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  • Pioneering Women in Venture Capital: Kathryn Gould

    Originally posted at www.steveblank.com

    By Steve Blank

    Steve BlankI met Kathryn Gould longer ago than either of us want to admit. Kathryn has been the founding VP of Marketing of Oracle, a successful recruiter, a world class Venture Capitalist, a co-founder of a  firm, a great board member, one of my mentors and most importantly a wonderful friend. During her she made a big point of not telling you: she was one of the first women Venture Capitalist’s in Silicon Valley (along with M.J. Elmore and Ann Winblad) – “I’m just a VC.”  Or one of the first women co-founders of a VC firm – “I co-founded a great firm.” She was twice as smart and just as tough as the guys. She has been a mentor and role model not just for a generation of women VC’s and CEO’s but for all VC’s and CEO’s – and I’m honored to have been one of them.

    One of the reasons I took up is my strong belief that it’s incumbent on all of us to make those who come after us smarter than we were.” So when I heard Kathryn gave the University of Chicago speech I suggested that she reach out to a larger audience and share her decades of experience.

    Her response? “The last thing I want is a bunch of people bugging me while I’m growing my grapes, flying, painting, playing music, and generally goofing off.”  I pointed out that, “Now that you retired, what happens to all the knowledge and experience you’ve acquired?” She still demurred so I gave it one last shot. I sent her an email saying, “When you’re gone everything you learned goes with you. This really is bigger than you. I have two daughters starting careers and nothing could be more inspiring than hearing your story. You really ought to share your journey.”

    So for the first time ever, she has. Here’s Kathryn’s story.

    ——-

    Why Give a Commencement speech
    One of the more fun things I’ve been asked to do lately was give the commencement speech at the University of Chicago Booth School of Business in June 2014.  What I didn’t tell them before, during, or after the talk was that I’d never gone to my own University of Chicago MBA , nor had I gone to my BSc in physics at University of Toronto.  I’ve never been big on pomp, and I had fun jobs I wanted to go to right away after each of them.  And to be fair, I wasn’t summa cum laude in either case.  I was merely respectable, so there was no appealing ego trip involved.  Anyway it was high time I went to a graduation.

    The most personally interesting part of writing this speech was thinking about what I could say to the young women that I wish I’d heard at their age. (I heard nothing).

    So, for the first time, I thought hard about what it was like to be a woman in a man’s business.  Not thinking about it earlier was a survival strategy—because if I’d thought about it, I’d have wanted to TALK about it, and that would have been stupid. I was working and competing with men daily.  And successfully. And the truth is, I like working with men. Being a physicist-turned-engineer, I have very little experience working with anything but men. So when members of the press or militant feminist types would question me about this stuff, I would avoid and be annoyed. Now that I’m retired I can speak out and let the chips fall. Still, a nod to Sheryl Sandberg for saying her piece while in the thick of it.

    In the aftermath of the speech, I got the most resonance in two areas:

    1) make unconventional choices that fit YOUR OWN aspirations

    2) from women appreciating the advice to go around obstacles, and enjoying hearing from a fellow ‘dragon lady’

    Actually it wasn’t “dragon lady,” it was a stronger, less feminine term — “Ball Buster” — but, hey, I couldn’t say that in a speech.  Reason I know is that I’m still very close to most of the former CEOs from my boards. I ran this speech by a couple of them.  Over time they had heard me referred to as that other term. They would jump to my defense – and they report that the people who said this had never met me –it was just the “word on the street.”  Insidious, yes?

    Anyway, mine is a study in making unconventional career choices (not that I recommend everybody go be a recruiter for a few years!), and searching for what you’re great at, and meant to encourage women to go right through those walls.

    So they call you a “dragon lady”; so what?!

    Here’s the speech:

    2014 University of Chicago Commencement speech ‘Your Great Adventure’
    “I’m so happy to be here today:  First, to help you celebrate your success thus far, and more important:  to celebrate your last day of doing what is expected of you —now each of you embark on your own great adventure—there is no ‘expected’ path from here on. You get to create your own history. No more tests, get into this school, get into that class, get this degree—now the real adventure begins. The second reason I’m glad to be here today is that 2 years ago, when Dean Kumar first asked me to do this speech, I wasn’t sure I”d even be alive, so I had to pass.  More on that later.

    So, about your adventure:  should you have a plan? Maybe. But don’t follow it. Planning prepares the mind, and chance favors the prepared mind, but chance usually messes up plans!  When I was where you are, 36 years ago (can ya believe it) I didn’t have a plan—but I did have an aspiration: I wanted to go to Silicon Valley and I wanted to work in .  I had no idea how I was going to get from here to there.  I was completely unprepared!  We had literally one course here in the mid 70s—taught by a guy who commuted in from Silicon Valley.  Compare that to now—with our superb curriculum, and I understand 70% of this class has either an interest or focus in .

    Chance Favors the Prepared Mind
    So here’s how it happened for me.  I had had a love affair with computers since I was 18 and a freshman physics major.img013

    Computers were so different from now—arcane, annoyingly difficult— and interesting. But they weren’t really in Silicon Valley at the time—they were in Boston, Minneapolis, New York. So going to Silicon Valley wasn’t an obvious move at the time. It was the invention of the microprocessor that made it obvious for me. I quit my good job here and moved to the valley. Most people thought I was nuts.  I had no idea what I was doing—just that I had to be there, and in a startup—so I took a job with the smallest company that made me an offer (passing up Intel, Tandem and Apple). It wasn’t a great choice, but I was THERE. But then, one our customers was Larry Ellison, with this little company that wasn’t even called Oracle at the time. I loved what he was working on (thanks to perspective in data management from my large company experience here—that prepared mind thing).  So I joined Oracle when it was about 20 people, eventually becoming VP Marketing. And it was an amazing time. Larry was the best entrepreneur I’ve ever known, and completely unconventional…

    What can you learn from this story so far?

    Put yourself in the way of success—get in front of an important wave and ride it.

    Gravitate to what’s new.

    Don’t be afraid to take a step down (Oracle was a $1 Million business, I had been marketing manager for a $100 Million  business).

    Build Your Skills Not Your Resume
    Eventually I left Oracle, wanting to do another startup. Problem is, startups that have world changing potential are not that easy to find. I wanted another Oracle, not any old startup. So I did something completely crazy and unplanned—which looks brilliant only in hindsight! I noticed that I loved looking for a job, even tho I didn’t’ find a company I wanted to join. I liked meeting people, hearing the company plans, learning about their technology, figuring out if it was for real—all that was fun. How could I do that for a living? The answer of course, was Venture Capital, but that was not in the cards—as yet. I had met a few exec recruiters in the process and thought what they did was similar and interesting.  So I started an exec search firm as a creative way to look for a new startup.  Turns out that I quickly became one of the few best recruiters in the valley for CEO and VP levels, got to work with the best VCs and their startups. And who would have guessed—perfect preparation for the VC business. I ended up doing that for 5 years, and in the process saw about 80 startups in various stages of success and disarray. I developed a deadly accurate intuition on people, an unbeatable set of contacts, and loved working for myself in my little firm. By the 4th year, VCs were asking me to join them, partly for recruiting help, but more because I kept introducing them to startup investment opportunities. As you’ve heard, it’s excruciatingly hard to get in to the VC business, and there I was. Because I”d built some unique skills.

    Plus, I had learned some stuff that you don’t get in business school:

    • How to cold call –adrenaline, real time, 3 seconds to grab their attention—learn this!
    • Also the adage As hire As, Bs hire Cs—absolutely true—be careful of the company you keep,
    • And what goes around comes around.   Help people with their careers, their ideas, contacts—and I’m serious, good things come back years later.

    I also learned that the first time without a paycheck is a little scary.

    Find Your Obession
    I joined VC firm Merrill Pickard in 1989. My first IPO wasn’t until 1995—the VC business takes patience. Two companies I helped start in 1992, DCTM and Grand Junction Networks both became Stanford business school cases and very valuable, successful companies. I was on the way to my lifetime IRR of 90%. I loved the business, and I was good at it.  But then, trouble. My two best partners went off to start Benchmark Capital, very successful to this day, so my firm was going to blow up. I went Boogie Boarding where I do my best thinking. I thought, gee, I could already afford to ride waves the rest of my life. That might be neat. But I couldn’t do it. I loved the business, couldn’t stop.  So I started Foundation Capital in 1995. I loved starting my own firm, doing it my way.  We brought in all operating guys—all had done startups, all had technical backgrounds. In 5 years we were one of the top firms in the Valley by any measure.  I had found my obsession.

    It’s Not the Calls You Take, It’s the Calls You Make  One of my sayings
    You are the creator of your destiny. In whatever business you’re in, there is always so much coming at you that you can stay insanely busy just responding.  Don’t do that. Always think about what is your agenda, what do you want to make happen, what do you want the future to look like.  This is not so easy.

    Go Where the Action Is: It’s not over in the Valley
    Now 35 years later, should you still move to the Valley (or Hollywood, or London, or Chicago!—or wherever the action is in your area of interest?). I can’t speak to the other places, but I”ll tell you what, it’s not over in the Valley.  From electric cars to drones, DNA sequencing to robotic surgery, enterprise software to social media –the size and variety of these markets makes the Valley of my early days look bush league. There’s no end in sight. The valley startup culture and talent pool is unique in the world.  If you think maybe you should go there—maybe you should.

    I retired in 2006. My husband and I bought a vineyard—so I’m a beginner again!  With another startup!

    A Word to the Ladies Here
    I understand a third of the class is women. I have always said, with an annoyed attitude when people ask, that there are no obstacles to women these days, just look at me! That’s the safe way to answer, right? But it’s not entirely true. One of the gifts of talking to you ladies here is that I forced myself to reflect on this.  I’ll just mention two obstacles that hit me—neither of which I even reacted to at the time, just accepted.

    First Obstacle
    I wanted to go to Caltech, but they didn’t take women undergrads until 1970. I wasn’t mad about that; I just thought it was my fault for being interested in guy things. So I dated a Caltech student and got to use their computer—first computer I ever met too—a monster. Structural obstacles like this are over with for you.  Good riddance.

    Second Obstacle
    Remember that business of starting Foundation Capital when my first firm blew up?  I did it because I didn’t have a choice—couldn’t get a job.  Really.  I spent a couple of months talking with the few VC firms that I was willing to join. (yes, I was picky) It became clear it was going to take a long time to get into one, and I didn’t have a long time.  I didn’t want to lose my momentum. Mind you, I was one of the top handful of VCs in the business at the time. Not on the Midas list yet, because it hadn’t been invented, but anybody could see that my results were heading toward extraordinary. I have to think that a guy with my numbers would have been snapped up pretty fast.  For me, starting the firm and raising the money was way faster. Don’t you think that’sstunning? A pretty big fat obstacle. So we went from Boogie Board to money in the bank in 6 months. Not that I’m sorry—it turned out great.  But you ambitious women will surely face something like this in your career. Just go around it!  There is always a way.  Note on the VC business, only 4% of senior VCs are women, according to Fortune Magazine. I don’t think it’s changing anytime soon either.

    Now to be fair, consider your advantages:  you’re much more memorable than most of the guys, they won’t forget you, and there is a self selection:  the men who have the guts to do business with you have the extra self confidence to be more successful.  The guys that wanted me on their board of directors had moxy—because of course they had heard all the crap about how I was a dragon lady (all ambitious women get called that as you know) and they still went for it. Who knows—could be why my companies were so successful…

    I often walk among my grapevines and think how grateful I am for my life right now.  But if the vines had come first, without the adventure and hard work, it wouldn’t be nearly as sweet. So that’s my story so far—but it’s not over yet, because the cabernet is really good!

    Tending a New Crop in My Next Venture

    So now, for each of you, go create your own unique adventure.  You are done preparing—go do it! Make a plan, but don’t stick to it. Let chance favor your prepared mind.  Break rules, find your obsession, be extraordinary!”

    View the speech in its entirety here

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  • Getting Lean in Education — By Getting Out of the Classroom

    Steve BlankOriginally posted at www.steveblank.com

    By Steve Blank

    This week the goes Lean on education by providing $1.2 million to educators who want to bring their classroom innovations to a wider audience.

    shutterstock_157439453——–

    The I-Corps program started when the U.S. National Science Foundation adopted my Lean LaunchPad class. Their goal was to train University scientists and researchers to use Lean Startup methods (business model design, and agile engineering) to commercialize their science. Earlier this month the National Institutes of Health announced I-Corps @ NIH, to help scientists doing medical research take their innovations from the lab-bench to the bedside and accelerate translational medicine.

    This week, the is announcing the next step in the I-Corps program– I-Corps for Learning  ().  This version of I-Corps is for STEM educators – anyone  who teaches Science, Technology, Engineering and Math from kindergarten to graduate school, and wants to learn how to bring an innovative strategy, technology, or set of curriculum materials to a wider audience. Following a successful pilot program, the NSF is backing the class with $1.2 million to fund the next 24 teams.

    The Problem in the Classroom
    A frustration common to both educators and policymakers is how difficult it has been to get new, innovative, education approaches into widespread use in classrooms where they can influence large numbers of students. While the federal government and corporations have dumped a ton of money into STEM education research, a disappointing few of these brave new ideas have made it into practice. These classroom innovations often remain effectively a secret – unknown to most STEM educators or the research community at large.

    It turns out that on the whole educators are great innovators but have had a hard time translating their ideas into widespread adoption. What we had was a very slow classroom diffusion rate.  Was there any was to speed this up?

    A year ago Don Millard of the National Science Foundation (who in a previous life had been a STEM Educator) approached me with a hypothesis that possibly could solve this problem. Don observed that educators with innovative ideas who actively got out of their classrooms and tested their innovations with other educators/institutions/students had a much better adoption rate.

    Up until now there was no formal way to replicate the skills of the educators who successfully evangelized their new concepts. Don’s insight was that the I-Corps model being rolled out for scientists might work equally well for educators/teachers. He pointed out that there was a close analogy between scientists trying to bring product discoveries to market and educators getting learning innovations into broad practice. Don thought that a formal /I-Corps methodology might be exactly what educators needed to understand how their classroom innovations could be used, how to get other educators and institutions to adopt them, and how to articulate their value to potential investors .

    Don then recruited Karl Smith from the University of Minnesota to pilot a class of 9 teams made up of STEM educators. Karl recruited a teaching team (Ann McKenna, Chris Swan, Russ Korte, Shawn Jordan, Micah Lande and Bob MacNeal) and Jerry Engel trained them. The team ran their first I-Corps for Learning class earlier this year.

    Karl and his teaching team really nailed it. So much so that the NSF is now rolling out I-Corps for Learning on a larger scale.

    I-Corps for Learning Details
    NSF will provide up to $1.2 million to support 24 teams. The I-Corps L cohort teams will receive additional support — in the form of mentoring and funding — to accelerate innovation in learning that can be successfully scaled, in a sustainable manner.

    To be eligible to pursue funding, applicants must have received a prior award from NSF (in a STEM education field relevant to the proposed innovation) that is currently active or that has been active within five years from the date of the proposal submission. Consideration will be given to projects that address K-12, undergraduate, graduate, and postdoctoral research, as well as learning in informal science education environments.

    Each team will consist of:

    • The principal investigator (who received the prior award);
    • An entrepreneurial lead (who is committed to investigate the landscape surrounding the innovation); and
    • A mentor (who understands the evidence concerning promise, e.g., from an institutional education-focused center or commercial background that will help inform the efforts)

    The outcomes of the pilot projects are expected to be threefold:

    • A clear go/no go decision concerning the viability and effectiveness of the learning-oriented resources/products, practices and services,
    • An implementation “product” and process for potential partners/adopters, and
    • A transition plan to move the effort forward and bring the innovation to scale

    Proposals from potential I-Corps L teams will be accepted through September 30, 2014. Class starts January 2015.

    Check out the I-Corps for Learning website here.

    Lessons Learned

    • The diffusion of STEM classroom innovations is excruciatingly slow
    • The Lean LaunchPad/I-Corps model may accelerate that process
    • I-Corps for Learning is accepting applications
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  • The Path of Our Lives

    Originally posted at www.steveblank.com

    By Steve Blank

    Some men see things as they are and say, why;
    I dream things that never were and say, why not
    ?”
    Robert Kennedy/George Bernard Shaw

    Steve BlankI got a call that reminded me that most people live their life as if it’s predestined – but some live theirs fighting to change it.

    At 19 I joined the Air Force during the Vietnam War. Out of electronics school my first assignment was to a fighter base in Florida. My roommate, Glen, would become my best friend in Florida and Thailand as we were sent to different air bases in Southeast Asia.

    An Enemy Attack May Make Your Stay Here Unpleasant

    On the surface, Glen and I couldn’t have been more different. He grew up in Nebraska, had a bucolic childhood that sounded like he was raised by parents from Leave it to Beaver. I didn’t, growing up in a New York City apartment that seemed more like an outpatient clinic. Yet somehow we connected on a level that only 19-year-olds can.  I introduced him to Richard Brautigan and together we puzzled through R.D. Laing’s The Politics of Experience. We explored the Everglades (and discovered first-hand that the then-new national park didn’t have any protective barriers on their new boardwalks into the swamps and that alligators sunning themselves on a boardwalk look exactly like stuffed ones – until you reach out to touch them.) In Thailand I even figured out how to sneak off base for a few days, cross Thailand via train, visit him in his airbase and convince everyone I had been assigned to do so (not that easy with a war on.) The chaos, the war, our age and our interests bonded us in a way that was deep and heartfelt.

    steve in Thailand 2 ARL-46Yet when the Vietnam War wound down, we were both sent to bases in different parts of the U.S. And as these things happen, as we grew older, more people and places came between us, and we went on with our lives and lost touch.

    Four Decades Later
    Last week I got an email with a subject line that only someone who knew me in the could have sent. While that caught my attention, the brief note underneath stopped me in my tracks. It read, “You have crossed my thoughts through the years. The other night you appeared in my dreams. I actually remembered it in the morning and googled your name. By God, there you were. A bit overwhelming…”

    You bet it was overwhelming, it’s been 40 years since I last heard from Glen.

    On the phone together, I spent an hour with an ear-to-ear grin as both of us recounted, “when we were young, crazy and stupid” stories, stories I still won’t tell my children (which makes me grateful it was life before social media documented every youthful indiscretion.) Glen even reminded me of my nickname (which still makes me cringe.)  The feel of long forgotten camaraderie let me wallow in nostalgia for a while. But as Glen began to catch me up with the four decades of his life, it was clear that while we both had the same type of advanced electronics training, both had been on the same airbases, and essentially both had been given the same opportunities, our careers and lives had taken much different paths. As he talked, I puzzled over why our lives ended up so different. Listening to him, I realized I was hearing a word I would never use to describe my life. Glen used the word “predestined” multiple times to describe his choices in life. His job choices were “predestined,” where he lived was “predestined,” who he married and divorced had been “predestined.”  I realized that our world views and how we lived our lives differed on that one single word.

    “Predestined.”

    The path of our lives
    While the call brought me back to when we were foolish and fearless, thinking about how Glen lived his life troubled me. It took me awhile to figure out why. I wasn’t bothered about anything that Glen did or didn’t accomplish. It was his life and he seemed happy with it. Hearing his voice brought back those days of enthusiasm, exploration, adventure and unlimited horizons. But listening to forty years of a life lived summed up as “preordained” felt like a sharp reminder of how most people live their lives.

    Glen’s worldview wasn’t unique. Most people appear to live an unexamined life, cruising through the years without much reflection about what it means, and/or taking what life hands them and believing it’s all predestined.

    As I’ve gotten older I’ve come to grips that the unexamined life is what works for most people. Most take what they learned in school, get a job, marry, buy a house, have a family, become a great parent, serve their god, community and country, hang with friends and live a good life. And for them that’s great.stages of awareness

    Some do want more out of life, but blame their circumstances on others – their parents or government or spouse or lack of opportunities, but almost never on their own lack of initiative. Initiative means change and change is hard for most. (Clearly there are still pockets in the world where opportunities and choice are limited but they are shrinking daily.)

    Perhaps the most painful to watch are those who wake up later in life thinking, “I could have or I should have.”

    Pushing the Human Race Forward
    Whether we have free will or whether our lives are predestined has been argued since humans first pondered their purpose in life. The truth is we won’t know until the second coming or the solution to the many-worlds theory.

    But what we know with certainty is that there is a small set of humans who don’t act like their lives are predestined. For better or worse, regardless of circumstances, country or culture they struggle their entire lives wanting to change the outcome. And a small percentage of these translate the “wanting to change” into acting on it. This small group is dissatisfied with waiting for life to hand them their path. They act, they do, they move, they change things.

    Those born into poverty actively strive to change their own lives and that of their children. Those who want to start a company or join one quit their job and do it, while others try to change their political system or fight for social or environmental justice.

    And the irony is while the individual stories are inspiring they are trying to tell a much bigger story. These misfits, rebels and troublemakers have been popping up in stories for thousands of years. Every culture has myths about larger than life heroes who rose from nothing. This archetype is a recessive gene common to all cultures. They are the ones that make things happen, they’re the ones that push the human race forward.

    This is what makes and drives Our heads are just wired differently.

    You Are Master of Your Own Fate
    The world is much different then when Glen and I were young and foolish. In the past, even if you did feel this spirit of adventure, you had no idea how and where to apply it. Barriers of race, gender or location threw up roadblocks that seemed insurmountable.

    The world is much smaller now. The obstacles aren’t gone but are greatly diminished. Everyone within reach of a smartphone, tablet or computer knows more about and opportunity and where to get it then all of Silicon Valley did 40 years ago. There’s no longer an excuse not to grab it with both hands.

    As far as we know, this life isn’t practice for the next one. For entrepreneurs the key to living this one to the fullest is the understanding that you can choose – that you do have a choice to effect the journey and change the rules, that you can decide to give it your best shot to do something, something extraordinary.

    If your passion is and , and your community, region or country doesn’t have an entrepreneurial culture and community – help start one. If there’s no funding for startups in your community - get up and move to where it is. If you’re in a company frustrated with the lack of opportunity - change jobs.

    You are master of your own fate. Act like it.

    Lessons Learned           

    • The same destiny overtakes us all
    • It’s what you choose to do with your life in between that makes the difference
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  •  
  • How Investors Make Better Decisions: The Investment Readiness Level

    Originally posted at www.steveblank.com

    By Steve Blank

    Steve BlankInvestors sitting through Incubator or Accelerator demo days have three metrics to judge fledgling – 1) great looking product demos, 2) compelling PowerPoint slides, and 3) a world-class team.  Other than “I’ll know it when I see it”, there’s no formal way for an investor to assess project maturity or quantify risks. Other than measuring engineering progress, there’s no standard language to communicate progress.

    What’s been missing for everyone is:

    1. a common language for investors to communicate objectives to startups
    2. a language corporate groups can use to communicate to business units and finance
    3. data that investors, accelerators and incubators can use to inform selection

    Teams can prove their competence and validate their ideas by showing investors evidence that there’s a repeatable and scalable business model. While it doesn’t eliminate great investor judgment, pattern recognition skills and mentoring, we’ve developed an Investment Readiness Level tool that fills in these missing pieces. Background about the Investment Readiness Level  here and here.

    While the posts were theory I was a bit surprised when John Selep, an early-stage investor, approached me and said he was actually using the Investment Readiness Level (IRL) in practice.

    Here’s John’s story.

    As Selections Committee chair for our Sacramento Angels investor group, I review applications from dozens of startup looking for investment.  I also mentor at our local university, and guest-lecture at a number of courses on how to pitch to investors, so the task of helping students and entrepreneurs visualize the process of investor decision-making has often been a challenge.

    When I first read about the Investment Readiness Level (IRL) on Steve’s blog, I was excited by Steve’s attempt to bridge the capital-efficient process for founders with the capital-raising process for funders. But the ‘ah-hah!’ moment for me was the realization that I could apply the IRL framework to dramatically improve the guidance and mentorship I was providing to startup company founders.

    Prior to having the Investment Readiness Level framework, this “how to get ready for an investor” discussion had been a “soft” conceptual discussion. The Investment Readiness Level makes the stages of development for the business very tangible. Achieving company milestones associated with the next level on the Investment Readiness Level framework is directly relevant to the capital-raising process.

    I use the Investment Readiness Level as part of my sessions to help the students understand that being ready for investment means that besides having a pretty PowerPoint, they need to do real work and show progress.

    Since I began incorporating the Investment Readiness Level framework I’ve made three observations. The Investment Readiness Level (IRL):

    1. Ties the Lean methodology (and capital efficiency) directly to the capital-raising process – closing the loop and tying these two processes together.
    2. Is Prescriptive – offers founders a “what-you-need-to-do-next” framework to reach a higher level of readiness.
    3. Enables better mentoring. The IRL provides a vocabulary and framework for shifting the conversation between investors and entrepreneurs from simply “No,” to the much-more-helpful “Not yet – but here’s what you can do. …”

    Selep IRLTying Fundraising to the Lean Startup
    The premise of the Lean Startup is that a startup’s initial vision is really just a series of untested hypotheses, and that the Customer Development process is a systematic approach to ‘getting out of the building’ and testing and validating each of those hypotheses to discover a repeatable, scalable business model. The Investment Readiness Level adds to this methodology by tying each phase of this discovery process or ‘hypothesis-validation’ to milestones representing a startup’s increasing readiness for investor support and capital investment.  For investors this is a big idea.

    I remind entrepreneurs that investors are implicitly seeking evidence of progress and milestones (but until the Investment Readiness Level never knew how to ask for it).  Entrepreneurs should always communicate their business’ very latest stage of customer development as part of their investor presentation. Given that a startup is continually learning weekly, the entrepreneur’s investor presentation will evolve on a weekly basis as well, reflecting their latest progress.

    In our Angel investor group, our Applicant Selections process ranks applicant companies relative to the other applicants.  In the past, the ranking process relied on our Selection Committee members having an intuitive “feel” for whether a startup was worth considering for investment.

    As part of our screening process, I’ve embraced the Investment Readiness Level (IRL)framework as a more-precise way to think through where applicant companies would rank. (BTW, this does not mean that the IRL framework has been embraced by rest of our Selections committee – organizational adoption is a lot more complicated than an individual adopting a framework.) I believe the IRL framework offers a more-precise method to discuss and describe ‘maturity’, and will likely become a more explicit part of our selections discussion in the year ahead.

    Investment Readiness Level is Prescriptive
    At first blush the Investment Readiness Level framework is a diagnostic tool – it can be used to gauge how far a business has progressed in its Customer Development process. A supposition is that startups that have validated hypotheses about key elements of their business have reduced the risks in launching their new business and are more ready for investment.

    But the IRL is more than a diagnostic. It enables a much richer investor -> founder dialog about exactly what milestones a startup has actually achieved, and ties that discussion to the stages of the business’ Customer Development and business development progress.  In the same way that Osterwalder’s Business Model Canvas provides a common vocabulary and enables a rich discussion and understanding of exactly what comprises the business’ design and business model, the IRL provides a common set of metrics and enables a rich discussion and understanding of just where the startup is in the maturity of its processes.

    This means the IRL is also a Prescriptive tool.  No matter where a startup is in its stage of development, the immediate next stage milestone – where the entrepreneurs should focus their attention next – is immediately clear.  Although every business is unique, and every business model emerges and evolves in its own unique way, the logical sequencing of incremental discovery and validation implicit in the IRL framework is very clear. No ambiguity. Clarity is good.

    Investment Readiness Level Enables Better Mentoring
    As you might imagine, our Angel group receives applications for funding from a wide, wide variety of businesses, with highly variable quality of the businesses and their applications, and highly variable levels of maturity of those businesses.  Some of our applicants are not scalable, high-growth businesses, and we tell them quickly if they don’t fit our profile. Others have the potential to be scalable, high-growth businesses, but simply aren’t as compelling or as mature as better candidates in our funnel. During every Selections cycle, as we refine our applicant funnel to select the entrepreneurs to present to our membership, I obviously have to say “No” to far more entrepreneurs than those to whom I can say “Yes.”

    The Investment Readiness Level adds a new dimension to those conversations, providing a vocabulary and framework for shifting the conversation from simply ‘No’, to the much-more-helpful “Not yet – but here’s what you can do. …”  It has completely changed the nature of the conversations I have with applicants. The prescriptive nature of the IRL means that wherever a business is in its current state of development, the next step on the ladder is nearly always pretty obvious. Of course, there should always be a little latitude for the unique nature of each business, but the IRL framework is a good guidepost. So the “here’s what you can do…” recommendations are clear, logical, and situationally relevant to the entrepreneur’s business.

    I would estimate that perhaps half of the applicants we see have heard of and use some form of Lean Startup or Customer Development methodology. The idea of a “Minimum Viable Product” is something that has entered the general vernacular, but I’m sure that not all of the businesses tossing the term around truly understand the Lean Startup teachings.

    So when I’m providing feedback to an entrepreneur applying to our group for funding, I leverage the IRL framework to guide the feedback that I give. I don’t refer to the framework explicitly, but I provide feedback based on where I assess the company to be in their development, and what steps they’d need to pursue to get another rung or two up the ladder.

    For example, I might say “The Sacramento Angels have decided that your firm isn’t quite ready for us to consider for potential investment at this point, but if you were able to discuss your prototype with 50-to-100 potential customers and get their feedback, this might help you identify the specific segments that care most-deeply about the advantages you’re offering over the existing alternative. We’d like to stay in touch with you and hear more from you once you’ve identified your initial target segment and how you are going to reach and service them …”

    I’ve almost universally found that the entrepreneurs I’m discussing these recommendations with are pleased to have the feedback, even if they’re disappointed that we may not be funding them. For an entrepreneur, receiving guidance of “Not now, but here’s what you can do…” is better than getting a flat, directionless “No”.  For me, the ability to articulate the concept of maturity, and investment readiness as a continuum, is extremely helpful. Being able to articulate that an applicant’s current stage of development, along that continuum, is not aligned with our group’s investment goals but that with further progress on their part, there may be alignment – this is a fundamentally superior message.

    The Investment Readiness Level has given me the tools to engage in a consultative, coaching and mentoring conversation that provides much more value to entrepreneurs, resulting in a much more-enjoyable conversation for all involved.

    Lessons Learned:

    • Investment Readiness ties capital-raising to the capital-efficient Lean Startup methodology
    • The Investment Readiness Level is Prescriptive
    • The Investment Readiness Level enables better mentoring
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  • I-Corps @ NIH – Pivoting the Curriculum

    Steve BlankOriginally posted at www.steveblank.com

    By Steve Blank

    We’ve pivoted our Lean LaunchPad / I-Corps curriculum. We’re changing the order in which we teach the business model canvas and to better-fit therapeutics, diagnostics and medical devices.Udacity canvas and value prop

    Over the last three years the Lean LaunchPad class has started to replace the last century’s “how to write a business plan” classes as the foundation for . The class uses the three “Lean Startup” principles:

    • Alexander Osterwalders “business model canvas” to frame hypotheses
    • “Customer Development” to test the hypotheses outside the building and
    • “Agile Engineering” to have teams prototype, test, and iterate their idea while discovering if they have a profitable business model.

    Teams talk to 10-15 customers a week and make a minimum of 100 customer visits. The Lean LaunchPad is now being taught in over 100 universities. Three years ago the class was adopted by the National Science Foundation and has become their standard for commercializing science. Today the announced their I-Corps @ NIH program.

    The one constant in all versions of the Lean LaunchPad / I-Corps class has been the order in which we teach the business model canvas.

    Value Propositions and Customer Segments are covered in weeks 1 and 2, emphasizing the search for problem/solution and then product/market fit. Next we teach Distribution Channels (how are you going to sell the product) and Customer Relationships (how do you Get/Keep/Grow customers) and Revenue Streams (what’s the Revenue Model strategy and pricing tactics.) Finally we move to the left side of the canvas to teach the supporting elements of Resources, Partners, Activities and Costs.

    current teaching order

    the class lectures in this order worked great, it helped the teams understand that the right-side of the canvas was where the action was. The left- hand side had the supporting elements of the business that you needed to test and validate, but only after you made sure the hypotheses on the right were correct.

    This lecture order was embedded in the Udacity Lectures, the syllabi and educators guide I open-sourced. Hundreds of teams in the , and my Stanford, Berkeley, Columbia, and classes learned to search for a repeatable and scalable business model in this way.

    It’s consistency was the reason that the NSF was able to scale the I-Corps from 15 to 30 University sites.

    So why change something that worked so well?

    Rationale
    Last fall at UCSF we taught 125 researchers and clinicians in therapeutics, diagnostics, medical devices and digital health in a Lean LaunchPad for class. While the teaching team made heroic efforts to adapt their lectures to our “standard” canvas teaching order, it was clear that for therapeutics, diagnostics and medical devices the order was wrong. Hypotheses about Intellectual Property, Reimbursement, Regulation and Clinical Trials found on the left side of canvas are as, or more important than those on the right side of the canvas.

    I realized we were trying to conform to a lecture order optimized for web, mobile, hardware. We needed to cover Intellectual Property, Reimbursement, Regulation and Clinical Trials a month earlier in the class than in the current format.

    The National Institutes of Health has adopted our class for its I-Corps @ NIH program starting this October. Most teams will be in therapeutics, diagnostics and medical devices. Therefore we’re going to teach the class in the following order:

    1) value proposition, 2) customer segments, 3) activities, 4) resources, 5) partners, 6) channel, 7) customer relationships, 8) revenue/costs

    LS Suggested Order simple

    I-Corps @  Lecture Order Details
    Customer Segments change over time.  CROs or Payers may ultimately be a resource, a partner or a revenue source, but until you get them signed up they’re first a customer. Your potential exit partners are also a customer. And most importantly, who reimburses you is a customer. (You get an introduction to reimbursement early here, while the details are described later in the “Revenue” lecture.)

    Activities are the key things you need to do to make the rest of the business model (value proposition, distribution channel, revenue) work. Activities cover clinical trials, FDA approvals, Freedom to Operate (IP, Licenses) software development, drug or device design, etc.

    Activities are not the product/service described in the value prop, they are the unique expertise that the company needs to deliver the value proposition.  In this week we generally describe the business rationale of why you need these. The specifics of who they are and how to work with them are covered in the “Resource” and “Partners” lectures.

    Resources - Once you establish what activities you need to do, the next question is, “how do these activities get accomplished?” I.e. what resources do I need to make the activities happen. The answer is what goes in the Resources box (and if necessary, the Partners box.) Resources may be CRO’s, CPT consultants, IP, Financial or Human resources (regardless of whether they’re consultants or employees.)

    Partners are external resources necessary to execute the Activities. You’ve identified the “class of partner” in the Resources box. This lecture talks about specifics – who are they, what deals work with them, how to get them, how to work with them.

    Customer Relationships is what we think of as traditional sales and marketing; assembling a SAB, getting the KOL’s, conferences, articles, etc.  Customer Relationships answers the question, “How will we create demand and drive it to our channel?”

    Suggested Order

    We think we now have a syllabus that will better fit a Life Science audience. Once the syllabus stops moving around we’ll open source it along with the educators guide this fall.

    Lessons Learned

    • The Lean LaunchPad class has started to replace the last century’s “how to write a business plan” classes
    • The lecture order emphasizes testing the right-side of the canvas first
    • That works for almost all markets
    • However, for life sciences hypotheses about Intellectual Property, Reimbursement, Regulation and Clinical Trials are critical to test early
    • Therefore we created a more effective lecture order for Life Sciences
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  • Why Lean May Save Your Life – The I-Corps @ NIH

    Originally posted at www.steveblank.com

    By Steve Blank

    Steve BlankToday the  announced they are offering my Lean LaunchPad class (I-Corps @ NIH ) to commercialize Life Science.

    There may come a day that one of these teams makes a drug, diagnostic or medical device that saves your life.

    —-

    Over the last two and a half years the National Science Foundation I-Corps has taught over 300 teams of scientists how to commercialize their technology and how to fail less, increasing their odds for commercial success.

    After seeing the process work so well for scientists and engineers in the , we hypothesized that we could increase productivity and stave the capital flight by helping build their companies more efficiently.

    So last fall we taught 26 life science and health care teams at UCSF in therapeutics, diagnostics and medical devices. 110 researchers and clinicians, and Principal Investigators got out of the lab and hospital, and talked to 2,355 customers, tested 947 hypotheses and invalidated 423 of them. The class had 1,145 engagements with instructors and mentors.

    NIH I Corps logo

    The results from the UCSF Lean LaunchPad Life Science class showed us that the future of commercialization in Life Sciences is Lean – it’s fast, it works and it’s unlike anything else ever done. It’s going to get research from the lab to the bedside cheaper and faster.

    Translational Medicine
    In life sciences the process of moving commercializing research –moving it from the lab bench to the bedside – is called Translational Medicine.

    The traditional model of how to turn scientific discovery into a business has been:
    1) make a substantive discovery, 2) write a business plan/grant application, 3) raise funding, 4) execute the plan, 5) reap the financial reward.

    For example, in therapeutics the implicit assumption has been that the primary focus of the venture was to validate the biological and clinical hypotheses(i.e. What buttons does this molecule push in target cells and what happens when these buttons are pushed? What biological pathways respond?) and then when these pathways are impacted, why do we believe it will matter to patients and physicians?

    We assumed that for commercial hypotheses (clinical utility, who the customer is, data and quality of data, how reimbursement works, what parts of the product are valuable, roles of partners, etc.) if enough knowledge was gathered through proxies or research a positive outcome could be precomputed. And that with sufficient planning successfulcommercialization was simply an execution problem. This process built a false sense of certainty, in an environment that is fundamentally uncertain.

    Current tran med

    We now know the traditional translational medicine model of commercialization is wrong.

    The reality is that as you validate the commercial hypotheses (i.e. clinical utility, customer, quality of data, reimbursement, what parts of the product are valuable, roles of CRO’s, and partners, etc.,) you make substantive changes to one or more parts of your initial business model, and this new data affects your biological and clinical hypotheses.

    We believe that a much more efficient commercialization process recognizes that 1) there needs to be a separate, parallel path to validate the commercial hypotheses and 2) the answers to the key commercialization questions are outside the lab and cannot be done by proxies. The key members of the team CEO, CTO, Principal investigator, need to be actively engaged talking to customers, partners, regulators, etc.

    outward facing

    And that’s just what we’re doing at the National Institutes of Health.

    Join the @
    Today the National Institutes of Health announced the I-Corps at NIH.

    It’s a collaboration with the National Science Foundation (NSF) to develop NIH-specific version of the -Corps. (Having these two federal research organizations working together is in itself a big deal.)  We’re taking the class we taught at and creating an even better version for the NIH.  (I’ll open source the syllabus and guide later this year.)

    The National Cancer Institute SBIR Development Center, is leading the pilot, with participation from the SBIR & STTR Programs at the National Heart, Lung and Blood Institute, the National Institute of Neurological Disorders and Stroke, and the National Center for Advancing Translational Sciences.

    NIH Uncle Sam small

    The class provides real world, hands-on learning on how to reduce commercialization risk in early stage therapeutics, diagnostics and device ventures. We do this by helping teams rapidly:

    • define clinical utility now, before spending millions of dollars
    • understand the core customers and the sales and marketing process required for initial clinical sales and downstream commercialization
    • assess intellectual property and regulatory risk before they design and build
    • gather data essential to customer partnerships/collaboration/purchases before doing the science
    • identify financing vehicles before you need them

    Like my Stanford/Berkeley and NSF classes, the I-Corps @ NIH  is a nine-week course. It’s open to NIH SBIR/STTR Phase 1 grantees.

    The class is team based. To participate grantees assemble three-member teams that include:

    • C-Level Corporate Officer: A high-level company executive with decision-making authority;
    • Industry Expert: An individual with a prior business development background in the target industry; and
    • Program Director/Principal Investigator (PD/PI): The assigned PD/PI on the SBIR/STTR Phase I award.

    Space is limited to 25 of the best teams with NIH Phase 1 grants. Application are due by August 7th (details are here.)

    If you’re attending the BIO Conference join our teaching team (me, Karl Handelsman, Todd Morrill and Alan May) at the NIH Booth Wednesday June 25th at 2pm for more details. Or sign up for the webinar on July 2nd here.

    This class takes a village: Michael Weingarten and Andrew Kurtz at the NIH, the teaching team: Karl Handelsman, Todd Morrill and Alan May, Babu DasGupat and Don Millard at the NSF, Erik Lium and Stephanie Marrus at UCSF, Jerry Engel and Abhas Gupta, Errol Arkilic at M34 Capital and our secret supporters; Congressman Dan Lipinski and Tom Kalil and Doug Rand at the OSTP and tons more.

    Lessons Learned

    • There needs to be a separate, parallel path to validate the commercial hypotheses
    • The answers to commercialization questions are outside the lab
    • They cannot be done by proxies
    • Commercial validation affects biological and clinical hypotheses
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  •  
  • Three Things I Learned on Commencement Day

    Steve BlankOriginally posted at www.steveblank.com

    By Steve Blank

    In the last five years I’ve been at Day at universities around the world – a few times to receive awards and three times as the commencement speaker. But attending both my daughters’ graduations this year helped me to see how things look from the other side of the podium.

    ——-

    Commencement

    First, college graduations fall in the category of “life cycle” events. At some major events– your birth and death for example, while you may be the center of attention, the events are managed by others and are more important to the people around you. Other events, like coming of age celebrations, getting your driver’s license, getting married, the birth of your children – are more important to you, and those attending are the celebrants at your event.

    While our daughters’ graduations felt important to us, on top of mind was that this day was about honoring their accomplishments not ours. We were there to celebrate with and for them. And we were incredibly proud of what they achieved – through their years as college students, they grew smarter, wiser and more prepared for the world in front of them.

    Second, for most students, our kids included, college was a halfway house to independence. The morning they stepped onto campus as freshman it was the first day of their own life –they were no longer just a child of their parents. College was the first place they could taste the freedom of making their own independent decisions – and in some of those “mornings-after” – learn the price of indulgence and the value of moderation.

    At school they had their first years of taking responsibility for themselves. While it may not be obvious to them yet, their college years were a transition from having their parents make decisions for them to making decisions for themselves. Through those years, we lived through a few crises, tried hard not to be helicopter parents and helped when we were needed.

    But as independent as our kids and their classmates felt, going to college is still a known path for 21 million U.S. college students. Commencement Day has a sobering finality in that it’s the end of the prescribed path. From that day forward each of these 21 million students now has to search for his or her own path through life

    That brings up my third and final observation. At the commencements I attended, graduates were classified by their academic rankings. Outstanding academic performance was noted in the programs and awarded with special honors. Schools reward their students for a combination of intelligence, perseverance and hard work, in the classroom and on the playing fields. But these metrics don’t help kids understand that great grades are not a pass for a great life.

    How many of those “A” students will find that after their first job, few employers care about grades and customers don’t ask for your transcript? In fact, in a decade or two, a good number of those “A” students may well be working for those supposed losers who barely graduated.

    It’s at the back of the hall where there were a few who see things differently. Who have no fondness for rules or respect for the status quo—these are the kids who are more likely to grow up to create new companies and new industries and push the envelope in directions not visible to those who follow a more conventional path. Successful founders and technology have at best a zero correlation with great grades.

    Colleges may not reward resiliency, curiosity, agility, resourcefulness, pattern recognition and tenacity. But as an entrepreneur, they matter a whole lot more than following directions, playing by the rules and getting top grades.

    Congratulations to those in both the front and back of the room. Your lives are going to be interesting – through very different paths.

    Lessons Learned

    • was their day. We were there to help them celebrate
    • Commencement Day is the end of the prescribed path. Now they have to find their own
    • Great grades are not a pass for a great life
    • After their first job, few employers care about grades and customers don’t ask for your transcript
    • Successful founders and technology entrepreneurs have at best a zero correlation with great grades
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  • Innovating Municipal Government Culture

    Originally posted at www.steveblank.com

    By Steve Blank

    Steve BlankD.R. Widder is the Vice President of and holds the Steve Blank Innovation Chair at Philadelphia University. He’s helping city government in Philadelphia become more innovative by applying methods and ’s innovation curriculum. I asked him to share an update on his work on  lean techniques to local governments.

    —-

    This February Philadelphia University and the City of Philadelphia founded the Academy for Municipal Innovation (AMI). Our goal is to foster innovation principles and practice in local government by changing the way government employees think about innovation and act on their ideas. We just graduated the inaugural class.  Here’s the story of our journey.

    Inaugural class - the Academy of Innovation Management

    The Academy for Municipal Innovation has come out of collaboration between Philadelphia University and the City of Philadelphia. Soon after I came to PhilaU as the chief innovation officer, I met Adel Ebeid, who was newly appointed as Chief Innovation Officer for the City of Philadelphia. We bonded over our similar challenges, as Adel was only the second chief innovation officer in city government and I was one of the first chief innovation officers in higher education.

    Building a Government Innovation Curriculum
    The Academy for Municipal Innovation curriculum is built on Philadelphia University’s distinctive approach to innovation education – it’s collaborative, multidisciplinary, and engaged in the real world. The curriculum draws from Philadelphia University’s design, engineering, and business disciplines, as all are needed to make innovation relevant in the government.

    Philadelphia University Undergraduate Curriculum

    The program is built around five core innovation practices that we teach:

    1. Integrated Design Processes – The process of opportunity finding, innovation and problem solving
    2. Business and Operations Models – How to describe, design, challenge, and evaluate innovation
    3. Systems Thinking – Methods for gathering and mapping out all stakeholders and influences surrounding an issue and solution
    4. Research Methods – How to find actionable insights and ask the right questions.
    5. Innovation Leadership – How to develop innovative teams and culture.

    We took this these core innovation practices in the form that has worked at the undergraduate level, and adapted the processes and content for the working professional in the government.

    The Academy for Municipal Innovation (AMI) curriculum
    We deliver the class to government employees in an Executive Ed format comprised of seven 4-hour sessions.

    Each class is a mix of theory and practice. A key design principle is that each session includes at least one tool that participants can use the very next day at work, so they can make it real immediately. For example, simple brainstorming techniques like “Yes, And” and “Silent Brainstorming” were put to use the same week they learned them.

    We select one common theme that runs through all the classes for continuity, and they build upon it as they go. The theme for the pilot class was “How can the city better communicate and advance innovative ideas”. We built on this theme teaching the students opportunity finding, concept development, stakeholder mapping, systems dynamics, research, and business models perspective, culminating with a capstone workshop where they bring it all together.

    The strategy is to take participants from across the full range of city organization chart to seed the culture change. The pilot class (we call them the Pioneers) learned innovation principles and tools, and will bring them back to their groups and spread the word. For example, a subset of the class self organized around how to better service businesses starting and operating in the city. They used the capstone to pilot a process that they plan to take back to their organizations and implement at scale.

    Scaling the Academy for Municipal Innovation
    We see the Academy for Municipal Innovation scaling in three dimensions:

    1. Culture – graduates become change agents in their home groups, and change their group culture locally, amplifying the impact of each graduate
    2. Depth – The certificate program can be expanded into courses for credit, and ultimate a master’s degree in innovation in government.
    3. Reach – As we move out of pilot, we will offer this program to other city governments (and other levels of government). Success in Philadelphia will make us a flagship for innovation at the city level.

    Academy for Innovation Management scaling strategy

    Lessons Learned

    • The bar is low but the need, and receptiveness is high for government innovation. The students in the Pioneer class have actively challenged ideas and assumptions, and are already applying what they have learned in their work. Today.
    • Creativity, collaboration, and critical thinking skills transcend context, age, and pre-existing knowledge. These skills are teachable/learnable and no matter how good you are, you can get better.
    • Leadership buy-in to innovation is that much more critical to success in government contexts.
    • Government doesn’t get to ‘opt-in’ to problem solving or choose which problems it will tackle. The government innovates with the hand it is dealt to a greater extent than the private sector.
    • The scale of a city as a building block is compelling for change and social impact. It is less complicated and with less inertia than the state and federal level, making the prospect of change more manageable.
    • “Municipal Innovation” might be an oxymoron to the cynic, but cities have scope, and levers of influence, that industry does not. Changes in policy, regulations, civic engagement, unique partnerships, social programs, and different funding mechanisms are all tools available for the municipal innovator.
    • The ‘boot camp’ experience creates a new communication network. Our pioneer class formed strong bonds learning new things together, in a new and intense environment. In addition to traditional communication, the closely bonded students can reach across the silos directly to each other, built on the relationships formed in class.

    Working with the City of Philadelphia on Academy for Municipal Innovation has left me exhilarated. The city leadership, and members of this pioneer class, are committed to real innovation in government. They are taking on systems highly resistant to change, with diverse stakeholders in intricate relationships, under public scrutiny and political complexities. The magnitude of the challenge and their commitment is inspiring.

    If you would like to find out more, click here

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  • Corporate Acquisitions of Startups: Why Do They Fail?

    Originally published at www.steveblank.com 

    By Steve Blank

    Steve BlankFor decades large companies have gone shopping in Silicon Valley for . Lately the pressure of continuous disruption has forced them to step up the pace.

    More often than not the results of these acquisitions are disappointing.

    What can companies learn from others’ failed efforts to integrate startups into large companies? The answer - there are two types of integration strategies, and they depend on where the startup is in its lifecycle.

    The Portfolio
    Most large companies manage three types of innovation: process innovation (making existing products incrementally better), continuous innovation (building on the strength of the company’s current business model but creating new elements) and disruptive innovation (creating products or services that did not exist before.)

    Companies manage these three types of innovation with an innovation portfolio – theybuild innovation internally, they buy it or they partner with resources outside their company.

    innovation portfolioFive Types of Innovation to Buy
    If they decide to buy, large companies can:

    1. license/acquire intellectual property
    2. acquire startups for their teams (and discard the product)
    3. buy out another company’s product line for the product
    4. acquire a company for the product and its installed base of users
    5. buy out an entire company for its revenue and profits.

    Silicon Valley – a Candy Store
    Corporate business development and strategic partner executives are flocking to Silicon Valley to find these five types of innovation. In response, firms like Sequoia and Andreessen/Horowitz are hiring new partners just to work with their portfolio companies and match them to corporations. They are actively organizing annual and quarterly activities to bring the portfolio and Fortune 500 decision makers together–  in both large events and one-on-one visits. The goal is to get a corporate investment or an outright acquisition of the startup.

    VCs like acquisitions as much as IPOs because the acquiring companies often can rationalize paying large multiples over the current valuation of the startup. For acquirers this math makes sense since they can factor in the potential impact the startup has when combined with their existing business. However, these nosebleed valuations make it even more important in getting the acquired company integrated correctly. The common mistake acquirers make is treating all acquisitions the same.

    Is the Potential Acquisition Searching or Executing?
    Not all new ventures are at the same stage of maturity. Remember, the definition of a startup is a temporary organization designed to search for a repeatable and scalable business model. (A business model is all the parts of a strategy necessary to deliver a product to a customer and make money from it. These include the product itself, the customer, the distribution channel, revenue model, how to get, keep and grow customers, resources and activities needed to build the business and costs.)

    Startups are those companies that are still in the process of searching for a business model. Ventures that are further along and now executing their business model are no longer startups, they are now early-stage companies. Large corporations come to the valley to looking to acquire both startups which are searching for a business model and early-stage companies which are executing.

    Companies that acquire startups for their intellectual property, teams or product lines are acquiring startups that are still searching for a business model. If they acquire later stage companies who already have users/customers and/or a predictable revenue stream, they are acquiring companies which are executing.

    What gets lost when a large company looks at the rationale for an acquisition (IP, team, product, users) is that startups are run by founders searching for a business model. The founding team is testing for the right combination of product, market, revenue, costs, etc. They do it with a continual customer discovery process, iterating, pivoting and building incremental MVP’s.

    This phase of a new venture is chaotic and unpredictable with very few processes, procedures or formal hierarchy. At this stage the paramount goal of the startup management team is to find product/market fit and a business model that can scale before they run out of cash. This search phase is driven by the startup culture which encourages individual initiative and autonomy, and creates a shared esprit de corps that results in the passionate and relentless pursuit of opportunity. This is the antithesis of the process, procedures and rules that make up large companies.

    In contrast, early stage companies that have found product/market fit are now inexecution mode, scaling their organization and customer base. While they still may share the same passion as a startup, the goal is now scale. Since scale and execution require repeatable processes and procedures, these companies have begun to replace their chaotic early days with org charts, HR manuals, revenue plans, budgets, key performance indicators and other tools that allow measurement and control of a growing business. And as part of their transition to predictable processes, their founders may or may not still be at the helm. Often they have brought in an operating executive as the new CEO.

    Predicting Success or Failure of an Acquisition
    So what? Who cares whether a potential acquisition is searching or executing?

    Ironically, the business development and strategic partner executives who find the startup and negotiate the deal are not the executives who manage the integration or the acquisition. Usually it’s up to the CTO or the operating executive who wanted the innovative technology (and at times with a formal HR integration process) to decide the fate of the startup inside the acquiring company.

    It turns out the success of the acquisition depends on whether the acquiring company intends to keep the new venture as a standalone division or integrate and assimilate it into the corporation.

    Actually there is a simple heuristic to guide this decision.

    If the startup is being acquired for its intellectual property and/or team, the right strategy is to integrate and assimilate it quickly. The rest is just overhead surrounding what is the core value to the acquiring company.

    However, if the startup is still in search mode, and you want the product line and users to grow at its current pace or faster, keep the startup as an independent division and appoint the existing CEO as the division head. Given startups in this stage are chaotic, and the speed of innovation depends on preserving a culture that is driven by autonomy and initiative, insulate the acquisition as much as possible from the corporate overhead. Unless you want to stop innovation in your new acquisition dead in its tracks, do not pile on the corporate KPI’s, processes and procedures. Provide the existing CEO with a politically savvy “corporate concierge” to access the acquiring company’s resources to further accelerate growth. (It helps if the acquirer has incentives for its existing employees that tie the new acquisition’s success to those that help them.) The key insight here is that for a startup still searching for a business model, corporate processes and policies will kill innovation and drive the employees responsible for innovation out of the acquiring company before the startup’s optimal value can be realized.

    If the acquisition is in execution mode, the right model is to integrate and assimilate it. Combine its emerging corporate KPI’s, process and procedures with those of the acquiring company. Unless it’s the rare founder who secretly loves processes and procedures, transition the existing CEO to a corporate innovation group or an exit.

    Acquisiton strategy

    Lessons Learned

    • Corporate acquirers need to know what they’re buying – is their acquisition searching or executing
    • If the startup is acquired for its IP, talent or revenue, it should be rapidly integrated into the acquirer
    • If the startup is acquired for its products and/or users, preserve its startup culture by keeping it an independent unit
      • Appoint a “corporate concierge” to access the acquiring company’s resources
      • Incentive programs need to tie together the new acquisition’s continued success and the rest of the company
    • Acquirers need a formal integration and on-boarding process
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