Steve Blank's Blog, page 50

The Pay-It-Forward Culture

Foreign visitors to Silicon Valley continually mention how willing we are to help, network and connect strangers.  We take it so for granted we never even to bother to talk about it.  It's the "Pay-It-Forward" culture.

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We're all in this together – The Chips are Down

in 1962 Walker's Wagon Wheel Bar/Restaurant in Mountain View became the lunch hangout for employees at Fairchild Semiconductor. When the first spinouts began to leave Fairchild, they discovered that fabricating semiconductors reliably was a black art. At times you'd have the recipe and turn out chips, and the next week something would go wrong, and your fab couldn't make anything that would work. Engineers in the very small world of silicon and semiconductors would meet at the Wagon Wheel and swap technical problems and solutions with co-workers and competitors.

We're all in this together – A Computer in every Home

In 1975 a local set of hobbyists with the then crazy idea of a computer in every home formed the Homebrew Computer Club and met in Menlo Park at the Peninsula School then later at the Stanford AI Lab. The goal of the club was: "Give to help others." Each meeting would begin with people sharing information, getting advice and discussing the latest innovation (one of which was the first computer from Apple.) The club became the center of the emerging personal computer industry.

We're all in this together – Helping Our Own

Until the 1980's Chinese and Indian engineers ran into a glass ceiling in large technology companies held back by the belief that "they make great engineers but can't be the CEO."  Looking for a chance to run their own show, many of them left and founded startups. They also set up ethnic-centric networks like TIE (The Indus Entrepreneur) and the Chinese Software Professionals Association where they shared information about how the valley worked as well as job and investment opportunities. Over the next two decades, other groups — Russian, Israeli, etc. — followed with their own networks. (Anna Lee Saxenian has written extensively about this.)

We're all in this together – Mentoring The Next Generation

While the idea of groups (chips, computers, ethnics) helping each other grew, something else happened. The first generation of executives who grew up getting help from others began to offer their advice to younger entrepreneurs. These experienced valley CEOs would take time out of their hectic schedule to have coffee or dinner with young entrepreneurs and asking for nothing in return.

They were the beginning of the Pay-It-Forward culture, the unspoken Valley culture that believes "I was helped when I started out and now it's my turn to help others."

By the early 1970's, even the CEOs of the largest valley companies would take phone calls and meetings with interesting and passionate entrepreneurs. In 1975, a young unknown, wannabe entrepreneur called the Founder/CEO of Intel, Bob Noyce and asked for advice. Noyce liked the kid, and for the next few years, Noyce met with him and coached him as he founded his first company and went through the highs and lows of a startup that caught fire.

Steve Jobs and Robert Noyce

The entrepreneur was Steve Jobs.  "Bob Noyce took me under his wing, I was young, in my twenties. He was in his early fifties. He tried to give me the lay of the land, give me a perspective that I could only partially understand," Jobs said, "You can't really understand what is going on now unless you understand what came before."

What Are You Waiting For?

Last week in Helsinki Finland at a dinner with a roomful of large company CEO's, one of them asked, "What can we do to help build an ecosystem that will foster entrepreneurship?" My guess is they were expecting me talk about investing in startups or corporate partnerships. Instead, I told the Noyce/Jobs story and noted that, as a group, they had a body of knowledge that entrepreneurs and business angels would pay anything to learn. The best investment they could make to help a startup culture in Finland would be to share what they know with the next generation. Even more, this culture could be created by a handful of CEO's and board members who led by example. I suggested they ought to be the ones to do it.

We'll see if they do.

——

Over the last half a century in Silicon Valley, the short life cycle of startups reinforced the idea that - the long term relationships that lasted was with a network of people - much larger than those in your current company. Today, in spite of the fact that the valley is crawling with IP lawyers, the tradition of helping and sharing continues. The restaurants and locations may have changed, moving from Rickey's Garden Cafe, Chez Yvonne, Lion and Compass and Hsi-Nan to Bucks, Coupa Café and Café Borrone,  but notion of competitors getting together and helping each other and experienced business execs offering contacts and advice has continued for the last 50 years.

It's the "Pay-It-Forward" culture.

Lessons Learned

Entrepreneurs in successful clusters build support networks outside of existing companies
These networks can be around any area of interest (technology, ethnic groups, etc.)
These were mutually beneficial –  you learned and contributed to help others
Over time experienced executives "pay-back" the help they got by mentoring others
The Pay-It-Forward culture makes the ecosystem smarter

Filed under: Family/Career, Secret History of Silicon Valley, Teaching

Why Governments Don't Get Startups

Not understanding and agreeing what "Entrepreneur" and "Startup" mean can sink an entire country's entrepreneurial ecosystem.

———

I'm getting ready to go overseas to teach, and I've spent the last week reviewing several countries' ambitious attempts to kick-start entrepreneurship.  After poring through stacks of reports, white papers and position papers, I've come to a couple of conclusions.

1) They sure killed a ton of trees

2) With one noticeable exception, governmental entrepreneurship policies and initiatives appear to be less than optimal, with capital deployed inefficiently (read "They would have done better throwing the money in the street.") Why? Because they haven't defined the basics:

What's a startup?  Who's an entrepreneur? How do the ecosystems differ for each one? What's the role of public versus private funding?

Six Types of Startups – Pick One

There are six distinct organizational paths for entrepreneurs: lifestyle business, small business, scalable startup, buyable startup, large company, and social entrepreneur. All of the individuals who start these organizations are "entrepreneurs" yet not understanding their differences screws up public policy because the ecosystem in supporting each type is radically different.

For policy makers, the first order of business is to methodically think through which of these entrepreneurial paths they want to help and grow.

Lifestyle Startups: Work to Live their Passion

On the California coast where I live, we see lifestyle entrepreneurs like surfers and divers who own small surf or dive shop or teach surfing and diving lessons to pay the bills so they can surf and dive some more.  A lifestyle entrepreneur is living the life they love, works for no one but themselves, while pursuing their personal passion. In Silicon Valley the equivalent is the journeyman coder or web designer who loves the technology, and takes coding and U/I jobs because it's a passion.

Small Business Startups: Work to Feed the Family

Today, the overwhelming number of entrepreneurs and startups in the United States are still small businesses. There are 5.7 million small businesses in the U.S. They make up 99.7% of all companies and employ 50% of all non-governmental workers.

Small businesses are grocery stores, hairdressers, consultants, travel agents, Internet commerce storefronts, carpenters, plumbers, electricians, etc. They are anyone who runs his/her own business.

They work as hard as any Silicon Valley entrepreneur. They hire local employees or family. Most are barely profitable. Small business entrepreneurship is not designed for scale, the owners want to own their own business and "feed the family." The only capital available to them is their own savings, bank and small business loans and what they can borrow from relatives. Small business entrepreneurs don't become billionaires and (not coincidentally) don't make many appearances on magazine covers. But in sheer numbers, they are infinitely more representative of "entrepreneurship" than entrepreneurs in other categories—and their enterprises create local jobs.

Scalable Startups: Born to Be Big

Scalable startups are what Silicon Valley entrepreneurs and their venture investors aspire to build. Google, Skype, Facebook, Twitter are just the latest examples. From day one, the founders believe that their vision can change the world. Unlike small business entrepreneurs, their interest is not in earning a living but rather in creating equity in a company that eventually will become publicly traded or acquired, generating a multi-million-dollar payoff.

Scalable startups require risk capital to fund their search for a business model, and they attract investment from equally crazy financial investors – venture capitalists. They hire the best and the brightest. Their job is to search for a repeatable and scalable business model.  When they find it, their focus on scale requires even more venture capital to fuel rapid expansion.

Scalable startups tend to group together in innovation clusters (Silicon Valley, Shanghai, New York, Boston, Israel, etc.) They make up a small percentage of the six types of startups, but because of the outsize returns, attract all the risk capital (and press.)

Just in the last few years we've come to see that we had been building scalable startups inefficiently. Investors (and educators) treated startups as smaller versions of large companies. We now understand that's just not true.  While large companies execute known business models, startups are temporary organizations designed to search for a scalable and repeatable business model.

This insight has begun to change how we teach entrepreneurship, incubate startups and fund them.

Buyable Startups: Born to Flip

In the last five years, web and mobile app startups that are founded to be sold to larger companies have become popular. The plummeting cost required to build a product, the radically reduced time to bring a product to market and the availability of angel capital willing to invest less than a traditional VCs– $100K – $1M versus $4M on up – has allowed these companies to proliferate – and their investors to make money. Their goal is not to build a billion dollar business, but to be sold to a larger company for $5-$50M.

Large Company Startups: Innovate or Evaporate

Large companies have finite life cycles. And over the last decade those cycles have grown shorter. Most grow through sustaining innovation, offering new products that are variants around their core products. Changes in customer tastes, new technologies, legislation, new competitors, etc. can create pressure for more disruptive innovation – requiring large companies to create entirely new products sold to new customers in new markets. (i.e. Google and Android.) Existing companies do this by either acquiring innovative companies (see Buyable Startups above) or attempting to build a disruptive product internally. Ironically, large company size and culture make disruptive innovation extremely difficult to execute.

Social Startups: Driven to Make a Difference

Social entrepreneurs are no less ambitious, passionate, or driven to make an impact than any other type of founder. But unlike scalable startups, their goal is to make the world a better place, not to take market share or to create to wealth for the founders. They may be organized as a nonprofit, a for-profit, or hybrid.

So What?

When I read policy papers by government organizations trying to replicate the lessons from the valley, I'm struck how they seem to miss some basic lessons.

Each of these six very different startups requires very different ecosystems, unique educational tools, economic incentives (tax breaks, paperwork/regulation reduction, incentives), incubators and risk capital.
Regions building a cluster around scalable startups fail to understand that a government agency simply giving money to entrepreneurs who want it is an exercise in failure. It is not a "jobs program" for the local populace. Any attempt to make it so dooms it to failure.
A scalable startup ecosystems is the ultimate capitalist exercise. It is not an exercise in "fairness" or patronage. While it's a meritocracy, it takes equal parts of risk, greed, vision and obscene financial returns. And those can only thrive in a regional or national culture that supports an equal mix of all those.
Building an scalable startup innovation cluster requires an ecosystem of private not government-run incubators and venture capital firms, outward-facing universities, and a rigorous startup selection process.
Any government that starts public financing entrepreneurship better have a plan to get out of it by building a private VC industry. If they're still publically funding startups after five to ten years they've failed.

To date, Israel is only country that has engineered a successful entrepreneurship cluster from the ground up. It's Yozma program kick-started a private venture capital industry with government funds, (emulating the U.S. lesson of using SBIC funds.), but then the government got out of the way.

In addition, the Israeli government originally funded 23 early stage incubators but turned them over to the VC's to own and manage. They're run by business professionals (not real-estate managers looking to rent out excess office space) and entry is not for life-style entrepreneurs, but is a bootcamp for VC funding.

Unless the people who actually make policy understand the difference between the types of startups and the ecosystem necessary to support their growth, the chance that any government policies will have a substantive effect on innovation, jobs or the gross domestic product is low.

Filed under: Big Companies versus Startups: Durant versus Sloan, Business Model versus Business Plan, Teaching, Technology, Venture Capital

It's Not How Big It Is – It's How Well It Performs: The Startup Genome Compass

What makes startups succeed or fail? More than 90% of startups fail, due primarily to self-destruction rather than competition. For the less than 10% of startups that do succeed, most encounter several near death experiences along the way. Simply put, while we now have some good theory, we just are not very good at creating startups yet. After 50 years of technology entrepreneurship it's still an art.

Three months ago I wrote about my ex-student Max Marmer and the Startup Genome Project. They've been attempting to quantify the art. They believe that they can crack the code of innovation and turn entrepreneurship into a science if they had hard data rather than speculation of why startups succeed or fail. Max and his partners had interviewed and analyzed over 650 early-stage Internet startups. In May they released the first Startup Genome Report— an in-depth analysis on what makes early-stage Internet startups successful.

Now 90 days later Max and his team have gathered data on 3200 startups and they believe they've discovered the most common reason startups fail.

Today you're invited to benchmark your own internet startup and see how you compare to the winners.

———

Benchmarking Your Startup

I hadn't heard from Max for awhile so I thought he took the summer off. I should have known better, it turned out he was hard at work.

Max and his team built a website called the Startup Genome Compass (their benchmarking web site) that allows an Internet startup to evaluate their business performance. The Startup Genome Compass uses a hybrid "Stage and Type" model that describes how startups progress through their business development lifecycle.

The benchmark takes 20 or so minutes to go through as series of questions, and in the end it spits out an analysis of how you are doing.

The benchmark is not perfect, it may even be flawed, but it is head and shoulders above what we have now – which is nothing – for giving Internet startups founders specific advice on best practices.  If you have a few world-class VC's on your board you're probably getting this advice in person. If you're like thousands of other startups struggling to get started, it's worth a look.

It's Not How Big It Is – It's How Well It Performs

If you're interested (and you should be) in how you compare to other early stage ventures, they summarized their results in a report "Startup Genome Report Extra: Premature Scaling."

One of the biggest surprises is that success isn't about size – of team or funding. It turns out Premature Scaling is the leading cause of hemorrhaging cash in a startup – and death. In fact:

The team size of startups that scale prematurely is 3 times bigger than the consistent startups at the same stage
74% of high growth Internet startups fail due to premature scaling
Startups that scale properly grow about 20 times faster than startups that scale prematurely
93% of startups that scale prematurely never break the $100k revenue per month threshold

The last time I wrote about Max I said, "I can't wait to see what Max does by the time he's 21." Turns out his birthday is in a week, September 7th.

Happy birthday Max.

Filed under: Big Companies versus Startups: Durant versus Sloan, Business Model versus Business Plan, Customer Development, Market Types

Hiring – Easy as Pie

Over the last few weeks I've gotten involved in hiring for two startups, a public agency and a non profit.  Part of each conversation was getting asked to help them put together a "job spec."

I had them leave with a pie chart.

——–

There must be something in the air. In the last week I had four separate groups through the ranch all wanting to talk either about hiring a senior exec or a senior exec looking for a new job. Having sat through these job discussions as an entrepreneur, board member, and now an interested observer, here's what I concluded:

Decide whether you're hiring someone to help search for the business model or to help execute a business model you've already found (same is true is you're looking for a job – are you going to be searching or executing?) Are you looking for a visionary or an operating executive?
The job spec's for the same title differ wildly depending on whether the job requires search versus execution skills. Founders search, operating executives execute.

If you're hiring an operating executive (CEO, VP, Executive Director, etc.)

Don't start with the candidate (board member x has a great VP of sales he knows, founder y wants this CEO he met at a conference, etc.)
Don't even start with the job spec

Since I've always been a visual guy, job specs with their long lists of job requirements always left me cold. My eyes would glaze over at these recruiter/board wish lists. I wished there was a way to see them at a glance. (Just to be clear this isn't the entire hiring process, just a way to visually begin the discussion.) So here's my suggestion: Start with a Pie Chart.

Draw a pie chart.
List all the job specs as slices
Adjust the width of the pie segments by importance. (Extra credit if you get the current CEO or internal candidate to help you write/draw the slices and weight their importance. Everyone involved in the hire gets to have an opinion on the slices and weights, but the person/group making the hiring decision gets to decide which ones to include.)
Now that you have this spec, evaluate each candidate by showing his/her competence in each slice by length


Compare candidates


Easy as pie!

Lessons Learned

Are you hiring for search or execution skills?
Show the job requirements visually as a pie chart
Prioritize each requirement by the width of the pie
Show your assessment of each candidate's competencies by the length of the slices
Now with the data in front of you, the conversation about hiring can start

Filed under: Big Companies versus Startups: Durant versus Sloan, Customer Development, Family/Career, Technology

The Four Steps to the Epiphany is Now in Russian

The Four Steps to the Epiphany (Четыре Шага к Озарению) is now available in Russian.

Thanks to Denis Dovgopoliy for making the Russian version happen.

It joins the French version: Les quatre étapes vers l'épiphanie

and the Japanese version アントレプレナーの教科書 [単行本（ソフトカバー）

Now in Japanese

Pay It Forward

What's pretty remarkable is these translations are not from a commercial publisher, but rather a labor of entrepreneurial love. All these translations have been crowd-sourced.

Entrepreneurs from Japan, France and now Russia believed they could help startups in their country if the Four Steps to the Epiphany was available in their native tongue. They translated it at their own expense. These are the first three translations and more are underway.

These individuals are "paying it forward" for their communities and country's. Thousands of entrepreneurs are better for their efforts.

Blame it On Eric

We can blame it all on Eric Ries. When Eric was my student in one of the first Berkeley Customer Development classes, he suggested that I take my class notes, which until then had been printed at Cafepress.com, and offer it widely on Amazon. He said, "I bet there are a few people outside the class who might like to read it." I photoshopped a cover for my notes, called it the Four Steps to the Epiphany, and bet him he was wrong.  He won the bet.

What A Long Strange Trip It's Been

I was going to end this post here, but it's late at night at the ranch and the coyotes are howling in the distance and somewhere closer, out in the redwoods, there's a barn owl hooting in the trees.

Seeing this book in Russian for me is more than just another translation.

As a child, my mother fled the Soviet Union smuggled out in a hay cart in the middle of Russian Civil war. Until she died, she reminded me that on the way to Ellis Island, her first view of the United States was the Statue of Liberty in New York harbor - and she never looked back. (As kids we memorized the poem inside the statue.)

When I was growing up the odds were pretty low that the Cold War war would end with a whimper rather than a bang. Both the U.S. and the Soviet Union trained daily to kill hundreds of millions of people. Entrepreneurship was a crime in the Soviet Union. In the 1970′s the Soviet military was on the ascendency and wasn't at all clear that the 20th century would end as the American century (or with 15,000 targeted nuclear warheads, anyones century.)

I spent my late teens here and my early 20′s here next to the sharp end of the spear, and this was no videogame. (There's equal part irony and satisfaction that Silicon Valley and semiconductor fabs had a role in the demise of the Soviet Union.)

When the Cold War ended I waited for the victory parade down Main Street.

We never did have a parade, but as a consolation prize there's now a McDonalds in Red Square, entrepreneurship is trying to blossom in a place that had 60 U.S. nuclear weapons aimed at it, my book (a revolutionary manual for capitalism,) is in Russian, and I've been asked to give my Secret History of Silicon Valley talk when I visit Moscow for the first time in September.

Good enough.

Filed under: Customer Development

There's Always a Plan B

Everyone has a plan 'till they get punched in the mouth. 

Mike Tyson

One of the key distinctions between an entrepreneur and an operating executive is an entrepreneur's almost seamless agility in the face of changing circumstances versus an operating executive's intense execution focus on a plan. World-class entrepreneurs learn how to combine both.

WTF?

Driving home over the mountains from a Coastal Commission hearing, I had time to ponder an email I received from a city official as the road wound through the Redwood trees. The Coastal Commission had found that a zoning change his city requested didn't conform to the Coastal Act, and we denied it. I felt sorry for him because he had put together a project that depended upon the property owner, developer, unions, hotel operator, local neighbors, city council, weather, wind speed, phase of the moon and astrological sign all aligning just to get the project in front of us. It was like herding cats and pushing water uphill. Reading his email I was sympathetic realizing that if you substituted customers, channel, product development, hiring, board of directors, and fund raising, he was describing a typical day at a startup. I felt real kinship until I got to his last sentence:

"Now we're screwed because we had no Plan B."

Say what?

I had to read his email a few times to let this sink in. I kept thinking, "What do you mean there's no plan B?" When I shared it with the other commissioners who were public officials, all of them could see that there could have been tons of alternate plans to get a project approved, and there were still several options going forward.  But the mayor just had been so intently focussed on executing a complex Plan A he never considered that he might need a Plan B.

By the time the mountain road unwound into rolling pastures and then flattened into the farmland just south of Silicon Valley, I realized that this was a real-world example of the difference between an entrepreneur and an operating executive.

There's Always a Plan B

My formal definition of a startup is a temporary organization in search of a scalable and repeatable business model. Yet if you've founded a company you know that regardless of any formal definition, startups are inherently pure chaos. As a founder, keeping your company alive requires you to think creatively and independently because more often than not, conditions on the ground will change so rapidly that any original well-thought-out plan quickly becomes irrelevant. (It's equally true for startups, war, love and life.)

The reality is that to survive requires a mindset which can quickly separate the crucial from the irrelevant, synthesize the output, and use this intelligence to create islands of order in the all-out chaos of a startup.  

To do this you are instinctually creating and testing multiple hypotheses which are creating an infinite number of possible future plans. And when the inevitable happens and some or all your assumptions were wrong, you pivot your model into the next plan and continue forward.  You do this until you find a scalable and repeatable business model or you die by running out of money.

Great entrepreneurs don't just have a Plan B, they have Plans B through ∞

Lessons Learned

A startup is initially about the search for a repeatable and scalable business model
Most of the time your hypotheses about Plan A, B and C are wrong
Searching requires agility, tenacity, resilience, curiosity, opportunism and pattern recognition
Execution requires a different set of skills. At times it means bringing an operating executive
Operating executives excel at focussed execution
World-class technology CEO's learned how to combine Searching and Execution (Gates, Jobs, Ellison, Bezos, Page, et al)

Filed under: California Coastal Commission, Customer Development

Going Out With His Boots On

He was a man, take him for all in all, I shall not look upon his like again

Shakespeare, Hamlet Act I, Scene 2

With 37 mllion people it's remarkable that California has one of the most pristine and unspoiled coastline in the United States. One man and the organization he's built is responsible for protecting it.

———–

California Dreaming

California Highway 1, (the Pacific Coast Highway) is a two-lane road that hugs the coast from Mexico to the town of Leggett in Northern California. It's carved out of the edge of the California almost designed to connect you to the Pacific Ocean in a way that no other road in the country does. In some stretches It's breathtaking and hair-raising and in others it's the most tranquil drive you'll ever take.

It goes through quintessential California beach towns right out of the 1950′s. It has hair-pin turns that have you're convinced you're about to fall into the ocean. It has open farm fields and hundreds of miles of unspoiled and undeveloped land. It's the kind of road you see in car ads and movies, one that looks like it was built to be driven in a Porsche with the top down.  The almost 400 mile coast drive from Los Angeles to San Francisco is one the road trips you need to do before you die.

15 air miles away, the road parallels Silicon Valley (and the 7 million people in the San Francisco Bay Area.) In that 45 mile stretch – from Half Moon Bay to Santa Cruz – there's not a single stoplight and less than 5,000 people.

The Peoples Coast

Yet there's no rational reason most of the 1,100 miles of the California coast should look like this. 33 million Californians live less than an hour from the coast. It's some of the most expensive land in the country. As our economy is organized to extract the maximum revenue and profits from any asset, you wonder why there aren't condos, hotels, houses, shopping centers and freeways, wall-to-wall for most of it's length (except in parts of Southern California where there already is.)

The explanation is that almost 40 years ago the people of California passed Proposition 20 – the Coastal Initiative – and in 1976 the state legislature followed it up by passing the Coastal Act, which created the California Coastal Commission. Essentially the Coastal Commission acts as California's planning commission for all 1,100 miles of the California coast. It has a staff of ~120 who recommend actions to the 12 commissioners (all political appointees) who make the final decisions.

Among other things the legislature said the goals of the Coastal Commission was to: 1) maximize public access to the coast and maximize public recreational opportunities in the coastal zone consistent with sound resources conservation principles and constitutionally protected rights of private property owners. And 2) assure priority for coastal-dependent and coastal-related development over other development on the coast.

You Can Make a Difference

This week I had my public servant hat on in my role as a California Coastal Commissioner.

I don't write about the commission because I want to avoid any conflict in my role as a public official.  But today is different. The single individual responsible for running the Commission staff for the last 26 years, it's executive director Peter Douglas, just announced his retirement.

Unlike Robert Moses who built modern New York City's or Baron Haussmann who built 19th century Paris in concrete and steel, the legacy and achievements of Peter Douglas are all the things you don't see in the 1,100 miles of the California coast; wetlands that haven't been filled, public access that hasn't been lost, highly scenic areas that haven't been spoiled and destroyed.

There's an old political science rule of thumb that says regulatory agencies become captured by the industries that they regulate within seven years. Yet for the 26 years of Peter's tenure he's managed to keep the commission independent despite of enormous pressure.

The Commission has been able to stave off the tragedy of the commons for the California coast. Upholding the Coastal Act had it taking unpopular positions upsetting developers who have fought with the agency over seaside projects, homeowners who strongly feel that private property rights unconditionally trump public access and local governments who believe they should have the final say in what's right for their community.

Peter opened the commission up to public participation and promoted citizen activism. He built a world-class staff who understand what public service truly means.

Over the last 40 years the winners have been 37 million Californians and the people who drive down the coast and can't imagine why its looks like it does. In spite of opposition the commission has carried out the public trust.

The coast is never saved, it is always being saved.  The work is never finished. The pressure to develop it is relentless, and it can be paved over with a thousand small decisions. I hope our children don't look back at pictures of the California coast and wistfully say, "look what our parents lost."

As commissioners it's our job to choose Peter's replacement. Hopefully we'll have the wisdom in finding a worthy successor. The people of California and their children deserve as much.

Godspeed Peter Douglas.

Filed under: California Coastal Commission

Bonfire of the Vanities

When I was in my 20's, I was taught the relationship between marketing and sales over a bonfire.

—

Over thirty years ago, before the arrival of the personal computer, there were desktop computers called office workstations. Designed around the first generation of microprocessors, these computers ran business applications like word processing, spreadsheets, and accounting. They were an improvement over the dumb terminals hanging off of mainframes and minicomputers, but ran proprietary operating systems and software. My third startup, Convergent Technologies (extra credit for identifying the photo on page 2) was in the business of making these workstations.

The OEM Business

Convergent's computers were bought and then resold by other computer manufacturers – all of them long gone: Burroughs, Prime, Monroe Data Systems, ADP, Mohawk, Gould, NCR, 4-Phase, AT&T. Convergent had assembled a stellar team with founders from Digital Equipment Corporation and Intel and engineers from Xerox PARC.  And once we went public, we hired a veteran VP of Sales from Honeywell.

As the company's revenues skyrocketed, Convergent started a new division to make a multi-processor Unix-based mini-computer. I had joined the company as the product marketing manager and now found myself as the VP of marketing for this new division. We were a startup inside a $200 million company. A marketer for 5 years, I thought I knew everything and proceeded to write the data sheets for our new computer.

Since this new computer was very complicated – it was a pioneer in multi-processing– I concluded it needed an equally detailed data sheet. In fact, when I was done, the datasheet describing our new computer, proudly called the MegaFrame, was 16 pages long. I fact-checked the datasheet with my boss (who would be my co-founder at Epiphany) and the rest of the engineering team.  We all agreed it was perfect. We'd left no stone unturned in answering every possible question anyone could ever have about our system. As we typically did, I printed up several thousand to send out to the sales force.

The day the datasheets came back from the printers, I sent the boxes to the sales department in Convergent's corporate headquarters, a separate building across the highway, and sent a copy to our CEO and the new VP of Sales.  (I was thinking it was such a masterpiece I might get an "attaboy" or at least a "wow, thanks for doing all the hard work for our sales organization.")

So when I got a call from the VP of Sales who said, "Steve, just read your new datasheet. Why don't you come over to corporate.  We have a surprise for you," I smugly thought, "They probably thought it was so good, I'm going to get a thank you or an award or maybe even a bonus."

Fahrenheit 451

I got in my car to make the five minute drive over the freeway. Turning into the parking lot, I noticed smoke coming from the far end of the lawn. As I parked and walked closer I noticed a crowd of people around what seemed to be an impromptu campfire.  "What the heck??" As an ex Sales and Marketing VP, our CEO had a Silicon Valley reputation for outrageous stunts so I wondered what it was this time -  a spur-of-the-moment BBQ? A marshmallow roast?

Heading to a meeting with the VP of Sales, I almost walked past the crowd into the building  until I heard the VP of Sales call me over to the fire. He was there with our CEO feeding things into the fire.  In fact as I got closer, it looked like the campfire was being entirely fed by paper.  "Here, toss these in," they said as they handed me a stack of…

Oh, my g-d they're burning my datasheets!!!

The Bonfire of the Vanities

I stood there stunned as I realized that my 16-page carefully constructed, brilliantly written, technically accurate datasheets were being destroyed en masse. I guess I was speechless for so long that the VP of Sales took pity on me and asked, "Steve, do you know we have a sales force?" I managed to stammer out, "Yes, of course."  He asked, "Do you know how much we pay them?"  Again, I managed to answer, "A lot." Then he got serious and started to explain what was going on. (In the meantime our CEO watched my reaction with a big grin on his face.) He said, "Steve, I've never seen such a perfect datasheet. It answers every possible question a prospective customer could have about our product. The problem is that our computer sells for $150,000. No one is going to buy it from the datasheet. In fact, reading these, the only thing your datasheet will do is give a prospective customer a reason for saying "no" before our salespeople ever get to talk to them.

"Do you mean you want a datasheet with less information?!"  I asked, not at all sure that I was hearing him correctly. "Yes, exactly. Your job in marketing is to get customers interested enough to engage our sales force, to ask for more information or better, to set up a meeting.  No one is going to buy our computer from a datasheet, but they will from a salesman."

Marketing to Match the Channel

It took me a few weeks to get over the lesson, but it stuck.  When selling a physical product through direct sales, Marketing's job is to drive end user demand into the sales channel.  Marketing creates a series of marketing activities at each stage of the sales funnel to generate awareness, then interest, then consideration and finally purchase. [image error]

Ironically, over the last decade, I've seen web startups have the opposite problem. For web sites with an ecommerce component, the site itself is supposed to both create demand and close the sale. Web designers have to do the work of both the marketing and the sales departments.

Lessons Learned

Marketing materials need to match the channel
Marketings job in direct sales channels with consultative sales need to drive demand to the salesforce
Indirect channels require marketing material with more information than a direct channel
Web sites that sell products combine sales and marketing
Confusing these can get you your own bonfire

Filed under: Convergent Technologies, Marketing

Eureka! A New Era for Scientists and Engineers

Silicon Valley was born in an era of applied experimentation driven by scientists and engineers. It wasn't pure research, but rather a culture of taking sufficient risks to get products to market through learning, discovery, iteration and execution. This approach would shape Silicon Valley's entrepreneurial ethos: In startups, failure was treated as experience (until you ran out of money).

The combination of Venture Capital and technology entrepreneurship is one of the great business inventions of the last 50 years. It provides private funds for untested and unproven technology and entrepreneurs. While most of these investments fail, the returns for the ones that win are so great they make up for the failures. The cultural tolerance for failure and experimentation, and a financial structure which balanced risk, return and obscene returns, allowed this system flourish in technology clusters in United States, particularly in Silicon Valley.

Yet this system isn't perfect. From the point of view of scientists and engineers in a university lab, too often entrepreneurship in all its VC-driven glory – income statements, balance sheets, business plans, revenue models, 5-year forecasts, etc. – seems like another planet. There didn't seem to be much in common between the Scientific Method and starting a company. And this has been a barrier to commercializing the best of our science research.

Until today.

Today, the National Science Foundation (NSF) – the $6.8-billion U.S. government agency that supports research in all the non-medical fields of science and engineering - is changing the startup landscape for scientists and engineers. The NSF has announced the Innovation Corps – a program to take the most promising research projects in American university laboratories and turn them into startups. It will train them with a process that embraces experimentation, learning, and discovery.

The NSF will fund 100 science and engineering research projects every year. Each team accepted into the program will receive $50,000.

To commercialize these university innovations NSF will be putting the Innovation Corps (I-Corps) teams through a class that teaches scientists and engineers to treat starting a company as another research project that can be solved by an iterative process of hypotheses testing and experimentation. The class will be a version of the Lean LaunchPad class we developed in the Stanford Technology Ventures Program, (the entrepreneurship center at Stanford's School of Engineering).

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This is a big deal. Not just for scientists and engineers, not just for every science university in the U.S., but in the way we think about bringing discoveries ripe for innovation out of the university lab. If this program works it will change how we connect basic research to the business world. And it will lead to more startups and job creation.

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Introducing the Innovation-Corps

The NSF Innovation-Corps program (I-Corps) is designed to help bridge the gap between the many scientists and engineers with innovative research and technologies, but little knowledge of the first steps to take in starting a company.

I-Corps will help scientists take the first steps from the research lab to commercialization.

Over a period of six months, each I-Corps team, guided by experienced mentors (entrepreneurs and VC's) will build their product and get out of their labs (and comfort zone) to discover who are their potential customers, and how those customers might best use the new technology/invention. They'll explore the best way to deliver the product to customers, the resources required, as well as competing technologies.  They will answer the question, "What value will this innovation add to the marketplace? And they'll do this using the business model / customer development / agile development solution stack.

At the end of the program each team will understand what it will takes to turn their research into a commercial success. They may decide to license their intellectual property based on their research. Or they may decide to cross the Rubicon and try to get funded as a startup (with strategic partners, investors, or NSF programs for small businesses). At the end of the class there will be a Demo Day when investors get to see the best this country's researchers have to offer.

What Took You So Long

A first reaction to the NSF I-Corps program might be, "You mean we haven't already been doing this?"  But on reflection it's clear why.  The common wisdom was that for scientists and engineers to succeed in the entrepreneurial world you'd have to teach them all about business. But it's only now that we realize that's wrong.  The insight the NSF had is that we just need to teach scientists and engineers to treat business models as another research project that can be solved with learning, discovery and experimentation.

And Stanford's Lean LaunchPad class could do just that.

Join the I-Corps

Today at 2pm the National Science Foundation is publishing the application for admission (what they call the "solicitation for proposals") to the program. See the NSF web page here.

The syllabus for NSF I-Corps version of the Lean LaunchPad class can be seen here.

Along with a great teaching team at Stanford, world-class VC's who get it, and foundation partners, I'm proud to be a part of it.

This is a potential game changer for science and innovation in the United States.

Join us.

Apply now.

Filed under: Lean LaunchPad, Teaching, Venture Capital

How Scientists and Engineers Got It Right, and VC's Got It Wrong

Scientists and engineers as founders and startup CEOs is one of the least celebrated contributions of Silicon Valley.

It might be its most important.

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ESL, the first company I worked for in Silicon Valley, was founded by a PhD in Math and six other scientists and engineers. Since it was my first job, I just took for granted that scientists and engineers started and ran companies.  It took me a long time to realize that this was one of Silicon Valley's best contributions to innovation.

Cold War Spin Outs

In the 1950's the groundwork for a culture and environment of entrepreneurship were taking shape on the east and west coasts of the United States. Each region had two of the finest research universities in the United States, Stanford and MIT, which were building on the technology breakthroughs of World War II and graduating a generation of engineers into a consumer and cold war economy that seemed limitless. Each region already had the beginnings of a high-tech culture, Boston with Raytheon, Silicon Valley with Hewlett Packard.

However, the majority of engineers graduating from these schools went to work in existing companies.  But in the mid 1950's the culture around these two universities began to change.

Stanford – 1950's Innovation

At Stanford, Dean of Engineering/Provost Fred Terman wanted companies outside of the university to take Stanford's prototype microwave tubes and electronic intelligence systems and build production volumes for the military. While existing companies took some of the business, often it was a graduate student or professor who started a new company. The motivation in the mid 1950's for these new startups was a crisis – we were in the midst of the cold war, and the United States military and intelligence agencies were rearming as fast as they could.

Why It's "Silicon" Valley

In 1956 entrepreneurship as we know it would change forever.  At the time it didn't appear earthshaking or momentous. Shockley Semiconductor Laboratory, the first semiconductor company in the valley, set up shop in Mountain View. Fifteen months later eight of Shockley's employees (three physicists, an electrical engineer, an industrial engineer, a mechanical engineer, a metallurgist and a physical chemist) founded Fairchild Semiconductor.  (Every chip company in Silicon Valley can trace their lineage from Fairchild.)

The history of Fairchild was one of applied experimentation. It wasn't pure research, but rather a culture of taking sufficient risks to get to market. It was learning, discovery, iteration and execution.  The goal was commercial products, but as scientists and engineers the company's founders realized that at times the cost of experimentation was failure. And just as they don't punish failure in a research lab, they didn't fire scientists whose experiments didn't work. Instead the company built a culture where when you hit a wall, you backed up and tried a different path. (In 21st century parlance we say that innovation in the early semiconductor business was all about "pivoting" while aiming for salable products.)

The Fairchild approach would shape Silicon Valley's entrepreneurial ethos: In startups, failure was treated as experience (until you ran out of money.)

Scientists and Engineers as Founders

In the late 1950's Silicon Valley's first three IPO's were companies that were founded and run by scientists and engineers: Varian (founded by Stanford engineering professors and graduate students,) Hewlett Packard (founded by two Stanford engineering graduate students) and Ampex (founded by a mechanical/electrical engineer.) While this signaled that investments in technology companies could be very lucrative, both Shockley and Fairchild could only be funded through corporate partners – there was no venture capital industry. But by the early 1960′s the tidal wave of semiconductor startup spinouts from Fairchild would find a valley with a growing number of U.S. government backed venture firms and limited partnerships.

A wave of innovation was about to meet a pile of risk capital.

For the next two decades venture capital invested in things that ran on electrons: hardware, software and silicon. Yet the companies were anomalies in the big picture in the U.S. – there were almost no MBA's. In 1960's and '70's few MBA's would give up a lucrative career in management, finance or Wall Street to join a bunch of technical lunatics. So the engineers taught themselves how to become marketers, sales people and CEO's. And the venture capital community became comfortable in funding them.

Medical Researchers Get Entrepreneurial

In the 60's and 70's, while engineers were founding companies, medical researchers and academics were skeptical about the blurring of the lines between academia and commerce. This all changed in 1980 with the Genentech IPO.

In 1973, two scientists, Stanley Cohen at Stanford and Herbert Boyer at UCSF, discovered recombinant DNA, and Boyer went on to found Genentech. In 1980 Genentech became the first IPO of a venture funded biotech company. The fact that serious money could be made in companies investing in life sciences wasn't lost on other researchers and the venture capital community.

Over the next decade, medical graduate students saw their professors start companies, other professors saw their peers and entrepreneurial colleagues start companies, and VC's started calling on academics and researchers and speaking their language.

Scientists and Engineers = Innovation and Entrepreneurship

Yet when venture capital got involved they brought all the processes to administer existing companies they learned in business school – how to write a business plan, accounting, organizational behavior, managerial skills, marketing, operations, etc. This set up a conflict with the learning, discovery and experimentation style of the original valley founders.

Yet because of the Golden Rule, the VC's got to set how startups were built and managed (those who have the gold set the rules.)

Fifty years later we now know the engineers were right. Business plans are fine for large companies where there is an existing market, product and customers, but in a startup all of these elements are unknown and the process of discovering them is filled with rapidly changing assumptions.

Startups are not smaller versions of large companies. Large companies execute known business models. In the real world a startup is about the search for a business model or more accurately, startups are a temporary organization designed to search for a scalable and repeatable business model.

Yet for the last 40 years, while technical founders knew that no business plan survived first contact with customers, they lacked a management tool set for learning, discovery and experimentation.

Earlier this year we developed a class in the Stanford Technology Ventures Program, (the entrepreneurship center at Stanford's School of Engineering), to provide scientists and engineers just those tools – how to think about all the parts of building a business, not just the product. The Stanford class introduced the first management tools for entrepreneurs built around the business model / customer development / agile development solution stack. (You can read about the class here.)

So what?

Starting this Thursday, scientists and engineers across the United States will once again set the rules.

Stay tuned for the next post.

Filed under: Lean LaunchPad, Venture Capital