Entrepreneurship as a Science – The Business Model/Customer Development Stack

Over the last 50 years engineers have moved from building computers out of individual transistors to building with prepackaged logic gates. Then they adopted standard microprocessors (e.g. x86, ARM.) At the same time every computer company was writing its own operating system.  Soon standard operating systems (e.g. Windows, Linux) emerged. In the last decade open source software (e.g LAMP) emerged for building web servers.

Each time a standard solution emerged, innovation didn’t stop. It just allowed new innovation to begin at a higher level.

In this post I want offer a solution stack for Entrepreneurship. It’s the combination of Business Model Design and Customer Development.

Business Model Design
Today every business organization from startup to large company uses the words “business model.”  Some use it with certainty like they know what it means. Others use it with an implied question mark realizing they don’t have a clue to its components.

Alexander Osterwalder and Yves Pigneur defined a business model as how an organization creates, delivers, and captures value. More importantly they showed how any company’s business model could be defined in 9 boxes. It’s an amazing and powerful tool.  It instantly creates a shared visual language while defining a business.  Their book “Business Model Generation,” is the definitive text on the subject.  (And their forthcoming Business Model Toolbox is a killer iPad app for business strategy.)

Business Model Canvas

Yet as powerful as the Business Model Canvas (a template with the nine blocks of a business model) is, at the end of the day it was a tool for brainstorming hypotheses without a formal way of testing them.

Business Model Design Gets Dynamic, Customer Development Gets Strategic
One of the key tenets of Customer Development is that your business model is nothing more than a set of untested hypotheses.  Yet Customer Development has no structured and systematic way of describing a business model.

In the last year I found that the Osterwalder Business Model canvas could be used for something much more than a static planning tool.  I realized that it was the launch-pad for setting up the hypotheses to test, and a scorecard for visually tracking iterations and Pivots during Customer Discovery and Validation.

Meanwhile on the other side of the world Alexander Osterwalder was coming to the same conclusion: tying the two processes together would create a “strategy stack for entrepreneurship.”  We got together this weekend (along with our partners Alan Smith and Bob Dorf and my student Max Marmer) to try to integrate the two.

Business Model Design Meets Customer Development
In its simplest form the way to think about the intersection of the two processes is that you start by designing your business model.  Next, each one of the 9 business model canvas boxes then directly translates into a set of Customer Discovery hypotheses that are described in Customer Development and the Four Steps to the Epiphany.

Business Model Design meets Customer Development

Pivots and Iterations
Many entrepreneurs assume that the assumptions in their original business model (or business plan if they wrote one) will be correct.  Confronting the reality that one of these hypotheses is wrong (finding out you have the wrong sales channel, revenue model, target market or customer) creates a crisis.

Pivots are Business Model Insights

Tying Osterwalder’s Business Model Canvas with the Customer Development process turns these potential crises into learning opportunities called the Pivot. Customer Development forces you to get out of the building and discover and validate each one of the assumptions behind the business model. A Pivot is when reality leads you to change one or more business model hypotheses.  The result is an updated business model not a fired VP of Sales.

The Pivot turns a failed business model hypotheses into insight.

The Business Model/Customer Development Stack
We’ll have more to say about combing these two methodologies in future posts.

Lessons Learned

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to Yahoo BuzzAdd to Newsvine

The Phantom Sales Forecast – Failing at Customer Validation

Startup CEO’s can’t delegate sales and expect it to happen. Customer Validation needs to have the CEO actively involved.

Here’s an example in a direct sales channel.

Customer Development Diagnostics over Lunch
A VC asked me to have lunch with the CEO of  a startup building cloud-based enterprise software. (Boy did I feel like Rip Van Winkle.) The board was getting nervous as the company was missing its revenue plan.

These lunches always start with the CEO looking like they had much better things to do. Before lunch even came the CEO ticked off the names of forty or so customers he talked to during the company’s first nine months and gave me a great dissertation on the day-in-the-life of his target customers and what their problems were. He went through his product feature by feature and matched them to the customer problems. He talked about how his business model would make money and how the prospects he talked to seem to agree with his assumptions.

It certainly sounded like he had done a great job of Customer Discovery.

Sales Process
Next, he took me through his sales process. They had five salespeople supported by two in marketing. (They had beta customers, using but not paying for the product.)

Over lunch the CEO told me he had stopped talking to customers since he had been tied up helping get the product out the door and his VP of Sales (a successful sales executive from a large company) had managed the sales process for the last six months. In fact, the few times he had asked to go out in the field the VP of Sales said, “Not yet, I don’t want to waste your time.”

Too Good to Be True
For the first time I started squirming in my seat. He said, “I insist on getting weekly status reports with forecasted deal size and probability of close. We have a great sales pipeline.” When I asked how close any of the deals on the forecast were to getting closed, he assured me the company’s two beta customers—well-known companies that would be marquee accounts if they closed—were imminent orders.

“How do you know this?” I asked. “Have you heard it personally from the customers?”

Now it was his turn to squirm a bit. “No, not exactly,” he replied, “but our VP of Sales assures me we will have a purchase order in the next few weeks or so.”

I put my fork down. Very few large companies write big checks to unknown startups without at least meeting the CEO. When I asked if he could draw the sales road map for these two accounts that were about to close, he admitted he didn’t know any of the details, given it was all in the VP of Sales’ head. Since we were running out of time, I said, “Your sales pipeline sounds great. In fact, it sounds too good to be true. If you really do close any of these accounts, my hat is off to you and your sales team. If, as I suspect they don’t close, do me a favor.”

“What’s that?” He asked, looking irritated.

“You need to pick up the phone and call the top five accounts on your sales pipeline. Ask them this question: if you gave them your product today for free, are they prepared to install and use it across their department and company? If the answer is no, you have absolutely no customers on your forecast who will be prepared to buy from you in the next six months.”

He smiled and stuck me with the tab for lunch. I didn’t expect to hear from him ever again.

What If the Price Were Zero?
Less than two weeks later, I got a call and was surprised to hear the agitated voice of the CEO. “Steve, our brand-name account, the one we have been working on for the last eight months, told us they weren’t going to buy the product this year. They just didn’t see the urgency.” Listening, I got the rest of the story.

“When my VP of Sales told me that,” he said, “I got on the phone and spoke to the account personally. I asked them your question—would they deploy the product in their department or company if the price were zero? I’m still stunned by the answer. They said the product wasn’t mission critical enough for their company to justify the disruption.”

“Wow, that’s not good,” I said, trying to sound sympathetic.

“It only gets worse,” he said. “Since I was hearing this from one of the accounts my VP of Sales thought was going to close, I insisted we jointly call our other ‘imminent’ account. It’s the same story as the first. Then I called the next three down the list and got essentially the same story. They all think our product is ‘interesting,’ but no one is ready to put serious money down now. I’m beginning to suspect our entire forecast is not real. What am I going to tell my board?”

My not-so-difficult advice was that he was going to have to tell his board exactly what was going on. But before he did, he needed to understand the sales situation in its entirety, and then come up with a plan for fixing it. Then he was going to present both the problem and suggested fix to his board. (You never want a board to have to tell you how to run your company. When that happens, it’s time to update your resume.)

The Phantom Sales Forecast
The implications of a phantom sales forecast meant something fundamental was broken. In talking to each of his salespeople, he discovered the sales team had no standardized sales process. Each was calling on different levels of an account and trying whatever seemed to work best. This was just a symptom of something deeper –  while they thought they understood the target customer their initial hypotheses from Customer Discovery were wrong. But no one had told the CEO.

He realized the company was going to have to start from scratch, Pivot back to Customer Discovery and find out how to develop a sales road map. He presented his plan to the board, fired the VP of Sales and kept his best salesperson and the marketing VP. Then he went home, kissed his family goodbye, and went out to the field to discover what would make a customer buy. His board wished him luck and started the clock ticking on his remaining tenure. He had six months to get and close customers.

Customer Validation
The CEO had discovered what happens when you do a good job on Customer Discovery but get too “busy” for to personally get involved in Customer Validation. It wasn’t that he didn’t need a VP of Sales, but he had entirely outsourced the Validation step to him. Until a scalable and repeatable business model is found the CEO needs to be intimately involved in the sales process.

Lessons Learned

  • Ownership of Customer Validation belongs to the CEO.
  • A VP of Sales can assist but the CEO needs to answer:
  • Do I understand the sales process in detail?
  • Is the sales process repeatable?
  • Can I prove it’s repeatable? (Proof are multiple full-price orders in sufficient quantity.)
  • Can we get these orders with the current product and release spec?
  • Do we have a workable sales and distribution channel?
  • Am I confident we can scale a profitable business?

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to Yahoo BuzzAdd to Newsvine

No One Wins In Business Plan Competitions

Last week one of the schools I teach at invited me to judge a business plan contest. I suggested that they first might want to read my post on why business plans are a poor planning and execution tool for startups. They called back laughing and the invitation disappeared.

At best I think business plan competitions are a waste of time. But until now I haven’t been able to articulate a framework of why or had a concrete suggestion of what to replace them with.

Now I do.

Business Plan Versus Business Models
Where did the idea that startups write business plans come from?  A business plan is the execution document that large companies write when planning product-line extensions where customer, market and product features are known. The plan describes the execution strategy for addressing these “knowns.”  In the early days of venture capital, investors and entrepreneurs were familiar with the format of business plans from large company and adopted it for startups. Without much thought it has been used ever since.

It turns out that’s a mistake.  A startup is not executing a series of knowns. Most startups are facing unknown customer needs, an unknown product feature set and is an organization formed to search for a repeatable and scalable business model.  That means that writing a static business plan adds no value to starting a company, as the plan does not represent the iterative nature of the search for the model. A simple way to think about it is that in a startup no business plan survives first contact with customers.

Instead of business plans I have suggested that startups use business models.

Business models are dynamic and reflect the iterative reality that startups face. Business models allow agile and opportunistic founders to keep score of the Pivots in their search for a repeatable business model.

Business Plan Competitions are Great for Schools and Bad For Students
Almost every university, region and car wash now has a business plan competition; the rules, who can participate, how large the prizes and who are the judges vary by school.

Business plan competitions perpetuate everything that is wrong about trying to make plans that were designed to be used in large companies fit startups. (One of my favorites: “Judging will include such factors as: Market opportunity, reward to risk, strategy, implementation plan, financing plan, etc.”) All of which may be true in large companies. But little of it is relevant to the chaos and uncertainty in the life of a startup.

Yet an ever increasing number of schools keep holding Business Plan competitions.  Why?

  • They’re a match for the “How to write a business plan” classes that are offered.
  • It makes the school appear relevant to their constituencies; students, donors, faculty, VC’s.
  • Business plans are easy to grade, score and judge.
  • Schools can get Venture Firms to fund prizes for the best business plan.
  • Venture Firms use the contests as another source of deal flow and talent.
  • There is no alternative.

The irony is that business plan competitions ought to be held for plans from large companies not for startups.

The Alternative – Business Model Competitions
I’ll offer that to be useful for startups Business Plan competitions need to turn into Business Model competitions. A Business Model competition has a radically different goal than writing a business plan.  The Business Model competition measures how well students learn how to Pivot by getting outside the building (not by writing a plan inside one.)

Each team would be judged by their business model presentation on these five steps.

  1. What did you initially think your initial business model was? (initial business model hypotheses)
  2. What did you build/do? (built first product, talked to users, etc.)
  3. What did you learn outside the building? (parts of our feature set/business model were wrong)
  4. Then what did you do? (iterated product, changed business model, etc.)
  5. Repeat steps 1-4

The business model would be scored and judged based on steps 3 and 4.  And extra credit for multiple times through the loop.

For the first time we’d have a competition that closely resembled the reality that founders face, rather than a creative writing exercise.

There are now examples of business model presentations on the web. They were also at the heart of the Startup Lessons Learned conference.

——–

I’ll be happy to hand out the prizes at the first competition.  Lets call it the “Pivot Award for Excellence.”

Lessons Learned

  • Business plans are the wrong tool to search for a startup business model
  • They are best suited for large companies
  • Yet we have startup business plan contests
  • Experienced entrepreneurs know that business model iteration and validation occurs outside the building
  • Some school will be first to hold a contest that rewards what matters

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to Yahoo BuzzAdd to Newsvine

Why Accountants Don’t Run Startups

This week I’m at the California Coastal Commission hearing in Ventura California wearing my other hat as a public official for the State of California.  After the hearing I drove up to Santa Barbara to give a talk to a Lean Startup Meetup.

The talk, “Why Accountants Don’t Run Startups” summarized my current thinking about startups, how and why they’re different than large companies and for good measure threw in a few thoughts about entrepreneurial education.

It was a dry run of a talk I’ll be giving at Eric Ries’ Startup Lessons Learned conference April 23 2010 in San Francisco (streaming and simulcast across the world.)  I’m a small part of what’s shaping up to be a spectacular conference and an all-star cast.

The talk is below.

Update: I’ve updated the slides to the latest version of the talk. The original can still be found here.

Why Startups are Agile and Opportunistic – Pivoting the Business Model

Startups are the search to find order in chaos.
Steve Blank

At a board meeting last week I watched as the young startup CEO delivered bad news. “Our current plan isn’t working. We can’t scale the company. Each sale requires us to handhold the customer and takes way too long to close.  But I think I know how to fix it.” He took a deep breath, looked around the boardroom table and then proceeded to outline a radical reconfiguration of the product line (repackaging the products rather than reengineering them) and a change in sales strategy, focusing on a different customer segment. Some of the junior investors blew a gasket. “We invested in the plan you sold us on.” A few investors suggested he add new product features, others suggested firing the VP of Sales. I noticed that through all of this, the lead VC just sat back and listened.

Finally, when everyone else had their turn, the grey-haired VC turned to the founder and said, “If you do what we tell you to do and fail, we’ll fire you. And if you do what you think is right and you fail, we may also fire you. But at least you’d be executing your plan not ours. Go with your gut and do what you think the market is telling you.  That’s why we invested in you.”  He turned to the other VC’s and added, “That’s why we write the checks and entrepreneurs run the company.”

The Search for the Business Model
A startup is an organization formed to search for a repeatable and scalable business model.

Investors bet on a startup CEO to find the repeatable and scalable business model.

Unlike the stories in the popular press, entrepreneurs who build successful companies don’t get it right the first time. (That only happens after the fact when they tell the story.) The real world is much, much messier.  And a lot more interesting. Here’s what really happens.

Observe, Orient, Decide and Act
Whether they’re using a formal process to search for a business model like Customer Development or just trial and error, startup founders are intuitively goal-seeking to optimize their business model. They may draw their business model formally or they may keep the pieces in their head. In either case founders who succeed observe that something isn’t working in their current business model, orient themselves to the new facts, decide what part of their business model needs to change and then act decisively.

(A U.S. Air Force strategist, Colonel John Boyd, first described this iterative Observe, Orient, Decide and Act (OODA) loop. The Customer Development model that I write and teach about is the entrepreneur’s version of Boyds’ OODA loop.)

Pivoting the Business Model
What happens when the startup’s leader recognizes that the original business model model is not working as planned? In traditional startups this is when the VP of Sales or Marketing gets fired and the finger-pointing starts. In contrast, in a startup following the Customer Development process, this is when the founders realize that something is wrong with the business model (because revenue is not scaling.) They decide what to change and then take action to reconfigure some part(s) of their model.

The Customer Development process assumed that many of the initial assumptions about your business model would probably be wrong, so it built in a iteration loop to fix them. Eric Ries coined this business model iteration loop – the Pivot.

(One of the Pivot’s positive consequences for the startup team is realizing that a lack of scalable revenue is not the fault of Sales or Marketing or Engineering departments – and the solution is not to fire executives – it’s recognizing that there’s a problem with the assumptions in the initial business model.)

Types of Pivots
“Pivoting” is when you change a fundamental part of the business model. It can be as simple as recognizing that your product was priced incorrectly. It can be more complex if you find the your target customer or users need to change or the feature set is wrong or you need to “repackage” a monolithic product into a family of products or you chose the wrong sales channel or your customer acquisition programs were ineffective.

If you draw your business model, figuring out how to Pivot is simpler as you can diagram the options of what to change. There are lots of books to help you figure out how to get to “Plan B,” but great entrepreneurs (and their boards) recognize that this process needs to occur rapidly and continuously.

Operating in Chaos + Speed + Pivots = Success
Unlike a large profitable company, startups are constrained by their available cash. If a startup does not find a profitable and scalable business model, it will go out of business (or worse end up in the “land of the living dead” eking out breakeven revenue.)  This means CEO’s of startups are continually looking to see if they need to make a Pivot to find a better model. If they believe one is necessary, they do not hesitate to make the change. The search for a profitable and scalable business model might require a startup is make multiple pivots – some small adjustments and others major changes.

As a founder, you need to prepare yourself to think creatively and independently because more often than not, conditions on the ground will change so rapidly that your original well-thought-out business model will quickly become irrelevant.

Summary
Startups are inherently chaotic. The rapid shifts in the business model is what differentiates a startup from an established company. Pivots are the essence of entrepreneurship and the key to startup success. If you can’t pivot or pivot quickly, chances are you will fail.

Pivot.

Lessons Learned

  • A startup is an organization formed to search for a repeatable and scalable business model.
  • Most startup business models are initially wrong.
  • The process of iteration in search of the successful business model is called the Pivot.
  • Pivots need to happen quickly, rapidly and often.
  • At the seed stage, microcap funds/ superangels understand that companies are still searching for a business model – they get Pivots.
  • Most of the time when startups go out for Series A or B round, the VC assumption is that a scalable business model has already been found.
  • Pivots are why startups must be agile and opportunistic and why their cultures are different from large companies.

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to Yahoo BuzzAdd to Newsvine

No Plan Survives First Contact With Customers – Business Plans versus Business Models

No campaign plan survives first contact with the enemy
Field Marshall Helmuth Graf von Moltke

I was catching up with an ex-graduate student at Café Borrone, my favorite coffee place in Menlo Park. This was the second of three “office hours” I was holding that morning for ex students. He and his co-founder were both PhD’s in applied math who believe they can make some serious inroads on next generation search. Over coffee he said, “I need some cheering up.  I think my startup is going to fail even before I get funded.” Now he had my attention. I thought his technology was was potentially a killer app. I put down my coffee and listened.

He said, “After we graduated we took our great idea, holed up in my apartment and spent months researching and writing a business plan. We even entered it in the business plan competition. When were done we followed your advice and got out of the building and started talking to potential users and customers.” Ok, I said, “What’s the problem?” He replied, “Well the customers are not acting like we predicted in our plan!  There must be something really wrong with our business. We thought we’d take our plan and go raise seed money. We can’t raise money knowing our plan is wrong.”

I said, “Congratulations, you’re not failing, you just took a three and a half month detour.”

Here’s why.

No Plan Survives First Contact With Customers
These guys had spent 4 months writing a 60-page plan with 12 pages of spreadsheets. They collected information that justified their assumptions about the problem, opportunity, market size, their solution and competitors and their team, They rolled up a 5-year sales forecast with assumptions about their revenue model, pricing, sales, marketing, customer acquisition cost, etc. Then they had a five-year P&L statement, balance sheet, cash flow and cap table. It was an exquisitely crafted plan. Finally, they took the plan and boiled it down to 15 of the prettiest slides you ever saw.

The problem was that two weeks after they got out of the building talking to potential customers and users, they realized that at least 1/2 of their key assumptions in their wonderfully well crafted plan were wrong.

Why a business plan is different than a business model
As I listened, I thought about the other startup I had met an hour earlier. They also had been hard at work for the last 3½ months. But they spent their time differently. Instead of writing a full-fledged business plan, they had focused on building and testing a business model.

A business model describes how your company creates, delivers and captures value. It’s best understood as a diagram that shows all the flows between the different parts of your company. This includes how the product gets distributed to your customers and how money flows back into your company. And it shows your company’s cost structures, how each department interacts with the others and where your company can work with other companies or partners to implement your business.

This team had spent their first two weeks laying out their hypotheses about sales, marketing, pricing, solution, competitors, etc. and put in their first-pass financial assumptions. It took just five PowerPoint slides to capture their assumptions and top line financials.

This team didn’t spend a lot of time justifying their assumptions because they knew facts would change their assumptions. Instead of writing a formal business plan they took their business model and got out of the building to gather feedback on their critical hypotheses (revenue model, pricing, sales, marketing, customer acquisition cost, etc.) They even mocked up their application and tested landing pages, keywords, customer acquisition cost and other critical assumptions. After three months they felt they had enough preliminary customer and user data to go back and write a PowerPoint presentation that summarized their findings.

This team had wanted to have coffee to chat about which of the four seed round offers they had received they should accept.

A plan is static, a model is dynamic
Entrepreneurs treat a business plan, once written as a final collection of facts. Once completed you don’t often hear about people rewriting their plan. Instead it is treated as the culmination of everything they know and believe.  It’s static.

In contrast, a business model is designed to be rapidly changed to reflect what you find outside the building in talking to customers.  It’s dynamic.

“So do you mean I should never have written a business plan?” asked the founder who had spent the time crafting the perfect plan. “On the contrary,” I said. “Business plans are quite useful. The writing exercise forces you to think through all parts of your business. Putting together the financial model forces you to think about how to build a profitable business. But you just discovered that as smart as you and your team are, there were no facts inside your apartment. Unless you have tested the assumptions in your business model first, outside the building, your business plan is just creative writing.

(Next post: Iterating the Business Model – The Pivot.)

Lessons Learned

  • A startup is an organization formed to search for a repeatable and scalable business model.
  • There are no facts inside your building, so get outside and get some.
  • Draw and test the Business Model first, the Business Plan then follows.
  • Few if any investors read your business plan to see if they’re interested in your business
  • They’re a lot more interested in what you learned

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to Yahoo BuzzAdd to Newsvine

Teaching Entrepreneurship – The “Survey” Class

The Fundamentals of Technology Entrepreneurship course at Stanford taught undergraduates how to take a technical idea and turn it into a profitable and scalable company. By getting out of the building on a team project, the class helped students viscerally understand that a startup is a search for a profitable business model. Students formed teams, came up with a business idea then talked to customers, vendors and sales channel partners to validate their business model. (And learned how to pivot their model as reality intruded.)

For undergraduates taking multiple classes finding the time to do it well was tough. But for those with full time jobs this class was a disaster.

Too Much
The first time I taught the Fundamentals of Technology Entrepreneurship class, a quarter of the class were foreign students in a special engineering-entrepreneurship program where they took one entrepreneurship class each quarter at Stanford while working full time in technology startups in Silicon Valley. The Fundamentals of Technology Entrepreneurship was intended to be their introduction to entrepreneurship. However, working full time while simultaneously attempting to participate in a team based project and Customer Discovery outside the classroom just didn’t work. The foreign students felt overwhelmed and the full time Stanford students thought they weren’t carrying their weight (when in fact they were carrying much, much more.)

We quickly realized we needed a different class to introduce entrepreneurship to students who were already knee deep in working in a startup 24/7.

Design a New Class Around Entrepreneurial Guest Speakers
Brainstorming with Tina Seelig we came up with the idea of a survey course – an introduction to entrepreneurship built around Stanford’s Entreprenuerial Thought Leaders speakers series which brings technology speakers to campus every week. In this survey course, the students would listen to the speakers and then attend twice-weekly classes which focused on the basic concepts of a startup (demand creation, sales, partnerships, team building, financing, etc.) We’d use the lectures and guest speakers to help students new to the field understand that a startup is simply a temporary organization to search for a repeatable and profitable business model.  Then we’d have the students interact directly with entrepreneurs and industry leaders in the classroom.

The Spirit of Entrepreneurship – An Interactive Survey Class
We christened the class The Spirit of Entrepreneurship. Open to all students at Stanford it was taught as two, one-hour sessions, one held the day before the guest speaker and one immediately after each guest speaker. To prepare for each speaker, we asked students to analyze the speakers company over the weekend. (For the students who were working full-time this schedule gave them the time they needed to complete their analysis.)

This new class also appealed to a wide variety of non-engineering Stanford students. In addition to the overseas work/study students I found myself teaching history majors, English majors, education majors, et al who were interested in getting their toes wet but weren’t sure they wanted to commit to the hardcore Fundamentals of Technology Entrepreneurship course.

Each week the students had to submit a two-page analysis of the presenting company’s business model, distribution channels, demand creation activities, and engineering. As some of the companies were already large, the students had to find out how the founders discovered their business model, built their team and got funded.

Since I did not select the guest speakers, the course turned into a continual improv session as I tried to match my lectures to the unpredictable variety of industries (biotech, enterprise software, video games, media, web 2.0, etc.) and different life cycle stages of the guest speakers’ companies (startup to 20+billion.)

Guest Speakers
The students saw the guests speak before a live-audience of several hundred of their fellow Stanford students.  (The videos of these speakers are edited, indexed and available as 1600 free videos and podcasts as part of Stanford’s E-Corner, on-line here.)

The heart of the class and its improvisational nature came when every speaker agreed to walk over to our classroom and sit and chat with our class one-on-one for an hour. I would interview them for the first 20 minutes or so and then turn the questioning over to the class. This personal first-hand interaction with entrepreneurs created lots of opportunity for insights. For example, hearing David Heinemeir Hannson of 37Signals talk about why his company will never get “big” and then have Steve Case of AOL/TimeWarner talk the next week about why his did helped students understand that there is no “right answer”. Similarly having the students question Trip Adler from Scribd one week about why posting documents on-line is the future and hearing from Rashmi Sinha and Jonathan Boutelle of Slideshare the next week remind us that it’s all about PowerPoints, vividly demonstrated that entrepreneurs can interpret the same market in very different ways.

Dinners
I spent quite a few dinners with my students in this class. The Stanford students were curious whether startups were for them and we talked about whether entreprenuers are born or can be made (the nature versus nurture debate.) The overseas students were trying to make sense of Silicon Valley, its work ethic and how its entrepreneurial culture would fit back home. In Silicon Valley we take for granted that someone who failed in their previous company is considered an “experienced entrepreneur.”  I was reminded that in other cultures and countries the consequences of failure are much less benign.

Lessons Learned

  • Entrepreneurship is an art not a science.
  • Entrepreneurship is driven by people as well as business models.
  • Entrepreneurship only thrives in a culture that does not penalize risk-taking or failure.
  • There is no “right path” to success

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to Yahoo BuzzAdd to Newsvine

Teaching Entrepreneurship – Logistics

Back from a family humanitarian trip/vacation to one of the last bastions of Communism where “marketing” isn’t even a profession and entrepreneurship is a crime.  The irony is that the “Revolutionary Square” in all these Communist countries will be the the first place the McDonald’s go when the system collapses.

——————-

In my last post I described my approach to one of the three classes I teach at Stanford in the engineering school: Fundamentals of Technology Entrepreneurship.  The key things I want students to take from the class are:

  • Understand that a startup is a temporary organization designed to search for a profitable business model
  • Learn how to put together a business model, not a business plan
  • Understand that a business model is only a series of hypotheses that need to be validated outside the building

Class Logistics
As described in the previous post, this is a hands-on class. The 55 students formed 11 teams, and each team had to come up with an original idea, size the opportunity, propose a Business Model, get out of the building and test their hypotheses and analyze and explain each of the parts of their model.

The class wouldn’t have been possible without lots of hands other than mine.

Teaching Team
Having a teaching partner makes life a lot easier and the class improves. A partner allows me the flexibility to miss a session or two (my job as a California Coastal Commissioner meets three days every month up and down the coast of California.)  But the best benefit is bringing a second set of eyeballs to the curriculum which always makes it better.

This was the year I finally got the “business model versus business plan” concept nailed down. In previous classes I had experimented with moving away from the traditional focus on writing a business plan to a hands-on approach to building a business model.

But it wasn’t until Ann Miura-Ko joined me as a teaching partner that this “teach the model not the plan” idea jelled. Ann who had been my Teaching Assistant while she had finished her PhD at Stanford felt the same frustration about teaching entrepreneurs to assemble a business plan that we knew in the real world wouldn’t survive first contact with customers. After Stanford, Ann joined Mike Maples’ Venture Capital firm Floodgate as a partner. Over the summer we had both been impressed with Alexander Osterwalder’s Business Model Template work. At first we thought of adopting his template for the class, but found that an even more simplified version of a canonical business model that Ann developed worked better.

Teaching Assistants
Teaching at both Stanford and Berkeley I get to see the difference between the resources in a private university and those of a state university. (For the first 5 years at Berkeley, I taught 60 students by myself with no teaching partner or teaching assistant.) As the Stanford entrepreneurship program for the engineering school sits in the Management Science and Engineering Department, most of our TA’s are students in the MS&E PhD program. For this class Daisy Chung and David Hutton were our Teaching Assistants (TA’s.) TA’s make managing 60 students working on cases and team projects manageable.

They set up and keep the class web site updated.  They provide logistical support for guest speakers. They answer enumerable emails about logistics as well as substantive questions about class content. In addition to Ann and my office hours, Daisy and David held their own office hours to provide student support.

Most importantly, while Ann I reviewed all the grades, the TA’s managed the logistics of grading: grading the homework (in this class the case study summaries) and the business model written summary, keeping track of class participation and rolling up all the grades from the formal presentation. And they gave us feedback after each class session letting us know if we were particularly incoherent and kept us abreast of the usual student and team dynamics/crisis.

Finally our TA’s managed the mentors we had supporting the students.

Mentors
One part of Silicon Valley culture that doesn’t get enough credit is the generosity of entrepreneurs and VC’s who are willing to share their time with students. Ann and I recruited VC’s and entrepreneurs to be mentors for each team. (We’ve never had a problem in getting help for these classes.) Typically we have a mix of new mentors and those who have volunteered their time before.)  I wrote a handbook for the mentors to explain their roles (here.)

Essentially mentors support and coach each team. They typically met once or twice in person with the team, help them network outside the building, answer emails, provide critiques, etc. On average, mentors spent about 6 to 8 hours of time over the quarter with students. Some even came into to class to cheer on their team for their final business model presentations.

Guest Speakers
Two important things I learned early on in teaching are: 1) regardless of how good you are, students get sick of hearing you drone on week after week, and 2) hearing a guest make a point you’ve been trying to get across often makes it stick.  So we tried to break up our lectures with guest speakers.

Ideally we attempt to match the guests with the case or class session subject. For example, when we taught the value of getting out of the building and agile development, we had Eric Ries talk about the Lean Startup. When we covered partnerships with the WebTV case, we had Spencer Tall who negotiated the deal with Sony for WebTV come in and explain to the class what really happened. (Ann also kept me in the 21st century by making sure we had several woman entrepreneurs as guest speakers.)

Results
In the last decade, entrepreneurship has become faddish, particularly in college. It’s now “cool” to be an entrepreneur, and every school wants some type of entrepreneurship course. While that’s gratifying, the fact is that most people are ill suited to survive in the wild as founders or early employees.

I taught this introductory undergraduate class without many compromises. If you want to know what being an entrepreneur is going to be like you didn’t get to sit in a classroom listening to lectures for a quarter and then write a business plan. (I also teach a less intense introduction class for engineers called the Spirit of Entrepreneurship and the Customer Development Class at Berkeley which I’ll describe in a future post.) I actually hoped that some students who were curious about entrepreneurship would discover that it is definitely not for them. Better to find it out in a classroom than as a career choice.

While that did happen to a few (some are still in shock that I “cold-call” in class, others can’t handle the team dynamics or complain that there is no “right” answer, or were disoriented that the mentors, professors and customers all had different answers) the class seems to have had the opposite effect on an interesting segment.

Sometimes you get emails like this at the end of class:

“Just want to say thank you for the “big ideas” you brought to us. Thanks to your class, I have been thinking thoroughly about my future career and have decided that I would become an entrepreneur rather than anything else. Actually I made up my mind just on my plane to my final round of interview with the Boston Consulting Group. I flew there and told the partner that I would become an entrepreneur instead.”

Oh, oh.

——–

Coming Soon
In the fall Ann and I are going to develop a new graduate-level class for Stanford that will take this one to the next level. Students will not only have to assemble a team, come up with the idea and leave the classroom to test the business model – they’ll need to come back with real customer orders.  (And if it’s a web-based product, they’ll have to build it.)

I wonder if we can fill the class.

———–

A few more of the final class presentations are here (click on the thumbnails to enlarge):

One last presentation here:


Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to Yahoo BuzzAdd to Newsvine

Teaching Entrepreneurship – By Getting Out of the Building

One of the classes I teach in the engineering school at Stanford is E145: the Fundamentals of Technology Entrepreneurship, an introduction to building a scalable startup. While the class is open to everyone at the University, we want to teach science and engineering undergraduates how they can take a technical idea and turn it into a profitable and scalable company.

The class which was authored by Tom Byers, is offered every quarter and taught by four different professors.  But thanks to Tom, we all get to teach it with a slightly emphasis.

I taught the class this semester with Ann Miura-Ko a partner at Maples Investments.

Teaching Goals
Our goal is to teach students the key concepts of the startup process and help them understand that a startup is a search for a profitable business model.  We did this with twice weekly lectures and seven case studies. Most importantly we tied the lectures to a hands-on team project. Students formed 5-person teams, came up with a business idea then got out of the building to validate their business model. (And learn how to pivot their model as reality intrudes.)

Our goal was not to teach the students to write a business plan nor were we trying to teach them how to give a pitch to VC’s.

A Startup is a Search For A Business Model
As I’ve described in previous posts; a startup is an organization formed to search for a repeatable and scalable business model.

A business model describes how your company creates, delivers and captures value. It’s best understood as a diagram that shows all the flows between the different parts of your company.  This includes how the product gets distributed to your customers and how money flows back into your company.  And it shows your company’s cost structures, how each department interacts with the others and where your company can work with other companies or partners to implement your business.

We want to teach our students to think about how their “idea” for a business translated into a business model and then to see if that business model will survive first contact with customers.

In our class Ann and I offered the students a template of a business model diagram.  Their job was to get out of the building and transform the boxes into real data.  (I’ll show you some of their examples at the end of this post.)

Class Lectures
We had ten weeks and an hour and fifty minutes twice a week to cover the basics of a startup.

Our lectures were organized as:

  • Where do ideas come from?
  • How to decide whether an idea is a scalable business opportunity.
  • What is a business model?
  • Distribution, Demand Creation and Partnerships
  • Customer Discovery
  • First Team Presentation – What’s the Idea and How Large is the Opportunity
  • Regulation and Intellectual Property
  • Building Startup Teams
  • Metrics That Matter (Business Model Metrics)
  • Accounting Basics and Multi-stage Finance
  • Liquidity – the End Game
  • Final Team Presentation – What’s the Business Model?

Interspersed among the lectures were seven “case studies”: Chegg, IMVU, WebTV. Nanogene, Wily, Solidworks and Barbara Arenson.  Each case study was a real world example of an issue an entrepreneur might encounter as they were building a company.

Final Team Project – What’s the Business Model?
11 student teams of 5 were working outside of class on the Opportunity Assessment Project. Each team had to take an original idea, come up with the positioning and analyze the potential size of the opportunity, propose a Business Model, and analyze and explain each of the parts of their model.

Customer Discovery
Only 5 out of the 55 students had taken an entrepreneurial class before. None of the students were domain experts in their areas, and each team had to figure out how to contact potential customers and channel partners. Yet every team did figure out how to conduct extensive out of building Customer Discovery.  (By design we didn’t give them too much Customer Development theory. The emphasis was on getting out of the building and testing their hypothesis.)

Here are some examples the “out of the building” work the students did.

Presenting the Project
As their final project, each of the 11 teams had 15 minutes to present their conclusions and then later submit a written summary.  (We were equally happy if the students discovered this would not be a profitable business as we were if they found a killer idea.) The presentations were graded on:

  • Did they quickly summarize their idea?
  • Did they articulate the problem?
  • Did they size the opportunity of solving the problem?
  • Was their solution clear? (for product companies, this should include manufacturing and cost of goods)
  • Did they describe demand creation and assign acquisition costs?
  • Did they describe lifetime value of a customer?
  • Did they describe distribution channel and assign channel costs?
  • Did they get out of the building?
  • Did they tell us what they learned from going out of the building?
  • Did they adequately diagram the business model?
  • Did they describe the risks?

Remember the goal was not a fundable pitch deck or a full business plan with pages of spreadsheets.  Rather we wanted them to start with an idea and see what it would take to build a real business (and tell us in 15 minutes).

This post and the next will have a few of the final presentations (click on the thumbnails to enlarge.)

And here was another presentation in a very different market.

Lessons Taught

  • Entrepreneurship is an art not a science.
  • It is best learned by a combination of theory and practice.
  • No business model survives first contact with customers
  • You won’t believe this until you hear customers tell you you’re wrong.
  • Agility and resiliency are not tested inside the building.
  • They’re essential outside.

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to Yahoo BuzzAdd to Newsvine

Customer Development for Web Startups

Customer Development is a technique startups use to quickly iterate and test each part of their business model.  How you execute Customer Development varies, depending on your type of business. In my book, “The Four Steps to the Epiphany” I use enterprise software as the business model example.

Ash Maurya, the CEO of WiredReach, has extended my work by building a model of Customer Development for Web Startups.

I think his process models are pretty good. Go read both of his posts on Discovery and Validation for web startups. His two key slides are at the end of this post but the details on his blog are worth reviewing.

Customer Development In Context
Your startup is an organization built to search for a repeatable and scalable business model.


Your job as a founder is to quickly validate whether the model is correct by seeing if customers behave as your model predicts. Most of the time the darn customers don’t behave as you predicted.

Customer Development is the process startups use to quickly iterate and test each element of their business model. Agile Development is the way startups quickly iterate their product as they learn. A Lean Startup is Eric Ries’s description of the intersection of Customer Development, Agile Development and if available, open platforms and open source.

Diving into the Customer Development diagram inside the diagram above, we see that the first two steps, Customer Discovery and Customer Validation are all about iteration and testing of your business model.

How you actually do Customer Discovery and Validation depends on what type of business you are in. What makes sense for startups selling Enterprise Software may not work for startups on the web. Therefore you need different versions of the actual steps of Customer Development for different types of businesses.

The Customer Discovery step for Enterprise Software Startups
The first step in the Customer Development is Customer Discovery: testing your hypotheses. The flow for Customer Discovery for an enterprise software company was described in the Four Steps to the Epiphany. It looked like this:


.

The Customer Discovery step for Web Startups
Ash Maurya‘s version of the Discovery step of Customer Development for a web startup looks like this:

.

Customer Validation for Enterprise Software Startups
The next step in the Customer Development process is Customer Validation – making sure that there really is a repeatable and scalable revenue and business model before you turn up your cash burn rate.  My version of Customer Validation for an enterprise software company looked liked this:

.

Customer Validation for Web Startups
Ash Maurya‘s version of the Valdiation step of Customer Development for a web startup looks like this:

Lessons Learned

  • A startup is an organization built to search for a repeatable and scalable business model.
  • Customer Development is a technique startups use to quickly iterate and test each part of their business model.
  • You need different versions of the actual steps of Customer Development for different types of businesses.
  • This post illustrates a version of Customer Development for startups on the web.

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to Yahoo BuzzAdd to Newsvine

%d bloggers like this: