them directly.

As much as possible the emphasis ought to be on experiential, learner-centric and inquiry-based classes that help to develop the mindset, reflexes, agility and resilience an entrepreneur needs to search for certainty in a chaotic world.

Lessons Learned

• The search for the business model is the front end of the startup process
• This is true in the smallest startup or largest company
• The goal is to find a repeatable/scalable model, and then execute
• Execution requires operating plans and financial forecasts
• Customer and Agile Development are the processes to search and build the model
• Product management is the process for executing the model
• Entrepreneurial education needs to develop its own management stack
  • Starting with how to design and search for a business model
  • Adding all the other skills startups needs
  • The case-method is the antitheses of an entrepreneurial teaching method

Five Cups of Coffee
I got a call from Satish, one of my ex-students last week. He got my attention when he said, “following your customer development stuff is making my company fail.” The rest of the conversation sounded too confusing for me to figure out over the phone, so I invited him out to the ranch to chat.

When he arrived, Satish sounded like he had 5 cups of coffee. Normally when I have students over, we’d sit in the house and we’d look at the fields trying to catch a glimpse of a bobcat hunting.  But in this case, I suggested we take a hike out to Potato Patch pond.

Potato Patch Pond
We took the trail behind the house down the hill, through the forest, and emerged into the bright sun in the lower valley. (Like many parts of the ranch this valley has its own micro-climate and today was one of those days when it was ten degrees warmer than up at the house.)

As we walked up the valley Satish kept up a running dialog catching me up on six years of family, classmates and how he started his consumer web company. It had recently rained and about every 50 feet we’d see another 3″ salamander ambling across the trail. When the valley dead-ended in the canyon, we climbed 30-foot up a set of stairs and emerged looking at the water. A “hanging pond” is always a surprise to visitors. All of a sudden Satish’s stream of words slowed to a trickle and just stopped. He stood at the end of the small dock for a while taking it all in. I dragged him away and we followed the trail through the woods, around the pond, through the shadows of the trees.

As we circled the pond I tried to both keep my eyes on the dirt trail while glancing sideways for pond turtles and red-legged frogs. When I’m out here alone it’s quiet enough to hear the wind through the trees, and after awhile the sound of your own heartbeat. We sat on the bench staring across the water, with the only noise coming from ducks tracing patterns on the flat water. Sitting there Satish described his experience.

We Did Everything Customers Asked For
“We did every thing you said, we got out of the building and talked to potential customers. We surveyed a ton of them online, ran A/B tests, brought a segment of those who used the product in-house for face-to-face meetings. ” Yep, sound good.

“Next, we built a minimum viable product.”  Ok, still sounds good.

“And then we built everything our prospective customers asked for.”  That took me aback. Everything?  I asked?  “Yes, we added all their feature requests and we priced the product just like they requested.  We had a ton of people come to our website and a healthy number actually activated.”  That’s great I said, “but what’s your pricing model?’  ”Freemium,” came the reply.

Oh, oh. I bet I knew the answer to the next question, but I asked it anyway.  “So, what’s the problem?”

“Well everyone uses the product for awhile, but no one is upgrading to our paid product. We spent all this time building what customers asked for. And now most of the early users have stopped coming back.”

I looked at hard at Satish trying to remember where he had sat in my class.  Then I asked, “Satish, what’s your business model?

What’s your business model?
“Business model?  I guess I was just trying to get as many people to my site as I could and make them happy. Then I thought I could charge them for something later and sell advertising based on the users I had.”

I pushed a bit harder.

“Your strategy counted on a freemium-to-paid upgrade path. What experiments did you run that convinced you that this was the right pricing tactic? Your attrition numbers mean users weren’t engaged with the product. What did you do about it?”

“Did you think you were trying to get large networks of engaged users that can disrupt big markets? Large” is usually measured in millions of users. What experiments did you run that convinced you could get to that scale?”

I realized by the look in his eyes that none of this was making sense. “Well I got out of the building and listened to customers.”

The wind was picking up over the pond so I suggested we start walking.

We stopped at the overlook a top of the waterfall, after the recent rain I had to shout over the noise of the rushing water. I offered that it sounded like he had done a great job listening to customers. And better, he had translated what he had heard into experiments and tests to acquire more users and get a higher percentage of those to activate.

But he was missing the bigger picture. The idea of the tests he ran wasn’t just to get data – it was to get insight.  All of those activities – talking to customers, A/B testing, etc. needed to fit into his business model – how his company will find a repeatable and scalable business model and ultimately make money.  And this is the step he had missed.

Customer Development = The pursuit of customer understanding
Part of Customer Development is understanding which customers make sense for your business.  The goal of listening to customers is not please every one of them.  It’s to figure out which customer segment served his needs – both short and long term. And giving your product away, as he was discovering, is often a going out of business strategy.

The work he had done acquiring and activating customers were just one part of the entire buisness model.

As we started the long climb up the driveway, I suggested his fix might be simpler than he thought.  He needed to start thinking about what a repeatable and scalable business model looked like.

I offered that getting acquiring users and then making money by finding payers assumed a multi-sided market (users/payers). But a freemium model assumed a single-sided market – one where the users became the payers.

He really needed to think through his Revenue Model (the strategy his company uses to generate cash from each customer segment). And how was he going to use Pricing, (the tactics of what he charged in each customer segment) to achieve that Revenue Model.  Freemium was just one of many tactics. Single or multi-sided market? And which customers did he want to help him get there?

My guess was that he was going to end up firing a bunch of his customers – and that was OK.

As we sat back in the living room, I gave him a copy of The Startup Owners Manual and we watched a bobcat catch a gopher.

Lessons Learned

• Getting out of the building is a great first step
• Listening to potential customers is even better
• Getting users to visit your site and try your product feels great
• Your job is not to make every possible customer happy
• Pick the customer segments and pricing tactics that drive your business model

The idea of a Business Model competition first emerged when I realized that Business Plan writing ought to be taught in English Departments – as they’re the best example of creative writing entrepreneurs will ever do.

The Business Plan 
- a roadmap for execution
When venture capital teamed up with technology entrepreneurs in the 1960’s they brought with them the canonical MBA planning tool – the business plan.

The business plan is a wonderful document for organizing and planning for existing companies to launch follow-on products. In an existing corporation, the business plan is the execution document for sustaining innovation.

The problem is that once a plan is written it’s static and assumes minimal new learning. This makes sense in a company where your customers, channel and competition are known. And your revenue plan is something more than a hallucination.  But for startups, business plans fail to match the chaotic reality they encounter in the real world. Yet year after year, decade after decade, VC’s would watch as no startup business plan survived first contact with customers. So what did the venture industry do? They kept insisting startups write business plans as the price of entry to venture funding.

Why?

VC’s thought of startups as smaller versions of large companies.  Large companies wrote business plans, so VC’s made startups write business plans.  Large companies had VP’s of Sales and Marketing, so VC’s made startups organize that way as well. Large companies executed plans well and when they didn’t work, they fired the executives who screwed up.  So VC’s assumed that startups should equally unfold per the plan – firing executives when reality intruded.

The reality is that startups needed a new class of management tools. Tools to help them manage the search for a repeatable and scalable business model. Startups needed tools to help them organize their hypotheses, and then needed a process to rapidly test those hypotheses. And they needed tools that recognized that most startups go from failure to failure as they searched for, and discovered, product/market fit. And that instead of firing executives to match a plan, it was the plan itself that needed to rapidly iterate.

Business Plan vs. Business Model + Customer Development
The term business model first appeared ~50 years ago, but the concept didn’t catch on until the 1990’s. It wasn’t until 2010 when Alexander Osterwalder published his book Business Model Generation that it became clear that this was the tool to organize startup hypotheses.

It wasn’t long before Alexander and I realized that organizing hypotheses with his canvas was just the first step in building a business. The next step was getting out of the building and testing the business model in a formal process – and that process is Customer Development.

We’ve blogged about the combined methodologies here and here.  Our Lean LaunchPad class at Stanford, Berkeley, Columbia and the National Science Foundation teach the combined Business Model Canvas + Customer Development tools.  My new book, The Startup Owners Manual integrates the two.

Three years ago, after watching my nth business plan competition I realized this was simply wrong.  Rather than having students invest months writing a 100-page tome and polishing slides that taught them almost nothing about what it was really like to build a company, I thought there had to be a better way.

I suggested that we hold competitions that actually emulated the real world (rather than what’s easy to grade) and hold competitions that emulate what entrepreneurs actually encounter – chaos, uncertainty and unknowns. A business model competition would emulate the “out of the building” experience of real entrepreneurs executing the customer development / business model / agile development stack.

You can write a business plan slide deck in your dorm or library.  But you can’t fake a business model/customer development presentation. It takes a ton of face-face customer interactions.

The International Business Model Competition
From the seed of this initial idea Professor Nathan Furr at BYU did the hard work and created a global business model competition, this year receiving over 100 submissions. The finals were held in the packed 1,000 seat BYU auditorium with lines of students outside unable to get in.

(I love walking around the BYU campus. It feels like being at a giant Eagle Scout convention.)

It was an eye-opener to see each of the teams take the stage to describe their journey in trying to validate each of the 9 parts of a business model, rather than the static theory of a business plan.

Each team used the business model canvas and customer development stack to go from initial hypotheses, getting outside the building to validate their ideas with customers, and going through multiple pivots to find a validated business model.

All of the Business Model finalists were pretty amazing.   Each one of these presentations moved the teams closer to building a real company.

This years winner were:

1. XoomPark, BYU

The “Startup Owner’s Manual” goes On Press Tuesday 2/14
Two years in the making and literally ten years in development, I’m proud to announce that my new book, The Startup Owners Manual, goes onto the printing press next Tuesday.  This 608-page work is, as its subtitle says, “the step-by-step guide for building a great company.”  It’s the result of a decade of me learning from 1,000′s of entrepreneurs, corporate partners, students and scientists the best practices of what wins in startups. I’ve spent the last two years cramming knowledge into this new book.

In brief, the The Startup Owners Manual is far more detailed and more readable than Four Steps to the Epiphany, (most of the sentences are even finished!).  In fact, you could say that all that remains from my last book are the four steps of Customer Development.  Briefly, the new book:

• Integrates Alexander Osterwalders “Business Model Canvas” as the front-end and “scorecard” for the customer discovery process.
• Provides separate paths and advice for web/mobile products versus physical products
• Offers a ton of detail and great tips on how to get, keep, and grow customers, recognizing that this happens very differently between web and physical channels.
• and finally it teaches a “new math” for startups: “metrics that matter.”

The Lean LaunchPad Online Class
My online Lean LaunchPad class has created a lot of buzz this week. As you may have heard, I was deep into the production of the lectures when I realized I was producing the wrong class.  The online class was originally based on my book The Four Steps to the Epiphany.

Only when I held the draft of my latest book, The Startup Owners Manual, in my hands, did it dawn on me that my online students deserved all the latest best practices of entrepreneurship and Customer Development. Not the stuff I taught a decade ago, but all that I’ve learned teaching the Lean LaunchPad in front of students at Stanford, Berkeley, Columbia and the National Science Foundation in the last year.  And I particularly wanted to incorporate everything I’ve spent two years integrating into The Startup Owners Manual into the class.

So apologies to all of you who were expecting the class this month.  I hope to get the updated version online in the next 60 days.  I’ll keep you updated on this blog as we record our lectures.

In the meantime, if you want to prepare for the class…or get a jump on your startup competition, you can start reading the “recommended text” for the online class right now by ordering my new book.  It is recommended—not required—reading for the free online course, and I believe it will be immensely helpful to the startup community at large.

Lessons Learned

• Startups search for business models, exisitng companies execute them
• There are tons of texts about execution, but a paucity of practical ones for founders on how to search
• The Startup Owners Manual is the definitive reference book for founders, investors and everyone interested in startups
• The Lean Launchpad on-line class will be based on the new book

But the total movie industry revenue was $87 billion. Where did the other $57 billion come from?

From sources that the studios at one time claimed would put them out of business: Pay-per view TV, cable and satellite channels, video rentals, DVD sales, online subscriptions and digital downloads.

The Movie Industry and Technology Progress
The music and movie business has been consistently wrong in its claims that new platforms and channels would be the end of its businesses. In each case, the new technology produced a new market far larger than the impact it had on the existing market.

• 1920’s – the record business complained about radio. The argument was because radio is free, you can’t compete with free. No one was ever going to buy music again.
• 1940’s – movie studios had to divest their distribution channel – they owned over 50% of the movie theaters in the U.S. “It’s all over,” complained the studios. In fact, the number of screens went from 17,000 in 1948 to 38,000 today.
• 1950’s – broadcast television was free; the threat was cable television. Studios argued that their free TV content couldn’t compete with paid.
• 1970’s – Video Cassette Recorders (VCR’s) were going to be the end of the movie business. The movie businesses and its lobbying arm MPAA fought it with “end of the world” hyperbole. The reality? After the VCR was introduced, studio revenues took off like a rocket.  With a new channel of distribution, home movie rentals surpassed movie theater tickets.
• 1998 – the MPAA got congress to pass the Digital Millennium Copyright Act (DMCA), making it illegal for you to make a digital copy of a DVD that you actually purchased.
• 2000 – Digital Video Recorders (DVR) like TiVo allowing consumer to skip commercials was going to be the end of the TV business. DVR’s reignite interest in TV.
• 2006 - broadcasters sued Cablevision (and lost) to prevent the launch of a cloud-based DVR to its customers.
• Today it’s the Internet that’s going to put the studios out of business. Sound familiar?

Technology Innovation
The movie industry was born with a single technical standard – 35mm film, and for decades had a single way to distribute its content – movie theaters (which until 1948 the studios owned.) It was 75 years until studios had to deal with technology changing their platform and distribution channel. And when it happened (cable, VCR’s, DVD’s, DVR’s, the Internet,) it was a relentless onslaught. The studios responded by trying to shut down the new technology and/or distribution channels through legislation and the courts.

Regulation/Legislation
But why does the movie business think their solution is in Washington and legislation?

History and success.

In the 1920’s individual states were beginning to censor movies and the federal government was threatening to do so as well. The studios set up their own self censorship and rating system keeping most sex and politics off the screen for 40 years. Never again wanting to be at the losing side of a political battle they created the movie industry’s lobbying arm, MPAA.

By the 1960’s, the MPPA achieved regulatory capture (where an industry co-opts the very people who are regulating it,) when they hired Jack Valenti, who ran the studios’ lobbying efforts for the next 38-years. Ironically, it was Valenti’s skill in hobbling competitive innovation that negated any need for studios to develop agility, vision and technology leadership.

Management of Innovation
The introduction of new technology is always disruptive to existing markets, particularly to content/copyright owners whose sell through well-established distribution channels. The incumbents tend to have short-sighted goals and often fail to recognize that more money can be made on new platforms and new distribution channels.

In an industry facing constant technology shifts the exec staff and boards of the studios have lawyers, MBAs and financial managers, but no management skill in dealing with disruption. So they rely on lobbying ($110 million a year,) lawsuits, campaign contributions (wonder why the President won’t be vetoing SOPA?) and Public Relations.

Ironically, the six major movie studios have a great technology lab in Silicon Valley with projects in streaming rights, Video On Demand, Ultraviolet, etc. But lacking the support from the studio CEOs or boards, the lab languishes in the backwaters of the studios’ strategy.  Instead of leading with new technology, the studios lead with litigation, legislation and lobbying. (Imagine if the $110 million/year spent on lobbying went to disruptive innovation.)

Piracy
One of the claims that studios make is that they need legislation to stop piracy. The fact is piracy is rampant in all forms of commerce. Video games and software have been targets since their inception. Grocery and retail stores euphemistically call it shrinkage. Credit card companies call it fraud.  But none use regulation as often as the movie studios to solve a business problem. And none are so willing to do collateral damage to other innovative industries (VCRs, DVRs, cloud storage and now the Internet itself.)

The studios don’t even pretend that this legislation benefits consumers. It’s all about protecting short-term profit.

SOPA
When lawyers, MBAs and financial managers run your industry and your lobbyists are ex-Senators, understanding technology and innovation is not one of your core capabilities.

The SOPA bill (and DNS blocking) is what happens when someone with the title of anti-piracy or copyright lawyer has greater clout than your head of new technology. SOPA gives corporations unprecedented power to censor almost any site on the Internet. It’s as if someone shoplifts in your store, SOPA allows the government to shut down your store.

History has shown that time and market forces provide equilibrium in balancing interests, whether the new technology is a video recorder, a personal computer, an MP3 player or now the Net. It’s prudent for courts and congress to exercise caution before restructuring liability theories for the purpose of addressing specific market abuses, despite their apparent present magnitude.

What the music and movie industry should be doing in Washington is promoting legislation to adapt copyright law to new technology — and then leading the transition to the new platforms.

The U.S. State Department has been championing the Internet Freedom initiative across the world. Secretary of State Clinton said, “…when ideas are blocked, information deleted, conversations stifled, and people constrained in their choices, the Internet is diminished for all of us.”

It’s too bad the head of the MPAA – an ex Senator - made a mockery of her words when he wondered “why our online censorship can’t be like China?”

We wonder, “Why can’t the film industry innovate like Silicon Valley?”

Lessons Learned

• Studios are run by financial managers who lack the skills to exploit disruptive innovation
• Studio anti-piracy/copyright lawyers trump their technologists
• Studios have no concern about collateral damage as long as it optimizes their revenue
• Studios $110M/year lobbying and political donations trump consumer objections
• Politicians votes will follow the money unless it will cost them an election

I was lucky enough to get interviewed by Ron Morris of American Entrepreneur Radio.

Ron Morris has a great “radio voice,” and actually seemed to understand what the heck I was talking about.  It made for a fun interview.

Click here to listen to the interview: Steve Blank American Entrepreneur Radio interview

The following week Ron Morris interviewed Regis McKenna, who for decades was the “gold standard” for high tech Public Relations in Silicon Valley. Click here to listen to the Regis interview.

.

The 21 NSF teams had been out of the classroom for just 15 hours as they filed back in with their business model canvas presentations.  Their assignment appeared (to them) to be deceptively simple:

• Write down their initial hypotheses for the 9 components of their company’s business model (who are the customers? what’s the product? what distribution channel? etc.)
• Come up with ways to test each of the 9 business model canvas hypotheses
  • Decide what constitutes a pass/fail signal for the test. At what point would you say that your hypotheses wasn’t even close to correct?
• Consider if their business worth pursuing? (Give us an estimate of market size)
• Start their team’s blog/wiki/journal to record their progress during for the class 

Teaching logistics
Each week every team presented a 5-minute summary of what they had done and what they learned that week. As each team presented, the teaching team would ask questions and give suggestions (at times direct, blunt and pointed) for things the students missed or might want to consider next week.

While the last sentence is short, it’s one of the key elements that made the class effective. Between the three of us on the teaching team there was 75 years of entrepreneurial experience. (The 2 VC’s between them probably have seen 1000′s of presentations.) While there’s no guarantee our comments were correct or we had any unique insight, we did have enough data for pattern recognition.

The instructors sat in the back of the room and used a shared Google spreadsheet for grading. We graded the teams on a scale of 1-10 and each of us left detailed comments the other teaching team members could share and comment on. Week after week it gave us a pretty detailed record of the progress and trajectory of each team.

(As great as the presentations may be, sitting through 21 of them in a row were exhausting. After this first cohort, the NSF will be putting 25 teams at a time in a class. We intend to break the group into three parallel presentation sections.)

All teams kept a blog – almost like a diary – to record everything they did outside the building. This let the teaching team keep tabs on their progress and offer advice in-between class sessions.

Getting the teams to blog required constant “encouragement,” but it was invaluable. First, as we had a window into each teams engagement with customers, it eliminated most of the surprises when they came into class to present. Second, the blog helped us see if they were gaining insight from their customer discovery. Insight is what enables entrepreneurs to iterate and pivot their business model. The goal wasn’t just to talk to lots of people – the goal was to learn from them. Finally, their blogs gave us and them a permanent record of who they talked to. Over time this contextual contact list will be turned into a shared contact database for all future NSF teams.

The 21 Teams Present
The first team up was Arka Lighting. We liked these guys, but for a while no one on the teaching team could figure out what their core technology was. We knew they wanted to make LED lights that had better performance because they would dissipate less heat.  Finally when we understood that their core technology was heat pipes, it wasn’t clear why that made them a better LED supplier.  Were they selling to end users? OEMs? Manufacturers? We suggested that perhaps they had jumped to too many assumptions.

If you can’t see the slide deck above, click here

Next up was SenSevere – solid-state hydrogen and hydrocarbon sensors for use in severe environments.  They were going to start with the $81M Chlorine market where they already had a partner. It seemed like a tiny business. Did they just want to become a licenser of technology? Were their other severe environments that their sensors fit into? Did customers just want the sensors or a more complete sensing solution?

If you can’t see the slide deck above, click here

Graphene Frontiers was next. Graphene is incredibly cool. It’s touted as the new “wonder material” and its inventors won the 2010 Nobel Prize in Physics. The team wanted to make wafer-scale Graphene films. And do it at ambient pressure. But their proposed products seemed like research lab selling other research labs low volume products. It seemed liked technology in search of a business. Reading the Graphene Frontiers blog for the first week, we realized that in a burst of enthusiasm they set up a Google AdWords campaign to drive traffic to their site!

If you can’t see the slide deck above, click here

Ground Flour Pharma was going to take Fluorine-18 and make a new generation of fluorodeoxyglucose (FDG) radiotracers for Positron emission tomography scanners. But it wasn’t clear who benefits enough to make this a business. If they need FDA trials is it worth the money needed for approval? Is this just a technology license or is it a company?

If you can’t see the slide deck above, click here

C6 Systems had a great set of photos with things on fire in the woods. It seemed like they were going to burn downed trees to do what? Make charcoal? It looked like fun but is this a hobby or a scalable business? Is their any patentable Intellectual Property? What was their Value Chain? Their blog showed a good head-start on talking to customers.

If you can’t see the slide deck above, click here

Photocatalyst made nanogrids that became miniaturized self-supported mats, similar to fishing nets, that float on water and rapidly decompose crude oil using sunlight. The result is that pollutants are turned into water, carbon dioxide and other biodegradable organics for environmental remediation. Their slides sounded like a technical presentation of nanocatalyst features but their blog showed that they had been actively talking to customers in the last two days.

If you can’t see the slide deck above, click here

After the teams presented it was the turn of the teaching team.  We presented our second lecture, this time on “Value Proposition.”

If you can’t see the slide deck above, click here

For tomorrow, the teams had 15-hours to get out of the building and talk to 10-15 customers and test their Value Proposition.

While most of the teams got on the phone or into their cars, a couple of others complained, “You didn’t tell us we were supposed to use our spare time to talk to customers. We thought this was just spare time.”

At first, I thought they were joking. Spare time? I don’t think you understand the key principle in a startup – there is no such thing as spare time. The clock is running and you’re burning cash.

Go!

They launched an incubator for the top scientists and engineers in the U.S.

This week we saw the results.

63 scientists and engineers in 21 teams made 2,000 customer calls in 8 weeks, turning laboratory ideas into formidable startups. 19 of the 21 teams are moving forward in commercializing their technology.

It was an extraordinary effort.

Your Country Needs You
In July I got a call from Errol Arkilic, a program manager at the National Science Foundation (NSF), the $6.8-billion U.S. government agency that supports research in all the non-medical fields of science and engineering.  “We’ve been reading your blog about your Lean Launchpad class.”  Wow, that’s nice, I thought, a call from a fan. No, the conversation was about to get more interesting.

“Our country needs you.” Say what? “Part of the NSF charter is to commercialize the best of the science and engineering research we fund. We want to make a bet that your Lean Launchpad class can apply the scientific method to market-opportunity identification. We think your class can train scientists to start companies better than how we’re doing it now.”  Uh oh, where’s this heading?  “We want to select the best of our researchers, pay them $50,000 to take your class and see if we can change the outcome of their careers and their research.”

“That’s great, maybe I can set up a class for you next year,” I replied.  The answer shot back, “We want the class to start in 90 days,”

I remember thinking, “Wow, whoever’s on the other end of phone sounds just like an entrepreneur, they were asking for the impossible.”  Just as I was computing whether this was possible, he added, “And we want to bring 25 new teams every quarter.”

So of course, I said yes.

While they’ll never admit it, the National Science Foundation was starting an incubator – the Innovation Corps – to take the most promising research projects in American university laboratories and turn them into startups.

The Innovation Corps – Using the Lean LaunchPad as an Incubator for Scientists and Engineers

The Innovation Corps Startup Team
These weren’t 22-year olds who wanted to build a social shopping web site. Each of the teams selected by the NSF had a Principal Investigator – a research scientist who was a University professor; an Entrepreneurial Lead – a graduate student working in the Investigator’s lab; and a mentor from their local area who had business and/or domain expertise. And they were hard at work at some real science.

The I-Corps Incubator Program
Unlike other incubators, our Lean LaunchPad Class had a specific curriculum. We taught them the business model / customer development / agile development solution stack. This methodology forces rapid hypothesis testing and Customer Development by getting out of the building while building the product. (The mentors in our program are there to support the methodology, but aren’t there to tell stories.)

The gamble was that we could train Professors doing hard-core science, who had never been near a startup or Silicon Valley, to get out of the building and talk to customers and Pivot as easily as someone at a web startup.

The Scientists, the NSF and the teaching team were all going to go where no one had before.

Given that Silicon Valley had started with scientists and engineers not MBA’s, I thought this was a bet worth making.

The Curriculum
Since the teams were in Universities scattered across the U.S., we couldn’t keep them in Silicon Valley for all 8 weeks, so we tried an experiment in teaching remotely.

First, we brought all 21 teams to Stanford for 3-days of 10 hour-a-day classes in business model design and customer development. After returning to their schools, they got out of their labs while they built their products. Once a week, via Webex,they presented their Customer Development progress on line to the teaching team and the other teams. Then it was our turn, and we lectured all the teams remotely. After 7 weeks they returned to Silicon Valley for their final presentations.

(The class syllabus is here. The class textbooks were “The Four Steps to the Epiphany and Business Model Generation.”)

Assembling the Teaching Team
We recruited two veteran Venture Capital partners to be part of the 10-week teaching team: Jon Feiber, at Mohr Davidow and John Burke of True Ventures. Alexander Osterwalder joined us for the opening day, and Oren Jacob, ex-CTO of Pixar joined us for a finale.

The First Class
As the first class settled into their seats at Stanford I wondered if we were going to be able to get them to act like startups. Most of the Principal Investigators were professors. Some had their own labs managing large groups of researchers. Their average age was in the mid-40’s. Their mentors were at least that old. Only the Entrepreneurial Leads (the PI’s assistants) were in their mid to late 20’s.

Looking at them  I wondered if: 1) hard-core science and engineering projects could rapidly pivot, 2) if the Principal Investigators would simply “assign” the work to their graduate students. I thought about the common wisdom that only 20-year olds doing Internet startups could be agile. Some incubators would have labeled this group too old to be entrepreneurs. I smiled as I realized that I was older than most (but not all) of them.

The Stanford Lectures
Our first lecture was about 1) how to organize their thinking of what it takes to build a startup – the business model canvas and 2) how to test their hypotheses – the Customer Development Process.

Since the first part of the lecture was about Alexander Osterwalder’s Business Model Canvas, Osterwalder flew in from Switzerland to teach slides 20-76. And since the rest of the slides were about Customer Development, I taught those.

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

The homework for the 21 teams in the next 24-hours? Come up with a business model canvas for their startup. And tell us how they will test each of their business model hypotheses.

As day one ended, I wondered what those canvases would look like.

Stay tuned for Part 2.

Over the last 40 years Technology investors have learned that the success of startups are not just about the technology but “it’s about the team.”

We spent a year screwing it up in our Lean LaunchPad classes until we figured out it was about having the right team.

Startup Team Lessons Learned
During the last 12 months we’ve taught 42 entrepreneurial teams with 147 students at Stanford, Berkeley, Columbia and the National Science Foundation. (As many teams as most startup incubators.)

Get into the Class
When I first started teaching hands-on, project/team entrepreneurship classes we’d take anyone who would apply. After awhile it became clear that by not providing an interview process we were doing these students a disservice. A good number of them just wanted an overview of what a startup was like – an entrepreneurial appreciation class (and we offer some great ones.) But some of our students hadn’t yet developed a passion for entrepreneurship and had no burning idea that they wanted to bring to market. Yet in class they’d be thrown into a “made-up in the first week” startup team and got dragged along as a spear-carrier for someone else’s vision.

Step One – Set a Bar
So as a first step we made students formally apply and  interview for the Lean LaunchPad class. We were looking for entrepreneurs who had great ideas and interest in making those ideas really happen. We’d hold mixers before the first class and the students would form their teams during week one of the class.

But we found we were wasting a week or more as the teams formed and their ideas gelled.

Step Two – Apply As A Team
So next time we taught, we had the students apply to the class as a team. We hold information sessions a month or more before the classes. Here students with preformed teams could come and have an interview with the teaching team and get admitted. Or those looking to find other students to join their team could mix and market their ideas or join others and then interview for a spot. This process moved the team logistics out of class time and provided us with more time for teaching.

But we had been selecting teams for admission on the basis of whether they had the best ideas. We should have known better.  In the classroom, as in startups, the best ideas in the hands of a B team is worse than a B idea in the hands of a world class team.

Here’s why.

Step Three – Hacker/Hardware, Hustler, Designer, Visionary
As we taught our Lean LaunchPad classes we painfully relearned the lesson that team composition matters as much or more than the product idea. And that teams matter as much in entrepreneurial classes as they do in startups.

In a perfect world you build your vision and your customers would run to buy your first product exactly as you spec’d and built it. We now know that this ‘build it and they will come” is a prayer rather than a business strategy.  In reality, a startup is a temporary organization designed to search for a repeatable and scalable business model. This means the brilliant idea you started with will change as you iterate and pivot your business model until you find product/market fit.

The above paragraph is worth reading a few times.

It basically says that a startup team needs to be capable of making sudden and rapid shifts – because it will be wrong a lot. Startups are inherently chaos. Conditions on the ground will change so rapidly that the original well-thought-out business plan becomes irrelevant.

And finding product/market fit in that chaos requires a team with a combination of skills.

What skills? Well it depends on the industry you’re in, but generally great technology skills (hacking/hardware/science) great hustling skills (to search for the business model, customers and market,) great user facing design (if you’re a web/mobile app,) and by having long term vision and product sense. Most people are good at one or maybe two of these, but it’s extremely rare to find someone who can wear all the hats.

It’s this combination of skills is why most startups are founded by a team, not just one person.

University Silos
While building these teams are hard in the real world, imagine how hard it is in a university with classes organized as silos. Business School classes were only open to business school students, Engineering School classes were only open to engineering school students, etc. No classes could be cross-listed. This meant that you couldn’t offer students an accurate simulation of what a startup team would look like. (In our business school classes we had students with great ideas but lacking the technical skills to implement it. And some of our engineering teams could have benefited from a role-model to follow as a hustler.)

So the next time we taught, we managed to ensure that the class was cross-listed and that the student teams had to have a mix of both business and engineering backgrounds.

I think we’ve finally got the team composition right – relearning all the lessons investors already knew.

But now on to the next goal – getting our mentor program correct.

Lessons Learned

• Finding product/market fit in startup chaos requires a team with a combination of skills
• Hacker/Hardware, Hustler, Designer, Visionary
• At times an A+ market (huge demand, unmet need) may trump all
• Getting the Mentors right is the next step

Steve Jobs

Watching an entrepreneur fail is sad, but watching them fail from a lack of nerve is tragic.

Excitement
At the beginning of this year Bob, one of my ex-students was in entrepreneurial heaven. He had an idea for a new class of enterprise software insight-as-a-service based on big data web analytics as a Cloud/SaaS (Software As a Service) application.

Bob had taken to heart the business model canvas and Customer Development lessons. After graduating he put together a prototype and had quickly marched through Customer Discovery, iterating his product with the help of CIOs and Fortune 1000 IT departments.

I had made one of the introductions to a Fortune 100 CIO’s so I got to hear his progress from both him and the CIO.

Takeoff
After 90 days, things seemed to be moving at startup speed. Bob had a backlog of users wanting to try his application, and the corporate IT people who were trying his early prototype said, “It’s crude, we hate the user interface, it’s missing lots of features – but we’ll kill you if you try to take it away from us.”

I pointed a VC who followed the space to the CIO who was testing the prototype. The VC told me the CIO wouldn’t get off the phone. He kept telling him he couldn’t remember when he had seen an enterprise software product with so much promise. The VC checked with other IT users and heard the same reaction. It was a “gotta use it, don’t take it away, we’ll have to buy it” product. After a demo and lunch, the VC (who normally did later stage deals) wrote my ex student a check for a seed round.

Life couldn’t be better.

I followed Bob progress in bits and pieces from updates from the CIO, the VC and his emails and blogs. He seemed to be on the fast track to startup success. But pretty soon a few worrying warning signs appeared.

The first thing that I noticed was that Bob couldn’t seem to find a co-founder. I wasn’t close enough to know if he wasn’t really looking for one, but given the early success he was having, it seemed a bit odd. But the next thing really got me concerned. Bob started hiring second rate developers. At best they were B- players.

Stall
A month went by, and the product stopped getting better. The U/I still sucked, and new features had stopped appearing. The next month, the same thing. I got a call from my CIO friend asking, “what was going on?” He said, “It was a great prototype, we would have loved to deploy it company-wide, and I hate to let it go, but it looks like Bob company just lost interest in developing it. I’m going to dump it and look for a substitute.” So I called Bob and suggested we grab a coffee.

I asked him how things were going and got the update on how the earlyvangelists were using the product. As I had heard, they were ecstatic. But Bob said he was worried he hadn’t found the right customer segment yet. “I’m not sure I can get all of these guys to pay me big bucks,” he said. “That’s why I stopped coding, and I’m spending all my time out in the field still talking to more customers.” “What does your VC’s say you ought to be doing?” I asked.  “Oh, he hasn’t had much time for me, his firm almost never does seed deals. It turns out I was an exception.”  Oh, oh.

The conversation was starting to make the hair on the back of my neck stand up. Bob had gotten to a place most founders never do – his product was a “gotta have it for people with big budgets.” He should have been back rapidly coding, iterating and finding out what feature set would get him to paying customers.

Instead he had produced barely 3 weeks of progress in the last 5 months. His prototype was rapidly wearing out its welcome.

A Lack of Nerve
When I pressed Bob on this he admitted, “No I guess my engineers aren’t very good. But I hired guys who were cheap because I wasn’t sure if my hypotheses were right. Didn’t you tell us to test our hypotheses first?” Now it was my time to be surprised. “Bob, you’ve validated your hypotheses better than any startup I’ve ever seen. You found that out in the first month. You got customers begging you to finish the product so they could buy it. You should have been hiring world-class talent and building something these CIO’s will pay for. It’s not too late. It’s time to grab them by the throat and go for it.”

I wasn’t ready for the answer, “Steve, I’ve been reading all about premature scaling and making sure everything is right before I go for it. I want to be sure I get all of this right. I’m afraid I’ll run out of money.”

I thought I’d make one more run at it. “Bob,” I said, “few entrepreneurs get the first time response you have from an early product. At your rate you’re going to burn through your cash trying to get it perfect. It’s a startup. You’ll never have perfect information. You’re sitting on a gold mine. Grab the opportunity!”

I got a blank stare.

We made some more small talk and shook hands as he left.

Bob was in the wrong business, not the wrong market. He wanted certainty, comfort and security.

I stared at my coffee for a long time.

Carpe Diem – make your lives extraordinary.

Lessons Learned

• Yes, premature scaling is a cause of startup death
• Yes, you need to get out of the building and test your hypotheses
• But, when an opportunity smacks you in the head for gosh sake grab it with both hands and don’t let go
• If you can’t, get out of the startup game

George Bernard Shaw

We’re in the middle of our National Science Foundation Innovation Corps class – taking the most promising research projects in American university laboratories and teaching these scientists the basics of entrepreneurship. Our goal is to accelerate the commercialization of their inventions. Our Lean LaunchPad class teaches scientists and engineers that starting a company is another research project that can be solved by an iterative process of hypotheses testing and experimentation built around the business model / customer development / agile development solution stack. It’s “the scientific method” applied to startups.

Although I typically don’t write about a class while it’s going on, I had to share this extraordinary reflection that Satish Kandlikar, one of the National Science Foundation principal investigators, posted to our Lean LaunchPad class blog.

Satish Kandlikar – The Spirit of Entrepreneurship
Satish Kandlikar has been a professor in the mechanical engineering department at the Rochester Institute of Technology for the past twenty-one years. His research is focused in the areas of flow boiling, critical heat flux, contact line heat transfer, and advanced cooling techniques

His team, Akara Lighting, wants to build a device for LED lights that gets rid of heat 50% better than anything on the market. This would result in LED’s having a higher performance at a reduced cost.

Here’s what he had to say about his experience in the Lean LaunchPad class ….

“It is quite an eye-opening experience to transition from an academic “PI” (Principal Investigator) to someone who wants to run a technology start-up. The change in the mindset is perhaps the important factor on the path to success…

The teaching team is simply phenomenal in identifying the pitfalls in our path and guiding us in finding the solutions. They have shown us the other side of the equation from technology to market acceptability. We have been extremely fortunate in having this kind of guidance and support.

A key finding I would like to report is that we just had another “pivot” two days ago when our mentor brought to our attention that we can succeed as a heat pipe company providing thermal solutions to various LED products as well as other applications. I visited two companies, one providing data center cooling solutions, and other providing control panel cooling systems. Key alliances are expected to occur through these initial, very positive, contacts.

One fundamental change that I see in my approach going forward is that I am looking at the research in a totally different way. It is no longer, in my mind, a means to publishing papers and simply graduating students. It means now, to me, how the research can be applied to make products that are accepted in marketplace. Making students understand the entire process, to whatever extent I can influence them, and inspiring them to aspire for transferring their knowledge to products is becoming an important thrust in my classroom interactions.

Another eye-opener was on understanding communications. While making presentations in academic setting, it was more of a paper-based research with extension of knowledge, without too much understanding of its application. Knowing the audience was really not a factor. Now after making “cold-calls”, and seeing that there is a certain way to get them interested in just a few opening sentences, was simply amazing. Knowing what their needs are is a crucial step.

Now it is becoming clear what Steve meant when he said, “get out of the building”. It is clear that the building referred to our mindset more than the physical act of going out or simply contacting someone outside.

The purpose of this posting was to document my beginning of the transformation process from an academician to an entrepreneur. And I am definitely enjoying it.”

Scientists Unleashed
Over fifty years ago Silicon Valley was born in an era of applied experimentation driven by scientists and engineers. Fifty years from now, we’ll look back to this current decade as the beginning of another revolution, where scientific discoveries and technological breakthroughs were integrated into the fabric of society faster than they had ever been before, unleashing a new era for a new American economy built on entrepreneurship and innovation.

And scientists like Satish Kandlikar and the National Science Foundation will lead the way.