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  • Early-Stage Regional Venture Funds–Part 2 of 3 of Bigger in Bend

    Originally published on www.steveblank.com

    By Steve Blank

    Steve BlankDino Vendetti a VC at Bay Partners, moved up to Bend, Oregon on a mission to engineer Bend into a regional cluster.  Over the years Dino and I brainstormed about how Lean would affect regional development.

    I visited Bend last year and caught up with his progress.

    Mt-Bachelor-Ski-Resort

    Today with every city, state and country trying to build out a technology cluster, following Dino’s progress can provide others with a roadmap of what’s worked and what has not.

    Here’s Part 2 of Dino’s story…

    ——-

    Tech investing is risky. Success depends on finding that have identified acute customer pains in large markets where conditions are ripe for a new entrant. Few find this scalable and repeatable business model because it’s not easy. However, four critical advances over the past decade (cloud, accelerators, Lean, and Angels) not only changed the math for tech investing but made regional tech clusters possible.

    • The cloud, open-source development tools and web 2.0 as a distribution channel have vastly reduced the amount of capital a startup needs at the early stage when the risk is greatest. (Startups still need capital to scale once they find good product-market fit and a repeatable-scalable business model.)
    • Accelerators, which became mechanisms for focused entrepreneurship mentoring and delivery of best practices to startups. This was valuable to startups in the Valley and has been vital to startups in regions where the ecosystem is less developed.
    • The Lean Movement, led by Steve Blank (and others,) created a set of methodologies that ushered in the era of Evidence Based Entrepreneurship. This has changed the way entrepreneurs think about building their startups and how investors should look at them.
    • Angels & Crowdfunding: Coincident with the capital efficient movement came the current wave of angel investors, this time armed with the ability to collectively fund startups to the point of meaningful value creation on modest amounts of capital. Sites like AngelList have only amplified the collective reach of individual and grouped angel investors.

    These four developments, while important to Silicon Valley, are vital to developing regional tech clusters. While the density of Silicon Valley startups can’t be replicated in regions, the barriers of money and resources have disappeared. These changes make entrepreneurship possible anywhere.

    What’s Missing Is Early Stage Capital
    While the technology gap is closing, what’s still missing in local regions is early stage capital.

    Three types of regional venture funds  exist today:

    • Regionally located funds, such as Foundry Group in Boulder,  are located outside of Silicon Valley or NY but their investments are primarily in the Valley or NY… they are not a regional fund per this discussion.
    • Regional Angel funds that pool investors capital and typically make a one time investment in a startup, sometimes at an early stage but often at a slightly later stage.
    • Late stage large regionally based funds that invest in late stage or mezzaninedeals.

    Large regionally based early stage funds have mostly failed.  They failed due to:

    1. the dearth of deals in the region that have IPO potential and
    2. most of those funds were also raised and invested prior to the huge capital efficient wave of the past 6-8 years. These regional funds invested in capital-intensive startups that required large initial investments. The result was too much money in too few deals. The inevitable failures then damaged returns.

    The Oregon startup scene today looks very different from what it did 10 years ago. Today it’s dominated by capital efficient software, web and mobile startups whereas 10 years ago it was dominated by semiconductor and hardware startups that consumed huge amounts of capital before their first dollar in revenue.

    So a regional fund must do three things:

    • focus on early stage investments
    • “right sized” for the exit environment;find and focus on the entrepreneurs and deals that want to build scalablestartups
      • if it’s too big you won’t be able to intelligently deploy capital;
      • too small and you won’t be able to follow on and protect your investments or make enough investments to ensure you have enough “at bats.”

    We believe that regional funds need to walk a delicate balance…but it doesn’t take huge IPOs to return multiples of capital on a small fund.

    Why Valley Rules Don’t Work in Regional Economies
    A typical VC fund in Silicon Valley might raise $200 -$400 million.  And over a 10-year life of a fund only one out of five deals will deliver all the returns.  A good return to your investors is 20% per year. That means over 10 years investors expect ~6x return on their investment. This means that those winning deals have to make a ~30x return to provide the fund that 20% compound return (the 6x).

    The Valley strategy is to get as much money to work in the high flying deals that are going to pop….It’s an educated/calculated swing-for-the-fences model and it can work and be extremely lucrative if you can consistently get in those deals.

    The problem for a regionally based investor is that there will be a limited number of startups in your region that have a realistic chance at an IPO. The percentage of VC backed startups that go public is very small, so counting on those exits in a regional fund would not be prudent (nice if it happens but don’t build the model to rely on it).

    The reality is that the super vast majority of liquidity events are M&A and the majority of those are in the under $100M range. As a result, large multi-hundred million-dollar funds focused on early stage investing in the region can be challenging. There just aren’t enough “right” regional startups to invest in.

    Regional
    Bend playing Moneyball makes a lot of sense. In fact, it’s the only game that investors in a regional cluster can play.  Regional investors need a way of improving their odds of getting base hits and minimize strikeouts.

    Playing Moneyball in venture capital means making smaller, smarter bets focused on companies and deals that the big teams, the Silicon Valley heavyweight investors, pass up; because the deals are too far from Silicon Valley, not yet known to them, not in their comfort zone, or not the fad of the month.

    Playing Moneyball also means playing with the money you have.  The reality for a regional investor is that you have to match the capital you raise to the deal/exit environment you are in.

    Specifically this means that a regional fund should be $10-30M. (With a portfolio of at least 20 investments, or you are at risk of the adverse selection problem.) And the fund should be looking at startups that can provide $20M to $100M exits – almost certainly as M&A deals.

    The chart below diagrams our regional fund strategy.

    Funds for Regional Markets

    The good news for regional investors is that these factors allow you to play Moneyball if (and that’s a big IF) you are investing in entrepreneurs who are living and breathing and who are building scalable startups. This is true whether the company is concept stage or ramping revenue. I’ve found a lot of companies in the region that have found a way to get to some level of revenue traction but haven’t broken out. When you dig in, the reasons are usually easily discoverable and observable.

    The Bend Experience
    One of the fundamental benefits of being so active in building the FoundersPadaccelerator (a 12-week, program focused on ) is working with the cohort participants on refining their business models. This experience has provided me a whole new set of pattern matching filters as an investor.

    The business model canvas and the customer development process provide investors an incredible opportunity to evaluate how deeply an entrepreneur has engaged with their target customers and, more importantly, what they have learned about the problem-solution space they are going after. This learning and the measurements and metrics that surround it is what evidence based entrepreneurship is all about and what makes it a powerful tool for entrepreneurs, investors and accelerators.

    If you are a regional accelerator or investor and would like to talk and compare notes please feel free to email me.

    Lessons Learned

    • Regions are missing early-stage capital.
    • Valley-sized VC funds don’t work.
    • Build $10-30M funds.
    • Look for $20-100M exits.
    • Focus on capital efficient, scalable startups and founders
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  • Bigger in Bend – Building a Regional Startup Cluster, Part 1 of 3

    Originally published at www.steveblank.com

    By Steve Blank

    Steve BlankWhen and the Lean Startup were just a sketch on the napkin, Dino Vendetti, a VC at Bay Partners, was one of the first venture capitalists I shared my ideas with.

    Dino and I kept in touch as he moved up to Bend, Oregon on a mission to engineer Bend into a regional cluster.  Over the years we brainstormed about how Lean would affect regional development.

    I visited Bend last year and caught up with his progress.

    This post and the two that follow highlight what Dino has learned about the characteristics of the startup and investing landscape in a regional market, and what it takes to intentionally engineer a thriving regional tech cluster.

    Today, with every city, state and country trying to build out a technology cluster, following Dino’s progress can provide others with a roadmap of what’s worked and what has not. Bend, Oregon is an ideal case study because of its size, location and entrepreneurial characteristics.

    Here’s Part 1 of Dino’s story…

    ———

    Let’s get right to the point… I fell in love with Bend, Oregon, once a sleepy logging town, now population 79,000. If you like skiing, hiking, biking, rafting, golfing, camping, fishing, picnicking, rock climbing, and  – you’d like Bend.1_BalloonsOverBend_2

    Before moving to Bend last year, my career took me from engineering development roles at defense contractors in the 80’s to product management and executive marketing roles in companies like Qualcomm in the 90’s, to the world of at several firms including Bay Partners, Formative Ventures and Vulcan Ventures.

    After several visits skiing here, I had become smitten with the “mojo” of Bend – its superb quality of life, recreational opportunities and proximity to the San Francisco Bay Area. The vibe of Bend is appealing, unique and unpretentious given the number of successful business, tech and professional athlete transplants who call it home. It’s home to a small but growing tech community that has been developing over the past decade, and that’s what piqued my interest.

    What’s Different
    The differences between the Bend, Oregon region and Silicon Valley are obvious. The sheer density of talent, companies, capital and universities that exist in the Valley are second to none. It truly is the epicenter of the startup world and it’s the regional cluster for and entrepreneurship. Working in the Valley, I took for granted the constant and real time networking opportunities, the volume of deals, and the ability to access nearly every corner of the tech industry – no surprise to anyone who has spent any time in the Valley.

    However, what I found in Bend was a deeply entrepreneurial community that is leaps and bounds beyond just a destination resort town. Bend fights way above its weight class and is professional scale for its size. Its ability to do so is tied to the deep entrepreneurial DNA that permeates the region (a very similar characteristic to Silicon Valley), originally out of necessity and now out of strategy.

    Job creation in Bend is everyone’s business.   People who make the move typically need to start a business to have a job. Bend is the 16th largest metro area in the country for high-tech startup density. Pretty amazing for a town with fewer than 100,000 people.

    Startups in Bend
    So what types of and startups exist in Bend?  There’s a concentration around several sectors: software, hardware, medical-technology, aviation, and a specialty of Oregon – craft beer brewing. The chart below shows the clustering of startups around these sectors.

    Bend Startup Ecosystem

    In addition to the four major data centers that include Facebook and , Bend currently boasts 95 startups across multiple technologynsectors: 47 software, 26 hardware/semi and 22 med tech related startups. Nearby Portland Oregon (just 160 miles away) is home to over 300 startups; between the two markets, nearly 80 new startups are forming each year.

    Silicon Valley Transplants
    In addition to local entrepreneurs building startups, I found something else I wasn’t expecting in Bend: a deep pool of talented Valley transplants who’ve made their way to Bend – either during their careers or after. There are retired Fortune 500 CEOs, senior execs from Valley startups and public companies as well as successful entrepreneurs who exited their companies. These smart, successful transplants have gotten involved with the local business community as mentors, advisors, entrepreneurs, or investors.

    But the real surprise was learning that for some Bend is a Silicon Valley bedroom community. A daily direct flight on United can have you in your Bay Area office by 8 a.m. Monday. Every week I meet someone new who just moved to Bend and commutes to work for , Facebook, Salesforce, Oracle, Marketo, Workday, and on and on….These people are important and useful in the engineering of a tech cluster; as startup coaches, angel investors and advocates for the community. They communicate and pass on the DNA of how Silicon Valley operates and what level of performance is needed to compete on a global scale.

    Entrepreneurs in Bend
    Within the Bend tech startup community I found three kinds of startups/entrepreneurs:

    • Scalable entrepreneurs similar to those you would find in Silicon Valley (although a smaller concentration exists in Bend). These entrepreneurs want to build a big company. They’re typically Silicon Valley transplants who had enough success and experience to know what they were getting themselves into, what it means to raise capital from investors, what it means to scale a company, and how to engineer an exit.
    • Viable entrepreneurs who think they are building scalable startups but lack either a key element of their business model and/or lack the right team DNA to “go for it..” In this region, these are the majority of new startups I see. They have two limitations, which I help coach to see if they have the capability and desire to become scalable.
      • They go after a market opportunity that’s too limited to result in a truly scalable business (still might be an M&A candidate, but at the lower end of the range).
      • Most teams have a reluctance and willingness to “go for it” when they finally do have a scalable business and have validated the key aspects of their business model. This “small business” mindset is a holdover of how capital starved early stage startups are/were in Oregon. Entrepreneurs (and angel investors) prioritize profitability over growth (this is OK for lifestyle startups, but not for scalable startups where capturing market share and thought leadership is vital).
    • Lifestyle entrepreneurs who are just building a business to make a profit and support their awesome lifestyle (Bend has a lot of these). There is nothing wrong with lifestyle entrepreneurs as they are providing valuable products and services to the local/regional economy, but these do not make for good venture or angel investments under the traditional equity based venture model.

    Regional entrepreneurs are at an inherent disadvantage in getting the attention of customers and late stage VCs.  Therefore they need to focus on building the most efficiently scalable business model possible. Without focus, it’s difficult to create enough signal to noise ratio to become relevant in their market segment. The good news is that whether you are an investor or accelerator, if your startup is located in an advantageous regional market (defined below) and if you apply lean methodologies, you can improve your on-base and slugging percentage.

    The opportunity and challenge in regional markets is to:

    • Educate the ecosystem about the differences between the three kinds of startups/entrepreneurs
    • Find, nurture and invest in the truly scalable startups and entrepreneurs, as they will be the ones that have the potential to deliver outsized returns

    Fixing the Missing Pieces of Infrastructure
    The evolution of very capital efficient business models and methodologies has led to easier paths to funding, launching and growing businesses. With a tech cluster developing in Bend, it was clear that there were four missing pieces in its infrastructure.

    I decided to fix each of them.

    Bend needed a startup accelerator.  While entrepreneurship in Bend was talked about, and everyone read the same blogs, there was no central place founders could get focused and intense coaching and mentorship. So I co-founded the FoundersPadaccelerator, a 12-week, Lean Startup program focused on customer development that helps founders develop, refine and grow their business.

    Founders Pad

    Bend needed its own venture firm. While Silicon Valley and New York are magnets for great startups, our bet is that awesome startups exist in (or can be attracted to) Oregon and Northern California. So I launched Seven Peaks Ventures with a team of investors that includes some of the region’s most active angel investors. We help Oregon-based startups build and scale their businesses by providing highly relevant mentoring and leveraging our deep network in Silicon Valley and beyond.

    Bend needs to attract more entrepreneurs. So I launched The Big Bend Theory with Bruce Cleveland.  We’ll fly founders and their spouses/significant others along with a team member to Bend to meet local startup executives and community leaders and experience the lifestyle. If they choose to relocate in Bend we’ll offer free temporary office space and help get them funded.

    Oregon State University’s new Bend campus didn’t have a Computer Science or User Experience design program.  So I helped develop the Computer Science program at Oregon State. (We’re looking for Computer Science professors, so email me if you want to live and teach in Bend!)

    Lessons Learned

    • Bend is a bet on a regional tech cluster
    • To build a successful regional cluster, look for an eco-system with:
      • experienced professionals willing to mentor
      • entrepreneurs with the energy and drive to build businesses
      • viable startups under development
    • We are engineering the infrastructure that lacks: accelerator, venture firm, outreach, university and training.
    • It is critical to understand the types of startups and entrepreneurs in your region and for venture funding
    • Seek out the truly scalable startups.
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  • Lean LaunchPad for Life Sciences: Lessons Learned in Medical Devices

    Originally posted at www.steveblank.com

    By Steve Blank

    Steve BlankThis post is part of our series on the National Science Foundation I-Corps  class in Life Science and Health Care at . Doctors, researchers and Principal Investigators in this class got out of the lab and hospital talked to 2,355 customers, tested 947 hypotheses and invalidated 423 of them.  The class had 1,145 engagements with instructors and mentors. (We kept track of all this data by instrumenting the teams with LaunchPad Central software.)

    We are redefining how translational medicine is practiced. It’s Lean, it’s fast, it works and it’s unlike anything else ever done.

    —–

    Sometimes teams win when they fail.

    Knox Medical Devices was building a Spacer which contained a remote monitoring device to allow for intervention for children with Asthma . (A Spacer is a tube between a container of Asthma medicine (in an inhaler) and a patient’s mouth.The tube turns the Asthma medicine into an aerosol.)Asthma

    Knox’s spacer had sensors for basic spirometry measurements (the amount of air and how fast it’s inhaled and exhaled) to see how well the lung is working. It also had a Nitrous Oxide sensor to provide data on whether the lungs airways are inflamed, an inhaler attachment and a GPS tracking device.

    Knox SpacerThe Spacer hardware was paired with data analysis software for tracking multiple facets of asthma patients.

    The Knox team members are:

    Allan May founder of Life Science Angels was the Medical Device cohort instructor. Alex DiNello CEO at Relievant Medsystems was their mentor.

    The Knox team was a great mix of hands-on device engineers and business development. They used agile engineering perfectly to continually test variants of their Minimum Viable Product (MVP’s) in front of customers often and early to get immediate feedback.

    Knox was relentless about understanding whether their device was a business or whether it was in search of a market. In 10 weeks they had face-to-face meetings with 117 customers, tested 33 hypotheses, invalidated 19 of them and 53 instructor and mentor interactions.

    Knox Medical’s 2-minute video summary is here

    Knox was a great example of having a technology in search of a customer. The initial hypothesis of who would pay for the device – parents of children with asthma – was wrong and resulted in Knox’s first pivot in week 4. By week 6 they had discovered that; 1) Peak Flow Meters are not as heavily prescribed as they thought, 2) Insurance company reimbursement is necessary for anything upwards of $15, 3) Nitrous Oxide testing isn’t currently used to measure asthma conditions.

    After the pivot they the found that the most likely users of their device would be low income Asthma patients who are treated at Asthma clinics funded by federal, state or county dollars. These clinics reduce hospitalization but Insurers weren’t paying to cover clinic costs nor would they cover the use of the Knox device. The irony was that those who most needed the Knox device were those who could least afford it and wouldn’t be able get it.

    Watch their Lesson Learned presentation above. Listen to the comments from Allan May the Device instructor at the end.

    If you can’t see the video above, click here

    In the end Knox, like a lot of in Life Science and Health Care, discovered that they had a multi-sided market.  They realized late in the class the patients (and their families) were not their payers - their payers were the insurance companies (and the patients were the users.)  If they didn’t have a compelling value proposition for the insurers (cost savings, increased revenue, etc.) it didn’t matter how great the technology was or how much the patients would benefit.

    The Knox Medical Device presentation slides are below. Don’t miss the evolution of their business model canvas in the appendix. It’s a film strip of the entrepreneurial process in action.

    If you can’t see the slides above, click here

    Knox is a great example of how the Lean LaunchPad allows teams to continually test hypotheses and fail fast and inexpensively. They learned a ton. And saved millions.

    Lessons Learned

    • In medical devices, understanding reimbursement, regulation and IP is critical
    • Sometimes teams win when they fail
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  •  
  • Lessons Learned in Digital Health

    Originally posted at www.steveblank.com

    By Steve Blank

    Steve BlankThis post is part of our series on the National Science Foundation I-Corps  class in Life Science and Health Care at .

    Our Lean LaunchPad for Life Science class talked to 2,355 customers, tested 947 hypotheses and invalidated 423 of them.  They had 1,145 engagements with instructors and mentors. (We kept track of all this data by instrumenting the teams with LaunchPad Central software.)

    This post is one of a series of the “Lessons Learned” presentations and videos from our class.

    Sometimes a startup results from a technical . Or from a change in regulation, declining costs, changes in consumers needs or an insight about customer needs. Resultcare, one of the 26 teams in the class started when a resident in clinical medicine at UCSF watched her mother die of breast cancer and her husband get critically injured.

    The team members are:

    • Dr. Mima Geere  Clinical Medicine at UCSF.
    • Dr. Arman Jahangiri HHMI medical fellow at UCSF, Department of Neurological Surgery
    • Dr. Brandi Castro in Neuroscience at UCSF
    • Mitchell Geere product design
    • Kristen Bova MBA, MHS
    • Nima Anari PhD in Data Science

    Abhas Gupta was the Digital Health cohort instructor. Richard Caro was their mentor.

    ResultCare is a mobile app that helps physicians take the guesswork out of medicine. It enables physicians to practice precision medicine while reducing costs.precision medicine

    Resultcare’s 2-minute video summary is here.

    Watch their Lesson Learned presentation above. The first few minutes of the talk is quite personal and describes the experiences that motivated Dr. Geere to address this problem.

    If you can’t see the video above, click here

    The ResultCare presentation slides are here

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  • We’ve seen the future of translational medicine and it’s disruptive

    Originally published Dec. 17, 2013, at www.steveblank.com

    By Steve Blank

    Steve BlankA team of 110 researchers and clinicians, in therapeutics, diagnostics, devices and in 25 teams at UCSF, has just shown us the future of .  It’s 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.

    Welcome to the for and Healthcare (part of theNational Science Foundation I-Corps).

    This post is part of our series on the in Life Science and Health Care.

    ——–

    Our class talked to 2,355 customers, tested 947 hypotheses and invalidated 423 of them.  They had 1,145 engagements with instructors and mentors. (We kept track of all this data by instrumenting the teams with LaunchPad Central software.)

    In a packed auditorium in Genentech Hall at UCSF, the teams summarized what they learned after 10 weeks of getting out of the building. This was our version of Demo Day – we call it “Lessons Learned” Day. Each team make two presentations:

    • 2 minutes YouTube Video: General story of what they learned from the class
    • 8 minute Lessons Learned Presentation: Very specific story about what they learned in 10 weeks about their business model

    In the next few posts I’m going to share a few of the final “Lessons Learned” presentations and videos and then summarize lessons learned from the teaching team.

    Magnamosis
    Magnamosis is a medical device company that has a new way to create a magnetic compression anastomosis (a surgical connection between two tubular structures like the bowel) with improved outcomes.

    anastomosis

    Team Members were: Michael Harrison (the father of fetal surgery),Michael DantyDillon KwiatElisabeth Leeflang, Matt Clark.  Jay Watkinswas the team mentor. Allan May and George Taylor were the medical device cohort instructors.

    Their initial idea was that making an anastomosis that’s better, faster and cheaper will have surgeons fighting to the death to get a hold of their device. magnamosisThey quickly found out that wasn’t the case.  Leak rates turned out to a bigger issue with surgeons and a much larger market.

    Their 2 minute video summary is above.

    If you can’t see the video, click here.

    Watch their Lessons Learned video here and see how a team of doctors learned about product/market fit, channels and pricing.

    Their slide deck is here. Don’t miss the evolution of their business model in the Appendix.

    The best summary of why Scientists, Engineers and Principal Investigators need to get out of the building was summarized by Dr. Harrison here. After working on his product for a decade listen to how 10 weeks of the Lean LaunchPad class radically changed his value proposition and business model.

    For further reading:

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  • How Do You Want to Spend the Next 4 Years of Your Life?

    Steve BlankOriginally posted Dec. 9, 2013, at www.steveblank.com

    By Steve Blank

    As our Lean LaunchPad for Life Sciences class winds down, a good number of the 26 teams are trying to figure out whether they should go forward to turn their class project into a business.

    Given that we’ve been emphasizing and the Investment Readiness Level, I guess I shouldn’t have been surprised when someone asked, “After we figure all this data out, should we pursue our idea based on the numbers?”

    Ouch.

    I pointed out that the “data” you gather in 10 weeks (talking to 100+ customers, partners, payers, etc.,) are not the first thing you should look at. There are three more important things you should worry about.

    (see 0:30 in the video below)

    turning point

    ——–

    1. Do you want to spend the next 3 or 4 years of your life doing this?

    (See 1:03 in the video above)

    Now that you’ve gotten to know your potential channel and customers, regardless of how much money you’re going to make, will you enjoy working with these customers for the next 3 or 4 years?

    One of the largest mistakes in my career was getting this wrong. I used to be in where I was dealing with engineers designing our microprocessors or selling supercomputers to research scientists solving really interesting technical problems. But in my next to last company, I got into the video game business.

    My customers were 14-year old boys. (see 1:30 in the video)  I hated them. It was a lifelong lesson that taught me to never start a business where you hate your customers. It never goes well. You don’t want to talk to them. You don’t want to do with them. You just want them to go away.  And in my case they did – they didn’t buy anything.

    So you and your team need to feel comfortable being in this business with these customers.

    2. Is this a scalable business?  And if not, are you OK with something small?

    (See 2:03 in the video above)

    Is it a lifestyle business while you’re keeping your other job?  Is it a small business that hits $4 million in revenue in four years and $8 million in ten years?  Or is it something that can grow to a size that will result in an acquisition or some liquidity event?

    You need to decide what your personal goal is and how it matches what you think this business can grow into.  And you and your cofounders need to have that discussion to make sure that all the co-founders’ interests are aligned – before you make any decision to start the company.  If one of you are happy making $500K/year and the other has visions of selling the company to Roche for a billion dollars, you have very different goals. Without clear alignment, one or both of you will be really unhappy later when you try to make decisions.

    3. If I Didn’t Make Any Money After 4 Years, Did I Still Have A Great Time?

    (See 4:36 in the video above)

    If your company fails, would you still say you had one hell of a ride? Founders don’t do startups because they’re searching for a huge financial windfall. They do it because it’s the greatest invention they can imagine. Most of the time you will fail. So if you’re not going to have a great time with your team and learn and build something you are truly excited about – don’t do it.

    If you can’t see the video above, click here

    Lessons Learned

    • Do you want to spend the next 3 or 4 years of your life doing this business?
    • Is this a scalable business?  And if not, are you Ok with something small?
    • If you didn’t make any money after 4 years, did you have a great time?
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  • When Customers Make You Smarter

    Steve BlankOriginally posted Dec. 2, 2013, at www.steveblank.com

    By Steve Blank

    We talk a lot about , but there’s nothing like seeing it in action to understand its power. Here’s what happened when an extraordinary team gained several critical insights about their business model. The first was reducing what they thought was a five-sided market to a simpler two-sided one.

    But the big payoff came when their discussions with medical device customers revealed an entirely new way to think about pricing —potentially tripling their revenue.

    ——

    We’re into week 9 of teaching a Lean LaunchPad class for Life Sciences and Health Care (therapeutics, diagnostics, devices and digital health) at with a team of veteran venture capitalists. The class has talked to ~2,200 customers to date. (Our final – not to be missed – Lessons Learned presentations are coming up December 10th.)

    Among the 28 in the Digital Health cohort is Tidepool. They began the class believing they were selling an open data and software platform for people with Type 1 Diabetes into a multi-sided market comprised of patients, providers, device makers, app builders and researchers.

    tidepool website

    The Tidepool team members are:

    • Aaron Neinstein MD  Assistant Professor of Clinical Medicine, Endocrinology and Assistant Director of Informatics at UCSF. He’s an expert in the intersection between technological innovations and system improvement in healthcare. His goal is to make health information easier to access and understand.
    • Howard Look, CEO of Tidepool, was VP of Software and User Experience at TiVo. He was also VP of Software at Pixar, developing Pixar’s film-making system, and at Amazon where he ran a cloud services project. At Linden Lab, delivered the open-sourced Second Life Viewer 2.0 project. His teenage daughter has Type 1 diabetes.
    • Brandon Arbiter was a VP at FreshDirect where he built the company’s data management and analytics practices. He was diagnosed at age 27 with Type 1 Diabetes. He developed a new generation diabetes app, “nutshell,” that gives patients the information they need to make the right decisions about their dosing strategies.
    • Kent Quirk was director of engineering at Playdom and director of engineering at Linden Labs.

    A Five-sided Market
    In Week 1 the Tidepool team diagramed its customer segment relationships like this:

    Tidepool ecosystem

    Using the business model canvas they started with their value proposition hypotheses, articulating the products and services they offered for each of the five customer segments. Then they summarized what they thought would be the gain creators and pain relievers for each of these segments.

    Tide pool value prop week 1

    Next, they then did the same for the Customer Segment portion of the canvas. They listed the Customer Jobs to be done and the Pains and Gains they believed their Value Proposition would solve for each of their five customer segments.

    Tide pool cust week 1

    It’s Much Simpler
    Having a multisided market with five segments is a pretty complicated business model. In some industries such as its just a fact of life. But after talking to dozens of customers by week 3, Tidepool discovered that in fact they had a much simpler business model – it was a two-sided market.

    tidepool simplification

    They discovered that the only thing that mattered in the first year or two of their business was building the patient-device maker relationship. Everything else was secondary. This dramatically simplified their value proposition and customer segment canvas.

    So they came up with a New Week 3 Value Proposition Canvas:

    Tide pool value prop week 3

    And that simplified their New Week 3 Customer Segment Canvas

    Tide pool cust week 3

    Cost-based Pricing versus Value-based Pricing
    While simplifying their customer segments was a pretty big payoff for 3 weeks into the class, the best was yet to come.

    As part of the revenue streams portion of the business model canvas, each team has to diagram the payment flows.

    Tide pool market pricing

    The Tidepool team originally believed they were going charge their device partners “market prices” for access to their platform. They estimated their Average Revenue per User (ARPU) would be about $36 per year.

    Tide pool market pricing ARPU

    But by week 6 they had spoken to over 70 patients and device makers. And what they found raised their average revenue per user from $36 to $90.

    When talking to device makers they learned how the device makers get, keep and grow their customers.  And they discovered that:

    • device makers were spending $500-$800 in Customer Acquisition Cost (CAC) to acquire a customer
    • device makers own customers would stay their customers for 10 years (i.e. the Customer Life Time (CLT))
    • and the Life Time Value (LTV) of one customer over those 10 years to a device maker is $10,000

    Tide pool market pricing device cac

    These customer conversations led the Tidepool team to further refine their understanding of the device makers’ economics.  They found out that the device makers sales and marketing teams were both spending money to acquire customers.  ($500 per sales rep per device + $800 marketing discounts offered to competitors’ customers.)

    Tide pool device economics

    Once they understood their device customers’ economics, they realized they could help these device companies reduce their marketing spend by moving some of those dollars to Tidepool. And they realized that the use of the Tidepool software could reduce the device companies’ customer churn rate by at least 1%.

    This meant that Tidepool could price their product based on the $1,800 they were going to save their medical device customers.  Read the previous sentence again. This is a really big idea.

    Tide pool value pricing big idea

    The Tidepool team went from cost-based pricing to value-based pricing. Raising their average revenue per user from $36 to $90.

    Tide pool value pricing $90 ARPU

    There is no possible way that any team, regardless of how smart they are could figure this out from inside their building.

    If you want to understand how Customer Discovery works and what it can do in the hands of a smart team, watch the video below. The team ruthlessly dissects their learning and builds value-pricing from what they learned.

    The short video above is a classic in Customer Discovery.

    If you can’t see the video click here.

    Lessons Learned

    • Most startups begin by pricing their product based on cost or competition
    • Smart startups price their product based on value to the customer
    • You can’t guess how your product is valued by customers
    • Customer Development allows you to discover the economics needed for value pricing your product
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  • It’s Time to Play Moneyball: The Investment Readiness Level

    Steve BlankOriginally published Nov. 25, 2013, at www.steveblank.com

    By Steve Blank

    Investors 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.

    We think we can do better.

    We now have the tools, and data to take incubators and accelerators to the next level. Teams can prove their competence and validate their ideas by showing investors evidence that there’s a repeatable and scalable business model. And we can offer investors metrics to play – with the Investment Readiness Level.

    Here’s how.

    ————–

    We’ve spent the last 3 years building a methodology, classes, an accelerator and software tools and we’ve tested them on ~500 startups teams.

    • Lean Startup methodology offers a framework to focus on what’s important: Business Model Discovery. Teams use the toolkit: the Business Model Canvas + process + Agile Engineering. These three tools allow startups to focus on the parts of an early stage venture that matter the most: the product, product/market fit, customer acquisition, revenue and cost model, channels and partners.

    Lean moneyball

    • An Evidence-based Curriculum (currently taught in the Lean LaunchPad classes and NSF Innovation Corps accelerator). In it we emphasize that a) the data needed exists outside the building, b) teams use the scientific method of hypothesis testing c) teams keep a continual weekly cadence of:
      • Hypothesis – Here’s What We Thought
      • Experiments – Here’s What We Did
      • Data – Here’s What We Learned
      • Insights and Action – Here’s What We Are Going to Do Next

    Evidence moneyball

    • LaunchPad Central software is used to track the business model canvas and customer discovery progress of each team. We can see each teams hypotheses, look at the experiments they’re running to test the hypotheses, see their customer interviews, analyze the data and watch as they iterate and pivot.

    LPC

    We focus on evidence and trajectory across the business model. Flashy demo days are great theater, but it’s not clear there’s a correlation between giving a great PowerPoint presentation and a two minute demo and building a successful business model. Rather than a product demo – we believe in a “Learning Demo”. We’ve found that “Lessons Learned” day showing what the teams learned along with the “metrics that matter” is a better fit than a Demo Day.

    “Lessons Learned” day allows us to directly assess the ability of the team to learn, pivot and move forward. Based on the “lessons learned” we generate an Investment Readiness Level metric that we can use as part of our “go” or “no-go” decision for funding.

    Some background.

    NASA and the Technology Readiness Level (TRL)
    In the 1970’s/80’s NASA needed a common way to describe the maturity and state of flight readiness of their technology projects.  They invented a 9-step description of how ready a technology project was.  They then mapped those 9-levels to a thermometer.NASA TRL

    What’s important to note is that the TRL is imperfect. It’s subjective. It’s incomplete.  But it’s a major leap over what was being used before.  Before there was no common language to compare projects.

    The TRL solved a huge problem – it was a simple and visual way to share a common understanding of technology status.  The U.S. Air Force, then the Army and then the entire U.S. Department of Defense along with the European Space Agency (ESA) all have adopted the TRL to manage their complex projects. As simple as it is, the TRL is used to manage funding and go/no decisions for complex programs worldwide.

    We propose we can do the same for new ventures – provide a simple and visual way to share a common understanding of startup readiness status. We call this the Investment Readiness Level . 

    The Investment Readiness Level (IRL)
    The collective wisdom of venture investors (including angel investors, and venture capitalists) over the past decades has been mostly subjective. Investment decisions made on the basis of “awesome presentation”, “the demo blew us away”, or “great team” is used to measure startups. These are 20th century relics of the lack of data available from each team and the lack of comparative data across a cohort and portfolio.

    Those days are over.

    Hypotheses testing and data collection
    We’ve instrumented our startups in our Lean LaunchPad classes and the NSF I-Corps incubator using LaunchPad Central to collect a continuous stream of data across all the teams.  Over 10 weeks each team gets out and talks to 100 customers. And they are testing hypotheses across all 9 boxes in the business model canvas.

    We collect this data into a Leaderboard (shown in the figure below) giving the incubator/accelerator manager a single dashboard to see the collective progress of the cohort. Metrics visible at a glance are number of customer interviews in the current week as well as aggregate interviews, hypotheses to test, invalidated hypotheses, mentor and instructor engagements. This data gives a feel for the evidence and trajectory of the cohort as a whole and a top-level of view of each teams progress.

    leaderboard moneyball

    Next, we have each team update their Business Model Canvas weekly based on the 10+ customer interviews they’ve completed.

    canvas updates moneyball

    The canvas updates are driven by the 10+ customer interviews a week each team is doing. Teams document each and every customer interaction in a Discovery Narrative. These interactions provide feedback and validate or invalidate each hypothesis.

    disovery 10 moneyball

    Underlying the canvas is an Activity Map which shows the hypotheses tested and which have been validated or invalidated.

    activty updates moneyball

    All this data is rolled into a Scorecard, essentially a Kanban board which allows the teams to visualize the work to do, the work in progress and the work done for all nine business model canvas components.

    scorecard update moneyball

    Finally the software rolls all the data into an Investment Readiness Level score.

    IRL

    MoneyBall
    At first glance this process seems ludicrous. Startup success is all about the team. Or the founder, or the product, or the market – no metrics can measure those intangibles.

    Baseball used to believe that as well. Until 2002 – when the Oakland A’s’ baseball team took advantage of analytical metrics of player performance to field a team that competed successfully against much richer competitors.

    Statistical analysis demonstrated that on-base percentage and slugging percentagewere better indicators of offensive success, and the A’s became convinced that these qualities were cheaper to obtain on the open market than more historically valued qualities such as speed and contact. These observations often flew in the face of conventional baseball wisdom and the beliefs of many baseball scouts and executives.

    By re-evaluating the strategies that produce wins on the field, the 2002 Oakland A’s spent $41 million in salary, and were competitive with the New York Yankees, who spent $125 million.

    Our contention is that the Lean Startup + Evidence based + LaunchPad Central Software now allows incubators and accelerators to have a robust and consistent data set across teams. While it doesn’t eliminate great investor judgement, pattern recognitions skills and mentoring – it does provide them the option to play Moneyball.

    Watch the video here

    Last September Andy SackJerry Engel and I taught our first stealth class for incubator/accelerator managers who wanted to learn how to play Moneyball.

    We’re offering one again this January here.

    Lessons Learned

    • It’s not clear there’s a correlation between a great PowerPoint presentation and two minute demo and building a successful business
    • We now have the tools and technology to take incubators and accelerators to the next step
    • We focus on evidence and trajectory across the business model
    • The data gathered can generate an Investment Readiness Level score for each team
    • the Lean Startup + Evidence based Entrepreneurship + LaunchPad Central Software now allows incubators and accelerators to play Moneyball
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  • When Product Features Disappear – Amazon, Apple, Tesla and the Troubled Future for 21st Century Consumers

    Steve BlankOriginally posted Nov. 21, 2013, at www.steveblank.com

    By Steve Blank

    One of the great innovations of the 21st century are products that are cloud-connected and update and improve automatically. For software, gone are the days of having to buy a new version of physical media (disks or CD’s.) For hardware it’s the magical ability to have a product get better over time as new features are automatically added.

    The downside is when companies unilaterally remove features from their products without asking their customers permission and/or remove consumers’ ability to use the previous versions. Products can just as easily be downgraded as upgraded.Loser

    It was a wake up call when Amazon did it with books, disappointing when did it with Maps, annoying when did it to their office applications – but just did it on a $100,000 car.

    It’s time to think about a 21st Century Bill of Consumer Product Rights.

    ——

    Amazon – Down the Memory Hole
    In July 2009 facing a copyright lawsuit Amazon remotely deleted two books users had already downloaded and paid for on their Kindles. Amazon did so without notifying the users let alone asking their permission. It was a chilling reminder that when books and content are bits instead of atoms, someone can change the content – or simply disappear a book – all without users’ permission. (The irony was the two books Amazon deleted were Animal Farm and 1984.)

    Google – Well It Looks Better
    In July 2013 Google completely redesigned Google Maps – and users discovered that on their desktop/laptop, the new product was slower than the one it replaced and features that were previously available disappeared. The new Google Maps was worse then one it replaced – except for one key thing – its User Interface and was prettier and was unified across platforms. If design was the goal, then Google succeeded. If usability and functionality was a goal, then the new version was a step backwards.

    Apple – Our Code Base is More Important than Your Features
    In November 2013 Apple updated its operating system and cajoled its customers to update their copies of Apple’s iWork office applications – Pages (Apple’s equivalent to Microsoft Word),  Keynote (its PowerPoint equivalent), and Numbers (an attempt to match Excel). To get users to migrate from Microsoft Office and Google Docs, Apple offered these iWorks products for free.iwork

    Sounds great– who wouldn’t want the newest version of iWorks with the new OS especially at zero cost?  But that’s because you would assume the new versions would have more features. Or perhaps given its new fancy user interface, the same features? The last thing you would assume is that it had fewer features. Apple released new versions of these applications with key features missing, features that some users had previously paid for, used, and needed. (Had they bothered to talk to customers, Apple would have heard these missing features were critical.)

    But the release notes for the new version of the product had no notice that these features were removed.

    Their customers weren’t amused.

    Apple’s explanation? “These applications were rewritten from the ground up, to be fully 64-bit and to support a unified file format between OS X and iOS 7 versions.”

    Translated into English this meant that Apple engineering recoding the products ran out of time to put all the old features back into the new versions. Apple said, “… some features from iWork ’09 were not available for the initial release. We plan to reintroduce some of these features in the next few releases and will continue to add brand new features on an ongoing basis.

    Did they think anyone wouldn’t notice?

    Decisions like this make you wonder if anyone on the Apple executive staff actually understood that a “unified file format” is not a customer feature.

    While these examples are troubling, up until now they’ve been limited to content or software products.

    Tesla – Our Problems are Now Your Problems
    In November 2013 Tesla, a manufacturer of ~$70,000 to $120,000 electric cars, used a software “update” to disable a hardware option customers had bought and paid for – without telling them or asking their permission.

    Tesla Model SOne of Tesla features is a $2,250 “smart air suspension” option that automatically lowers the car at highway speeds for better mileage and stability. Over a period of 5 weeks, three Tesla Model S cars had caught fire after severe accidents – two of them apparently from running over road debris that may have punctured the battery pack that made up the floor pan of the car. After the car fires Tesla pushed a software release out to its users. While the release notice highlighted new features in the release, nowhere did it describe that Tesla had unilaterally disabled a key part of the smart air suspension feature customers had purchased.

    Only after most of Telsa customers installed the downgrade did Tesla’s CEO admit in ablog post,  “…we have rolled out an over-the-air update to the air suspension that will result in greater ground clearance at highway speed.”

    Translation – we disabled one of the features you thought you bought. (The CEO went on to say that another software update in January will give drivers back control of the feature.) The explanation of the nearly overnight removal of this feature was vague “…reducing the chances of underbody impact damage, not improving safety.” If it wasn’t about safety, why wasn’t it offered as a user-selected option? One could only guess the no notice and immediacy of the release had to do with the National Highway Safety Administration investigation of the Tesla Model S car fires.

    This raises the question: when Tesla is faced with future legal or regulatory issues, what other hardware features might Tesla remove or limit in cars in another software release? Adding speed limits?  Acceleration limits? Turning off the Web browser when driving?  The list of potential downgrades to the car is endless with the precedent now set of no obligation to notify their owners or ask their permission.

    In the 20th century if someone had snuck into your garage and attempted to remove a feature from your car, you’d call the police. In the 21st century it’s starting to look like the normal course of business.

    What to Do
    While these Amazon, Google, Apple and Tesla examples may appear disconnected, taken together they are the harbinger of the future for 21st century consumers. Cloud-based updates and products have changed the landscape for consumers. The product you bought today may not be the product you own later.

    Given there’s no corporate obligation that consumers permanently own their content or features, coupled with the lack of any regulatory oversight of cloud-based products, Apple’s and Tesla’s behavior tells us what other companies will do when faced with engineering constraints, litigation or regulation. In each of these cases they took the most expedient point of view; they acted as if their customers had no guaranteed rights to features they had purchased. So problem solving in the corporate board room has started with “lets change the feature set” rather than “the features we sold are inviolate so lets solve the problem elsewhere.”

    There’s a new set of assumptions about who owns your product. All these companies have crafted the legal terms of use for their product to include their ability to modify or remove features. Manufacturers not only have the means to change or delete previously purchased products at will, there’s no legal barrier to stop them from doing so.

    The result is that consumers in the 21st century have less protection then they did in the 20th.

    What we can hope for is that smart companies will agree to a 21st Century Bill of Consumer Product Rights. What will likely have to happen first is a class-action lawsuit establishing consumers’ permanent rights to retain features they have already purchased.

    Some smart might find a competitive advantage by offering customer-centric products with an option of “no changes” and “perpetual feature rights” guarantee.

    A 21st Century Bill of Consumer Product Rights

    • For books/texts/video/music:
      • No changes to content paid for (whether on a user’s device or accessed in the cloud)
    • For software/hardware:
      • Notify users if an update downgrades or removes a feature
      • Give users the option of not installing an update
      • Provide users an ability to rollback (go back to a previous release) of the software

    Lessons Learned

    • The product you bought today may not be the product you have later
    • Manufacturers can downgrade your product as well as upgrade it
    • You have no legal protection
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