Steve Blank Entrepreneurs

Let’s Fire Our Customers

Posted on September 24, 2009 by steve blank

As a board member, investor and consumer, I’ve encountered companies firing their customers. While this sounds inexplicable to an outside observer, sometimes it makes sense. Other times it’s just plain dumb.

Pattern Recognition
One of the great things about being an entrepreneur is that you are constantly running a pattern recognition algorithm against a continual collection of customer and market data. For me this was one of the joys of entrepreneurship – constant learning and new insights. But at times it’s why entrepreneurs can sink their own companies.

The Founder’s New Insight
Smart founders are never satisfied with simply executing their current business model, they are constantly observing, orienting and deciding whether their current business model can be made better. This tendency is a two edged sword: by iterating strategy a startup can dramatically improve the size and trajectory of the company, but at times this process can be the bane of venture investors (and why they have prematurely grey hair.) When a startup finds a repeatable sales process and steadily increasing revenue, its investors wants to harvest the rewards and build a culture of “execution.” However, if the founder is still running the company, the last thing he wants is a company complacent with day-to-day execution.

This disconnect – between a founder’s endorphin rush from learning, discovery, insight and acting – versus investors needs for stability, execution and liquidity – is the basis of lots of founder/board travails. (More on this in later posts.) But the purpose of this post is what happens when a founder (or large company CEO) finds a better business model.

Let’s Fire Our Customers
Part of the DNA of great entrepreneurs is a bias towards decisive and immediate action. However, when a startup gets past its early days and has acquired a substantial customer base, an insight about a better path, if executed and communicated poorly, can lead to disaster.

I’ve seen startup CEO’s realize that their company could be much more profitable if they only could get rid of some portion of their existing customers. (It’s a natural part of learning about your customers and business model.) But instead of spending the time to move these unprofitable customers politely to some other company, (hopefully a competitor) founders tend to want to do it immediately. “Get it done, now. These customers are idiots and I don’t want them anymore.” The founder has seen the future and wants to get there immediately. And while technically correct, and eventually the company ought to fire unprofitable customers, the result when done by impatient founders is most often less than optimal.

While it is “just business,” many customers form emotional bonds sometimes with products, other times with the company itself. In fact, if you’re doing your job right as a startup, you’re encouraging customers to be passionate about your company and products. When you abruptly break that connection you can quickly generate hordes of hurt, disappointed and now disgruntled customers, who feel jilted and badmouth the company to other potential or existing customers.

If you’ve had taken the time to fire them politely with a bit more panache and patience, they’re likely to break less furniture as they leave. Entrepreneurs overlook that the customers you fire badly are ones who will do damage to your company for a long, long time (even if the impact of their departure is an increase in profitability.)

The problem isn’t about a founder’s instinct to make a strategic shift. It’s the “do it now” impatience and minimal communication once you have a sizeable customer base. Startups with a customer base need to maintain an ongoing dialog with their customers – not make a set of announcements when the founder thinks it’s time for something new.

This is why entrepreneurship is an art. When you have a critical mass of customers, there’s a fine line between sticking with the status quo too long and changing too abruptly.

You’ve Been an Idiot For Sticking With Us
This behavior is not just limited to startups. I’ve watched new CEO’s brought into large existing consumer products companies to turn around a failing strategy. Their new strategy included a complete revamp and simplification of the product line. Yet instead of making their existing customers feel like partners in the turnaround, these smart CEO’s publicly announce that the current product line is obsolete. (“Can’t you see we’re busy reinventing the company?”)

Ok, that’s a great strategy inside the boardroom, but what are you doing to transition your customers to your new strategy? Nothing? No trade-up program? No discount for existing users? No tools to transition your customers data to the new and improved but incompatible product(s)? Congratulations, you’ve just fired your existing customer base. Instead of having loyal customers willing to work with you, you’ve told them, “You own a product we no longer care about. You’ve been an idiot for sticking with us.” The company now needs to acquire new customers rather than upgrade it’s existing ones. (Usually about 10x more expensive.)

(eBay’s shift from a full range auction site to selling used and off-season goods is an example. Microsoft forcing users of Windows XP to have to format their disks to upgrade to Windows 7 seems to fit this pattern as well.)

The fact that this strategy seems to play out often seems to be symptomatic of turnaround CEO’s transferring their impatience and disdain for the company’s old strategy and products onto that of their loyal customers.

Customers who have been told they were idiots for being loyal tend to leave sadly and with regret. And they rarely come back.

Lessons Learned

The art of firing customers is as important as the art of acquiring them

Don’t confuse your impatience with getting to the new strategy with the damage badly fired customers can do.

New strategic direction in companies with loyal customers have different consequences then when you had no customers

Acquiring new customers are a lot more expensive that converting existing ones.

Filed under: Customer Development | Tagged: Entrepreneurs | 7 Comments »

Can You Trust Any VC’s Under 40?

Posted on September 14, 2009 by steve blank

Over the last 30 years Wall Street’s appetite for technology stocks have changed radically – swinging between unbridled enthusiasm to believing they’re all toxic. Over the same 30 years, Venture Capital firms have honed their skills and strategies to match Wall Streets needs to achieve liquidity for their portfolio companies.

You have to wonder: does the VC you have on your board today have the right skill set to help you succeed in today’s economic environment?

What Do VC’s Do?
One of the biggest mistakes entrepreneurs make is misunderstanding the role of venture capital investors. There’s lots of lore, emotion, and misconceptions of what VC’s do or don’t do for entrepreneurs. The reality is that VC’s have one goal – to maximize the amount of money they return to their investors. To do this they have to accomplish five things;

1) get deal flow – via networking and legwork, they identify likely industries, companies and teams with the potential for rapid growth (less than 10 years),

2) evaluate those companies and teams on the basis of technology, market opportunity, and team. (Each VC firm/partner has a different spin on what to weigh more.)

3) invest in and take equity stakes in exchange for capital.

4) help nurture and grow the companies they invest in.

5) liquidate their investment in each company at the highest possible price.

Going Public
VC’s make money by selling their share of your company to some other buyer – hopefully at a large multiple over what they originally paid for it. From 1979 when pensions funds began fueling the expansion of venture capital, the way VC’s sold their portion of your company was to help you take your company “public.” Your firm worked with an investment banking firm that underwrote and offered stock (typically on the NASDAQ exchange) to the public. At this Initial Public Offering your company raised money for its use in expanding the business.

In theory when you went public, everyone’s shares were now tradable on the stock exchange, but usually the underwriters required a six month “lockup” when company insiders (employees and investors) couldn’t sell. After the end of the lockup, venture firms sold off their stock in an orderly fashion, and entrepreneurs sold theirs and bought new cars and houses.

Five Quarters of Profitability
During the 1980’s and through the mid 1990’s startups going public had to do something that most companies today never heard of – they had to show a track record of increasing revenue and consistent profitability. Underwriters who would offer the stock to the public typically asked for a young company to show five consecutive quarters of profits. There was no law that said that a company had to, but most underwriters wouldn’t take a company public without it. (On top of all this it was considered very bad form not to have at least four additional consecutive quarters of profits after an IPO.) While there was an occasional bad apple, the public markets rewarded companies with revenue growth and sustainable profits.

What this meant for entrepreneurs and VC’s was simple, profound and unappreciated today: VC’s worked with entrepreneurs to build profitable and scalable businesses. In this time, building a successful business meant building a company that had paying customers quarter after quarter. It did not mean building a startup into a company to flip or hype on the market with no earnings or revenue, but building a company that had paying customers.

Your Venture Capitalists on your board brought your firm their expertise to build long-term sustainable companies. They taught you about customers, markets and profits.

The world of building profitable startups as the primary goal of Venture Capital would end in 1995.

The IPO Bubble – August 1995 – March 2000
In August 1995 Netscape went public, and the world of start ups turned upside down. On its first day of trading, Netscape stock closed at $58/share, valuing the company at $2.7 billion for a company with less than $50 million in sales. (Yahoo would hit $104/share in March 2000 with a market cap of $104 billion.) There was now a public market for companies with no revenue, no profit and big claims. Underwriters realized that as long as the public was happy snapping up shares, they could make huge profits on the inflated valuations (regardless of whether or not the company should have ever been public.)

And some companies didn’t even have to go public to get liquid. Tech acquisitions went crazy at the same time the IPO market did. Large companies were acquiring technology startups just to get in the game at the same absurd prices.

What this meant for entrepreneurs and VC’s was simple– the gold rush to liquidity was on. The old rules of building companies with sustainable revenue and consistent profitability went out the window. VCs worked with entrepreneurs to brand, hype and take public unprofitable companies with grand promises of the future. The goals were “first mover advantage,” “grab market share” and “get big fast.” VCs or entrepreneurs who talked about building profitable businesses were told, “You just don’t get the new rules.” And to be honest, for four years, these were the new rules. Entrepreneurs and VCs made returns 10x, or even 100x larger than anything ever seen. (No value judgments here, VCs were doing what the market rewarded them for, and their investors expected – maximum returns.)

(And since Venture Capital looked like anyone could do it, the number of venture firms soared as fast as stock prices.)

Venture Capitalists on your board developed the expertise to get your firm public as soon as possible using whatever it took including hype, spin, expand, and grab market share because the sooner you got your billion dollar market cap, the sooner the VC firm could sell their shares and distribute their profits.

The boom in Internet startups would last 4½ years until it came crashing down to earth in March 2000.

The Rise of Mergers and Acquisitions -– March 2003 -2008
After the dot.com bubble collapsed, the IPO market (and most tech M&A deals) shutdown for technology companies. Venture investors spent the next three years doing triage, sorting through the rubble to find companies that weren’t bleeding cash and could actually be turned into businesses. With Wall Street leery of technology companies, tech IPOs were a receding memory, and mergers and acquisitions became the only path to liquidity for startups and their investors. For the next four or five years, technology M&A boomed, growing from 50 in 2003 to 450 in 2006.

What this meant for entrepreneurs and VCs was a bit more complex– the IPO market was all but closed (with the Google IPO in 2004 as a brilliant exception), but it was possible find a buyer for your company. The valuations for acquisitions were nothing like the Internet bubble, but there was a path to liquidity, difficult as it was. (Every startup wanted to believe they could get acquired like YouTube for $1.4 billion.) VCs worked with entrepreneurs to build their company with an eye out for a chance to flip it to an acquirer. The formula for exits was a variation of the formula they used in the Internet bubble, morphing into: brand, hype and sell the company.

In the Fall of 2008, the credit crisis wiped out mergers and acquisitions as a path to liquidity as M&A collapsed with the rest of the market.

So what’s left?

2009 – Back to The Future
The bad news is that since the bubble most VC firms haven’t made a profit. It may just be that the message of building companies that have predictable revenue and profit models hasn’t percolated through the VC business model. (Perhaps in direct proportion to the number of “freemium” and “eyeballs” web deals funded.)

It may be that the venture business will have to return to the old days of helping entrepreneurs build companies – not hype them, not spin them, but actually make them worth something to customers and investors.

The question is: do VC’s still have what it takes to do so?

Next time you sit in a board meeting with your VCs, step back a bit from the moment and listen to their advice like you are hearing them for the first time. Are these VC’s who know how to build a company? Is the advice they are giving you going to help you build a repeatable and scalable revenue model that’s profitable quarter after quarter?

Or were they trained and raised in the bubble and M&A hype and still looking for some shortcut to liquidity?

Filed under: Customer Development, Venture Capital | Tagged: Entrepreneurs | 16 Comments »

The Leading Cause of Startup Death – Part 1: The Product Development Diagram

Posted on August 27, 2009 by steve blank

When I started working in Silicon Valley, every company bringing a new product to market used some form of the Product Development Model. Thirty years later we now realize that its one the causes of early startup failure. This series of posts is a brief explanation of how we’ve evolved from Product Development to Customer Development to the Lean Startup.

The Product Development Diagram
Emerging early in the twentieth century, this product-centric model described a process that evolved in manufacturing industries. It was adopted by the consumer packaged goods industry in the 1950s and spread to the technology business in the last quarter of the twentieth century. It has become an integral part of startup culture.

At first glance, the diagram, which illustrates the process of getting a new product into the hands of waiting customers, appears helpful and benign. Ironically, the model is a good fit when launching a new product into an existing, well-defined market where the basis of competition is understood, and its customers are known.

The irony is that few startups fit these criteria. (None of mine did.) We had no clue what our market was when we first started. Yet we used the product development model not only to manage product development, but as a road map for finding customers and to time our marketing launch and sales revenue plan. The model became a catchall tool for all schedules, plans, and budgets. Our investors used the product development diagram in our board meeting to see if we were “on plan” and “on schedule.” Everyone was using a road map that was designed for a very different location, yet they are surprised when they end up lost.

Product Development Diagram

To see what’s wrong with using the product development model as a guide to building a startup, let’s first examine how the model is currently used to launch a new product. We’ll look at the model stage-by-stage.

Concept and Seed Stage
In the Concept and Seed Stage, founders capture their passion and vision for the new company and turn them into a set of key ideas, which quickly becomes a business plan, sometimes on the back of the proverbial napkin. The first thing captured and wrestled to paper is the company’s vision.

Then the product needs to be defined: What is the product or service concept? What are the features and benefits? Is it possible to build? Is further technical research needed to ensure that the product can be built?

Next, who will the customers be and where will they be found? Statistical and market research data plus potential customer interviews determine whether the ideas have merit.

After that there’s a discussion of how the product will reach the customer and the potential distribution channel. The distribution discussion leads to some conclusions about competition: who are they and how they differ. The startup develops its first positioning statement and uses this to explain the company and its benefits to venture capitalists.

The distribution discussion also leads to some assumptions about pricing. Combined with product costs, an engineering budget, and schedules, this results in a spreadsheet that faintly resembles the first financial plan in the company’s business plan. If the startup is to be backed by venture capitalists, the financial model has to be alluring as well as believable. If it’s a new division inside a larger company, forecasts talk about return on investment. in this concept and seed stage, creative writing, passion, and shoe leather combine in hopes of convincing an investor to fund the company or the new division.

Product Development
In stage two, product development, everyone stops talking and starts working. The respective departments go to their virtual corners as the company begins to specialize by functions.

Engineering focuses on building the product; it designs the product, specifies the first release and hires a staff to build the product. It takes the simple box labeled “product development” and makes detailed critical path method charts, with key milestones. With that information in hand, Engineering estimates delivery dates and development costs.

Meanwhile, Marketing refines the size of the market defined in the business plan (a market is a set of companies with common attributes), and begins to target the first customers. In a well-organized startup (one with a fondness for process), the marketing folk might even run a focus group or two on the market they think they are in and prepare a Marketing Requirements Document (MRD) for Engineering. Marketing starts to build a sales demo, writes sales materials (presentations, data sheets), and hires a PR agency. In this stage, or by alpha test, the company traditionally hires a VP of Sales who begins to assemble a sales force.

Alpha/Beta Test
In stage three, alpha/beta test, Engineering works with a small group of outside users to make sure that the product works as specified and tests it for bugs. Marketing develops a complete marketing communications plan, provides Sales with a full complement of support material, and starts the public relations bandwagon rolling. The PR agency polishes the positioning and starts contacting the long lead-time press while Marketing starts the branding activities.

Sales signs up the first beta customers (who volunteer to pay for the privilege of testing a new product), begins to build the selected distribution channel, and staffs and scales the sales organization outside the headquarters. The venture investors start measuring progress by number of orders in place by first customer ship.

Hopefully, somewhere around this point the investors are happy with the company’s product and its progress with customers, and the investors are thinking of bringing in more money. The CEO refines his or her fund-raising pitch and hits the street and the phone searching for additional capital.

Product Launch and First Customer Ship
Product launch and first customer ship is the final step in this model, and the goal the company has been driving for. With the product working (sort of), the company goes into “big bang” spending mode. Sales is heavily building and staffing a national sales organization; the sales channel has quotas and sales goals. Marketing is at its peak. The company has a large press event, and Marketing launches a series of programs to create end-user demand (trade shows, seminars, advertising, email, and so on). The board begins measuring the company’s performance on sales execution against its business plan (which typically was written a year or more earlier, when the entrepreneur was looking for initial investments).

Building the sales channel and supporting the marketing can burn a lot of cash. Assuming no early liquidity (via an IPO or merger) for the company, more fund raising is required. The CEO looks at the product launch activities and the scale-up of the sales and marketing team, and yet again goes out, palm up, to the investor community. (In the dot-com bubble economy, the investors used an IPO at product launch to take the money and run, before there was a track record of success or failure.)

The Leading Cause of Startup Death
If you’ve ever been involved in a startup, the operational model no doubt sounds familiar. It is a product-centric and process-centric model used by countless startups to take their first product to market. It used to be if you developed a plan on model that looked like this your investors would have thought you were geniuses.

In hindsight both you and your investors were idiots. Following this diagram religiously will more often than not put you out of business. The diagram was developed to be used by existing companies doing product line extensions – not startups creating new markets or resegmenting existing ones. Most experienced entrepreneurs will tell you that the model collapses at first contact with customers.

VC’s who still believe in the product development model in the 21st century offer no value in building a company other than their rolodex and/or checkbook.

Coming next Part 2: What’s Wrong with Product Development as a Model?

Filed under: Customer Development | Tagged: Customer Development, Early Stage Startup, Entrepreneurs, Tips for Startups | 24 Comments »

Coffee With Startups

Posted on August 20, 2009 by steve blank

I’ve just met four great startups in the last three days.

An Existing Market
All four were trying to resegment an “Existing Market.” An existing market is one where competitors have a profitable business selling to customers who can name the market and can tell you about the features that matter to them. Resegmentation means these startups are trying to lure some of the current or potential customers away from incumbents by either offering a lower cost product, or by offering features that appealed to a specific niche or subset of the existing users.

Some of the conversations went like this:

Startup 1
Entrepreneur -“I’m competing against Company x and have been following the Customer Development process and I’ve talked to lots of customers.”
Me – “Have you used Company x’s product? Do you know have they distribute their product? Do you know how they create demand? Do you know how many units they are selling? Do you know the archetype of their customers?
Entrepreneur -“Well no but my product is much better than their product and I have this great idea….”

Rule 1: In an existing market Customer Development means not only understanding potential customers, but your competitors in detail – their product features, their sales channels, their demand creation strategy, their business model, etc.

Startup 2
Entrepreneur -“I’m competing against Company x and we are going to offer a lower-cost, web-based version. We’re about to ship next week.”
Me –“That’s a great hypothesis, do customers tell you that they’d buy your version if it was cheaper or on the web?
Entrepreneur -“Well no but my product is much cheaper and everyone’s on the web and I have this great idea….”

Rule 2: In an existing market Customer Development means understanding whether your hypothesis of why customers will buy match reality. This is easy to test. Do this before you write code you may end up throwing away.

Startup 3
Entrepreneur -“I’m competing against Large Company x and we solve problems for a set of customers – I’ve talked to many of them and they would buy it.”
Me – “So what’s the problem?”
Entrepreneur – “We just started letting early customers access the product and adoption/sales isn’t taking off the way we thought it would. We only have 20 customers, and Large Company x has millions.”
Me – “How are you positioning your product?”
Entrepreneur – “We tell potential customers about all our features.”

Rule 3: In an existing market directly compare your product against the incumbent and specifically describe the problems you solve and why Company x’s products do not.”

Startup 4
Entrepreneur -“I have something really, really new. No one has anything like it.”
Me – “Isn’t it kind of like Twitter but better?”
Entrepreneur – “You don’t get it.”

Rule 4: You may want to think twice positioning as a New Market. If customers immediately get an analogy for your product, don’t dissuade them. Save the “New Billion Dollar Market” positioning for the investors, not customers.

Lessons Learned

Deeply understand the incumbents that make up the Existing Market

The “hypotheses tested to lines of code written” ratio ought to be high

Position against the incumbents weaknesses – their customers will tell you what they are

Existing Markets adoption rates are measured in % market share gained, New Markets have adoption rates which may occur in your company’s lifetime

Filed under: Customer Development | Tagged: Customer Development, Customer Discovery, Early Stage Startup, Entrepreneurs, Tips for Startups | 10 Comments »

Touching the Hot Stove – Experiential versus Theoretical Learning

Posted on August 13, 2009 by steve blank

I’m a slow learner. It took me 8 startups and 21 years to get it right, (and one can argue success was due to the Internet bubble rather then any brilliance.)

In 1978 when I joined my first company, information about how to start companies simply didn’t exist. No internet, no blogs, no books on startups, no entrepreneurship departments in universities, etc. It took lots of trial and error, learning by experience and resilience through multiple failures.

The first few months of my startups were centered around building the founding team, prototyping the product and raising money. Since I wasn’t an engineer, my contribution was around the team-building and fund raising.

I was an idiot.

Customer Development/Lean Startups
In hindsight startups and the venture capital community left out the most important first step any startup ought to be doing – hypothesis testing in front of customers- from day one.

I’m convinced that starting a company without talking to customers is like throwing your time and money in the street (unless you’re already a domain expert).

This mantra of talking to customers and iterating the product is the basis of the Lean Startup Methodology that Eric Ries has been evangelizing and I’ve been teaching at U.C. Berkeley and at Stanford. It’s what my textbook on Customer Development describes.

Experiential versus Theoretical Learning
After teaching this for a few years, I’ve discovered that subjects like Lean Startups and Customer Development are best learned experientially rather than solely theoretically.

Remember your parents saying, “Don’t touch the hot stove!” What did you do? I bet you weren’t confused about what hot meant after that. That’s why I make my students spend a lot of time “touching the hot stove” by talking to customers “outside the building” to test their hypotheses.

However, as hard as I emphasize this point to aspiring entrepreneurs every year I usually get a call or email from a past student asking me to introduce them to my favorite VC’s. The first questions I ask is “So what did you learn from testing your hypothesis?” and “What did customers think of your prototype?” These questions I know will be on top of the list that VC’s will ask.

At least 1/3 of the time the response I get is, “Oh that class stuff was real interesting, but we’re too busy building the prototype. I’m going to go do that Customer Development stuff after we raise money.”

Interestingly this response almost always comes from first time entrepreneurs. Entrepreneurs who have a startup or two under their belt tend to rattle off preliminary customer findings and data that blow me away (not because I think their data is going to be right, but because it means they have built a process for learning and discovery from day one.)

Sigh. Fundraising isn’t the product. It’s not a substitute for customer input and understanding.

Sometimes you need a few more lessons touching the hot stove.

Filed under: Corporate/Gov't Innovation, Customer Development | Tagged: Customer Development, Entrepreneurs, Tips for Startups | 9 Comments »

Ask and It Shall be Given

Posted on July 27, 2009 by steve blank

Once I recovered from burnout at Zilog, I was working less and accomplishing more. I even had time to find a girlfriend who was a contractor to the company. One of her first comments was, “I didn’t know you even worked here. Where were you hiding?” If she only knew.

What’s the Worst that Can Happen?
Our small training department had been without a manager for months and finding a replacement didn’t seem to be high on the VP of Sales list. We four instructors would grumble and complain to one another about our lack of leadership. Then it hit me – no one else wanted to be manager – what was the worst that could happen? I walked into the VP of Sales’ office and with my knees trembling, I politely asked for the job. I still remember him chuckling as I nervously babbled on what I good job I would do, what I would change for the better in the department, why I was qualified, etc. He said, “you know I figured it would be you to come in here and ask for the job. I was wondering how long it would take you.” I was now manager of Training and Education at Zilog.

All I had to do was ask.

Zilog Correspondence Course Matchbook

From that day forward, in my business and personal relationships, I would calculate the consequences of a “No” for an answer against the benefits of getting a “Yes.” The math said that it was almost always worth asking for what you want. And the odds in your favor are even higher, as most of your peers wouldn’t even get into the game due to some unspoken belief that in a meritocracy, good things will come to those who wait. Perhaps if you have a union job based on seniority, but not in any startup I’ve ever seen.

For entrepreneurs good things come to those who ask.

What’s Marketing?
As part of the sales organization, I thought I kind of figured out what the function of the sales department was. (In reality it would be another 20 years.) And I understood engineering since I interacted with them almost daily. And since Zilog still had a semiconductor fab next door, I learned what manufacturing did in a chip company, as every training class wanted to see their chips being made. But the one group that had me stumped was something called “marketing.” “Explain it to me again,” I’d ask.

After a year and a half of running training and teaching the new Z-8000 and its peripheral chips, I began to figure out that one of the jobs of marketing was to translate what engineering built into a description that our salesmen could use to talk to potential customers. I distinctly remember this is the first time I head the phrases “features and benefits.” And since I saw our ads (but didn’t quite understand them,) I knew marketing was the group that designed them, somehow to get customers to think our products were better than Intel and Motorola’s.

But Intel was kicking our rear.

One day I heard there was an opening in the marketing department for a product marketing manager for the Z-8000 peripheral chips. The department had hired a recruiter and was interviewing candidates from other chip companies. I looked at the job spec and under “candidate requirements” it listed everything I didn’t have: MBA,
5-10 years product marketing experience, blah, blah.

I asked for the job.

The response was at first less than enthusiastic. I certainly didn’t fit their profile. However, I pointed out that while I didn’t have any of the traditional qualifications I knew the product as well as anyone. I had been teaching Z8000 design to customers for the last year and a half. I also knew our customers. I understand how our products were being used and why we won design-in’s over Intel or Motorola. And finally, I had a great working relationship with our engineers who designed the chips. I pointed out it that it would take someone else 6 months to a year to learn what I already knew – and I was already in the building.

A week later Zilog had a new product marketing manager, and I had my first job in marketing.

Now all I needed to do was to learn what a marketeer was supposed to do.

MBA or Domain Expert
Years later when I was running marketing departments I came up with a heuristic that replicated my own hire: in a technology company it’s usually better to train a domain expert to become a marketer than to train an MBA to become a domain expert. While MBA’s have a ton of useful skills, what they don’t have is what most marketing departments lack – customer insight. I found that having a senior marketer responsible for business strategy surrounded by ex-engineers and domain experts makes one heck of a powerful marketing department.

Entreprenuers Know How to Ask
Successful entrepreneurs have the ability to ask for things relentlessly. In the face of rules that stand in their way they find a way to change the rules. (To an entrepreneur comments like, “you need an MBA, we don’t fund companies like yours, we don’t buy from start-ups, you have to go through our vendor selection committee” are just the beginning of a negotiation rather than the end.) Entrepreneurs are fearless, persistent and uninhibited about asking – whether it’s asking to assemble a team, get financing, sell customers, etc. or whatever is necessary to build a company. If you are on the path to be a successful entrepreneur, hopefully you are already asking for things you want/need/aspire to. If not, don’t wait. Get started asking. It is a skill you need to either have or develop.

Lessons Learned

Ask, and it shall be given you; seek, and you shall find; knock, and it will be opened to you.

King James Bible, New Testament – Matthew 7:7

Filed under: Marketing, Technology, Zilog | Tagged: Entrepreneurs, Steve Blank | 21 Comments »

Burnout

Posted on July 20, 2009 by steve blank

If you hang around technology companies long enough, you or someone you know may experience “burnout” – a state of emotional exhaustion, doubt and cynicism. Burnout can turn productive employees into emotional zombies and destroy careers. But it can also force you to hit the pause button and perhaps take a moment to reevaluate your life and your choices.

Hitting “burnout” changed the trajectory of both ends of my career in Silicon Valley. This post, which is divided in two parts, is the story of the first time it happened to me.

Zilog
Zilog was my first Silicon Valley company where you could utter the customer’s name in public. Zilog produced one of the first 8-bit microprocessors, the Z-80 (competing at the time with Intel’s 8080, Motorola 6800, and MOS Technology 6502.)

I was hired as a training instructor to teach microprocessor system design for the existing Z-80 family and to write a new course for Zilog’s soon to be launched 16-bit processor, the Z-8000. Given the hardware I had worked on at ESL, learning microprocessors wasn’t that hard but figuring out how to teach hardware design and assembly language programming was a bit more challenging. Luckily while I was teaching classes at headquarters, Zilog’s field application engineers (the technical engineers working alongside our salesmen) would work side-by-side with our large customers as they designed their systems with our chips. So our people in the field could correct any egregious design advice I gave to customers who mattered.

Customers
The irony is that Zilog had no idea who would eventually become its largest customers. Our salesmen focused on accounts that ordered the largest number of chips and ignored tiny little startups that wanted to build personal computers around these chips (like Cromemco, Osborne, Kaypro, Coleco, Radio Shack, Amstrad, Sinclair, Morrow, Commodore, Intertec, etc.) Keep in mind this is still several years before the IBM PC and DOS. And truth be told, these early systems were laughable, at first having no disk drives (you used tape cassettes,) no monitors (you used your TV set as a display,) and no high level programming languages. If you wanted your own applications, you had to write them yourself. No mainframe or minicomputer company saw any market for these small machines.

Two Jobs at Once
When I was hired at Zilog part of the deal was that I could consult for the first six months for my last employer, ESL.

Just as I was getting settled into Zilog, the manager of the training department got fired. (I was beginning to think that my hiring managers were related to red-shirted guys on Star Trek.) Since the training department was part of sales no one really paid attention to the four of us. So every day I’d come to work at Zilog at 9, leave at 5 go to ESL and work until 10 or 11 or later. Repeat every day, six or seven days a week.

Meanwhile, back at ESL the project I was working on wanted to extend my consulting contract, the company was trying to get me to return, and in spite of what I had done on the site, “the customer” had casually asked me if I was interested in talking to them about a job. Life was good.

But it was all about to catch up to me.

Where Am I?
It was a Friday (about ¾’s through my work week) and I was in a sales department meeting. Someone mentioned to me that there were a pile of upcoming classes heading my way, and warned me “remember that the devil is in the details.” The words “heading my way” and “devil” combined in my head. I immediately responded, “well that’s OK, I got it under control – as long as the devil coming at me isn’t an SS-18.” Given that everyone in the room knew the NATO codename for the SS-18 was SATAN, I was thinking that this was a witty retort and expected at least a chuckle from someone.

I couldn’t understand why people were staring at me like I was speaking in tongues. The look on their faces were uncomfortable. The VP of Sales gave me a funny look and just moved on with the agenda.

VP of Sales? Wait a minute.. where am I?

I looked around the room thinking I’d see the faces of the engineers in the ESL M-4 vault, but these were different people. Who were these people? I had a moment of confusion and then a much longer minute of panic trying to figure out where I was. I wasn’t at ESL I was at Zilog. As I realized what I had said, a much longer panic set in. I tried to clear my head and remember what else I had said, like anything that would be really, really, really bad to say outside of a secure facility.

As I left this meeting I realized I didn’t even remember when I had left ESL or how I had gotten to Zilog. Something weird was happening to me. As I was sitting in my office looking lost, the VP of Sales came in and said, “you look a bit burned out, take it easy this weekend.”

“Burned out?” What the heck was that? I had been working at this pace since I was 18.

Burnout
I was tired. No I was more than tired, I was exhausted. I had started to doubt my ability to accomplish everything. Besides seeing my housemates in Palo Alto I had no social life. I was feeling more and more detached at work and emotionally drained. Counting the Air Force I had been pounding out 70 and 80 hour weeks nonstop for almost eight years. I went home and fell asleep at 7pm and didn’t wake up until the next afternoon.

The bill had come due.

Recovery
That weekend I left the Valley and drove along the coast from San Francisco to Monterey. Crammed into Silicon Valley along with millions of people around the San Francisco Bay it’s hard to fathom that 15 air miles away was a stretch of California coast that was still rural. With the Pacific ocean on my right and the Santa Cruz Mountains on my left, Highway 1 cut through mile after mile of farms in rural splendor. There wasn’t a single stop-light along 2-lane highway for the 45 miles from Half Moon Bay to Santa Cruz. Looking at the green and yellows of the farms, I realized that my life lacked the same colors. I had no other life than work. While I was getting satisfaction from what I was learning, the sheer joy of it had diminished.

As the road rolled on, it dawned on me that there was no one looking out for me. There was no one who was going to tell me, “You’ve hit your limit, now work less hours and go enjoy yourself.” The idea that only I could be responsible for taking care of my happiness and health was a real shock. How did I miss that?

At the end of two days I realized,

This was the first full weekend I had taken off since I had moved to California
3 years ago.
I had achieved a lot by working hard, but the positive feedback I was getting just encouraged me to work even harder.
I needed to learn how to relax without feeling guilty.
I needed a life outside work.

And most importantly I needed to pick one job not two. I had to make a choice about where I wanted to go with my career–back to ESL, try to work for the Customer or stay at Zilog?

More about that choice in the next post.

Lessons Learned

No one will tell you to work fewer hours

You need to be responsible for your own health and happiness

Burnout sneaks up on you

Burnout is self-induced. You created it and own it.

Recovery takes an awareness of what happened and…

A plan to change the situation that got you there

Filed under: Customer Development, ESL, Family/Career/Culture, Zilog | Tagged: Early Stage Startup, Entrepreneurs, Steve Blank | 14 Comments »

Rocket Science 5: Who Needs Domain Experts

Posted on July 16, 2009 by steve blank

What Business Are We In?
While the Rocket Science press juggernaut moved inexorably forward, a few troubling facts kept trying to bubble up into my consciousness. The company was founded to build games with embedded video to bring Hollywood stories, characters, and narratives to a market where “shoot and die” twitch games were in vogue. But underlying the company’s existence was a fundamental hypothesis we refused to see or test – customers would care if we did.

In the game business of the early 1990’s video was at best a brief narrative, a distraction you maybe watched once, not the core of the game. Our potential customers didn’t seem to be calling for Hollywood stories, characters and narrative. That’s OK, because we knew better. We thought we had figured out what the next generation of games was going to be. We were thinking we were in the movie business, but video games were more akin to pinball; both pinball and movies were entertainment but you would never confuse them with each other. Successful pinball companies didn’t hire Hollywood talent.

Meanwhile our company was pouring an enormous amount of dollars into building tools and video compression technology, while also hiring a lot of high-priced Hollywood talent like art directors, and script and story editors.

We Don’t Need Domain Experts
When I looked around at our executive staff, there wasn’t a single founder who was a gamer. Worse, there wasn’t a single person on our executive team who had come from a game company. Nor was there anyone with game experience on our board. As the company grew a sense of unease started gnawing at the outer fringes of the “you’re in trouble” part of my brain. Meanwhile my partner was in heaven working with his newly hired group of game designers directing and producing our first games. When I pointed out my rising apprehension his response was, “I’ve been playing games since I was 10. I know what’s great and what’s not. We agreed this part of the company was my responsibility. Don’t worry the games are going to be great.” Given my fiduciary responsibility to my board and my investors did his blasé answer force me to grab him by the collar and scream, “Snap out of it, we’re in trouble!”

Nah. Instead I said, “Oh, OK, glad it’s all under control.” Then I went back to raising more money and getting more press for our soon to be spectacular games.

Hire Advice I Can Ignore
But the nagging little voice in the back of my head that said, “This doesn’t feel right,” wouldn’t go away. So I hired a VP of Marketing from Sega, one of the video game platforms on which our games would run. After only two weeks on the job, he came into my office and said, “Have you’ve seen the games we are building?” What kind of question was that? Of course I had seen pieces of the video we shot and beautiful storyboards. “No,” he insisted, “Have you seen the game play, the part that supposed to keep players addictively glued to the game console for hours?” Hmm. “No, not really, but my partner owns the studio and tells me it’s spectacular and everyone will love it. Don’t bother him; he knows what he’s doing. Go spend some time outside the building talking to potential distribution partners. Tell them how great it’s going to be and see how many pre-orders we can get.”

A month later the VP of Marketing appeared in my office again. “Steve I have to tell you some bad news, I just showed our potential channel partners and customers a few completed pieces of the games we had. They think the games stink.”

Now I know I heard his words because years later I can still remember them well enough to write them down. But somehow the translation between my ears and what I was supposed to do with what I was hearing shut down. Was my response to stop development of the games? Bring in some outside professionals to review our progress? Call a board meeting and say we may have a serious problem? Nah. I said, “That can’t be true! The press is saying we are the hottest super group around. Look, we’re on the cover of Wired magazine. They think we’re brilliant. Our VCs think we are visionary. Stop annoying our game designers and start working on selling and marketing the games.”

Hindsight
In hindsight it’s easy to laugh. Saying you knew how to build great games because you played them all your life was like saying, “Hey I eat out a lot so why don’t I open a restaurant.” Or “I’ve seen a lot of movies so let’s start a movie studio.” Only in Silicon Valley could we have got funded with this idea, and not surprisingly, it was our technology that had the VC’s confused. It was more like we had invented the world’s best new kitchen utensils and wanted to open a restaurant, or had built the world’s finest movie cameras and wanted to start a movie studio. Our venture backers and our executive team confused our technology and our tools — and our passion for the games business — with any practical experience in the real business we were in. We were an entertainment business – and not a very subtle entertainment business. As we were about to find out, if video game players wanted a cinematic experience, they went to the movies, they didn’t buy a video game. Our customers wanted to kill, shoot or hunt for something. Fancy video narratives and plots were not video games.

Interest Alignment
Why VC’s invested in companies like ours is what’s great and bad about entrepreneurship. A Venture Capitalist I respect reminded me that he thought about investment risk as either:

investing $1 million in 10 companies and have all ten succeed. With each of those ten companies returning 2x their money for $20 million. Or
investing in 10 companies and having 8 fail – but the remaining two companies returning 20x their money for $40 million.

His point was that it was in the VC’s interest in having entrepreneurs swing for the fences.

However the VC’s are managing a portfolio while you, the entrepreneur are managing one company – yours. While VC’s might love you and your firm, a 2x return isn’t why they’re in business. It’s nothing personal, but your interests and your VC’s may not be aligned. (More on this in future posts.)

The Search for the Black Swan
What keeps founders and their investors going is the the dream/belief that your startup will be the Black Swan – a company that breaks all the obvious rules, ignores tradition and does something unique and spectacular and with a result that is unpredicted and financial returns that are breathtaking.

Think of the Microprocessor, Personal Computer, Internet, Twitter, Youtube, Facebook, Google, the iPhone. Creating those technologies and companies required entrepreneurs willing to follow their own vision and convincing others that the path is worth following.

The mistake isn’t having a vision and taking risks. The mistake is assuming you are a Black Swan and continuing to ignore the facts as they pile up in front of you.

Customer Development
There was nothing wrong about Rocket Science having a vision radically different than the conventional wisdom. We could have been right and invented a new form of gaming and entertainment. What went awry was continuing to execute on the vision when all the evidence in front of us told us our hypothesis was wrong. We compounded the problem when we failed to have an honest discussion about why it made sense to ignore the evidence. (A tip-off is when you start saying, “they just don’t get it yet.”)

At Rocket Science, hubris took over and was about to lead to the fall.

Customer Development says having a vision, faith and a set of hypotheses are a normal part of the startup experience. But it is critical to build in a process for testing those hypothesis outside the building and listening to the responses – or you might as well throw your money in the street.

Lessons learned?

While a lack of relevant domain expertise is not always fatal, believing you don’t need any is.

Founders need to validate their vision in front of customers early and often.

Your goals and your VC’s goals may not be aligned. Make sure they are.

Filed under: Customer Development, Rocket Science Games | Tagged: Early Stage Startup, Entrepreneurs, Steve Blank | 8 Comments »

Rocket Science 3: Hollywood Meets Silicon Valley

Posted on July 9, 2009 by steve blank

What do you mean you don’t want to hear about features?
I was now a CEO of Rocket Science, and having a great time building the company (more about that in future posts.) Unfortunately, while I had gone through phases of video game addiction in my life, in no way could I be described as even a “moderate hard-core gamer,” which ruled me out as a domain expert. So I got out out of the building to meet and understand our customers and distribution partners. I remember after a month or two of talking to 14-22 year old male gamers (our potential target market,) I realized that for the first time in my career I had no emotional connection to my customers or channel partners.

I was about 90 days into the company when I began to realize there was something very different about this business. In previous companies I could talk about technology details and how the product features could solve a customers problem. But people didn’t buy video games on features and they weren’t looking to solve a problem. I was in a very, very different business.

I was in the entertainment business.

There couldn’t have been a worse choice for CEO in Silicon Valley.

Alarm bell one should have started ringing – for me and my board.

Hollywood Meets Silicon Valley was an Oxymoron
A key premise of our new company was that our video compression and authoring technology would revolutionize how games were made and played. We believed that by putting full motion video (i.e. movies) into video games we could tell stories, build characters, have narratives and bring all the 100 years of craft and cinematic experience of Hollywood to the sterile “shoot and die” twitch games that were currently in vogue. (This wasn’t just some random Silicon Valley fantasy. My partner had convinced several major Hollywood names that this was the inevitable consequence of the merger of Hollywood and Silicon Valley. And at the time it was a plausible scenario.)

But in reality our passionate belief that video would transform gaming was just our hypothesis. There was zero proof in the marketplace that was the case. And we weren’t going to be bothered to go out and prove ourselves wrong with facts. (Why should we – our VC’s had already told us what geniuses we were by fighting to even get into the deal to fund us. Never mind that no one on our board was in the game business or even played games.)

Alarm bell two should have started ringing – for me and my board.

Swing For the Fences
Since we were so smart we were going to ramp up and build not one game, but an entire game studio based on this hypothesis. Why shouldn’t we. Doing one game and seeing customer reaction meant a) acknowledging that some of our assumptions might be wrong, and 2) wasting time. We were all about scale and swinging for the fences. That’s what VC funded companies do, don’t they?

Alarm bell three should have started ringing – for my partner and me.

Tools Are the Not the Product
We were going to build an easy to use authoring system that would revolutionize how games were made. (My partner had convinced several of the key members of the Apple Quicktime team to join us.) Our tools group became as important as our content group. Unfortunately, the market was going to remind us that games are about game play.

Customers don’t care about your tools regardless of what business you’re in. Customers of software applications don’t say, “wow, elegant code base.” In movies theater-goers don’t leave talking about your cameras, just whether they were entertained, and in restaurants diners don’t care about your cooking implements, what matters is what the food tasted like. The tools may provide efficiencies, but what customers care about is your final product. (Later on, way too late, we’d remind ourselves it’s the game stupid.)

Alarm bell four should have started ringing louder for me.

Lessons learned

Never, ever, start a company when you’re not passionate about the company, product and customers

Always validate your key assumptions on what makes your company tick

Swing for the fences is your VC’s strategy. Make sure it is yours.

Don’t confuse your passion for your tools with why your customers will buy your product.

Filed under: Customer Development, Rocket Science Games | Tagged: Early Stage Startup, Entrepreneurs, Steve Blank, Tips for Startups | 8 Comments »

Customer Development Fireside Chat

Posted on July 7, 2009 by steve blank

I did a fireside chat with a few entrepreneurs interested in Customer Development at Draper Fisher Jurvetson, the venture firm behind such Skype, Baidu, Overture, ….

Ravi Belani was nice enough to set it up, blog about the talk and film it. The relevant part starts about 4:30 into the video (wait for it to download.)

Lessons Learned

Most entrepreneurs start a company with hypothesis not facts

None of these hypothesis can be tested in the building

Therefore – Get out of the building

“Market Types” matter

Find a market for the product as specified