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 | 4 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/

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Be Where Your Business Is

Posted on January 10, 2023 by steve blank

This post previously appeared on the readwrite blog.

 

A CEO running a B-to-B startup in needs to live in the city where their business is – or else they’ll never scale.

I was having breakfast with Erin, an ex-student, just off a red-eye flight from New York. She’s built a 65-person startup selling enterprise software to the financial services industry. Erin had previously worked in New York for one of those companies and had a stellar reputation in the industry. As one would expect, with banks and hedge funds as customers, the majority were based in the New York metropolitan area.

Where Are Your Biggest Business Deals?
Looking a bit bleary-eyed, Erin explained, “Customers love our product, and I think we’ve found product/market fit. I personally sold the first big deals and hired the VP of sales who’s building the sales team in our New York office. They’re growing the number of accounts and the deal size, but it feels like we’re incrementally growing a small business, not heading for exponential growth. I know the opportunity is much bigger, but I can’t put my finger on what’s wrong.”

Erin continued, “My investors are starting to get impatient. They’re comparing us to another startup in our space that’s growing much faster. My VP of Sales and I are running as fast as we can, but I’ve been around long enough to know I might be the ex-CEO if we can’t scale.”

While Erin’s main sales office is in New York, next to her major prospects and customers, Erin’s company was headquartered in Silicon Valley, down the street from where we were having breakfast. During the Covid pandemic, most of her engineering team worked remotely. Her inside sales team (Sales Development and Business Development reps) used email, phone, social media and Zoom for prospecting and generating leads. At the same time, her account executives were able to use Zoom for sales calls and close and grow business virtually.

There’s a Pattern Here
Over breakfast, I listened to Erin describe what at first seemed like a series of disconnected events.

First, a new competitor started up. Initially, she wasn’t concerned as the competitor’s product had only a subset of the features that Erin’s company did. However, the competitor’s headquarters was based in New York, and their VP of Sales and CEO were now meeting face-to-face with customers, most of whom had returned to their offices. While Erin’s New York-based account execs were selling to the middle tier management of organizations, the CEO of her competitor had developed relationships with the exec staff of potential customers. She lamented, “We’ve lost a couple of deals because we were selling at the wrong level.”

Second, Erin’s VP of sales had just bought a condo in Miami to be next to her aging parents, so she was commuting to NY four days a week and managing the sales force from Miami when she wasn’t in New York. Erin sighed, “She’s as exhausted as I am flying up and down the East Coast.”

Third, Erin’s account execs were running into the typical organizational speedbumps and roadblocks that closing big deals often encounter. However, solving them via email, Zoom and once-a-month fly-in meetings wasn’t the same as the NY account execs being able to say, “Hey, our VP of Sales and CEO are just down the street. Can we all grab a quick coffee and talk this over?” Issues that could have been solved casually and quickly ballooned into ones that took more work and sometimes a plane trip for her VP of Sales or Erin to solve.

By the time we had finished breakfast it was clear to me that Erin was the one putting obstacles in front of her path to scale. Here’s what I observed and suggested.

Keep Your Eye on The Prize
While Erin had sold the first deals herself, she needed to consider whether each deal happened because as CEO, she could call on the company’s engineers to pivot the product. Were the account execs in New York trying to execute a sales model that wasn’t yet repeatable and scalable without the founder’s intervention? Had a repeatable and scalable sales process truly been validated? Or did each sale require a heroic effort?

Next, setting up their New York office without Erin or her VP of Sales physically living in New York might have worked during Covid but was now holding her company back. At this phase of her company the goal of the office shouldn’t be to add new accounts incrementally – but should be how to scale – repeatably. Hiring account execs in an office in New York let Erin believe that she had a tested, validated, and repeatable sales playbook that could rapidly scale the business. The reality was that without her and the VP of Sales living and breathing the business in New York, they were trying to scale a startup remotely.

Her early customers told Erin that her company had built a series of truly disruptive financial service products. But now, the company was in a different phase – it needed to build and grow the business exponentially. And in this phase, her focus as a CEO needed to change – from searching for product/market fit to driving exponential growth.

Exponential Growth Requires Relentless Execution
Because most of her company’s customers were concentrated in a single city, Erin and her VP of Sales needed to be there – not visiting in a hotel room. I suggested that:

  • Erin had to quickly decide if she wanted to be the one to scale the business. If not, her investors were going to find someone who could.
  • If so, she needed to realize that she had missed an important transition in her company. In a high-dollar B-to-B business, building and scaling sales can’t be done remotely. And she was losing ground every day. Her New York office needed a footprint larger than she was. It needed business development and marketing people rapidly creating demand.
  • Her VP of Sales might be wonderful, but with the all the travel the company is only getting her half-time. Erin needs a full-time head of sales in New York. Time to have a difficult conversation.
  • Because she was behind, Erin needed to rent an apartment in New York for a year, and spend the next six months there and at least two weeks a month after that. Her goal was to:
    • 1) Validate that there was a repeatable sales process. It not, build one
    • 2) Build a New York office that could create a sales and marketing footprint without her presence. Only then could she cut back her time in the City.
  • Finally, she needed to consider that if her customers were primarily in New York and the engineers were working remotely, why weren’t the company headquarters in New York?

I Hate New York
As we dug into these issues, I was pretty surprised to hear her say, “I spent a big part of my career in New York. I thought coming out to Stanford and the West Coast meant I could leave the bureaucracy of large companies and that culture behind. Covid let me do that for a few years. I guess now I’m just avoiding jumping back into an environment I thought I had left.”

We lingered over coffee as I suggested it was time for her to take stock of what’s next. She had something rare – a services company that provided real value with products that early customers loved. Her staff didn’t think they were joining a small business, neither did her investors. If she wasn’t prepared to build something to its potential, what was her next move?

Lessons Learned

  • For a startup, the next step after finding product/market fit is finding a repeatable and scalable sales process
  • This requires a transition to the relentless execution of creating demand and exponentially growing sales
  • If your customers are concentrated in a city or region, you need to be where your customers are
  • The CEO needs to lead this growth focus
  • And then hand it off to a team equally capable and committed

Filed under: Corporate/Gov't Innovation, Customer Development | 6 Comments »

The Three Pillars of World-class Corporate Innovation

Posted on November 11, 2022 by steve blank

My good friend Alexander Osterwalder, the inventor of the business model canvas (one of foundations of the Lean Methodology) has written a playbook (along with his associate partner Tendayi Viki,) From Innovation Theater to Growth Engine to explain how to build and implement repeatable innovation processes inside a company. 

Here’s their introduction to the key concepts inside the playbook.

Over 75% of executives report that innovation is a top three priority at their companies. However, only 20% of executives indicate that their companies are ready to innovate at scale. This is the challenge for contemporary organizations: How to develop a world-class ecosystem that can drive repeatable innovation at scale.

The playbook describes the three pillars of corporate innovation: Innovation Portfolios, Innovation Programs and a Culture of Innovation. Under each pillar, the playbook describes three questions that leaders and teams can ask to evaluate whether their company has the right innovation ecosystem in place.

Innovation Portfolio: what are your company’s portfolio of innovation projects?

  • Are your company’s innovation efforts exploring or exploiting business modes?
  • Does your company have a balanced portfolio of projects that cover efficiency, sustaining and transformative innovation?
  • What is the health of your innovation funnel or pipeline?

Explore: Search for new value propositions and business models by designing and testing new business ideas rather than execution. 

Exploit: Manage existing business models by scaling emerging businesses, renovating declining ones and protecting the successful ones.


Innovation Programs: how are your company’s innovation programs are structured and managed.

  • Do your leaders get excited about the wrong innovation programs?
  • What results are your innovation programs producing?
  • Are your company’s innovation programs interconnected in a strategic way?

To close the innovation capability gap, companies can evaluate their innovation programs by asking whether they’reinnovation theater or producing tangible results for the company.

  • Value Creation: Creating new products, services, value propositions and business models. These programs invest in and manage innovation projects that create value by producing new growth or cost savings.
  • Culture Change: Transforming the company to establish an innovation culture. This may include new processes, metrics, incentive systems, or changing organizational structures. These transformations help the company innovate in a consistent and repeatable way.

Innovation Culture: What are the blockers and enablers of innovation in your company –

  • How much time does your leadership spend on innovation?
  • Where does innovation live in your organization and how much power does it have?
  • What is your kill rate for innovation projects?

To overcome the innovation capability gap, companies need to create a culture that enables the right behaviors to produce world-class innovative outcomes. A reliable indicator of the quality of your innovation culture is how innovation teams would describe it. Is it a culture that is dominated by blockers of innovation or enablers of innovation?

  • Leadership Support: How can corporate leaders have the biggest impact on innovation in terms of time spent, strategic guidance, and resource allocation.
  • Organizational Design: How to give innovation legitimacy and power, the right incentives, and clear policies for collaboration with the core business.
  • Innovation Practice: How to develop people’s innovation skills and experience and acquire the right innovation talent. How to ensure that we are using the right tools, processes, and metrics to test and adapt ideas in order to reduce risk.

 Lessons Learned

  • The three pillars of an innovation ecosystem:
    • Innovation Portfolios
    • Innovation Programs
    • a Culture of Innovation
  • Download the Osterwalder Playbook here

Filed under: Corporate/Gov't Innovation | 3 Comments »

A Simple Map for Innovation at Scale

Posted on October 25, 2022 by steve blank

An edited version of this article previously appeared in the Boston Consulting Group’s strategy think tank website.

I spent last week at a global Fortune 50 company offsite watching them grapple with disruption. This 100+-year-old company has seven major product divisions, each with hundreds of products. Currently a market leader, they’re watching a new and relentless competitor with more money, more people and more advanced technology appear seemingly out of nowhere, attempting to grab customers and gain market share.

This company was so serious about dealing with this threat (they described it as “existential to their survival”) that they had mobilized the entire corporation to come up with new solutions. This wasn’t a small undertaking, because the threats were coming from multiple areas in multiple dimensions; How do they embrace new technologies? How do they convert existing manufacturing plants (and their workforce) for a completely new set of technologies? How do they bring on new supply chains? How do they become present on new social media and communications channels? How do they connect with a new generation of customers who had no brand loyalty? How to they use the new distribution channels competitors have adopted? How do they make these transitions without alienating and losing their existing customers, distribution channels and partners? And how do they motivate their most important asset – their people – to operate with speed, urgency, and passion?

The company believed they had a handful of years to solve these problems before their decline would become irreversible. This meeting was a biannual gathering of all the leadership involved in the corporate-wide initiatives to out-innovate their new disruptors. They called it the “Tsunami Initiative” to emphasize they were fighting the tidal wave of creative destruction engulfing their industry.

To succeed they realized this isn’t simply coming up with one new product. It meant pivoting an entire company – and its culture. The scale of solutions needed dwarf anything a single startup would be working on.

The company had hired a leading management consulting firm that helped them select 15 critical areas of change the Tsunami Initiative was tasked to work on. My hosts, John and Avika, at the offsite were the co-leads overseeing the 15 topic areas. The consulting firm suggested that they organize these 15 topic areas as a matrix organization, and the ballroom was filled with several hundred people from across their company –  action groups and subgroups with people from across the company: engineering, manufacturing, market analysis and collection, distribution channels, and sales. Some of the teams even included some of their close partners. Over a thousand more were working on the projects in offices scattered across the globe.

John and Avika had invited me to look at their innovation process and offer some suggestions.

Are these the real problems?
This was one of the best organized innovation initiatives I have seen. All 15 topic had team leads presenting poster sessions, there were presenters from the field sales and partners emphasizing the urgency and specificity of the problems, and there were breakout sessions where the topic area teams brainstormed with each other. After the end of the day people gathered around the firepit for informal conversations. It was a testament to John and Avika’s leadership that even off duty people were passionately debating how to solve these problems. It was an amazing display of organizational esprit de corps.

While the subject of each of the 15 topic areas had been suggested by the consulting firm, it was in conjunction with the company’s corporate strategy group, and the people who generated these topic area requirements were part of the offsite. Not only were the requirements people in attendance but so was a transition team to facilitate the delivery of the products from these topic teams into production and sales.

However, I noticed that several of the requirements from corporate strategy seemed to be priorities given to them from others (e.g. here are the problems the CFO or CEO or board thinks we ought to work on) or likely here are the topics the consulting firm thought they should focus on) and/or were from subject matter experts (e.g. I’m the expert in this field. No need to talk to anyone else; here’s what we need). It appeared the corporate strategy group was delivering problems as fixed requirements, e.g. deliver these specific features and functions the solution ought to provide.

Here was a major effort involving lots of people but missing the chance to get the root cause of the problems.

I told John and Avika that I understood some requirements were known and immutable. However, when all of the requirements are handed to the action teams this way the assumption is that the problems have been validated, and the teams do not need to do any further exploration of the problem space themselves.

Those tight bounds on requirements constrain the ability of the topic area action teams to:

  • Deeply understand the problems – who are the customers, internal stakeholders (sales, other departments) and beneficiaries (shareholders, etc.)? How to adjudicate between them, priority of the solution, timing of the solutions, minimum feature set, dependencies, etc.
  • Figure out whether the problem is a symptom of something more important
  • Understand whether the problem is immediately solvable, requires multiple minimum viable products to test several solutions, or needs more R&D

I noticed that with all of the requirements fixed upfront, instead of having a freedom to innovate, the topic area action teams had become extensions of existing product development groups. They were getting trapped into existing mindsets and were likely producing far less than they were capable of. This is a common mistake corporate innovation teams tend to make.

I reminded them that when team members get out of their buildings and comfort zones, and directly talk to, observe, and interact with the customers, stakeholders and beneficiaries, it allows them to be agile, and the solutions they deliver will be needed, timely, relevant and take less time and resources to develop. It’s the difference between admiring a problem and solving one.

As I mentioned this, I realized having all fixed requirements is a symptom of something else more interesting – how the topic leads and team members were organized. From where I sat, it seemed there was a lack of a common framework and process. 

Give the Topic Areas a Common Framework
I asked John and Avika if they had considered offering the topic action team leaders and their team members a simple conceptual framework (one picture) and common language. I suggested this would allow the teams to know when and how to “ideate” and incorporate innovative ideas that accelerate better outcomes. The framework would use the initial corporate strategy requirements as a starting point rather than a fixed destination. See the diagram.

I drew them a simple chart and explained that most problems start in the bottom right box.

These are “unvalidated” problems. Teams would use a customer discovery process to validate them. (At times some problems might require more R&D before they can be solved.) Once the problems are validated, teams move to the box on the bottom left and explore multiple solutions. Both boxes on the bottom are where ideation and innovation-type of problem/solution brainstorming are critical. At times this can be accelerated by bringing in the horizon 3, out-of-the-box thinkers that every company has, and let them lend their critical eye to the problem/solution.

If a solution is found and solves the problem, the team heads up to the box on the top left.

But I explained that very often the solution is unknown. In that case think about having the teams do a “technical terrain walk.” This is the process of describing the problem to multiple sources (vendors, internal developers, other internal programs) debriefing on the sum of what was found. A terrain walk often discovers that the problem is actually a symptom of another problem or that the sources see it as a different version of the problem. Or that an existing solution already exists or can be modified to fit.

But often, no existing solution exists. In this case, teams could head to the box on the top right and build Minimal Viable Products – the smallest feature set to test with customers and partners. This MVP testing often results in new learnings from the customers, beneficiaries, and stakeholders –  for example, they may tell the topic developer that the first 20% of the deliverable is “good enough” or the problem has changed, or the timing has changed, or it needs to be compatible with something else, etc. Finally, when a solution is wanted by customers/beneficiaries/stakeholders and is technically feasible, then the teams move to the box on the top left.

The result of this would be teams rapidly iterating to deliver solutions wanted and needed by customers within the limited time the company had left.

Creative destruction
Those companies that make it do so with an integrated effort of inspired and visionary leadership, motivated people, innovative products, and relentless execution and passion.

Watching and listening to hundreds of people fighting the tsunami in a legendary company was humbling.

I hope they make it.

Lessons Learned

  • Creative destruction and disruption will happen to every company. How will you respond?
  • Topic action teams need to deeply understand the problems as the customer understands them, not just what the corporate strategy requirements dictate
    • This can’t be done without talking directly to the customers, internal stakeholders, and partners
  • Consider if the corporate strategy team should be more facilitators than gatekeepers
  • A light-weight way to keep topic teams in sync with corporate strategy is to offer a common innovation language and problem and solution framework

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

Finding and Growing the Islands of Innovation inside a large company – Action Plan for A New CTO

Posted on June 20, 2022 by steve blank

This post previously appeared in Fast Company.

How does a newly hired Chief Technology Officer (CTO) find and grow the islands of innovation inside a large company?

How not to waste your first six months as a new CTO thinking you’re making progress when the status quo is working to keep you at bay?

I just had coffee with Anthony, a friend who was just hired as the Chief Technology Officer (CTO) of a large company (30,000+ people.) He previously cofounded several enterprise software startups, and his previous job was building a new innovation organization from scratch inside another large company. But this is the first time he was the CTO of a company this size.

Good News and Bad
His good news was that his new company provides essential services and regardless of how much they stumbled they were going to be in business for a long time. But the bad news was that the company wasn’t keeping up with new technologies and new competitors who were moving faster. And the fact that they were an essential service made the internal cultural obstacles for change and innovation that much harder.

We both laughed when he shared that the senior execs told him that all the existing processes and policies were working just fine. It was clear that at least two of the four divisions didn’t really want him there. Some groups think he’s going to muck with their empires. Some of the groups are dysfunctional. Some are, as he said, “world-class people and organizations for a world that no longer exists.”

So the question we were pondering was, how do you quickly infiltrate a large, complex company of that size? How do you put wins on the board and get a coalition working? Perhaps by getting people to agree to common problems and strategies? And/or finding the existing organizational islands of innovation that were already delivering and help them scale?

The Journey Begins
In his first week the exec staff had pointed him to the existing corporate incubator. Anthony had long come to the same conclusion I had, that highly visible corporate incubators do a good job of shaping culture and getting great press, but most often their biggest products were demos that never get deployed to the field. Anthony concluded that the incubator in his new company was no exception. Successful organizations recognize that innovation isn’t a single activity (incubators, accelerators, hackathons); it is a strategically organized end-to-end process from idea to deployment.

In addition, he was already discovering that almost every division and function was building groups for innovation, incubation and technology scouting. Yet no one had a single road map for who was doing what across the enterprise. And more importantly it wasn’t clear which, if any, of those groups were actually continuously delivering products and services at high speed.  His first job was to build a map of all those activities.

Innovation Heroes are Not Repeatable or Scalable
Over coffee Anthony offered that in a company this size he knew he would find “innovation heroes” – the individuals others in the company point to who single-handedly fought the system and got a new product, project or service delivered (see article here.) But if that was all his company had, his work was going to be much tougher than he thought, as innovation heroics as the sole source of deployment of new capabilities are a sign of a dysfunctional organization.

Anthony believed one of his roles as CTO was to:

  • Map and evaluate all the innovation, incubation and technology scouting activities
  • Help the company understand they need innovation and execution to occur simultaneously. (This is the concept of an ambidextrous organization (seethis HBR article).)
  • Educate the company that innovation and execution have different processes, people, and culture. They need each other – and need to respect and depend on each other
  • Create an innovation pipeline – from problem to deployment – and get it adopted at scale

Anthony was hoping that somewhere three, four or five levels down the organization were the real centers of innovation, where existing departments/groups – not individuals – were already accelerating mission/delivering innovative products/services at high speed. His challenge was to

find these islands of innovation and who was running them and understand if/how they

  • Leveraged existing company competencies and assets
  • Understand if/how they co-opted/bypassed existing processes and procedures
  • Had a continuous customer discovery to create products that customers need and want
  • Figured out how to deliver with speed and urgency
  • And if they somehow had made this a repeatable process

If these groups existed, his job as CTO was to take their learning and:

  • Figure out what barriers the innovation groups were running into and help build innovation processes in parallel to those for execution
  • Use their work to create a common language and tools for innovation around rapid acceleration of existing mission and delivery
  • Make permanent delivering products and services at speed with a written innovation doctrine and policy
  • Instrument the process with metrics and diagnostics

Get out of the office
So with another cup of coffee the question we were trying to answer was, how does a newly hired CTO find the real islands of innovation in a company his size?

A first place to start was with the innovation heroes/rebels. They often know where all the innovation bodies were buried. But Anthony’s insight was he needed to get out of his 8th floor office and spend time where his company’s products and services were being developed and delivered.

It was likely that most innovative groups were not simply talking about innovation, but were the ones who rapidly delivering innovative solutions to customer’s needs.

One Last Thing
As we were finishing my coffee Anthony said, “I’m going to let a few of the execs know I’m not out for turf because I only intend to be here for a few years.” I almost spit out the rest of my coffee. I asked how many years the division C-level staff has been at the company. “Some of them for decades” he replied.  I pointed out that in a large organization saying you’re just “visiting” will set you up for failure, as the executives who have made the company their career will simply wait you out.

As he left, he looked at a bit more concerned than we started. “Looks like I have my work cut out for me.”

Lessons Learned

  • Large companies often have divisions and functions with innovation, incubation and technology scouting all operating independently with no common language or tools
  • Innovation heroics as the sole source of deployment of new capabilities are a sign of a dysfunctional organization
  • Innovation isn’t a single activity (incubators, accelerators, hackathons); it is a strategically organized end-to-end process from idea to deployment
  • Somewhere three, four or five levels down the organization are the real centers of innovation – accelerating mission/delivering innovative products/services at high speed
  • The CTO’s job is to:
    • create a common process, language and tools for innovation
    • make them permanent with a written innovation doctrine and policy
  • And don’t ever tell anyone you’re a “short timer”

Filed under: Corporate/Gov't Innovation | 3 Comments »

Technology, Innovation, and Great Power Competition  – Wrap Up

Posted on January 11, 2022 by steve blank

This article first appeared in West Point’s Modern War Institute.

We just had our final session of our Technology, Innovation, and Great Power Competition class. Joe Felter, Raj Shah and I designed the class to give our students insights on how commercial technology (AI, machine learning, autonomy, cyber, quantum, semiconductors, access to space, biotech, hypersonics, and others) will shape how we employ all the elements of national power (our influence and footprint on the world stage).

(Catch up with the class by reading our intro to the class, and summaries of Classes 1, 2, 3, 4, 5 6, 7 and 8.)

This class has four parts that were like most lecture classes in international policy:

  • Weekly Readings – 5-10 articles/week
  • 20+ guest speakers on technology and its impact on national power – prior secretaries of defense and state, current and prior National Security council members, four-star generals who lead service branches
  • Lectures/Class discussion
  • Midterm individual project – a 2,000-word policy memo that describes how a U.S. competitor is using a specific technology to counter U.S. interests and a proposal how the U.S. should respond

The fifth part of the class was unique.

  • A quarter-long, team-based final project. Students developed hypotheses of how commercial technologies can be used in new and creative ways to help the U.S. wield its instruments of national power. And then they got out of the classroom and interviewed 20+ beneficiaries, policy makers, and other key stakeholders testing their hypotheses and proposed solutions.

At the end of the quarter, each of the teams gave a final “Lessons Learned” presentation with a follow-up a 3,000 to 5,000-word team-written paper.

By the end the class all the teams realized that the problem they had selected had morphed into something bigger, deeper and much more interesting.

Team Army Venture Capital

Original problem statement: the U.S. needs to reevaluate and improve its public venture capital relationship with companies with dual-use technologies.

Final problem statement: the DoD needs to reevaluate and improve its funding strategies and partnerships with dual-use mid-stage private companies.

If you can’t see the presentation click here.

We knew that these students could write a great research paper. As we pointed out to them, while you can be the smartest person in the building, it’s unlikely that 1) all the facts are in the building, 2) you’re smarter than the collective intelligence sitting outside the building.

Team Conflicted Capital

Original problem statement: Chinese investment in US startups with critical technologies poses a threat to US military capabilities, but the lack of transparency in venture capital makes it challenging to track them.

Final problem statement: Chinese adversarial venture capital investments in U.S. dual-use startups continue to threaten US military capabilities across critical technologies, but the scope of the problem is relatively small. VCs and entrepreneurs can play a role in addressing the challenge by shunning known sources of adversarial capital.

If you can’t see the presentation click here.

By week 2 of the class students formed teams around a specific technology challenge facing a US government agency and worked throughout the course to develop their own proposals to help the U.S. compete more effectively through new operational concepts, organizations, and/or strategies.

Team Aurora

Original Problem Statement: How can the U.S. employ its cyber capabilities to provide the populace of China with unrestricted Internet access to bolster civil society against CCP crackdowns, in order to pressure the PRC, spread American liberal values, and uphold U.S. freedom of action in the information domain?

Final Problem Statement: How does the USG leverage a soft-power information campaign to support Hong Kong residents’ right to self-determination and democratic governance without placing individuals at undue risk (of prosecution as foreign agents under the National Security Law)?

If you can’t see the presentation click here.

We wanted to give our students hands-on experience on how to deeply understand a problem at the intersection of our country’s diplomacy, information, its military capabilities, economic strength, finance, intelligence, and law enforcement and dual-use technology. First by having them develop hypotheses about the problem; next by getting out of the classroom and talking to relevant stakeholders across government, industry, and academia to validate their assumptions; and finally by taking what they learned to propose and prototype solutions to these problems.

Team ShortCircuit

Original Problem Statement: U.S. semiconductor procurement is heavily dependent on TSMC, which creates a substantial vulnerability in the event a PRC invasion of Taiwan, or other kinetic disruptions in the Indo-Pacific.

Final Problem Statement: How should the U.S. Government augment the domestic semiconductor workforce through education and innovation initiatives to increase its semiconductor sector competitiveness?

If you can’t see the presentation click here. 

We want our students to build the reflexes and skills to deeply understand a problem by gathering first-hand information and validating that the problem they are solving is the real problem, not a symptom of something else. Then, students began rapidly building minimal viable solutions (policy, software, hardware …) as a way to test and validate their understanding of both the problem and what it would take to solve it.

Team Drone

Original Problem Statement: Drones can be used as a surprise element in an amphibious assault to overwhelm defenses. In a potential Taiwan Strait Crisis, there is a need for a low-cost and survivable counter-drone system to defend Taiwan.

Final Problem Statement: Taiwan needs a robust and survivable command and control system to effectively and quickly bring the right asset to the right place at the right time during an invasion.

If you can’t see the presentation click here.

One other goal of the class was testing a teaching team hypothesis – that we could turn a lecture class into one that gave back more in output than we put in. That by tasking the students to 1) use what they learned from the lectures and 2) then test their assumptions outside the classroom, the external input they received would be a force multiplier. It would make the lecture material real, tangible and actionable. And we and they would end up with something quite valuable.

Team Apollo

Original Problem Statement: The Space Force must leverage commercial innovation and establish a trained, experienced acquisition workforce that will deliver innovation impact that the Space Force requires.

Final Problem Statement: The United States Space Force lacks the supply chain and rapid launch capabilities needed to respond to contingencies in space. The private sector possesses these capabilities, but is not being adequately leveraged or incentivized.

If you can’t see the presentation click here. 

We knew we were asking a lot from our students. We were integrating a lecture class with a heavy reading list with the best practices of hypothesis testing from Lean Launchpad/Hacking for Defense/I-Corps. But I’ve yet to bet wrong in pushing students past what they think is reasonable. Most rise way above the occasion.

Given this was the first time we taught integrated lectures and projects our student reviews ranged from the “we must have paid them to write this” to “did they take the same class as everyone else?” (Actually it was, let’s fix the valid issues they raised.)

A few student quotes:

“This is a MUST TAKE [caps theirs]. The professors and teaching team are second to none, and the guest speakers are truly amazing. This course is challenging, but you truly get out of it what you put into it, and you will learn so much crucial and interesting material.”

“THIS IS A FANTASTIC COURSE! [caps theirs]. The material was excellent, the instruction from legendary professions was top notch and the reading material was timely, interesting, and relevant. Anyone who is interested in geopolitics and technology innovation needs to take this course. Not only that, but each week features a different guest speaker that is usually from the highest levels of US government and is THE expert in the subject for that week’s course. Really amazing experience getting to listen to and have Q&A with such incredible people.”

Team Catena

Original Problem Statement: China’s cryptocurrency ban presents the U.S. with an opportunity to influence blockchain development, attract technical talent, and leverage digital asset technology.

Final Problem Statement: CCP’s economic coercion makes countries such as Australia dependent on China’s economy and vulnerable to the party’s will. The U.S. must analyze which key Australian industries are most threatened and determine viable alternative trading partners.

If you can’t see the presentation click here.

A few more student quotes:

“This is hands-down one of the best courses I’ve taken at Stanford. From the moment I walked into the door, I was stunned by both the caliber of people you’re sharing oxygen with in that room, and how welcoming and accessible they are. Despite it being the first offering of this course, everything was well-organized, and our team was always supported with a wealth of resources and access we needed to get our policy deliverables to, alongside a healthy dose of near-constant feedback and encouragement from the teaching team. Readings were engaging and insightful, and the guest list we had was simply unbelievable- Mattis, McFaul, Rice, Pottinger, among several others in the White House, Pentagon, and beyond. There’s a real feeling that everyone who worked on this course wants you to grow as a student but also teach them what you’re learning.

Beware Steve Blank- he can be harsh and aggressive but exemplifies the ‘rude but life-saving doctor’ trope. I’ve learned more from responding to a single Blank cold-question in lecture than from three entire quarters of applied math at Stanford. Be sure to get started early on your teamwork and talk to the lecturers as much as you can- this really is a ‘you get as much as you give’ course, and the highest returns are to be had by being tenacious, loud, and unabashed in your questioning.
And, for God’s sake, don’t draw cartoons on your final presentation- the JCOS might be watching.

“DO NOT TAKE THIS COURSE! This class is a complete waste of time.“

“This was the worst class I took at Stanford “

While the positive feedback accolades for the class were rewarding, several comments identified areas we can improve:

  • Letting the students know upfront the workload and unique format of the class
  • Better organization and timing
    • Readings: be much clearer on which ones are mandatory vs optional
    • Clarify details, flows and objectives for each class
    • Tie speakers to projects / student presentations
  • Make weekly office hours mandatory to ensure all students receive regular professor/student interaction, feedback and guidance from week 1

All of our students put in extraordinary amount of work. Our students, a mix between international policy and engineering, will go off to senior roles in State, Defense, policy and to the companies building new disruptive technologies. They will be the ones to determine what the world-order will look like for the rest of the century and beyond. Will it be a rules-based order where states cooperate to pursue a shared vision for a free and open region and where the sovereignty of all countries large and small is protected under international law? Or will it be an autocratic and dystopian future coerced and imposed by a neo-totalitarian regime?

This class changed the trajectory of many of our students. A number expressed newfound interest in exploring career options in the field of national security. Several will be taking advantage of opportunities provided by the Gordian Knot Center for National Security Innovation to further pursue their contribution to national security.

Lessons Learned

  • We could turn a lecture class into one that gave back more in output than we put in.
  • Tasking the students to test their assumptions outside the classroom, the external input they received was a force multiplier
    • It made the lecture material real, tangible and actionable
  • Pushing students past what they think is reasonable results in extraordinary output. Most rise way above the occasion
  • The output of the class convinced us that the work of students like these could materially add to the safety and security of the free world
  • It is a national security imperative to create greater opportunities for our best and brightest to engage and address challenges at the nexus of technology, innovation and national security

Note: Inspired by our experience with this course, we decided to increase the focus of Stanford’s Gordian Knot Center for National Security Innovation on developing and empowering the extraordinary and largely untapped potential of students across the university and beyond.

Filed under: Corporate/Gov't Innovation, Technology Innovation and Great Power Competition | Leave a comment »

The Gordian Knot Center for National Security Innovation at Stanford

Posted on November 30, 2021 by steve blank

penitus cogitare, cito agere – think deeply, act quickly

75 years ago, the Office of Naval Research (ONR) helped kickstart innovation in Silicon Valley with a series of grants to Fred Terman, Dean of Stanford’s Engineering school. Terman used the money to set up the Stanford Electronics Research Lab. He staffed it with his lab managers who built the first electronic warfare and electronic intelligence systems in WWII. This lab pushed the envelope of basic and applied research in microwave devices and electronics and within a few short years made Stanford a leader in these fields. The lab became ground zero for the wave of Stanford’s entrepreneurship and innovation in the 1950’s and 60’s and helped form what would later be called Silicon Valley.

75 years later, ONR just laid down a bet again, one we believe will be equally transformative. They’re the first sponsors of the new Gordian Knot Center for National Security Innovation at Stanford that Joe Felter, Raj Shah, and I have started.

Gordian What?

A Gordian Knot is a metaphor for an intractable problem. Today, the United States is facing several seemingly intractable national security problems simultaneously.

We intend to help solve them in Stanford’s Gordian Knot Center for National Security Innovation. Our motto of penitus cogitare, cito agere, think deeply, act quickly, embraces our unique intersection of deep problem understanding, combined with rapid solutions. The Center combines six unique strengths of Stanford and its location in Silicon Valley.

  1. The insights and expertise of Stanford international and national security policy leaders
  2. The technology insights and expertise of Stanford Engineering
  3. Exceptional students willing to help the country win the Great Power Competition
  4. Silicon Valley’s deep technology ecosystem
  5. Our experience in rapid problem understanding, rapid iteration and deployment of solutions with speed and urgency
  6. Access to risk capital at scale

Our focus will match our motto. We’re going to coordinate resources at Stanford and peer universities, and across Silicon Valley’s innovation ecosystem to:

  • Scale national security innovation education
  • Train national security innovators
  • Offer insight, integration, and policy outreach
  • Provide a continual output of minimal viable products that can act as catalysts for solutions to the toughest problems

Why Now? Why Us?

Over the last decade we’ve created a series of classes in entrepreneurship, rapid innovation, and national security: Lean LaunchPad; National Science Foundation I-Corps; Hacking for Defense; Hacking for Diplomacy; Technology, Innovation and Modern War last year; and this year Technology, Innovation and Great Power Competition. These classes have been widely adopted, across the U.S. and globally.

Simultaneously, each of us was actively engaged in helping different branches of the government understand, react, and deliver solutions in a rapidly changing and challenging environment. It’s become clear to us that for the first time in three decades, the U.S. is now engaged in a Great Power Competition. And we’re behind. Our national power (our influence and footprint on the world stage) is being challenged and effectively negated by autocratic regimes like China and Russia.

GKC joins a select group of national security think tanks

At Stanford, the Gordian Knot Center will sit in the Freeman Spogli Institute for International Studies run by Mike McFaul, ex ambassador to Russia. And Mike has graciously agreed to be our Principal Investigator along with Riitta Katila in the Management Science and Engineering Department (MS&E) in the Engineering School. MS&E is where disruptive technology meets national security, and has a long history of brilliant contributions from Bill Perry, Sig Hecker and Elisabeth Pate-Cornell and others. (Stanford’s other policy institute is the Hoover Institution, run by Condoleezza Rice, ex secretary of state). All are world-class leaders in understanding international problems, policies, and institutions. Other U.S. foreign affairs and national security think tanks include:

We intend to focus the new Center on solving problems across the spectrum of activities that create and sustain national power. National power is the combination of a country’s diplomacy (soft power and alliances), information, military and economic strength as well as its finance, intelligence, and law enforcement – or DIME-FIL. Our projects will be those at the intersection of DIME-FIL with the onslaught of commercial technologies (AI, machine learning, autonomy, biotech, cyber, semiconductors, commercial access to space, et al.). And we’re going to hit the ground running by moving our two national security classes — Hacking for Defense, and Technology Innovation and Great Power Competition (which this year is now a required course in the International Policy program) — into the Center.

We hope our unique charter, “think deeply, act quickly” can complement the extraordinary work these other institutions provide.

The Office of Naval Research (ONR)

The Office of Naval Research (ONR) has been planning, fostering, and encouraging scientific research—and reimagining naval power—since 1946. The grants it made to Stanford that year were the first to any university.

Today, the Navy and the U.S. Marine Corps is looking to find ways to accelerate technology development and delivery to our naval forces. There is broad consensus that the current pace of technology development and adoption is unsatisfactory, and that without significant reform, we will lose the competition with China in the South China Sea for maritime superiority.

Rear Admiral Selby, Chief of Naval Research, has recognized that it’s no longer “business as usual.” That ONR delivering sustaining innovations for the existing fleet and marine forces is no longer good enough to deter war or keep us in the fight. And that ONR once again needs to lead with disruptive technologies, new operational concepts, new types of program management and mindsets. He’s on a mission to provide the Navy and U.S. Marine Corps with just that. When we approached him about the idea of the Gordian Knot Center he reminded us, that not only did ONR sponsor Stanford in 1946, they’ve been sponsoring our Hacking for Defense class since 2016!  Now they’ve become our charter sponsor for the Gordian Knot Center.

We hope to earn it – for him, ONR, and the country.

Steve, Joe and Raj

Lessons Learned

The Center combines six unique strengths of Stanford and its location in Silicon Valley

  • The insights and expertise of Stanford international and national security policy leaders
  • The technology insights and expertise of Stanford Engineering
  • Exceptional students willing to help the country win the Great Power Competition
  • Silicon Valley’s deep technology ecosystem
  • Our experience in rapid problem understanding, rapid iteration and deployment of solutions with speed and urgency
  • Access to risk capital at scale

Our focus will match our motto. We’re going to coordinate resources at Stanford and peer universities and across Silicon Valley’s innovation ecosystem to:

  • Scale national security innovation education
  • Train national security innovators
  • Offer insight, integration, and policy outreach
  • Provide a continual output of minimal viable products that can act as catalysts for solutions to the toughest problems

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Technology, Innovation, and Great Power Competition – Class 8 – Cyber

Posted on November 26, 2021 by steve blank

This article first appeared in West Point’s Modern War Institute.

We just completed the eighth week of our new national security class at Stanford – Technology, Innovation and Great Power Competition. Joe Felter, Raj Shah and I designed the class to cover how technology will shape the character and employment of all instruments of national power.

In class 1, we learned that national power is the sum of all the resources available to a state to pursue its national objectives and interests. This power is wielded through a combination of a country’s diplomacy, information, its military capabilities, economic strength, finance, intelligence, and law enforcement. These instruments of national power employed in a “whole of government approach” to advance a state’s interests are known by the acronym DIME-FIL.

Class 2 focused on China, the U.S.’s primary great power competitor. China is using all elements of its national power, e.g. information/ intelligence, its military might and economic strength as well as exploiting Western finance and technology. China’s goal is to challenge and overturn the U.S.-led liberal international order and replace it with its own neo-totalitarian model where China emerges as the dominant regional and global power.

The third class focused on Russia, which since 2014 has asserted itself as a competing great power. We learned how Russia pursues security and economic interests in parallel with its ideological aims.

The fourth class shifted our focus to the impact commercial technologies have on the instruments of national power (DIME-FIL). The first technology we examined was semiconductors, and the U.S. dependence on TSMC in Taiwan, for its most advanced logic chips. This is problematic as China claims Taiwan is a province of China.

In the fifth class we examined the impact that AI and Machine Learning will continue to have on the capabilities and employment of DIME-FIL. We heard from the Joint Artificial Intelligence Center (JAIC), the focal point of the DOD AI strategy; and from the Defense Innovation Unit (DIU) – a DoD organization that contracts with commercial companies to solve national security problems.

In class six we discussed unmanned systems and autonomy and how the advent of these weapons will change operational concepts and the face of war.

Class seven looked at the Second Space Age, how our military and civilian economy rely on assets in space, and how space is now a contested environment, with China and Russia capable of disabling/destroying our satellites

Today’s class: Cyber

Catch up with the class by reading our intro to the class, and summaries of Classes 1, 2, 3, 4, 5 6 and 7

 

Required readings

Case Study for Class

Competition in Cyber Space

Cyber Attacks / Cyber Warfare

IP & Protected Personal Information Theft

Political Interference

Reading Assignment Questions

Pick one of the below questions and answer in approximately 100 words, based on the required readings. Please note that this assignment will be graded and count towards course participation. 

  1. What is the U.S. Cyber Command’s doctrinal approach to competing in the cyber domain? Do you agree with the current doctrine? Why or why not? Would you do anything differently?
  2. Of the different types of cyber threats presented in this week’s readings (cyberattacks, PPI and IP theft, and political interference), which do you think presents the greatest threat to U.S. interests and why? What should the U.S do to address that threat? Be specific if your recommendations are for the government or private sector.

Class 8 – Guest Speaker

Dr. Michael Sulmeyer is a Senior Adviser, USCYBERCOM (Cyber Command). He was the former Senior Director for Cyber at the National Security Council. The former Cyber Project Director at the Harvard Kennedy School-Belfer Center. He was a past Director, Plans and Operations, for Cyber Policy in the Office of the Secretary of Defense. Previously, he worked on arms control and the maintenance of strategic stability between the United States, Russia, and China.

Cyber Command formed in 2010 and is one of the eleven unified combatant commands of the United States Department of Defense. It’s commanded by a four-star general, General Paul Nakasone who is also the director of the National Security Agency and chief of the Central Security Service. It has three main missions: (1) defending the DoD information systems, (2) supporting joint force commanders with cyberspace operations, and (3) defending the nation from significant cyberattacks.

Dr. Sulmeyer has written, “A focus on cyber-deterrence is understandable but misplaced. Deterrence aims to change the calculations of adversaries by persuading them that the risks of an attack outweigh the rewards or that they will be denied the benefits they seek. But in seeking merely to deter enemies, the United States finds itself constantly on the back foot. Instead, the United States should be pursuing a more active cyberpolicy, one aimed not at deterring enemies but at disrupting their capabilities. In cyberwarfare, Washington should recognize that the best defense is a good offense.

In countries where technology companies are willing to cooperate with the U.S. government (or with requests from their own government), a phone call to the right cloud provider or Internet service provider (ISP) could result in getting bad actors kicked off the Internet.

U.S. hackers could pursue a campaign of erasing computers at scale, disabling accounts and credentials used by hackers to attack, and cutting off access to services so it is harder to compromise innocent systems to conduct their attacks.”

Our national defense cyber policy has now moved to “persistent engagement.” Defending forward as close as possible to the origin of adversary activity extends our reach to expose adversaries’ weaknesses, learn their intentions and capabilities, and counter attacks close to their origins. Continuous engagement imposes tactical friction and strategic costs on our adversaries, compelling them to shift resources to defense and reduce attacks. We will pursue attackers across networks and systems to render most malicious cyber and cyber-enabled activity inconsequential while achieving greater freedom of maneuver to counter and contest dangerous adversary activity before it impairs our national power.

Lecture 8

If you can’t see the lecture 8 slides click here.

Lessons Learned

  • Cyber Command’s role is to:
    • defend the DoD information systems
    • support joint force commanders with cyberspace operations, and
    • defend the nation from significant cyberattacks
  • Cyber Command has evolved from a reactive, defensive posture to a proactive posture called “persistent engagement”


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Technology, Innovation, and Modern War – Introduction

Posted on September 10, 2020 by steve blank

I’m teaching my first non-lean start up class in a decade at Stanford next week; Technology, Innovation and Modern War: Keeping America’s Edge in an Era of Great Power Competition. The class is joint listed in Stanford’s International Policy department as well as in the Engineering School, in the department of Management Science and Engineering.

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Why This Course?

Five years ago, Joe Felter, Pete Newell and I realized that few of our students considered careers in the Department of Defense or Intelligence Community. In response we developed the Hacking for Defense class where students could learn about the nation’s emerging threats and security challenges while working with innovators inside the Department of Defense (DoD) and Intelligence Community to solve real national security problems. Today there is a national network of 40 colleges and universities teaching Hacking for Defense. We’ve created a network of entrepreneurial students who understand the security threats facing the country and engaged them in partnership with islands of innovation in the DOD/IC. The output of these classes is providing hundreds of solutions to critical national security problems every year. This was our first step in fostering a more agile, responsive and resilient, approach to national security in the 21st century.

Fast forward to today. For the first time since the start of the Cold War, Americans face the prospect of being unable to win in a future conflict. In 2017, the Chairman of the Joint Chiefs of Staff gave a prescient warning that “In just a few years, if we do not change the trajectory, we will lose our qualitative and quantitative competitive advantage.” Those few years are now, and this warning is coming to fruition.

New emerging technologies will radically change how countries will be able to fight and deter threats across air, land, sea, space, and cyber. But winning future conflicts requires more than just adopting new technology; it requires a revolution in thinking about how this technology can be integrated into weapons systems to drive new operational and organizational concepts that change the way we fight.

Early in 2020, Joe Felter (previously Assistant Secretary of Defense for South Asia, Southeast Asia, and Oceania and Hacking for Defense co-creator) and I began to talk about the need for a new class that gave students an overview of the new technologies and explored how new technologies turn into weapons, and how new concepts to use them will emerge. We recruited Raj Shah (previously the managing director of the Defense Innovation Unit that was responsible for contracting with commercial companies to solve national security problems) and we started designing the class. One couldn’t hope for a better set of co-instructors.

The Class
War, in one form or another, appeared with the first man. Ever since someone picked up a rock and realized you could throw it, humans have embraced new technology for war. Each new generation of technology (spears, bows and arrows, guns, planes, etc.) inevitably created new types of military systems. But just picking up the rock didn’t win a conflict, it required the development of a new operational concept learning how to use it to win, i.e. what was the best way to throw a rock, how many people needed to throw rocks, the timing of when you threw it, etc. As each new technology created new military systems, new operational concepts were developed (bows and arrows were used differently than rocks, etc.). Our course will examine the new operational concepts and strategies that will emerge from 21st century technologies – Space, Cyber, AI & Machine Learning and Autonomy. We’ll describe how new military systems are acquired, funded, and fielded, and also consider the roles of Congress, incumbent contractors, lobbyists, and start-ups.

This course begins with an overview of the history of military innovation then describes the U.S. strategies developed since World War II to gain and maintain our technological competitive edge during the bipolar standoff of the Cold War. Next, we’ll discuss the challenge of our National Defense Strategy – we no longer face a single Cold War adversary but potentially five – in what are called the “2+3 threats” (China and Russia plus Iran, North Korea, and non-nation state actors.)

The course offers students the insight that for hundreds of years, innovation in military systems has followed a repeatable pattern:  technology innovation > new weapons > experimentation with new weapons/operational concepts > pushback from incumbents > first use of new operational concepts.

In the second part of course, we’ll use this framework to examine the military applications of emerging technologies in Space, Cyber, AI & Machine Learning, and Autonomy. Students will develop their own proposals for new operational concepts, defense organizations, and strategies to address these emergent technologies while heeding the funding and political hurdles to get them implemented.

The course draws on the experience and expertise of guest lecturers from industry and from across the Department of Defense and other government agencies to provide context and perspective. Bookending the class will be two past secretaries of Defense – Ash Carter and Jim Mattis.

Much like we’ve done with our past classes; – the Lean LaunchPad which became the National Science Foundation I-Corps (taught in 98 universities) and Hacking For Defense (taught in 40 schools,) – our goal is to open source this class to other universities.

As Christian Brose assesses in his prescient book “The Kill Chain”, our challenge is not the lack of money, technology, or capable and committed people in the US government, military and private industry – but of a lack of imagination. This course, like its cousin Hacking for Defense, aims to harness America’s comparative advantage in innovative thinking and the quality of its institutions of higher education, to bring imaginative and creative approaches to developing the new operational concepts we need to compete and prevail in this era of great power rivalry.

The syllabus for the class is below:

Technology, Innovation and Modern War

Part I: History, Strategy and Challenges

Sep 15: Course Introduction
Guest Speaker: Ash Carter 25th Secretary of Defense

Sep 17: History of Defense Innovation: From Long Bows to Nuclear Weapons and Off-Set Strategies.
Guest Speaker: Max Boot author War Made New

Sep 22: DoD 101: Sourced, Acquiring and Deploying Technology for Modern War.
Guest Speaker: Anja Manuel ex State Dept, responsible for South Asia Policy

Sep 24: US Defense Strategies and Military Plans in an Era of Great Power Competition
Guest Speaker: Bridge Colby ex Deputy Asst Secretary of Defense for Strategy and Force Development

Sep 29: The Challenges of Defending America in the Future of High Tech War
Guest Speaker: Christian Brose, author The Kill Chain, head of Strategy for Anduril

Oct 1: Innovations in Acquisitions in Modern War
Guest Speaker: Will Roper Asst Secretary of the Air Force for Acquisition, Technology and Logistics

Part II: Military Applications, Operational Concepts, Organization and Strategy 

Artificial Intelligence and Machine Learning
Oct 6: Introduction
Guest Speaker: LTG General Jack Shanahan (ret)  fmr Director Joint Artificial Intelligence Center (JAIC)

Oct 8: Military Applications
Guest Speaker: Chris Lynch (CEO Rebellion Defense, ex head Defense Digital Service/Nand Mulchandani(CTO of the JAIC)

Autonomy
Oct 13: Introduction
Guest Speaker: Maynard Holliday

Oct 16: Military Applications
Guest Speaker: Michele Flournoy

Cyber
Oct 20: Introduction
Guest Speaker: Michael Sulmeyer

Oct 22: Military Applications
Guest Speaker: Sumit Agarwal

Space
Oct 27: Introduction/Military Applications
Guest Speaker: General John Raymond, Commander U.S. Space Force

Oct 29: Applying Innovaton to Future Plans
Guest Speaker: Admiral Lorin Selby, Chief of Naval Research

Part III: Building an integrated plan for the future (Student group project)

How to build a plan for future war
Nov 3:
Guest Speaker(s): COCOM and Joint Staff Planners

Nov 5: Conops planning
Guest Speaker: Maj. General Mike Fenzel

Nov 10: Budget and Planning/Mid Term Presentation
Guest Speaker: Congressman Mike Gallagher

Group Presentations Dry Runs and Instructor Critiques
Nov 12: All six teams

Group Presentations
Nov 17: All six teams
Guest Critique:  US Indo-Pacom TBA

Course Reflections
Nov 19: Defending a Shared Vision for the Future
Guest Speaker General (ret) James Mattis 26th Secretary of Defense

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