I’m sitting next to the fireplace in my favorite chair listening to holiday music, looking at the ocean and making occasional attempts to “help” get ready for Christmas dinner. We went for a hike checking out our new trail signs and playing “spot the bobcat.” Our kids are home for the school break, some friends are visiting from the east coast and we have everything for the holidays but snow on the California coast.
My kids are now almost the age I was long ago at another Christmas.
So This is Christmas
As a 20-year old in Thailand in the middle of the chaos of the Vietnam War, my days were filled being a infinitesimal part of the synchronized machinery of maintaining, arming, and launching row after row of fighter planes parked in their revetments –
F-105 Wild Weasels, F-4’s, A-7’s, as well AC-130 Spectre gunships.
There was something both awe-inspiring and incongruous watching fighter planes with bombs on the wing racks take off two at a time. They would accelerate down the runway with full afterburners with sound you could feel in your chest, climb steeply banking sharply to avoid the towering thunderstorms and seem to fly through double rainbows so bright and beautiful they looked painted on the sky.
While I spent most of my time in an air-conditioned avionics shop, my forays out to the flight-line forever made the smell of JP-4 (jet fuel) an integral part of my life. I still associate the kerosene odor with the ballet-like choreography and precision of hundreds of bomb loaders, pod loaders, start-carts, maintenance crews and the cacophonous sound of dozens of jet engines and fighters purposefully taxiing to the runway. As I look out of the window from a seat of a commercial airplane and see the fuel trucks and baggage carts scurry about, the smell of jet fuel still makes me remember somewhere else.
Halfway through my tour of duty I got to go on vacation – what the military called R&R (rest and recreation.) All my buddies went to Bangkok or somewhere equally exotic. I decided to go to Ann Arbor Michigan to see my girlfriend. Normally you got 5 days off and then it was time to forget civilian life and get back to the war. Somehow (lost in the mist of time, or perhaps it was because my R&R would occur over the Christmas holidays) I managed to make my R&R 7 days.
One day I was in the middle of Thailand and the next I was hopping space-available military flights to snow-bound Michigan.
So This is Christmas
To my girlfriend Christmas was the high point of her year. Getting off the plane I was in a jet-lagged daze, standing out with very short-hair in a ‘70’s college town, as she met me by at the gate reminding me that having me back was her best Christmas present. As soon as we left the airport we began a 7-day frenzy of a full-immersion Christmas. (All of this was new for me, as I was raised by a single mother who never celebrated holidays- secular or religious, including events like birthdays.)
I still remember some of the things we did; making wrapping paper by tie-dying plain tissue paper, baking Christmas cookies and Gingerbread men and fruitcake. We made our own Christmas ornaments. I even believe, given how little money we had, we made each other our presents. We went caroling in the snow and had Christmas dinner with friends.
Yet with all of that holiday activity the one thing I still remember, the one thing I can still feel after almost 40 years, was regardless of the adventures you have, how important coming home to a family was.
Of all the goals I set in my life coming home to a family was the one I set standing in the snow that Christmas.
Duality of Man
On the flight back I had plenty of time to think of the contradictions of war with the messages of peace, the imperfections of man and the limits of reason.
Merry Christmas and Happy Holidays
From our family to yours.
Listen to this blog post here [audio http://traffic.libsyn.com/albedrio/steveblank_hplewis_091224_FULL.mp3]
Sometimes financial decisions that are seemingly rational on their face can precipitate mass exodus of your best engineers.
We Hired the CFO
Last week as a favor to a friend, I sat in on a board meeting of a fairly successful 3½ year-old startup. Given all that could go wrong in this economy, they were doing well. Their business had just crossed cash flow breakeven, had grown past 50 employees, just raised a substantive follow-on round of financing and had recently hired a Chief Financial Officer. It was an impressive performance.
Then the new CFO got up to give her presentation – all kind of expected; Sarbanes Oxley compliance, a new accounting system, beef up IT and security, Section 409A (valuation) compliance, etc. Then she dropped the other shoe.
“Do you know how much our company is spending on free sodas and snacks?” And to answer her own question she presented the spreadsheet totaling it all up.
There were some experienced VC’s in the room and I was waiting for them to “educate” her about startup culture. But my jaw dropped when the board agreed that the “free stuff” had to go.
“We’re too big for that now” was the shared opinion. But we’ll sell them soda “cheap.”
I had lived through this same conversation four times in my career, and each time it ended as an example of unintended consequences. No one on the board or the executive staff was trying to be stupid. But to save $10,000 or so, they unintentionally launched an exodus of their best engineers.
This company had grown from the founders, who hired an early team of superstars, many now managing their own teams. All these engineers were still heads-down, working their tails off, just as they had been doing since the first few months of the company. Too busy working, most were oblivious to the changes that success and growth had brought to the company.
The Elves Leave Middle Earth – Sodas Are No Longer Free
One day the engineering team was clustered in the snack room looking at the soda machine. The sign said, “Soda now 50 cents.” The uproar began. Engineers started complaining about the price of the soda. Someone noticed that instead of the informal reimbursement system for dinners when they were working late, there was now a formal expense report system. Some had already been irritated when “professional” managers had been hired over their teams with reportedly more stock than the early engineers had. Lots of email was exchanged about “how things were changing for the worse.” A few engineers went to the see the CEO.
But the damage had been done. The most talented and senior engineers looked up from their desks and noticed the company was no longer the one they loved. It had changed. And not in a way they were happy with.
The best engineers quietly put the word out that they were available, and in less than month the best and the brightest began to drift away.
Startups go through a metamorphosis as they become larger companies. They go from organizations built to learn, discover and iterate, to predominately one that can execute adroitly having found product/market fit.
Humans seem to be hard-wired for numbers of social relationships. These same numbers also define boundaries in growing an organization – get bigger than a certain size and you need a different management system. The military has recognized this for thousands of years as they built command and control hierarchies that matched these numbers.
Wake Up Call
The engineers focused on building product never noticed when the company had grown into something different than what they first joined.
The sodas were just the wake-up call.
As startups scale into a company, founders and the board need to realize that the most important transitions are not about systems, buildings or hardware. It’s about the company’s most valuable asset – its employees.
Great companies do this well.
- Be careful of unintended consequences when you grow
- Recognize the transition boundaries in company size
- Preserve and manage an Innovation Culture
Gathering real-world feedback from customers is a core concept of Customer Development as well as the Lean Startup. But what information to collect?
Only 57 Questions
Yesterday I got an email from an ex-student lamenting that only 2% of their selected early testers responded to their on-line survey. The survey said in part:
The survey has 57 questions, the last three of which are open ended, and should take about 20 minutes to complete. Please note that you must complete the entire survey once you begin. You cannot stop along the way and have your responses to that point saved.
If it wasn’t so sad it would be funny. I called the founder and noted that there are SAT tests that are shorter than the survey. When I asked him if he actually had personally left the building and talked to these potential customers, or even had gotten them on the phone, he sounded confused. “We’re a web startup, all our customers are on the web. Why can’t I just get them to give me the answers I need this way?”
Continual Data Flow
Customer Development suggests that founders have continual and timely customer, channel and market information.
Founders need three views of information to truly understand what is going on:
- First-hand knowledge
- A “birds-eye” view
- The view from the eyes of customers and competitors
First-hand knowledge is “getting outside the building” and talking to potential or actual customers. Customer Development proposes that the best way to get customer data is through personal observation and experience—getting out from behind your desk and getting up close and personal with customers, competitors, and the market.
Web startups are at real disadvantage here as founders may confuse web metrics, A/B testing and on-line surveys as the entirety of first-hand knowledge – for most web business models they are not. In fact, this mistake can be a “going out of business” strategy. Metrics tell you that something is happening. A/B testing can tell you that one something is better than another. But neither can tell you why. And getting answers back from customers only with on-line surveys when you can’t watch their pupils dilate or hear the intonation of their voice is not something I’d build a business on.
Of course you need to collect metrics, do A/B testing and run online surveys. It’s just that without having founders “get outside the building”, you are missing a key point of Customer Development – the numeric data you collect may be blinding you to the fact that you’re more than likely working to optimize the wrong business model. Customer needs are non-deterministic.
The second picture founders need is a synthesized “birds-eye view” of the customer, market and competitive environment. You assemble this view by gathering information from a variety of sources: web sites, social media (Facebook, Twitter, blogs, et al) sales data, win/loss information, market research data (i.e. compete.com, Alexa, etc.,) competitive analyses, and so on. From this big-picture view, founders try to make sense of the shape of the market and the overall patterns in the unfolding competitive and customer situation. At the same time, they can gauge how well industry data and the actual sales match the company’s revenue and market-share expectations.
(Just remember that most market research firms are excellent at predicting the past. If they could predict the future, they’d be entrepreneurs.)
My test for how well you understand this “order of battle” is to hand the founder a marker, have them go up to the whiteboard and diagram the players in the market and where they fit. (Try it.)
See through the eyes of customers and competitors
The third view is of the action as seen through the eyes of customers and competitors. Put yourself in your customers’ and competitors’ shoes in order to deduce possible competitors’ moves and anticipate customer needs. In an existing market this is where you ask yourself, “If I were my own competitor and had its resources, what would my next move be?” In looking through the eyes of a customer, the question might be, “Why should I buy from this company versus the incumbent.” In a new or resegmented market, the questions might be “Why would more than a few early adopters use this app, web site or buy this product? How would I get my 90-year grandmother to understand and buy this product?”
Think of this technique as playing chess. You need to be looking at all the likely moves from both sides of the chessboard. What would we do if we were our competitors? How would we react? What would we be planning? After a while this type of role playing will become an integral part of everyone’s thinking and planning.
Putting it All Together
First-hand knowledge is clearly the most detailed and essential, but offers a narrow field of view. Founders who focus only on this information risk losing sight of the big picture.
The “birds-eye view” provides a view of the market but lacks the critical detail. Founders who focus only on this image risk missing the “ground truth.”
Seeing through the eyes of customers and competitors is a theoretical exercise limited by the fact that you can never be sure what your customers and competitors are up to.
The combination of all three views helps founders form an accurate picture of what is going on in their business and help them hone in on product/market fit.
Even with information from all three views, founders need to remember there will never be enough information to make a perfect decision.
Building an Information Culture
The most important element of data gathering is what to do with the information once you collect it. Customer information dissemination is a cornerstone of Lean and agile companies. This information, whether good or bad, must not be guarded like some precious commodity. Large company cultures reward executives who hoard knowledge or suppress bad news. In any of my companies, that is a firing offense.
All news, but especially bad news, needs to be shared, dissected, understood, and acted upon.
This means that understanding poor click-through rates, retention numbers and sales losses are more important than understanding sales wins; understanding why a competitor’s products are better is more important than rationalizing ways in which yours is still superior. Winning startups build a startup culture that reward not punish messengers of bad news.
- Three views of information: First-hand knowledge, “birds-eye” view, view from the eyes of customers and competitors
- Web startups can fall into the trap of confusing metrics, testing and surveys with Customer Interaction.
- Goal is to build an information culture to help you get to product/market fit.
“In War: Resolution. In Defeat: Defiance. In Victory: Magnanimity. In Peace: Goodwill.” Winston Churchill
In March I was the keynote at the In-Q-Tel Venture Capital Conference, giving a talk on the Secret History of Silicon Valley. (In-Q-Tel is the Central Intelligence Agency’s Venture Capital firm in Silicon Valley.)
The gist of the talk was that the needs of electronic intelligence in the midst of the Cold War and a single Stanford Professor was a key catalyst for entrepreneurship in Silicon Valley.
There were about 300 people in the audience, about 150 from the U.S. intelligence community.
Last week I was the keynote at the American Business Association of Russian Speaking Professionals.
There were about 300 people in the audience, almost all from the old Soviet Union.
I presented the same Secret History talk, pointing out that the launch of the first Soviet satellite (Sputnik) galvanized the U.S. government to accidentally contribute to the start the Venture Capital industry as we know it.
Afterwards a few of the audience came up and told me stories about Soviet weapons systems that could have won someone an intelligence medal 30 years earlier.
I would have loved to have given the talk to both audiences at the same time.
Early on in my career I took a “we’re moving too fast to deal with lawyers” attitude to patents and Intellectual Property (IP.) That changed when I joined the board of a startup, and we sued Microsoft and Sony on the same day for patent infringement – and won $120 million.
A few caveats, this post is not legal advice, it’s not even advice, and it deals with law in the United States. Outside the U.S. your results will vary depending on your distance to a consistent and predictable legal system.
At one of my entrepreneurship classes at Stanford, Dan Dorosin, of Fenwick & West LLP guest lectures about startups and Intellectual Property. Most of this post is from Dan’s lecture. (But there are no guarantees that I got it right.) It may seem full of legal definitions and terms but my two takeaways are: 1) Entrepreneurs need to know about these legal options, 2) Consulting an intellectual property attorney is a good move even before you get funded.
Intellectual property gives you rights to stop others from using your creativity.
The assets you can protect may include your “core technology” like source code, hardware designs, architectures, processes, formulas. Or it can be your brand, logo or domain name. You can protect business processes, know how, customer information, product road map. Protection is also available for content such as music, books, or film.
For some of these assets, you get protection automatically. For other classes, to get full protection, you should/must go through a registration, application or examination process.
Types of Intellectual Property Protection
| Type of IP
| What is Protectable
|Branding (i.e. Nike swoosh)
|marks, logos, slogans
|Copyright _____________||Creative, authored works; expressions (not ideas)
|software, songs, movies, web site content
|Secrets with economic value
(i.e. the Coke recipe)
customer lists, formula
|As defined in the contract
|technology, business information
A trademark protects branding and marks, it gives you the right to prevent others from using “confusingly similar” marks and logos. Trademark protection lasts as long as you are using the mark. The more you use the mark, the stronger your protection. Trademark registration is optional, but has significant advantages if approved.
A copyright protects creative works of authorship; typically songs, books, movies, photos, etc. Copyright gives you the right to prevent others from copying, distributing or making derivatives of your work. It protects “expressions” of ideas but does not protect the underlying ideas. (If your product is software, copyright is also used to prevent someone from stealing your software and reselling it as machine and/or source code.) Copyright protection lasts practically forever. Registration is optional, but is required to sue for infringement.
A contract is a binding legal agreement that is enforceable in a court of law. There’s no official registration process. You have whatever protection is defined in the contract (e.g., a Non Disclosure Agreement gives you certain rights to protection of your confidential information.) The protection lasts for the time period defined in the contract.
A patent is a government granted monopoly to prevent others from making, using or selling your invention – even if the other parties infringement was innocent or accidental.
Just about anything can be patented: circuits, hardware, software, applied algorithms, formulas, designs, user interfaces, applications, systems. Scientific principles or pure mathematical algorithms cannot be patented.
Your invention must be “non-obvious.” The test for non-obvious is: given the prior art at the time of the invention, would a typical engineer 1) identify the problem, and 2) solve it with the invention? You must be “first” to patent. In the U.S. that means “first to invent” while outside U.S. it means “first to file.” You must file in U.S. within one year of sale, offer for sale, public disclosure or public use.
Your patent application has to include a written description with details of the claims of the invention. The details have to allow others to duplicate your invention from your description and has to the “best mode” in describing critical techniques/technologies. And it has to identify all prior art.
Patent protection lasts typically for 15-20 years. There is a formal application and examination process that’s required. Each patent filing will cost your company $10-30k and take 1-4 years. Filing of patents is frequently of major interest to people funding your company.
(There’s something called a “provisional patent.” It’s an alternative to a full patent. It allows you to claim “first to file” and use the term “patent pending.” Provisional patents get into the patent office quickly and cheaply. However they automatically expire after one year and no patent rights are granted. Provisional patents are a good placeholder because they are cheap to file and doesn’t get in the way of your other patent efforts.)
Key Idea #1 – Intellectual Property Creates Value
Intellectual Property is an asset for you company. You need to acquire, protect and exploit it. An intellectual property strategy will map out:
- Who are the key players and technologies in its market(s)?
- What are the most important ideas and inventions that need patents (or provisional patents?) Start filing these early!
- What are the important patent applications that come next?
Key Idea #2 – Your Intellectual Property Needs Are Unique
What type of intellectual property matters to your company, and what you should do to protect it is highly company/industry dependent, requiring unique analysis and/or protection. For example if you are a:
- Medical device company – patents are key
- Web 2.0/social network start up – trademark and copyright are more likely
- Enterprise software company – copyright and trade secrets are probable
- Biotech/phama – don’t even leave your bedroom until you have a patent counsel
Make sure you understand Intellectual Property for your specific industry.
Four Common Intellectual Property Mistakes by Start-Ups
1. Founders Didn’t Make Clean Break with Prior Employer
Under California law, employers may own inventions that are “related to employer’s reasonably anticipated R&D.” It’s a very subjective standard, and since startups don’t often have resources or time to spend in lawsuits large companies use threats of litigation to ensure you don’t take anything. Therefore the best advice is “take only memories.” If you’re at a university, they may have patent policies that apply, too.
2. Your Company Cannot Clearly Show That it Owns its Intellectual Property
Take the time to create a well documented, clear chain of title to your intellectual property. If you are using independent contractors make sure you have written agreements assigning work created. Make sure you have Employee Invention Assignment Agreements. (If you hire subcontractors or friends to do some work, get assignment agreements as well.)
3. Your Company Lost Patent Rights due to Filing Delays/Invention Disclosures
In the U.S. patent rights are forfeited if you wait greater than 1 year after:
– Disclosure in a printed publication: Red flags: White paper, journal/conference article, Web site
– Offer for sale in the U.S.:Red flags: Start of sales effort, Price list, price quotation, Trade show demonstration, Any demonstration not under NDA
– Public use in the U.S.
In most foreign countries there is no one-year grace period.
4. Your Company Grants “Challenging” Licenses to Intellectual Property
Startups acquiring their first customers may give special licensing terms in key markets, territories, etc. For example, a grant of “most favored nations” license terms or other licensee-favorable economic terms can make your intellectual property less valuable to future buyers of your company. Or you may cut a deal that you can’t assign or transfer (or can’t get out of) if you get acquired.
- Protecting your startups intellectual property should be a strategy not an after the fact tactic.
- You need a plan for trademarks, copyright, trade secrets, contracts/NDA’s and patents before you get funded.
- Your intellectual property may be an additional revenue stream or may add substantial value to your company.
In my 21 years of startups, I had my ideas “stolen” twice. See part one for the first time it happened. This time it was serious.
As a reminder, this post is not legal advice, it’s not even advice. It’s just a story about what happened to me.
We were starting Epiphany, my last company. I was out and about in Silicon Valley doing what I would now call Customer Discovery trying to understand how marketing departments in large corporations worked. The initial hypothesis for Epiphany (from my much smarter partner Ben) was that as departments in the enterprise (manufacturing, finance, customer support sales) became automated, the marketing department would eventually get its turn.
I remember presenting our ideas for Marketing Automation to one VP of Marketing in a large Silicon Valley company. His enthusiastic response was, “This will revolutionize marketing departments!” He continued: “I’d like to convince my boss so our company can be your first customer.” I should have been suspicious when he said, “I’d like to take a copy of your presentation to show him.” Caught up in the enthusiasm of hearing what a great idea we had, I violated one of my cardinal rules, and left him a hard copy.
Fast forward nine months. After talking to tons of customers and almost as many VC’s, we got Epiphany funded as a company that was going to automate Marketing Departments. After a ton of unreturned phone calls, I had written off the enthusiastic VP of Marketing who wanted to show my slides to his boss and moved on with building our company.
By now we had found a few customers and learned a lot more about the market from them and other prospects. Our business model changed as we realized that to become a large company, we needed to automate more than just a few marketers. As we were out looking for our Series B round, our company had gotten the attention of “name of big VC firm here” who wanted a play in enterprise software.
Are These Your Slides?
During the due-diligence process, I sat down with one of the partners who pulled out a set of slides and asked me: ”Have you seen these?” I quickly leafed through them and replied, “Sure they’re our original slides. Why?” He said, “Look again.” They had all my words from a year ago, but hey wait a minute, there’s someone else’s logo on my slides?! What’s going on? He said, “That’s what we’re trying to figure out. These guys just got funded, and they sound a lot like you guys.” Luckily I had the original slides and could prove who came first. Still the fact was a competitor had raised money using our idea and our slide deck.
And who was this competitor? The VP of Marketing who a year earlier had wanted a hard copy of our slides. He was now CEO of a new company in our market.
I felt like I had just been kicked in the stomach.
Disbelief, Anger, Resignation and Acceptance
My cofounders and I went through the stages of disbelief, anger, resignation and acceptance. Here was a competitor who had appropriated our idea and gotten funded. (Welcome to the Internet bubble.) There was lots of venting as we talked about lawsuits and issuing nasty press releases.
We consciously didn’t ask potential customers to sign a Non-Disclosure Agreement (NDA). In Customer Discovery we were learning as much from them as they did from us. And we figured that unless litigation was going to be our business strategy, NDA’s would have inhibited the back-and-forth that made us smarter. We concluded that, at least for us in this market, an NDA would be a bigger impediment than asset. Now we started asking ourselves, “Did we make a mistake? Would have getting a signed confidentially agreement deterred this person?” On further reflection, (and their track record since) not in the least. But that still left us with a problem. What should we do about this competitor copying our strategy?
Finally, we concluded, “You can’t drive forward by looking in the rear-view mirror.”
Our competitor was executing on hypotheses we had developed 9 months ago, and their strategy remained static. We on the other hand, had moved on. We had discovered detailed information about what customers really needed and wanted and turned our original hypotheses into facts. We had validated our new assumptions by a set of orders, and we had pivoted on our business model. Our original idea had been nothing more than an untested set of hypotheses. Truth be told, we were no longer the company in those stolen slides.
While the common wisdom said that our success was going to be determined by which company executed better, the common wisdom was wrong. In a startup success isn’t about just execution, it’s how well we could take our original hypothesis and learn, discover, iterate and execute.
Never Get Even, Get Ahead
With a set of orders from brand name customers, we had growing confidence that we had achieved product/market fit. We were within three months of formally announcing our company and products at a major industry trade show. We made sure our competitor knew this. In fact, we made sure they knew what day at the show we were going to announce. Just as we predicted, they picked the day before us for their announcement in an effort to preempt our company launch with theirs. We made sure they heard how shocked and upset we were that they were going to beat us to an announcement in our market.
Our competitor announced on a Monday solidifying their position in the small market we had abandoned because we realized it was unprofitable and would not scale.
We announced the next day, positioned as a player in a much larger and broader market with new positioning, strategy and customers.
Our copycat competitor was now publicly locked into a company and product strategy that was obsolete and untenable.
Over the next two years we left them in the dust.
While how you iterate and execute your idea is more important than the idea itself, there are parts of your intellectual property a startup does need to protect. More on this in the next post.
- Your business concept is not a company. Lots of people have ideas. Typically they are just a set of untested hypotheses.
- Successful companies are about the learning, discovery, iteration on your initial ideas. If someone can do a better job iterating hypotheses and executing than you can, you deserve to fail.
- No business plan survives first contact with customers
- The real value is finding the product/market fit. That’s not found in a set of slides.