Steve Blank

I’ve introduced a new class at Stanford to teach engineers, scientists and other professionals how startups really get built.

They are going to get out of the building, build a company and get orders in ten weeks.

Jon Feiber of Mohr Davidow Ventures and Ann Miura-Ko of Floodgate are co-teaching the class with me (and Alexander Osterwalder is a guest lecturer.) We have two great teaching assistants, plus we’ve rounded up a team of 25 mentors (VC’s and entrepreneurs) to help coach the teams.

Why Teach This Class?
Business schools teach aspiring executives a variety of courses around the execution of known business models, (accounting, organizational behavior, managerial skills, marketing, operations, etc.)

In contrast, startups search for a business model. (Or more accurately, startups are a temporary organization designed to search for a scalable and repeatable businessmodel.)  There are few courses which teach aspiring entrepreneurs the skills (business models, customer and agile development, design thinking, etc.) to optimize this search.

Many entrepreneurship courses focus on teaching students “how to write a business plan.” Others emphasize how to build a product. If you’ve read any of my previous posts, you know I believe that:  1) a product is just a part of a startup, but understanding customers, channel, pricing, etc. are what make it a business,
2) business plans are fine for large companies where there is an existing market, existing product and existing customers. In a startup none of these are known.

Therefore we developed a class to teach students how to think about all the parts of building a business, not just the product.

What’s Different About the Class?
This Stanford class will introduce management tools for entrepreneurs.  We’ll build the class around the business model / customer development / agile development solution stack.

Students will start by mapping their assumptions (their business model) and then each week test these hypotheses with customers and partners outside in the field (customer development) and use an iterative and incremental development methodology (agile development) to build the product.

The goal is to get students out of the building to test each of the 9 parts of their business model, understand which of their assumptions were wrong, and figure out what they need to do fix it. Their objective is to get users, orders, customers, etc. (and if a web-based product, a minimum feature set,) all delivered in 10 weeks.  Our objective is to get them using the tools that help startups to test their hypotheses and make adjustments when they learn that their original assumptions about their business are wrong.  We want them to experience faulty assumptions not as a crisis, but as a learning event called a pivot —an opportunity to change the business model.

How’s the Class Organized?
During the first week of class, students form teams (optimally 4 people in a team but we’re flexible.) Their company can focus in any area– software, hardware, medical device or a service of any kind.

The class meets ten times, once a week for three hours. In those three hours we’ll do two things.  First, we’’ll lecture on one of the 9 building blocks of a business model (see diagram below, taken from Business Model Generation).  Secondly, each student team will present “lessons learned” from their team’s experience getting out of the building learning, testing, iterating and/or pivoting their business model.

They’ll share with the class answers to these questions:

1. What did you initially think?
2. So what did you do?
3. Then what did you learn?
4. What are you going to do next?

At the course’s end, each team will present their entire business model and highlight what they learned, their most important pivots and conclusions.

We’re going to be teaching it for the first time in January.  Below is the class syllabus.

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Class 1  is here.  Follow along!

Engineering 245
This course provides 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. It’s not an exercise on how smart you are in a classroom, or how well you use the research library. The end result is not a PowerPoint slide deck for a VC presentation. Instead you will be getting your hands dirty talking to customers, partners, competitors, as you encounter the chaos and uncertainty of how a startup actually works.  You’ll work in teams learning how to turn a great idea into a great company. You’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 other than you would want/use your product. Finally, you’ll see how agile development can help you rapidly iterate your product to build something customers will use and buy.  Each week will be new adventure as you test each part of your business model and then share the hard earned knowledge with the rest of the class. Working with your team you will encounter issues on how to build and work with a team and we will help you understand how to build and manage the startup team.

Besides the instructors and TA’s, each team will be assigned two mentors (an experienced entrepreneur and/or VC) to provide assistance and support.

Suggested Projects: While your first instinct may be a web-based startup we suggest that you consider a subject in which you are a domain expert, such as your graduate research. In all cases, you should choose something for which you have passion, enthusiasm, and hopefully some expertise.  Teams that select a web-based product will have to build the site for the class.

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Pre-reading For 1^st Class:  Read pages 1-51 of Osterwalder’s Business Model Generation.

Class 1    Jan 4^th Intro/Business Model/Customer Development
Class Lecture/Out of the Building Assignment:
What’s a business model? What are the 9 parts of a business model?  What are hypotheses? What is the Minimum Feature Set? What experiments are needed to run to test business model hypotheses?   What is market size? How to determine whether a business model is worth doing?

Deliverable: Set up teams by Thursday, Jan 6 (a mixer will be hosted on Wednesday to help finalize teams).  Submit your project for approval to the teaching team.

Read:

• Business Model Generation, pp. 118-119, 135-145, skim examples pp. 56-117
• Four Steps to the Epiphany Chapters 1-2
• Steve Blank, “What’s a Startup? First Principles,” http://steveblank.com/2010/01/25/whats-a-startup-first-principles/
• Steve Blank, “Make No Little Plans – Defining the Scalable Startup,” http://steveblank.com/2010/01/04/make-no-little-plans-–-defining-the-scalable-startup/
• Steve Blank, “A Startup is Not a Smaller Version of a Large Company”, http://steveblank.com/2010/01/14/a-startup-is-not-a-smaller-version-of-a-large-company/

Deliverable for January 11th:

• Write down hypotheses for each of the 9 parts of the business model.
• Come up with ways to test:
  • is a business worth pursuing (market size)
  • each of the hypotheses
  • Come up with what constitutes a pass/fail signal for the test (e.g. at what point would you say that your hypotheses wasn’t even close to correct)?
  • Start your blog/wiki/journal

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Jan 6^th 5-7pm Speed Dating  (Meet in Thornton 110)

Get quick feedback on your initial team business concept from the teaching team.

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Class 2            Jan 11^th Testing Value Proposition
Class Lecture/Out of the Building Assignment:
What is your product or service? How does it differ from an idea? Why will people want it? Who’s the competition and how does your customer view these competitive offerings? Where’s the market? What’s the minimum feature set?  What’s the Market Type?  What was your inspiration or impetus?  What assumptions drove you to this?  What unique insight do you have into the market dynamics or into a technological shift that makes this a fresh opportunity?

Action:

• Get out of the building and talk to 10-15 customers face-to-face
• Follow-up with Survey Monkey (or similar service) to get more data

Read:

• Business Model Generation, pp. 161-168 and 226-231
• Four Steps to the Epiphany, pp. 30-42, 65-72 and 219-223
• The Blue Ocean Strategy pages 3-22

Deliverable for Jan 18^th:

• Find a name for your team.
• What were your value proposition hypotheses?
• What did you discover from customers?
• Submit interview notes, present results in class.
• Update your blog/wiki/journal

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Class 3            Jan 18^th Testing Customers/users
Class Lecture/Out of the Building Assignment:
Who’s the customer? User? Payer?  How are they different? How can you reach them? How is a business customer different from a consumer?

Action:

• Get out of the building and talk to 10-15 customers face-to-face
• Follow-up with Survey Monkey (or similar service) to get more data

Read:

• Business Model Generation, pp. 127-133
• Four Steps to the Epiphany, pp. 43-49, 78-87 224-225, and 242-248
• Giff Constable, “12 Tips for Early Customer Development Interviews,” http://giffconstable.com/2010/07/12-tips-for-early-customer-development-interviews/

Deliverable for Jan 25^th:

• What were your hypotheses about who your users and customers were? Did you learn anything different?
• Submit interview notes, present results in class. Did anything change about Value Proposition?
• What are your hypotheses around customer acquisition costs?  Can you articulate the direct benefits (economic or other) that are apparent?
• If your customer is part of a company, who is the decision maker, how large is the budget they have authority over, what are they spending it on today, and how are they individually evaluated within that organization, and how will this buying decision be made?
• What resonates with customers?
• For web startups, start coding the product. Setup your Google or Amazon cloud infrastructure.
• Update your blog/wiki/journal

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Class 4            Jan 25^th Testing Demand Creation
Class Lecture/Out of the Building Assignment:
How do you create end user demand? How does it differ on the web versus other channels?   Evangelism vs. existing need or category? General Marketing, Sales Funnel, etc

Action:

• If you’re building a web site:
  • Small portion of your site should be operational on the web
  • Small portion of your site should be operational on the web
• Actually engage in “search engine marketing” (SEM)spend $20 as a team to test customer acquisition cost
  • Ask your users to take action, such as signing up for a newsletter
  • use Google Analytics to measure the success of your campaign
  • change messaging on site during the week to get costs lower, team that gets lowest delta costs wins.
  • If you’re assuming virality of your product, you will need to show viral propagation of your product and the improvement of your viral coefficient over several experiments.

• If non-web,
  • build demand creation budget and forecast.
  • Get real costs from suppliers.

Read:

• Four Steps to the Epiphany, pp. 52-53, 120-125 and 228-229
• Dave McClure, “Startup Metrics for Pirates”,
  http://www.slideshare.net/dmc500hats/startup-metrics-for-pirates-seedcamp-2008-presentation
• Dan Siroker, “How Obama Raised $60 Million by Running a Simple Experiment”, http://blog.optimizely.com/how-obama-raised-60-million-by-running-an-exp

Watch: Mark Pincus, “Quick and Frequent Product Testing and Assessment”, http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2313

Deliverable for Feb 1^st :

• Submit interview notes, present results in class.
• Did anything change about Value Proposition or Customers/Users or Channel?
• Present and explain your marketing campaign. What worked best and why?
• Update your blog/wiki/journal

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Class 5            Feb 1^st Testing Channel
Class Lecture/Out of the Building Assignment:
What’s a channel?  Direct channels, indirect channels, OEM. Multi-sided markets.  B-to-B versus B-to-C channels and sales (business to business versus business to consumer)

Action: If you’re building a web site, get the site up and running, including minimal feature.

• For non-web products, get out of the building talk to 10-15 channel partners.

Read: Four Steps to the Epiphany, pp. 50-51, 91-94, 226-227, 256, 267

Deliverable for Feb 8^th:

• For web teams:
  • Get a working web site and analytics up and running. Track where your visitors are coming from (marketing campaign, search engine, etc) and how their behavior differs. What were your hypotheses about your web site results?
  • Submit web data or customer interview notes, present results in class.
  • Did anything change about Value Proposition or Customers/Users?
  • What is your assumed customer lifetime value?  Are there any proxy companies that would suggest that this is a reasonable number?
  • For non-web teams:
    • Interview 10-15 people in your channel (salesmen, OEM’s, etc.).
    • Did anything change about Value Proposition or Customers/Users?
    • What is your customer lifetime value?  Channel incentives – does your product or proposition extend or replace existing revenue for the channel?
    • What is the “cost” of your channel, and it’s efficiency vs. your selling price.
    • Everyone: Update your blog/wiki/journal.
      • What kind of initial feedback did you receive from your users?
      • What are the entry barriers?

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Class 6            Feb 8^th Testing Revenue Model
Class Lecture/Out of the Building Assignment:
What’s a revenue model? What types of revenue streams are there? How does it differ on the web versus other channels?

Action: What’s your revenue model?

• How will you package your product into various offerings if you have more than one?
• How will you price the offerings?
• What are the key financials metrics for your business model?
• Test pricing in front of 100 customers on the web, 10-15 customers non-web.
• What are the risks involved?
• What are your competitors doing?

Read: John Mullins & Randy Komisar, Getting to Plan B (2009) pages 133-156

Deliverable for Feb 15^th :

• Assemble an income statement for the your business model. Lifetime value calculation for customers.
• Submit interview notes, present results in class.
• Did anything change about Value Proposition or Customers/Users, Channel, Demand Creation, Revenue Model?
• Update your blog/wiki/journal

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Class 7            Feb 15^th Testing Partners
Class Lecture/Out of the Building Assignment:
Who are partners?  Strategic alliances, competition, joint ventures, buyer supplier, licensees.

Action: What partners will you need?

• Why do you need them and what are risks?
• Why will they partner with you?
• What’s the cost of the partnership?
• Talk to actual partners.
• What are the benefits for an exclusive partnership?

Deliverable for Feb 22^nd

• Assemble an income statement for the your business model.
• Submit interview notes, present results in class.
• Did anything change about Value Proposition or Customers/Users, Channel, Demand Creation?
• What are the incentives and impediments for the partners?
• Update your blog/wiki/journal

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Class 8            Feb 22^nd Testing Key Resources & Cost Structure
Class Lecture/Out of the Building Assignment:
What resources do you need to build this business?  How many people? What kind? Any hardware or software you need to buy? Any IP you need to license?  How much money do you need to raise?  When?  Why? Importance of cash flows? When do you get paid vs. when do you pay others?

Action: What’s your expense model?

• What are the key financials metrics for costs in your business model?
• Costs vs. ramp vs. product iteration?
• Access to resources. What is the best place for your business?
• Where is your cash flow break-even point?

Deliverable for March 1^st

• Assemble a resources assumptions spreadsheet.  Include people, hardware, software, prototypes, financing, etc.
• When will you need these resources?
• Roll up all the costs from partners, resources and activities in a spreadsheet by time.
• Submit interview notes, present results in class.
• Did anything change about Value Proposition or Customers/Users, Channel, Demand Creation/Partners?
• Update your blog/wiki/journal

Guest: Alexander Osterwalder

For March 1^st or 8^th

• Prepare 30 –minute Team Lessons Learned Presentation
• Read:
  • Steve Blank, “Lessons Learned – A New Type of Venture Capital Pitch”, http://steveblank.com/2009/11/12/“lessons-learned”-–-a-new-type-of-vc-pitch/
  • Steve Blank, “Raising Money Using Customer Development”, http://steveblank.com/2009/11/05/raising-money-with-customer-development/
  • Business Model Generation, pp. 216-224

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Class 9            March 1^st Team Presentations of Lessons Learned (1^st half of the class)

Deliverable: Each team will present a 30 minute “Lessons Learned” presentation about their business.

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Class 10            March 8^th Team Presentations of Lessons Learned (2^nd half of the class)

Deliverable: Each team will present a 30 minute “Lessons Learned” presentation about their business.

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March 11^th 1-4pm Demo Day at VC Firm (Location TBD)

Show off your product to the public and real VC’s.  Set up a booth, put up posters, run demos, etc.  Food and refreshments provided.

Class 1  is here.  Follow along!

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Mentor List (as of Dec 3^rd 2010)

• Gina Bianchini, Ning
• Doug Camplejohn, Fliptop
• Shawn Carolan, Menlo Ventures
• Eric Carr, Loopt
• Rowan Chapman, MDV
• Jason Davies, SOS Technologies
• Jonathan Ebinger, BlueRun Ventures
• David Feinleib, MDV
• Jim Greer, Kongregate
• Konstantin Guericke, LinkedIn
• Will Harvey, IMVU
• Thomas Hessler, Zanox
• Heiko Hubertz, BigPoint
• Charles Hudson, Gaia/Virtual Goods
• Maheesh Jain, Cafepress
• George John, Rocket Fuel
• Josh Reeves, unwrap
• Karen Richardson, Silverlake Partners
• Josh Schwarzapel, Cooliris
• Justin Shaffer, Facebook
• Jim Smith, MDV
• Bryan Stolle, MDV
• Steve Weinstein, Movielabs
• George Zachary, Charles River Ventures

Class 1  is here.  Follow along!
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