1. “A startup is a temporary organization designed to search for a repeatable and scalable business model.” Any analysis of this statement should start with a definition of “business model.” I like the Mike Maples, Jr. definition: “The way that a business converts innovation into economic value.” Steve Blank has his own definition: “A business model describes how your company creates, delivers and captures value.” One very effective way to find a business model is to apply a trial and error process in which the optimal result is discovered via experimentation rather than a grand plan generated at once from whole cloth. As I pointed out in my Eric Ries/Lean Startup post, others believe the truly big and important business models can’t be discovered incrementally. Applying the scientific method to the business model discovery process can be very valuable. It is not the only useful model for creating a business model, but it is an important one.
2. “A company is a permanent organization designed to execute a repeatable and scalable business model.” “Large companies are large because they found a repeatable business model and they spend most of their energy executing – meaning doing the same thing over and over again. They figured out what the secret is to growing their business.” An established business that has existing systems and procedures developed to execute on a known business model can, if it is not careful, generate antibodies which stifle the development of new products and services as well as new business models. There is an inherent tension between creating a new repeatable and scalable business model and optimal execution, since great execution often involves eliminating anything that is not core to that mission.
3. “Business plans are the tools existing companies use for execution. They are the wrong tool to search for a business model.” “Startups are not smaller versions of larger companies. There are something very different. So, I asked ‘Why are you teaching us to write business plans? Business plans are operating plans. and we don’t even know what it is we are supposed to be operating.’ A business plan is the last thing you want a startup to write, yet we’re still not only requiring it for small businesses, we won’t fund you without one.
“A business plan is exactly like telling you to go boil water when someone’s having a baby: it’s to keep you busy, but there’s no correlation between success and your activity.” “The unique people who need a 5-year business plan are VCs and Soviet Union.”
“In a startup, no business plan survives first contact with customers.” The operative word in this series of Steve Blank quotes on business plans is “search.” You can describe your ‘planned search process’ when you are creating a startup, but trying to describe the result of your search before it happens is a useless exercise. The world is changing so quickly and there is so much uncertainty that writing out a long-term business plan is essentially a work of fiction and a waste of precious time and resources.
4. “A startup is not about executing a series of knowns. Most startups are facing a series of unknowns—unknown customer segments, unknown customer needs, unknown product feature set, etc.” “A pessimist sees danger in every opportunity but an optimist sees opportunity in every danger.” The biggest financial returns are harvested when uncertainty is the greatest, since that is when assets have a much more significant tendency to be mispriced. I have written a post on optionality and venture capital which directly addresses what Steve Blank is talking about. Making decisions in life and in business is a probabilistic activity. We all face:
- Risk: future states of the world known, and probabilities of those future states known (e.g., roulette).
- Uncertainty: future states of the world known, but probabilities of those future states are not known (i.e., most things in life).
- Ignorance: future states of the world unknown, probabilities therefore not computable (i.e., black swans).
The best way to deal with this reality is to apply the following four-step process like Howard Marks:
- “The future should be viewed not as a fixed outcome that’s destined to happen and capable of being predicted, but as a range of possibilities and, hopefully on the basis of insight into their respective likelihoods, as a probability distribution;”
- “Risk means more things can happen than will happen;”
- “Knowing the probabilities doesn’t mean you know what’s going to happen;” and,
- “Even though many things can happen, only one will.”
Howard Marks goes on to say: “since future events can’t be predicted, risk can’t be qualified with precision.” One can deal with this by having a probabilistic approach to life, focusing on having sound processes and thinking long-term.
For a founder or investor who can remain rational this uncertainty is a huge opportunity, since this is what causes assets and opportunities to be mispriced. It was precisely when the economy was at its low point after the recent financial crisis that the times of greatest opportunity existing for an investor or founder. In other words, the best time to found a company is in a downturn. Employees are easier to recruit, resources less expensive, and competition less intense. It takes courage to do this, but that courage can pay big dividends. Optimists and people who have been through previous business cycles are much more likely to realize that things inevitably get better.
5. “Products developed with senior management out in front of customers early and often – win. Products handed off to a sales and marketing organization that has only been tangentially involved in the new product development process lose. It’s that simple.”
“The reality for most companies today is that existing product introduction methodologies are focused on activities that go on inside a company[‘s] own building. While customer input may be a checkpoint or ‘gate’ in the process it doesn’t drive it.” “There are no facts inside the building so get the hell outside.” Nothing drives the customer development process forward more than time spent with actual customers. The best founders, CEOs and senior managers spend huge amounts of time with customers. It is not an activity they delegate. This inevitably happens because they love the product and services and want to share this love with others. This is a large part of why missionary founders do better than mercenary founders. Passion of founders and employees pays dividends that compound for the startup.
6. “This whole lean stuff actually works best if you’ve failed once. If you’ve failed once, you’d really appreciate the value of not just following your passion, but maybe devoting 10 percent to testing your passion before you commit three to four years of your life to it.” Good judgment tends to come from experiencing bad judgment either on a first party or third party basis. Nothing is more precious than time, and time spent early in the process figuring out whether the dogs will eat the dog food is priceless. There is no sense following your passion right off a cliff if a relatively small effort devoted to testing can keep you from that fate. Better yet, that experimentation may allow you to discover a vastly better way forward that does not involve a journey off that cliff.
7. “’Build it and they will come,’ is not a strategy; it’s a prayer.” “Using the Product Development Waterfall diagram for Customer Development activities is like using a clock to tell the temperature. They both measure something, but not the thing you wanted.” The traditional product development process is described as a “waterfall” since the intent is to have progress flow down from step by step over time.
The syllabus of Eric Ries’s Udemy class on Lean Startup contrasts the approaches:
“Waterfall – the linear path of product build-out – is best used when the problem and its solutions are well-understood. However, its hazard is that it can also lead to tremendous investment without guarantee of its success. Agile development, on the other hand, is a less-risky model of what can happen when the product changes with frequent user feedback and minimal waste. Without an authoritative solution clearly in sight, which is often the case of the startup, agile programming allows the growing enterprise to build-out quickly and correct itself often.”
8. “The company that consistently makes and implements decisions rapidly gains a tremendous, often decisive, competitive advantage.” “What matters is having forward momentum and a tight fact-based data/metrics feedback loop to help you quickly recognize and reverse any incorrect decisions. That’s why startups are agile. By the time a big company gets the committee to organize the subcommittee to pick a meeting date, your startup could have made 20 decisions, reversed five of them and implemented the fifteen that worked.” The companies that survive in a rapidly evolving environment are those that are most agile. The Lean movement and agile development generally reference using a process of continuous experimentation and feedback from the results of those experiments to stay on top of changes.
Nassim Taleb describes this approach in this passage from Antifragile: “Any trial and error can be seen as the expression of an option, so long as one is capable of identifying a favorable result and exploiting it…” and “Someone who, unlike a tourist, makes a decision opportunistically at every step to revise his schedule (or his destination) so he can imbibe things based on new information obtained. In research and entrepreneurship, being a flaneur is called “looking for optionality.”
9. “Founders see a vision but then they manage to attract of a set of world-class employees to help them create that vision.” A founder who will succeed at creating a startup must be able to sell, and a very early test of that skill is his or her ability to recruit a team. Convincing world class people to join something with as much uncertainty attached to it as a startup is a genuinely valuable skill. The best venture capitalists know that the first hires are critical so they will often help with recruiting especially at that stage. It is not uncommon for a founder to spend 25% or more of the their time recruiting the team that will ultimately drive the startup forward.
10. “You don’t have to be the smartest person, but showing up is 80% of the game. My career has been all about just showing up and people saying, ‘Who’s here? Blank is here. Let’s pick him.’ Volunteering and showing up has been a great thing for me. But all along the way, I’ve always been very good at pattern recognition. Picking signal out of noise. Not smarter than everyone else, but more competent perhaps at seeing patterns.” Things like being on time, being there when leaders and teams are chosen, and developing sound judgment, are the blocking and tackling of the startup/business world. Woody Allen once wrote in a letter: “My observation was that once a person actually completed a play or a novel, he was well on his way to getting it produced or published, as opposed to a vast majority of people who tell me their ambition is to write, but who strike out on the very first level and indeed never write the play or book. In the midst of the conversation, as I’m now trying to recall, I did say that 80 percent of success is showing up.” To create a startup or a new line of business you must first start. As an example, the way I wrote my first book was that I started writing. I didn’t know anything about book proposals, agents or the sometimes strange ways of the publishing world. I just wrote a book and sent it to a publisher and they published it. What I did is not a process I would recommend now that I know more about the industry, but at least I started. By writing the book I “showed up.” Each weekend when a 25IQ “12 things” blog post appears, I “show up.”
11. “Upper management needs to understand that a new division pursuing disruptive innovation is not the same as a division adding a new version of an established product. Rather, it is an organization searching for a business model (inside a company that’s executing an existing one.) When you’re doing disruptive innovation in a multi-billion dollar company, a $10 million/year new product line doesn’t even move the needle. So to get new divisions launched, large optimistic forecasts are the norm.
Ironically, one of the greatest risks in large companies is high pressure expectations to make these first pass forecasts that subvert an honest Customer Development process. The temptation is to transform the vision of a large market into a solid corporate revenue forecast – before Customer Development even begins.” People spend a lot of time at large companies coming up with optimistic market forecasts. They are often created using methods pioneered by Professor “Rosy Scenario.” Market research firms make a nice living supplying these forecasts. Lots of forecasts about the future have zero tie to reality. They are little more than imaginative story telling trying to convince people that an area with some optionality has promise. I like stories. Stories are very useful and can be fun to tell. I have published two books of stories that you can buy on Amazon http://www.amazon.com/Ah-Mo-Indian-Legends-Northwest/dp/0888392443/ref=sr_1_1?ie=UTF8&qid=1413604348&sr=8-1&keywords=ah+mo+griffin and http://www.amazon.com/More-Indian-Legends-From-Northwest/dp/0888393032/ref=pd_sim_sbs_b_1?ie=UTF8&refRID=139GKX2N9KC8WDFG2E50 but they are just stories.
12. “I said ‘There are 500 people in this room. The good news is, in ten years, there’s two of you who are going to make $100 million dollars. The rest of you, you might as well have been working at Wal-Mart for how much you’re going to make.’ And everybody laughs. And I said, ‘No, no, that’s not the joke. The joke is all of you are looking at the other guys feeling sorry for those poor son-of-a-bitches.’” Financial success in creating and funding startups follows a power law. This means that a very small number of startup founders, employees and investors will reap most all of the financial rewards. The overconfidence heuristic will make most everyone overconfident that the winners will include them. The inevitable failures are hard for individuals, but the right thing for society as a whole.