The VC Pitch – Confusing the Destination with the Journey

Posted on November 30, 2010 by steve blank

Too often we are so preoccupied with the destination, we forget the journey.
Unknown

Entrepreneurs hear that VC pitches ought to be short, 10-20 slides.  What most don’t know is that there is no way they can deliver a presentation that short by just “writing” the slide deck.

You Got to be Kidding
An entrepreneur I’ve known for a long time came by the ranch over Thanksgiving break to show me the first pass of his new startup slide deck.

My eyes were glazed by slide 9. It was over 35 slides long, with each slide feeling like it had 12 lines of 10-point type. It had a problem statement going back to the invention of the telephone, an opportunity claiming to exceed the Gross National Product and it had every possible product feature with enough left over for three other startups products.

My first reaction was, “you got to be kidding.” Yet I was hearing the pitch from an experienced entrepreneur with multiple wins under his belt. He had raised money from name-brand VC’s in past startups and knew what a fundable VC slide deck looked like.  What was going on?

Then I remembered, every slide deck I ever wrote started out just like this.

The Slide Deck As A Brainstorming Tool
Most startups ideas are not built in an afternoon, typically they are the sum of seemingly disparate and discrete pieces of information, and a pattern recognition algorithm continuously running in a founders head.

What I was seeing was an entrepreneur using a slide deck as a way to collect his thoughts.  The slides were his brainstorming tool.  He was using them to think through the impact of the idea he had, and was trying on for size the potential opportunity and trying to use the slides to spec his features.

The difference between this entrepreneur and a novice was that he knew his presentation wasn’t ready to show to a VC; he was using it to share his thinking with me to get more feedback on his business model.

We talked about how much of his presentation were just hypotheses (most but not all,) what hypotheses he could quickly test outside the building (assumptions about minimum feature set, pricing and customer archetypes) and how to turn some of the hypotheses into facts.  I pointed him to my “Lessons Learned” slide decks that turn a standard VC pitch into something more informative.  He left with both of us knowing that he was months away (and lots of customer feedback) from being ready for a VC pitch.

Advice From People Who Get Bored Easy
Most of the advice founders get about Venture Capital slide decks are from the recipients of the presentations – the VC’s – letting you know how they want to see the final deck. And most of their recommendations are essentially “show us your business plan in PowerPoint.” Few VC’s have experienced the process a founder uses to get their idea into 10-slides. And none of them tell you how.

If you find yourself trying to shoehorn your 35-slide presentation into a “VC-ready” format, you don’t know enough yet. And you won’t know any more by sitting in your office surfing the web and writing more slides. Get out of the building and talk to potential users and customers. The irony is the more you know, the easier it is to make your presentation short and concise.

Lessons Learned

  • Long slide decks are indicative of you thinking out loud;
  • Get out of the building and get smarter.
  • The more you know (versus guess) the shorter the deck.
  • Most VC’s are looking for the “give us the business plan in PowerPoint”
  • Give them a “Lessons Learned” VC presentation.

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Filed under: Venture Capital | 12 Comments »

When It’s Darkest Men See the Stars

Posted on November 24, 2010 by steve blank

When It’s Darkest Men See the Stars
Ralph Waldo Emerson

This Thanksgiving it might seem that there’s a lot less to be thankful for. One out of ten of Americans is out of work. The common wisdom says that the chickens have all come home to roost from a disastrous series of economic decisions including outsourcing the manufacture of America’s physical goods. The United States is now a debtor nation to China and that the bill is about to come due. The pundits say the American dream is dead and this next decade will see the further decline and fall of the West and in particular of the United States.

It may be that all the doomsayers are right.

But I don’t think so.

Let me offer my prediction. There’s a chance that the common wisdom is very, very wrong. That the second decade of the 21st century may turn out to be the West’s and in particular the United States’ finest hour.

I believe that we will look back at this decade as the beginning of an economic revolution as important as the scientific revolution in the 16th century and the industrial revolution in the 18th century. We’re standing at the beginning of the entrepreneurial revolution. This doesn’t mean just more technology stuff, though we’ll get that. This is a revolution that will permanently reshape business as we know it and more importantly, change the quality of life across the entire planet for all who come after us.

There’s Something Happening Here, What It Is Ain’t Exactly Clear
The story to date is a familiar one. Over the last half a century, Silicon Valley has grown into the leading technology and innovation cluster for the United States and the world. Silicon Valley has amused us, connected (and separated us) as never before, made businesses more efficient and led to the wholesale transformation of entire industries (bookstores, video rentals, newspapers, etc.)

Wave after wave of hardware, software, biotech and cleantech products have emerged from what has become “ground zero” of entrepreneurial and startup culture. Silicon Valley emerged by the serendipitous intersection of:

  • Cold war research in microwaves and electronics at Stanford University,
  • a Stanford Dean of Engineering who encouraged startup culture over pure academic research,
  • Cold war military and intelligence funding driving microwave and military products for the defense industry in the 1950’s,
  • a single Bell Labs researcher deciding to start his semiconductor company next to Stanford in the 1950’s which led to
  • the wave of semiconductor startups in the 1960’s/70’s,
  • the emergence of venture capital as a professional industry,
  • the personal computer revolution in 1980’s,
  • the rise of the Internet in the 1990’s and finally
  • the wave of internet commerce applications in the first decade of the 21st century.

The pattern for the valley seemed to be clear. Each new wave of innovation was like punctuated equilibrium – just when you thought the wave had run its course into stasis, a sudden shift and radical change into a new family of technology emerged.

The Barriers to Entrepreneurship
While startups continued to innovate in each new wave of technology, the rate of innovation was constrained by limitations we only now can understand. Only in the last few years do we appreciate that startups in the past were constrained by:

  1. long technology development cycles (how long it takes from idea to product),
  2. the high cost of getting to first customers (how many dollars to build the product),
  3. the structure of the venture capital industry (a limited number of VC firms each needing to invest millions per startups),
  4. the expertise about how to build startups  (clustered in specific regions like Silicon Valley, Boston, New York, etc.),
  5. the failure rate of new ventures (startups had no formal rules and were a hit or miss proposition),
  6. the slow adoption rate of new technologies by the government and large companies.

The Democratization of Entrepreneurship
What’s happening is something more profound than a change in technology. What’s happening is that all the things that have been limits to startups and innovation are being removed.  At once.  Starting now.

Compressing the Product Development Cycle
In the past, the time to build a first product release was measured in months or even years as startups executed the founder’s vision of what customers wanted. This meant building every possible feature the founding team envisioned into a monolithic “release” of the product. Yet time after time, after the product shipped, startups would find that customers didn’t use or want most of the features.  The founders were simply wrong about their assumptions about customer needs. The effort that went into making all those unused features was wasted.

Today startups have begun to build products differently.  Instead of building the maximum number of features, they look to deliver a minimum feature set in the shortest period of time.  This lets them deliver a first version of the product to customers in a fraction on the time.

For products that are simply “bits” delivered over the web, a first product can be shipped in weeks rather than years.

Startups Built For Thousands Rather than Millions of Dollars
Startups traditionally required millions of dollars of funding just to get their first product to customers. A company developing software would have to buy computers and license software from other companies and hire the staff to run and maintain it. A hardware startup had to spend money building prototypes and equipping a factory to manufacture the product.

Today open source software has slashed the cost of software development from millions of dollars to thousands. For consumer hardware, no startup has to build their own factory as the costs are absorbed by offshore manufacturers.

The cost of getting the first product out the door for an Internet commerce startup has dropped by a factor of a ten or more in the last decade.

The New Structure of the Venture Capital industry
The plummeting cost of getting a first product to market (particularly for Internet startups) has shaken up the venture capital industry. Venture capital used to be a tight club clustered around formal firms located in Silicon Valley, Boston, and New York. While those firms are still there (and getting larger), the pool of money that invests risk capital in startups has expanded, and a new class of investors has emerged. New groups of VC’s, super angels, smaller than the traditional multi-hundred million dollar VC fund, can make small investments necessary to get a consumer internet startup launched. These angels make lots of early bets and double-down when early results appear. (And the results do appear years earlier then in a traditional startup.)

In addition to super angels, incubators like Y Combinator, TechStars and the 100+ plus others worldwide like them have begun to formalize seed-investing. They pay expenses in a formal 3-month program while a startup builds something impressive enough to raise money on a larger scale.

Finally, venture capital and angel investing is no longer a U.S. or Euro-centric phenomenon. Risk capital has emerged in China, India and other countries where risk taking, innovation and liquidity is encouraged, on a scale previously only seen in the U.S.

The emergence of incubators and super angels have dramatically expanded the sources of seed capital. The globalization of entrepreneurship means the worldwide pool of potential startups has increased at least ten fold since the turn of this century.

Entrepreneurship as Its Own Management Science
Over the last ten years, entrepreneurs began to understand that startups were not simply smaller versions of large companies. While companies execute business models, startups search for a business model. (Or more accurately, startups are a temporary organization designed to search for a scalable and repeatable businessmodel.)

Instead of adopting the management techniques of large companies, which too often stifle innovation in a young start up, entrepreneurs began to develop their own management tools. Using the business model / customer development / agile development solution stack, entrepreneurs first map their assumptions (their business model) and then test these hypotheses with customers outside in the field (customer development) and use an iterative and incremental development methodology (agile development) to build the product. When founders discover their assumptions are wrong, as they inevitably will, the result isn’t a crisis, it’s a learning event called a pivot — and an opportunity to change the business model.

The result, startups now have tools that speed up the search for customers, reduce time to market and slash the cost of development.

Consumer Internet Driving Innovation
In the 1950’s and ‘60’s U.S. Defense and Intelligence organizations drove the pace of innovation in Silicon Valley by providing research and development dollars to universities, and purchased weapons systems that used the valley’s first microwave and semiconductor components. In the 1970’s, 80’s and 90’s, momentum shifted to the enterprise as large businesses supported innovation in PC’s, communications hardware and enterprise software. Government and the enterprise are now followers rather than leaders. Today, it’s the consumer – specifically consumer Internet companies – that are the drivers of innovation. When the product and channel are bits, adoption by 10’s and 100’s of millions users can happen in years versus decades.

The Entrepreneurial Singularity
The barriers to entrepreneurship are not just being removed. In each case they’re being replaced by innovations that are speeding up each step, some by a factor of ten. For example, Internet commerce startups the time needed to get the first product to market has been cut by a factor of ten, the dollars needed to get the first product to market cut by a factor of ten, the number of sources of initial capital for entrepreneurs has increased by a factor of ten, etc.

And while innovation is moving at Internet speed, this won’t be limited to just internet commerce startups. It will spread to the enterprise and ultimately every other business segment.

When It’s Darkest Men See the Stars
The economic downturn in the United States has had an unexpected consequence for startups – it has created more of them. Young and old, innovators who are unemployed or underemployed now face less risk in starting a company.  They have a lot less to lose and a lot more to gain.

If we are at the cusp of a revolution as important as the scientific and industrial revolutions what does it mean? Revolutions are not obvious when they happen. When James Watt started the industrial revolution with the steam engine in 1775 no one said, “This is the day everything changes.”  When Karl Benz drove around Mannheim in 1885, no one said, “There will be 500 million of these driving around in a century.” And certainly in 1958 when Noyce and Kilby invented the integrated circuit, the idea of a quintillion (10 to the 18th) transistors being produced each year seemed ludicrous.

Yet it’s possible that we’ll look back to this decade as the beginning of our own revolution. We may remember this as the time when scientific discoveries and technological breakthroughs were integrated into the fabric of society faster than they had ever been before. When the speed of how businesses operated changed forever. As the time when we reinvented the American economy and our Gross Domestic Product began to take off and the U.S. and the world reached a level of wealth never seen before.  It may be the dawn of a new era for a new American economy built on entrepreneurship and innovation.

One that our children will look back on and marvel that when it was the darkest, we saw the stars.

Happy Thanksgiving.
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Filed under: Customer Development, Customer Development Manifesto, Venture Capital | 80 Comments »

Crisis Management by Firing Executives – There’s A Better Way

Posted on November 18, 2010 by steve blank

Insanity is doing the same thing over and over again and expecting different results.
Albert Einstein

For decades startups were managed by pretending the company would follow a predictable path (revenue plan, scale, etc.) and being continually surprised when it didn’t.

That’s the definition of insanity. Luckily most startups now realize there is a better way.

Startups Are Not Small Versions of Large Companies
As we described in previous posts, startups fail on the day they’re founded if they are organized and managed like they are a small version of a large company. In an existing company with existing customers you 1) understand the customers problem and 2) since you do, you can specify the entire feature set on day one. But startups aren’t large companies, but for decades VC’s insisted that startups organize and plan like they were.

These false assumptions – that you know the customer problem and product features – led startups to organize their product introduction process like the diagram below – essentially identical to the product management process of a large company. In fact, for decades if you drew this diagram on day one of a startup VC’s would nod sagely and everyone would get to work heading to first customer ship.


The Revenue Plan – The Third Fatal Assumption
Notice that the traditional product introduction model leads to a product launch and the execution of a revenue plan. The revenue numbers and revenue model came from a startups original Business Plan. A business plan has a set of assumptions (who’s the customer, what’s the price, what’s the channel, what are the product features that matter, etc.) that make up a business model. All of these initial assumptions must be right for the revenue plan to be correct. Yet by first customer ship most of the business model hasn’t been validated or tested. Yet startups following the traditional product introduction model are organized to execute the business plan as if it were fact.

Unless you were incredibly lucky most of your assumptions are wrong. What happens next is painful, predictable, avoidable, yet built into to every startup business plan.

Ritualized Crises
Trying to execute a startup revenue plan is why crises unfold in a stylized, predicable ritual after first customer ship.

You can almost set your watch to six months or so after first customer ship, when Sales starts missing its “numbers,” the board gets concerned and Marketing tries to “make up a better story.” The web site and/or product presentation slides start changing and Marketing and Sales try different customers, different channels, new pricing, etc. Having failed to deliver the promised revenue, the VP of Sales in a startup who does not make the “numbers” becomes an ex-VP of Sales. (The half-life of the first VP of sales of a startup is ~18 months.)

Now the company is in crisis mode because the rest of the organization (product development, marketing, etc.) has based its headcount and expenses on the business plan, expecting Sales to make its numbers. Without the revenue to match its expenses, the company is in now danger of running out of money.

Pivots By Firing Executives
A new VP of Sales (then VP of Marketing, then CEO) looks at their predecessors’ strategy, and if they are smart, they do something different (they implement a different pricing model, pick a new sales channel, target different customers and/or partners, reformulate the product features, etc.)

Surprisingly we have never explicitly articulated or understood that what’s really happening when we hire a new VP or CEO in a startup is that the newly hired executive is implicitly pivoting (radically changing) some portion of the business model.  We were changing the business model when we changed executives.

Startups were pivoting by crisis and firing executives.  Yikes.

Business Model Design and Customer Development Stack
The alternative to the traditional product introduction process is the Business Model Design and Customer Development Stack. It assumes the purpose of a startup is the search for a business model (not execution.) This approach has a startup drawing their initial business model hypotheses on the Business Model Canvas.

Each of the 9 business model building blocks has a set of hypotheses that need to be tested. The Customer Development process is then used to test each of the 9 building blocks of the business model. Each block in the business model canvas maps to hypotheses in the Customer Discovery and Validation steps of Customer Development.

Simultaneously the engineering team is using an Agile Development methodology to iteratively and incrementally build the Minimum Feature Set to test the product or service that make up the Value Proposition.

Pivots Versus Crises
If we accept that startups are engaged in the search for a business model, we recognize that radical shifts in a startups business model are the norm, rather than the exception.

This means that instead of firing an executive every time we discover a faulty hypothesis, we expect it as a normal course of business.

Why it’s not a crisis is that the Customer Development process says, “do not staff and hire like you are executing. Instead keep the burn rate low during Customer Discovery and Validation while you are searching for a business model.”  This low burn rate allows you to take several swings at the bat (or shots on the goal, depending on your country.) Each pivot gets you smarter but doesn’t put you out of business. And when you finally find a scalable and repeatable model, you exit Customer Validation, pour on the cash and scale the company.

Lessons Learned

  • “I know the Customer problem” and “I know the features to build” are rarely true on day one in a startup
  • These hypotheses lead to a revenue plan that is untested, yet becomes the plan of record.
  • Revenue shortfalls are the norm in a startup yet they create a crisis. 
  • The traditional solution to a startup crisis is to remove executives. Their replacements implicitly iterate the business model.
  • The alternative to firing and crises is the Business Model/Customer Development process.
  • It says faulty hypotheses are a normal part of a startup
  • We keep the burn rate low while we search and pivot allowing for multiple iterations of the business model.
  • No one gets fired.

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Filed under: Business Model versus Business Plan, Customer Development, Customer Development Manifesto | 11 Comments »

Creating Startup Success – Customer Development + Business Model Design

Posted on November 15, 2010 by steve blank

In previous posts I’ve talked about what the combination of Business Model Design, Customer Development and Agile Methodologies mean to startups and intrapreneurs in large companies; it’s the beginning of entrepreneurship as a science with its own rules and methodologies.

Alexander Osterwalder, who authored the Business Model Generation book, put together a slidedeck on his thoughts of what happens when you combine the business model concept to shape and structure your business ideas with the Customer Development approach to test, prove and build them.

I think his slides are great (and by far much easier on the eye then mine.)

Teaching In the Big Apple
I was in New York teaching at Columbia University this week and gave a few talks around town. A nice surprise was an invite to crash a dinner in progress with Fred Wilson, Mark Suster, and Joanne Wilson. (Funny to learn latter that someone at the next table was listening to our conversation and tweeting it.)

My public talk at Columbia University was part of their Science, Technology, Engineering and Math Startup lecture series. Thanks to an invite by Professor Chris Wiggins in the Computational Biology and Bioinformatics Department (but better known as the founder of HackNY), I was honored to be shoe-horned in between Mark Suster who appeared the day before and Peter Thiel, who was going to present the next day.

It was great to see my ex Stanford teaching assistant Christina Cacioppo, now at Union Square Ventures, in the audience. (She posted her notes from the talk here.) Now I have an ex teaching assistant in VC firms on both coasts.

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Filed under: Business Model versus Business Plan, Customer Development | 16 Comments »

Get Out of The Building – And Win $50,000

Posted on November 11, 2010 by steve blank

The only thing that interferes with my learning is my education.
Albert Einstein

Entrepreneurship As A Management Science
Those of you who have been reading my blog already know that I have been talking about a new approach to entrepreneurship education called “E-School” or the Durant School of Entrepreneurship. I believe that we have now learned enough about entrepreneurship as its own management science, to rethink our approach on how to teach it.

A place to start would be by recognizing the fundamental difference between an existing company and a startup: existing companies executebusiness models, while startups searchfor a business model. (Or more accurately, startups are a temporary organization designed to search for a scalable and repeatable businessmodel.) Therefore the very foundations of teaching entrepreneurship should start with how to search for a business model.

This startup search process is the business model / customer development / agile development solution stack. This solution stack proposes that entrepreneurs should first map their assumptions (their business model) and then test whether these hypotheses are accurate, outside in the field (customer development) and then use an iterative and incremental development methodology (agile development) to build the product. When founders discover their assumptions are wrong, as they inevitably will, the result isn’t a crisis, it’s a learning event called a pivot — and an opportunity to update the business model.

Business Model Design meets Customer Development

Lean Launchpad
So how do we teach this approach? Both Stanford and Berkeley have been extremely generous in letting me test these ideas in their engineering and business schools. In fact, starting in January, Stanford will offer Engineering 245, a.k.a the Lean Launchpad, the first hands-on class utilizing the entire business model/customer development / agile development stack. I’ll be teaching this class with two world-class VC’s:  Ann Miura-Ko of Floodgate, and Jon Feiber of MDV.

In this class students get real world, hands-on learning on what it’s like to actually start a high-tech company. This class is not about how to write a business plan. The end result is not a PowerPoint slide deck for a VC presentation. Instead students get their hands dirty talking to customers, partners and competitors as they encounter the chaos and uncertainty of how a startup actually works.  They’ll work in teams learning how to turn a great idea into a great company. They’ll learn how to use a business model to brainstorm each part of a company and customer development to get out of the classroom to see whether anyone would want/use their product. Finally, they’ll use agile development to rapidly iterate the product in class to build something customers will use and buy.  Each week will be a new adventure as they test each part of their business model and then share the hard earned knowledge with the rest of the class.

But what if you’re not a Stanford student and want to learn how to build a startup with the “get out of the building” experience as taught in the Lean Launchpad class?

You can.

International Business Model Competition
One of the things I have suggested is that instead of business plan competitions (which tend to focus on a static plan which is often just a series of guesses about a customer problem and the product solution), entrepreneurship educators should think about holding competitions that emulate what entrepreneurs encounter – chaos, uncertainty and unknowns. A business model competition would emulate the “out of the building” experience of the Stanford E-245 class and the customer development / business model / agile stack.

Nathan Furr, a professor at Brigham Young University, is launching the firstinternational business model competition.

The competition will be held on January 24th 2011 (submission deadline Jan 10th) and is open to university students enrolled at least half-time anywhere in the world (more about the competition here and information packet is here). While Professor Furr’s vision is to make this the Moot Corp (the championship of business plan competitions) of the business model world, the broader goal is to kick start change in the way students and educators think about how to train the next generation of entrepreneurs—Durant entrepreneurs.

Not only is this an exciting event planting a flag for the future of e-schools, but Alexander Osterwalder, who wrote the definitive book on business model design, and I will be doing the judging along with Professor Nathan Furr.

Oh yes, and by the way, the prize money is $50,000.

See you there.
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Filed under: Business Model versus Business Plan, Customer Development, Teaching | 19 Comments »

Hubris Versus Humility: The $15 billion Difference

Posted on November 8, 2010 by steve blank

Describing your product as “new and “never been done before” instead of “we’re just like those others guys, but better” could cost your company billions.  RIM and TiVo are two examples of getting it right and wrong.

Research in Motion (RIM)
By 1992 Research in Motion (RIM) had been in business for eight years, had 16 employees, sales of about $500,000 a year, and three or four business lines. That year the two founders decided to get serious about being a company, and hired a CEO. Soon, RIM was focusing on making products for people on the move, using wireless communication and digital data.

Wireless Communications
In the early 1990’s two different trends were occurring in wireless communication. First, wireless voice networks – cell phone networks – had started to emerge. The ability to make a phone call untethered from a traditional phone was revolutionary and was starting to catch on fast. These new cellular phone networks were built around two-way circuit switched technology designed to move voice calls without interruption.

At the same time, digital data networks to support “pagers” were also growing rapidly. Pagers were small receive-only devices with 1 or 2-line displays that showed the phone number of who was “paging” them. Users ran to a traditional telephone and called a paging service who would read them their message. Doctors and drug dealers equally found these devices handy. Unlike the circuit-switched cell phone networks, pager networks were built around digital packet-switched technology.

Sell Directly to Businesses
In 1996 RIM was still in the hardware business selling packet-switched wireless radio modems to OEMs. In a major strategy shift, they decided to sell a product directly to businesses. In 1997, RIM introduced the first packet-switched messaging device. It used narrowband PCS and was housed in a clamshell device with a full keyboard.

RIM Interactive Pager 900

The new device could hold names, email addresses, phone and fax numbers and incoming and outgoing messages. In 1998 RIM quickly followed this up with a next generation product with an 8-line display, ran on AA batteries and would last 500 hours.

The fact that you could send messages interactively blew people away. Underneath the hood RIM’s product was a technical tour de force. But RIM decided to hide all of that from their customers.

RIM positioned the Blackberry as an “interactive pager” because pagers were something people could understand. While the device was actually was doing email, people understood it as “the pager that you could respond with.” While phrases like “mobile email and packet switching” didn’t mean a thing to RIM’s first customers, the “interactive pager” positioning proved important in attracting early adopters.

Resegmenting an Existing Market
RIM’s product needed very little explanation. If you knew what a pager was, you knew what an interactive pager was. You got it. (You might gulp at the price – paging prices were dropping like a stone ($9/month versus $99/month for a RIM interactive pager) since most people were moving from pagers to cell phone to get calls. But to businesses where instant information gave you a critical edge (Wall Street, politicians, etc.) these new capabilities were worth almost any price.

In today’s language of Customer Development, RIM positioned the Blackberry as a segment of an existing market – pager users who needed two-way communication. Their intent: initial sales would come from users who already understood what the product could do so adoption would occur rapidly.

Humility
RIM, the Blackberry and its network had more inventions per square inch than most startups. The founders could have easily described the product as “the first packet-switched interactive messaging network.” Or they could have said, “corporate email now seamlessly forwarded from your company’s network to your pocket.” They did none of that.  The founders swallowed their pride and simply introduced the Blackberry as an “interactive pager.” Their board, with no need to prove how smart and creative they were, agreed.

After a few years, as users became comfortable with the technology, the entire space of interactive pagers became known as the “Blackberry or “wireless email” market rather than the “interactive pager” market.

Video Recording
In 1999, about the same time RIM introduced its first interactive pager, another advanced technology company, TiVo, shipped its first product.

Recording video on magnetic tape was developed in the mid 1950’s by Ampex, and had evolved into a consumer-friendly cassette by the late 1960’s. VCR’s caught on in the home in the late 1970’s driven by movie rentals and pornography. Sales of VHS-based VCRs exploded after Sony and JVC fought a brutal standards battle (Betamax versus VHS) and when the U.S. Supreme Court ruled that home taping of television programs for later viewing (“time-shifting”) constituted a fair use.

But cassette tapes were still bulky and awkward. And most consumers had never mastered recording a TV program (let alone setting the clock on their VCR.)

TiVo
TiVo solved all those problems. It was the logical marriage of computers and video recording. Essentially TiVo was a computer with a hard drive integrated with a TV tuner and MPEG decoder.  It digitized and compressed analog video from an antenna, cable or direct broadcast satellite. But it was the software that made the TiVo great. It was reliable. Its user interface was simple. It let users record from the familiar program guide. Since you were recording video to a hard disk, you could appear to pause live TV, instant replay, rewind or record anything.

TiVo Series 1

TiVo originally sold directly to consumers through consumer electronics stores, via Sony and Phillips and was integrated into set-top boxes from DirecTV.

Creating a New Market
TiVo’s product needed very little explanation. After a demo, if you knew what a VCR was you knew what a TiVo was.  You got it. (You might pause at the price – VCR prices were plummeting – $150 versus $800 for the first TiVos, but compared to a VCR it took your breath away.)

In today’s language of Customer Development, a TiVo positioned as a segment of an existing market (VCR’s) was a no brainer. Everyone would have immediately understood it.

Except there was one problem. The TiVo CEO hated the idea that customers might think of TiVo as a better VCR. In fact he said, “Anytime anyone says that to me, I go completely nuts. So we had this challenge of explaining, It’s actually not a VCR. It’s a lot more sophisticated and uses a hard disk, and therefore you can record and playback simultaneously and do clever things like pause live TV, and so on.”  And the board, being enamored with Silicon Valley technology, first mover advantage and concerned about the huge price gap between a VCR and TiVo, agreed.

As a result, the company instead chose to position TiVo as a New Market. In a new market when customers have no idea what the product can do, a company needs to educate potential customers about the space not the product. This results in a much slower adoption curve – the classic hockey stick.

New Market Revenue Curve

Hubris
TiVo spent the next five years trying to convince users that the box they wanted to buy as a better VCR was really something different. Hundreds of millions of dollars went into marketing campaigns to create an entirely new consumer electronics category – Digital Video Recorders. TiVo was first positioned as a “personal television system.” But no one knew what that meant. Next they tried the slogan “TiVo, TV your way.” Early adopters simply ignored the company’s positioning buying the device in spite of the inane descriptions.

But trying to create a totally new market took its toll. TiVo had plenty of other battles to fight: competition, issues with channel partners, patent battles, as well as the movie studios, cable companies, broadcast networks and advertisers who all wanted TiVo dead. Instead the company used most its cash on marketing and advertising in trying to define a new product category and accelerate adoption.

Summary
RIM sales were $15 billion in 2010. In the last ten years they’ve made over $9 billion in profit.

TiVo sales were $240 million in 2010.  In the last ten years they lost $400 million dollars.

How much of this can be traced back to the time, money and energy they spent on their initial positioning?

Lessons Learned

  • Market Type matters
  • No one will stop you from picking a new market.
  • If you do, realize you have defined a space with no customers. You now need to spend your marketing dollars in educating users about the market not your product.
  • In an existing market you’ve picked a space that has customers. Here you need to spend your marketing dollars differentiating your product from the incumbents. Are you faster and better?  Are you cheaper? Do you uniquely appeal to a segment?

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Filed under: Customer Development, Market Types | 24 Comments »

No Business Plan Survives First Contact With A Customer – The 5.2 billion dollar mistake.

Posted on November 1, 2010 by steve blank

At $5.2-billion Iridium was one of the largest, boldest and audacious startup bets ever made. Conceived in 1987 by Motorola and spun out in 1990 as a separate company, Iridium planned to build a mobile telephone system that would work anywhere on earth. It would cover every city, town and square inch of the earth from ships in the middle of the Arctic Ocean to the jungles of Africa to the remote mountain peaks of the Himalayas. And Iridium would do this without building a single cell tower.

How? With an out-of-this-world business plan. First, the company bought a fleet of 15 rockets from Russia, the U.S. and China.  Next, it  built 72 satellites on an assembly line and used the rockets to launch them into orbit 500 miles above the earth. There the satellites acted like 500-mile high cell phone towers capable of providing phone coverage to any spot on the planet. Seven years after it was founded their satellites and ground stations were in place.  It was a technical tour de force.

iridium satellite network

But nine months after the first call was made in 1998, Iridium was in Chapter 11 bankruptcy. It crashed back down to earth as one of the largest startup failures on record. What went wrong?

We Think We Identified a Large Problem
When Iridium was first conceived inside Motorola in 1987, worldwide cell phone coverage was sparse, calls were unreliable and per minute costs were expensive. Cell phone handsets were the size of a lunch box and cost thousands of dollars.

Motorola Dynatac 8000x ~1987

When it was spun out as a a separate company, Iridium’s 1990 business plan had assumptions about potential customers, their problems and the product needed to solve that problem. All were predicated on the state of the mobile phone industry in 1990. They made other assumptions about the type of sales channel, partnerships and revenue model they would need. And they rolled all of this up into a set of financial forecasts with a “size of market” forecast from brand name management consulting firms that said they’d have 42 million customers by 2002. Iridium looked like it would be printing money when it got its satellites into space.

A Business Plan Frozen in Time
But in the 11 years it took Iridium to go from concept to launch, innovation in mobile phones and cell phone networks moved at blinding speed. By the time Iridium launched, there were far fewer places on the planet where cell phone service was unavailable. Traditional cell phone companies now had coverage in the most valuable parts of the world. Prices for local and international cell service declined dramatically. The size of a cell phone handset had shrunk so it could fit in your pocket.

In contrast, when Iridium’s service became available its satellite phone was bigger than a brick and weighed about the same.

iridium-9500 satellite phone ~1999

Worse, Iridium’s cell phone couldn’t make calls from cars, offices or other buildings since phones had to be used outdoors with a line-of-sight connection to the satellites. But the nail in the coffin was price. Instead of the 50 cents per minute for a regular cell phone, Iridium’s calls cost $7 per minute– plus users needed to pay $3,000 for the handset.

In the eleven years since they had been at work, Iridium’s potential market had shrunk nearly every day. But Iridium’s business model assumptions were fixed like it was still 1990. They were dead on arrival as a mass market cell phone service the day they went live.

No Business Plan Survives First Contact With A Customer
The result was a classic startup failure writ large. Iridium followed its original business plan assumptions off a cliff. Their mistakes?  First, in 1990 the company thought it knew the customer problem to solve, and therefore it  knew what solution to build.

Second, since it knew the solution, it went into a 8-year Waterfall engineering development process. Waterfall development is a sequential way to develop a product (requirements, design, implementation, verification – ship.) Waterfall makes lots of sense in a market with the customer problem is known and all customer needs and product features can be specified up front. It is death in a rapidly changing business. Waterfall development shut off Iridium’s ability to listen, learn, test and adapt to changing customer needs and a rapidly changing market place.

Third, its business plan had no notion of learning and discovery. The idea of iteration or pivots was unthinkable. This business plan was a static document.  It was great for fundraising, looked great in business schools and large companies, but completely broke down when confronted by the realities of the changing mobile phone business.  When the company launched, it ran into diminishing customers and markets that didn’t correspond to its business plan and financial projections, but it had no ability to pivot and change their business model.  A Customer Discovery and Validation process that was ongoing with product development could have provided early warning that its market was not developing in Iridium’s favor.  Instead management was more comfortable executing to the plan.

It All Came Crashing Down
All this, plus the corporate hubris of having raised billions of dollars, with no adult on either Iridum’s or Motorola’s board who was asking “does this still make sense?” resulted in a disaster. Instead of the 42 million customers called for in its business plan, Iridium had 30,000 subscribers at its peak. The company burned its way through more than $5.2-billion because it fell in love with technology, succumbed to Waterfall product development and never bothered to get out of the building, get their heads out of their spreadsheets and ask, “What do customers want today?”

In 2000, new investors bought Iridium’s satellites and network for $25-million, or one half of one percent of the invested capital. Today, the successor company serves some 300,000 customers in a series of niche markets including American soldiers calling home from war zones, oil rig managers, and big game hunters.

Customer Development, Business Model Design and Agile Development could have changed the outcome.

Lessons Learned

  • Business plans are the leading cause of startup death
  • No Business Plan survives first contact with a customer
  • Rapidly changing markets require continuous business model iteration/customer development
  • Your ability to raise money has no correlation with customer adoption

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Filed under: Business Model versus Business Plan, Customer Development | 43 Comments »