Why Startups Are _Not_ Small Versions of Large Companies

Why Startups Are Not Small Versions of Large Companies

Steve Blankwww.steveblank.com

Twitter: sgblank

I Wrote This

Five Short Stories

Not All Startups Are Equal

Small BusinessStartup

Small Business Startups

• Serve known customer with known product

• Feed the family


Exit Criteria- Business Model found- Profitable business- Existing team< $1M in revenue


• known customer known product

• Feed the family


- 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. workers

http://www.sba.gov/advo/stats/sbfaq.pdf

Transition Large Company

ScalableStartup

Sustaining Innovation

• Existing Market / Known customer• Known product feature needs

Large Company Sustaining Innovation

Large Company Disruptive Innovation

New Division Transition Large Company

Disruptive Innovation

• New Market / Unknown customer needs• New tech / Unknown product features• Looks like a scalable startup

ScalableStartup

Large Company>$100M/year

Scalable Startup

Goal is to solve for: unknown customer and

unknown features

ScalableStartup


Exit Criteria- Business model found- Total Available Market > $500m -$1B- Can grow to $100m/year- Focused on execution and process

Scalable Startup

ScalableStartup


- Total Available Market > $500m- 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”

ScalableStartup

Large Company

- customer needs/product features found i.e. Product/Market fit- Business Model found- Repeatable sales model- Managers hired

What’s A Startup?

A Startup is the organization used to search for a scalable business model

Search

ScalableStartup

Large CompanyTransition

- Founders depart- Professional Mgmt- Process- Beginning of scale

What VC’s Don’t Tell You:The Transition – Founders Leave

Build

Why Product Managers Wear Sneakers

ScalableStartup


Business Model found- customer needs/product features found i.e. Product/Market fit- Found by founders, not employees- Repeatable sales model- Managers hired

The Search for the Business Model

Startups Search and Pivot

ScalableStartup


- 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


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


Sales- Sales Organization- Scalable- Price List/Data Sheets- Revenue Plan


Customer Validation Versus Sales

ScalableStartup


Customer Validation- Early Adopters- Pricing/Feature unstable- Not yet repeatable- “One-off’s”- Done by founders

Sales- Sales Organization- Scalable- Price List/Data Sheets- Revenue Plan


Customer Validation Versus Sales

ScalableStartup


Product Management- Delivers MRD’s- Feature Spec’s- Competitive Analysis- Prod Mgmt driven


Customer Development VersusProduct Management

ScalableStartup


Customer Development- Hypothesis Testing- Minimum Feature Set- Pivots - Founder-driven


Customer Development Versus Product Management

Product Management- Delivers MRD’s- Feature Spec’s- Competitive Analysis

ScalableStartup



Engineering Versus Agile Development

Engineering- Requirements Docs.- Waterfall Development- QA - Tech Pubs

ScalableStartup


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


- Plan describes “knowns”- Known features for line extensions- Known customers/markets- Known business model


Startups Model, Companies Plan

ScalableStartup


- Unknown customer needs- Unknown feature set- Unknown business model- Model found by iteration


Startups Model, Companies Plan


- Plan describes “knowns”- Known features for line extensions- Known customers/markets- Known business model

ScalableStartup


- Pains in the butt- Always looking at something different- Doesn’t get with the program

Startups Protect Mavericks, Companies Fire Mavericks


ScalableStartup


- Pains in the butt- Always looking at something different- Doesn’t get with the program


Startups Protect Mavericks, Companies Fire Mavericks


- CEO of your company- Finds your next market

ScalableStartup


- 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!

Plan versus Model

Business Plan

• A document your investors make you write that they don’t read

• A useful place for you to collect your guesses about your business- Size of Opportunity- Customers- Channel- Demand Creation- Revenue/Expenses/Profit

• The template to look like everyone else when you present to VC’s/Management

No Business Plan survives first contact with customers

So Search for a Business Model

What Is a Business Model?

• Diagram of flows between company and customers• Scorecard of hypotheses testing• Rapid change with each iteration and pivot• Product Management-driven

* Alex Osterwalder

VALUEPROPOSITION

COSTSTRUCTURE

CUSTOMERRELATIONSHIP

TARGETCUSTOMER

DISTRIBUTIONCHANNEL

VALUECONFIGURATION

CORECAPABILITIES

PARTNERNETWORK

REVENUESTREAMS

gives an overall view of a company's bundle of products and services

portrays the network of cooperative agreements with other companies

describes the channels to communicate and get in touch with customers

describes the arrangement of activities and resources

explains the relationships a company establishes with its customers

sums up the monetary consequences to run a business model

describes the revenue streams through which money is earned

describes the customers a company wants to offer value to

outlines the capabilities required to run a company's business model

INFRASTRUCTURE CUSTOMER

OFFER

FINANCE

Business Model = Keeping Score in a Startup

Business Model Generation Book

How Do Startups Search For A Business Model?

• The Search is called Customer Development• The Implementation is called Agile

Development

The Lean Startup

Who Does This Search?

The FoundersNot Employees

How?

Customer Development

Solving For Customer and Product Unknowns:



Get the Hell Out of the Building

The founders

^

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?

• None to manage customer development?

Startup - Back of the Napkin 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




• 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 First Bus Dev

• Do deals for FCS

Business Development

Tradition – Hire Engineering/Product Mgmt

Concept Product Dev.

Alpha/Beta Test

Launch/1st Ship




• Hire Sales VP• Pick distribution

Channel

• Build Sales Channel / Distribution

Marketing

Sales

• Hire First Bus Dev

• Do deals for FCS

Business Development

Engineering/Product Mgmt

• Write MRD

• Waterfall

• Q/A • Tech Pubs


Concept/Bus. Plan

Product Dev.

Alpha/Beta Test

Launch/1st Ship

Product Development


CompanyBuilding

CustomerDiscovery

CustomerValidation

Customer Creation

+

• Stop selling, start listening• Test your hypotheses• Continuous Discovery• Done by founders

Customer Discovery

CustomerDiscovery

CustomerValidation

CompanyBuilding

CustomerCreation

Customer Discovery

CustomerDiscovery

Phase 1AuthorHypothesis

Phase 2TestProblemHypothesis

Phase 4Verify, Iterate & Expand

Phase 3TestProductHypothesis

To Validation

Hypothesis

Product Customer/Problem Distribution/Pricing Demand Creation Market Type Competition

Customer Validation

Customer

Discovery

CustomerValidatio

n

Customer Creation

CompanyBuilding

• Repeatable and scalable business model?• Passionate Earlyvangelists?• Pivot back to Discovery if no customers

Pivot

Customer Validation

Phase 1Get Readyto Sell

Phase 2Sell toEarlyVangelists

Phase 4Business ModelVerified

Phase 3Positioning

From DiscoveryTo Creation

CustomerValidation

The Pivot

• The heart of Customer Development

• Iteration without crisis

• Fast, agile and opportunistic

Speeding Up Cycle Time

• Speed of cycle minimizes cash needs

• Minimum feature set speeds up cycle time

• Near instantaneous customer feedback drives feature set

So What Does Engineering Do?

Customer Problem: known

Product Features: known

Waterfall / Product ManagementExecution on Two “Knowns”

Requirements

Design

Implementation

Verification

Maintenance

Source: Eric Rieshttp://startuplessonslearned.blogspot.com

Problem: Known Solution: Unknown

“Product Owner” or in-house customer

Agile - Customer Problem is KnownExisting Company/Market


Unit of progress: a line of working code

Problem: Unknown Solution: Unknown

Lean StartupCustomer Problem + Product Features are Unknown


64

Customer Creation

• Creation comes after proof of sales

• $’s for scale

• Lean Startups are not cheap startups

CustomerDiscovery

CustomerValidation

CompanyBuilding

CustomerCreation

Company Building

CustomerDiscovery

CustomerValidation

Customer Creation

Company

Building

• (Re)build company’s organization & management

• Re look at your mission

I Write a Blog www.steveblank.com

Summary

• Founders can’t delegate customer discovery

• Startups are about speed of pivots– Product

– Customer

– Channel

• They are not about MRD’s and process

• Product management can be an asset or an albatross in startups

• You can make the difference…with sneakers

Thanks

www.steveblank.com

Why Startups Are _Not_ Small Versions of Large Companies

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