Teams that build continuous customer discovery into their DNA will become smarter than their investors, and build more successful companies.
Awhile back I blogged about Ashwin, one of my ex-students wanted to raise a seed round to build Unmanned Aerial Vehicles (drones) with a Hyper-spectral camera and fly it over farm fields collecting hyper-spectral images. These images, when processed with his company’s proprietary algorithms, would be able to tell farmers how healthy their plants were, whether there were diseases or bugs, whether there was enough fertilizer, and enough water.
(When computers, GPS and measurement meet farming, the category is called “precision agriculture.” I see at least one or two startup teams a year in this space.)
At the time I pointed out to Ashwin that his minimum viable product was actionable data to farmers and not the drone. I suggested that to validate their minimum viable product it would be much cheaper to rent a camera and plane or helicopter, and fly over the farmers field, hand process the data and see if that’s the information farmers would pay for. And that they could do that in a day or two, for a tenth of the money they were looking for.
Fast forward a few months and Ashwin and I had coffee to go over what his company Ceres Imaging had learned. I wondered if he was still in the drone business, and if not, what had become the current Minimum Viable Product.
It was one of those great meetings where all I could do was smile: 1) Ashwin and the Ceres team had learned something that was impossible to know from inside their building, 2) they got much smarter than me.
Crop Dusters Even though the Ceres Imaging founders initially wanted to build drones, talking to potential customers convinced them that as I predicted, the farmers couldn’t care less how the company acquired the data. But the farmers told them something that they (nor I) had never even considered – crop dusters (fancy word for them are “aerial applicators”) fly over farm fields all the time (to spray pesticides.)
They found that there are ~1,400 of these aerial applicator businesses in the U.S. with ~2,800 planes covering farms in 44 states. Ashwin said their big “aha moment” was when they realized that they could use these crop dusting planes to mount their hyperspectral cameras on. This is a big idea. They didn’t need drones at all.
Local crop dusters meant they could hire existing planes and simply attach their Hyper-spectral camera to any crop dusting plane. This meant that Ceres didn’t need to build an aerial infrastructure – it already existed. All of sudden what was an additional engineering and development effort now became a small, variable cost. As a bonus it meant the 1,400 aerial applicator companies could be a potential distribution channel partner.
The Ceres Imaging Minimum Viable Product was now an imaging system on a cropdusting plane generating data for high value Tree Crops. Their proprietary value proposition wasn’t the plane or camera, but the specialized algorithms to accurately monitor water and fertilizer. Brilliant.
I asked Ashwin how they figured all this out. His reply, “You taught us that there were no facts inside our building. So we’ve learned to live with our customers. We’re now piloting our application with Tree Farmers in California and working with crop specialists at U.C. Davis. We think we have a real business.”
It was a fun coffee.
Build continuous customer discovery into your company DNA
An MVP eliminates parts of your business model that create complexity
Focus on what provides immediate value for Earlyvangelists
Two of the hot topics in education in the last few years have been Massive Open Online Courses (MOOC’s) and the flipped classroom. I’ve been experimenting with both of them.
What I’ve learned (besides being able to use the word “pedagogy” in a sentence) is
1) assigning students lectures as homework doesn’t guarantee the students will watch them and 2) in a flipped classroom you can become hostage to the pedagogy.
Here’s the story of what we tried and what we learned.
MOOC’s – Massive Open Online Courses A MOOC is a complicated name for a simple idea – an online course accessible to everyone over the web. I created my MOOC by serendipity. Learning how to optimize it in my classes has been a more deliberate and iterative process.
When my Lean LaunchPad class was adopted by the National Science Foundation, we taught our original classes to scientists scattered across the U.S. We adopted WebEx, a web video conferencing tool, to hold our classes remotely. Just like my students at Stanford, these NSF teams got out of the building and spoke to 10-15 customers a week. Back in their weekly class, the scientists would present their results in front of their peers – in this case via Webex, as the teaching team gave them critiques and “guidance”. When their presentations were over, it was my turn. I lectured to these remote students about the next week’s objectives.
Is it Live or Is It a MOOC? After the first NSF class held via videoconference, it dawned on me that since I wasn’t physically in front of the students, they wouldn’t know if my lecture was live or recorded.
Embracing the “too dumb to know it can’t be done,” I worked with a friend from Stanford, Sebastian Thrun and his startup Udacity, to put my Lean LaunchPad lectures online. Rather than just have me drone on as a talking head, I hired an animator to help make the lectures interesting, and the Udacity team had the insight to suggest I break up my lecture material into small, 2-4 minute segments that matched students’ attention spans.
Over a few months we developed the online lectures, then tried it as a stand-in for me on the NSF videoconferences, and found that because of the animations and graphics the students were more engaged than if I were teaching it in person. Ouch.
Now the NSF teams were learning from these online lectures instead of video conferenced lectures – but the online lectures were still being played during class time.
I wondered if we could be more efficient with our classroom time.
Flipping Back at Stanford and Berkeley, I realized that I could use my newly created Lean LaunchPad MOOC and “flip” the classroom. It sounded easy, I had read the theory:
1) A flipped classroom moves lectures traditionally taught in class, and assigns them as homework. Therefore my students will all eagerly watch the videos and come to class ready to apply their knowledge, 2) this would eliminate the need for any lecture time in class. And as a wonderful consequence, 3) I could now admit more teams to the class because we’d now have more time for teams to present.
So much for theory. I was wrong on all three counts.
Theory Versus Practice After each class, we’d survey the students and combine it with a detailed instructor post mortem of lessons learned. (An example from our UCSF Lean LaunchPad for Life Sciences Class is here.)
Here’s what we found when we flipped the classroom:
More than half the students weren’t watching the lectures at home.
Without an automated tool to take an attendance, I had no idea who was or wasn’t watching.
Without lectures, my teaching team and I felt like observers. Although we were commenting and critiquing on students presentations, the flipped classroom meant we were no longer in the front of the room.
No lectures meant no flexibility to cover advanced topics or real time ideas past the MOOC lecture material.
We decided we needed to fix these issues, one at a time.
In subsequent classes we reduced class size from ten teams to eight. This freed up time to get lecture and teaching time back in the classroom.
We manually took attendance of who watched our MOOC (later this year this will be an automated part of the LaunchPad Central software we use to manage the classes.)
To get the teaching team front and center, I required students to submit questions about material covered in the MOOC lecture they watched the previous evening. I selected the best questions and used them to open the class with a discussion. I cold-called on students to ensure they all had understood the material.
We developed advanced lectures which combined a summary of the MOOC material with new material such as lectures focused on domain specific perspectives. For example, in our UCSF Life Sciences class the four VC’s who taught the class with me developed advanced business model lectures for therapeutics, diagnostics, medical devices and digital health. (These advanced lectures are now on-line and available to everyone who teaches the class.)
The class, now taught as hybrid flipped classroom, looks like this:
There’s still more to do.
While we use LaunchPad Central to have the teams provide feedback to each other, knowledge sharing across the teams still needs to be deeper and more robust.
While we insist that an MVP is part of the class, we need a more rigorous process for building the MVP in parallel with Customer Discovery
Outcomes Besides finding the right balance in a flipped classroom, a few other good things have come from these experiments. The Udacity lectures now have over 250,000 students. They are not only used in my classes but are also part of other educators’ classes, as well as being viewed by aspiring entrepreneurs as stand-alone tutorials.
My experiments in how to teach the Lean LaunchPad class have led to a 2 ½ day class for 75 educators a quarter (information here.) And we’ve found a pretty remarkable way to use the Lean LaunchPad to organize corporate innovation/incubator groups. (We opened source our teaching guide we use in the classes here.)
Creating engaging MOOC’s are hard
Confirming that students watched the MOOC’s is even harder
I recently learned being tough when you select teams for a capstone class pays off for all involved.
Our Lean LaunchPad class requires student teams to get out of the building and talk to 10-15 customers a week while they’re building the product. And they do this while they are talking a full load of other classes. To say it’s a tough class is an understatement. The class is designed for students who said they want a hands-on experience in what it takes to build a startup – not just writing a business plan or listening to lectures.
The class syllabus has all kinds of “black box” warnings about how difficult the class is, the amount of time required, etc.
Yet every year about 20% of teams melt down and/or drop the class because some of the team members weren’t really committed to the class or found they’ve overcommitted.
This year that drop out rate went to zero when I ran an accidental “be a jerk” experiment.
Here Are the Rules We set up the Lean LaunchPad class so that teams hit the ground running in the first class. Before students are admitted, they formed teams, applied as a team with a business model canvas, had homework and were expected to be presenting their business model canvas hypotheses on day one of the class. Our first class session is definitely not a “meet and greet”. The syllabus is clear that attendance was mandatory for the first class.
This year, at one of the universities where I teach in the engineering school, our quarter was going to start right after the New Year. Some of the teams had students from the business school, law school and education school whose start dates were a few days later.
To remind everyone that attendance at the first class was required, we sent out an email to all the teams in December. We explained why attendance at the first class was essential and reminded them they agreed to be there when they were admitted to the class. The email let them know if they missed the first class, they weren’t going to be allowed to register. And since teams required 4 members, unless their team found a replacement by the first week, the team would not be allowed to register either. (We made broad exceptions for family emergencies, events and a few creative excuses.)
I had assumed everyone had read the syllabus and had planned to be back in time for class.
Then the excuses started rolling in.
Be A Jerk About 25% of the teams had team members who had purposely planned to miss the first class. Most of the excuses were, “I thought I could make it up later.”
In past years I would have said, “sure.” This year I decided to be a jerk.
I had a hypothesis that showing up for the first class might be a good indicator of commitment when the class got tough later in the quarter. So this time, unless I heard a valid excuse for an absence I said, “too bad, you’ve dropped the class.”
You could hear the screaming around the world (this is in a school where the grading curve goes from A to A+.) The best was an email from a postdoc who said “all his other professors had been accommodating his “flexible” schedule his entire time at the school and he expected I would be as well.“ Others complained that they had paid for plane tickets and it would cost them money to change, etc.
I stuck to my guns – pointing out that they had signed up for the class knowing this was the deal.
Half the students who said they couldn’t make it magically found a way to show up. The others dropped the class.
The results of the experiment? Instead of the typical 20% drop out rate during the quarter none left – 0.
We had a team of committed and passionate students who wanted to be in the class. Everyone else failed the “I’m committed to making this happen” test.
Commitment is the first step in building a startup team.
Having a film crew in your living room for two days is something you want to put on your bucket list.
With a ~$2 billion endowment the Kauffman Foundation is the largest non-profit focused on entrepreneurship in the world. Giving away $80 million to every year (~$25 million to entrepreneurial causes) makes Kauffman the dominant player in the entrepreneurship space.
Kauffman just launched Founders School - a new education series to help entrepreneurs develop their businesses during the startup stage by highlighting how startups are different from big companies. After weeks honing the script and days of filming, I’m honored to present the “Startups” section of Founders School.
Dino Vendetti a VC at Bay Partners, moved up to Bend, Oregon on a mission to engineer Bend into a regional technology cluster. Over the years Dino and I brainstormed about how Lean entrepreneurship would affect regional development.
I visited Bend last year and caught up with his progress.
Today with every city, state, country trying to build out a technology cluster, following Dino’s progress can provide others with a roadmap of what’s worked and didn’t.
As a transplanted Silicon Valley VC and now a regional investor, I often get asked, “How do we go about building up our local tech ecosystem?”
The short answer is, “One step at a time.”
In the beginning in Bend, “necessity was the mother of invention.” Local entrepreneurs just made it up as they went. But today we are intentionally engineering six distinct activities to support this tech cluster: entrepreneurial density, university, transportation, capital, accelerator, and business community.
Let’s look at each of these six elements in more detail and I’ll explain what we have been doing in Bend to accelerate each of these.
1. Entrepreneurial Density: Density – the connection of like-minded firms and their support services – is a critical component of a cluster. The most fertile source of entrepreneurs is the population of existing entrepreneurial companies. But for clusters without sufficient firms you first need to attract companies to your region. However, it’s difficult to create density overnight. Entrepreneurs need to understand and believe the reasons why they should want to cluster in your region given there are other alternatives (nationally Silicon Valley or New York; regionally Seattle and Bellevue, Portland and Bend).
In addition to technical and entrepreneurial talent, a region also needs experienced executive talent with industry appropriate backgrounds and personal networks. The goal of this talent is to help mentor startups as they scale and navigate the myriad of issues they will face in growing their business.
Bend’s economic development agency (EDCO) and city leaders (Visit Bend, City of Bend) get it – and have started communicating that Bend welcomes and is friendly to entrepreneurs and startups. Word is spreading and there are lots of people up and down the West Coast who know of and have been to Bend. But it’s easy to get drowned out by the noise from Silicon Valley and other cities in Washington and Oregon. That means that in regional communities like Bend, everyone needs to turn up the volume to consistently sing praises that will not only put the community on the map but also ensure it doesn’t slip.
2. University Almost every successful tech cluster has a local technical university. This provides a source of technical talent, research, etc. It’s extremely difficult to import enough talent to fuel a rapidly growing tech cluster, so a university is critical to organically generate and retain talent within the region. In particular it’s critical to offer technical degrees that train the talent pool needed to drive the local tech cluster
OSU-Cascades is a new four-year university in Bend that is beginning the build out of its new campus in Bend and offer computer science and user design courses. This effort was over a decade in the making and something that the local community fought hard for.
3. Transportation Direct flights to the San Francisco Bay Area and other major metro areas (depending on location of the region) are vital to reduce the friction of conducting business, encourage talent to test drive your community, and attract investors and other ecosystem partners to the region.
Bend’s economic development agency (EDCO) has worked very hard to establish direct flights to major West Coast cities including San Francisco, Los Angeles, Seattle, Portland, and Denver. At times this required rallying local business leaders to make advance purchases of flights to ensure enough passenger volume for the airlines.
4. Local Early-Stage Risk Capital Early stage venture funds are more important than your mother. If this doesn’t exist your regional cluster is dead-on-arrival. Organize risk-capital in the form of angel funds or venture funds, particularly at the early stage where the largest capital gap exists. This should be a strategic initiative within your state to close the capital gap with in-region capital sources.
Bend is now home to Seven Peaks Ventures and Cascade Angels, both born over the past year in response to the opportunity in the region. The state of Oregon is also making funds available to invest in and support the formation of venture funds within the state.
Bend Venture Conference Winner
5. Local Entrepreneurial Community Entrepreneurial-driven Events The local entrepreneurial community has been active in running Startup Weekends, launching the FoundersPad accelerator, running hackathons and Ruby on Rails conferences (Ruby on Ales), building out shared tech space, offering incentives (The Big Bend Theory) for startups to relocate to Bend from the Valley, and building up the state’s largest tech/venture conference, the Bend Venture Conference which is now going on its 11th year. There are many more efforts underway to build upon what has worked and continue the process of evolving and learning.
6. Business Community Support One of the most difficult things to do is technically the easiest – a dispassionate self-assessment to understand what assets your community has and what you lack.
First, what is your value proposition to a family or business to locate in your region? Recognize that a big part of your job is to remove friction, drive awareness, and amplify the efforts of your local entrepreneurs. Successful entrepreneurs attract other entrepreneurs, so it’s vital to kick start the cycle.
Next, identify your goal. Is it creating a job works program? Stopping brain drain in the region? Attracting and building some key core competency in the region? Ideally your existing talent base and ecosystem naturally support the “core competency magnet” you want to develop.
Finally, put your money where your mouth is – help fund the events and programs in the early years. Once the tech cluster forms, these activities will become self-funding. The ROI won’t be obvious for some early on, but will pay dividends in time.
Regional Cluster Ecosystem
Summary: Bend Is a Global Entrepreneurship Experiment There are about 25,000 economic development agencies in regional markets across the U.S., all trying to expand the number of businesses that create products and services sold outside their region. These regional businesses create primary jobs that lead to the creation of local secondary jobs.
The Bend experiment is a model to consciously engineer an entrepreneurial cluster in a regional market to spur economic development and job creation.
In the past most regional growth strategies have focused on attracting established companies looking to expand or open a new plant. While it may be strategic for the region to recruit some of these established businesses, those deals usually involve huge tax subsidies and typically create a small finite number of jobs. What isn’t part of most regional growth plans is the organic growth of an entrepreneurial tech cluster in the region. If successful, sewing the seeds of entrepreneurship can lead to a more rapid and sustainable job growth for the region.
By engineering a regional tech cluster, we can impact the trajectory of growth in the region and:
Slow and even reverse the historical migration of tech talent and capital out of the region/state
Locally grow successful tech companies to become amazing primary job creators
Recycle the wealth that is created by re-investing in the region versus transferring wealth to Silicon Valley
Help local successful entrepreneurial and technical talent stay local – by creating their next startup in the region versus emigrating to Silicon Valley
Create a more diversified and healthy economic base that includes tech entrepreneurs
The democratization of entrepreneurship has created a huge opportunity for any region with the right characteristics to create its own sustainable tech cluster. But, as with any true democracy, it won’t happen without the combined participation of the community and desire of entrepreneurs to lead the movement. This is happening in Bend, and I look forward to hearing from others about your own experiments.
Regional tech clusters can be engineered if …
the region has key attributes and a focused effort from the entrepreneurial and business community
Opportunity exists for economic development in regions where tech clusters can be formed
potential to dramatically increase the growth of entrepreneurship and job creation in the region.
Entrepreneurs are the path to job creation and growth…
attract them, reduce the friction to growth, and do everything possible to cause the wealth created to recycle locally
Dino Vendetti a VC at Bay Partners, moved up to Bend, Oregon on a mission to engineer Bend into a regional technology cluster. Over the years Dino and I brainstormed about how Lean entrepreneurship would affect regional development.
I visited Bend last year and caught up with his progress.
Today with every city, state and country trying to build out a technology cluster, following Dino’s progress can provide others with a roadmap of what’s worked and what has not.
Tech investing is risky. Success depends on finding startups that have identified acute customer pains in large markets where conditions are ripe for a new entrant. Few entrepreneurs find this scalable and repeatable business model because it’s not easy. However, four critical advances over the past decade (cloud, accelerators, Lean, and Angels) not only changed the math for tech investing but made regional tech clusters possible.
The cloud, open-source development tools and web 2.0 as a distribution channel have vastly reduced the amount of capital a startup needs at the early stage when the risk is greatest. (Startups still need capital to scale once they find good product-market fit and a repeatable-scalable business model.)
Accelerators, which became mechanisms for focused entrepreneurship mentoring and delivery of best practices to startups. This was valuable to startups in the Valley and has been vital to startups in regions where the ecosystem is less developed.
The Lean Movement, led by Steve Blank (and others,) created a set of methodologies that ushered in the era of Evidence Based Entrepreneurship. This has changed the way entrepreneurs think about building their startups and how investors should look at them.
Angels & Crowdfunding: Coincident with the capital efficient movement came the current wave of angel investors, this time armed with the ability to collectively fund startups to the point of meaningful value creation on modest amounts of capital. Sites like AngelList have only amplified the collective reach of individual and grouped angel investors.
These four developments, while important to Silicon Valley, are vital to developing regional tech clusters. While the density of Silicon Valley startups can’t be replicated in regions, the barriers of money and resources have disappeared. These changes make entrepreneurship possible anywhere.
Three types of regional venture funds exist today:
Regionally located funds, such as Foundry Group in Boulder, are located outside of Silicon Valley or NY but their investments are primarily in the Valley or NY… they are not a regional fund per this discussion.
Regional Angel funds that pool investors capital and typically make a one time investment in a startup, sometimes at an early stage but often at a slightly later stage.
Late stage large regionally based funds that invest in late stage or mezzanine deals.
Large regionally based early stage funds have mostly failed. They failed due to:
the dearth of deals in the region that have IPO potential and
most of those funds were also raised and invested prior to the huge capital efficient wave of the past 6-8 years. These regional funds invested in capital-intensive startups that required large initial investments. The result was too much money in too few deals. The inevitable failures then damaged returns.
The Oregon startup scene today looks very different from what it did 10 years ago. Today it’s dominated by capital efficient software, web and mobile startups whereas 10 years ago it was dominated by semiconductor and hardware startups that consumed huge amounts of capital before their first dollar in revenue.
So a regional fund must do three things:
focus on early stage investments
“right sized” for the exit environment;
if it’s too big you won’t be able to intelligently deploy capital;
too small and you won’t be able to follow on and protect your investments or make enough investments to ensure you have enough “at bats.”
find and focus on the entrepreneurs and deals that want to build scalable startups
We believe that regional funds need to walk a delicate balance…but it doesn’t take huge IPOs to return multiples of capital on a small fund.
Why Valley Rules Don’t Work in Regional Economies A typical VC fund in Silicon Valley might raise $200 -$400 million. And over a 10-year life of a fund only one out of five deals will deliver all the returns. A good return to your investors is 20% per year. That means over 10 years investors expect ~6x return on their investment. This means that those winning deals have to make a ~30x return to provide the venture capital fund that 20% compound return (the 6x).
The Valley strategy is to get as much money to work in the high flying deals that are going to pop….It’s an educated/calculated swing-for-the-fences model and it can work and be extremely lucrative if you can consistently get in those deals.
The problem for a regionally based investor is that there will be a limited number of startups in your region that have a realistic chance at an IPO. The percentage of VC backed startups that go public is very small, so counting on those exits in a regional fund would not be prudent (nice if it happens but don’t build the model to rely on it).
The reality is that the super vast majority of liquidity events are M&A and the majority of those are in the under $100M range. As a result, large multi-hundred million-dollar funds focused on early stage investing in the region can be challenging. There just aren’t enough “right” regional startups to invest in.
Regional Moneyball Bend playing Moneyball makes a lot of sense. In fact, it’s the only game that investors in a regional cluster can play. Regional investors need a way of improving their odds of getting base hits and minimize strikeouts.
Playing Moneyball in venture capital means making smaller, smarter bets focused on companies and deals that the big teams, the Silicon Valley heavyweight investors, pass up; because the deals are too far from Silicon Valley, not yet known to them, not in their comfort zone, or not the fad of the month.
Playing Moneyball also means playing with the money you have. The reality for a regional investor is that you have to match the capital you raise to the deal/exit environment you are in.
Specifically this means that a regional fund should be $10-30M. (With a portfolio of at least 20 investments, or you are at risk of the adverse selection problem.) And the fund should be looking at startups that can provide $20M to $100M exits – almost certainly as M&A deals.
The chart below diagrams our regional fund strategy.
The good news for regional investors is that these factors allow you to play Moneyball if (and that’s a big IF) you are investing in entrepreneurs who are living and breathing evidence-based entrepreneurship and who are building scalable startups. This is true whether the company is concept stage or ramping revenue. I’ve found a lot of companies in the region that have found a way to get to some level of revenue traction but haven’t broken out. When you dig in, the reasons are usually easily discoverable and observable.
The Bend Experience One of the fundamental benefits of being so active in building the FoundersPad accelerator (a 12-week, Lean Startup program focused on customer development) is working with the cohort participants on refining their business models. This experience has provided me a whole new set of pattern matching filters as an investor.
The business model canvas and the customer development process provide investors an incredible opportunity to evaluate how deeply an entrepreneur has engaged with their target customers and, more importantly, what they have learned about the problem-solution space they are going after. This learning and the measurements and metrics that surround it is what evidence based entrepreneurship is all about and what makes it a powerful tool for entrepreneurs, investors and accelerators.
If you are a regional accelerator or investor and would like to talk and compare notes please feel free to email me.
Regions are missing early-stage capital.
Valley-sized VC funds don’t work.
Build $10-30M funds.
Look for $20-100M exits.
Focus on capital efficient, scalable startups and founders
When Customer Development and the Lean Startup were just a sketch on the napkin, Dino Vendetti, a VC at Bay Partners, was one of the first venture capitalists I shared my ideas with.
Dino and I kept in touch as he moved up to Bend, Oregon on a mission to engineer Bend into a regional technology cluster. Over the years we brainstormed about how Lean entrepreneurship would affect regional development.
I visited Bend last year and caught up with his progress.
This post and the two that follow highlight what Dino has learned about the characteristics of the startup and investing landscape in a regional market, and what it takes to intentionally engineer a thriving regional tech cluster.
Today, with every city, state and country trying to build out a technology cluster, following Dino’s progress can provide others with a roadmap of what’s worked and what has not. Bend, Oregon is an ideal case study because of its size, location and entrepreneurial characteristics.
Here’s Part 1 of Dino’s story…
Let’s get right to the point… I fell in love with Bend, Oregon, once a sleepy logging town, now population 79,000. If you like skiing, hiking, biking, rafting, golfing, camping, fishing, picnicking, rock climbing, and startups – you’d like Bend.
Before moving to Bend last year, my career took me from engineering development roles at defense contractors in the 80’s to product management and executive marketing roles in companies like Qualcomm in the 90’s, to the world of venture capital at several firms including Bay Partners, Formative Ventures and Vulcan Ventures.
After several visits skiing here, I had become smitten with the “mojo” of Bend – its superb quality of life, recreational opportunities and proximity to the San Francisco Bay Area. The vibe of Bend is appealing, unique and unpretentious given the number of successful business, tech and professional athlete transplants who call it home. It’s home to a small but growing tech community that has been developing over the past decade, and that’s what piqued my interest.
What’s Different The differences between the Bend, Oregon region and Silicon Valley are obvious. The sheer density of talent, companies, capital and universities that exist in the Valley are second to none. It truly is the epicenter of the startup world and it’s the regional cluster for innovation and entrepreneurship. Working in the Valley, I took for granted the constant and real time networking opportunities, the volume of deals, and the ability to access nearly every corner of the tech industry – no surprise to anyone who has spent any time in the Valley.
However, what I found in Bend was a deeply entrepreneurial community that is leaps and bounds beyond just a destination resort town. Bend fights way above its weight class and is professional scale for its size. Its ability to do so is tied to the deep entrepreneurial DNA that permeates the region (a very similar characteristic to Silicon Valley), originally out of necessity and now out of strategy.
Startups in Bend So what types of entrepreneurs and startups exist in Bend? There’s a concentration around several sectors: software, hardware, medical-technology, aviation, and a specialty of Oregon – craft beer brewing. The chart below shows the clustering of startups around these sectors.
Bend Startup Ecosystem
In addition to the four major data centers that include Facebook and Apple, Bend currently boasts 95 startups across multiple technologynsectors: 47 software, 26 hardware/semi and 22 med tech related startups. Nearby Portland Oregon (just 160 miles away) is home to over 300 startups; between the two markets, nearly 80 new startups are forming each year.
Silicon Valley Transplants In addition to local entrepreneurs building startups, I found something else I wasn’t expecting in Bend: a deep pool of talented Valley transplants who’ve made their way to Bend – either during their careers or after. There are retired Fortune 500 CEOs, senior execs from Valley startups and public companies as well as successful entrepreneurs who exited their companies. These smart, successful transplants have gotten involved with the local business community as mentors, advisors, entrepreneurs, or investors.
But the real surprise was learning that for some Bend is a Silicon Valley bedroom community. A daily direct flight on United can have you in your Bay Area office by 8 a.m. Monday. Every week I meet someone new who just moved to Bend and commutes to work for Google, Facebook, Salesforce, Oracle, Marketo, Workday, and on and on….These people are important and useful in the engineering of a tech cluster; as startup coaches, angel investors and advocates for the community. They communicate and pass on the DNA of how Silicon Valley operates and what level of performance is needed to compete on a global scale.
Entrepreneurs in Bend Within the Bend tech startup community I found three kinds of startups/entrepreneurs:
Scalable entrepreneurs similar to those you would find in Silicon Valley (although a smaller concentration exists in Bend). These entrepreneurs want to build a big company. They’re typically Silicon Valley transplants who had enough success and experience to know what they were getting themselves into, what it means to raise capital from investors, what it means to scale a company, and how to engineer an exit.
Viable entrepreneurs who think they are building scalable startups but lack either a key element of their business model and/or lack the right team DNA to “go for it..” In this region, these are the majority of new startups I see. They have two limitations, which I help coach to see if they have the capability and desire to become scalable.
They go after a market opportunity that’s too limited to result in a truly scalable business (still might be an M&A candidate, but at the lower end of the range).
Most teams have a reluctance and willingness to “go for it” when they finally do have a scalable business and have validated the key aspects of their business model. This “small business” mindset is a holdover of how capital starved early stage startups are/were in Oregon. Entrepreneurs (and angel investors) prioritize profitability over growth (this is OK for lifestyle startups, but not for scalable startups where capturing market share and thought leadership is vital).
Lifestyle entrepreneurs who are just building a business to make a profit and support their awesome lifestyle (Bend has a lot of these). There is nothing wrong with lifestyle entrepreneurs as they are providing valuable products and services to the local/regional economy, but these do not make for good venture or angel investments under the traditional equity based venture model.
Regional entrepreneurs are at an inherent disadvantage in getting the attention of customers and late stage VCs. Therefore they need to focus on building the most efficiently scalable business model possible. Without focus, it’s difficult to create enough signal to noise ratio to become relevant in their market segment. The good news is that whether you are an investor or accelerator, if your startup is located in an advantageous regional market (defined below) and if you apply lean methodologies, you can improve your on-base and slugging percentage.
The opportunity and challenge in regional markets is to:
Educate the ecosystem about the differences between the three kinds of startups/entrepreneurs
Find, nurture and invest in the truly scalable startups and entrepreneurs, as they will be the ones that have the potential to deliver outsized returns
Fixing the Missing Pieces of Infrastructure The evolution of very capital efficient business models and Lean Startup methodologies has led to easier paths to funding, launching and growing businesses. With a tech cluster developing in Bend, it was clear that there were four missing pieces in its infrastructure.
I decided to fix each of them.
Bend needed a startup accelerator. While entrepreneurship in Bend was talked about, and everyone read the same blogs, there was no central place founders could get focused and intense coaching and mentorship. So I co-founded the FoundersPad accelerator, a 12-week, Lean Startup program focused on customer development that helps founders develop, refine and grow their business.
Bend needed its own venture firm. While Silicon Valley and New York are magnets for great startups, our bet is that awesome startups exist in (or can be attracted to) Oregon and Northern California. So I launched Seven Peaks Ventures with a team of investors that includes some of the region’s most active angel investors. We help Oregon-based startups build and scale their businesses by providing highly relevant mentoring and leveraging our deep network in Silicon Valley and beyond.
Bend needs to attract more entrepreneurs. So I launched The Big Bend Theory with Bruce Cleveland. We’ll fly founders and their spouses/significant others along with a team member to Bend to meet local startup executives and community leaders and experience the lifestyle. If they choose to relocate in Bend we’ll offer free temporary office space and help get them funded.
Oregon State University’s new Bend campus didn’t have a Computer Science or User Experience design program. So I helped develop the Computer Science program at Oregon State. (We’re looking for Computer Science professors, so email me if you want to live and teach in Bend!)
Bend is a bet on a regional tech cluster
To build a successful regional cluster, look for an eco-system with:
experienced professionals willing to mentor
entrepreneurs with the energy and drive to build businesses
viable startups under development
We are engineering the infrastructure that lacks: accelerator, venture firm, outreach, university and training.
It is critical to understand the types of startups and entrepreneurs in your region and for venture funding