In Defense of Unreasonableness – Saving the California Coast

Posted on June 28, 2013 by steve blank

CLCV Enviro AwardsLast night Alison and I along with others were honored for environmental leadership by the California League of Conservation Voters. Here are the remarks I made.

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Alison and I both grew up on the East Coast but we’ve been fortunate to live in California for 30 years.  One of the things we love most about living here is how beautiful the natural landscapes are and how close nature is to urban areas.  When we had kids, we began to think about our role in protecting these California landscapes for future generations.

Alison got a head start on me by joining the board of the State Parks Foundation. I soon followed by joining the board of Audubon, Peninsula Open Space Trust and the California League of Conservation Voters. And 6 ½ years ago I was appointed to the California Coastal Commission.

As you know, for the last 35 years we’ve been running a science experiment on the California Coast: How would the Coastal Act affect California’s coastal economy?

The results are now in.

California has some of the most expensive land in the country and as we all know, our economy is organized to extract the maximum revenue and profits from any asset. Visitors are amazed that there aren’t condos, hotels, houses, shopping centers and freeways, wall-to-wall, for most of the length of our state’s coast.shutterstock_127554866

It was the Coastal Act that saved California from looking like the coast of New Jersey.

In 1976 the voters of California wisely supported the Coastal Act and the creation of a California Coastal Commission with 2 goals.

First, to maximize public access and public recreational opportunities in the coastal zone while preserving the  rights of private property owners, and

Second, to assure priority for coastal-dependent and coastal-related development over other development on the coast.

For the last three decades, the Coastal Commission has upheld these directives while miraculously managing to avoid regulatory capture. It was able to do so because of three forces that sustained it: 1) an uncompromising executive director, 2) a majority of commissioners who looked past local parochial interests and voted for the interests of all Californians, and 3) an environmental community that acted as a tenacious watchdog.

The Commission has been able to stave off the tragedy of the commons for the California coast. Upholding the Coastal Act meant the Commission took unpopular positions upsetting developers who have fought with the agency over seaside projects, homeowners who strongly feel that private property rights unconditionally trump public access, and local governments who believe they should have the final say in what’s right for their community, regardless of its impact on the rest of the state.

During the last three decades, Peter Douglas ran the Coastal Commission. Unlike Robert Moses who built modern New York City’s or Baron Haussmann who built 19th century Paris in concrete and steel, the legacy of Peter Douglas is all the things you don’t see in the 1,100 miles of the California coast: wetlands that have not been filled, public access that has not been lost, coastal views that have not been blocked by hotels or condominiums. Douglas did this by standing up to developers, speakers of the state assembly, governors, and others who wanted him to be “reasonable” and to come to a “compromised solution”.

I was appointed to the Coastal Commission by a governor hoping to find a candidate with “green enough” credentials who would be “reasonable” and understand how “compromises” are made in California politics.

And for the first few years, I was reasonable.  New development, sure –just avoid the wetland.  More condos—OK but watch out for the Environmentally Sensitive Habitat Areas (ESHA).

I’m a slow learner but over the last few years, I realized that the coast of California exists as it is because the Commission had an unreasonable leader, who refused the political allure of “compromise” and who managed to keep the commission independent despite enormous pressure. And we as commissioners had to stand up to those pressures and be at times unreasonable in order to not compromise the essence of the Coastal Act.

Unfortunately Peter Douglas is gone and his unbending vision to save the coast is fading. Some current commissioners seem to want the Commission to be reasonable, and understand the reality of politics. In fact, some may even want a new “reasonable” executive director who will turn the commission into just another regulatory organization driven by the people they are supposed to regulate.

Sadly, even today with the results of an independent commission in front of us, some of our appointing authorities haven’t understood the gift that has been handed them – 100’s of miles of Pacific coastline, much of it unspoiled and accessible to all. And unlike other regulatory agencies, the unspoiled California Coast is finite, and bad decisions are virtually impossible to turn back once a development decision is implemented.

Over the last few years I learned that unless there is a vigilant and engaged public, lobbyists and developers will take over the commission using “reasonableness” and “fair compromise” as their watch words. It is up to individuals and our environmental organizations to become more active on coastal issues.

As Peter Douglas used to say, the coast is never saved, rather it is being saved every day,” as an ongoing process.

Unless we insist that our elected officials appoint people who are willing to prioritize the principals of the Coastal Act over both their own careers and the notion of being “reasonable” within the larger ecosystem of day-to-day California Politics, our children may one day look back at pictures of the California coast and wistfully say, “Look what our parents lost.”

Today it was with a feeling of a mission yet to be accomplished, I let the governor know that I am resigning from the Coastal Commission. My work on innovation, job creation and entrepreneurship for the Federal Government is taking an increasing amount of my time.

I’ve had a great time at the Commission. I’ve learned a lot from my fellow commissioners and hope I’ve done my part for my fellow Californians. I’d like to thank my alternate Jim Wickett on the Commision who has also dedicated his time and uncompromising votes towards carrying out the Coastal Act.

Most of all, I’m proud to have been “unreasonable” and “uncompromising” in defense of the California Coast. To be anything less risks the loss of what the Coastal Act and Peter Douglas has uniquely brought to all Californians.

Thank you for this award, and I very much appreciate all the support you have provided to me to be able to make my contribution to the California Coast and the Environment.

Poppies full size

Filed under: California Coastal Commission, Conservation | 23 Comments »

Strangling Innovation: Tesla versus “Rent Seekers”

Posted on June 24, 2013 by steve blank

The greatest number of jobs is created when startups create a new market – one where the product or service never existed before or is radically more convenient. Yet this is where startups will run into anti-innovation opponents they may not expect. These opponents have their own name –  “rent seekers” – the landlords of the status-quo.

Smart startups prepare to face off against rent seekers and map out creative strategies for doing so…. First, however, they need to understand what a rent seeker is and how they operate…

———-

Recently, the New York and North Carolina legislatures considered a new law written by Auto Dealer lobbyists that would make it illegal for Tesla to sell cars directly to consumers. This got me thinking about the legal obstacles that face innovators with new business models.

Examples of startups challenging the status quo include: Lyft, Square, Uber, Airbnb, SpaceX, Zillow, Bitcoin, LegalZoom, food trucks, charter schools, and massively open online courses. Past examples of startups that succeeded in redefining current industries include Craigslist, Netflix, Amazon, Ebay and Paypal.

While Tesla, Lyft, Uber, Airbnb, et al are in very different industries, they have two things in common: 1) they’re disruptive business models creating new markets and upsetting the status quo and 2) the legal obstacles confronting them weren’t from direct competitors, but from groups commonly referred to as “rent seekers.”

Rent Seekers
Rent seekers are individuals or organizations that have succeeded with existing business models and look to the government and regulators as their first line of defense against innovative competition. They use government regulation and lawsuits to keep out new entrants with more innovative business models. They use every argument from public safety to lack of quality or loss of jobs to lobby against the new entrants. Rent seekers spend money to increase their share of an existing market instead of creating new products or markets. The key idea is that rent seeking behavior creates nothing of value.

These barriers to new innovative entrants are called economic rent. Examples of economic rent include state automobile franchise laws, taxi medallion laws, limits on charter schools, auto, steel or sugar tariffs, patent trolls, bribery of government officials, corruption and regulatory capture. They’re all part of the same pattern – they add no value to the economy and prevent innovation from reaching the consumer.

No regulation?
Not all government regulation is rent or rent seeking. Not all economic rents are bad. Patents for example, provide protection for a limited time only, to allow businesses to recoup R&D expenses as well as make a profit that would often not be possible if completely free competition were allowed immediately upon a products’ release. But patent trolls emerged as rent seekers by using patents as legalized extortion of companies.

How do Rent Seekers win?
Instead of offering better products or better service at lower prices, rent seekers hire lawyers and lobbyists to influence politicians and regulators to pass laws, write regulations and collect taxes that block competition. The process of getting the government to give out these favors is rent-seeking.

Rent seeking lobbyists go directly to legislative bodies (Congress, State Legislatures, City Councils) to persuade government officials to enact laws and regulations in exchange for campaign contributions, appeasing influential voting blocks or future jobs in the regulated industry. They also use the courts to tie up and exhaust a startups limited financial resources.

Lobbyists also work through regulatory bodies like FCC, SEC, FTC, Public Utility, Taxi, or Insurance Commissions, School Boards, etc.   Although most regulatory bodies are initially set up to protect the public’s health and safety, or to provide an equal playing field, over time the very people they’re supposed to regulate capture the regulatory agencies. Rent Seekers take advantage of regulatory capture to protect their interests against the new innovators.

PayPal – Dodging Bullets
PayPal consistently walked a fine line with regulators. Early on the company shutdown their commercial banking operation to avoid being labeled as a commercial bank and burdened by banks’ federal regulations. PayPal worried that complying with state-by-state laws for money transmission would also be too burdensome for a startup so they first tried to be classified as a chartered trust company to provide a benign regulatory cover, but failed. As the company grew larger, incumbent banks forced PayPal to register in each state. The banks lobbied regulators in Louisiana, New York, California, and Idaho and soon they were issuing injunctions forcing PayPal to delay their IPO. Ironically, once PayPal complied with state regulations by registering as a “money transmitter” on a state-by-state basis, it created a barrier to entry for future new entrants.

U.S. Auto Makers – Death by Rent Seeking
The U.S. auto industry is a textbook case of rent seeking behavior. In 1981 unable to compete with the quality and price of Japanese cars, the domestic car companies convinced the U.S. government to restrict the import of  “foreign” cars. The result? Americans paid an extra $5 billion for cars. Japan overcame these barriers by using their import quotas to ship high-end, high-margin luxury cars, establishing manufacturing plants in the U.S. for high-volume lower cost cars and by continuing to innovate. In contrast, U.S. car manufacturers raised prices, pocketed the profits, bought off the unions with unsustainable contracts, ran inefficient factories and stopped innovating. The bill came due two decades later as the American auto industry spiraled into bankruptcy and its market share plummeted from 75% in 1981 to 45% in 2012.

Innovation in the Auto Industry
According to the Gallup Poll American consumers view car salesman as dead last in honesty and ethics. Yet when Tesla provided consumers with a direct sales alternative, the rent seekers – the National Auto Dealers Association turned its lobbyists loose on State Legislatures robbing consumers in North Carolina, New York and Texas of choice in the marketplace.

In these states it appears innovation be damned if it gets in the way of a rent seeker with a good lobbyist.

Much like Paypal, it’s likely that after forcing Tesla to win these state-by-state battles, the auto dealers will have found that they dealt themselves the losing hand.

Rent seeking is bad for the economy
Rent seeking strangles innovation in its crib. When companies are protected from competition, they have little incentive to cut costs or to pay attention to changing customer needs. The resources invested in rent seeking are a form of economic waste and reduce the wealth of the overall economy.

Schumpeter’s theory of creative destruction – that entry by entrepreneurs was the disruptive force that sustained economic growth even as it destroyed the value of established companies – didn’t take into account that countries with lots of rent-seeking activity (pick your favorite nation where bribes and corruption are the cost of doing business) or dominated by organized interest groups tend to be the economic losers. As rent-seeking becomes more attractive than innovation, the economy falls into decline.

Startups, investors and the public have done a poor job of calling out the politicians and regulators who use the words “innovation means jobs” while supporting rent seekers.

What does this mean for startups?
In an existing market it’s clear who your competitors are. You compete for customers on performance, ease of use, or price. However, for startups creating a new market – one where either the product or service never existed before or the new option is radically more convenient for customers –  the idea that rent seekers even exist may come as a shock. “Why would anyone not want a better x, y or z?” The answer is that if your startup threatens their jobs or profits, it doesn’t matter how much better life will be for consumers, students, etc. Well organized incumbents will fight if they perceive a threat to the status quo.

As a result disrupting the status quo in regulated market can be costly. On the other hand, being a private and small startup means you have less to lose when you challenge the incumbents.

If you’re a startup with a disruptive business model here’s what you need to do:

Map the order of battle

  • Laughing at the dinosaurs and saying, “They don’t get it” may put you out of business. Expect that existing organizations will defend their turf ferociously i.e. movie studios, telecom providers, teachers unions, etc.
  • Understand who has political and regulator influence and where they operate
  • Figure out an “under the radar” strategy which doesn’t attract incumbents lawsuits, regulations or laws when you have limited resources to fight back

Pick early markets where the rent seekers are weakest and scale

  • For example, pick target markets with no national or state lobbying influence. i.e. Craigslist versus newspapers, Netflix versus video rental chains, Amazon versus bookstores, etc.
  • Go after rapid scale of passionate consumers who value the disruption i.e. Uber and Airbnb, Tesla
  • Ally with some larger partners who see you as a way to break the incumbents lock on the market. i.e. Palantir and the intelligence agencies versus the Army and IBM’s i2, / Textron Systems Overwatch

AirBnb – Damn the torpedoes full speed ahead
For example, Airbnb, thrives even though almost all of its “hosts” are not paying local motel/hotel taxes nor paying tax on their income, and many hosts are violating local zoning laws. Some investors and competitors may be concerned about regulatory risk and liability.  AirBNB’s attitude seems to be “build the business until someone stops me, and change or comply with regulations later.”  This is the same approach that allowed Amazon to ignore local sales taxes for the last two decades.

When you get customer scale and raise a large financing round, take the battle to the incumbents. Strategies at this stage include:

  • Hire your own lobbyists
  • Begin to build your own influence and political action groups
  • Publicly shame the incumbents as rent seekers
  • Use competition among governments to your advantage, eg, if  New York or North Carolina doesn’t want Tesla, put the store in New Jersey, across the river from Manhattan, increasing New Jersey’s tax revenue
  • Cut deals with the rent seekers. i.e. revenue/profit sharing, two-tier hiring, etc.
  • Buy them out i.e. guaranteed lifetime employment

Lessons Learned

  • Rent seekers are organizations that have lost the ability to innovate
  • They look to the government to provide their defense against innovation
  • Map the order of battle
  • Pick early markets and scale
  • With cash, take the battle to the incumbent

Listen to the post here: or download the Podcast here

Filed under: Corporate/Gov't Innovation, Marketing, Science and Industrial Policy, Tesla | 59 Comments »

The Lean LaunchPad Educators Class

Posted on June 18, 2013 by steve blank

There is nothing more powerful than an idea whose time has come

Victor Hugo

The Lean LaunchPad entrepreneurship curriculum has caught fire. This week 100 educators from around the world will come to Stanford to learn how to teach it.

—–

Life is full of unintended consequences.

Ten years ago I started thinking about why startups are different from existing companies.  I wondered if business plans and 5-year forecasts were the right way to plan a startup.  I asked, “Is execution all there is to starting a company?”

It dawned on me that the plans were a symptom of a larger problem: we were executing business plans when we should first be searching for business models. We were putting the plan before the planning.

So what would a search process for a business model look like? I read a ton of existing literature and came up with a formal methodology for search I called Customer Development. I wrote a book about this called the Four Steps to the Epiphany.

Teaching “Search versus Execution”
In 2003 U.C. Berkeley asked me to teach a class in Customer Development at Haas business school. In 2004 I funded IMVU, a startup by Will Harvey and Eric Ries. As a condition of my investment I insisted Will and Eric take my class at Berkeley. Having Eric in the class was the best investment I ever made. Eric’s insight was that traditional product management and Waterfall development should be replaced by Agile Development. While I had said startups were “Searching” for a business model, I had been a bit vague about what exactly a business model looked like. For the last two decades there was no standard definition. That is until Alexander Osterwalder wrote Business Model Generation.

Finally we had a definition of what it was startups were searching for. Business model design + customer development + agile development is the process that startups use to search for a business model. It’s called the Lean Startup. The sum of these parts is now the cover story of the May 2013 Harvard Business Review. Bob Dorf and I wrote a book, The Startup Owners Manual that put all these pieces together.

 

But then I realized rather than just writing about it, or lecturing on Customer Development, we should have a hands-on experiential class. So my book and Berkeley class turned into the Lean LaunchPad class in the Stanford Engineering school. The class emphasizes experiential learning, a flipped classroom and immediate feedback as a way to engage students with real world entrepreneurship.

Students learn by proposing and immediately testing hypotheses. They get out of the classroom and talk to customers, partners and competitors and encounter the chaos and uncertainty of commercializing innovations and creating new ventures.

Then in July 2011, the National Science Foundation read my blog posts on the Lean LaunchPad class.  They said scientists had already made a career out of hypotheses testing, and the Lean LaunchPad was simply a scientific method for entrepreneurship. They asked if I could adapt the class to teach scientists who want to commercialize their basic research. The result was the NSF Innovation Corps, my Lean LaunchPad class now taught at 11 major universities to 400 teams/year. ARPA-E joined the program this year, and in the fall we’ll teach a Life Science version of the class at UCSF. And other countries are adopting the class to commercialize their nations scientific output.

Unexpected Consequences
One of the most surprising things that came out of the National Science Foundation classes was the reaction of the principal investigators (these were the tenured professors who leading their teams in commercializing their science.)  A sizable number of them went back to their schools and asked, “How come we don’t offer this class to our students?”

While I had open-sourced all my lectures and put them online via Udacity, I was getting requests to teach other educators how teach the class.  I wasn’t sure how to respond, until Jerry Engel, the National Faculty Director of the NSF Innovation Corps suggested we hold an educators class.  So we did. The Lean LaunchPad Educators program is a 3-day program designed for experienced entrepreneurship faculty.  It is a hands-on program where you experience the process, and be given the tools to create, a curriculum and course plan you can put to immediate use.

We offered the first class in August and had 50 attendees, the January class had 70, and the one being held this week we had to cap at 100.

As part of each of the classes we open source our educators guide here

and all our other tools for educators here.

Where are we in Entrepreneurial Education?
Entrepreneurial education is in the middle of a major transition.

Entrepreneurship educators are realizing that curricula oriented around business plans and “execution” fail to prepare students for the realities of building or working in startups. Startups are a fundamentally a different activity than managing a business and “search versus execute” require very different skills. Therefore entrepreneurial education must teach how to search the uncertainties and unknowns.

Educators are now beginning to build curricula that embrace startup management tools built around “searching for a business model” rather than the “execution of a business model” tools needed in larger companies.

But we’re just beginning the transition. Like other revolutionary changes there are the early adopters and others who adopt later. For the Lean LaunchPad classes we’ve seen adoption fall into five categories:

  1. Those who get how teaching students how to “search versus execute” changes our curriculum.
    • They say, “Here’s how we are going to add value to what you started.”
  2. Those who get how teaching students how to “search versus execute” changes our curriculum.
    • They say, “We’re teaching the Lean Launchpad class as is. Thanks!”
  3. Those who get that there is a major shift in entrepreneurial education occurring and we understand business model design + customer development + agile engineering is at it’s core
    • They say, “We are going to rename each of these components so we can take credit for them at our business school.”
  4. Those who are not changing anything
    • They say, “We don’t buy it.”
  5. Those who really don’t understand the key concepts but we need to be “buzzword compliant” to seem relevant
    • They say, “We’re throwing Lean on top of our “how to write a business plan” and other standard classes.”

The good news is that it’s the marketplace that will eventually drive all schools to adopt experiential classes that teach Lean principles. We’re incredibly proud of those educators who already have.
There is nothing more powerful than an idea whose time has come

The next Lean LaunchPad Educators Class will be held in New York, September 25-27th. Info here.

We’ll also offer a version for incubators and accelerators in New York, September 22-24th. info@kandsranch.com

Lessons Learned

  • Entrepreneurial education is in the middle of a major transition
  • Transition from startups are a smaller version of a large company, teaching execution
  • To teaching that startups search for a business model
  • Business model design + customer development + agile development is the process that startups use to search for a business model
  • Lean LaunchPad is an experiential class that teaches students how to search
    • It’s part of a broader new entrepreneurial curriculum
    • We teach this in the Lean LaunchPad Educators Class

Listen to the post here: or download the Podcast here

Filed under: Customer Development, Lean LaunchPad, Teaching | 15 Comments »

Fund Raising is a Means Not an End

Posted on June 11, 2013 by steve blank

Not all that glitters is gold
William Shakespeare

For many entrepreneurs “raising money” has replaced “building a sustainable business” as their goal.  That’s a big mistake. When you take money from investors their business model becomes yours.

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One of my ex students came out to the ranch to give me an update on his startup. When I asked, “What are you working on?” the first words out of his mouth was his fund raising progress.  Sigh… What I should have been hearing is the search for the business model, specifically the progress on product/market fit, but I hear the fund raising story first at least 90% of the time.  It never makes me happy.

shutterstock_2694848Entrepreneurs need to think about 1) when to raise money, 2) why to raise money and 3) who to take money from, 4) the consequences of raising money.

It all starts with understanding what a startup is.

What’s a Startup? Just as a reminder, a startup is a temporary organization designed to search for a repeatable and scalable business model.  It’s worth parsing this sentence:

•  Temporary Organization: The goal of a startup is not to remain a startup. The goal is to scale.  (If you don’t have scale as a goal then you shouldn’t be raising money from angel or venture investors, you should be getting a commercial or government small business loan.)

•  Search. Although you believe your idea is the most brilliant innovation ever thought of, the odds are that you are wrong. If you raise millions of dollars on day one, simply executing the idea means you’re going to waste all those dollars attempting to scale a bad idea.

•  Repeatable: Startups may get orders that come from board members’ customer relationships or heroic, single-shot efforts of the CEO. These are great, but they are not repeatable by a sales organization. What you are searching for is not the one-off revenue hits but rather a repeatable pattern that can be replicated by a sales organization selling off a pricelist or by customers coming to your web site.

•  Scalable: The goal is not to get one customer but many – and to get those customers so each additional customer adds incremental revenue and profit. The test is: If you add one more sales person or spend more marketing dollars, does your sales revenue go up by more than your expenses?

•  Business model: A business model answers the basic questions about your entire business: Who are the customers? What problems do they want solved? Does our product or service solve a customer problem (product-market fit)? How do we attract, keep and grow customers? What are revenue strategy and pricing tactics? Who are the partners? What are the resources and activities needed to make this business happen? And what are its costs?

Who to take money from?
First, decide what type of startup you are.  If you’re a lifestyle entrepreneur or a small business, odds are the return you can provide is not what traditional angel or venture investors are looking for.  These types of startups are better suited to raising money from friends, family, commercial and government small business loans, etc.

If you’re a scalable startup, you want to spend small amounts of money (seed capital) as you run experiments testing your hypotheses. Why small amounts? No startup ever spends less then it raises. And at this early stage you’ll be giving up a larger percentage of your firm to investors. A seed round can come from friends, family, Kickstarter, angels – and most importantly, early customers.

These sources are a lot more forgiving of iterations and pivots than later-stage venture-capital funds.

When to raise money
In a Lean Startup, the goal is to preserve your cash until you find a repeatable and scalable business model. In times of unlimited cash (internet bubbles, frothy venture climates) you can fix your mistakes by burning more dollars. In normal times, when there aren’t dollars to undo mistakes, you use Customer Development to find product-market fit.  It’s only after you have found product-market fit (value proposition – customer segment in the language of the business model canvas) that you spend like there is no tomorrow.

Don’t confuse “raising money” with “building a sustainable business.” In a perfect world, you would never need investors and would fund the company from customer revenue.  But to achieve scale, startups need risk capital.

Raise as much money as you can after you have tangible evidence you have product/market fit, not before.

The consequences of raising venture money
The day you raise money from a venture investor, you’ve also just agreed to their business model.

Here’s a simple test: If you’re the founder of a startup, go to a whiteboard and diagram how a VC fund works.  How do the fund and the partners make money? What is an IRR? How long is a fund’s life? How much will they invest in the life of your company? How much do they need to own at a liquidity event?  What’s a win for them? Why?

There are two reasons to take venture money. The first is to scale like there is no tomorrow. You invest the dollars to create end-user demand and drive those customers into your sales channel.

The second is the experience, pattern recognition and contacts that great investors bring to the table.

Just make sure it’s the right time.

Lessons Learned

  • Fund raising is a means not an end
  • Preserve your cash until you find a repeatable and scalable business model
    • Focus on product – market fit
    • Run small experiments testing your hypotheses
  • Raise as much money as you can after you have tangible evidence you have product/market fit

Listen to the post here: Download the Podcast here

Filed under: Venture Capital | 19 Comments »

Who’s Doing the Learning?

Posted on June 3, 2013 by steve blank

In a startup instead of paying consultants to tell you what they learned you want to pay them to teach you how to learn.

—-

Roominate, one of my favorite Lean LaunchPad teams came out to the ranch last week for a strategy session. Alice and Bettina had taken an idea they had tested in the class – building toys for young girls to have fun with Science, Technology, Engineering, and Math, and started a company. The Roominate dollhouse building kits are being sold via their own website and soon, retail channels. They’ve shipped over 5,000 to enthusiastic parents and their daughters.

Roominate kit

As soon as they had designed the product, they found a contract manufacturer to build the product in China. Alice and Bettina are hands-on mechanical and electrical engineers, so instead of assuming everything would go smoothly, they wisely got on a plane to Dongguan China and worked with the factory directly. They learned a ton.

But we were meeting to talk about sales and marketing. They outlined their retail channel and PR strategy and told me about the type of consultants they wanted to hire.

Hiring Channel Sales
“So what would the retail channel consultant do?” I asked.  Alice looked at me like I was a bit slow, but went on to describe how this consultant was going to take their product around to buyers inside major retail chains like Target, Toys R Us, Walmart, and others to see if they could get them to buy their product. “That sounds great.” I said, “When are you leaving for the trip?”  They looked confused.  “We’re not going on any of these calls.  Our consultant is going and then he’s going to give us a report of how willing these stores are to carry our product.”  Oh…

I said, “Let me see if I understand this correctly. What if a buyer asks, can you make a custom version of your product? Can your consultant answer that question on the spot? What if a buyer said no? Will your consultant know what questions to ask right then to figure out how to get them to yes?”  I let this sink in and then offered, “Think about it for a minute. You’re going to pay someone else to learn and discover if your product fits this channel, and you’re are not going to do any of the learning yourself?  You didn’t skip the trip learning how to manufacture the product. You got on a plane yourself and went to China. Why doesn’t this sound like the right thing to do for channel sales?”  They thought about it for a moment and said, “Well we feel like we understand how to build things, but sales is something we thought we’d hire an expert to do.”

Hiring PR Agencies
We had an almost identical conversation when the subject turned to hiring a Public Relations agency.  Bettina said, “We want to drive customer demand into our channel.”  That’s smart I thought, a real clear charter for PR.  “What are they going to do for you?” I asked.  “Well all the agencies we interview tell us they can survey our customers and come up with our positioning and then help us target the right blogs, influencers and press.

This felt like déjà vu all over again.

I took a deep breath and said, “Look this is just like the channel consultant conversation. But in this case it’s even clearer.  Didn’t you get started by testing out every iteration with girls and watching firsthand what gets them excited? Don’t you have 5,000 existing customers? And haven’t you been telling me you’ve been talking to them continuously?”  They nodded in agreement.  I suggested, “Why don’t you guys take a first pass and draft a positioning brief with target messages, think through who you think the audiences are, and you take a first pass at who you think the press should be.  The team looked at me incredulously.  “You want us to do this? We don’t know the first thing about press, that’s why we want to hire the experts.”  It was the answer I expected.Roominate project

“Let me be clear,” I explained.  “At this moment you know more about your customers than any PR agency will.  You’ve spent the last six months testing positioning, messages, and talking to the press yourself.  What I want you to do is spend an hour in a conference room and write up all you learned.  What worked, what didn’t, etc.  Then summarize it in a brief – a one, max two-page document that you hand to prospective PR agencies.  And when you hand it to them say, “We know you can do better, but here’s what we’ve learned so far.”” They thought about it for a while and said, “We want to hire a PR agency so we don’t have to do this stuff. We’re too busy focusing on getting the product right.”

I pushed back, reminding them, “Look, half the agencies that see your brief are going to decline to work with you. They make most of their money doing the front-end work you already did.  You do need to hire a PR agency, but I’m suggesting that you start by raising the bar on where they need to start.”

You Need to Do the Learning
Thinking that founders hire domain experts to get them into places and do things they don’t have any clue about is a mistake most founding CEOs make.  It’s wrong. If you plan to be the CEO who runs the company, you need these resources teaching you how to do it, not reporting their results to you.  For Roominate I suggested that Alice and Bettina needed to try to find a channel consultant who would take them along on the sales calls and have the founders meet buyers directly.  Why?  Not to turn them into channel sales people but to hear customer objections unfiltered. To get data that they – and only they, not a consultant – could turn into insight about iterations and pivots about their business model.  And to see how the process works directly.

A year from now when they will be hiring their first VP of Channel Sales, they want the interview to go something like,  “Well we sold the first three channel partners ourselves – what can you do for us?”

The same is true for hiring the PR agency.  The conversation should be, “Here’s what we learned, but we know this is your expertise.  Tell us what we’re missing and how your firm can do better than our first pass.”

As a founder –  when you’re searching for a business model make sure that you’re the ones doing the learning… not the outsourced help.

There’s Not Enough Time
The biggest objections I get when I offer this advice is, “There’s not enough time in the day,” or “I need to be building the product,” or the more modern version is, “I’m focused on product/market fit right now.”

The reality is that they’re all excuses. Of course product and product/market fit are the first critical steps in a startup –  but outsourcing your learning about the other parts of the business model are the reasons why your investors will be hiring an operating executive as your replacement – once you done all the hard work.

Lessons Learned

  • You need to do the learning not your consultants
  • Most consultants will think that’s their secret sauce and not want your business
    • The smart ones will realize that’s how they’ll build a long-term relationship with you
    • Hire them
  • Not understanding the other parts of your business model is a reason investors hire an operating executive

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Filed under: Customer Development, Lean LaunchPad, Marketing, Teaching | 28 Comments »