Steve Blank's Blog, page 43

China Startups – The Gold Rush and Fire Extinguishers (Part 5 of 5)

I just spent a few weeks in Japan and China on a book tour for the Japanese and Chinese versions of the Startup Owners Manual.  In these series of 5 posts, I thought I’d share what I learned in China. All the usual caveats apply. I was only in China for a week so this a cursory view. Thanks to Kai-Fu Lee of Innovation Works, David Lin of Microsoft Accelerator, Kevin Dewalt and Frank Hawke of the Stanford Center in Beijing, and my publisher China Machine Press. 

The previous post, part 4, was about Beijing’s entrepreneurial ecosystem these are my final observations.

Land Rush

For the last 10 years China essentially closed its search, media and social network software market to foreign companies with the result that Google, Facebook, Twitter, YouTube, Dropbox, and 30,000 other websites were not accessible from China. This left  an open playing field for Chinese software startups as they “copy to China” existing U.S. business models. Of course “copy” is too strong a word.  Adapt, adopt and extend is probably a better description.  But for the last decade “innovation” in Chinese software meant something different than it did in Silicon Valley.

The Chinese Social Media Landscape diagram below from Resonance does a great job of illustrating the players in the Chinese market. (Note that the inner ring shows their global equivalents.)

The downside is that with so much venture and angel capital available, investors have been willing to fund the 10th Groupon clone.  For the last few years, there really hasn’t been a demand to innovate on top of the ecosystem that’s been built.

New Rules for China

Not only is the Chinese ecosystem completely different but also the consumer demographics and user expectations are equally unique. 70% of Chinese Internet users are under 30. Instead of email, they’ve grown up with QQ instant messages. They’re used to using the web and increasingly the mobile web for everything, commerce, communication, games, etc. (They also probably haven’t seen a phone that isn’t mobile.) By the end of 2012, there were 85 million iOS and 160 million Android devices in China. And they were increasing at an aggregate 33 million IOS and Android activations per month.

It was interesting to learn about China’s digital divide – the gap between East China and Midwest China, and between urban and rural areas. Internet penetration in Beijing is  greater than 70% while it’s less than 25% in Yunnan, Jiangxi, Guizhou and other provinces. While there are 564 million web users with 420 million having mobile web access, 74% of Chinese Internet users make less than $500/month and are students, blue-collar workers or jobless.

Unlike U.S. websites that are sparse and slick, Chinese users currently expect complicated, crowded and busy web pages. However, there’s a growing belief that the “design preferences” of Chinese consumers are just bad design. TenCents WeChat, (designed for an international market) is the first incredibly popular app in China to dramatically raise the bar for what a good user interface and user experience looks and feels like. WeChat may change the game for Chinese U/I and U/X experience. The one caveat about online commerce is that while Chinese users will buy physical goods online (Taobao is huge), they seem to hate to pay for music or software, and the model for games seems to be moving to free play with in-app-purchases for accessories and powers. An interesting consequence of the rigid censoring and control of mainstream media is that blogging – reading and writing – is much higher than U.S.

My guess is the current wave of “copy to China” will burn itself out in the next few years as the smart money starts to move to “innovate in China” (i.e. like WeChat.)

Competition

If you’re a software startup competing in China, the words that come to mind are “ruthless and relentless.” The not so polite ones I’ve heard from others are “vicious, unethical and illegal.” Intellectual property protection is great on paper and “limited” in practice. The large players like Alibaba, Baidu and Tencent historically would be more likely to simply copy a startup’s features than to hire their talent. The large companies strategy seems to be to cover every possible market niche by copying successful models from others.

The slide below from the Zhen Fund shows the breadth of business coverage of each of the Chinese Internet incumbents.  Each column represents a company (QQ, Sina, Baidu, Netease, Sohu etc.) and the rows indicates their offerings in open platform, group buying, online games, microblogging, Instant Messaging, BBS, Q&A and E-commerce.

Small startups act the same way, simply cloning each other’s products. Sharing and cooperation is not yet part of the ethos. I can’t imagine a U.S. company setting up some subsidiary here and expecting them to compete while they were following U.S. rules.  In some ways, the best description of the market dynamics would be “imagine you were competing with 100 companies who are as rapacious as Microsoft was in the 1980’s and 1990’s.” Eventually, China’s innovation-driven economy needs intellectual property rights and anti-trust laws that are enforced.

Sea Turtles and VPN – the connections to  the rest of the world

Entrepreneurs in Beijing were knowledgeable about Silicon Valley, entrepreneurship and the state of software and tools available for two reasons.  First, there are continuous stream of “sea turtles”—Chinese who have studied or worked abroad—returning home. (The Chinese government must be laughing hysterically over U.S. immigration policy that’s forcing Chinese grad students out of the U.S.) Many of these returnees have worked in Silicon Valley and startups or went to school at MIT and Stanford. (There is a huge difference between the Chinese who have never left and those who went to school abroad, even for a few months – at least a difference in their ability to relate to me and have a conversation on the same wavelength. It’s clear why families try so hard to send their children abroad. It changes everything for them.)

Second, most websites that a non-Chinese would use are blocked including Facebook, Twitter, Youtube, Google Docs, Scribd, Blogspot, Dropbox, New York Times, etc. Almost every entrepreneur I met was using VPN to circumvent the Great Firewall. When the Chinese government censors (run by their propaganda department) shutdown access to yet another U.S. web site, they create another 100,000 VPN users.  And when the government tools to detect encrypted VPN’s get more sophisticated, (as it did last year), Chinese users just use stealthier tools. It’s an amazing cat and mouse system.

(Note to Chinese Communist party – the best name for your propaganda department should probably not be the “Propaganda Department.”)

Beijing’s Academic Hub

Right next door to Zhongguancun are China’s top two universities, Peking University and Tsinghua University. Northwest of Beijing is also home to other universities, including technical universities like USTB, BIT, BUPT, and Beihang.  Like Silicon Valley, Zhongguancun also has a critical mass of people who are crazy enough to do startups.  Equally of interest is a good number of them end up in the PLA’s GSD 3rd Department (the equivalent of our National Security Agency. ) And some of their best and brightest have ended up in the organizations like the 2nd Bureau, Unit 61398 tasked euphemistically for “Computer Network Operations.”

While I didn’t get much time with the academic community, in talking to students, education seems to still be one of China’s bottlenecks – rote lectures, passive learning, follow the process, exam-based performance, etc.  And while startups and entrepreneurship courses are now being added to the curriculum, “How to write a business plan” seems to be the state of the art. China’s education system needs to give more attention to fostering students’ innovative thinking, creativity and entrepreneurship.

Entrepreneurial  Culture

Fear of Failure

Though they’re familiar with technology in the valley, I picked up some important cultural difference from students and startup engineers I talked to. Even though they’re next to Zhongguancun, the hottest place for startups in China, there seems to be a lower appetite for risk, a lack of interest in equity (instead optimizing for a high salary) and very little loyalty to any one company. The overall culture still has a fear of failure. Most of their parents still tell them to work for the government or a big company.

Talent

I heard from a few investors that as the startup ecosystem is relatively new, there’s a battle for experienced engineering talent and lack of experienced C-level execs. The lack of a previous generation of successful startup CEOs means the current pool of mentors to coach this generation is almost non-existent.

Because salaries are cheap, startups seem to try to solve every problem by throwing bodies at it. Startup teams feel like they are 2-5x the size of American teams. There seems to be little appreciation or interest in multi-skilled people.

Turnover of employees in capital in Beijing is very high. Employees work here for a few months and are suddenly gone. There’s a noticeable lack of tenacity in young, new entrepreneurs. They start a project, and if it isn’t a home run, they’re gone. Perhaps it’s the weather. Silicon Valley has great weather and lifestyle, and nobody wants to leave. Beijing has awful weather and pollution, it’s a temporary place to get rich and then leave.

Management 101

The board/CEO relationship still isn’t clearly understood by either party. I’ve talked to entrepreneurs who view the investors as a “boss.”  A good number of startups in Beijing seem driven by the VCs – and not the founders. This might also be a hangover from the command and control system of a state-driven planned economy. Ironically investors told me that the reverse has been true as well. Some startups acted like the VC was a bank. They took the money and then ignored their board. Over time, as investors add more value than writing checks, this relationship will mature.

Creativity

I was surprised that startup teams ask what seems like the kind of questions Americans learn at their first jobs.

Team: ”We keep spending money trying to get people to our web site but they don’t come back. We are almost out of money.”

Me:  ”Ok.  Why are you still spending money?”

Team: “long…silence…we need people to come to the website.”

On the other hand, for most of them it probably is their first job. And the educational system hasn’t prepared them for executing anything other than a plan. Iterations and pivots are a tough concept if you’ve never been taught to think for yourself. And challenging the system is not something that’s actually encouraged in China.

They also ask questions I just don’t know how to answer. “How do you know how to be creative? What do we have to do to be creative?”  ”You Americans just seem to know how to do things even if you’ve never done them – can you show us how to do that?”  This seems to be an artifact of the Chinese rote educational system and its current system of government.

Innovation Ecosystem

On the plane ride home I started to think about the similarities and differences between the innovation ecosystems of Silicon Valley and the TMT segment I saw in Beijing. The motivations are the same – profit – driven by entrepreneurs and venture finance. And the infrastructure is close to the same – research universities, predictable economic system, a path to liquidity, a stable legal system and 24/7 utilities. But the differences are worth noting – it’s a young ecosystem, so startup management tools are nearly non-existent. But there’s a difference in the culture of failure and risk taking –  the current cultural pressure is to “work for a big company or the government.” Outward facing Universities are just starting to appear, and while there’s a free flow of information inside China, it suffers from the constraints of the Great Firewall.

But there are two striking differences. The first is the lack of creativity. The Beijing software ecosystem I saw has spent the last decade in a protected market copying successful U.S. business models. ”Copying, adopting and adapting,” is not the same as ”competing, innovating and creating” in a global market. Perhaps products like WeChat, designed for an international market, might be the beginning of real innovation.

The second difference in ecosystems – the lack of freedom to dissent – goes deeper to the difference between the two systems. In the U.S. entrepreneurs are encouraged to “Think Different.” Our touchstone for creativity is the Apple ad that said, “Here’s to the crazy ones, the misfits, the rebels, the troublemakers,… the ones who see things differently — they’re not fond of rules… You can quote them, disagree with them, glorify or vilify them, but the only thing you can’t do is ignore them because they change things….” This spirit of rebellion against the status quo got us Steve Jobs.  In China the same attitude is likely to get you jail time. Unless you can speak truth to power, you’ll never have an innovation economy.

Conclusion

China is astonishing. The country has risen. Their economy is the envy of the world. The entrepreneurial and “can do” spirit reminds me of what the U.S. was known for. Chinese citizens are proud of their country and believe the world is theirs in the way Americans did in the 1950’s. Their leadership has shown incredible foresight in engineering an amazing economic engine and formidable military. They come so far, and yet…

To take nothing away from what China has accomplished, a visit to Beijing had all the subtle reminders that this version of capitalism has come without democracy or justice; the guards in the Forbidden City armed with fire extinguishers in case more protestors try to set themselves on fire, the security around Tiananmen Square to prevent protestors from gathering, and the “black jails” to keep rural petitioners out of Beijing.  And of course the “great firewall,” attempting to keep information about the outside world from reaching inside China.

The bet the government is making is that if they can keep the economy cooking and distract the masses with ever increasing consumer goods and foreign adventures, maybe it can survive.

All of these are signs of a weak China not a strong one. They are the signs of a leadership frightened not by external enemies but by their own people.

It usually doesn’t end well.

Filed under: China, Customer Development, Technology, Venture Capital

Zhongguancun in Beijing – China’s Silicon Valley (Part 4 of 5)

I just spent a few weeks in Japan and China on a book tour for the Japanese and Chinese versions of the Startup Owners Manual.  In these series of 5 posts, I thought I’d share what I learned in China. All the usual caveats apply. I was only in China for a week so this a cursory view. Thanks to Kai-Fu Lee of Innovation Works, David Lin of Microsoft Accelerator, Frank Hawke of the Stanford Center in Beijing, and my publisher China Machine Press.

The previous post described the evolution of the Chinese Venture Capital system. The next two posts are about what I saw and learned in my short stay exploring Beijing’s entrepreneurial ecosystem.

Entrepreneurship in Beijing

In the few days I was in China I met with several VC’s, angel investors, business press and spoke to hundreds of entrepreneurs. I was blown away by what I saw in Beijing. First, I was amazed by the physical impact of the city itself. This was a modern city in a hurry to make a first impression – think of what Rome looked like in the time of the empire or New York in the 1920’s – now it’s Beijing announcing that China has arrived.

However if you scratch the surface, you can still find a bit of the old Beijing in the hutongs. Drive 50 miles outside the city into the surrounding villages and you see the distance China has to travel to bring the rural areas into the 21st century. In Beijing we hadn’t seen air so badly polluted since we had been in Agra in India in the winter where I swear there was a day you could wave your hand in front of you and see traces of it in the air (and their excuse was they burn dung for heat.)

David Lin and the Microsoft China Accelerator was gracious enough to host two wonderful days of events for me. I trained the Startup Weekend Next Beijing mentors and instructors, presented to several hundred entrepreneurs, and had a great fireside chat with Zhen Fund founding partner Xu Xiaoping in front of another roomful of entrepreneurs.

Kai-fu Lee of Innovation Works was equally generous with his time. We had a fireside chat with a room full of eager entrepreneurs. And he was generous in sharing his insights about the current state of entrepreneurship and investment in China. And through it all Louis Yuan my patient and wonderful publisher from China Machine Press kept me moving through the events.

But what made the overwhelming impression for me was finding an entrepreneurial software cluster on par with the Internet software portion of  Silicon Valley. The physical heart of the Beijing startups is in Zhongguancun in the Haidian District, located in the northwest side of Beijing. Startups here are primarily in what they call the TMT (Technology, Media and Telecommunications) segment. Not only does Zhongguancun have Chinese startups, but global technology companies (Nokia, Ericsson, Motorola, Sony Ericsson, Microsoft, IBM, Sun, Oracle, BEA, Alcatel Lucent, Google) all have offices here or elsewhere in Beijing.

If there ever was any question about the value of China’s Torch Program walk around Zhongguancun. It was the first of the 54 Science and Technology Industrial Parks.

China Venture Capital

An entrepreneurial ecosystem is driven one of two ways; either by a crisis (i.e. innovation in the U.S. during World War II,) or during peacetime by profit.

If it’s driven by profit then the ecosystem needs both entrepreneurs as well as Venture Finance.

China now has plenty of both.

China has the biggest Venture Capital industry outside the U.S.  To compare the two, in 2011 U.S. venture capitalists invested $26.5 billion in all deals. Out of that total, they funded 967 Internet deals with $6.7 billion.

By comparison, in 2011 Chinese VC’s invested $13 billion in all deals. Out of that total, they funded 268 Internet deals with $3.2 billion. About 1/3 of all China’s Venture Capital investment is made in Beijing and the majority of those investments are in the Technology, Media and Telecommunications (TMT) sector I’ll describe shortly.

As vibrant as the China venture business has been, 2012 was a different story. VC’s pulled back and only invested $3.7 billion in all deals, funding just only 43 deals with $563 million.

Closed for You, Open For Us

First a bit of context in what the VC’s in Beijing are investing in. China has essentially closed its internal search, media and social network software market to foreign companies who wouldn’t play with the government rules on the Great Firewall. (China blocks “objectionable” website content and monitors everyone’s Internet access.)

Google retreated to Hong Kong and Baidu took its place.  Facebook was too frightening to Chinese censors, so Renren is the leading social media player. Email? Working professionals/white collar use emails, but most users grew up instant messaging on TenCent’s QQ and most are moving to Weixin/WeChat. Twitter? No, it’s Sina Weibo, and if you want games with your chat – TenCent.  Amazon and Ebay? Nope in China it’s Alibaba’s Taobao or 360buy.com.  If you’re outside of China, you never hear about these companies or interact with them because they’re geared to serve only Chinese users.

This closed but very large market means that greater than 90% of Chinese software startups focus exclusively on the Chinese market. (The outside of China. Another 10% may try to go global when they’re larger and have the resources for two languages, cultures and regulations. )

This has resulted in a completely different consumer software ecosystem than found elsewhere in the world. Given the closed market to U.S. Internet companies, VC’s in China have guided startups to execute the “copy to China” model. Thinking, if it worked in the U.S., copying a known model is less risky than trying something new and untested.  The problem is that this space is getting really crowded – from the bottom up as everyone tries the 200th clone – and from the top down, as the major incumbents try to fill every possible market niche.

The table below maps the type of software in China to their global equivalents in each product category in the Technology, Media and Telecommunications (TMT) sector.

A Huge Market Is Finally Real

For a hundred years the fantasy of global marketers was, “ if only everyone in China would buy one…”  That day is final here. The numbers of mobile subscribers are staggering – 1.18 billon, 260 million are 3G. Chinese Internet companies live in a large closed, self-contained ecosystem with 564 million web users with 420 million having mobile web access. 309 million use microblogs and 242 million shop online. (BTW, market research, financial and other statistical information are usually unreliable in China, but even taken with a grain of salt these are staggering numbers.)

The table below from web2asia.com shows the number of users of online social networks as of 2009.  Did I mention this is a huge market.

Investment in the Technology, Media and Telecommunications (TMT) sector

The charts below from David Lin, Microsoft Accelerator detail investments in the Technology, Media and Telecommunications (TMT) sector – almost all of it is centered in Beijing. (Note that these numbers differ from the Zhen Fund data -welcome to statistics in China – but they both provide an overall sense of the market size and direction.)

45% of all Venture Capital Investment in China went into the Technology, Media and Telecommunications (TMT) sector.

The number of deals in Technology, Media and Telecommunications more than doubled in 2011 over the previous five years and slowed back down dramatically in 2012. More than 1,600 VC investments in TMT have been made since 2007, with a record high of 436 in 2011.

Internet investments makes up more than 50% of all the deals in Technology, Media and Telecommunications made since 2011, while, E-commerce investments, in turn, accounts for nearly 50% of the investment deals in Internet. Investments in Mobile Internet makes up roughly 11% of all the deals in Technology, Media and Telecommunications, and have been on the rise since 2011.

Series-A round investments dominates Technology, Media and Telecommunications (TMT) deals, making up 60% of all.

Beijing, Guangdong (including Shenzhen) and Shanghai came out as the most dynamic spots for Technology, Media and Telecommunications (TMT) investments.

Beijing Venture/Angel Ecosystem

While Beijing has VC’s and Angel investors happy to write a check there aren’t as many angels/VCs in China versus US per capita. Several VC’s mentioned that there’s a funding gap for seed stage investments. The Angel/Seed network in Beijing feels fragmented and mostly inexperienced (as are a good number of the China VC’s). Kind of reminded me of the drivers in Beijing – they were all driving in a way that made me think they all just got their drivers license – until I remembered that they did. Car sales in China went from 1 million in 2001 to 14 million in 2011.

Other Beijing ecosystem issues I heard about were the things we take for granted:  the lack of knowledge sharing (“pay it forward” isn’t part of the culture,) limited mentoring (few experienced mentors,) and a lack of open source education, and no AngelList model. In the U.S. it’s easy to share and browse ideas and deals, but in China there’s a long legacy of guarding knowledge as power, and the justifiable paranoia of someone copying your idea prevents sharing.

Liquidity

Unlike the U.S. there are almost no mergers or acquisitions in this market segment. It’s much easier to just steal their ideas and hire their employees. So big companies rarely acquire startups. Liquidity for most Internet startups happens via IPO’s. 70% of exits in China are via IPO (in the U.S. on NASDAQ or the NYSE or on ChiNext, China’s equivalent of NASDAQ) compared to the 90% of exits in US via mergers or acquisitions. Alibaba (commerce), Tencent (games/chat) and Baidu (search) all have market caps over $40 billion.

The next post, the Gold Rush and Fire Extinguishers – Beijing entrepreneurs, startup culture and some conclusions.

Lessons Learned

China has the biggest Venture Capital industry outside the U.S
For software, the action is in Beijing
China has closed its search, media and social network software market to foreign companies
Beijing’s VC’s primarily invest in the Technology, Media and Telecommunications segment
Liquidity is via IPO’s not buy outs



Filed under: China, Customer Development, Technology, Venture Capital

The Rise of Chinese Venture Capital – (Part 3 of 5)

I just spent a few weeks in Japan and China on a book tour for the Japanese and Chinese versions of the Startup Owners Manual.  In these series of 5 posts, I thought I’d share what I learned in China. All the usual caveats apply. I was only in China for a week so this a cursory view. Thanks to Kai-Fu Lee of Innovation Works, David Lin of Microsoft Accelerator, Frank Hawke of the Stanford Center in Beijing, and my publisher China Machine Press.

The first post described how China built a science and technology infrastructure to support advanced weapons systems development. The previous post described how the Torch program built China’s innovation clusters. This post is about the rise of Chinese venture capital and how it helped build the countries entrepreneurial ecosystem.

The Rise of Chinese Venture Capital

China’s move away from a state system that solely depended on a command and control economy started in the 1990s. The first wave of startups began when R&D centers and universities began to provide the technology and seed capital for new startups that were spin-outs or spin-offs. This could be a group of individuals leaving a university or research center or an entire department leaving. For example, in the 1990’s 85% of the start-up funds of the new technology companies founded in Beijing came from the research center or university they left.

The second wave of technology investors were Chinese banks, who provided the majority of the later stage investments in the Torch Program. By 1991, 70% of the Torch funded startups were getting bank financing for expansion and later stages of the new ventures, with local governments acting as guarantors. Like the U.S. SBIR and STTR programs, the Torch Program’s funding for new ventures was limited to seed funding the front end. Being designated as a Torch Program startup gave banks comfort to provide loans to these ventures for technology commercialization.

Technology zones with Science and Technology Industrial Parks were the third source of support for new ventures. Inside the zones were Torch Technology Business Incubators with startups licensed by the local governments.  These local governments financially supported the startups because, by locating in these zones, the new ventures were seen as contributing to local economic development. This helped the startups qualify for funding from banks and venture capital firms.

By the mid-1990s, Chinese leaders realized that the Torch program couldn’t be the source of all capital for startups. At the same time neither banks nor local governments had the cash to finance startups on the scale the country needed. The problem was that in China the government didn’t recognize venture capital firms as a legitimate organizational type. The founding of domestic VC firms began with the establishment of local government-financed venture capital firms (GVCFs), followed by university-backed VC firms (UVCFs). (The State Science and Technology Commission and the Ministry of Finance formed the China New Technology Venture Investment Corporation in 1986, but it was a government agency supporting national technology venture policy objectives, rather than a profit-oriented private enterprise. It went bankrupt in 1997.)

A few foreign VC firms like IDG Capital Partners entered China in the early 1990s. Gradually, from the mid-1990s, the perception of venture capital shifted from its being a type of government funding to being a commercial activity necessary to support the commercialization of new technology. But it wasn’t until 1998 that corporate-backed VC firms could be established, and that started a wave of VC funds backed by government, corporate and foreign capital.

A great summary diagram below from OECD’s Report on China’s Innovation Policy traces the evolution of China’s Innovation Ecosystem.

Investing in China Today

Fast forward a decade, today the Private Equity and Venture Capital business is booming in China with over 1000 firms actively investing. Most of the early deals were done by offshore venture funds – with their fund registered in countries outside China and using dollars. The latest trends are as Renminbi (“RMB”) funds (the Renminbi is the official currency in China.)  In the past foreign funds who wanted to invest in China had to set up funds using dollars with complicated offshore structures with exits through offshore listings. The Renminbi funds have fewer restrictions on what industries the fund can invest in, less regulatory oversight and access to listing a portfolio company in China. There are two types of Renminbi funds: domestic funds and foreign-invested funds.  Domestic Renminbi funds are fully owned by Chinese investors, while foreign-invested Renminbi funds may be partially or fully owned by non-Chinese investors.  Both types of funds are organized under Chinese law and use Renminbi to invest in Chinese companies.

The other big change was the creation of ChiNext, China’s equivalent of NASDAQ stock exchange for start-ups, in 2009. The market was created to provide startups and their investors liquidity. Over 100 startups were listed on ChiNext the first year of its launch at sky-high valuations (average of 66 times earnings.) About 60% of the startups listed on ChiNext were backed by Renminbi funds, making the investors of these funds one of the main beneficiaries of the exchange.

The next posts Part 4  Zhongguancun in Beijing – China’s Silicon Valley and part 5, the Gold Rush and Fire Extinguishers describe the Beijing entrepreneurship ecosystem.

 

Lessons Learned

China’s venture capital system has made a remarkable journey from the “state owns everything” to the free market
It’s done it in a series of evolutionary stages, each new one learning from the last


Filed under: China, Customer Development, Technology, Venture Capital

China’s Torch Program – the glow that can light the world (Part 2 of 5)

I just spent a few weeks in Japan and China on a book tour for the Japanese and Chinese versions of the Startup Owners Manual. In these series of 5 posts, I thought I’d share what I learned in China. All the usual caveats apply. I was only in China for a week so this a cursory view.Thanks to Kai-Fu Lee of Innovation Works, David Lin of Microsoft Accelerator, Frank Hawke of the Stanford Center in Beijing, and my publisher China Machine Press.

The previous post described how China built its science and technology infrastructure. This post is about the how the Chinese government engineered technology clusters.

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The Torch Program

In size, scale and commercial results China’s Torch Program from MOST (the Ministry of Science and Technology) is the most successful entrepreneurial program in the world. Of all the Chinese government programs, the Torch Program is the one program that kick-started Chinese high-tech innovation and startups.

In the last decade Torch managed to break free of China’s state central planning bureaucracies. Of all the Chinese innovation programs, Torch is the one that was run like a startup – iterating and pivoting as it learned and discovered. This enabled Torch to evolve with China’s rapidly global economy.

Torch has four major parts: Innovation Clusters, Technology Business Incubators (TBIs), Seed Funding (Innofund) and Venture Guiding Fund.

Innovation Clusters

Industries have a competitive advantage when related companies cluster in a geographical location. Examples are Hollywood for movies, Milan for fashion, New York for finance and today, Silicon Valley for technology entrepreneurship. The early clusters occurred by happenstance of geography or history. But the theory is that you can artificially create a cluster by concentrating resources, finance and competences to a critical threshold, giving the cluster a decisive sustainable competitive advantage over other places. Israel, Singapore and now China are the three countries that have successfully put that theory into practice.

The Torch program created Innovation Clusters by creating national Science and Technology Industrial Parks (STIPs), Software Parks, and Productivity Promotion Centers.

The first Science and Technology Industrial Park was Zhongguancun Science Park in Beijing. It has become China’s Silicon Valley. (This was the area I visited in this trip to China.) In addition to the one in Beijing, China has set up 53 additional industrial parks and in them are ~60,000 companies with 8 million employees. Industry or technology specific versions of these clusters have been set up; for example Donghu in Wuhan – specializing in optoelectronics, Zhangjiang in Shanghai – focusing on integrated circuits and pharmaceuticals, Tianjin – biotech and new energy, Shenzhen – telecommunications and Zhongshan – medical devices and electronics.

The Science and Technology Industrial Parks contributed 7% of China’s GDP and close to 50% of all of China’s R&D spending.

In addition to the 54 Science and Technology Industrial Parks, the Torch program also set up an additional 32 Torch Program Software Parks.

Another key part of China’s cluster strategy was collaboration between research and business, as well as between large enterprises and tech-based small and medium enterprises. It did so by building a national network of a 1,000+ Productivity Promotion Centers. They provide consulting, promotion, product testing, hiring, training and incubation services to startups.

Technology Business Incubators (TBIs)

While the Innovation Clusters designated specific areas of the countries where high tech was to occur, it’s the Technology Business incubators located inside these clusters where the startup companies physically reside. Much like incubators worldwide, they provide startups with office space, free rent, access to university technology transfer, etc.

By 2011, there were a total of 1034 Technology Business Incubators across China, including 336 as National incubators, hosting nearly 60,000 companies. (20% of the National Incubators were privately-run and their percentage is steadily increasing.) In recent years Business Incubators have developed into diverse models. For example, the Ministry of Education and the Ministry of Science and Technology teamed up to put 45 incubators in universities. There are close to 100 specialized incubators for companies founded by returned overseas Chinese scientists and engineers. There are a dozen sector-specific incubators (a Biomedicine Incubator in Shanghai, Advanced Material Incubator in Beijing, a Marine Technology Incubator in Tianjin, etc.) These incubators are mostly clustered in the eastern coastal regions, and disproportionately target TMT (Technology Media and Telecom) and Biotech.

Some of the startups coming out of these incubators have become large international companies including Lenovo, Huawai, Suntech Power, etc.

Seed Funding (Innofund).

The best analog for China’s InnoFund is the U.S. government’s SBIR and STTR programs. Set up in 1999, Innofund offers grants ($150 – $250K), loan interest subsidies and equity investment. Innofund is designed to bridge early stage technology companies that have innovative technology and good market potential but are too early for commercial funding (banks or VCs.) Innofund applicants have to be in high-tech R&D, have less than 500 people, at least 30% of the employees have to be technical and the majority of the company owned by Chinese. The ultimate goal of Innofund is to get the startups far enough along in technology and market validation so other sources of financial capital (banks, VC’s, corporate partners) will invest.

Since its establishment, there’s been over 35,000 applications with 9,000 projects approved and close to a $1 billion allocated.

Most Venture Capitalists in China viewed the Innofund the same way most U.S. VC’s treat the SBIR and STTR programs – they never heard of it, or they think it takes too much time to apply for too little money. And with the same complaints; tedious, relationship driven application process, bureaucratic reporting requirements, and outcomes often measured in quantity and not quality. However, for startups who have gotten an Innofund grant, it does provide the same positive cachet as an SBIR and STTR grant – the government has reviewed your technology and thought it was worthy.

Venture Guiding Fund

In 2007 the Ministries of Science and Finance raised the stakes to get VC’s focused on funneling more VC money into growing startups – they set up a Venture Guiding Fund. The Venture Guiding Fund invests directly into VC funds, co-invests with VC’s, and covers some VC bets. It does this with four programs: 1) A fund of funds, holding < 25% equity in VC firms, requiring only a fixed rate return; 2) the fund will co-invest with other VC firms matching up to 50% of other VC firm’s equity investment or a maximum of $500K; 3) Risk subsidies for VC firms, where the fund will be compensated for the cost and loss of VC firms which have made investments in technology-based startups; and 4) Grants for portfolio reserves, where the fund will provide grants for technology-based startups which are being incubated and coached by VC firms.

Part 3, the next post describes the rise of Chinese venture capital.

Lessons Learned

The Torch Program is the worlds largest “lets engineer entrepreneurial clusters” experiment
Torch has four major parts: Clusters, Business Incubators, Seed Funding, and Funds to support Venture Capital firms
Torch was the rare government program that was run like a startup – iterating and pivoting as it learned and discovered.


Filed under: China, Customer Development, Technology, Venture Capital

China – The Sleeper Awakens (Part 1 of 5)

I just spent a few weeks in Japan and China on a book tour for the Japanese and Chinese versions of the Startup Owners Manual.  In these series of 5 posts, I thought I’d share what I learned in China.  My post about Japan will follow. All the usual caveats apply. I was only in China for a week so this a cursory view. Thanks to Kai-Fu Lee of Innovation Works, David Lin of Microsoft Accelerator, and my publisher China Machine Press.

Summary: I’ve lived in Silicon Valley for 35 years, I’ve taught in entrepreneurial clusters in New York, Boston, Helsinki, Santiago Chile, St. Petersburg, Moscow, Prague, and Tokyo, but the visit to the heart of the Beijing startup world Zhongguancun has truly blown me away.

Each of these clusters has wondered how to become the next Silicon Valley.  Beijing is already there.

———-

What a long strange trip China has been through. After the creation of the Peoples Republic of China in 1949, all industry was nationalized, agriculture was collectivized, and the private sector was eliminated. All companies were owned by the state, all planning was centralized, and the state determined the allocation of resources. This was the China I grew up with – the one where private enterprise was a crime and marketing wasn’t a profession.

To say China has transformed itself is perhaps the biggest understatement one can make. China has embraced state capitalism in a way Wall Street can only dream about.

Startups, Venture Capital and the Communist Party: how did this happen in China?

The best analogy to describe the relationship of science and technology and the Chinese startup scene is to understand its parallels with the United States during the Cold War with the Soviet Union.  During World War II, the U.S. mobilized scientists in a way no other country had. For 45 years – post World War II until the fall of the Soviet Union – the U.S. viewed science and technology as a strategic asset. We made major investments in it, understanding that establishing basic and applied science leadership was necessary for us to build advanced weapons systems to defend our country and deter and if necessary, wage and win a war with the Soviet Union.

These investments took the form of building national research organizations, several for basic science (NSF, NIH) and others for applied weapons research (DOD, DARPA, DOE, etc.) Research universities also became an integral part of the military ecosystem as the federal government pumped billions into supporting science.

Startups, entrepreneurship and commercial applications are happy byproducts of those military investments. For example, as the semiconductor business started, the largest customers for Fairchild’s and Texas Instruments new integrated circuits were the Apollo Guidance Computer and the guidance system for the Minuteman II ICBM.

China is following the same path...

Over the last three decades, to achieve strategic parity with the United States and to construct a modern military, the Chinese have made massive investments in building their science and technology infrastructure. China has gone from a land-based army to one that can support its territorial claims to the South China Sea and Taiwan with anti-access/area-denial weapons. This evolution required a transition, moving from a reliance on the numerical superiority of its land army toward a force boasting sophisticated aircraft and naval platforms, precision- strike weapons, and modern C4SIR (Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance) capabilities. Its Second Artillery Corps not only controls China’s ICBMs, but also its short range missiles pointed at Taiwan, Vietnam, Philippines, and U.S. bases in Guam and Okinawa. And its new terminally guided ICBMs have put U.S. aircraft carriers in harms way in any regional confrontation. Its air force and navy have gone from a self-defense force to one that can project regional power effectively to the first island chain and beyond.

China’s military modernization depends heavily on investments in China’s science and technology infrastructure, reform of its defense industry, and overt and covert procurement of advanced technology and weapons from abroad.

Building China’s Science and Technology infrastructure

Science and startups have come a long way since the 1980’s when the Chinese government owned everything and controlled it through a central planning system.  But before startups could happen, China’s basic science, technology and finance infrastructure and ecosystem needed to be built.  Here’s how a national policy for science and technology emerged.

Beginning in the 1982, China started a series of science and technology programs in five areas: support of basic research, high technology R&D, technology innovation and commercialization, construction of scientific research infrastructure, and development of human resources in science and technology.

The majority of the science and technology programs are driven by MOST (Ministry of Science and Technology) and NSFC (National Natural Science Foundation). As we’ll see later, the MOF (Ministry of Finance) also has had a hand in funding new ventures.

The diagram below from OECD’s Report on China’s Innovation Policy puts the ministries involved in science in context. (Note that it does not show the military technology ministries.)

Basic research: National Natural Science Foundation (equivalent to the U.S. National Science Foundation,) ~$1.75 billion budget. The 973 program (National Basic Research Program) part of the Ministry of Science and Technology.
High technology R&D: 863 Program (State High Technology R&D Program) headed by ex leaders of Chinese strategic weapons programs, and the National Key Technology R&D Program.
Technology innovation and commercialization: National New Product Program, the Spark program for rural innovation, and probably the most important one for startups in China , the Torch Program
Science research infrastructure:  National Key Laboratories Program, and the MOST program for the construction of research facilities, R&D databases, and a scientific research network
Development of human resources in science and technology: Programs for attracting returnees or overseas Chinese talent: from the Ministry of Education – the Seed Funds for Returned Overseas Scholars, Chunhui Program, and the Cheung Kong Scholar Program. From the Ministry of Personnel – the Hundred Talents Program. From the National Science Foundation – the National Distinguished Young Scholars Program.

Part two the next post, describes China’s Torch Program, the largest government-run entrepreneurial program in the world.

Lessons Learned

China is working to build basic and applied science and technology leadership
Like the U.S. and the Soviet Union in the Cold War they are using science and technology to build advanced weapons systems
Technology startups are a side effect from these investments


Filed under: China, Customer Development, Technology, Venture Capital

The Lean LaunchPad Goes to Middle School

While the Lean LaunchPad class has been adopted by Universities and the National Science Foundation, the question we get is, “Can students in K-12 handle an experiential entrepreneurship class?”  Hawken School has now given us an answer.

Hawken is an independent school for grades K-12 in Cleveland, Ohio, committed to the idea that students learn more “by doing than by listening.” Experiential education is threaded in the school’s DNA.

Doris Korda, spent the first 15 years of her career in the high tech industry and is now the Associate Head of School. Natasha Chornesky, who ran a publishing business, is the Director of Entrepreneurial Studies. They both attended our latest Lean LaunchPad Educators Class. These two posts are what they did when they returned.

Part one was about Hawken School’s experience using the Lean LaunchPad curriculum for high school seniors, this post is what happened when they used it for 6th- to 8th-graders.

——

6th  to 8th Graders: from Pitch to Prototype

We believed that we could teach entrepreneurship at Hawken to the 6th to the 8th graders, so the week after Christmas Break I taught a 35-hour, one-week course in our Middle School Insights Program. Boys and girls ages 11 -14 pitched ideas on Monday and then worked through the week to pitch their Minimum Viable Products to VCs on Friday — StartUp Weekend style.

Because it is important for kids in North East Ohio to understand what high tech is and why and how a solution may be scalable, students were allowed to pitch any idea that could be solved using a mobile/web solution.

The Week

Monday students pitched, voted and joined teams. By Tuesday morning, students fleshed out what they believed to be their value proposition and customer segments. We spent a lot of time defining an MVP and steering them away from multiple features for the user. Scrum boards went up detailing everything they needed to accomplish by Friday afternoon. Tuesday afternoon they got out of the building and headed to a local mall to begin the customer validation and development process.

Wednesday morning they tabulated data and brought their original hypotheses to a grinding halt based on what they learned outside the building.  With new hypotheses and the help of a local UX Designer from Cleveland’s agile methods experts, LeanDog, the pivots began. Using paper templates, students worked out user experiences and taped them to the wall next to their drawings of customer archetypes. The energy in the room was electrifying.

In addition to regular lunch, the kids consumed 16 boxes of dry cereal, a crate of Clementines and an untold number of juice boxes. On Wednesday and Thursday, splash pages were launched; email addresses captured, cost structures and revenue streams explored. By Thursday noon each team knew, through hypothesis testing and customer interviews, the single feature behind its MVP and they headed out of the building one last time.

Results

Teams conducted 20-40 face-to-face interviews that week. They drew customer archetypes and storyboards, tried emailing, phone scripts and face-to-face conversations. We instituted the “Great Idea Gong” (GIG) that they thwacked every time a teammate wanted to share a “Big Idea” with the rest of the class.  We didn’t blog, but kids submitted an exit ticket at the end of each day. They answered Steve’s prompts: “This is what I thought . . . this is what I learned . . . This is what I am doing next . . . This is what I am keeping in mind… “

“I thought everyone at the mall would want to talk to us. I learned that people are in a hurry and busy and they may not care. Next time, I am going to talk to people without my partner so it’s one-to-one. And, I am going to change where I stand,” wrote Max, an 8th-grader.

Students even watched a little Shark Tank, which explains why on Friday, when they pitched local VCs from Cleveland’s business accelerator, JumpStart they declined the celebratory cake and ice cream and spent their last hour of class time grilling the judges not only on what their financial terms were, but about what level of expertise they would bring to the particular team? “If we move forward, we don’t just need a big check, we need someone who is really knowledgeable and experienced in creating partnerships. We don’t know much about that when it comes to clothing brands. Without that help, the money won’t matter,” explained Stephanie, a 7th-grader.

Lessons Learned:

When stuck with “no ideas,” instruct younger students to become detectives and identify the things that bug their friends, family and themselves. Next ask, “What is a possible solution to that problem?”
For each block in the business model canvas, have the students focus on only one or two questions
Reword the questions in age-appropriate language. Asking, “What do we need to do to make our solution a reality?” and “What are the things/people we need to make our solution a reality?” helps students who are stuck completing a business model canvas
Encourage an atmosphere of sharing with everything from food to great ideas
Scrum boards are a huge success for kid teams
Worry less about covering content and more about students developing the skill and willingness to take a risk, fail, makes some changes and try again.
Interrupt work every so often with something physical like dancing to loud music or running around outside. Ask the kids to teach you a new game
Teachers should check their own egos at the door

Summary for the Lean LaunchPad in K-12 Education

We are learning how to use the Lean LaunchPad model to build our entrepreneurial program for high school and middle school students, and will soon use it as the basis for developing an entrepreneurial program for our youngest students as well.

Our educational Goals for Hawken Middle and High School students is to:

Develop and apply an entrepreneurial mindset in all their endeavors (inside and outside of entrepreneurship class):            

This is what I thought . .  .
This is what I learned . . .
This is what I am doing next . . .
This is what I am keeping in mind . . .
Acquire real-world experience outside the classroom
Identify the key components of high-tech scalable businesses, not common in our geographic region.
Develop project management and team communication skills.
Become better and more empathetic listeners through the customer development process.
Embrace failure as an essential element of success.
Understand the ever-evolving relationships among the 9 BMC blocks.

We are finding the Lean LaunchPad curriculum to be a powerfully relevant and inspiring educational tool for students of all ages.

For additional information and/or resources, contact dkorda@hawken.edu or nchor@hawken.edu

Filed under: Lean LaunchPad, Teaching

The Lean LaunchPad Goes to High School

While the Lean LaunchPad class has been adopted by Universities and the National Science Foundation, the question we get is, “Can students in K-12 handle an experiential entrepreneurship class?”  Hawken School has now given us an answer.

Hawken is an independent school for grades K-12 in Cleveland, Ohio, committed to the idea that students learn more “by doing than by listening.” Experiential education is threaded in the school’s DNA.

Doris Korda, spent the first 15 years of her career in the high-tech industry and is now the Associate Head of School. Natasha Chornesky, who ran a publishing business, is the Director of Entrepreneurial Studies.  They both attended our latest Lean LaunchPad Educators Class. These two posts are what they did when they returned.

Part one is about Hawken School’s experience using the Lean LaunchPad curriculum for high school seniors, part two is what happened when they used it for 6th- to 8th-graders.

——

High School Entrepreneurship:  Choosing the Lean LaunchPad over a Mini-MBA Program

Adopting the Lean LaunchPad instead of a “mini MBA program” for Hawken students made good sense pedagogically, (we knew that searching for a viable business model is the core of entrepreneurship,) though it presented some challenges in perception:

None of the neighboring high schools was using the Lean LaunchPad
Most of these schools have entrepreneurship classes focused on students making crafts and selling them
Other schools curricula were steeped in traditional management and economics texts

Having taught grades 6-12, survived two “tours of duty” as a middle school principal, and designed curriculum for grades 3 and up, it was obvious to me that Steve’s Lean LaunchPad provides an accessible framework for young students to search successfully. We started with a few hypotheses, and iterated and pivoted to a successful program.

Hypothesis 1:

High school students will come through the door burning with passion to transform an idea into a business.

Reality: My seniors arrived to class with no ideas and no idea that they needed an idea. They thought they were learning about other people’s ideas in case studies and articles. They didn’t think they’d be doing entrepreneurship.

Practice:  We created time in class to share ideas. I framed the search for a viable business model as the focus. We determined as a class that we wouldn’t pass judgment on ideas until we dove into the customer development process. I stressed to the students they would be assessed on their ability to move through the Customer Development process, rather than be graded on an idea’s perceived worth. How quickly can you test hypotheses, learn from the tests, iterate?

Currency in my class became the ability to quickly test hypotheses, iterate and pivot.  It would be several months before my seniors, obsessed with college admissions, embraced this methodology, which felt so foreign at the onset.

Still apprehensive about working on their own businesses, I connected them with local entrepreneurs, but with a twist. Following Steve’s Golden Rule that entrepreneurs were not allowed as guest speakers in class, I went out to the community and located entrepreneurs who needed help with their customer discovery process. I worked with the entrepreneurs to craft a deliverable that was both helpful to them and with which my students would be successful. One of the requirements was that my students had to get out of the building and start talking to customers. Students blogged using Steve’s four prompts, below. The more they were out in the field, the stronger their entrepreneurial mindset grew, which was reflected in their posts.

This is what I thought . .  .
This is what I learned . . .
This is what I am doing next . . .
This is what I am keeping in mind . . .

Result: By the end of the first semester, the world opened up, questions and opportunities popped up everywhere, even where kids previously had seen failure or disappointment. Students’ entrepreneurial mindsets had permeated the most unlikely places.  “I don’t know what is going on in your class, but these kids have changed. Their entire mindset is different and the way they are showing up in the college admissions process is really different—in a great way,” remarked Director of College Admissions, Andrea Hays.

Hypothesis 2:

Hawken’s entrepreneurship class needed to look and feel familiar to students, parents and others in order to be successful.

Reality: A local school that is held as the pinnacle of entrepreneurship education uses Harvard case studies, so I thought we should, too. We were three-quarters of the way through the year and we hadn’t touched one. We didn’t need them.

The customer discovery and development process provides real experience, and real experience trumps case studies.  Plus, kids will tell you that the cases are the same old problems and they’ve already been solved.  Reading and discussing problems is never as meaningful as experiencing the problem, which can only be achieved by getting out of the building.

Practice:  Throughout the entire first semester, I maintained a routine of weekly take-home quizzes. Quiz questions asked students to use their favorite businesses to flush out business models using the Business Model Canvas. While the students aced these quizzes, they quickly forgot the information.

Initially students craved a syllabus, a checklist and the opportunity to easily memorize and regurgitate facts and concepts, and wanted to be told what to do. By second semester, they outgrew these needs. “We’re biased toward action and the action is always changing,” explains senior Peter Labes, adding, “We’ve learned to prioritize based on urgency, which is a lot different than operating off a teacher’s checklist.”

Iteration: I “flipped the classroom” by switched from assigning chapters to read to assigning Steve’s Udacity videos. Understanding, enthusiasm and retention increased. I abandoned the weekly quizzes and instituted weekly “here’s what I learned for customer discovery” presentations from the students , followed with a class Q&A session. The presentations demonstrated their hypotheses tested, results, customer interactions and iterations. I graded the presentations and I graded the verbal feedback students offered one another.

When the quality of the verbal feedback became such that there was too much great information for kids to just remember, I introduced the use of Steve’s live feedback through Google Docs. At first my seniors giggled and snickered and told me I was nuts to put this tool in their hands. We talked about the value of immediate meaningful feedback. They quit giggling. We’re never going back. The quality of feedback and the quality of the presentations has increased exponentially.  “I opened up the Google Doc to review the commentary from my classmates about the slide decks. The variety, complexity and creativity of ideas were impressive. Some people touched on concepts that our four-person group hadn’t even thought to consider. There really is strength in numbers,” writes a senior in her blog.

What’s next: Having completed in-depth customer discovery my students will be the first to tell you that “Being an entrepreneur is a TON of work!” Returning from spring break, the entire class will break up into teams and commence their own search for a viable business model for a passion-driven idea. It’s going to be dirty, messy and lots of time outside the building.

Result: “At the beginning of the year, we were scared to commit ourselves,” explains senior Emily Leizman. ”We worked, but not 100%. Now, we’ve worked the customer development process for three companies and we treated them like our own. We’re working at 110% commitment now, so it’s time to do it for ourselves. We’re ready,”

Lessons Learned

The Lean LaunchPad methodology is proven. Go 100% from the start.  Don’t phase it in.
Be transparent with your students. Your class is in Startup mode. Embrace failure.
Kids have less to “unlearn” than older students and they are naturally excited by Lean LaunchPad 100% experiential methodology.
Be clear in your mind that the skills acquired through Lean LaunchPad methodology trump content and act accordingly. Act tough, too.
Remind kids that they are being assessed on how quickly they learn from testing their hypotheses and how quickly they iterate and pivot.
Leverage your local entrepreneurship community in meaningful ways, instead of using them as guest speakers.

In the next post, 6-8th graders use the Lean LaunchPad at Hawken School.

Filed under: Lean LaunchPad, Teaching

Failure and Redemption

“What’s gone and what’s past help

Should be past grief.”

William Shakespeare - The Winter’s Tale

We give abundant advice to founders about how to make startups succeed yet we offer few models about dealing with failure.

So here’s mine.

——–

In my experience, living through failure has 6 stages:

Stage 1: Shock and Surprise
Stage 2: Denial
Stage 3: Anger and Blame
Stage 4: Depression
Stage 5: Acceptance
Stage 6: Insight and Change

While I had been part of a few failed startups, none of them had fallen squarely on my shoulders until Rocket Science Games where my business card said CEO. It was there that I lived through all 6 stages and came out the other side a changed man.

Failure

Stage 1: Shock and Surprise

We raised $35 million and after 18 months made the cover of Wired magazine. The press called Rocket Science one of the hottest companies in Silicon Valley and predicted that our games would be great because the storyboards and trailers were spectacular. 90 days later, I found out our games are terrible, no one is buying them, our best engineers started leaving, and with 120 people and a huge burn rate, we’re running out of money and about to crash. This can’t be happening to me.

Stage 2: Deny any of it was your fault

In my mind, I had done everything the investors asked me to do. I raised a ton of money and got a ton of press. We hired everyone according to our plan. It was everyone else who screwed up. I did everything right.

Stage 3: Get angry and blame everyone else

This was the fault of my cofounder since he was in charge of game development, it was the engineers who bailed on me, it was the sales and marketing people who didn’t tell me how bad the games were, it was the VC’s who refused to put any more money in the company, it was Sega’s fault for making a bad gaming platform…

State 4: Get depressed

When the inevitability and magnitude of the failure sunk in, I slept in a lot. There were days I’d get up late and go to bed again at 5 pm. I lost interest in anything associated with my past industry. (To this day I still can’t play a video game.)

Redemption

Step 5: Gradually accept your role in the failure

A few weeks after leaving, I began to think about what I should have done, could have done and pondered why I didn’t do it. (I didn’t listen, I didn’t act, I didn’t own my role as CEO, I wasn’t prepared to do what was right or leave.) This was hard and didn’t happen overnight. My wife was a great partner here. I often reverted to Stages 2 and 3, but over time I took ownership of my primary role in the debacle.

Stage 6: Gain insight and change your behavior

This was the hardest part. While I stopped blaming others, understanding what I could change in my behavior took long months. It would have been much easier to just move on, but I was looking for the lessons that would make my next startup successful. I looked at the patterns of behavior, not just at my last company but also across my entire career. I learned how to dial back the hubris, get other smart people to work with me – rather than just for me, listen better, and act and do what was right – regardless of what others thought I should do.

Epilogue

For my next startup I parked the behaviors that drove Rocket Science off the cliff. We established a team of founders who worked collaboratively. When my co-founders and I got the company scalable and repeatable, we hired an operating executive as the CEO and returned a billion dollars to each of our two lead investors.

Now when I listen to entrepreneurs who’ve cratered a company, I listen for their stories of failure and redemption.

Lessons Learned

Six stages of failure and redemption
Don’t get stuck in Stages 2, 3 or 4  - move forward
Don’t skip acceptance of your role
Get to insight so you can change your behavior—then commit to the challenge of doing it differently the next time


Filed under: Family/Career/Culture, Science and Industrial Policy

Why Big Companies Can’t Innovate

My friend Ron Ashkenas interviewed me for his blog on the Harvard Business Review. Ron is a managing partner of Schaffer Consulting, and is currently serving as an Executive-in-Residence at the Haas School of Business at UC Berkeley. He is a co-author of The GE Work-Out and The Boundaryless Organization. His latest book is Simply Effective.  For what I had thought were a few simple ideas about taking what we’ve learned about startups and applying it to corporate innovation, the post has gotten an amazing reaction. Here’s Ron’s blog post.

———–

What’s striking about Fast Company’s 2013 list of the world’s 50 most innovative companies is the relative absence of large, established firms. Instead the list is dominated by the big technology winners of the past 20 years that have built innovation into their DNA (Apple, Google, Amazon, Samsung, Microsoft), and a lot of smaller, newer start-ups. The main exceptions are Target, Coca Cola, Corning, Ford, and Nike (the company that topped the list).

It’s not surprising that younger entrepreneurial firms are considered more innovative. After all, they are born from a new idea, and survive by finding creative ways to make that idea commercially viable. Larger, well-rooted companies however have just as much motivation to be innovative — and, as Scott Anthony has argued, they have even more resources to invest in new ventures. Sowhy doesn’t innovation thrive in mature organizations?

To get some perspective on this question, I recently talked with Steve Blank, a serial entrepreneur, co-author of The Start-Up Owner’s Manual, and father of the “lean start-up” movement. As someone who teaches entrepreneurship not only in universities but also to U.S. government agencies and private corporations, he has a unique perspective. And in that context, he cites three major reasons why established companies struggle to innovate.

First, he says, the focus of an established firm is to execute an existing business model — to make sure it operates efficiently and satisfies customers. In contrast, the main job of a start-up is to search for a workable business model, to find the right match between customer needs and what the company can profitably offer. In other words in a start-up, innovation is not just about implementing a creative idea, but rather the search for a way to turn some aspect of that idea into something that customers are willing to pay for.

Finding a viable business model is not a linear, analytical process that can be guided by a business plan. Instead it requires iterative experimentation, talking to large numbers of potential customers, trying new things, and continually making adjustments. As such, discovering a new business model is inherently risky, and is far more likely to fail than to succeed. Blank explains that this is why companies need a portfolio of new business start-ups rather than putting all of their eggs into a limited number of baskets. But with little tolerance for risk, established firms want their new ventures to produce revenue in a predictable way — which only increases the possibility of failure.

Finally, Blank notes that the people who are best suited to search for new business models and conduct iterative experiments usually are not the same managers who succeed at running existing business units. Instead, internal entrepreneurs are more likely to be rebels who chafe at standard ways of doing things, don’t like to follow the rules, continually question authority, and have a high tolerance for failure. Yet instead of appointing these people to create new ventures, big companies often select high-potential managers who meet their standard competencies and are good at execution (and are easier to manage).

The bottom line of Steve Blank’s comments is that the process of starting a new business — no matter how compelling the original idea — is fundamentally different from running an existing one. So if you want your company to grow organically, then you need to organize your efforts around these differences.

Filed under: Big Companies versus Startups: Durant versus Sloan, Business Model versus Business Plan

Crazy enough to change the world

“Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma – which is living with the results of other people’s thinking. Don’t let the noise of other’s opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.“

Steve Jobs, Stanford University commencement speech, 2005

Last week one of our mentors abruptly resigned from coaching one of the Lean LaunchPad student teams after claiming the students were ignoring his practical advice and years of expertise in the field.

His reaction reminded me one more time why entrepreneurship is an art, why VC’s manage portfolios of companies and why new ideas come from those who don’t respect the status quo.

I’m a Domain Expert Damn It

We always assign experienced mentors to our student teams. In this class this seemed like a perfect fit – a driven (irrational?) founder paired with a mentor who had two operating companies in this space, who had developed and sold vertical market software to companies in this space, and had studied the field as an academic specialty. A match made in heaven?  Not exactly.

The mentor tried his best to get the team to look at the actual operating data that exists for this kind of service and the likely regulatory hurdles they will find. He was very negative about the concept and strongly suggested the team do a pivot, but the founder was very determined to make a go of his concept.

He finally quit in frustration.

And here’s the conundrum – given a wise mentor (or VC) with years of experience telling you it’s a bad idea – what should you as the founder do?

Are You Crazy Enough?

What we suggest to teams in the classroom is the same as I suggest to teams in real world startups – after customers and experienced people are telling you it won’t work –

Are you passionate enough to still believe?
Can you explain after why getting out of the building and hearing all the negative news you still want to persevere?
Will it change the world enough to make it worth the trials, travails and pain in getting there?

If so, ignore the other voices. The world moves forward on those who are dissidents. Because without dissent there is no creativity. A healthy disrespect for the status quo coupled with passion, persistence and agility trumps everything else.

Filed under: Customer Development, Teaching