Steve Blank Innovation and Entrepreneurship September 2010

Less is More, More or Less

Posted on September 27, 2010 by steve blank

In Customer Development the goal of a minimum feature set is to pare the features of the first product release to the minimum necessary for early customers.

But finding what those “minimum” features are can be an adventure.

All the Data and Not a Drop to Think
We started Epiphany to solve the “too much data but not enough insight” problem. During the 1990’s large corporations had bought different software applications to automate each part of their enterprise – finance, customer support, manufacturing, sales, etc. Yet the data these applications collected were accessed via reporting tools from the IT organization. More importantly, the data existed in “virtual silos” with each functional system walled off from the other. The finance system didn’t talk to the sales system which didn’t know the manufacturing system even existed. (Queries like – compare the sales data of green dresses versus the blue ones, with how many of each does manufacturing have in inventory, and what does finance say the gross margin by region of these product are – would be hard to answer because it required combining data from three incompatible applications.) It might take days or even weeks to get a report. And if that question led to another one, add more days or weeks to get the next answers back. And once you got the data you asked for, it still took weeks or months for a marketer to tease out any customer insight and trends from the data. And if you actually want to respond to shifting customer behavior by running a new marketing campaign (ads, email, etc.,) it would again take weeks or months.

An Epiphany
Initially our engineering team designed three products to solve these problems: an On-Line Analytical Processing (OLAP) tool – think of it as a multi-dimensional Excel to search through reams of customer data, data mining tools to search for patterns in customer data, and a campaign manager to combine all the data and generate customer specific ads/emails. And underneath these products was our own data warehouse (a place to store all this different data) and our own tools to Extract, Transformation and Load (ETL) customer information from existing enterprise applications like SAP, PeopleSoft, Oracle Financials, etc. And back then the radical notion was that you could view this information anytime and anywhere through this new technology called a web browser.

You’re An Idiot
As a founder my first job was Customer Discovery – getting out of the building to listen to customers and see whether our understanding of what problems customers had was correct, and if so whether our product as spec’d would solve that problem. Over time one of our hypothesis was that our product should be a great fit for companies who had lots of customers, tons of data on them and wanted to quickly come up with new marketing campaigns.

We had put together an advisory board, and one of our advisors was the VP of Database Marketing at Schwab. She was incredibly generous with her time and said that our system might work in their application. She introduced me to five other Database Marketing executives who essentially said, “If you get a system working at Schwab, we’ll have to buy one as well.” You couldn’t get much better than that. I thought we had found our first Earlyvangelist and first market.

But each time we met and she looked at the technical details of our system, and politely told me I was an idiot and my engineering department was even dumber. It took two meetings before I finally got what she was trying to tell me – we understood her problem all right, but our architecture was missing the most important feature to solve it. Our database schema didn’t include “householding” and without this feature was she could never buy our system. (Householding means recognizing that two or more people at the same physical address live together. This feature was crucial to direct marketers who did not want to send multiple ads to the same address.) Our data warehouse didn’t have the concept of householding in its schema. And no amount of sales and marketing hand waving was going to fix the problem.

Founder Too
My engineering co-founder and I had a great relationship. If I thought I discovered a customer with a feature we were missing he was coming out to hear it himself. Just don’t waste his time on the first “getting to know you” meetings. We had agreed that Schwab and the database marketing application sounded like the right fit for the technology so he was as eager as I was to figure out what we were missing. So now, a week later, he’s in San Francisco with me listening to the Schwab VP of Database Marketing and her engineering team go into a deep technical dive about what our software needed to do. My partner asked five or ten questions, everybody nods and the meeting was over.

What Do You Mean Page 6?
We got back into my car for the drive back from San Francisco to our office in Silicon Valley. 5 miles goes by and we’re talking about the weather. 10 miles goes by and he’s talking about his kids, and 20 miles goes by and we’re talking about my kids. Finally, unable to stand it any longer, I ask, “Ben, what are we going to do about the Householding feature that Schwab asked for?” In an innocent and deadpan voice, he replied, “Well just take a look at page 6 of our spec.” I had to think for another couple of seconds until I said, “What do you mean page 6? Our spec only has 5 pages!”

He looked at me and smiled as he said, “Not any more.”

Our first order from Schwab came the next week.

We had just iterated the product and refined the minimum feature set.

A week later we sat down to figure out what other feature we would toss out to make room for this one.

Lessons Learned

Founders’ start with a hypothesis of what the minimum feature set is.

Your customers teach you which features actually matter by whether they will buy.

You swap (not add) features as you learn what will optimize market share of earlyvangelists.

Filed under: Customer Development, E.piphany | 8 Comments »

Panic at the Pivot – Aligning Incentives By Burning the Boats

Posted on September 23, 2010 by steve blank

It’s a paradox, but early sales success in a startup can kill its chances of becoming a large successful company. The cause is often sales and marketing execs who’ve become too comfortable with an initial sales model and panic at the first sign of a Pivot. As a result they block new iterations of the business model that might take the company to the next level.

Fairchild
As I was reading a history of the startup years of Fairchild Semiconductor, I realized that a problem I thought was new – sales as an obstacle to Pivots – had occurred 50 years ago at the dawn of what would become Silicon Valley.

Fairchild, the first successful semiconductor company in the valley, was founded on two technical innovations: manufacturing transistors out of Silicon instead of the then conventional Germanium, and using a diffusion manufacturing process which enabled the production of silicon mesa transistors in batches on assembly line. (While this might sound like Greek to you, it was a revolution.)

Early on, the young company made a dramatic technical pivot when it discovered a way to build silicon planar transistors that dramatically improved reliability. (This was an even bigger revolution.) This increased reliability qualified Fairchild’s transistors for military weapons systems (airborne electronics, missile guidance systems, etc.) With orders from military subcontractors arming the cold war, Fairchild’s sales skyrocketed from $500K in 1958 to $7M in 1959 to $21M in 1960.

By the end of 1960, Fairchild was at the top of its game. In less than three years from the day it started, the company had pivoted its technology process, sales had done a masterful job of Customer Discovery and had found a sweet spot in the market and its fabrication plants were busy turning out as many transistors and diodes as they could make.

What could go wrong?

It was when engineering Pivoted again. And this time sales revolted.

The Revolution Will Not Be Televised
When Fairchild engineers realized that its planar process of manufacturing individual transistors could now be connected together on a single piece of silicon, the Integrated Circuit was born. Engineering thought this could dramatically change the way electronic systems were built, but the head of sales tried to kill the Integrated Circuit program, loudly and vociferously. Engineering was confused, why didn’t the Fairchild salesforce want a revolutionary new product line?

Over My Dead Body
From the point of view of the sales organization this new family of integrated circuits were a major distraction. The Fairchild sales team was on a roll executing a known business model – selling planar diodes and transistors into an existing market. In the transistor market, the problem was known, the customer was known and the basis of competition was known (technical features, price and delivery schedule.)

Integrated circuits were different. Unlike transistors, no one in 1960 was clamoring for the new technology. Integrated circuits were a new market. It wasn’t clear exactly what problem the product would solve, or who the customer was. In fact, the most likely customers, computer designers were openly hostile as they saw integrated circuits doing what they were supposed to be doing – designing circuits. So selling integrated circuits meant a search for a business model.

This meant that a high testosterone sales team that was busy “executing” as order takers and deal makers had to put on a different hat and become educators and consultative engineers. No way.

You Get What You Incent
What the engineers also didn’t know is that the head of Sales of Fairchild had cut a great deal on his compensation package. He was paid 1% of gross sales. While this made sense in the first few years when Fairchild was a startup, now it had unintended consequences. His salesmen were also compensated on a commission basis. Why would they want a product they had to force customers to take when they had existing products that were making them rich?

The VP of sales’ incentives led him to stifle any innovation that got in the way of selling as much of the current technology as he could – even if it meant killing the future of the company. Luckily for Fairchild and the future of the semiconductor and computer business, he quit when his compensation plan was changed.

The Land of the Living Dead
I see this same pattern in early stage startups. Early sales look fine, but often plateau. Engineering comes into a staff meeting with several innovative ideas and the head of sales and/or marketing shoot them down with the cry of “It will kill our current sales.”

The irony is that “killing our current sales” is often what you need to do. Most startups don’t fail outright, they end up in “the land of living dead” where sales are consistently just OK but never breakout into a profitable and scalable company. This is usually due to a failure of the CEO and board in forcing the entire organization to Pivot. The goal of a scalable startup isn’t optimizing the comp plan for the sales team but optimizing the long-term outcome of the company. At times they will conflict. And startup CEO’s need a way to move everyone out of their comfort zone to the bigger prize.

Burn The Boats
In 1519 Hernando Cortes landed in the Yucatan peninsula to conquer the Aztec Empire and bring their treasure back to Spain. His small army arrived in 11 boats. As they landed Cortes solved the problem of getting his team focused on what was ahead of them – he ordered them to burn the boats they came in. Now the only way home was to succeed in their new venture or die.

Pivots that involve radical changes to the business model may at times require burning the boats at the shore.

——

Every chip company in Silicon Valley is descended from Fairchild.

Lessons Learned

Sales organizations may get too comfortable to early.

Sales execs execute to their compensation plans.

Pivots are not subject to a vote in the exec staff meeting.

CEO’s and their boards make the Pivot decisions.

To force a Pivot burn the boats at the shore.

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Filed under: Customer Development | 13 Comments »

The Peter Pan Syndrome–The Startup to Company Transition

Posted on September 20, 2010 by steve blank

One of the ironies of being a startup is that when you are small no one can put you out of business but you. Paradoxically, as your revenues and market share increase the risk of competitors damaging your company increases.

Often the cause is the inability to grow the startup past the worldview of its founders.

We’re Getting Our Butts Kicked
One of my ex-engineering students helped start a six-year old company headquartered in Los Angeles that sells to government agencies. (They had funded this company themselves after their last networking company got acquired.) While he had designed a good part of the product, he now found himself the titular head of sales and marketing. We usually catch up when he’s in town, but this time he said he was bringing his co-founder.

“We’re trying to solve a puzzle in sales. We’re not sure you know anything about our market but we sure would like to talk it through. We’re suddenly getting our butts kicked in our sales to the government.”

I knew their business fairly well. They were the darlings of the three-letter agencies in Washington. Their equipment was used almost everywhere. And for the last few years they couldn’t make and deliver their product fast enough. Last year they had done over $50 million in sales. Now, over lunch I heard that for the first time sales were getting tougher. It even looked as if they might not make this year’s sales forecast.

“What’s changed?” I asked. “Well things were going great last year, but now we’re competing for larger orders and for the first time we have to go through competitive bids with formal Request For Proposals – RFP’s. Fortune 100 companies who never had a product in this space are saying that they can deliver what we can. We know that’s not true, but we’re getting our butts kicked. They’re also bundling in services and other products we don’t have and can’t offer. We even lost a few orders we didn’t even know were out for bid.”

He’s A Nice Guy
Trying to understand a bit more about their sales process, I asked them to tell me why their sales were so easy for the last few years. My student looked almost blissful when he described the process, “Oh, customers found our product by word of mouth. We solve a really hard and important problem. We’d give a demo, they’d bring their boss over, jaws would drop, and we’d get an order. We’d install the system, more people could see what it would do and then we’d get more orders. Doing all those demos took up a lot of my travel time so I hired someone from one of the customers as our Washington sales person.” Hmm, a hint.

My student had always struck me as very smart, driven, articulate and a “nice guy.” His co-founder seemed to have the same temperament. I ventured a question, “Is your sales head a nice guy?” “Why yes, he fits perfectly into our company culture.” And he then went into a long soliloquy about their company culture of respect, ethics, compatibility, mission, etc, etc.

“So do your competitors have the same culture?”

The Peter Pan Syndrome
There was a bit of a pause as he thought, and said, “I don’t exactly know, but I’d guess not. They’re mostly multi-billion dollar companies who’ve been around a long time and they seem a lot tougher and willing to do anything to get an order. They even put things in their RFP responses that I bet aren’t true.”

It was about then that I remembered that one of the key reasons that these entrepreneurs had funded the company themselves was that they didn’t want any VC’s on their board. “Our VC’s screwed us in our last company, and now that we could afford it we don’t need them.” So far they hadn’t seemed to suffer. But now I was curious. “Any killer sales people on your board of directors?” They listed a couple of world-class engineering professors and a retired customer who had pointed them to some key early sales. But it dawned on me what they might be missing.

A Killer Sales Culture
“My first observation is that you guys don’t even know what you don’t know,” I suggested. “Large procurements for government agencies are being played out on level you aren’t participating in. There’s a game going on around you that you don’t even know about.” So far they hadn’t got up and left so I continued. “I think the root cause is that you two are “nice guys.” Your company needs to grow up – not in a way that changes your entire company culture, but enough to realize that the world outside your offices doesn’t match your idealistic view of how things should operate. The question is whether you are willing to accept that some part of how you sell may have to change.”

My ex-student asked, “Are you suggesting we hire a new Washington sales person?” “Actually no. Not yet,” I offered. Of all cities, Washington had an abundance of seasoned sales people that could teach them how the game was played. Turning to my student, “I think you need to go to Washington, hire one or more of these grizzled sales veterans as consultants and have them teach you what you need to know. If you are going to compete in Federal procurements, your company is going to have to grow up to play on another level, and eventually you are going to have to hire a team that can play that game.

But first you need to become a domain expert. Spend a year in Washington.”

Lessons Learned

When the big guys discover your market you need to recognize their game.

You don’t have to play by their rules, but to understand what they are.

Then you need to develop a strategy that lets you compete.

Otherwise they will eat your lunch.

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You Negotiate Commodities, But You Seize Opportunities

Posted on September 16, 2010 by steve blank

It took losing something important to understand the difference between a commodity and an opportunity. Along the way I also learned yet another way entrepreneurs see the world differently from their investors.

Advisory Board
In the early days of Rocket Science I realized that we needed high-level advice on multiple fronts; technology, game development, video game distribution, etc. At one of our initial board meetings we had agreed on the general principle of an advisory board and put together an overall stock budget to compensate advisors.

One of the first potential advisors I reached out to was someone who 10 years earlier tried to hire me as the VP of Marketing of his new division at Sun Microsystems. For lots of reasons that never worked out, but I liked him so much that the following year I tried to hire him as the VP of Engineering of Ardent. (He was having too much fun at Sun and turned me down.)

Now a decade later, we caught up over lunch and I found that he was in the middle of taking a new job inside his company and had some time on his hands. Chatting with him just reinforced my earlier opinion that he was an extraordinary combination of sheer technical talent, great business and common sense and a level-headed decision maker. I knew he would bring immense value to me and the company.

Over the next week we exchanged emails over advisory board stock. I made him an offer and he countered with one I thought was still reasonable (but I didn’t tell him that.) The timing was perfect, my board meeting was in two days. I could get him the stock he asked for approved at my board meeting and then reply.

Death by Spreadsheet
I was so excited to break the news to the board that I put this new advisor on as the first agenda item. Even back then the advisor was a well-known name in Silicon Valley. The conversation went great and everyone agreed he’d teach us a lot – until one of the board members asked, “How much stock do we have to give him?” I threw out the number of shares I had offered and he had requested, naively thinking everyone would see what a no-brainer this was. Instead what I got was, “Wait a minute. He’s asking for one-third of our advisory board stock budget. We had agreed we were going to get 5 to 6 advisors with that amount of stock.” At first I wasn’t sure I was hearing this correctly. The advisor was a world-class guy, in my judgment he was worth more than all the other advisors I was going to get.

Then the other VC’s piled on. “You need to live on the budget we gave you. Go back to him and offer him less stock.”

As a first-time CEO getting beaten up my board I thought this wasn’t a fight worth having. (I couldn’t have been more wrong.) So I agreed to go back to my potential advisor and tell him the best I could do was my first offer.

I was about to get a few lessons that have lasted for a long time.

Thanks But No Thanks
Putting my best marketing spin on it, I sent our potential advisor a message that essentially said, “I’m not sure I can meet your request, but here’s another offer.” I dressed it up as best as I could, making some of the other terms more palatable, but it still wasn’t what he asked for.

I guess I shouldn’t have been surprised when he sent me a very polite note back that said, “Thanks but no thanks. I’m now getting more involved in my new job as CTO and I’m too busy to go back and forth negotiating this.” But I was crushed. I knew my company had just lost something important. Something that I couldn’t just go out and replace. And I realized I screwed up in at least two major ways.

You Negotiate Commodities, But You Seize Opportunities
I hadn’t just lost a potential advisor I had lost an irreplaceable opportunity. We lost him not just over a stock offer. We lost him because we had treated him as a commodity – something that was readily available from multiple sources – and that you could negotiate its price.

In reality what I had in front of me was an opportunity – a favorable combination of circumstances that rarely occurs and if seized upon would have given me an advantage.

You treat commodities and opportunities radically differently.

Founding CEO’s are supposed to search for a repeatable business model, not just blindly execute their original plan. That requires you to identify opportunities and seize the day. Opportunities are not just about sales, marketing or product. In this case it was about a resource I had in my hands and let go of.

I had acted like an employee, not as a founder and certainly not as the CEO of a startup. I had let my board tell me that the opportunity I saw was a commodity that could be managed by a spreadsheet. And I didn’t stand up for what I had believed in.

It would never happen again.

Lessons Learned

Great entrepreneurs see opportunities before others do.

Ask, “Is it a commodity or an opportunity?”

If it’s a one-of-a-kind that give you an advantage, it’s an opportunity.

Grab opportunities with both hands and don’t let go.

It’s better to beg for forgiveness than ask for permission.

Carpe Diem

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Filed under: Rocket Science Games | 24 Comments »

Job Titles That Can Sink Your Startup

Posted on September 13, 2010 by steve blank

I had coffee with an ex student earlier in the week that reminded me yet again why startups burn through so many early VP’s. And after 30 years of Venture investing we still have a hard time articulating why.

Here’s one possible explanation – Job titles in a startup mean something different than titles in a large company.

You Can’t Always Get What You Want
I hadn’t seen Rajiv in the two years since he started his second company. He had raised a seed round and then a Series A from a name brand Venture firm. I was glad to see him but it was clear over coffee that he was struggling with his first hiring failure. “I’ve been running our company, cycling through Customer Discovery and Validation and the board suggested that I was running out of bandwidth and needed some help in closing our initial orders. They suggested I get a VP of Sales to help.”

It was deja vu all over again. I knew where this conversation was going. “Let me guess, your VC’s helped you find a recruiter?”

“Yeah, and they were great. They helped me hire the best VP of Sales I could find. The recruiter verified all the references and he completely checked out. He was in the top 1% club at (insert the name of your favorite large company here.) He’s been in sales for almost 15 years.”

I listened as he told me the rest of the story. “I thought our new Sales VP would be out in front helping us lead Customer Validation and help us find the Pivot. That was the plan. We had talked about it in the interview and he said he understood and agreed that’s what he would do. Even when we went out to dinner before we hired him he said, he said he read the Four Steps and couldn’t wait to try this Customer Development stuff.”

“So what happened,” I asked, though I was betting I could finish the conversation for him (since I had made the same mistake.) “Well, he’s completely lost at the job. When we ask him to call on a different group of customers all he wants to do is call on the people already in his rolodex. When a customer throws us out he wants to get on to the next sales call and I want to talk about why we failed. He says great sales people don’t do that, they just keep selling. Every time we iterate even a small part of our business model or product he gets upset. When we change the company presentation it takes him days to get up to speed to the smallest change. He’s finally told us we got to stop changing everything or else he can’t sell. He was supposed to be a great VP of Sales. I’m probably going to fire him and start a search for another one, but what do I do wrong?”

“Nothing,” I said, “You got what you asked for. But you didn’t get what you need. The problem isn’t his, it’s yours. You didn’t need a VP of Sales, you needed something very different.

Companies Have Titles to Execute a Known Business Model
I offered that in an existing company job titles reflect the way tasks are organized to execute a known business model. For example, the role of “Sales” in an existing company means that:

there’s a sales team executing
a repeatable and scalable business model
selling a known product to
a well-understood group of customers
using a standard corporate presentation
with an existing price-list and
standard terms, conditions and contract

Therefore the job title “Sales” in an existing company is all about execution around a series of “knowns.”

We Use the Same Title For Two Very Different Jobs
I asked Rajiv to go through this checklist. Did he have a repeatable and scalable business model? “No.” Did he have a well understood group of customers? “No.” Did he have a standard corporate presentation? “No.” etc. Did he and his recruiter say any of this when they put together the job spec or interviewed candidates? “No.”

Then why was he surprised the executive he hired wasn’t a fit.

Startups Need Different Titles to Search For an Unknown Business Model
In a startup you need executives whose skills are 180 degrees different from what defines success in an existing company. A startup wants execs comfortable in chaos and change – with presentations changing daily, with the product changing daily, talking and with analyzing failure rather than high-fiving a success. In short you are looking for the rare breed:

comfortable with learning and discovery
trying to search for a repeatable and scalable business model
agile enough to deal with daily change, operating “without a map”
with the self-confidence to celebrate failure when it leads to iteration and Pivots

That means the function called Sales used in a large company (and the title that goes with it, “VP of Sales”) don’t make sense in a startup searching for a business model. Sales implies “execution,” but that mindset impedes (majorly screws-up) progress in searching for a business model. Therefore we need a different job function, job title and different type of person. They would be responsible for Customer Validation and finding Pivots and searching around a series of unknowns. And they would look nothing like his failed VP of Sales.

I suggested to Rajiv his problem was pretty simple. Since he hadn’t yet found a repeatable and scalable business model, his startup did not need a “VP of Sales.” The early hire he needed to help him run Customer Validation and Pivots has a very different skill set and job spec. What Rajiv needed to hire was a VP of Customer Development and part ways with his VP of Sales.

I suggested he chat with his investors and see if they agreed. “I hope they don’t make me hire another “experienced” VP of Sales,” he said as left.

Lessons Learned

Companies have titles which reflect execution of known business models

Early stage startups are still searching for their business model

Individuals that excel at execution of a process rarely excel in chaotic environments

We burn through early VP’s in startups because the job functions we are hiring for are radically different, but we are using the same titles.

Startups need to use different titles to indicate that the search for a business model requires different skills than executing a business model.

Filed under: Corporate/Gov't Innovation, Customer Development | 53 Comments »

Why Product Managers Wear Sneakers

Posted on September 2, 2010 by steve blank

I gave a talk last night to the Silicon Valley Product Management Association. It’s a San Francisco Bay Area forum for networking, jobs and education for over 500 Product Management professionals. This is one of the Silicon Valley organizations that remind you why this is a company-town whose main industry is entrepreneurship, (and a great example of an industry cluster.)

The published title of the talk was, “How to Create a $100M Business and Out Innovate your Competition.” I read that and thought, “If I knew how to do that I would have been a VC.” So instead I gave a talk I called, “Why Product Managers Need Sneakers.”

The gist of the talk was to observe that:

startups are not smaller versions of large companies
startups search for a business model, large companies execute an existing one
the skills that talented product managers bring to a large company are at best not transferable to a startup (and at worst destructive)
product managers in a startup can either be an asset or an albatross.
They’re an albatross if they perform as they do in a large company, and believe that they “own” customer interaction, feedback to engineering and authoring market requirements documents.
They’re an asset to a startup if they understand that their job is to get the founder outside the building and in front of customers.
They can be the scorekeepers in Customer Discovery and Validation as the company iterates and pivots the business model and refines the minimum feature set.

“Why Product Managers Wear Sneakers” was a reference to the amount of running around outside the building (with the founder) product managers will need to do in a startup. Except they won’t be called Product Managers. In a startup they will be part of the Customer Development team.

If you’ve seen my talks before you can skip forward to slide 19.

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