Editor’s note: This is a cross-post from the Steve Blank visits Finland -website. His visit and the awesome agenda for the week is made possible with the help of AaltoES, Tekes, Sitra, Teknologiateollisuus and others. Original text by Kalpana Shah.
Steve Blank is that rare combination of successful entrepreneur and inspiring teacher who’s also an insightful writer. His writings define, explain and predict trends that are sweeping the entrepreneurial world. Customer Development, Agile Development, the Lean Startup, The Four Steps to the Epiphany, Business Model Generation are all terms for methodologies that can actually help startups get on in life.
Question: As the economy threatens to enter a downward spiral once again, how can large companies remain innovative?
Steve: Let me quote Charles Darwin: It’s not the strongest of the species that survive, nor the most intelligent, but the one that is most responsive to change. This applies to companies as well.
Companies have a fairly predictable life cycle. They start with an innovation, search for a repeatable business model, build the infrastructure for a company, then grow by efficiently executing the model.
Over time, innovations outside the company (demographic, cultural, new technologies, etc.) outpace an existing company’s business model. The company loses customers, then revenues and profits decline and it eventually gets acquired or goes out of business.
Over 15 years ago, Clayton Christensen observed that there are two types of innovative strategies for a large company – sustaining and disruptive innovation. He believed that large companies handle sustaining innovation – evolutionary changes in their markets, products, etc. valued by their existing customers – fairly well. But most large companies find it hard to deal with disruptive innovation – radical shifts in technology, customers, regulatory changes, etc., that create new markets.
Yet most research has shown that disruptive innovation, that is, innovations that go after new markets, new customers, new technologies, etc. are best built outside a large company’s existing organization.
This type of organization is best for finding new niches in existing markets or creating entirely new markets. Why? Disruptive innovation in a large company is attempting to solve two simultaneous unknowns: the customer/market is unknown, and the product feature set is unknown. Just like a startup.
Question: Can you define these?
Steve: The people a large firm needs for disruptive innovation looks suspiciously like startup founders and the processes needed look like Customer Development. Customer and Agile Development (and the Lean Startup) may be the emerging methodologies large companies need to build innovative new products.
When you’re doing disruptive innovation in a multi-billion dollar company, a $10million/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.
Solution: 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.) That means you may find that revenue appears later than the plan called for, or that there are no customers or fewer than the plan suggests.
Question: The thinking in countries like Finland is that economic revival is most likely to be fuelled by growth of startups in the next couple of decades rather than of large organizations. Do you agree with this view?
Steve: Absolutely, I 100% agree. One of my most widely-read blog posts ever, written last Fall, explains my high degree of confidence in entrepreneurship as a major driver of our economy in the US over the decade ahead. Almost every word of it applies to Finland as well. I believe that the second decade of the 21st century may turn out to be the West’s and in particular the United States’ finest hour.
I believe that we will look back at this decade as the beginning of an economic revolution as important as the scientific revolution in the 16th century and the industrial revolution in the 18th century. We’re standing at the beginning of the entrepreneurial revolution. This doesn’t mean just more technology stuff, though we’ll get that. This is a revolution that will permanently reshape business as we know it and more importantly, change the quality of life across the entire planet for all who come after us.
Question: Around the world, startups themselves are managing with lesser funds than they did a decade ago. Do you think this trend will last? If so, what factors will contribute?
Steve: I believe this trend will indeed continue, fueled in large measure by the lower cost of funding startup businesses. After the first wave of venture-backed companies, followed by the dot.com boom and bust came the “back-to-basics” phase which lasted from 2001 to 2004. Over time, open source software, the rise of the next wave of web startups, and the embrace of Agile Engineering meant that startups no longer needed millions of dollars to buy specialized computers and license expensive software – they could start a company on their credit cards. Customer Development, Agile Engineering and the Lean methodology enforced a process of incremental and iterative development. Startups could now get a first version of a product out to customers in weeks/months rather than months/years. This next wave of web startups, Social Networks and Mobile Applications, now reached hundreds of millions of customers.
Startups began to recognize that they weren’t merely a smaller version of a large company. Rather they understood that a startup is a temporary organization designed to search for a repeatable and scalable business model. This meant that startups needed their own tools, techniques and methodologies distinct from those used in large companies.
Rules for building a company in 2011 are different than they were in 2008 or 1998. Startup exits in the next three years will include IPOs as well as acquisitions. The first wave of IPOs will be companies showing “real” revenue, profits and customers in massive numbers (think Facebook, Zynga, Twitter, LinkedIn, Groupon, etc.) But like all bubbles, these initial IPOs will attract companies with less stellar financials, the quality IPO pipeline will diminish rapidly, and the bubble will pop. At the same time, acquisition opportunities will expand as large existing companies, unable to keep up with the pace of innovation in these emerging Internet markets, will “innovate” by buying startups. Finally, new forms of liquidity are emerging such as private-market stock exchanges for buying and selling illiquid assets (SecondMarket, SharesPost, etc.)
Question: How are startups managing to do more with less?
Steve: Today’s startups have all the tools needed for a short development cycle and rapid customer adoption – Agile and Customer Development plus Business Model Design.
The Four Steps to the Epiphany, Business Model Generation and the Lean Startup movement have become the playbook for startups. The payoff: in this bubble, a startup can actively “engineer for an acquisition.” Here’s how:
- Order of Battle
Each market has a finite number of acquirers and a finite number of deal makers, each looking to fill specific product/market holes. So determining who specifically to target and talk to is not an incalculable problem. For a specific startup this list is probably a few hundred names.
- Wide Adoption
Startups that win will be those that get wide adoption (using freemium, viral growth, low costs, etc.) and massive distribution (i.e. Facebook, Android/Apple App store.) They will focus on getting massive user bases first, and let the revenue follow later.
During the Lean Startup era, the advice was clear: focus on building the company and avoid hype. Now that advice has changed. While you still need irrational focus on customers for your product, you and your company now need to be everywhere and look larger than life. Show and talk at conferences, be on lots of blogs, use social networks and build a brand
Question: If another downturn is indeed going to sweep the world, what advice would you give to European youngsters and potential entrepreneurs? Hold it for now? This is the best time?
Steve: There has never been a better time to be an entrepreneur! What’s happening is something more profound than a change in technology. What’s happening is that all the things that have been limits to startups and innovation are being removed. In the past, the time to build a first product release was measured in months or even years as startups executed the founder’s vision of what customers wanted.
Today startups have begun to build products differently. Instead of building the maximum number of features, they look to deliver a minimum feature set in the shortest period of time. This lets them deliver a first version of the product to customers in a fraction on the time.
For products that are simply “bits” delivered over the web, a first product can be shipped in weeks rather than years.
Startups traditionally required millions of dollars of funding just to get their first product to customers. Today open source software has slashed the cost of software development from millions of dollars to thousands. For consumer hardware, no startup has to build their own factory as the costs are absorbed by offshore manufacturers.
The cost of getting the first product out the door for an Internet commerce startup has dropped by a factor of a ten or more in the last decade. As I said, there’s no better time to be an entrepreneur!
Question: How has this impacted the venture capital industry?
Steve: The plummeting cost of getting a first product to market (particularly for Internet startups) has shaken up the venture capital industry. Venture capital used to be a tight club clustered around formal firms located in Silicon Valley, Boston, and New York. While those firms are still there (and getting larger), the pool of money that invests risk capital in startups has expanded, and a new class of investors has emerged. New groups of VCs, super angels, smaller than the traditional multi-hundred million dollar VC fund, can make small investments necessary to get a consumer internet startup launched. These angels make lots of early bets and double-down when early results appear. (And the results do appear years earlier than in a traditional startup.)
In addition to super angels, incubators like Y Combinator, TechStars and hundreds of others worldwide like them have begun to formalize seed-investing. They pay expenses in a formal 3-month program while a startup builds something impressive enough to raise money on a larger scale.
Finally, venture capital and angel investing is no longer a U. or Euro-centric phenomenon. Risk capital has emerged in China, India and other countries where risk taking, innovation and liquidity is encouraged, on a scale previously only seen in the US.
The emergence of incubators and super angels has dramatically expanded the sources of seed capital. The globalization of entrepreneurship means the worldwide pool of potential startups has increased at least 10-fold since the turn of this century.
Question: Are you saying then that the downturn is good?
Steve: The economic downturn in the United States has had an unexpected consequence for startups – it has created more of them. Young and old, innovators who are unemployed or underemployed now face less risk in starting a company. They have a lot less to lose and a lot more to gain.
If we are at the cusp of a revolution as important as the scientific and industrial revolutions what does it mean? Revolutions are not obvious when they happen. When James Watt started the industrial revolution with the steam engine in 1775 no one said, “This is the day everything changes.” When Karl Benz drove around Mannheim in 1885, no one said, “There will be 500 million of these driving around in a century.” And certainly in 1958 when Noyce and Kilby invented the integrated circuit, the idea of a quintillion (10 to the 18th) transistors being produced each year seemed ludicrous.
Yet it’s possible that we’ll look back to this decade as the beginning of our own revolution. We may remember this as the time when scientific discoveries and technological breakthroughs were integrated into the fabric of society faster than they had ever been before. When the speed of how businesses operated changed forever. As the time when the American economy was reinvented, our Gross Domestic Product began to take off and the US and the world reached a level of wealth never seen before. It may be the dawn of a new era for a new economy built on entrepreneurship and innovation. One that our children will look back on and marvel that when it was the darkest, we saw the stars.
Question: This is a question that many have attempted to answer but needs to be asked again and again, so: what is the magic formula for a geographical region to be a successful host for startups? Why, for instance, is Silicon Valley THE dream place for entrepreneurs? Can it be replicated – adjusted perhaps for local flavour – in other parts of the world?
Steve: It can absolutely be replicated. Let me tell you about my visit to Chile early in 2011. Chile has decided that it wants to be an innovation hub in South America. In my short time in Chile, I spent time meeting with entrepreneurs, the government, universities and independent non-profits.
Entrepreneurship and innovation is being talked about continually in Chile. This isn’t some small-time effort. The country is dead serious in all levels of government and universities about making this happen. They’ve been thinking hard and smart about the lessons to be learned not only from Silicon Valley, but with only 16 million people, they are also looking for lessons from other small innovation clusters such as Israel, Singapore and Finland. These countries are great models of countries too small to sustain startups of scale on just domestic consumption yet have managed to create innovation with a global reach. As an outsider I was incredibly impressed with how far Chile has progressed in making the country an innovation hub. It does have challenges, such as the fact that venture capital is not mature enough as an industry, connections are not yet formed between large corporations and universities, lack of clarity on what startups are made of (they are not smaller versions of large companies) and a couple of other issues. If the country can also become a magnet for talent and can celebrate entrepreneurial failures, there’s no reason why Chilecon Valley should not fare exceedingly well.
Question: Do you think the old world – Europe in particular – is beginning to catch up as far as innovative startups go? Are there any specific companies that you believe will be the Skypes of tomorrow?
Steve: Europe seems to be slowly awakening to the entrepreneurial opportunities that remain so much more widespread in the US. Finland and other Scandinavian countries seem to be at the front of the pack. Russia has been an entrepreneurial hotbed for some time. I do not follow specific companies, so it is difficult and inappropriate for me to point to specific startups.
Question: On a personal note, how did you manage the stress of starting up so many companies? What did you have to give up?
Steve: It was always a passion for me, and seldom stressful. If my magnificent journey caused me to “give up” anything, it was more time with my wonderful wife and daughters. I did my best to keep my weekends free for the family—which of course didn’t always work—and, for two decades, had “date night” with my wife of 30+ years, where PDA’s and work discussions were banned. I was never much for golf or tennis, so “missing” those doesn’t even bother me today, when I’m retired.
Question: From your experience, do you think that entrepreneurship can be taught?
Steve: I have devoted the last decade of my life and my “fourth career” to trying to prove that methods for improving entrepreneurial success can be taught. Entrepreneurship itself is more of a genetic phenomenon. Either you have the passion and drive to start something, or you don’t. I believe entrepreneurs are artists, and I’d like to quote George Bernard Shaw to illustrate:
“Some men see things as they are and ask why.
Others dream things that never were and ask why not.”
Over the last decade we assumed that once we found repeatable methodologies (Agile and Customer Development, Business Model Design) to build early stage ventures, entrepreneurship would become a “science,” and anyone could do it. I’m beginning to suspect this assumption may be wrong.
It’s not that the tools are wrong. Where I think we have gone wrong is the belief that anyone can use these tools equally well.
When page-layout programs came out with the Macintosh in 1984, everyone thought it was going to be the end of graphic artists and designers. “Now everyone can do design,” was the mantra. Users quickly learned how hard it was do design well and again hired professionals. The same thing happened with the first bit-mapped word processors. We didn’t get more or better authors. Instead we ended up with poorly written documents that looked like ransom notes. Today’s equivalent is Apple’s “Garageband”. Not everyone who uses composition tools can actually write music that anyone wants to listen to.
It may be we can increase the number of founders and entrepreneurial employees, with better tools, more money, and greater education. But it’s more likely that until we truly understand how to teach creativity, their numbers are limited. Not everyone is an artist, after all.
Steve Blank will be visiting Finland next week and the week agenda can be seen from SteveBlank.fi. Getting him to Finland is a joint effort from the ecosystem, and one of the reasons for his visit is to influence media, politicians and other key stake holders of society at large to see the importance of startups and growth entrepreneurship in a modern society.