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Customer Discovery: The Search for Product/Market Fit. 2 Minutes to See Why
Posted on June 28, 2014 by steve blank
I-Corps @ NIH – Pivoting the Curriculum
Posted on June 26, 2014 by steve blank
We’ve pivoted our Lean LaunchPad / I-Corps curriculum. We’re changing the order in which we teach the business model canvas and customer development to better-fit therapeutics, diagnostics and medical devices.
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Over the last three years the Lean LaunchPad class has started to replace the last century’s “how to write a business plan” classes as the foundation for entrepreneurial education. The Lean LaunchPad class uses the three “Lean Startup” principles:
- Alexander Osterwalders “business model canvas” to frame hypotheses
- “Customer Development” to test the hypotheses outside the building and
- “Agile Engineering” to have teams prototype, test, and iterate their idea while discovering if they have a profitable business model.
Teams talk to 10-15 customers a week and make a minimum of 100 customer visits. The Lean LaunchPad is now being taught in over 100 universities. Three years ago the class was adopted by the National Science Foundation and has become their standard for commercializing science. Today the National Institutes of Health announced their I-Corps @ NIH program.
The one constant in all versions of the Lean LaunchPad / I-Corps class has been the order in which we teach the business model canvas.
Value Propositions and Customer Segments are covered in weeks 1 and 2, emphasizing the search for problem/solution and then product/market fit. Next we teach Distribution Channels (how are you going to sell the product) and Customer Relationships (how do you Get/Keep/Grow customers) and Revenue Streams (what’s the Revenue Model strategy and pricing tactics.) Finally we move to the left side of the canvas to teach the supporting elements of Resources, Partners, Activities and Costs.
Teaching the class lectures in this order worked great, it helped the teams understand that the right-side of the canvas was where the action was. The left- hand side had the supporting elements of the business that you needed to test and validate, but only after you made sure the hypotheses on the right were correct.
This lecture order was embedded in the Udacity Lectures, the syllabi and educators guide I open-sourced. Hundreds of teams in the NSF, and my Stanford, Berkeley, Columbia, and UCSF classes learned to search for a repeatable and scalable business model in this way.
It’s consistency was the reason that the NSF was able to scale the I-Corps from 15 to 30 University sites.
So why change something that worked so well?
Rationale
Last fall at UCSF we taught 125 researchers and clinicians in therapeutics, diagnostics, medical devices and digital health in a Lean LaunchPad for Life Sciences class. While the teaching team made heroic efforts to adapt their lectures to our “standard” canvas teaching order, it was clear that for therapeutics, diagnostics and medical devices the order was wrong. Hypotheses about Intellectual Property, Reimbursement, Regulation and Clinical Trials found on the left side of canvas are as, or more important than those on the right side of the canvas.
I realized we were trying to conform to a lecture order optimized for web, mobile, hardware. We needed to cover Intellectual Property, Reimbursement, Regulation and Clinical Trials a month earlier in the class than in the current format.
The National Institutes of Health has adopted our class for its I-Corps @ NIH program starting this October. Most teams will be in therapeutics, diagnostics and medical devices. Therefore we’re going to teach the class in the following order:
1) value proposition, 2) customer segments, 3) activities, 4) resources, 5) partners, 6) channel, 7) customer relationships, 8) revenue/costs
I-Corps @ NIH Lecture Order Details
Customer Segments change over time. CROs or Payers may ultimately be a resource, a partner or a revenue source, but until you get them signed up they’re first a customer. Your potential exit partners are also a customer. And most importantly, who reimburses you is a customer. (You get an introduction to reimbursement early here, while the details are described later in the “Revenue” lecture.)
Activities are the key things you need to do to make the rest of the business model (value proposition, distribution channel, revenue) work. Activities cover clinical trials, FDA approvals, Freedom to Operate (IP, Licenses) software development, drug or device design, etc.
Activities are not the product/service described in the value prop, they are the unique expertise that the company needs to deliver the value proposition. In this week we generally describe the business rationale of why you need these. The specifics of who they are and how to work with them are covered in the “Resource” and “Partners” lectures.
Resources – Once you establish what activities you need to do, the next question is, “how do these activities get accomplished?” I.e. what resources do I need to make the activities happen. The answer is what goes in the Resources box (and if necessary, the Partners box.) Resources may be CRO’s, CPT consultants, IP, Financial or Human resources (regardless of whether they’re consultants or employees.)
Partners are external resources necessary to execute the Activities. You’ve identified the “class of partner” in the Resources box. This lecture talks about specifics – who are they, what deals work with them, how to get them, how to work with them.
Customer Relationships is what we think of as traditional sales and marketing; assembling a SAB, getting the KOL’s, conferences, articles, etc. Customer Relationships answers the question, “How will we create demand and drive it to our channel?”
We think we now have a syllabus that will better fit a Life Science audience. Once the syllabus stops moving around we’ll open source it along with the educators guide this fall.
Lessons Learned
[soundcloud url=”https://api.soundcloud.com/tracks/156404645″ params=”show_artwork=false” height=”66″ iframe=”true” /]
- The Lean LaunchPad class has started to replace the last century’s “how to write a business plan” classes
- The lecture order emphasizes testing the right-side of the canvas first
- That works for almost all markets
- However, for life sciences hypotheses about Intellectual Property, Reimbursement, Regulation and Clinical Trials are critical to test early
- Therefore we created a more effective lecture order for Life Sciences
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Keep Calm and Test the Hypothesis. 2 Minutes to See Why
Posted on June 23, 2014 by steve blank
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Why Lean May Save Your Life – The I-Corps @ NIH
Posted on June 19, 2014 by steve blank
Today the National Institutes of Health announced they are offering my Lean LaunchPad class (I-Corps @ NIH ) to commercialize Life Science.
There may come a day that one of these teams makes a drug, diagnostic or medical device that saves your life.
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Over the last two and a half years the National Science Foundation I-Corps has taught over 300 teams of scientists how to commercialize their technology and how to fail less, increasing their odds for commercial success.
After seeing the process work so well for scientists and engineers in the NSF, we hypothesized that we could increase productivity and stave the capital flight by helping Life Sciences startups build their companies more efficiently.
So last fall we taught 26 life science and health care teams at UCSF in therapeutics, diagnostics and medical devices. 110 researchers and clinicians, and Principal Investigators got out of the lab and hospital, and talked to 2,355 customers, tested 947 hypotheses and invalidated 423 of them. The class had 1,145 engagements with instructors and mentors.
The results from the UCSF Lean LaunchPad Life Science class showed us that the future of commercialization in Life Sciences is Lean – it’s fast, it works and it’s unlike anything else ever done. It’s going to get research from the lab to the bedside cheaper and faster.
Translational Medicine
In life sciences the process of moving commercializing research –moving it from the lab bench to the bedside – is called Translational Medicine.
The traditional model of how to turn scientific discovery into a business has been:
1) make a substantive discovery, 2) write a business plan/grant application, 3) raise funding, 4) execute the plan, 5) reap the financial reward.
For example, in therapeutics the implicit assumption has been that the primary focus of the venture was to validate the biological and clinical hypotheses. (i.e. What buttons does this molecule push in target cells and what happens when these buttons are pushed? What biological pathways respond?) and then when these pathways are impacted, why do we believe it will matter to patients and physicians?
We assumed that for commercial hypotheses (clinical utility, who the customer is, data and quality of data, how reimbursement works, what parts of the product are valuable, roles of partners, etc.) if enough knowledge was gathered through proxies or research a positive outcome could be precomputed. And that with sufficient planning successful commercialization was simply an execution problem. This process built a false sense of certainty, in an environment that is fundamentally uncertain.
We now know the traditional translational medicine model of commercialization is wrong.
The reality is that as you validate the commercial hypotheses (i.e. clinical utility, customer, quality of data, reimbursement, what parts of the product are valuable, roles of CRO’s, and partners, etc.,) you make substantive changes to one or more parts of your initial business model, and this new data affects your biological and clinical hypotheses.
We believe that a much more efficient commercialization process recognizes that 1) there needs to be a separate, parallel path to validate the commercial hypotheses and 2) the answers to the key commercialization questions are outside the lab and cannot be done by proxies. The key members of the team CEO, CTO, Principal investigator, need to be actively engaged talking to customers, partners, regulators, etc.
And that’s just what we’re doing at the National Institutes of Health.
Join the I-Corps @ NIH
Today the National Institutes of Health announced the I-Corps at NIH.
It’s a collaboration with the National Science Foundation (NSF) to develop NIH-specific version of the Innovation-Corps. (Having these two federal research organizations working together is in itself a big deal.) We’re taking the class we taught at UCSF and creating an even better version for the NIH. (I’ll open source the syllabus and teaching guide later this year.)
The National Cancer Institute SBIR Development Center, is leading the pilot, with participation from the SBIR & STTR Programs at the National Heart, Lung and Blood Institute, the National Institute of Neurological Disorders and Stroke, and the National Center for Advancing Translational Sciences.
The class provides real world, hands-on learning on how to reduce commercialization risk in early stage therapeutics, diagnostics and device ventures. We do this by helping teams rapidly:
- define clinical utility now, before spending millions of dollars
- understand the core customers and the sales and marketing process required for initial clinical sales and downstream commercialization
- assess intellectual property and regulatory risk before they design and build
- gather data essential to customer partnerships/collaboration/purchases before doing the science
- identify financing vehicles before you need them
Like my Stanford/Berkeley and NSF classes, the I-Corps @ NIH is a nine-week course. It’s open to NIH SBIR/STTR Phase 1 grantees.
The class is team based. To participate grantees assemble three-member teams that include:
- C-Level Corporate Officer: A high-level company executive with decision-making authority;
- Industry Expert: An individual with a prior business development background in the target industry; and
- Program Director/Principal Investigator (PD/PI): The assigned PD/PI on the SBIR/STTR Phase I award.
Space is limited to 25 of the best teams with NIH Phase 1 grants. Application are due by August 7th (details are here.)
If you’re attending the BIO Conference join our teaching team (me, Karl Handelsman, Todd Morrill and Alan May) at the NIH Booth Wednesday June 25th at 2pm for more details. Or sign up for the webinar on July 2nd here.
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This class takes a village: Michael Weingarten and Andrew Kurtz at the NIH, the teaching team: Karl Handelsman, Todd Morrill and Alan May, Babu DasGupat and Don Millard at the NSF, Erik Lium and Stephanie Marrus at UCSF, Jerry Engel and Abhas Gupta, Errol Arkilic at M34 Capital and our secret supporters; Congressman Dan Lipinski and Tom Kalil and Doug Rand at the OSTP and tons more.
Lessons Learned
- There needs to be a separate, parallel path to validate the commercial hypotheses
- The answers to commercialization questions are outside the lab
- They cannot be done by proxies
- Commercial validation affects biological and clinical hypotheses
Listen to the blog post here
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Hostages Strapped to the Tank: Coastal Commission Stories – Lesson 2
Posted on June 17, 2014 by steve blank
“Never attempt to win by force what can be won by deception.”
Niccolò Machiavelli, The Prince
For six and a half years I served as a public official on the California Coastal Commission.
Since it’s been a year since I resigned, it’s time to tell a few stories about what I learned as a Coastal Commissioner.
Each and every month I learned something new about human nature, deception and greed.
Here’s Lesson 2: Hostages Strapped to the Tank. (see here for Lesson 1.)
Background
The California coast is a panorama of open farm fields and hundreds of miles of undeveloped land. Highway 1 (the Pacific Coast Highway) follows the coast for almost the entire length of the state. The kind of road you see in car ads and movies, it looks like it was built to be driven in a sports car with the top down. The almost 400 mile coast drive from Los Angeles to San Francisco is one of the road trips you need to do before you die. With 39 million people in the state, there’s no rational reason there aren’t condos, hotels, houses, shopping centers and freeways, wall-to-wall for most of the length of our state’s coast (instead of just in Southern California). 
In 1976 the state legislature passed the Coastal Act, creating the California Coastal Commission, which acts as California’s planning commission for all 1,100 miles of the California coast. The Coastal Act saved California from looking like the coast of New Jersey, giving us the most pristine and undeveloped coast in the country — with recreation and access for all.
To achieve this amazing accomplishment, the coastal zone has the strictest zoning and planning requirements in the country.
As a new commissioner I got a very quick education on what developers would do to bypass those requirements. My first lesson was farming for developers. The second lesson was learning that developers would strap hostages on the front of the tank to get a project approved.
How Do We Fix This?
The business model for real estate developers isn’t hard to understand: buy farms and/or ranches then build commercial buildings or houses and sell them off. They make money from the difference between the raw land and net profit on the houses or the commercial buildings. But there’s a lot that has to happen before developers can realize their profits. If they’re building homes, they need to get approvals to rezone and subdivide the property, bring in utilities (water, sewer, electricity, phone, internet), build infrastructure (roads, sidewalks, street lights, etc.), get approvals to build the units, etc. A lot of capital is at play.
At times developers building in the Coastal Zone know that their proposed project violates major provisions of the Coastal Act like building in Environmentally Sensitive Habitat Area (ESHA) or bulldozing Wetlands or attempting to rezone land reserved for farming or open space, blocking coastal views, busting the urban rural boundaries or building a project too large for the site, or lacking public services like insufficient water, or sewers. Some of these projects are such egregious violations of almost every part of city, county and coastal zoning that I wondered, “What on earth are they thinking? This will never be approved.” Part of my education as a commissioner was learning how developers took projects that appeared headed for instant denial and turned them into projects that had a good shot at an approval.
We’re Doing This For Our Community
I soon learned that developers love new soccer fields, new parks, new schools, homes for the disabled, and they generously offer these and other improvements to the local community as part of a package – approve this project and I’ll throw in this benefit.
When I first encountered this, I thought, “Wow what a great deal. The developers are generously helping the community by offering needed amenities and services that the community can’t afford.“
Boy was I dumb.
In these projects the developers calculate that if they add a component to the project that the local community really needs, wants, and most important – can get passionate about – community support might overwhelm local elected officials. So developers promise to build needed soccer fields to get the soccer parents supporting their project or offer to build a new building for the local Boys and Girls club or pay for a long needed school. Then they actively help the community organize an “independent” advocacy group to support and lobby for this project.
In all these cases, the developer’s goal is to move the scrutiny away from the specifics of their development to get all eyes focused on the benefit. To them it’s simply math – if they can’t get a project approved by itself, try throwing in a school or soccer field if it’s still profitable. They get the local community so focused on these extra benefits that no one objects to everything else about the project that’s damaging – not only to their own community but to the rest of 39 million people in the state who share their coast.
Developers calculate that in the face of overwhelming public support for their project, local elected officials will look at a roomful of supporters, remember that the attendees passionate about this project vote at election time, and approve a project in spite of its obvious violations of local and state zoning. However, while local projects in the Coastal Zone typically start by getting city or county approval, if someone appeals the project claiming it violates the Coastal Act, these projects invariably end up in front of the Coastal Commission. As a coastal commissioner, that’s when I got involved.
Our Coastal Commission staff would do a thorough analysis of the entire project (not just the tacked on benefit) and propose their recommendations to us. Then the theater would happen. Developers would bus in the local supporters to fill the Coastal Commission meeting with enthusiastic locals waving signs and passionately extolling the virtue of the soccer field on the bulldozed wetland or conveniently ignoring the wall-to-wall condos that would block coastal access for the other 39 million Californians or the freeway about to destroy a favored surfing spot. The developers hoped the momentum of community support would overwhelm the twelve Coastal Commissioners, six of whom were also local elected city or county officials.
After a while I realized that the worse the project, the more appealing the benefit a developer would offer.
Hostages Strapped to the Tank
I thought I had seen it all until one project came to the Commission on appeal that felt like the developers had strapped hostages onto the front of a tank and dared the county and Coastal Commission to deny the project.
The developers wanted to build 8 office buildings totaling 225,000 square feet (twice the size of an average Wal-Mart) plus a parking lot with 640 spaces, all of this in an area without public services. To get the water the project needed, the developers proposed to convert an agricultural well as its domestic water source and dump part of their wastewater into the public sewer system. And there was more. Traffic from this huge project would fill local roads not designed for this density/development, and this traffic would impact the public’s beach access. Given all this, how did they get unanimous approval from the county’s Board of Supervisors?
It was brilliant. They proposed that after building these eight office buildings, they would build a housing facility for 57 developmentally disabled adults. They had convinced the dedicated, deserving and passionate parents of this group that this project was the only hope these families would ever have to secure housing for their children (neglecting to tell them they had located the housing in a tsunami inundation area.)
Naturally these parents were vociferous advocates for the project. They brought their disabled children to the hearings and did exactly what the developers had hoped – moved the attention from a project that violated local and state zoning onto a small and deserving group of individuals. It was heartbreaking. The developers dared us to shoot the hostages strapped to the front of their tank.
We did.
At the hearing there wasn’t as single commissioner with a dry eye. Yet we unanimously denied the project. The commissioners explained to the parents that while the goal of providing housing for developmentally disabled adults was eminently laudable, the developers had exploited the parents’ pain to get the project approved. We pointed out that the Coastal Commission staff had attempted to negotiate with the developer to reduce the size and scale of the project before the hearing. But they had refused (as some suggested because they were certain that since their strategy had worked to get the county to approve the project, would force the Coastal Commission to roll over as well.) We told the developer we applauded their desire to build housing for the developmental disabled and to come back with a project that met local and state Coastal Act requirements.
While I learned a lot about what someone would do for profit, I hated this lesson.
Lessons Learned
- Developers offer “shiny objects” to distract attention from the rest of their project
- Often, the worse the project, the more appealing the benefit a developer offers
- At times developers dared the Commission to shoot the hostages strapped to the front of their tank
- At times, we did
Listen to the blog post here:
Download the podcast here
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Farming for Developers: Coastal Commission Stories – Lesson 1
Posted on June 10, 2014 by steve blank
“Oh, what a tangled web we weave…when first we practice to deceive.”
Walter Scott, Marmion
Last week I got an email last week from a New York VC asking for advice about building a house in the California Coastal Zone. For six and a half years I served as a public official on the California Coastal Commission.
The call reminded me that it’s been a year since I resigned, and it’s time to tell a few stories of what I learned as a Coastal Commissioner. Each and every month I learned that not everything was how it seemed.
Here’s Lesson 1: Farming for Developers.
Background
The California coast is a panorama of open farm fields and hundreds of miles of undeveloped land. Highway 1 (the Pacific Coast Highway) follows the coast for almost the entire length of the state. The kind of road you see in car ads and movies, it looks like it was built to be driven in a sports car with the top down. The almost 400 mile coast drive from Los Angeles to San Francisco is one of the road trips you need to do before you die.
With 39 million people in the state, there’s no rational reason there aren’t condos, hotels, houses, shopping centers and freeways, wall-to-wall for most of the length of our state’s coast (instead of just in Southern California).
The Coastal Act saved California from looking like the coast of New Jersey.
Almost 40 years ago the people of California passed Proposition 20 – the Coastal Initiative – and in 1976, the state legislature followed with the Coastal Act, which created the California Coastal Commission. Essentially the Coastal Commission acts as California’s planning commission of last resort for all 1,100 miles of the California coast.
Thanks to the Coastal Act and the Coastal Commission, generations of Californians and our visitors enjoy the most pristine and undeveloped coast in the country, with recreation and access for all. It’s an amazing accomplishment.
The downside is that the coastal zone has the strictest zoning and planning requirements in the country.
As a new commissioner I learned quickly what developers would do to bypass those requirements.
A Different Type of Developer
After 30 years in Silicon Valley I thought I knew what a developer was: a software programmer building a web site, app, game, firmware, etc. But as a Coastal Commissioner, I was dealing with a different type of developer – a real estate developer – someone who acquires land and builds housing and commercial buildings.
The business model for real estate developers isn’t hard to understand: buy farms and/or ranches then build commercial buildings or houses and sell them off. Real estate developers make their money off the difference between the raw land and the net profit on the houses or the commercial buildings.
But a lot must happen before they can make money. If they’re building homes, they need to get approvals to rezone and subdivide the property, bring in utilities (water, sewer, electricity, phone, internet); build infrastructure (roads, sidewalks, street lights, etc.), get approvals to build the units, etc. A lot of capital is at play. Naturally if you’re a developer you want to maximize your return on invested capital. The easiest way to do that is to ensure that you can build as many units (apartments, condos, houses, etc.) as you can on the parcel you own.
Absent any zoning or regional planning, each developer will naturally maximize the development density of a parcel while leaving the impacts on traffic, views, water, wildlife, ecosystem, community character for others to worry about. The result is what’s called the tragedy of the commons (individuals acting independently end up depleting shared resources.) An example of this are the wall-to-wall housing developments on the Southern California coast and resulting gridlock on the freeways.
The Coastal Act has tried to protect the remaining parts of the California Coast. The opening section of the Act starts by stating, “…the permanent protection of the state’s natural and scenic resources is a paramount concern to present and future residents of the state and nation.” It follows with, “…it is necessary to protect the ecological balance of the coastal zone and prevent its deterioration and destruction.” One of the ways it protects the coast is that you can’t build on land that has been designated an Environmentally Sensitive Habitat Area (ESHA) or on lands that are Wetlands.
Part of my education as a commissioner was seeing how housing developers attempted to avoid these rules.
Farming for Developers
My first lesson was learning that developers love farmers.
In fact, developers think farms and farmers are the best thing to ever happen to the coast of California. Developers love buying farms. They buy-out family farms for prices that far exceed what the farmers could ever get from selling their crops. And often developers let the farmer stay on the farm, leasing them back the land so they can continue to farm it. Developers even help farmers optimize their output by making sure that they plant multiple crops each year and insisting that each time they plant they till each and every inch of their fields. And the farmers are told to make sure the fields are perfectly level so no water can collect or pond on the fields, regardless of how small.
When I first ran into this I thought, “Wow what a great deal. The developers are helping farmers maximize their yields by making all these improvements to California farming. “
Boy was I dumb.
The developers knew that if the farm fields were to remain fallow, many of them would return to the native wetlands or sensitive habitats that are protected by the Coastal Act and when that happened, developers couldn’t build on them. If enough of the farm would be found to have ESHA or Wetland, it would limit the number of houses that could be built (reducing the value of the project) or might even make the entire project economically unfeasible.
The reality was that the real estate developers could care less about farming or the crops. Tilling every inch of the farm and pouring pesticides on it meant nothing but a single crop could grow. Making it perfectly level meant that no water could pool and start a wetland. Developers were using the farmers to ensure the continued eradication of any Environmentally Sensitive Habitat Area (ESHA) or Wetland.
So the developers keep the farmers plowing the fields as the developers work on changing the zoning and getting approvals, and when they do, the bulldozers show up to start building the condos or houses that have buried Southern California. And the farmers retire.
That’s why developers on the California coast love farming.
Lessons Learned
- The Coastal Act prohibits development in Environmentally Sensitive Habitat Areas (ESHA) or Wetlands
- Existing farms have previously eradicated ESHA or Wetland
- Keeping the farming going while developers get approvals minimizes environmental objections
Listen to the podcast here [soundcloud url=”https://api.soundcloud.com/tracks/154075863″ params=”show_artwork=false” height=”66″ iframe=”true” /]
Download the podcast here
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Pivot – Firing the Plan Not the People. 2 Minutes to See Why.
Posted on June 5, 2014 by steve blank
If you can’t see the video click here
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Filed under: 2 Minute Lessons, Business Model versus Business Plan, Customer Development, Teaching | 3 Comments »