why fighter pilots run startups
TRANSCRIPT
Why Fighter Pilots Run Startups
Steve BlankStanford - School of Engineering
U.C. Berkeley - Haas School Of Business
www.steveblank.comTwitter: sgblank
Early-Stage Ventures
I Drew This
CustomerDiscovery
CustomerValidation
Company Building
Customer Creation
Pivot
I Called It:
Customer Development
CustomerDiscovery
CustomerValidation
Company Building
Customer Creation
Pivot
I Wrote This
I Write a Blog www.steveblank.com
Six Short Stories
Not All Startups Are Equal
Small BusinessStartup
Small Business Startups
Small BusinessStartup
- Business Model found- Profitable business- Existing team< $10M in revenue
Small Business Startups
Small BusinessStartup
- Business Model found- Profitable business- Existing team< $10M in revenue
Small Business Startups
• 97% of all companies in Israel are small businesses
http://www.milkeninstitute.org/pdf/israel_small_business_0105.pdf
Small BusinessStartup
- Business Model found- Profitable business- Existing team< $10M in revenue
Small Business Startup: Internet Edition
• The Internet allows a new class of Small Businesses• Not all businesses on the Internet are “Scalable Startups”
Transition Large Company
ScalableStartup
Sustaining Innovation
• Existing Market• Incremental improvements
Large Company Sustaining Innovation
Large Company Disruptive Innovation
New Division Transition Large Company
Disruptive Innovation• New Market• New tech, customers, channels
ScalableStartup
Large Company>$100M/year
Scalable Startup
ScalableStartup
Large Company>$100M/year
- Total Available Market > $500m- Company can grow to $100m/year- Business model found- Focused on execution and process
Scalable Startup
ScalableStartup
Large Company>$100M/year
- 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 venture (risk) capital• What Silicon Valley means when they say “Startup”
Small BusinessStartup
- Business Model found- Profitable business- Existing team< $10M
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”
Very Different Startup Goals
Small BusinessStartup
ScalableStartup
Large Company
Venture Firms Invest in Scalable Startups
ScalableStartup
Large CompanyTransition
- Business Model found- i.e. Product/Market fit- Repeatable sales model- Managers hired
What’s A Startup?
A Startup is the organization used to search for a scalable business model
ScalableStartup
Large CompanyTransition
What VC’s Don’t Tell You:The Transition
Search Build Grow
ScalableStartup
Large CompanyTransition
- Founders depart- Professional Mgmt- Process- Beginning of scale
What VC’s Don’t Tell You:The Transition – Founders Leave
Plan versus Model
No Business Plan survives first contact with customers
So Search for a Business Model
The Search for a Business Model
• A Business Plan is static
• A Business Model diagrams how a company creates, delivers and captures value – it’s dynamic
• Or in English: How a company makes money
Emphasis On Hypotheses Testing
Startups Continually Pivot (Iterate)
Startups versus Companies
ScalableStartup
Large CompanyTransition
- Business Model found- i.e. Product/Market fit- Repeatable sales model- Managers hired
The Search for the Business Model
Startups Search and Pivot
ScalableStartup
Large CompanyTransition
- Business Model found- Product/Market fit- Repeatable sales model- 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
LargeCompanyTransition
Traditional Accounting- Balance Sheet- Cash Flow Statement- Income Statement
The Execution of the Business Model
Metrics Versus Accounting
ScalableStartup
LargeCompanyTransition
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
The Search for the Business Model The Execution of the Business Model
Metrics Versus Accounting
ScalableStartup
LargeCompanyTransition
Sales- Sales Organization- Scalable- Price List/Data Sheets- Revenue Plan
The Execution of the Business Model
Customer Validation Versus Sales
ScalableStartup
LargeCompanyTransition
Customer Validation- Early Adopters- Pricing/Feature unstable- Not yet repeatable- “One-off’s”
Sales- Sales Organization- Scalable- Price List/Data Sheets- Revenue Plan
The Search for the Business Model The Execution of the Business Model
Customer Validation Versus Sales
ScalableStartup
Large CompanyTransition
Product Management- Delivers MRD’s- Feature Spec’s- Competitive Analysis
The Execution of the Business Model
Customer Development VersusProduct Management
ScalableStartup
Large CompanyTransition
Customer Development- Hypothesis Testing- Minimum Feature Set- Pivots
The Search for the Business Model The Execution of the Business Model
Customer Development Versus Product Management
Product Management- Delivers MRD’s- Feature Spec’s- Competitive Analysis
ScalableStartup
Large CompanyTransition
The Execution of the Business Model
Engineering Versus Agile Development
Engineering- Requirements Docs.- Waterfall Development- QA - Tech Pubs
ScalableStartup
Large CompanyTransition
Agile Development- Continuous Deployment- Continuous Learning- Self Organizing Teams- Minimum Feature Set- Pivots
The Search for the Business Model The Execution of the Business Model
Engineering Versus Agile Development
Engineering- Requirements Docs.- Waterfall Development- QA - Tech Pubs
ScalableStartup
Large CompanyTransition
- Plan describes “knowns”- Known features for line extensions- Known customers/markets- Known business model
The Execution of the Business Model
Startups Model, Companies Plan
ScalableStartup
Large CompanyTransition
- Unknown customer needs- Unknown feature set- Unknown business model- Model found by iteration
The Search for the Business Model
Startups Model, Companies Plan
The Execution of the Business Model
- Plan describes “knowns”- Known features for line extensions- Known customers/markets- Known business model
ScalableStartup
Large CompanyTransition
- Business Model found- Product/Market fit- Repeatable sales model- Managers hired
- Cash-flow breakeven- Profitable- Rapid scale- New Senior Mgmt~ 150 people
Startups Don’t Last Forever
You fail if you remain a startup!
Customer Risk Versus Technology Risk
Large CompanyTransition
Industry Affects Type of Risk
Web 2.0 Enterprise Software Enterprise Hardware Communication Hardware Communication Software Consumer Electronics Game Software Semiconductors Electronic Design Automation Cleantech Med Dev / Health Care Life Science / Biotech Personalized Medicine
Large CompanyTransition
Technology Known, Customers Unknown
Customer Risk
Web 2.0 Enterprise Software Enterprise Hardware Communication Hardware Communication Software Consumer Electronics Game Software Semiconductors Electronic Design Automation Cleantech Med Dev / Health Care Life Science / Biotech Personalized Medicine
Large CompanyTransition
Technology Unknown, Customers Known
Technology Risk
Web 2.0 Enterprise Software Enterprise Hardware Communication Hardware Communication Software Consumer Electronics Game Software Semiconductors Electronic Design Automation Cleantech Med Dev / Health Care Life Science / Biotech Personalized Medicine
Technology and Customers Unknown
Customer and Technology Risk
Web 2.0 Enterprise Software Enterprise Hardware Communication Hardware Communication Software Consumer Electronics Game Software Semiconductors Electronic Design Automation Cleantech Med Dev / Health Care Life Science / Biotech Personalized Medicine
Rewards Differ by Industry
Technology Risk
• Huge payoff in biotech for solving technology problem
• In other industries you’re giving away your hard work
Web 2.0 Enterprise Software Enterprise Hardware Communication Hardware Communication Software Consumer Electronics Game Software Semiconductors Electronic Design Automation Cleantech Med Dev / Health Care Life Science / Biotech Personalized Medicine
Rewards Differ by Industry
Technology Risk
• No payoff in Web 2.0 until you solve the customer risk
Customer Risk Web 2.0 Enterprise Software Enterprise Hardware Communication Hardware Communication Software Consumer Electronics Game Software Semiconductors Electronic Design Automation Cleantech Med Dev / Health Care Life Science / Biotech Personalized Medicine
How Do Startups Search For A Business Model?
• The Search is called Customer Development• The Implementation is called Agile
Development
The Lean Startup
• The Search is called Customer Development• The Implementation is called Agile
Development
Customer Development
Solving For Customer Risk:Customer Development
Solving For Customer Risk:Customer Development
Get the Hell Out of the Building
Solving For Customer Risk:Customer Development
Get the Hell Out of the Building
Country
More startups fail from a lack of customers than from a failure of product development
Then why do we have:
• process to manage product development?
Then why do we have:
• process to manage product development?
• no process to manage customer development?
Because:
• The smarter the founders the more likely, “I know what customers want”– Usually wrong– Usually come from military intelligence
• Startups are not an intelligence test
Product Development Model
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
- Create Marcom Materials- Create Positioning
- Hire PR Agency- Early Buzz
- Create Demand- Launch Event- “Branding”
• 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
- Create Marcom Materials- Create Positioning
- Hire PR Agency- Early Buzz
- Create Demand- Launch Event- “Branding”
• Hire Sales VP• Pick distribution
Channel
• Build Sales Channel / Distribution
Marketing
Sales
• Hire First Bus Dev
• Do deals for FCS
Business Development
Tradition – Hire Engineering
Concept Product Dev.
Alpha/Beta Test
Launch/1st Ship
- Create Marcom Materials- Create Positioning
- Hire PR Agency- Early Buzz
- Create Demand- Launch Event- “Branding”
• Hire Sales VP• Pick distribution
Channel
• Build Sales Channel / Distribution
Marketing
Sales
• Hire First Bus Dev
• Do deals for FCS
Business Development
Engineering • Write MRD
• Waterfall
• Q/A • Tech Pubs
Customer Development
Concept/Bus. Plan
Product Dev.
Alpha/Beta Test
Launch/1st Ship
Product Development
Customer Development
CompanyBuilding
CustomerDiscovery
CustomerValidation
Customer Creation
+
• Stop selling, start listening
• Test your hypotheses
• Continuous Discovery
Customer Discovery
CustomerDiscovery
CustomerValidation
CompanyBuilding
CustomerCreation
Customer Validation
Customer
Discovery
CustomerValidatio
n
Customer Creation
CompanyBuilding
• Repeatable and scalable business model?
• Passionate earlyvangelists?
• Pivot back to Discovery if no customers
Pivot
The Pivot
• The heart of Customer Development
• Iteration without crisis
• Fast, agile and opportunistic
So What Does Engineering Do?
Problem: known Solution: known
Waterfall
Traditional Product DevelopmentUnit of progress: Advance to Next Stage
Requirements
Design
Implementation
Verification
Maintenance
Source: Eric Rieshttp://startuplessonslearned.blogspot.com
Problem: Known Solution: Unknown
“Product Owner” or in-house customer
When the Customer Problem is Known
Source: Eric Rieshttp://startuplessonslearned.blogspot.com
Problem: Known Solution: Unknown
“Product Owner” or in-house customer
Agile - Customer Problem is KnownUnit of progress: a line of working code
Source: Eric Rieshttp://startuplessonslearned.blogspot.com
Problem: Unknown Solution: Unknown
When the Customer Problem is Unknown
Source: Eric Rieshttp://startuplessonslearned.blogspot.com
Problem: Unknown Solution: Unknown
Customer Problem is UnknownUnit of progress: learning about customers
Source: Eric Rieshttp://startuplessonslearned.blogspot.com
Leadership Versus Management
ScalableStartup
Large CompanyTransition
Leadership Versus Management
ScalableStartup
Large CompanyTransition
Leadership Versus Management
ScalableStartup
Large CompanyTransition
Leadership Versus Management
Search
ScalableStartup
LargeCompanyTransition
Leadership Versus Management
BuildSearch
ScalableStartup
LargeCompanyTransition
Leadership Versus Management
Build GrowSearch
Why Fighter Pilots Run Startups
No Surprises in an Airline
ScalableStartup
Large CompanyTransition
Scheduled Airline
• Scheduled• Routine• Burn rate preplanned
Air-Air Combat is Constant Surprise
ScalableStartup
Large CompanyTransition
Air-Air Combat
• Uncertain environment • Rapid, unanticipated changes • Changes lead to disorientation• Burn rate (time, fuel, bullets,
$’s) limits window of opportunity
Observe, Orient, Decide and Act:OODA Loop
John Boyd
Observe, Orient, Decide and Act:OODA Loop
• Agility requires continuous interactions with the environment
• Winning requires constant assessment of change and ways to mitigate risk
• Iterating faster than competitors yields substantial advantage
= Victory
86
Boyd’s OODA Loop
FeedForward
Observations Decision(Hypothesis)
Action(Test)
CulturalTraditions
GeneticHeritage
NewInformation Previous
Experience
Analyses &Synthesis
FeedForward
FeedForward
ImplicitGuidance& Control
ImplicitGuidance& Control
InteractionWith
EnvironmentInteraction w/Environment
OutsideInformation
UnfoldingCircumstances
Observe Orient Decide Act
Customer Development = OODA Loop
Observe Orient ActDecide
OODA Loop is Not an Intelligence Test
• It’s about Agility
• It’s about Resilience
• It’s not about winning arguments inside the company
• Fighters pilots vs. military intelligence
Warfare (Startups) Changes Forever
Thanks
www.steveblank.com