Chile 1208 generating innovation hubs 2010

Generating High Growth Innovation Hubs

Steve Blankwww.steveblank.com

Twitter: sgblank

A Few Short Stories

Silicon Valley History

All Startups Are Not the Same

Why Startups and Companies Differ

E- School Versus B-School

To predict the future you need to understand the past

The Popular View of Silicon Valley History

1910 1960 1970 1980 20001990

Innovation Networks

FruitOrchards

PersonalComputers

IntegratedCircuits

Internet

1930 1940 19501920

FruitOrchards

FruitOrchards

Steve Jobs

Moore/Noyce

Marc Andreessen

Hewlett & Packard

The Real Story of Silicon Valley History

1910 1960 1970 1980 20001990

Innovation Networks

Microwaves/Defense

PersonalComputers

IntegratedCircuits

Internet

1930 1940 19501920

TestEquipment

VacuumTubes

Venture Capital

Story 1:

WWII The First Electronic War

Strategic Bombing of Germany The Combined Bomber Offensive

• British bombed at Night– Area Bombing

• Lancaster's• Halifax• Flew at 7 - 17 thousand feet

• The American’s by Day– Precision Bombing

• B-17’s• B-24’s• Flew at 15 - 25 thousand feet

Math Challenge

For every 100 bombers on a mission 4 - 20% would not return

Crews had to fly 25 mission to go home

Story 2:

The Electronic Shield – Electronic Warfare

Harvard Radio Research Lab (RRL) Signals Intelligence and Electronic Warfare

• Reduce losses to fighters and flak• Find/understand German Air Defense

– Electronic and Signals Intelligence

• Jam/confuse German Air Defense– Radar Order of Battle– Chaff– Jammers

• Top Secret 800 person lab

Electronically Blind German Radar Jam the Radars with Noise

• Put Jammers on Airplanes• Jam and shut down

– Early Warning Radars– Anti-aircraft Radars– Fighter Radars– Ground Control Radars

• Built over 30,000 jammers

MANDRELJammer

DINAJammer

Who Ran this Secret Lab and became the Father of Electronic Warfare?

• Harvard Radio Research Lab– Ran all electronic warfare in WWII – 800 people

• Director: Fredrick Terman - Stanford

Fredrick Terman “the Father of Silicon Valley”

• Stanford Professor of engineering 1926– encouraged his students, William Hewlett

and David Packard to start a company• Dean of Engineering 1946• Provost 1955

Story 3:

Stanford And The Cold War

WWII Office of Scientific Research and Development (OSRD)

• $450 million spent on weapons R&D – MIT $117 million– Caltech $83 million– Harvard and Columbia ~ $30 million

• Stanford ~ $50K

Terman’s Postwar Strategy

• Focus on microwaves and electronics– Not going to be left out of gov’t $’s this time

• Recruits 11 members of war lab as faculty• By 1950 Stanford was the MIT of the West• Students came from all over the U.S.

Stanford Spinouts - Microwave Components

• Microwave Tube Startups:Klystrons, BWO’s, & TWT’s– Eitel-McCullough (1934)– Varian Associates (1948)– Litton Industries (1946)– Huggins Laboratories (1948)– Stewart Engineering (1952) – Watkins-Johnson (1957)– Microwave Electronics Co. (1959)

The Cold War and Stanford

• The Cold War battlefield moves 500 miles east

• Countermeasures, ELINT become critical

• Stanford becomes a center of excellence for the CIA, NSA, Navy, Air Force

• 400-person weapons lab in engineering department

Lockheed Comes to Town - 1956

• Polaris missile SLBM• Built by Lockheed Missiles

Division in Sunnyvale• 20,000 employees by 1960

– From 0 in 4 years– HP: 3,000 employees 1960

Stanford Spinouts - Military Systems

• Sylvania Electronics Defense Laboratory (1953)• GE Microwave Laboratory (1956)• Granger Associates (1956)• Applied Technology (1959)• Electronic Systems Laboratories (ESL) (1964)• Argo Systems (1969)• Advent Systems (1972)

Terman Changes the Startup/University RulesSilicon Valley as We Know it Starts Here

• Graduate students encouraged to start companies• Professors encouraged to consult for companies• Terman and other professors take board seats• Technology transfer/IP licensing easy• Getting out in the real world was good for your

academic career• Failure was accepted as part of the culture

Stanford and the Cold War Silicon Valley’s 1st Wave

EntrepreneursWeaponsFinance

Crisis ProfitMotivation

24/7 UtilitiesPredictable

Economic System

Infrastructure StableLegal System

ResearchUniversities

Risk TakingCulture

EntrepreneurialOutward-FacingTech Universities

Free flow ofPeople/Info

Customer Development

Mgmt Tools AgileDevelopment

Business ModelDesign

Design Thinking

Story 4:

1956 - The Year it Becomes Silicon Valley

Meanwhile, on the Other Side of Town…

The Head of Radar Bombing training for Air Force starts a Company


1910 1960 1970 1980 20001990

Innovation Networks

Microwaves/Defense

PersonalComputers

IntegratedCircuits

Internet

1930 1940 19501920

TestEquipment

VacuumTubes

Venture Capital

William Shockley “The Other Father of Silicon Valley”

• Director of Navy anti-submarine warfare• Head of Radar Bombing training for Air Force• Co-inventor of the transistor

– Nobel Prize in 1956• Founded Shockley Semiconductor 1956

William Shockley “Great Researcher, Awesome Talent

Spotter, Horrible Manager”

• Unintended consequences: “The traitorous 8” leave Shockley – found Fairchild Semiconductor– 1st VC-backed startup– Noyce & Moore leave Fairchild to start Intel– 65 other chip companies in the next 20 years

Semiconductor Genealogy: 1955 - 1976

Story 5:

The Rise of Venture Capital


1910 1960 1970 1980 20001990

Innovation Networks

Microwaves/Defense

PersonalComputers

IntegratedCircuits

Internet

1930 1940 19501920

TestEquipment

VacuumTubes

Venture Capital

The Rise of Risk CapitalFamily Money 1940’s - 1960’s

• J.H. Whitney– 1st family office 1946

• Laurance Rockefeller– Draper Gaither & Anderson (1st limited Partnership) 1958

– Spun out as Venrock in 1969• Bessemer

• East Coast focus• Wide variety of industries

The Valley Attracts Financial AttentionThe 1st West Coast IPO’s

• 1956Varian

• 1957Hewlett Packard

• 1958Ampex

The Rise of Risk Capital SBIC Act of 1958

• Cold war program – Sputnik motivated• Gov’t match of private investments 3:1 • 700 SBIC funds by 1965

– 75% of all VC funding in 1968– 7% in 1988

• Replaced by the Limited Partnership

The Rise of Venture Capital The Limited Partnership

• Raise money from pension funds, private universities, wealthy individuals – the limited partners

• Investment professionals manage the fund – the general partners i.e. the VC’s– Compensate the general partners via the “2 and 20”– 2% management fee, 20% carried interest (i.e. of the profits)

• Draper Gaither & Anderson 1958

• Rock and Davis 1961

• Sutter Hill 1964

• Patricof & Co. 1969

• Kleiner Perkins 1972

• Sequoia Capital 1972

The Rise of Risk Capital 1978/1979 - A Watershed

• Capital gains slashed (1978)– 49.5% to 28%

• Employee Retirement Income Security Act (1979) – Pension funds can invest

Venture CapitalSilicon Valley’s 2nd Wave

EntrepreneursVentureFinance



Economic System



Risk TakingCulture






Design Thinking

Story 6:

Entrepreneurship as a Management Science

Not All Startups Are Equal

Companies Get Educated

• Gov’t charted companies ~1600’s• Modern corporations ~1800’s• Business Schools to educate corporate execs

– Organize body of knowledge– First Harvard MBA – 1908

Startups Get Educated

• Every company began as a startup• Modern startups ~ 1950’s• Venture funded startups ~1970’s• Entrepreneurship Schools to educate founders

– Organize body of knowledge– Emerging now

Wait a Minute…

Aren’t Startups Small Versions of Large Companies?

50 Years of Experience Says NO

Story 7:

Not All Startups Are Equal

Small Business

Scalable Startups

Large Company Innovation

Small BusinessStartup

Exit Criteria- Business Model found- Profitable business- Existing team< $1M in revenue

Small Business Startups

• known customer known product

• Feed the family

Small BusinessStartup

- Business Model found- Profitable business- Existing team< $10M in revenue

Small Business Startup: Internet Edition

• The Internet allows a new class of Small Businesses• Not all businesses on the Internet are “Scalable Startups”

ScalableStartup

Large Company>$100M/year

Exit Criteria- Total Available Market > $500m- Can grow to $100m/year- Business model found- Focused on execution and process

Scalable Startup

A Startup is a temporary organization used to search for a scalable business model

ExecuteSearch

ScalableStartup

Large Company>$100M/year

- Total Available Market > $500m- Can grow to $100m/year- Business model found- Focused on execution and process- Typically requires “risk capital”

Scalable Startup

• In contrast a scalable startup is designed to grow big• Typically needs risk capital• What Silicon Valley means when they say “Startup”

ExecuteSearch

ScalableStartup

Large CompanyTransition

- Founders depart- Professional Mgmt- Process- Beginning of scale

What VC’s Don’t Tell You:The Transition – Founders Leave

Build ExecuteSearch

Transition Large Company

ScalableStartup

Sustaining Innovation

• Existing Market / Known customer• Known product feature needs

Large Company Sustaining Innovation

Large Company Disruptive Innovation

New Division Transition Large Company

Disruptive Innovation

• New Market / Unknown customer needs• New tech / Unknown product features• Looks like a scalable startup

Story 8:

Why Startups Are Not Small Versions of Large Companies

ScalableStartup


Business Model found- customer needs/product features found i.e. Product/Market fit- Found by founders, not employees- Repeatable sales model- Managers hired

The Search for the Business Model

Startups Search, Companies Execute

ScalableStartup


- Business Model found- Product/Market fit- Repeatable sales model- Managers hired

- Cash-flow breakeven- Profitable- Rapid scale- New Senior Mgmt~ 150 people

The Search for the Business Model The Execution of the Business Model

Startups Search, Companies Execute

ScalableStartup

LargeCompanyTransition

Sales- Sales Organization- Scalable- Price List/Data Sheets- Revenue Plan

The Execution of the Business Model

Customer Validation Versus Sales

ScalableStartup


Customer Validation- Early Adopters- Pricing/Feature unstable- Not yet repeatable- “One-off’s”- Done by founders

Sales- Sales Organization- Scalable- Price List/Data Sheets- Revenue Plan


Customer Validation Versus Sales

ScalableStartup



Engineering Versus Agile Development

Engineering- Requirements Docs.- Waterfall Development- QA - Tech Pubs

ScalableStartup


Agile Development- Continuous Deployment- Continuous Learning- Self Organizing Teams- Minimum Feature Set- Pivots


Engineering Versus Agile Development

Engineering- Requirements Docs.- Waterfall Development- QA - Tech Pubs

ScalableStartup


Traditional Accounting- Balance Sheet- Cash Flow Statement- Income Statement


Metrics Versus Accounting

ScalableStartup


Startup Metrics- Customer Acquisition Cost- Viral coefficient- Customer Lifetime Value- Average Selling Price/Order Size- Monthly burn rate- etc.

Traditional Accounting- Balance Sheet- Cash Flow Statement- Income Statement


Metrics Versus Accounting

ScalableStartup


- Lots to Lose- Reduce risk- Optimize certainty- Protect profits

Risk Versus Safety


ScalableStartup


- Pains in the butt- Always looking at something different- Doesn’t get with the program


Risk Versus Safety


- Nothing to lose- No profits to risk- Searching equals risk

ScalableStartup


- Failure impedes execution- Affects revenue/profit- Reflects on individual/organization- Covered up

Learning Versus Failure


ScalableStartup


- Pains in the butt- Always looking at something different- Doesn’t get with the program


Learning Versus Failure


- Failure = learning- Normal part of startups- Not a crisis- Shared, lessons learned- Iterations and Pivots

Story 9:

Plan versus Model

Business Plan

• A document your investors make you write that they don’t read

• A useful place for you to collect your guesses about your business- Size of Opportunity- Customers- Channel- Demand Creation- Revenue/Expenses/Profit

• The template to look like everyone else when you present to VC’s/Management

No Business Plan survives first contact with customers

So Search for a Business Model

What Is a Business Model?

• Diagram of flows between company and customers• Scorecard of hypotheses testing• Rapid change with each iteration and pivot• Founder-driven

* Alex Osterwalder

9 building blocks of a business model:

CUSTOMER SEGMENTS

which customers and users are you serving? which jobs do they really want to get done?

VALUE PROPOSITIONS

what are you offering them? what is that getting done for them? do they care?

CHANNELS

how does each customer segment want to be reached? through which interaction points?

CUSTOMER RELATIONSHIPS

what relationships are you establishing with each segment? personal? automated? acquisitive? retentive?

REVENUE STREAMS

what are customers really willing to pay for? how? are you generating transactional or recurring

revenues?

KEY RESOURCES

which resources underpin your business model? which assets are essential?

74

KEY ACTIVITIES

which activities do you need to perform well in your business model? what is crucial?

KEY PARTNERS

which partners and suppliers leverage your model?

who do you need to rely on?

COST STRUCTURE

what is the resulting cost structure? which key elements drive your costs?

77images by JAM

customer segments

key partners

cost structure

revenue streams

channels

customer relationships

key activities

key resources

value proposition

sketch out your business model

building

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buildingblock

buildingblock

buildingblock

building

block

buildingblock

buildingblock

building

block

buildingblock

buildingblock

buildingblock

But,Realize They’re Hypotheses

9 Guesses

Guess Guess

Guess

Guess

GuessGuess

Guess

GuessGuess

How Do Startups Search For A Business Model?

• The Search is called Customer Development• The Implementation is called Agile

Development


Solving For Customer Risk

Story 10:

Why Startups Fail

Traditional Product Introduction Model:Two Implicit Assumptions

Concept Product Dev.

Alpha/Beta Test

Launch/1st Ship

Customer Problem: known

Product Features: known

More startups fail from a lack of customers than from a failure of product development

Story 11:


Get Out of the BuildingThe founders

^


Concept/Bus. Plan

Product Dev.

Alpha/Beta Test

Launch/1st Ship

Product Development


CompanyBuilding

CustomerDiscovery

CustomerValidation

Customer Creation

Pivot

• Stop selling, start listening• Test your hypotheses• Continuous Discovery• Done by founders

Customer Discovery

CustomerDiscovery

CustomerValidation

CompanyBuilding

CustomerCreation

Test Hypotheses:• Product• Market Type• Competition

Turning Hypotheses to Facts

Test Hypotheses:• Problem• Customer• User• Payer

Test Hypotheses:• Channel


Test Hypotheses:• Demand

Creation


Test Hypotheses:• Product• Market Type• Competitive

Test Hypotheses:• Pricing Model / Pricing

Test Hypotheses:• Size of Opportunity/Market• Validate Business Model

Test Hypotheses:• Channel• (Customer)• (Problem)



Creation





Test Hypotheses:• Channel• (Customer)• (Problem) Customer

Development Team

Agile Development



Creation





Test Hypotheses:• Channel• (Customer)• (Problem) Customer

Development Team

Agile Development

The Pivot

• The heart of Customer Development

• Iteration without crisis

• Fast, agile and opportunistic

Entrepreneurship as A Mgmt ScienceSilicon Valley’s 3rd Wave

EntrepreneursAngel / Venture

Finance



Economic System



Risk TakingCulture






Design Thinking

Story 12:

Entrepreneurship as a Management Science

E-School instead of B-School

ScalableStartup


- Execution- Strategy- Accounting- Products- Engineering- Management- Administration

Business School

Business School Versus Entrepreneurship School

ScalableStartup


Business School Versus Entrepreneurship School

Entrepreneurship School

- Hypothesis testing- Business Model testing- Customer Development- Agile Development- Metrics- Venture Finance- Design Thinking

- Execution- Accounting- Products- Engineering- Management- Administrative

Business School

ScalableStartup


Business School

Business School Courses Versus Entrepreneurship Courses

Courses- Managerial Finance/Accounting- Managing Groups and Teams- Financial Accounting- Operations- Modeling for Optimization- Global Value Chain Strategies

ScalableStartup


Courses- Lean Launchpad- Customer/Agile Development- Business Model Design- Entrepreneurial Management- Creativity and Innovation- Entrepreneurial Finance

Business School

Business School Versus Entrepreneurship Courses

Entrepreneurship School

Courses- Managerial Finance/Accounting- Managing Groups and Teams- Financial Accounting- Operations- Modeling for Optimization- Global Value Chain Strategies

E-School Will Emerge

• Entrepreneurial Education will change radically

• E-School Students are not B-School Students

• Entrepreneurship as its own management science

Story 13:

Why Accountants Don’t Run Startups

ScalableStartup


Inventor of the Modern Corporation

ScalableStartup


Inventor of the Modern Corporation

Alfred P. Sloan

ScalableStartup


Alfred P. Sloan

General Motors, President/Chairman- Cost Accounting- MIT Sloan School- Sloan Foundation- etc.

ScalableStartup


Founder of General Motors

ScalableStartup


Founder of General Motors

Billy Durant

ScalableStartup


Billy Durant

- Leader in horse-drawn buggy’s- Fired by board, starts Chevrolet- Regains control of GM - Fired by board, GM ~$3.6 billion*

* GM Net sales in 1921 $304.5M = $3.6 Billion today

ScalableStartup


Durant Versus Sloan

Durant Versus Sloan

• Dies, rich, honored and famous

Durant Versus Sloan

• Dies, rich, honored and famous• Dies managing a bowling alley

Durant Versus Sloan

• Dies, rich, honored and famous• Dies managing a bowling alley

Accountant

ScalableStartup


You are here

Where is Chile?

EntrepreneursAngel / Venture

Finance



Economic System



Risk TakingCulture






Design Thinking

Lessons Learned

• Culture needs to support and encourage risk– Failure is integral to the startup process

• Technology hubs must be magnets for engineers – But they cluster around industry specialties– In what area will Chile build a world-class hub?

• E-School reduces early stage startup risk• Healthy Venture Capital industry = large profits

– Chilean market not large enough – Teach startups how to go global early

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