Balloon Wars: Part 16 of the Secret History of Silicon Valley

In the 1950’s the U.S. Military and the CIA enlisted balloons (some as tall as a 40-story building) as weapons systems targeting the Soviet Union. Throughout the decade they launched a series of Top Secret/codeword balloon projects and thousands of balloons, to gather intelligence about the Soviet Union. The individual stories of these programs are interesting but an unexpected consequence of their secrecy was that they created a mythology that outlasted the missions.

Why Balloons?
In the 1950’s balloons had attributes that airplanes couldn’t match. In the days before satellites they could stay aloft for a long time (days or even weeks,) they could reach altitudes where airplanes couldn’t fly (100,000 feet,) and they could go places that were too dangerous for manned aircraft (flying over the Soviet Union.)

The Search for Soviet Nuclear Weapons
Project MOGUL was an Air Force balloon program to detect Soviet nuclear tests by listening to sound waves traveling through the upper atmosphere. During World War II, scientists had discovered the existence of an ocean layer that conducted underwater sound for thousands of miles. They thought that a similar sound channel might exist in the upper atmosphere. If they could put microphones in the upper atmosphere, the U.S. thought they might be able to hear Soviet nuclear tests and even detect ballistic missiles launches heading toward their targets. Designed to test this theory, Project Mogul balloons carried microphones up to the sound channel to “listen” and radio transmitters to send the sound to the ground. At first, project MOGUL flights involved trains of small weather balloons up to 600 feet in length. Later MOGUL flights used the large polyethylene balloons developed for the Navy’s SKYHOOK.

Flying Sandwich Bags – SKYHOOK
SKYHOOK balloons, funded by the Office of Naval Research, were designed to stay at a fixed altitude (~100,000 feet) and carry a payload of thousands of pounds. They were huge, 400 feet high, made possible because the then new material called polyethylene.  These “flying sandwich bags” were built by a company that had experience using this material in packaging – General Mills (the same company that makes Cheerios.)

Sniffing for a Reactor – Nuclear Air Sampling – ASHCAN
In 1957 the Air Force started Project ASHCAN (using SKYHOOK class balloons at 100,0000 feet) to take high altitude air samples and search for nuclear particles and trace gases in fallout from tests in the Soviet Union. For the first time, U.S. intelligence could estimate the amount of plutonium being produced by Soviet weapons production reactors. These balloons were secretly launched from Brazil and the Panama Canal Zone, and from air force bases in the U.S.  Over time, U.S. intelligence also used reconnaissance planes like the U-2, RB-57’s, and C-130 aircraft to collect air samples.

Genetrix Launched from the U.S.S. Valley Forge

Ballooning Over the Soviet Union – GENETRIX
While the nuclear detection balloons did their spying while flying above the U.S. or allied countries, the next series of balloons flew over the Soviet Union.

In the 1950’s, while U.S. reconnaissance aircraft flew around the periphery of the Soviet Union, U.S. military planners still had virtually no information about what was going on in vast areas of the Soviet territory. While there were a few overflights of the Soviet interior in the early 1950’s these missions were extremely risky and couldn’t provide enough information to assess Soviet military strength. Spy satellites and the U-2 spy planes were still far in the future so the U.S. military became big fans of reconnaissance balloons as a solution to this problem.

In 1950 the Air Force thought that high-altitude balloons might be used to perform photo and ELINT spyflights over the Soviet Union.  They placed aerial reconnaissance cameras on the balloons and ran a series of test programs (code names of GOPHER, MOBY DICK, GRANDSON and GRAYBACK) launching 640 balloons from New Mexico, Montana, the West Coast, Missouri and Georgia. With the tests completed, the program name changed to GENETRIX and was given the designation of Weapons System 119L.

In late 1955 President Eisenhower gave the ok to launch the GENETRIX balloons over the Soviet Union. Hundreds of these balloons took off from secret sites in Norway, Scotland, West Germany, and Turkey carrying a gondola with two reconnaissance cameras.

The United States launched 516 of the GENETRIX balloons but only 44 or so made it out of the Soviet Union.  The rest landed on Soviet farms dumping 600-pound cameras in hayfields. We did get coverage of about 8 percent of the Soviet Union, but politically it created a lot of tension as cameras were popping up on Khrushchev’s desk.  “Oh, another balloon Mr. Premier.”  The Soviets put on a public exhibition of the equipment.

Bigger and Better- MELTING POT
Never one to give up, the military suggested a bigger and better balloon program. Since the GENETRIX balloons flying at 55,000 feet were relatively easy for Soviet fighters to intercept, the new balloons would be built around the Navy SKYHOOK design and fly at 100,000 feet for up to a month. These balloons would carry a new reconnaissance camera, built by the Boston University Physical Research Lab. Three of these balloons were launched in July 1958 from an aircraft carrier off the east coast of Japan (in those months the jet stream at the altitude went west to east.) All three accidentally dropped their gondolas over Communist territory.  President Eisenhower cancelled all the balloon overflights.

Unexpected Consequences – UFO’s in the 1950’s
All these balloon flights had an unexpected consequence on a jittery and paranoid nation in the Cold War. Before sunrise and after sunset, while the Earth below was dark, high altitude balloons were still lit by sunlight, and their plastic skin glowed and appeared to change color with the change in sun angle. Some of the Project Mogul balloon flights were launched from Alamogordo Air Base in New Mexico in 1947, and a few crashed nearby – one near a town called Roswell. The start of the Mogul balloon flights coincided with the first reports of UFO’s. To someone on the ground, these balloons may have looked like UFOs.

Because each of these separate balloon programs were highly compartmentalized programs it’s doubtful that there was any one individual who realized that the sum of the programs were putting thousands of high altitude balloons in the air in the 1950’s. The MOGUL, MOBY DICK, ASHCAN and GENETRIX programs were the CIA/military’s most closely guarded secret projects. Balloon sightings were dismissed with cover story: they were just weather balloons. Even as one part of the military tried to investigate these sightings, the other kept them away from the true purpose of the balloon missions.The reason for the denials – 1) the Soviets could have masked their nuclear tests and filtered their reactor emissions if they knew what we were sampling and 2) GENETRIX balloon flights over the Soviet Union were a violation of international law.

The thousands of classified balloon flights (along with the first flight of the high altitude CIA U-2 reconnaissance plane in 1955) are a possible explanation of of UFO sightings in the 1950’s and the claim of military cover-ups.

What’s A Startup? First Principles.

Success consists of going from failure to failure without loss of enthusiasm.
Winston Churchill

Everyone knows what a startup is for – don’t they?

In this post we’re going to offer a new definition of why startups exist: a startup is an organization formed to search for a repeatable and scalable business model.

A Business Model
Ok, but what is a business model?

A business model describes how your company creates, delivers and captures value.

Or in English: A business model describes how your company makes money.
(Or depending on your metrics for success, get users, grow traffic, etc.)

Think of a business model as a drawing that shows all the flows between the different parts of your company.  A business model diagram also shows how the product gets distributed to your customers and how money flows back into your company.  And it shows your company’s cost structures, how each department interacts with the others and where your company fits with other companies or partners to implement your business.

While this is a mouthful, it’s a lot easier to draw.

Drawing A Business Model
Lots of people have been working on how to diagram and draw a business. I had my students drawing theirs for years, but Alexander Osterwalder’s work on business models is the clearest description I’ve read in the last decade. The diagram below is his Business Model template. In your startup’s business model, the boxes will have specific details of your company’s strategy.

Alexander Osterwalder's Business Model Template

(At Stanford, Ann Miura-Ko and I have been working on a simplified Silicon Valley version of this model. Ann will be guest posting more on business models soon.)

But What Does a Business Model Have to Do With My Startup?
Your startup is essentially an organization built to search for a repeatable and scalable business model.  As a founder you start out with:

1) a vision of a product with a set of features,

2) a series of hypotheses about all the pieces of the business model: Who are the customers/users? What’s the distribution channel. How do we price and position the product? How do we create end user demand? Who are our partners? Where/how do we build the product? How do we finance the company, etc.

Your job as a founder is to quickly validate whether the model is correct by seeing if customers behave as your model predicts. Most of the time the darn customers don’t behave as you predicted.

How Does Customer Development, Agile Development and Lean Startups Fit?
The Customer Development process is the way startups quickly iterate and test each element of their business model. Agile Development is the way startups quickly iterate their product as they learn. A Lean Startup is Eric Ries’s description of the intersection of Customer DevelopmentAgile Development and if available, open platforms and open source. (This methodology does for startups what the Toyota Lean Production System did for cars.)

Business Plan Versus Business Model
Wait a minute, isn’t the Business Model the same thing as my Business Plan?  Sort of…but better.  A business plan is useful place for you to collect your hypotheses about your business, sales, marketing, customers, market size, etc. (Your investors make you write one, but they never read it.)  A Business Model is how all the pieces in your business plan interconnect.

The Pivot
How do you know your business model is the right one? When revenue, users, traffic, etc., start increasing in a repeatable way you predicted and make your investors happy. The irony is the first time this happens, you may not have found your company’s optimal model.  Most startups change their business model at least once if not several times.  How do you know when reached the one to scale?

Stay tuned. More in future posts.

Lessons Learned

  • A startup is an organization formed to search for a repeatable and scalable business model.
  • The goal of your early business model can be revenue, or profits, or users, or click-throughs – whatever you and your investors have agreed upon.
  • Customer and Agile Development is the way for startups to quickly iterate and test their hypotheses about their business model
  • Most startups change their business model multiple times.

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I’ve seen the Promised Land. And I might not get there with you.

…I’ve been to the mountaintop and I’ve seen the Promised Land. And I might not get there with you… Martin Luther King

The startup founder who gets fired just as his/her company is growing into large company could be a cliché – if it wasn’t so true – and painful.

Let’s take a look at why.

Full disclosure: I’ve worn all the hats in this post. I’ve been the founder who got fired, I’ve been on the board as my friends got fired and I’ve been the board member who fired the founders.

Scalable Startups at Adolescence
In our previous post we posited that Scalable Startups are designed to become large companies.  Yet at their early stages, they are not small versions of larger established companies. They are different in every possible way – people, culture, goals, etc.  Scalable startups go through an transitional form, as unique as a startup or large company, before they can grow into a large company

Management in the Transition
When Startups reach the Transition stage, it’s time to look inward and decide whether the current CEO and executive staff are capable of scaling to a large company.

To get to this Transition stage, the company needed passionate visionaries who can articulate a compelling vision, agile enough to learn and discover in real time, resilient enough to deal with countless failures, and responsive enough to capitalize on what they learned in order to secure early customers. The good news is this team found a business model, product/market fit and a repeatable sales model.

What lies ahead, however, is a different set of challenges: finding the new set of mainstream customers on the other side of the chasm and managing the sales growth curve. These new challenges require a different set of management and leadership skills. Critical for this transition are a CEO and executive staff who are clear-eyed pragmatists, capable of crafting and articulating a coherent mission for the company and distributing authority down to departments that are all driving toward the same goal.

What’s Next
By now, the board has a good sense of the skill set of the CEO and executive team as entrepreneurs. What makes the current evaluation hard is that is based not on an assessment of what they have done, but on a forecast of what they are capable of becoming. This is the irony of successful entrepreneurial executives: their very success may predicate their own demise.

The table below helps elucidate some of the characteristics of entrepreneurial executives by stage of the company. One of the most striking attributes of founders is their individual contribution to the company, be it in sales or product development. As technical or business visionaries, they are leaders by the dint of their personal achievements. As the company grows, however, it needs less of an iconoclastic superstar and more of a leader who is mission- and goal-driven.

Management Skills Needed as a Startup Grows into Large CompanyLeaders at this Transition stage must be comfortable driving the company goals down the organization and building and encouraging mission-oriented leadership on the departmental level. This Transition stage also needs less of a 24/7 commitment from its CEO and more of an as-needed time commitment to prevent burnout.

Planning is another key distinction. The Scalable Startup stage called for opportunistic and agile leadership. As the company gets bigger, it needs leaders who can keep a larger team focused on a single-minded mission. In this mission-centric Transition stage, hierarchy is added, but responsibility and decision making become more widely distributed as the span of control gets broader than one individual can manage. Keeping this larger organization agile and responsive is a hallmark of mission-oriented management.

I Don’t Get It – I Built This Company – I Deserve to Run It
This shift from Customer and Agile Development teams to mission-centric organization may be beyond the scope and/or understanding of a first-time CEO and team. Some never make the transition from visionary autocrats to leaders. Others understand the need for a transition and adapt accordingly. It’s up to the board to decide which group the current executive team falls into.

This assessment involves a careful consideration of the risks and rewards of abandoning the founders. Looking at the abrupt change in skills needed in the transition from Customer Development to a mission-centric organization to process-driven growth and execution, it’s tempting for a board to say: Maybe it’s time to get more experienced executives. If the founders and early executives leave, that’s OK; we don’t need them anymore. The learning and discovery phase is over. Founders are too individualistic and cantankerous, and the company would be much easier to run and calmer without them. All of this is often true. It’s particularly true in a company in an existing market, where the gap between early customers and the mainstream market is nonexistent, and execution and process are paramount. A founding CEO who wants to chase new markets rather than reap the rewards of the existing one is the bane of investors, and an unwitting candidate for unemployment.

Don’t Fire the Founders
Nevertheless, the jury is still out on whether more startups fail in the long run from getting the founders completely out of the company or from keeping founders in place too long. In some startups (technology startups especially), product life cycles are painfully short. Regardless of whether a company is in a new market, an existing market, or a resegmented market, the one certainty is that within three years the company will be faced with a competitive challenge. The challenge may come from small competitors grown bigger, from large companies that now find the market big enough to enter, or from an underlying shift in core technology. Facing these new competitive threats requires all the resourceful, creative, and entrepreneurial skills the company needed as a startup.

Time after time, startups that have grown into adolescence stumble and succumb to voracious competitors large and small because they have lost the corporate DNA for innovation and learning and discovery. The reason? The new management team brought in to build the company into a profitable business could not see the value of founders who kept talking about the next new thing and could not adapt to a process-driven organization. So they tossed them out and paid the price later.

Take the Money and Let Someone Else Sort it Out
In an overheated economic climate, where investors could get their investments liquid early via a public offering, merger or acquisition, none of this was their concern. Investors could take a short-term view of the company and reap their profit by selling their stake in the company long before the next crisis of innovation occurred. However, in an economy where startups need to build for lasting value, boards and investors may want to consider the consequences of losing the founder instead of finding a productive home to hibernate the creative talent for the competitive storm that is bound to come.

Instead of viewing the management choices in a startup as binary—entrepreneur-driven on Monday, dressed up in suits and processes on Tuesday—the Transition stage and mission-oriented leadership offers a middle path that can extend the life of the initial management team, focus the company on its immediate objectives, and build sufficient momentum to cross the chasm.  We’ll cover the details in a future post.

Lessons Learned

  • Founder/Investor struggles about leadership are not about past successes – they’re about who’s best to lead future growth
  • Founder success in the Startup stage is not a predictor for success in the next stages
  • Few founders make great large company execs
  • The exceptions, Gates, Jobs, Ellison, etc. are founders who grew into large company executives while retaining founder instincts

The Secret History of Silicon Valley Part 14: Weapons System 117L and Corona

This post is the latest in the “Secret History Series.”  They’ll make much more sense if you read some of the earlier ones for context. See the Secret Historyvideo and slides as well as the bibliography for sources and supplemental reading.


The Soviet Union’s detonation of an atomic weapon in 1949 and the start of the Korean War in 1950 fed cold war paranoia in the military and political leadership of the United States. The U.S. intelligence community was determined to find out what was going on inside the Soviet Union. But Soviet secrecy had the country locked down tightly. Desperate for intelligence, the CIA would fly the Lockheed built U-2 spy plane into and over the Soviet Union on 24 missions from 1956-1960 taking photos of its military installations.

But even as the U-2 was beginning its overflights, the U.S. military had concluded that the future of intelligence over the Soviet Union would no longer be with airplanes, but would rely instead on spy satellites orbiting hundreds of miles above in space.

One company in what is today Silicon Valley would build most of them.

Weapons System 117L
In 1956 Lockheed Missiles had just won the contract to build the Polaris Submarine Launched Ballistic Missile (SLBM) for the U.S. Navy in Sunnyvale California, and down in Los Angeles, the U.S. Air Force was on a “crash program” to build land-based Intercontinental Ballistic Missiles (ICBM’s) – the Atlas, Titan and Minuteman.

In 1954, three years before the U.S. or the Soviet Union ever orbited a single satellite, the Air Force asked the RAND corporation to study what satellites could do for the military. Their answer: satellites would enable us to peer over the closed border and inside the Soviet Union.  In 1956, the Air Force organization building our ICBMs was assigned to build a family of satellites to spy on the Soviet Union from space. These satellites would be configured to carry out different reconnaissance missions, including photo reconnaissance, infrared missile warning, and Electronic Intelligence.

This military spy satellite program was called Weapons System 117L.

Spies in Sunnyvale
In 1956 the Air Force gave Lockheed Missiles Division in Sunnyvale the contract to build Weapons System 117L.

Over the next two years Weapons System 117L evolved into a large ambitious program with multiple satellites:

  • The Satellite and Missile Observation System (SAMOS) would take low resolution pictures of the Soviet Union from space and transmit the photos electronically to earth.
  • Another SAMOS version (called Ferrets) would collect electronic intelligence on Soviet radars and transmit the location and radar details electronically to earth.
  • The Missile Detection Alarm System (MIDAS) would provide early warning of the launch of Soviet missiles heading to the U.S. by looking for the hot exhaust (the infrared plume) of rocket engines and transmit the location of the launch electronically to earth.

In 1957, a year after Lockheed got the contract to start building WS-117L, the Soviet Union tested an ICBM – one that could carry a nuclear warhead to the United States. They quickly followed with the launch of Sputnik, the first earth-orbiting satellite.

These two events jolted the U.S. intelligence agencies into crisis mode. The Soviet Union claimed they could turn out ICBMs like sausages, and the CIA desperately needed to know how many missiles the Soviets really had and where they were.

Not Good Enough
The photo reconnaissance satellite designed for Weapons System-117 would have let the U.S. military see objects larger than 100-feet from space.  This 100-foot resolution was sufficient for its original mission – to assess how effective the first wave of nuclear attacks on the Soviet Union had been. This “post-strike bomb damage assessment” would allow targets that had been missed by the nuclear armed SAC bombers to be retargeted for follow-on attacks. Because of the immediacy of the information, it required real-time electronic read-out of film developed on orbit.

The problem was that while 100-foot resolution was good enough to locate craters left in cities from space, it wasn’t sufficient for the new mission; to locate the new Soviet ICBM silos and bombers. In addition, the electronic read-out of film developed on orbit was nowhere near ready; it was too complex for its time and technology.

The CIA and Corona
The CIA convinced the Secretary of Defense that the best bet was to build a separate photo reconnaissance satellite carrying a camera that took pictures from space as it passed over the Soviet Union. Film from the camera would be de-orbited in a capsule that could survive the heat of re-entry from space. A parachute would slow the descent of the capsule, which would be snatched in mid-air over the Pacific Ocean by a recovery plane hooking its parachute.  The idea was that this film-based spy satellite would be a short-term project until the Lockheed electronic readout version was in better shape.

This Project was code-named Corona.

The Flamingo Motel
In March 1958 a few unassuming guests checked into the Flamingo Motel in San Mateo, California, near the San Francisco airport.  The CIA, and their primary contractors Lockheed, Kodak, Fairchild and GE, met to hash out their roles and the schedule. The CIA was the customer. Lockheed would integrate and assemble the satellites, Itek (which replaced Fairchild) would provide the camera, Kodak the film, and GE would provide the recovery system that would bring the exposed film through the fiery re-entry back to earth.

After the meeting, the Lockheed manager for Corona rented his own hotel room in Rickey’s Hyatt House in Palo Alto to start to plan the program. He needed to find a factory, separate from the already secret Polaris factory in Sunnyvale. He found an unused facility at the Hiller Helicopter factory on Willow Road in East Palo Alto which became the Lockheed “Advanced Projects” facility.

To hide the fact that we were launching high-resolution photo reconnaissance satellites over the Soviet Union, the CIA had the Air Force publically cancel the SAMOS photo reconnaissance portion of WS-117L. The program then was resurrected as a “deep black” “compartmentalized” CIA program. When the Corona satellites were launched the CIA used a “cover” story. They called the Corona satellites the  “Discoverer” program and claimed it was an experimental program to develop and test satellite subsystems and explore environmental conditions in space. The film recovery capsule was described as a “biomedical capsule” for the recovery of biological specimens sent into space as an early test of how humans would react to manned spaceflight.

East Palo Alto – Lockheed’s Satellite Factory
The Corona project was run like a startup – a small team, minimum bureaucracy, focussed on a goal and tightly integrated with customer needs. Starting in February 1959, only 12 months after the program began the Air Force launched the first  Corona reconnaissance satellite from the military’s secret spaceport on the California coast at Vandenberg Air Force Base. But the first 13 missions were failures. Yet the program was deemed so important to national security the CIA and the Air Force persevered. And when the first images were received they transformed technical intelligence forever. At first, objects as small as 35-50 feet could be seen from space, with later versions improving to be able to see 6-10 feet objects, over millions of miles of a formally closed country.

Corona Image of Stepnogorsk Bioweapons Facility

Over the life of the program there were 145 Corona launches – 120 were complete or partial successes. During that same decade the Corona program evolved into six different satellite models (the KH-1 thru KH-6) with three different intelligence objectives.

Lockheed turned the Hiller Helicopter plant in East Palo Alto into the control facility for all spy satellites and the Corona spy satellite assembly line – building about one a month and delivering ~145 Corona satellites over the life of the program.

Stanford, Jasons, WS-117L and Corona
In addition to Lockheed, Stanford University also had a hand in Corona. Sidney Drell, then a professor in the Stanford Physics department, was one of the dozen of young scientists who were founding members of the Jason Group (scientists working on national security problems.) His first project was understanding whether a Soviet nuclear burst in space could blind the infrared sensors on the Midas portion of WS-117L.  This research got him invited to be part of the President’s Scientific Advisory Council (PSAC). But it was when the CIA asked him to solve some technical problems with the film on the Corona spacecraft that his career became intertwined with photo reconnaissance. His studies convinced the CIA that photo interpreters needed an order of magnitude improvement in resolution, and Corona had been pushed to its limits. In the late 1960’s Drell, as a member of the Land Panel convinced the CIA that the next generation of photo reconnaissance satellites should transmit their images back to earth in real-time, and use CCD’s rather than film.

For his work, Drell, still at Stanford, was recognized as one of the ten founders of National Reconnaissance by the NRO.

Corona Firsts
While Corona had a number of technological breakthroughs, including the first photoreconnaissance satellite, the first recovery of an object from space, etc. it was Corona imagery in 1961 that told the intelligence community and the new Kennedy administration that the “missile gap” (the supposed Soviet lead in ICBMs) was illusory. By fall of 1961 Soviet Union had a total of six deployed ICBMs – we had ten times as many. In truth, it was the U.S. that had the lead in missiles.

Corona was just the beginning. Overhead reconnaissance would become an integral part of the U.S. intelligence community. Hidden in plain sight, Lockheed and the U.S. intelligence community were just getting started in Silicon Valley.

Next – Agena, Midas, Ferrets and the NRO in Part XV of the Secret History of Silicon Valley.

A Startup is Not a Smaller Version of a Large Company

A journey of a thousand miles begins with a single step.      Lao-tzu

If you read the academic literature or business press, you might believe that large companies and their business models are brought by the stork.

This series of posts are going to offer a new three-stage model of how startups grow into large companies. And I’ll end with some thoughts about a new approach to entrepreneurial education using this model.

Children, Adolescents and Adults
In the Middle Ages children were considered to be smaller versions of adults. We now know that the human life cycle is more complex; children aren’t just small adults, and adolescents are not simply large children. Instead each is a unique stage of development with distinctive behavior, modes of thinking, physiology and more.

The same is true for startups and companies.

In the past, most business literature has treated the life cycle of corporation as if the practices that make sense for a large corporation were equally appropriate for a startup. They only differed by timing or scale.

I argue that as a scalable startup grows from a garage into a Google, it progresses through three distinct stages – each presenting a unique set of challenges and decisions – and each requiring vastly different resources, skills and strategy.

Let’s take a closer look at the first two of these stages.

Stage 1: The Scalable Startup
A scalable startup is designed by intent from day one to become a large company. The founders believe they have a big idea – one that can grow to $100 million or more in annual revenue—by either disrupting  an existing market and taking customers from existing companies or creating a new market. Scalable startups aim to provide an obscene return to their founders and investors using all available outside resources.

Entrepreneurs who have run a startup know that startups are not small versions of big companies. Rather they are different in every possible way – from goals, to measurements, from employees to culture. Very few skills, process, people or strategies that work in a startup are successful in a large established company and vice versa because a startup is a different organizational entity than a large established company.

Therefore, it follows that:

a)  Startups need different management principles, people and strategies than large established companies

b)  Any advice that’s targeted to large established companies is irrelevant, distracting and potentially damaging in growing and managing a startup

Getting From Here to There
If you would ask a startup CEO to create a diagram showing how their startup will become a large company, you’d probably get a simple line extending from “here’s where we are” to “here’s where we’re going.”

All the activities of a scalable startup such as Customer Development, Agile Development, Pivots, search for a repeatability, scale, business model, team building etc. would be inside the box to the left. In this simplistic model, on the day a startup achieves product/market fit, they would stop doing all the startup activities and magically become a “large company” – somehow acquiring a completely new set of skills, executing a known business model, generating profits and achieving liquidity for its founders and investors.

Since we know the world doesn’t work like this, the question is, “what is the process that transforms a a startup into a large company?”

Stage 2: Metamorphosis – the Transition
Any entrepreneur who has been successful (lucky) enough to grow their startup into a large company knows that this process is not a simple linear transition – it’s a metamorphosis. Startups traverse a clearly defined and chaotic stage before they become a large enterprise.

And once again, very few skills, processes, people or strategies that work in a scalable startup or in a large established company are successful in this transitional stage.

The transitional period between a startup and a company is a different organizational entity than either a startup or a large enterprise. While it is no longer an early stage scalable startup, it is not yet a large company.

This is the “they fired the founders and took away the free sodas” stage.

The new taxonomy for understanding how startups differ and grow into large company’s looks like this:

Each stage is an entirely different business entity with different management needs and requirements. In the next few posts I will explore how they differ in:

  • Management
  • Culture
  • Sales
  • Marketing
  • Strategy

Then I’ll propose why this three step model calls for a new approach to entrepreneurial education—Durant School of Entrepreneurship™.

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Victory From Adversity

Sometimes what sounds like bad news when talking to customers might be your finest hour.

Hypothesis Testing
As we started E.piphany, we got out of the building to test our hypotheses by talking to potential customers in and around Silicon Valley. On one of our most memorable visits, we met with Joe DiNucci, the VP of Marketing at Silicon Graphics who was generous enough to brainstorm the types of problems corporate marketers had. At the time Silicon Graphics – with 2+ billion dollars in sales of 3d workstations – was one of the hottest hardware companies in Silicon Valley.

The conversation seemed to click as he checked off every one of the issues we thought might define our product:  no closed-loop between expensive marketing activities and results, lack of department and corporate wide visibility to real-time sales and marketing data, browser versus client-server application, etc. We came up with a rough estimate of how much Silicon Graphics could save if they had a way to solve these problems, and together did a back of the napkin ROI (Return on Investment) analysis. Next we started enumerating what form a solution might take and what kind of features a product should have. Amazingly we came up with a feature list that was pretty close to the one we were building.  I was feeling like a genius so I went to the next step and I asked Joe: “It sounds like Silicon Graphics might be interested in working with us to be an early customer?”

My Bubble Burst
The answer was not what I expected.  “No not at all.”  Say, what?  Why?  “We also decided that this was an important problem to solve, and since we couldn’t find any vendor selling it, my director of marketing wrote the software to do it. We’ve built and deployed the product throughout Silicon Graphics. It’s called Mine Your Own Business.”

Talk about feeling your bubble deflate fast. I went from feeling the high of believing that I might have an early customer in an innovative company to the low in realizing that they’d never buy anything from us. And worse, what we had envisioned as a product so unique that no one had thought of it, someone had already built. We wouldn’t be the first. We were doomed.

I left Silicon Graphics feelings discouraged. But on the drive back to E.piphany a few things hit me.

  • A credible customer told me that we had hit on a high-value problem
  • They couldn’t find commercial software to solve this problem.
  • It was an important enough problem that they invested effort to write their own software.
  • It had been deployed inside their company and there were real world users
  • I could now point potential investors and visionary customers to the widespread use of the product inside SGI as a proxy for our product

The more I thought about it, the better I felt. This was a validation of our ideas not a negation.

Take No Prisoners
The next day I called the VP of Marketing back and asked him if I could get a demo of their software. Soon I was in the office of John McCaskey, the director of Silicon Graphics Science Industry Marketing who wrote Mine Your Own Business. As he went through the demo, I realized I was looking at working code for a big part of what we had spec’d as our first release.

I told John he ought to join our startup. “How many of you are there?” he asked. “Three, I said. “Including me. Four if we count you.” John rolled his eyes and tried to change the subject. I said, “We’re three now, but if we do this right we could be selling $100 million dollars a year of your software. Wouldn’t you rather be doing that than working at a big company?” That got his attention. “Well who’s funding you?” My turn to pause, “Well no one yet, but every VC thinks it’s a great idea.”

Watching someone rolling their eyes twice is not a good sign you’re going to close the deal, so I grabbed the phone and called Bill Davidow, a legendary VC whose office I had just left. “Bill, do me a favor,” I asked, “Can you tell this guy how big the enterprise software market can get?”  I don’t know who was more surprised, Bill Davidow in getting a call from me (since he had just told me he wasn’t going to invest in our new company – his firm having funding Rocket Science, the previous company I had just cratered) or John having watched me get the VC on the phone on the first ring (pure and unadulterated luck.) Bill was kind enough to spend a couple of minutes educating John about the opportunities for a startup like ours, and enough of a gentleman not to mention he had passed on our deal.

Thirty days later John became the fourth co-founder of E.piphany.

Sixty days later we convinced Silicon Graphics to license us all of John’s code for a dollar. (During the craziness of the Internet bubble E.piphany’s market cap would be greater than Silicon Graphics.)

John’s boss, Joe DiNucci, the VP of Marketing of Silicon Graphics became E.piphany’s VP of Sales.

Lessons Learned

  • Finding that a potential customer wrote their own software (or hardware) to solve a problem is good news, not bad
  • It’s a strong sign that there’s a high-value problem
  • ABR – Always Be Recruiting

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The Secret History of Silicon Valley Part 13: Lockheed-the Startup with Nuclear Missiles

This post is the latest in the “Secret History Series.”  They’ll make much more sense if you read some of the earlier ones for context. See the Secret History bibliography for sources and supplemental reading.


The Future is Clear – Microwave Valley Forever
In 1956 Hewlett Packard, back then a maker of test equipment was the valley’s largest electronics employer with 900 employees. But startups were rapidly spinning out of Stanford’s Applied Electronics Lab delivering microwave tubes, components and complete electronic intelligence and electronic warfare systems for the U.S. military and intelligence agencies. The future of the valley was clear – microwaves.

1956 – Change Everything
In 1956 two events would change everything.  At the time neither appeared earthshaking or momentous. Shockley Semiconductor Laboratory, the first semiconductor company in the valley, set up shop in Mountain View. And down the street, Lockheed Missiles Systems Division which would become the valley’s most important startup for the next 20 years, moves its new missile division from Burbank to 275 acres next to the Moffett Naval Air Station in Sunnyvale.

Lockheed – Building Nuclear Missiles in Sunnyvale
Lockheed, an airplane manufacturer, was getting into the missile business by becoming the prime contractor to build the Polaris, a submarine launched ballistic missile (SLBM) developed by the Navy. The Polaris was unique: it would be the first solid-fuel ballistic missile used by the U.S.  Solid fuel solved the safety problem of carrying missiles at sea and underwater and also allowed for instant launch capability. Polaris launched SLBM’s would become the third part of the nuclear triad the U.S. built in the cold war –  the Polaris, the B-52 manned bomber, and the Minuteman, and Titan land-based Intercontinental Ballistic Missiles (ICBMs.)

Each Polaris missile carried a 600 kT nuclear warhead, (later Polaris versions carried three) and each ballistic missile submarine carried 16 of these missiles. 10 years after the program started the United States had built and put to sea 41 ballistic missile submarines carrying 656 Lockheed missiles (28.5 ft high, and weighing 29,000 lbs.) The company acquired a 5,000 acre missile test facility near Santa Cruz, and for years would test it’s missiles in the mountains above the valley.

One can assume that with spares, Lockheed built close to 1000 of these missiles in those ten years.  That’s 100 missiles a year, 8/month or 2 a week flying out of Moffett Field.

You Can Be Sure if It’s Westinghouse
Polaris submarines carried each missile in a separate launch tube. Down the street from Lockheed in Sunnyvale, another American corporate icon, Westinghouse became the developer of the launch tube for the Polaris missile.  To launch missiles from a submarine under water, Westinghouse had to solve several problems. The launch tube had to keep the missile snug in its tube until firing.  It had to eject the missile with sufficient velocity so it would head to the surface from a 100’ feet under water, and it had to protect the submarine when ocean water came rushing in to the now empty launch tube.  Oil-filled shock absorbers solved the cushioning problem and compressed air launched the missile out of the tube through a thin diaphragm that separated the missile from the ocean once the missile launch covers were opened.

Zero to 28,000 people – We Become “Defense Valley”
By 1965 Hewlett Packard, the test and instrumentation company, had grown ten-fold.  From 900 people in 1956 it now employed 9,000. Clearly it must have been the dominant company in the valley? Or perhaps it was Fairchild, the direct descendant of Shockley Semiconductor, now the dominant semiconductor supplier in the valley (80% of its first years business coming from military systems) with ~10,000 people?

Nope, it was the Lockheed Missiles Division, which had zero employees in 1956, now in 1965 had 28,000 employees in Sunnyvale.  The best and the brightest were coming from across the country to the valley south of San Francisco.

And they were not only building Polaris missiles.

By 1965 Lockheed factories in Sunnyvale, Stanford and East Palo Alto were building the most secret spy satellites and rockets you never heard of. While the 1950’s had made us “Microwave Valley,” the growth of Lockheed, Westinghouse and their suppliers had turned us into “Defense Valley.”

In the next post; Spy Satellites in East Palo Alto and Stanford – Corona, WS-117, Samos, Ferret’s and Agena in Part XIV of the Secret History of Silicon Valley.

Make No Little Plans – Defining the Scalable Startup

Make no little plans. They have no magic to stir men’s blood
Daniel Burnham

A lot of entrepreneurs think that their startup is the next big thing when in reality they’re just building a small business. How can you tell if your startup has the potential to be the next Google, Intel or Facebook? A first order filter is whether the founders are aiming for a scalable startup.

Go For Broke
A few years ago I sat on the board of IMVU when the young company faced a choice my mother used to describe as “you should be so lucky to have this problem.” For its first year IMVU had funded itself with money from friends and family. Now with customers and early revenue, it was out raising its first round of venture money. (Not only did their sales curve look like a textbook case of a VC-friendly hockey stick, but their Lessons Learned funding presentation was an eye-opener.)

Staring at us in the board meeting were three term-sheets from brand name VC’s and an unexpected buy-out offer from Google. In fact, Google’s offer for $15 Million was equal to the highest valuation from the venture firms. The question was: what did the founders want to do?

Will Harvey, Eric Ries and the other founders were unequivocal – “Screw the buy-out, we’re here to build a company. Lets take venture capital and grow this thing into a real business.”

The Scalable Startup
Will and Eric implicitly had already made six decisions that defined a scalable startup.

  1. Their vision for IMVU was broad and deep and very big – 3D avatars and virtual goods would eventually be everywhere in the on-line world. They wanted to build an industry not just a product or a company.
  2. Their personal goal wasn’t to have a company that stayed small and paid them well. Nor did they think flipping the company to make a few million dollars would be a win. They believed their vision and work was going to be worth a lot more – or zero.
  3. They envisioned that their tiny startup was to going to be a $100 million/year company by creating an entirely new market – selling virtual goods.
  4. They used Customer and Agile development to search for a scalable and repeatable business model to become a large company. It reduced risk while allowing them to aim high.
  5. They hired a world-class team with co-founders and early employees who shared their vision.
  6. They fervently believed that only they were the ones who could and would make this happen.

These decisions guaranteed that the outcome of the board meeting was preordained. Selling out to Google would mean that someone else would define their vision. They were too driven and focused to let that happen. A few million dollars wasn’t their goal. Taking venture money was just a means to an end. Their goal was to get profitable and big. And risk capital allowed them to do that sooner than later. Venture money also meant that the VC’s goals of obscene returns were aligned with the founders. For the entire team, turning down the Google deal was equivalent to burning the boats on the shore. (One founder quit and joined Google.) After that, there was no doubt to existing employees and new hires what the company was aiming for.

Take No Prisoners
A “scalable startup” takes an innovative idea and searches for a scalable and repeatable business model that will turn it into a high growth, profitable company. Not just big but huge. It does that by entering a large market and taking share away from incumbents or by creating a new market and growing it rapidly.

A scalable startup typically requires external “risk” capital to create market demand and scale. And the founders must have a reality distortion field to convince investors their vision is not a hallucination and to hire employees and acquire early customers. A scalable startup requires incredibly talented people taking unreasonable risks with an unreasonable effort from the founders and employees.

Not All Startups are Scalable
The word entrepreneur covers a lot of ground. It means someone who organizes, manages, and assumes the risks of a business. Entrepreneurship often describes a small business whose owner starts up a company i.e. a plumbing supply store, a restaurant, a consulting firm. In the U.S. 5.7 million companies with fewer than 100 employees make up 99.5% of all businesses. These small businesses are the backbone of American capitalism. But small businesses startups have very different objectives than scalable startups.

First, their goal is not scale on an industry level. They may want to grower larger, but they aren’t focused on replacing an incumbent in an existing market or creating a new market. Typically the size of their opportunity and company doesn’t lend itself to attracting venture capital. They grow their business via profits or traditional bank financing. Their primary goal is a predictable revenue stream for the owner, with reasonable risk and reasonable effort and without the need to bring in world-class engineers and managers.

The Web and Startups
The Internet has created a series of new and innovative business models. Herein lies the confusion; not every business on the web can scale big. While the Internet has enabled scalable Internet startups like Google and Facebook, it has also created a much, much larger class of web-based small businesses that can’t or won’t scale to a large company. Some are in small markets, some are run by founders who don’t want to scale or can’t raise the capital, or acquire the team. (The good news is that there is an emerging class of investors who are more than happy to fund and flip Web small businesses.)

Scalable Startup or Small Business – Which One is Right?
There’s nothing wrong with starting a small business. In fact, it is scalable startups that are the abnormal condition. You have to be crazy to make the bet the IMVU founders did. Unfortunately the popular culture and press have made scalable startups like Google and Facebook the models that every entrepreneur should aspire to and disparages technology small businesses with pejoratives like “lifestyle business.”

That’s just plain wrong.  It’s simply a choice.

Just make it a conscious choice.

Lessons Learned

  • Not all startups are scalable startups
  • 6 initial conditions differentiate a scalable startup from a small business;
    • Breadth of an entrepreneurs’ vision
    • Founders’ personal goals
    • Size of the target market
    • Customer and Agile development to find the business model
    • World-class founding team and initial employees
    • Passionate belief and a reality distortion field
  • Understand your personal risk profile/ don’t try to be someone you’re not
  • Which one is “right” is up to you, not the crowd
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