Steve Blank Corporate/Gov’t Innovation

Napkin Entrepreneurs

Posted on March 29, 2011 by steve blank

Faith is taking the first step even when you don’t see the whole staircase.
Martin Luther King, Jr.

The barriers for starting a company have come down. Today the total available markets for new applications are hundreds of millions if not billion of users, while new classes of investors are popping up all over (angels, superangels, archangels, and even seraphim and cherubim have been spotted.)

Entrepreneurship departments are now the cool thing to have in colleges and universities, and classes on how to start a company are being taught over a weekend, a month, six weeks, and via correspondence course.

If the opportunity is so large, and the barriers to starting up so low, why haven’t the number of scalable startups exploded exponentially? What’s holding us back?

It might be that it’s easier than ever to draw an idea on the back of the napkin, it’s still hard to quit your day job.

Napkin Entrepreneurs
One of the amazing consequences of the low cost of creating web and mobile apps is that you can get a lot of them up and running simultaneously and affordably. I call these app development projects “science experiments.”

These web science experiments are the logical extension of the Customer Discovery step in the Customer Development process. They’re a great way to brainstorm outside the building, getting real customer feedback as you think through your ideas about value proposition/customer/demand creation/revenue model.

They’re the 21st century version of a product sketch on a back of napkin. But instead of just a piece of paper, you end up with a site that users can visit, use and even pay for.

Ten of thousands of people who could never afford to start a company can now start several over their lunch break. And with any glimmer of customer interest they can decide whether they want to:

run it as a part-time business
commit full-time to build a “buyable startup” (~$5-$25 Million exit)
commit full-time and try to build a scalable startup

But it’s important to note what these napkin projects/test are not. They are not a company, nor are they are a startup. Running them doesn’t make you a founder. And while they are entrepreneurial experiments, until you actually commit to them by choosing one idea, quitting your day job and committing yourself 24/7 it’s not clear that the word “founder or entrepreneur” even applies.

Lessons Learned

The web now allows you to turn your “back of the napkin” ideas into live experiments

Running lots of app experiments is a great idea

But these experiments are not a company and you’re not a “founder”. You’re just a “napkin entrepreneur.”

Founding a company is an act of complete commitment

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Filed under: Corporate/Gov't Innovation, Teaching | 50 Comments »

The Democratization of Entrepreneurship

Posted on March 21, 2011 by steve blank

I gave a talk at the Stanford Graduate School of Business as part of Entrepreneurship Week on the Democratization of Entrepreneurship. The first 11 minutes or so of the talk covers the post I wrote called “When It’s Darkest, Men See the Stars.”

In it I observed that the barriers to entrepreneurship are not just being removed. In each case they’re being replaced by innovations that are speeding up each step, some by a factor of ten.

My hypotheses is that we’ll look back to this decade as the beginning of our own revolution. We may remember this as the time when scientific discoveries and technological breakthroughs were integrated into the fabric of society faster than they had ever been before. When the speed of how businesses operated changed forever. As the time when we reinvented the American economy and our Gross Domestic Product began to take off and the U.S. and the world reached a level of wealth never seen before. It may be the dawn of a new era for a new American economy built on entrepreneurship and innovation.

If you can’t see the video above, click here.)

If you’ve seen my other talks, after the first 11 minutes you can skip to ~1:04 with the Sloan versus Durant story and some interesting student Q&A. You can follow the talk along with the slides I used, below.

(If you can’t see the slide presentation above, click here.)

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Filed under: Corporate/Gov't Innovation, Customer Development | 12 Comments »

Honor and Recognition in Event of Success

Posted on March 2, 2011 by steve blank

“Men wanted for hazardous journey. Low wages, bitter cold, long hours of complete darkness. Safe return doubtful. Honour and recognition in event of success.”

Attributed to Ernest Shackleton

In 1912 Ernest Shackleton placed this ad to recruit a crew for the ship Endurance and his expedition to the South Pole. This would be one of the most heroic journeys of exploration ever undertaken. In it Shackleton defined courage and leadership.

Over the last year I’ve been lucky enough to watch the corporate equivalent at a major U.S. corporation – starting a new technology division bringing disruptive technology to market at General Electric.

One of GE’s new divisions – GE’s Energy Storage – has been given the charter to bring an entirely new battery technology to market. This battery works equally well whether it’s below freezing or broiling hot. It’s high density, long life, environmentally friendly and can go places other batteries can’t.

This is a new division of a large, old company where one would think innovation had long been beaten out of them. You couldn’t be more wrong. The Energy Storage division is acting like a startup, and Prescott Logan its General Manager, has lived up to the charter. He’s as good as any startup CEO in Silicon Valley. Working with him, I’ve been impressed to watch his small team embrace Customer Development (and Business Model Generation) and search the world for the right product/market fit. They’ve tested their hypotheses with literally hundreds of customer interviews on every continent in the world. They’ve gained as good of an insight into customer needs and product feature set than any startup I’ve seen. And they’ve continuously iterated and gone through a few pivots of their business model. (Their current initial markets for their batteries include telecom, utilities, transportation and Uninterrupted Power Supply (UPS) markets.) And they’ve being doing this while driving product cost down and performance up.

GE’s performance in implementing Customer Development gives lie to the tale that only web startups can be agile. Corporate elephants can dance.

So why this post?

GE’s Energy Storage division is looking to hire two insanely great people who can act like senior execs in a startup:

A leader of Customer Development — think of it as a Product Manger running a product line who knows how to get out of the building and not write MRD’s but listen to customers.
A Sales Closer – a salesman who can make up the sales process on the fly and bring in deals without a datasheet, price list or roadmap. They will build the sales team that follows.

If you’ve been intrigued by the notion of customer development in an early stage startup —getting out of the building to talk to customers and working with an engineering team that’s capable of being agile and responsive – yet backed by a $150 billion corporation, this is the opportunity of a lifetime. (The good news/bad news is that you’ll spend ½ your time on airplanes listening to customers.)

If you have 10 years of product management or sales experience, and think that you have extraordinary talent to match the opportunity, submit your resume by: 1) Clicking on Customer Development or Sales Closer, and 2) Emailing your resume to Prescott Logan at prescott.logan@ge.com Tell him you want to sign up for the adventure.

Honor and recognition in event of success.
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Filed under: Corporate/Gov't Innovation, Technology | 4 Comments »

The Cover-Up Culture

Posted on January 10, 2011 by steve blank

In a startup “Good news needs to travel fast, but bad news needs to travel faster.”

There’s something about the combination of human nature (rationalization and self deception) and large hierarchical organizations (corporations, military, government, etc.) that actively conspire to hide failure and errors. Institutional cover-up’s are so ingrained that we take them for granted.

Yet for a startup a cover-up culture is death. In a startup founders and the board need to do exact the opposite of a large company – failures need to be shared, discussed and dissected to extract “lessons learned” so a new direction can be set.

Lie to My Face
The first time I saw a corporate cover-up was as a new board member of a medium size public company. The VP of an operating division had run into trouble in product development; the product was late and getting later. The revenue plan had the new product baked into the numbers and it was clear that this division General Manager was going to crater his forecast (happens all the time, nothing new here.) I knew this from talking to his people before the board meeting so none of this was a surprise. What was a surprise was the boldface lies the VP told us at the board meeting. “The product’s on schedule. No problems. We’ll make the numbers.” The disconnect between reality and a senior executive’s willingness to blatantly lie to his CEO and board just blew me away.

It would have been so much simpler for him to say, “We’re screwed, and I need your help.” Until I dug deeper and realized that the entire company had a “cover-up culture” – the CEO punished failure and bad news. Since only good news was rewarded (as defined by the revenue and product plan shared with Wall Street analysts,) I understood why avoiding bad news and covering mistakes was the general manager’s rational choice in this company. Because earlier in my career I had a board that beat me senseless when I missed a milestone.

Cover-up Or Look Like an Idiot
In large companies executives are hired and compensated for pristine and efficient execution. If you screw up, there’s an unspoken assumption that you’ve screwed up a known process – something that was repeatable and predictable. You cover up because your screw-ups not only make you look like a failure, but everyone up the line (your boss, their boss, etc.) look like an idiot. Further, the odds are that the information you hide won’t immediately be discovered or damage the company.

I mention this not because this post is about cover-ups in large companies, (I’ll leave that to the experts in organizational behavior and social theory) but to contrast it with the very different kind of culture that startups need to survive.

The Cover-Up Culture: The Role of the Board
As a founder I quickly learned how open I could be with my board. A few times I had not so great investors who believed that a startup should unfold like a Harvard case study. They ignored the reality that most startups are a chaotic set of events from which founders are trying to extract a repeatable and profitable pattern. The first time I delivered bad news I got my head handed to me. The lesson this chastened CEO took from that board meeting? Don’t tell this board bad news.

In other startups I was lucky and had great investors who knew how to manage and deal with chaos. They realized that conditions change so rapidly that the original business plan hypotheses becomes irrelevant. These investors taught me metrics appropriate forsearching for a business model, how to work with the board when I didn’t make a milestone, and how we would figure out when it was time to change the strategy. I thought of these board members as partners and I shared everything with them; good, bad and ugly.

These board members encouraged me to instill the right culture in the company. They reminded me that failures in startups tell the founders which direction not to pursue – while teaching you how to succeed. This means covering up failure in a startup was like tossing their money in the street. So instead of a cover-up culture they encouraged a “Lessons Learned culture.”

Startups: Good News Needs to Travel Fast, but Bad News Needs to Travel Faster
A key element of a “Lessons Learned” culture is rapid dissemination of information. All information, whether good or bad, must be shared rapidly. We taught our company that understanding sales losses were more important than understanding sales wins; understanding why a competitor’s products were better was more important than rationalizing ways in which ours were superior. All news, but especially bad news, needed to be shared, dissected, understood, and acted on. At each weekly department and company meeting we discussed what worked and hadn’t. And when we found employees who hoarded information or covered up problems we removed them. They were cultural poison for a startup.

The resulting conversations made us smarter, agile and relentless.

Lessons Learned

Startups are built around rapid iterations of hypotheses. Most of them turn out be wrong

Make sure your board is not beating up on the truth

Build a culture of rapid dissemination of all news; good or bad

Founders lead by example in sharing Lessons Learned

Collectively analyze failures,then iterate, pivot and try again

A cover-up culture is death to a startup

Fire employees who hoard information or hide bad news

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Filed under: Corporate/Gov't Innovation | 27 Comments »

The Peter Pan Syndrome–The Startup to Company Transition

Posted on September 20, 2010 by steve blank

One of the ironies of being a startup is that when you are small no one can put you out of business but you. Paradoxically, as your revenues and market share increase the risk of competitors damaging your company increases.

Often the cause is the inability to grow the startup past the worldview of its founders.

We’re Getting Our Butts Kicked
One of my ex-engineering students helped start a six-year old company headquartered in Los Angeles that sells to government agencies. (They had funded this company themselves after their last networking company got acquired.) While he had designed a good part of the product, he now found himself the titular head of sales and marketing. We usually catch up when he’s in town, but this time he said he was bringing his co-founder.

“We’re trying to solve a puzzle in sales. We’re not sure you know anything about our market but we sure would like to talk it through. We’re suddenly getting our butts kicked in our sales to the government.”

I knew their business fairly well. They were the darlings of the three-letter agencies in Washington. Their equipment was used almost everywhere. And for the last few years they couldn’t make and deliver their product fast enough. Last year they had done over $50 million in sales. Now, over lunch I heard that for the first time sales were getting tougher. It even looked as if they might not make this year’s sales forecast.

“What’s changed?” I asked. “Well things were going great last year, but now we’re competing for larger orders and for the first time we have to go through competitive bids with formal Request For Proposals – RFP’s. Fortune 100 companies who never had a product in this space are saying that they can deliver what we can. We know that’s not true, but we’re getting our butts kicked. They’re also bundling in services and other products we don’t have and can’t offer. We even lost a few orders we didn’t even know were out for bid.”

He’s A Nice Guy
Trying to understand a bit more about their sales process, I asked them to tell me why their sales were so easy for the last few years. My student looked almost blissful when he described the process, “Oh, customers found our product by word of mouth. We solve a really hard and important problem. We’d give a demo, they’d bring their boss over, jaws would drop, and we’d get an order. We’d install the system, more people could see what it would do and then we’d get more orders. Doing all those demos took up a lot of my travel time so I hired someone from one of the customers as our Washington sales person.” Hmm, a hint.

My student had always struck me as very smart, driven, articulate and a “nice guy.” His co-founder seemed to have the same temperament. I ventured a question, “Is your sales head a nice guy?” “Why yes, he fits perfectly into our company culture.” And he then went into a long soliloquy about their company culture of respect, ethics, compatibility, mission, etc, etc.

“So do your competitors have the same culture?”

The Peter Pan Syndrome
There was a bit of a pause as he thought, and said, “I don’t exactly know, but I’d guess not. They’re mostly multi-billion dollar companies who’ve been around a long time and they seem a lot tougher and willing to do anything to get an order. They even put things in their RFP responses that I bet aren’t true.”

It was about then that I remembered that one of the key reasons that these entrepreneurs had funded the company themselves was that they didn’t want any VC’s on their board. “Our VC’s screwed us in our last company, and now that we could afford it we don’t need them.” So far they hadn’t seemed to suffer. But now I was curious. “Any killer sales people on your board of directors?” They listed a couple of world-class engineering professors and a retired customer who had pointed them to some key early sales. But it dawned on me what they might be missing.

A Killer Sales Culture
“My first observation is that you guys don’t even know what you don’t know,” I suggested. “Large procurements for government agencies are being played out on level you aren’t participating in. There’s a game going on around you that you don’t even know about.” So far they hadn’t got up and left so I continued. “I think the root cause is that you two are “nice guys.” Your company needs to grow up – not in a way that changes your entire company culture, but enough to realize that the world outside your offices doesn’t match your idealistic view of how things should operate. The question is whether you are willing to accept that some part of how you sell may have to change.”

My ex-student asked, “Are you suggesting we hire a new Washington sales person?” “Actually no. Not yet,” I offered. Of all cities, Washington had an abundance of seasoned sales people that could teach them how the game was played. Turning to my student, “I think you need to go to Washington, hire one or more of these grizzled sales veterans as consultants and have them teach you what you need to know. If you are going to compete in Federal procurements, your company is going to have to grow up to play on another level, and eventually you are going to have to hire a team that can play that game.

But first you need to become a domain expert. Spend a year in Washington.”

Lessons Learned

When the big guys discover your market you need to recognize their game.

You don’t have to play by their rules, but to understand what they are.

Then you need to develop a strategy that lets you compete.

Otherwise they will eat your lunch.

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Filed under: Corporate/Gov't Innovation | 8 Comments »

Job Titles That Can Sink Your Startup

Posted on September 13, 2010 by steve blank

I had coffee with an ex student earlier in the week that reminded me yet again why startups burn through so many early VP’s. And after 30 years of Venture investing we still have a hard time articulating why.

Here’s one possible explanation – Job titles in a startup mean something different than titles in a large company.

You Can’t Always Get What You Want
I hadn’t seen Rajiv in the two years since he started his second company. He had raised a seed round and then a Series A from a name brand Venture firm. I was glad to see him but it was clear over coffee that he was struggling with his first hiring failure. “I’ve been running our company, cycling through Customer Discovery and Validation and the board suggested that I was running out of bandwidth and needed some help in closing our initial orders. They suggested I get a VP of Sales to help.”

It was deja vu all over again. I knew where this conversation was going. “Let me guess, your VC’s helped you find a recruiter?”

“Yeah, and they were great. They helped me hire the best VP of Sales I could find. The recruiter verified all the references and he completely checked out. He was in the top 1% club at (insert the name of your favorite large company here.) He’s been in sales for almost 15 years.”

I listened as he told me the rest of the story. “I thought our new Sales VP would be out in front helping us lead Customer Validation and help us find the Pivot. That was the plan. We had talked about it in the interview and he said he understood and agreed that’s what he would do. Even when we went out to dinner before we hired him he said, he said he read the Four Steps and couldn’t wait to try this Customer Development stuff.”

“So what happened,” I asked, though I was betting I could finish the conversation for him (since I had made the same mistake.) “Well, he’s completely lost at the job. When we ask him to call on a different group of customers all he wants to do is call on the people already in his rolodex. When a customer throws us out he wants to get on to the next sales call and I want to talk about why we failed. He says great sales people don’t do that, they just keep selling. Every time we iterate even a small part of our business model or product he gets upset. When we change the company presentation it takes him days to get up to speed to the smallest change. He’s finally told us we got to stop changing everything or else he can’t sell. He was supposed to be a great VP of Sales. I’m probably going to fire him and start a search for another one, but what do I do wrong?”

“Nothing,” I said, “You got what you asked for. But you didn’t get what you need. The problem isn’t his, it’s yours. You didn’t need a VP of Sales, you needed something very different.

Companies Have Titles to Execute a Known Business Model
I offered that in an existing company job titles reflect the way tasks are organized to execute a known business model. For example, the role of “Sales” in an existing company means that:

there’s a sales team executing
a repeatable and scalable business model
selling a known product to
a well-understood group of customers
using a standard corporate presentation
with an existing price-list and
standard terms, conditions and contract

Therefore the job title “Sales” in an existing company is all about execution around a series of “knowns.”

We Use the Same Title For Two Very Different Jobs
I asked Rajiv to go through this checklist. Did he have a repeatable and scalable business model? “No.” Did he have a well understood group of customers? “No.” Did he have a standard corporate presentation? “No.” etc. Did he and his recruiter say any of this when they put together the job spec or interviewed candidates? “No.”

Then why was he surprised the executive he hired wasn’t a fit.

Startups Need Different Titles to Search For an Unknown Business Model
In a startup you need executives whose skills are 180 degrees different from what defines success in an existing company. A startup wants execs comfortable in chaos and change – with presentations changing daily, with the product changing daily, talking and with analyzing failure rather than high-fiving a success. In short you are looking for the rare breed:

comfortable with learning and discovery
trying to search for a repeatable and scalable business model
agile enough to deal with daily change, operating “without a map”
with the self-confidence to celebrate failure when it leads to iteration and Pivots

That means the function called Sales used in a large company (and the title that goes with it, “VP of Sales”) don’t make sense in a startup searching for a business model. Sales implies “execution,” but that mindset impedes (majorly screws-up) progress in searching for a business model. Therefore we need a different job function, job title and different type of person. They would be responsible for Customer Validation and finding Pivots and searching around a series of unknowns. And they would look nothing like his failed VP of Sales.

I suggested to Rajiv his problem was pretty simple. Since he hadn’t yet found a repeatable and scalable business model, his startup did not need a “VP of Sales.” The early hire he needed to help him run Customer Validation and Pivots has a very different skill set and job spec. What Rajiv needed to hire was a VP of Customer Development and part ways with his VP of Sales.

I suggested he chat with his investors and see if they agreed. “I hope they don’t make me hire another “experienced” VP of Sales,” he said as left.

Lessons Learned

Companies have titles which reflect execution of known business models

Early stage startups are still searching for their business model

Individuals that excel at execution of a process rarely excel in chaotic environments

We burn through early VP’s in startups because the job functions we are hiring for are radically different, but we are using the same titles.

Startups need to use different titles to indicate that the search for a business model requires different skills than executing a business model.

Filed under: Corporate/Gov't Innovation, Customer Development | 53 Comments »

Why Product Managers Wear Sneakers

Posted on September 2, 2010 by steve blank

I gave a talk last night to the Silicon Valley Product Management Association. It’s a San Francisco Bay Area forum for networking, jobs and education for over 500 Product Management professionals. This is one of the Silicon Valley organizations that remind you why this is a company-town whose main industry is entrepreneurship, (and a great example of an industry cluster.)

The published title of the talk was, “How to Create a $100M Business and Out Innovate your Competition.” I read that and thought, “If I knew how to do that I would have been a VC.” So instead I gave a talk I called, “Why Product Managers Need Sneakers.”

The gist of the talk was to observe that:

startups are not smaller versions of large companies
startups search for a business model, large companies execute an existing one
the skills that talented product managers bring to a large company are at best not transferable to a startup (and at worst destructive)
product managers in a startup can either be an asset or an albatross.
They’re an albatross if they perform as they do in a large company, and believe that they “own” customer interaction, feedback to engineering and authoring market requirements documents.
They’re an asset to a startup if they understand that their job is to get the founder outside the building and in front of customers.
They can be the scorekeepers in Customer Discovery and Validation as the company iterates and pivots the business model and refines the minimum feature set.

“Why Product Managers Wear Sneakers” was a reference to the amount of running around outside the building (with the founder) product managers will need to do in a startup. Except they won’t be called Product Managers. In a startup they will be part of the Customer Development team.

If you’ve seen my talks before you can skip forward to slide 19.

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Filed under: Corporate/Gov't Innovation, Customer Development | 23 Comments »

Solving the Innovator’s Dilemma – Customer Development in a Big Company

Posted on August 23, 2010 by steve blank

One of the ways I learn is to teach. My students ask questions I can’t answer and challenge me to solve problems I never considered. At times I’ll do what I consider an extension of teaching; a two-day Customer Discovery/Validation intensive session with a large corporation serious about Customer Development at my ranch on the California Coast.

My last session was with a passionate, smart, entrepreneurial team from a Fortune 100 company. (And if I told you who they were I’d have to kill you.) Their copies of the Four Steps were dog-eared and marked with sticky notes. We spent two days of analyzing and exploring their customer discovery visits just completed across South America, Africa and Asia. Learning which hypotheses survived these visits were eye-openers for all of us. We used what they learned to plan their next steps for additional Discovery, and ultimately Customer Validation.

It reminded me of the differences in Customer Discovery between a scalable startup and a big company. Here’s what we observed:

It’s Easier for Big Companies to Get Meetings – But It’s Not Always a Blessing
When a big company calls prospective customers to set up Discovery meetings, their datebook fills up fast. Execs at higher levels than you’d expect join the meeting eager to hear what the big company has to say about their industry. That’s the good news. The bad news is that the meetings become far more formal and more crowded, than one that a startup would have. This crowd actually dampens the opportunity for learning. Since the meetings attract senior execs everyone around the table waits for the big boss to speak and follows his or her lead. This stifles or shuts down the important “outlier” conversations that drive pivots and iterations in the discovery process.

Solution: try to get a blend of one-on-one meetings along with the group session. And be sure to set expectations for the meeting before it happens.

We’re Not Here for a Sales Call
If someone from a large company is flying halfway around the world to visit your company, your presumption is they have something to sell you. Crucial in the Customer Discovery process is not selling…it’s listening. The exploring, probing, gaining reactions is why you’re there. (Of course, if someone forces a purchase order on you and you reject it, you’ve just failed miserably at entrepreneurship.) Disabusing the audience of the notion that the visit is a sales call is vital to the customer discovery mission. Followers of the Customer Development process know that you can’t start selling until you have transformed product, customer and other hypotheses into a validated business model and sales roadmap. (Short-circuiting that process is a major “foul” that often leads to premature business models and suboptimal sales results.)

To potential customers who’ve never been asked for their opinion before, the purpose of a Discovery meeting can be confusing. There are business cultures where the vendor/customer interactions are limited to “here’s what I have to sell, do you want to buy it.”

Solution: spend more time on the “setup” for the meeting. Tell potential customers before you meet, “We’re working on an interesting product and we’d be happy to share where we are in exchange for some feedback. But we are not here for a sales call.”

Getting the Customer to Talk is Even More Challenging
There’s no more important skill in Customer Discovery than “good listening.” When a big company shows up, everyone expects an important formal presentation, which is hardly your Discovery mission at all. Structuring the conversation in a way that elicits feedback before you reveal the product hypothesis is essential to getting honest reactions, good or bad. Yet just reading your questions from a list is a real-turnoff. Insert them casually into a conversation and don’t try too hard to get every one of them answered in every meeting.

Solution: One of our favorite hints, from a great post by ash maurya, is to pose problems to the group in a randomized list. “We see these three problems in your industry. Do you agree? Could you rank them in order of importance to you?” This literally forces a discussion and prioritization and is repeatable again and again. “We believe the most important features you need in a supersonic transporter are….” or “Our research tells us that female consumers most want a, b, and c.”

Big Companies are Bred for Large Scale Success
When you’re doing disruptive innovation in a multi-billion dollar company, a $10Million dollar/year new product line doesn’t even move the needle. So to get new divisions launched large optimistic forecasts are the norm. Ironically, one of the greatest risks in large companies is high pressure expectations to make these first pass forecasts that subvert an honest Customer Development process. The temptation is to transform the vision of a large market into a solid corporate revenue forecast – before Customer Development even begins.

Solution: Upper management needs to understand that a new division pursuing disruptive innovation is not the same as a division adding a new version of an established product. Rather, it is a organization searching for a business model (inside a company that’s executing an existing one.) That means you may find that revenue appears later than the plan called for, or that there are no customers or fewer than the plan suggests.

Customer Development Without Agile Engineering Is A Plan For Failure
Beleving in Customer Development but still retaining waterfall development for engineering and manufacturing is a setup for problems if not outright failure. Even in a large company you can’t do Customer Development without aligning some part of engineering to respond to unexpected customer needs and findings.

Solution: Get engineering buy-in by. Make sure the engineering and manufacturing plans “before” Customer Development don’t look the same as “after” Customer Development.

Spend your Way to Success Usually Results in the Opposite
Ironically large revenue goals may lead to largesse in overfunding the new division, with the implicit assumption that dollars can “buy your way to success.” All the money in the world doesn’t negate the painful search for a business model, or the lack of a scalable/profitable one. And new divisions in large companies operate just like startups who get overfunded – somehow their expense budgets always equal at least their funding.

Solution: Eight and nine digit funding before Customer Discovery is a curse not a blessing. Take the money in tranches (equivalent to VC “rounds”) predicated on milestones in finding a repeatable and scalable business model.

There’s an Overhead Cost to Being an Entrepreneur in a big, established corporation
Large companies are just plain organized – with rules, HR, finance and more importantly, are built around process and procedures for execution. It’s why so few big companies succeed at true entrepreneurship.

Solution: Assume as a given that as a new division head at least 15% of your time will be spent managing up and protecting down. Few in your own company will understand what you’re up to.

Lessons Learned

Customer Development in large companies has it’s own unique challenges

Some parts of being a big company make it easier, others make being a startup even riskier

Filed under: Corporate/Gov't Innovation, Customer Development, Teaching | 10 Comments »

Welcome to the Lost Decade (for Entrepreneurs, IPO’s and VC’s)

Posted on July 15, 2010 by steve blank

If you take funding from a venture capital firm or angel investor and want to build a large, enduring company (rather than sell it to the highest bidder), this isn’t the decade to do it. The collapse of the IPO market and dysfunctional math in the venture capital community has stacked the odds against you.

Here’s why.

The Golden Age for Entrepreneurs and VC’s
The two decades from 1979 when pension funds fueled the expansion of venture capital to 2000 when the dot-com bubble burst were the Golden Age for entrepreneurs and venture capital firms. VC’s were making investments every other financially prudent institution wouldn’t touch – and they were printing money.

The system worked in predictable and profitable ways. VC’s invested their limited partners’ “risk capital” in a portfolio of startups in exchange for illiquid stock. Most of the startups they invested in either died by running out of money before they found a scalable business model or ended up in the “land of the living dead” by never growing (failing to Pivot.)

Startup lifecycle in an IPO Market

But a few startups succeeded and grew into profitable companies. Their venture investors made money by selling their share of these successful companies at a large multiple over what they originally paid for it. One of the ways most predictable ways for an investor to sell these shares was to take a company “public.” (Until 1995 startups going public typically had a track record of revenue and profits. Netscape’s 1995 IPO changed the rules. Suddenly there was a public market for companies with limited revenue and no profit. This was the beginning of the 5-year dot-com bubble.)

During the decade between 1991 and 2000, nearly 2000 venture backed companies went public. Take a look at the chart below. (It includes venture funded startups in all industries, from software to biotech. Source: NVCA.)

Number of Venture Backed Liquidity Events 1991-2000

The size of the red bars (IPO’s) versus blue (mergers and acquisitions) illustrates that while venture-backed startups did get acquired, the IPO market was booming.

Free At Last
Going public did two things for your company. Your company had money in the bank to expand your business, scaling the company from the “build” stage into the “grow” stage. But even more important, your VC’s could sell off their ownership of your company. This changed their interest from managing your board for their liquidity to managing the board for all shareholders. Most VC’s would get off of boards of companies that went public.

Success Means That You’re Acquired
The public markets for venture-backed technology stocks never really recovered after the collapse of the dot-com boom. Fast forward to today and take a look at the last ten years of IPO’s and M&A’s in the chart below, and you’ll see why life is different for entrepreneurs.

Number of Venture Backed Liquidity Events 2000-2010

Depending on your industry, in this decade it’s 5 to 10x less likely that your company will have an IPO as an exit. And what the chart doesn’t show is that the dollar amount of the deals are significantly smaller than the last decade.

Since there’s no public market for the shares your venture investor has bought in your startup, the most reasonable way for a venture firm to make money is to have you sell your company to another company. But unlike an IPO where you sold stock to the public and got to run your company, in an acquisition your company is gone, and the odds are in a year or so you will be too.

Startup Lifecycle Today

VC “Plan B”
None of this has gone unnoticed by the venture community. Some of the old-line venture firms have changed their strategy, but some are still locked into last decade’s model while the partners are living off of their management fees and go through cargo cult like rituals. You can tell who they are by how often they remind you “this is the year the IPO market will come back.” (If the limited partners of these VC’s acted like real fiduciaries rather than waiting for the end of life of the fund, more than half of old-line venture firms would have shut themselves down today.)

New, agile and adroit venture firms with new business models have emerged to deal with the reality that 1) web 2.0 startups require significantly less capital to start, 2) exits for venture firms are predominately acquisitions, and 3) a venture firm with a smaller fund <$150M matches these exits. Floodgate, Greycroft, Union Square Ventures, True Ventures, etc. are example of this class of firm. (Raising a VC fund in this environment had it’s own perils.) And the explosion of private Angel firms continues to fuel this new ecosystem.

Other VC’s who invest in Information Technology have taken a different approach. They’ve created virtual IPO’s for founders and employees via late-stage private financing. It has put a per user dollar value on these sites and these few startups will be the next likely IPO candidates. In their short time as a fund, Andreessen Horowitz seems to be on top of this game with their investments in Facebook, Skype and Zynga.

What About Us?
But not all industries are as capital efficient as the Web or Information Technology. Biotech, medical devices, semiconductors, communications and CleanTech require significantly more capital to build and scale before they can generate profits. It’s in these industries that the lack of a public market has taken the heaviest toll on entrepreneurs and their startups. Great companies with innovative ideas have simply died not having the cash to scale. VC’s who would have normally kept writing checks were faced with no public exits and cut them off.

Some of these industries have turned to the U.S government for funding. Elon Musk has not only tapped the feds for his electric car startup Tesla, but also received hundreds of millions for his space launch company – SpaceX. Other Clean Tech companies have tried this approach as well. Yet while the U.S. government doles out funds to connected entrepreneurs, it lacks an integrated strategy to deal with the lack of public market financing for critical growth industries.

It may be that these entrepreneurial industries suffer the same fate as manufacturing in the U.S.- they die out of benign neglect and a lack of a coherent understanding of the role of risk capital in our national interest.

What Does it Mean to an Entrepreneur?
If you’re starting a software company, your exit is most likely a sale to a larger company. This decade has been a Darwinian filter – only the very best companies will survive as standalone companies.

If you’re starting a company in other, capital intensive industries, it’s no longer just about having great technology. You need a plan for partnership and long term funding from day one.

In either case Customer Development provides entrepreneurs with a methodology for being capital efficient.

We live in interesting times.

Lessons Learned

Advice that’s more than 5 years old is obsolete.

Software startups are most likely to exit as an acquisition.

Being acquired has lots of math challenges about your valuation, amount of money raised, percent of founder ownership, type of investor, etc.

Non-software companies need to be thinking much deeper and further than ever before about search, build, grow funding strategies. It’s no longer just about building great technology.

Customer Development provides entrepreneurs with a methodology for being capital efficient to scale when the funding environment demands it.

You will probably not survive the acquisition.

Filed under: Corporate/Gov't Innovation, Technology, Venture Capital | 27 Comments »

How I Spent My Summer Vacation

Posted on July 6, 2010 by steve blank

My summer has circled around serendipity and three presentations I’ve given.

Full Circle from Yosemite
Nine years ago I took my young daughters on a 7-day pack trip riding mules at 10,000 feet to the Yosemite High-Sierra camps. Granite mountains and alpine green meadows during the day, unblinking stars in the frigid August nights. At a campsite almost two miles high our daughters adopted a young couple, and over the campfire I found out they were Stanford MBA’s and entrepreneurs. Instead of ghost stories they were the first to hear the ideas of what would become Customer Development.

Fast forward to today. One of those students, Shawn Carolan, is now a partner at Menlo Ventures. When we were looking for funding for IMVU (the company where Eric Ries first implemented Customer and Agile Development and where the Lean Startup was born,) I thought of Shawn. He became the first venture investor and “present at the creation.” If you’re doing Customer Development/Lean Startup, Shawn is a great guy to have as an investor. He’s lived it and gets it.

Recently, Shawn invited me to share the Customer Development story at Menlo Ventures annual CEO conference.

(I’ll show you the slides a bit later in this post.)

Let’s Get Together Every 15 Years
About a month ago I got a phone call from Alan Patricof of Greycroft Partners who saw the article about Lean Startups in the NY Times and invited me to talk at their CEO conference. After a few minutes on the phone, Alan and I realized that we had met 15 years ago when his firm looked at investing in my last startup, E.piphany.

It’s kind of hard not to know who Alan Patricof is. He built APAX Partners into one of the largest VC firms on the East Coast and in Europe. He started a new venture firm when he realized that that the rules had changed for the venture business – VC’s could no longer expect the same kind of returns they got in the past through an IPO. Instead, he realized that most VC-backed startups would exit through a merger or acquisition- at a sale price of $20 to $100 million.

One of the benefits of speaking at this conference was getting to know VC’s on the east coast and LA. The Greycroft team and Mark Suster of GRP Partners provided lots of local color. (Mark had an amusing summary of the conference here. Mark is the guy I would call if I was doing a deal in LA and his blog should be on your reading list.)

You are Here
When I was in a startup, I remember being so focused on my daily tasks of getting customers and running the business that I had no time to consider “why” I was doing what I was doing. I had even less time to consider how to differentiate what were the right things to do in startup versus a larger company. The talk I gave to the startup CEO’s at both Menlo Ventures and Greycroft Partners was a big picture perspective about how startups differ from large companies and where customer and agile development fit. The talk integrated a series of posts I’ve written since the beginning of 2010: “What is entrepreneurship? The Four types of entrepreneurial organizations, Innovation and entrepreneurship in large companies and The role Pivots play in Customer Development.

18-Hour Flight for a 45 Minute Talk
Truth be told, I went to NY for the Greycroft conference because I was already heading east to Tel Aviv for a 45 minute talk. While flying 18 hours to give a 45-minute talk might not seem rational, in fact it provided the rationale to visit a part of the world my wife and I had never seen. I turned the 45-minute invitation into a three week trip. New York to Cairo, Aswan, Abu Simbel, Luxor, Tel Aviv, Haifa, Tiberias and Jerusalem.

As a country, Israel has the highest ratio of scalable startups per capita. A high percentage of Israeli startups are founded by entrepreneurs who served in Unit 8200 and military intelligence. They are agile, resourceful and aggressive. In the dot-com bubble Israel had more technology companies listed on the NASDQ exchange than all of Europe. Today Israeli companies solve technology problems then typically sell out to a larger U.S. firm.

While this is an enviable track record, my talk observed that solving just the technology problems and selling out meant that Israeli companies did not become adept at understanding customer needs. (And in Israel you can’t just get out of the building to understand customers, you need to get out of the country.) Given the current Israeli economic and venture climate having great technology is no longer enough. I observed that this may be the time for Israel to take entrepreneurship to the next step and teach their startups the skills needed to grow from flipping technology startups to building enduring companies.

I used the metaphor of fighter pilots (who have to constantly adapt in real-time) versus military intelligence (who have time to analyze and debate the right answer.) John Boyd of OODA Loop fame got a starring role in the talk.

It went over like a lead balloon.

(Slides 43-49 and 81-89 are the ones that differ from the Greycroft presentation.)

BTW, the schedule of my future talks are now on Plancast.