It Must Be A Marketing Problem

Posted on February 11, 2010 by steve blank

The Customer Development process is the way startups quickly iterate and test each element of their business model, reducing customer and market risk. The first step of Customer Development is called Customer Discovery. In Discovery startups take all their hypotheses about the business model: product, market, customers, channel, etc. outside the building and test them in front of customers.

At least that’s the theory. Helping out some friends I got to see firsthand the consequence of skipping Customer Discovery.

It’s A Marketing Problem
After I retired I would get calls from VC’s to help with “marketing problems” in their portfolio companies. The phone call would sound something like: “We have a company with great technology and a hot product but at the last board meeting we determined that they have a marketing problem. Can you take a look and tell us what you think?”

A week later I was in the conference room of the company having a meeting with the CEO.

We Have a Marketing Problem
“So VC x says you guys have a marketing problem. How can I help?” CEO – “Well, we’ve missed our sales numbers for the last six months.”  Me – “I’m confused. I thought you guys have a marketing problem.  What does this have to do with missing your sales plan? CEO – “Well our VP of Sales isn’t making the sales plan and he says it’s a marketing problem, and he’s a really senior guy.”

Now, I’m intrigued. The CEO asks the VP of Sales to join us in the conference room. (Note that most VP of Sales’ have world-class antenna for career danger. Being invited to chat with the CEO and an outside consultant that a board member brought in creates enough tension in a room to create static discharge.)

No One is Buying Our Product
“Tell me about the marketing problem.” VP of Sales – “Marketing’s positioning and strategy is all wrong.” Me – “How’s that?” VP of Sales – “No one is interested in buying our product.”

If you’ve been in marketing long enough you recognize the beginning of the sales versus marketing finger pointing.  (It usually ends up bad for all concerned.) Sales’ is on the hook for making the numbers and things aren’t looking good.

Six is a Proxy for Burn Rate
“How many salespeople do you have?” VP of Sales – “Six in the field, plus me.”  Later I realized six salespeople without revenue to match was a proxy for an out of control burn rate that now had the boards serious attention.

There’s Always One in Boston
“Is there a salesperson in Boston?” VP of Sales – “Sure.”  Me – “What sales presentation is he using? VP of Sales – “The corporate presentation. What else do you think he’d be using?”  Me – “Let’s get him on the phone and ask.”

Sure enough we’d get the sales person on the phone and find out that he stopped using the corporate presentation months ago. Why?  The standard corporate presentation wasn’t working, so the Boston sales rep made up his own. (I asked for the Boston sales rep because in the U.S. they’re furthest from the Silicon Valley corporate office and any oversight.)

We call the five other sales people and find that they are also “winging it.”

Early Orders Were a Detriment
I learned that the founders received their initial product orders from their friends in the industry and through board members personal connections. These “friends and family orders” made the first nine months of their revenue plan. With that initial sales “success” they began to hire and staff the sales department per the ”plan.”  That’s how they ended up with seven people in sales (plus three more in marketing.)

But now the bill had come due. It turned out that these “friends and family orders” meant the company really hadn’t understood how and why customers would buy their product. There was no deep corporate understanding about customers or their needs. The company had designed and built their product and assumed it was going to sell well based on their initial early orders. Marketing was writing presentations and data sheets without having a clue what real problems customers had.  And without that knowledge, sales essentially was selling blind.

Advice You Don’t Want to Hear
My report back to the VC?  Missing the sales numbers had nothing to do with marketing. The problem was much, much worse. The company had failed to do any Customer Discovery. Neither the CEO, VP of Sales or VP of Marketing had any idea what a repeatable sales model would look like before they scaled the sales force. Now they had a sales force in Brownian motion in the field, and a marketing department changing strategy and the corporate slide deck weekly. Cash was flowing out of the company and the VP of Sales was still hiring.

I suggested they cut the burn rate back by firing all the salespeople in the field, (keeping one in Silicon Valley,) and get rid of all of marketing. The CEO needed to get back to basics and personally get out of the building in front of customers to learn and discover what problems customers had and why the company’s product solved them.

The VC’s response?  “Nah, it can’t be that bad, it’s a marketing problem.”

I’ll leave it to you to guess what the VC’s did six months later.

Lessons Learned

  • Premature Scaling of sales and marketing is the leading cause of hemorrhaging cash in a startup.
  • Scale sales and marketing after the founders and a small team have found a repeatable sales model.
  • Early sales from board members or friends are great for morale and cash but may not be indicative of learning and discovering a business model.

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Filed under: Corporate/Gov't Innovation, Customer Development, Venture Capital | 44 Comments »

Emulating Empathy

Posted on February 8, 2010 by steve blank

One of the hardest problems for engineers in founding roles in a startup is interacting with customers up close and personal. Over the years I’ve found the best way to learn to do this is by emulating empathy.

The Problem
I was having dinner in Palo Alto with some of my Stanford engineering students and one of the subjects they were most interested in talking about was “how do you really get out of the building and talk to customers.”  Listening to them reminded me how terribly painful it had been for me.

Data Driven
I was always curious about technology and how things worked, but early in my career, this curiosity didn’t extend to people. I was more comfortable with data.

In my first company, ESL, I sat in secure locations and taught complex intelligence gathering systems to a classroom of maintenance and/or operations students. I was essentially responsible for imparting a fire hose of technical information efficiently. At my next company, Zilog, it was the same – I taught microprocessor system design to engineers. It was all about the efficient transfer of knowledge. High bandwidth, low noise.

But later at Zilog I moved into marketing. While I learned how to write data sheets, product marketing at Zilog was very little “listen to customers” and much more “talk at customers.”  It wasn’t until my next company, Convergent Technologies, that I began to understand the value of customer interaction.  As a product marketing manager, I traveled to customers at the behest of our sales people to impart the latest technical wisdom from the factory. Traveling with these salesmen was eye opening – they were comfortable having conversations with strangers and knew how to build rapport, relationships and trust. These guys explained to me that most people were happy to talk about themselves. My job was just to get the conversation started. Our products improved as our salesmen made customers comfortable enough to share their needs and issues. (As I would find out, every one of these salesmen had been design engineers in their past.  Yet most of the time, they artfully hid how much they knew.)

Emulation
I began to understand that while my brain was wired to dive into technical minutia and exchange product information at high speed, this wasn’t what most potential customers (and most people who had a modicum of social skills) wanted to do. In fact, unbelievably (to me) most people would trade valuable time in a meeting for social niceties.

Although these social cues were something that still didn’t come naturally to me, I concluded that to get much further in my career, I was going to have to have to learn. Over time, I watched how the best sales people did it and emulated their behavior. I learned how to smile, shake hands, make eye contact rather than stare at my shoes, talk about sports, ask customers about their jobs, their families, etc. and evidence apparent interest in people I didn’t know way before we got to chat about products. I’d even go out to lunch or dinner and manage to hold a conversation. The two hardest things to learn were: how to speak in front of a group and to make “cold calls” by myself. (Every once in awhile I’d run into a customer wired like me who’d say, “Can we cut the chatter and get down to business?” I’d laugh, and we’d do a high-speed data transfer.)

Surprisingly, I learned that listening to customers and others made me more creative. My best ideas started coming from brainstorming with others, something just not possible when communication was a one-way street.

Fast forward a few companies – MIPS and Ardent – I was still learning (at times painfully) to appreciate that facts were outside the building and not between my ears. After a decade in Silicon Valley, I had finally learned to emulate empathy.

Emulating Empathy
By the time I got to SuperMac, the transformation had taken hold. It was here that I began to teach others what I had learned.

I had inherited a manager of technical marketing, much smarter than me but with zero instinct or feel for customers. He was completely data driven, and our sales department wanted him nowhere near customers. I felt like I had just met my doppelganger from ten years ago. We established that his world view was not shared by most customers. And he understood that if he wanted a bigger role in marketing, he was going to have to change. So I ran the first of what would be many “how to emulate empathy” classes.

I described how getting closer to customers was at first going to be a cerebral rather than gut activity. With no instinct to guide him, he would have to consciously precompute what kind of response each situation called for and play them back when appropriate. He was going to have to sign up for public speaking classes. He was going to go on the road with our sales people, but this time he was going to have to watch what they do and start to copy them. I found him a mentor in a salesman who appreciated his technical skill and was willing to let him tag along.

As expected, the first couple of months was tough – on him, sales and customers. We’d debrief after many of his road trips and calls and course correct as necessary.  (At times I’d feel like I was talking to some earlier version of myself.) But by the end of the year, he had learned enough that the VP of Sales asked whether he could move permanently into a presales support role.

Repeatability
Over the next ten years in startups, I repeated this process with others. Today I remind my engineering students that empathy, while seemingly a foreign language, is possible to learn.

As for me, what I had emulated became second nature. Most of the time I can’t tell which mode is running.

Lessons Learned

  • Customer metrics are not the same as customer interaction.
  • Customer interaction is necessary for startup founders.
  • For some it is extremely difficult.
  • If it’s not instinctual customer empathy is a skill that can be taught and learned.

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Memo From the Monastery

Posted on February 4, 2010 by steve blank

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Incentives and Legends

Posted on February 1, 2010 by steve blank

Entrepreneurs and the early startup team all need to be motivated by a shared vision, passion and desire to build a large company.  Yet it’s the company legends that live on.

Fund Raising
Rocket Science, our little startup was less than a year-old.  We had been busy assembling our team and had just hired the last member of our exec staff.  We had also just closed our Series B financing with a major overseas partner.  The financing felt like a real validation of our strategy. In truth, it was only proof that our reality distortion field worked in Asia as well.

My Wife Thinks I Deserve a Bonus
One of the new hires was Jim Wickett, my VP of Business Development.  He knew so little about technology that I used to say he needed a manual to operate a light switch, but I hired him because a small voice said, “He’ll do extraordinary things.”

He did.  And still does.

Jim, among other things ran the fundraising for us in Asia and worked with an outside firm that had great connections in Japan to drag us around Tokyo and get the deal closed.  As in raising $10Million dollars kind of closed.

Everyone at our startup was working on startup starvation salaries, and Jim had taken a large pay cut to join us. When the Japanese partner deal was done, Jim said,  “Steve, I deserve at least a $10,000 bonus.  I haven’t been home in weeks, and I pulled off a financing even you admit was unbelievable.”

I patiently explained that this type of miraculous event was the norm for startups. The engineers were pulling off miracles on a daily basis, we were all taking fumes for salaries, but our payoff will be when our stock is worth something.  Until then, tell your wife you’ll get $10,000 when hell freezes over. No bonuses in a startup. To his credit Jim said while he understood, he was going to hear about it at home for not being appreciated.

Dinner
Since our management team hadn’t met each others’ spouses, I thought the financing would be a great reason to get everyone together for a low key celebratory dinner.  We picked a restaurant in Palo Alto down the street from the company and got a private room.

We drank lots of wine, had a nice dinner and after the dinner plates had been cleared I made a speech about teamwork, startup, passion, commitment, blah, blah.

I then congratulated the outside firm that Jim had used in Japan. I had invited their CEO and his wife and handed him a check for their retainer bonus for their help in the deal. Jim kept glancing at his wife who was giving him frosty looks and was very clearly not happy.

The New Briefcase
I then announced that it was unfair that Jim shouldn’t go unrecognized for his hard work so I had an award for him as well. The atmosphere around Jim’s wife began to thaw.  I said, “Jim had carried the same old beat up leather briefcase he had since law school and I knew he wouldn’t trade it for anything but I think its time he had something more professional looking.  So Jim, on behalf of the company, we bought you a new briefcase.”

The look on both Jim’s face and his wife’s went from happy to disbelief, to “I can’t believe you’re working for this idiot” on his wife’s face to “I can’t believe I work for this idiot” on Jim’s face.

I said, “Your new briefcase is under the table by your feet.  Why don’t you just put it on the table.”  Jim rooted around a bit and found the briefcase and put it on the table. It was the ugliest and cheapest briefcase you will ever see.

Everyone was now looking slightly embarrassed, all thinking that perhaps they had the most obtuse CEO in Silicon Valley. I thought Jim’s wife was going to throw a steak knife across the table.  I made another speech about how great Jim was and then sat down and said, “Lets get the waiter for coffee and desert.”

The ugly briefcase with its implicit statement sat on the table virtually steaming.

Legend
“Oh, one more thing,” I said.  “Jim, can you open up the briefcase and dump the papers on the table. We should clear out the stuffing so you can put your papers from your old briefcase in it.”

With almost an audible sigh, Jim unlatched the briefcase, held it upside down over the table and dumped out the contents.

In slow motion, dollar bills began to tumble out of the new briefcase.  And they kept coming out.  And they started making a pile of bills in front of Jim and his wife and the rest of the executive staff.

15,000 dollars in dollar bills.

Jim’s wife started crying.

I said, “Extraordinary work in a startup is the norm, but you performed even beyond my expectations. In my startups that’s worth recognizing.”

Rewards for extraordinary effort became part of the company’s legend.

Epilogue
Lest you think only salespeople are motivated by cash in a startup, over the life of the company we sprung the same surprise on engineers who did deliver the impossible. And at Christmas we gave out hundred dollar bills to each employee. While this small token of appreciation would have been dismissed if it had been a check, it had our engineers showing these bills to their friends in other companies.

In three or so years these cash incentives added up to no more than $50K. While everyone understood the theory that we were working to make the stock valuable, the cash reminded them that we cared and noticed.

Lessons Learned

  • Cash has a much greater affect than a check.
  • Awards for critical contributions can make a lasting impact.
  • Small amounts spread through the company can be a great motivator.
  • Done correctly it turns incentives into legends.

Filed under: Family/Career/Culture, Rocket Science Games | 16 Comments »

Balloon Wars: Part 16 of the Secret History of Silicon Valley

Posted on January 28, 2010 by steve blank

In 2023 China flying a “spy balloon” over the U.S. created an international incident.

It turns out the U.S. did the same to the Soviet Union in the 1950’s.

In the 1950’s the U.S. Military and the CIA enlisted balloons (some as tall as a 40-story building) as weapons systems targeting the Soviet Union. Throughout the decade they launched a series of Top Secret/codeword balloon projects and thousands of balloons, to gather intelligence about the Soviet Union. The individual stories of these programs are interesting but an unexpected consequence of their secrecy was that they created a mythology that outlasted the missions.

Why Balloons?
In the 1950’s balloons had attributes that airplanes couldn’t match. In the days before satellites they could stay aloft for a long time (days or even weeks,) they could reach altitudes where airplanes couldn’t fly (100,000 feet,) and they could go places that were too dangerous for manned aircraft (flying over the Soviet Union.)

The Search for Soviet Nuclear Weapons
Project MOGUL was an Air Force balloon program to detect Soviet nuclear tests by listening to sound waves traveling through the upper atmosphere. During World War II, scientists had discovered the existence of an ocean layer that conducted underwater sound for thousands of miles. They thought that a similar sound channel might exist in the upper atmosphere. If they could put microphones in the upper atmosphere, the U.S. thought they might be able to hear Soviet nuclear tests and even detect ballistic missiles launches heading toward their targets. Designed to test this theory, Project Mogul balloons carried microphones up to the sound channel to “listen” and radio transmitters to send the sound to the ground. At first, project MOGUL flights involved trains of small weather balloons up to 600 feet in length. Later MOGUL flights used the large polyethylene balloons developed for the Navy’s SKYHOOK.

Flying Sandwich Bags – SKYHOOK
SKYHOOK balloons, funded by the Office of Naval Research, were designed to stay at a fixed altitude (~100,000 feet) and carry a payload of thousands of pounds. They were huge, 400 feet high, made possible because the then new material called polyethylene. These “flying sandwich bags” were built by a company that had experience using this material in packaging – General Mills the same company that makes Cheerios. (Like many American companies in the Cold War they worked on other defense problems.)

Sniffing for a Reactor – Nuclear Air Sampling – ASHCAN
In 1957 the Air Force started Project ASHCAN (using SKYHOOK class balloons at 100,0000 feet) to take high altitude air samples and search for nuclear particles and trace gases in fallout from tests in the Soviet Union. For the first time, U.S. intelligence could estimate the amount of plutonium being produced by Soviet weapons production reactors. These balloons were secretly launched from Brazil and the Panama Canal Zone, and from air force bases in the U.S.  Over time, U.S. intelligence also used reconnaissance planes like the U-2, RB-57’s, and C-130 aircraft to collect air samples.

Genetrix Launched from the U.S.S. Valley Forge

Ballooning Over the Soviet Union – GENETRIX
While the nuclear detection balloons did their spying while flying above the U.S. or allied countries, the next series of balloons flew over the Soviet Union.

In the 1950’s, while U.S. reconnaissance aircraft flew around the periphery of the Soviet Union, U.S. military planners still had virtually no information about what was going on in vast areas of the Soviet territory. While there were a few overflights of the Soviet interior in the early 1950’s these missions were extremely risky and couldn’t provide enough information to assess Soviet military strength. Spy satellites and the U-2 spy planes were still far in the future so the U.S. military became big fans of reconnaissance balloons as a solution to this problem.

In 1950 the Air Force thought that high-altitude balloons might be used to perform photo and ELINT spyflights over the Soviet Union.  They placed aerial reconnaissance cameras on the balloons and ran a series of test programs (code names of GOPHER, MOBY DICK, GRANDSON and GRAYBACK) launching 640 balloons from New Mexico, Montana, the West Coast, Missouri and Georgia. With the tests completed, the program name changed to GENETRIX and was given the designation of Weapons System 119L.

In late 1955 President Eisenhower gave the ok to launch the GENETRIX balloons over the Soviet Union. Hundreds of these balloons took off from secret sites in Norway, Scotland, West Germany, and Turkey carrying a gondola with two reconnaissance cameras.

The United States launched 516 of the GENETRIX balloons but only 44 or so made it out of the Soviet Union.  The rest landed on Soviet farms dumping 600-pound cameras in hayfields. We did get coverage of about 8 percent of the Soviet Union, but politically it created a lot of tension as cameras were popping up on Khrushchev’s desk. “Oh, another balloon Mr. Premier.”  The Soviets put on a public exhibition of the equipment.

Bigger and Better- MELTING POT
Never one to give up, the military suggested a bigger and better balloon program. Since the GENETRIX balloons flying at 55,000 feet were relatively easy for Soviet fighters to intercept, the new balloons would be built around the Navy SKYHOOK design and fly at 100,000 feet for up to a month. These balloons would carry a new reconnaissance camera, built by the Boston University Physical Research Lab. Three of these balloons were launched in July 1958 from an aircraft carrier off the east coast of Japan (in those months the jet stream at the altitude went west to east.) All three accidentally dropped their gondolas over Communist territory. President Eisenhower cancelled all the balloon overflights.

Unexpected Consequences – UFO’s in the 1950’s
All these balloon flights had an unexpected consequence on a jittery and paranoid nation in the Cold War. Before sunrise and after sunset, while the Earth below was dark, high altitude balloons were still lit by sunlight, and their plastic skin glowed and appeared to change color with the change in sun angle. Some of the Project Mogul balloon flights were launched from Alamogordo Air Base in New Mexico in 1947, and a few crashed nearby – one near a town called Roswell. The military cover-up of the secret purpose of the balloon led to conspiracy theories about aliens and UFOs. The start of the Mogul balloon flights coincided with the first reports of UFO’s. To someone on the ground, these balloons may have looked like UFOs.

Because each of these separate balloon programs were highly compartmentalized programs it’s doubtful that there was any one individual who realized that the sum of the programs were putting thousands of high altitude balloons in the air in the 1950’s. The MOGUL, MOBY DICK, ASHCAN and GENETRIX programs were the CIA/military’s most closely guarded secret projects. Balloon sightings were dismissed with cover story: they were just weather balloons. Even as one part of the military tried to investigate these sightings, the other kept them away from the true purpose of the balloon missions.The reason for the denials – 1) the Soviets could have masked their nuclear tests and filtered their reactor emissions if they knew what we were sampling and 2) GENETRIX balloon flights over the Soviet Union were a violation of international law.

The thousands of classified and compartmentalized balloon flights (along with the first flight of the high altitude CIA U-2 reconnaissance plane in 1955) are a possible explanation of of UFO sightings in the 1950’s and the claim of military cover-ups.

Read part 17 of the Secret History Series here.

Filed under: Secret History of Silicon Valley | 10 Comments »

What’s A Startup? First Principles.

Posted on January 25, 2010 by steve blank

Success consists of going from failure to failure without loss of enthusiasm.
Winston Churchill

Everyone knows what a startup is for – don’t they?

In this post we’re going to offer a new definition of why startups exist: a startup is an organization formed to search for a repeatable and scalable business model.

A Business Model
Ok, but what is a business model?

A business model describes how your company creates, delivers and captures value.

Or in English: A business model describes how your company makes money.
(Or depending on your metrics for success, get users, grow traffic, etc.)

Think of a business model as a drawing that shows all the flows between the different parts of your company.  A business model diagram also shows how the product gets distributed to your customers and how money flows back into your company.  And it shows your company’s cost structures, how each department interacts with the others and where your company fits with other companies or partners to implement your business.

While this is a mouthful, it’s a lot easier to draw.

Drawing A Business Model
Lots of people have been working on how to diagram and draw a business. I had my students drawing theirs for years, but Alexander Osterwalder’s work on business models is the clearest description I’ve read in the last decade. The diagram below is his Business Model template. In your startup’s business model, the boxes will have specific details of your company’s strategy.

Alexander Osterwalder's Business Model Template

(At Stanford, Ann Miura-Ko and I have been working on a simplified Silicon Valley version of this model. Ann will be guest posting more on business models soon.)

But What Does a Business Model Have to Do With My Startup?
Your startup is essentially an organization built to search for a repeatable and scalable business model.  As a founder you start out with:

1) a vision of a product with a set of features,

2) a series of hypotheses about all the pieces of the business model: Who are the customers/users? What’s the distribution channel. How do we price and position the product? How do we create end user demand? Who are our partners? Where/how do we build the product? How do we finance the company, etc.

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

How Does Customer Development, Agile Development and Lean Startups Fit?
The Customer Development process is the way startups quickly iterate and test each element of their business model. Agile Development is the way startups quickly iterate their product as they learn. A Lean Startup is Eric Ries’s description of the intersection of Customer Development, Agile Development and if available, open platforms and open source. (This methodology does for startups what the Toyota Lean Production System did for cars.)

Business Plan Versus Business Model
Wait a minute, isn’t the Business Model the same thing as my Business Plan?  Sort of…but better.  A business plan is useful place for you to collect your hypotheses about your business, sales, marketing, customers, market size, etc. (Your investors make you write one, but they never read it.)  A Business Model is how all the pieces in your business plan interconnect.

The Pivot
How do you know your business model is the right one? When revenue, users, traffic, etc., start increasing in a repeatable way you predicted and make your investors happy. The irony is the first time this happens, you may not have found your company’s optimal model.  Most startups change their business model at least once if not several times.  How do you know when reached the one to scale?

Stay tuned. More in future posts.

Lessons Learned

  • A startup is an organization formed to search for a repeatable and scalable business model.
  • The goal of your early business model can be revenue, or profits, or users, or click-throughs – whatever you and your investors have agreed upon.
  • Customer and Agile Development is the way for startups to quickly iterate and test their hypotheses about their business model
  • Most startups change their business model multiple times.

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I’ve seen the Promised Land. And I might not get there with you.

Posted on January 21, 2010 by steve blank

…I’ve been to the mountaintop and I’ve seen the Promised Land. And I might not get there with you… Martin Luther King

The startup founder who gets fired just as his/her company is growing into large company could be a cliché – if it wasn’t so true – and painful.

Let’s take a look at why.

Full disclosure: I’ve worn all the hats in this post. I’ve been the founder who got fired, I’ve been on the board as my friends got fired and I’ve been the board member who fired the founders.

Scalable Startups at Adolescence
In our previous post we posited that Scalable Startups are designed to become large companies.  Yet at their early stages, they are not small versions of larger established companies. They are different in every possible way – people, culture, goals, etc.  Scalable startups go through an transitional form, as unique as a startup or large company, before they can grow into a large company

Management in the Transition
When Startups reach the Transition stage, it’s time to look inward and decide whether the current CEO and executive staff are capable of scaling to a large company.

To get to this Transition stage, the company needed passionate visionaries who can articulate a compelling vision, agile enough to learn and discover in real time, resilient enough to deal with countless failures, and responsive enough to capitalize on what they learned in order to secure early customers. The good news is this team found a business model, product/market fit and a repeatable sales model.

What lies ahead, however, is a different set of challenges: finding the new set of mainstream customers on the other side of the chasm and managing the sales growth curve. These new challenges require a different set of management and leadership skills. Critical for this transition are a CEO and executive staff who are clear-eyed pragmatists, capable of crafting and articulating a coherent mission for the company and distributing authority down to departments that are all driving toward the same goal.

What’s Next
By now, the board has a good sense of the skill set of the CEO and executive team as entrepreneurs. What makes the current evaluation hard is that is based not on an assessment of what they have done, but on a forecast of what they are capable of becoming. This is the irony of successful entrepreneurial executives: their very success may predicate their own demise.

The table below helps elucidate some of the characteristics of entrepreneurial executives by stage of the company. One of the most striking attributes of founders is their individual contribution to the company, be it in sales or product development. As technical or business visionaries, they are leaders by the dint of their personal achievements. As the company grows, however, it needs less of an iconoclastic superstar and more of a leader who is mission- and goal-driven.

Management Skills Needed as a Startup Grows into Large CompanyLeaders at this Transition stage must be comfortable driving the company goals down the organization and building and encouraging mission-oriented leadership on the departmental level. This Transition stage also needs less of a 24/7 commitment from its CEO and more of an as-needed time commitment to prevent burnout.

Planning is another key distinction. The Scalable Startup stage called for opportunistic and agile leadership. As the company gets bigger, it needs leaders who can keep a larger team focused on a single-minded mission. In this mission-centric Transition stage, hierarchy is added, but responsibility and decision making become more widely distributed as the span of control gets broader than one individual can manage. Keeping this larger organization agile and responsive is a hallmark of mission-oriented management.

I Don’t Get It – I Built This Company – I Deserve to Run It
This shift from Customer and Agile Development teams to mission-centric organization may be beyond the scope and/or understanding of a first-time CEO and team. Some never make the transition from visionary autocrats to leaders. Others understand the need for a transition and adapt accordingly. It’s up to the board to decide which group the current executive team falls into.

This assessment involves a careful consideration of the risks and rewards of abandoning the founders. Looking at the abrupt change in skills needed in the transition from Customer Development to a mission-centric organization to process-driven growth and execution, it’s tempting for a board to say: Maybe it’s time to get more experienced executives. If the founders and early executives leave, that’s OK; we don’t need them anymore. The learning and discovery phase is over. Founders are too individualistic and cantankerous, and the company would be much easier to run and calmer without them. All of this is often true. It’s particularly true in a company in an existing market, where the gap between early customers and the mainstream market is nonexistent, and execution and process are paramount. A founding CEO who wants to chase new markets rather than reap the rewards of the existing one is the bane of investors, and an unwitting candidate for unemployment.

Don’t Fire the Founders
Nevertheless, the jury is still out on whether more startups fail in the long run from getting the founders completely out of the company or from keeping founders in place too long. In some startups (technology startups especially), product life cycles are painfully short. Regardless of whether a company is in a new market, an existing market, or a resegmented market, the one certainty is that within three years the company will be faced with a competitive challenge. The challenge may come from small competitors grown bigger, from large companies that now find the market big enough to enter, or from an underlying shift in core technology. Facing these new competitive threats requires all the resourceful, creative, and entrepreneurial skills the company needed as a startup.

Time after time, startups that have grown into adolescence stumble and succumb to voracious competitors large and small because they have lost the corporate DNA for innovation and learning and discovery. The reason? The new management team brought in to build the company into a profitable business could not see the value of founders who kept talking about the next new thing and could not adapt to a process-driven organization. So they tossed them out and paid the price later.

Take the Money and Let Someone Else Sort it Out
In an overheated economic climate, where investors could get their investments liquid early via a public offering, merger or acquisition, none of this was their concern. Investors could take a short-term view of the company and reap their profit by selling their stake in the company long before the next crisis of innovation occurred. However, in an economy where startups need to build for lasting value, boards and investors may want to consider the consequences of losing the founder instead of finding a productive home to hibernate the creative talent for the competitive storm that is bound to come.

Instead of viewing the management choices in a startup as binary—entrepreneur-driven on Monday, dressed up in suits and processes on Tuesday—the Transition stage and mission-oriented leadership offers a middle path that can extend the life of the initial management team, focus the company on its immediate objectives, and build sufficient momentum to cross the chasm.  We’ll cover the details in a future post.

Lessons Learned

  • Founder/Investor struggles about leadership are not about past successes – they’re about who’s best to lead future growth
  • Founder success in the Startup stage is not a predictor for success in the next stages
  • Few founders make great large company execs
  • The exceptions, Gates, Jobs, Ellison, etc. are founders who grew into large company executives while retaining founder instincts

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The Secret History of Silicon Valley Part 14: Weapons System 117L and Corona

Posted on January 18, 2010 by steve blank

This post is the latest in the “Secret History Series.”  They’ll make much more sense if you read some of the earlier ones for context. See the Secret History video and slides as well as the bibliography for sources and supplemental reading.

————

The Soviet Union’s detonation of an atomic weapon in 1949 and the start of the Korean War in 1950 fed cold war paranoia in the military and political leadership of the United States. The U.S. intelligence community was determined to find out what was going on inside the Soviet Union. But Soviet secrecy had the country locked down tightly. Desperate for intelligence, the CIA would fly the Lockheed built U-2 spy plane into and over the Soviet Union on 24 missions from 1956-1960 taking photos of its military installations.

But even as the U-2 was beginning its overflights, the U.S. military had concluded that the future of intelligence over the Soviet Union would no longer be with airplanes, but would rely instead on spy satellites orbiting hundreds of miles above in space.

One company in what is today Silicon Valley would build most of them.

Weapons System 117L
In 1956 Lockheed Missiles had just won the contract to build the Polaris Submarine Launched Ballistic Missile (SLBM) for the U.S. Navy in Sunnyvale California, and down in Los Angeles, the U.S. Air Force was on a “crash program” to build land-based Intercontinental Ballistic Missiles (ICBM’s) – the Atlas, Titan and Minuteman.

In 1954, three years before the U.S. or the Soviet Union ever orbited a single satellite, the Air Force asked the RAND corporation to study what satellites could do for the military. Their answer: satellites would enable us to peer over the closed border and inside the Soviet Union. In 1956, the Air Force organization building our ICBMs was assigned to build a family of satellites to spy on the Soviet Union from space. These satellites would be configured to carry out different reconnaissance missions, including photo reconnaissance, infrared missile warning, and Electronic Intelligence.

This military spy satellite program was called Weapons System 117L.

Spies in Sunnyvale
In 1956 the Air Force gave Lockheed Missiles Division in Sunnyvale the contract to build Weapons System 117L.

Over the next two years Weapons System 117L evolved into a large ambitious program with multiple satellites:

  • The Satellite and Missile Observation System (SAMOS) would take low resolution pictures of the Soviet Union from space and transmit the photos electronically to earth.
  • Another SAMOS version (called Ferrets) would collect electronic intelligence on Soviet radars and transmit the location and radar details electronically to earth.
  • The Missile Detection Alarm System (MIDAS) would provide early warning of the launch of Soviet missiles heading to the U.S. by looking for the hot exhaust (the infrared plume) of rocket engines and transmit the location of the launch electronically to earth.

Crisis
In 1957, a year after Lockheed got the contract to start building WS-117L, the Soviet Union tested an ICBM – one that could carry a nuclear warhead to the United States. They quickly followed with the launch of Sputnik, the first earth-orbiting satellite.

These two events jolted the U.S. intelligence agencies into crisis mode. The Soviet Union claimed they could turn out ICBMs like sausages, and the CIA desperately needed to know how many missiles the Soviets really had and where they were.

Not Good Enough
The photo reconnaissance satellite designed for Weapons System-117 would have let the U.S. military see objects larger than 100-feet from space.  This 100-foot resolution was sufficient for its original mission – to assess how effective the first wave of nuclear attacks on the Soviet Union had been. This “post-strike bomb damage assessment” would allow targets that had been missed by the nuclear armed SAC bombers to be retargeted for follow-on attacks. Because of the immediacy of the information, it required real-time electronic read-out of film developed on orbit.

The problem was that while 100-foot resolution was good enough to locate craters left in cities from space, it wasn’t sufficient for the new mission; to locate the new Soviet ICBM silos and bombers. In addition, the electronic read-out of film developed on orbit was nowhere near ready; it was too complex for its time and technology.

The CIA and Corona
The CIA convinced the Secretary of Defense that the best bet was to build a separate photo reconnaissance satellite carrying a camera that took pictures from space as it passed over the Soviet Union. Film from the camera would be de-orbited in a capsule that could survive the heat of re-entry from space. A parachute would slow the descent of the capsule, which would be snatched in mid-air over the Pacific Ocean by a recovery plane hooking its parachute.  The idea was that this film-based spy satellite would be a short-term project until the Lockheed electronic readout version was in better shape.

This Project was code-named Corona.

The Flamingo Motel
In March 1958 a few unassuming guests checked into the Flamingo Motel in San Mateo, California, near the San Francisco airport. The CIA, and their primary contractors Lockheed, Kodak, Fairchild and GE, met to hash out their roles and the schedule. The CIA was the customer. Lockheed would integrate and assemble the satellites, Itek (which replaced Fairchild) would provide the camera, Kodak the film, and GE would provide the recovery system that would bring the exposed film through the fiery re-entry back to earth.

After the meeting, the Lockheed manager for Corona rented his own hotel room in Rickey’s Hyatt House in Palo Alto to start to plan the program. He needed to find a factory, separate from the already secret Polaris factory in Sunnyvale. He found an unused facility at the Hiller Helicopter factory on Willow Road in East Palo Alto which became the Lockheed “Advanced Projects” facility.

Deception
To hide the fact that we were launching high-resolution photo reconnaissance satellites over the Soviet Union, the CIA had the Air Force publically cancelled the SAMOS photo reconnaissance portion of WS-117L. The program then was resurrected as a “deep black” “compartmentalized” CIA program. When the Corona satellites were launched the CIA used a “cover” story. They called the Corona satellites the  “Discoverer” program and claimed it was an experimental program to develop and test satellite subsystems and explore environmental conditions in space. The film recovery capsule was described as a “biomedical capsule” for the recovery of biological specimens sent into space as an early test of how humans would react to manned spaceflight.

East Palo Alto – Lockheed’s Satellite Factory
The Corona project was run like a startup – a small team, minimum bureaucracy, focussed on a goal and tightly integrated with customer needs. Starting in February 1959, only 12 months after the program began the Air Force launched the first  Corona reconnaissance satellite from the military’s secret spaceport on the California coast at Vandenberg Air Force Base. But the first 13 missions were failures. Yet the program was deemed so important to national security the CIA and the Air Force persevered. And when the first images were received they transformed technical intelligence forever. At first, objects as small as 20-35 feet could be seen from space, with later versions improving to be able to see 6 foot objects, over millions of miles of a formally closed country.

Corona Image of Stepnogorsk Bioweapons Facility

Over the life of the program there were 145 Corona launches – 120 were complete or partial successes. During that same decade the Corona program evolved into six different satellite models (the KH-1 thru KH-6) with three different intelligence objectives.

Lockheed turned the Hiller Helicopter plant in East Palo Alto into the control facility for all spy satellites and the Corona spy satellite assembly line – building about one a month and delivering ~145 Corona satellites over the life of the program.

Stanford, Jasons, WS-117L and Corona
In addition to Lockheed, Stanford University also had a hand in Corona. Sidney Drell, then a professor in the Stanford Physics department, was one of the dozen of young scientists who were founding members of the Jason Group (scientists working on national security problems.) His first project was understanding whether a Soviet nuclear burst in space could blind the infrared sensors on the Midas portion of WS-117L.  This research got him invited to be part of the President’s Scientific Advisory Council (PSAC). But it was when the CIA asked him to solve some technical problems with the film on the Corona spacecraft that his career became intertwined with photo reconnaissance. His studies convinced the CIA that photo interpreters needed an order of magnitude improvement in resolution, and Corona had been pushed to its limits. In the late 1960’s Drell, as a member of the Land Panel convinced the CIA that the next generation of photo reconnaissance satellites should transmit their images back to earth in real-time, and use CCD’s rather than film.

For his work, Drell, still at Stanford, was recognized as one of the ten founders of National Reconnaissance by the NRO.

Corona Firsts
While Corona had a number of technological breakthroughs, including the first photoreconnaissance satellite, the first recovery of an object from space, etc. it was Corona imagery in 1961 that told the intelligence community and the new Kennedy administration that the “missile gap” (the supposed Soviet lead in ICBMs) was illusory. By fall of 1961 Soviet Union had a total of six deployed ICBMs – we had ten times as many. In truth, it was the U.S. that had the lead in missiles.

Corona was just the beginning. Overhead reconnaissance would become an integral part of the U.S. intelligence community. Hidden in plain sight, Lockheed and the U.S. intelligence community were just getting started in Silicon Valley.

Next – Agena, Midas, Ferrets and the NRO in Part XV of the Secret History of Silicon Valley.

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A Startup is Not a Smaller Version of a Large Company

Posted on January 14, 2010 by steve blank

A journey of a thousand miles begins with a single step.      Lao-tzu

If you read the academic literature or business press, you might believe that large companies and their business models are brought by the stork.

This series of posts are going to offer a new three-stage model of how startups grow into large companies. And I’ll end with some thoughts about a new approach to entrepreneurial education using this model.

Children, Adolescents and Adults
In the Middle Ages children were considered to be smaller versions of adults. We now know that the human life cycle is more complex; children aren’t just small adults, and adolescents are not simply large children. Instead each is a unique stage of development with distinctive behavior, modes of thinking, physiology and more.

The same is true for startups and companies.

In the past, most business literature has treated the life cycle of corporation as if the practices that make sense for a large corporation were equally appropriate for a startup. They only differed by timing or scale.

I argue that as a scalable startup grows from a garage into a Google, it progresses through three distinct stages – each presenting a unique set of challenges and decisions – and each requiring vastly different resources, skills and strategy.

Let’s take a closer look at the first two of these stages.

Stage 1: The Scalable Startup
A scalable startup is designed by intent from day one to become a large company. The founders believe they have a big idea – one that can grow to $100 million or more in annual revenue—by either disrupting  an existing market and taking customers from existing companies or creating a new market. Scalable startups aim to provide an obscene return to their founders and investors using all available outside resources.

Entrepreneurs who have run a startup know that startups are not small versions of big companies. Rather they are different in every possible way – from goals, to measurements, from employees to culture. Very few skills, process, people or strategies that work in a startup are successful in a large established company and vice versa because a startup is a different organizational entity than a large established company.

Therefore, it follows that:

a)  Startups need different management principles, people and strategies than large established companies

b)  Any advice that’s targeted to large established companies is irrelevant, distracting and potentially damaging in growing and managing a startup

Getting From Here to There
 If you would ask a startup CEO to create a diagram showing how their startup will become a large company, you’d probably get a simple line extending from “here’s where we are” to “here’s where we’re going.”

All the activities of a scalable startup such as Customer Development, Agile Development, Pivots, search for a repeatability, scale, business model, team building etc. would be inside the box to the left. In this simplistic model, on the day a startup achieves product/market fit, they would stop doing all the startup activities and magically become a “large company” – somehow acquiring a completely new set of skills, executing a known business model, generating profits and achieving liquidity for its founders and investors.

Since we know the world doesn’t work like this, the question is, “what is the process that transforms a a startup into a large company?”

Stage 2: Metamorphosis – the Transition
Any entrepreneur who has been successful (lucky) enough to grow their startup into a large company knows that this process is not a simple linear transition – it’s a metamorphosis. Startups traverse a clearly defined and chaotic stage before they become a large enterprise.

And once again, very few skills, processes, people or strategies that work in a scalable startup or in a large established company are successful in this transitional stage.

The transitional period between a startup and a company is a different organizational entity than either a startup or a large enterprise. While it is no longer an early stage scalable startup, it is not yet a large company.

This is the “they fired the founders and took away the free sodas” stage.

Summary
The new taxonomy for understanding how startups differ and grow into large company’s looks like this:

Each stage is an entirely different business entity with different management needs and requirements. In the next few posts I will explore how they differ in:

  • Management
  • Culture
  • Sales
  • Marketing
  • Strategy

Then I’ll propose why this three step model calls for a new approach to entrepreneurial education—Durant School of Entrepreneurship™.

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Victory From Adversity

Posted on January 11, 2010 by steve blank

Sometimes what sounds like bad news when talking to customers might be your finest hour.

Hypothesis Testing
As we started E.piphany, we got out of the building to test our hypotheses by talking to potential customers in and around Silicon Valley. On one of our most memorable visits, we met with Joe DiNucci, the VP of Marketing at Silicon Graphics who was generous enough to brainstorm the types of problems corporate marketers had. At the time Silicon Graphics – with 2+ billion dollars in sales of 3d workstations – was one of the hottest hardware companies in Silicon Valley.

The conversation seemed to click as he checked off every one of the issues we thought might define our product:  no closed-loop between expensive marketing activities and results, lack of department and corporate wide visibility to real-time sales and marketing data, browser versus client-server application, etc. We came up with a rough estimate of how much Silicon Graphics could save if they had a way to solve these problems, and together did a back of the napkin ROI (Return on Investment) analysis. Next we started enumerating what form a solution might take and what kind of features a product should have. Amazingly we came up with a feature list that was pretty close to the one we were building.  I was feeling like a genius so I went to the next step and I asked Joe: “It sounds like Silicon Graphics might be interested in working with us to be an early customer?”

My Bubble Burst
The answer was not what I expected.  “No not at all.”  Say, what?  Why?  “We also decided that this was an important problem to solve, and since we couldn’t find any vendor selling it, my director of marketing wrote the software to do it. We’ve built and deployed the product throughout Silicon Graphics. It’s called Mine Your Own Business.”

Talk about feeling your bubble deflate fast. I went from feeling the high of believing that I might have an early customer in an innovative company to the low in realizing that they’d never buy anything from us. And worse, what we had envisioned as a product so unique that no one had thought of it, someone had already built. We wouldn’t be the first. We were doomed.

I left Silicon Graphics feelings discouraged. But on the drive back to E.piphany a few things hit me.

  • A credible customer told me that we had hit on a high-value problem
  • They couldn’t find commercial software to solve this problem.
  • It was an important enough problem that they invested effort to write their own software.
  • It had been deployed inside their company and there were real world users
  • I could now point potential investors and visionary customers to the widespread use of the product inside SGI as a proxy for our product

The more I thought about it, the better I felt. This was a validation of our ideas not a negation.

Take No Prisoners
The next day I called the VP of Marketing back and asked him if I could get a demo of their software. Soon I was in the office of John McCaskey, the director of Silicon Graphics Science Industry Marketing who wrote Mine Your Own Business. As he went through the demo, I realized I was looking at working code for a big part of what we had spec’d as our first release.

I told John he ought to join our startup. “How many of you are there?” he asked. “Three, I said. “Including me. Four if we count you.” John rolled his eyes and tried to change the subject. I said, “We’re three now, but if we do this right we could be selling $100 million dollars a year of your software. Wouldn’t you rather be doing that than working at a big company?” That got his attention. “Well who’s funding you?” My turn to pause, “Well no one yet, but every VC thinks it’s a great idea.”

Watching someone rolling their eyes twice is not a good sign you’re going to close the deal, so I grabbed the phone and called Bill Davidow, a legendary VC whose office I had just left. “Bill, do me a favor,” I asked, “Can you tell this guy how big the enterprise software market can get?”  I don’t know who was more surprised, Bill Davidow in getting a call from me (since he had just told me he wasn’t going to invest in our new company – his firm having funding Rocket Science, the previous company I had just cratered) or John having watched me get the VC on the phone on the first ring (pure and unadulterated luck.) Bill was kind enough to spend a couple of minutes educating John about the opportunities for a startup like ours, and enough of a gentleman not to mention he had passed on our deal.

Thirty days later John became the fourth co-founder of E.piphany.

Sixty days later we convinced Silicon Graphics to license us all of John’s code for a dollar. (During the craziness of the Internet bubble E.piphany’s market cap would be greater than Silicon Graphics.)

John’s boss, Joe DiNucci, the VP of Marketing of Silicon Graphics became E.piphany’s VP of Sales.

Lessons Learned

  • Finding that a potential customer wrote their own software (or hardware) to solve a problem is good news, not bad
  • It’s a strong sign that there’s a high-value problem
  • ABR – Always Be Recruiting

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