AgileFall – When Waterfall Sneaks Back Into Agile


This article previously appeared in the Harvard Business Review

AgileFall is an ironic term for program management where you try to be agile and lean, but you keep using waterfall development techniques. It often produces a result that’s like combining a floor wax and dessert topping.

I just sat through my a project management meeting where I saw AgileFall happen first-hand. The good news is that a few tweaks in process got us back on track.


I just spent half a day with Henrich, the head of product of a Fortune 10 company. We’re helping them convert one of the critical product lines inside an existing division from a traditional waterfall project management process into Lean.

Henrich is smart, innovative and motivated. His company is facing disruption from new competitors. He realized that traditional Waterfall development wasn’t appropriate when the problem and solution had many unknowns.a

This product line has 15 project managers overseeing 60 projects. Over the last few months we’ve helped him inject the basic tenets of Lean into these projects. All are Horizon 1 or 2 projects – creating new features for existing products targeting existing customers or repurposing existing products, tools, or techniques to new customers. Teams are now creating minimum viable products (MVPs), getting out of the building to actually talk with users and stakeholders, and have permission to pivot, etc.  All good Lean basics.

AgileFall in Real Life
But in our latest meeting I realized Heinrich was still managing his project managers using a Waterfall process. Teams only checked in – wait for it – every three months in a formal schedule review. I listened as Henrich mentioned that the teams complained about the volume of  paperwork he makes them fill out for these quarterly reviews. And he was unhappy with the quality of the reports because he felt most teams wrote the reports the night before the review. How, he asked, could he get even more measures of performance and timely reporting from the project managers?

At first glance I thought, what could be bad about more data? Isn’t that what we want – evidence-based decisions? I was about to get sucked down the seductive path of suggesting even more measures of effectiveness when I realized Henrich still had a process where success was measured by reports, not outcomes. It was the same reporting process used to measure projects that used linear, step-by-step Waterfall.

(To be fair to Henrich, his product team is a Lean island in a company where Waterfall still dominates. While his groups has changed the mindset and cadence of the organization, the folks he reports up to don’t yet get Agile/Lean learning and outcomes. They just want to see the paperwork.)

In both managing down and up we needed a very different project management mindset.

Lean Project Management Philosophy
So our discussion was fun. As the conversation progressed, we agreed about the ways to manage projects using a few operating principles of Lean/Agile project management (without ever mentioning the words Lean or Agile.)

  1. It was the individuals who were creating the value (finding solution/mission ft) not the processes and reports
  2. However, the process and reports were still essential to management above him.
  3. Having the teams build incremental and iterative MVPs was more important than obsessing about early documentation/reporting
  4. Allow teams to pivot to what they learned in customer discovery rather than blindly follow a plan they sold you on day one
  5. Progress to outcomes (solution/mission ft) is non-linear and not all teams progress at the same rate

Pivoting the Process
With not too much convincing, Henrich agreed that rather than quarterly reviews, the leadership team would to talk to 4-5 project managers every week, looking at 16-20 projects. This meant the interaction cycle – while still long – would go from the current three months to at least once a month.

More importantly we decided that he would focus these conversations on outcomes rather than reports. There would be more verbal communication and a lot less paper. The reviews would be about frequent delivery, incremental development and how leadership could remove obstacles. And Henrich’s team would continue to share progress reporting across the teams so they could learn from each other.

In sum, the radical idea for Henrich was tha this role was not to push the paperwork down. It was to push an outcome orientation down, and then translate its progress back up the chain. While this was great for the teams, it put the onus on Henrich to report progress back up to his leadership in a way they wanted to see it.

I knew the lightbulb had fully gone on when near the end of the meeting Henrich asked his team, “Going forward, who are the right team members to manage a Lean process versus a Waterfall?” And I smiled when they concluded that Lean could be managed by fewer people who could operate in a chaotic learning environment, versus a process-driven, execution one.

I can’t wait for the next meeting.

Lessons Learned

  • AgileFall is a seductive trap – using some Lean processes but retaining the onerous parts of Waterfall
  • The goal of leadership in Lean product management is not to push the paperwork down. It’s to push an outcome orientation down and translate its progress back up the chain

U.C. Santa Cruz Commencement Speech – 2019

I was honored to give the commencement speech at the University of California Santa Cruz, right down the road from the ranch. Rather than my usual talks about innovation and entrepreneurship I shared a few lessons learned after serving seven years as a public official on the California Coastal Commission. I told four stories about the conflict between money and power versus the common good.

I was invited to give the talk by Professor Sue Carter, now the provost of the college. In 2011 Professor Carter was in the first National Science Foundation I-Corps class. Last year, she testified in front of Congress about the program.

Bay Nature, the San Francisco regional nature magazine, did a great job in capturing the context of my commencement speech in this article.  Worth a read first, before you read below.

The speech is below.

—–

Congratulations to the graduates!

The talk starts at 27:00

If you can’t see the video click here

Today while we celebrate your college degree, it represents just the end of one part of your life and the beginning of the next.

You’ve just spent the last four years putting passion, energy and conviction into your friendships, politics, social justice, partying and – every once in a while – your classes.

Now your time in the classroom is over and your real education is about to begin.  Many of you will find yourselves colliding with a world driven – less by ideas, knowledge and the pursuit of truth – and more by money – ideology – and power.

So today, I’m going to offer you a glimpse of how the world outside of this esteemed institution really works. And offer some tips on how to be effective change agents for repairing the world.

It’s altogether fitting and proper that in a college named after Rachel Carson, to share four short stories of what happened when truth and justice faced money and power – for the seven years I served as a public official on the California Coastal Commission. The agency that regulates land use on all 1100 miles of the California Coast.

My first story is that the Smartest person in the room is almost never the most effective.

One of things I loved about being a coastal commissioner was how much I learned. Coming out of Silicon Valley and the tech world, I was a complete novice on how policy gets made. So, I had to read the Coastal Act, the Coastal Regulations, and enough law to understand the positions our staff took and what the applicants were contending. And each month I’d have to read through 100 staff reports to figure out how to vote. Deciding between the applicants, their lobbyists, the environmental community, the staff, the coastal act and the law.

Meanwhile, while I was reading everything, I noticed that one of the other commissioners was reading nothing, not the staff reports, not the coastal act, not the law.  In fact, all he could do was count to seven.

And that ability to count to seven made him the most effective commissioner.

Why? Because out of 12 commissioners, seven is the number needed to win a majority in a vote.

While I was the master of the facts and data, he was calling in favors, cajoling others, and building a coalition to get the majority of commissioners to see the world his way.

So, my first lesson is – You don’t need to be the smartest person in the room to be the most effective. Being effective means not just mastering the facts but – figuring out how to move your agenda forward.

My second story is about the power of Misdirection over the truth

Magicians use misdirection all the time: they sweep off their top-hat, you fixate on it, and all of a sudden, their assistant standing next to them disappears.

I got to watch a magic act unfold before my eyes when real estate developers made eight office buildings totaling ¼ million square feet — twice the size of a Wal-Mart — disappear. How?

The developers wanted to build office buildings in an area zoned for farmland. Traffic from this huge project would have filled local roads not designed for this density and would impact the public’s access to the beach. Given that on the face of it, this project violated all kinds of laws, how did these developers make it disappear – andget unanimous approval from the county’s Board of Supervisors?

Their solution was brilliant – and evil. They proposed that after building these eight office buildings, they would build a housing facility for developmentally disabled adults. They convinced the dedicated, deserving and passionate parents of this group that this project was the only hope these families would ever have to secure housing for their children (neglecting to tell them they had located the housing for the disabled in a tsunami inundation zone).

Naturally these parents became vociferous advocates for the project. They brought their disabled children to the hearings and did exactly what the developers had hoped – with not a dry eye in the house, no one could see the project anymore. The developer had moved the attention from a project that violated local and state zoning onto a small and deserving group of individuals. It was heartbreaking. And it was world-class misdirection.

The lesson here is that misdirection is designed to distract you from the truth. Obscuring a fact-based argument with a faith-based one is what demagogues do – in policy and politics.  See through it. Help others to see how this kind of misdirection distorts their perspectives.

My third story was about the day I learned to Follow the Money

The business model for real estate developers isn’t hard to understand – they buy farms and ranches then build houses and sell them off. And in California if you can build 1,500 houses on a 400-acre farm, that might be worth a billion dollars. Developers make their profit off the difference between the cost of the land and the net profit on the houses.

But one obstacle for California developers is that the Coastal Act says you can’t build on land that has been designated a Sensitive Habitat or wetland. So, if you’re a developer, having any land declared sensitive is a loss of potential revenue.  In fact, it can kill the project. However, … there is one loophole in those rules – if you’re a farmer you can plow under anything.

So as a consequence,real estate developers are great farmers. They buy-out family farms for prices that far exceed what the farmers could ever get from selling their crops. And then they lease the land back to them so they can continue to farm. The developers invest in equipment so farmers can plant multiple crops each year, till each and every inch of their fields, and ensure those fields are perfectly level so no water can collect on the fields.

When I first ran into this I thought, “Wow what a great deal. The developers are great for the environment, they’re helping farmers by making all these improvements.

It took me a year and lots of looking at puddles on farms for the dim lightbulb to go on over my head. Real estate developers couldn’t care less about farming or the crops.

The developers were keeping the farmers plowing the fields to make sure no sensitive habitat would appear.  And the day a developer got the zoning approvals, the bulldozers would show up to start building the houses that would bury the farm.

The lesson here was that when I was standing in the farm field, I wasn’t looking at a puddle – I was staring at a billion dollarsv- and I didn’t see it.

So when you hear or see something that is too good to be true – follow the money. It’s usually a long and winding road – but eventually you’ll find it.

My final story is: if you want to make change you have to learn to communicate and inspire others.

In all these lessons, I’d be remiss if I didn’t mention the namesake of your school – Rachel Carson. You all study her work your first year here. You know she was a marine biologist at theU.S. Fish and Wildlife Service – only the second woman in the job – and she served as editor-in-chief of all its publications.

Her 1962 book, Silent Spring, launched the modern environmental movement.

The book’s title evokes a spring when all the songbirds died. Ittold the story of the damage caused by indiscriminate use of pesticides, especially DDT, to control insects. It educated a mass audience, most who had never seen a scientific paper in their lives, about how these chemicals entered the food chain, accumulated in the tissues of animals and ultimately made their way up to humans.

DuPont and other chemical companies threatened Carson’s publisher as well as the New Yorker and Audubon Magazine unless their planned Silent Spring features were canceled but nevertheless, she persisted. The book was a moral call to arms for people to take personal action.

Rachel Carson wasn’t first to raise concerns about DDT, but her impact was to communicate scientific evidence in a way that the general public could understand – she used facts to inspire others to take action.

In naming this college the donors said, “Carson, like UC Santa Cruz, epitomizes love of the natural world, ethical judgment based on sound scientific principles, and the persistence and courage to create change.”

Change happens when you can educate and inspire others – when you can use facts to create faith in what’s possible.

For those of you who will continue in the sciences or research, the easy part will be to write papers for your peers. The harder part is how you’ll explain “inconvenient truths” to people who may not want to hear them. How will you rouse an audience to action?

Finally, why do public service?

My work on the Coastal Commission took four days of my week each month in public hearings – at times in exhausting 12-hour days. And I’ve sat on the boards of other local and national non-profits.

But why serve your community, state or country? For me, I volunteered my time because of a gift I received my first year in college.

On my first day of school in Michigan I met Michael Krzys, who one day would be the best man at my wedding.  As we got to know each other, I pretty quickly realized that I had met my match, someone with even more curiosity, creativity and a wry sense of humor.

But as I got to know Michael, there was another, completely foreign part of him I didn’t understand. It would take me another 30 years.

From the day I met him he had a commitment to public service that was deep, heartfelt, profound, unshakable and to me, mysterious and completely unfathomable. Even as a freshman, Michael already knew that his calling was to help others and to do so he was determined to become a public service lawyer.

It confused and unnerved me to know someone with so much certainty about the meaning and direction of his life.  It couldn’t have been more different from mine.

After our first year our lives took different paths. When they would touch again, it would be in ways neither of us could have predicted. 

I left school and joined the Air Force during Vietnam, and Michael and I kept in touch via letters – me telling him about adventures in the military, fighter planes, electronics and foreign countries. His letters to me explained that while he appreciated my dedication to national service, public service was the higher calling. Each of his letters ended with him reminding me that I was destined for a different career.

When I got back from Southeast Asia, Michael was in Law School and I was stationed nearby. Over dinner we’d argue about politics, talk about how to best save the world, and he’d tell me what he was learning that week in his law school classes.  I remember when he taught me the best way to understand an issue was to learn how to argue both sides of a case.

When I got out of the military, Michael was finishing up law school. A year later he and his new wife headed to the South to work for Georgia Legal Services.

I moved to Silicon Valley, and we kept up a sporadic correspondence, me trying to explain startups and Michael telling me about the world of civil rights and social justice for the poor.

If possible, it seemed like his excitement for what he was doing matched mine.  I just didn’t understand why he did it.

For entrepreneurs, understanding why people dedicate their lives to working for non-profits is hard to fathom. Why work for low pay, on something that wasn’t going to deliver a product that would change the world?

Today, each time I see the staffs of those non-profits I support, I get a glimpse of that same passion, commitment and sense of doing right that I first heard my freshman year decades ago.  For the best of them, it’s not a job, it’s a life-long calling. They remind me of what Michael might have become.

One fine California April day, three years in Silicon Valley and now into my second startup, I got a call from someone in Michigan who had been trying to track me down.

Michael and his wife were bringing some kids to camp, and he was killed in a head-on car accident with a drunk driver.  His wife and the kids survived.

It took me a long time, but as I got older, I realized that life was more than just about work, technical innovation and business. Michael and others worked to preserve and protect the values that made life worth living.  And while we were making things, they were the ones who were changing our society into a more just place to live.

There wasn’t a day that went by during my time on the Coastal Commission that I didn’t wonder what Michael Krzys would do. He was my model as a human being who found his own compass.

I always hoped that mine would point in the same direction…

Graduates, as you set out on your own extraordinary adventures, remember the measure of a life is not time or money. It’s the impact you make serving God, your family, community, and country.

Your report card is whether you leave the world a better place.

Carpe Diem. Seize the Day.

Hacking for Defense @ Stanford 2019

We just finished our 4th annual Hacking for Defense class at Stanford. At the end of each class we have each team give a Lessons Learned presentation. Unlike traditional demo days or Shark Tanks which are “here’s how smart I am, please give me money,” a Lessons Learned presentation tells a story of a journey of hard-won learning and discovery. For all the teams it’s a roller coaster narrative of what happens when you discover that everything you thought you knew was wrong and how they eventually got it right.

Watching each of the teams present I was left with wonder and awe about what they accomplished in 10 weeks.

  • The eight teams spoke to over 820 beneficiaries, stakeholders, requirements writers, program managers, warfighters, legal, security, customers, etc.
  • By the end the class all of the teams realized that the problem as given by the sponsor had morphed into something bigger, deeper and much more interesting.

Our keynote speaker was Palmer Luckey, founder of Oculus and the designer of the Oculus Rift. He’s now the CEO/founder of the AI-focussed defense contractor Anduril Industries.

If you can’t see the video of Palmer Luckey click here

Presentation Format
Each of the eight teams presented a 2-minute video to provide context about their problem.

Followed by an 8-minute slide presentation follow their customer discovery journey over the 10-weeks. All the teams used the Mission Model Canvas, Customer Development and Agile Engineering to build Minimal Viable Products, but all of their journeys were unique.

All the presentations are worth a watch.

Team: Panacea

If you can’t see the Panacea 2-minute video click here

If you can’t see the video of the Panacea team presenting click here

If you can’t see the Panacea slides click here

Mission-Driven Entrepreneurship
This class is part of a bigger idea – Mission-Driven Entrepreneurship. Instead of students or faculty coming in with their own ideas — we now have them working on societal problems, whether they’re problems for the State Department or the Department of Defense, or non-profits/NGOs, or for the City of Oakland or for energy or the environment, or for anything they’re passionate about. And the trick is we use the same Lean LaunchPad / I-Corps curriculum — and kept the same class structure – experiential, hands-on, driven this time by a mission-model not a business model.

Mission-driven entrepreneurship is the answer to students who say, “I want to give back. I want to make my community, country or world a better place, while solving some of the toughest problems.”

Team: Learn2Win

If you can’t see the Learn2Win 2-minute video click here

If you can’t see the video of the Leanr2Win team presenting click here

If you can’t see the Leanr2Win slides click here

It Started with an Idea
Hacking for Defense has its origins in the Lean LaunchPad class I first taught at Stanford in 2011. I observed that teaching case studies and/or how to write a business plan as a capstone entrepreneurship class didn’t match the hands-on chaos of a startup. And that there was no entrepreneurship class that combined experiential learning with the Lean methodology. Our goal was to teach both theory and practice.

The same year we started the class, it was adopted by the National Science Foundation to train Principal Investigators who wanted to get a federal grant for commercializing their science (an SBIR grant.) The NSF observed, “The class is the scientific method for entrepreneurship. Scientists understand hypothesis testing” and relabeled the class as the NSF I-Corps (Innovation Corps). The class is now taught in 9 regional locations supporting 98 universities and has trained over 1500 science teams. It was adopted by the National Institutes of Health as I-Corps at NIH in 2014 and at the National Security Agency in 2015.

Team: Embargo NK

If you can’t see the EmbargoNK 2-minute video click here

If you can’t see the video of the EmbargoNK team presenting click here

If you can’t see the EmbargoNK slides click here

Origins of Hacking For Defense
In 2016, brainstorming with Pete Newell of BMNT and Joe Felter at Stanford we observed that students in our research universities had little connection to the problems their government as well as the larger issues civil society was grappling with. Wondering how we could get students engaged, we realized the same Lean LaunchPad/I-Corps class would provide a framework to do so. That year Hacking for Defense and Hacking for Diplomacy (with Professor Jeremy Weinstein) with the State Department were both launched at Stanford.

 

Team: Common Ground

If you can’t see the Common Ground 2-minute video click here

If you can’t see the video of the Common Ground team presenting click here

If you can’t see the Common Ground slides click here

Goals for the Hacking for Defense Class
Our primary goal was to teach students Lean Innovation while they engaged in a national public service. Today if college students want to give back to their country they think of Teach for America, the Peace Corps, or Americorps or perhaps the US Digital Service or the GSA’s 18F. Few consider opportunities to make the world safer with the Department of Defense, Intelligence Community or other government agencies.

Next, we wanted the students to learn about the nation’s threats and security challenges while working with innovators inside the DoD and Intelligence Community. While doing so, also teach our sponsors (the innovators inside the Department of Defense (DOD) and Intelligence Community (IC)) that there is a methodology that can help them understand and better respond to rapidly evolving asymmetric threats. That if we could get teams to rapidly discover the real problems in the field using Lean methods, and only then articulate the requirements to solve them, could defense acquisition programs operate at speed and urgency and deliver timely and needed solutions.

Finally, we wanted to familiarize students about the military as a profession, its expertise, and its proper role in society. And conversely show our sponsors in the Department of Defense and Intelligence community that civilian students can make a meaningful contribution to problem understanding and rapid prototyping of solutions to real-world problems.

Team: Deepfakes

If you can’t see the Deepfakes 2-minute video click here

If you can’t see the video of the Deepfakes team presenting click here

If you can’t see the Deepfakes slides click here

Mission-driven in 30 Universities
Hacking for Defense is offered in over 25 universities, but quickly following, Orin Herskowitz started Hacking for Energy at Columbia, Steve Weinstein started Hacking for Impact (Non-Profits) and Hacking for Local (Oakland) at Berkeley and will be starting Hacking for Oceans at Scripps. Hacking for Conservation and Development at Duke followed.

Team: IntelliSense

If you can’t see the Intellisense 2-minute video click here

If you can’t see the video of the Intellisense team presenting click here

If you can’t see the Intellisense slides click here

Team: Gutenberg

If you can’t see the Gutenberg 2-minute video click here

If you can’t see the video of the Gutenberg team presenting click here

If you can’t see the Gutenberg slides click here

Team: PredictiMx

If you can’t see the PredictiMx 2-minute video click here

If you can’t see the video of the PredictiMX team presenting click here

If you can’t see the PredictiMx slides click here

It Takes a Village
While I authored this blog post, this classes is a team project. The teaching team consisted of:

  • Pete Newell is a retired Army Colonel and CEO of BMNT.
  • Steve Weinstein a 30-year veteran of Silicon Valley technology companies and Hollywood media companies.  Steve was CEO of MovieLabs the joint R&D lab of all the major motion picture studios.
  • Tom Bedecarré was the founder and CEO of AKQA, the leading digital advertising agency. Four decades as part of the most successful advertising agencies in the world.
  • Jeff Decker is a social science researcher at Stanford. Jeff served in the U.S. Army as a special operations light infantry squad leader in Iraq and Afghanistan.

Our teaching assistants Nate Simon, Aidan Daniel McCarty, Mackenzie Burnett and Diego CervantesA special thanks to the National Security Innovation Network (NSIN) and Rich Carlin and the Office of Naval Research for supporting the program at Stanford and across the country. And our course advisor – Tom Byers, Professor of Engineering and Faculty Director, STVP.

We were lucky to get a team of mentors (VC’s and entrepreneurs) who selflessly volunteered their time to help coach the teams. Thanks to Kevin Ray, Lisa Wallace, Rafi Holtzman, Craig Seidel, Todd Basche, Don Peppers, Robert Locke, and Mark Clapper.

We were privileged to have the support of an extraordinary all volunteer team of professional senior military officers representing all branches of service attending fellowship programs at Stanford’s Hoover Institution, and Center for International Security and Cooperation (CISAC) and Asia Pacific Research Center (APARC) at the Freeman Spogli Institute (FSI) as well as from the Defense Innovation Unit. These included:Tim Mungie, Tim Murphy, Matt Kent, Todd Mahar, Donnie Hasseltine, Jay Garcia, Kevin Childs.

And of course a big shout-out to our sponsors. At United Nations Command Security Battalion – CPT Justin Bingham, Air Force Air Combat Command – Mr. Steven Niewiarowski, Office of the Secretary of Defense Asian & Pacific Security Affairs – Chief of Staff Julie Sheetz, U.S. Coast Guard – Security Specialist Asad Hussain, IQT – Vishal Sandesara, Veterans Adminstration – Kristopher “Kit” Teague, Chief Operating Officer, IARPA – John Beieler, DNI – Dean Souleles

Thanks!

The Evolution of Entrepreneurial Education and Corporate Innovation

I was interviewed by Philip Bouchard, Executive Director of TrustedPeer Entrepreneurship Advisory, about how entrepreneurship education has changed, mission-driven entrepreneurship, and what we’ve learned about corporate innovation.

Worth a read.

Interview highlights:

  • How is the way that universities teach entrepreneurship evolving?
  • Lean LaunchPad class developed for Stanford
  • Innovation and entrepreneurship will become the liberal arts of the 21st century
  • Teaching basic entrepreneurial appreciation
  • Mission-Driven Entrepreneurship
  • Hacking for X classes
  • Ethics in entrepreneurship
  • How has innovation in large corporations evolved over the last 10 years?
  • Innovation theater in large corporations
  • “I want to see what you look like in a prison suit.”
  • What are companies doing beyond innovation theater?
  • How innovation can succeed inside of a large company
  • The easy part is, “Let’s have an incubator.” The hard part is, “How do we deliver something?”
  • “Heroic innovation” within large corporations
  • End-to-end “Innovation Pipeline” process
  • Innovators are not entrepreneurs
  • Building an entrepreneurship ecosystem
  • How can corporations work more closely with universities?

Philip Bouchard: You’ve started teaching at Berkeley since 2002, Columbia in 2003 and at Stanford since 2011. How is the way that universities teach entrepreneurship evolving? What changes have you seen in the last 15 years?

Steve Blank: When I first starting teaching, the capstone entrepreneurship class was how to write a business plan. Other classes were on how to prep for VC pitches or develop the five year income statements, balance sheets and cash flows or read case studies. Today, people laugh if somebody says that’s a capstone entrepreneurship class. But years ago, we had no alternative – how to write a business plan was it.

My contribution has been, “Why don’t we design classes more closely modeled to what innovators and entrepreneurs actually do.” Today the capstone class is most often experiential, team-based, hands on, focused around the search for a repeatable and scalable business model. And the Lean LaunchPad class I developed at Stanford was the first such class. It was adopted by the National Science Foundation for commercializing science in the United States. It’s called NSF I-Corps.

The other change is that universities, instead of being passive, have become active in building an entrepreneurial community. In addition to Stanford I also teach at Columbia, and at these research universities – Stanford, Columbia, Berkeley, and others – they all now have an internal incubator, they have maker spaces, they have their own venture funds, they connect to the community, they connect to venture capital. They’ve become outward-facing universities. It’s a big idea.

Years ago, entrepreneurship was taught like everything else, inward-facing, which was a mindset of, “I focus on what I know as an academic and I will teach you that,” which was mostly theory and/or consulting experience with large corporations. And the odds of learning from faculty who actually had experienced the chaos and uncertainty of building a startup was low. It wasn’t really part of the job as an educator. Today, if you’re building an entrepreneurship program, the teaching team most often includes adjuncts with entrepreneurial experience as complements to the tenured faculty, classes are experiential and the community you’re building is a set of additional components that never existed before.

PB: In addition to being more outward facing, how should universities be thinking about what to offer next? What do you see in the next 2-3 years?

SB: I think innovation and entrepreneurship will become the liberal arts of the 21st century. With the nature of work changing, the core skills entrepreneurs need to know to become practitioners are actually core skills that everybody will need to know to get a job: creativity, agility, resilience, tenacity, curiosity.

The analogy I like to use is that 500 years ago in the Renassiance we realized that the best way to teach artists, painters and sculptors, was by via hands-on apprenticeships and long-term commitment. You learned a modicum of theory and got a ton practice. (Today, if you’ve decided the arts are your career, your goal might be to get into Juilliard or CalArts.)

But about 100 years ago, in the art world, somebody had a lightbulb moment and said, “Wait a minute, in addition to the capstone classes, why don’t we teach art appreciation at the earliest possible age to everyone?” For example, finger-painting, making clay ashtrays and writing. The reason for that is two-fold. One is to have people self-identify at an early age that, “Oh, my gosh. Painting can be a career? I knew I was interested.” And second, so that the rest of us who are not going to be artists can appreciate how hard it is, and learn how to look at art and how to look at sculpture and how to appreciate good writing.

I believe the analogy is identical for entrepreneurship. The capstone entrepreneurship classes like NSF I-Corps or a Lean LaunchPad class, are for those who have already decided they want to be entrepreneurs. The part of the entrepreneurship curriculum that’s missing is offering entrepreneurial appreciation classes to everyone. We ought to be creating a set of classes on creativity, agility and resilience and being able to tell facts from “fake news” — components of innovation and entrepreneurship that I think are going to be required 21st century skills.

PB: The trend is to add majors, minors and certificates in entrepreneurship. Not just in the business schools. For example, you can minor in entrepreneurship at the University of Colorado College of Music. In terms of teaching basic entrepreneurial appreciation, how saturated should entrepreneurship become? Is it one or two courses? Where do you see this trend going?

SB: Teaching basic entrepreneurial appreciation in the 21st century is literally the equivalent to liberal arts of the 20th. Forward thinking schools will start offering a series of classes that are core curriculum like liberal arts were in schools in the ’50s through the ’80s that said “for a liberal arts education you need to understand literature and you need to understand art.” In the 21st century we’re going to add some additional core skills.

That said, entrepreneurship education needs to be a combination of theory and practice. It’s pretty easy to offer classroom entrepreneurship lectures and forget that it’s the hands-on application that makes the theory relevant. Think if medical schools just taught doctors the textbooks, but never had them touch a patient.

The other direction where teaching is going – and what we’ve been pioneering – is Mission-Driven Entrepreneurship. Instead of students or faculty coming in with their own ideas — we now have them working on societal problems, whether they’re problems for the State Department or the military or non-profits/NGOs, or for the City of Oakland or for energy or the environment, or for anything they’re passionate about. And the trick is we use the same Lean LaunchPad / I-Corps curriculum — and kept the same class structure – experiential, hands-on, driven this time by a mission-model not a business model.

Mission-driven entrepreneurship is the answer to students who say, “I want to give back. I want to make my community, country or world a better place, while solving some of the toughest problems.” These classes include Hacking for Defense, Hacking for Diplomacy, Hacking for Energy, Hacking for Impact, or Hacking for Oceans, etc., but the umbrella term is “mission-driven entrepreneurship.” The class syllabus uses exactly the same pedagogy as the Lean LaunchPad and I-Corps classes.

PB: How has your Lean LaunchPad course, ENGR 245, evolved?

SB: I’ve always believed that great classes continue to thrive after the original teachers have moved on. To be honest, as I watch other instructors now run these classes, I feel a proud “passing of the torch” though touched by moments of King Lear and Kurosawa’s Ran. Way past my ad hoc activities, the Stanford teaching team has thoroughly professionalized the class.

After eight years the class is still taught to students working on their own problems. It’s taught at Stanford, Berkeley, Columbia and probably another hundred universities and colleges because I open-sourced the class and trained educators on how to teach it. 98 universities teach it through the National Science Foundation.

As I mentioned, the Mission-Driven Entrepreneurship classes are a new variant that’s taught in ~30 universities. The nice part is that we have educators who are already trained on teaching Lean LaunchPad or I-Corps, so for the educators there’s nothing particularly new. The only hard part about it, is to get well-defined problems from sponsors in the local city or government agency that you offer to students.

PB: Everyone looks for a turnkey solution. “I want a low overhead, self-guided solution.” Can someone go through your Lean LaunchPad step-by-step course without a trainer? Can it be self-directed? How long does it take to train a trainer?

SB: All my class lectures are online at Udacity.com for free. Can you become a founder by watching videos? Perhaps, but founders are closer to artists than any other profession. So can you become an artist by reading about art? Can you learn entrepreneurship without taking an experiential hands-on class or better, actually be part of a startup? Well, you can read a lot about entrepreneurship and learn the theory, but it’s like reading about painting or sculpture or music. You need theory and practice – lots of practice.

PB: Is ethics in entrepreneurship going to be part of the broader entrepreneurship curriculum like a general liberal arts education? Is ethics something that you bring into your Lean LaunchPad course or your ENGR 245 course?

SB: I think ethics are a critical missing component of most business curriculums. At Stanford, Tom Byers, who runs the innovation and entrepreneurship program inside the engineering school, has made that a big deal and it’s now part of the curriculum. Tom has added a class on entrepreneurial ethics.

However, the problem with teaching entrepreneurial ethics is the same as with teaching corporate ethics: Everything is great in theory until the sxxt hits the fan. When you don’t have any checks and balances, that is, when the government isn’t really paying attention or there are no consequences, you tend to get people who game the system, whether they’re corporations or they’re entrepreneurs and innovators.

It’s exactly like if you’ve ever been driving on a highway and reach a merge and people are cutting into the line and you go, “What the heck am I’m doing waiting for the merge while people are cutting in?” Then everybody else starts doing it and you think “Why am I the only person who’s patiently waiting?” There’s a social component about what’s the norm for behavior.

It’s not like we need a nanny-state, but if there’s no enforcement at all, we can teach ethics all we want, but people tend to devolve to the least common denominator.

PB: How has innovation in large corporations evolved over the last 10 years? You talk about “innovation theater” in large corporations. What’s the trend in terms of corporations developing cultures of innovation and programs for intrapreneurs?

SB: If you’re a large corporation, the world has turned upside down. In hindsight the 20th century was the golden age for corporations. Today, companies face five challenges they never had to deal with:

Challenge one – As companies are discovering every day, the web has changed everything. Distribution channels, brand loyalty, etc.

Challenge two – Large companies are dealing with startups that are funded with unimaginable capital. In the past, the idea of a startup having more capital than an existing corporation was a fantasy. But today if I’m a startup and I’m raising a hundred million dollars or billions of dollars, like Uber, Airbnb or Tesla, I can take on an entire industry.

Challenge three – Today, investors willingly fund startups to do anything on day one. Anything. Including break the law. Tesla, Airbnb, Uber, all were predicated on, “Well, what if we said, ‘screw the law’. How big would that opportunity be?”

In the 20th century no venture capitalist would have funded that. In the 21st century they got out their little eyeshades and calculators and said, “Ha! If we actually succeed, there’s a $10 billion company here.”

In contrast, as much as a corporation wants to do that, the first thing that will happen is your general counsel’s in your office saying, “I want to see what you look like in a prison suit.” Because a company can’t do the things that a startup can.

Challenge four – In a startup, 100% of the company is focused on innovation and entrepreneurship. In a large corporation, 99% of the company is focused on execution of the current business model by building repeatable processes and procedures. And a very small percentage are focused on innovation. I could keep going on down the list.

Challenge five – In a startup, if you win, it’s a payout of billions of dollars. In a large company, for the individual, there is no such payout.

PB: However, there are some companies that do evolve, that do pivot and make the right changes. What you’re talking about, “A large corporation is not a startup,” doesn’t necessarily mean it’s going to go the way of the dodo. What are companies doing beyond innovation theater?

SB: I just wanted to give you the setup of why it’s harder for corporations. Not why they can’t do it. In spite of all the things that I just mentioned, there are large companies that have figured out how to build innovation ecosystems. My favorite is a private company called W.L.Gore & Associates. At their core they make products out of expanded PTFE like GORE-TEX fabrics. But they’ve taken that basic technology past fabrics into multiple markets – medical, filtration, fibers, cables, etc. They have a process of continual innovation – an innovation pipeline. But this type of innovation requires leadership who understands that is their goal. If you’re a large company’s CEO today, the problem is that you’re dealing with, well, lots of issues, not just innovation.

  • One – “How do I deal with activist investors who want to take my company apart and sell it for pieces?”
  • Two – “I’ve been hearing about this innovation stuff, but if I’m running a 10,000-person company, my skill-set is about execution, not innovation. I might give you some head nods about innovation, but I really don’t have that in my DNA.”
  • Three – Companies are driven by processes and procedure, those same processes and procedures strangle innovation in its crib. For innovation to succeed inside of a large company, you need a parallel set of processes, not to replace the existing ones, but to operate on a fast track.

Some companies have figured out how to do this, not just internally, but by just acquiring those that do. So, if you think about how a large company can innovate, they could build, they could buy, they could partner, they could license. All parts of their toolset where startups don’t have those opportunities. Basically, startups are just building.

PB: Large corporations have a number of tools they use for innovation. One area is innovation challenges and idea challenges to come up with a thousand new ideas. A second option is for corporations to provide accelerators where they invite startups to apply to be part of their accelerator program. A third is incubators and makers’ spaces. Do you see those as innovation programs that can work? They’re spending a lot of money on it.

SB: No. What you just described is innovation theater. These are innovation activities, not deliverables. The hard part in a company is not getting a demo or setting up an internal accelerator, it’s getting something delivered all the way through your existing sales channel. What does it take to get from that demo into your engineering group, to be delivered as a product into your existing sales channel? And that’s where the difficulties are. You run into, “Well, wait a minute, this isn’t on our budget or schedule.” “Wait a minute, this conflicts with our existing product line.” “This will put our most profitable product out of business,” or “We don’t even have a sales force that knows how to sell this thing.”

A good number of companies focus on the easy part, which is, “Let’s have an incubator/accelerator.” The hard part is, “How do we deliver something with speed and urgency?” For example, when I teach this for the government, our focus is on innovation that gets deployed and fielded, not demos. (Yes, you might need a demo to convince someone to fund your program, but the demo is not the goal – delivery is.) Companies have more demos than they’ll ever need. But really the goal of a successful innovation program is figuring out how do you deploy something by getting through the hard political wiring diagram of who owns what, and how does this differ from what we already have, and which budget is it going to come from, and “this is unscheduled” and “wait a minute, it doesn’t meet our quality standards” and “we’re going to screw up our brand”?

How do we solve those problems? And that doesn’t mean it’s not solvable. It just means the “Let’s throw a party” approach reminds me of the old Andy Hardy movies of “Let’s put on a show.” Ok, we’ve got a show, now what?

The “now what” is that we lack a corporate innovation doctrine.

PB: I’m going to read a quote from you, which is “We believe the next big step is to get teams of leaders to think about the innovation process from end to end. That is, to visualize the entire flow of how and from where an idea is generated – the source – all the way to deployment – how to get it into the user’s hands.” You also have talked about an innovation stack and operational innovation, which is absent and so difficult to implement. What prompted these insights?

SB: Here’s what I observed. Large companies and government agencies have always had innovation, but it’s what I call “heroic innovation.” That is, there was no process, no procedure, but you always hear stories about somebody who managed to get a new product or idea out the door. We tend to celebrate those without anybody ever thinking, “Well, wait a minute. Maybe the fact that there are no formal innovation processes is the problem, not that there was some heroic stuff happening.”

In the last couple years, my work, Eric Ries’s work, Alexander Osterwalder’s work, all were focused on building a body of professional knowledge – doctrine – around innovation. And as part of that we’ve developed a set of tools that could be used to search for business models. Companies have adopted this innovation doctrine and startup tools and have been running accelerators and whatever. The problem is that there still wasn’t an end-to-end innovation implementation process, inside a large company.

What we came up with last year is called the Innovation Pipeline, a process inside a company or a government agency that says, “Let’s start with innovation sourcing. And then build a process to take that all the way to delivery or deployment. What are the steps internally we need to take that are different than how engineering builds products today?”

This end-to-end pipeline has a couple of steps. The first step is where the ideas or technology come from. They can come from inside the company, outside as acquisitions, universities, etc. The second step is, “What problem are we solving?” which we call problem curation. “Is this a real problem or is this a neat piece of flashy technology? How do we prioritize all the things we’re now doing inside this pipeline. And then how do we test solutions and hypotheses?”

In the middle of this pipeline is the I-Corps Lean LaunchPad methodology for customer discovery and validation. Next, how do we incubate it, and then how do we transition and integrate it with our existing engineering and sales organizations to deliver this stuff That’s an end-to-end process.

By contrast, an incubator and accelerator is a point activity.

As we’ve been teaching organizations this end-to-end Innovation Pipeline process we realized that at each one of those steps the team evolves. At the beginning of that pipeline you might have an innovator, a technologist in R&D. That’s great, but we now know that either in startups or large companies innovators don’t make sxxt happen. They invent things.

Typically, to partner with the innovator on the first step, you need to find an entrepreneur. An entrepreneur inside of a company is somebody who knows how to get stuff across the finish line inside the bureaucracy. That’s very different than the innovator. The mistake that we tend to make is, “Oh, let’s teach the innovators how to do that.” But innovators are almost never entrepreneurs. You can make them appreciate entrepreneurs, but they’re not the same people.

PB: A trending challenge for directors of university entrepreneurship programs is to build an entrepreneurship ecosystem. These executive directors are struggling to decide, “What do I build out next? What program do I add next?” Is there some way to take your approach and to direct it to building university entrepreneurship ecosystems?

SB: An example of what you just talked about is the tech transfer and venture group at Columbia University, run by Orin Herskowitz. Orin has spun seven different programs out of the Lean LaunchPad and Hacking for Defense programs. In energy and biotech and devices and whatever. Basically, using this pedagogy and building an entire ecosystem around it. It’s really impressive. Columbia’s tech transfer organization is a model of how universities may want to think about entrepreneurship ecosystems.

The other leading thinkers you should talk to are Tom Byers and Tina Seelig at Stanford. Stanford and Tom and Tina and their STVP program are still ground zero for entrepreneurship programs in the world.

Also to watch is Stephen Spinelli who just took over as Babson’s president. Between Spinelli, Orin, and Tom and Tina I think you’ll get an idea of the bleeding edge university entrepreneurship programs. If you want to talk to people who are inventing the future rather than talking about it, I would start with these three universities.

PB: How can corporations work more closely with universities? How can they tap into student entrepreneurship talent for developing the kind of disruptive initiatives that corporations want? Instead of waiting until something happens. How can you create a pipeline with universities that are local or even virtually with universities?

SB: For decades companies have been the primary acquirer of university research via tech transfer. And companies were the magnet for universities best and brightest students. No longer. In the 21st century companies are no longer competing for this tech and talent with their corporate peers, but with startups. To tap into university talent corporate innovation programs need to be more than an afterthought. Corporate leadership needs to make their internal commitment to innovation a beacon to the talent they desire.

How to Stop Playing “Target Market Roulette”: A new addition to the Lean toolset

Modern entrepreneurship began at the turn of this century with the observation that startups aren’t smaller versions of large companies – large companies at their core execute known business models, while startups search for scalable business models. Lean Methodology consists of three tools designed for entrepreneurs building new ventures:

These tools tell you how to rapidly find product/market fit inside a market, and how to pivot when your hypotheses are incorrect. However, they don’t help you figure out where to start the search for your new business.

A new tool – the Market Opportunity Navigator – helps do just that. It provides a wide-lens perspective to find different potential market domains for your innovation, before you zoom in and design the business model or test your minimal viable products. This new framework can act as the front-end of Customer Development. It helps figure out the most promising starting position – market domain – for your customer development process. And it helps identify promising Plan B’s and new growth options if you have already embarked on your innovation journey.

Over the years, I have seen many startups and innovation projects perform a painful “re-start” to completely new market domains. With a little more thinking up front these entrepreneurs and innovators could have identified more promising business contexts to play in, and thus avoided this difficult pivot down the road. But while the academic literature is full of papers covering market selection and the literature has some popular books (Blue Ocean Strategy, et al.) there is a lack of easy-to-use tools to do so.

In large companies and government agencies the problem is even more acute. Where do we spend our limited time and resources on our next moves? While the Innovation Pipeline tells us how to go to from sourcing to delivery how do we prioritize our choices? The Market Opportunity Navigator is a useful adjunct to the curation and prioritization steps.

Just like the Business Model Canvas, the Market Opportunity Navigator has closed the gap between academic theory and books by offering a simple, visual way to navigate the process of how to select what market to start with. Developed by Prof. Marc Gruber and Dr. Sharon Tal and based on hundreds of cases they studied during their practical and academic work, the Market Opportunity Navigator is described in their new book, Where to Play.

In three simple steps the Market Opportunity Navigator can help you:

  • Identify a portfolio of market opportunities stemming from your technology or unique abilities
  • Reveal the most attractive domain(s) by evaluating the potential and challenges of each option
  • Prioritize market opportunities smartly to set the boundaries for your lean experimentations

I asked Sharon and Marc to summarize why market selection is important and describe an example of how to use it.


Different Playgrounds mean different Rules of the Game
There are many ways in which you may have identified a market for your business. Some of you may have identified a market need based on your own experience, or you may have been approached by potential customers, or if you are corporate innovator you may have applied an innovative solution to an existing target market. Yet, are you sure that this is the best opportunity? Could there be greener pastures (larger markets, more profitable markets, etc.) out there for commercializing your technology or unique abilities?

Taking the time to reveal the most promising market – the best starting position – before you engage in a focused customer development process is critical, because market domains vary in their value creation potential, competitive landscape, regulatory regime and risks associated with launching new products. In fact, by not asking “Where to Play” innovators risk choosing an inferior playground – one that does not allow the project to prosper. Beyond the possible loss of revenues, this early decision may be difficult to change, or even irreversible: it influences how you develop your technology going forward, raise money, write patents, recruit employees and pick a brand name. If re-start in another target market is required, such a pivot is painful, costly, and sometimes even impossible.

Finding the best starting position is a learning process that takes time and bandwidth – two scarce resources. So instead of taking a deliberate step back to understand their portfolio of opportunities, entrepreneurs and innovators often just start running. They make a bet and engage in customer development experiments – adopting “local” pivots in a relatively fixed context, until a scalable business model is (hopefully) revealed. This can be a big bet! The search for product/market fit and for a scalable, promising business model should therefore begin with uncovering and understanding the different market contexts in which you can play. In fact, by adopting a wider lens, the search process shifts from 2D (finding a product-market fit) to 3D (finding multiple product-market fits in different market contexts).

Academic research published in Management Science investigated 85 VC-backed startups and offered a conclusion that seems obvious in hindsight: “look before you leap.” The big idea was that experienced entrepreneurs tend to generate a portfolio of market opportunities before deciding where to play, thereby laying the ground for significant performance benefits. In other words, understanding your arena of opportunities is a key asset for entrepreneurs and innovators.

Identifying your Arena and Choosing Where to Play
The Market Opportunity Navigator provides a visual framework to discover, compare and prioritize different market domains and business contexts. It helps you to think about your arena, rather than your industry – a key mindset shift in today’s competitive landscape.

The Navigator walks you through a three-step process that helps you to make a more informed choice. It does so in a friendly, intuitive manner, with a visual design board and 3 worksheets to guide the process.

You can download the Navigator and its worksheets here.

Putting it all together: A Superset of Tools
Mapping out your market opportunities to understand your most promising starting position generates valuable insights for your innovation journey. In short, the big-picture view provided by the Navigator helps you zoom-out to understand “where to play,” while the detailed views of the lean approach and the Business Model and Value Proposition Canvases help you zoom-in and understand in detail “how to play.” Together, they create a superset of tools that supports you in an iterative learning process until you find a scalable, promising business.

Having a market opportunity portfolio to draw from offers an additional benefit. By having gamed out multiple markets, you can bake agility into the DNA of your venture – a key component in the Lean methodology. It allows you to carefully select and keep open backup and growth options.  If a “re-start” is eventually required, it will be less painful and less costly.

Let’s take a look at an example from the startup world to see how the Market Opportunity Navigator works.

We Can Fly Anywhere – but Where Do We Go First?
Flyability develops drones to inspect difficult-to-access locations. In theory, they can custom-build their drone to perform different jobs in completely different markets: industrial inspection, search and rescue, entertainment or surveillance – to name but a few. Each of these markets varies significantly in its business context and in its promise for growth. Furthermore, each market would require its own customer development process to reveal a scalable, repeatable business model – clearly a demanding process that is difficult to run simultaneously in multiple domains.

So how did Flyability find its best starting position – the initial market domain where the founders should engage in detailed customer discovery and build their business? They used the Navigator and its three worksheets to guide their process.

Worksheet 1: Generate your market opportunity set
The founders’ first idea was to use the drone for observing critical disasters, like the reactor meltdowns in Fukushima, Japan. Yet, by going through the first step of the Navigator, the team began to uncover alternative markets where their drone could add value for customers. Among others, they considered drone-based inspection of boilers in thermal power plants, the inspection of oil & gas storage tanks, and intelligence-gathering by police forces. Overall, five market domains seemed interesting and required further evaluation.

Worksheet 2: Evaluate market opportunity attractiveness
Using the second step of the Navigator, the team systematically examined the potential of each market and its unique challenges. This allowed Flyability to map out their options and visually compare their attractiveness. Gradually, it became clear that thermal power plants were a “gold mine” option worth playing in. They could now use the Business Model Canvas and the lean experimentation processes to design and validate a scalable business model within this market.

Worksheet 3: Design your agile focus strategy
Once the founders chose their primary market, they could leverage alternatives to create a more agile company by mitigating risk and avoiding locking-in. Specifically, using the third step of the Navigator, the founders designed a small portfolio of backup and growth options that they would keep open. This foresight laid the ground to early key decisions that have long-term consequences, like how they developed their drone or chose their brand name. In addition, it helped them clearly define which options they would place in storage for now (as focusing is about saying no more than anything else).

By employing the Market Opportunity Navigator, Flyability has not only figured out “Where to Play” it has mapped out an interesting growth path that is appealing to investors. To get a better sense of this process, you can view Flyability’s Navigator below, or read the full case study by clicking here.

Insights for VCs, Tech Transfer Officers, and Social Entrepreneurs
Identifying your arena of opportunities is not only key for startups and established firms, but for anyone dealing with technology commercialization. For VC’s, the macro-level perspective shows the market opportunities that can be addressed by a startup and lays out a clear monetization process over time. It also offers a portfolio perspective when screening initial or successive investments. If you are working for a Tech Transfer Office, a wide-lens perspective is essential for assessing the value of an invention, and for figuring out in which hands you should put it. Furthermore, if you are trying to address a social problem, the Navigator helps ensure you identify a market that allows you to generate an economic bottom-line in addition to your social impact.

Lessons Learned

  • Lean Startup tools offer the details of “how to play,” while the Market Opportunity Navigator helps you to zoom-out to understand “where to play”
    • There are multiple “starting positions” for your customer discovery journey
    • Each starting point has different challenges to overcome
  • What would be your most valuable domain?
  • The Market Opportunity Navigator is an easy-to-apply framework for this process

Startup Stock Options – Why A Good Deal Has Gone Bad

A version of this article first appeared in the Harvard Business Review

VC’s have just changed the ~50-year old social contract with startup employees. In doing so they may have removed one of the key incentives that made startups different from working in a large company.

For most startup employee’s startup stock options are now a bad deal.

Here’s why.


Why Startups Offer Stock Options
In tech startups stock options were here almost from the beginning, first offered to the founders in 1957 at Fairchild Semiconductor, the first chip startup in Silicon Valley. As Venture Capital emerged as an industry in the mid 1970’s, investors in venture-funded startups began to give stock options to all their employees. On its surface this was a pretty radical idea. The investors were giving away part of their ownership of the company — not just to the founders, but to all employees. Why would they do that?

Stock options for all employees of startups served several purposes:

  • Because startups didn’t have much cash and couldn’t compete with large companies in salary offers, stock options dangled in front of a potential employee were like offering a lottery ticket in exchange for a lower salary. Startup employees calculated that a) their hard work could change the odds and b) someday the stock options they were vesting might make them into millionaires.
  • Investors bet that by offering prospective hires a stake in the company’s future growth- with a visible time horizon of a payoff – employees would act more like owners and work harder– and that would align employee interests with the investor interests. And the bet worked. It drove the relentless “do whatever it takes” culture of 20th century Silicon Valley. We slept under the tables, and pulled all-nighters to get to first customer ship, man the booths at trade shows or ship products to make quarterly revenue – all because it was “our” company.
  • While founders had more stock than the other employees, they had the same type of stock options as the rest of the employees, and they only made money when everyone else did (though a lot more of it.) Back then, when Angel/Seed investing didn’t exist, to get the company started, founders put a lot more on the line – going without a salary, mortgaging their homes etc. This “we’re all in it together” kept founders and employees aligned on incentives.

The mechanics of a stock option was a simple idea – you received an option (an offer) to buy a part of the company via common stock options (called ISOs or NSOs) at a low price (the “strike price”.) If the company was successful, you could sell it at a much higher price when the company went public (when its shares were listed on a stock exchange and could be freely traded) or was acquired.

You didn’t get to own your stock options all at once. The stock trickled out over four years, as you would “vest” 1/48th of the option each month. And just to make sure you were in the company for at least a year, with most stock option plans, unless you stayed an entire year, you wouldn’t vest any stock.

Not everyone got the same amount of stock. The founders got most of the common stock. Early employees got a smaller percentage, and later employees received even a smaller piece – fractions of a percent – versus the double digits the founders owned.

In the 20th century, the best companies IPO’d in 6-8 years from startup (and in the Dot-Com bubble of 1996-1999 that could be as short as 2-3 years.) Of the four startups I was in that went public, it took as long as six years and as short as three.

One other thing to note is that all employees – founders, early employees and later ones – all had the same vesting deal – four years – and no one made money on stock options until a “liquidity event” (a fancy word to mean when the company went public or got sold.) The rationale was that since there was no way for investors to make money until then, neither should anyone else.  Everyone—investors, founders and startup employees—was, so to speak, in the same boat.

Startup Compensation Changes with Growth Capital – 12 Years to an IPO
Much has changed about the economics of startups in the two decades. And Mark Suster of Upfront Capital has a great post that summarizes these changes.

The first big idea is that unlike in the 20th century when there were two phases of funding startups–Seed capital and Venture capital–today there is a new, third phase. It’s called Growth capital.

Instead of a startup going public six to eight years after it was founded to raise capital to grow the company, today companies can do $50M+ funding rounds, deferring the need for an Initial Public Offering to 10 or more years after a company is founded.

Suster points out that the longer the company stays private, the more valuable it becomes. And if during this time VC’s can hold onto their pro-rata (fancy word for what percentage of the startup they own), they can make a ton more money.

The premise of Growth capital is that if that by staying private longer, all the growth upside that went to the public markets (Wall Street) could instead be made by the private investors (the VC’s and Growth Investors.)

The three examples Suster uses – Salesforce, Google and Amazon – show how much more valuable the companies were after their IPOs. Before these three went public, they weren’t unicorns – that is their market cap was less than a billion dollars. Twelve years later, Salesforce’s market cap was $18 billion, Google’s was $162 billion, and Amazon’s was $17 billion.To Suster’s point, it isn’t that startups today can’t raise money by going public, it’s that their investors can make more money by keeping them private and going public later – now 10-12 yearsAnd currently there is an influx of capital to do that.

Founders Rule
The emergence of Growth capital, and pushing an IPO out a decade or more, has led to a dramatic shift in the balance of power between founders and investors. For three decades, from the mid-1970s to the early 2000s, the rules of the game were that a company must become profitable and hire a professional CEO before an IPO.

That made sense. Twentieth-century companies, competing in slower-moving markets, could thrive for long periods on a single innovation. If the VCs threw out the founder, the professional CEO who stepped in could grow a company without creating something new. In that environment, replacing a founder was the rational decision. But 21st century companies face compressed technology cycles, which create the need for continuous innovation over a longer period of time. Who leads that process best? Often it is founders, whose creativity, comfort with disorder, and risk-taking are more valuable at a time when companies need to retain a startup culture even as they grow large.

With the observation that founders added value during the long runup in the growth stage, VCs began to cede compensation and board control to founders. (See the HBR story here.)

Startup Stock Options – Why A Good Deal Has Gone Bad
While founders in the 20th century had more stock than the rest of their employees, they had the same type of stock options. Today, that’s not true. Rather, when a startup first forms, the founders grant themselves Restricted Stock Awards (RSA) instead of common stock options. Essentially the company sells them the stock at zero cost, and they reverse vest.

In the 20th century founders were taking a real risk on salary, betting their mortgage and future. Today that’s less true. Founders take a lot less risk, raise multimillion-dollar seed rounds and have the ability to cash out way before a liquidity event.

Early employees take an equal risk that the company will crater, and they often work equally as hard.  However, today founders own 30-50 times more than a startup’s early employees. (What has happened in founder compensation and board control has mirrored the growth in corporate CEO compensation. In the last 50 years, corporate CEO pay went from 20 times an average employee to over 300 times their compensation.)

On top of the founder/early employee stock disparity, the VC’s have moved the liquidity goal posts but haven’t moved the vesting goal posts for non-founders. Consider that the median tenure in a startup is 2 years. By year three, 50% of the employees will be gone. If you’re an early employee, today the company may not go public until eight years after you vest.

So why should non-founding employees of startups care? You’ll still own your stock, and you can leave and join another startup. There are four problems:

  • First, as the company raises more money, the value of your initial stock option grant gets diluted by the new money in. (VC’s typically have pro-rata rights to keep their percentage of ownership intact, but employees don’t.) So while the VCs gain the upside from keeping a startup private, employees get the downside.
  • Second, when IPO’s no longer happen within the near time horizon of an employee’s tenure, the original rationale of stock options – offering prospective hires a stake in the company’s future growth with a visible time horizon of a payoff for their hard work – has disappeared. Now there’s little financial reason to stay longer than the initial grant vesting.
  • Third, as the fair market value of the stock rises (to what the growth investors are paying), the high exercise price isn’t attractive for hiring new employees especially if they are concerned about having to leave and pay the high exercise price in order to keep the shares.
  • And finally, in many high valued startups where there are hungry investors, the founders get to sell parts of their vested shares at each round of funding. (At times this opportunity is offered to all employees in a “secondary” offering.) A “secondary” usually (though not always) happens when the startup has achieved significant revenue or traction and is seen as a “leader” in their market space, on the way to an IPO or a major sale

The End of the High-Commitment/High-Performance Work System?
In the academic literature, the work environment of a startup is called a high-commitment/ high-performance work system. This is a bundle of Human Resources startup practices that include hiring, self-managing teams, rapid and decentralized decision-making, on-boarding, flexible work assignments, communication, and stock options. And there is evidence that stock options increase the success of startups.

Successful startups need highly committed employees who believe in the goals and values of the company. In exchange for sharing in the potential upside—and being valued as a critical part of the team, they’re willing to rise to the expectation of putting work and the company in front of everything else. But this level of commitment depends on whether employees perceive these practices to be fair, both in terms of the process and the outcomes.

VCs have intentionally changed the ~50-year-old social contract with startup employees. At the same time, they may have removed one of the key incentives that made startups different from working in a large company.

While unique technology or market insight is one component of a successful startup everyone agrees that attracting and retaining A+ talent differentiates the winners from the losers. In trying to keep companies private longer, but not pass any of that new value to the employees, the VC’s may have killed the golden goose.

What Should Employees Do?
In the past the founders and employees were aligned with the same type of common stock grant, and it was the VCs who got preferential stock treatment. Today, if you’re an employee you’re now are at the bottom of the stock preference pile. The founders have preferential stock treatment and the VC have preferred stock. And you’re working just as hard. Add to that all the other known negatives of a startups– no work-life balance, insane hours, inexperienced management, risk of going out of business, etc.

That said, joining a startup still has a lot of benefits for employees who are looking to work with high performance teams with little structure. Your impact likely be felt. Constant learning opportunities, responsibility and advancement are there for those who take it.

If you’re one of the early senior hires, there’s no downside of asking for the same Restricted Stock Agreements (RSAs) as the founders. And if you’re joining a larger startup, you may want to consider those who are offering restricted stock units (RSUs) rather than common stock.

What Should Investors Do?
One possibility is to replace early employee (first ~10 employees) stock options with the same Restricted Stock Agreements (RSAs) as the founders.

For later employees make sure the company offers “refresh” option grants to longer-tenured employees. Better yet, offer restricted stock units (RSUs). Restricted Stock Units are a company’s promise to give you shares of the company’s stock. Unlike a stock option, which always has a strike (purchase) price higher than $0, an RSU is an option with a $0 purchase price. The lower the strike price, the less you have to pay to own a share of company stock. Like stock options, RSU’s vest.

But to keep employees engaged, they ought to be allowed buy their vested RSU stock and sell it every time the company raises a new round of funding.

Lessons Learned

  • Venture Capital structures were set up for a world in which successful companies exited in 6-8 years and didn’t raise too much capital
  • Venture capital growth funds are now giving startups the cash they would have received at an IPO
    • “Growth Capital” moved the need for an IPO out another five years
    • This allows VCs to capture the increase in market cap in the company
    • It may have removed the incentive for non-founders to want to work in a startup versus a large company
    • As stock options with four-year vesting are no longer a good deal
  • Investors and Founders have changed the model to their advantage, but no one has changed the model for early employees
    • VCs need to consider a new stock incentive model – RSA’s for the first key hires and then RSU’s – Restricted Stock Units for everyone else
  • Large companies now have an opportunity to attract some of the talent that previously went elsewhere

The Lean LaunchPad Class: It’s the same, but different

It’s the same, but different

We just finished the 8th annual Lean LaunchPad class at Stanford. The team presentations are at the end of this post.

It’s hard to imagine, but only a decade ago, the capstone entrepreneurship class in most universities was how to write – or pitch- a business plan. As a serial entrepreneur turned educator, this didn’t make sense to me. In my experience, I saw that most business plans don’t survive first contact with customers.

So in 2011, with support from the Stanford Technology Ventures Program (the entrepreneurship center in the Stanford Engineering School), we created a new capstone entrepreneurship class – the Lean LaunchPad. The class was unique in that it was 1) team-based, 2) experiential, 3) lean-driven (hypothesis testing/business model/customer development/agile engineering). This new class aimed to mimic the uncertainty all startups face as they search for a business model while imparting an understanding of all the components of a business model, not just how to give a pitch or a demo.

(It’s worth reading the blog post that became the manifesto of the class here as well as what we learned when we first taught it- here.)

Ninety days after we first offered this class at Stanford, the National Science Foundation adopted the class calling it the NSF I-Corps (the Innovation Corps) to train our country’s top scientists how to commercialize their inventions. I-Corps is now offered in 88 universities. The National Institute of Health teaches its version in the National Cancer Institute. (I-Corps @ NIH). (The NIST report on Unleashing Innovation recommended expanding I-Corps and the House just passed the Innovators to Entrepreneurs Act to do just that.) The Lean LaunchPad/I-Corps syllabus is the basis for a series of Mission-Driven Entrepreneurship classes; Hacking for Diplomacy, Defense, Energy, Oceans, non-profits and cities.

If you had dropped by in 2011, the first time I taught the class, and then stuck your head in today, you’d say it was the same class. The syllabus is almost identical, the teams still get out of the building to do customer discovery every week, then come back to class and present what they learned weekly, etc.

But while it’s the same, it’s different.

After thousands of students taking this class, here are a few ways the class has changed.

—-

A Great Class Endures Beyond Its Author
I’ve always believed that great classes continue to thrive after the original teachers have moved on. While I created the Lean LaunchPad methodology and pedagogy (how to teach the class) and the train-the-trainer course for the NSF I-Corps, the sheer scale and success of the class is due to the efforts of the 100’s of National Science Foundation instructors and the NSF. And while I created the original course, the Stanford class is now led by Jeff Epstein and Steve Weinstein.

To be honest, as I watch other instructors now run these classes, I feel a proud “passing of the torch” though touched by moments of King Lear and Kurosawa’s Ran. Way past my ad hoc activities, the Stanford teaching team has thoroughly professionalized the class.

Expanded Teaching Team
In addition to the lead instructors, the Stanford teaching team now includes George John, Mar Hershenson, and Tom Bedecarre, all generously volunteering their time. Each of them brings decades of industry experience to the class. This type of teaching firepower and headcount was necessary as the teaching team expanded the class size to meet student demand.

Class Size
For the first few National Science Foundation classes, we taught 24 teams at a time with three instructors. We did it by breaking the class into three separate sections, having all teams together for our lectures and separating into sections of eight teams each when the teams presented. (After painful trial and error, we had discovered that the teaching team could listen to 8 teams present before our brains melted down.)

At Stanford we limited the class to 8 teams – four students per team. However, this year, the class was so oversubscribed, and the quality of the teams applying was so high, the teaching team admitted 14 teams and reverted to the original NSF model of separating into sections. The additional teaching team members made it possible.

Class Velocity/Depth
When we started this class, the concept of Lean (business models, customer development, agile, pivots, mvp’s) was new to everyone. Now they’re common buzzwords, and most of the students come in with an understanding of Lean. This head start has allowed the teaching team to accelerate the velocity and depth of learnings past the basics.

Women
In past years, the student teams in the Stanford classes were weighted toward men, reflecting the makeup of the applicants. While Ann Miura-Ko was part of the original teaching team, having all male instructors for the last five years didn’t help. After Mar Hershenson joined the teaching team last year, she made an all-out effort to recruit women to apply. A role model as a successful CEO and VC, Mar successfully sparked interest in women students and sponsored women-only lunch sessions, mixers and meetings to introduce them to the class. As you’ll notice from the presentations below, the result was that this year 50% of the applicants and accepted teams were women.

The lessons for me were: 1) the class had been unintentionally signaling a “boys-only” environment, 2) these unconscious biases were easily dismissed by assuming that the class makeup simply reflected the applicant pipeline, and 3) when in fact it required active outreach by a woman to change that perception and bring more women into the pipeline and subsequent teams.

Product/Market Fit Versus The Business Model Canvas
My original vision for the class was to use the business model canvas as a framework to teach engineering students all the nine elements of the business model: customer, distribution channel, revenue, get/keep/grow, value proposition, activities, resources, partners and costs. And instead of the traditional income statement, balance sheet and cash flow, discover the key “metrics that matter” for their business model.

While students want to spend their time focusing on product/market fit (who’s the customer and what should we build for them) and building product-centric minimum viable products, I thought that Y-Combinator and other accelerators already did an excellent job of that. My goal was to use the canvas to expose engineering students to other essential aspects of a successful business they may be less familiar with (sales, marketing, finance, operations.)

Admittedly this was tough to do, because in one quarter teams haven’t yet found product/market fit and are loath to move off it until they do. But since my goal was to teach a methodology rather than to run an accelerator, I traded off time on product/market fit for exposure to the rest of the canvas.

If we were designing a curriculum rather than just a single class, we’d offer it as two semesters/quarters – the first searching for problem/solution and product/market fit, and the second half focusing on the rest of the canvas testing feasibility and viability.

As you look at this year’s presentations, you can see the presentations still tend to focus on product/market fit. Obviously, there is no right answer to what and how to teach, and the answer may change over time.

TAs/ Diagnostics/Mentors
Our Teaching Assistants keep all the moving parts of the class running. Each years TAs have continued to make the class better (although I must admit it was interesting to watch the TAs remove any uncertainty from what students need to do week-to-week, as I had designed a level of uncertainty into the class to mimic what a real-world startup would feel like.) The teaching team and TA’s have added an enormous number of useful diagnostics to measure student reactions to each part of the pedagogy and the overall value of the class. However, the real art of teaching is to remember that the class wasn’t designed by a focus group.

Finally, the mentors (unpaid industry advisors) who volunteer their time have been professionalized and managed by Tom Bedecarre. Each mentor’s contribution gets graded by the students in the team they coached.

Things That Needed Constant Reminders
Every time we slipped up and admitted an all engineering or all MBA team we were reminded by their struggles that successful teams need to be diverse – that they include both innovators and entrepreneurs (typically engineers and MBA’s.)

The same holds true for pushing the students. Every time we slacked off relentlessly direct feedback we saw a commensurate drop in the quality of the teams output.

The Teams
In the end, this class is not only about what the instructors try to teach the students but also about whether students processed what we intended for them to learn. Over time, two of our major insights were: 1) teams needed a week to process all they learned, and 2) we needed to teach them how to turn that learning into a story of their journey.

This year all our teams accomplished that and much, much more.

And after 9 years of classes, students still find that this class is the closest thing to being in a real startup.

Take a look at their presentations below.

AgAI

If you can’t see the presentation click here

If you can’t see the video click here

BeaconsAI

If you can’t see the presentation click here

If you can’t see the video click here

Equify

If you can’t see the presentation click here

If you can’t see the video click here

Equipped

If you can’t see the presentation click here

If you can’t see the video click here

HardHats

If you can’t see the presentation click here

If you can’t see the video click here

Lemnos

If you can’t see the presentation click here

If you can’t see the video click here

NanoSense

If you can’t see the presentation click here

If you can’t see the video click here

Neuro

If you can’t see the presentation click here

If you can’t see the video click here

NeuroDiversity Nerds

If you can’t see the presentation click here

If you can’t see the video click here

 

Praxis

If you can’t see the presentation click here

If you can’t see the video click here

Promote.It

If you can’t see the presentation click here

If you can’t see the video click here

RightFoot

If you can’t see the presentation click here

If you can’t see the video click here

Topt

If you can’t see the presentation click here

If you can’t see the video click here

Wanderwell

If you can’t see the presentation click here

If you can’t see the video click here

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