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

Why the Future of Tesla May Depend on Knowing What Happened to Billy Durant

A version of this article appeared in the Harvard Business Review

Elon Musk, Alfred Sloan, and entrepreneurship in the automobile industry.

The entrepreneur who founded and grew the largest startup in the world to $10 billion in revenue and got fired is someone you have probably never heard of. The guy who replaced him invented the idea of the modern corporation. If you want to understand the future of Tesla and Elon Musk’s role – something many want to do, given the constant stream of headlines about the company — you should start with a bit of automotive history from the 20th Century.

Alfred P. Sloan and the Modern Corporation
By the middle of the 20th century, Alfred P. Sloan had become the most famous businessman in the world. Known as the “Inventor of the Modern Corporation,” Sloan was president of General Motors from 1923 to 1956 when the U.S. automotive industry grew to become one of the drivers of the U.S. economy.

Today, if you look around the United States it’s hard to avoid Sloan. There’s the Alfred P. Sloan Foundation, the Sloan School of Management at MIT, the Sloan program at Stanford, and the Sloan/Kettering Memorial Cancer Center in New York. Sloan’s book My Years with General Motors, written half a century ago, is still a readable business classic.

Peter Drucker wrote that Sloan was “the first to work out how to systematically organize a big company. When Sloan became president of GM in 1923 he put in place planning and strategy, measurements, and most importantly, the principles of decentralization.”

When Sloan arrived at GM in 1920 he realized that the traditional centralized management structures organized by function (sales, manufacturing, distribution, and marketing) were a poor fit for managing GM’s diverse product lines.  That year, as management tried to coordinate all the operating details across all the divisions, the company almost went bankrupt when poor planning led to excess inventory, with unsold cars piling up at dealers and the company running out of cash.

Borrowing from organizational experiments pioneered at DuPont (run by his board chair), Sloan organized the company by division rather than function and transferred responsibility down from corporate into each of the operating divisions (Chevrolet, Pontiac, Oldsmobile, Buick and Cadillac). Each of these GM divisions focused on its own day-to-day operations with each division general manager responsible for the division’s profit and loss. Sloan kept the corporate staff small and focused on policymaking, corporate finance, and planning. Sloan had each of the divisions start systematic strategic planning.  Today, we take for granted divisionalization as a form of corporate organization, but in 1920, other than DuPont, almost every large corporation was organized by function.

Sloan put in place GM’s management accounting system (also borrowed from DuPont) that for the first time allowed the company to: 1) produce an annual operating forecast that compared each division’s forecast (revenue, costs, capital requirements and return on investment) with the company’s financial goals. 2) Provide corporate management with near real-time divisional sales reports and budgets that indicated when they deviated from plan. 3) Allowed management to allocate resources and compensation among divisions based on a standard set of corporate-wide performance criteria.

Modern Corporation Marketing
When Sloan took over as president of GM in 1923, Ford was the dominant player in the U.S. auto market. Ford’s Model T cost just $260 ($3,700 in today’s dollars) and Ford held 60% of the U.S. car market. General Motors had 20%. Sloan realized that GM couldn’t compete on price, so GM created multiple brands of cars, each with its own identity targeted at a specific economic bracket of American customers. The company set the prices for each of these brands from lowest to highest (Chevrolet, Pontiac, Oldsmobile, Buick, and Cadillac). Within each brand there were several models at different price points.

The idea was to keep customers coming back to General Motors over time to upgrade to a better brand as they became wealthier. Finally, GM created the notion of perpetual demand within brands by continually obsoleting their own products with new models rolled out every year. (Think of the iPhone and its yearly new models.)

By 1931, with the combination of superior financial management and an astute brand and product line strategy, GM had 43% market share to Ford’s 20% – a lead it never relinquished.

Sloan transformed corporate management into a real profession, and its stellar example was the continuous and relentless execution of the GM business model (until its collapse 50 years later).

What Does GM Have to Do with Tesla And Elon Musk?
Well, thanks for the history lesson but why should I care?

If you’re following Tesla, you might be interested to know that Sloan wasn’t the founder of GM. Sloan was president of a small company that made ball bearings that GM acquired in 1918. When Sloan became President of General Motors in 1923, it was already a $700 million company (about $10.2 billion in sales in today’s dollars).

Yet, you never hear who built GM to that size. Who was the entrepreneur who founded what would become General Motors 16 years earlier, in 1904? Where are the charitable foundations, business schools, and hospitals named after the founder of GM? What happened to him?

The founder of what became General Motors was William (Billy) Durant. At the turn of the 20th century, Durant was one of the largest makers of horse-drawn carriages, building 150,000 a year. But in 1904, after his first time seeing a car in Flint, Michigan, he was one of the first to see that the future was going to be in a radically new form of transportation powered by internal combustion engines.

Durant took his money from his carriage company and bought a struggling automobile startup called Buick. Durant was a great promoter and visionary, and by 1909 he had turned Buick into the best-selling car in the U.S. Searching for a business model in a new industry, and with the prescient vision that a car company should offer multiple brands, that year he bought three other small car companies — Cadillac, Oldsmobile, and Pontiac — and merged them with Buick, renaming the combined company General Motors. He also believed that to succeed the company needed to be vertically integrated and bought up 29 parts manufacturers and suppliers.

The next year, 1910, trouble hit. While Durant was a great entrepreneur, the integration of the companies and suppliers was difficult, a recession had just hit, and GM was overextended with $20 million in debt ($250 million in 2018 dollars) from all the acquisitions and was about to run out of cash. Durant’s bankers and board fired him from the company he had founded.

For most people the story might have ended there. But not for Durant. The next year Durant co-founded another automobile startup, this one started with Louis Chevrolet. Over the next five years Durant built Chevrolet into a competitor to GM. And in one of the greatest corporate comeback stories, in 1916 Durant used Chevrolet to buy back control of GM with the backing of Pierre duPont. He once again took over General Motors, merged Chevrolet into GM, bought Fisher Body and Frigidaire, created GMAC GM’s financing arm and threw out the bankers who six years earlier had fired him.

Durant had another great four years at the helm of GM. At the time he was not only running GM but was a major Wall Street speculator (even on GM stock) and was big in the New York social scene. But trouble was on the horizon. Durant was at his best when there was money to indulge his indiscriminate expansion. (He bought two car companies – Sheridan and the Scripps-Booth – that competed with his existing products.) But by 1920, a post-World War I recession had hit, and car sales has slowed. Durant kept building for a future assuming the flow of cash and customers would continue.

Meanwhile, inventory was piling up, the stock was cratering, and the company was running out of cash. In the spring of 1920 with company had to go to the banks and he got an $80 million loan (about a billion dollars in 2018) to finance operations. While everyone around him acknowledged he was a visionary and a world-class fund raiser, Durant’s one-man show was damaging the company. He couldn’t prioritize, couldn’t find time to meet with his direct reports, fired them when they complained about the chaos, and the company had no financial controls other than Durant’s ability to manage to raise more money. When the stock collapsed Durant’s personal shares were underwater and were exposed to being called by bankers who would then own a good part of GM. The board decided that the company had enough vision — they bought out Durant’s shares and realized it was now time for someone who could execute at scale.

Once again, his board (this time led by the DuPont family) tossed him out of General Motors (when GM sales were $10 billion in today’s dollars.)

Alfred Sloan became the President of GM and ran it for the next three decades.

William Durant tried to build his third car company, Durant Motors, but he was still speculating on stocks, and got wiped out in the Depression in 1929. The company closed in 1931. Durant died managing a bowling alley in Flint, Michigan, in 1947.

From the day Durant was fired in 1920, and for the next half a century, American commerce would be led by an army of “Sloan-style managers” who managed and executed existing business models.

But the spirit of Billy Durant would rise again in what would become Silicon Valley. And 100 years later Elon Musk would see that the future of transportation was no longer in internal combustion engines and build the next great automobile company.

Days of Futures Past for Tesla
In all of his companies, Elon Musk has used his compelling vision of a future transformed to capture the imagination of customers and, equally important, of Wall Street, raising the billions of dollars to make his vision a reality.

Yet, as Durant’s story typifies, one of the challenges for visionary founders is that they often have a hard time staying focused on the present when the company needs to transition into relentless execution and scale. Just as Durant had multiple interests, Musk is not only Tesla’s CEO and Product Architect, overseeing all product development, engineering, and design. At SpaceX (his rocket company) he’s CEO and lead designer overseeing the development and manufacturing of advanced rockets and spacecraft. He’s also the founder at The Boring Company (the tunneling company) and co-founder and chairman of OpenAI. And a founder of Neuralink a brain-computer interface startup.

All of these companies are doing groundbreaking innovations but even Musk only has 24 hours in a day and 7 days in a week. Others have noted that diving in and out of your current passion makes you a dilettante, not a CEO.

One of the common traits of a visionary founder is that once you have proven the naysayers wrong, you convince yourself that all your pronouncements have the same prescience.

For example, after the success of the Model S sedan, Tesla’s next car was an SUV, the Model X. By most accounts, Musk’s insistence on adding bells and whistles (like the Falcon Wing doors and other accoutrements) to what should have been simple execution of the next product made manufacturing the car in volume a nightmare. Executives who disagreed (and had a hand in making the Model S a success) ended up leaving the company. The company later admitted that the lesson learned was hubris.

The Tesla Model 3 was designed to be simple to manufacture, but instead of using the existing assembly line Musk said, “the true problem, the true difficulty, and where the greatest potential is – is building the machine that makes the machine. In other words, it’s building the factory. I’m really thinking of the factory like a product.” Fast forward two years and it turns out that the Model 3 assembly line was a great example of over-automation. “Excessive automation at Tesla was a mistake. To be precise, my mistake” Musk recently tweeted,

Sleeping on the factory floor to solve self-inflicted problems is not a formula for success at scale, and while it’s great PR, it’s not management. It is in fact a symptom of a visionary founder imposing chaos just at the time where execution is required. Tesla now has a pipeline of newly announced products, a new Roadster (a sports car), a Semi Truck, and a hinted crossover called the Model Y. All of them will require massive execution at scale, not just vision.

Unlike Durant, Musk has engineered his extended tenure and this year got his shareholders to give him a new $2.6 billion compensation plan (and it could potentially be worth as much as $55 billion) if he can grow the company’s market cap in $50 billion increments to $650 billion. The board said that it “believes that the Award will continue to incentivize and motivate Elon to lead Tesla over the long-term, particularly in light of his other business interests.”

Elon Musk has done what Steve Jobs and Jeff Bezos did – disrupt a series of stagnant businesses controlled by rent seekers, permanently changing the trajectory of multiple industries – while capturing the imagination of consumers and the financial community. Just a handful of people with these skills emerge every century. However, fewer combine the talent for creating an industry with the very different skills needed for scale. Each of Tesla’s stumbles has begun to squander the very advantage that Musks vision gave the company. And what was once an insurmountable lead by having an economic castle surrounded by a defensible moat (battery technology, superchargers, autonomous driving, over the air updates, etc.) is closing rapidly.

One wonders if $2.6 billion in executive compensation would be better spent finding someone to lead Tesla to becoming a reliable producer of cars in high volume – without the drama in each new model.

Perhaps Tesla now needs its Alfred P. Sloan.

Lesson Learned

  • Founders/visionaries see things other don’t and the extraordinary ones create new industries
  • When technology changes are rapid you want the founder to continue to run the company
  • However, when success depends on exploitation and execution at scale their impatience for continuous innovation and invention often gets in the way of day-to-day execution
  • The best ones know when it’s time to let go

Why Entrepreneurs Start Companies Rather Than Join Them

If you asked me why I gravitated to startups rather than work in a large company I would have answered at various times: “I want to be my own boss.” “I love risk.” “I want flexible work hours.” “I want to work on tough problems that matter.” “I have a vision and want to see it through.” “I saw a better opportunity and grabbed it. …”

It never crossed my mind that I gravitated to startups because I thought more of my abilities than the value a large company would put on them. At least not consciously. But that’s the conclusion of a provocative research paper, Asymmetric Information and Entrepreneurship, that explains a new theory of why some people choose to be entrepreneurs. The authors’ conclusion — Entrepreneurs think they are better than their resumes show and realize they can make more money by going it alone.  And in most cases, they are right.

I’ll summarize the paper’s conclusions, then share a few thoughts about what they might mean – for companies, entrepreneurs and entrepreneurial education. (By the way, as you read the conclusions keep in mind the authors are not talking just about high-tech entrepreneurs. They are talking about everyone who chooses to be self-employed – from a corner food vendor without a high school diploma to a high-tech founder with a PhD in Computer Science from Stanford.)

The authors’ research came from following 12,686 people over 30+ years. They found:

  1. Signaling. When you look for a job you “signal” your ability to employers via a resume with a list of your educational qualifications and work history. Signaling is a fancy academic term to describe how one party (in this case someone who wants a job) credibly conveys information to another party (a potential employer).
  2. Capable. People choose to be entrepreneurs when they feel that they are more capable than what employers can tell from their resume or an interview. So, entrepreneurs start ventures because they can’t signal their worth to potential employers.
  3. Better Pay. Overall, when people choose entrepreneurship they earn 7% more than they would have in a corporate job. That’s because in companies pay is usually set by observable signals (your education and experience/work history).
  4. Less Predictable Pay. But the downside of being an entrepreneur is that as a group their pay is more variable – some make less than if they worked at a company, some much more.
  5. Smarter. Entrepreneurs score higher on cognitive ability tests than their educational credentials would predict. And their cognitive ability is higher than those with the same educational and work credentials who choose to work in a company.
  6. Immigrants and Funding. Signaling (or the lack of it) may explain why some groups such as immigrants, with less credible signals to existing companies (unknown schools, no license to practice, unverifiable job history, etc.) tend to gravitate toward entrepreneurship. And why funding from families and friends is a dominant source of financing for early-stage ventures (because friends and family know an entrepreneur’s ability better than any resume can convey).
  7. Entrepreneurs defer getting more formal education because they correctly expect their productivity will be higher than the market can infer from just their educational qualifications. (There are no signals for entrepreneurial skills.)

Lemons Versus Cherries. The most provocative conclusion in the paper is that asymmetric information about ability leads existing companies to employ only “lemons,” relatively unproductive workers. The talented and more productive choose entrepreneurship. (Asymmetric Information is when one party has more or better information than the other.) In this case the entrepreneurs know something potential employers don’t – that nowhere on their resume does it show resiliency, curiosity, agility, resourcefulness, pattern recognition, tenacity and having a passion for products.
This implication, that entrepreneurs are, in fact, “cherries” contrasts with a large body of literature in social science, which says that the entrepreneurs are the “lemons”— those who cannot find, cannot hold, or cannot stand “real jobs.”

So, what to make of all this?
If the authors are right, the way we signal ability (resumes listing education and work history) is not only a poor predictor of success, but has implications for existing companies, startups, education, and public policy that require further thought and research.

Companies: In the 20thcentury when companies competed with peers with the same business model, they wanted employees to help them execute current business models (whether it was working on an assembly line or writing code supporting or extending current products). There was little loss when they missed hiring employees who had entrepreneurial skills. However, in the 21stcentury companies face continuous disruption; now they’re looking for employees to help them act entrepreneurial.  Yet their recruiting and interviewing processes – which define signals they look for – are still focused on execution not entrepreneurial skills.

Surprisingly, the company that best epitomized this was not some old-line manufacturing company but Google. When Marissa Mayer ran products at Google the New York Times  described her hiring process, “More often than not, she relies on charts, graphs and quantitative analysis as a foundation for a decision, particularly when it comes to evaluating people…At a recent personnel meeting, she homes in on grade-point averages and SAT scores to narrow a list of candidates, many having graduated from Ivy League schools, …One candidate got a C in macroeconomics. “That’s troubling to me,” Ms. Mayer says. “Good students are good at all things.”

Really.  What a perfect example of adverse signaling. No wonder the most successful Google products, other than search, have been acquisitions of startups not internal products: YouTube, Android, DoubleClick, Keyhole (Google Maps), Waze were started and run by entrepreneurs. The type of people Google and Marissa Mayer wouldn’t and didn’t hire started the companies they bought.

Entrepreneurship. When I shared the paper withTina Seelig at Stanford she asked, “If schools provided better ways to signal someone’s potential to employers, will this lead to less entrepreneurship?”  Interesting question.

Imagine if in a perfect world corporate recruiters found a way to identify the next Steve Jobs, Elon Musks, or Larry Ellisons. Would the existing corporate processes, procedures and business models crush their innovative talents, or would they steer the large companies into a new renaissance?

The Economic Environment. So, how much of signaling (hiring only by resume qualifications) is influenced by the economic environment? One could assume that in a period of low unemployment, it will be easier to get a traditional job, which would lead to fewer startups and explain why great companies are often founded during a downturn. Those who can’t get a traditional job start their own venture. Yet other public policies come into play. Between the late 1930s and the 1970s the U.S. tax rate for individuals making over $100,000 was 70% and 90% (taxes on capital gains fluctuated between 20% and 25%.) Venture capital flourished when the tax rates plummeted in the late 1970s. Was entrepreneurship stifled by high personal income taxes? And did it flourish only when entrepreneurs saw the opportunity to make a lot more money on their own?

Leaving a Company. Some new ventures are started by people who leave big companies to strike out on their own – meaning they weren’t trying to find employment in a corporation, they were trying to get away from it.  While starting your own company may look attractive from inside a company, the stark reality of risking one’s livelihood, financial stability, family, etc., is a tough bar to cross.  What motivates these people to leave the relative comfort of a steady corporate income and strike out on their own?  Is it the same reason – their company doesn’t value their skills for innovation and is just measuring them on execution? Or something else?

Entrepreneurial Education. Is entrepreneurship for everyone? Should we expect that we can teach entrepreneurship as a mandatory class? Or is it calling? Increasing the number of new ventures will only generate aggregate wealth if those who start firms are truly more productive as entrepreneurs.

Lessons Learned

  • Entrepreneurs start their own companies because existing companies don’t value the skills that don’t fit on a resume
  • The most talented people choose entrepreneurship (Lemons versus Cherries)
  • Read the paper and let me know what you think

 

The Difference Between Innovators and Entrepreneurs

I just received a thank-you note from a student who attended a fireside chat I held at the ranch. Something I said seemed to inspire her:

“I always thought you needed to be innovative, original to be an entrepreneur. Now I have a different perception. Entrepreneurs are the ones that make things happen. (That) takes focus, diligence, discipline, flexibility and perseverance. They can take an innovative idea and make it impactful. … successful entrepreneurs are also ones who take challenges in stride, adapt and adjust plans to accommodate whatever problems do come up.”


Over the last decade I’ve watched hundreds of my engineering students as well as ~1,500 of the country’s best scientists in the National Science Foundation Innovation Corps, cycle through the latest trends in startups: social media, new materials, big data, medical devices, diagnostics, digital health, therapeutics, drones, robotics, bitcoin, machine learning, etc.  Some of these world-class innovators get recruited by large companies like professional athletes, with paychecks to match. Others join startups to strike out on their own. But what I’ve noticed is that it’s rare that the smartest technical innovator is the most successful entrepreneur.

Being a domain expert in a technology field rarely makes you competent in commerce. Building a company takes very different skills than building a neural net in Python or decentralized blockchain apps in Ethereum.

Nothing makes me happier than to see my students getting great grades (and as they can tell you, I make them very work hard for them). But I remind them that customers don’t ask for your transcript. Until we start giving grades for resiliency, curiosity, agility, resourcefulness, pattern recognition, tenacity and having a passion for products and customers, great grades and successful entrepreneurs have at best a zero correlation (and anecdotal evidence suggests that the correlation may actually be negative.)

Most great technology startups – Oracle, Microsoft, Apple, Amazon, Tesla – were built by a team led by an entrepreneur.

It doesn’t mean that if you have technical skills you can’t build a successful company. It does mean that success in building a company that scales depends on finding product/market fit, enough customers, enough financing, enough great employees, distribution channels, etc. These are entrepreneurial skills you need to rapidly acquire or find a co-founder who already has them.

Lessons Learned

  • Entrepreneurship is a calling, not a job.
  • A calling is something you feel you need to follow, it gives you direction and purpose but no guarantee of a paycheck.
  • It’s what allows you to create a missionary zeal to recruit others, get customers to buy into a vision and gets VC’s to finance a set of slides.
  • It’s what makes you get up and do it again when customers say no, when investors laugh at your idea or when your rocket fails to make it to space.

Leadership is More Than a Memo

I just read Brotopia: Breaking Up the Boys’ Club of Silicon Valley. It was both eye-opening and cringe-worthy. The book explores the role of gender in the tech industry – at startups and venture capital firms – and the interaction between men and women in the two. While Silicon Valley has grown to have global influence, in many ways the cultural leadership from the venture community has dramatically shrunk in the last decade. Chasing deal flow has resulted in many VCs leading the race to the bottom in startup ethical behavior.

Among other things the book reminded me how important leadership is in setting startup culture – both consciously and implicitly.

Here was the day I got that lesson.

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With the reckless and naïve abandon of founders who had no clue what they were about to tackle, we had just started Ardent, a supercomputer company. Ben Wegbreit, the VP of Engineering (one of my mentors and then co-founder of Epiphany), broke his foot skiing just as the company started. So every day Ben hobbled into our very small office nattily dressed in his suit but wearing sneakers over his cast. (Yes, in the dim past of Silicon Valley the execs really wore suits.)

At first the company just consisted of the founders, but Ben soon started to hire his engineering team. Since this was the pre-Hoodie era, they interviewed in various types of then engineering attire – most with jeans, some with khakis, etc. (And back then they were all men.) But as each engineer was hired and started work I began to notice that after a few days they started to wear suits… wait for it… with sneakers. Obviously, this was a pretty bizarre fashion statement – and no one had sent out a memo announcing this as the engineering dress code. After six weeks of furious staffing and recruiting Ben had a team of 10 or so engineers and I have vivid memories of all of them trying to look like Ben.

Yet Ben was oblivious to the suit-and-sneaker clone army he had created.

With my now decades of hindsight, I realize I should have just let the engineers know that Ben had broken his foot and there was no attempt at sartorial innovation. But I remember just being mesmerized by this lesson in implicit leadership unfolding before me.

I knew that the cast was going to come off, and Ben would show up one day wearing regular shoes. What I didn’t know was what would happen to the engineering dress code then– would they all then adopt suits and shoes? Drop the suits all together? Keep their suit and sneaker style?

And how long would the change in engineering dress take? The next day?  A week?

And then it happened. Ben showed up wearing a suit and … shoes.

I’m sure engineering productivity took a big hit that week as cognitive dissonance set in.  Some of the engineers literally went home at lunch and changed – some into shoes, some dropping the whole suit.  Most started wearing regular shoes the next day, and by the second day no one was wearing sneakers.

Decades later Mark Zuckerberg would run the experiment at scale.

Lessons Learned

  • Culture gets set both explicitly with rules and implicitly by example
  • The bro culture of the Valley is a failure of leadership – by VC’s who should know better and CEO’s who need to be taught
  • Ironically, it would take a Los Angeles VC, Mark Suster at Upfront Ventures and the Inclusion Clause to lead the change in venture capital culture

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.

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