Chile 1208 generating innovation hubs 2010

Generating High Growth Innovation Hubs<br />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<br />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<br />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

<ul><li>The American’s by Day

Precision Bombing

B-17’s

B-24’s

Flew at 15 - 25 thousand feet</li></ul>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<br />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<br />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<br />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<br />VacuumTubes The Real Story of Silicon Valley History 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<br />

Story 5: The Rise of VentureCapital

Internet PersonalComputers IntegratedCircuits Microwaves/Defense TestEquipment<br />VacuumTubes The Real Story of Silicon Valley History 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) <ul><li>Draper Gaither & Anderson 1958

Rock and Davis 1961

Sutter Hill 1964

Patricof & Co. 1969

Kleiner Perkins 1972

Sequoia Capital 1972</li></li></ul><li>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<br />Customer Development Mgmt Tools Agile Development Business ModelDesign 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<br /><ul><li> Business Model found</li></ul>- Profitable business <ul><li> Existing team</li></ul>< $1M in revenue Small Business Startups <ul><li>known customer known product

Feed the family</li></li></ul><li>Small Business Startup:Internet Edition Small Business Startup - Business Model found - Profitable business <ul><li> Existing team</li></ul>< $10M in revenue <ul><li>The Internet allows a new class of Small Businesses

Not all businesses on the Internet are “Scalable Startups”</li></li></ul><li>Scalable Startup Large Company >$100M/year Exit Criteria <ul><li>Total Available Market > $500m

Can grow to $100m/year

Business model found

Focused on execution and process</li></ul>Scalable Startup Execute Search A Startup is a temporary organization used tosearch for a scalable business model

Scalable Startup Large Company >$100M/year<br /><ul><li>Total Available Market > $500m

Can grow to $100m/year

Business model found

Focused on execution and process

Typically requires “risk capital”</li></ul>Scalable Startup<br />Execute Search <ul><li> In contrast a scalable startup is designed to grow big

Typically needs risk capital

What Silicon Valley means when they say “Startup”</li></li></ul><li>What VC’s Don’t Tell You:The Transition – Founders Leave Build Execute Search Scalable Startup Transition Large Company <ul><li>Founders depart

Professional Mgmt

Process

Beginning of scale</li></li></ul><li>Large Company Sustaining Innovation Sustaining Innovation Transition Scalable Startup Large Company <ul><li>Existing Market / Known customer

Known product feature needs</li></li></ul><li>Large Company Disruptive Innovation New Division Transition Large Company Disruptive Innovation <ul><li> New Market / Unknown customer needs

New tech / Unknown product features

Looks like a scalable startup</li></li></ul><li>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 Business Model found <ul><li> customer needs/product features found</li></ul> i.e. Product/Market fit <ul><li> Found by founders, not employees

Repeatable sales model</li></ul>- Managers hired<br />

Startups Search, Companies Execute The Execution of the Business Model The Search for the Business Model Scalable Startup Transition Large Company - Cash-flow breakeven - Profitable - Rapid scale - New Senior Mgmt ~ 150 people <ul><li>Business Model found

Product/Market fit</li></ul>- Repeatable sales model<br />- Managers hired

Customer Validation Versus Sales The Execution of the Business Model Scalable Startup Transition Large Company Sales <ul><li>Sales Organization

Scalable

Price List/Data Sheets

Revenue Plan</li></li></ul><li>Customer Validation Versus Sales<br />The Search for the Business Model The Execution of the Business Model Scalable Startup Transition Large Company Customer Validation <ul><li> Early Adopters

Pricing/Feature unstable

Not yet repeatable

“One-off’s”

Done by founders</li></ul>Sales <ul><li> Sales Organization

Scalable

Price List/Data Sheets

Revenue Plan</li></li></ul><li>Engineering Versus Agile Development<br />The Execution of the Business Model Scalable Startup Transition Large Company Engineering <ul><li> Requirements Docs.

Waterfall Development

Tech Pubs</li></li></ul><li>Engineering Versus Agile Development<br />The Search for the Business Model The Execution of the Business Model Scalable Startup Transition Large Company Engineering <ul><li> Requirements Docs.

Waterfall Development

Tech Pubs</li></ul>Agile Development <ul><li> Continuous Deployment

Continuous Learning

Self Organizing Teams

Minimum Feature Set

Pivots</li></li></ul><li>Metrics Versus Accounting The Execution of the Business Model Scalable Startup Transition Large Company Traditional Accounting <ul><li>Balance Sheet

Cash Flow Statement

Income Statement</li></li></ul><li>Metrics Versus Accounting The Search for the Business Model The Execution of the Business Model Scalable Startup Transition Large Company Startup Metrics <ul><li> Customer Acquisition Cost

Viral coefficient

Customer Lifetime Value

Average Selling Price/Order Size

Monthly burn rate

etc. </li></ul>Traditional Accounting <ul><li> Balance Sheet

Cash Flow Statement

Income Statement</li></li></ul><li>Risk Versus Safety The Execution of the Business Model Scalable Startup Transition Large Company <ul><li>Lots to Lose

Reduce risk

Optimize certainty

Protect profits</li></li></ul><li>Risk Versus Safety The Search for the Business Model The Execution of the Business Model Scalable Startup Transition Large Company <ul><li> 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</li></li></ul><li>Learning Versus Failure The Execution of the Business Model Scalable Startup Transition Large Company <ul><li>Failure impedes execution

Affects revenue/profit

Reflects on individual/organization

Covered up</li></li></ul><li>Learning Versus Failure The Search for the Business Model The Execution of the Business Model Scalable Startup Transition Large Company <ul><li> 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</li></li></ul><li>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 <ul><li>Size of Opportunity

Customers

Channel

Demand Creation

Revenue/Expenses/Profit</li></ul>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?<br />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<br />

building block building block building<br />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<br />Guess Guess Guess Guess Guess Guess

How Do Startups Search For A Business Model? <ul><li> The Search is called Customer Development

The Implementation is called Agile Development</li></li></ul><li>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<br />^ 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 Customer Development Pivot

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

Test Hypotheses: <ul><li>Product

Market Type

Competition</li></ul>Turning Hypotheses to Facts 

Test Hypotheses: <ul><li>Problem

Customer

User

Payer</li></li></ul><li>Test Hypotheses: <ul><li>Channel</li></li></ul><li>Test Hypotheses: <ul><li>Demand Creation</li></ul>Test Hypotheses: <ul><li>Problem

Customer

User

Payer</li></ul>Test Hypotheses: <ul><li>Product

Market Type

Competitive</li></ul>Test Hypotheses: <ul><li>Channel

(Customer)

(Problem)</li></ul>Test Hypotheses: <ul><li>Channel</li></ul>Test Hypotheses: <ul><li>Pricing Model / Pricing</li></ul>Test Hypotheses: <ul><li>Size of Opportunity/Market

Validate Business Model</li></li></ul><li>Test Hypotheses: <ul><li>Demand Creation</li></ul>Test Hypotheses: <ul><li>Problem

Customer

User

Payer</li></ul>Agile Development Test Hypotheses: <ul><li>Product

Market Type

(Customer)

(Problem)</li></ul>Customer Development Team Test Hypotheses:<br /><ul><li>Channel</li></ul>Test Hypotheses: <ul><li>Pricing Model / Pricing</li></ul>Test Hypotheses: <ul><li>Size of Opportunity/Market

Validate Business Model</li></li></ul><li>Test Hypotheses: <ul><li>Demand Creation</li></ul>Test Hypotheses: <ul><li>Problem

Customer

User

Payer</li></ul>Agile Development Test Hypotheses: <ul><li>Product

Market Type

(Customer)

(Problem)</li></ul>Customer Development Team Test Hypotheses:<br /><ul><li>Channel</li></ul>Test Hypotheses: <ul><li>Pricing Model / Pricing</li></ul>Test Hypotheses: <ul><li>Size of Opportunity/Market

Validate Business Model</li></li></ul><li>The Pivot <ul><li>The heart of Customer Development

Iteration without crisis

Fast, agile and opportunistic</li></li></ul><li>Entrepreneurs Angel / VentureFinance Crisis Profit Motivation Customer Development Mgmt Tools Agile Development Business ModelDesign 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<br />Business School Scalable Startup Transition Large Company <ul><li>Execution

Strategy

Accounting

Products

Engineering

Management

Administration</li></li></ul><li>Business School Versus Entrepreneurship School<br />Entrepreneurship School Business School Scalable Startup Transition Large Company <ul><li>Hypothesis testing

Business Model testing

Customer Development

Agile Development

Metrics

Venture Finance

Design Thinking

Execution

Accounting

Products

Engineering

Management

Administrative</li></li></ul><li>Business School Courses Versus Entrepreneurship Courses Business School Scalable Startup Transition Large Company Courses <ul><li>Managerial Finance/Accounting

Managing Groups and Teams

Financial Accounting

Operations

Modeling for Optimization

Global Value Chain Strategies</li></li></ul><li>Business School Versus Entrepreneurship Courses Business School Entrepreneurship School Scalable Startup Transition Large Company Courses <ul><li> Lean Launchpad

Customer/Agile Development

Business Model Design

Entrepreneurial Management

Creativity and Innovation

Entrepreneurial Finance</li></ul>Courses <ul><li> Managerial Finance/Accounting

Managing Groups and Teams

Financial Accounting

Operations

Modeling for Optimization

Global Value Chain Strategies</li></li></ul><li>E-School Will Emerge <ul><li> Entrepreneurial Education will change radically

E-School Students are not B-School Students

Entrepreneurship as its own management science</li></li></ul><li>Story 13:Why Accountants Don’t Run Startups

Inventor of the Modern Corporation<br />Scalable Startup Transition Large Company

Inventor of the Modern Corporation<br />Scalable Startup Transition Large Company Alfred P. Sloan

Alfred P. Sloan Scalable Startup<br />Transition Large Company General Motors, President/Chairman <ul><li> Cost Accounting

MIT Sloan School

Sloan Foundation

etc. </li></li></ul><li>Founder of General Motors<br />Scalable Startup Transition Large Company

Founder of General Motors Scalable<br />Startup Transition Large Company Billy Durant

Billy Durant Scalable Startup Transition<br />Large Company <ul><li> Leader in horse-drawn buggy’s

Fired by board, starts Chevrolet

Regains control of GM

Fired by board, GM ~$3.6 billion*</li></ul>* GM Net sales in 1921 $304.5M = $3.6 Billion today

Durant Versus Sloan Scalable Startup<br />Transition Large Company

Durant Versus Sloan <ul><li>Dies, rich, honored and famous</li></li></ul><li>Durant Versus Sloan <ul><li>Dies managing a bowling alley

Dies, rich, honored and famous</li></li></ul><li>Durant Versus Sloan Accountant <ul><li>Dies managing a bowling alley

Dies, rich, honored and famous</li></li></ul><li>You are here Scalable Startup Transition Large Company

Entrepreneurs Angel / VentureFinance Crisis<br />Profit Motivation Customer Development Mgmt Tools Agile Development Business ModelDesign 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

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