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  • The Lean LaunchPad Educators Course

    By Steve Blank

    There is nothing more powerful than an idea whose time has come

    Victor Hugo

    The curriculum has caught fire. This week 100 educators from around the world will come to Stanford to learn how to teach it.

    —–

    Life is full of unintended consequences.

    Ten years ago I started thinking about why are different from existing companies.  I wondered if business plans and 5-year forecasts were the right way to plan a startup.  I asked, “Is execution all there is to starting a company?”

    It dawned on me that the plans were a symptom of a larger problem: we wereexecuting business plans when we should first be searching for business models. We were putting the plan before the planning.

    So what would a search process for a business model look like? I read a ton of existing literature and came up with a formal methodology for search I called Customer Development. I wrote a book about this called the Four Steps to the Epiphany.

    “Search versus Execution”
    In 2003 U.C. Berkeley asked me to teach a class in at Haas business school. In 2004 I funded IMVU, a startup by Will Harvey and Eric Ries. As a condition of my investment I insisted Will and Eric take my class at Berkeley. Having Eric in the class was the best investment I ever made. Eric’s insight was that traditional product management and Waterfall development should be replaced by Agile Development. While I had said startups were “Searching” for a business model, I had been a bit vague about what exactly a business model looked like. For the last two decades there was no standard definition. That is until Alexander Osterwalder wroteBusiness Model Generation.

    Finally we had a definition of what it was startups were searching for. Business model design + customer development + agile development is the process that startups use to search for a business model. It’s called the . The sum of these parts is now the cover story of the May 2013 Harvard Business Review. Bob Dorf and I wrote a book, The Startup Owner’s Manual that put all these pieces together.

    Idea who's time has come

    But then I realized rather than just writing about it, or lecturing on Customer Development, we should have a hands-onexperiential class. So my book and Berkeley class turned into the Lean LaunchPad class in the Stanford school. The class emphasizes experiential learning, a flipped classroom and immediate feedback as a way to engage students with real world entrepreneurship.

    Students learn by proposing and immediately testing hypotheses. They get out of the classroom and talk to customers, partners and competitors and encounter the chaos and uncertainty of commercializing innovations and creating new ventures.

    Then in July 2011, the National Science Foundation read my blog posts on the Lean LaunchPad class.  They said scientists had already made a career out of hypotheses testing, and the Lean LaunchPad was simply a scientific method for entrepreneurship. They asked if I could adapt the class to teach scientists who want to commercialize their basic research. The result was the NSF Innovation Corps, my Lean LaunchPad class now taught at 11 major universities to 400 teams/year. ARPA-E joined the program this year, and in the fall we’ll teach a Life Science version of the class atUCSF. And other countries are adopting the class to commercialize their nations scientific output.

    Unexpected Consequences
    One of the most surprising things that came out of the National Science Foundation classes was the reaction of the principal investigators (these were the tenured professors who leading their teams in commercializing their science.)  A sizable number of them went back to their schools and asked, “How come we don’t offer this class to our students?”

    While I had open-sourced all my lectures and put them online via Udacity, I was getting requests to teach other educators how teach the class.  I wasn’t sure how to respond, until Jerry Engel, the National Faculty Director of the NSF Corps suggested we hold an educators class.  So we did. The Lean LaunchPad Educators program is a 3-day program designed for experienced entrepreneurship faculty.  It is a hands-on program where you experience the process, and be given the tools to create, a curriculum and course plan you can put to immediate use.

    We offered the first class in August and had 50 attendees, the January class had 70, and the one being held this week we had to cap at 100.

    As part of each of the classes we open source our educators guide here

    and all our other tools for educators here.

    Where are we in Entrepreneurial Education?
    Entrepreneurial education is in the middle of a major transition.

    Entrepreneurship educators are realizing that curricula oriented around business plans and “execution” fail to prepare students for the realities of building or working in startups. Startups are a fundamentally a different activity than managing a business and “search versus execute” require very different skills. Therefore entrepreneurial education must teach how to search the uncertainties and unknowns.

    Educators are now beginning to build curricula that embrace startup management tools built around “searching for a business model” rather than the “execution of a business model” tools needed in larger companies.

    But we’re just beginning the transition. Like other revolutionary changes there are the early adopters and others who adopt later. For the Lean LaunchPad classes we’ve seen adoption fall into five categories:

    1. Those who get how teaching students how to “search versus execute” changes our curriculum.
      • They say, “Here’s how we are going to add value to what you started.”
    2. Those who get how teaching students how to “search versus execute” changes our curriculum.
      • They say, “We’re teaching the Lean Launchpad class as is. Thanks!”
    3. Those who get that there is a major shift in entrepreneurial education occurring and we understand business model design + customer development + agile engineering is at it’s core
      • They say, “We are going to rename each of these components so we can take credit for them at our business school.”
    4. Those who are not changing anything
      • They say, “We don’t buy it.”
    5. Those who really don’t understand the key concepts but we need to be “buzzword compliant” to seem relevant
      • They say, “We’re throwing Lean on top of our “how to write a business plan” and other standard classes.”

    The good news is that it’s the marketplace that will eventually drive all schools to adopt experiential classes that teach Lean principles. We’re incredibly proud of those educators who already have.
    There is nothing more powerful than an idea whose time has come

    The next Lean LaunchPad Educators Class will be held in New York, September 25-27th. Info here.

    We’ll also offer a version for incubators and accelerators in New York, September 22-24th. Email [email protected]

    Lessons Learned

    • Entrepreneurial education is in the middle of a major transition
    • Transition from startups are a smaller version of a large company, teaching execution
    • To teaching that startups search for a business model
    • Business model design + customer development + agile development is theprocess that startups use to search for a business model
    • Lean LaunchPad is an experiential class that teaches students how to search
      • It’s part of a broader new entrepreneurial curriculum
      • We teach this in the Lean LaunchPad Educators Class
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  • Fund Raising is a Means Not an End

    By Steve Blank

    Not all that glitters is gold
    William Shakespeare

    For many “raising money” has replaced “building a sustainable business” as their goal.  That’s a big mistake. When you take money from investors their business model becomes yours.

    ———–

    One of my ex students came out to the ranch to give me an update on his startup. When I asked, “What are you working on?” the first words out of his mouth was his fund raising progress.  Sigh… What I should have been hearing is the search for the business model, specifically the progress on product/market fit, but I hear the fund raising story first at least 90% of the time.  It never makes me happy.

    shutterstock_2694848Entrepreneurs need to think about 1) when to raise money, 2) why to raise money and 3) who to take money from, 4) the consequences of raising money.

    It all starts with understanding what a startup is.

    What’s a Startup? Just as a reminder, a startup is a temporary organization designed to search for a repeatable and scalable business model.  It’s worth parsing this sentence:

    •  Temporary Organization: The goal of a startup is not to remain a startup. The goal is to scale.  (If you don’t have scale as a goal then you shouldn’t be raising money from angel or venture investors, you should be getting a commercial or government small business loan.)

    •  Search. Although you believe your idea is the most brilliant ever thought of, the odds are that you are wrong. If you raise millions of dollars on day one, simply executing the idea means you’re going to waste all those dollars attempting to scale a bad idea.

    •  Repeatable:  may get orders that come from board members’ customer relationships or heroic, single-shot efforts of the CEO. These are great, but they are not repeatable by a sales organization. What you are searching for is not the one-off revenue hits but rather a repeatable pattern that can be replicated by a sales organization selling off a pricelist or by customers coming to your web site.

    •  Scalable: The goal is not to get one customer but many – and to get those customers so each additional customer adds incremental revenue and profit. The test is: If you add one more sales person or spend more marketing dollars, does your sales revenue go up by more than your expenses?

    •  Business model: A business model answers the basic questions about your entire business: Who are the customers? What problems do they want solved? Does our product or service solve a customer problem (product-market fit)? How do we attract, keep and grow customers? What are revenue strategy and pricing tactics? Who are the partners? What are the resources and activities needed to make this business happen? And what are its costs?

    Who to take money from?
    First, decide what type of startup you are.  If you’re a lifestyle entrepreneur or a small business, odds are the return you can provide is not what traditional angel or venture investors are looking for.  These types of startups are better suited to raising money from friends, family, commercial and government small business loans, etc.

    If you’re a scalable startup, you want to spend small amounts of money (seed capital) as you run experiments testing your hypotheses. Why small amounts? No startup ever spends less then it raises. And at this early stage you’ll be giving up a larger percentage of your firm to investors. A seed round can come from friends, family, Kickstarter, angels – and most importantly, early customers.

    These sources are a lot more forgiving of iterations and pivots than later-stage venture-capital funds.

    When to raise money
    In a Lean Startup, the goal is to preserve your cash until you find a repeatable and scalable business model. In times of unlimited cash (internet bubbles, frothy venture climates) you can fix your mistakes by burning more dollars. In normal times, when there aren’t dollars to undo mistakes, you use Customer Development to find product-market fit.  It’s only after you have found product-market fit (value proposition – customer segment in the language of the business model canvas) that you spend like there is no tomorrow.

    Don’t confuse “raising money” with “building a sustainable business.” In a perfect world, you would never need investors and would fund the company from customer revenue.  But to achieve scale, startups need risk capital.

    Raise as much money as you can after you have tangible evidence you have product/market fit, not before.

    The consequences of raising venture money
    The day you raise money from a venture investor, you’ve also just agreed to their business model.

    Here’s a simple test: If you’re the founder of a startup, go to a whiteboard and diagram how a VC fund works.  How do the fund and the partners make money? What is an IRR? How long is a fund’s life? How much will they invest in the life of your company? How much do they need to own at a liquidity event?  What’s a win for them? Why?

    There are two reasons to take venture money. The first is to scale like there is no tomorrow. You invest the dollars to create end-user demand and drive those customers into your sales channel.

    The second is the experience, pattern recognition and contacts that great investors bring to the table.

    Just make sure it’s the right time.

    Lessons Learned

    • Fund raising is a means not an end
    • Preserve your cash until you find a repeatable and scalable business model
      • Focus on product – market fit
      • Run small experiments testing your hypotheses
    • Raise as much money as you can after you have tangible evidence you have product/market fit
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  • Who’s Doing the Learning?

    By Steve Blank

    In a startup instead of paying consultants to tell you what they learned you want to pay them to teach you how to learn.

    —-

    Roominate, one of my favorite Lean LaunchPad teams came out to the ranch last week for a strategy session. Alice and Bettina had taken an idea they had tested in the class – building toys for young girls to have fun with Science, , , and Math, and started a company. The Roominate dollhouse building kits are being sold via their own website and soon, retail channels. They’ve shipped over 5,000 to enthusiastic parents and their daughters.

    Roominate kit

    As soon as they had designed the product, they found a contract manufacturer to build the product in Alice and Bettina are hands-on mechanical and electrical engineers, so instead of assuming everything would go smoothly, they wisely got on a plane to Dongguan China and worked with the factory directly. They learned a ton.

    But we were meeting to talk about sales and marketing. They outlined their retail channel and PR strategy and told me about the type of consultants they wanted to hire.

    Hiring Channel Sales
    “So what would the retail channel consultant do?” I asked.  Alice looked at me like I was a bit slow, but went on to describe how this consultant was going to take their product around to buyers inside major retail chains like Target, Toys R Us, Walmart, and others to see if they could get them to buy their product. “That sounds great.” I said, “When are you leaving for the trip?”  They looked confused.  “We’re not going on any of these calls.  Our consultant is going and then he’s going to give us a report of how willing these stores are to carry our product.”  Oh…

    I said, “Let me see if I understand this correctly. What if a buyer asks, can you make a custom version of your product? Can your consultant answer that question on the spot? What if a buyer said no? Will your consultant know what questions to ask right then to figure out how to get them to yes?”  I let this sink in and then offered, “Think about it for a minute. You’re going to pay someone else to learn and discover if your product fits this channel, and you’re are not going to do any of the learning yourself?  You didn’t skip the trip learning how to manufacture the product. You got on a plane yourself and went to China. Why doesn’t this sound like the right thing to do for channel sales?”  They thought about it for a moment and said, “Well we feel like we understand how to build things, but sales is something we thought we’d hire an expert to do.”

    Hiring PR Agencies
    We had an almost identical conversation when the subject turned to hiring a Public Relations agency.  Bettina said, “We want to drive customer demand into our channel.”  That’s smart I thought, a real clear charter for PR.  “What are they going to do for you?” I asked.  “Well all the agencies we interview tell us they can survey our customers and come up with our positioning and then help us target the right blogs, influencers and press.

    This felt like déjà vu all over again.

    I took a deep breath and said, “Look this is just like the channel consultant conversation. But in this case it’s even clearer.  Didn’t you get started by testing out every iteration with girls and watching firsthand what gets them excited? Don’t you have 5,000 existing customers? And haven’t you been telling me you’ve been talking to them continuously?”  They nodded in agreement.  I suggested, “Why don’t you guys take a first pass and draft a positioning brief with target messages, think through who you think the audiences are, and you take a first pass at who you think the press should be.  The team looked at me incredulously.  “You want us to do this? We don’t know the first thing about press, that’s why we want to hire the experts.”  It was the answer I expected.Roominate project

    “Let me be clear,” I explained.  “At this moment you know more about your customers than any PR agency will.  You’ve spent the last six months testing positioning, messages, and talking to the press yourself.  What I want you to do is spend an hour in a conference room and write up all you learned.  What worked, what didn’t, etc.  Then summarize it in a brief – a one, max two-page document that you hand to prospective PR agencies.  And when you hand it to them say, “We know you can do better, but here’s what we’ve learned so far.”” They thought about it for a while and said, “We want to hire a PR agency so we don’t have to do this stuff. We’re too busy focusing on getting the product right.”

    I pushed back, reminding them, “Look, half the agencies that see your brief are going to decline to work with you. They make most of their money doing the front-end work you already did.  You do need to hire a PR agency, but I’m suggesting that you start by raising the bar on where they need to start.”

    You Need to Do the Learning
    Thinking that founders hire domain experts to get them into places and do things they don’t have any clue about is a mistake most founding CEOs make.  It’s wrong. If you plan to be the CEO who runs the company, you need these resources you how to do it, not reporting their results to you.  For Roominate I suggested that Alice and Bettina needed to try to find a channel consultant who would take them along on the sales calls and have the founders meet buyers directly.  Why?  Not to turn them into channel sales people but to hear customer objections unfiltered. To get data that they – and only they, not a consultant – could turn into insight about iterations and pivots about their business model.  And to see how the process works directly.

    A year from now when they will be hiring their first VP of Channel Sales, they want the interview to go something like,  “Well we sold the first three channel partners ourselves – what can you do for us?”

    The same is true for hiring the PR agency.  The conversation should be, “Here’s what we learned, but we know this is your expertise.  Tell us what we’re missing and how your firm can do better than our first pass.”

    As a founder –  when you’re searching for a business model make sure that you’re the ones doing the learning… not the outsourced help.

    There’s Not Enough Time
    The biggest objections I get when I offer this advice is, “There’s not enough time in the day,” or “I need to be building the product,” or the more modern version is, “I’m focused on product/market fit right now.”

    The reality is that they’re all excuses. Of course product and product/market fit are the first critical steps in a startup –  but outsourcing your learning about the other parts of the business model are the reasons why your investors will be hiring an operating executive as your replacement - once you’ve done all the hard work.

    Lessons Learned

    • You need to do the learning not your consultants
    • Most consultants will think that’s their secret sauce and not want your business
      • The smart ones will realize that’s how they’ll build a long-term relationship with you
      • Hire them
    • Not understanding the other parts of your business model is a reason investors hire an operating executive
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  •  
  • U of Minnesota Commencement Speech

    Steve at Podium

    By Steve Blank

    Originally published May 15, 2013,  at www.steveblank.com

    I am honored to be with you as we gather to celebrate your graduation.

    This school has a distinguished roster of graduates… Earl Bakken, the founder of Medtronic, was an Electrical grad, and Bob Gore of Gortex, and your current president are both alums of your Chemical Engineering program.

    In fact, I feel very connected to another one your grads. I’m sure you’ve heard of Seymour Cray, he built a supercomputer company in Chippewa Falls that made the fastest computers in the world. These were very expensive supercomputers. They cost 10’s of millions of dollars and filled two tractor-trailers worth of space.

    Back in Silicon Valley I co-founded a company that built desktop workstations powerful enough to compete against Cray. We bid against them in a sale to the Pittsburgh Supercomputer Center… and lost. I never forgot that loss because instead of buying hundreds of our small computers they spent $35 Million on that Cray. My startup never recovered and soon after went out of business.

    Fast-forward 15 years, Now retired I noticed that the Pittsburgh Supercomputer Center had put their Cray for sale on Ebay.  Yep – the $35 Million machine was now for sale for $35,000 dollars.

    I bought that Cray, … Honest… you can Google “Cray on eBay” and there I am… I had it shipped to my ranch and kept it in the barn next to the cows and manure.

    It was closure.

    But the story about Cray is also a story about success and failure.  If I can keep you awake, I’m going to tell you why – while you may have thought today was the end of your education – it’s really only the beginning. And while you might be moaning about that thought, pay attention because what I’m about to share could make a few of you very, very successful.

    First day of your life
    For most of you, college was the first day of your own life – the morning you stepped onto campus you were no longer just a child of your parents – college was the first place you could taste the freedom of making your own decisions – and in some of those mornings-after – learn the price of indulgence and the value of moderation.

    Here at school you had your first years of taking responsibility for yourself. While it may not be obvious to you yet, your college years were a transition from having your parents make decisions for you to making decisions for yourself.  But now you face a new chapter that -– if you’re not careful – could result in having companies make decisions for you.

    UofM Commencement

    Career Choices
    It might turn out that graduating from college and getting a job may be just an illusionof independence. If you’re not careful you’ll simply end up having others tell you what to work on, how to spend your time, when to show up and when to go home.  In fact, working in a company could be the adult version of listening to your parents tell you what to do… Only the pay is usually a whole lot better than your allowance.

    For some of you, that may be exactly what you are looking for. Many of you are going to take what you learned here, get a good job, get married, buy a house, have a family, be a great parent, serve your community and country, hang with friends and live a good life. And that’s great. Minnesota is a wonderful place to hunt, fish, canoe, raise kids, and pursue lots of interests other than just your job.

    All of you will ultimately make a choice… a choice about whether you “work to live” or you “live to work.” This should be a conscious choice. Don’t get trapped into the daily routine of showing up and just getting by.

    Diverging Interests
    While you’re excited about your first “real” job, recognize that your interests and those of your employer are probably not the same. Having your employer tell you what a great job you’re doing and rewarding you for it is not the same as discovering your passion, and figuring out who you are, and what’s rewarding for you.

    What I am saying is, “Don’t let a career just happen to you.”  And as much you love, respect and honor your parents, don’t live their lives. Your obligations to meet theirexpectations ended the day you became an adult.

    At the end of the day, you can decide whether you want to be an employee with a great attendance record, getting promoted to ever better titles and working on interesting projects – or whether you want to attempt to do something spectacular – this be or do should be a question you never stop asking yourself — for the next 20 years, and beyond. Be? or Do?

    Let me share with you the day I faced the Be or Do question.

    Big Company versus Startup
    Out of the military, my first job in Silicon Valley was with one of the most exciting companies you never heard of. By the time I joined it was a decade old, and no longer a startup. Our customers were the CIA, NSA, and National Reconnaissance Office. Our CEO, Bill Perry eventually became the Secretary of Defense.

    In the 1970’s and ‘80’s the U.S. military realized that our advantage over the Soviet Union was in silicon, software and systems. These technologies allowed the U.S. to build weapons previously thought impossible or impractical.  The was amazing, and somehow in my 20’s I found myself in the middle of all of it.

    Building these systems required resources way beyond the scope of a single company. A complete system had spacecraft and rockets and the resources of ten’s of thousands of people from multiple companies.

    If you love technology, these projects are hard to walk away from. It was geek heaven.

    While I worked on these incredibly interesting intelligence systems, my friends in worked on new things called microprocessors.  They’d run around saying, “Hey look, I can program this chip to make this speaker go beep.” I’d roll my eyes, comparing the toy-like microprocessors to what I was working on – which was so advanced you would have thought we acquired it from aliens.

    But before long I realized that at my company, I was just a cog in a very big wheel. A small team had already figured out how to solve the problem and ten’s of thousands of us worked to build the solution. Given where I was in the hierarchy, I calculated that the odds of me being in on those decisions didn’t look so hot.

    In contrast, my friends at startups were living in their garages fueled with an energy and passion to use their talents to pursue their own ideas, however unexpected or crazy they sounded. “Really, you’re building a computer I can have in my house?”

    For me, the light bulb went off when I realized that punching a time clock is not the way to change the world. I chose the path of entrepreneurship and never looked back.

    Engineers Run the World
    Engineers used to be the people who made other peoples ideas work. Today, they change the world.  We live in a time where scientists and engineers are synonymous with continuous . We don’t think twice as our phones shrink, our computers fit in our pockets, our cars run on batteries, and our lives are extended as new medical devices are implanted in our bodies. Scientists and engineers no longer work anonymously in backrooms. Today we celebrate them for improving the quality of peoples’ lives.

    George Bernard Shaw once said, Some men see things as they are and ask why. Others dream things that never were and ask why not.” Engineers like you have the capacity to move the world forward by continually asking “why not?” It’s your special “doing” gene that empowers us to do better.

    You invent. You imagine. You see things that others don’t. Where others see blank canvases, you’ll see finished paintings. You hear the music that’s not written, you see the bridges that have yet to be built.  You envision the products and companies that don’t exist yet.

    DSC_5829

    Only In America
    University of Minnesota Science and Engineering alumni have founded more than 4,000 active companies, employing over ½ million people and generating annual revenues of $90 billion. These alums chose not to take the safe road but instead topush beyond their boundaries and DO.

    At some time you might decide that you want to become the master of your own destiny – that you want to take an idea – and start your own company. And all of you sitting here just earned a degree that gives you choices that very few other professions have.

    is not something foreign – it’s built into the DNA of this country.America was built by those who left the old behind. Not too many generations ago your family packed up what they had, got on boat and came to America. They struck out across the country and ended up here in Minnesota.

    And what’s great about the United States… No other country embraces innovation and entrepreneurship quite like we do. You don’t have to stay in one job, and it’s really, really hard to starve to death.

    Passion
    I predict that 78% of all speeches this year will have advice about “pursuing your passion and doing stuff you love.” But they don’t tell you why.  Well here’s the secret – if you’re going to spend your career in a company, doing stuff you enjoy will help you keep showing up..

    But if you want to do something, something entrepreneurial, just loving what you do is isn’t enough. You’re pursuing ideas you can’t get out of your headIdeas that you obsess about. That you work on in your spare time.

    Because that fearless vision and relentless passion are what it takes to sustain an entrepreneur through the inevitable bad times - the times your co-founder quits, or when no one buys, or the product doesn’t work. The time when everyone you know thinks that what your doing is wrong and a waste of time. The time when people tell you that you ought to get a “real” job.

    By the way, every year I remind my students that great grades and successful entrepreneurs have at best a zero correlation – and anecdotal evidence suggests that the correlation may actually be negative. There’s a big difference between being anemployee at a great company and having the guts to start one.

    You don’t get grades for resiliency, curiosity, agility, resourcefulness, pattern recognition and tenacity.

    You just get successful.

    Failure
    The downside of starting something new is that’s it’s tough, because unlike the movies – you fail a lot. For every Facebook and Google, thousands never make it.

    Like Rocket Science Games, which was my biggest failure. 90 days after showing up on the cover of Wired Magazine I knew the game company where I raised 35 million dollars was headed for disaster.

    We’d believed our own press, inhaled our own fumes and built lousy games. Customers voted with their wallets and didn’t buy our products. The company went out of business. Given the press we had garnered, it was a very public failure.

    We let our customers, our investors, and our employees down. I thought my career and my life were over. But I learned that in Silicon Valley, honest failure is a badge of experience.

    All of you will fail at some time in your career…or in love, or in life.

    No one ever sets out to fail.

    But being afraid to fail means you’ll be afraid to try.  Playing it safe will get you nowhere.

    As it turned out, rather than run me out of town, the two firms that had lost $12 million in my failed startup actually asked me to work with them again.

    During the next couple years…and much humbler… I raised more money and started another company that we were ultimately able to take public, and those patient investors more than made up for their earlier loss – many times over.

    Hypothesis Testing
    As scientists and engineers, you know about failure. You know that virtually no experiment works the first time.  And in a new company all you have is a series of untested hypotheses. You learned something vital in school — to test your hypotheses by designing experiments, getting accurate data, analyzing the results, and then modifying your initial hypotheses based on those results. This is the scientific method, and surprisingly we found the exact same method works for startups.

    Because failure is a part of the startup process. In Silicon Valley, we have a special word for a failed entrepreneur – it’s called experienced.  Our country and our entrepreneurial culture is one of second and third chances. It’s what makes us great. You don’t have to change your name or leave town. in America know that they get multiple shots at the goal.

    Be or Do
    Someday several of you in this graduating class will be worth a $100 million dollars. And a few of you might change the way the world works.

    I want you to look around you.  …Go ahead.  Take a few seconds and give it a look…

    While most of you were looking around wondering who this was going to be, I hope a few of you were feeling sorry for the rest of your classmates, knowing that the most successful person in the audience is going to be you.

    These days I write a blog about entrepreneurship.  At the end of each post, I conclude with “lessons learned”—a kind of Cliff Notes of my key takeaways.  So that’s how I’ll finish up today.

    Here are the two lessons that I’d like to pass on to you

    Your science or engineering degree gives you tremendous choices – you, and no one else gets to decide two things:

    • whether you choose to be or you choose to do
    • whether you “work to live” or whether you “live to work”

    Remember… live your life with no regrets. There’s no undo button.

    And Congratulations  — you’ve earned it!

    Thank you very much.

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  • Guns and Cyber Security

    By Steve Blank

    The online world can be a dangerous place for the unprepared.  And it’s just going to get worse. It’s time to teach Cyber Security as integral part of the high school and college curriculum and to all corporate employees.

    —-

    I grew up in New York City and for a few years heaven on earth for me was going to Boy Scout camp in the summer near the Delaware River.  Boy Scout HandbookThe camp had all the summer adventures a city kid could imagine, hiking, fishing, canoeing, etc. But for me the best part was the rifle range.  For a 12-year old kid from the city shooting target practice and skeet  with a 22 rifle meant being entrusted by adults with something you knew was dangerous – because while they were beating gun safety into our brains every step of the way.

    From the minute we walked onto the shooting range to even before we got to touch a gun, we learned basic rules of handling weapons I still haven’t forgotten. You screwed up and you got yelled at and if you did it again you got escorted out of the rifle range.

    While target practice and skeet shooting were fun, safety was serious.

    scouts at rifle range

    Over the years I would learn how to shoot an M-16 in basic training in the military, go through a basic combat course to go to Southeast Asia (when we acted like this was a lark, our instructor stopped our drill and said, “For your sake I hope the guys shooting at you were screwing around in their combat course.”  It got our attention.)  When I bought the ranch herds of wild boar still roamed the fields. While we were putting in the miles of fencing to keep them out, I bought much heavier weapons to deal with a charging 400-pound boar and hired an instructor to teach me how to safely use them.  Each time gun safety was an integral part of training with new weapons.  For me, guns and gun safety became one and the same.

    Hacking and Cyber Security
    For consumers, online surfing, shopping, banking and entertaining ourselves have become an integral part of our lives. And with that has come identify theft, hacking, phishing, online scams, bullying, and predators online. As well as a loss of privacy.

    But for businesses, the threats are even more real. Go ask RSA, Northrop, Lockheed, Google, Amazon and almost every other company with an online presence. Intellectual property stolen, customer data hacked, funds illegally transferred, goods stolen, can damage a company and put them out of business.

    I think we’re missing something.

    In the last 20 years 3 billion people have gained access to the web. Yet for most of them safety online remains a problem for other people. It pretty clear that for a company going online today is equivalent to playing with a loaded gun. The analogy of comparing the net with guns might seem stretched, but I think it’s an apt one. Guns have been around for hundreds of years, to provide food as well as wage war, but it wasn’t until the 20th century that gun safety rules were codified and taught.

    I think we need the equivalent of gun safety training for online access.

    We now know the basic tools online hackers use. We know enough to harden sites to stop the simple hacks and to educate employees about basic social and phishing attempts. It’s time to teach Cyber Security as integral part of the high school and/or college curriculum – not as an elective. Companies need to make Cyber Security education an integral part of their on-boarding process.

    The Academy basic Cyber Security course is a good place to start (Stanford and other schools have a similar syllabi.) The class consists of basic networking and administration, network mapping, remote exploits, denial of service, web vulnerabilities, social engineering, password vulnerabilities, wireless network exploitation, persistence, digital media analysis, and cyber mission operations.

    Lessons Learned

    • The web is not a benign environment
    • Companies, high schools and colleges ought to make a basic Cyber Security course a requirement of getting online access.
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  • China Startups — The Gold Rush and Fire Extinguishers

    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, Kevin Dewalt and Frank Hawke of the Stanford Center in Beijing, and my publisher China Machine Press. 

    China Dragon

    The previous post, part 4, was about Beijing’s entrepreneurial ecosystem these are my final observations.

    Land Rush
    For the last 10 years China essentially closed its search, media and social network software market to foreign companies with the result that Google, Facebook, Twitter, YouTube, Dropbox, and 30,000 other websites were not accessible from China. This left  an open playing field for Chinese software as they “copy to China” existing U.S. business models. Of course “copy” is too strong a word.  Adapt, adopt and extend is probably a better description.  But for the last decade “innovation” in Chinese software meant something different than it did in Silicon Valley.

    The Chinese Social Media Landscape diagram below from Resonance does a great job of illustrating the players in the Chinese market. (Note that the inner ring shows their global equivalents.)

    China Social Media Ecosystem

    The down side is that with so much venture and angel capital available, investors have been willing to fund the 10th Groupon clone.  For the last few years, there really hasn’t been a demand to innovate on top of the ecosystem that’s been built.

    New Rules for China
    Not only is the Chinese ecosystem completely different but also the consumer demographics and user expectations are equally unique. 70% of Chinese Internet users are under 30. Instead of email, they’ve grown up with QQ instant messages. They’re used to using the web and increasingly the mobile web for everything, commerce, communication, games, etc. (They also probably haven’t seen a phone that isn’t mobile.) By the end of 2012, there were 85 million iOS and 160 million Android devices in China. And they were increasing at an aggregate 33 million IOS and Android activations per month.

    It was interesting to learn about China’s digital divide – the gap between East China and Midwest China, and between urban and rural areas. Internet penetration in Beijing is  greater than 70% while it’s less than 25% in Yunnan, Jiangxi, Guizhou and other provinces. While there are 564 million web users with 420 million having mobile web access, 74% of Chinese Internet users make less than $500/month and are students, blue-collar workers or jobless.

    Unlike U.S. websites that are sparse and slick, Chinese users currently expect complicated, crowded and busy web pages. However, there’s a growing belief that the “design preferences” of Chinese consumers are just bad design. TenCents WeChat, (designed for an international market) is the first incredibly popular app in China to dramatically raise the bar for what a good user interface and user experience looks and feels like. WeChat may change the game for Chinese U/I and U/X experience. The one caveat about online commerce is that while Chinese users will buy physical goods online (Taobao is huge), they seem to hate to pay for music or software, and the model for games seems to be moving to free play with in-app-purchases for accessories and powers. An interesting consequence of the rigid censoring and control of mainstream media is that blogging – reading and writing – is much higher than U.S.

    My guess is the current wave of “copy to China” will burn itself out in the next few years as the smart money starts to move to “innovate in China” (i.e. like WeChat.)

    Competition
    If you’re a software startup competing in China, the words that come to mind are “ruthless and relentless.” The not so polite ones I’ve heard from others are “vicious, unethical and illegal.” Intellectual property protection is great on paper and “limited” in practice. The large players like Alibaba, Baidu and Tencent historically would be more likely to simply copy a startup’s features than to hire their talent. The large companies strategy seems to be to cover every possible market niche by copying successful models from others.

    The slide below from the Zhen Fund shows the breadth of business coverage of each of the Chinese Internet incumbents.  Each column represents a company (QQ, Sina, Baidu, Netease, Sohu etc.) and the rows indicates their offerings in open platform, group buying, online games, microblogging, Instant Messaging, BBS, Q&A and E-commerce.

    Internet Giants Want to do it all

    Small startups act the same way, simply cloning each other’s products. Sharing and cooperation is not yet part of the ethos. I can’t imagine a U.S. company setting up some subsidiary here and expecting them to compete while they were following U.S. rules.  In some ways, the best description of the market dynamics would be “imagine you were competing with 100 companies who are as rapacious as Microsoft was in the 1980’s and 1990’s.” Eventually, China’s innovation-driven economy needs intellectual property rights and anti-trust laws that are enforced.

    Sea Turtles and VPN – the connections to  the rest of the world
    in Beijing were knowledgeable about Silicon Valley, and the state of software and tools available for two reasons.  First, there are continuous stream of “sea turtles”—Chinese who have studied or worked abroad—returning home. (The Chinese government must be laughing hysterically over U.S. immigration policy that’s forcing Chinese grad students out of the U.S.) Many of these returnees have worked in Silicon Valley and startups or went to school at MIT and Stanford. (There is a huge difference between the Chinese who have never left and those who went to school abroad, even for a few months – at least a difference in their ability to relate to me and have a conversation on the same wavelength. It’s clear why families try so hard to send their children abroad. It changes everything for them.)

    Second, most websites that a non-Chinese would use are blocked including Facebook, Twitter, Youtube, Google Docs, Scribd, Blogspot, Dropbox, New York Times, etc. Almost every entrepreneur I met was using VPN to circumvent the Great Firewall. When the Chinese government censors (run by their propaganda department) shutdown access to yet another U.S. web site, they create another 100,000 VPN users.  And when the government tools to detect encrypted VPN’s get more sophisticated, (as it did last year), Chinese users just use stealthier tools. It’s an amazing cat and mouse system.

    CCP Propaganda Department logo(Note to Chinese Communist party – the best name for your propaganda department should probably not be the “Propaganda Department.”)

    Beijing’s Academic Hub
    Right next door to Zhongguancun are China’s top two universities, Peking University and Tsinghua University. Northwest of Beijing is also home to other universities, including technical universities like USTBBITBUPT, and Beihang.  Like Silicon Valley, Zhongguancun also has a critical mass of people who are crazy enough to do startups.  Equally of interest is a good number of them end up in the PLA’s GSD 3rd Department (the equivalent of our National Security Agency. ) And some of their best and brightest have ended up in the organizations like the 2nd Bureau, Unit 61398 tasked euphemistically for “Computer Network Operations.”

    While I didn’t get much time with the academic community, in talking to students, education seems to still be one of China’s bottlenecks – rote lectures, passive learning, follow the process, exam-based performance, etc.  And while startups and entrepreneurship courses are now being added to the curriculum, “How to write a business plan” seems to be the state of the art. China’s education system needs to give more attention to fostering students’ innovative thinking, creativity and entrepreneurship.

    Entrepreneurial Culture

    Fear of Failure
    Though they’re familiar with in the valley, I picked up some important cultural difference from students and startup engineers I talked to. Even though they’re next to Zhongguancun, the hottest place for startups in China, there seems to be a lower appetite for risk, a lack of interest in equity (instead optimizing for a high salary) and very little loyalty to any one company. The overall culture still has a fear of failure. Most of their parents still tell them to work for the government or a big company.

    Talent
    I heard from a few investors that as the startup ecosystem is relatively new, there’s a battle for experienced talent and lack of experienced C-level execs. The lack of a previous generation of successful startup CEOs means the current pool of mentors to coach this generation is almost non-existent.

    Because salaries are cheap, startups seem to try to solve every problem by throwing bodies at it. Startup teams feel like they are 2-5x the size of American teams. There seems to be little appreciation or interest in multi-skilled people.

    Turnover of employees in capital in Beijing is very high. Employees work here for a few months and are suddenly gone. There’s a noticeable lack of tenacity in young, new entrepreneurs. They start a project, and if it isn’t a home run, they’re gone. Perhaps it’s the weather. Silicon Valley has great weather and lifestyle, and nobody wants to leave. Beijing has awful weather and pollution, it’s a temporary place to get rich and then leave.

    Management 101
    The board/CEO relationship still isn’t clearly understood by either party. I’ve talked to entrepreneurs who view the investors as a “boss.”  A good number of startups in Beijing seem driven by the VCs – and not the founders. This might also be a hangover from the command and control system of a state-driven planned economy. Ironically investors told me that the reverse has been true as well. Some startups acted like the VC was a bank. They took the money and then ignored their board. Over time, as investors add more value than writing checks, this relationship will mature.

    Creativity
    I was surprised that startup teams ask what seems like the kind of questions Americans learn at their first jobs.

    Team: ”We keep spending money trying to get people to our web site but they don’t come back. We are almost out of money.”

    Me:  ”Ok.  Why are you still spending money?”

    Team: “long…silence…we need people to come to the website.”

    On the other hand, for most of them it probably is their first job. And the educational system hasn’t prepared them for executing anything other than a plan. Iterations and pivots are a tough concept if you’ve never been taught to think for yourself. Andchallenging the system is not something that’s actually encouraged in China.

    They also ask questions I just don’t know how to answer. “How do you know how to be creative? What do we have to do to be creative?”  ”You Americans just seem to know how to do things even if you’ve never done them – can you show us how to do that?”  This seems to be an artifact of the Chinese rote educational system and its current system of government.

    Innovation Ecosystem
    On the plane ride home I started to think about the similarities and differences between the innovation ecosystems of Silicon Valley and the TMT segment I saw in Beijing. The motivations are the same – profit – driven by entrepreneurs and venture finance. And the infrastructure is close to the same – research universities, predictable economic system, a path to liquidity, a stable legal system and 24/7 utilities. But the differences are worth noting – it’s a young ecosystem, so startup management tools are nearly non-existent. But there’s a difference in the culture of failure and risk taking –  the current cultural pressure is to “work for a big company or the government.” Outward facing Universities are just starting to appear, and while there’s a free flow of information inside China, it suffers from the constraints of the Great Firewall.

    China vs. US ecosystem

    But there are two striking differences. The first is the lack of creativity. The Beijing software ecosystem I saw has spent the last decade in a protected market copying successful U.S. business models. ”Copying, adopting and adapting,” is not the same as ”competing, innovating and creating” in a global market. Perhaps products likeWeChat, designed for an international market, might be the beginning of real innovation.

    The second difference in ecosystems – the lack of freedom to dissent – goes deeper to the difference between the two systems. In the U.S. entrepreneurs are encouraged to “Think Different.” Our touchstone for creativity is the Apple ad that said, “Here’s to the crazy ones, the misfits, the rebels, the troublemakers,… the ones who see things differently — they’re not fond of rules… You can quote them, disagree with them, glorify or vilify them, but the only thing you can’t do is ignore them because they change things….” This spirit of rebellion against the status quo got us Steve Jobs.  In China the same attitude is likely to get you jail time. Unless you can speak truth to power, you’ll never have an innovation economy.

    Conclusion
    China is astonishing. The country has risen. Their economy is the envy of the world. The entrepreneurial and “can do” spirit reminds me of what the U.S. was known for. Chinese citizens are proud of their country and believe the world is theirs in the way Americans did in the 1950’s. Their leadership has shown incredible foresight in engineering an amazing economic engine and formidable military. They come so far, and yet…

    To take nothing away from what China has accomplished, a visit to Beijing had all the subtle reminders that this version of capitalism has come without democracy or justice; the guards in the Forbidden City armed with fire extinguishers in case more protestors try to set themselves on fire, the security around Tiananmen Square to prevent protestors from gathering, and the “black jails” to keep rural petitioners out of Beijing.  And of course the “great firewall,” attempting to keep information about the outside world from reaching inside China.

    The bet the government is making is that if they can keep the economy cooking and distract the masses with ever increasing consumer goods and foreign adventures, maybe it can survive.

    All of these are signs of a weak China not a strong one. They are the signs of a leadership frightened not by external enemies but by their own people.

    It usually doesn’t end well.

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  •  
  • Fly High

     

    Todd Branchflower was one my Lean LaunchPad students entrepreneurial enough to convince the send him to Stanford to get his graduate degree. After watching my Secret History of Silicon Valley talk, he became fascinated by how serendipity created both weapon systems and in World War II – and brought us federal support of science and Silicon Valley.

    In class I would tease Todd that while the Navy had me present the Secret History talk in front of 4,000 cadets at the Naval Post Graduate School, I had yet to hear from theAir Force Academy.  He promised that one day he would fix that.

    F-22Fast-forward three years and Todd is now Captain Todd Branchflower, electrical engineering at the Air Force Academy.  He extended an invitation to me to come out to the Academy in Colorado Springs to address the cadets and meet the faculty.

    Out of the airport the first stop was in Denver – an impromptu meetup at Galvanize and a fireside chat with a roomful of 200 great .

    U.S. Military Academies
    Then it was on to Colorado Springs and the Air Force Academy. All officers in the U.S. military need a college degree. The Air Force Academy is one of the four U.S. military service academies (academy is a fancy word for 4-year college.) The oldest is the Army’s U.S. Military Academy at West Point in New York, founded in 1802 to educate Army officers. The next military college was the Naval Academy in Annapolis Maryland, set up in 1845 to train Navy officers. The Coast Guard Academy opened in New London Connecticut in 1876. The Air Force, originally part of the U.S. Army, wasn’t an independent military branch until 1947, set up their academy in 1955 in Colorado Springs. Only ~20% of officers go through a service academy. Over 40% get the military to pay for their college by joining via the Reserve Officers Training Corps (ROTC) program. The rest get their college degree in a civilian college or university and then join their branch of the military after a 10-week Officer Training School.

    Secret History
    Given my Air Force career I came thinking that sharing the Secret History of Silicon Valley talk with 1000 soon to be Air Force Officers would be the highpoint of the visit. And it was as much fun as I expected – a full auditorium – a standing ovation, great feedback and a trophy – but two other things, completely unexpected, made the visit even more interesting.Air Force Trophy

    First, I got to meet the faculty in both electrical/computer engineering and management and share what I’ve learned about Lean and the Lean LaunchPad class. In their senior year all Air Force cadets on the electrical engineering track have a two-semester “Capstone” class project.  They specify, design and build a project that may be of use.  Unfortunately the class operates much like the military acquisition system: the project specification has minimal input from real world users, the product gets built with a waterfall engineering process, and there’s no input on whether the product actually meets real world needs until the product is delivered. This means students spend a ton of time and effort to deliver a “final” product release but it’s almost certain that it wouldn’t meet real world users’ needs without extensive rework and modification.

    I was surprised how interested the faculty was in exploring whether the Capstone class could be modified to use the process to get input from potential “customers” inside the Air Force.  And how the engineering process could be turned Agile. with the product built incrementally and iteratively, as students acquire more customer feedback. Success in the Capstone project would not only be measured on the technical basis of “did it work?” but also on how much they learned about the users and their needs.  I invited the faculty to attend the Lean LaunchPad educators’ course to learn how we teach the class.

    We’ll see if I made a dent.

    Table for 4000
    In between faculty meetings I got a great tour of the Academy facilities and some of the classes.  As on any college campus there are dorms, great sports facilities (sports are not optional), classrooms, etc. The curriculum was definitely oriented to practical science and service. However not on too many other college campuses will you find dorms arranged in squadrons of 40 of 100 students each, where students have to make their beds and have full-time hall monitors, and simultaneously eat lunch with 4,000 other cadets in one dining room (an experience I got to participate in from the guest tower overlooking the dining hall.)  All the hierarchal rituals were on  display; freshman have to run on the main quad walking on narrow strips, carry their backpacks in their hands, daily room inspections, etc.

    And I saw things that made this uniquely an Air Force college – they had their own airfield, flying clubs, the Aero Lab with three wind tunnels, heavy emphasis on engineering and aeronautics, etc. (And it was fun to play “what aircraft is that” with those on static display around the grounds.) But the second surprise for me was the one that made me feel very, very old – it was the Academy’s Cyber Warfare curriculum.

    Cyber Warfare
    I visited the Cyber 256 class and got a look at the syllabus. Imagine going to college not only to learn how to hack computers but also actually majoring in it. The class consisted of basic networking and administration, network mapping, remote exploits, denial of service, web vulnerabilities, social engineering, password vulnerabilities, wireless network exploitation, persistence, digital media analysis, and cyber mission operations. In addition to the class in Cyber Warfare, there was also a cadet Cyber Warfare Club and an annual National Security Agency Cyber Warfare competition. The Air Force competes with other military branches and National Guard units; the instructor proudly told me that the Air Force has won for the last two years.  I only wish I had taken a picture of the huge trophy in the back of the classroom.

    We do what?
    On the plane ride home I had time to process what I saw.

    When I was in the military the battle was just ending between the National Security Agency (NSA) and the military branches over who owned signals and communications intelligence. Was it the military (Air Force, Navy) or was it our intelligence agencies?  In the end the NSA became the primary owner, the NRO (National Reconnaissance Office) owned and built the spacecraft that collected the intelligence and the military branches had organizations (Air Force Security Services, Army Security Agency or Naval Security Group) that manned the collection platforms (airplanes, listening posts, etc) which all fed back into the National Security Agency.

    Cyber Warfare has been through the same battles. While each of the military branches have Cyber Warfare organizations reporting into a unified military Cyber Command, the head of the National Security Agency is its director, making the NSA the agency that owns Cyber Warfare for the U.S.  Cyber Warfare has three components:

    1) Computer Network Attack (CNA) – shut down an enemies ability to command and control its weapon systems in a war (i.e. Chinese satellite and over the horizon radar systems targeting U.S. carriers) or prevent potential adversaries from creating weapons of mass destruction, (i.e. Stuxnet targeted at the Iranian nuclear weapons program),
    2) Computer Network Defense (CND) – stop potential adversaries from doing the same to you.
    3) Computer Network Espionage (CNE) – steal everything you can get your hands (China and RSA’s SecureID breach, hacks of Google and AWS.)

    While the U.S. complains about the Chinese military hackers from the PLA’s GSD 3rd Department (the equivalent of our National Security Agency,) and their 2nd Bureau, Unit 61398 tasked euphemistically for “Computer Network Operations,” we’ve done the same.

    Unfortunately, potential adversaries have much softer targets in the U.S. While the military is hardening its command and control systems, civilian computer systems are relatively unprotected. Financial institutions have successfully lobbied against the U.S. government forcing them to take responsibility in protecting your data/money.  Given our economy is just bits, the outcome of a successful attack will not be pretty.

    Summary

    • Thanks to the Air Force Academy, its faculty, cadets and Captain Todd Branchflower for a great visit
    • The class may find a place in the military
    • We should be glad that the military is taking Cyber Warfare seriously, you should wish your bank did the same
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  • When Hell Froze Over — in The Harvard Business Review

    Page 1 HBR with text

    “I refuse to join any club that would have me as a member.”

    Groucho Marx

    In my 21 years as an entrepreneur, I would come up for air once a month to religiously read the Harvard Business Review. It was not only my secret weapon in thinking about new startup strategies, it also gave me a view of the management issues my customers were dealing with. Through HBR I discovered the work of Peter Druckerand first read about management by objective. I learned about Michael Porters’s five forces. But the eye opener for me was reading Clayton Christensen HBR article on disruption in the mid 1990’s and then reading the Innovators Dilemma. Each of these authors (along with others too numerous to mention) profoundly changed my view of management and strategy. All of this in one magazine, with no hype, just a continual stream of great ideas.

    HBR Differences

    For decades this revered business magazine described management techniques that were developed in and were for large corporations –  offering more efficient and creative ways toexecute existing business models. As much as I loved the magazine, there was little in it for (or new divisions in established companies) searching for a business model. (The articles about and , while insightful felt like they were variants of the existing processes and techniques developed for running existing businesses.) There was nothing suggesting that startups and new ventures needed their owntools and techniques, different from those written about in HBR or taught in business schools.

    To fill this gap I wrote The Four Steps to the Epiphany, a book about the process and how it changes the way startups are built. The Four Steps drew the distinction that “startups are not smaller versions of large companies.” It defined a startup as a “temporary organization designed to search for a repeatable and scalable business model.” Today its concepts of  “minimum viable product,” “iterate and pivot”, “get out of the building,” and “no business plan survives first contact with customers,” have become part of the entrepreneurial lexicon. My new book, The Startup Owners Manual, outlined the steps of building a startup or new division inside a company in far greater detail.

    HBR Cust DevIn the last decade it’s become clear that companies are facing continuous disruption from globalization, shifts, rapidly changing consumer tastes, etc. Business-as-usual management techniques focused on efficiency and execution are no longer a credible response. The techniques invented in what has become the movement are now more than ever applicable to reinventing the modern corporation. Large companies like GE, Intuit, Merck, Panasonic, and Qualcomm are leading the charge to adopt the lean approach to drive corporate innovation. And  the National Science Foundation and ARPA-E adopted it to accelerate commercialization of new science.

    Today, we’ve come full circle as Lean goes mainstream. 250,0000 copies of the May issue of Harvard Business Review go in the mail to corporate and startup executives and investors worldwide. In this month’s issue, I was honored to write the cover story article, “Why the Lean Startup Changes Everything.”  The article describes Lean as the search for a repeatable and scalable business model – and business model design, customer development and agile – as the way you implement it.

    I’m  proud to be called the “father” of the Lean Startup Movement. But I hope at least two—if not fifty—other catalysts of the movement are every bit as proud today. Eric Ries, who took my first Customer Development class at Berkeley, had the insight that Customer Development should be paired with Agile Development. He called the combination “The Lean Startup” and wrote a great book with that name.

    HBR CanvasAlexander Osterwalder‘s inspired approach to defining the business model in his bookBusiness Model Generation provide a framework for the Customer Development and the search for facts behind the hypotheses that make up a new venture. Osterwalder’s business model canvas is the starting point for Customer Development, and the “scorecard” that monitors startups’ progress as they turn their hypotheses about what customers want into actionable facts—all before a startup or new division has spent all or most of its capital.

    For the next month, The Harvard Business Review is providing free access to the cover story article, “Why the Lean Startup Changes Everything.  Go read it.

    Then go do it.

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  • Zhongguancun in Beijing – China’s Silicon Valley

    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.

    Beijing with Kai-fu Lee

    The previous post described the evolution of the Chinese system. The next two posts are about what I saw and learned in my short stay exploring Beijing’s entrepreneurial ecosystem.

    in Beijing
    In the few days I was in China I met with several VC’s, angel investors, business press and spoke to hundreds of . I was blown away by what I saw in Beijing. First, I was amazed by the physical impact of the city itself. This was a modern city in a hurry to make a first impression – think of what Rome looked like in the time of the empire or New York in the 1920’s – now it’s Beijing announcing that China has arrived.

    However if you scratch the surface, you can still find a bit of the old Beijing in thehutongs. Drive 50 miles outside the city into the surrounding villages and you see the distance China has to travel to bring the rural areas into the 21st century. In Beijing we hadn’t seen air so badly polluted since we had been in Agra in India in the winter where I swear there was a day you could wave your hand in front of you and see traces of it in the air (and their excuse was they burn dung for heat.)

    David Lin and the Microsoft China Accelerator was gracious enough to host two wonderful days of events for me. I trained the Startup Weekend Next Beijing mentors and instructors, presented to several hundred entrepreneurs, and had a great fireside chat with Zhen Fund founding partner Xu Xiaoping in front of another roomful of entrepreneurs.

    Microsoft Accelerator China

    Kai-fu Lee of Innovation Works was equally generous with his time. We had a fireside chat with a room full of eager entrepreneurs. And he was generous in sharing his insights about the current state of entrepreneurship and investment in China. And through it all Louis Yuan my patient and wonderful publisher from China Machine Press kept me moving through the events.

    But what made the overwhelming impression for me was finding an entrepreneurialsoftware cluster on par with the Internet software portion of  Silicon Valley. The physical heart of the Beijing is in Zhongguancun in the Haidian District, located in the northwest side of Beijing. Startups here are primarily in what they call the TMT (, Media and Telecommunications) segment. Not only does Zhongguancun have Chinese startups, but global companies (Nokia, Ericsson, Motorola, Sony Ericsson, Microsoft, IBM, Sun, Oracle, BEA, Alcatel Lucent, Google) all have offices here or elsewhere in Beijing.

    If there ever was any question about the value of China’s Torch Program walk aroundZhongguancun. It was the first of the 54 Science and Technology Industrial Parks.

    China Venture Capital
    An entrepreneurial ecosystem is driven one of two ways; either by a crisis (i.e. innovation in the U.S. during World War II,) or during peacetime by profit.

    Finance plus Entreprenuers

    If it’s driven by profit then the ecosystem needs both entrepreneurs as well as Venture Finance.

    China now has plenty of both.

    China has the biggest Venture Capital industry outside the U.S.  To compare the two, in 2011 U.S. venture capitalists invested $26.5 billion in all deals. Out of that total, they funded 967 Internet deals with $6.7 billion.

    VC Funding USA

    By comparison, in 2011 Chinese VC’s invested $13 billion in all deals. Out of that total, they funded 268 Internet deals with $3.2 billion. About 1/3 of all China’s Venture Capital investment is made in Beijing and the majority of those investments are in the Technology, Media and Telecommunications (TMT) sector I’ll describe shortly.

    As vibrant as the China venture business has been, 2012 was a different story. VC’s pulled back and only invested $3.7 billion in all deals, funding just only 43 deals with $563 million.

    VC Funding China

    Closed for You, Open For Us
    First a bit of context in what the VC’s in Beijing are investing in. China has essentially closed its internal search, media and social network software market to foreign companies who wouldn’t play with the government rules on the Great Firewall. (China blocks “objectionable” website content and monitors everyone’s Internet access.)

    Google retreated to Hong Kong and Baidu took its place.  Facebook was too frightening to Chinese censors, so Renren is the leading social media player. Email? Working professionals/white collar use emails, but most users grew up instant messaging on TenCent’s QQ and most are moving to Weixin/WeChat. Twitter? No, it’s Sina Weibo, and if you want games with your chat – TenCent.  Amazon and Ebay? Nope in China it’s Alibaba’s Taobao or 360buy.com.  If you’re outside of China, you never hear about these companies or interact with them because they’re geared to serve only Chinese users.

    This closed but very large market means that greater than 90% of Chinese software startups focus exclusively on the Chinese market. (The <10% that decide to go global early do so by starting outside of China. Another 10% may try to go global when they’re larger and have the resources for two languages, cultures and regulations. )

    This has resulted in a completely different consumer software ecosystem than found elsewhere in the world. Given the closed market to U.S. Internet companies, VC’s in China have guided startups to execute the “copy to China” model. Thinking, if it worked in the U.S., copying a known model is less risky than trying something new and untested.  The problem is that this space is getting really crowded – from the bottom up as everyone tries the 200th clone – and from the top down, as the major incumbents try to fill every possible market niche.

    The table below maps the type of software in China to their global equivalents in each product category in the Technology, Media and Telecommunications (TMT) sector.

    China Vs US players 2

    A Huge Market Is Finally Real
    For a hundred years the fantasy of global marketers was, “ if only everyone in China would buy one…”  That day is final here. The numbers of mobile subscribers are staggering – 1.18 billon, 260 million are 3G. Chinese Internet companies live in a large closed, self-contained ecosystem with 564 million web users with 420 millionhaving mobile web access. 309 million use microblogs and 242 million shop online. (BTW, market research, financial and other statistical information are usually unreliable in China, but even taken with a grain of salt these are staggering numbers.)

    The table below from web2asia.com shows the number of users of online social networks as of 2009.  Did I mention this is a huge market.

    Social Network Services in China

    Investment in the Technology, Media and Telecommunications (TMT) sector
    The charts below from David Lin, Microsoft Accelerator detail investments in the Technology, Media and Telecommunications (TMT) sector – almost all of it is centered in Beijing. (Note that these numbers differ from the Zhen Fund data -welcome to statistics in China – but they both provide an overall sense of the market size and direction.)

    45% of all Venture Capital Investment in China went into the Technology, Media and Telecommunications (TMT) sector.

    China VC Market

    The number of deals in Technology, Media and Telecommunications more than doubled in 2011 over the previous five years and slowed back down dramatically in 2012. More than 1,600 VC investments in TMT have been made since 2007, with a record high of 436 in 2011.

    TMT Investments 2007-2012

    Internet investments makes up more than 50% of all the deals in Technology, Media and Telecommunications made since 2011, while, E-commerce investments, in turn, accounts for nearly 50% of the investment deals in Internet. Investments in Mobile Internet makes up roughly 11% of all the deals in Technology, Media and Telecommunications, and have been on the rise since 2011.

    TMT Investments by sector 2007-2012

    Series-A round investments dominates Technology, Media and Telecommunications (TMT) deals, making up 60% of all.

    TMT Investments by round 2011-2012Beijing, Guangdong (including Shenzhen) and Shanghai came out as the most dynamic spots for Technology, Media and Telecommunications (TMT) investments.

    TMT Investments by region 2011-2012

    Beijing Venture/Angel Ecosystem
    While Beijing has VC’s and Angel investors happy to write a check there aren’t as many angels/VCs in China versus US per capita. Several VC’s mentioned that there’s a funding gap for seed stage investments. The Angel/Seed network in Beijing feels fragmented and mostly inexperienced (as are a good number of the China VC’s). Kind of reminded me of the drivers in Beijing – they were all driving in a way that made me think they all just got their drivers license – until I remembered that they did. Car sales in China went from 1 million in 2001 to 14 million in 2011.

    Active Player in China VC

    Other Beijing ecosystem issues I heard about were the things we take for granted:  the lack of knowledge sharing (“pay it forward” isn’t part of the culture,) limited mentoring (few experienced mentors,) and a lack of open source education, and no AngelListmodel. In the U.S. it’s easy to share and browse ideas and deals, but in China there’s a long legacy of guarding knowledge as power, and the justifiable paranoia of someone copying your idea prevents sharing.

    Liquidity
    Unlike the U.S. there are almost no mergers or acquisitions in this market segment. It’s much easier to just steal their ideas and hire their employees. So big companies rarely acquire startups. Liquidity for most Internet startups happens via IPO’s. 70% of exits in China are via IPO (in the U.S. on NASDAQ or the NYSE or on ChiNext, China’s equivalent of NASDAQ) compared to the 90% of exits in US via mergers or acquisitions. Alibaba (commerce), Tencent (games/chat) and Baidu (search) all have market caps over $40 billion.

    The next post, the Gold Rush and Fire Extinguishers – Beijing entrepreneurs, startup culture and some conclusions.

    Lessons Learned

    • China has the biggest Venture Capital industry outside the U.S
    • For software, the action is in Beijing
    • China has closed its search, media and social network software market to foreign companies
    • Beijing’s VC’s primarily invest in the Technology, Media and Telecommunications segment
    • Liquidity is via IPO’s not buy outs
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