university of michigan in silicon valley 030211

The Entrepreneurial Explosion

Steve BlankStanford - School of Engineering

www.steveblank.comTwitter: @sgblank

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A Few Short Stories

Startup Constraints

High Cost to First Product

Startup Constraints

Buy expensive workstations

Buy expensive development tools

Low Cost to 1st Product

Entrepreneurial Explosion

Develop on inexpensive PC’s/Mac’s

Use Open Source Software

Long Time to First Product

High Cost to First Product

Startup Constraints

Use Waterfall Development

First Customer Ship in months/years

Short Time to First Product

Low Cost to First Product

Entrepreneurial Explosion

Use Agile Development

First Customer Ship in weeks/months

Long Time to First Product

High Cost to First Product

Slow Customer Adoption

Startup Constraints

Customers – Gov’t/Businesses

# of customers - hundreds/thousands

Short Time to First Product

Low Cost to First Product

Fast Customer Adoption

Entrepreneurial Explosion

Customers – Consumers

# of customers - millions

Long Time to First Product

High Cost to First Product

High Startup Failure

Rate

Slow Customer Adoption

Startup Constraints

Startups are small versions of large companies

Focus is on execution of business plan

Short Time to First Product

Low Cost to First Product

Lower Startup

Failure Rate

Fast Customer Adoption

Entrepreneurial Explosion

Startups are not small versions of large companies

Focus is on Search for a business model

Long Time to First Product

High Cost to First Product

High Startup Failure Rate

Slow Customer Adoption

Limited Number of

Venture Capitalists

Startup Constraints

3000 Sand Hill Road

Short Time to First Product

Low Cost to First Product

Lower Startup Failure Rate

Fast Customer Adoption

Rate

Large Pool of Risk Capital

Entrepreneurial Explosion

Sand Hill Road

Long Time to First Product

High Cost to First Product

High Startup Failure Rate

Slow Customer Adoption

Limited Number of

Venture Capitalists

Innovation Limited to

a Few Regions

Startup Constraints

3000 Sand Hill RoadMenlo Park, California

Short Time to First Product

Low Cost to First Product

Lower Startup Failure Rate

Global Innovation

Fast Customer Adoption

Rate

Large Pool of Risk Capital

Entrepreneurial Explosion

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

Short Time to First Product

Low Cost to First Product

Lower Startup

Failure Rate

Global Innovation

Fast Customer Adoption

Rate

Large Pool of Risk Capital

Entrepreneurial ExplosionThis talk

Why Startups Are Not Small Versions of A Large Company

ScalableStartup

Large CompanyTransition

Startups Search, Companies Execute

Search Build Execute

ScalableStartup

Large CompanyTransition

Business Model found by founders- customer needs/product features 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

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

Business Plan- describes “knowns”- features- customers/markets- business model

The Execution of the Business Model

Startups Model, Companies Plan

ScalableStartup

Large CompanyTransition

- Business Model- describes “unknowns”- customer needs- feature set- business 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

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

Customer Problem: known

Product Features: known

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?

58

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?

61images 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

block

building

block

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block

building

blockbuildingblock

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building

block

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block

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But,Realize They’re Hypotheses

9 Guesses

Guess Guess

Guess

Guess

GuessGuess

Guess

GuessGuess

How Startups Succeed

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

• Test your business model 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

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 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

Thanks

www.steveblank.com