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  • The Rise of China Venture Capital (Part 3 of 5)

    I just spent a few weeks in Japan and on a book tour for the Japanese andChinese versions of the Startup Owners Manual.  In these series of 5 posts, I thought I’d share what I learned in China. All the usual caveats apply. I was only in China for a week so this a cursory view. Thanks to Kai-Fu Lee of Works, David Lin of Microsoft Accelerator, Frank Hawke of the Stanford Center in Beijing, and my publisher China Machine Press.

    China speaking 2

    The first post described how China built a science and technology infrastructure to support advanced weapons systems development. The previous post described how the Torch program built China’s innovation clusters. This post is about the rise of Chinese and how it helped build the countries entrepreneurial ecosystem.

    The Rise of Chinese Venture Capital
    China’s move away from a state system that solely depended on a command and control economy started in the 1990s. The first wave of startups began when R&D centers and universities began to provide the technology and seed capital for new that were spin-outs or spin-offs. This could be a group of individuals leaving a university or research center or an entire department leaving. For example, in the 1990’s 85% of the start-up funds of the new technology companies founded in Beijing came from the research center or university they left.

    China Startup Funding

    The second wave of technology investors were Chinese banks, who provided the majority of the later stage investments in the Torch Program. By 1991, 70% of the Torch funded startups were getting bank financing for expansion and later stages of the new ventures, with local governments acting as guarantors. Like the U.S. SBIR and STTR programs, the Torch Program’s funding for new ventures was limited to seed funding the front end. Being designated as a Torch Program startup gave banks comfort to provide loans to these ventures for technology commercialization.

    Technology zones with Science and Technology Industrial Parks were the third source of support for new ventures. Inside the zones were Torch Technology Business Incubators with startups licensed by the local governments.  These local governments financially supported the startups because, by locating in these zones, the new ventures were seen as contributing to local economic development. This helped the startups qualify for funding from banks and venture capital firms.

    By the mid-1990s, Chinese leaders realized that the Torch program couldn’t be the source of all capital for startups. At the same time neither banks nor local governments had the cash to finance startups on the scale the country needed. The problem was that in China the government didn’t recognize venture capital firms as a legitimate organizational type. The founding of domestic VC firms began with the establishment of local government-financed venture capital firms (GVCFs), followed by university-backed VC firms (UVCFs). (The State Science and Technology Commission and the Ministry of Finance formed the China New Technology Venture Investment Corporation in 1986, but it was a government agency supporting national technology venture policy objectives, rather than a profit-oriented private enterprise. It went bankrupt in 1997.)

    A few foreign VC firms like IDG Capital Partners entered China in the early 1990s. Gradually, from the mid-1990s, the perception of venture capital shifted from its being a type of government funding to being a commercial activity necessary to support the commercialization of new technology. But it wasn’t until 1998 that corporate-backed VC firms could be established, and that started a wave of VC funds backed by government, corporate and foreign capital.

    A great summary diagram below from OECD’s Report on China’s Innovation Policy traces the evolution of China’s Innovation Ecosystem.

    Evolution of China's Innovation Ecosystem

    Investing in China Today
    Fast forward a decade, today the Private Equity and Venture Capital business is booming in China with over 1000 firms actively investing. Most of the early deals were done by offshore venture funds – with their fund registered in countries outside China and using dollars. The latest trends are as Renminbi (“RMB”) funds (the Renminbi is the official currency in China.)  In the past foreign funds who wanted to invest in China had to set up funds using dollars with complicated offshore structures with exits through offshore listings. The Renminbi funds have fewer restrictions on what industries the fund can invest in, less regulatory oversight and access to listing a portfolio company in China. There are two types of Renminbi funds: domestic funds and foreign-invested funds.  Domestic Renminbi funds are fully owned by Chinese investors, while foreign-invested Renminbi funds may be partially or fully owned by non-Chinese investors.  Both types of funds are organized under Chinese law and use Renminbi to invest in Chinese companies.

    The other big change was the creation of ChiNext, China’s equivalent of NASDAQ stock exchange for start-ups, in 2009. The market was created to provide startups and their investors liquidity. Over 100 startups were listed on ChiNext the first year of its launch at sky-high valuations (average of 66 times earnings.) About 60% of the startups listed on ChiNext were backed by Renminbi funds, making the investors of these funds one of the main beneficiaries of the exchange.

    The next posts, Part 4  Zhongguancun in Beijing – China’s Silicon Valley and part 5, the Gold Rush and Fire Extinguishers,describe the Beijing ecosystem.

     

    Lessons Learned

    • China’s venture capital system has made a remarkable journey from the “state owns everything” to the free market
    • It’s done it in a series of evolutionary stages, each new one learning from the last
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  • China’s Torch Program — The Glow That Can Light the World (Part 2 of 5)

     

    I just spent a few weeks in Japan and on a book tour for the Japanese andChinese versions of the Startup Owners Manual. In these series of 5 posts, I thought I’d share what I learned in China. All the usual caveats apply. I was only in China for a week so this a cursory view.Thanks to Kai-Fu Lee of Works, David Lin of Microsoft Accelerator, Frank Hawke of the Stanford Center in Beijing, and my publisher China Machine Press.

    China Book Unveiling

    The previous post described how China built its science and technology infrastructure. This post is about the how the Chinese government engineered technology clusters.

    The Torch Program
    In size, scale and commercial results China’s Torch Program from MOST (the Ministry of Science and Technology) is the most successful entrepreneurial program in the world. Of all the Chinese government programs, the Torch Program is the one program that kick-started Chinese high-tech innovation and .

    In the last decade Torch managed to break free of China’s state central planning bureaucracies. Of all the Chinese innovation programs, Torch is the one that was run like a startup – iterating and pivoting as it learned and discovered. This enabled Torch to evolve with China’s rapidly global economy.

    Torch has four major parts: Innovation ClustersTechnology Business Incubators (TBIs), Seed Funding (Innofund) and Venture Guiding Fund.

    Innovation Clusters
    Industries have a competitive advantage when related companies cluster in a geographical location. Examples are Hollywood for movies, Milan for fashion, New York for finance and today, Silicon Valley for technology . The early clusters occurred by happenstance of geography or history. But the theory is that you can artificially create a cluster by concentrating resources, finance and competences to a critical threshold, giving the cluster a decisive sustainable competitive advantage over other places. Israel, Singapore and now China are the three countries that have successfully put that theory into practice.

    STIPS in ChinaThe Torch program createdInnovation Clusters by creating national Science and Technology Industrial Parks (STIPs), Software Parks, and Productivity Promotion Centers.

    The first Science and Technology Industrial Park was Zhongguancun Science Park in Beijing. It has become China’s Silicon Valley. (This was the area I visited in this trip to China.) In addition to the one in Beijing, China has set up 53 additional industrial parks and in them are ~60,000 companies with 8 million employees. Industry or technology specific versions of these clusters have been set up; for example Donghu in Wuhan – specializing in optoelectronics, Zhangjiang in Shanghai – focusing on integrated circuits and pharmaceuticals, Tianjin – biotech and new energy, Shenzhen – telecommunications and Zhongshan – medical devices and electronics.

    The Science and Technology Industrial Parks contributed 7% of China’s GDP and close to 50% of all of China’s R&D spending.

    In addition to the 54 Science and Technology Industrial Parks, the Torch program also set up an additional 32 Torch Program Software Parks.

    STIPs revenue

    Another key part of China’s cluster strategy was collaboration between research and business, as well as between large enterprises and tech-based small and medium enterprises. It did so by building a national network of a 1,000+ Productivity Promotion Centers. They provide consulting, promotion, product testing, hiring, training and incubation services to startups.

    Technology Business Incubators (TBIs)
    While the Innovation Clusters designated specific areas of the countries where high tech was to occur, it’s the Technology Business incubators located inside these clusters where the startup companies physically reside. Much like incubators worldwide, they provide startups with office space, free rent, access to university technology transfer, etc.

    By 2011, there were a total of 1034 Technology Business Incubators across China, including 336 as National incubators, hosting nearly 60,000 companies. (20% of the National Incubators were privately-run and their percentage is steadily increasing.) In recent years Business Incubators have developed into diverse models. For example, the Ministry of Education and the Ministry of Science and Technology teamed up to put 45 incubators in universities. There are close to 100 specialized incubators for companies founded by returned overseas Chinese scientists and engineers. There are a dozen sector-specific incubators (a Biomedicine Incubator in Shanghai, Advanced Material Incubator in Beijing, a Marine Technology Incubator in Tianjin, etc.) These incubators are mostly clustered in the eastern coastal regions, and disproportionately target TMT (Technology Media and Telecom) and Biotech.

    Some of the startups coming out of these incubators have become large international companies including Lenovo, Huawai, Suntech Power, etc.

    Seed Funding (Innofund).
    The best analog for China’s InnoFund is the U.S. government’s SBIR and STTRprograms. Set up in 1999, Innofund offers grants ($150 – $250K), loan interest subsidies and equity investment. Innofund is designed to bridge early stage technology companies that have innovative technology and good market potential but are too early for commercial funding (banks or VCs.) Innofund applicants have to be in high-tech R&D, have less than 500 people, at least 30% of the employees have to be technical and the majority of the company owned by Chinese. The ultimate goal of Innofund is to get the startups far enough along in technology and market validation so other sources of financial capital (banks, VC’s, corporate partners) will invest.

    Since its establishment, there’s been over 35,000 applications with 9,000 projects approved and close to a $1 billion allocated.

    Most Venture Capitalists in China viewed the Innofund the same way most U.S. VC’s treat the SBIR and STTR programs – they never heard of it, or they think it takes too much time to apply for too little money. And with the same complaints; tedious, relationship driven application process, bureaucratic reporting requirements, and outcomes often measured in quantity and not quality. However, for startups who have gotten an Innofund grant, it does provide the same positive cachet as an SBIR andSTTR grant – the government has reviewed your technology and thought it was worthy.

    Venture Guiding Fund
    In 2007 the Ministries of Science and Finance raised the stakes to get VC’s focused on funneling more VC money into growing startups – they set up a Venture Guiding Fund. The Venture Guiding Fund invests directly into VC funds, co-invests with VC’s, and covers some VC bets. It does this with four programs: 1) A fund of funds, holding < 25% equity in VC firms, requiring only a fixed rate return; 2) the fund will co-invest with other VC firms matching up to 50% of other VC firm’s equity investment or a maximum of $500K; 3) Risk subsidies for VC firms, where the fund will be compensated for the cost and loss of VC firms which have made investments in technology-based startups; and 4) Grants for portfolio reserves, where the fund will provide grants for technology-based startups which are being incubated and coached by VC firms.

    Funding for MOSST Programs

    Part 3, the next post, describes the rise of Chinese .

    Lessons Learned

    • The Torch Program is the worlds largest “lets engineer entrepreneurial clusters” experiment
    • Torch has four major parts: Clusters, Business Incubators, Seed Funding, and Funds to support Venture Capital firms
    • Torch was the rare government program that was run like a startup – iterating and pivoting as it learned and discovered.
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  • China-The Sleeper Awakens (Part 1 of 5)

     

    I just spent a few weeks in Japan and on a book tour for the Japanese Japan bookcoverandChina bookcoverChinese versions of the Startup Owners Manual.  In these series of 5 posts, I thought I’d share what I learned in China.  My post about Japan will follow. All the usual caveats apply. I was only in China for a week so this a cursory view. Thanks to Kai-Fu Lee of Works, David Lin of Microsoft Accelerator, and my publisher China Machine Press.

    Summary: I’ve lived in Silicon Valley for 35 years, I’ve taught in entrepreneurial clusters in New York, Boston, Helsinki, Santiago Chile, St. Petersburg, Moscow, Prague, and Tokyo, but the visit to the heart of the Beijing startup world Zhongguancun has truly blown me away.

    Each of these clusters has wondered how to become the next Silicon Valley.  Beijing is already there.

    ———-

    What a long strange trip China has been through. After the creation of the Peoples Republic of China in 1949, all industry was nationalized, agriculture was collectivized, and the private sector was eliminated. All companies were owned by the state, all planning was centralized, and the state determined the allocation of resources. This was the China I grew up with – the one where private enterprise was a crime and marketing wasn’t a profession.

    To say China has transformed itself is perhaps the biggest understatement one can make. China has embraced state capitalism in a way Wall Street can only dream about.

    , and the Communist Party: how did this happen in China?
    The best analogy to describe the relationship of science and technology and the Chinese startup scene is to understand its parallels with the United States during the Cold War with the Soviet Union.  During World War II, the U.S. mobilized scientists in a way no other country had. For 45 years – post World War II until the fall of the Soviet Union – the U.S. viewed science and technology as a strategic asset. We made major investments in it, understanding that establishing basic and applied science leadership was necessary for us to build advanced weapons systems to defend our country and deter and if necessary, wage and win a war with the Soviet Union.

    These investments took the form of building national research organizations, several for basic science (NSF, NIH) and others for applied weapons research (DOD, DARPA, DOE, etc.) Research universities also became an integral part of the military ecosystem as the federal government pumped billions into supporting science.

    Startups, and commercial applications are happy byproducts of those military investments. For example, as the semiconductor business started, the largest customers for Fairchild’s and Texas Instruments new integrated circuits were the Apollo Guidance Computer and the guidance system for the Minuteman II ICBM.

    China is following the same path...
    Over the last three decades, to achieve strategic parity with the United States and to construct a modern military, the Chinese have made massive investments in building their science and technology infrastructure. China has gone from a land-based army to one that can support its territorial claims to the South China Sea and Taiwan with anti-access/area-denial weapons. This evolution required a transition, moving from a reliance on the numerical superiority of its land army toward a force boasting sophisticated aircraft and naval platforms, precision- strike weapons, and modern C4SIR (Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance) capabilities. Its Second Artillery Corps not only controls China’s ICBMs, but also its short range missiles pointed at Taiwan, Vietnam, Philippines, and U.S. bases in Guam and Okinawa. And its new terminally guided ICBMs have put U.S. aircraft carriers in harms way in any regional confrontation. Its air force and navy have gone from a self-defense force to one that can project regional power effectively to thefirst island chain and beyond.

    DongFeng 21C (CSS-5 Mod-3)

    China’s military modernization depends heavily on investments in China’s science and technology infrastructure, reform of its defense industry, and overt and covert procurement of advanced technology and weapons from abroad.

    Building China’s Science and Technology infrastructure
    Science and startups have come a long way since the 1980’s when the Chinese government owned everything and controlled it through a central planning system.  But before startups could happen, China’s basic science, technology and finance infrastructure and ecosystem needed to be built.  Here’s how a national policy for science and technology emerged.

    Beginning in the 1982, China started a series of science and technology programs in five areas: support of basic research, high technology R&D, technology innovation and commercialization, construction of scientific research infrastructure, and development of human resources in science and technology.

    The majority of the science and technology programs are driven by MOST (Ministry of Science and Technology) and NSFC (National Natural Science Foundation). As we’ll see later, the MOF (Ministry of Finance) also has had a hand in funding new ventures.

    MOST logo

    The diagram below from OECD’s Report on China’s Innovation Policy puts the ministries involved in science in context. (Note that it does not show the military technology ministries.)

    MOST in China

    • Basic researchNational Natural Science Foundation (equivalent to the U.S. National Science Foundation,) ~$1.75 billion budget. The 973 program(National Basic Research Program) part of the Ministry of Science and Technology.
    • High technology R&D863 Program (State High Technology R&D Program) headed by ex leaders of Chinese strategic weapons programs, and theNational Key Technology R&D Program.
    • Technology innovation and commercializationNational New Product Program,the Spark program for rural innovation, and probably the most important one for startups in China , the Torch Program
    • Science research infrastructure:  National Key Laboratories Program, and the MOST program for the construction of research facilities, R&D databases, and a scientific research network
    • Development of human resources in science and technology: Programs for attracting returnees or overseas Chinese talent: from the Ministry of Education – the Seed Funds for Returned Overseas Scholars, Chunhui Program, and the Cheung Kong Scholar Program. From the Ministry of Personnel – the Hundred Talents Program. From the National Science Foundation – the National Distinguished Young Scholars Program.

    Part two, the next post, describes China’s Torch Program, the largest government-run entrepreneurial program in the world.

    Lessons Learned

    • China is working to build basic and applied science and technology leadership
    • Like the U.S. and the Soviet Union in the Cold War they are using science and technology to build advanced weapons systems
    • Technology startups are a side effect from these investments
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  •  
  • The Lean LaunchPad Goes to Middle School

    Steve Blank 2011 PhotoWhile the class has been adopted by Universities and the National Science Foundation, the question we get is, “Can students in K-12 handle an experiential class?”  Hawken School has now given us an answer.

    Hawken is an independent school for grades K-12 in Cleveland, Ohio, committed to the idea that students learn more “by doing than by listening.” Experiential education is threaded in the school’s DNA.

    Doris Korda, spent the first 15 years of her career in the high tech industry and is now the Associate Head of School. Natasha Chornesky, who ran a publishing business, is the Director of Entrepreneurial Studies. They both attended our latest Lean LaunchPad Educators Class. These two posts are what they did when they returned.

    Part one was about Hawken School’s experience using the Lean LaunchPad curriculum for high school seniors, this post is what happened when they used it for 6th- to 8th-graders.

    ——
    6th  to 8th Graders: from Pitch to Prototype
    We believed that we could teach entrepreneurship at Hawken to the 6th to the 8th graders, so the week after Christmas Break I taught a 35-hour, one-week course in our Middle School Insights Program. Boys and girls ages 11 -14 pitched ideas on Monday and then worked through the week to pitch their Minimum Viable Products to VCs on Friday — StartUp Weekend style.

    Hawken Middle School LLP classBecause it is important for kids in North East Ohio to understand what high tech is and why and how a solution may be scalable, students were allowed to pitch any idea that could be solved using a mobile/web solution.

    The Week
    Monday students pitched, voted and joined teams. By Tuesday morning, students fleshed out what they believed to be their value proposition and customer segments. We spent a lot of time defining an MVP and steering them away from multiple features for the user. Scrum boards went up detailing everything they needed to accomplish by Friday afternoon. Tuesday afternoon they got out of the building and headed to a local mall to begin the customer validation and development process.

    Wednesday morning they tabulated data and brought their original hypotheses to a grinding halt based on what they learned outside the building.  With new hypotheses and the help of a local UX Designer from Cleveland’s agile methods experts,LeanDog, the pivots began. Using paper templates, students worked out user experiences and taped them to the wall next to their drawings of customer archetypes. The energy in the room was electrifying.

    In addition to regular lunch, the kids consumed 16 boxes of dry cereal, a crate ofClementines and an untold number of juice boxes. On Wednesday and Thursday, splash pages were launched; email addresses captured, cost structures and revenue streams explored. By Thursday noon each team knew, through hypothesis testing and customer interviews, the single feature behind its MVP and they headed out of the building one last time.

    Results
    Teams conducted 20-40 face-to-face interviews that week. They drew customer archetypes and storyboards, tried emailing, phone scripts and face-to-face conversations. We instituted the “Great Idea Gong” (GIG) that they thwacked every time a teammate wanted to share a “Big Idea” with the rest of the class.  We didn’t blog, but kids submitted an exit ticket at the end of each day. They answered Steve’s prompts: “This is what I thought . . . this is what I learned . . . This is what I am doing next . . . This is what I am keeping in mind… “

    “I thought everyone at the mall would want to talk to us. I learned that people are in a hurry and busy and they may not care. Next time, I am going to talk to people without my partner so it’s one-to-one. And, I am going to change where I stand,” wrote Max, an 8th-grader.

    Students even watched a little Shark Tank, which explains why on Friday, when they pitched local VCs from Cleveland’s business accelerator, JumpStart they declined the celebratory cake and ice cream and spent their last hour of class time grilling the judges not only on what their financial terms were, but about what level of expertise they would bring to the particular team? “If we move forward, we don’t just need a big check, we need someone who is really knowledgeable and experienced in creating partnerships. We don’t know much about that when it comes to clothing brands. Without that help, the money won’t matter,” explained Stephanie, a 7th-grader.

    Lessons Learned:

    • When stuck with “no ideas,” instruct younger students to become detectives and identify the things that bug their friends, family and themselves. Next ask, “What is a possible solution to that problem?”
    • For each block in the business model canvas, have the students focus on only one or two questions
    • Reword the questions in age-appropriate language. Asking, “What do we needto do to make our solution a reality?” and “What are the things/people we needto make our solution a reality?” helps students who are stuck completing a business model canvas
    • Encourage an atmosphere of sharing with everything from food to great ideas
    • Scrum boards are a huge success for kid teams
    • Worry less about covering content and more about students developing the skill and willingness to take a risk, fail, makes some changes and try again.
    • Interrupt work every so often with something physical like dancing to loud music or running around outside. Ask the kids to teach you a new game
    • Teachers should check their own egos at the door

    Summary for the Lean LaunchPad in K-12 Education
    We are learning how to use the Lean LaunchPad model to build our entrepreneurial program for high school and middle school students, and will soon use it as the basis for developing an entrepreneurial program for our youngest students as well.

    Our educational Goals for Hawken Middle and High School students is to:

    • Develop and apply an entrepreneurial mindset in all their endeavors (inside and outside of entrepreneurship class):            
      • This is what I thought . .  .
      • This is what I learned . . .
      • This is what I am doing next . . .
      • This is what I am keeping in mind . . .
      • Acquire real-world experience outside the classroom
      • Identify the key components of high-tech scalable businesses, not common in our geographic region.
      • Develop project management and team communication skills.
      • Become better and more empathetic listeners through the process.
      • Embrace failure as an essential element of success.
      • Understand the ever-evolving relationships among the 9 BMC blocks.

    We are finding the Lean LaunchPad curriculum to be a powerfully relevant and inspiring educational tool for students of all ages.

    For additional information and/or resources, contact [email protected] or [email protected]

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  • The Lean LaunchPad goes to high school

    Steve Blank 2011 PhotoWhile the class has been adopted by Universities and the National Science Foundation, the question we get is, “Can students in K-12 handle an experiential class?”  Hawken School has now given us an answer.

    Hawken is an independent school for grades K-12 in Cleveland, Ohio, committed to the idea that students learn more “by doing than by listening.” Experiential education is threaded in the school’s DNA.

    Doris Korda, spent the first 15 years of her career in the high-tech industry and is now the Associate Head of School. Natasha Chornesky, who ran a publishing business, is the Director of Entrepreneurial Studies.  They both attended our latest Lean LaunchPad Educators Class. These two posts are what they did when they returned.

    Part one is about Hawken School’s experience using the Lean LaunchPad curriculumfor high school seniors, part two is what happened when they used it for 6th- to 8th-graders.

    ——

    High School Entrepreneurship:  Choosing the Lean LaunchPad over a Mini-MBA Program
    Adopting the Lean LaunchPad instead of a “mini MBA program” for Hawken students made good sense pedagogically, (we knew that searching for a viable business modelis the core of entrepreneurship,) though it presented some challenges in perception:

    • None of the neighboring high schools was using the Lean LaunchPad
    • Most of these schools have entrepreneurship classes focused on students making crafts and selling them
    • Other schools curricula were steeped in traditional management and economics texts

    Having taught grades 6-12, survived two “tours of duty” as a middle school principal, and designed curriculum for grades 3 and up, it was obvious to me that Steve’s Lean LaunchPad provides an accessible framework for young students to searchsuccessfully. We started with a few hypotheses, and iterated and pivoted to a successful program.Hawken High School Students

    Hypothesis 1:
    High school students will come through the door burning with passion to transform an idea into a business.

    Reality: My seniors arrived to class with no ideas and no idea that they needed an idea. They thought they were learning about other people’s ideas in case studies and articles. They didn’t think they’d be doingentrepreneurship.

    Practice:  We created time in class to share ideas. I framed the search for a viable business model as the focus. We determined as a class that we wouldn’t pass judgment on ideas until we dove into the process. I stressed to the students they would be assessed on their ability to move through the process, rather than be graded on an idea’s perceived worth. How quickly can you test hypotheses, learn from the tests, iterate?

    Currency in my class became the ability to quickly test hypotheses, iterate and pivot.  It would be several months before my seniors, obsessed with college admissions, embraced this methodology, which felt so foreign at the onset.

    Still apprehensive about working on their own businesses, I connected them with local , but with a twist. Following Steve’s Golden Rule that were not allowed as guest speakers in class, I went out to the community and located who needed help with their customer discovery process. I worked with the to craft a deliverable that was both helpful to them and with which my students would be successful. One of the requirements was that my students had to get out of the building and start talking to customers. Students blogged using Steve’s four prompts, below. The more they were out in the field, the stronger their entrepreneurial mindset grew, which was reflected in their posts.

    • This is what I thought . .  .
    • This is what I learned . . .
    • This is what I am doing next . . .
    • This is what I am keeping in mind . . .

    Result: By the end of the first semester, the world opened up, questions and opportunities popped up everywhere, even where kids previously had seen failure or disappointment. Students’ entrepreneurial mindsets had permeated the most unlikely places.  “I don’t know what is going on in your class, but these kids have changed. Their entire mindset is different and the way they are showing up in the college admissions process is really different—in a great way,” remarked Director of College Admissions, Andrea Hays.

    Hypothesis 2:
    Hawken’s entrepreneurship class needed to look and feel familiar to students, parents and others in order to be successful.

    Reality: A local school that is held as the pinnacle of entrepreneurship education uses Harvard case studies, so I thought we should, too. We were three-quarters of the way through the year and we hadn’t touched one. We didn’t need them.

    The customer discovery and development process provides real experience, and real experience trumps case studies.  Plus, kids will tell you that the cases are the same old problems and they’ve already been solved.  Reading and discussing problems is never as meaningful as experiencing the problem, which can only be achieved by getting out of the building.

    Practice:  Throughout the entire first semester, I maintained a routine of weekly take-home quizzes. Quiz questions asked students to use their favorite businesses to flush out business models using the Business Model Canvas. While the students aced these quizzes, they quickly forgot the information.

    Initially students craved a syllabus, a checklist and the opportunity to easily memorize and regurgitate facts and concepts, and wanted to be told what to do. By second semester, they outgrew these needs. “We’re biased toward action and the action is always changing,” explains senior Peter Labes, adding, “We’ve learned to prioritize based on urgency, which is a lot different than operating off a teacher’s checklist.”

    Iteration: I “flipped the classroom” by switched from assigning chapters to read to assigning Steve’s Udacity videos. Understanding, enthusiasm and retention increased. I abandoned the weekly quizzes and instituted weekly “here’s what I learned for customer discovery” presentations from the students , followed with a class Q&A session. The presentations demonstrated their hypotheses tested, results, customer interactions and iterations. I graded the presentations and I graded the verbal feedback students offered one another.

    When the quality of the verbal feedback became such that there was too much great information for kids to just remember, I introduced the use of Steve’s live feedback through Google Docs. At first my seniors giggled and snickered and told me I was nuts to put this tool in their hands. We talked about the value of immediate meaningful feedback. They quit giggling. We’re never going back. The quality of feedback and the quality of the presentations has increased exponentially.  “I opened up the Google Doc to review the commentary from my classmates about the slide decks. The variety, complexity and creativity of ideas were impressive. Some people touched on concepts that our four-person group hadn’t even thought to consider. There really is strength in numbers,” writes a senior in her blog.

    What’s next: Having completed in-depth customer discovery my students will be the first to tell you that “Being an entrepreneur is a TON of work!” Returning from spring break, the entire class will break up into teams and commence their own search for a viable business model for a passion-driven idea. It’s going to be dirty, messy and lots of time outside the building.

    Result: “At the beginning of the year, we were scared to commit ourselves,” explains senior Emily Leizman. ”We worked, but not 100%. Now, we’ve worked the customer development process for three companies and we treated them like our own. We’re working at 110% commitment now, so it’s time to do it for ourselves. We’re ready,”

    Lessons Learned

    • The Lean LaunchPad methodology is proven. Go 100% from the start.  Don’t phase it in.
    • Be transparent with your students. Your class is in Startup mode. Embrace failure.
    • Kids have less to “unlearn” than older students and they are naturally excited by Lean LaunchPad 100% experiential methodology.
    • Be clear in your mind that the skills acquired through Lean LaunchPad methodology trump content and act accordingly. Act tough, too.
    • Remind kids that they are being assessed on how quickly they learn from testing their hypotheses and how quickly they iterate and pivot.
    • Leverage your local entrepreneurship community in meaningful ways, instead of using them as guest speakers.

    In the next post, 6-8th graders use the Lean LaunchPad at Hawken School.

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  • Failure and Redemption

    Steve Blank 2011 Photo

    “What’s gone and what’s past help
    Should be past grief.”

    William Shakespeare - The Winter’s Tale

    We give abundant advice to founders about how to make succeed yet we offer few models about dealing with failure.

    So here’s mine.
    ——–

    In my experience, living through failure has 6 stages:

    • Stage 1: Shock and Surprise
    • Stage 2: Denial
    • Stage 3: Anger and Blame
    • Stage 4: Depression
    • Stage 5: Acceptance
    • Stage 6: Insight and Change

    While I had been part of a few failed startups, none of them had fallen squarely on my shoulders until Rocket Science Games where my business card said CEO. It was there that I lived through all 6 stages and came out the other side a changed man.

    Failure

    Stage 1: Shock and Surprise
    We raised $35 million and after 18 months made the cover of Wired magazine. Wired 2.11 CoverThe press called Rocket Science one of the hottest companies in Silicon Valley and predicted that our games would be great because the storyboards and trailers were spectacular. 90 days later, I found out our games are terrible, no one is buying them, our best engineers started leaving, and with 120 people and a huge burn rate, we’re running out of money and about to crash. This can’t be happening tome.

    Stage 2: Deny any of it was your fault
    In my mind, I had done everything the investors asked me to do. I raised a ton of money and got a ton of press. We hired everyone according to our plan. It was everyone else who screwed up. I did everything right.

    Stage 3: Get angry and blame everyone else
    This was the fault of my cofounder since he was in charge of game development, it was the engineers who bailed on me, it was the sales and marketing people who didn’t tell me how bad the games were, it was the VC’s who refused to put any more money in the company, it was Sega’s fault for making a bad gaming platform…

    State 4: Get depressed
    When the inevitability and magnitude of the failure sunk in, I slept in a lot. There were days I’d get up late and go to bed again at 5 pm. I lost interest in anything associated with my past industry. (To this day I still can’t play a video game.)

    Redemption

    Step 5: Gradually accept your role in the failure
    A few weeks after leaving, I began to think about what I should have done, could have done and pondered why I didn’t do it. (I didn’t listen, I didn’t act, I didn’t own my role as CEO, I wasn’t prepared to do what was right or leave.) This was hard and didn’t happen overnight. My wife was a great partner here. I often reverted to Stages 2 and 3, but over time I took ownership of my primary role in the debacle.

    Stage 6: Gain insight and change your behavior
    This was the hardest part. While I stopped blaming others, understanding what I couldchange in my behavior took long months. It would have been much easier to just move on, but I was looking for the lessons that would make my next startup successful. I looked at the patterns of behavior, not just at my last company but also across my entire career. I learned how to dial back the hubris, get other smart people to work withme – rather than just for me, listen better, and act and do what was right – regardless of what others thought I should do.

    Epilogue
    For my next startup I parked the behaviors that drove Rocket Science off the cliff. We established a team of founders who worked collaboratively. When my co-founders and I got the company scalable and repeatable, we hired an operating executive as the CEO and returned a billion dollars to each of our two lead investors.

    Now when I listen to who’ve cratered a company, I listen for their stories of failure and redemption.

    Lessons Learned

    • Six stages of failure and redemption
    • Don’t get stuck in Stages 2, 3 or 4  - move forward
    • Don’t skip acceptance of your role
    • Get to insight so you can change your behavior—then commit to the challenge of doing it differently the next time
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  •  
  • Crazy Enough to Change the World

    Steve Blank 2011 PhotoYour time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma – which is living with the results of other people’s thinking. Don’t let the noise of other’s opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.

    Steve Jobs, Stanford University commencement speech, 2005

    Last week one of our mentors abruptly resigned from coaching one of the Lean LaunchPad student teams after claiming the students were ignoring his practical advice and years of expertise in the field.

    His reaction reminded me one more time why is an art, why VC’s manage portfolios of companies and why new ideas come from those who don’t respect the status quo.

    I’m a Domain Expert Damn It
    We always assign experienced mentors to our student teams. In this class this seemed like a perfect fit – a driven (irrational?) founder paired with a mentor who had two operating companies in this space, who had developed and sold vertical market software to companies in this space, and had studied the field as an academic specialty. A match made in heaven?  Not exactly.

    The mentor tried his best to get the team to look at the actual operating data that exists for this kind of service and the likely regulatory hurdles they will find. He was very negative about the concept and strongly suggested the team do a pivot, but the founder was very determined to make a go of his concept.

    He finally quit in frustration.

    And here’s the conundrum – given a wise mentor (or VC) with years of experience telling you it’s a bad idea – what should you as the founder do?

    Are You Crazy Enough?
    What we suggest to teams in the classroom is the same as I suggest to teams in real world – after customers and experienced people are telling you it won’t work –

    1. Are you passionate enough to still believe?
    2. Can you explain after why getting out of the building and hearing all the negative news you still want to persevere?
    3. Will it change the world enough to make it worth the trials, travails and pain in getting there?

    If so, ignore the other voices. The world moves forward on those who are dissidents. Because without dissent there is no creativity. A healthy disrespect for the status quo coupled with passion, persistence and agility trumps everything else.

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  • Qualcomm’s Corporate Entrepreneurship Program — Lessons Learned (Part 2)

    Steve Blank 2011 Photo

    I ran into Ricardo Dos Santos and his amazing Qualcomm Venture Fest a few years ago and was astonished with its breath and depth.  From that day on, when I got asked about which corporate program had the best process for idea selection, I started my list with Qualcomm.

    This is part 2 of Ricardo’s “post mortem” of the life and death of Qualcomm’s corporate program.  Part 1 outlining the program is here. Read it first.

    ———

    What Qualcomm corporate innovation challenges remained? 
    Ironically, our very success in creating radically new product and business ideas ran headlong into cultural and structural issues as well as our entrenched R&D driven innovation model:

    • Cultural Issues:  Managers approved their employees sign-up for the bootcamp, but became concerned with the open-ended decision timelines that followed for most of the radical ideas.  Employees had a different concern – they simply wanted more clarity on how to continue to be involved, since formal rules of engagement ended with the bootcamp.
    • Structural Issues:  Most of the radical ideas coming out of the 3-month bootcamp possessed a high hypotheses-to-facts ratio.  When the teams exited the bootcamp, however, it was unclear which existing business unit should evaluate them. Since there weren’t corporate resource for further evaluation, (one of our programs’ constraints was not to create new permanent infrastructures for implementation,) we had no choice but to assign the idea to a business unit and ask them to perform due diligence the best they could. (By definition, before they had a chance to fully buy into the idea and the team).

    With hindsight we should have had “proof of concepts” tested in a corporate center (think ‘pop-up incubator’) where they would do extensive Customer Discovery. We should had done this before assigning the teams to a particular business unit (or had the ability to create a new business unit, or spin the team out of the company).

    The last year of the program, we tried to solve this problem by requiring that the top 20 teams first seek a business unit sponsor before being admitted into the bootcamp (and we raised a $5 million fund from the BUs earmarked for initial implementation ($250K/team.) Ironically this drew criticism from some execs fearing we might have missed the more radical, out-of-the box ideas!

    • Entrenched Innovation Model Issues:  Qualcomm’s existing innovation model – wireless products were created in the R&D lab and then handed over to existing business units for commercialization – was wildly successful in the existing wireless and mobile space. Venture Fest was not integral to their success. Venture Fest was about proposing new ventures, sometimes outside the wireless realm, by stressing new business models, design and open innovation thinking, not proposing new R&D projects.These non-technical ideas ran counter to the company’s existing R&D, lab-to-market model that built on top of our internally generated intellectual property.  The result was that we couldn’t find internal homes for what would have been great projects or spinouts. (Eventually Qualcomm did create a corporate incubator to handle projects beyond the scope of traditional R&D, yet too early to hand-off to existing business unit).

    We were asking the company’s R&D leads, the de-facto innovation leaders, who had an existing R&D process that served the company extremely well, to adopt our odd-ball projects. Doing so meant they would have to take risks for IP acquisition and customer/market risks outside their experience or comfort zone. So when we asked them to embrace these new product ideas, we ran into a wall of (justified) skepticism. Therefore a major error in setting up our corporate innovation program was our lack of understanding how disruptive it would be to the current innovation model and to the executives who ran the R&D Labs.

    What could have been done differently?
    We had relative success flowing a good portion of ideas from the bootcamp into the business and R&D units for full adoption, partial implementation or strategic learning purposes, but it was a turbulent affair.  With hindsight, there were four strategic errors and several tactical ones:

    1)   We should have recruited high level executive champions for the program (besides the CEO). They could have helped us anticipate and solve organizational challenges and agree on how we planned to manage the risks.

    2)   We should have had buy-in about the value of disruptive new business models,design and open innovation thinking.

    3)   We unknowingly set up an organizational conflict on day one. We were prematurely pushing some of the teams in the business units. The ‘elephant in the room’ was that the Venture Fest program didn’t fit smoothly with the BU’s readiness for dealing with unexpected ‘bottoms up’ innovation, in a quarterly- centric, execution environment.

    4)   Our largest customer should have been the R&D units, but the reality was that we never sold them that the company could benefit by exploring multiple innovation models to reduce the risks of disruption – we had taken this for granted and met resistance we were unprepared to handle.

    Qualcomm Lessons Learned

    Qualcomm Lessons Learned

    • The Venture Fest program truly was ground breaking.  Yet we never told anyone outside the company about it. We should have been sharing what we built with the leading business press, highlighting the vision and support of the program’s originator, the CEO.
    • We should have asked for a broader innovation time off and incentive policy for employees, managers, and executives.  Entrepreneurial employees must have clear opportunities to continue to own ideas through any stage of funding – that’s the major incentive they seek.  Managers and execs should be incentivized for accommodating employee involvement and funding valuable experiments.
    • We needed a for a Proof of Concept center.  Radical ideas seldom had an obvious home immediately following the bootcamp.  We lacked a formal center that could help facilitate further experiments before determining an implementation path.  A Proof of Concept center, which is not the same as a full-fledged incubator, would also be responsible to develop a companywide core competence in business model and open innovation design and a VC-like, staged-risk funding decision criteria for new market opportunities.
    • It’s hard to get ideas outside of a company’s current business model get traction (given that the projects have to get buy-in from operating execs) – encouraging spin-offs is a tactic worth considering to keep the ideas flowing.

    Epilogue
    The program became large enough that it came time to choose between expanding the program or making it more technology focused and closely tied to corporate R&D. In the end my time in the sun eventually ran out.

    I had the greatest learning experience of my life running Qualcomm’s corporate entrepreneurship program and met amazingly brave and gracious employees with whom I’ve made a lifetime connection.  I earnestly believe that large corporations should emulate Lean (Business model design, and Agile Engineering.)  I am now eager to share and discuss the insights with other practitioners of innovation – I can be reached at [email protected]

    Lessons Learned

    • We now have the tools to build successful corporate entrepreneurship programs.
    • However, they need to match a top-level (board, CEO, exec staff) agreement on strategy and structure.
    • If I were starting a corporate innovation program today, I’d use the Lean LaunchPad classes as the starting framework.
    • Developing a program to generate new ideas is the easy part.  It gets really tough when these projects are launched and have to fight for survival against current corporate business models.
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  • Designing a Corporate Entrepreneurship Program — A Qualcomm Case Study (Part 1 of 2)

    Steve Blank 2011 Photo

    I ran into Ricardo Dos Santos and his amazing Qualcomm Venture Fest a few years ago and was astonished with its breath and depth.  From that day on, when I got asked about which corporate program had the best process for idea selection, I started my list with Qualcomm.

    This is Ricardo’s “post mortem” account of the life and death of a corporate program.  Part 1 outlining the program is here.  Part 2 describing the challenges and “lessons learned” will follow.

    ———-

    The origin 
    In 2006, as a new employee of the Fortune 100 provider of wireless technology and services, San Diego’s Qualcomm, I volunteered to salvage a fledging idea management system (fancy term for an online suggestion box) by turning into a comprehensive corporate entrepreneurship program.

    Qualcomm’s visionary CEO, Paul Jacobs, wanted to use internal Qualcomm ideas to find breakthrough innovation that could be turned into products, (not simply a suggestion box for creative thoughts or improving sustaining innovation.)  He gave my innovation team free reign on designing a new employee innovation program. His only request was that we keep two of the original program’s goals:

    1. The program had to remain fully open to employees from all divisions.
    2. The ideas were to be implemented by existing business or R&D units – i.e., no need to create new permanent infrastructures for innovation.

    And he added a third goal that would ensure his greater involvement and support going forward.

    3. The program had to have an efficient mechanism to bubble-up the best ideas (and their champions) to the timely attention of the top executive team.

    The design challenge

    We wanted to transform our simple online suggestion box into a program that encouraged employees to behave like intrapreneurs (and their managers and executives as enablers).  Our challenge was to design a program that could:

    • Teach participants on how to turn their ideas into fundable experiments.
    • Educate employees who submit ideas that in corporations, there is no magic innovation leprechaun at the end of the rainbow that turn their unsolicited suggestions into pots of gold – they themselves had to take ownership and fight for their ideas.

    All while keeping in mind that employees, managers and executives have day jobs – so how could we ask them to spend significant time on new ideas while not sacrificing their present obligations?

    Thus began our search for a program that would properly balance the focus on the present with the need to increase our options for the future.

    Qualcomm Innovation Process

    Qualcomm Innovation Process

    Qualcomm’s Corporate Entrepreneurship Program – Venture Fest
    In 2006 we searched outside of Qualcomm for other similar entrepreneurship programs where participants also had to balance other obligations.  We realized this mechanism had been occurring for years at University’s startup competitions, such as the MIT 100K Accelerate Contest.   In these competitions, multidisciplinary self-forming teams of students work part time to pitch new companies.  The program we implemented inside of Qualcomm ended up being very similar.  We dubbed the program Qualcomm’s Venture Fest and the process, “Collective Entrepreneurship”, a three-phase program combining crowdsourcing with entrepreneurial techniques for startup creation.

    The first phase of the program leveraged the idea management system to collect a large number of competing entries then ultimately down-selected to the top 10-20 concepts with the most breakthrough potential, according to peer and expert reviews.

    Qualcomm Venture Fest

    Qualcomm Venture Fest

    The second phase, and heart of the program, was a three-month, part time bootcamp that would prepare idea champions for the internal funding battle that followed.  The bootcamp requested that participants do what do before requesting seed funding  – Discover, Network and Accelerate.  (In hindsight we were having our employees get out of the building to talk to customers, build prototypes and generate partner interest – essentially doing Customer Discovery years before Steve Blank taught his Lean LaunchPad class at Stanford and the National Science Foundation!). Our employees faced the typical impediments to corporate entrepreneurship – lack of employee time, skills, connections, pre-seed money, and official sources to discuss and manage the risk/rewards tradeoffs of sticking your neck-out. So our program staff built a support system of contextual education, mentorship, micro-funding, and hands-on coaching.

    Finally, the third phase of the program, implementation, began with the top team’s pitches to the C-level executive team, which determined the competition winners, prize money and directed other promising teams to target business unit sponsors. Our program staff facilitated the handoff and disseminated the value extracted from any funded experiments, including future option, strategic and exit value.

    In retrospect we designed something akin to a startup accelerator, the Lean LaunchPad classes or the National Science Foundation’s Innovation Corps, although none of these existed in 2006.

    What went right?
    We had C-level support. The CEO of the company embraced the program and supported the process, especially since it brought novel and thought provoking ideas to his executive team’s attention.

    The program steadily generated healthy interest from Qualcomm employees – submissions grew from 82 in the first year to over 500 in its fifth and final year.  Several ideas were fully or partially implemented, (with hundreds of millions of USD invested), with a couple of genuine breakthrough successes, and hundreds of related patents were filed.  Employees reported noticeable gains in entrepreneurial skills and attitude, and the CEO seemed happy with how his baby was being raised.

    —-

    Part 2 – challenges and lessons learned – to follow.

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