Chile 1208 generating innovation hubs 2010

Generating High Growth Innovation Hubs
Steve Blank
www.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

Internet
PersonalComputers
IntegratedCircuits
FruitOrchards
FruitOrchards
FruitOrchards
The Popular View of Silicon Valley History
Marc Andreessen
Steve Jobs
Moore/Noyce
Hewlett & Packard
Innovation Networks
1910
1960
1970
1980
2000
1990
1930
1940
1950
1920

Internet
PersonalComputers
IntegratedCircuits
Microwaves/Defense
TestEquipment
VacuumTubes
The Real Story of Silicon Valley History
Venture Capital
Innovation Networks
1910
1960
1970
1980
2000
1990
1930
1940
1950
1920

Story 1: WWII The First Electronic War

The American’s by Day
Precision Bombing
B-17’s
B-24’s
Flew at 15 - 25 thousand feet
Strategic Bombing of Germany The Combined Bomber Offensive
British bombed at Night
Area Bombing
Lancaster's
Halifax
Flew at 7 - 17 thousand feet

Math ChallengeFor 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 RadarJam the Radars with Noise
MANDREL
Jammer
Put Jammers on Airplanes
Jam and shut down
Early Warning Radars
Anti-aircraft Radars
Fighter Radars
Ground Control Radars
Built over 30,000 jammers
DINA
Jammer

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 PostwarStrategy
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

Entrepreneurs
WeaponsFinance
Crisis
Profit
Motivation
Customer
Development
Mgmt Tools
Agile
Development
Business ModelDesign
Design Thinking
Stanford and the Cold War Silicon Valley’s 1st Wave
Risk Taking
Culture
Entrepreneurial
Outward-Facing
Tech Universities
Free flow of
People/Info
Infrastructure
24/7 Utilities
Predictable
Economic System
Stable
Legal System
Research
Universities

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

Internet
PersonalComputers
IntegratedCircuits
Microwaves/Defense
TestEquipment
VacuumTubes
Venture Capital
Innovation Networks
1910
1960
1970
1980
2000
1990
1930
1940
1950
1920

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 VentureCapital

Internet
PersonalComputers
IntegratedCircuits
Microwaves/Defense
TestEquipment
VacuumTubes
Venture
Capital
Innovation Networks
1910
1960
1970
1980
2000
1990
1930
1940
1950
1920

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
1956 Varian
1957 Hewlett Packard
1958 Ampex

The Rise of Risk CapitalSBIC Act of 1958
Cold war program – Sputnik motivated
Gov’tmatch 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 CapitalThe 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 Capital1978/1979 - A Watershed
Capital gains slashed (1978)
49.5% to 28%
Employee Retirement Income Security Act (1979)
Pension funds can invest

Entrepreneurs
VentureFinance
Crisis
Profit
Motivation
Customer
Development
Mgmt Tools
Agile
Development
Design Thinking
Venture CapitalSilicon Valley’s 2nd Wave
Risk Taking
Culture
Entrepreneurial
Outward-Facing
Tech Universities
Free flow of
People/Info
Infrastructure
24/7 Utilities
Predictable
Economic System
Stable
Legal System
Research
Universities

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 Business
Startup
Exit Criteria
Business Model found
- Profitable business
Existing team
< $1M in revenue
Small Business Startups
known customer known product
Feed the family

Small Business Startup:Internet Edition
Small Business
Startup
- Business Model found
- Profitable business
Existing team
< $10M in revenue
The Internet allows a new class of Small Businesses
Not all businesses on the Internet are “Scalable Startups”

Scalable
Startup
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
Execute
Search
A Startup is a temporary organization used tosearch for a scalable business model

Scalable
Startup
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
Execute
Search
In contrast a scalable startup is designed to grow big
Typically needs risk capital
What Silicon Valley means when they say “Startup”

What VC’s Don’t Tell You:The Transition – Founders Leave
Build
Execute
Search
Scalable
Startup
Transition
Large Company
Founders depart
Professional Mgmt
Process
Beginning of scale

Large Company Sustaining Innovation
Sustaining Innovation
Transition
Scalable
Startup
Large Company
Existing Market / Known customer
Known product feature needs

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

Startups Search, Companies Execute
The Search for the Business Model
Scalable
Startup
Transition
Large Company
customer needs/product features found
i.e. Product/Market fit
Found by founders, not employees
Repeatable sales model
- Managers hired

Startups Search, Companies Execute
The Execution of the Business Model
Scalable
Startup
Transition
Large Company
- Cash-flow breakeven
- Profitable
- Rapid scale
- New Senior Mgmt
~ 150 people
Product/Market fit
- Repeatable sales model
- Managers hired

Customer Validation Versus Sales
Scalable
Startup
Transition
Large
Company
Sales
Sales Organization
Scalable
Price List/Data Sheets
Revenue Plan

Customer Validation Versus Sales
Scalable
Startup
Transition
Large
Company
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

Engineering Versus Agile Development
Scalable
Startup
Transition
Large Company
Engineering
Requirements Docs.
Waterfall Development
QA
Tech Pubs

Engineering Versus Agile Development
Scalable
Startup
Transition
Large Company
Engineering
Requirements Docs.
Waterfall Development
QA
Tech Pubs
Agile Development
Continuous Deployment
Continuous Learning
Self Organizing Teams
Minimum Feature Set
Pivots

Metrics Versus Accounting
Scalable
Startup
Transition
Large
Company
Traditional Accounting
Balance Sheet
Cash Flow Statement
Income Statement

Metrics Versus Accounting
Scalable
Startup
Transition
Large
Company
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

Risk Versus Safety
Scalable
Startup
Transition
Large Company
Lots to Lose
Reduce risk
Optimize certainty
Protect profits

Risk Versus Safety
Scalable
Startup
Transition
Large Company
Nothing to lose
No profits to risk
Searching equals risk
Pains in the butt
Always looking at something different
Doesn’t get with the program

Learning Versus Failure
Scalable
Startup
Transition
Large Company
Failure impedes execution
Affects revenue/profit
Reflects on individual/organization
Covered up

Learning Versus Failure
Scalable
Startup
Transition
Large Company
Failure = learning
Normal part of startups
Not a crisis
Shared, lessons learned
Iterations and Pivots
Pains in the butt
Always looking at something different
Doesn’t get with the program

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?

KEY ACTIVITIES
which activities do you need to perform well in your business model? what is crucial?
74

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?

value proposition
customer relationships
key activities
customer segments
key partners
cost structure
revenue streams
key
resources
channels
77
images by JAM

sketch out your business model

building
block
building
block
building
block
building
block
building
block
building
block
building
block
building
block
building
block
building
block
building
block
building
block

But,Realize They’re Hypotheses

9 Guesses
Guess
Guess
Guess
Guess
Guess
Guess
Guess
Guess
Guess

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
Customer Problem: known
Concept
Product Dev.
Alpha/Beta Test
Launch/
1st Ship
Product Features: known

More startups fail from a lack of customers than from a failure of product development

Story 11:Customer Development
The founders
^
Get Out of the Building

Product Development
Concept/Bus. Plan
Product Dev.
Alpha/Beta Test
Launch/1st Ship
CustomerDevelopment
Company
Building
CustomerDiscovery
CustomerValidation
Customer Creation
Pivot

Customer Discovery
CustomerDiscovery
CustomerValidation
Company
Building
CustomerCreation
Stop selling, start listening
Test your hypotheses
Continuous Discovery
Done by founders

Test Hypotheses:
Product
Market Type
Competition
Turning Hypotheses to Facts

Test Hypotheses:
Problem
Customer
User
Payer

Test Hypotheses:
Channel

Test Hypotheses:
Demand Creation
Test Hypotheses:
Problem
Customer
User
Payer
Test Hypotheses:
Product
Market Type
Competitive
Test Hypotheses:
Channel
(Customer)
(Problem)
Test Hypotheses:
Channel
Test Hypotheses:
Pricing Model / Pricing
Test Hypotheses:
Size of Opportunity/Market
Validate Business Model

Test Hypotheses:
Demand Creation
Test Hypotheses:
Problem
Customer
User
Payer
Agile Development
Test Hypotheses:
Product
Market Type
Competitive
Test Hypotheses:
Channel
(Customer)
(Problem)
Customer Development Team
Test Hypotheses:
Channel
Test Hypotheses:
Pricing Model / Pricing
Test Hypotheses:
Size of Opportunity/Market
Validate Business Model

The Pivot
The heart of Customer Development
Iteration without crisis
Fast, agile and opportunistic

Entrepreneurs
Angel / VentureFinance
Crisis
Profit
Motivation
Customer
Development
Mgmt Tools
Agile
Development
Design Thinking
Entrepreneurship as A Mgmt ScienceSilicon Valley’s 3rd Wave
Risk Taking
Culture
Entrepreneurial
Outward-Facing
Tech Universities
Free flow of
People/Info
Infrastructure
24/7 Utilities
Predictable
Economic System
Stable
Legal System
Research
Universities

Story 12:Entrepreneurship as a Management Science
E-School instead of B-School

Business School Versus Entrepreneurship School
Business School
Scalable
Startup
Transition
Large Company
Execution
Strategy
Accounting
Products
Engineering
Management
Administration

Business School Versus Entrepreneurship School
Entrepreneurship School
Business School
Scalable
Startup
Transition
Large Company
Hypothesis testing
Business Model testing
Agile Development
Metrics
Venture Finance
Design Thinking
Execution
Accounting
Products
Engineering
Management
Administrative

Business School Courses Versus Entrepreneurship Courses
Business School
Scalable
Startup
Transition
Large Company
Courses
Managerial Finance/Accounting
Managing Groups and Teams
Financial Accounting
Operations
Modeling for Optimization
Global Value Chain Strategies

Business School Versus Entrepreneurship Courses
Business School
Entrepreneurship School
Scalable
Startup
Transition
Large Company
Courses
Lean Launchpad
Customer/Agile Development
Business Model Design
Entrepreneurial Management
Creativity and Innovation
Entrepreneurial Finance
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

Inventor of the Modern Corporation
Scalable
Startup
Transition
Large Company

Inventor of the Modern Corporation
Scalable
Startup
Transition
Large Company
Alfred P. Sloan

Alfred P. Sloan
Scalable
Startup
Transition
Large Company
General Motors, President/Chairman
Cost Accounting
MIT Sloan School
Sloan Foundation
etc.

Founder of General Motors
Scalable
Startup
Transition
Large Company

Founder of General Motors
Scalable
Startup
Transition
Large Company
Billy Durant

Billy Durant
Scalable
Startup
Transition
Large Company
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

Durant Versus Sloan
Scalable
Startup
Transition
Large Company

Durant Versus Sloan
Dies, rich, honored and famous

Durant Versus Sloan
Dies managing a bowling alley

Durant Versus Sloan
Accountant
Dies managing a bowling alley

You are here
Scalable
Startup
Transition
Large Company

Entrepreneurs
Angel / VentureFinance
Crisis
Profit
Motivation
Customer
Development
Mgmt Tools
Agile
Development
Design Thinking
Where is Chile?
Risk Taking
Culture
Entrepreneurial
Outward-Facing
Tech Universities
Free flow of
People/Info
Infrastructure
24/7 Utilities
Predictable
Economic System
Stable
Legal System
Research
Universities

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

I Write a Blog
www.steveblank.com

This Presentation Combines
www.businessmodelgeneration.com
www.steveblank.com

Thanks
www.steveblank.com

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Chile 1208 generating innovation hubs 2010

by steve blank

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