Steve Blank Innovation and Entrepreneurship

Even the Smartest VCs Sometimes Get it Wrong – Bill Gurley and Regulated Markets

Posted on November 7, 2023 by steve blank

Bill Gurley was one of Silicon Valley’s smartest and most successful VCs. He recently gave a talk at the All-In Summit that was really two talks in one. The first part was railing against the consequences of regulatory capture on innovation and a second part, about the consequences of premature government regulation of AI and why the incumbents are all for it. He illustrated his talk with regulatory horror stories in the telecom market, electronic health records, and Covid antigen tests.

Bill’s closing line, “The reason why Silicon Valley is so successful is that it’s so fxxxng far away from Washington” received great applause. Unfortunately, for startups entering a regulated market following this advice this might not be the optimum path.

(You can watch Bill’s entire 24-minute talk here or his thesis summarized in this 7 second clip here. https://youtu.be/HMIyDf3gBoY?feature=shared )

Let’s be clear, rent seekers and regulatory capture strangle innovation in its crib. It’s the antithesis of how founders want to build a business. (And to be fair that was the was the point of the last part of Bill’s presentation.) But entrepreneurs entering regulated markets need to understand how the game is played, how they can play it, what their VC’s should be doing to help them, and how to win.

Regulation
What’s regulatory capture? Why is it bad? And why was Bill’s advice of staying away from Washington flawed for startups?

All businesses have regulations to follow – paying taxes, incorporating the company, complying with financial reporting. And some have to ensure that there are no patents or blocking patents. But regulated markets are different. Regulated marketplaces have significant government regulation to promote and protect (ostensibly) the public interest for the benefit of all citizens. A good example is the regulations the FDA (Food and Drug Administration) have in place for approving new drugs and medical devices.

In a regulated market, the government controls how products and services are allowed to enter the market, what prices may be charged, what features the product/service must have, safety of the product, environmental regulations, labor laws, domestic/foreign content, etc. In the U.S. regulation happens on three levels:

federal laws that are applicable across the country developed by Federal government in Washington, D.C.
state laws that are applicable in one state imposed by state government
local city and county laws come from local government

Federal Regulation
In the U.S. the government has regulatory authority over commerce between the states, foreign trade, and other business activities of national scope. Congress decides what things need to be regulated and passes laws that determine those regulations. Congress often does not include all the details needed to explain how an individual, business, state or local government, or others might follow the law. To make the laws work day-to-day, Congress authorizes government agencies to write the regulations which set the specific requirements about what is legal and what isn’t. The regulatory agencies then oversee these requirements.

In the U.S. startups might run into an alphabet soup of federal regulatory agencies, for example: ATF, CFPB,DEA, DoD, EPA, FAA, FCC, FDA, FDIC, FERC, FTC, OCC, OSHA, SEC. These agencies exist because Congress passed laws.

State Regulation
In addition to federal laws, each State has its own regulatory environment that applies to businesses operating within the state in areas such as land-use, zoning, motor vehicles, state banking, building codes, public utilities, drug laws, etc.

Cities/County Regulation
Finally, local cities and counties may have local laws and regulatory agencies or departments like taxi commissions, zoning laws, public safety, permitting, building codes, sanitation, drug laws, etc.

Incumbents Advantage – Rent Seekers and Regulatory Capture
If you’re a startup entering a regulated market (Telecom, Pharma, Education, Energy, Department of Defense, Intelligence, Health, Fintech, Insurance, Transportation, Agriculture, Gaming, Cannabis, Petrochemicals, Automotive, Air Transportation, Fishing, et al.) you need to know that the game is rigged. And it’s not in your favor.

Incumbents in a regulated a market keep out new, innovative, and disruptive competitors by “gaming the system” in their favor. They do this by either being Rent Seekers and/or by Regulatory Capture. (Bill Gurley’s point.)

Rent seekers are individuals or organizations with successful existing business models who use government regulation and lawsuits to keep out new entrants that might threaten their 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 lobbying to increase their share of an existing market instead of creating new products or markets but create nothing of value.

These barriers to new innovative startups are called economic rent. Examples of economic rent include state automobile franchise laws, taxi medallion laws, limits on charter schools, cable company monopolies, patent trolls, bribery of government officials, corruption, and regulatory capture.

Rent-seeking lobbyists go directly to legislative bodies (Congress, State Legislatures, City Councils) to persuade government officials and their staff to enact laws and regulations in exchange for campaign contributions, appeasing influential voting blocks, or the “revolving door” – offering officials future jobs in the industry they regulated. They use the courts to tie up and exhaust a startup’s limited financial resources. Their lobbyists also work through regulatory bodies like the FCC, SEC, FTC, Public Utility, Taxi, or Insurance Commissions, School Boards, etc.

Regulatory capture is what happens when the very organizations set up to protect the public’s health and safety, or to provide an equal playing field, are taken over by the very people they’re supposed to regulate. These are the examples Bill Gurley were talking about.

Tech Companies Use Regulatory Capture
In my first two decades inside the Silicon Valley bubble we built products people wanted and needed. We competed with other technology companies, and, like Bill Gurley, largely ignored whatever was going on in Washington. We were content Washington didn’t know we existed. Unless you were in life sciences (therapeutics, medical devices, or diagnostics), very little government regulation applied. We ignored Washington and Washington mostly ignored us (defense contractors excepted.)

The tech ecosystem got a rude awakening in May 1998 when the U.S. Justice Department and 20 state Attorneys General brought suit again Microsoft for anticompetitive practices designed to maintain its monopoly in PC operating systems and internet browsers. While tech hadn’t come to Washington, Washington came for the tech industry. Until then no tech company had an organized lobbying organization of significance in DC.

Fast forward 25 years. The tech industry grew up and realized rather than running away from Washington they needed to play the game. Companies like Intuit mastered regulatory capture as a massive advantage while Big Tech (Microsoft, Amazon, Google, Facebook, Oracle, Intuit, Uber et al.) spent $124 million in lobbying and campaign contributions in the 2020 election with 333 registered lobbyists.

Startups have successfully disrupted regulated markets and rent seekers – Uber with local taxi licensing laws (a board Bill Gurley sat on with a ShowTime series highlighting his role), AirBnB with local zoning laws, Tesla with state dealership licensing, SpaceX competing with the Air Force and United Launch Alliance – and in doing so they have built impenetrable moats for their business.

What Do Startups Need to Know?
There’s nothing magical about dealing with regulated markets. However, every regulated market has its own rules, dynamics, language, players, politics, etc. And they are all very different from the business-to-consumer or business-to-business markets most founders and their investors are familiar with.

How do you know you’re in a regulated market? It’s simple– ask yourself three questions:

Can I do anything I want or are there laws and regulations that might stop me or slow me down?
Are there incumbents who will view us as a threat to the status quo? Can they use laws and regulations to impede our growth?
Do you understand how the regulatory process works? For example, do you just fill out an online form and pay a $50 fee with your credit card and get a permit? Or do you need to spend millions of dollars and years running clinical trials to get FDA clearance and approval? And are these approvals good in every state? In every country? What do you need to do to sell worldwide?

What Do I Need to Do?
The first step is to understand what you’re up against. Who are the incumbents, who do they influence, how much are they spending on influence, who are their lobbyists, and what are their messages? And most importantly, how are they going to stop you from scaling?

Next, figure who are the other stakeholders, saboteurs, rent seekers, influencers, bureaucrats, politicians, and regulators. As you get out of the building and start talking to people you’ll discover more and more players. You’ll discover that the interests of your product’s end user versus a regulator versus an advocacy group, key opinion leaders or a politician, are radically different. For you to succeed you need to understand all of them.

Start diagraming out the relationships of all the customer segments. Who influences who? How do they interconnect? What laws and regulations are in your way for deployment and scale? How powerful are each of the players? For the politicians, what are their public positions versus actual votes and performance. Follow the money by using opensecrets.org. If an elected official’s major donor is organization x, you’re not going to be able to convince them with a cogent argument. And most importantly, start asking “who are the best lobbyists/advisors in this market?”

The book Regulatory Hacking calls this diagram the Power Map. As an example, this is a diagram of the multiple beneficiaries and stakeholders that a software company developing math software for middle school students has to navigate. Your diagram may be more complex. There is no possible way you can draw this on day one of your startup. You’ll discover these players as you get out of the building and start filling out your value proposition canvases.

While this sounds complicated, entering a regulated market should be a strategy not a disconnected set of tactics. (Or worse obliviousness.) You need a lobbying/government relations strategy from day one.

Draw your strategy diagram (see figure below) and share it with your board. What regulatory issues need to be solved? In what order? For example, do you beg for forgiveness or ask for permission? How do you get regulators who don’t see a need to change to move? How do you get your early customers to advocate on your behalf? (The books The Fixer and Regulatory Hacking give examples of regulatory pitfalls, problems and suggested solutions.)

Most early stage startups don’t have the regulatory domain expertise in-house. Get outside advice at each step. Hire/advisors from the inside industry but use them to make you smarter not just to outsource the work. Having a meeting or two with a congressman or contributing to their campaign might get you a return call, but only sustained engagement (via money, influence, and an on-the-ground presence in D.C.) will move the needle. Eventually you’ll need to build an in-house team to manage regulatory affairs.

Choose VCs who have experience in operating in regulated markets – not those who hope it stays away. Have them tell you how they helped other companies in their portfolio succeed, pitfalls to avoid, and the lobbying resources they can bring to bear. You and your board need to be in sync about the costs and risks of getting into a street fight entering these markets. (Strategic choices include asking for permission versus forgiveness, public versus private battles. Tactical activities can include influencing key opinion leaders, political donations, advocacy groups, and grassroots and grasstops campaigns, etc.)

Finally, as an innovation ecosystem (VCs, their limited partners, and startups) we need to do a better job in insisting in transparency in government, calling out rent seekers and regulators who no longer regulate, and try to keep government from premature regulation of new innovation. For the majority of regulators and policymakers who want to make the system better, we can help shape policy by educating them on why the products/changes we are proposing make the world a better place.

But startups? They need to understand the game and work the system.

Post note. Ironically the best example of premature government regulation was AT&T and U.S. telephone service. In 1921 AT&T argued that telephone service was a natural monopoly, and that competition was inefficient. The government agreed and land line communications became a government sanctioned monopoly for the next 63 years. Innovation in telecom outside of AT&T died and the industry could only innovate as fast as AT&T approved. A possible proxy for why the incumbent AI providers went to Congress. They want to lock-in their lead.

Lessons Learned

If you’re in regulated market, often the game is rigged by incumbents

Understand Rent Seeking and Regulatory Capture

You need a lobbying/government relations strategy from day one

Choose VCs who understand how to play the game not those who hope it stays away

The CEO needs to get out of the building to understand the regulatory ecosystem

CEO and board need to be in sync about the learning and strategy

Hire initial lobbyists (but learn from them, not just outsource to them)

As the company gets larger staff an internal public affairs group to manage the lobbying effort

If you figure out the regulatory game, it can be your defensible moat

Filed under: Corporate/Gov't Innovation | 2 Comments »

Leaving Government for the Private Sector – Part 2

Posted on October 23, 2023 by steve blank

Laura Thomas is a former CIA operations officer. Reading how she moved in 2021 from CIA ops to a quantum technology company offered insightful career transition advice for those leaving her agency. Most of her lessons were applicable to any government employee venturing out to the private sector.

Below is the second of her three-part series. Read part one here.

Before leaving government service one of my biggest challenges was to understand how my skill as a Case Officer would translate into a job in the commercial world. I had to spend a lot of time learning a new language and new job descriptions. Here’s what I learned.

What would you like to do/can do? Some commercial company roles:

Business Development or “BD” roles: Case Officers are well suited for business development (BD) roles as its akin to first half of the CIA recruitment cycle. In a business development role you’re out shaping the perception of your company in the market (networking), determining leads, and contacting leads. The larger the company, the more they’ll separate out business development and sales, with business development focused primarily on lead generation and sales focused on sealing the actual sale of the product or service.

Sales roles: The sales cycle is similar to the recruitment cycle of a source. At a small company, you have the ability to do the whole sales cycle, which integrates strategy, business development, sales, and customer success: figure out what you should sell, who you should sell it to, how to get in touch with them, actually get in touch with them, sell it, keep selling to them and make sure they’re happy (customer success), and at some point, decide whether to move on to better sales targets, or convince your company they need to be selling something different. At a large company, sales usually means someone else has done the broad shaping for a potential customer. You just have to go in and work through the mechanics of selling them on your product or service.

Customer Success roles: This is akin to handling a source. You make sure the customer is happy and keeps buying, preferably more.

Security roles: Some ex-Agency people gravitate to roles in security. I discovered that while I know a lot about tradecraft-related security and how to stay alive for the first minutes of an ambush, I know little about building security and computer systems security. Some companies will see your CIA background and confuse it with roles that are more akin to FBI or law enforcement. If you worked in an actual cybersecurity or security role, you can learn it and integrate well into those teams.

Trust and Safety roles, Threat and Business Intelligence roles: If you’ve been a targeter and/or an analyst these might be good fits. The role broadly is to protect a company and its people/users (or multiple companies) by tracking bad actors and threats. In large companies these roles report to a security division (however there are entire companies just providing Threat and Business Intelligence).

Government Affairs/Legislative Affairs roles: Large companies pay to have people represent them on Capitol Hill and advocate for their interests. If you have significant experience engaging with and briefing the Hill, this is a possibility, however you’ll be competing against staffers rotating off committees who are actually much better equipped than you as far as networking and know-how. You may be able to join a larger company’s government affairs team at a more junior to mid-level, and you’ll probably find your skills most relevant to a company that works on national security-related issues.

At first many start-ups hire a lobbying firm. You may be able to step in once they want to transition into an in-house role for this, but keep in mind that they’re looking for the Capitol Hill contacts you already have, as well as your ability to work the legislative process, not just your briefing or networking skills.

Strategy and Operations roles: These roles help make sure vision, resources (budgets and people), and the market opportunity are aligned. Working closely with the CEO or CFO, they help figure out what to do to make things go right, and what to do when things go wrong. The smaller the company, the bigger your chance at a role like this.

A Chief of Staff role, for example, is largely a strategy role, but is heavily dependent on the needs of the CEO/company. In my case, at Infleqtion I’m the person who tells our CEO what he needs to hear, not necessarily what he wants to hear. I also serve as an executive advisor – from product strategy to setting business milestones to working with investors. I also work closely with all members of the executive team, the Board of Directors, and Advisory Board. I think this role is ideal for a former Case Officer, but I’m obviously biased.

Larger companies hiring a Chief of Staff often look for someone who has an MBA, experience with one of the big consulting firms, or experience doing the job already.

Entrepreneur: A successful CIA case officer must be able to operate amid ambiguity and make judgment calls that require strong second- and third-order thinking. Achievement-focused and good storytellers, they know how to figure things out, “read the room,” and assess and mitigate risk. Most people believe case officers and entrepreneurs are big risk takers, when, in fact, they’re risk mitigators.

If you find an A-player CIA officer jumping into a founder role mid-way in their career (or decide to start something yourself,) they’ll probably go on to do great things. They have enough confidence in themselves to leave without the safety net of a future pension as well as the energy, ambition, and know-how to navigate uncertainty. The same Emotional Quotient and approach that attracts investors will also attract excellent employees.

Venture Capitalist: An early-stage VC requires some of the same skills as a Case Officer – spotting, assessing, developing, recruiting, and handling founders building a company amid an uncertain operating environment that will bring a heavy return on investment. (However, many VCs have also accrued years/decades as domain experts in the technologies/and or industries they invest in.) Being a successful VC and successful case officer both involve some levels of luck and timing misattributed to skill. The biggest difference is in the VC world, nobody is going to die.

If you’re a Retiree leaving with a full pension – you have different choices than a “job.” You can:

consult
sit on a company Advisory Board or Board of Directors
serve as a senior executive at a small company (you’ll be expected to actually work, not pontificate and delegate) or mid- to senior level at a larger company (you might just be a face)
get hired by Wall Street/Private Equity/VC firms assuming you’re senior enough and have enough New York or Silicon Valley connections

For 2-4, you’re generally being hired for your name and the introductions you can make assuming you’re within the top 15 of leadership.

Boards: The term “board” can mean two very different things in the commercial world – an Advisory Board versus a Board of Directors. An Advisory Board provides advice. It has no legal role in the company. Often companies will put you on their advisory board just to use your name and image (and not really want your advice). Every company can organize and compensate its advisory board any way it likes. Some Advisory Boards meet once a quarter, others once a year. Advisory Board members may field weekly to monthly emails and calls from the company executive team to provide feedback on strategy and positioning and make introductions. Advisory Board members are often paid in a balance of equity (stock options) and cash (“cash” is the industry term for money wired to your bank account).

A Board of Directors has a formal and legal role. It provides governance and financial oversight to the company. They can vote to hire and fire the CEO. CEOs seek their advice (and often must seek their formal approval) for major strategic decisions such as acquisitions, major budget changes, hiring of C-level executives, etc.) Formal Board positions are harder to come by. If you’re an A-player from the senior-most ranks, consider joining a private company board if you’re aligned with their mission and team. They need you.

For me, personally: People in the senior ranks at startups usually call themselves operators. Obviously, that’s a different definition of the term. I knew I wanted to stay/go into an operator role because that’s where the business learning I sought would happen. I didn’t want to have to sell back into the intelligence community, because I didn’t want to leverage my contacts so tactically, but plenty of people do it (and we need good people to do it. We all know how badly the government needs commercial technology solutions). From the start, my job was closest to a business development role. Because it was a small company and I was going from top-down with the CEO rather than responding to a job advertisement, I was able to craft my function and initial title as, “Senior Director of National Security Solutions.” I began writing unsolicited strategy docs for the CEO. This ultimately led me into a strategy role, which led me into a strategy and fundraising role. I also took an advisory role with another startup working on national security technology, QuSecure.

Where should you go? Big company or small? Choose big for stability and higher salaries. Choose small for learning, growth, and impact. In large companies, they usually want you in a narrow and specific role. However, you will have more roles you could move into if the first one isn’t a great fit. If you join a big company, assuming it’s public, you’ll get stock which immediately can translate into financial gains assuming the company performs well. The salaries are almost always higher. You can get rich in a big company (at least by our humble government standards), but rarely wealthy based on returns from that company alone.

At small companies, you wear many hats at once. I wanted to understand the daily challenges a company faced at the senior levels in trying to push a new technology in government markets and commercial markets, and how capital flows impacted all of this. However, a bigger company is more defined in terms of a 9-to-5. I work just as much now as I did in the field. And though I work from an office most days, I also work from home, which affords a lot of flexibility because I’m not chained to a SCIF.

You can get wealthy with the right startup, but many startups fail, so it’s a long shot. Of course, “wealth” is subjective. More than money, most of us crave impact. Both are possible on the outside.

How should you think about and mitigate risk if joining a startup? Know your appetite for risk. If you’re really bold, join an early-stage company (seed stage, Series A), but have conviction about the team. You may need to cover some portion of your own salary for a year. If you need to make a salary equivalent to what you make in government, target startups that have closed a Series B round within the last few months. If you’ve received a formal offer from a startup, ask how much runway (months of cash left) they have. If they won’t discuss any aspects of runway or value of the equity package they’re offering, look elsewhere.

Look before you leap. Talk with multiple employees at the company. Try to talk with an investor in the company. Research their Board of Directors and Advisory Board members and contact some of them. Look for people on LinkedIn who used to work at the company, reach out to them and ask why they left.

Being part of a “failed” startup is not a badge of dishonor. Most startups fail, especially those in the early stages. So long as you and the company weren’t operating unethically and illegally, it’s not a red flag on your resume. In fact, this sort of experience matters far more to the next prospective tech startup employer than the decade+ that you put in at the Agency.

Action:

A) If you’re an A-player, stay in government.
B) If you’re an A-player and leave, do great things on the outside and return to government service at some point.

Coming up next:

Part III – title, compensation (salary + equity + bonuses) and resources you can use.

Read the rest of Laura’s blogs at https://www.lauraethomas.com/

Filed under: Corporate/Gov't Innovation | Leave a comment »

Leaving Government for the Private Sector – Part 1

Posted on October 10, 2023 by steve blank

Laura Thomas is a former CIA operations officer. Reading how she moved in 2021 from CIA ops into a quantum technology company offered insightful career transition advice for those leaving her agency. Most of her lessons were applicable to any government employee venturing out to the private sector.
Below is the first of her three-part series.

—-

At least a few times a month, people looking to jump ask about my transition, which has led to me consolidating my answers below. To be up front, some of what I write will be controversial and all of it is biased. Due to length, I’ve broken it up into a three-part series.

Is it really a big jump to the private sector? It wasn’t a big jump. At the Agency, 85% of my time was spent navigating bureaucracy and equities, arguing for resources and permission for operations, and dealing with the bottom rung of employees, all while making decisions with little data or data overload. Only 15% of my time was doing the more exciting operations. Though that 15% – along with the camaraderie of some of my colleagues – made the work deeply meaningful.

Industry is similar. Human nature is human nature, and I deal with many of the same challenges and pull many of the same levers of satisfaction. The difference is my decisions now aren’t life or death.

Another large difference is the greater level of autonomy I now have. Making decisions on the fly in operations is an extreme example of autonomy, of course, but there is always a back-end overhead. Depending on company culture, decision-making can be driven dramatically down with less overhead. As an example, I can make direct recommendations to Congress with no oversight, no internal reporting requirements, and with the trust of the CEO and Board.

Do you miss it? Yes. Nothing beats the rush of bumping a target who agrees to meet with you again or landing in a foreign country for the first time. I no longer know the stories behind the headlines, and I’m not the person making those stories happen. Aside from close friends, I am now treated as an “outsider” by former colleagues.

Fortunately, I still work with smart people solving hard problems every day. And there is still meaning in what I do. Raising tens of millions of dollars from investors to advance a technology faster than the Chinese Communist Party uses the same skillset. Learning how M&A deals are structured gives me the same thrill as first learning the mechanics of a surveillance detection route. It’s the excitement of being a beginner again, but one with deep and profound experiences, which blunts the downs and enhances the ups that you will face post-Agency.

Today, I get to move our national security mission in emerging technologies farther and faster in ways that I could not in government. And while there is some level of self-justification in these statements, there is nonlinearity in industry. You can move at exponential speed.

How do you transfer your old skills to your current role? Driving decisions, organizational change, and operations in a deep tech company presents many of the same challenges and opportunities as my time in government. Leading and managing people amid uncertainty, high degrees of change, and making decisions remain my day-to-day functions. My current role as a Chief of Staff is in many ways like a DCOS (deputy chief of station) or a traditional Chief of Staff in government. I work behind the scenes, and sometimes out front, to shape our company vision, strategy and then execute, measure, and refine. (Rather than giving away bags of cash in my old job, I now ask for money from investors.)

Relationship dynamics are the same, minus the burden of extreme secrecy. All the things that most of the outside world doesn’t understand as being critical to a handler-asset relationship are just as critical to relationships in industry. Judgment remains paramount.

In the Agency I dealt with a few difficult personalities focused on empire-building and metrics rather than running sound operations. You likely will still deal with this in industry, though there are far fewer layers and entrenched interests to deal with. Knowing how to navigate various stakeholders and interests, avoid landmines, and bring people together is an extremely useful skill in industry. If you’ve been a “doer” who knows how to communicate, work, and gain buy-in across an enterprise that is geographically dispersed, as well as with and against external third parties who are frenemies (or outright hostile), this will serve you well in industry. Talk about it when you’re seeking jobs and interviewing.

Did you make any resume missteps? Most often your resume is not what will get you a job, and submitting one to a recruiter or resume bank is not the right move. Odds are your resume is almost certainly written in government-speak, and probably more terrible than you realize. It likely talks about all the jobs you held (to the degree you can share) and the dates and maybe the general locations but says nothing about what you actually accomplished or how it specifically relates to industry. You probably won’t even get beyond the AI filter.

Having a resume that says you served in country X and wrote reports that went to policymakers, and “the President,” might get you a curiosity interview, but won’t get you a job. Unless you can translate how your skills provide commercial value, you won’t get hired.

For starters, first figure out which industry you want to work in, narrow it down, and work hard to get intros at the senior levels to a handful of companies (Board of Directors member, Advisory Board member, member of the C-suite (CEO, CTO, CFO, etc), and/or investor.) You have to do a lot of networking to create your list and build your network. Find a way to meet and captivate them with a story of what you did, and how your skills can transfer this to industry and add value to their company.

An early learning point for me came as I was speaking with a prospective VC about a job. He flat-out told me he didn’t understand my value to the company. He asked point blank, “How much money did you net the U.S. Government over your career, what exactly did you do in order to get those results, and how would you bring me those same returns?”

You will get asked a question like this.

My suggestion is to say something along these lines: “It’s exponentially harder to be hired by the Agency than it is to get into Harvard, and not only was I hired based on an assessment of my judgment and the ability to operate in ambiguous situations, I then was trained to do just that, and then did it for years.

I was entrusted to create and carry out some of the most sensitive and most important missions that the U.S. Government conducts, often with little direction. Not only did I have to plan and do them, I had to do so in secret, with lives on the line, which is hard to put a price tag on.

You can give me your toughest problem, and I will figure out how to solve it in record time with buy-in from those whom you rarely get buy-in, and position you for multiple shots on goal for future opportunities because I will have your company and sector wired. I can do for you what I did for our country: evaluate opportunity, mitigate risk, and make quick and smart decisions that attack problems differently than a typical insider would. I’ll turn my salary into millions of dollars in returns or investments within two years – not singlehandedly – but in a cooperative way that leverages many parts of the company. We’ll row in unison and we’ll row in the right direction.”

How did you get your current job? I networked nonstop and ran a full targeting campaign for multiple companies to get to their CEOs. I didn’t have a resume when I was looking for jobs. I had to find senior people who had left the agency who would vouch for me.

For my current company Infleqtion, I was introduced to a former senior Intelligence Community official who previously served on a board with the CEO, who made an introduction. When we met I asked the CEO his challenges and outlined how I might be able to help. Five months later, the CEO called and said he may have a job for me and invited me to visit and speak with others in the company for their input. I received an offer shortly thereafter.

Meanwhile, three years before I left the Agency I had done a cold outreach on LinkedIn to the person I suspected was the hiring manager for a job advertisement for a company that I liked. The person told me they wanted someone with more business experience for the role, but then came calling three years later when another role opened that they thought would be a good fit. Ultimately, I met each layer up in that company including the CEO.

This all came in handy when negotiating salary, title, and function. From the many, many hours of networking hustle, I received two job offers, which happened in parallel, and I negotiated around the same title and compensation levels. Throughout the entire process, I forwarded them relevant articles and commentary on opportunities to demonstrate my value. Ultimately, I chose Infleqtion because of its mission, its people, and its reputation amid US Government circles.

Action: A) If you’re an A-player, stay in government. B) If you’re an A-player and leave, do great things on the outside and return to government service at some point.

Coming up next:

• Part II – what are the criteria for choosing your next role, the most common types of business roles that formers go into, and how to think about big vs small company risks and current markets.

• Part III – title, compensation (salary + equity + bonuses) and resources you can use.

Read the rest of Laura’s blogs at https://www.lauraethomas.com/

Filed under: Family/Career/Culture, National Security | Leave a comment »

Profound Beliefs

Posted on September 5, 2023 by steve blank

This post previously appeared in EIX.

In the early stages of a startup your hypotheses about all the parts of your business model are your profound beliefs. Think of profound beliefs as “strong opinions loosely held.”

You can’t be an effective founder or in the C-suite of a startup if you don’t hold any.

Here’s how I learned why they were critical to successful customer development.

I was an aggressive, young and a very tactical VP of marketing at Ardent, a supercomputer company – who really hadn’t a clue about the relationship between profound beliefs, customer discovery and strategy.

One day the CEO called me into his office and asked, “Steve I’ve been thinking about this as our strategy going forward. What do you think?” And he proceeded to lay out a fairly complex and innovative sales and marketing strategy for our next 18 months. “Yeah, that sounds great,” I said. He nodded and then offered up, “Well what do you think of this other strategy?” I listened intently as he spun an equally complex alternative strategy. “Can you pull both of these off?” he asked looking right at me. By the angelic look on his face I should have known that I was being set up. I replied naively, “Sure, I’ll get right on it.”

Ambushed
Decades later I still remember what happened next. All of a sudden the air temperature in the room dropped by about 40 degrees. Out of nowhere the CEO started screaming at me, “You stupid x?!x. These strategies are mutually exclusive. Executing both of them would put us out of business. You don’t have a clue about what the purpose of marketing is because all you are doing is giving engineering a list of feature requests and executing a series of tasks like they’re like a big To Do list. Without understanding why you’re doing them, you’re dangerous as the VP of Marketing, in fact you’re just a glorified head of marketing communications. You have no profound beliefs.”

I left in a daze, angry and confused. There was no doubt my boss was a jerk, but I didn’t understand the point. I was a great marketer. I was getting feedback from customers, and I’d pass on every list of what customers wanted to engineering and tell them that’s the features our customers needed. I could implement any marketing plan handed to me regardless of how complex. In fact I was implementing three different ones. Oh…hmm… perhaps I was missing something.

I was executing a lot of marketing “things” but why was I doing them? The CEO was right. I had approached my activities as simply a task-list to get through. With my tail between my legs I was left to ponder: What was the function of marketing in a startup? And more importantly, what was a profound belief and why was it important?

Hypotheses about Your Business Model = Your Profound Beliefs Loosely Held
Your hypotheses about all the parts of your business model are your profound beliefs. Think of them as strong opinions loosely held. You can’t be an effective founder or in the C-suite if you don’t have any.

The whole role of customer discovery and validation outside your building is to inform your profound beliefs. By inform I mean use the evidence you gather outside the building to either validate your beliefs/hypotheses, invalidate or modify them. Specifically, what beliefs and hypotheses? Start with those around product/market fit – who are your customers and what features do they want? Who are the payers? Then march through the rest of the business model. What price will they pay? What role do regulators pay? Etc. The best validation you can get is an order. (BTW, if you’re creating a new market, it’s even OK to ignore customer feedback but you have to be able to articulate why.)

The reality of a startup is that that on day one most of your beliefs/hypotheses are likely wrong. However, you will be informed by those experiments outside the building, and data from potential customers, partners, regulators, et al will modify your vision over time.

It’s helpful to diagram the consequences between hypotheses/ beliefs and customer discovery. (See the diagram)

If you have no beliefs and haven’t gotten out of the building to gather evidence, then your role inside a new venture is neutral. You act as a tactical implementer as you add no insight/or value to product development.

If you’ve gotten out of the building to gather evidence but have no profound beliefs to guide your inquiries, then your role inside a new venture is negative. You’ll collect a laundry-list of customer feature requests and deliver them to product development, without any insight. This is essentially a denial of service attack on engineering’s time. (I was mostly operating in this box when I got chewed out by our CEO.)

The biggest drag on a startup is those who have strong beliefs but haven’t gotten out of the building to gather evidence. Meetings become opinion contests and those with the loudest voices (or worse “I’m the CEO and my opinion matters more than your facts”) dominate planning and strategy. (They may be right, but Twitter/X is an example where Elon is in the box on the bottom right of the diagram. )

The winning combination is strong beliefs that are validated or modified by evidence gathered outside the building. These are “strong opinions loosely held.”

Strategy is Not a To Do List, It Drives a To Do List
It took me awhile, but I began to realize that the strategic part of my job was to recognize that (in today’s jargon) we were still searching for a scalable and repeatable business model. Therefore my job was to:

Articulate the founding team’s strong beliefs and hypotheses about our business model
Do an internal check-in to see if a) the founders were aligned and b) if I agreed with them
Get out of the building and test our strong beliefs and hypotheses about who were potential customers, what problems they had and what their needs were
Test product development’s/engineering’s beliefs about customer needs with customer feedback
When we found product/market fit, marketing’s job was to put together a strategy/plan for marketing and sales. That should be easy. If we did enough discovery customers would have told us what features were important to them, how we compare to competitors, how we should set prices, and how to best sell to them

Once I understood the strategy, the tactical marketing To Do list (website, branding, pr, tradeshows, white papers, data sheets) became clear. It allowed me to prioritize what I did, when I did it and instantly understand what would be mutually exclusive.

Lessons Learned

Profound beliefs are your hypotheses about all the parts of your business model

No profound beliefs but lots of customer discovery ends up as a feature list collection which is detrimental to product development

Profound beliefs but no customer discovery ends up as opinion contests and those with the loudest voices dominate

The winning combination is strong beliefs that are validated or modified by evidence gathered outside the buildingThese are “strong opinions loosely held.”

Filed under: Customer Development | 6 Comments »

Before there was Oppenheimer there was Vannevar Bush

Posted on August 29, 2023 by steve blank

I just saw the movie Oppenheimer. A wonderful movie on multiple levels.

But the Atomic Bomb story that starts at Los Alamos with Oppenheimer and General Grove misses the fact that from mid-1940 to mid-1942 it was Vannevar Bush (and his number 2, James Conant, the president of Harvard) who ran the U.S. atomic bomb program and laid the groundwork that made the Manhattan Project possible.

Here’s the story.

During World War II, the combatants (Germany, Britain, U.S. Japan, Italy, and the Soviet Union) made strategic decisions about what types of weapons to build (tanks, airplanes, ships, submarines, artillery, rockets), what was the right mix (aircraft carriers, fighter planes, bombers, light/ medium/ heavy tanks, etc.) and how many to build.

But only one country – the U.S. — succeeded in building nuclear reactors and nuclear weapons during the war, moving from atomic theory and lab experiments to actually deploying nuclear weapons in a remarkable 3 years.

Three reasons unique to the U.S. made this possible:

Émigré and U.S. physicists who feared that the Nazis would have an atomic bomb led to passionate advocacy before the government became involved.
A Presidential Science Advisor who created a civilian organization for building advanced weapons systems, funded and coordinated atomic research, then convinced the president to authorize an atomic bomb program and order the Army build it.
The commitment of U.S. industrial capacity and manpower to the atomic bomb program as the No. 1 national priority.

The Atom Splits
In December 1938 scientists in Nazi Germany reported a new discovery – that the Uranium atom split (fissioned) when it hit with neutrons. Other scientists calculated that splitting the uranium atom released an enormous amount of energy.

Fear and Einstein
Once it became clear that in theory a single bomb with enormous destructive potential was possible, it’s hard to understate the existential dread, fear, and outright panic of U.S. and British emigre physicists – many of them Jewish refugees who had fled Germany and occupied Europe. In the 1920s and ‘30s, Germany was the world center of advanced physics and the home of many first-class scientists. After seeing firsthand the terror of Nazi conquest, the U.S. and British understood all too well what an atomic bomb in the hands of the Nazis would mean. They assumed that German scientists had the know-how and capacity to build an atomic bomb. This was so concerning that physicists convinced Albert Einstein in August 1939 to write to President Roosevelt pointing out the potential of an atomic weapon and the risk of the bomb in German hands.

Motivated by fear of a Nazi atomic bomb, for the next two years scientists in the U.S. lobbied, pushed and worked at a frantic speed to get the government engaged, believing they were in a race with Nazi Germany to build a bomb.

After Einstein’s letter, Roosevelt appointed an Advisory Committee on Uranium. In early 1940 the Committee recommended that the government fund limited research on Uranium isotope separation. It spent $6,000.

Vannevar Bush Takes Over – National Defense Research Committee (NRDC)
European émigré physicists (Einstein, Fermi, Szilard, and Teller) and Ernest Lawrence at Berkeley were frustrated at the pace the Advisory Committee on Uranium was moving. As theorists, they thought it was clear an atomic bomb could be built. They wanted the U.S. government to aggressively fund atomic research, so that the U.S. could build an atomic bomb before the Germans had one.

They weren’t alone in feeling frustrated about the U.S. approach to advanced weapons, not just atomic bombs.

In June 1940 Vannevar Bush, ex-MIT dean of engineering; and a group of the country’s top science and research administrators (Harvard President James Conant, Bell Labs President and head of the National Academy of Sciences Frank Jewett, and Richard Tolman Caltech Dean) all felt that there was a huge disconnect. The U.S. military had little idea of what science could provide in the event of war, and scientists were wholly in the dark as to what the military needed. As a result, they believed the U.S. was woefully unprepared and ill-equipped for a war driven by technology.

This group engineered a massive end run around the existing Army and Navy Research and Development labs. Bush and others believed that advanced weapons could be created better and faster if they could be designed by civilian scientists and engineers in universities and companies.

The scientists drafted a one-page plan for a National Defense Research Committee (NDRC). The NDRC would look for new technologies that the military labs weren’t working on (radar, proximity fuses, and anti-submarine warfare. (At first, atomic weapons weren’t even on their list.)

in June 1940 Bush got Roosevelt’s approval for the NDRC. In a masterful bureaucratic sleight of hand the NDRC sat in the newly created Executive Office of the President (EOP), where it got its funding and reported directly to the president. This meant that the NDRC didn’t need legislation or a presidential executive order. More importantly it could operate without congressional or military oversight.

Roosevelt’s decision gave the United States an 18-month head start for employing science in the war effort.

The NRDC was divided into five divisions and one committee, each run by a civilian director and each having a number of sections. (see diagram below.)

Bush became chairman of the NDRC and the first U.S. Presidential Science Advisor systematically applying science to develop advanced weapons. The U.S., alone among all the Axis powers and Allied nations, now had a science advisor who reported directly to the president and had the charter and budget to fund advanced weapon systems research – outside the confines of the Army or Navy.

NRDC was run by science administrators, who had managed university researchers as well as complex research and applied engineering projects science before. They took input from theorists, experimental physicists, and industrial contractors, and were able to weigh the advice they were receiving. They understood the risks, scale and resources needed to turn blackboard theory to deployed weapons. Equally important, they weren’t afraid to make multiple bets on a promising technology nor were they afraid to kill projects that seemed like dead ends for the war effort.

200+ contracts
Prior to mid 1940 research in U.S. universities was funded by private foundations or companies. There was no government funding. The NRDC changed that. With a budget of $10,000,000 to fund research proposed by the five section chairmen, the NDRC funded 200+ contracts for research in radar, physics, optics, chemical engineering, and atomic fission.

For the first time ever, U.S. university researchers were receiving funding from the U.S. government. (It would never stop.)

The Uranium Committee
In addition to the five NRDC divisions working on conventional weapons, the NRDC took over the moribund standalone Uranium Committee and made it a scientific advisory board reporting directly to Bush. The goal was to understand whether the theory of an atomic weapon could be turned into a practical weapon. Now the NRDC could directly fund research scientists to investigate ways to separate for U-235 to make a bomb.

What Didn’t Work at the NRDC?
After a year, it was clear to Bush that while the NDRC was funding advanced research, the military wasn’t integrating those inventions into weapons. The NRDC had no authority to build and acquire weapons. Bush decided what he needed was a way to bypass traditional Army and Navy procurement processes and get those advanced weapons built.

Read the sidebars for background.

The Office of Scientific Research and Development Stands Up
In May 1941 Bush went back to President Roosevelt, this time with a more audacious request: Turn NRDC into an organization that not only funded research but built prototypes of new advanced weapons and had the budget and authority to write contracts to industry to build these weapons at scale. In June 1941 Roosevelt agreed and signed the Executive Order creating the Office of Scientific Research and Development (OSRD). (It’s worth reading the Executive Order here to see the extraordinary authority he gave OSRD.)

OSRD expanded the National Defense Research Committee’s (NDRC) original five divisions into 19 weapons divisions, five research committees and a medical portfolio. Each division managed a broad portfolio of projects from research to production, and deployment. Its organization chart is shown below.

These divisions spearheaded the development of an impressive array of advanced weapons including radar, rockets, sonar, the proximity fuse, Napalm, the Bazooka and new drugs such as penicillin and cures for malaria.

The OSRD was a radical experiment. Instead of the military controlling weapons development Bush was now running an organization where civilian scientists designed and built advanced weapons systems. Nearly 10,000 scientists and engineers received draft deferments to work in these labs.

As a harbinger of much bigger things, the NRDC uranium committee was enlarged and renamed the S-1 Section on Uranium.

Throughout the next year the pace of atomic research picked up. And Bush’s involvement in launching the U.S. nuclear weapons program would grow larger.

By the middle of 1941 Bush was beginning to believe that building an atomic bomb was possible. But he felt he did not have enough evidence to suggest to the president that the country commit to the massive engineering effort to build the bomb.

Then the MAUD report from the British arrived.

The British Nuclear Weapons Program codenamed “Tube Alloys” and the MAUD Report

Meanwhile in the UK, British nuclear physicists had not only concluded that building an atomic bomb was feasible, but they had calculated the size of the industrial effort needed.In March 1940 scientists had told UK Prime Minister Winston Churchill that nuclear weapons could be built.

In June 1940 the UK formed the MAUD Committee to study the possibility of developing a nuclear weapon. A year later they had their answer: the July 1941 the MAUD Committee report, “Use of Uranium for a Bomb,” said that it was possible to build a bomb from uranium using gaseous diffusion on a massive scale to produce uranium-235. It kick-started the UK’s own nuclear weapons program called Tube Alloys. (Read the MAUD report here.)

They delivered their report to Vannevar Bush in July 1941. And it changed everything.

Bush is Convinced by the MAUD Report
The MAUD Report finally pushed Bush over the edge. The British report showed how it was possible to build an atomic bomb. The fact that the British were independently saying what passionate advocates like Lawrence, Fermi, et al were saying convinced Bush that an atomic bomb program was worth investing in at the scale needed.

For a short period of time in 1941 the UK was ahead of the U.S. in thinking about how to weaponize uranium, but British officials dithered on approaching the U.S. for a full nuclear partnership with the U.S. By mid 1942, when the British realized their industrial capacity was stretched too thin and they couldn’t build the uranium separation plants and Bomb alone during the War, the Manhattan Project was scaling up and the U.S. had no need for the UK.

The UK would play a minor role in the Manhattan project.

Bush Tells Roosevelt – We Can Build an Atomic Bomb
In October 1941, Bush told the President about the British MAUD report conclusions: the bomb’s uranium core might weigh twenty-five pounds, its explosive power might equal eighteen hundred tons of TNT, but to separate the U-235 they would need to build a massive industrial facility. The President asked Bush to work with the Army Corps of Engineers to figure out what type of plant to build, how to build it and how much would it cost.

A month later, in November 1941 the U.S. National Academy of Sciences confirmed to Bush that the British MAUD report conclusions were correct.

Bush now had all the pieces lined up to support an all-out effort to develop an atomic bomb.

December 1941 – Let’s Build an Atomic Bomb
In December 1941, the day before the Japanese attack on Pearl Harbor, the atomic bomb program was placed under Vannevar Bush. He renamed the Uranium program as the S-1 Committee of OSRD.

In addition to overseeing the 19 Divisions of OSRD, Bush’s new responsibility was to coordinate all the moving parts of the atomic bomb program – the research, the lab experiments, and now the beginning of construction contracts.

With the Presidents support, Bush reorganized the program to take it from research to a weapons program. The goal now was to find the best ways to produce uranium-235 and Plutonium in large quantities. He appointed Harold Urey at Columbia to lead the gaseous diffusion and centrifuge methods and heavy-water studies. Ernest Lawrence at Berkeley took electromagnetic and plutonium responsibilities, and Arthur Compton at Chicago ran chain reaction and weapons theory programs. This team proposed to begin building pilot plants for all five methods of separating U-235 before they were proven. Bush and Conant agreed and sent the plan to the President, Vice President, and Secretary of War, suggesting the Army Corps of Engineers build these plants.

With U.S. now at war with Germany and Japan, the race to build the bomb was on.

In January 1942, Compton made Oppenheimer responsible for fast neutron research at Berkeley. This very small part of the atomic bomb program is the first time Oppenheimer was formally engaged in atomic bomb work.

Enter the Army
The Army began attending OSRD S-1 (the Atomic Bomb group) meetings in March 1942. Bush told the President that by the summer of 1942 the Army should be authorized to build full-scale plants.

Build the U-235 Separation and Plutonium Plants
By May 1942 it was still unclear which U-235 separation method would work and what was the right way to build a nuclear reactor to make Plutonium, so the S-1 committee recommended – build all of them. Build centrifuge, electromagnetic separation, and gaseous diffusion plants as fast as possible; build a heavy water plant for the nuclear reactors as an alternative to graphite; build reactors to produce plutonium; and start planning for large-scale production and select the site(s). The S-1 Committee also recommended the Army be in charge of building the plants.

Meanwhile that same month, Oppenheimer was made the “Coordinator of Rapid Rupture.” He headed up a group of theorists working with experimentalists to calculate how many pounds of U-235 and Plutonium were needed for a bomb.

The Manhattan Engineering District – The Atomic Program Moves to the Army
In June 1942, the president approved Bush’s plan to hand building the bomb over to the Army. The Manhattan Engineering District became the new name for the U.S. atomic bomb program. General Groves was appointed its head in September 1942.

To everyone’s surprise Groves selected Oppenheimer to administer the program. It was a surprise because up until then Oppenheimer was a theoretical physicist, not an experimentalist nor had he ever run or managed any programs.

Grove and Oppenheimer decided that in addition to the massive production facilities – U-235 in Oak Ridge, TN, and Plutonium in Hanford, WA – they would need a central laboratory to design the bomb itself. This would become Los Alamos. And Oppenheimer would head that lab bringing together a diverse set of theorists, experimental physicists, explosive experts, chemistry, and metallurgists.

Bush, Conant and Grove at Plutonium production site at Hanford -July 1945

At its peak in mid-1944 130,000 people were working on the Manhattan Project; 5,000 of them worked at Los Alamos.

Vannevar Bush would be present at the test of the Plutonium weapon at the Trinity test site in July 1945.

The OSRD would be the organization that made the U.S. the leader in 20^th century research. At the end of World War II, Bush laid out his vision for future U.S. support of research in an article called “Science the Endless Frontier.” OSRD was disbanded in 1947, but after a long debate it was resurrected in pieces. Out of it came the National Science Foundation, the National Institute of Health, the Atomic Energy Commission and ultimately NASA and DARPA – all would all spring from its roots.

50 years before it happened Bush would describe what would become the internet in a 1945 article called As We May Think.

Summary

By the time Oppenheimer and Grove took over the Atomic Bomb program, Vannevar Bush had been running it for two years

The U.S. atomic bomb program was the sum of multiple small decisions guided by OSRD and a Presidential science advisor – Vannevar Bush

Bush’s organizations kick-started the program. The NDRC invested (in 2023 dollars) $10M in nuclear research, OSRD put in another $250M for nuclear experiments

The Manhattan project would ultimately cost ~$40 billion to build the two bombs.

As the country was in a crisis – decisions were made in days/weeks by small groups with the authority to move with speed and urgency.

Large-scale federal funding for science research in U.S. universities started with the Office of Scientific Research and Development (OSRD) – more to come in subsequent posts

Filed under: National Security, Science and Industrial Policy | 6 Comments »

Lean Meets Wicked Problems

Posted on July 25, 2023 by steve blank

This post previously appeared in Poets & Quants.

I just spent a month and a half at Imperial College London co-teaching a “Wicked” Entrepreneurship class. In this case Wicked doesn’t mean morally evil, but refers to really complex problems, ones with multiple moving parts, where the solution isn’t obvious. (Understanding and solving homelessness, disinformation, climate change mitigation or an insurgency are examples of wicked problems. Co mpanies also face Wicked problems. In contrast, designing AI-driven enterprise software or building dating apps are comparatively simple problems.)

I’ve known Professor Cristobal Garcia since 2010 when he hosted my first visit to Catholic University in Santiago of Chile and to southern Patagonia. Now at Imperial College Business School and Co-Founder of the Wicked Acceleration Labs, Cristobal and I wondered if we could combine the tenets of Lean (get out of the building, build MVPs, run experiments, move with speed and urgency) with the expanded toolset developed by researchers who work on Wicked problems and Systems’ Thinking.

Our goal was to see if we could get students to stop admiring problems and work rapidly on solving them. As Wicked and Lean seem to be mutually exclusive, this was a pretty audacious undertaking.

This five-week class was going to be our MVP.

Here’s what happened.

Finding The Problems
Professor Garcia scoured the world to find eight Wicked/complex problems for students to work on. He presented to organizations in the Netherlands, Chile, Spain, the UK (Ministry of Defense and the BBC), and aerospace companies. The end result was a truly ambitious, unique, and international set of curated Wicked problems.

Increasing security and prosperity amid the Mapuche conflict in Araucania region of Chile
Enabling and accelerating a Green Hydrogen economy
Turning the Basque Country in Spain into an AI hub
Solving Disinformation/Information Pollution for the BBC
Creating Blue Carbon projects for the UK Ministry of Defense
Improving patient outcomes for Ukrainian battlefield injuries
Imagining the future of a low-earth-orbit space economy
Creating a modular architecture for future UK defense ships

Recruiting the Students
With the problems in hand, we set about recruiting students from both Imperial College’s business school and the Royal College of Art’s design and engineering programs.

We held an info session explaining the problems and the unique parts of the class. We were going to share with them a “Swiss Army Knife” of traditional tools to understand Wicked/Complex problems, but they were not going to research these problems in the library. Instead, using the elements of Lean methodology, they were going to get out of the building and observe the problems first-hand. And instead of passively observing them, they were going to build and test MVPs. All in six weeks.

50 students signed up to work on the eight problems with different degrees of “wickedness”.

Imperial Wicked Problems and Systems Thinking – 2023 Class

The Class
The pedagogy of the class (our teaching methods and the learning activities) were similar to all the Lean/I-Corps and Hacking for Defense classes we’ve previously taught. This meant the class was team-based, Lean-driven (hypothesis testing/business model/customer development/agile engineering) and experiential – where the students, rather than being presented with all of the essential information, must discover that information rapidly for themselves.

The teams were going to get out of the building and talk to 10 stakeholder a week. Then weekly each team will present 1) here’s what we thought, 2) here’s what we did, 3) here’s what we learned, 4) here’s what we’re going to do during this week.

More Tools
The key difference between this class and previous Lean/I-Corps and Hacking for Defense classes was that Wicked problems required more than just a business model or mission model to grasp the problem and map the solution. Here, to get a handle on the complexity of their problem the students needed a suite of tools – Stakeholder Maps, Systems Maps, Assumptions Mapping, Experimentation Menus, Unintended Consequences Map, and finally Dr. Garcia’s derivative of the Alexander Osterwalder’s Business Model Canvas – the Wicked Canvas – which added the concept of unintended consequences and the “sub-problems” according to the different stakeholders’ perspectives to the traditional canvas.

During the class the teaching team offered explanations of each tool, but the teams got a firmer grasp on Wicked tools from a guest lecture by Professor Terry Irwin, Director of the Transition Design Institute at Carnegie Mellon (see her presentation here.) Throughout the class teams had the flexibility to select the tools they felt appropriate to rapidly gain an holistic understanding and yet to develop a minimum viable product to address and experiment with each of the wicked problems.

Class Flow
Week 1

What is a simple idea? What are big ideas and Impact Hypotheses?
- Characteristics of each. Rewards, CEO, team, complexity, end point, etc.
What is unique about Wicked Problems?
- Beyond TAM and SAM (“back of the napkin”) for Wicked Problems
You need Big Ideas to tackle Wicked Problems: but who does it?
- Startups vs. Large Companies vs. Governments
- Innovation at Speed for Horizon 1, 2 and 3 (Managing the Portfolio across Horizons)
What is Systems Thinking?
How to map stakeholders and systems’ dynamics?
Customer & Stakeholder Discovery: getting outside the building, city and country: why and how?

Mapping the Problem(s), Stakeholders and Systems – Wicked Tools

Week 2

Teams present for 6 min and receive 4 mins feedback
The Wicked Swiss Army Knife for the week: Mapping Assumptions Matrix, unintended consequences and how to run and design experiments
Prof Erkko Autio (ICBS and Wicked Labs) on AI Ecosystems and Prof Peter Palensky (TU Delft) on Smart Grids, Decarbornization and Green Hydrogen
Lecture on Minimal Viable Products (MVPs) and Experiments
Homework: getting outside the building & the country to run experiments

Assumption Mapping and Experimentation Type – Wicked Tools

Week 3

Teams present in 6 min and receive 4 mins feedback
The Wicked Swiss Army Knife for the week: from problem to solution via “How Might We…” Builder and further initial solution experimentation
On Canvases: What, Why and How
The Wicked Canvas
Next Steps and Homework: continue running experiments with MVPs and start validating your business/mission/wicked canvas

The Wicked Canvas – Wicked Tools

Experimentation Design and How We Might… – Wicked Tools

Week 4

Teams present in 6 min and receive 5 mins feedback
Wicked Business Models – validating all building blocks
The Geography of Innovation – the milieu, creative cities & prosperous regions
How World War II and the UK Started Silicon Valley
The Wicked Swiss Tool- maps for acupuncture in the territory
Storytelling & Pitching
Homework: Validated MVP & Lessons learned

Acupuncture Map for Regional System Intervention – Wicked Tools

Week 5

Teams presented their Final Lessons Learned journey – Validated MVP, Insights & Hindsight (see the presentations at the end of the post.)
- What did we understand about the problem on day 1?
- What do we now understand?
- How did we get here?
- What solutions would we propose now?
- What did we learn?
- Reflections on the Wicked Tools

Results
To be honest, I wasn’t sure what to expect. We pushed the students way past what they have done in other classes. In spite of what we said in the info session and syllabus, many students were in shock when they realized that they couldn’t take the class by just showing up, and heard in no uncertain terms that no stakeholder/customer interviews in week 1 was unacceptable.

Yet, everyone got the message pretty quickly. The team working on the Mapuche conflict in the Araucania region of Chile, flew to Chile from London, interviewed multiple stakeholders and were back in time for next week’s class. The team working to turn the Basque Country in Spain into an AI hub did the same – they flew to Bilbao and interviewed several stakeholders. The team working on the Green Hydrogen got connected to the Rotterdam ecosystem and key stakeholders in the Port, energy incumbents, VCs and Tech Universities. The team working on Ukraine did not fly there for obvious reasons. The rest of the teams spread out across the UK – all of them furiously mapping stakeholders, assumptions, systems, etc., while proposing minimal viable solutions. By the end of the class it was a whirlwind of activity as students not only presented their progress but saw that of their peers. No one wanted to be left behind. They all moved with speed and alacrity.

Lessons Learned

Our conclusion? While this class is not a substitute for a years-long deep analysis of Wicked/complex problems it gave students:

a practical hands-on introduction to tools to map, sense, understand and potentially solve Wicked Problems

the confidence and tools to stop admiring problems and work on solving them

I think we’ll teach it again.

Team final presentations

The team’s final lessons learned presentations were pretty extraordinary, only matched by their post-class comments. Take a look below.

Team Wicked Araucania

Click here if you can’t see the Araucania presentation.

Team Accelerate Basque

Click here if you can’t see the Accelerate Basque presentation.

Team Green Hydrogen

Click here if you can’t see the Green Hydrogen presentation.

Team Into The Blue

Click here if you can’t see the Team Blue presentation.

Team Information Pollution

Click here if you can’t see the Team Information Pollution presentation.

Team Ukraine

Click here if you can’t see the Team Ukraine presentation.

Team Wicked Space

Click here if you can’t see the Team Wicked Space presentation.

Team Future Proof the Navy

Click here if you can’t see the Future Proof the Navy presentation.

Filed under: Customer Development, Lean LaunchPad, Teaching | 9 Comments »

Reorganizing the DoD to Deter China and Win in the Ukraine – A Road Map for Congress

Posted on April 19, 2023 by steve blank

This article previously appeared in Defense News. It was co-written with Joe Felter, and Pete Newell.

Today, the U.S. is supporting a proxy war with Russia while simultaneously attempting to deter a China cross-strait invasion of Taiwan. Both are wakeup calls that victory and deterrence in modern war will be determined by a state’s ability to both use traditional weapons systems and simultaneously rapidly acquire, deploy, and integrate commercial technologies (drones, satellites, targeting software, et al) into operations at every level.

Ukraine’s military is not burdened with the DoD’s 65-year-old acquisition process and 20th-century operational concepts. It is learning and adapting on the fly. China has made the leap to a “whole of nation” approach. This has allowed the Peoples Liberation Army (PLA) to integrate private capital and commercial technology and use them as a force multiplier to dominate the South China Sea and prepare for a cross-strait invasion of Taiwan.

The DoD has not done either of these. It is currently organized and oriented to execute traditional weapons systems and operational concepts with its traditional vendors and research centers but is woefully unprepared to integrate commercial technologies and private capital at scale.

Copying SecDef Ash Carter’s 2015 strategy, China has been engaged in Civil/Military Fusion employing a whole of government coordinated effort to harness these disruptive commercial technologies for its national security needs. To fuel the development of technologies critical for defense, China has tapped into $900 billion of private capital in Civil/Military Guidance (Investment) Funds and has taken public state owned enterprises to fund their new shipyards, aircraft, and avionics. Worse, China will learn from and apply the lessons from Russia’s failures in the Ukraine at an ever increasing pace.

But unlike America’s arch strategic rival, the US to date has been unwilling and unable to adapt and adopt new models of systems and operational concepts at the speed of our adversaries. These include attritable systems, autonomous systems, swarms, and other emerging new defense platforms threaten legacy systems, incumbent vendors, organizations, and cultures. (Until today, the U.S. effort was still-born with its half-hearted support of its own Defense Innovation Unit and history of lost capabilities like those that were inherent the US Army’s Rapid Equipping Force.)

Viewing the DoD budget as a zero-sum game has turned the major defense primes and K-street lobbyists into saboteurs for DoD organizational innovation that threaten their business models. Using private capital could be a force multiplier by adding 100’s of billions of dollars outside the DoD budget. Today, private capital is disincented to participate in national security and incentives are aligned to ensure the U.S. military is organized and configured to fight and win the wars of the last century. The U.S. is on a collision course to experience catastrophic failure in a future conflict because of it. Only Congress can alter this equation.

For the U.S. to deter and prevail against China the DoD must create both a strategy and a redesigned organization to embrace those untapped external resources – private capital and commercial innovation. Currently the DoD lacks a coherent plan and an organization with the budget and authority to do so.

A reorganized and refocused DoD could acquire traditional weapons systems while simultaneously rapidly acquiring, deploying, and integrating commercial technologies. It would create a national industrial policy that incentivizes the development of 21st-century shipyards, drone and satellite factories and a new industrial base along the lines of the CHIPS and Innovation and Competition acts.

Congress must act to identify and implement changes within the DoD needed to optimize its organization and structure. These include:

Create a new defense ecosystem that uses the external commercial innovation ecosystem and private capital as a force multiplier. Leverage the expertise of prime contractors as integrators of advanced technology and complex systems, refocus Federally Funded Research and Development Centers (FFRDCs) on areas not covered by commercial tech (kinetics, energetics, nuclear and hypersonics).
Reorganize DoD Research and Engineering. Allocate its budget and resources equally between traditional sources of innovation and new commercial sources of innovation and capital. Split the OSD R&E organization in half. Keep the current organization focused on the status quo. Create a peer organization – the Under Secretary of Defense for Commercial Innovation and Private Capital.
Scale up the new Office of Strategic Capital (OSC) and the Defense Innovation Unit (DIU) to be the lead agencies in this new organization. Give them the budget and authority to do so and provide the services the means to do the same.
Reorganize DoD Acquisition and Sustainment. Allocate its budget and resources equally between traditional sources of production and the creation of new from 21st-century arsenals – new shipyards, drone manufacturers, etc. – that can make 1,000s of low-cost, attritable systems.
Coordinate with Allies. Expand the National Security Innovation Base (NSIB) to an Allied Security Innovation Base. Source commercial technology from allies.

Why Is It Up To Congress?

National power is ephemeral. Nations decline when they lose allies, economic power, interest in global affairs, experience internal/civil conflicts, or miss disruptive technology transitions and new operational concepts.

The case can be made that all of these have or are happening to the U.S.

There is historical precedent for Congressional action to ensure the DoD is organized to fight and win our wars. The 1986 Goldwater/Nichols Act laid the foundation for conducting coordinated and effective joint operations by reorganizing the roles of the military services, and the Joint Chiefs, and creating the Joint Staff and the combatant commands. US Congress must take Ukraine and China’s dominance in the South China Sea as call for action and immediately establish a commission to determine what reforms and changes are needed to ensure the U.S. can fight and win our future wars.

While parts of the DoD understand we’re in a crisis to deter, or if that fails, win a war in the South China Sea, the DoD as a whole shows little urgency and misses a crucial point: China will not defer solving the Taiwan issue on our schedule. Russia will not defer its future plans for aggression to meet our dates. We need to act now.

We fail to do so at our peril and the peril of all those who depend on U.S. security to survive.

Filed under: China, National Security, Technology Innovation and Great Power Competition | 10 Comments »

Playing With Fire – ChatGPT

Posted on April 4, 2023 by steve blank

The world is very different now. For man holds in his mortal hands the power to abolish all forms of human poverty and all forms of human life.

John F. Kennedy

Humans have mastered lots of things that have transformed our lives, created our civilizations, and might ultimately kill us all. This year we’ve invented one more.

Artificial Intelligence has been the technology right around the corner for at least 50 years. Last year a set of specific AI apps caught everyone’s attention as AI finally crossed from the era of niche applications to the delivery of transformative and useful tools – Dall-E for creating images from text prompts, Github Copilot as a pair programming assistant, AlphaFold to calculate the shape of proteins, and ChatGPT 3.5 as an intelligent chatbot. These applications were seen as the beginning of what most assumed would be domain-specific tools. Most people (including me) believed that the next versions of these and other AI applications and tools would be incremental improvements.

We were very, very wrong.

This year with the introduction of ChatGPT-4 we may have seen the invention of something with the equivalent impact on society of explosives, mass communication, computers, recombinant DNA/CRISPR and nuclear weapons – all rolled into one application. If you haven’t played with ChatGPT-4, stop and spend a few minutes to do so here. Seriously.

At first blush ChatGPT is an extremely smart conversationalist (and homework writer and test taker). However, this the first time ever that a software program has become human-competitive at multiple general tasks. (Look at the links and realize there’s no going back.) This level of performance was completely unexpected. Even by its creators.

In addition to its outstanding performance on what it was designed to do, what has surprised researchers about ChatGPT is its emergent behaviors. That’s a fancy term that means “we didn’t build it to do that and have no idea how it knows how to do that.” These are behaviors that weren’t present in the small AI models that came before but are now appearing in large models like GPT-4. (Researchers believe this tipping point is result of the complex interactions between the neural network architecture and the massive amounts of training data it has been exposed to – essentially everything that was on the Internet as of September 2021.)

(Another troubling potential of ChatGPT is its ability to manipulate people into beliefs that aren’t true. While ChatGPT “sounds really smart,” at times it simply makes up things and it can convince you of something even when the facts aren’t correct. We’ve seen this effect in social media when it was people who were manipulating beliefs. We can’t predict where an AI with emergent behaviors may decide to take these conservations.)

But that’s not all.

Opening Pandora’s Box
Until now ChatGPT was confined to a chat box that a user interacted with. But OpenAI (the company that developed ChatGPT) is letting ChatGPT reach out and interact with other applications through an API (an Application Programming Interface.) On the business side that turns the product from an incredibly powerful application into an even more incredibly powerful platform that other software developers can plug into and build upon.

By exposing ChatGPT to a wider range of input and feedback through an API, developers and users are almost guaranteed to uncover new capabilities or applications for the model that were not initially anticipated. (The notion of an app being able to request more data and write code itself to do that is a bit sobering. This will almost certainly lead to even more new unexpected and emergent behaviors.) Some of these applications will create new industries and new jobs. Some will obsolete existing industries and jobs. And much like the invention of fire, explosives, mass communication, computing, recombinant DNA/CRISPR and nuclear weapons, the actual consequences are unknown.

Should you care? Should you worry?
First, you should definitely care.

Over the last 50 years I’ve been lucky enough to have been present at the creation of the first microprocessors, the first personal computers, and the first enterprise web applications. I’ve lived through the revolutions in telecom, life sciences, social media, etc., and watched as new industries, markets and customers created literally overnight. With ChatGPT I might be seeing one more.

One of the problems about disruptive technology is that disruption doesn’t come with a memo. History is replete with journalists writing about it and not recognizing it (e.g. the NY Times putting the invention of the transistor on page 46) or others not understanding what they were seeing (e.g. Xerox executives ignoring the invention of the modern personal computer with a graphical user interface and networking in their own Palo Alto Research Center). Most people have stared into the face of massive disruption and failed to recognize it because to them, it looked like a toy.

Others look at the same technology and recognize at that instant the world will no longer be the same (e.g. Steve Jobs at Xerox). It might be a toy today, but they grasp what inevitably will happen when that technology scales, gets further refined and has tens of thousands of creative people building applications on top of it – they realize right then that the world has changed.

It’s likely we are seeing this here. Some will get ChatGPT’s importance instantly. Others will not.

Perhaps We Should Take A Deep Breath And Think About This?
A few people are concerned about the consequences of ChatGPT and other AGI-like applications and believe we are about to cross the Rubicon – a point of no return. They’ve suggested a 6-month moratorium on training AI systems more powerful than ChatGPT-4. Others find that idea laughable.

There is a long history of scientists concerned about what they’ve unleashed. In the U.S. scientists who worked on the development of the atomic bomb proposed civilian control of nuclear weapons. Post WWII in 1946 the U.S. government seriously considered international control over the development of nuclear weapons. And until recently most nations agreed to a treaty on the nonproliferation of nuclear weapons.

In 1974, molecular biologists were alarmed when they realized that newly discovered genetic editing tools (recombinant DNA technology) could put tumor-causing genes inside of E. Coli bacteria. There was concern that without any recognition of biohazards and without agreed-upon best practices for biosafety, there was a real danger of accidentally creating and unleashing something with dire consequences. They asked for a voluntary moratorium on recombinant DNA experiments until they could agree on best practices in labs. In 1975, the U.S. National Academy of Science sponsored what is known as the Asilomar Conference. Here biologists came up with guidelines for lab safety containment levels depending on the type of experiments, as well as a list of prohibited experiments (cloning things that could be harmful to humans, plants and animals).

Until recently these rules have kept most biological lab accidents under control.

Nuclear weapons and genetic engineering had advocates for unlimited experimentation and unfettered controls. “Let the science go where it will.” Yet even these minimal controls have kept the world safe for 75 years from potential catastrophes.

Goldman Sachs economists predict that 300 million jobs could be affected by the latest wave of AI. Other economists are just realizing the ripple effect that this technology will have. Simultaneously, new startups are forming, and venture capital is already pouring money into the field at an outstanding rate that will only accelerate the impact of this generation of AI. Intellectual property lawyers are already arguing who owns the data these AI models are built on. Governments and military organizations are coming to grips with the impact that this technology will have across Diplomatic, Information, Military and Economic spheres.

Now that the genie is out of the bottle, it’s not unreasonable to ask that AI researchers take 6 months and follow the model that other thoughtful and concerned scientists did in the past. (Stanford took down its version of ChatGPT over safety concerns.) Guidelines for use of this tech should be drawn up, perhaps paralleling the ones for genetic editing experiments – with Risk Assessments for the type of experiments and Biosafety Containment Levels that match the risk.

Unlike moratoriums of atomic weapons and genetic engineering that were driven by the concern of research scientists without a profit motive, the continued expansion and funding of generative AI is driven by for-profit companies and venture capital.

Welcome to our brave new world.

Lessons Learned

Pay attention and hang on

We’re in for a bumpy ride

We need an Asilomar Conference for AI

For-profit companies and VC’s are interested in accelerating the pace

Filed under: Technology | 10 Comments »

Startups that Have Employees In Offices Grow 3½ Times Faster

Posted on February 14, 2023 by steve blank

This article previously appeared in EIX – Entreprenuers and Innovators Exchange.

Data shows that pre-seed and seed startups with employees showing up in a physical office have 3½ times higher revenue growth than those that are solely remote.

Let the discussion begin.

During the pandemic, companies engaged in one of the largest unintended experiments in how to organize office work – remotely, in offices, or a hybrid of the two.

Post-pandemic, startups are still struggling to manage the best way to manage return-to-office issues – i.e. employee’s expectations of continuing to work remotely versus the best path to build and grow a profitable company.

Before we can ask which is the best configuration, the first question is what, exactly do we mean by “remote work” versus “office work”? Today work configurations span the spectrum from no office (fully remote, default digital) to some office (flexible hybrid, synchronized hybrid, office first,) to office only.

James Kim at Reach Capital, an early-stage tech ed investor, surveyed their portfolio of 37 companies using the following taxonomy of how virtual and physical work could be configured.

Using this model James found that pre-seed and seed-stage startups that had employees returning to some type of office had 3½ times the revenue growth of startups that were fully remote. Those are staggeringly large differences, and while other factors may play some role (see “What Does This Mean, below), the impact of the all-hands-on-deck approach can’t be ignored.

What might account for these differences? Not surprisingly, almost 90% of the responses from pre-seed/seed startups said team culture was influenced by work configuration. However, unexpectedly, self-reported team culture, eNPS (employee Net Promoter Score) and regrettable attrition – departures that hurt the company — are similar across work configurations.

So while the employees said regardless of the office configuration the team culture didn’t appear to change, the performance of very early stage startups (as measured by revenue growth) told a different story.

What Does This Mean?
The data is suggestive but not conclusive. See a full summary of the survey results here.

Let’s start with the data set. The survey sample size was 37 companies from the Reach Capital portfolio. That’s large enough to see patterns, but not large enough to generalize across all startups. Next, Reach Capital’s portfolio of companies are in education and the future of work. The revenue results by workplace configuration may be different in other markets. Reach Capital’s investments are made in many regions including Brazil, so the geography is not limited to Silicon Valley.

Finally office configuration is only one factor that might influence a startup’s growth rate. Still the results are suggestive enough that other VC’s might want to run the same surveys across their portfolio of companies and see if the results match.

(BTW, Nick Bloom at Stanford and others have done extensive research with thousands of people on remote and hybrid work here, and here. Their research is mostly focused on employees working on independent day-to-day tasks such as travel agents. However, we’re interested in the very specific subset of creative knowledge workers in the early stage of startups. Specifically at the stage when startups are searching for product/market fit and a business model not when they are executing day-to-day tasks.

If the results appear elsewhere, then one can speculate why. Working from home may offer more distractions by chores, family, network issues. Do those little things add up to meaningful productivity differences?

Is it that in early-stage startups the random conversations between employees at unscheduled and unplanned times lead to better insights and ideas? And if so, is the productive brainstorming occurring inside of departments –e.g. engineer to engineer — or is it the cross-fertilization between departments – e.g. engineering to marketing?

Research since the 20^thcentury has proven that informal face-to-face interaction is important for the coordination of group activities, maintaining company culture, and team building. This informal information gives employees access to new, non-redundant information through connections to different parts of an organization’s formal org chart and through connections to different parts of an organization’s informal communication network. In addition, research has found that creativity is greatly enhanced in a “small world network – a network structure that is both highly locally clustered and often a hotbed of unscheduled fluid interactions that support innovation. In other words, inside an early-stage startup.

For decades Silicon Valley company founders and investors have known this small world network effect as tacit knowledge. It has been a hallmark of the physical design of Silicon Valley office space – from Xerox PARC to Pixar’s headquarters, to Google and Apple.

So perhaps the converse is true. Does remote work with ad hoc or fixed meetings via Zoom actually stunt the growth of creativity and new insights, just at the time a startup most needs them? Are there new tools such as Discord and others that can duplicate the water cooler effect of physical proximity?

Either way, it’s the beginning of an interesting discussion.

What has been your experience?

Lessons Learned

Data from one VC shows pre-seed and seed-stage startups with employees that show up to the office have 3½ times the revenue growth of those that work remotely

Is the data valid? Is it the same in all markets/industries?

If it’s valid, why?

Is there a difference in remote vs. in-office productivity for creative tasks versus execution tasks?

Filed under: Covid-19/Recovery, Family/Career/Culture | 17 Comments »

Is a Venture Studio Right for You?

Posted on January 17, 2023 by steve blank

This post previously appeared in the Harvard Business Review.

Three types of organizations – Incubators, Accelerators and Venture Studios – have emerged to reduce the risk of early-stage startup failure by helping teams find product/market fit and raise initial capital. Venture Studios are an “idea factory” with their own employees searching for product/market fit and a repeatable and scalable business model. They do the most to de-risk the early stages of a startup.

Outside a small university in the Midwest, I was having coffee with Carlos, a rising star inside a mid-sized manufacturing company. He had a track record of taking small teams and growing them into successful product lines. However, after a decade working for others, Carlos was interested in building and growing a company of his own. I asked how much he knew about how to get started. He said that from what he read, the path to building and funding a company seemed to be: 1) come up with an idea, 2) form a team, 3) start testing minimal viable products, 4) raise seed funding, 5) then obtain venture capital.

As he described his work in additive manufacturing and 3D printing, Carlos said he knew that there were seed investors in his town, but venture capital was still largely on the coasts, and it was hard to get their attention. He also wasn’t sure his idea was great. But he still had the itch to grow something small into a substantive company.

As we grabbed dessert, Carlos asked, “Other than raising money, are there other ways to start a company?”

I pointed out that there were.

Reducing Startup Risk
In the last two decades, three types of organizations — incubators, accelerators and venture studios — have emerged to reduce the risk of early-stage startup failure by helping teams find product/market fit and raise initial capital. Most are founded and run by experienced entrepreneurs that have previously built companies and who understand the difference between theory and practice.

I pointed out to Carlos that accelerators like Y-Combinator, Techstars, and 500 Startups offer a cohort of startups a six to 12-week bootcamp. But these look for founders who have a technical or business model insight and a team. Accelerators provide these teams with technical and business expertise and connect them to a network of other founders and advisors. The culmination of this bootcamp is a “demo day” where all startups in the cohort have a few minutes to pitch their companies to venture capitalists and angel investors. (In some cases the accelerator provides initial funding themselves.) In exchange for attending an accelerator, startups give up 5% to 10% of their company’s equity.

There are thousands of accelerators across the globe. The business model for most of these accelerators is to select startups that can generate venture-class returns – i.e. grow into companies that can potentially be worth billions of dollars. For most accelerators, admission is by application and interview. Some, like Y-Combinator, Techstars, and 500 Startups are open to all types of startups in any market, while others like SOSV, IndieBio, HAX, Orbit, dLab are more specialized.

Incubators are similar to accelerators in that they provide space and shared resources to startups, but usually no or very small amounts of capital. Their financial models are based on membership fees that grant access to a shared coworking space, resources, and access to other founders and operational expertise.

Carlos stirred his coffee. “Accelerators don’t sound like a fit for where I am at in my career,” he offered. “I don’t have a killer idea, or a technical team, but I do know how to build, grow, and manage teams.”

The Alternative: Venture Studios
I pointed out there were organizations that might be a better fit for his skills and passion to go out on his own — venture studios. Unlike an accelerator, a venture studio does not fund existing startups.

Venture studios create startups by incubating their own ideas or ideas from their partners. The studio’s internal team builds the minimal viable product, then validates an idea by finding product/market fit and early customers. If the idea passes a series of “Go/No Go” decisions based on milestones for customer discovery and validation, the studio recruits entrepreneurial founders to run and scale those startups. Examples of companies that have emerged from venture studios, include Overture, Twilio, bitly, aircalla, and the most famous alum, Moderna,

I suggested Carlos think of a venture studio as an “idea factory” with their own full-time employees engaged in searching for product/market fit and a repeatable and scalable business model.

How Venture Studios Work
Unlike an accelerator or incubator, a venture studio doesn’t fund existing startups. It’s a company that creates multiple startups in-house, then finds entrepreneurs who take them over to grow them.

Most venture studios create and launch several startups each year. These have a greater success rate than those that come out of accelerators or traditional venture-funded companies. That’s because unlike accelerators, which operate on a six- to 12-week cadence, studios don’t have a set timeframe. Instead, they search and pivot until product-market fit is found. Unlike an accelerator or a VC firm, a venture studio kills most of their ideas that can’t find traction and won’t launch a startup if they can’t find evidence that it can be a scalable and profitable company.

Comparing Startup Funding Options
Venture studios are a good fit for entrepreneurs who don’t have an idea or team but would like to run and grow a startup. The venture studio’s employees have already identified a product, market fit and early customers — meaning someone else has eliminated many of the early risks of a new venture. In return for the lower risk, a venture studio typically takes a larger percentage of equity.

There are four main types of venture studios:

Tech transfer studios, such as America’s Frontier Fund, work with companies and/or government labs to source ideas and intellectual property. They then transfer the IP and build the startup inside the venture studio.
Corporate studios, such as Applied Materials, source ideas and intellectual property inside their own company. They then build the startup inside a separate corporate venture studio inside the company.
A niche studio is a standalone venture studio that generates its own ideas and IP in a specific industry and domain – for example Flagship Pioneering , which is focused on health care and incubated LS18 — the company that became Moderna.
An industry agnostic studio, such as Rocket Internet, is a standalone venture studio that generates its own ideas and IP and is industry and market agnostic.

Today there are around 720+ venture studios across the world – half are in Europe. In both North America and Europe, many venture studios in non-major cities are funded by government agencies to stimulate local growth, at times with matching donations from companies. These studios have different metrics than startup studios whose limited partners are private family offices or venture capitalists.

Why Would an Entrepreneur Join a Venture Studio?
While we were on our second cup of coffee, I told Carlos about the downside to joining a company created by a venture studio — how much equity/ownership they take.

In contrast with an accelerator that takes 5%-10% of a startup’s equity, venture studios take anywhere from 30%-80% of a startup’s equity. This is because companies exiting a venture studios have been handed a startup that has de-risked of much of the early-stage startup process. (There’s a direct correlation between the amount of equity a venture studio takes and their belief in how much they want their founding CEO to be an entrepreneur versus executor.)

Why would an entrepreneur join a venture studio and give up the majority of their company rather than go to accelerator? Most accelerators tend to look for a “founder type” — a stereotypical techie, fresh out of college, who already has an idea and cofounders.

Most people don’t fit that pattern. Yet many are more than capable of taking an idea that’s been stress-tested and validated and building it.

What To Look for in a Venture Studio?
As we got up to leave Carlos asked, “How would I know whether the venture studio a good one?”

It was a great question. While there are no hard-and-fast rules, I advise entrepreneurs to ask these four questions:

Is the studio run by a former founder and does it have former founders as full-time employees? The most successful venture studios are founded by entrepreneurs that have previously built companies with $10+M in revenue and had 100+ employees.
What percentage of equity are they asking for? The answer will be directly proportional to what they think your value is. Firms asking for greater than 60% are actually hiring an employee rather than a founder.
Do you want a studio with specific expertise? Studios that focus on specific niches and industries can build a deep bench of domain experts – e.g. founder, advisors, and mentors – who are experts in this one field
Do they have enough funding? Watch out for Zombie studios. If you’ve given away a majority of your company to a studio, it would be helpful to have them around for support after you’ve started. If they don’t have enough funding to keep the lights on for several years, you’re on your own. Make sure your studio has raised more than $10m in funding.

A few weeks later I got a note from Carlos letting me know that he found that there was a venture studio in his city, another run by the state, and a third in his region focused on manufacturing. He had applied to all of them.

Filed under: Harvard Business Review, Venture Capital | 6 Comments »

Email Subscription

Entrepreneurship is a Calling

Categories

Get Steve Blank via your RSS Feed

Recent Posts

Archives

Other Stuff

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Class Flow Week 1

Week 2

Week 3

Week 4

Week 5

Lessons Learned

Team final presentations

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Class Flow
Week 1