Ardent 2: Get Out of My Building

Some of the most important business lessons are learned in the most unlikely ways. At Ardent I learned many of them with a sharp smack on the side of the head from a brilliant but abusive boss. Not a process I recommend, but one in which the lessons stuck for a lifetime. (Read the previous Ardent post for context.)

Lessons to Learn
By the time I joined Ardent I thought I was an experienced marketer, but I’ll never forget my first real lesson in what it meant to understand customers and product/market fit.

We were sitting in our conference room in our first “system-planning meeting”  trying to define the specifications of our new supercomputer and make the trade-offs between what was possible to build, and what customers in this new market would actually want and need. The conversation that day would become one of my professional watermarks.

Marketing is Heard From
Engineering was discussing how sophisticated the graphics portion of our computer should be, debating cost and time-to-market tradeoffs of arcane details such as double-buffering, 24 versus 32-bits of color, alpha channels, etc. I was pleased with myself that not only did I understand the issues, but I also had an opinion about what we should build. All of a sudden I decided that I hadn’t heard the sound of my own voice in a while  so I piped up:  “I think our customers will want 24-bits of double-buffered graphics.”

Silence descended across the conference table. The CEO turned to me and asked “What did you say?” Thinking he was impressed with my mastery of the subject as well as my brilliant observation, I repeated myself and embellished my initial observation with all the additional reasons why I thought our customers would want this feature. I was about to get an education that would last a lifetime.

Picture the scene: the entire company (all 15 of us) are present. For this startup we had assembled some of the best and brightest hardware and software engineers in the computer industry. My boss, the CEO, had just come from a string of successes at Convergent Technologies, Intel and Digital Equipment, names that at that time carried a lot of weight. Some of us had worked together in previous companies; some of us had just started working together for the first time.  I thought I was bright, aggressive and could do no wrong as a marketer. I loved my job and I was convinced I was god’s gift to marketing. Now in a voice so quiet it could be barely heard across the conference table our CEO turns to me and says, “That’s what I thought you said. I just wanted to make sure I heard it correctly.”  It was the last sentence I heard before my career trajectory as a marketer was permanently changed.

Get Out of My Company
At the top of his lungs he screamed, “You don’t know a damn thing about what these customers need!  You’ve never talked to anyone in this market, you don’t know who they are, you don’t know what they need, and you have no right to speak in any of these planning meetings.”  I was mortified with the dressing down in front of my friends as well as new employees I barely knew. Later my friends told me my face went pale. He continued yelling, “We have a technical team assembled in this room that has more knowledge of scientific customers and scientific computers than any other startup has ever had. They’ve been talking to these customers since before you were born, and they have a right to have an opinion. You are a disgrace to the marketing profession and have made a fool of yourself and will continue to do so every time you open your mouth. Get out of this conference room, get out of this building and get out of my company; you are wasting all of our time.”

I was stunned by the verbal onslaught. At that moment I felt so small I could have walked out of a room underneath the crack in a closed door.

Facts Not Opinions
The shock quickly wore off as I processed the gist of what he told me. He was right.  I personally didn’t have any facts, and if we were counting opinions, there were a bunch more educated opinions in that room than I had. All I had been doing was filling the air with marketing noises.

I was convinced that I had just been humiliatingly fired – 90 days into our new company.

Get Out of the Building
As I got up to leave the room, the CEO said, “I want you out of the building talking to customers; find out who they are, how they work, and what we need to do to sell them lots of these new computers.” Motioning to our VP of Sales, he ordered: “Go with him and get him in front of customers, and both of you don’t come back until you can tell us something we don’t know.”

And he was smiling.

My career as marketer had just begun.

Lessons learned:

  • Corporate culture is either set by fiat, by default, or by consensus. But regardless of how it gets set, it gets set early
  • An intelligent opinion is still a guess
  • The dumbest person with a fact trumps anyone with an opinion
  • There are no facts inside the building so get the heck outside

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Ardent 1: Supercomputers Get Personal

Last month on an east coast college tour with my daughter, I found myself in North Carolina for the first time in nearly 24 years.

I had last been in Chapel Hill on a winter’s day in 1986, traveling with the VP of Sales of our new supercomputer startup, Ardent. We were on the University of North Carolina campus to meet with Fred Brooks and Henry Fuchs. We just turned on the rental car radio as we entered campus and heard the mid day BBC news – the space shuttle Challenger had just exploded.

It was the best of times, it was the worst of times
Ardent would be my third technology company as a VP of Marketing (Convergent Technologies and MIPS Computers were the other two.) It would be the company where I actually earned the title.

This is the first of a series of posts on the company.

A Phone Call
After I left MIPS Computers I was in New York tagging along with a friend (a computer architect whose products at Apple a decade later would change the shape of personal computing) who was consulting for a voice recognition startup. We were sitting in our cheap hotel room when the phone rang. It was my ex boss from Convergent Technologies, “Steve we’ve all just resigned from Convergent and we’re starting a new company. I’ve convinced the team you’d be perfect, come join us as the VP of Marketing.” My ex-boss was going to be the VP of Engineering and I would report to the CEO whose marketing acumen and sales instincts seemed at the time to be telepathic and sense of theater was legend. And so was his reputation for being verbally abusive to his direct reports.  Gulp.

The culture and work ethic of Convergent had earned it the title “the Marine Corps of Silicon Valley”. (Not until I was older and wiser did I realize that this was not always meant as a compliment.)

Working with my old boss sounded like a great idea. And in the course of the phone call I put my friend on the phone and let him interview for a job.  On the ride to the airport my friend asked me what our new company was going to do.

Only then did I realize we both forgot to ask.

Never mind
The first idea for our new company was a software product that looked something like Hypertext. With a bit of research it turned out that a professor at Brown University had invented something close to what we had in mind. The VP of Sales and I flew to Providence to convince Andy van Dam at Brown to join our company, or at a minimum lead our advisory board.

On a rainy day in Providence we tracked Andy down just as he was leaving for a trip to Europe.  He agreed to talk to us as he packed his office, and we followed him down the street as he went to get a haircut. With me holding the umbrella our VP of Sales kept reminding him how wonderful it would be if his research could turn into commercial products- all as we all walked downtown to the barbershop. While van Dam sat in the chair getting his haircut, the VP of Sales and I flanked him on either side, with the barber trying to get his clippers in between us. We were painting a picture of hypertext on every desktop computer. I knew we almost had him convinced when our sales guy and Andy started talking to each other in Dutch.

As the conversation began to get down to how much stock and salary we could offer van Dam, we left the barber to finish his work and went to a payphone to call our CEO to confirm the deal. The response from across the country?  “Glad you two called, we were trying to get a hold of you guys.  Forget the Hypertext idea and come on back to California. We’re building a supercomputer.”  Oops.  We told Andy we’d talk further when he got back from Europe.

Supercomputers get Personal
Back in Sunnyvale my friend had not only been hired but had convinced the team that we should be building hardware – making a new class of computers not a software application. Our vision was that just as the PC was revolutionizing the business market, we were going to do the same for scientists and engineers. We were going to target scientists and researchers who were longing to do “interactive simulations,” requiring both scientific computing and visualization of real-world phenomena. We were going to invent a new product and create an entirely new market by putting a personal graphics supercomputer on every desk.

By the mid 1980’s microprocessor technology—specifically off-the-shelf RISC-based microprocessors like the one from MIPS, my previous startup– had evolved to support  the speed needed to support a new class of computers for scientists and engineers.  Unlike Intel chips, MIPS chip architecture also made it possible to plug in a math co-processor. By adding a vector unit to these RISC processors, we believed we could take some of the supercomputer market from Cray (at the time the maker of the most powerful scientific computers in the world) as well as from the emerging class of mini-supercomputers (Convex and Alliant.)

To do that we needed to build a supercomputer, but since the RISC processors weren’t fast enough, we decided to build a multiprocessor supercomputer, (running up to 4 processors in parallel.)  We had to write our parallelizing and vectorizing compilers and build our own high-end graphics boards, and write our own 3d graphics subroutine language – and put in all in a box that could fit in an office. Oh, and since it was not code compatible with anything, we were going to have to port all the key scientific applications our customers needed (as soon as we figured out who they were.)  Some of the other founders had sold minicomputers to scientists and engineers, but no one knew or understood the unique class of applications and customers of supercomputers.  We were going to be guessing.

Personal supercomputers meant yet again learning something completely new; new computer architectures, new applications and customers, new markets.

I couldn’t believe they were paying me to do this job; I would have gladly done it for free.

The Streets of Palo Alto
As our company was getting formed, I happened to bump into Gordon Bell – the ex VP of Engineering of DEC (the company that defined the minicomputer) on the streets of Palo Alto. (It was Gordon who had prodded John Hennessy and the MIPS team at Stanford to start a commercial chip company.) After telling Gordon what we were doing and who was doing it, he realized that he knew most of our founding team when they all had worked at DEC. I invited him to meet the team.  A few days later Gordon became a founder. (Later he would leave for a few years to start the Computing Directorate at the National Science Foundation, help spec what became the Internet and then come back and run Ardent’s engineering.)

I would learn a ton from Gordon for over a decade, not only about practical heuristics for managing complex engineering projects (i.e. the “schedule fantasy factor,”) or his eleven rules of supercomputer design but also a real appreciation for how a technical visionary thinks. (I tried my best to narrow the time that I went from believing that Gordon had yet another insane idea to when I realized it was a profound insight.) It was a challenge to keep up with him (I never did) but it was fun to try.

At the same time Gordon was looking forward, he had a great appreciation of saving the past. He and his wife Gwen would found the Computer Museum, first in the lobby of DEC headquarters, then in Boston (and now as the Computer History Museum in Mountain View, California.) When our kids were little they would play with the computer artifacts (Napier bones and Pascal engines) scattered across their living room and overflowing their shelves when we stayed at their condo in Boston. My first inkling that computing had a history (with deep military connections) was looking at the SAGE air defense computer at the Boston Computer Museum.

I would be lucky in my career to work with Gordon and three other people I consider as mentors.  They would all work in this one company.

Get Out of Building
Our trip to North Carolina was part of a year long effort to get out of the building to understand our market, customers and their applications. How I learned to “get out of the building” is in the next post.

Lessons learned:

  • Ardent’s personal supercomputer pushed at the edge of what was possible to build in technology
  • Our enthusiasm and passion for technology would soon intersect with our hypotheses about customers and market

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The Leading Cause of Startup Death – Part 1: The Product Development Diagram

When I started working in Silicon Valley, every company bringing a new product to market used some form of the Product Development Model.  Thirty years later we now realize that its one the causes of early startup failure. This series of posts is a brief explanation of how we’ve evolved from Product Development to Customer Development to the Lean Startup.

The Product Development Diagram
Emerging early in the twentieth century, this product-centric model described a process that evolved in manufacturing industries. It was adopted by the consumer packaged goods industry in the 1950s and spread to the technology business in the last quarter of the twentieth century. It has become an integral part of startup culture.

At first glance, the diagram, which illustrates the process of getting a new product into the hands of waiting customers, appears helpful and benign.  Ironically, the model is a good fit when launching a new product into an existing, well-defined market where the basis of competition is understood, and its customers are known.

The irony is that few startups fit these criteria. (None of mine did.)  We had no clue what our market was when we first started. Yet we used the product development model not only to manage product development, but as a road map for finding customers and to time our marketing launch and sales revenue plan. The model became a catchall tool for all schedules, plans, and budgets. Our investors used the product development diagram in our board meeting to see if we were “on plan” and “on schedule.” Everyone was using a road map that was designed for a very different location, yet they are surprised when they end up lost.

Product Development Diagram

Product Development Diagram

To see what’s wrong with using the product development model as a guide to building a startup, let’s first examine how the model is currently used to launch a new product. We’ll look at the model stage-by-stage.

Concept and Seed Stage
In the Concept and Seed Stage, founders capture their passion and vision for the new company and turn them into a set of key ideas, which quickly becomes a business plan, sometimes on the back of the proverbial napkin. The first thing captured and wrestled to paper is the company’s vision.

Then the product needs to be defined: What is the product or service concept? What are the features and benefits? Is it possible to build? Is further technical research needed to ensure that the product can be built?

Next, who will the customers be and where will they be found? Statistical and market research data plus potential customer interviews determine whether the ideas have merit.

After that there’s a discussion of how the product will reach the customer and the potential distribution channel. The distribution discussion leads to some conclusions about competition: who are they and how they differ. The startup develops its first positioning statement and uses this to explain the company and its benefits to venture capitalists.

The distribution discussion also leads to some assumptions about pricing. Combined with product costs, an engineering budget, and schedules, this results in a spreadsheet that faintly resembles the first financial plan in the company’s business plan. If the startup is to be backed by venture capitalists, the financial model has to be alluring as well as believable. If it’s a new division inside a larger company, forecasts talk about return on investment.  in this concept and seed stage, creative writing, passion, and shoe leather combine  in hopes of convincing an investor to fund the company or the new division.

Product Development
In stage two, product development, everyone stops talking and starts working. The respective departments go to their virtual corners as the company begins to specialize by functions.

Engineering focuses on building the product; it designs the product, specifies the first release and hires a staff to build the product. It takes the simple box labeled “product development” and makes detailed critical path method charts, with key milestones. With that information in hand, Engineering estimates delivery dates and development costs.

Meanwhile, Marketing refines the size of the market defined in the business plan (a market is a set of companies with common attributes), and begins to target the first customers. In a well-organized startup (one with a fondness for process),  the marketing folk might even run a focus group or two on the market they think they are in and prepare a Marketing Requirements Document (MRD) for Engineering. Marketing starts to build a sales demo, writes sales materials (presentations, data sheets), and hires a PR agency. In this stage, or by alpha test, the company traditionally hires a VP of Sales who begins to assemble a sales force.

Alpha/Beta Test
In stage three, alpha/beta test, Engineering works with a small group of outside users to make sure that the product works as specified and tests it for bugs. Marketing develops a complete marketing communications plan, provides Sales with a full complement of support material, and starts the public relations bandwagon rolling. The PR agency polishes the positioning and starts contacting the long lead-time press while Marketing starts the branding activities.

Sales signs up the first beta customers (who volunteer to pay for the privilege of testing a new product), begins to build the selected distribution channel, and staffs and scales the sales organization outside the headquarters. The venture investors start measuring progress by number of orders in place by first customer ship.

Hopefully, somewhere around this point the investors are happy with the company’s product and its progress with customers, and the investors are thinking of bringing in more money. The CEO refines his or her fund-raising pitch and hits the street and the phone searching for additional capital.

Product Launch and First Customer Ship
Product launch and first customer ship is the final step in this model, and the goal the company has been driving for. With the product working (sort of), the company goes into “big bang” spending mode. Sales is heavily building and staffing a national sales organization; the sales channel has quotas and sales goals. Marketing is at its peak. The company has a large press event, and Marketing launches a series of programs to create end-user demand (trade shows, seminars, advertising, email, and so on). The board begins measuring the company’s performance on sales execution against its business plan (which typically was written a year or more earlier, when the entrepreneur was looking for initial investments).

Building the sales channel and supporting the marketing can burn a lot of cash. Assuming no early liquidity (via an IPO or merger) for the company, more fund raising is required. The CEO looks at the product launch activities and the scale-up of the sales and marketing team, and yet again goes out, palm up, to the investor community. (In the dot-com bubble economy, the investors used an IPO at product launch to take the money and run, before there was a track record of success or failure.)

The Leading Cause of Startup Death
If you’ve ever been involved in a startup, the operational model no doubt sounds familiar. It is a product-centric and process-centric model used by countless startups to take their first product to market.  It used to be if you developed a plan on model that looked like this your investors would have thought you were geniuses.

In hindsight both you and your investors were idiots. Following this diagram religiously will more often than not put you out of business. The diagram was developed to be used by existing companies doing product line extensions – not startups creating new markets or resegmenting existing ones. Most experienced entrepreneurs will tell you that the model collapses at first contact with customers.

VC’s who still believe in the product development model in the 21st century offer no value in building a company other than their rolodex and/or checkbook.

Coming next Part 2: What’s Wrong with Product Development as a Model?

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Coffee With Startups

I’ve just met four great startups in the last three days.

An Existing Market
All four were trying to resegment an “Existing Market.” An existing market is one where competitors have a profitable business selling to customers who can name the market and can tell you about the features that matter to them. Resegmentation means these startups are trying to lure some of the current or potential customers away from incumbents by either offering a lower cost product, or by offering features that appealed to a specific niche or subset of the existing users.

Some of the conversations went like this:

Startup 1
Entrepreneur -“I’m competing against Company x and have been following the Customer Development process and I’ve talked to lots of customers.”
Me – “Have you used Company x’s product? Do you know have they distribute their product? Do you know how they create demand? Do you know how many units they are selling? Do you know the archetype of their customers?
Entrepreneur -“Well no but my product is much better than their product and I have this great idea….”

Rule 1: In an existing market Customer Development means not only understanding potential customers, but your competitors in detail – their product features, their sales channels, their demand creation strategy, their business model, etc.

Startup 2
Entrepreneur -“I’m competing against Company x and we are going to offer a lower-cost, web-based version. We’re about to ship next week.”
Me –“That’s a great hypothesis, do customers tell you that they’d buy your version if it was cheaper or on the web?
Entrepreneur -“Well no but my product is much cheaper and everyone’s on the web and I have this great idea….”

Rule 2: In an existing market Customer Development means understanding whether your hypothesis of why customers will buy match reality. This is easy to test. Do this before you write code you may end up throwing away.

Startup 3
Entrepreneur -“I’m competing against Large Company x and we solve problems for a set of customers – I’ve talked to many of them and they would buy it.”
Me – “So what’s the problem?”
Entrepreneur – “We just started letting early customers access the product and adoption/sales isn’t taking off the way we thought it would. We only have 20 customers, and Large Company x has millions.”
Me – “How are you positioning your product?”
Entrepreneur – “We tell potential customers about all our features.”

Rule 3: In an existing market directly compare your product against the incumbent and specifically describe the problems you solve and why Company x’s products do not.”

Startup 4
Entrepreneur -“I have something really, really new. No one has anything like it.”
Me – “Isn’t it kind of like Twitter but better?”
Entrepreneur – “You don’t get it.”

Rule 4: You may want to think twice positioning as a New Market. If customers immediately get an analogy for your product, don’t dissuade them. Save the “New Billion Dollar Market” positioning for the investors, not customers.

Lessons Learned

  • Deeply understand the incumbents that make up the Existing Market
  • The “hypotheses tested to lines of code written” ratio ought to be high
  • Position against the incumbents weaknesses – their customers will tell you what they are
  • Existing Markets adoption rates are measured in % market share gained, New Markets have adoption rates which may occur in your company’s lifetime

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Burnout

If you hang around technology companies long enough, you or someone you know may experience “burnout” – a state of emotional exhaustion, doubt and cynicism.  Burnout can turn productive employees into emotional zombies and destroy careers. But it can also force you to hit the pause button and perhaps take a moment to reevaluate your life and your choices.

Hitting “burnout” changed the trajectory of both ends of my career in Silicon Valley. This post, which is divided in two parts, is the story of the first time it happened to me.

Zilog
Zilog was my first Silicon Valley company where you could utter the customer’s name in public. Zilog produced one of the first 8-bit microprocessors, the Z-80 (competing at the time with Intel’s 8080, Motorola 6800, and MOS Technology 6502.)

I was hired as a training instructor to teach microprocessor system design for the existing Z-80 family and to write a new course for Zilog’s soon to be launched 16-bit processor, the Z-8000. Given the hardware I had worked on at ESL, learning microprocessors wasn’t that hard but figuring out how to teach hardware design and assembly language programming was a bit more challenging.  Luckily while I was teaching classes at headquarters, Zilog’s field application engineers (the technical engineers working alongside our salesmen) would work side-by-side with our large customers as they designed their systems with our chips. So our people in the field could correct any egregious design advice I gave to customers who mattered.

Customers
The irony is that Zilog had no idea who would eventually become its largest customers.  Our salesmen focused on accounts that ordered the largest number of chips and ignored tiny little startups that wanted to build personal computers around these chips (like Cromemco, Osborne, Kaypro, Coleco, Radio Shack, Amstrad, Sinclair, Morrow, Commodore, Intertec, etc.) Keep in mind this is still several years before the IBM PC and DOS. And truth be told, these early systems were laughable, at first having no disk drives (you used tape cassettes,) no monitors (you used your TV set as a display,) and no high level programming languages.  If you wanted your own applications, you had to write them yourself. No mainframe or minicomputer company saw any market for these small machines.

Two Jobs at Once
When I was hired at Zilog part of the deal was that I could consult for the first six months for my last employer, ESL.

Just as I was getting settled into Zilog, the manager of the training department got fired.  (I was beginning to think that my hiring managers were related to red-shirted guys on Star Trek.)  Since the training department was part of sales no one really paid attention to the four of us.  So every day I’d come to work at Zilog at 9, leave at 5 go to ESL and work until 10 or 11 or later.  Repeat every day, six or seven days a week.

Meanwhile, back at ESL the project I was working on wanted to extend my consulting contract, the company was trying to get me to return, and in spite of what I had done on the site, “the customer” had casually asked me if I was interested in talking to them about a job.  Life was good.

But it was all about to catch up to me.

Where Am I?
It was a Friday (about ¾’s through my work week) and I was in a sales department meeting. Someone mentioned to me that there were a pile of upcoming classes heading my way, and warned me “remember that the devil is in the details.”  The words “heading my way” and “devil” combined in my head. I immediately responded, “well that’s OK, I got it under control – as long as the devil coming at me isn’t an
SS-18.”  Given that everyone in the room knew the NATO codename for the SS-18 was SATAN, I was thinking that this was a witty retort and expected at least a chuckle from someone.

I couldn’t understand why people were staring at me like I was speaking in tongues. The look on their faces were uncomfortable.  The VP of Sales gave me a funny look and just moved on with the agenda.

VP of Sales?  Wait a minute.. where am I?

I looked around the room thinking I’d see the faces of the engineers in the ESL M-4 vault, but these were different people.  Who were these people?  I had a moment of confusion and then a much longer minute of panic trying to figure out where I was.  I wasn’t at ESL I was at Zilog.  As I realized what I had said, a much longer panic set in.  I tried to clear my head and remember what else I had said, like anything that would be really, really, really bad to say outside of a secure facility.

As I left this meeting I realized I didn’t even remember when I had left ESL or how I had gotten to Zilog.  Something weird was happening to me.  As I was sitting in my office looking lost, the VP of Sales came in and said, “you look a bit burned out, take it easy this weekend.”

“Burned out?” What the heck was that? I had been working at this pace since I was 18.

Burnout
I was tired.  No I was more than tired, I was exhausted. I had started to doubt my ability to accomplish everything. Besides seeing my housemates in Palo Alto I had no social life. I was feeling more and more detached at work and emotionally drained. Counting the Air Force I had been pounding out 70 and 80 hour weeks nonstop for almost eight years. I went home and fell asleep at 7pm and didn’t wake up until the next afternoon.

The bill had come due.

Recovery
That weekend I left the Valley and drove along the coast from San Francisco to Monterey. Crammed into Silicon Valley along with millions of people around the San Francisco Bay it’s hard to fathom that 15 air miles away was a stretch of California coast that was still rural. With the Pacific ocean on my right and the Santa Cruz Mountains on my left, Highway 1 cut through mile after mile of farms in rural splendor.  There wasn’t a single stop-light along 2-lane highway for the 45 miles from Half Moon Bay to Santa Cruz.  Looking at the green and yellows of the farms, I realized that my life lacked the same colors.  I had no other life than work. While I was getting satisfaction from what I was learning, the sheer joy of it had diminished.

As the road rolled on, it dawned on me that there was no one looking out for me. There was no one who was going to tell me, “You’ve hit your limit, now work less hours and go enjoy yourself.” The idea that only I could be responsible for taking care of my happiness and health was a real shock.  How did I miss that?

At the end of two days I realized,

  • This was the first full weekend I had taken off since I had moved to California
    3 years ago.
  • I had achieved a lot by working hard, but the positive feedback I was getting just encouraged me to work even harder.
  • I needed to learn how to relax without feeling guilty.
  • I needed a life outside work.

And most importantly I needed to pick one job not two. I had to make a choice about where I wanted to go with my career–back to ESL, try to work for the Customer or stay at Zilog?

More about that choice in the next post.

Lessons Learned

  • No one will tell you to work fewer hours
  • You need to be responsible for your own health and happiness
  • Burnout sneaks up on you
  • Burnout is self-induced.  You created it and own it.
  • Recovery takes an awareness of what happened and…
  • A plan to change the situation that got you there

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Rocket Science 5: Who Needs Domain Experts

What Business Are We In?
While the Rocket Science press juggernaut moved inexorably forward, a few troubling facts kept trying to bubble up into my consciousness. The company was founded to build games with embedded video to bring Hollywood stories, characters, and narratives to a market where “shoot and die” twitch games were in vogue. But underlying the company’s existence was a fundamental hypothesis we refused to see or test – customers would care if we did.

In the game business of the early 1990’s video was at best a brief narrative, a distraction you maybe watched once, not the core of the game. Our potential customers didn’t seem to be calling for Hollywood stories, characters and narrative. That’s OK, because we knew better. We thought we had figured out what the next generation of games was going to be. We were thinking we were in the movie business, but video games were more akin to pinball; both pinball and movies were entertainment but you would never confuse them with each other. Successful pinball companies didn’t hire Hollywood talent.

Meanwhile our company was pouring an enormous amount of dollars into building tools and video compression technology, while also hiring a lot of high-priced Hollywood talent like art directors, and script and story editors.

We Don’t Need Domain Experts
When I looked around at our executive staff, there wasn’t a single founder who was a gamer. Worse, there wasn’t a single person on our executive team who had come from a game company.  Nor was there anyone with game experience on our board. As the company grew a sense of unease started gnawing at the outer fringes of the “you’re in trouble” part of my brain. Meanwhile my partner was in heaven working with his newly hired group of game designers directing and producing our first games. When I pointed out my rising apprehension his response was, “I’ve been playing games since I was 10. I know what’s great and what’s not. We agreed this part of the company was my responsibility. Don’t worry the games are going to be great.” Given my fiduciary responsibility to my board and my investors did his blasé answer force me to grab him by the collar and scream, “Snap out of it, we’re in trouble!”

Nah. Instead I said, “Oh, OK, glad it’s all under control.” Then I went back to raising more money and getting more press for our soon to be spectacular games.

Hire Advice I Can Ignore
But the nagging little voice in the back of my head that said, “This doesn’t feel right,” wouldn’t go away.  So I hired a VP of Marketing from Sega, one of the video game platforms on which our games would run.  After only two weeks on the job, he came into my office and said, “Have you’ve seen the games we are building?”  What kind of question was that?   Of course I had seen pieces of the video we shot and beautiful storyboards. “No,” he insisted, “Have you seen the game play, the part that supposed to keep  players addictively glued to the game console for hours?”   Hmm.  “No, not really, but my partner owns the studio and tells me it’s spectacular and everyone will love it.  Don’t bother him; he knows what he’s doing.  Go spend some time outside the building talking to potential distribution partners.  Tell them how great it’s going to be and see how many pre-orders we can get.”

A month later the VP of Marketing appeared in my office again.  “Steve I have to tell you some bad news, I just showed our potential channel partners and customers a few completed pieces of the games we had. They think the games stink.”

loadstar

Now I know I heard his words because years later I can still remember them well enough to write them down.  But somehow the translation between my ears and what I was supposed to do with what I was hearing shut down. Was my response to stop development of the games?  Bring in some outside professionals to review our progress?  Call a board meeting and say we may have a serious problem?  Nah. I said, “That can’t be true! The press is saying we are the hottest super group around.  Look, we’re on the cover of Wired magazine.  They think we’re brilliant.  Our VCs think we are visionary. Stop annoying our game designers and start working on selling and marketing the games.”

Hindsight
In hindsight it’s easy to laugh.  Saying you knew how to build great games because you played them all your life was like saying, “Hey I  eat out a lot so why don’t I open a restaurant.” Or “I’ve seen a lot of movies so let’s start a movie studio.”  Only in Silicon Valley could we have got funded with this idea, and not surprisingly, it was our technology that had the VC’s confused. It was more like we had invented the world’s best new kitchen utensils and wanted to open a restaurant, or had built the world’s finest movie cameras and wanted to start a movie studio. Our venture backers and our executive team confused our technology and our tools — and our passion for the games business — with any practical experience in the real business we were in.  We were an entertainment business – and not a very subtle entertainment business.  As we were about to find out, if video game players wanted a cinematic experience, they went to the movies, they didn’t buy a video game.  Our customers wanted to kill, shoot or hunt for something.  Fancy video narratives and plots were not video games.

Interest Alignment
Why VC’s invested in companies like ours is what’s great and bad about entrepreneurship.  A Venture Capitalist I respect reminded me that he thought about investment risk as either:

  • investing $1 million in 10 companies and have all ten succeed.  With each of those ten companies returning 2x their money for $20 million. Or
  • investing in 10 companies and having 8 fail  – but the remaining two companies returning 20x their money for $40 million.

His point was that it was in the VC’s interest in having entrepreneurs swing for the fences.

However the VC’s are managing a portfolio while you, the entrepreneur are managing one company – yours.  While VC’s might love you and your firm, a 2x return isn’t why they’re in business.  It’s nothing personal, but your interests and your VC’s may not be aligned. (More on this in future posts.)

The Search for the Black Swan
What keeps founders and their investors going is the the dream/belief that your startup will be the Black Swan – a company that breaks all the obvious rules, ignores tradition and does something unique and spectacular and with a result that is unpredicted and financial returns that are breathtaking.

Think of the Microprocessor, Personal Computer, Internet, Twitter, Youtube, Facebook, Google, the iPhone. Creating those technologies and companies required entrepreneurs willing to follow their own vision and convincing  others that the path is worth following.

The mistake isn’t having a vision and taking risks.  The mistake is assuming you are a Black Swan and continuing to ignore the facts as they pile up in front of you.

Customer Development
There was nothing wrong about Rocket Science having a vision radically different than the conventional wisdom.  We could have been right and invented a new form of gaming and entertainment. What went awry was continuing to execute on the vision when all the evidence in front of us told us our hypothesis was wrong.  We compounded the problem when we failed to have an honest discussion about why it made sense to ignore the evidence.  (A tip-off is when you start saying, “they just don’t get it yet.”)

At Rocket Science, hubris took over and was about to lead to the fall.

Customer Development says having a vision, faith and a set of hypotheses are a normal part of the startup experience.  But it is critical to build in a process for testing those hypothesis outside the building and listening to the responses – or you might as well throw your money in the street.

Lessons learned?

  • While a lack of relevant domain expertise is not always fatal, believing you don’t need any is.
  • Founders need to validate their vision in front of customers early and often.
  • Your goals and your VC’s goals may not be aligned.  Make sure they are.

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Rocket Science 4: The Press is Our Best Product

At Rocket Science while my partner Peter was managing the tools and game development, I was managing everything else. Which at this stage of the company was marketing and financing.

Our “Hollywood meets Silicon Valley” story played great in Silicon Valley, they ate it up in Hollywood, and the business press tripped over themselves to talk to us.  The story had universal appeal, and we spun the tale and keep the buzz going.  It worked. Judging by the ink we had gotten, we were the hottest company in the game business, with stories in Fortune, Forbes, Variety, The Hollywood Reporter, and the cover of Wired magazine. Yet we hadn’t shipped a single product.

While it felt wonderful at the time, this was a very bad idea.

Wired 2.11 Cover

Everyone Else is an Idiot
The theme of our press blitz was all about how we were going to show the old tired game companies the right way to make video games. Our press infuriated the established companies who had spent years building games that sold well, but had zero press recognition.  (They all accurately predicted our demise because of our lack of game expertise.)  Ah, the arrogance of inexperience. Fortunately I’ve never been good at lying, to be effective in communicating a story I truly had to believe in what I was saying.  At the time I was a true believer that Rocket Science was going to change the gaming world. The positive effect of the tidal wave of press was as a door opener for us to raise money from corporate partners.  Companies in the entertainment business around the world knew who we were, and were interested in meeting us, if only to see what the hype was about. Our VP of Business Development had no problems getting meetings and fund raising was easy.

The Digital Dream Team
Way before the Internet phenomenon, we had created “Rocket Science the brand” that was much bigger in size and importance than Rocket Science the company. One magazine called us the “Digital Dream Team”, young, edgy and hip, and by the looks of the company (great building, nice furniture, and well dressed 20-year olds) we were trying to live up to the reputation.  All this activity occurring before we actually shipped a product.  We were larger than life, but as one potential investor told us, “You guys are all hat and no cattle.”

Believing Your Own BS is Toxic
Lots of noise and smoke before a product ships seems to be a toxic byproduct of enthusiastic entrepreneurs. Every generation of new technology seems to find a willing audience in naïve journalists and eager readers.  However, when the smoke clears the surviving companies are more than likely the ones that focussed on execution, not on creating a cacophony of press releases. If Rocket Science wasn’t a clear enough lesson in the danger of premature enthusiasm, the dot-com bubble that followed should have been. The only difference between us and the Internet bubble that would follow was that we did branding on the cheap by creating our image with public relations, whilethe dot-bomb era was to do it by spending enormous sums on advertising (those large venture rounds had to get spent somewhere.)

Hindsight is wonderful.  For years the one solace I was able to take from the Rocket Science debacle was that I had got the branding right. Then I watched the criminally expensive dot-bomb-bust branding activities to see how futile and wasteful it was to brand a company before it has shipped products.

To a Hammer Everything Looks Like a Nail
In hindsight my failure was that I executed to my strength – telling a compelling story – without actually listening to customer feedback.

It wasn’t that I didn’t know how to listen to customers.  It wasn’t that I didn’t have a smart VP of Marketing who was getting early feedback from customers and screaming that the games didn’t match the hype.  It’s that as CEO I was too busy talking to the press and raising money to hear customer comments directly.

I had outsourced customer feedback and ignored the input. In fact, hearing input that contradicted the story I was telling created cognitive dissonance.  So while the words may have passed through my ears I couldn’t “hear” it.  Not being able to hear negative customer input is an extremely bad idea.

Out of the Ashes
A few of the key tenets of Customer Development, came from the ashes.  The Customer Discovery lessons of “get outside the building and test your hypothesis with customers,” and “the founders need to hear the results,” came from this debacle.

The Customer Validation lesson of, “no formal launch until you have early sales validating the product and sales process” was also born here.  Given the lukewarm feedback we were getting from potential customers and channel buyers we should have dramatically dialed back the hype until the follow-on games could match it. Given the talented people we had, there’s no doubt they would have done so.  Instead the huge mismatch between expectations and reality of our first games diminished the brand and demoralized the company – we never recovered.

Lessons Learned

  • PR is not a product- it is a demand creation activity to fill a sales channel
  • The product needs to come close to the hype
  • Fire the CEO who insists on press and PR before they understand customer feedback
  • Branding is a process that should happen after you have customers

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Rocket Science 3: Hollywood Meets Silicon Valley

What do you mean you don’t want to hear about features?
I was now a CEO of Rocket Science, and having a great time building the company (more about that in future posts.) Unfortunately, while I had gone through phases of video game addiction in my life, in no way could I be described as even a “moderate hard-core gamer,” which ruled me out as a domain expert.  So I got out out of the building to meet and understand our customers and distribution partners. I remember after a month or two of talking to 14-22 year old male gamers (our potential target market,) I realized that for the first time in my career I had no emotional connection to my customers or channel partners.

I was about 90 days into the company when I began to realize there was something very different about this business. In previous companies I could talk about technology details and how the product features could solve a customers problem. But people didn’t buy video games on features and they weren’t looking to solve a problem.  I was in a very, very different business.

I was in the entertainment business.

There couldn’t have been a worse choice for CEO in Silicon Valley.

Alarm bell one should have started ringing – for me and my board.

Rocket Science logo

Hollywood Meets Silicon Valley was an Oxymoron
A key premise of our new company was that our video compression and authoring technology would revolutionize how games were made and played. We believed that by putting full motion video (i.e. movies) into video games we could tell stories, build characters, have narratives and bring all the 100 years of craft and cinematic experience of Hollywood to the sterile “shoot and die” twitch games that were currently in vogue.  (This wasn’t just some random Silicon Valley fantasy. My partner had convinced several major Hollywood names that this was the inevitable consequence of the merger of Hollywood and Silicon Valley.  And at the time it was a plausible scenario.)

But in reality our passionate belief that video would transform gaming was just our hypothesis. There was zero proof in the marketplace that was the case. And we weren’t going to be bothered to go out and prove ourselves wrong with facts.  (Why should we – our VC’s had already told us what geniuses we were by fighting to even get into the deal to fund us.  Never mind that no one on our board was in the game business or even played games.)

Alarm bell two should have started ringing – for me and my board.

Swing For the Fences
Since we were so smart we were going to ramp up and build not one game, but an entire game studio based on this hypothesis.  Why shouldn’t we.  Doing one game and seeing customer reaction meant a) acknowledging that some of our assumptions might be wrong, and 2) wasting time.  We were all about scale and swinging for the fences.  That’s what VC funded companies do, don’t they?

Alarm bell three should have started ringing – for my partner and me.

Tools Are the Not the Product
We were going to build an easy to use authoring system that would revolutionize how games were made. (My partner had convinced several of the key members of the Apple Quicktime team to join us.) Our tools group became as important as our content group. Unfortunately, the market was going to remind us that games are about game play.

Customers don’t care about your tools regardless of what business you’re in. Customers of software applications don’t say, “wow, elegant code base.” In movies theater-goers don’t leave talking about your cameras, just whether they were entertained, and in restaurants diners don’t care about your cooking implements, what matters is what the food tasted like.  The tools may provide efficiencies, but what customers care about is your final product. (Later on, way too late, we’d remind ourselves it’s the game stupid.)

Alarm bell four should have started ringing louder for me.

Lessons learned

  • Never, ever, start a company when you’re not passionate about the company, product and customers
  • Always validate your key assumptions on what makes your company tick
  • Swing for the fences is your VC’s strategy.  Make sure it is yours.
  • Don’t confuse your passion for your tools with why your customers will buy your product.

Customer Development Fireside Chat

I did a fireside chat with a few entrepreneurs interested in Customer Development at Draper Fisher Jurvetson, the venture firm behind such Skype, Baidu, Overture, ….

Ravi Belani was nice enough to set it up, blog about the talk and film it.  The relevant part starts about 4:30 into the video (wait for it to download.)

Lessons Learned

  • Most entrepreneurs start a company with hypothesis not facts
  • None of these hypothesis can be tested in the building
  • Therefore – Get out of the building
  • “Market Types” matter
  • Find a market for the product as specified

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Rocket Science 2: Drinking the Kool-Aid

Sometimes faith-based decisions can be based on too much faith.

Entrepreneur-in-Residence
After SuperMac I had been approached by one of our venture investors to be an entrepreneur in residence (EIR), a Silicon Valley phrase which says one thing but means another.

To an entrepreneur, being asked to join a venture firm with an Entrepreneur-in-Residence title means you have been tapped on the shoulder by the VC gods. It means you get to sit at a venture capital firm (some even pay you for the privilege) and stay until you have come up with an idea for your next company or have joined a company you’ve met as they passed through the VC’s offices.  Depending on the size of the venture firm they may have one to three EIR’s who stay an average of a year or so.  It really means that the VC’s would like to own a piece of you.

To a VC it’s a cheap investment, and if they somehow don’t bind you to their firm, someone else will.  In reality an EIR is a set of wonderful golden handcuffs.  Of course no VC firm will come right out and say, “If you’re an EIR for us you can’t do your next deal with any other firm.”  Hmm… You’ve taken their money, eaten their food, sat in their meetings and you are going to take money from someone else?  They have your soul.  It sounded like a great deal. I had no idea what I wanted to do next, and would get paid to think about it?  How could it go wrong?  Little did I know.

Video Games
At SuperMac, Peter Barrett was the witty and creative 24-year old Australian engineer who had designed several of our most successful products, culminating with the software for the Video Spigot.  Now he wanted to go off start his own company. I offered to introduce him to the firm whose Entrepreneur-in-Residence offer I had just accepted. I asked Peter what kind of company he had in mind and was surprised and dismayed by the answer, “I want to make video games.”  I remember thinking, “What a disappointment one of the smartest engineers I know and he is going to waste his time making games.”  I didn’t give his video game idea another thought. I set up the meeting for him, and at the request of the VC who was going to see him, agreed to sit in when they met.

It was a Friday and we showed up at the VC offices on Sand Hill road. Peter had no slides, and I had absolutely no idea what he was about to say, all I knew is that he wanted to talk about something I was utterly uninterested in – video games.

Henry the Vth
To this day, the VC and I still believe either Peter made what was the single most compelling speech we have ever heard or he had slipped something funny into our water.  As Peter began to speak extemporaneously our mouths slowly fell open as he described the video game market, its size, its demographics, the state of the technology, and the state of games. He took us through a day (and a night) of a hardcore gamer and told us about the new class of CD-ROM based game machines about to hit the market.

Peter described the first company in which “Hollywood meets Silicon Valley” and we were enthralled. When he elaborated how CD-ROMs were going to change both the nature of gaming and the economics of the content business, we were certain he had a brilliant idea and by the end of the meeting convinced that this was a company would make a ton of money.

By the end of the meeting the seasoned venture capitalist and I had signed up.

While this all might sound farcical now, a little historical context is in order.  The CDROM content business in the early 1990’s was one of the many of the long line of venture capital fads.  If you were a “with it” VC you needed to have a “Content” or “Multimedia” company in your portfolio to impress your limited partners – educational software companies, game companies, or anything that could be described as content and/or Multimedia.

There Ought to be a Law
Nowadays there are laws that allow you to back out of a time-share condo contract, or used car purchase after seven days because even the government believes there are times when grown adults lose their minds and stand up and yell “Yes I believe, sign me up!”  There are still no laws like that in the venture capital business.

A month later, after raising $4 million dollars (we literally had VC’s fighting over who else would fund us), Peter and I started our video game company, Rocket Science Games.

In reality I had been hired as CEO and the adult supervision and administrative overseer of one of the most creative talents in the valley. And I would get to use my marketing skills at generating an industry-wide reality distortion field to make this company look like the second coming.

I was going to find out why this wasn’t a good idea.

Lessons learned

  • Your level of due diligence should be commensurate with your position in the company and proportional to the reality distortion field of the presenter
  • Never join (or start) a company whose business model you can’t draw
  • Subjects in which you are not a domain expert always sound exciting
  • Sleep on any major decision

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Convergent Technologies: War Story 1 – Selling with Sports Scores

When I was a young marketer I learned how to listen to customers by making a fool of myself.

Twenty eight years ago I was the bright, young, eager product marketing manager called out to the field to support sales by explaining the technical details of Convergent Technologies products to potential customers.

The OEM Business
Convergent’s business was selling desktop computers (with our own operating system and office applications) to other computer manufacturers – most of them long gone: Burroughs, Prime, Monroe Data Systems, ADP, Mohawk, Gould, NCR, 4-Phase, AT&T.  These companies would take our computers and put their name on them and resell them to their customers.

Business customers were starting to ask for “office automation solutions” – word processing, spreadsheets, graphing software on a desktop.  This was just before the IBM PC hit the desktop so there were no “standard” operating systems or applications for desktop platforms. Computer hardware companies were faced with their customers asking for low-cost (relatively) desktop computers they had no experience in building. Their engineering teams didn’t have the expertise using off-the-shelf microprocessors (back then “real” computer companies designed their own instruction sets and operating systems.) They couldn’t keep up with the fast product development times that were enabled by using standard microprocessors. So their management teams were insisting that they OEM (buy from someone else) these products.  Convergent Technologies was one of those OEM suppliers.

Their engineers hated us.

I was traveling with the regional sales manager who had called on these companies, gotten them interested and now needed someone from the factory to provide technical details and answer questions about how the product could be configured and customized.

See How Smart I Am
As the eager young marketer on my first sales call, as soon as we shook hands I was in front of the room pitching our product and technical features. I knew everything about our operating system, hardware and applications – and I was going to prove it.  I talked all about how great the new products were and went into excruciating detail on our hardware and operating system and explained why no one other than our company could build something so brilliantly designed. (This being presented to another company’s proud engineering team who was being forced to buy product from us because they couldn’t build their own in time.)  After I sat down I was convinced the only logical conclusion was for the customer to tell us how many they wanted to buy.

The result wasn’t what I expected. The customers didn’t act particularly excited about the product and how brilliantly I presented it. I do believe some actually rolled their eyes.  They looked at their watches, gave our sales guy a quizzical look and left.

After the meeting our sale rep took me aside and asked if “perhaps I wouldn’t mind watching him on the next call.“

Sports Scores
The next day, as I drove to our next meeting the sales guy was intently reading the sports section of the newspaper and as I glanced over he seemed to be writing down the scores.  I wondered if he had a bookie.  When we got to the meeting he reminded me to be quiet and follow his lead.

We shook hands with the customers, but instead of launching into a product pitch (or better, letting me launch into the pitch) he started asking how their families were.  He even remembered the names of their wives and kids and some details about schools or events. (I couldn’t believe it, here we were wasting precious time and the dumb sales guy is talking about other stuff.)

Just as I thought we were going to talk about the product, he then mentioned the previous nights football game. (Damn, another five minutes down the tube as the whole room chimed in with an opinion as we talked about something else unimportant.)

The Customer is a Genius
Then instead of talking about our products he segued the conversation into their products. He complemented their elegantly designed minicomputers and made some astute comment about their architecture (now I’m rolling my eyes, their computers were dinosaurs) and asked who were the brilliant designers.  I was surprised to see that they were in the room.  And soon the conversation were about architectural tradeoffs and then how customers didn’t appreciate the elegant designs and how the world was going to hell in a handbasket because of these commodity microprocessors.  And our sales guy was agreeing and commiserating.  (And I’m thinking why is he doing all this, just tell these idiots that the world has passed them by and they need to buy our stuff and lets get an order.)

The engineers spoke about all the pressure they were getting from management to build desktop personal computers rather than their traditional minicomputers. And that their management wanted these new systems on a schedule that was impossible to meet. Then our sales guy says something that makes me stop breathing for a while.  “I bet if your management team would give you guys the resources you guys could build desktop computers better than anyone, even better than us.”  There’s a unanimous agreement around the table about how great they were and how bad management was.

The Consultative Sale
Our sales guy then quietly asked if there was any way we could help them.  (Help them?!! We’re here to sell them our stuff, why can’t we just present what we got and they’ll buy it.)  The VP of Engineering says, “well we don’t have the resources or time, and as long as you know we could build better computers then you guys, why don’t you tell us the details about your computers.”

I had just watched a master of the consultative sale.

Engineers as Salesmen
I thought (and still do) that this sales guy walked on water. He had spent 12 years at DEC, first as a hardware engineer designing part of the PDP-16, then as the marketing manager for the LSI-11 and then into sales.

Making sales calls with him taught me what a world class salesperson was like.  It also made me understand what kind of support sales people needed from marketing and what marketing programs were wasted motion.

It also made me realize that there are times you don’t want any sales people in your company.

Startups and Sales
If you read this post you can come away with the impression that every startup with a direct salesforce needs a consultative sales team.  Not true.

The answer depends on your answer to two questions:

  1. which step in the Customer Development process are you on?
  2. what Market Type is your startup?

Customer Development and Selling Strategy
If you’ve just started your company you are in customer discovery.  If you’ve tried to slog your way through my book on Customer Development you know that I’m insistent that the founders need to be the ones getting outside the building (physically or virtually) to validate all the initial hypotheses of the business model and product.  If you hire a VP of Sales with the idea that they can do customer discovery you violated the first principle of Customer Development – this isn’t a step the can be outsourced to a non-founder.

Customer Development DiagramHiring a VP of Sales in customer discovery typically sets a startup back. It’s only after you’re done with customer discovery and are in the final steps of customer validation (building a repeatable and scalable sales process) that you start hiring a sales executive.

The next thing you need to do is match your sales team with your market type.

Market Type and Sales Teams
If you remember from a previous post, startups fall into four Types of Markets. You need to hire the right type of sales people for the type of market.

market-typeIf you are in a New Market, (delivering what Clayton Christensen calls disruptive innovation) the market doesn’t even have a name and customers have no clue on how your product works or how it could help them.  This market cries out for a sales force that can help educate and guide the market to making the right choices.  Your sales team is an extension of your marketing department.  The same is true if you are in an existing marketing and trying to sell to a niche or a segment of the market based on your knowledge of their particular needs.  Both New Markets and Resegmented Niche Markets required a skilled consultative sales force.

This is very different from the sales team you would hire to sell in an existing market or a cheaper product.

If you’re in an existing market and you have a superior product, by all means tout your features and specifications.  However, your product itself will be doing a lot of the selling.  If it is demonstrably better as you claim your marketing department needs to communicate that competitive advantage and your sales curve should look linear as you take share from the existing incumbents.

If you are resegmenting an existing market a product with a cheaper alternative, by all means tout your price.  Your marketing department should be all over this.  In both cases you really don’t need a skilled/consultative sales force.  A sales team with a great rolodex will do.

Sales by Market Type

Sales by Market Type

Lessons Learned

  • Get out of the building (physically or virtually)
  • Sales calls aren’t your IQ test or PhD defense
  • Stop talking and listen to the customers problem
  • Hire a sales team at the Customer Validation step
  • Match the sales team to market type

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Elephants Can Dance – Reinventing HP

I was at the Stanford library going through the papers of Fred Terman and came across a memo from 1956 that probably hasn’t been seen or read in over 50 years. It had nothing to do with the subject I was looking for, so I read it, chuckled, put it back in the file and kept leafing through the other papers. About a minute later I did a double-take as it hit me what I had just read. (I’ll show you the memo in a second. But first some background.)

Things Change
In 1956 Hewlett Packard (HP) was a 17-year old company with $20 million in test equipment sales with 900 employees.  It was still a year away from its IPO.

Its latest product was an oscilloscope, the HP 150a.

HP 150a Oscilloscope 1956

HP 150a Oscilloscope 1956

In March of 1956, Fred Terman, the Stanford professor who encouraged Bill Hewlett and David Packard to start HP, wrote Bill Hewlett asking for help.

Terman, who now was the Provost of Stanford, had joined the U.S. Army Signal Corps advisory board, and the Army was going to acquire their first computer for research.  No one in the Army Signal Corps knew much about computers. (To be fair in 1956 not too many people in the world knew much either.) So the Army asked Terman for help.

Fred Terman wrote to Bill Hewlett asking if he or anyone at Hewlett Packard could help them figure out these “computers.”

Hewlett’s answer, in the memo I discovered in the Stanford library, is below.

HP Letter

I have no personal knowledge of computers nor does anyone in our organization have any appreciable knowledge.

We Changed Our Mind
In 1966, 10 years after Hewlett’s memo, Hewlett Packard’s revenue and headcount had grown ten fold; $200 million and 11,000 employees – all from test and measurement equipment.  That year HP introduced its first computer, the HP 2116A, as an instrument controller for HP’s test and measurement products. (Hewlett’s partner Dave Packard wanted to get into the computer business.)  It was priced at $22,000 – equivalent to about $140,000 in 2009 dollars.

HP2116B Computer

HP2116B Computer

Thirty-three years after introducing its first computer, Hewlett Packard split into two separate companies.  The original Hewlett Packard which made test and measurement products was spun-out and renamed Agilent.  The remaining company kept the Hewlett Packard name and focussed on computers.

  • Agilent is a $5.8 billion dollar test and measurement company.
  • Hewlett Packard (HP) at a $118 billion is the largest PC and notebook manufacturer in the world.

That’s a pretty long way from a company that admitted it knew nothing about computers.

Elephants Can Dance
HP’s complete makeover made me wonder about other large companies that reinvented themselves.

Intel was founded in 1968 to make memory chips (bipolar RAM) but 17 years later they got out of the memory business and become the leading microprocessor company.

IBM had a near death experience in 1993, and moved from a product-centric hardware company to selling a complete set of solutions and services.

After failing dismally at making disposable digital cameras in 2003 Pure Digital Technologies reinvented their company in 2007 to make the Flip line of camcorders.

Apple was a personal computer company but 25 years after it started, it began the transformation to the iPod and iPhone.

A few carriage makers in the early part of the 20th century made the transition to become car companies. A great example is William Durant’s Durant-Dort Carriage Company. Durant took over Buick, in 1904 and in 1908 he created General Motors by acquiring Oldsmobile, Pontiac, and Cadillac.

Elephant Graveyard
Reinvention of large companies, while making for great case studies are rare.  For the first 25 years HP’s business model was static. It got bigger by inventing new test and measurement equipment and it hired people who knew how to execute that strategy. Of course HP did ship new products and innovate, but their center of innovation was sustaining innovation, around the core of their existing business. (Clayton Christensen describes this brilliantly in the Innovators Dilemma.)

However, no markets last forever. Technology changes, culture changes, customer needs change, more agile competitors emerge, etc.  So what causes some big companies to reinvent themselves and others to remain static?

Creative Destruction
Most established companies fall into the seductive trap of following short term profits all the way into the ground – leaving only their t-shirts and coffee cups. It’s not the executives are stupid it’s just that there are no incentives (or corporate DNA) for doing otherwise.  General managers of divisons are compensated on division P&L not long term innovation. CEO’s and the executive staff are watching the corporate bottom line and earnings per share. Wall Street wants quarterly earnings.

It’s a pretty safe bet that left to their own devices most large corporations wouldn’t last more than a generation without major reinvention.  And venture capital and entrepreneurship has made life even tougher for the modern corporation. Over the last 35 years venture capital has funded nimble new entrants (on a scale never imagined by Schumpeter) who exist to exploit discontinuities in technology or customer behavior. Startups have forced an accelerated cycle of creative destruction for large companies that didn’t exist in the first half of the 20th century.

Cultural Revolution at Large Corporations – the Founders Return
Of the companies that do reinvent themselves it’s interesting that often its the founder or an outsider that has the insight and makes the radical changes. At HP the founders were still at the company and still running the business. It was David Packard who wanted to get into the commercial computer business – over the objections of his co-founder Bill Hewlett and most of the company.  Packard had the stature and authority to encourage the shift and the internal political acumen to acquire a minicomputer company and label the first HP computer as a “instrument controller.”

At Apple the company reinvented itself on Steve Jobs return.  Howard Shultz came back at Starbucks, Michael Dell reengaging at Dell. Outsiders like Lou Gerstner at IBM and Jon Rubenstein at Palm were brought in to reinvent their companies.

Lessons Learned

  • It’s the founders that can reinvent a company by seeing market shifts that professional managers focused on execution can not
  • If the founders aren’t around, bring in outsiders with fresh insights

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Am I a Founder? The Adventure of a Lifetime.

When my students ask me about whether they should be a founder or cofounder of a startup I ask them to take a walk around the block and ask themselves:

Are you comfortable with:

  • Chaos – startups are disorganized
  • Uncertainty – startups never go per plan

Are you:

  • Resilient – at times you will fail – badly.  How quickly will you recover?
  • Agile – you may find the real opportunities for your company was somewhere else.  Can you recognize and capitalize on them?
  • Creative / Pattern Recognition – can you think “out of the box?”  Or if not, can you recognize patterns others miss?
  • Passionate – is the company/product/customers the most important thing in your life? 24/7?
  • Tenacious – can you keep going when everyone else gives up? Can you keep giving 200% despite all the naysayers who don’t believe in your idea?
  • Articulate – can you create a reality distortion field and have others see and share your vision and passion?

And I remind them that they should be bringing some type of domain expertise (technical or business) to the table.

This is the minimum feature set for founders.

Other Roles in a Startup
Generic advice given to entrepreneurs assumes that everyone is going to be the founder/co-founder. Yet for every founder there are 10-20 other employees who take the near-equivalent risks in joining an early-stage company.  If you’re not a founder (by choice, timing or temperament,) you may be an early employee or a later stage startup employee.

(And my advice to students who believe they want to do a startup but are unsure if they want to start one, is to join one that’s already raised their first round of funding. Founders know they want to start something.  If you’re unsure, you’ve just decided.)

I believe that founder, early and later stage employees require different risk/personality profile.

The Early Employee
If you’re a founder/co-founder all the attributes I mentioned above are needed in spades.  However, if you want to join a startup as an early employee (say in the first 25 employees,) you can modify the list above.

You still need to be comfortable with chaos and uncertainty, but by this time the major risk of where the first round of funding is coming from is gone.  However, you will be dealing with almost daily change, (new customer feedback/insights from a Customer Development process and technical roadblocks,) as the company searches for a repeatable and scalable business model. This means you still need to have a resilient personality, and be agile.

Early stage employees are “self-starters” and show initiative rather than waiting for other people to tell them what to do or how to do it. (You may be wearing multiple hats in one-day.) You have to be passionate about your work, the company and its mission to be working 24/7. But more than likely you don’t need to be as articulate or creative as the founders (they’re doing the talking, while you’re doing the work.)  And while you do need to be tenacious, you won’t need to be the last man standing if the ship goes down.

The Later Employee
If you want to join a startup as a later employee (say employee number 25-125, before the company is profitable) you can continue to modify the list above.

You still need to be comfortable with chaos and uncertainty.  And you will be dealing with change, but it won’t be the constant daily change the early employees dealt with. By now the company may have found and settled on a repeatable business model. And at this stage of the company rather than everyone doing everything, actual departments may begin to form. However, job responsibilities  and organizations will change regularly and you need to feel comfortable in embracing those changes and taking responsibility and ownership.

And you’ll still need to have a resilient and agile personality, as new customer and product opportunities will appear and change your work.  But it won’t be happening daily.  And while you still need to love what you do your passion doesn’t have to extend to tattooing the company’s logo on your arm.

The Adventure of a Lifetime
Take the time and think through who you are and what level of challenge you are looking for.

You’re not joining a big company.  Startups are the adventure of a lifetime.  But make sure it fits who you are.

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Faith-Based versus Fact-Based Decision Making

I’ve screwed up a lot of startups on faith.

One of the key tenets of entrepreneurship is that you start your company with insufficient resources and knowledge.

Faith-based Entrepreneurship
At first, entrepreneurship is a Faith-based initiative.  There is no certainty about a startup on day-one.  You make several first order approximations about your business model, distribution channels, demand creation, and customer acceptance. You leave the comfort of your existing job, convince a few partners to join you and you jump off the bridge together.

At each startup I couldn’t wait to do this.  No building, no money, no customers, no market?  Great, sign me up.  We’ll build something from scratch.

You start a company on a vision; on a series of Faith-based hypotheses.

Fact-based Execution
However, successfully executing a startup requires the company to become Fact-based as soon as it can.

Think about all the assumptions you’ve made to get your business off the ground.  Who are the customers?  What problems do they have?  What are their most important problems?  How much would they pay to solve them?  What’s the best way to tell them about our product?…

Ad infinitum. These customer and market risks need to be translated into facts as soon as possible.

You can blindly continue to execute on faith that your hypothesis are correct.  You’ll ship your product and you’ll find out if you were wrong when you run out of money

Or you can quickly get out of the building and test whether your hypothesis were correct and turn them into facts.

In hindsight, when I was young, this where I went wrong.  It’s a lot more comfortable to hang on to your own beliefs than to get (or face) the facts.  Because at times facts may create cognitive dissonance with the beliefs that got you started and funded.

Customer Development
This strategy of starting on faith, and quickly turning them into facts is the core of the Customer Development process.


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Vertical Markets 3: Reducing Risk in Startups

This post makes sense when you read the previous two vertical markets posts first.

Reducing Risk – Simulation versus Customer Development
If you remember the first part of this discussion, startups face two types of risk; invention risk and/or customer/market risk.  In either type of startup you want to put in place processes in place to reduce risk.

Simulation to Reduce Invention Risk
If you’re in a vertical where “invention risk” is dominant, then you want to do everything you can to manage and reduce those risks. Simulation allows you to build test, fail, and iterate without actually building the physical device. (You can use static methods like Monte Carlo simulation, or dynamic methods using continuous or discrete simulation.) But however you do it, in companies with invention risk you want to simulate as much of process as possible, as early as possible. For some markets you can design a model of your product on a computer and conduct experiments with the computer model to understand whether it will work, long before you actually build it. For example, in the semiconductor business engineers spend enormous time, money and effort on simulation, the process of actually building the chip in software and running tests to see how well it will perform – well before they ever get to first silicon. And the holy grail of the biotech business is another simulation process called computer aided drug discovery, which someday might be used to streamline the drug discovery and development process. 

Customer Development to Reduce Risk
Conversely, if you’re in a startup where the greatest set of risks are about failing to find the right customers/markets you would look for processes to reduce those risks.  The Customer Development Process I teach and write about is designed to do just that.

Customer Development Diagram

The Customer Development Model

The Customer Development model says that when you start your company customer needs are unknown.  You may have a set of hypothesis about them but you really don’t know.  The Customer Development process puts you in continuous contact with customers to test your concept, fail, and iterate way before you actually ship the product. It allows you to systematically replace each business-critical hypothesis with facts.

(When I wrote the Four Steps to the Epiphany, the Customer Development text, I hadn’t yet thought about what vertical markets it might be appropriate for.)

Since my class was using the Customer Development text, I updated this diagram on to reflect in which markets the process was appropriate.  For example, I told my students doing life sciences projects it would be 5-10 years before they needed to worry about customers. However, for the Web 2.0 companies they needed to start the Customer Development process now.

Customer Development by Vertical - Click to Enlarge

Customer Development by Vertical - Click to Enlarge

(As a reminder, if you’ve slogged you way through the Customer Development textbook, you know the Customer Development process says your business plan is just a series of untested hypothesis (unless you’re a domain expert.)  So starting with the vision of your product, get out of the building, and see if you can find customers and a market for the product as specified. In contract to the linear execution via business plan, the Customer Development process is built on low-cost and continuous learning and iterating.)

Two Sides of the Same Coin
Simulation and Customer Development are simply two sides of the same coin.  They both have offer startups a path of getting it wrong often and early without go out of business.

The next Vertical Markets post will put all the pieces together.

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