Crisis Management by Firing Executives – There’s A Better Way

Posted on November 18, 2010 by steve blank

Insanity is doing the same thing over and over again and expecting different results.
Albert Einstein

For decades startups were managed by pretending the company would follow a predictable path (revenue plan, scale, etc.) and being continually surprised when it didn’t.

That’s the definition of insanity. Luckily most startups now realize there is a better way.

Startups Are Not Small Versions of Large Companies
As we described in previous posts, startups fail on the day they’re founded if they are organized and managed like they are a small version of a large company. In an existing company with existing customers you 1) understand the customers problem and 2) since you do, you can specify the entire feature set on day one. But startups aren’t large companies, but for decades VC’s insisted that startups organize and plan like they were.

These false assumptions – that you know the customer problem and product features – led startups to organize their product introduction process like the diagram below – essentially identical to the product management process of a large company. In fact, for decades if you drew this diagram on day one of a startup VC’s would nod sagely and everyone would get to work heading to first customer ship.


The Revenue Plan – The Third Fatal Assumption
Notice that the traditional product introduction model leads to a product launch and the execution of a revenue plan. The revenue numbers and revenue model came from a startups original Business Plan. A business plan has a set of assumptions (who’s the customer, what’s the price, what’s the channel, what are the product features that matter, etc.) that make up a business model. All of these initial assumptions must be right for the revenue plan to be correct. Yet by first customer ship most of the business model hasn’t been validated or tested. Yet startups following the traditional product introduction model are organized to execute the business plan as if it were fact.

Unless you were incredibly lucky most of your assumptions are wrong. What happens next is painful, predictable, avoidable, yet built into to every startup business plan.

Ritualized Crises
Trying to execute a startup revenue plan is why crises unfold in a stylized, predicable ritual after first customer ship.

You can almost set your watch to six months or so after first customer ship, when Sales starts missing its “numbers,” the board gets concerned and Marketing tries to “make up a better story.” The web site and/or product presentation slides start changing and Marketing and Sales try different customers, different channels, new pricing, etc. Having failed to deliver the promised revenue, the VP of Sales in a startup who does not make the “numbers” becomes an ex-VP of Sales. (The half-life of the first VP of sales of a startup is ~18 months.)

Now the company is in crisis mode because the rest of the organization (product development, marketing, etc.) has based its headcount and expenses on the business plan, expecting Sales to make its numbers. Without the revenue to match its expenses, the company is in now danger of running out of money.

Pivots By Firing Executives
A new VP of Sales (then VP of Marketing, then CEO) looks at their predecessors’ strategy, and if they are smart, they do something different (they implement a different pricing model, pick a new sales channel, target different customers and/or partners, reformulate the product features, etc.)

Surprisingly we have never explicitly articulated or understood that what’s really happening when we hire a new VP or CEO in a startup is that the newly hired executive is implicitly pivoting (radically changing) some portion of the business model.  We were changing the business model when we changed executives.

Startups were pivoting by crisis and firing executives.  Yikes.

Business Model Design and Customer Development Stack
The alternative to the traditional product introduction process is the Business Model Design and Customer Development Stack. It assumes the purpose of a startup is the search for a business model (not execution.) This approach has a startup drawing their initial business model hypotheses on the Business Model Canvas.

Each of the 9 business model building blocks has a set of hypotheses that need to be tested. The Customer Development process is then used to test each of the 9 building blocks of the business model. Each block in the business model canvas maps to hypotheses in the Customer Discovery and Validation steps of Customer Development.

Simultaneously the engineering team is using an Agile Development methodology to iteratively and incrementally build the Minimum Feature Set to test the product or service that make up the Value Proposition.

Pivots Versus Crises
If we accept that startups are engaged in the search for a business model, we recognize that radical shifts in a startups business model are the norm, rather than the exception.

This means that instead of firing an executive every time we discover a faulty hypothesis, we expect it as a normal course of business.

Why it’s not a crisis is that the Customer Development process says, “do not staff and hire like you are executing. Instead keep the burn rate low during Customer Discovery and Validation while you are searching for a business model.”  This low burn rate allows you to take several swings at the bat (or shots on the goal, depending on your country.) Each pivot gets you smarter but doesn’t put you out of business. And when you finally find a scalable and repeatable model, you exit Customer Validation, pour on the cash and scale the company.

Lessons Learned

  • “I know the Customer problem” and “I know the features to build” are rarely true on day one in a startup
  • These hypotheses lead to a revenue plan that is untested, yet becomes the plan of record.
  • Revenue shortfalls are the norm in a startup yet they create a crisis. 
  • The traditional solution to a startup crisis is to remove executives. Their replacements implicitly iterate the business model.
  • The alternative to firing and crises is the Business Model/Customer Development process.
  • It says faulty hypotheses are a normal part of a startup
  • We keep the burn rate low while we search and pivot allowing for multiple iterations of the business model.
  • No one gets fired.

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Creating Startup Success – Customer Development + Business Model Design

Posted on November 15, 2010 by steve blank

In previous posts I’ve talked about what the combination of Business Model Design, Customer Development and Agile Methodologies mean to startups and intrapreneurs in large companies; it’s the beginning of entrepreneurship as a science with its own rules and methodologies.

Alexander Osterwalder, who authored the Business Model Generation book, put together a slidedeck on his thoughts of what happens when you combine the business model concept to shape and structure your business ideas with the Customer Development approach to test, prove and build them.

I think his slides are great (and by far much easier on the eye then mine.)

Teaching In the Big Apple
I was in New York teaching at Columbia University this week and gave a few talks around town. A nice surprise was an invite to crash a dinner in progress with Fred Wilson, Mark Suster, and Joanne Wilson. (Funny to learn latter that someone at the next table was listening to our conversation and tweeting it.)

My public talk at Columbia University was part of their Science, Technology, Engineering and Math Startup lecture series. Thanks to an invite by Professor Chris Wiggins in the Computational Biology and Bioinformatics Department (but better known as the founder of HackNY), I was honored to be shoe-horned in between Mark Suster who appeared the day before and Peter Thiel, who was going to present the next day.

It was great to see my ex Stanford teaching assistant Christina Cacioppo, now at Union Square Ventures, in the audience. (She posted her notes from the talk here.) Now I have an ex teaching assistant in VC firms on both coasts.

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Get Out of The Building – And Win $50,000

Posted on November 11, 2010 by steve blank

The only thing that interferes with my learning is my education.
Albert Einstein

Entrepreneurship As A Management Science
Those of you who have been reading my blog already know that I have been talking about a new approach to entrepreneurship education called “E-School” or the Durant School of Entrepreneurship. I believe that we have now learned enough about entrepreneurship as its own management science, to rethink our approach on how to teach it.

A place to start would be by recognizing the fundamental difference between an existing company and a startup: existing companies executebusiness models, while startups searchfor a business model. (Or more accurately, startups are a temporary organization designed to search for a scalable and repeatable businessmodel.) Therefore the very foundations of teaching entrepreneurship should start with how to search for a business model.

This startup search process is the business model / customer development / agile development solution stack. This solution stack proposes that entrepreneurs should first map their assumptions (their business model) and then test whether these hypotheses are accurate, outside in the field (customer development) and then use an iterative and incremental development methodology (agile development) to build the product. When founders discover their assumptions are wrong, as they inevitably will, the result isn’t a crisis, it’s a learning event called a pivot — and an opportunity to update the business model.

Business Model Design meets Customer Development

Lean Launchpad
So how do we teach this approach? Both Stanford and Berkeley have been extremely generous in letting me test these ideas in their engineering and business schools. In fact, starting in January, Stanford will offer Engineering 245, a.k.a the Lean Launchpad, the first hands-on class utilizing the entire business model/customer development / agile development stack. I’ll be teaching this class with two world-class VC’s:  Ann Miura-Ko of Floodgate, and Jon Feiber of MDV.

In this class students get 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. The end result is not a PowerPoint slide deck for a VC presentation. Instead students get their hands dirty talking to customers, partners and competitors as they encounter the chaos and uncertainty of how a startup actually works.  They’ll work in teams learning how to turn a great idea into a great company. They’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 would want/use their product. Finally, they’ll use agile development to rapidly iterate the product in class to build something customers will use and buy.  Each week will be a new adventure as they test each part of their business model and then share the hard earned knowledge with the rest of the class.

But what if you’re not a Stanford student and want to learn how to build a startup with the “get out of the building” experience as taught in the Lean Launchpad class?

You can.

International Business Model Competition
One of the things I have suggested is that instead of business plan competitions (which tend to focus on a static plan which is often just a series of guesses about a customer problem and the product solution), entrepreneurship educators should think about holding competitions that emulate what entrepreneurs encounter – chaos, uncertainty and unknowns. A business model competition would emulate the “out of the building” experience of the Stanford E-245 class and the customer development / business model / agile stack.

Nathan Furr, a professor at Brigham Young University, is launching the firstinternational business model competition.

The competition will be held on January 24th 2011 (submission deadline Jan 10th) and is open to university students enrolled at least half-time anywhere in the world (more about the competition here and information packet is here). While Professor Furr’s vision is to make this the Moot Corp (the championship of business plan competitions) of the business model world, the broader goal is to kick start change in the way students and educators think about how to train the next generation of entrepreneurs—Durant entrepreneurs.

Not only is this an exciting event planting a flag for the future of e-schools, but Alexander Osterwalder, who wrote the definitive book on business model design, and I will be doing the judging along with Professor Nathan Furr.

Oh yes, and by the way, the prize money is $50,000.

See you there.
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Hubris Versus Humility: The $15 billion Difference

Posted on November 8, 2010 by steve blank

Describing your product as “new and “never been done before” instead of “we’re just like those others guys, but better” could cost your company billions.  RIM and TiVo are two examples of getting it right and wrong.

Research in Motion (RIM)
By 1992 Research in Motion (RIM) had been in business for eight years, had 16 employees, sales of about $500,000 a year, and three or four business lines. That year the two founders decided to get serious about being a company, and hired a CEO. Soon, RIM was focusing on making products for people on the move, using wireless communication and digital data.

Wireless Communications
In the early 1990’s two different trends were occurring in wireless communication. First, wireless voice networks – cell phone networks – had started to emerge. The ability to make a phone call untethered from a traditional phone was revolutionary and was starting to catch on fast. These new cellular phone networks were built around two-way circuit switched technology designed to move voice calls without interruption.

At the same time, digital data networks to support “pagers” were also growing rapidly. Pagers were small receive-only devices with 1 or 2-line displays that showed the phone number of who was “paging” them. Users ran to a traditional telephone and called a paging service who would read them their message. Doctors and drug dealers equally found these devices handy. Unlike the circuit-switched cell phone networks, pager networks were built around digital packet-switched technology.

Sell Directly to Businesses
In 1996 RIM was still in the hardware business selling packet-switched wireless radio modems to OEMs. In a major strategy shift, they decided to sell a product directly to businesses. In 1997, RIM introduced the first packet-switched messaging device. It used narrowband PCS and was housed in a clamshell device with a full keyboard.

RIM Interactive Pager 900

The new device could hold names, email addresses, phone and fax numbers and incoming and outgoing messages. In 1998 RIM quickly followed this up with a next generation product with an 8-line display, ran on AA batteries and would last 500 hours.

The fact that you could send messages interactively blew people away. Underneath the hood RIM’s product was a technical tour de force. But RIM decided to hide all of that from their customers.

RIM positioned the Blackberry as an “interactive pager” because pagers were something people could understand. While the device was actually was doing email, people understood it as “the pager that you could respond with.” While phrases like “mobile email and packet switching” didn’t mean a thing to RIM’s first customers, the “interactive pager” positioning proved important in attracting early adopters.

Resegmenting an Existing Market
RIM’s product needed very little explanation. If you knew what a pager was, you knew what an interactive pager was. You got it. (You might gulp at the price – paging prices were dropping like a stone ($9/month versus $99/month for a RIM interactive pager) since most people were moving from pagers to cell phone to get calls. But to businesses where instant information gave you a critical edge (Wall Street, politicians, etc.) these new capabilities were worth almost any price.

In today’s language of Customer Development, RIM positioned the Blackberry as a segment of an existing market – pager users who needed two-way communication. Their intent: initial sales would come from users who already understood what the product could do so adoption would occur rapidly.

Humility
RIM, the Blackberry and its network had more inventions per square inch than most startups. The founders could have easily described the product as “the first packet-switched interactive messaging network.” Or they could have said, “corporate email now seamlessly forwarded from your company’s network to your pocket.” They did none of that.  The founders swallowed their pride and simply introduced the Blackberry as an “interactive pager.” Their board, with no need to prove how smart and creative they were, agreed.

After a few years, as users became comfortable with the technology, the entire space of interactive pagers became known as the “Blackberry or “wireless email” market rather than the “interactive pager” market.

Video Recording
In 1999, about the same time RIM introduced its first interactive pager, another advanced technology company, TiVo, shipped its first product.

Recording video on magnetic tape was developed in the mid 1950’s by Ampex, and had evolved into a consumer-friendly cassette by the late 1960’s. VCR’s caught on in the home in the late 1970’s driven by movie rentals and pornography. Sales of VHS-based VCRs exploded after Sony and JVC fought a brutal standards battle (Betamax versus VHS) and when the U.S. Supreme Court ruled that home taping of television programs for later viewing (“time-shifting”) constituted a fair use.

But cassette tapes were still bulky and awkward. And most consumers had never mastered recording a TV program (let alone setting the clock on their VCR.)

TiVo
TiVo solved all those problems. It was the logical marriage of computers and video recording. Essentially TiVo was a computer with a hard drive integrated with a TV tuner and MPEG decoder.  It digitized and compressed analog video from an antenna, cable or direct broadcast satellite. But it was the software that made the TiVo great. It was reliable. Its user interface was simple. It let users record from the familiar program guide. Since you were recording video to a hard disk, you could appear to pause live TV, instant replay, rewind or record anything.

TiVo Series 1

TiVo originally sold directly to consumers through consumer electronics stores, via Sony and Phillips and was integrated into set-top boxes from DirecTV.

Creating a New Market
TiVo’s product needed very little explanation. After a demo, if you knew what a VCR was you knew what a TiVo was.  You got it. (You might pause at the price – VCR prices were plummeting – $150 versus $800 for the first TiVos, but compared to a VCR it took your breath away.)

In today’s language of Customer Development, a TiVo positioned as a segment of an existing market (VCR’s) was a no brainer. Everyone would have immediately understood it.

Except there was one problem. The TiVo CEO hated the idea that customers might think of TiVo as a better VCR. In fact he said, “Anytime anyone says that to me, I go completely nuts. So we had this challenge of explaining, It’s actually not a VCR. It’s a lot more sophisticated and uses a hard disk, and therefore you can record and playback simultaneously and do clever things like pause live TV, and so on.”  And the board, being enamored with Silicon Valley technology, first mover advantage and concerned about the huge price gap between a VCR and TiVo, agreed.

As a result, the company instead chose to position TiVo as a New Market. In a new market when customers have no idea what the product can do, a company needs to educate potential customers about the space not the product. This results in a much slower adoption curve – the classic hockey stick.

New Market Revenue Curve

Hubris
TiVo spent the next five years trying to convince users that the box they wanted to buy as a better VCR was really something different. Hundreds of millions of dollars went into marketing campaigns to create an entirely new consumer electronics category – Digital Video Recorders. TiVo was first positioned as a “personal television system.” But no one knew what that meant. Next they tried the slogan “TiVo, TV your way.” Early adopters simply ignored the company’s positioning buying the device in spite of the inane descriptions.

But trying to create a totally new market took its toll. TiVo had plenty of other battles to fight: competition, issues with channel partners, patent battles, as well as the movie studios, cable companies, broadcast networks and advertisers who all wanted TiVo dead. Instead the company used most its cash on marketing and advertising in trying to define a new product category and accelerate adoption.

Summary
RIM sales were $15 billion in 2010. In the last ten years they’ve made over $9 billion in profit.

TiVo sales were $240 million in 2010.  In the last ten years they lost $400 million dollars.

How much of this can be traced back to the time, money and energy they spent on their initial positioning?

Lessons Learned

  • Market Type matters
  • No one will stop you from picking a new market.
  • If you do, realize you have defined a space with no customers. You now need to spend your marketing dollars in educating users about the market not your product.
  • In an existing market you’ve picked a space that has customers. Here you need to spend your marketing dollars differentiating your product from the incumbents. Are you faster and better?  Are you cheaper? Do you uniquely appeal to a segment?

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No Business Plan Survives First Contact With A Customer – The 5.2 billion dollar mistake.

Posted on November 1, 2010 by steve blank

At $5.2-billion Iridium was one of the largest, boldest and audacious startup bets ever made. Conceived in 1987 by Motorola and spun out in 1990 as a separate company, Iridium planned to build a mobile telephone system that would work anywhere on earth. It would cover every city, town and square inch of the earth from ships in the middle of the Arctic Ocean to the jungles of Africa to the remote mountain peaks of the Himalayas. And Iridium would do this without building a single cell tower.

How? With an out-of-this-world business plan. First, the company bought a fleet of 15 rockets from Russia, the U.S. and China.  Next, it  built 72 satellites on an assembly line and used the rockets to launch them into orbit 500 miles above the earth. There the satellites acted like 500-mile high cell phone towers capable of providing phone coverage to any spot on the planet. Seven years after it was founded their satellites and ground stations were in place.  It was a technical tour de force.

iridium satellite network

But nine months after the first call was made in 1998, Iridium was in Chapter 11 bankruptcy. It crashed back down to earth as one of the largest startup failures on record. What went wrong?

We Think We Identified a Large Problem
When Iridium was first conceived inside Motorola in 1987, worldwide cell phone coverage was sparse, calls were unreliable and per minute costs were expensive. Cell phone handsets were the size of a lunch box and cost thousands of dollars.

Motorola Dynatac 8000x ~1987

When it was spun out as a a separate company, Iridium’s 1990 business plan had assumptions about potential customers, their problems and the product needed to solve that problem. All were predicated on the state of the mobile phone industry in 1990. They made other assumptions about the type of sales channel, partnerships and revenue model they would need. And they rolled all of this up into a set of financial forecasts with a “size of market” forecast from brand name management consulting firms that said they’d have 42 million customers by 2002. Iridium looked like it would be printing money when it got its satellites into space.

A Business Plan Frozen in Time
But in the 11 years it took Iridium to go from concept to launch, innovation in mobile phones and cell phone networks moved at blinding speed. By the time Iridium launched, there were far fewer places on the planet where cell phone service was unavailable. Traditional cell phone companies now had coverage in the most valuable parts of the world. Prices for local and international cell service declined dramatically. The size of a cell phone handset had shrunk so it could fit in your pocket.

In contrast, when Iridium’s service became available its satellite phone was bigger than a brick and weighed about the same.

iridium-9500 satellite phone ~1999

Worse, Iridium’s cell phone couldn’t make calls from cars, offices or other buildings since phones had to be used outdoors with a line-of-sight connection to the satellites. But the nail in the coffin was price. Instead of the 50 cents per minute for a regular cell phone, Iridium’s calls cost $7 per minute– plus users needed to pay $3,000 for the handset.

In the eleven years since they had been at work, Iridium’s potential market had shrunk nearly every day. But Iridium’s business model assumptions were fixed like it was still 1990. They were dead on arrival as a mass market cell phone service the day they went live.

No Business Plan Survives First Contact With A Customer
The result was a classic startup failure writ large. Iridium followed its original business plan assumptions off a cliff. Their mistakes?  First, in 1990 the company thought it knew the customer problem to solve, and therefore it  knew what solution to build.

Second, since it knew the solution, it went into a 8-year Waterfall engineering development process. Waterfall development is a sequential way to develop a product (requirements, design, implementation, verification – ship.) Waterfall makes lots of sense in a market with the customer problem is known and all customer needs and product features can be specified up front. It is death in a rapidly changing business. Waterfall development shut off Iridium’s ability to listen, learn, test and adapt to changing customer needs and a rapidly changing market place.

Third, its business plan had no notion of learning and discovery. The idea of iteration or pivots was unthinkable. This business plan was a static document.  It was great for fundraising, looked great in business schools and large companies, but completely broke down when confronted by the realities of the changing mobile phone business.  When the company launched, it ran into diminishing customers and markets that didn’t correspond to its business plan and financial projections, but it had no ability to pivot and change their business model.  A Customer Discovery and Validation process that was ongoing with product development could have provided early warning that its market was not developing in Iridium’s favor.  Instead management was more comfortable executing to the plan.

It All Came Crashing Down
All this, plus the corporate hubris of having raised billions of dollars, with no adult on either Iridum’s or Motorola’s board who was asking “does this still make sense?” resulted in a disaster. Instead of the 42 million customers called for in its business plan, Iridium had 30,000 subscribers at its peak. The company burned its way through more than $5.2-billion because it fell in love with technology, succumbed to Waterfall product development and never bothered to get out of the building, get their heads out of their spreadsheets and ask, “What do customers want today?”

In 2000, new investors bought Iridium’s satellites and network for $25-million, or one half of one percent of the invested capital. Today, the successor company serves some 300,000 customers in a series of niche markets including American soldiers calling home from war zones, oil rig managers, and big game hunters.

Customer Development, Business Model Design and Agile Development could have changed the outcome.

Lessons Learned

  • Business plans are the leading cause of startup death
  • No Business Plan survives first contact with a customer
  • Rapidly changing markets require continuous business model iteration/customer development
  • Your ability to raise money has no correlation with customer adoption

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Checklists for Chaos, The Path to Success

Posted on October 28, 2010 by steve blank

In a startup the search for a business model is chaotic, unpredictable and uncertain. Yet the Customer Development process uses a series of checklists to ensure that you walk through the Customer Discovery and Validation steps. In addition it explicitly calls for synchronization and confirmation of the steps by the entire team.

Surely a checklist and discussion gets in the way of progress in a fast moving startup? Here’s how using it helped E.piphany rather than hindered it.

Tell Them What You’re Hearing
When E.piphany was a small struggling startup in Mountain View, we had a weekly Friday afternoon beer and wine fest, no different than what hundreds of other startups were doing. (Insurance companies in the valley should check the accident rates for Friday traffic.) The company headcount was mostly engineers accomplishing the impossible on a regular basis while a few of us were outside the building trying to do what we would call today Customer Discovery and Validation.

A Checklist for Chaos
While all startups are chaotic, we had been through enough of them (E.piphany was my 8th) to realize that we could understand our potential customer better if we had a standard checklist and process of how to approach complex enterprise sales. These started with the business model hypotheses in Customer Discovery (who’s the customer, channel, pricing model, etc.)

Customer Hypothesis Checklist

I remember that for the first few weeks of the company, my partner Ben and I would give the usual rah-rah platitudes about how great things were going to motivate the engineers.  Then one week Ben turned to me and said, “Why don’t you really tell them what you’re doing and what you’re hearing.”  Uh oh. Thinking about all the ups and downs of sales in a startup and twists and turns in strategy and positioning I wondered if it would be demoralizing. “Do you think they can handle the truth?”  We talked about it and realized our motto for our weekly meeting would be, “Don’t panic when we change the strategy. Only panic if we ask you to rearchitect the product.”  (Today’s version would be “Don’t worry when we pivot the business model, only panic if we ask you to develop the product with a Waterfall methodology.”)

Sharing the Checklist
Soon after, our Friday’s meetings would start with me describing the highs and lows of the week: who we called on, what they said and what happened (essentially walking engineering through the series of checklists as we went through Customer Discovery and Validation. And what I had to report was mostly us getting a “not interested” or “we don’t get it” from a prospective customer.

Almost immediately the most unexpected things started happening at our Friday meetings.

Don’t Treat Them Like Mushrooms
First, I thought that not pumping up engineering every week would demotivate the team. Reality turned out 180 degrees from what I expected. Engineering was much smarter. When it became clear that my partner and I were not going to treat them like mushrooms (keep them in the dark and feed them sx!t) but let them know what was really going on, they engaged on a much different level.

You’re Explaining it Wrong
Second, as I was reporting on my sales calls a few of the engineers realized that I was describing technical professionals in large companies who were just like them. When I detailed how I was explaining the product, our own engineers said, “You’re explaining it wrong. Even I wouldn’t buy it from us if you told me that.” The first time I heard that I was speechless. Who the hell were these engineers telling me how to market and sell our product?  My first instinct was to cycle through all the “my business card says I’m the expert here and you just write code.”

Then I realized – they were right. Our engineers were just like the customer, and if they didn’t think our product description made sense, no one else would.  So in front of the entire company, I threw out our positioning and we started to discuss how to better articulate what we were doing. (I think we invented our meta-data architecture diagram that Friday.) It was great to realize that instead of just me trying to figure out customer feedback, that every Friday I’d have the collective wisdom of engineering engaged.

Confirming the Checklist
Synchronizing our Discovery and Validation had a third benefit. Engineering now felt that they had a stake in making the process better and took a great interest in that mysterious and elusive “customer.”  Soon engineers were spending lots of time talking to customers. More importantly they had a vested interest in getting the process right.

Synchronizing the Discovery and Validation checklists with the entire company made us collectively smarter, faster and gave us a shared understanding of our objective – build great products that customers wanted.

Checklists and synchronization were part of the reason why we grew from $0 to $125 million in three years.

Lessons Learned

  • Customer Discovery and Validation in any type of startup requires a series of checklists (see Appendix B of the Four Steps to the Epiphany)
  • The checklists require the team to share their findings for confirmation and synchronization

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

Posted on October 25, 2010 by steve blank

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

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

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

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

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

Business Model Canvas

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

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

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

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

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

Business Model Design meets Customer Development

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

Pivots are Business Model Insights

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

The Pivot turns a failed business model hypotheses into insight.

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

Lessons Learned

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Filed under: Business Model versus Business Plan, Customer Development, Customer Development Manifesto | 65 Comments »

Who’s An Entrepreneur-Talk with the Kauffman Foundation

Posted on October 21, 2010 by steve blank

The Kauffman Foundation is the leading private funder of economic research related to growth and innovation in the United States. (Translation: They write checks for $100 Million dollars a year.) The Churchill Club, Silicon Valley’s largest public affairs organization, invited Carl Schramm, president and CEO of the Kauffman Foundation and I to talk about entrepreneurship. (The official title of the talk was Fresh Perspectives on Entrepreneurial Innovation and Economic Growth.) Rich Karlgaard, publisher of Forbes and co-founder of the Churchill Club refereed the event.

Carl has been been shaking up the staid world of academic entrepreneurship research for over 8 years as the head of the foundation. I think the expectation was that putting the two of us together would see the fur fly.

Instead of a brawl it turned out to be collegial, entertaining and informative.

BTW, the definition of entrepreneurship I describe at 2:50 into the video is described in detail in the post “You’re Not a Real Entrepreneur.”

Here’s a 6 minute excerpt from the talk.


Listen to the post here: Download the Podcast here

Filed under: Customer Development | 2 Comments »

Requiem For A Roommate

Posted on October 18, 2010 by steve blank

And, when he shall die, Take him and cut him out in little stars,
And he will make the face of Heaven so fine
That all the world will be in love with night
And pay no worship to the garish sun.
William Shakespeare

Last week I had my “public servant” hat on in my official capacity as a California Coastal Commissioner.  Walking out after a 13-hour hearing, one of my fellow commissioners asked, “Why on earth do we do this?” As I got back to the hotel, I found myself wondering the same thing.  What ever got me interested in public service and non-profits? As I tried to unwind, I turned on the hotel TV and caught part of an old movie, The Big Chill.

It reminded me that I volunteer my time because of a gift I had received my first year in college.

Unshakable Certainty
I had never been outside of New York so to me Michigan seemed like a foreign country. On the first day of college I wandered down my dorm hall introducing myself and met Michael Krzys, the guy who would one day be the best man at my wedding, making a salad on the floor of his room.  I provided the bowl and as we started talking, I was fascinated that he was from Adrian Michigan, a quintessential small town in the Midwest. He was equally curious about someone who grew up in New York. As we got to know each other, I pretty quickly I realized that I had met my match, someone with even more curiosity, creativity and a wry sense of humor.  As best friends our freshman year, we did all the crazy things that first year college students do (things I still won’t tell my kids.)

But as I got to know Michael, there was another, completely foreign part of him I didn’t understand. (It would take me another 30 years.) From the day I met him he had a commitment to public service that was deep, heartfelt, profound, unshakable and to me, mysterious and completely unfathomable. Even as a freshman, Michael already knew that his calling was to help others and to do so he was determined to become a public service lawyer. It confused and unnerved me to know someone with so much certainty about the meaning and direction of his life.  It couldn’t have been more different from mine.

After our first year our lives took different paths. When they would touch again, it would be in ways neither of us could have predicted.

Different Paths
With the Vietnam War going full tilt, I left school and joined the Air Force, spending a year and a half in Southeast Asia. Michael and I kept in touch via letters – me telling him about adventures in the military, fighter planes, electronics and foreign countries. His letters explained to me why I was an idiot, war was immoral and that while he appreciated my dedication to national service, it was public service that was the higher calling. Each of his letters ended with him reminding me that I was destined for a different career.

When I got back from Thailand the war was winding down and Michael was now in the University of Michigan Law School (having finished his undergrad degree in 3-years.) For my last year in the Air Force, I was stationed on a B-52 bomber base, 183 miles from Ann Arbor. I knew the exact mileage as I would drive it every weekend to see my girlfriend and hang out with Michael. Over dinner we’d argue about politics, talk about how to best save the world, and he’d tell me what he was learning that week in his law school classes.  I remember when he taught me the best way to understand an issue was to learn how to argue both sides of a case.

It didn’t take long before he was loaning me his last quarter’s law books to read during the week at the airbase where I was keeping the world safe for democracy.  (While students in law school were hiding their Playboy magazines inside their law books, I’m probably the only guy who had to hide his law books from fellow airmen under a pile of Playboy magazines.)

Remove the Tag
In his last year in law school, the high point for Michael was arguing his first pro bono case in Detroit for a tenant who he claimed was being illegally evicted. (In Michigan law students could appear and practice in limited court settings under the supervision of an admitted attorney.) When I drove down to Ann Arbor that weekend, I was regaled with Michael’s tale of his passionate defense of his first client as he stood in front of the judge waving his arms for effect in his first-ever sports coat. Michael said he was ecstatic that the judge ruled in his favor, but was a bit confused when the judge motioned him to approach the bench.  In a low voice the judge said, “Son, that was a pretty good argument for a law student. However the next time you’re in court, you may want to remove the price tag from the sleeve of your sports coat.”

When I got out of the military and went back to school, Michael was finishing up law school, and a year later he and his new wife headed to the South to work for Georgia Legal Services in McIntosh County in Georgia. I moved to Silicon Valley, and we kept up a sporadic correspondence, me trying to explain startups and Michael telling me about the world of civil rights and equal justice for the poor. If possible it seemed like his excitement for what he was doing matched mine.  I just didn’t understand why he did it.

It’s a Calling
For entrepreneurs, understanding why people dedicate their lives to working for non-profits is hard to fathom. Why work for low pay, on something that wasn’t going to deliver a product that would change the world?

Today, each time I see the staffs of those non-profits where I’m on the board, I get a glimpse of that same passion, commitment and sense of doing right that I first heard my freshman year decades ago.  For the best of them, it’s not a job, it’s a life-long calling.  The executive directors of the Coastal Commission and POST remind me of what Michael might have become.

A Life Worth Living
One fine California April day in 1981, three years in Silicon Valley now into my second startup, I got a call from someone in Michigan who had been trying to track me down.  Michael and his wife were bringing some kids to camp, and he was killed in a head-on car accident with a drunk driver.  His wife and the kids survived.

It took me a long time, but as I got older I realized that life was more than just about work, technical innovation and business. Michael and others worked to preserve and protect the values that made life worth living.  And while we were making things, they were the ones who were who changing our society into a more just place to live.

There isn’t a day that goes by on the Coastal Commission that I don’t wonder what Michael Kryzs would do. To this day he is my model as a human being who found his own compass.

I always hoped that mine would point in the same direction.

—

Update: after three decades I finally got to give Michael a memorial even he would have thought was fitting and proper. I established the Michael Krzys Public Interest Fellowship at the University of Michigan Law School. Details here

Listen to this post here:

Download the Podcast here

 

Filed under: Air Force, California Coastal Commission, Family/Career/Culture | 22 Comments »

Too Young to Know It Can’t be Done

Posted on October 13, 2010 by steve blank

The young do not know enough to be prudent, and therefore they attempt the impossible – and achieve it, generation after generation.
Pearl S. Buck

Ask people what makes entrepreneurs successful and you’ll hear a familiar list of adjectives; agile, tenacious, resilient, opportunistic, etc.

What you don’t hear is that often they didn’t know any better.

It Can’t Be Done
I was just rereading Jessica Livingston’s book Founders at Work, and a common thread through the stories reminded me that there is a type of technology innovation that occurs in startups when a founder/team simply doesn’t know what they’re attempting is impossible.

Steve Wozniak at Apple building the Apple II floppy disk controller without ever seeing one. The original Fairchild Semiconductor team of Moore and Hoerni racing to build the first silicon diffused PNP and NPN transistors and ending up with Planar transistors and integrated circuits. The list of “I just did it without knowing it was impossible” appears time and again as a common thread in stories about technology innovation.

I got to see this first hand, when I was lucky enough to be present as an incredibly small team designed and built the Zilog and MIPS microprocessors.  And at Ardent I watched an equally minuscule company tackle building a supercomputer and at again at E.piphany building a data warehouse.

Almost all these innovations were built by people in their 20’s with a few of the old-timers in their 30’s. (One of the common themes was the physical effort to get these projects completed –  entrepreneurs staying up for days to finish a project and/or sleeping at work until it shipped.) I flew more red-eyes than I can remember, and also had days where I just slept in the office with the engineers.

Age Means Wisdom
It’s not that older entrepreneurs can’t start or build innovative companies – of course they can. Older entrepreneurs just work smarter and strategically. (Though my hypothesis is that funding from risk capital sources – angels and VC’s- don’t follow a normal distribution curve for older founders.)

And if they’re really strategic older founders hire engineers in their 20’s and 30’s who don’t know what they’ve been asked to do is impossible (exactly the strategy of my partner Ben at E.piphany.)

Older Means You Know Too Much
However, as I’ve gotten older I’ve observed that it’s not just that stamina that changes for entrepreneurs. One of the traps of age is growing to accept the common wisdom of what’s possible and not. Accumulated experience can at times become an obstacle in thinking creatively. Knowing that “it can’t be done” because you can recount each of the failed attempts in the last 20 years to solve the problem can be a boat anchor on insight and imagination. This not only effects individuals, but happens to companies as they age.

When you’re young anything seems possible.

And at times it is.

Lessons Learned

Listen to the post here: Download the Podcasts here

Filed under: Family/Career/Culture, Technology | 50 Comments »

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