I had a group of ex-students out to the ranch who were puzzling over a dilemma – they’ve been working hard on their startup, were close at finding product/market fit and had been approached by Oren, a potential angel investor. Oren had been investing since he left Google four years ago and was insisting on not only a board seat, but he wanted to be chairman of the board. The team wasn’t sure what to do.
I listened for a while as they went back and forth about whether he should be chairman. Then I asked, “Why should he even be on your board at all?” I got looks of confusion and then they said, “We thought all investors get a board seat. At least that’s what Oren told us.”
Uh oh. Red flags just appeared in front of my eyes. I realized it was time for the board of directors versus advisors talk.
Roles for Financial Investors I pointed out that there are four roles a financial investor can take in your company: a board member, a board observer (a non-voting attendee of board meetings,) an advisory board member, or no active role. I explained that as a non-public company there was no legal requirement for any investor to have a board seat. Period. That said, professional venture capital firms that lead a Series investment round usually make their investment contingent on a board seat. And it sounded like if successful, their startup was going to need additional funding past an angel round to scale.
In the last few years, it’s become more common for angel investors to ask for a board seat, but I suggested they really want to think hard about whether that’s something they need to do now.
“But how do we get the advice we need? We’re getting to the point that we have lots of questions about strategic choices and relationships. Isn’t that what a board is for? That’s what we learned in business school.”
What’s a board for? I realized that while my students had been through the theory it was time for some practice. So I told them, “At the end of the day your board is not your friend. You may like them and they might like you, but they have a fiduciary duty to the shareholders, not the founders. (And they have a fiduciary responsibility to their own limited partners.) That means the board is your boss, and they have an obligation to optimize results for the company. You may be the ex-employees one day if they think you’re holding the company back.”
I let that sink it for a bit and then asked, “How long have you worked with Oren?”
I kind of expected the answer, but still was a bit disappointed. “Well we met him twice, once over coffee and then over lunch.”
“You want to think hard about appointing someone to be your boss just because they’re going to write you what in the scheme of things will be a small check.”
Now they looked really confused. “But we need people with great advice who we can help us with our next moves.”
Advisory Board “Do you know what an advisory board is?” I asked. From the look on their faces, I realized they didn’t so I continued, “Advisors are just like they sound. They provide advice, introductions, investment, and visual theater – (proof that you can attract A+ talent.) An advisor that provides a combination of at least two of these is useful.”
A “board” of advisors is not a formal legal entity like a board of directors. That means that they can’t fire you or have any control of your company. While some founders like to meet their advisors in quarterly advisory board meetings, most companies don’t really have their advisory board meet as group. You can connect with them with them on an “as needed” basis. While you traditionally compensate advisors by giving them stock, I suggest you ask them to match any grant with an equal investment in the company – so they have “skin in the game.”
Equally important is that an advisory board is a great farm team for potential outside board members. It allows you to work with them over an extended period of time and see the quality of their advice and how it’s delivered. If they are world-class contributors, when you raise a Series A round and you need to bring in an outside board member, picking someone you’ve worked with on your advisory board is ideal.”
Finally I suggested that Oren’s request to be chairman of a five-person startup seemed to be coming from someone looking to upgrade their resume, not to optimize their startup.
No Outsiders Until a Series A As we wrapped up, I offered that there was no “right answer” (see Brad Feld’s post) but they should think about their board strategy as a balance between the amount of control given to outsiders versus the great advice outsiders can bring. I suggested that if they could pull it off they might want to consider keeping the board to the two founders for now, surrounded by great advisors which may include their seed investors. Then when they got a Series A, they’ll probably add one or two professional VC’s on the board with one great advisor as an outside board member.
As they left they were going through the experienced execs they knew who they were going to take out for coffee.
Your board of directors is your boss
Your advisory board is your friend
Not all investors get board seats, it’s your choice
Alison and I both grew up on the East Coast but we’ve been fortunate to live in California for 30 years. One of the things we love most about living here is how beautiful the natural landscapes are and how close nature is to urban areas. When we had kids, we began to think about our role in protecting these California landscapes for future generations.
As you know, for the last 35 years we’ve been running a science experiment on the California Coast: How would the Coastal Act affect California’s coastal economy?
The results are now in.
California has some of the most expensive land in the country and as we all know, our economy is organized to extract the maximum revenue and profits from any asset. Visitors are amazed that there aren’t condos, hotels, houses, shopping centers and freeways, wall-to-wall, for most of the length of our state’s coast.
It was the Coastal Act that saved California from looking like the coast of New Jersey.
First, to maximize public access and public recreational opportunities in the coastal zone while preserving the rights of private property owners, and
Second, to assure priority for coastal-dependent and coastal-related development over other development on the coast.
For the last three decades, the Coastal Commission has upheld these directives while miraculously managing to avoid regulatory capture. It was able to do so because of three forces that sustained it: 1) an uncompromising executive director, 2) a majority of commissioners who looked past local parochial interests and voted for the interests of all Californians, and 3) an environmental community that acted as a tenacious watchdog.
The Commission has been able to stave off the tragedy of the commons for the California coast. Upholding the Coastal Act meant the Commission took unpopular positions upsetting developers who have fought with the agency over seaside projects, homeowners who strongly feel that private property rights unconditionally trump public access, and local governments who believe they should have the final say in what’s right for their community, regardless of its impact on the rest of the state.
During the last three decades, Peter Douglas ran the Coastal Commission. Unlike Robert Moses who built modern New York City’s or Baron Haussmann who built 19th century Paris in concrete and steel, the legacy of Peter Douglas is all the things you don’t see in the 1,100 miles of the California coast: wetlands that have not been filled, public access that has not been lost, coastal views that have not been blocked by hotels or condominiums. Douglas did this by standing up to developers, speakers of the state assembly, governors, and others who wanted him to be “reasonable” and to come to a “compromised solution”.
I was appointed to the Coastal Commission by a governor hoping to find a candidate with “green enough” credentials who would be “reasonable” and understand how “compromises” are made in California politics.
I’m a slow learner but over the last few years, I realized that the coast of California exists as it is because the Commission had an unreasonable leader, who refused the political allure of “compromise” and who managed to keep the commission independent despite enormous pressure. And we as commissioners had to stand up to those pressures and be at times unreasonable in order to not compromise the essence of the Coastal Act.
Unfortunately Peter Douglas is gone and his unbending vision to save the coast is fading. Some current commissioners seem to want the Commission to bereasonable, and understand the reality of politics. In fact, some may even want a new “reasonable” executive director who will turn the commission into just another regulatory organization driven by the people they are supposed to regulate.
Sadly, even today with the results of an independent commission in front of us, some of our appointing authorities haven’t understood the gift that has been handed them – 100’s of miles of Pacific coastline, much of it unspoiled and accessible to all. And unlike other regulatory agencies, the unspoiled California Coast is finite, and bad decisions are virtually impossible to turn back once a development decision is implemented.
Over the last few years I learned that unless there is a vigilant and engaged public, lobbyists and developers will take over the commission using “reasonableness” and “fair compromise” as their watch words. It is up to individuals and our environmental organizations to become more active on coastal issues.
As Peter Douglas used to say, the coast is never saved, rather it is being saved every day,” as an ongoing process.
Unless we insist that our elected officials appoint people who are willing to prioritize the principals of the Coastal Act over both their own careers and the notion of being “reasonable” within the larger ecosystem of day-to-day California Politics, our children may one day look back at pictures of the California coast and wistfully say, “Look what our parents lost.”
Today it was with a feeling of a mission yet to be accomplished, I let the governor know that I am resigning from the Coastal Commission. My work on innovation, job creation and entrepreneurship for the Federal Government is taking an increasing amount of my time.
I’ve had a great time at the Commission. I’ve learned a lot from my fellow commissioners and hope I’ve done my part for my fellow Californians. I’d like to thank my alternate Jim Wickett on the Commision who has also dedicated his time and uncompromising votes towards carrying out the Coastal Act.
Most of all, I’m proud to have been “unreasonable” and “uncompromising” in defense of the California Coast. To be anything less risks the loss of what the Coastal Act and Peter Douglas has uniquely brought to all Californians.
Thank you for this award, and I very much appreciate all the support you have provided to me to be able to make my contribution to the California Coast and the Environment.
The greatest number of jobs is created when startups create a new market – one where the product or service never existed before or is radically more convenient. Yet this is where startups will run into anti-innovation opponents they may not expect. These opponents have their own name – “rent seekers” – the landlords of the status-quo.
Smart startups prepare to face off against rent seekers and map out creative strategies for doing so…. First, however, they need to understand what a rent seeker is and how they operate…
Recently, the New York and North Carolina legislatures considered a new law written by Auto Dealer lobbyists that would make it illegal for Tesla to sell cars directly to consumers. This got me thinking about the legal obstacles that face innovators with new business models.
While Tesla, Lyft, Uber, Airbnb, et al are in very different industries, they have two things in common: 1) they’re disruptive business models creating new markets and upsetting the status quo and 2) the legal obstacles confronting them weren’t from direct competitors, but from groups commonly referred to as “rent seekers.”
Rent Seekers Rent seekers are individuals or organizations that have succeeded with existing business models and look to the government and regulators as their first line of defense against innovative competition. They use government regulation and lawsuits to keep out new entrants with more innovative business models. They use every argument from public safety to lack of quality or loss of jobs to lobby against the new entrants. Rent seekers spend money to increase their share of an existing market instead of creating new products or markets. The key idea is that rent seeking behavior creates nothing of value.
These barriers to new innovative entrants are called economic rent. Examples of economic rent include state automobile franchise laws, taxi medallion laws, limits on charter schools, auto, steel or sugar tariffs, patent trolls, bribery of government officials, corruption and regulatory capture. They’re all part of the same pattern – they add no value to the economy and prevent innovation from reaching the consumer.
No regulation? Not all government regulation is rent or rent seeking. Not all economic rents are bad. Patents for example, provide protection for a limited time only, to allow businesses to recoup R&D expenses as well as make a profit that would often not be possible if completely free competition were allowed immediately upon a products’ release. But patent trolls emerged as rent seekers by using patents as legalized extortion of companies.
How do Rent Seekers win? Instead of offering better products or better service at lower prices, rent seekers hire lawyers and lobbyists to influence politicians and regulators to pass laws, write regulations and collect taxes that block competition. The process of getting the government to give out these favors is rent-seeking.
Lobbyists also work through regulatory bodies like FCC, SEC, FTC, Public Utility, Taxi, or Insurance Commissions, School Boards, etc. Although most regulatory bodies are initially set up to protect the public’s health and safety, or to provide an equal playing field, over time the very people they’re supposed to regulate capture the regulatory agencies. Rent Seekers take advantage of regulatory capture to protect their interests against the new innovators.
PayPal – Dodging Bullets PayPal consistently walked a fine line with regulators. Early on the company shutdown their commercial banking operation to avoid being labeled as a commercial bank and burdened by banks’ federal regulations. PayPal worried that complying with state-by-state laws for money transmission would also be too burdensome for a startup so they first tried to be classified as a chartered trust company to provide a benign regulatory cover, but failed. As the company grew larger, incumbent banks forced PayPal to register in each state. The banks lobbied regulators in Louisiana, New York, California, and Idaho and soon they were issuing injunctions forcing PayPal to delay their IPO. Ironically, once PayPal complied with state regulations by registering as a “money transmitter” on a state-by-state basis, it created a barrier to entry for future new entrants.
U.S. Auto Makers – Death by Rent Seeking The U.S. auto industry is a textbook case of rent seeking behavior. In 1981 unable to compete with the quality and price of Japanese cars, the domestic car companies convinced the U.S. government to restrict the import of “foreign” cars. The result? Americans paid an extra $5 billion for cars. Japan overcame these barriers by using their import quotas to ship high-end, high-margin luxury cars, establishing manufacturing plants in the U.S. for high-volume lower cost cars and by continuing to innovate. In contrast, U.S. car manufacturers raised prices, pocketed the profits, bought off the unions with unsustainable contracts, ran inefficient factories and stopped innovating. The bill came due two decades later as the American auto industry spiraled into bankruptcy and its market share plummeted from 75% in 1981 to 45% in 2012.
In these states it appears innovation be damned if it gets in the way of a rent seeker with a good lobbyist.
Much like Paypal, it’s likely that after forcing Tesla to win these state-by-state battles, the auto dealers will have found that they dealt themselves the losing hand.
Rent seeking is bad for the economy Rent seeking strangles innovation in its crib. When companies are protected from competition, they have little incentive to cut costs or to pay attention to changing customer needs. The resources invested in rent seeking are a form of economic waste and reduce the wealth of the overall economy.
Startups, investors and the public have done a poor job of calling out the politicians and regulators who use the words “innovation means jobs” while supporting rent seekers.
What does this mean for startups? In an existing market it’s clear who your competitors are. You compete for customers on performance, ease of use, or price. However, for startups creating a new market – one where either the product or service never existed before or the new option is radically more convenient for customers - the idea that rent seekers even exist may come as a shock. “Why would anyone not want a better x, y or z?” The answer is that if your startup threatens their jobs or profits, it doesn’t matter how much better life will be for consumers, students, etc. Well organized incumbents will fight if they perceive a threat to the status quo.
As a result disrupting the status quo in regulated market can be costly. On the other hand, being a private and small startup means you have less to lose when you challenge the incumbents.
If you’re a startup with a disruptive business model here’s what you need to do:
Map the order of battle
Laughing at the dinosaurs and saying, “They don’t get it” may put you out of business. Expect that existing organizations will defend their turf ferociously i.e. movie studios, telecom providers, teachers unions, etc.
Understand who has political and regulator influence and where they operate
Figure out an “under the radar” strategy which doesn’t attract incumbents lawsuits, regulations or laws when you have limited resources to fight back
Pick early markets where the rent seekers are weakest and scale
For example, pick target markets with no national or state lobbying influence. i.e. Craigslist versus newspapers, Netflix versus video rental chains, Amazon versus bookstores, etc.
Go after rapid scale of passionate consumers who value the disruption i.e. Uber and Airbnb, Tesla
AirBnb – Damn the torpedoes full speed ahead
For example, Airbnb, thrives even though almost all of its “hosts” are not paying local motel/hotel taxes nor paying tax on their income, and many hosts are violating local zoning laws. Some investors and competitors may be concerned about regulatory risk and liability. AirBNB’s attitude seems to be “build the business until someone stops me, and change or comply with regulations later.” This is the same approach that allowed Amazon to ignore local sales taxes for the last two decades.
When you get customer scale and raise a large financing round, take the battle to the incumbents. Strategies at this stage include:
Use competition among governments to your advantage, eg, if New York or North Carolina doesn’t want Tesla, put the store in New Jersey, across the river from Manhattan, increasing New Jersey’s tax revenue
Cut deals with the rent seekers. i.e. revenue/profit sharing, two-tier hiring, etc.
Buy them out i.e. guaranteed lifetime employment
Rent seekers are organizations that have lost the ability to innovate
Theylook to the government to provide their defense against innovation
There is nothing more powerful than an idea whose time has come
The Lean LaunchPad entrepreneurship curriculum has caught fire. This week 100 educators from around the world will come to Stanford to learn how to teach it.
Life is full of unintended consequences.
Ten years ago I started thinking about why startups are different from existing companies. I wondered if business plans and 5-year forecasts were the right way to plan a startup. I asked, “Is execution all there is to starting a company?”
It dawned on me that the plans were a symptom of a larger problem: we were executing business plans when we should first be searching for business models. We were putting the plan before the planning.
So what would a search process for a business model look like? I read a ton of existing literature and came up with a formal methodology for search I called Customer Development. I wrote a book about this called the Four Steps to the Epiphany.
Teaching “Search versus Execution” In 2003 U.C. Berkeley asked me to teach a class in Customer Development at Haas business school. In 2004 I funded IMVU, a startup by Will Harvey and Eric Ries. As a condition of my investment I insisted Will and Eric take my class at Berkeley. Having Eric in the class was the best investment I ever made. Eric’s insight was that traditional product management and Waterfall development should be replaced by Agile Development. While I had said startups were “Searching” for a business model, I had been a bit vague about what exactly a business model looked like. For the last two decades there was no standard definition. That is until Alexander Osterwalder wrote Business Model Generation.
Finally we had a definition of what it was startups were searching for. Business model design + customer development + agile development is the process that startups use to search for a business model. It’s called the Lean Startup. The sum of these parts is now the cover story of the May 2013 Harvard Business Review. Bob Dorf and I wrote a book, The Startup Owners Manual that put all these pieces together.
But then I realized rather than just writing about it, or lecturing on Customer Development, we should have a hands-on experiential class. So my book and Berkeley class turned into the Lean LaunchPad class in the Stanford Engineering school. The class emphasizes experiential learning, a flipped classroom and immediate feedback as a way to engage students with real world entrepreneurship.
Students learn by proposing and immediately testing hypotheses. They get out of the classroom and talk to customers, partners and competitors and encounter the chaos and uncertainty of commercializing innovations and creating new ventures.
Then in July 2011, the National Science Foundation read my blog posts on the Lean LaunchPad class. They said scientists had already made a career out of hypotheses testing, and the Lean LaunchPad was simply a scientific method for entrepreneurship. They asked if I could adapt the class to teach scientists who want to commercialize their basic research. The result was the NSF Innovation Corps, my Lean LaunchPad class now taught at 11 major universities to 400 teams/year. ARPA-E joined the program this year, and in the fall we’ll teach a Life Science version of the class at UCSF. And other countries are adopting the class to commercialize their nations scientific output.
Unexpected Consequences One of the most surprising things that came out of the National Science Foundation classes was the reaction of the principal investigators (these were the tenured professors who leading their teams in commercializing their science.) A sizable number of them went back to their schools and asked, “How come we don’t offer this class to our students?”
While I had open-sourced all my lectures and put them online via Udacity, I was getting requests to teach other educators how teach the class. I wasn’t sure how to respond, until Jerry Engel, the National Faculty Director of the NSF Innovation Corps suggested we hold an educators class. So we did. The Lean LaunchPad Educators program is a 3-day program designed for experienced entrepreneurship faculty. It is a hands-on program where you experience the process, and be given the tools to create, a curriculum and course plan you can put to immediate use.
We offered the first class in August and had 50 attendees, the January class had 70, and the one being held this week we had to cap at 100.
As part of each of the classes we open source our educators guide here
Where are we in Entrepreneurial Education? Entrepreneurial education is in the middle of a major transition.
Entrepreneurship educators are realizing that curricula oriented around business plans and “execution” fail to prepare students for the realities of building or working in startups. Startups are a fundamentally a different activity than managing a business and “search versus execute” require very different skills. Therefore entrepreneurial education must teach how to search the uncertainties and unknowns.
Educators are now beginning to build curricula that embrace startup management tools built around “searching for a business model” rather than the “execution of a business model” tools needed in larger companies.
But we’re just beginning the transition. Like other revolutionary changes there are the early adopters and others who adopt later. For the Lean LaunchPad classes we’ve seen adoption fall into five categories:
Those who get how teaching students how to “search versus execute” changes our curriculum.
They say, “Here’s how we are going to add value to what you started.”
Those who get how teaching students how to “search versus execute” changes our curriculum.
They say, “We’re teaching the Lean Launchpad class as is. Thanks!”
Those who get that there is a major shift in entrepreneurial education occurring and we understand business model design + customer development + agile engineering is at it’s core
They say, “We are going to rename each of these components so we can take credit for them at our business school.”
Those who are not changing anything
They say, “We don’t buy it.”
Those who really don’t understand the key concepts but we need to be “buzzword compliant” to seem relevant
They say, “We’re throwing Lean on top of our “how to write a business plan” and other standard classes.”
The good news is that it’s the marketplace that will eventually drive all schools to adopt experiential classes that teach Lean principles. We’re incredibly proud of those educators who already have. There is nothing more powerful than an idea whose time has come
The next Lean LaunchPad Educators Class will be held in New York, September 25-27th. Info here.
We’ll also offer a version for incubators and accelerators in New York, September 22-24th. firstname.lastname@example.org
Entrepreneurial education is in the middle of a major transition
Transition from startups are a smaller version of a large company, teaching execution
To teaching that startups search for a business model
Business model design + customer development + agile development is the process that startups use to search for a business model
Lean LaunchPad is an experiential class that teaches students how to search
It’s part of a broader new entrepreneurial curriculum
We teach this in the Lean LaunchPad Educators Class
For many entrepreneurs “raising money” has replaced “building a sustainable business” as their goal. That’s a big mistake. When you take money from investors their business model becomes yours.
One of my ex students came out to the ranch to give me an update on his startup. When I asked, “What are you working on?” the first words out of his mouth was his fund raising progress. Sigh… What I should have been hearing is the search for the business model, specifically the progress on product/market fit, but I hear the fund raising story first at least 90% of the time. It never makes me happy.
Entrepreneurs need to think about 1) when to raise money, 2) why to raise money and 3) who to take money from, 4) the consequences of raising money.
It all starts with understanding what a startup is.
What’s a Startup? Just as a reminder, a startup is a temporary organization designed to search for a repeatable and scalable business model. It’s worth parsing this sentence:
• Temporary Organization:The goal of a startup is not to remain a startup. The goal is to scale. (If you don’t have scale as a goal then you shouldn’t be raising money from angel or venture investors, you should be getting a commercial or government small business loan.)
• Search. Although you believe your idea is the most brilliant innovation ever thought of, the odds are that you are wrong. If you raise millions of dollars on day one, simply executing the idea means you’re going to waste all those dollars attempting to scale a bad idea.
• Repeatable:Startups may get orders that come from board members’ customer relationships or heroic, single-shot efforts of the CEO. These are great, but they are not repeatable by a sales organization. What you are searching for is not the one-off revenue hits but rather a repeatable pattern that can be replicated by a sales organization selling off a pricelist or by customers coming to your web site.
• Scalable: The goal is not to get one customer but many – and to get those customers so each additional customer adds incremental revenue and profit. The test is:If you add one more sales person or spend more marketing dollars, does your sales revenue go up by more than your expenses?
• Business model: A business model answers the basic questions about your entire business: Who are the customers? What problems do they want solved? Does our product or service solve a customer problem (product-market fit)? How do we attract, keep and grow customers? What are revenue strategy and pricing tactics? Who are the partners? What are the resources and activities needed to make this business happen? And what are its costs?
Who to take money from? First, decide what type of startup you are. If you’re a lifestyle entrepreneur or a small business, odds are the return you can provide is not what traditional angel or venture investors are looking for. These types of startups are better suited to raising money from friends, family, commercial and government small business loans, etc.
If you’re a scalable startup, you want to spend small amounts of money (seed capital) as you run experiments testing your hypotheses. Why small amounts? No startup ever spends less then it raises. And at this early stage you’ll be giving up a larger percentage of your firm to investors. A seed round can come from friends, family, Kickstarter, angels – and most importantly, early customers.
These sources are a lot more forgiving of iterations and pivots than later-stage venture-capital funds.
When to raise money In a Lean Startup, the goal is to preserve your cash until you find a repeatable and scalable business model. In times of unlimited cash (internet bubbles, frothy venture climates) you can fix your mistakes by burning more dollars. In normal times, when there aren’t dollars to undo mistakes, you use Customer Development to find product-market fit. It’s only after you have found product-market fit (value proposition – customer segment in the language of the business model canvas) that you spend like there is no tomorrow.
Don’t confuse “raising money” with “building a sustainable business.” In a perfect world, you would never need investors and would fund the company from customer revenue. But to achieve scale, startups need risk capital.
Raise as much money as you can after you have tangible evidence you have product/market fit, not before.
The consequences of raising venture money The day you raise money from a venture investor, you’ve also just agreed to their business model.
Here’s a simple test: If you’re the founder of a startup, go to a whiteboard and diagram how a VC fund works. How do the fund and the partners make money? What is an IRR? How long is a fund’s life? How much will they invest in the life of your company? How much do they need to own at a liquidity event? What’s a win for them? Why?
There are two reasons to take venture money. The first is to scale like there is no tomorrow. You invest the dollars to create end-user demand and drive those customers into your sales channel.
The second is the experience, pattern recognition and contacts that great investors bring to the table.
Just make sure it’s the right time.
Fund raising is a means not an end
Preserve your cash until you find a repeatable and scalable business model
Focus on product – market fit
Run small experiments testing your hypotheses
Raise as much money as you can after you have tangible evidence you have product/market fit
In a startup instead of paying consultants to tell you what they learned you want to pay them to teach you how to learn.
Roominate, one of my favorite Lean LaunchPad teams came out to the ranch last week for a strategy session. Alice and Bettina had taken an idea they had tested in the class – building toys for young girls to have fun with Science, Technology, Engineering, and Math, and started a company. The Roominate dollhouse building kits are being sold via their own website and soon, retail channels. They’ve shipped over 5,000 to enthusiastic parents and their daughters.
As soon as they had designed the product, they found a contract manufacturer to build the product in China. Alice and Bettina are hands-on mechanical and electrical engineers, so instead of assuming everything would go smoothly, they wisely got on a plane to Dongguan China and worked with the factory directly. They learned a ton.
But we were meeting to talk about sales and marketing. They outlined their retail channel and PR strategy and told me about the type of consultants they wanted to hire.
Hiring Channel Sales “So what would the retail channel consultant do?” I asked. Alice looked at me like I was a bit slow, but went on to describe how this consultant was going to take their product around to buyers inside major retail chains like Target, Toys R Us, Walmart, and others to see if they could get them to buy their product. “That sounds great.” I said, “When are you leaving for the trip?” They looked confused. “We’re not going on any of these calls. Our consultant is going and then he’s going to give us a report of how willing these stores are to carry our product.” Oh…
I said, “Let me see if I understand this correctly. What if a buyer asks, can you make a custom version of your product? Can your consultant answer that question on the spot? What if a buyer said no? Will your consultant know what questions to ask right then to figure out how to get them to yes?” I let this sink in and then offered, “Think about it for a minute. You’re going to pay someone else to learn and discover if your product fits this channel, and you’re are not going to do any of the learning yourself? You didn’t skip the trip learning how to manufacture the product. You got on a plane yourself and went to China. Why doesn’t this sound like the right thing to do for channel sales?” They thought about it for a moment and said, “Well we feel like we understand how to build things, but sales is something we thought we’d hire an expert to do.”
Hiring PR Agencies We had an almost identical conversation when the subject turned to hiring a Public Relations agency. Bettina said, “We want to drive customer demand into our channel.” That’s smart I thought, a real clear charter for PR. “What are they going to do for you?” I asked. “Well all the agencies we interview tell us they can survey our customers and come up with our positioning and then help us target the right blogs, influencers and press.
This felt like déjà vu all over again.
I took a deep breath and said, “Look this is just like the channel consultant conversation. But in this case it’s even clearer. Didn’t you get started by testing out every iteration with girls and watching firsthand what gets them excited? Don’t you have 5,000 existing customers? And haven’t you been telling me you’ve been talking to them continuously?” They nodded in agreement. I suggested, “Why don’t you guys take a first pass and draft a positioning brief with target messages, think through who you think the audiences are, and you take a first pass at who you think the press should be. The team looked at me incredulously. “You want us to do this? We don’t know the first thing about press, that’s why we want to hire the experts.” It was the answer I expected.
“Let me be clear,” I explained. “At this moment you know more about your customers than any PR agency will. You’ve spent the last six months testing positioning, messages, and talking to the press yourself. What I want you to do is spend an hour in a conference room and write up all you learned. What worked, what didn’t, etc. Then summarize it in a brief – a one, max two-page document that you hand to prospective PR agencies. And when you hand it to them say, “We know you can do better, but here’s what we’ve learned so far.”” They thought about it for a while and said, “We want to hire a PR agency so we don’t have to do this stuff. We’re too busy focusing on getting the product right.”
I pushed back, reminding them, “Look, half the agencies that see your brief are going to decline to work with you. They make most of their money doing the front-end work you already did. You do need to hire a PR agency, but I’m suggesting that you start by raising the bar on where they need to start.”
You Need to Do the Learning Thinking that founders hire domain experts to get them into places and do things they don’t have any clue about is a mistake most founding CEOs make. It’s wrong. If you plan to be the CEO who runs the company, you need these resources teaching you how to do it, not reporting their results to you. For Roominate I suggested that Alice and Bettina needed to try to find a channel consultant who would take them along on the sales calls and have the founders meet buyers directly. Why? Not to turn them into channel sales people but to hear customer objections unfiltered. To get data that they – and only they, not a consultant – could turn into insight about iterations and pivots about their business model. And to see how the process works directly.
A year from now when they will be hiring their first VP of Channel Sales, they want the interview to go something like, “Well we sold the first three channel partners ourselves – what can you do for us?”
The same is true for hiring the PR agency. The conversation should be, “Here’s what we learned, but we know this is your expertise. Tell us what we’re missing and how your firm can do better than our first pass.”
As a founder – when you’re searching for a business model make sure that you’re the ones doing the learning… not the outsourced help.
There’s Not Enough Time The biggest objections I get when I offer this advice is, “There’s not enough time in the day,” or “I need to be building the product,” or the more modern version is, “I’m focused on product/market fit right now.”
The reality is that they’re all excuses. Of course product and product/market fit are the first critical steps in a startup – but outsourcing your learning about the other parts of the business model are the reasons why your investors will be hiring an operating executive as your replacement - once you done all the hard work.
You need to do the learning not your consultants
Most consultants will think that’s their secret sauce and not want your business
The smart ones will realize that’s how they’ll build a long-term relationship with you
Not understanding the other parts of your business model is a reason investors hire an operating executive
I am honored to be with you as we gather to celebrate your graduation.
This school has a distinguished roster of graduates… Earl Bakken, the founder of Medtronic, was an Electrical Engineering grad, and Bob Gore of Gortex, and your current president are both alums of your Chemical Engineering program.
In fact, I feel very connected to another one your grads. I’m sure you’ve heard of Seymour Cray, he built a supercomputer company in Chippewa Falls that made the fastest computers in the world. These were very expensive supercomputers. They cost 10’s of millions of dollars and filled two tractor-trailers worth of space.
Back in Silicon Valley I co-founded a company that built desktop workstations powerful enough to compete against Cray. We bid against them in a sale to the Pittsburgh Supercomputer Center… and lost. I never forgot that loss because instead of buying hundreds of our small computers they spent $35 Million on that Cray. My startup never recovered and soon after went out of business.
Fast-forward 15 years, Now retired I noticed that the Pittsburg Supercomputer Center had put their Cray for sale on Ebay. Yep – the $35 Million machine was now for sale for $35,000 dollars.
I bought that Cray, … Honest… you can Google “Cray on eBay” and there I am… I had it shipped to my ranch and kept it in the barn next to the cows and manure.
But the story about Cray is also a story about success and failure. If I can keep you awake, I’m going to tell you why – while you may have thought today was the end of your education – it’s really only the beginning. And while you might be moaning about that thought, pay attention because what I’m about to share could make a few of you very, very successful.
First day of your life For most of you, college was the first day of your own life – the morning you stepped onto campus you were no longer just a child of your parents – college was the first place you could taste the freedom of making your own decisions – and in some of those mornings-after – learn the price of indulgence and the value of moderation.
Here at school you had your first years of taking responsibility for yourself. While it may not be obvious to you yet, your college years were a transition from having your parents make decisions for you to making decisions for yourself. But now you face a new chapter that -– if you’re not careful – could result in having companies make decisions for you.
Career Choices It might turn out that graduating from college and getting a job may be just anillusionof independence. If you’re not careful you’ll simply end up having others tell you what to work on, how to spend your time, when to show up and when to go home. In fact, working in a company could be the adult version of listening to your parents tell you what to do… Only the pay is usually a whole lot better than your allowance.
For some of you, that may be exactly what you are looking for. Many of you are going to take what you learned here, get a good job, get married, buy a house, have a family, be a great parent, serve your community and country, hang with friends and live a good life. And that’s great. Minnesota is a wonderful place to hunt, fish, canoe, raise kids, and pursue lots of interests other than just your job.
All of you will ultimately make a choice… a choice about whether you “work to live” or you “live to work.” This should be a conscious choice. Don’t get trapped into the daily routine of showing up and just getting by.
Diverging Interests While you’re excited about your first “real” job, recognize that your interests and those of your employer are probably not the same. Having your employer tell you what a great job you’re doing and rewarding you for it is not the same as discovering your passion, and figuring out who you are, and what’s rewarding for you.
What I am saying is, “Don’t let a career just happen to you.” And as much you love, respect and honor your parents, don’t live their lives. Your obligations to meet their expectations ended the day you became an adult.
At the end of the day, you can decide whether you want to be an employee with a great attendance record, getting promoted to ever better titles and working on interesting projects – or whether you want to attempt to do something spectacular – this be or do should be a question you never stop asking yourself — for the next 20 years, and beyond. Be? or Do?
Let me share with you the day I faced the Be or Do question.
Big Company versus Startup Out of the military, my first job in Silicon Valley was with one of the most exciting companies you never heard of. By the time I joined it was a decade old, and no longer a startup. Our customers were the CIA, NSA, and National Reconnaissance Office. Our CEO, Bill Perry eventually became the Secretary of Defense.
In the 1970’s and ‘80’s the U.S. military realized that our advantage over the Soviet Union was in silicon, software and systems. These technologies allowed the U.S. to build weapons previously thought impossible or impractical. The technology was amazing, and somehow in my 20’s I found myself in the middle of all of it.
Building these systems required resources way beyond the scope of a single company. A complete system had spacecraft and rockets and the resources of ten’s of thousands of people from multiple companies.
If you love technology, these projects are hard to walk away from. It was geek heaven.
While I worked on these incredibly interesting intelligence systems, my friends in startups worked on new things called microprocessors. They’d run around saying, “Hey look, I can program this chip to make this speaker go beep.” I’d roll my eyes, comparing the toy-like microprocessors to what I was working on – which was so advanced you would have thought we acquired it from aliens.
But before long I realized that at my company, I was just a cog in a very big wheel. A small team had already figured out how to solve the problem and ten’s of thousands of us worked to build the solution. Given where I was in the hierarchy, I calculated that the odds of me being in on those decisions didn’t look so hot.
In contrast, my friends at startups were living in their garages fueled with an energy and passion to use their talents to pursue their own ideas, however unexpected or crazy they sounded. “Really, you’re building a computer I can have in my house?”
Engineers Run the World Engineers used to be the people who made other peoples ideas work. Today, they change the world. We live in a time where scientists and engineers are synonymous with continuous innovation. We don’t think twice as our phones shrink, our computers fit in our pockets, our cars run on batteries, and our lives are extended as new medical devices are implanted in our bodies. Scientists and engineers no longer work anonymously in backrooms. Today we celebrate them for improving the quality of peoples’ lives.
George Bernard Shaw once said, “Some men see things as they are and ask why. Others dream things that never were and ask why not.” Engineers like you have the capacity to move the world forward by continually asking “why not?” It’s your special “doing” gene that empowers us to do better.
You invent. You imagine. You see things that others don’t. Where others see blank canvases, you’ll see finished paintings. You hear the music that’s not written, you see the bridges that have yet to be built. You envision the products and companies that don’t exist yet.
Only In America University of Minnesota Science and Engineering alumni have founded more than 4,000 active companies, employing over ½ million people and generating annual revenues of $90 billion. These alums chose not to take the safe road but instead to push beyond their boundaries and DO.
At some time you might decide that you want to become the master of your own destiny – that you want to take an idea – and start your own company. And all of you sitting here just earned a degree that gives you choices that very few other professions have.
Entrepreneurship is not something foreign – it’s built into the DNA of this country. America was built by those who left the old behind. Not too many generations ago your family packed up what they had, got on boat and came to America. They struck out across the country and ended up here in Minnesota.
And what’s great about the United States… No other country embraces innovation and entrepreneurship quite like we do. You don’t have to stay in one job, and it’s really, really hard to starve to death.
Passion I predict that 78% of all commencement speeches this year will have advice about “pursuing your passion and doing stuff you love.” But they don’t tell you why. Well here’s the secret – if you’re going to spend your career in a company, doing stuff you enjoy will help you keep showing up..
But if you want to do something, something entrepreneurial, just loving what you do is isn’t enough. You’re pursuing ideas you can’t get out of your head. Ideas that you obsess about. That you work on in your spare time.
Because that fearless vision and relentless passion are what it takes to sustain an entrepreneur through the inevitable bad times - the times your co-founder quits, or when no one buys, or the product doesn’t work. The time when everyone you know thinks that what your doing is wrong and a waste of time. The time when people tell you that you ought to get a “real” job.
You don’t get grades for resiliency, curiosity, agility, resourcefulness, pattern recognition and tenacity.
You just get successful.
Failure The downside of starting something new is that’s it’s tough, because unlike the movies – you fail a lot. For every Facebook and Google, thousands never make it.
Like Rocket Science Games, which was my biggest failure. 90 days after showing up on the cover of Wired Magazine I knew the game company where I raised 35 million dollars was headed for disaster.
We’d believed our own press, inhaled our own fumes and built lousy games. Customers voted with their wallets and didn’t buy our products. The company went out of business. Given the press we had garnered, it was a very public failure.
We let our customers, our investors, and our employees down. I thought my career and my life were over. But I learned that in Silicon Valley, honest failure is a badge of experience.
All of you will fail at some time in your career…or in love, or in life.
No one ever sets out to fail.
But being afraid to fail means you’ll be afraid to try. Playing it safe will get you nowhere.
As it turned out, rather than run me out of town, the two venture capital firms that had lost $12 million in my failed startup actually asked me to work with them again.
During the next couple years…and much humbler… I raised more money and started another company that we were ultimately able to take public, and those patient investors more than made up for their earlier loss – many times over.
Hypothesis Testing As scientists and engineers, you know about failure. You know that virtually no experiment works the first time. And in a new company all you have is a series of untested hypotheses. You learned something vital in school — to test your hypotheses by designing experiments, getting accurate data, analyzing the results, and then modifying your initial hypotheses based on those results. This is the scientific method, and surprisingly we found the exact same method works for startups.
Becausefailure is a part of the startup process. In Silicon Valley, we have a special word for a failed entrepreneur – it’s calledexperienced. Our country and our entrepreneurial culture is one of second and third chances. It’s what makes us great. You don’t have to change your name or leave town. Entrepreneurs in America know that they get multiple shots at the goal.
Be or Do Someday several of you in this graduating class will be worth a $100 million dollars. And a few of you might change the way the world works.
I want you to look around you. …Go ahead. Take a few seconds and give it a look…
While most of you were looking around wondering who this was going to be, I hope a few of you were feeling sorry for the rest of your classmates, knowing that the most successful person in the audience is going to be you.
These days I write a blog about entrepreneurship. At the end of each post, I conclude with “lessons learned”—a kind of Cliff Notes of my key takeaways. So that’s how I’ll finish up today.
Here are the two lessons that I’d like to pass on to you
Your science or engineering degree gives you tremendous choices – you, and no one else gets to decide two things:
whether you choose to be or you choose to do
whether you “work to live” or whether you “live to work”
Remember… live your life with no regrets. There’s no undo button.