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 1: Bad Advice – All Startups are the Same

In the past entrepreneurship was viewed (and taught) as a single process, with a single approach to creating a business plan and securing funding for a startup.  The best entrepreneurship textbooks and blogs assume that advice to startups is generalizable.  But as I learned from my students this “one-size-fits-all” approach does not work for all startups.  Different market opportunities present radically different startup risks and costs.

Capital Requirements
In my class students form teams and spend a semester building a detailed plan for a company. When I started teaching I launched project teams with this advice: All you need is a half a million dollars to start a company and at most a few million more to scale the company.” And the students nodded, OK, yes sir, and they wrote down, “a half a million bucks to start.”

The next week in class a project group raised their hands and said, “Hey, Professor Blank, we found out the common wisdom in the biotech business is that “we need $10-20 million just for the R&D phase and 100’s of million to get through clinical trials.”

“Of course,” I said, “Life science is completely different. The time to product and scale of investment is radically different than other startup markets.”

Intellectual Property
At the next class I said, “You all ought to get out and start talking to customers on day one, and get early feedback on your idea. You don’t need to worry about any Intellectual Property (IP) issues. Just get out of the building.”

The next week another team, working on a new type of solid oxide fuel cell, remarked, “Professor Blank, in our industry there’s a ton of patents and stuff and people tell us we shouldn’t be out there unless we start patent protecting all our IP.”

“Oops,” I said, “you’re right.  In clean tech nanomaterials you guys need to be talking to patent attorneys.  Don’t share the details of your manufacturing process with customers until you’ve locked up your intellectual property.”

Government Regulations
I turned to the class and said, “The rest of you can keep building your company and shipping your product because you don’t need to worry about government regulations. You’re a startup, just get your product out the door.”

The next week another group raised their hands, “Professor Blank, we’re building a medical device and there’s something called the 510K that the FDA requires, and that’s a two-year process.”

Verticals Are Different
I began to realize that entrepreneurs (and their professors) act like every vertical market and industry has the same set of rules. The guidelines I had originally proposed to my students worked for enterprise software or Web 2.0 startups, but medical device, biotech and cleantech startups required radically different approaches.

So the first heuristic is: do not assume the startup rules are the same for all vertical markets.

Now when my students begin their team projects, I list 13 vertical markets on the whiteboard.  Just for discussion, the markets I chose were:

  • Web 2.0,
  • enterprise software
  • enterprise hardware
  • communications software
  • communications hardware
  • consumer electronics
  • games software
Vertical Markets

Vertical Markets - Click to Enlarge

  • semiconductors
  • Electronic Design Automation (EDA)
  • clean tech
  • medical devices
  • life sciences
  • personalized medicine

There’s nothing special about this list other than it represents a diverse set of markets.  If your market is missing, just add it as we go through this discussion.

Entrepreneurs who have experience in the vertical market they’re entering do this analysis automatically. If you don’t have deep knowledge of the domain you are about to start a business in, you need to begin by understanding the answers to questions like these:

  • What vertical market are you in?
  • Do you have domain expertise in your market?
  • Do you have advisors who are domain experts in your market?
  • Do your potential investors understand your market?
  • What is it that’s unique about the market I’m in?

We’ll talk about the implications of what vertical market you’re entering in the next few posts. 

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Founders and dysfunctional families

Startup CEO Traits
I was having lunch with a friend who is a retired venture capitalist and we drifted into a discussion of the startups she funded. We agreed that all her founding CEOs seemed to have the same set of personality traits – tenacious, passionate, relentless, resilient, agile, and comfortable operating in chaos. I said, “well for me you’d have to add coming from a dysfunctional family.”  Her response was surprising, “Steve, almost all my CEO’s came from very tough childhoods.  It was one of the characteristics I specifically looked for. It’s why all of you operated so well in the unpredictable environment that all startups face.” 74HGZA3MZ6SV

I couldn’t figure out if I was more perturbed about how casual the comment was or how insightful it was.  What makes an individual a great startup founder (versus an employee) has been something I had been thinking about since I retired. My comfort in operating in chaos was something I first recognized when I was working in the Midwest.

The Rust Belt – (Skip this Section if I’m Boring You)
Out of the Air Force, my first job out of school was in Ann Arbor, Michigan, in the mid-1970’s installing broadband process control systems in automotive and manufacturing plants throughout the Midwest. I got to travel and see almost every type of Rust Belt factory – at the time, the heart and muscle of American manufacturing – GM, American Motors, Ford, U.S. Steel, Whirlpool.  Our equipment was installed in the manufacturing lines of these companies, and if it went down sometimes it brought the entire manufacturing line down.

I always made a habit of getting a tour of whatever manufacturing plant I was visiting. Most plant foremen were more than accommodating and flattered that someone actually was interested.  I was fascinated to learn how everyday objects (cars, washing machines, structural steel, etc.) that ended up on our shelves or driveways were assembled.

My favorite factory was the massive U.S. Steel plant by Lake Erie. On my first visit the foreman walked through this enormous building, not much more than a giant steel shed, where they had an open hearth furnace. We came in time to see the furnace being tapped, pouring steel out into giant buckets. (Years later I realized I watched the end of an era. The last open hearth furnaces closed in the 1980’s.)

We stood on a platform several stories up and light streamed diagonally through windows set high on top of the building cutting through the black soot particles created when the incandescent steel hit the bucket. It was too loud to talk so I just watched the steel pour through the clouds of soot backlit by the blinding bright liquid metal. It looked like an update of the iconic image of Penn Station writ large.

And as I stared through the billowing clouds of soot flashing between black and white took on fantastical shapes as tiny figures on the factory floor scurried around the bucket. I could have stayed there all day.

Automobile plants were equally fascinating. They were like being inside a pinball machine. At the Ford plant in Milpitas the plant foreman proudly took me down the line. I remember stopping at one station a little confused about its purpose. All the other stations on the assembly line had groups workers with power tools adding something to the car.

This station just had one guy with a 2×4 piece of lumber, a large rubber mallet and a folded blanket.  His spot was right after the station where they had dropped the hoods down on the cars, and had bolted them in. As I was watched, the next car rolled down the line, the station before attached the hood, and as the car approached this station, the worker took the 2×4, shoved it under one corner of the hood and put the blanket over the top of the hood and started pounding it with the rubber mallet while prying with the lumber.  “It’s our hood alignment station,” the plant manager said proudly.  These damn models weren’t designed right so we’re fixing them on the line.”

I had a queasy feeling that perhaps this wasn’t the way to solve the car quality problem.  Little did I know that I was watching the demise of the auto industry in front of my eyes.

Operating in Chaos
Repairing our equipment could be time critical. One day, I was at the Ford Wixom auto assembly plant training my replacement and I was at met at the door by an irate plant manager.  He welcomed us by screaming, “Do you know how much it costs every minute this line is down.” As I’m troubleshooting our equipment scattered across the plant, (in the computer room, above the steel, in NEMA cabinets next to line, etc.,) the manager followed us still yelling.  My understudy looked at me and said, “how can you deal with this chaos and still focus?”  And until that moment I had never thought about it before.  I realized that what others heard as chaos, I just shut out.

A Day in the Life of A Founder
For those of you who’ve never started a company, let me assure you that it never happens like the pleasant articles you read in business magazines or in case studies.  Founding a company is a sheer act of will and tenacity in the face of immense skepticism from everyone – investors, customers, friends, etc.  You literally have to take your vision of the opportunity and against all rational odds assemble financing, and a team to help you execute.  And that’s just to get started.

Next, you have to deal with the daily crisis of product development and acquiring early customers.  And here’s where life gets really interesting, as the reality of product development and customer input collide, the facts change so rapidly that the original well-thought-out business plan becomes irrelevant.

If you can’t manage chaos and uncertainty, if you can’t bias yourself for action and if you wait around for someone else to tell you what to do, then your investors and competitors will make your decisions for you and you will run out of money and your company will die.

Great founders live for these moments.

Creating the Entrepreneurial Personality – A Thought Experiment
Fast forward three decades back to today.  The lunch conversation was an interesting data point to add to a hypothesis I’ve had.

I’ve wondered, just as a thought experiment, how would we go about creating individuals who operate serenely in chaos, and have the skills we associate with one type of entrepreneurial founder/leader?

One possible path might be to raise children in an environment where parents are struggling in their own lives and they create an environment where fighting, abusive or drug/alcohol related behavior is the norm.

In this household nothing would be the same from day to day, the parents would constantly bombard their kids with dogmatic parenting, (harsh and inflexible discipline,) and they would control them by withholding love, praise, and attention. Finally we could make sure no child is allowed to express the “wrong” emotion. Children in these families would grow up thinking that this behavior is normal.

(If this seems unimaginably cruel to you, congratulations, you had a great set of parents.  On the other hand, if the description is making you uncomfortable remembering some of how you were raised – welcome to a fairly wide club.)

Over the last 5 years I’ve asked over 500 of my students how many of them grew up in a dysfunctional family (participation was voluntary.) I’ve been surprised at the data. In this admittedly very unscientific survey I’ve found that between a quarter and half of the students I consider “hard-core” entrepreneurs/founders (working passionately to found a company,) self-identified as coming from a less than benign upbringing.

Founders as Survivors
My hypothesis is that most children are emotionally damaged by this upbringing.  But a small percentage, whose brain chemistry and wiring is set for resilience, come out of this with a compulsive, relentless and tenacious drive to succeed.  They have learned to function in a permanent state of chaos.  And they have channeled all this into whatever activity they could find outside of their home – sports, business, or …entrepreneurship.

Therefore, I’ll posit one possible path for a startup founder – the dysfunctional family theory.

Throwing hand grenades in Your Own Company
One last thought. The dysfunctional family theory may explain why founders who excel in the chaotic early phases of a company throw organizational hand grenades into their own companies after they find a repeatable and scaleable business model and need to switch gears into execution.

The problem, I believe, is that repeatability represents the extreme discomfort zone of this class of entrepreneur. And I have seen entrepreneurs emotionally or organizationally try to create chaos — it’s too calm around here — and actually self-destruct.

So What?
Lets be clear, in no way am I suggesting that growing up in a dysfunctional family is the only path to becoming a founder of a startup.  Nor am I suggesting that everyone who does so turns out well. And in particular I’m not suggesting that every employee who joins a startup fits this profile, it just seems more prevalent in the founder(s).

And this hypothesis might be a good example of confusing cause and effect. Yet I am surprised given how much is written about the attributes of a startup founder, how little has been written about what “makes” a founder.

Let me know what you think.   Does any of this match your experience or people you know?

Comments and brickbats welcomed.

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The Sharp End of the Stick

The Sharp End of the Stick
At some point in my career as I began to formulate thoughts about mission and intentI started to think about the broader role of marketing in a growing technology company. It became clear to me that the mission of marketing in most companies has to be to support sales.  While this may seem obvious to anyone not in sales and marketing, trust me, in a technology company this is a conceptual breakthrough. In my experience, every marketer with an MBA wants to “do strategy.” Every marketing communication hire couldn’t wait to produce the next great ad or PR program.  Every product marketer thought they should help define the product feature set, etc.  But without sales there is no revenue, and without revenue there is no company.  All the strategic thinking in the world won’t make up for a missed revenue plan.  74HGZA3MZ6SV

Sales was the Sharp End of the Stick, and Marketing was the Stick
The epiphany for me was that in any company where I was running the marketing department, marketing’s number one job (its mission) would be to support sales – and to make the (commission-driven) sales VP the highest-paid person in the company. We were going to do that by turning marketing into a machine to generate end user demand, drive the that demand into our sales channels, and educate our sales channels.  And the same time we were also going to do all the other strategic stuff about pricing, positioning, promotion and customer discovery and validation to help engineering understand customer needs.  But sales came first.

(By the way, companies that have a single individual as the VP of Sales and Marketing have decided that marketing doesn’t add any other value then tactical sales support, and the only way to get is to put it under the VP of Sales.  That’s why you almost never see a marketer as the VP of Sales and Marketing.)

My way of explaining our support and service role to the marketing department was that:

  1. Sales is the sharp end of the stick, and marketing at best, is the stick.
  2. But while the sales team works for commission, the rest of the employees have equity (stock) in the company.
  3. If sales revenue and profits are high enough, we could take the company public or sell it, and the stock would be worth more than the paper it was printed on.
  4. In exchange for being the “point” organization, performance of a salesperson is measured continuously and individuals who fail to deliver quota are removed.
  5. If sales as an organization failed to deliver revenue to plan then all we had were worthless shares.
  6. In reality the sales team was working for the rest of the company to make all of our stock valuable.

No one was confused after that.

Who’s on the Sharp End
In an early stage startup, instead of sales being up front, the point departments are likely to be product development and customer development. Later on in this same company’s life, sales will become the pointy end and product development moves to a supporting role.  In other companies it may be that manufacturing or finance is the sharp end of the stick.  In an IP licensing business, legal and finance are the sharp end of the stick. It varies by company and changes over time.  There’s no magic formula but there are always “leading” departments.  And all “leading” departments have some type of “consequence-based” feedback loops that make success or failure obvious.

The clearest example is the U.S. military.  Combat troops are the “tip of the spear” while everyone else is the logistical tail.  No one in the support chain of the troops is confused or resentful as they all understand that the greatest risk is up at the front.

Killing The Company With Equality
I’ve been on boards where the CEOs took the egalitarian position that “all our departments are equal, no one is more important than any other.”  The unfortunate corollary is that in these companies no department believed it was in a supporting or service role.

In these companies, departments that should have been providing support and service instead behaved like they were the “sharp end” organizations. I’ve encountered finance organizations with budget processes designed to simplify their lives, but not the rest of the company’s. Or expense reporting requirements that took hours of a sales teams time to fill out every week.  Sometimes it was the legal department crafting contracts so onerous I wouldn’t even sign it, let alone expect a customer to do so. At times it was human resources with policies that made people leave rather than stay, or it was a CIO more interested in standards than deployment.

None of these departments operated with any particular sense of malice – just with the certainty that the company revolved around them. But they were misguided because they lacked a clear departmental mission statement that reminded them of the corporate goals. If each department had a mission statement, it would have been clear whether their role was in support or at the sharp end. Having each department develop a mission statement depends on leadership and direction from the CEO.

“Going Out of Business” Strategy
I’m now convinced “all our departments are equal” is a “going out of business” strategy. Not understanding who are the “lead departments” makes companies feel like ponderous, bureaucratic and frustrating places to work.  The best people in the “sharp end” organizations simply vote with their feet and leave.

I loved to compete against these companies.  Their own internal culture would tie them up in knots, and agile startups could run rings around them.

Don’t let this happen to your company.  Embrace and then communicate the idea of a lead department(s).  Build a company culture where everyone supports the “sharp end of the stick.”  

Stay agile, stay focused. 

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Customer Development Talk Startup2Startup

Eric Ries of Lean Startup fame and the author of the Lessons Learned blog joined me at Startup2Startup for a joint Customer Development talk. Thanks to Dave McClure and Leonard Speiser for the opportunity to speak.

The Customer Development talk can be seen here74HGZA3MZ6SV

Part 1

Part 2

Part 3

The slides are here.

If you’ve never seen Eric’s Lean Startup presentation, take a few minutes to at least watch his part. It starts at ~40:30 in the video.

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Killing Innovation with Corner Cases and Consensus

I was visiting a friend whose company teaches executives how to communicate effectively. He had just filmed the second of a series of videos called, Speaking to the Big Dogs: How mid-level managers can communicate effectively with C-level executives  (CEO, VP’s, General Managers, etc.)  As we were plotting marketing strategy, I mentioned that the phrase “Speaking to the Big Dogs” might end up as his corporate brand.  And that he might want to think about aligning all his video and Internet products under that name. 74HGZA3MZ6SV

We were happily brainstorming when one of his managers spoke up and said, “Well, the phrase ‘Big Dogs’ might not work because it might not translate well in our Mexican and Spanish markets.”  Hmm, that’s a fair comment, I thought, surprised they even had international locations. “How big are your Mexican and Spanish markets,” I asked? “Well, we’re not in those markets today… but we might be some day.”  I took a deep breath and asked, “Ok, if you were, what percentage of your sales do you think these markets would be in 5 years?”   “I guess less than 5%,” was the answer.

Now I mention this conversation not because the objection was dumb, but because objections like these happen all the time when you’re brainstorming.  And when you are brainstorming you really do want to hear all ideas and all possible pitfalls.  But entrepreneurial leaders sometimes forget that in startups, you can’t allow a “corner case” to derail fearless decision making.

Corner Cases
A corner case is an objection that may be:

  1. technically reasonable
  2. may have a probability of occurring
  3. its probability of occurring is lower than your probability of running out of money.

I’ve noticed that corner case comments are directly proportional to the intelligence of the people in the room.  The smarter the team the more objections you’ll have – and they’ll all be technically and theoretically possible.

Corner Cases and Consensus are For Large Companies
Carefully considering each and every possible outcome before you proceed with a decision is something large companies with large revenues, shareholders and employees need to do.  

Achieving consensus about every corner case from each stakeholder in the room  is something large companies with large revenues, shareholders and employees need to do.  

Unlike large corporations, startup meetings are not about achieving consensus for every objection raised.  They are about forward motion, momentum and feedback loops (i.e. Customer Development.)

Calculate the Odds
The heuristic I suggest is: hear the corner case objections, make the objector calculate the odds, if the potential damage estimate is low (probability of the event occurring multiplied by its ability to put you out of business) keep the meeting focussed and move on.  If you do this consistently your team will catch on.

You’ll be spending your time on what matters, rather what’s theoretically possible. For a startup “No Corner Cases” needs to be an integral part of your corporate DNA.

Any startup that’s striving for consensus on corner cases instead of speed and tempo will be out of business.

Focus on Speed and Tempo

“Speed and Tempo” – Fearless Decision Making for Startups

”If things seem under control, you are just not going fast enough.”

- Mario Andretti

I was catching up over breakfast with a friend who’s now CEO of his own startup. One of the things he mentioned was that when it came to decision-making he still tended to think and act like an engineer. Each and every decision he made was carefully thought through and weighed. And he recognized it was making his startup feel and act like a big ponderous company. 74HGZA3MZ6SV

Speed = Execution Now

General George Patton said, “A good plan violently executed now is better than a perfect plan next week.” The same is true in your company. Most decisions in a startup must be made in the face of uncertainty. Since every situation is unique, there is no perfect solution to any engineering, customer or competitor problem, and you shouldn’t agonize over trying to find one. This doesn’t mean gambling the company’s fortunes on a whim. It means adopting plans with an acceptable degree of risk, and doing it quickly. (Make sure these are fact-based, not faith-based decisions.) In general, the company that consistently makes and implements decisions rapidly gains a tremendous, often decisive, competitive advantage.

Decision Making Heuristics for the Startup CEO

The heuristic I gave my friend was to think of decisions of having two states: those that are reversible and those that are irreversible. An example of a reversible decision could be adding a product feature, a new algorithm in the code, targeting a specific set of customers, etc. If the decision was a bad call you can unwind it in a reasonable period of time. An irreversible decision is firing an employee, launching your product, a five-year lease for an expensive new building, etc. These are usually difficult or impossible to reverse.

My advice was to start a policy of making reversible decisions before anyone left his office or before a meeting ended. In a startup it doesn’t matter if you’re 100% right 100% of the time. What matters is having forward momentum and a tight fact-based feedback loop (i.e. Customer Development) to help you quickly recognize and reverse any incorrect decisions. That’s why startups are agile. By the time a big company gets the committee to organize the subcommittee to pick a meeting date, your startup could have made 20 decisions, reversed five of them and implemented the fifteen that worked.

Tempo = Speed Consistently Over Time

Once you learn how to make decisions quickly you’re not done.  Startups that are agile have mastered one other trick – and that’s Tempo – the ability to make quick decisions consistently over extended periods of time.  Not just for the CEO or the exec staff, but for the entire company.  For a startup Speed and Tempo need to be an integral part of your corporate DNA.

Great startups have a tempo of 10x a large company.

Try it.

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