stanford entrepreneurship week 030211

The Democratization of

Entrepreneurship

Steve BlankStanford - School of Engineering

www.steveblank.com

Twitter: @sgblank

This Presentation Combines

www.businessmodelgeneration.comwww.steveblank.com

I Write a Blog

www.steveblank.com

A Few Short Stories

Startup Constraints

High Cost to First Product

Startup Constraints

Buy expensive workstations

Buy expensive development tools

Long Time to First Product


Startup Constraints

Use Waterfall Development

First Customer Ship in months/years



Slow Customer Adoption

Startup Constraints

Customers – Gov’t/Businesses

# of customers - hundreds/thousands



High Startup Failure

Rate


Startup Constraints

Startups are small versions of large companies

Focus is on execution of business plan



High Startup Failure Rate


Limited Number of

Venture Capitalists

Startup Constraints

3000 Sand Hill Road





Limited Number of

Venture Capitalists

Innovation Limited to

a Few Regions

Startup Constraints

3000 Sand Hill RoadMenlo Park, California





Limited Number of

Venture Capitalists

Innovation Limited to a Few Regions

Startup Constraints

There’s Something Happening

Here, What It Is Ain’t Exactly Clear

Startup ConstraintsEntrepreneurial Explosion

Low Cost to 1st Product

Entrepreneurial

Explosion

Develop on inexpensive PC’s/Mac’s

Use Open Source Software

Short Time to First Product

Low Cost to First Product

Entrepreneurial

Explosion

Use Agile Development

First Customer Ship in weeks/months



Fast Customer Adoption

Entrepreneurial

Explosion

Customers –Consumers

# of customers -millions



Lower Startup

Failure Rate


Entrepreneurial

Explosion

Startups arenot small versions of large companies

Focus is on Search for a business model



Lower Startup Failure Rate


Rate

Large Pool of Risk Capital

Entrepreneurial

Explosion

Sand Hill Road



Lower Startup Failure Rate

Global Innovation


Rate


Entrepreneurial

Explosion

Menlo Park, San Francisco New York, Shanghai, Israel, Chile,

Singapore



Lower Startup

Failure Rate

Global Innovation


Rate


Entrepreneurial

ExplosionThis talk

Not All Startups Are Equal

Small Business

Startup

Small Business Startups

• Serve known customer with

known product

• Feed the family

Small Business

Startup

Exit Criteria

- Business Model found

- Profitable business

- Existing team

< $1M in revenue


• known customer

known product

• Feed the family

Small Business

Startup

- Business Model found

- Profitable business

- Existing team

< $10M in revenue


• 5.7 million small businesses in the U.S. <500 employees

• 99.7% of all companies

• ~ 50% of total U.S. workershttp://www.sba.gov/advo/stats/sbfaq.pdf

TransitionLarge

CompanyScalableStartup

Sustaining Innovation

• Existing Market / Known customer

•Known product feature needs

Large Company Sustaining Innovation

Large Company Disruptive Innovation

New Division

TransitionLarge

Company

Disruptive Innovation

•New Market

•New tech, customers, channels

Large Company Disruptive Innovation

New Division TransitionLarge Company

Disruptive Innovation•Build

•Acquire

- Talent

- Product

- Customers

- Business

ScalableStartup

Large Company

Scalable Startup

Goal is to solve for:

unknown customer and

unknown features

Search

ScalableStartup

Large Company

Exit Criteria

- Business model found

- Total Available Market > $500m -$1B

- Can grow to $100m/year

Scalable Startup

Search Execute

ScalableStartup

Large Company

-Total Available Market > $500m

- Company can grow to $100m/year

- Business model found

- Focused on execution and process

- Typically requires “risk capital”

Scalable Startup

• In contrast a scalable startup is designed to grow big

• Typically needs risk capital

• What Silicon Valley means when they say “Startup”

Search Execute

ScalableStartup

Large Company

-Business Model found

- i.e. Product/Market fit

- Repeatable sales model

- Managers hired

What’s A Startup?

A Startup is a temporary organization used to search for

a scalable and repeatable business model

ScalableStartup

Large Company

Transition

What VC’s Don’t Tell You:

The Transition

Search Build Execute

ScalableStartup

Large Company

Transition

-Founders depart

- CEO = Operating Exec

- Professional Mgmt

-Process

- Beginning of scale

What VC’s Don’t Tell You:

The Transition – Founders Leave

ScalableStartup

Large Company

Transition


- i.e. Product/Market fit


- Managers hired

What’s A Startup?

You fail if you stay a startup

Why Startups Are Not Small

Versions of A Large Company

ScalableStartup

Large Company

Transition

Business Model found by founders

- customer needs/product features found

i.e. Product/Market fit


- Managers hired

The Search for the Business Model

Startups Search and Pivot

ScalableStartup

Large Company

Transition


- Product/Market fit


- Managers hired

- Cash-flow breakeven

- Profitable

- Rapid scale

- New Senior Mgmt

~ 150 people

The Search for the Business Model The Execution of the Business Model

Startups Search, Companies Execute

ScalableStartup

LargeCompany

Transition

Traditional Accounting

-Balance Sheet

- Cash Flow Statement

- Income Statement

The Execution of the Business Model

Metrics Versus Accounting

ScalableStartup

LargeCompany

Transition

Startup Metrics

- Customer Acquisition Cost

- Viral coefficient

- Customer Lifetime Value

- Average Selling Price/Order Size

- Monthly burn rate

- etc.

Traditional Accounting

- Balance Sheet

- Cash Flow Statement

- Income Statement


Metrics Versus Accounting

ScalableStartup

LargeCompany

Transition

Sales

-Sales Organization

- Scalable

- Price List/Data Sheets

- Revenue Plan


Customer Validation Versus Sales

ScalableStartup

LargeCompany

Transition

Customer Validation

- Early Adopters

- Pricing/Feature unstable

- Not yet repeatable

-“One-off’s”

Sales

- Sales Organization

- Scalable

- Price List/Data Sheets

- Revenue Plan


Customer Validation Versus Sales

ScalableStartup

Large Company

Transition


Engineering Versus

Agile Development

Engineering

- Requirements Docs.

- Waterfall Development

- QA

- Tech Pubs

ScalableStartup

Large Company

Transition

Agile Development

- Continuous Deployment

- Continuous Learning

- Self Organizing Teams

- Minimum Feature Set

- Pivots


Engineering Versus

Agile Development

Engineering

- Requirements Docs.

- Waterfall Development

- QA

- Tech Pubs

ScalableStartup

Large Company

Transition

Business Plan

- describes “knowns”

- features

- customers/markets

- business model


Startups Model, Companies Plan

ScalableStartup

Large Company

Transition

-Business Model

- describes “unknowns”

-customer needs

- feature set

- business model

- found by iteration

The Search for the Business Model

Startups Model, Companies Plan


-Plan describes “knowns”

- Known features for line extensions

- Known customers/markets

- Known business model

How Do Startups Search For A

Business Model?

• The Search is called Customer Development

• The Implementation is called Agile Development

Customer

Development

Why Startups Fail

More startups fail from

a lack of customers than from a

failure of product development

Product Introduction Model:Two Implicit Assumptions

Customer Problem: known

Product Features: known

Concept/Seed Round

Product Dev.

Alpha/Beta Test

Launch/1st Ship

Tradition – Hire Marketing

Concept/Seed Round

Product Dev.

Alpha/Beta Test

Launch/1st Ship

- Create Marcom Materials

- Create Positioning

- Hire PR Agency- Early Buzz

- Create Demand- Launch Event- “Branding”

Marketing

Tradition – Hire Sales

Concept/Seed Round

Product Dev.

Alpha/Beta Test

Launch/1st Ship





• Build Sales Organization

Marketing

Sales • Hire Sales VP• Hire 1st Sales Staff

Tradition – Hire Bus Development

Concept Product Dev.

Alpha/Beta Test

Launch/1st Ship





• Hire Sales VP• Pick distribution Channel

• Build Sales Channel / Distribution

Marketing

Sales

• Hire FirstBus Dev

• Do deals for FCSBusiness

Development

Tradition – Hire Engineering

Concept Product Dev.

Alpha/Beta Test

Launch/1st Ship





• Hire Sales VP• Pick distribution Channel

• Build Sales Channel / Distribution

Marketing

Sales

• Hire FirstBus Dev

• Do deals for FCSBusiness

Development

Engineering • Write MRD • Waterfall • Q/A •Tech Pubs

How Startups Succeed

Customer Development

Get Out of the Building

The founders

^

Customer Development

Concept/Bus. Plan

Product Dev.

Alpha/Beta Test

Launch/1st Ship

Product Development

CustomerDevelopment

CompanyBuilding

CustomerDiscovery

CustomerValidation

Customer Creation

+

Pivot

• Test yourbusiness model hypotheses

• Continuous Discovery

• Done by founders

Customer Discovery

CustomerDiscovery

CustomerValidation

CompanyBuilding

CustomerCreation

No Business Plan survives first

contact with customers

So Search for a Business Model

The Business Model:

Any company can be described in 9 building blocks

CUSTOMER SEGMENTS

which customers and users are you serving?

which jobs do they really want to get done?

VALUE PROPOSITIONS

what are you offering them? what is that

getting done for them? do they care?

CHANNELS

how does each customer segment want to be reached?

through which interaction points?

CUSTOMER RELATIONSHIPS

what relationships are you establishing with each segment?

personal? automated? acquisitive? retentive?

REVENUE STREAMS

what are customers really willing to pay for? how?

are you generating transactional or recurring revenues?

KEY RESOURCES

which resources underpin your business model? which

assets are essential?

82

KEY ACTIVITIES

which activities do you need to perform well in your

business model? what is crucial?

KEY PARTNERS

which partners and suppliers leverage your model?

who do you need to rely on?

COST STRUCTURE

what is the resulting cost structure?

which key elements drive your costs?

85images by JAM

customer

segments

key

partners

cost

structure

revenue

streams

channels

customer

relationships

key activities

key

resources

value

proposition

Test

Hypotheses:

•Product

• Market Type

• Competition

Turning Hypotheses to Facts

Test

Hypotheses:

•Problem

• Customer

• User

• Payer

Test Hypotheses:

•Channel

Test

Hypotheses:

•Problem

• Customer

• User

• Payer

Test

Hypotheses:

•Demand

Creation

Test Hypotheses:

•Channel

Test

Hypotheses:

•Product

• Market Type

• Competitive

Test Hypotheses:

•Pricing Model / Pricing

Test Hypotheses:

•Size of Opportunity/Market

• Validate Business Model

Test

Hypotheses:

•Channel

• (Customer)

• (Problem)

Test

Hypotheses:

•Problem

• Customer

• User

• Payer

Test

Hypotheses:

•Demand

Creation

Test Hypotheses:

•Channel

Test

Hypotheses:

•Product

• Market Type

• Competitive

Test Hypotheses:

•Pricing Model / Pricing

Test Hypotheses:

•Size of Opportunity/Market

• Validate Business Model

Test

Hypotheses:

•Channel

• (Customer)

• (Problem)Customer

Development

Team

Agile

Development

The Minimum Viable Product (MVP)

• Smallest feature set that gets you the most …

orders, learning, feedback, failure…

•MVP + Customer are the first two you need to nail

• MVP is just 1 of the 9 parts of your model

The Pivot

•The heart of Customer Development

•Iteration without crisis

•Fast, agile and opportunistic

Wrap Up

• Startup are not small versions of large companies

• Traditional big company planning tools fail

• Startups are built on hypotheses

– You need to test each one of them

– Business Models help you keep score

– Customer Development is how you test hypotheses

Why Startups Aren’t Run By

Accountants

ScalableStartup

Large Company

Transition

Inventor of the Modern Corporation

ScalableStartup

Large Company

Transition

Inventor of the Modern Corporation

Alfred P. Sloan

ScalableStartup

Large Company

Transition

Alfred P. Sloan

General Motors, President/Chairman

- Cost Accounting

- MIT Sloan School

- Sloan Foundation

- etc.

ScalableStartup

Large Company

Transition

Founder of General Motors

ScalableStartup

Large Company

Transition

Founder of General Motors

Billy Durant

ScalableStartup

Large Company

Transition

Billy Durant

- Leader in horse-drawn buggy’s

-Fired by board, starts Chevrolet

- Regains control of GM

-Fired by board, GM ~$3.6 billion*

* GM Net sales in 1921 $304.5M = $3.6 Billion today

ScalableStartup

Large Company

Transition

Durant Versus Sloan

Durant Versus Sloan

•Dies, rich, honored and famous

Durant Versus Sloan

• Dies, rich, honored and famous•Dies managing a bowling alley

Durant Versus Sloan

• Dies, rich, honored and famous•Dies managing a bowling alley

Accountant

ScalableStartup

Large Company

Transition

You are here

Thanks

www.steveblank.com

stanford entrepreneurship week 030211

Education