Steve Blank

For the past three months, we’ve run an experiment in teaching entrepreneurship.

In January, we introduced a new graduate course at Stanford called the Lean LaunchPad. It was designed to bring together many of the new approaches to building a successful startup – customer development, agile development, business model generation and pivots.

We thought it would be interesting to share the week-by-week progress of how the class actually turned out. This post is part one.

We were positing that 20 years of teaching “how to write a business plan” might be obsolete. Startups, are not about executing a plan where the product, customers, channel are known. Startups are in fact only temporary organizations, organized to search–not execute–for a scalable and repeatable business model.

We were going to toss teaching the business plan aside and try to teach engineering students a completely new approach to start companies – one which combines customer development, agile development, business models and pivots. (The slides below and the syllabus here describe the details of the class.)

Get Out of the Building and test the Business Model
While we were going to teach theory and frameworks, these students were going to get a hands-on experience in how to start a new company. Over the quarter, teams of students would put the theory to work, using these tools to get out of the building and talk to customer/partners, etc. to get hard-earned information. (The purpose of getting out of the building is not to verify a financial model but to hypothesize and verify the entire business model. It’s a subtle shift but a big idea with tremendous changes in the end result.)

Team Autonomow: Weeding Robot Prototype on a Farm

We were going to teach entrepreneurship like you teach artists – combining theory – with intensive hands-on practice. And we were assuming that this approach would work for any type of startup – hardware, medical devices, etc. – not just web-based startups.

If we were right, we’d see the results in their final presentations – after 8 weeks of class the information/learning density in the those presentations should be really high. In fact they would be dramatically different than any other teaching method.

But we could be wrong.

While I had managed to persuade two great VC’s to teach the class with me (Jon Feiber and Ann Miura-ko), what if I was wasting their time? And worse, what if I was going to squander the time of my students?

I put on my best game face and watched the seats fill up in the classroom.

Mentors
A few weeks before the Stanford class began, the teaching team went through their Rolodexes and invited entrepreneurs and VCs to volunteer as coaches/mentors for the class’s teams. (Privately I feared we might have more mentors than students.) An hour before this first class, we gathered these 30 impressive mentors to brief them and answer questions they might have after reading the mentor guide which outlined the course goals and mentor responsibilities.

As the official start time of the first class drew near, I began to wonder if we had the wrong classroom. The room had filled up with close to a 100 students who wanted to get in. When I realized they were all for our class, I could start to relax. OK, somehow we got them interested. Lets see if we can keep them. And better, lets see if we can teach them something new.

The First Class
The Lean LaunchPad class was scheduled to meet for three hours once a week. Given Stanford’s 10 week quarters, we planned for eight weeks of lecture and the last two weeks for team final presentations. Our time in class would be relatively straightforward. Every week, each team would give a 10-minute presentation summarizing the “lessons learned” from getting out of the building. When all the teams were finished the teaching team lectured on one of the 9 parts of the business model diagram. The first class was an introduction to the concepts of business model design and customer development.

The most interesting part of the class would happen outside the classroom when each team spent 50-80 hours a week testing their business model hypotheses by talking to customers and partners and (in the case of web-based businesses) building their product.

Selection, Mixer and Speed Dating
After the first class, our  teaching team met over pizza and read each of the 100 or so student applications. Two-thirds of the interested students were from the engineering school; the other third were from the business school. And the engineers were not just computer science majors, but in electrical, mechanical, aerospace, environmental, civil and chemical engineering. Some came to the class with an idea for a startup burning brightly in their heads.  Some of those applied as teams. Others came as individuals, most with no specific idea at all.

We wanted to make sure that every student who took the class had at a minimum declared a passion and commitment to startups. (We’ll see later that saying it isn’t the same as doing it.) We tried to weed out those that were unsure why they were there as well as those trying to build yet another fad of the week web site. We made clear that this class wasn’t an incubator. Our goal was to provide students with a methodology and set of tools that would last a lifetime – not to fund their first round. That night we posted the list of the students who were accepted into the class.

The next day, the teaching team held a mandatory “speed-dating” event with the newly formed teams. Each team gave each professor a three-minute elevator pitch for their idea, and we let them know if it was good enough for the class. A few we thought were non-starters were sold by teams passionate enough to convince us to let them go forward with their ideas. (The irony is that one of the key tenets of this class is that startups end up as profitable companies only after they learn, discover, iterate and Pivot past their initial idea.) I enjoyed hearing the religious zeal of some of these early pitches.

The Teams
By the beginning of second session the students had become nine teams with an amazing array of business ideas. Here is a brief summary of each.

Agora isan affordable “one-stop shop” for cloud computing needs. Intended for cloud infrastructure service providers, enterprises with spare capacity in their private clouds, startups, companies doing image and video processing, and others. Agora’s selling points are its ability to reduce users’ IT infrastructure cost and enhance revenue for service providers.

Autonomow is an autonomous large-scale mowing intended to be a money-saving tool for use on athletic fields, golf courses, municipal parks, and along highways and waterways. The product would leverage GPS and laser-based technologies and could be used on existing mower or farm equipment or built into new units.

BlinkTraffic will empower mobile users in developing markets (Jakarta, Sao Paolo, Delhi, etc.) to make informed travel decisions by providing them with real-time traffic conditions. By aggregating user-generated speed and location data, Blink will provide instantaneously generated traffic-enabled maps, optimal routing, estimated time-to-arrival and predictive itinerary services to personal and corporate users.

D.C. Veritas is making a low cost, residential wind turbine. The goal is to sell a renewable source of energy at an affordable price for backyard installation. The key assumptions are: offering not just a product, but a complete service (installation, rebates, and financing when necessary,) reduce the manufacturing cost of current wind turbines, provide home owners with a cool and sustainable symbol (achieving “Prius” status.)

JointBuy is an online platform that allows buyers to purchase products or services at a cheaper price by giving sellers opportunities to sell them in bulk. Unlike Groupon which offers one product deal per day chosen based on the customer’s location. JointBuy allows buyers to start a new deal on any available product and share the idea with others through existing social networking sites. It also allows sellers to place bids according to the size of the deal.  

MammOptics is developing an instrument that can be used for noninvasive breast cancer screening. It uses optical spectroscopy to analyze the physiological content of cells and report back abnormalities. It will be an improvement over mammography by detecting abnormal cells in an early stage, is radiation-free, and is 2-5 times less expensive than mammographs. We will sell the product directly to hospitals and private doctors.

Personal Libraries is a personal reference management system streamlinig the processes for discovering, organizing and citing researchers’ industry readings. The idea came from seeing the difficulty biomed researchers have had in citing the materials used in experiments. The Personal Libraries business model is built on the belief that researchers are overloaded with wasted energy and inefficiency and would welcome a product that eliminates the tedious tasks associated with their work.

PowerBlocks makes a line of modular lighting. Imagine a floor lamp split into a few components (the base, a mid-section, the top light piece). What would you do if wanted to make that lamp taller or shorter? Or change the top light from a torch-style to an LED-lamp? Or add a power plug in the middle? Or a USB port? Or a speaker? “PowerBlocks” modular lighting is “floor-lamp meets Legos” but much more high-end. Customers can choose components to create the exact product that fit their needs.

Voci.us is an ad-supported, web-based comment platform for daily news content. Real-time conversations and dynamic curation of news stories empowers people to expand their social networks and personal expertise about topics important to them. This addresses three problems vexing the news industry: inadequate online community engagement, poor topical search capacity on news sites, and scarcity of targeted online advertising niches.

While I was happy with how the class began, the million dollar question was still on the table – is teaching entrepreneurship with business model design and customer development better than having the students write business plans? Would we have to wait 8 more weeks until their final presentation to tell? Would we signs of success early?  Or was the business model/customer development framework just smoke, mirror and B.S.?

The Adventure Begins
We’re going to follow the adventures of a few of the teams week by week as they progressed through the class, (and we’ll share the teams weekly “lessons learned,” as well as our class lecture slides.

The goal for the teams for next week were:

• Write down their hypotheses for each of the 9 parts of the business model.
• Come up with ways to test:
  • what are each of the 9 business model hypotheses?
  • is their business worth pursuing (market size)
• Come up with what constitutes a pass/fail signal for the test (e.g. at what point would you say that your hypotheses wasn’t even close to correct)?
• Start their blog/wiki/journal for the class

Next Post: The Business Model and Customer Discovery Hypotheses – Class 2
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Filed under: Business Model versus Business Plan, Customer Development, Lean LaunchPad, Teaching | 44 Comments »

I’ve introduced a new class at Stanford to teach engineers, scientists and other professionals how startups really get built.

They are going to get out of the building, build a company and get orders in ten weeks.

Jon Feiber of Mohr Davidow Ventures and Ann Miura-Ko of Floodgate are co-teaching the class with me (and Alexander Osterwalder is a guest lecturer.) We have two great teaching assistants, plus we’ve rounded up a team of 25 mentors (VC’s and entrepreneurs) to help coach the teams.

Why Teach This Class?
Business schools teach aspiring executives a variety of courses around the execution of known business models, (accounting, organizational behavior, managerial skills, marketing, operations, etc.)

In contrast, startups search for a business model. (Or more accurately, startups are a temporary organization designed to search for a scalable and repeatable businessmodel.)  There are few courses which teach aspiring entrepreneurs the skills (business models, customer and agile development, design thinking, etc.) to optimize this search.

Many entrepreneurship courses focus on teaching students “how to write a business plan.” Others emphasize how to build a product. If you’ve read any of my previous posts, you know I believe that:  1) a product is just a part of a startup, but understanding customers, channel, pricing, etc. are what make it a business,
2) business plans are fine for large companies where there is an existing market, existing product and existing customers. In a startup none of these are known.

Therefore we developed a class to teach students how to think about all the parts of building a business, not just the product.

What’s Different About the Class?
This Stanford class will introduce management tools for entrepreneurs.  We’ll build the class around the business model / customer development / agile development solution stack.

Students will start by mapping their assumptions (their business model) and then each week test these hypotheses with customers and partners outside in the field (customer development) and use an iterative and incremental development methodology (agile development) to build the product.

The goal is to get students out of the building to test each of the 9 parts of their business model, understand which of their assumptions were wrong, and figure out what they need to do fix it. Their objective is to get users, orders, customers, etc. (and if a web-based product, a minimum feature set,) all delivered in 10 weeks.  Our objective is to get them using the tools that help startups to test their hypotheses and make adjustments when they learn that their original assumptions about their business are wrong.  We want them to experience faulty assumptions not as a crisis, but as a learning event called a pivot —an opportunity to change the business model.

How’s the Class Organized?
During the first week of class, students form teams (optimally 4 people in a team but we’re flexible.) Their company can focus in any area– software, hardware, medical device or a service of any kind.

The class meets ten times, once a week for three hours. In those three hours we’ll do two things.  First, we’’ll lecture on one of the 9 building blocks of a business model (see diagram below, taken from Business Model Generation).  Secondly, each student team will present “lessons learned” from their team’s experience getting out of the building learning, testing, iterating and/or pivoting their business model.

They’ll share with the class answers to these questions:

1. What did you initially think?
2. So what did you do?
3. Then what did you learn?
4. What are you going to do next?

At the course’s end, each team will present their entire business model and highlight what they learned, their most important pivots and conclusions.

We’re going to be teaching it for the first time in January.  Below is the class syllabus.

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Class 1  is here.  Follow along!

Engineering 245
This course provides real world, hands-on learning on what it’s like to actually start a high-tech company. This class is not about how to write a business plan. It’s not an exercise on how smart you are in a classroom, or how well you use the research library. The end result is not a PowerPoint slide deck for a VC presentation. Instead you will be getting your hands dirty talking to customers, partners, competitors, as you encounter the chaos and uncertainty of how a startup actually works.  You’ll work in teams learning how to turn a great idea into a great company. You’ll learn how to use a business model to brainstorm each part of a company and customer development to get out of the classroom to see whether anyone other than you would want/use your product. Finally, you’ll see how agile development can help you rapidly iterate your product to build something customers will use and buy.  Each week will be new adventure as you test each part of your business model and then share the hard earned knowledge with the rest of the class. Working with your team you will encounter issues on how to build and work with a team and we will help you understand how to build and manage the startup team.

Besides the instructors and TA’s, each team will be assigned two mentors (an experienced entrepreneur and/or VC) to provide assistance and support.

Suggested Projects: While your first instinct may be a web-based startup we suggest that you consider a subject in which you are a domain expert, such as your graduate research. In all cases, you should choose something for which you have passion, enthusiasm, and hopefully some expertise.  Teams that select a web-based product will have to build the site for the class.

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Pre-reading For 1^st Class:  Read pages 1-51 of Osterwalder’s Business Model Generation.

Class 1    Jan 4^th Intro/Business Model/Customer Development
Class Lecture/Out of the Building Assignment:
What’s a business model? What are the 9 parts of a business model?  What are hypotheses? What is the Minimum Feature Set? What experiments are needed to run to test business model hypotheses?   What is market size? How to determine whether a business model is worth doing?

Deliverable: Set up teams by Thursday, Jan 6 (a mixer will be hosted on Wednesday to help finalize teams).  Submit your project for approval to the teaching team.

Read:

• Business Model Generation, pp. 118-119, 135-145, skim examples pp. 56-117
• Four Steps to the Epiphany Chapters 1-2
• Steve Blank, “What’s a Startup? First Principles,” http://steveblank.com/2010/01/25/whats-a-startup-first-principles/
• Steve Blank, “Make No Little Plans – Defining the Scalable Startup,” http://steveblank.com/2010/01/04/make-no-little-plans-–-defining-the-scalable-startup/
• Steve Blank, “A Startup is Not a Smaller Version of a Large Company”, http://steveblank.com/2010/01/14/a-startup-is-not-a-smaller-version-of-a-large-company/

Deliverable for January 11th:

• Write down hypotheses for each of the 9 parts of the business model.
• Come up with ways to test:
  • is a business worth pursuing (market size)
  • each of the hypotheses
  • Come up with what constitutes a pass/fail signal for the test (e.g. at what point would you say that your hypotheses wasn’t even close to correct)?
  • Start your blog/wiki/journal

——————–
Jan 6^th 5-7pm Speed Dating  (Meet in Thornton 110)

Get quick feedback on your initial team business concept from the teaching team.

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Class 2            Jan 11^th Testing Value Proposition
Class Lecture/Out of the Building Assignment:
What is your product or service? How does it differ from an idea? Why will people want it? Who’s the competition and how does your customer view these competitive offerings? Where’s the market? What’s the minimum feature set?  What’s the Market Type?  What was your inspiration or impetus?  What assumptions drove you to this?  What unique insight do you have into the market dynamics or into a technological shift that makes this a fresh opportunity?

Action:

• Get out of the building and talk to 10-15 customers face-to-face
• Follow-up with Survey Monkey (or similar service) to get more data

Read:

• Business Model Generation, pp. 161-168 and 226-231
• Four Steps to the Epiphany, pp. 30-42, 65-72 and 219-223
• The Blue Ocean Strategy pages 3-22

Deliverable for Jan 18^th:

• Find a name for your team.
• What were your value proposition hypotheses?
• What did you discover from customers?
• Submit interview notes, present results in class.
• Update your blog/wiki/journal

——————–
Class 3            Jan 18^th Testing Customers/users
Class Lecture/Out of the Building Assignment:
Who’s the customer? User? Payer?  How are they different? How can you reach them? How is a business customer different from a consumer?

Action:

• Get out of the building and talk to 10-15 customers face-to-face
• Follow-up with Survey Monkey (or similar service) to get more data

Read:

• Business Model Generation, pp. 127-133
• Four Steps to the Epiphany, pp. 43-49, 78-87 224-225, and 242-248
• Giff Constable, “12 Tips for Early Customer Development Interviews,” http://giffconstable.com/2010/07/12-tips-for-early-customer-development-interviews/

Deliverable for Jan 25^th:

• What were your hypotheses about who your users and customers were? Did you learn anything different?
• Submit interview notes, present results in class. Did anything change about Value Proposition?
• What are your hypotheses around customer acquisition costs?  Can you articulate the direct benefits (economic or other) that are apparent?
• If your customer is part of a company, who is the decision maker, how large is the budget they have authority over, what are they spending it on today, and how are they individually evaluated within that organization, and how will this buying decision be made?
• What resonates with customers?
• For web startups, start coding the product. Setup your Google or Amazon cloud infrastructure.
• Update your blog/wiki/journal

——————–
Class 4            Jan 25^th Testing Demand Creation
Class Lecture/Out of the Building Assignment:
How do you create end user demand? How does it differ on the web versus other channels?   Evangelism vs. existing need or category? General Marketing, Sales Funnel, etc

Action:

• If you’re building a web site:
  • Small portion of your site should be operational on the web
  • Small portion of your site should be operational on the web
• Actually engage in “search engine marketing” (SEM)spend $20 as a team to test customer acquisition cost
  • Ask your users to take action, such as signing up for a newsletter
  • use Google Analytics to measure the success of your campaign
  • change messaging on site during the week to get costs lower, team that gets lowest delta costs wins.
  • If you’re assuming virality of your product, you will need to show viral propagation of your product and the improvement of your viral coefficient over several experiments.

• If non-web,
  • build demand creation budget and forecast.
  • Get real costs from suppliers.

Read:

• Four Steps to the Epiphany, pp. 52-53, 120-125 and 228-229
• Dave McClure, “Startup Metrics for Pirates”,
  http://www.slideshare.net/dmc500hats/startup-metrics-for-pirates-seedcamp-2008-presentation
• Dan Siroker, “How Obama Raised $60 Million by Running a Simple Experiment”, http://blog.optimizely.com/how-obama-raised-60-million-by-running-an-exp

Watch: Mark Pincus, “Quick and Frequent Product Testing and Assessment”, http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2313

Deliverable for Feb 1^st :

• Submit interview notes, present results in class.
• Did anything change about Value Proposition or Customers/Users or Channel?
• Present and explain your marketing campaign. What worked best and why?
• Update your blog/wiki/journal

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Class 5            Feb 1^st Testing Channel
Class Lecture/Out of the Building Assignment:
What’s a channel?  Direct channels, indirect channels, OEM. Multi-sided markets.  B-to-B versus B-to-C channels and sales (business to business versus business to consumer)

Action: If you’re building a web site, get the site up and running, including minimal feature.

• For non-web products, get out of the building talk to 10-15 channel partners.

Read: Four Steps to the Epiphany, pp. 50-51, 91-94, 226-227, 256, 267

Deliverable for Feb 8^th:

• For web teams:
  • Get a working web site and analytics up and running. Track where your visitors are coming from (marketing campaign, search engine, etc) and how their behavior differs. What were your hypotheses about your web site results?
  • Submit web data or customer interview notes, present results in class.
  • Did anything change about Value Proposition or Customers/Users?
  • What is your assumed customer lifetime value?  Are there any proxy companies that would suggest that this is a reasonable number?
  • For non-web teams:
    • Interview 10-15 people in your channel (salesmen, OEM’s, etc.).
    • Did anything change about Value Proposition or Customers/Users?
    • What is your customer lifetime value?  Channel incentives – does your product or proposition extend or replace existing revenue for the channel?
    • What is the “cost” of your channel, and it’s efficiency vs. your selling price.
    • Everyone: Update your blog/wiki/journal.
      • What kind of initial feedback did you receive from your users?
      • What are the entry barriers?

——————–
Class 6            Feb 8^th Testing Revenue Model
Class Lecture/Out of the Building Assignment:
What’s a revenue model? What types of revenue streams are there? How does it differ on the web versus other channels?

Action: What’s your revenue model?

• How will you package your product into various offerings if you have more than one?
• How will you price the offerings?
• What are the key financials metrics for your business model?
• Test pricing in front of 100 customers on the web, 10-15 customers non-web.
• What are the risks involved?
• What are your competitors doing?

Read: John Mullins & Randy Komisar, Getting to Plan B (2009) pages 133-156

Deliverable for Feb 15^th :

• Assemble an income statement for the your business model. Lifetime value calculation for customers.
• Submit interview notes, present results in class.
• Did anything change about Value Proposition or Customers/Users, Channel, Demand Creation, Revenue Model?
• Update your blog/wiki/journal

——————–
Class 7            Feb 15^th Testing Partners
Class Lecture/Out of the Building Assignment:
Who are partners?  Strategic alliances, competition, joint ventures, buyer supplier, licensees.

Action: What partners will you need?

• Why do you need them and what are risks?
• Why will they partner with you?
• What’s the cost of the partnership?
• Talk to actual partners.
• What are the benefits for an exclusive partnership?

Deliverable for Feb 22^nd

• Assemble an income statement for the your business model.
• Submit interview notes, present results in class.
• Did anything change about Value Proposition or Customers/Users, Channel, Demand Creation?
• What are the incentives and impediments for the partners?
• Update your blog/wiki/journal

——————–
Class 8            Feb 22^nd Testing Key Resources & Cost Structure
Class Lecture/Out of the Building Assignment:
What resources do you need to build this business?  How many people? What kind? Any hardware or software you need to buy? Any IP you need to license?  How much money do you need to raise?  When?  Why? Importance of cash flows? When do you get paid vs. when do you pay others?

Action: What’s your expense model?

• What are the key financials metrics for costs in your business model?
• Costs vs. ramp vs. product iteration?
• Access to resources. What is the best place for your business?
• Where is your cash flow break-even point?

Deliverable for March 1^st

• Assemble a resources assumptions spreadsheet.  Include people, hardware, software, prototypes, financing, etc.
• When will you need these resources?
• Roll up all the costs from partners, resources and activities in a spreadsheet by time.
• Submit interview notes, present results in class.
• Did anything change about Value Proposition or Customers/Users, Channel, Demand Creation/Partners?
• Update your blog/wiki/journal

Guest: Alexander Osterwalder

For March 1^st or 8^th

• Prepare 30 –minute Team Lessons Learned Presentation
• Read:
  • Steve Blank, “Lessons Learned – A New Type of Venture Capital Pitch”, http://steveblank.com/2009/11/12/“lessons-learned”-–-a-new-type-of-vc-pitch/
  • Steve Blank, “Raising Money Using Customer Development”, http://steveblank.com/2009/11/05/raising-money-with-customer-development/
  • Business Model Generation, pp. 216-224

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Class 9            March 1^st Team Presentations of Lessons Learned (1^st half of the class)

Deliverable: Each team will present a 30 minute “Lessons Learned” presentation about their business.

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Class 10            March 8^th Team Presentations of Lessons Learned (2^nd half of the class)

Deliverable: Each team will present a 30 minute “Lessons Learned” presentation about their business.

——————–
March 11^th 1-4pm Demo Day at VC Firm (Location TBD)

Show off your product to the public and real VC’s.  Set up a booth, put up posters, run demos, etc.  Food and refreshments provided.

Class 1  is here.  Follow along!

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Mentor List (as of Dec 3^rd 2010)

• Gina Bianchini, Ning
• Doug Camplejohn, Fliptop
• Shawn Carolan, Menlo Ventures
• Eric Carr, Loopt
• Rowan Chapman, MDV
• Jason Davies, SOS Technologies
• Jonathan Ebinger, BlueRun Ventures
• David Feinleib, MDV
• Jim Greer, Kongregate
• Konstantin Guericke, LinkedIn
• Will Harvey, IMVU
• Thomas Hessler, Zanox
• Heiko Hubertz, BigPoint
• Charles Hudson, Gaia/Virtual Goods
• Maheesh Jain, Cafepress
• George John, Rocket Fuel
• Josh Reeves, unwrap
• Karen Richardson, Silverlake Partners
• Josh Schwarzapel, Cooliris
• Justin Shaffer, Facebook
• Jim Smith, MDV
• Bryan Stolle, MDV
• Steve Weinstein, Movielabs
• George Zachary, Charles River Ventures

Class 1  is here.  Follow along!
Listen to the post here: Download the Podcast here

Filed under: Business Model versus Business Plan, Customer Development, Lean LaunchPad, Teaching | 71 Comments »