Generating High Growth Innovation Hubs
Steve Blankwww.steveblank.com
Twitter: sgblank
A Few Short Stories
Silicon Valley History
All Startups Are Not the Same
Why Startups and Companies Differ
E- School Versus B-School
To predict the future you need to understand the past
The Popular View of Silicon Valley History
1910 1960 1970 1980 20001990
Innovation Networks
FruitOrchards
PersonalComputers
IntegratedCircuits
Internet
1930 1940 19501920
FruitOrchards
FruitOrchards
Steve Jobs
Moore/Noyce
Marc Andreessen
Hewlett & Packard
The Real Story of Silicon Valley History
1910 1960 1970 1980 20001990
Innovation Networks
Microwaves/Defense
PersonalComputers
IntegratedCircuits
Internet
1930 1940 19501920
TestEquipment
VacuumTubes
Venture Capital
Story 1:
WWII The First Electronic War
Strategic Bombing of Germany The Combined Bomber Offensive
• British bombed at Night– Area Bombing
• Lancaster's• Halifax• Flew at 7 - 17 thousand feet
• The American’s by Day– Precision Bombing
• B-17’s• B-24’s• Flew at 15 - 25 thousand feet
Math Challenge
For every 100 bombers on a mission 4 - 20% would not return
Crews had to fly 25 mission to go home
Story 2:
The Electronic Shield – Electronic Warfare
Harvard Radio Research Lab (RRL) Signals Intelligence and Electronic Warfare
• Reduce losses to fighters and flak• Find/understand German Air Defense
– Electronic and Signals Intelligence
• Jam/confuse German Air Defense– Radar Order of Battle– Chaff– Jammers
• Top Secret 800 person lab
Electronically Blind German Radar Jam the Radars with Noise
• Put Jammers on Airplanes• Jam and shut down
– Early Warning Radars– Anti-aircraft Radars– Fighter Radars– Ground Control Radars
• Built over 30,000 jammers
MANDRELJammer
DINAJammer
Who Ran this Secret Lab and became the Father of Electronic Warfare?
• Harvard Radio Research Lab– Ran all electronic warfare in WWII – 800 people
• Director: Fredrick Terman - Stanford
Fredrick Terman “the Father of Silicon Valley”
• Stanford Professor of engineering 1926– encouraged his students, William Hewlett
and David Packard to start a company• Dean of Engineering 1946• Provost 1955
Story 3:
Stanford And The Cold War
WWII Office of Scientific Research and Development (OSRD)
• $450 million spent on weapons R&D – MIT $117 million– Caltech $83 million– Harvard and Columbia ~ $30 million
• Stanford ~ $50K
Terman’s Postwar Strategy
• Focus on microwaves and electronics– Not going to be left out of gov’t $’s this time
• Recruits 11 members of war lab as faculty• By 1950 Stanford was the MIT of the West• Students came from all over the U.S.
Stanford Spinouts - Microwave Components
• Microwave Tube Startups:Klystrons, BWO’s, & TWT’s– Eitel-McCullough (1934)– Varian Associates (1948)– Litton Industries (1946)– Huggins Laboratories (1948)– Stewart Engineering (1952) – Watkins-Johnson (1957)– Microwave Electronics Co. (1959)
The Cold War and Stanford
• The Cold War battlefield moves 500 miles east
• Countermeasures, ELINT become critical
• Stanford becomes a center of excellence for the CIA, NSA, Navy, Air Force
• 400-person weapons lab in engineering department
Lockheed Comes to Town - 1956
• Polaris missile SLBM• Built by Lockheed Missiles
Division in Sunnyvale• 20,000 employees by 1960
– From 0 in 4 years– HP: 3,000 employees 1960
Stanford Spinouts - Military Systems
• Sylvania Electronics Defense Laboratory (1953)• GE Microwave Laboratory (1956)• Granger Associates (1956)• Applied Technology (1959)• Electronic Systems Laboratories (ESL) (1964)• Argo Systems (1969)• Advent Systems (1972)
Terman Changes the Startup/University RulesSilicon Valley as We Know it Starts Here
• Graduate students encouraged to start companies• Professors encouraged to consult for companies• Terman and other professors take board seats• Technology transfer/IP licensing easy• Getting out in the real world was good for your
academic career• Failure was accepted as part of the culture
Stanford and the Cold War Silicon Valley’s 1st Wave
EntrepreneursWeaponsFinance
Crisis ProfitMotivation
24/7 UtilitiesPredictable
Economic System
Infrastructure StableLegal System
ResearchUniversities
Risk TakingCulture
EntrepreneurialOutward-FacingTech Universities
Free flow ofPeople/Info
Customer Development
Mgmt Tools AgileDevelopment
Business ModelDesign
Design Thinking
Story 4:
1956 - The Year it Becomes Silicon Valley
Meanwhile, on the Other Side of Town…
The Head of Radar Bombing training for Air Force starts a Company
The Real Story of Silicon Valley History
1910 1960 1970 1980 20001990
Innovation Networks
Microwaves/Defense
PersonalComputers
IntegratedCircuits
Internet
1930 1940 19501920
TestEquipment
VacuumTubes
Venture Capital
William Shockley “The Other Father of Silicon Valley”
• Director of Navy anti-submarine warfare• Head of Radar Bombing training for Air Force• Co-inventor of the transistor
– Nobel Prize in 1956• Founded Shockley Semiconductor 1956
William Shockley “Great Researcher, Awesome Talent
Spotter, Horrible Manager”
• Unintended consequences: “The traitorous 8” leave Shockley – found Fairchild Semiconductor– 1st VC-backed startup– Noyce & Moore leave Fairchild to start Intel– 65 other chip companies in the next 20 years
Semiconductor Genealogy: 1955 - 1976
Story 5:
The Rise of Venture Capital
The Real Story of Silicon Valley History
1910 1960 1970 1980 20001990
Innovation Networks
Microwaves/Defense
PersonalComputers
IntegratedCircuits
Internet
1930 1940 19501920
TestEquipment
VacuumTubes
Venture Capital
The Rise of Risk CapitalFamily Money 1940’s - 1960’s
• J.H. Whitney– 1st family office 1946
• Laurance Rockefeller– Draper Gaither & Anderson (1st limited Partnership) 1958
– Spun out as Venrock in 1969• Bessemer
• East Coast focus• Wide variety of industries
The Valley Attracts Financial AttentionThe 1st West Coast IPO’s
• 1956Varian
• 1957Hewlett Packard
• 1958Ampex
The Rise of Risk Capital SBIC Act of 1958
• Cold war program – Sputnik motivated• Gov’t match of private investments 3:1 • 700 SBIC funds by 1965
– 75% of all VC funding in 1968– 7% in 1988
• Replaced by the Limited Partnership
The Rise of Venture Capital The Limited Partnership
• Raise money from pension funds, private universities, wealthy individuals – the limited partners
• Investment professionals manage the fund – the general partners i.e. the VC’s– Compensate the general partners via the “2 and 20”– 2% management fee, 20% carried interest (i.e. of the profits)
• Draper Gaither & Anderson 1958
• Rock and Davis 1961
• Sutter Hill 1964
• Patricof & Co. 1969
• Kleiner Perkins 1972
• Sequoia Capital 1972
The Rise of Risk Capital 1978/1979 - A Watershed
• Capital gains slashed (1978)– 49.5% to 28%
• Employee Retirement Income Security Act (1979) – Pension funds can invest
Venture CapitalSilicon Valley’s 2nd Wave
EntrepreneursVentureFinance
Crisis ProfitMotivation
24/7 UtilitiesPredictable
Economic System
Infrastructure StableLegal System
ResearchUniversities
Risk TakingCulture
EntrepreneurialOutward-FacingTech Universities
Free flow ofPeople/Info
Customer Development
Mgmt Tools AgileDevelopment
Business ModelDesign
Design Thinking
Story 6:
Entrepreneurship as a Management Science
Not All Startups Are Equal
Companies Get Educated
• Gov’t charted companies ~1600’s• Modern corporations ~1800’s• Business Schools to educate corporate execs
– Organize body of knowledge– First Harvard MBA – 1908
Startups Get Educated
• Every company began as a startup• Modern startups ~ 1950’s• Venture funded startups ~1970’s• Entrepreneurship Schools to educate founders
– Organize body of knowledge– Emerging now
Wait a Minute…
Aren’t Startups Small Versions of Large Companies?
50 Years of Experience Says NO
Story 7:
Not All Startups Are Equal
Small Business
Scalable Startups
Large Company Innovation
Small BusinessStartup
Exit Criteria- Business Model found- Profitable business- Existing team< $1M in revenue
Small Business Startups
• known customer known product
• Feed the family
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”
ScalableStartup
Large Company>$100M/year
Exit Criteria- Total Available Market > $500m- Can grow to $100m/year- Business model found- Focused on execution and process
Scalable Startup
A Startup is a temporary organization used to search for a scalable business model
ExecuteSearch
ScalableStartup
Large Company>$100M/year
- 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”
ExecuteSearch
ScalableStartup
Large CompanyTransition
- Founders depart- Professional Mgmt- Process- Beginning of scale
What VC’s Don’t Tell You:The Transition – Founders Leave
Build ExecuteSearch
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
Story 8:
Why Startups Are Not Small Versions of Large Companies
ScalableStartup
Large CompanyTransition
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, Companies Execute
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
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”- Done by founders
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
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
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
Large CompanyTransition
- Lots to Lose- Reduce risk- Optimize certainty- Protect profits
Risk Versus Safety
The Execution of the Business Model
ScalableStartup
Large CompanyTransition
- Pains in the butt- Always looking at something different- Doesn’t get with the program
The Search for the Business Model
Risk Versus Safety
The Execution of the Business Model
- Nothing to lose- No profits to risk- Searching equals risk
ScalableStartup
Large CompanyTransition
- Failure impedes execution- Affects revenue/profit- Reflects on individual/organization- Covered up
Learning Versus Failure
The Execution of the Business Model
ScalableStartup
Large CompanyTransition
- Pains in the butt- Always looking at something different- Doesn’t get with the program
The Search for the Business Model
Learning Versus Failure
The Execution of the Business Model
- Failure = learning- Normal part of startups- Not a crisis- Shared, lessons learned- Iterations and Pivots
Story 9:
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• Founder-driven
* Alex Osterwalder
9 building blocks of a business model:
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?
74
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?
77images by JAM
customer segments
key partners
cost structure
revenue streams
channels
customer relationships
key activities
key resources
value proposition
sketch out your business model
building
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buildingblock
buildingblock
buildingblock
building
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buildingblock
buildingblock
building
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buildingblock
buildingblock
buildingblock
But,Realize They’re Hypotheses
9 Guesses
Guess Guess
Guess
Guess
GuessGuess
Guess
GuessGuess
How Do Startups Search For A Business Model?
• The Search is called Customer Development• The Implementation is called Agile
Development
Customer Development
Solving For Customer Risk
Story 10:
Why Startups Fail
Traditional Product Introduction Model:Two Implicit Assumptions
Concept Product Dev.
Alpha/Beta Test
Launch/1st Ship
Customer Problem: known
Product Features: known
More startups fail from a lack of customers than from a failure of product development
Story 11:
Customer Development
Get Out of the BuildingThe founders
^
Customer Development
Concept/Bus. Plan
Product Dev.
Alpha/Beta Test
Launch/1st Ship
Product Development
Customer Development
CompanyBuilding
CustomerDiscovery
CustomerValidation
Customer Creation
Pivot
• Stop selling, start listening• Test your hypotheses• Continuous Discovery• Done by founders
Customer Discovery
CustomerDiscovery
CustomerValidation
CompanyBuilding
CustomerCreation
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
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 Pivot
• The heart of Customer Development
• Iteration without crisis
• Fast, agile and opportunistic
Entrepreneurship as A Mgmt ScienceSilicon Valley’s 3rd Wave
EntrepreneursAngel / Venture
Finance
Crisis ProfitMotivation
24/7 UtilitiesPredictable
Economic System
Infrastructure StableLegal System
ResearchUniversities
Risk TakingCulture
EntrepreneurialOutward-FacingTech Universities
Free flow ofPeople/Info
Customer Development
Mgmt Tools AgileDevelopment
Business ModelDesign
Design Thinking
Story 12:
Entrepreneurship as a Management Science
E-School instead of B-School
ScalableStartup
Large CompanyTransition
- Execution- Strategy- Accounting- Products- Engineering- Management- Administration
Business School
Business School Versus Entrepreneurship School
ScalableStartup
Large CompanyTransition
Business School Versus Entrepreneurship School
Entrepreneurship School
- Hypothesis testing- Business Model testing- Customer Development- Agile Development- Metrics- Venture Finance- Design Thinking
- Execution- Accounting- Products- Engineering- Management- Administrative
Business School
ScalableStartup
Large CompanyTransition
Business School
Business School Courses Versus Entrepreneurship Courses
Courses- Managerial Finance/Accounting- Managing Groups and Teams- Financial Accounting- Operations- Modeling for Optimization- Global Value Chain Strategies
ScalableStartup
Large CompanyTransition
Courses- Lean Launchpad- Customer/Agile Development- Business Model Design- Entrepreneurial Management- Creativity and Innovation- Entrepreneurial Finance
Business School
Business School Versus Entrepreneurship Courses
Entrepreneurship School
Courses- Managerial Finance/Accounting- Managing Groups and Teams- Financial Accounting- Operations- Modeling for Optimization- Global Value Chain Strategies
E-School Will Emerge
• Entrepreneurial Education will change radically
• E-School Students are not B-School Students
• Entrepreneurship as its own management science
Story 13:
Why Accountants Don’t Run Startups
ScalableStartup
Large CompanyTransition
Inventor of the Modern Corporation
ScalableStartup
Large CompanyTransition
Inventor of the Modern Corporation
Alfred P. Sloan
ScalableStartup
Large CompanyTransition
Alfred P. Sloan
General Motors, President/Chairman- Cost Accounting- MIT Sloan School- Sloan Foundation- etc.
ScalableStartup
Large CompanyTransition
Founder of General Motors
ScalableStartup
Large CompanyTransition
Founder of General Motors
Billy Durant
ScalableStartup
Large CompanyTransition
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 CompanyTransition
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 CompanyTransition
You are here
Where is Chile?
EntrepreneursAngel / Venture
Finance
Crisis ProfitMotivation
24/7 UtilitiesPredictable
Economic System
Infrastructure StableLegal System
ResearchUniversities
Risk TakingCulture
EntrepreneurialOutward-FacingTech Universities
Free flow ofPeople/Info
Customer Development
Mgmt Tools AgileDevelopment
Business ModelDesign
Design Thinking
Lessons Learned
• Culture needs to support and encourage risk– Failure is integral to the startup process
• Technology hubs must be magnets for engineers – But they cluster around industry specialties– In what area will Chile build a world-class hub?
• E-School reduces early stage startup risk• Healthy Venture Capital industry = large profits
– Chilean market not large enough – Teach startups how to go global early
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