What Your Startup Needs to Know About Regulated Markets

Often the opposite of disruption is the status quo.

If  you’re a startup trying to disrupt an existing business you need to read The Fixer by Bradley Tusk and Regulatory Hacking by Evan Burfield. These two books, one by a practitioner, the other by an investor, are must-reads.

The Fixer is 1/3rd autobiography, 1/3rd case studies, and 1/3rd a “how-to” manual. Regulatory Hacking is closer to a “step-by-step” textbook with case studies.

Here’s why you need to read them.


One of the great things about teaching has been seeing the innovative, unique, groundbreaking and sometimes simply crazy ideas of my students. They use the Business Model (or Mission Model) Canvas to keep track of their key hypotheses and then rapidly test them by talking to customers and iterating their Minimal Viable Products. This allows them to quickly find product/market fit.

Except when they’re in a regulated market.

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

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

In the U.S. regulation happens on three levels:

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

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

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

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

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

A Playbook for Entering a Regulated Market
Startup battles with regulatory agencies – like Uber with local taxi licensing laws, AirBnB with local zoning laws, and Tesla with state dealership licensing – are legendary. Each of these is an example of a startup disrupting regulated markets.

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

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

  • Can I do anything I want or are there laws and regulations that might stop me or slow me down?
  • Are there incumbents who will view us as a threat to the status quo? Can they use laws and regulations to impede our growth?

Diagram Your Business Model
The best way to start is by drawing a business model canvas. In the customer segments box, you’re going to discover that there may be 5, 10 or more different players: users, beneficiaries, stakeholders, payers, saboteur, rent seeker, influencers, bureaucrats, politician, regulators. As you get out of the building and start talking to people you’ll discover more and more players.

Instead of lumping them together, each of these users, beneficiaries, stakeholders, payers, saboteur, rent seekers, etc. require a separate Value Proposition Canvas. This is where you start figuring out not only their pains, gains and jobs to be done, but what products/services solve those pains and gains. When you do that, you’ll discover that the interests of your product’s end user versus a regulator versus an advocacy group, key opinion leaders or a politician, are radically different. For you to succeed you need to understand all of them.

One of the critical things to understand is how the regulatory process works. For example, do you just fill out an online form and pay a $50 fee with your credit card and get a permit? Or do you need to spend millions of dollars and years running clinical trials to get FDA clearance and approval? And are these approvals good in every state? In every country? What do you need to do to sell worldwide?

Find the Saboteurs and Rent Seekers
One of the unique things about entering a regulated market is that the incumbents have gotten there first and have “gamed the system” in their favor. Rent seekers are individuals or organizations with successful existing business models who look to the government and regulators as their first line of defense against innovative competition. They use government regulation and lawsuits to keep out new entrants that might threaten their business models. They use every argument from public safety to lack of quality or loss of jobs to lobby against the new entrants. Rent seekers spend money to increase their share of an existing market instead of creating new products or markets but create nothing of value.

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

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

Although most regulatory bodies are initially created to protect the public’s health and safety, or to provide an equal playing field, over time the very people they’re supposed to regulate capture the regulatory agencies. Rent Seekers take advantage of regulatory capture to protect their interests against the new innovators.

Understand Who Pays
For revenue streams figure out who’s going to pay. Is it the end user? An insurer? Some other third party?  If it’s the government, hang on to your seat because you now have to deal with government procurement and/or reimbursement. These payers need a Value Proposition Canvas as well.

Customer Relationships
For Customer Relationships, figuring out how to “Get, Keep and Grow” customers in a regulated market is a lot more complex than simply “Let’s buy some Google Adwords”. Market entry in a regulated market often has many more moving parts and is much costlier than a traditional market, requiring lobbyists, key opinion leaders, political donations, advocacy groups, and grassroots and grasstops campaigns, etc.

Diagram the Customer Segment Relationships
Start diagraming out the relationships of all the customer segments. Who influences who? How do they interconnect? What laws and regulations are in your way for deployment and scale? How powerful are each of the players? For the politicians, what are their public positions versus actual votes and performance. Follow the money. If an elected official’s major donor is organization x, you’re not going to be able to convince them with a cogent argument.

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

Diagram the Competition
Next, draw a competitive Petal diagram of competitors and adjacent market players.  Who’s already serving the users you’re targeting? Who are the companies you’re disrupting?

I’ve always thought of my startup as the center of the universe. So, put your company in the center of the slide like this.

In this example the startup is creating a new category – a lifelong learning network for entrepreneurs. To indicate where their customers for this new market would come from they drew the 5 adjacent market segments they believed their future customers were in today: corporate, higher education, startup ecosystem, institutions, and adult learning. To illustrate this they drew these adjacent markets as a cloud surrounding their company. (Unlike the traditional X/Y graph you can draw as many adjacent market segments as you’d like.)

Fill in the market spaces with the names of the companies that are representative players in each of the adjacent markets.

Strategy diagram
Finally, draw your strategy diagram – how will you build a repeatable and scalable sales process? What regulatory issues need to be solved? In what order?  What is step 1? Then step 2? For example, beg for forgiveness or ask for permission? How do you get regulators who don’t see a need to change to move? And do so in your lifetime? How do you get your early customers to advocate on your behalf?

I sketched out a sample diagram of some of things to think about in the figure below. Both The Fixer and Regulatory Hacking give great examples of regulatory pitfalls, problems and suggested solutions.

Politicians
If you read Tusk’s book The Fixer you come away with the view that the political process in the U.S. follows the golden rule – he who has the gold makes the rules. It is a personal tale of someone who was deep inside politics – Tusk was deputy governor of Illinois, Mike Bloomberg’s campaign manager, Senator Charles Schumer’s communication director, and ran Uber’s first successful campaign to get regulatory approval in New York. And he is as cynical about politicians as one can get. On the other hand, Regulatory Hacking by is written by someone who understands Washington—but still needs to work there.

Read both books.

Lessons Learned

  • Regulated markets have different rules and players than traditional Business-to-Business or Business-to-Consumer markets
  • Entering a regulated market should be a strategy not a disconnected set of tactics
    • You need to understand the Laws and Regulations on the federal, state and local levels
    • You and your board need to be in sync about the costs and risks of entering these markets
    • Strategic choices include: asking for permission versus forgiveness, public versus private battles
  • Most early stage startups don’t have the regulatory domain expertise in-house. Go get outside advice at each step

Is the Lean Startup Dead?

A version of this article first appeared in the Harvard Business Review

Reading the NY Times article “Jeffrey Katzenberg Raises $1 Billion for Short-Form Video Venture,” I realized it was time for a new startup heuristic: the amount of customer discovery and product-market fit you need to find is inversely proportional to the amount and availability of risk capital.

And while the “first mover advantage” was the rallying cry of the last bubble, today’s is: “Massive capital infusion can own the entire market.”


Fire, Ready, Aim
Jeff Katzenberg has a great track record – head of the studio at Paramount, chairman of Disney Studios, co-founder of DreamWorks and now chairman of NewTV. The billion dollars he just raised is on top of the $750 million NewTV’s parent company, WndrCo, has raised for the venture. He just hired Meg Whitman. the ex-CEO of HP and eBay, as CEO of NewTV. Their idea is that consumers will want a subscription service for short form entertainment (10-minute programs) for mobile rather than full length movies. (Think YouTube meets Netflix).

It’s an almost $2-billion-dollar bet based on a set of hypotheses. Will consumers want to watch short-form mobile entertainment? Since NewTV won’t be making the content, they will be licensing from and partnering with traditional entertainment producers. Will these third parties produce something people will watch? NewTV will depend on partners like telcos to distribute the content. (Given Verizon just shut down Go90, its short form content video service, it will be interesting to see if Verizon distributes Katzenberg’s offerings.)

But NewTV doesn’t plan on testing these hypotheses. With fewer than 10 employees but almost $2-billion dollars in the bank, they plan on jumping right in.

It’s the antithesis of the Lean Startup.  And it may work. Why?

Dot Com Boom to Bust
Most entrepreneurs today don’t remember the Dot-Com bubble of 1995 or the Dot-Com crash that followed in 2000. As a reminder, the Dot Com bubble was a five-year period from August 1995 (the Netscape IPO) when there was a massive wave of experiments on the then-new internet, in commerce, entertainment, nascent social media, and search. When Netscape went public, it unleashed a frenzy from the public markets for anything related to the internet and signaled to venture investors that there were massive returns to be made investing in anything internet related. Almost overnight the floodgates opened, and risk capital was available at scale from venture capital investors who rushed their startups toward public offerings. Tech IPO prices exploded and subsequent trading prices rose to dizzying heights as the stock prices became disconnected from the traditional metrics of revenue and profits. Some have labeled this period as irrational exuberance. But as Carlota Perez has so aptly described, all new technology industries go through an eruption and frenzy phase, followed by a crash, then a golden age and maturity. Then the cycle repeats with a new set of technologies.

Given the stock market was buying “the story and vision” of anything internet, inflated expectations were more important than traditional metrics like customers, growth, revenue, or heaven forbid, profits. Startups wrote business plans, generated expansive 5-year forecasts and executed (hired, spent and built) to the plan. The mantra of “first mover advantage,” the idea that winners are the ones who are the first entrants in their market, became the conventional wisdom of investors in Silicon Valley.“ First Movers” didn’t understand customer problems or the product features that solved those problems (what we now call product-market fit). These bubble startups were actually guessing at their business model and did premature and aggressive hype and early company launches and had extremely high burn rates – all predicated on an IPO to raise more cash. To be fair, in the 20th century, there really wasn’t a model for how to build startups other than write plan, raise money, and execute – the bubble was this method, on steroids. And to be honest, VC’s in this bubble really didn’t care. Massive liquidity awaited the first movers to the IPO’s, and that’s how they managed their portfolios.

When VC’s realized how eager the public markets were for anything related to the internet, they pushed startups with little revenue and no profits into IPOs as fast as they could. The unprecedented size and scale of VC returns transformed venture capital from a financial asset backwater into full-fledged player in the financial markets.

Then one day it was over. IPOs dried up. Startups with huge burn rates – building leases, staff, PR and advertising – ran out of money. Most startups born in the bubble died in the bubble.

The Rise of the Lean Startup
After the crash, venture capital was scarce to non-existent. (Most of the funds that started in the late part of the boom would be underwater). Angel investment, which was small to start with, disappeared, and most corporate VCs shut down. VC’s were no longer insisting that startups spend faster, and “swing for the fences”. In fact, they were screaming at them to dramatically reduce their burn rates. It was a nuclear winter for startup capital.

The idea of the Lean Startup was built on top of the rubble of the 2000 Dot-Com crash.

With risk capital at a premium and the public markets closed, startups and their investors now needed a methodology to preserve capital and survive long enough to generate revenue and profits. And to do that they needed a different method than just “build it and they will come.” They needed to be sure that what they were building was what customers wanted and needed. And if their initial guesses were wrong, they needed a process that would permit them to change early on in the product development process when the cost of changes was small – the famed “pivot”.

Lean started from the observation that you cannot ask a question that you have no words for. At the time we had no language to describe that startups were not smaller versions of large companies; the first insight was that large companies executed known business models, while startups searched for them. Yet while we had plenty of language and tools for execution, we had none for search.  So we (Blank, Ries, Osterwalder) built the tools and created a new language for innovation and modern entrepreneurship. It helped that in the nuclear winter that followed the crash, 2001 – 2004, startups and VCs were extremely risk averse and amenable to new ideas that reduced risk. (This same risk averse, conserve the cash, VC mindset would return after the 2008 meltdown of the housing market.)

As described in the HBR article “Why the Lean Startup Changes Everything,” we developed Lean as the business model / customer development / agile development solution stack where entrepreneurs first map their hypotheses about their business model and then test these hypotheses with customers in the field (customer development) and use an iterative and incremental development methodology (agile development) to build the product. This allowed startups to build Minimal Viable Products (MVPs) – incremental and iterative prototypes – and put them in front of a large number of customers to get immediate feedback. When founders discovered their assumptions were wrong, as they inevitably did, the result wasn’t a crisis; it was a learning event called a pivot— and an opportunity to change the business model.

Every startup is in a race against time. It has to find product-market fit before running out of cash. Lean makes sense when capital is scarce and when you need to keep burn rates low. Lean was designed to inform the founders’ vision while they operated frugally at speed. It was not built as a focus group for consensus for those without deep convictions.

The result? Startups now had tools that sped up the search for customers, ensured that what was being built met customer needs, reduced time to market and slashed the cost of development.

Carpe Diem – Seize the Cash
Today, memories of frugal VC’s and tight capital markets have faded, and the structure of risk capital is radically different. The explosion of seed funding means tens of thousands of companies that previously languished in their basement are getting funding, likely two orders of magnitude more than received Series A funding during the Dot-Com bubble. As mobile devices offer a platform of several billion eyeballs, potential customers which were previously small niche markets now include everyone on the planet. And enterprise customers in a race to reconfigure strategies, channels, and offerings to deal with disruption provide a willing market for startup tools and services.

All this is driven by corporate funds, sovereign funds and even VC funds with capital pools of tens of billions of dollars dwarfing any of the dollars in the first Dot Com bubble – and all looking for the next Tesla, Uber, Airbnb, or Alibaba. What matters to investors now is to drive startup valuations into unicorn territory (valued at $1 billion or more) via rapid growth – usually users, revenue, engagements but almost never profits. As valuations have long passed the peak of the 2000 Internet bubble, VC’s and founders who previously had to wait until they sold their company or took it public to make money no longer have to wait. They can now sell part of their investment when they raise the next round. And if the company does go public, the valuations are at least 10x of the last bubble.

With capital chasing the best deals, and hundreds of millions of dollars pouring into some startups, most funds now scoff at the idea of Lean. Rather than the “first mover advantage” of the last bubble, today’s theory is that “massive capital infusion owns the entire market.” And Lean for startups seems like some quaint notion of a bygone era.

And that explains why investors are willing to bet on someone with a successful track record like Katzenberg who has a vision of disrupting an entire industry.

In short, Lean was an answer to a specific startup problem at a specific time, one that most entrepreneurs still face and which ebbs and flows depending on capital markets. It’s a response to scarce capital, and when that constraint is loosened, it’s worth considering whether other approaches are superior. With enough cash in the bank, Katzenberg can afford to create content, sign distribution deals, and see if consumers watch. If not, he still has the option to pivot. And if he’s right, the payoff will be huge.

One More Thing…
Well-funded startups often have more capital for R&D than the incumbent companies they’re disrupting. Companies struggle to compete while reconfiguring legacy distribution channels, pricing models and supply chains. And government agencies find themselves being disrupted by adversaries unencumbered by legacy systems, policies and history.  Both companies and government agencies struggle with how to deliver innovation at speed. Ironically, for this new audience that makes the next generation of Lean – the Innovation Pipeline – more relevant than ever.

Lessons Learned:

  • When capital for startups is readily available at scale, it makes more sense to go big, fast and make mistakes than it does to search for product/market fit.
  • The amount of customer discovery and product-market fit you need to do is inversely proportional to the amount and availability of risk capital.
  • Still, unless your startup has access to large pools of capital or have a brand name like Katzenberg, Lean still makes sense.
  • Lean is now essential for companies and government agencies to deliver innovation at speed
  • The Lean Startup isn’t dead. For companies and government the next generation of Lean – the Innovation Pipeline – is more relevant than ever.

Brown University Talk

Every year I head to the East coast for vacation. We live in a semi-rural area, just ~10,000 people in town, with a potato farm across the street and an arm of the ocean in the backyard. While they own tech, smartphones and computers, most of my neighbors can’t tell you about the latest trends in AI, Bitcoin or Facebook. In contrast, Silicon Valley is an innovation cluster, a monoculture of sorts, with a churning sea of new tech ideas, sailed by entrepreneurs who each passionately believe they’re the next Facebook or Google, with their sails driven by the hurricane winds of investor capital.

The seas are calm here. Most years out here I spend my time reading. This year has been a bit more interesting. One of the things I did was to speak to the startup community in Providence Rhode Island at Brown University.

The talk is here

It’s worth a listen.

7:54: How we used to build startups

11:40: How the Lean Startup began

13:34: Why startups are not smaller versions of large companies

14:06: The three pillars of Lean

20:10: Customer Development is an art

26:42: How we changed the way science is commercialized in the U.S.

29:14: What’s a pivot?

37:34: Customer Discovery isn’t just a bunch of random conversations

39:03: Mistakes that blow a customer meeting

42:45: How you know you’ve talked to enough customers

48:51: Why corporations are mostly doing innovation theater

54:59: Tesla started in my living room

57:28: It takes two: Why world-class startups have both a great innovator and a great entrepreneur

1:04:05: Failure sucks

1:08:43: Avoiding the startup deathtrap

1:13:22: Talk to the crazy people

1:16:05: How you know when you stop being a startup

The Innovation Stack: How to make innovation programs deliver more than coffee cups

Is your organization full of Hackathons, Shark Tanks, Incubators and other innovation programs, but none have changed the trajectory of your company/agency?

Over the last few years Pete Newell and I have helped build innovation programs inside large companies, across the U.S. federal science agencies and in the Department of Defense and Intelligence Community. But it is only recently that we realized why some programs succeed and others are failing.

After doing deep dives in multiple organizations we now understand why individual innovators are frustrated, and why entrepreneurial success requires heroics. We also can explain why innovation activities have generated innovation theater, but few deliverables. And we can explain why innovation in large organizations looks nothing like startups. Most importantly we now have a better idea of how to build innovation programs that will deliver products and services, not just demos.

It starts by understanding the “Innovation Stack” – the hierarchy of innovation efforts that have emerged in large organizations. The stack consists of: Individual Innovation, Innovation Tools and Activities, Team-based Innovation and Operational Innovation.

Individual Innovation
The pursuit of innovation inside large companies/agencies is not a 21st-century invention. Ever since companies existed, there have been passionate individuals who saw that something new, unplanned and unscheduled was possible. And pushing against the status quo of existing process, procedure and plan, they went about building a demo/prototype, and through heroic efforts succeeded in getting a new innovation over the goal line – by shipping/deploying a new innovation.

We describe their efforts as “heroic” because all the established procedures and processes in a large company are primarily designed to execute and support the current business model. From the point of view of someone managing an engineering, manufacturing or operations organization, new, unplanned and unscheduled innovations are a distraction and a drag on existing resources. (The best description I’ve heard is that, “Unfettered innovation is a denial of service attack on core capabilities.”) That’s because until now, we hadn’t levied any requirements, rigor or evidence on the innovator to understand what it would take to integrate, scale and deploy products/services.

Finally, most corporate/agency innovation processes funnel “innovations” into “demo days” or “shark tanks” where they face an approval/funding committee that decides which innovation ideas are worth pursuing. However, without any measurable milestones to show evidence of the evolution of what the team has learned about validity of the problem, customer needs, pivots, etc., the best presenter and flashiest demo usually win.

In some companies and government agencies, innovators even have informal groups, i.e. an Innovators Alliance, where they can exchange best practices and workarounds to the system. (Think of this as the innovator’s support group.) But these innovation activities are ad hoc, and the innovators lack authority, resources and formal process to make innovation programs an integral part of their departments or agencies.

Innovators vs. Entrepreneurs
There are two types of people who engage in large company/agency innovation: Innovators – those who invent new technology, product, service or processes; and Entrepreneurs – those who’ve figured out how to get innovation adopted and delivered through the existing company/agency procedures and processes. Although some individuals operate as both innovator and entrepreneur, any successful innovation program requires an individual or a team with at least these two skill sets. (More detail can be found here.)

Innovation Tools and Activities
Over the last decade, innovators have realized that they needed tools and activities different from traditional project management tools used for new versions of existing products/customers.They have passionately embraced innovation tools and activities that for the first time help individual innovators figure out what to build, who to build it for and how to create effective prototypes and demos.

Some examples of innovation tools are Customer Development, Design Thinking, User-Centric Design, Business Model Canvas, Storytelling, etc. Companies/agencies have also co-opted innovation activities developed for startups such as Hackathons, Incubators, internal Kickstarters, as well as Open Innovation programs and Maker Spaces that give individual innovators a physical space and dedicated time to build prototypes and demos. In addition, companies and agencies have set up Innovation Outposts (most often located in Silicon Valley) to be closer to relevant technology and then to invest, partner or buy.

These activities make sense in a startup ecosystem (where 100% of the company is focused on innovation,) however they generate disappointing results inside companies/agencies (when 98% of the organization is focused on executing the existing business/mission model.) While these tools and activities educated innovators and generated demos and prototypes, they lacked an end-to-end process that focused on delivery/deployment. So it should be no surprise that very few contributed to the company’s top or bottom line (or an agency’s mission).

One of the ironies of the tools/activities groups is rather than talking about the results of using the tools – i.e. the ability to rapidly deliver new products/services that are wanted and needed – their passion has them evangelizing the features of the tools and activities. This means that senior leadership has pigeonholed most of these groups as extensions of corporate training departments and skeptics view this as the “latest fad.”

Team-based Innovation
Rather than just teaching innovators how to use new tools or having them build demos, we recognized that there was a need for a process that taught all the components of a business/mission model (who are the customers, what product/service solves their problem, how do we get it to them, support it, etc.) The next step in entrepreneurial education was to teach teams a formal innovation process for how to gather evidence that lets them test if their idea is feasible, desirable and viable. Examples of team-based innovation programs are the National Science Foundation Innovation Corps (I-Corps @ NSF), for the Intelligence Community I‑Corps@ NSA, and for the Department of Defense, Hacking for Defense (H4D).

In contrast to single-purpose activities like Incubators, Hackathons, Kickstarters, etc., these curricula teach what it takes to turn an idea into a deliverable product/service by using the scientific method of hypothesis testing and experimentation outside the building. This process emphasizes rapid learning cycles with speed, urgency, accepting failure as learning, and innovation metrics.

Teams talk to 100+ beneficiaries and stakeholders while building minimal viable products to maximize learning and discovery. They leave the program with a deep understanding of all the obstacles and resources needed to deliver/deploy a product.

The good news – I-Corps, Hacking for Defense and other innovation programs that focus on training single teams have raised the innovation bar. These programs have taught thousands of teams of federally funded scientists as well as innovators in corporations, the Department of Defense and intelligence community. However, over time we’ve seen teams that completed these programs run into scaling challenges. Even with great evidence-based minimal viable products (prototypes), teams struggled to get these innovations deployed at scale and in the field. Or a team that achieved product-market fit building a non-standard architecture could find no way to maintain it at scale within the parent organization.

Upon reflection we identified two root causes. The first is a lack of connection between innovation teams and their parent organization. Teams form/and are taught outside of their parent organization because innovation is disconnected from other activities. This meant that when teams went back to their home organization, they found that execution of existing priorities took precedence. They returned speaking a foreign language (What’s a pivot? Minimum viable what?) to their colleagues and bosses who are rewarded on execution-based metrics. Further, as budgets are planned out years in advance, their organization had no slack for “good ideas.” As a result, there was no way to finish and deploy whatever innovative prototypes the innovators had developed – even ones that have been validated.

The second root cause emerged because neither the innovator’s teams nor their organizations had the mandate, budget or people to build an end-to-end innovation pipeline process, one that started with innovation sourcing funnel (both internal and external sources) all the way to integrating their prototypes into mainstream engineering production. (see below and this HBR article on the innovation pipeline.)

Operational Innovation
As organizations have moved from – individual innovators working alone, to adopting innovation tools and activities, to teaching teams about evidence-based innovation – our most important realization has been this: Having skills/tools and activities are critical building blocks but by themselves are insufficient to build a program that delivers results that matter to leadership.  It’s only when senior leaders see how an innovation process can deliver stuff that matters – at speed—that they take action to change the processes and procedures that get in the way.

We believe that the next big step is to get teams and leaders to think about the innovation process from end-to-end – that is to visualize the entire flow of how and from where an idea is generated (the source) all the way to deployment (how it gets into users’ hands). So, we’ve drawn a canonical innovation pipeline. (The HBR article here describes it in detail.) For context, in the figure below, the I-Corps program described earlier is the box labeled “Solution Exploration/Hypotheses Testing.” We’ve surrounded that process with all the parts necessary to build and deliver products and services at speed and at scale.

Second, we’ve realized that while individual initiatives won “awards,” and Incubators and Hackathons got coffee cups and posters, senior leadership sat up and took notice when operating groups transformed how they work in the service of a critical product or mission. When teams in operating groups adopted the innovation pipeline, it made an immediate impact on delivering products/services at speed.

An operating group can be a corporate profit and loss center or anything that affects revenue, profit, users, market share, etc. In a government agency it can be something that allows a group to execute mission more effectively or in a new disruptive way. Operating groups have visibility, credibility and most importantly direct relevance to mission.

Where are these groups? In every large company or agency there are groups solving operational problems that realize “they can’t go on like this” and/or “we need to do a lot more stuff” and/or “something changed, and we rapidly need to find new ways to do business.” These groups are ready to try something new. Most importantly we learned that “the something new” is emphatically not more tools or activities (design thinking, user-centric design, storytelling, hackathons, incubators, etc.) Because these groups want an end-to-end solution, the innovation pipeline resonates with the “do’ers” who lead these groups.

(One example of moving up the Innovation Stack is that the NSA I-Corps team has recently shifted their focus from working with individual teams to helping organizations deploy the methodology at scale.  In true lean startup fashion, they are actively testing a number of approaches with a variety of internal organizations ranging in size from 40 to 1000+ people.)

However, without a mandate for actually delivering innovation from senior leadership, scaling innovation across the company/agency means finding one group at a time – until you reach a tipping point of recognition. That’s when leadership starts to pay attention. Our experience to date is that 25- to 150-person groups run by internal entrepreneurs with budget and authority to solve critical problems are the right place to start to implement this. Finding these people in large companies/agencies is a repeatable process. It requires patient and persistent customer discovery inside your company/agency to find these groups and deeply understand their pains/gains and jobs to be done.

Lessons Learned

  • Companies/agencies have adapted and adopted startup innovation tools
    • Lean, Design Thinking, User-centric Design, Business Model Canvas, etc.
  • As well as startup activities and team-based innovation 
    • Hackathons, Incubators, Kickstarters, I-Corps, FastWorks, etc.
  • Because they are disconnected from the mainstream business/mission model very few have been able to scale past a demo/prototype
  • Use the Innovation Stack and start working directly with operating groups
    • Find those who realize “they can’t go on like this” and/or “we need to do a lot more stuff” and/or “something changed, and we rapidly need to find new ways to do business”
  • You’ll deliver stuff that matters instead of coffee cups

The State of Entrepreneurship

Co-founder magazine just interviewed me about the current state of entrepreneurship – in startups and large companies – and how we got here. I thought they did a good job of capturing my thoughts.

Take a read here.

click here to read the rest of the article

CoinOut Gets Coin In

It’s always fun to see what happens to my students after they leave class. Jeff Witten started CoinOut four years ago in my Columbia University 5-day Lean LaunchPad class. CoinOut eliminates the hassle of getting a pocket full of loose change from merchants by allowing you to put it in a digital wallet.

Jeff just appeared on Shark Tank and the Sharks funded him. We just caught up and I got to do a bit of customer discovery on Jeff’s entrepreneurial journey to date.

What was the Shark Tank experience like?
It was surreal. We were not prepped or told what to expect, and really just thrown into the “tank” like a baby in the deep end. Given the stage and possibility of embarrassment, it was very intimidating. With that came a ton of adrenaline – it felt like a gallon of it was pumped into my veins – and it allowed me to focus and defend the business/myself as if there were no tomorrow. Looking back I can barely remember what went on in there, but just that I went in with a fighter’s mentality of not letting them speak over me, bully me or misrepresent what we are doing.

SHARK TANK – Coverage. (ABC/Michael Desmond)
JEFF WITTEN (COINOUT)

Anything about the Lean LaunchPad class or just being an entrepreneur in general prepare you for pitching on Shark Tank?
The class was almost a mini shark tank – I still remember the very first pitch we did in front of the class. Each time you speak publicly, or even privately for that matter, about your business I believe that you learn something and help improve / sharpen your pitch. Also, as an entrepreneur, you have to fight every single day. Nothing is easy and you need to convince people that your new way of doing something brings value that someone should pay for. That mentality certainly is one I needed to survive the “Tank.”

Coming into the Lean LaunchPad class, what did you know about starting a company?
I knew very little! I had lots of thoughts that turned out to be wildly incorrect and off target. I had a faint idea of how to interact with potential customers, but no real-life experience doing so. I also knew how to write up a great, theoretical proposal and presentation but that was about it!

What was the 5-day LaunchPad class experience like?
The 5 days were still one of the most intense stretches I’ve gone through (even more intense than some law school finals)! I was working with 4 other folks for the first time and we had to slam together as much as possible to come to some legitimate findings by the end of the course. We actually forced our way into a retail conference that was going on in the Javits Center and ran around berating a million different very large companies, half of whom told us to get lost. At the end of the day, we were able to re-focus and come up with half decent findings with the help of the business model canvas and mentoring from our professors. It was a real whirlwind, but when I look back, many of the discoveries still animate the product and company today.

Jeff’s original CoinOut presentation after five days is here

What did you learn in the LaunchPad class?
I learned how to build a Minimum Viable Product (MVP), test it with real customers and ask the right questions to get unbiased feedback. I took those learnings and implemented that immediately in a pilot while still in school. I feel like I’ve done 30 different MVP’s and customer tests over the few years since the course and continue to use the lean methods in all things we look to do for our customers and merchants.

What were the biggest learnings in your first 3, 6, 12, 24 months as an entrepreneur?
The biggest learning was that it’s vital to get out of the building. After getting some data and feedback it’s easy to then say we have enough and know what we need to build. Still today, even after a couple years at this, I have to remind myself that we always have more we can learn from potential and existing customers.

I would say the first 3 months it was to keep asking questions and iterating based on what we were getting. After 6 months, it was learning how to tackle everything with grit and determination as if there were no other option. And in the 12 – 24 months it was to always keep an open mind and never assume a product is right until you truly have product-market-fit. We keep doing pivots to this day. We believe we will always be searching for a better version of product-market-fit!

What are the top three things you wished you knew when you started your company?

  1. I wish I knew how critical good distribution channels are, particularly in the early stages of a company. You can have the greatest product in the world but if it can’t get into customers’ hands efficiently and effectively it is meaningless.
  2. I wish I knew how difficult it is to change people’s perceptions in large companies. Sometimes when you are hot out of the gates with entrepreneurial fever you think you can do anything. I think that is always a valuable feeling to have, but when selling through to larger organizations I’ve learned you need to temper your expectations and do as much as you possibly can to mitigate the risks of partnership ahead of time. Show them why they need to do it rather than why it would be a nice thing to have.
  3. I wish I knew how much fun this was going to be because I would have gotten in sooner! Many people say how hard entrepreneurship is, and I 100% agree. It is incredibly hard. But it is also rewarding like nothing else and when things work out well it is really fun.

See the articles about CoinOut in Forbes and in Columbia entrepreneurship and on Shark Tank episode 23.

While we can’t guarantee an appearance on Shark Tank, the five-day Lean LaunchPad class at Columbia is offered every January and open to all Columbia students.

We Have A Moral Obligation

I was in Boston and was interviewed by The Growth Show about my current thinking about innovation in companies and government agencies.The interviewer was great and managed to get me to summarize several years of learning in one podcast.

It’s worth a listen.

At the end of the interview I got surprised by a great question – “What’s the Problem that Still Haunts You?”  I wasn’t really prepared for the question but gave the best answer I could on the fly.

Part of the answer is the title of this blog post.

Listen to the entire interview here:
Taking the Lean Startup From Silicon Valley to Corporations and the State and Defense Department

Or just parts of the interview:
1:20  Failure and Lessons Learned

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