Startups – So Easy a 12 Year Old Can Do It

Posted on January 31, 2011 by steve blank

Out of the mouths of babes. Maybe because it’s a company town and everyone in Silicon Valley has a family connection to entrepreneurship. Or maybe I just encountered the most entrepreneurial 12 year olds ever assembled under one roof. Or maybe we’re now teaching entrepreneurial thinking in middle schools. Either way I had an astounding evening as one of the judges at the Girls Middle School 7th grade Entrepreneurial night.

12 Year Olds Writing Business Plans
In this school every seventh-grade girl becomes part of a team of four or five who create and run their own business. The students write business plans, request start-up capital from investors, receive funding for their companies, make product samples, manufacture inventory, and sell their products to real-world customers. This class is experiential learning at its best.

It was amazing to read their plans talking about income, revenue, cost of goods, fixed and variable costs, profit and liquidity. (Heck, I don’t think I understood cost of goods until I was 30.) As they built their business, having to work with a team meant the girls learned firsthand the importance of creativity, teamwork, communication, consensus-building, personal responsibility, and compromise. (Next time I have to adjudicate between founders in a real startup I can now say, “I’ve seen 12 year olds get along better than you.”)

One highlight of the girls Entrepreneurial Program is the annual “Entrepreneurial Night” that showcases the newly created businesses for both the school and the wider Silicon Valley community. All of the teams had booths where they sold their products as if in a trade show. Then after a break, each of the 12 teams of 7th graders got up in front of the audience of several hundred (and the judges) and presented Powerpoint summary of their business and progress to date. (I couldn’t write or deliver a pitch that good until my third startup.)

Wow.

(Watching these girls gave me even more confidence about predictions of the future of entrepreneurship in the post When It’s Darkest, Men See the Stars.)

Women as Entrepreneurs
Teaching entrepreneurship in middle school is an amazing achievement. But teaching it to young women is even better. Not all these girls will choose to be career professionals in a corporate world. But learning entrepreneurial thinking early can help regardless of your career choice, be it teacher, mother, doctor, lawyer or startup founder. They will forever know that starting a company is not something that only boys do, but was something they mastered in middle school.

The Girls Middle School is not alone in teaching young students entrepreneurship. Organizations like Bizworld and The National Foundation for Teaching Entrepreneurship are also spreading the word. If you have any influence on the curriculum of your childrens’ school, adding an entrepreneurship class will be good for them, good for your community and great for our country.

Lessons Learned

  • Middle school is a great time to introduce entrepreneurship into a curriculum
  • Students that age can master the basics of a small business
  • It’s best taught as a full immersion, “get out of the building, make it, sell it and do it” experience
  • The lessons will last a lifetime
  • Extra credit if you teach it in a girls-only school

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Filed under: Family/Career/Culture, Teaching | 23 Comments »

The 47th (-46) International Business Model Competition

Posted on January 27, 2011 by steve blank

Utah may be known for many things, but who would have thought that Utah, and particularly Brigham Young University (BYU), would be participating in the transformation of entrepreneurship?

I spent last weekend in Utah at BYU as a guest of Professor Nathan Furr, (a former Ph.D. student of our MS&E department at Stanford,) where they are set on being a leader in developing the management science of entrepreneurship. The most visible step was the first International Business Model Competition, hosted by the BYU Rollins Center for Entrepreneurship and Technology.

What’s A Startup?
We’ve been teaching that the difference between a startup and an existing company is that 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 business model.) 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 Versus Business Plan
The traditional business plan is an essential organizing and planning document to launch new products in existing companies with known customers and markets. But this same document is a bad fit when used in a startup, as the customers and market are unknown. A business plan in a startup becomes an exercise in creative writing with a series of guesses about a customer problem and the product solution. Most business plans are worse than useless in preparing an entrepreneur for the real world as “no business plan survives first contact with customers.”

I suggested that if we wanted to hold competitions that actually emulated the real world (rather than what’s easy to grade) entrepreneurship educators should hold competitions that emulate what entrepreneurs actually encounter – chaos, uncertainty and unknowns. A business model competition would emulate the “out of the building” experience of real entrepreneurs executing the customer development / business model / agile stack.

The 47th (-46) Annual Business Model Competition
From the seed of this initial idea last summer Professor Nathan Furr, and his team at BYU created a global business model competition, receiving over 60 submissions from across the world. Alexander Osterwalder, Professor Furr and I were the judges for selecting the winner from the final 4 contestants. The finals were held in the packed 800 seat BYU Varsity Theater with lines of students outside unable to get in. It was an eye-opener to see each of the teams take the stage to describe their journey in trying to validate each of the 9 parts of a business model, rather than the static theory of a business plan.

Each team used the business model canvas and customer development stack to go from initial hypotheses, getting outside the building to validate their ideas with customers, and going through multiple pivots to find a validated business model. The winner was Gamegnat, a gaming information portal (take a look at their presentation here.) At the end of the competition Gavin Christensen, managing director of Kickstart Seed Fund said, “This is going to change the way we invest.” A nice testament to the visible difference in the quality of every teams presentation. The competition was an inspiration to the students, mentors and teaching teams.

Utah: Entrepreneurial Surprises
While I was in Utah, my host kept me busy with a series of talks. I spoke at lunch to a room of 400 entrepreneurs and investors from the region about the business model / customer development stack. I was quite surprised to find the depth and interest in innovation and sheer number of startups that I saw. I was even more surprised to learn that University of Utah has gone from being ranked 94th in the U.S. for startups created from university intellectual property to number one.

When I met with the faculty and Deans at BYU they were proud to tell me that they were number one in the U.S. for startups, licenses, and patent applications per research dollar. BYU has embraced an e-school approach, changing their curriculum to develop and teach the ideas in the business model / customer development stack. Their vision is to make the Business Model Competition an even larger international event, creating competitions at partner schools and providing the materials and insight to create a network of business model competitions culminating in an international finals event. And they are ready to share!

Keep your eye out for more details about creating your own competition, or contact Nathan Furr directly.

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Filed under: Business Model versus Business Plan, Teaching, Venture Capital | 8 Comments »

Startup Suicide – Rewriting the Code

Posted on January 25, 2011 by steve blank

The benefits of customer and agile development and minimum features set are continuous customer feedback, rapid iteration and little wasted code. But over time if developers aren’t careful, code written to find early customers can become unwieldy, difficult to maintain and incapable of scaling. Ironically it becomes the antithesis of agile. And the magnitude of the problem increases exponentially with the success of the company. The logical solution? “Re-architect and re-write” the product.

For a company in a rapidly changing market, that’s usually the beginning of the end.

It Seems Logical
I just had lunch (at my favorite Greek restaurant in Palo Alto forgetting it looked like a VC meetup) with a friend who was technical founder of his company and is now its chairman. He hired an operating exec as the CEO a few years ago. We caught up on how the company was doing (“very well, thank you, after five years, the company is now at a $50M run rate,”) but he wanted to talk about a problem that was on his mind. “As we’ve grown we’ve become less and less responsive to changing market and customer needs. While our revenue is looking good, we can be out of business in two years if we can’t keep up with our customer’s rapid shifts in platforms. Our CEO doesn’t have a technology background, but he’s frustrated he can’t get the new features and platforms he wants (Facebook, iPhone and Android, etc.) At the last board meeting our VP of engineering explained that the root of our problems was ‘our code has accumulated a ton of “technical debt,’ it’s really ugly code, and it’s not the way we would have done it today. He told the board that the only way to to deliver these changes is to re-write our product.” My friend added, “It sounds logical to the CEO so he’s about to approve the project.”

Shooting Yourself in the Head
“Well didn’t the board read him the riot act when they heard this?” I asked. “No,” my friend replied, sadly shaking his head, “the rest of the board said it sounded like a good idea.”

With a few more questions I learned that the code base, which had now grown large, still had vestiges of the original exploratory code written back in the early days when the company was in the discovery phase of Customer Development. Engineering designs made back then with the aim of figuring out the product were not the right designs for the company’s current task of expanding to new platforms.

I reminded my friend that I’ve never been an engineering manager so any advice I could give him was just from someone who had seen the movie before.

The Siren Song to CEO’s Who Aren’t Technical
CEO’s face the “rewrite” problem at least once in their tenure. If they’re an operating exec brought in to replace a founding technical CEO, then it looks like an easy decision – just listen to your engineering VP compare the schedule for a rewrite (short) against the schedule of adapting the old code to the new purpose (long.) In reality this is a fools choice. The engineering team may know the difficulty and problems adapting the old code, but has no idea what difficulties and problems it will face writing a new code base.

A CEO who had lived through a debacle of a rewrite or understood the complexity of the code would know that with the original engineering team no longer there, the odds of making the old mistakes over again are high. Add to that introducing new mistakes that weren’t there the first time, Murphy’s law says that unbridled optimism will likely turn the 1-year rewrite into a multi-year project.

My observation was that the CEO and VP of Engineering were confusing cause and effect. The customers aren’t asking for new code. They are asking for new features and platforms –now. Customers couldn’t care less whether it was delivered via spaghetti code, alien spacecraft or a completely new product. While the code rewrite is going on, competitors who aren’t enamored with architectural purity will be adding features, platforms, customers and market share. The difference between being able to add them now versus a year or more in the future might be the difference between growing revenue and going out of business.

Who Wants to Work on The Old Product
Perhaps the most dangerous side-effect of embarking on a code rewrite is that the decision condemns the old code before a viable alternative exists. Who is going to want to work on the old code with all its problems when the VP Engineering and CEO have declared the new code to be the future of the company?  The old code is as good as dead the moment management introduces the word “rewrite.”  As a consequence, the CEO has no fallback. If the VP Engineering’s schedule ends up taking four years instead of one year, there is no way to make incremental progress on the new features during that time.

What we have is a failure of imagination
I suggested that this looked like a failure of imagination in the VP of Engineering  – made worse by a CEO who’s never lived through a code rewrite – and compounded by a board that also doesn’t get it and hasn’t challenged either of them for a creative solution.

My suggestion to my friend? Given how dynamic and competitive the market is, this move is a company-killer. The heuristic should be don’t rewrite the code base in businesses where time to market is critical and customer needs shift rapidly.” Rewrites may make sense in markets where the competitive cycle time is long.

I suggest that he lay down on the tracks in front of this train at the board meeting. Force the CEO to articulate what features and platforms he needs by when, and what measures he has in place to manage schedule risk. Figure out whether a completely different engineering approach was possible. (Refactor only the modules for the features that were needed now? Rewrite the new platforms on a different code-base? Start a separate skunk works team for the new platforms?  etc.)

Lessons Learned

  • Not all code rewrites are the same.  When the market is stable and changes are infrequent, you may have time to rewrite.
  • When markets/customers/competitors are shifting rapidly, you don’t get to declare a “time-out” because your code is ugly.
  • This is when you need to understand 1) what problem are you solving (hint it’s not the code) and 2) how to creatively fix what’s needed.
  • Making the wrong choice can crater your company.
  • This is worth a brawl at the board meeting.

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Filed under: Customer Development, Technology, Venture Capital | 88 Comments »

The Bad Board Member

Posted on January 19, 2011 by steve blank

Over the last 40 years the U.S. has evolved an entrepreneurial ecosystem with two of the most unlikely partners – venture capital investors and technology entrepreneurs. This alliance has led to an explosion of technology innovation, scalable startups and job creation.

Tied at the hip, VC’s and entrepreneurs take large risks together. VC’s invest in startups with minimal tangible assets and no certainty about the product’s viability, market size or customer adoption. Entrepreneurs face all that, and add one more risk to their list: the bad board member.

The Bad Board Member
I had coffee last week with one of my ex students. 30 months ago he raised a Series A venture round from two name brand Silicon Valley VC firms. It was early in the day, but he looked tired. “I need some advice about my board. I get along great with one of the VC’s, but the other one, Bob, is making my life miserable. Nothing I do is right in his eyes.” He looked pained as he continued. “We never had any personal chemistry, and it’s gotten so bad in the last six months, our board meetings are just hell. They consist of Bob beating me up regardless of whether the results are good or bad. I can’t tell if he’s trying to get me to quit, fire me and bring on a new CEO or is just a miserable human being.”

My antenna went up when I heard that Bob was his board member because the senior partner who led the investment said he was too busy to take another board seat (and right after the closing had assigned Bob to take the seat for his firm.)

Uh oh, I thought. I lived through this one. Admittedly, my ex student was quirky, bordering on eccentric, but he had a long and successful track record in Silicon Valley delivering complex products before he went back to get his MBA. He was a great engineering manager and recruited, hired and inspired a world-class team. This was his first CEO job. He said that Bob described him to others on the board as the “crazy aunt you hide in the closet when the guests come.”

We went through the status of the company, and at least from the outside it sounded good. In fact it sounded great: three major versions of the product shipped, multiple iterations and a few pivots under their belt, revenue was growing even faster than plan.

“Well you just need to talk to your other board members and ask for their counsel,” I offered.  “I did! I’ve talked to the other VC and he told me it’s a problem that I just need to work out with Bob.“ Hmm, this wasn’t sounding good. “Why don’t you go back to the partner who led the deal and ask for his advice?”

The look on his face told me I knew what the answer would be. “Why do you think I’m having breakfast with you?  I did just that, and do you know what he said?” I sat there thinking I knew exactly what the senior VC said because I had heard it myself when I was an entrepreneur. “The senior partner at the firm said he wasn’t going to get involved in “chemistry” issues.” Sounding both sad and frustrated he said, “What do I do now? I built a great company, and I think I’m being set up to be fired.”

The VC Lemon Law
Every Venture Capitalist I’ve heard talk about founder/board member problems treats them like they only happen in other funds. “Great VC’s in brand name firms don’t have these problems” is the line I hear.

The venture capital industry is in denial.

The problem is as bad in large brand name funds as in the smaller firms. While most board problems arise from founder performance issues, naiveté or disagreements about strategy, a number are created by bad behavior on the part of a board member. Yet while a VC can remove a founder who misbehaves, there is no corresponding recourse when a VC is the source of the problem.

Astonishingly, there’s no professional standards in the venture capital industry that acknowledges this problem even exists. Not only does the industry lack a code of conduct, but individual venture firms lack avenues for founders/CEOs to bring these problems to light. There’s no ombudsman or 3rd party in a firm to hear an objective review, and no remedy to deal with a partner’s bad behavior. (And why would there be if the problems are only with the founders.)

The rationale seems to be rooted in both tradition and math. Like doctors VC’s tend to bury their mistakes. If a partner screws up a single company in a portfolio it’s not the end of the world since they have 20-30 companies in a fund.  If a single partner has a consistently terrible track record, he or she just won’t be invited into the next fund.  But in the meantime this bad board member has left a trail of broken companies. When it comes time to understand individual partner performance, information asymmetry is at play – like bad doctors, knowledge about a partner’s performance is limited—and entrepreneurs rarely have a say in the matter even if they do have some knowledge.

Finally, there’s more than a whiff of noblesse oblige at play. If firms believe that VC’s always act responsibly and the problems are always with the founders, they don’t need to worry about bad board member behavior. They can continue to pretend it never occurs.

The reality is that the VC business has expanded from the clubby group of 20 or so firms that sat on Sand Hill Road 40 years ago into an industry of ~400.  My hope is that they realize that with that expansion comes a different set of responsibilities.

Lessons Learned

  • Most Entrepreneur/VC clashes arise from founder performance issues
  • Infrequently the cause is bad behavior from a board member
  • Currently founders have no recourse
  • After 40 years of growth the VC industry still operates with “small club” rules and mindset

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Filed under: Venture Capital | 29 Comments »

New Models for Investing in Innovation

Posted on January 13, 2011 by steve blank

In November 2010 as part of my interview about entrepreneurs and Customer Development, the Shoshin Project also asked me about my thoughts on investing in innovation. They wanted some words of wisdom for their investment bank and hedge fund customers.

This falls into the “Asking someone who was handy versus knowledgeable” category. (I was a entrepreneur who retired at the right time, not a VC or hedge fund manager.) But never one to miss an opportunity when the camera was rolling, I shared my thoughts for five minutes.

Fast forward to today. Given Goldman Sachs’ $500 million investment in Facebook at a $50 billion valuation it appears someone might have been listening (particularly around 2:35 mark in the video.)

Oops.

http://bcove.me/70jvfjro

Filed under: Venture Capital | 1 Comment »

The Cover-Up Culture

Posted on January 10, 2011 by steve blank

In a startup “Good news needs to travel fast, but bad news needs to travel faster.”

There’s something about the combination of human nature (rationalization and self deception) and large hierarchical organizations (corporations, military, government, etc.) that actively conspire to hide failure and errors. Institutional cover-up’s are so ingrained that we take them for granted.

Yet for a startup a cover-up culture is death. In a startup founders and the board need to do exact the opposite of a large company – failures need to be shared, discussed and dissected to extract “lessons learned” so a new direction can be set.

Lie to My Face
The first time I saw a corporate cover-up was as a new board member of a medium size public company. The VP of an operating division had run into trouble in product development; the product was late and getting later. The revenue plan had the new product baked into the numbers and it was clear that this division General Manager was going to crater his forecast (happens all the time, nothing new here.) I knew this from talking to his people before the board meeting so none of this was a surprise. What was a surprise was the boldface lies the VP told us at the board meeting. “The product’s on schedule. No problems. We’ll make the numbers.” The disconnect between reality and a senior executive’s willingness to blatantly lie to his CEO and board just blew me away.

It would have been so much simpler for him to say, “We’re screwed, and I need your help.” Until I dug deeper and realized that the entire company had a “cover-up culture” – the CEO punished failure and bad news. Since only good news was rewarded (as defined by the revenue and product plan shared with Wall Street analysts,) I understood why avoiding bad news and covering mistakes was the general manager’s rational choice in this company. Because earlier in my career I had a board that beat me senseless when I missed a milestone.

Cover-up Or Look Like an Idiot
In large companies executives are hired and compensated for pristine and efficient execution. If you screw up, there’s an unspoken assumption that you’ve screwed up a known process – something that was repeatable and predictable. You cover up because your screw-ups not only make you look like a failure, but everyone up the line (your boss, their boss, etc.) look like an idiot. Further, the odds are that the information you hide won’t immediately be discovered or damage the company.

I mention this not because this post is about cover-ups in large companies, (I’ll leave that to the experts in organizational behavior and social theory) but to contrast it with the very different kind of culture that startups need to survive.

The Cover-Up Culture: The Role of the Board
As a founder I quickly learned how open I could be with my board. A few times I had not so great investors who believed that a startup should unfold like a Harvard case study. They ignored the reality that most startups are a chaotic set of events from which founders are trying to extract a repeatable and profitable pattern. The first time I delivered bad news I got my head handed to me. The lesson this chastened CEO took from that board meeting? Don’t tell this board bad news.

In other startups I was lucky and had great investors who knew how to manage and deal with chaos. They realized that conditions change so rapidly that the original business plan hypotheses becomes irrelevant. These investors taught me metrics appropriate forsearching for a business model, how to work with the board when I didn’t make a milestone, and how we would figure out when it was time to change the strategy. I thought of these board members as partners and I shared everything with them; good, bad and ugly.

These board members encouraged me to instill the right culture in the company. They reminded me that failures in startups tell the founders which direction not to pursue – while teaching you how to succeed. This means covering up failure in a startup was like tossing their money in the street. So instead of a cover-up culture they encouraged a “Lessons Learned culture.”

Startups: Good News Needs to Travel Fast, but Bad News Needs to Travel Faster
A key element of a “Lessons Learned” culture is rapid dissemination of information. All information, whether good or bad, must be shared rapidly. We taught our company that understanding sales losses were more important than understanding sales wins; understanding why a competitor’s products were better was more important than rationalizing ways in which ours were superior. All news, but especially bad news, needed to be shared, dissected, understood, and acted on. At each weekly department and company meeting we discussed what worked and hadn’t. And when we found employees who hoarded information or covered up problems we removed them. They were cultural poison for a startup.

The resulting conversations made us smarter, agile and relentless.

Lessons Learned

  • Startups are built around rapid iterations of hypotheses. Most of them turn out be wrong
  • Make sure your board is not beating up on the truth
  • Build a culture of rapid dissemination of all news; good or bad
  • Founders lead by example in sharing Lessons Learned
  • Collectively analyze failures,then iterate, pivot and try again
  • A cover-up culture is death to a startup
  • Fire employees who hoard information or hide bad news

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Filed under: Corporate/Gov't Innovation | 27 Comments »

Now Hear This

Posted on January 6, 2011 by steve blank

Much like my career, in the last two years this blog has traveled a serendipitous path. I orignally wrote it with four goals in mind:

  • First, to explain to my kids, then just graduating from High School, stories about their dad’s life when he was their age. And with the 30-year statute of limitations now passed, stories about who I worked for (and the names of agencies.)
  • Second, to share how my how my thinking about entrepreneurship as a distinct practice and how Customer Development as one of its central components has evolved over the last decade.
  • Third, to share both thinking and practice as I learned how to teach entrepreneurs (the way one teaches artists and musicians.)
  • Fourth, as a public official in the State of California, to offer a window on how public policy on California Coastal protection gets made. The Coastal stories are going to have to wait until I’m no longer a public official. (With Jerry Brown as our new governor I’m up for reappointment so you might get to hear the stories soon, or may have to wait a bit longer.)

On my first day as a blogger I got 20 views. Now I’ve had days with 20 viewers per minute. So Happy New Year to my 100,000-plus monthly readers throughout the world, and to many more who read my posts via some of the most important media in the startup/tech/entrepreneurship world, in more languages and places than I can keep track of.

Now Hear This
For 2011, I’m glad to announce that you can now hear my blog posts via a podcast that you can subscribe to, download or have emailed to you a few days after each blog post goes live. An innovative entrepreneur put his company to work delivering the podcasts with his compliments. Marcos Polanco, founder of Clearshore and himself a serial entrepreneur, “never found time to read the blog, no matter how much I loved it. “I told Steve” said Marcus, “in true hacker fashion, I was too lazy to read his blog, and I figured others must be in the same spot, so I proposed to turn the blog into a podcast instead.”

Marcos has agreed that the list of podcast subscribers will never be rented, sold or traded to anyone (same goes with our own email list). His big payoff from this effort is the chance to put a few lines of copy about his latest venture, Clearshore, at the bottom of each podcast link email. Clearshore is a “matchmaker” that helps small businesses get their fair share of the $60-billion US government budget for R&D and innovation. Today, startups receive only 4% of those funds, something Clearshore–now in the customer discovery phase–is out to change.

To add your email to the free podcast alert service, click here.

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Filed under: Uncategorized | 5 Comments »

Creating the Next Silicon Valley – The Chilean Experiment

Posted on January 4, 2011 by steve blank

I spent two weeks of December in Chile as a guest of Professor Cristóbal García, Director of EmprendeUC at the Catholic University of Chile, which just signed up a 3-year collaboration partnership with Stanford’s Technology Ventures Program. I did a keynote on innovation hubs at the newly created DoFuture program, spoke at Santiago’s Startup Weekend on Customer and Agile Development, and at a Conference in Patagonia supported by the Ministry of Economy’s Innovation Division.

I got smarter about the world outside of Silicon Valley, met some wonderful people who made me feel part of their family and shared some thoughts about entrepreneurship.

This post is a personal view of what I saw in what I call “Chilecon Valley” — in no way does it represent the views of the fine institutions I teach at. Read this with all the usual caveats: visiting a place for a few weeks doesn’t make you an expert (heck I’ve lived in Silicon Valley for over 30 years and I’m still surprised), I’m not an economist, and the odds are I misunderstood or misinterpreted what I saw or just didn’t see enough.

Creating the Next Silicon Valley – The Chilean Experiment
Chile has decided that it wants to be an innovation hub in South America.

In my short time in Chile, I spent time meeting with:

The good news:
Entrepreneurship and innovation is being talked about continually in Chile. This isn’t some small-time effort. The country is dead serious in all levels of government and universities about making this happen. They’ve been thinking hard and smart about the lessons to be learned not only from Silicon Valley, but with only 16 million people, they are also looking for lessons from other small innovation clusters such as Israel, Singapore and Finland. These countries are great models of countries too small to sustain startups of scale on just domestic consumption yet have managed to create innovation with a global reach.

What needs work:
As an outsider I was incredibly impressed with how far Chile has progressed in making the country an innovation hub. However I had questions about the challenges that still needed to be addressed.

Venture Capital
Perhaps it was just who I was meeting, but for a country so focused on innovation and startups the lack of venture capitalists was noticeable. Given the interesting things going on in the engineering labs I visited and the startups I met, one would have thought the place would have been crawling with VC’s fighting over deals. Instead it felt like the government – through CORFO – was doing most of the risk capital investing. Given that great VC’s are much, much more than just a bag of money, this means that startups lack experienced board members with practical experience. There seemed to be very few who knew how to coach entrepreneurs and to build companies. Finally, it wasn’t clear if everyone was on the same page; that for a Chilean startup to scale it was going to have to reach past Chile and go global. There seemed to be few tools, techniques and strategies to do so.

A sign of progress will be when some of the CORFO guys leave the government and start their own VC firms.

Corporate Connections
Entrepreneurship in Chile seems to be disconnected from the country’s largest industries and core resources. The clearest example is the country’s copper mining industry, which contributes 20% of the Chilean Gross Domestic Product. (Chile produces 35% of the world’s mined cooper.) The largest company, the state-run Chilean National Copper Corp CODELCO, has $23 billion in sales. Yet the copper companies import nearly 100% of the advanced technology they use. Interestingly, CODELCO is required to contribute 10% of its revenues to the armed forces, but the mining industry seems to have little or no connection with innovation and entrepreneurship efforts in universities and startups. (Perhaps it’s because the Ministry responsible for Mining is separate from the Ministry responsible for the Economy and Innovation.)

I suggested that Chile’s mining industry could contribute to building innovation leadership by funding a multi-tiered initiative in the country’s leading universities:

  1. Professional management training (obvious and immediate payback)
  2. Applied engineering (top 10 annual challenges from the mining companies)
  3. Basic research (copper based materials science, robotics, materials handling)

Small Business versus Scalable Startup versus Corporate Entrepreneurship
There’s confusion in both the Government and Universities about the difference between small business entrepreneurship (startups designed to be family businesses,) scalable startup entrepreneurship (startups designed from day one to scale big inside Chile and then expand globally) and corporate entrepreneurship.

I suggested that they think about educating (and funding) each class of entrepreneurs differently and realize different regions of Chile have different needs.  In Santiago the concept that startups are not smaller versions of large companies and traditional business school classes and methods don’t apply, is starting to take hold and will help shape how they educate entrepreneurs. In contrast, over lunch with the governor of Ultima Esperanza (the “Last Hope” province on the Southern tip of Chile,) it became clear that there’s a pressing need for training and education in small business entrepreneurship, dramatically different then the scalable startup education wanted in Santiago.

These three types of entrepreneurship need to be explicitly recognized, encouraged and managed.

A Magnet For Talent
My sense is that Chile has not yet “declared a major.” Saying that you support entrepreneurship and innovation is a start, but the sentence needs to be finished. Entrepreneurship and innovation in what field?  Where will Chile establish technical and innovative leadership?  Is the only way they will attract talent by paying entrepreneurs to come to the country? Or will students and entrepreneurs come to Chile because it is one of the best places in the world for innovation in certain specific industries (pick your favorite – alternative energy? materials science? food science? cellulose outputs? video games and film? South American web commerce hub? automated mining? UAV’s? etc.)

Already there are multiple centers of excellence in the engineering schools in Santiago with strong entrepreneurial professors. Yet no dean, provost or government minister seems to want to issue a declarative sentence that says, “For the next five years we’re going to focus on building world-class leadership in these three areas.” (Perhaps because the cost of a public failure is so high in Chile. See below.)

I suggested that what seems to be missing is a stated goal for Chile to become a magnet for talent in specific domains. Why will people from South America stream to Chile, besides its magnificent geography?  In what fields will Chile’s universities and entrepreneurial culture create such an irresistible pull?

A Culture that does not accept failure
Chileans I met were concerned that their culture was not accepting of business and/or personal failure. This is not the land of second chances where failure means you are an experienced entrepreneur. Partially due to a lack of bankruptcy or commercial courts, the bankruptcy process in Chile is draconian. In discussions with accounting and financial professionals, I learned that getting caught up in it feels like a Dickens’s novel, it can take years to shut down a company.

In addition, in Chile the cost of personal failure is high. If you fail, you’ve failed your family, your community and your country. As a result, societal pressures favor people who avoid risky ventures. Because its entrepreneurs are unlikely to make commitments or definitive statements which they know might be risky, i.e. “we’re going to be a leader in our market” or “our startup will be $100 million in five years,” Chile can’t foster the “reality distortion field” that underlies a dynamic entrepreneurial culture.

I suggested that perhaps using a science analogy could help change Chilean perspectives about the risk and experimentation it takes to build new ventures. Entrepreneurship and incubators could be described as an “Innovation Laboratory”  – similar to a scientific laboratory where entrepreneurs develop and test hypothesis (iterative guesses) about new business models. And like science, starting a new venture is not a linear process but one that involves failures, dead ends and changes in direction.

Lessons From the Valley
At one of my presentations the audience was a mix of deans of multiple schools at Catholic University, government officials from the Ministry of the Economy, active entrepreneurs and students. I offered that Silicon Valley’s rise was serendipitous, that you can’t reverse engineer an accidental Entrepreneurial Cluster formed in the Cold War. However, we can point out the elements that made our valley successful, and point out the ones that may be helpful in Chile; the role of Universities and defense-driven university R&D, the rise of venture capital, a failure-tolerant culture and the emerging science of entrepreneurial education. Slides 22, 36, 97 and 117 are the key points.

Come To Chilecon Valley
If you’re serious about understanding centers of entrepreneurship outside the U.S., Chile is now one of the required stops. The progress in the last few years has been nothing short of outstanding.

I’ll be back.

Lessons Learned

  • Chile is trying to engineer an entrepreneurial cluster as a National policy
  • They’ve gotten off to a good start with a committed Ministry of the Economy
  • The universities are on board with passionate faculty and excited students
  • The country needs to build a deeper Venture Capital industry
  • Chilean core industries need to view entrepreneurship as an asset, and technological innovation as an opportunity to leap forward
  • Second chances are hard to come by in current Chilean business climate and culture

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