Why fighter pilots run startups

Why Fighter Pilots Run Startups
Steve Blank
Stanford - School of Engineering
U.C. Berkeley - Haas School Of Business
www.steveblank.com
Twitter: sgblank

Early-Stage Ventures

I Drew This
CustomerDiscovery
Company
Building
CustomerValidation
Customer Creation
Pivot

I Called It:Customer Development
CustomerDiscovery
Company
Building
CustomerValidation
Customer Creation
Pivot

I Wrote This

I Write a Blog
www.steveblank.com

Six Short Stories

Not All Startups Are Equal

Small Business
Startup
Small Business Startups

Small Business
Startup
- Business Model found
- Profitable business
Existing team
< $10M in revenue

Small Business
Startup
Existing team
< $10M in revenue
97% of all companies in Israel are small businesses
http://www.milkeninstitute.org/pdf/israel_small_business_0105.pdf

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

Large Company Sustaining Innovation
Sustaining Innovation
Transition
Scalable
Startup
Large Company
Existing Market
Incremental improvements

Large Company Disruptive Innovation
New Division
Transition
Large Company
Disruptive Innovation
New Market
New tech, customers, channels

Scalable
Startup
Large Company
>$100M/year
Scalable Startup

Scalable
Startup
Large Company
>$100M/year
Total Available Market > $500m
Company can grow to $100m/year
Business model found
Focused on execution and process
Scalable Startup

Scalable
Startup
Large Company
>$100M/year
Typically requires “risk capital”
Scalable Startup
In contrast a scalable startup is designed to grow big
Typically needs venture (risk) capital
What Silicon Valley means when they say “Startup”

Very Different Startup Goals
Small Business
Startup
Existing team
< $10M
Scalable
Startup
Large Company
Typically requires “risk capital”

Venture Firms Invest in Scalable Startups
Small Business
Startup
Scalable
Startup
Large Company

Scalable
Startup
Transition
Large Company
Business Model found
i.e. Product/Market fit
- Repeatable sales model
- Managers hired
What’s A Startup?
A Startup is the organization used to search for a scalable business model

What VC’s Don’t Tell You:The Transition
Scalable
Startup
Transition
Large Company
Search
Build
Grow

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

Plan versus Model

No Business Plan survives first contact with customers

So Search for a Business Model

The Search for a Business Model
A Business Plan is static
A Business Model diagrams how a company creates, delivers and captures value – it’s dynamic
Or in English: How a company makes money

Emphasis On Hypotheses Testing

Startups Continually Pivot (Iterate)

Startups versus Companies

Startups Search and Pivot
The Search for the Business Model
Scalable
Startup
Transition
Large Company
i.e. Product/Market fit
- 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
- Managers hired

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

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

Customer Development VersusProduct Management
Scalable
Startup
Transition
Large Company
Product Management
Delivers MRD’s
Feature Spec’s
Competitive Analysis

Customer Development Versus Product Management
Scalable
Startup
Transition
Large Company
Product Management
Delivers MRD’s
Feature Spec’s
Competitive Analysis
Customer Development
Hypothesis Testing
Minimum Feature Set
Pivots

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

Startups Model, Companies Plan
Scalable
Startup
Transition
Large Company
Plan describes “knowns”
Known features for line extensions
Known customers/markets
Known business model

Startups Model, Companies Plan
Scalable
Startup
Transition
Large Company
Unknown customer needs
Unknown feature set
Unknown business model
Model found by iteration
Plan describes “knowns”
Known features for line extensions
Known customers/markets
Known business model

Startups Don’t Last Forever
Scalable
Startup
Transition
Large Company
- Cash-flow breakeven
- Profitable
- Rapid scale
- New Senior Mgmt
~ 150 people
Product/Market fit
- Managers hired
You failif you remain a startup!

Customer Risk Versus Technology Risk

Industry Affects Type of Risk
Web 2.0
Enterprise Software
Enterprise Hardware
Communication Hardware
Communication Software
Consumer Electronics
Game Software
Semiconductors
Electronic Design Automation
Cleantech
Med Dev / Health Care
Life Science / Biotech
Personalized Medicine
Large Company
Transition

Technology Known,Customers Unknown
Web 2.0
Enterprise Software
Enterprise Hardware
Game Software
Semiconductors
Cleantech
Customer Risk
Large Company
Transition

Technology Unknown, Customers Known
Web 2.0
Enterprise Software
Enterprise Hardware
Game Software
Semiconductors
Cleantech
Large Company
Transition
Technology Risk

Technology and Customers Unknown
Web 2.0
Enterprise Software
Enterprise Hardware
Game Software
Semiconductors
Cleantech
Customer and
Technology Risk

Rewards Differ by Industry
Web 2.0
Enterprise Software
Enterprise Hardware
Game Software
Semiconductors
Cleantech
Huge payoff in biotech for solving technology problem
In other industries you’re giving away your hard work
Technology Risk

Rewards Differ by Industry
Web 2.0
Enterprise Software
Enterprise Hardware
Game Software
Semiconductors
Cleantech
Customer Risk
No payoff in Web 2.0 until you solve the customer risk
Technology Risk

How Do Startups Search For A Business Model?
The Search is called Customer Development
The Implementation is called Agile Development

The Lean Startup
The Search is called Customer Development
The Implementation is called Agile Development

Solving For Customer Risk:Customer Development

Get the Hell Out of the Building

Get the Hell Out of the Building
Country

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?
no process to manage customer development?

Because:
The smarter the founders the more likely, “I know what customers want”
Usually wrong
Usually come from military intelligence
Startups are not an intelligence test

Product Development 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 Demand
- Launch Event
- “Branding”
- Hire PR Agency
- Early Buzz
Create Marcom
Materials
- Create Positioning
Marketing

Tradition – Hire Sales
Concept/Seed Round
Product Dev.
Alpha/Beta Test
Launch/
1st Ship
- Create Demand
- Launch Event
- “Branding”
- Hire PR Agency
- Early Buzz
Create Marcom
Materials
Marketing
Build Sales Organization
Hire Sales VP
Hire 1st Sales Staff
Sales

Tradition – Hire Bus Development
Concept
Product Dev.
Alpha/Beta Test
Launch/
1st Ship
- Create Demand
- Launch Event
- “Branding”
- Hire PR Agency
- Early Buzz
Create Marcom
Materials
Marketing
Build Sales Channel / Distribution
Hire Sales VP
Pick distribution Channel
Sales
Business
Development
Hire First Bus Dev
Do deals for FCS

Tradition – Hire Engineering
Concept
Product Dev.
Alpha/Beta Test
Launch/
1st Ship
- Create Demand
- Launch Event
- “Branding”
- Hire PR Agency
- Early Buzz
Create Marcom
Materials
Marketing
Build Sales Channel / Distribution
Hire Sales VP
Pick distribution Channel
Sales
Business
Development
Hire First Bus Dev
Do deals for FCS
Engineering
Write MRD
Waterfall
Q/A
Tech Pubs

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

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

Customer Validation
CustomerDiscovery
CustomerValidation
Customer Creation
Company
Building
Pivot
Repeatable and scalable business model?
Passionate earlyvangelists?
Pivot back to Discovery if no customers

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

So What Does Engineering Do?

Traditional Product DevelopmentUnit of progress: Advance to Next Stage
Waterfall
Requirements
Design
Problem: known
Solution: known
Implementation
Verification
Maintenance
Source: Eric Rieshttp://startuplessonslearned.blogspot.com

When the Customer Problem is Known
“Product Owner” or
in-house customer
Problem: Known
Solution: Unknown

Agile - Customer Problem is KnownUnit of progress: a line of working code
“Product Owner” or
in-house customer
Problem: Known
Solution: Unknown

When the Customer Problem is Unknown
Problem: Unknown
Solution: Unknown

Customer Problem is UnknownUnit of progress: learning about customers
Problem: Unknown
Solution: Unknown

Leadership Versus Management

Scalable
Startup
Transition
Large Company

Scalable
Startup
Transition
Large Company
Search

Scalable
Startup
Transition
Large
Company
Build
Search

Scalable
Startup
Transition
Large
Company
Build
Grow
Search

Why Fighter Pilots Run Startups

No Surprises in an Airline
Scalable
Startup
Transition
Large Company
Scheduled Airline
Scheduled
Routine
Burn rate preplanned

Air-Air Combat is Constant Surprise
Scalable
Startup
Transition
Large Company
Air-Air Combat
Uncertain environment
Rapid, unanticipated changes
Changes lead to disorientation
Burn rate (time, fuel, bullets, $’s)limits window of opportunity

Observe, Orient, Decide and Act:OODA Loop
John Boyd

Observe, Orient, Decide and Act:OODA Loop
Agility requires continuous interactions with the environment
Winning requires constant assessment of change and ways to mitigate risk
Iterating faster than competitors yields substantial advantage
= Victory

86
Boyd’s OODA Loop
Observe
Orient
Decide
Act
ImplicitGuidance& Control
ImplicitGuidance& Control
UnfoldingCircumstances
CulturalTraditions
Observations
GeneticHeritage
Decision(Hypothesis)
Analyses &Synthesis
Action(Test)
FeedForward
FeedForward
FeedForward
NewInformation
PreviousExperience
OutsideInformation
InteractionWithEnvironment
Interaction w/Environment

Customer Development = OODA Loop
Observe
Orient
Act
Decide

OODA Loop is Not an Intelligence Test
It’s about Agility
It’s about Resilience
It’s not about winning arguments inside the company
Fighters pilots vs. military intelligence

Warfare (Startups) Changes Forever

Thanks
www.steveblank.com

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Why fighter pilots run startups

by steve blank

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