Teaching Customer Development and the Lean Startup – Topological Homeomorphism

Posted on April 29, 2010 by steve blank

I’ve been teaching Customer Development at U.C. Berkeley’s Haas Business School since the fall of 2004 and in a joint MBA with Columbia since 2005. This Tuesday I finished the lectures for this semester and my students are now working hard on their final project.

A lot has happened since I first authored and taught the class.

Four Steps
Back in 2004, Jerry Engel the head of the Entreprenuership program at Haas Business School at U.C. Berkeley was brave enough to let me write and teach a class on a subject that no one had ever heard of – Customer Development. The previous two years at Haas I had guest taught and then co-taught an entreprenuership course, but this would be my first time going it alone.

The rubble was still bouncing from the dot-com collapse and my goal was to teach students that there might be another way to think about how to build a startup. Customer Development was a process to quickly search for a profitable business model when customer needs (features, pricing, channel, etc.) are unknown. My intent at the time (as it is now) was not to offer Customer Development as the way but another way.

The class essentially followed the text I wrote, The Four Steps to the Epiphany. The class met once a week for three hours. The syllabus was what you would expect; the first week of class was an introduction, and then subsequent weeks covered Market Type, Product versus Customer Development, and then two weeks on each of the four steps.

There Are No Cases
Since this was Business School part of the teaching was with the case-method (students read a story, “the case,” about a real-world business problem. The cases are designed to have insufficient or confusing information and usually end with a dilemma. Students have to analyze the case, discuss it in the class and propose possible solutions.) This is a lot more fun then just hearing me drone on for three hours.

The problem was that Harvard Business School who writes most of the cases used in Business Schools worldwide, had never heard of Customer Development. (Tom Eisenmann at HBS is now fixing that.) But at the time this meant that there were no cases written for any of the four steps in Customer Development. So I read through the HBS web site and picked 10 cases that were such egregious failures they unintentionally illustrated why a lack of Customer Discovery or Validation could sink a company.  A few cases, like Motive, IMVU (written by Stanford,) Documentum and Priceline were examples of companies done right. Each semester I rotated through the cases and taught 6 or 7 of them.

Is Mike Maples An Idiot?
To supplement the lectures and cases I brought in a series of guests that could help illustrate some of the points I was making in each of the four steps of Customer Development. My favorite case was about a company called Motive. In it the VP of Business Development is in Customer Validation and faced with the dilemma of whether he should give away his product in beta test or charge for it. The case says he decides to charge $50,000 for his beta software and is now worrying whether anyone will buy it. After discussing the case and its relevance to Customer Validation I’d ask the class, “How many of you think that Mike Maples the VP of Business Development of Motive is a genius?”  I get a show of hands “Tell me why you think he’s so smart?” I’d ask. “How many of you think he’s an idiot?” Another show of hands. (The class usually split 50/50.) “If you think he’s an idiot what would you tell him?” I innocently asked. The responses usually got explicit and colorful.

I then point to the back of the room and announce, “Mike, why don’t you come up here and tell us why you weren’t an idiot.” Mike Maples, the subject of the case, had been sitting in the back of the classroom. (Mike is now a partner in the super-angel firm Floodgate.) The class would roar. No matter how many years Mike and I did this it still surprised every class.

Exercises and Assignments
After each of the four steps students had a one-page assignment – they needed to get out of the building and analyze a company to see whether it had engaged in that step of Customer Development. How did it affect their success or failure? What were some of the key things they learned/should have learned?

For the final project, students formed 5-person teams, got out of the building and analyzed a company’s progress through all four steps of Customer Development.

It’s Getting Stale
While the Customer Development class was cutting edge theory in 2004, by 2009 the class was getting stale. Ironically it was because one of my students, Eric Ries who solved the problem of how engineering would actually build products in companies with a Customer Development process.

Customer Development was a way to quickly search outside the building for a profitable business model when customer needs are unknown. Eric observed that an Agile Development model was the right match for engineering to build a product when the initial feature set was unknown. The sum of solving for both unknown customer needs and unknown features became the Lean Startup.

Topological Homeomorphism
This year I decided the Customer Development class needed to morph into the Lean Startup class. We needed to teach both Customer Development and Agile methodologies. I drafted Eric to help teach the class and we began to transform the curriculum.

Guests Who’ve Done It
Six years ago when students would ask, “So Professor Blank which companies are actually doing Customer Development?” The best I could do was wave my hands and say it’s a good academic theory and some day lots of startups will be doing it. Fast forward to this year and Eric brought in a stream of companies doing all or part of Customer and Agile Development.

We had so many guests this semester that most of the cases I normally teach got preempted by these real-world examples.

What’s Next
This was a transition year for the curriculum. The guests were great but they were all web 2.0 examples. I need some enterprise software and hardware company cases. The lecture material is still heavily Customer Development. I’m going to have to work hard and extract the specifics of how engineering does continuous learning and deployment and teach it in sync with each step of Customer Development. The Pivot’s are the core of the iterative nature of Customer and Agile Development and we need more lecture, case and guest examples.

I love this stuff.

Lessons Learned

  • “Innovate or Die” is as applicable for teaching entrepreneurship as it is implementing entrepreneurship
  • Never look back unless you’re planning to go that way.

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Filed under: Customer Development, Teaching | 20 Comments »

Woodstock for Entrepreneurs – the Startup Lessons Learned Conference

Posted on April 26, 2010 by steve blank

Entrepreneurs see things before others do. They recognize patterns, form hypotheses and act long before all the data is in. Von Clausewitz described this as seeing through the “fog of war.” When their hypotheses are wrong we say they were hallucinating. When they are right we call them visionaries. (The best entrepreneurs pivot on each hallucination until they get it right – then we call them practitioners of the Lean Startup.)

Woodstock for Entrepreneurs
Last Friday’s Startup Lessons Learned Conference may go down as the Woodstock of entrepreneurship. It was an all day event devoted to the theory and practice of Lean Startups and Customer Development.

There’s a growing realization that startups with market and customer risk can be built in a radically different way than have been done before – not just cheaper, or faster – but potentially with something more profound – a greater probability of success.

The 400 people who filled the conference room in San Francisco and thousands who watched it across the world shared this belief.

But what was more remarkable were the list of speakers who have embraced (all or part of ) this methodology; Kent Beck (creator of Extreme Programming and Test Driven Development), Brett Durrett of IMVU (the first Lean Implementation), Randy Komisar partner at Kleiner Perkins, Hiten Shah of KISSmetrics, Drew Houston of Dropbox, Farbood Nivi of Grockit, David Weekly of PBworks and on and on. The full list of great speakers is here and links to their presentations are here and videos of all the presentations can be found here.

Two tests for any successful conference are: a) to see how many seats are empty by the end of the day. After 8 full hours at this one there seemed to be more people in the hall at the end then when we started and b) if everyone thought they got their money’s worth. It wasn’t my show, but I think they’ll be renting a much bigger hall next year.

This was one of those events that if you weren’t there you will say you were.

Eric Ries’s Show
This conference and the Lean Startup was the work of one amazing individual – Eric Ries. It was both satisfying and a bit surrealistic to sit in the back of the hall looking at the sea of heads and listening to speakers extend, embellish and expand on a topic that a scant five years ago was just my theory in my U.C. Berkeley classroom.

It wasn’t until Eric Ries sat in my class and had the insight – that to actually implement Customer Development engineers needed to couple it with an agile methodology – that the theory turned into practice. It was then that Customer Development became one of the building blocks of the Lean Startup. Eric left my classroom, and with his partner Will Harvey implemented the Lean Startup at IMVU. He since traveled the world becoming the Johnny Appleseed of the Lean Startup principles.

Thanks Eric.

Why Accountants Don’t Run Startups
If you wanted to know what I’ve been thinking about after Customer Development, you can see and hear it in the talk I gave at the conference.  Watch the expanded version of “Why Accountants Don’t Run Startups below.

  • The first story, Shifts in Entrepreneurship starts at 4:20
  • Not All Startups Are Equal starts at 7:30
  • What VC’s Don’t Tell You starts at 12:00
  • Business Plans Versus Business Models at 14:08
  • Startups Search Companies Execute at 17:05
  • Leadership Versus Management at 24:50
  • Durant Versus Sloan at 30:13
  • E-School Versus B-School at 33:41


[vodpod id=Video.3483534&w=425&h=350&fv=allowFullScreen%3Dtrue%26auto_play%3Dfalse%26start_volume%3D25%26title%3DView+the+live+stream+from+the+Startup+Lessons+Learned+Conference+in+San+Francisco+on+April+23%2C+2010%21+Apr+23+2010+at+3%3A49PM+PDT%26channel%3Dstartuplessonslearned%26archive_id%3D262670582%26]
All The News That’s Fit to Print
The New York Times also thought the Lean Startup was a good idea. Their story in the Sunday Times Business Section is here. NY Times columnist Steve Lohr expands on the article in his Bits blog here.

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Filed under: Corporate/Gov't Innovation, Customer Development | 19 Comments »

Turning on your Reality Distortion Field

Posted on April 22, 2010 by steve blank

I was catching up over coffee and a muffin with a student I hadn’t seen for years who’s now CEO of his own struggling startup.  As I listened to him present the problems of matching lithium-ion battery packs to EV powertrains and direct drive motors, I realized that he had a built a product for a segment of the electric vehicle market that possibly could put his company on the right side of a major industry discontinuity.

But he was explaining it like it was his PhD dissertation defense.

Our product is really complicated
After hearing more details about the features of the product (I think he was heading to the level of Quantum electrodynamics) I asked if he could explain to me why I should care. His response was to describe even more features. When I called for a time-out the reaction was one I hear a lot. “Our product is really complicated I need to tell you all about it so you get it.”

I told him I disagreed and pointed out that anyone can make a complicated idea sound complicated. The art is making it sound simple, compelling and inevitable.

Turning on your Reality Distortion Field
The ability to deliver a persuasive elevator pitch and follow it up with a substantive presentation is the difference between a funded entrepreneur and those having coffee complaining that they’re out of cash. It’s a litmus test of how you will behave in front of customers, employees and investors.

30-seconds
The common wisdom is that you need to be able to describe your product/company in 30-seconds. The 30 second elevator pitch is such a common euphemism that people forget its not about the time, it’s about the impact and the objective.  The goal is not to pack in every technical detail about the product. You don’t even need to mention the product. The objective is to get the listener to stop whatever they had planned to do next and instead say, “Tell me more.”

How do you put together a 30-second pitch?

Envision how the world will be different five years after people started using your product. Tell me. Explain to me why it’s a logical conclusion. Quickly show me that it’s possible. And do this in less than 100 words.

The CEOs reaction over his half- finished muffin was, “An elevator pitch is hype. I’m not a sales guy I’m an engineer.”

The reality is that if you are going to be a founding CEO, investors want to understand that you have a vision big enough to address a major opportunity and an investment. Potential employees need to understand your vision of the future to decide whether against all other choices they will join you. Customers need to stop being satisfied with the status quo and queue up for whatever you are going to deliver. Your elevator pitch is a proxy for all of these things.

While my ex student had been describing the detailed architecture of middleware of electric vehicles I realized what I wanted to understand was how this company was going to change the world.

All he had to say was, “The electric vehicle business is like the automobile business in 1898.  We’re on the cusp of a major transformation. If you believe electric vehicles are going to have a significant share of the truck business in 10 years, we are going to be on the right side of the fault zone.  The heart of these vehicles will be a powertrain controller and propulsion system. We’ve designed, built and installed them. Every electric truck will have to have a product like ours.”

75 words.

That would have been enough to have me say, “Tell me more.”

Lessons Learned

  • Complex products need a simple summary
  • Tell me why I should quit my job to join you
  • Tell me why I should invest in you rather than the line outside my door
  • Tell me why I should buy from you rather than the existing suppliers
  • Do it in 100 words or less.

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Filed under: Marketing | 20 Comments »

Blind Men and an Elephant- Nature Versus Nurture and Entrepreneurship

Posted on April 19, 2010 by steve blank

One of the best ways to get a debate going into the entrepreneurial world is to throw the “Nature versus Nurture” hand-grenade into a conversation. The question is whether you are born with innate entrepreneurial talent or whether you can be taught to operate like an entrepreneur.

Taking Sides
Fred Wilson of Union Square Ventures, Jason Calacanis, founder of Mahalo.com, and Mark Suster of GRP Partners, have all weighed in on the nature side – you’re born being an entrepreneur or you’re not.

Vivek Wadhwa, Director of Research, Center for Entrepreneurship at Duke, the Kauffmann Foundation for Entreprenuership and others have the opposing view – you can teach people to be entrepreneurial.

The Debate
This Tuesday, April 20th Stanford’s Business Association of Stanford Entrepreneurial Students will be sponsoring a panel discussion on Nature Versus Nurture and Entrepreneurship. Mark Suster, Vivek Wadhwa and Patrick Chung, Partner at New Enterprises Associates will be debating. I’ll be the moderator (referee).

Since I get to ask questions but not talk, I’ll weigh in with my two cents here.

What’s An Entrepreneur?
Most of the nature versus nurture conversations start by defining the characteristics of an entrepreneur: risk taking, tenacity, resilience, confidence, competiveness, belief in ones self, ability to construct a vision, reality distortion field, etc. The conversation then goes into making the case whether these can be taught or you’re born with them.

It’s Nature – My DNA is Much Better Than Yours
The “it’s all about nature” point of view is pretty simple. You got the skills you were born with hardwired in your DNA.

There was a point in my life when it felt good thinking that I was born with skills that few others have. Heck, if there is one defining characteristic that all entrepreneurs do have it’s a healthy ego and the feeling that their skills are special and unique. How depressing to think that others could be trained to do what I could do.

Everything about my own career says I was born with it.

It’s Nurture – Of Course We Can Train You
On the other hand, there’s something un-American to think that you cannot rise above your genes and your station in life. The idea that the U.S. is an egalitarian society based on “All men are created equal” is what makes the country a magnet for so many. The nurture camp believes that with hard work and the right education anyone can learn to be an entrepreneur.

As I got older I realized that whatever I was born with was shaped by thousands of hours of my environment – a chaotic upbringing, learning how to work in a war zone, multiple mentors throughout my career, etc.

Everything about my own career says I was nurtured by my environment.

Blind Men and an Elephant
One of the common threads through the blogs on the Nature/Nurture subject is the tendency of the writers to take their personal experience and extrapolate it to others; the “I knew I was an entrepreneur since high school – therefore everyone else is” to make the nature case. Or the “My parents were in business, or I had a great set of mentors and teachers” to explain why nurture is correct.

This “debate” feels like the story about the blind men describing the elephant – what seems an absolute truth may be relative due to the deceptive nature of half-truths.

Perhaps the Answer is Yes to Both
Over the last decade I’ve taught over a 1000 students in entrepreneurial classes and a good percentage of them start companies. They’ve come from all backgrounds and walks of life, ethnicity, class, and type of schools. An interesting proportion come from dysfunctional families yet the majority had a normal upbringing. My students from foreign countries beat the long odds to make it from their distant country to my classroom, while others were born in New York and flew here first class. Some were hard-wired from an early age knowing they wanted to kill it from day one. Others saw the light first go on as PhD students as they sat in my classroom.

VC’s might fund one of these types or another (started their first company in high school, top schools versus not, men versus women, etc.) but it’s not clear that there’s any evidence other than their selection bias that one is better than the other.

Just some passionate opinions stated with certainty.

Nature Versus Nurture versus Culture?
Local culture and environment is the last part of the debate that rarely gets mentioned and may be of equal importance.

Thirty plus years ago when I came to Silicon Valley Asians and Indians in high technology were a small minority, and almost none were running companies or in venture capital. Were there no Asians or Indians with entrepreneurial DNA in the U.S.? Were they not being nurtured? Or was there something about the (venture capital) culture of the valley at the time that didn’t think they could be entrepreneurial founders or investors?

Are we going to look back in 30 years and say the same about why there are so few woman entrepreneurs today?

Today Silicon Valley, New York and Boston are magnets for entrepreneurs in the U.S. But is every entrepreneur with great DNA working in these locations? Is the rest of the country truly bereft of any remaining talent?  Or is it something about those locations (network effect, risk capital, nurturing network) that makes entrepreneurs in other parts of the country start small businesses or even spend their lives in a 9 to 5 job? (I’ve written and presented a bit on this subject.)

Or look at Israel. They have more public companies on the U.S. NASDAQ stock exchange than any other country. (In fact, 3 times all other countries combined.) Is it their DNA?  Nurture? Or something about their local culture and environment that makes for more entrepreneurs per square mile than anywhere else?  (Hint – Unit 8200 and the Talpiot program.)

And how do we explain China?  China today is a hotbed of entrepreneurship. But there were no large-scale entrepreneurs in China in the 1960’s. Is it possible that no one in China had any entrepreneurial DNA in the 1960’s?  Or no entrepreneurs were being nurtured in China in the 1960’s?

Change the external culture and environment and entrepreneurship can bloom regardless of its source – nature or nurture.

The reality seems to be that there are multiple paths to becoming an entrepreneur.

Nature, nurture and culture.

Lessons Learned

  • Entrepreneurs are born not made. True.
  • Entrepreneurs are made not born. True.
  • Entrepreneurs can’t flourish without a supportive culture and environment.

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Filed under: Customer Development, Venture Capital | 15 Comments »

Why Accountants Don’t Run Startups

Posted on April 15, 2010 by steve blank

This week I’m at the California Coastal Commission hearing in Ventura California wearing my other hat as a public official for the State of California.  After the hearing I drove up to Santa Barbara to give a talk to a Lean Startup Meetup.

The talk, “Why Accountants Don’t Run Startups” summarized my current thinking about startups, how and why they’re different than large companies and for good measure threw in a few thoughts about entrepreneurial education.

It was a dry run of a talk I’ll be giving at Eric Ries’ Startup Lessons Learned conference April 23 2010 in San Francisco (streaming and simulcast across the world.)  I’m a small part of what’s shaping up to be a spectacular conference and an all-star cast.

The talk is below.

Update: I’ve updated the slides to the latest version of the talk. The original can still be found here.

Filed under: California Coastal Commission, Corporate/Gov't Innovation, Customer Development, Customer Development Manifesto | 24 Comments »

Why Startups are Agile and Opportunistic – Pivoting the Business Model

Posted on April 12, 2010 by steve blank

Startups are the search to find order in chaos.
Steve Blank

At a board meeting last week I watched as the young startup CEO delivered bad news. “Our current plan isn’t working. We can’t scale the company. Each sale requires us to handhold the customer and takes way too long to close.  But I think I know how to fix it.” He took a deep breath, looked around the boardroom table and then proceeded to outline a radical reconfiguration of the product line (repackaging the products rather than reengineering them) and a change in sales strategy, focusing on a different customer segment. Some of the junior investors blew a gasket. “We invested in the plan you sold us on.” A few investors suggested he add new product features, others suggested firing the VP of Sales. I noticed that through all of this, the lead VC just sat back and listened.

Finally, when everyone else had their turn, the grey-haired VC turned to the founder and said, “If you do what we tell you to do and fail, we’ll fire you. And if you do what you think is right and you fail, we may also fire you. But at least you’d be executing your plan not ours. Go with your gut and do what you think the market is telling you.  That’s why we invested in you.”  He turned to the other VC’s and added, “That’s why we write the checks and entrepreneurs run the company.”

The Search for the Business Model
A startup is an organization formed to search for a repeatable and scalable business model.

Investors bet on a startup CEO to find the repeatable and scalable business model.

Unlike the stories in the popular press, entrepreneurs who build successful companies don’t get it right the first time. (That only happens after the fact when they tell the story.) The real world is much, much messier.  And a lot more interesting. Here’s what really happens.

Observe, Orient, Decide and Act
Whether they’re using a formal process to search for a business model like Customer Development or just trial and error, startup founders are intuitively goal-seeking to optimize their business model. They may draw their business model formally or they may keep the pieces in their head. In either case founders who succeed observe that something isn’t working in their current business model, orient themselves to the new facts, decide what part of their business model needs to change and then act decisively.

(A U.S. Air Force strategist, Colonel John Boyd, first described this iterative Observe, Orient, Decide and Act (OODA) loop. The Customer Development model that I write and teach about is the entrepreneur’s version of Boyds’ OODA loop.)

Pivoting the Business Model
What happens when the startup’s leader recognizes that the original business model model is not working as planned? In traditional startups this is when the VP of Sales or Marketing gets fired and the finger-pointing starts. In contrast, in a startup following the Customer Development process, this is when the founders realize that something is wrong with the business model (because revenue is not scaling.) They decide what to change and then take action to reconfigure some part(s) of their model.

The Customer Development process assumed that many of the initial assumptions about your business model would probably be wrong, so it built in a iteration loop to fix them. Eric Ries coined this business model iteration loop – the Pivot.

(One of the Pivot’s positive consequences for the startup team is realizing that a lack of scalable revenue is not the fault of Sales or Marketing or Engineering departments – and the solution is not to fire executives – it’s recognizing that there’s a problem with the assumptions in the initial business model.)

Types of Pivots
“Pivoting” is when you change a fundamental part of the business model. It can be as simple as recognizing that your product was priced incorrectly. It can be more complex if you find the your target customer or users need to change or the feature set is wrong or you need to “repackage” a monolithic product into a family of products or you chose the wrong sales channel or your customer acquisition programs were ineffective.

If you draw your business model, figuring out how to Pivot is simpler as you can diagram the options of what to change. There are lots of books to help you figure out how to get to “Plan B,” but great entrepreneurs (and their boards) recognize that this process needs to occur rapidly and continuously.

Operating in Chaos + Speed + Pivots = Success
Unlike a large profitable company, startups are constrained by their available cash. If a startup does not find a profitable and scalable business model, it will go out of business (or worse end up in the “land of the living dead” eking out breakeven revenue.)  This means CEO’s of startups are continually looking to see if they need to make a Pivot to find a better model. If they believe one is necessary, they do not hesitate to make the change. The search for a profitable and scalable business model might require a startup is make multiple pivots – some small adjustments and others major changes.

As a founder, you need to prepare yourself to think creatively and independently because more often than not, conditions on the ground will change so rapidly that your original well-thought-out business model will quickly become irrelevant.

Summary
Startups are inherently chaotic. The rapid shifts in the business model is what differentiates a startup from an established company. Pivots are the essence of entrepreneurship and the key to startup success. If you can’t pivot or pivot quickly, chances are you will fail.

Pivot.

Lessons Learned

  • A startup is an organization formed to search for a repeatable and scalable business model.
  • Most startup business models are initially wrong.
  • The process of iteration in search of the successful business model is called the Pivot.
  • Pivots need to happen quickly, rapidly and often.
  • At the seed stage, microcap funds/ superangels understand that companies are still searching for a business model – they get Pivots.
  • Most of the time when startups go out for Series A or B round, the VC assumption is that a scalable business model has already been found.
  • Pivots are why startups must be agile and opportunistic and why their cultures are different from large companies.

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Filed under: Corporate/Gov't Innovation, Customer Development, Customer Development Manifesto | 55 Comments »

No Plan Survives First Contact With Customers – Business Plans versus Business Models

Posted on April 8, 2010 by steve blank

No campaign plan survives first contact with the enemy
Field Marshall Helmuth Graf von Moltke

I was catching up with an ex-graduate student at Café Borrone, my favorite coffee place in Menlo Park. This was the second of three “office hours” I was holding that morning for ex students. He and his co-founder were both PhD’s in applied math who believe they can make some serious inroads on next generation search. Over coffee he said, “I need some cheering up.  I think my startup is going to fail even before I get funded.” Now he had my attention. I thought his technology was was potentially a killer app. I put down my coffee and listened.

He said, “After we graduated we took our great idea, holed up in my apartment and spent months researching and writing a business plan. We even entered it in the business plan competition. When were done we followed your advice and got out of the building and started talking to potential users and customers.” Ok, I said, “What’s the problem?” He replied, “Well the customers are not acting like we predicted in our plan!  There must be something really wrong with our business. We thought we’d take our plan and go raise seed money. We can’t raise money knowing our plan is wrong.”

I said, “Congratulations, you’re not failing, you just took a three and a half month detour.”

Here’s why.

No Plan Survives First Contact With Customers
These guys had spent 4 months writing a 60-page plan with 12 pages of spreadsheets. They collected information that justified their assumptions about the problem, opportunity, market size, their solution and competitors and their team, They rolled up a 5-year sales forecast with assumptions about their revenue model, pricing, sales, marketing, customer acquisition cost, etc. Then they had a five-year P&L statement, balance sheet, cash flow and cap table. It was an exquisitely crafted plan. Finally, they took the plan and boiled it down to 15 of the prettiest slides you ever saw.

The problem was that two weeks after they got out of the building talking to potential customers and users, they realized that at least 1/2 of their key assumptions in their wonderfully well crafted plan were wrong.

Why a business plan is different than a business model
As I listened, I thought about the other startup I had met an hour earlier. They also had been hard at work for the last 3½ months. But they spent their time differently. Instead of writing a full-fledged business plan, they had focused on building and testing a business model.

A business model describes how your company creates, delivers and captures value. It’s best understood as a diagram that shows all the flows between the different parts of your company. This includes 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 can work with other companies or partners to implement your business.

This team had spent their first two weeks laying out their hypotheses about sales, marketing, pricing, solution, competitors, etc. and put in their first-pass financial assumptions. It took just five PowerPoint slides to capture their assumptions and top line financials.

This team didn’t spend a lot of time justifying their assumptions because they knew facts would change their assumptions. Instead of writing a formal business plan they took their business model and got out of the building to gather feedback on their critical hypotheses (revenue model, pricing, sales, marketing, customer acquisition cost, etc.) They even mocked up their application and tested landing pages, keywords, customer acquisition cost and other critical assumptions. After three months they felt they had enough preliminary customer and user data to go back and write a PowerPoint presentation that summarized their findings.

This team had wanted to have coffee to chat about which of the four seed round offers they had received they should accept.

A plan is static, a model is dynamic
Entrepreneurs treat a business plan, once written as a final collection of facts. Once completed you don’t often hear about people rewriting their plan. Instead it is treated as the culmination of everything they know and believe.  It’s static.

In contrast, a business model is designed to be rapidly changed to reflect what you find outside the building in talking to customers.  It’s dynamic.

“So do you mean I should never have written a business plan?” asked the founder who had spent the time crafting the perfect plan. “On the contrary,” I said. “Business plans are quite useful. The writing exercise forces you to think through all parts of your business. Putting together the financial model forces you to think about how to build a profitable business. But you just discovered that as smart as you and your team are, there were no facts inside your apartment. Unless you have tested the assumptions in your business model first, outside the building, your business plan is just creative writing.”

(Next post: Iterating the Business Model – The Pivot.)

Lessons Learned

  • A startup is an organization formed to search for a repeatable and scalable business model.
  • There are no facts inside your building, so get outside and get some.
  • Draw and test the Business Model first, the Business Plan then follows.
  • Few if any investors read your business plan to see if they’re interested in your business
  • They’re a lot more interested in what you learned

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Filed under: Business Model versus Business Plan, Corporate/Gov't Innovation, Customer Development, Customer Development Manifesto | 79 Comments »

Teaching Entrepreneurship – The “Survey” Class

Posted on April 5, 2010 by steve blank

The Fundamentals of Technology Entrepreneurship course at Stanford taught undergraduates how to take a technical idea and turn it into a profitable and scalable company. By getting out of the building on a team project, the class helped students viscerally understand that a startup is a search for a profitable business model. Students formed teams, came up with a business idea then talked to customers, vendors and sales channel partners to validate their business model. (And learned how to pivot their model as reality intruded.)

For undergraduates taking multiple classes finding the time to do it well was tough. But for those with full time jobs this class was a disaster.

Too Much
The first time I taught the Fundamentals of Technology Entrepreneurship class, a quarter of the class were foreign students in a special engineering-entrepreneurship program where they took one entrepreneurship class each quarter at Stanford while working full time in technology startups in Silicon Valley. The Fundamentals of Technology Entrepreneurship was intended to be their introduction to entrepreneurship. However, working full time while simultaneously attempting to participate in a team based project and Customer Discovery outside the classroom just didn’t work. The foreign students felt overwhelmed and the full time Stanford students thought they weren’t carrying their weight (when in fact they were carrying much, much more.)

We quickly realized we needed a different class to introduce entrepreneurship to students who were already knee deep in working in a startup 24/7.

Design a New Class Around Entrepreneurial Guest Speakers
Brainstorming with Tina Seelig we came up with the idea of a survey course – an introduction to entrepreneurship built around Stanford’s Entreprenuerial Thought Leaders speakers series which brings technology speakers to campus every week. In this survey course, the students would listen to the speakers and then attend twice-weekly classes which focused on the basic concepts of a startup (demand creation, sales, partnerships, team building, financing, etc.) We’d use the lectures and guest speakers to help students new to the field understand that a startup is simply a temporary organization to search for a repeatable and profitable business model.  Then we’d have the students interact directly with entrepreneurs and industry leaders in the classroom.

The Spirit of Entrepreneurship – An Interactive Survey Class
We christened the class The Spirit of Entrepreneurship. Open to all students at Stanford it was taught as two, one-hour sessions, one held the day before the guest speaker and one immediately after each guest speaker. To prepare for each speaker, we asked students to analyze the speakers company over the weekend. (For the students who were working full-time this schedule gave them the time they needed to complete their analysis.)

This new class also appealed to a wide variety of non-engineering Stanford students. In addition to the overseas work/study students I found myself teaching history majors, English majors, education majors, et al who were interested in getting their toes wet but weren’t sure they wanted to commit to the hardcore Fundamentals of Technology Entrepreneurship course.

Each week the students had to submit a two-page analysis of the presenting company’s business model, distribution channels, demand creation activities, and engineering. As some of the companies were already large, the students had to find out how the founders discovered their business model, built their team and got funded.

Since I did not select the guest speakers, the course turned into a continual improv session as I tried to match my lectures to the unpredictable variety of industries (biotech, enterprise software, video games, media, web 2.0, etc.) and different life cycle stages of the guest speakers’ companies (startup to 20+billion.)

Guest Speakers
The students saw the guests speak before a live-audience of several hundred of their fellow Stanford students.  (The videos of these speakers are edited, indexed and available as 1600 free videos and podcasts as part of Stanford’s E-Corner, on-line here.)

The heart of the class and its improvisational nature came when every speaker agreed to walk over to our classroom and sit and chat with our class one-on-one for an hour. I would interview them for the first 20 minutes or so and then turn the questioning over to the class. This personal first-hand interaction with entrepreneurs created lots of opportunity for insights. For example, hearing David Heinemeir Hannson of 37Signals talk about why his company will never get “big” and then have Steve Case of AOL/TimeWarner talk the next week about why his did helped students understand that there is no “right answer”. Similarly having the students question Trip Adler from Scribd one week about why posting documents on-line is the future and hearing from Rashmi Sinha and Jonathan Boutelle of Slideshare the next week remind us that it’s all about PowerPoints, vividly demonstrated that entrepreneurs can interpret the same market in very different ways.

Dinners
I spent quite a few dinners with my students in this class. The Stanford students were curious whether startups were for them and we talked about whether entreprenuers are born or can be made (the nature versus nurture debate.) The overseas students were trying to make sense of Silicon Valley, its work ethic and how its entrepreneurial culture would fit back home. In Silicon Valley we take for granted that someone who failed in their previous company is considered an “experienced entrepreneur.”  I was reminded that in other cultures and countries the consequences of failure are much less benign.

Lessons Learned

  • Entrepreneurship is an art not a science.
  • Entrepreneurship is driven by people as well as business models.
  • Entrepreneurship only thrives in a culture that does not penalize risk-taking or failure.
  • There is no “right path” to success

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Filed under: Corporate/Gov't Innovation, Customer Development Manifesto, Teaching | 3 Comments »

Airman Roachclip, Ashley P.

Posted on April 1, 2010 by steve blank

I thought today was an appropriate time to tell this story. I’m hoping the Statute of Limitations has run out.

————-

As I’ve gotten older, I realized that one of the skills I have is pattern recognition across large data sets.  When I was young, I didn’t have much data. So back then I constructed “what if…” scenarios in my head to amuse myself. The first time I did this I created havoc on an Air Force base by convincing everyone that gravity would be turned off. This time what was meant as a private joke accidentally ended up involving the entire U.S. Air Force Pacific Command in the middle of the Vietnam War.

The Night Shift
I was 20 years old in Thailand repairing electronic countermeasures receivers on the “graveyard” shift (midnight-to-eight in the morning.) Outside our air-conditioned shop, the nights were still warm and muggy as other maintenance technicians were also working through the night repairing all the broken parts of fighter planes; navigation, radar, jet engines, etc. The fighters would sit in their protective revetments until morning slowly being reassembled for the next days shift over North Vietnam. As the early morning sun was lighting up the flightline I could hear the rumble of the fighters taking off. I’d get off work with the sun still low in the morning sky and watch them taxi to the ready line, arm their weapons and roar down the runway.

Access
Since I was responsible for my tiny part of the 150+ person shop, I had the keys to the electronic warfare administrative office. Giving a 20-year old with an active imagination and a history of large scale pranks access to an administrative office was a bad idea. The office had file cabinets with personnel records, training records, administrative records, etc.  And with time on my hands I went through everybody’s files, and while there was nothing particularly interesting, it kept me busy reading for weeks.

As I looked at all these personnel records, I thought it would be funny to create an entirely new person who didn’t exist.  To amuse myself, my project over the next few months would be to create all the records for this fictional persona. But what to name him?  Cheech and Chong, a comedy team in the early 1970’s, had come up with a character whose name I had found laugh-out-loud funny (remember I was 20) – Ashley Roachclip.

That’s who I was going to have join the war effort –  Airman Ashley P. Roachclip.

Airman Ashley P. Roachclip Reporting For Duty
Each evening after I finished repairing microwave warning receivers that hopefully would allow our fighter planes to see the North Vietnamese Surface to Air Missiles before they launched, I sat and typed away. I spent weeks copying all the personnel and training forms, assembling a complete dossier for Airman Roachclip. This was my first attempt at creative writing, and I gave him a very interesting career (he was a very bad airman.) When I was done, there must have been 70 pages in Airman Ashley P. Roachclip’s personal file.

Airman Roachclip was now part of the Vietnam war effort. Feeling fulfilled, I put his records back in the files and never had a second thought.

Formation
Fast forward a few months. Most of the time my only interaction with our shop’s military hierarchy was getting briefed by the swing shift which preceded me, and me briefing the day shift which followed me. We’d discuss transition issues about equipment problems or talk about parts needed to fix the remaining equipment, etc.

But one day as I came into work, the swing shift said, “There is a mandatory military formation (meeting) at 0900.” And the meeting wasn’t just for me, it was for the entire 150+ people in the shop.

At 0900 we stepped out into the bright Thai sunlight and formed up. And I realized that it’s not just our shop, but it looks like it’s most of the 500 person avionics squadron.

On the Record
A few captains surrounded the assistant base commander. For an enlisted man sighting of an officer other than the flight crews was never a good sign. I managed to work my way to the back row. Stacked on a long table in front of the officers were boxes of personnel records. As we formed up, we’re all asking each other, “What’s going on?”

Finally someone calls us all to attention, and the assistant base commander announced, “We’re here today because of a personnel matter. This base submitted the total number of airmen we have to Pacific Headquarters in Hawaii.  According to USAF records, 123,912 airmen were sent to Southeast Asia, but they have records showing that are 123,913 airmen here. That means there is one extra airman we can’t account for. Headquarters has traced that one extra airman in the entire Pacific theatre down to this avionics squadron.”

“When we call your name come up to the table, report in to your shop chief and pick up your personnel record. We’ll start with the radar shop,” a captain announced.

At this moment I realized the personnel record I created had somehow gotten reported as being a real member of our shop and had screwed up the system. I’m in a war zone, and I’m probably going to be shot for this.

The captain read names alphabetically through each shop. When he called out, “Airman Jones,” you went up, saluted and picked up your records. They looked at it, they looked at you, and then you were dismissed.  I died a bit at each time they called a name. They called all the names in radar shop, then the nav shop and now they were down to the electronic warfare shop.

He’s A Mythical Character Sir
The names became a blur, “Airman Johnson, yes, sir, Airman Potts, yes sir…” I couldn’t tell if I was sweating from standing in the Thai sunlight or out sheer terror. How did this happen? Unlike my previous prank I had no intention of this one becoming public. Now I was wondering if they’d arrest me in front of my entire shop. And I wondered what kind of prison the military had.

Finally the captain calls out, “Airman Roachclip,” … Silence.  They call again, this time louder, “Airman Roachclip front and center.” People began to snicker, as they yell again, “Airman Ashley P. Roachclip front and center.”  And all of a sudden all the young guys started to laugh out loud.

The assistant base commander who had been irritated at the start of this process was now really mad. He walked out from behind the table and put his face right in front of one of my shop mates who had been laughing the loudest. “What’s so funny, airman?” He shouted. The startled airmen replied, “Sir, Ashley P. Roachclip is a mythical character, sir.”

This time it was the major’s turn to be surprised, “What did you say, son?”  My shop mate managed to stammer out, “Sir, Ashley Roachclip is in a Cheech and Chong album and he’s the President of the United Heads For Hemp.”  The base commander started to turn red, but before he could say anything else someone else volunteered, “I have the album in my barracks, sir. I can get it for you.”

Finally the base commander asks, “Are you telling me Ashley P. Roachclip is not an airman in the United States Air Force?” The airman replied, “ Yes, sir, no he’s not, sir.”

You can just imagine the fur ball of activity this revelation created among the officers and shop chiefs. All I could think is: “Why did I do this again?  It was the same chaos that happened the last time I pulled a prank in the military. I promised myself that if I somehow got out of this one without being caught, I was never going to do another practical joke again.

After 15 minutes of further discussion, (and after review of the clearly fantastic accomplishments in Airman Roachclip’s personnel record) they dismissed us. For the next three months I thought they would dust the personnel record for fingerprints, find out it was me, and send me to jail.

And then one day the air war was over the North was over. We were all going home.

I never did do another prank…

Until 20 years later when I put the Moon Rock in the Rocket Science lobby.

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Filed under: Air Force | 8 Comments »