One of the confusing things to entrepreneurs, investors and educators is the relationship between customer development and business model design and business planning and execution.
When does a new venture focus on customer development and business models? And when do business planning and execution come into play?
Here’s an attempt to put this all in context.
Don’t Throw the Tomatoes
I was in Washington D.C. last week presenting at the ARPA-E conference. I spent the next day working with the National Science Foundation on the Innovation Corps, and talking to congressional staffs about how entrepreneurial educational programs can reshape our economy. (And I even found time to go to the Spy Museum.)
One of the issues that came up is whether the new lexicon of entrepreneurial ideas – Customer Development, Business Model Design, Lean, Lean LaunchPad class, etc. – replace all the tools and classes that are currently being taught in entrepreneurship curriculums and business schools. I was a bit surprised since most of what I’ve been advocating is complementary to existing courses. However, I realize I’ve primarily written about business model design and customer development. Given that I’m speaking this month in front of entrepreneurship educators at the NCIIA conference, I thought I should put it in context before they throw tomatoes at me.
Search Versus Execution
One of the things startups have lacked is a definition of who they were. For years we’ve treated startups like they are just smaller versions of a large company. However, we now know that a startup is a temporary organization designed to search for a repeatable and scalable business model. Within this definition, a startup can be a new venture or it can be a new division or business unit in an existing company.
If your business model is unknown – that is just a set of untested hypotheses- you are a startup searching for a repeatable business model. Once your business model (market, customers, features, channels, pricing, Get/Keep/Grow strategy, etc.) is known, you will be executing it. Search versus execution is what differentiates a new venture from an existing business unit.
Strategy
The primary objective of a startup is to validate its business model hypotheses (and iterate and pivot until it does.) Then it moves into execution mode. It’s at this point the business needs an operating plan, financial forecasts and other well-understood management tools.
Process
The processes used to organize and implement the search for the business model are Customer Development and Agile Development. A search for a business model can be in any new business – in a brand new startup new or in a new division of an existing company.
In search, you want a process designed to be dynamic, so you work with a rough business model description knowing it will change. The model changes because startups use customer development to run experiments to test the hypotheses that make up the model. And most of the time these experiments fail. Search embraces failure as a natural part of the startup process. Unlike existing companies that fire executives when they fail to match a plan, we keep the founders and change the model.
Once a company has found a business model (it knows its market, customers, product/service, channel, pricing, etc.), the organization moves from search to execution.
The product execution process – managing the lifecycle of existing products and the launch of follow-on products – is the job of the product management and engineering organizations. It results in a linear process where you make a plan and refine it into detail. The more granularity you add to a plan, the better people can execute it: a Business Requirement document (BRD) leads to a Market Requirements Document (MRD) and then gets handed off to engineering as a Functional Specifications Document (FSD) implemented via Agile or Waterfall development.
Organization
Searching for a business model requires a different organization than the one used to execute a plan. Searching requires the company to be organized around a customer development team led by the founders. In contrast, execution, (which follows search) requires the company to be organized by function (product management, sales, marketing, business development, etc.)
Companies in execution suffer from a “fear of failure culture“, (quite understandable since they were hired to execute a known job spec.) Startups with Customer Development Teams have a “learning and discovery” culture for search. The fear of making a move before the last detail is nailed down is one of the biggest problems existing companies have when they need to learn how to search.
The idea of not having a functional organization until the organization has found a proven business model is one of the hardest things for new startups to grasp. There are no sales, marketing or business development departments when you are searching for a business model. If you’ve organized your startup with those departments, you are not really doing customer development. (It’s like trying to implement a startup using Waterfall engineering.)
Education
Entrepreneurship curriculums are only a few decades old. First taught as electives and now part of core business school curriculums, the field is still struggling to escape from the bounds of the business plan-centric view that startups are “smaller versions of a large company.” VC’s who’ve watched as no startup business plan survived first contact with customers continue to insist that startups write business plans as the price of entry to venture funding. Even as many of the best VCs understand that the business ‘planning’ and not the ‘plan’ itself, are what is important.
The trouble is that over time – this key message has gotten lost. As business school professors, many of whom lack venture experience, studied how VCs made decisions, they observed the apparently central role of the business plan and proceeded to make the plan [not the planning], the central framework for teaching entrepreneurship. As new generations of VCs with MBA’s came into the business, they compounded the problem (“that’s how we always done it” or “that’s what I learned (or the senior partners learned) in business school.”)
Entrepreneurship educators have realized that plan-centric curriculum may get by for teaching incremental innovation but they’re not turning out students prepared for the realities of building new ventures. Educators are now beginning to build their own E-School curriculum with a new class of management tools built around “search and discovery.” Business Model Design, Product/Service Development, Customer Development, Startup Team-Building, Entrepreneurial Finance, Marketing, Founder Transition, etc. all provide the startup equivalent of the management tools MBAs learn for execution.
Instructional Strategy
Entrepreneurial education is also changing the focus of the class experience from case method to hands-on experience. Invented at Harvard, the case method approach assumes that knowledge is gained when students actively participate in a discussion of a situation that may be faced by decision makers.
The search for a repeatable business model for a new product or service is not a predictable pattern. An entrepreneur must start with the belief that all her assumptions are simply hypotheses that will undoubtedly be challenged by what she learns from customers. Analyzing a case in the classroom removed from the realities of chaos and conflicting customer responses adds little to an entrepreneur’s knowledge. Cases can’t be replicated because the world of a startup too chaotic and complicated. The case method is the antithesis of how entrepreneurs build startups – it teaches pattern recognition tools for the wrong patterns – and therefore has limited value as an entrepreneurship teaching tool.
The replacement for cases are not better cases written for startups. Instead, it would be business model design – using the business model canvas as a way to 1) capture and visualize the evolution of business learning in a company, and 2) see what patterns match real world iterations and pivots. It is a tool that better matches the real-world search for the business model.
An entrepreneurial curriculum obviously will have some core classes based on theory, lecture and mentorship. There’s embarrassing little research on entrepreneurship education and outcomes, but we do know that students learn best when they can connect with the material in a hands-on way – personally making the mistakes and learning from them directly.
As much as possible the emphasis ought to be on experiential, learner-centric and inquiry-based classes that help to develop the mindset, reflexes, agility and resilience an entrepreneur needs to search for certainty in a chaotic world.
Lessons Learned
- The search for the business model is the front end of the startup process
- This is true in the smallest startup or largest company
- The goal is to find a repeatable/scalable model, and then execute
- Execution requires operating plans and financial forecasts
- Customer and Agile Development are the processes to search and build the model
- Product management is the process for executing the model
- Entrepreneurial education needs to develop its own management stack
- Starting with how to design and search for a business model
- Adding all the other skills startups needs
- The case-method is the antitheses of an entrepreneurial teaching method
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Filed under: Business Model versus Business Plan, Corporate/Gov't Innovation, Customer Development, Lean LaunchPad, Teaching |
Thanks Steve for another outstanding post to help unravel the mystery of the “startup” and the journey that one is about to undertake during one’s business development process.
Your “get out of the building” priority can now be further enhanced by a “get out of the classroom” mandate. Experiences, solutions and answers that are developed through traditional classroom platforms, case studies, etc. can now pivot towards a more effective and meaningful learning experience in educational entrepreneurship.
This is yet another extremely useful and inspiring post. However there’s one sentence that is possibly harmful (if left without a comment): “(…)execution, (which follows search) requires the company to be organized by function (product management, sales, marketing, business development, etc.)”. I think that such focus on functional organization needs to be balanced by focus on business processes running across the organizational structure, and their impact on value provided to the customer. Without this complimentary view companies are prone to many problems (with management, internal communication, innovation, customer service quality and many others). I believe that emphasizing the role of thinking in terms of processes might be really helpful for companies transforming from the search to execution phase. It will be also a nice, natural continuation of the Customer Development approach.
Very helpful post, Steve. Wonderful analogies.
Thanks Steve for sharing. I reflect on my own MBA which essentially taught me how to survive a big company, with big finances, manage and survive the politics/stakeholder management. It was incredibly useful for my big organization job at the time, particularly because of the students who all had big jobs to, I learnt as much from my peers as the professors.
Where as my time in the startup community taught me to find my niche, find the people who suffer from that pain, listen to what potential customers are saying rather then convince the customer my way is right, find the people who want to join my cause, ‘volunteer management’, how to deal with failure both emotional and rationally how to listen to ‘advice’ and seperate the wheat from the chaff quicker (e.g. become more coachable) and be more willing to re-invent the plan.
There are two examples in Canada (more in the states) of using the YC model of educating entrepreneurs and putting in on the campus: Waterloo’s VeloCity and Ryerson’s DMZ (Harvard has the i-lab, startupschool, etc). I built up VeloCity for 3 years while at the same time founding a startup (TribeHR).
With VeloCity there is a 70-bed residence, a co-working space, a small fund that offers $25k grants, and a movement to connect students to outside the campus to founders both in Canada and the valley. The building of a startup happens completely outside of academics. Like the varsity team for entrepreneurs. This type of program is being referred to as ‘experiential learning’ where students learn by going through the early stages of getting a product to a customer then iterate. I worked on this knowing (or thinking I knew) people needed to experience building a startup and be taught largely through peer mentorship.
The DMZ is a bit different but equally an experiment itself. It’s location gives it an advantage over VeloCity in Waterloo (big city vs small city) and both are remarkable in many different ways.
The success of the VeloCity environment helps with companies like Kik and Vidyard being a part of it. DMZ had 500px among others. But your post helped provide a little context that I think I was missing. Thank you.
I am starting to believe that ideas are going to be open source… It seems as though ideas are a dime a dozen… and it is really hard to have an original idea anymore because information is flowing so freely that many people identify needs and solutions concurrently…
the winners will be those who can rapidly test and learn…
[…] the positioning of Customer Development and traditional entrepreneurship. It’s titled “Search vs Execute” I really like this quote: we now know that a startup is a temporary organization designed to […]
This is a very useful model for understanding where business education can & should go to properly support entrepreneurship! I think this applies not only at the graduate level, but also in job training for children and transitioning adult workers. In addition, I would argue that there’s an intermediary of necessary business acumen between search and execute: transitioning. Not only is there a different skill set between search for a business model (or in my case collaborative literacy program model) and executing that model, there’s a different skillset in documenting, training, and codifying the culture and practices of that model. I’ve been surprised when highly capable people flounder in a pilot because they don’t know how to build the sustainable structure. Not only do we need these kinds of business “construction workers” who can cement the business infrastructure, but we also need those who know how to properly and effectively dismantle a business without the major economic disruptions we see in our “boom and bust” cycles. Basically, we need business midwives and funeral directors, too. Those positions require skills that I imagine would not even be touched in business schools and environments that instill “fear of failure.”
Thank you for your explanation.
You define a startup as a temporary organization designed to search for a repeatable and scalable business model. In the customer development process at the end of customer validation the business model is verified. So from this point an organization is not a startup anymore. But how do you define a company which is in the customer creation process? Is it not a startup?
Thanks for another excellent article! I’m in my final semester in the Colorado State MBA program, and our capstone class is based on the BMG Canvas and the build-test-learn cycle. We are building our business plans through testing hypotheses, and some of them are really starting to look like viable businesses: at least some of us plan to take them “live.” Learning how to formulate hypotheses, develop effective metrics, and test our hypotheses are some of the most valuable things I’ve learned.
I largely agree and would like to clarify my thinking. Startups have to focus on markets and customers. They need to design products/services that the market wants and they need to define a business model that supports the market.
So, they shouldn’t be searching for a business model as such. They should let the business model evolve from their efforts to generate revenue. This means they may evolve toward a non-standard business model — one that does not fit comfortably into traditional enterprise models. If so, embrace the new model and refine it but don’t try to force it to be traditional.
I think we largely agree but the details may differ.
Its so good to know that someone out there understands the need to fill the gap between class theories nd the practical end that determines the success of start ups . While at d same time knowing that the course is just graduating from mere elective to become a core in business students curriculum.
Good job Steve, I will like to receive your full insights about the subject of discuss
Beautiful definition of Startup = Temp org in search of a sustainable, repeatable business model. But I wonder how would you figure out when a startup has that business model? Does search ever stop?
[…] I def cannot take credit for this philosophy, its in one form or another all over the place. One of my favorite places is actually in this awesome Steve Blank post called Search vs. Execute. […]
Outstanding post. Not only do you convey your core mantra about the fundamentals of entrepreneurship, but you’ve also described a terrifically important role for the Federal government in sparking new growth in the private sector. A hat tip, and a deep bow.
[…] now know how to teach entrepreneurs how to think about business models and use customer development to turn hypotheses into facts. But […]
[…] are specific stages in the development of a company. Steve Blank has a fantastic post explaining the transition from an Idea to a Startup to a Company. I have written a lot about the inflection point we are in, basically in terms of technology […]
Great post Steve once again! Coming back to your though on “why accountants don’t run startups” I think Fruugo would be a great case study to feature!
They raised 40M eur and ended up with 100k in revenue. Company is now almost bankcrupt. Was run mostly by senior corporate executives with Nokia background.
http://www.arcticstartup.com/2012/04/16/fruugo-financials-bankruptcy
[…] version of my Lean LaunchPad class at Columbia University. While the class teaches a process to search and validate a business model, it does not offer any hints on how to create a killer startup idea. So after teaching several […]
[…] version of my Lean LaunchPad class at Columbia University. While the class teaches a process to search and validate a business model, it does not offer any hints on how to create a killer startup idea. So after teaching several […]
[…] la experiencia adecuada: construir un negocio es muy diferente a administrar uno existente (ver “Search vs. Execute“), y ejecutivos experimentados que tratan de aplicar los mismos principios de administración a […]
[…] LaunchPad approach (business model canvas + customer development) and bring their entrepreneurship curriculums into the 21st century. Over the past couple of years this Lean LaunchPad model has proven immensely effective at […]
[…] careful with old-school businessperson or politician who are trying to take the captain post of our business. They dont understand startup and how to run them at this century. Ask them […]
[…] According to Steve Blank, this stage can be divided into two sub-stages, referred to as Search and […]
[…] According to Steve Blank, this stage can be divided into two sub-stages, referred to as Search and Execution. • Search […]
[…] There’s a wonderful description of a startup by Steve Blank: “a startup is a temporary organization designed to search for a repeatable and scalable business mode…“ […]
[…] Porque Lean Startup muda tudo? Simples, porque o mundo está diferente e estas idéias estão 100% alinhadas aos novos tempos. Numa realidade em que a única certeza é a mudança (acelerada), aprender é a única alternativa. Num ambiente destes, está em franca vantagem quem consegue aprender e ter a agilidade para mudar rapidamente. Isto tem a ver com uma nova visão sobre startups e companhias estabelecidas, em que as startups buscam novos modelos de negócios (e estão 100% adaptadas para isso), enquanto as corporações executam em escala um modelo validado (Search x Execute). […]
Well Steve, I am 70 years old and after reading your book, your blog realized what I believed to be entrepreneurial was not!
Watch me!
(My way to transform)
Much appreciation,
Jim Hugues