Welcome To The Best Next Thing

Welcome to The Best Next Thing, a blog and information resource for entrepreneurially-minded Kellogg students, dedicated followers of fashion and lovers of truth worldwide. The first one anyway. We (David Schonthal and Carter Cast) developed BNT to delve deeper into topics of interest, to post entrepreneurial musings and observations and to share resources we think will be useful as you pursue your new venture ideas.

In the next handful of weeks, we’ll discuss further the “10 Themes of New Venture Discovery” sheet we distributed during the first class and why we think it’s a good framework to refer to as you develop your ideas. We’ll also log odd blogs when the spirit moves us…

–  Carter + David

Your Lack of Experience Could Be Just What a Startup Is Looking For

This is a piece David originally authored for Fortune Insiders. 

If your career change moves you in the direction of a startup, there’s no need to worry about having a non-traditional background. Startups, almost by definition, exist to question norms: How can the demands of the marketplace be met in new or better ways? In contemplating that question, your non-traditional background may have equipped you with skills and perspectives that are exactly what a startup needs.

It’s not so much of a stretch, then, whether your background makes you two steps away (i.e., a large corporate environment) or five steps away (i.e., something seemingly unrelated, such as the arts or social work). In both instances, there are ways to bridge the gap from where you’ve been to where you want to go — provided it’s authentic. In other words, you must possess valuable skills without adding “spin” designed to make you look like a better fit than you really are.

Consider the two-step distance. Maybe you came from a large company where you operated within specific processes and procedures — very different from a startup with a less-structured environment. However, your knowledge of a specific industry (e.g. banking or accounting), your network of contacts, and even your knowledge of structures and processes may be the “missing link” a startup needs to scale. You bring the professionalism, rigor, and empathy for customers that the startup likely needs to get to the next level.

Typically, founders have big ideas when they launch a startup, but as the company tries to scale, they often need a distinctly different skill set in order to take the firm from the “idea stage” to the “growth stage.” Earlier in my career, for example, I worked for three of the big-five tax firms before joining a five-person medical device startup. I didn’t have experience in the medical field or in startups, but I brought to the team expertise in the kinds of processes and systems that helped the firm scale. The rest I learned on the job.

In addition to your corporate experience, you may also be passionate in totally unrelated areas that show another side of you. Your experience in, say, improvisational theater shows that you are creative, understand the importance of timing, and can think on your feet.

Now, let’s say that your professional background is five steps away — maybe you were an artist or you spent a few years in the Peace Corps. No matter that these backgrounds are completely unrelated to a startup, you possess personal strengths that helped you be successful — whether cultural, behavioral, or attributes such as problem-solving. Your artistic performances may have allowed you to develop strengths in preparation, organization, motivating a team, or creating an experience. Or, your work with an NGO in the field may have given you invaluable insight into how to do more with less. Simply having a fresh perspective can lead you to ask the one new question that unlocks a whole universe of new possibilities for a company.

A non-traditional background isn’t a deal breaker for entering a new field, especially at a startup. By being willing to learn and reframe your experience, you can work with the new team to gain a better understanding of the business, while contributing the strengths and skills that you bring.

Reflecting Before an Exit

This piece, written by Carter, was originally published by the Wall Street Journal in a section called “The Accelerators.”

The strong pace of initial public offerings in 2014 and the first half of 2015 has many entrepreneurs contemplating if, when and how to look for an exit. Even though the IPO window may be closing for the moment, delicious deals like Shake Shake or Fitbit may encourage exit-minded founders to prepare for an IPO.

Entrepreneurs have to consider a myriad of challenges that come with preparing for a liquidity event. Before even contemplating prospectuses, entrepreneurs should step back and reflect on the emotional and psychological aspects of selling — whether through an IPO, to a private equity firm or to other third parties. Relinquishing control of “their baby” may be harder than entrepreneurs realize, and selling to a buyer who has a far different vision for the company may lead to regret. It pays to keep a few things in mind:

Are you truly ready to give up control? It may seem obvious, but in the intoxicating rush to an exit it can be easy to overlook the fact that selling the company means giving up control. The emotional and psychological impact of selling the company may be underestimated by the entrepreneur, even when gaining access to more capital resources appears to make sense, at least on paper. Though selling may be the right thing for the business, entrepreneurs shouldn’t jump to make a deal without first determining their own readiness. Entrepreneurs need to ask themselves: Am I prepared to hand over the reins or, at the very least, share control of what I’ve built?

To thine own self be true. It takes a tremendous amount of self-awareness for entrepreneurs to admit, even to themselves, that their company needs a different leadership profile, a broader managerial skill set or a more experienced management team to take it to the next phase. It’s rare for a founder to conceive of and start a company, find that elusive “product/market fit,” take it through the early hyper-growth phase and lead it into a sustained-growth scaling phase. In other words, launching a company and willing it to $20 million in revenues takes one (extraordinary) skill set; scaling it into a $150 million entity takes another. Entrepreneurs must consider whether their expertise lies in early-stage product and business development, or if they have the requisite skills to scale a business by doing such things as expanding into new markets, creating scalable processes and broadening their marketing and selling efforts, while also dealing with an ever-growing group of stakeholders.

“Prince Charming” doesn’t exist. Sometimes what looks like the “perfect” deal comes along — for example, the seemingly ideal match of Trunk Club, the online men’s clothing service, with Nordstrom in a $350 million acquisition in 2014. But for most companies looking to sell, holding out for perfection raises unrealistic expectations that are almost guaranteed to result in disappointment. Or, hoping to sell at the peak can leave a company stranded when an unfortunate turn in the market comes along. Being patient in order to find the right strategic and cultural match is one thing; attempting to ride a crest wave or waiting for Prince Charming to come riding in, offering a mind-blowing multiple on forward-year revenue projections is entirely another. So understand your priorities and be prepared to pull the trigger if and when they’re met.

Are you aligned with the prospective buyer? As entrepreneurs look for an exit, especially through a merger or acquisition, they need to understand the vision and values of the buyer. Is there a meeting of the minds, a shared vision on the future direction of the company? Does the potential buyer want to accelerate growth and expand into new markets or does the buyer really want to take the core assets and shutter the rest of the company? Will the legacy of what the entrepreneur created live on, or will it be “assimilated into the Borg?”

Who’s looking out for the team? An exit is not just about the entrepreneur. Successful startups grow because of a team’s efforts, and that team has a tremendous amount of product, customer and institutional knowledge to offer. Before sealing the deal, entrepreneurs need to make sure valued team members have the right incentives and protection to stay with the company to continue its growth strategy, or conversely that they are rewarded with severance packages that take into account their contribution.

As these points illustrate, looking for an exit takes more than analyzing ratios and multiples or cashing out in the most lucrative deal. Entrepreneurs who take the time to consider the emotional, psychological and strategic aspects first will be better positioned to make a successful transition to what comes next.

For Biggest Results, Focus On The Struggle

This is from a piece Co-Authored by David Schonthal and Bob Moesta, CEO of the Rewired Group (Originally published as a contribution Dave Kerpen’s column Inc Magazine):

Successful innovative products and technologies start by focusing on the consumers’ problems to be solvedWhat do consumers really want to do? What are they trying to do but cannot? What are the tradeoffs they are willing to make to achieve better outcomes?

The solutions target consumers’ functional, social, and emotional needs and, even more important, their desired outcomes. Think Maslow’s Hierarchy, with its tiers of psychological, safety, love, esteem, and self-actualization needsThe further aproduct‘s benefits extend up that pyramid the better chance the company will tap intomassive pent-up consumer demand for innovation. One example might be Fitbit and similar products that perform functional exercise- and diet-related tasks, but on an emotional level are really about delivering personal accountability and motivation. 

Identifying struggles also unlocks insights about consumers’ decisions to “fire” the products and services they’re currently using in order to “hire” new ones that promise to do the job better, faster, more efficiently, more cost effectively, etc. Yet such actions aren’t as obvious as swapping out one household cleaner for another. For example, Facebook appeared to create a new category in social media. But when examined through the lens of consumer struggle, it becomes clear that Facebook was hired by consumers to update friends and family on what’s going ona job that used to be occupied broutines such as the Sunday night family phone call. In terms of industry categories, Facebook doesn’t compete with AT&T, but in the consumers’ minds, even unconsciouslythey do. 

Consider BucketFeet with its trendy and colorful line of casual footwear featuring designs by independent street artists. As a shoe company, BucketFeet would appear to go toe-to-toe with megabrands such as Nike and Converse. But in consumers’ minds, BucketFeet is really wearable artdesigns on a different kind of canvas.

Consumers’ “hiring” and “firing” decisions are significant sources of insight becausethere really aren’t any new jobs for the latest products to assume. Consumers’ overcrowded lives can’t handle one more thing. For entrepreneurs, that reality is a compelling case to stop focusing on the features and benefits of what they’ve invented and developed, and instead put their emphasis on moments of struggle and consumers’ hire/fire decisions.

Successful innovation starts with finding the right struggle to solve. Many techniques such as the Jobs-To-Be-Done framework for consumer research and Design Research have long been applied to corporate innovation. The same approach can be utilized by startups.

Identifying moments of struggle can be accomplished by conducting research with asfew as ten people if the questions and observations are of sufficient depth about how and why they buy and use products and technologies. Go into people’s homes and witness how and what they are using. Study how they adapt products and technologies with their own workarounds and hacks, and improve or even push the limits of performance. Such small-scale but intensive ethnographic studies level the playing field for small startups and entrepreneurs who don’t have huge research departments and massive consumer databases at their disposal.

The key is to frame the forces of progress (function, social, and emotional) that causepeople to make progress in their lives. As the “Forces Diagram” (below) illustrates, the push of the situation and the pull of a new idea are weighed against the habit of current practice and the anxiety of adopting a new solution. Progress only happened when the push and pull are greater than the anxiety and habit.

(Sources: The Re-Wired Group)

Most consumer struggles from the functional to the emotional can’t be hypothesized in a research lab or conference room or sketched at a white board. Doing that runs the risk of targeting the wrong market or a need that really doesn’t exist. Consider the Segway, an intriguing personal mobility device that looked like it addressed a real functional need, but doesn’t target consumer struggle with a solution that allows them to make progress.

Just because something is possible, doesn’t mean that consumers will clamor for it en masse. 3-D printing is a great technology, but still largely in search of a mainstream job. There are interesting applications, such as in making custom hearing aids, but no one has yet found a widespread use for this influential technology. Feasibility and desirability are not the same and need to be thought about differently.

Consumers are the source of most successful innovations; their desires and struggles are the sparks of genius that lead to disruptive opportunities. Technologies are the enablers to make it easier, faster, lower cost, or just betterHenry Ford understood this, noting that people didn’t know they wanted an automobile. What they wanted was a faster horse. What followed was the firing of horses to transport the masses and the hiring of automobiles that could do the job better.

In the same way, entrepreneurs today need a keen understanding of human behaviorand consumer decision-making. By focusing on moments of struggle and real problems to be solved, even small startups can compete head-to-head with big companiesand win.

Your Customers Aren’t Data — They’re People

(Originally posted to Forbes)

“Big Data” is the phrase du jour — it’s no secret that data can serve as a powerful and practical resource for understanding consumer behavior. But it must be used in the proper context, or else it can distance companies from those they wish to understand.

A common problem arises when corporate innovation teams over-rely on data to uncover new insights about customers, or understand user behavior on a deeper level. They become seduced by numbers, convinced that statistics reveal indisputable truths about target-market behavior. While this data can be informative and even comforting (“Forty-eight percent of our new buying cohort claims they’ll repeat within three months!”), it also carries risk; it can miss the nuances of human behavior, paint abstract representations of people and generate information that’s void of empathy. Consumer needs, motivations, emotions and behavior can easily get lost in numerical translation and interpretation. As the Talking Heads once sang, “Facts all come with points of view; facts don’t do what I want them to.”

At the Kellogg School of Management, we advise corporate innovators to follow the lead of lean startups to gain a clearer and richer understanding of their customers. These startups, constrained by scarce resources, are forced to learn about their prospective customers in the most rudimentary way: by getting out into the market and observing and talking to people on an individual basis — in the right context.

It might seem unsophisticated, but this approach is how startups often discover the key consumer insights that large companies miss. And it’s how they create products, services and experiences with potential to disrupt massive industries.

Here are a few ways that any organization can introduce a bit of scrappiness and human-centered thinking into its research approach:

Manufacture constraints for yourself.

Act as if your corporate infrastructure and resource capabilities don’t exist. Just set them aside for a bit. That means getting out of the office and talking to your customers directly, or finding opportunities to tag along with customers for extended periods of time while they go through the purchasing process. Give yourself short deadlines to force resourcefulness (“We need to interview at least 30 users in the next 2 weeks!”).

Become best friends with your customer service center.

Inside the office, park yourself in the customer call center and answer phones so you can hear customers’ comments and complaints firsthand. By interacting with your customers in a direct, unfettered way, you will quickly learn what’s working for them, what isn’t, and what you can do to make their experience with your product or service better. Are the mice-type assembly instructions for your baby crib exasperating to customers? Is it hard to find the “image upload” button in your expense-management software? It’s not surprising that many successful entrepreneurs start off by handling a bulk of their company’s customer service calls themselves. There is no better way to learn.

Think of your customers as individuals, not data sets.

In the early days of developing a new product or service, seek depth over breadthMove beyond large surveys and customer data sets, and have long, open-ended conversations with 10 current or potential customers about their experiences with your product and competitors’ products. Explore: What problem are they really trying to solve by using your product? Where do various products delight or disappoint them? What’s the biggest hassle they tolerate when using your products — perhaps without even realizing it? What must they give up to use your offering? If you can answer these types of questions, you can unlock innovation opportunities that data alone will miss.

Put on your anthropologist hat.

Here is a human truth: People say one thing, but do another. Because of this, it’s imperative that you observe your customer in the wild, exploring their behavior in the context of their everyday lives. Put on your Jane Goodall hat and seek to understand them, rather than validate your ideas. Like an anthropologist, collect artifacts that will help you communicate your learning with your team. Take field notes and pictures, record video and audio.

All of this will help you learn (and remember) how consumers live their lives and use your product. It will likely reveal important, sometimes painful, findings. You might realize, for example, that you’ve misjudged customers’ interest in a signature feature that your group developed, or that your product/service doesn’t easily integrate with peripherals that your customers use. Indeed, this process of immersion is how Chuck Templeton, one of our Kellogg School alums, figured out how to design the OpenTable restaurant reservation system; he sat in restaurants for days, observing how restauranteurs managed — and struggled with — their software and point-of-sale systems.

 Track emotional peaks and valleys throughout the journey.

Today’s consumers go through a dizzying pre-purchase, purchase and post-purchase process. Gone are the days where the buying public passively receives a product message from Wilford Brimley while watching “The Waltons” and walks into a grocer the next day to buy some Quaker Oats. In this age, corporate innovators must be keenly aware of all the social networking activity that precedes the purchase (e.g., getting inspired on Instagram or comparing deals on Retail-Me-Not) as well as all the discussions following the purchase (e.g., inside a Facebook group or through a nasty Yelp review).

It’s not enough to focus on the moment of purchase. Map the entire customer journey so you can understand the full spectrum of customers’ emotional highs and lows, from the moment they decide to buy in your category to their post-purchase experience with your product. Sometimes, the experiences leading up to, or right after, the purchase of your product is where you will uncover new opportunities. For example, there may be relatively easy and inexpensive ways to alleviate your customers’ pain or frustration while increasing their overall satisfaction in a dramatic way, like when GE modified its MRI experience for pediatric patients or the way that Uber delights its users with extras like Spotify radio and cashless transactions.

Don’t get us wrong — it’s terrific to have big data. It points you in the right direction and helps you hone in on a problem to solve. But to get the texture and nuance that leads to innovation, you need to have direct experiences with the individuals whose problems you’re solving.

What Corporations Can Learn From Startups

(Originally Posted on Forbes.com)

Organic growth has softened. Purchase frequency has slowed. What to do? When pressed to innovate, many corporations have the same knee-jerk reaction: to hire people and spend money. They create cross-functional task-force teams and launch expensive, time-consuming market research studies, generating mounds of data, but to little effect.

Instead of helping a company bring new ideas to market, these efforts at spurring innovation often lead to counterproductive results, distancing the firm from the very group it wants to serve: their buying public. Instead of observing customers first-hand and drawing insights from their behavior, the company’s innovation team becomes bogged down and bleary-eyed, managing task force meeting calendars and wading through reams of purchase rate propensities and lifetime value projections. Process gets in the way of progress. Company decision-makers find themselves staring at well-constructed PowerPoint decks and Excel models but are no closer to uncovering the searing insights that will translate into highly desired new products and services.

At the Kellogg School of Management, we advise corporate leaders to consider a fundamentally different approach to innovation, one that draws upon the playbook of startups. It boils down to adopting what we call “venture thinking,” a mindset of resourceful entrepreneurship that’s applicable to virtually any company looking to spur innovation and drive growth.

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Startups find ways of turning their constraints into strengths. For them, scarcity is the mother of invention. With a small budget and limited time, startups are forced to operate with a great sense of urgency. They are often able to out-maneuver large corporations because of their speed in bringing new ideas to market and their nimbleness in adapting to market needs. In order to compete with startups, large organizations should be inspired by them.

Venture thinking is rooted in three basic ideas:

1. Go native

Successful startups have a visceral understanding of their customers. With no research department to guide them, entrepreneurs are forced to go out into the market themselves to learn firsthand what their customers are experiencing. In many cases, founders are their own customers, starting a company in an effort to solve a problem they were experiencing.

Corporations should do the same. Instead of interpreting customer behavior through data, ask customers questions directly. Observe them in their buying or usage environment. Empathize with them, noting where they appear to struggle, where they look confused and frustrated, where they give up or create a workaround in an attempt to solve a problem. Connecting and empathizing with customers is the best way to uncover problems and develop solutions that will lead to new sources of value.

2. Embrace experimentation

It’s rare that a startup’s initial product idea is the one that brings them success. Groupon started as a community organization platform, Flickr started as an online role-playing game and Avon started as a book seller. These firms evolved into their current model through a process of constant iteration.

Larger organizations often fall into the “perfect is the enemy of good” trap; in an effort to get it right from day one, they spend too much time refining their product before testing it in market. Instead, they should take their “minimum viable product” (MVP) directly to the market, experimenting and iterating with it.

Venture thinking organizations aim to be nimble when testing potential solutions to problems. They create well-articulated hypotheses and test them through a sequence of small experiments. They don’t attempt to boil the ocean with a big, broad research plot that lacks specific objectives. Their goal is to kill bad ideas quickly and refine their solutions multiple times on the way to market. Just as in a science experiment, failures in entrepreneurial testing aren’t viewed as huge Failures —they’re merely opportunities to learn and sharpen the focus. This mindset often requires a cultural shift in larger organizations, and as a result this principle may be the hardest of the three to realize.

3. Show, don’t tell

Successful startups know the best way to communicate the value of a new idea is to visualize it. A great example of this can be seen on Kickstarter, where each campaign is accompanied by a video that helps bring the idea to life — in many cases, long before the product is even built!

Startups show, they don’t tell. They know their early prototypes don’t need to be anywhere close to their final product. They need to be just good enough to answer a key question. In the case of most Kickstarter campaigns, the question entrepreneurs are answering with their videos is: “Does anyone care about the problem I’m solving?”

Corporations too should embody their questions in the form of prototypes. Customer reactions will be more authentic and actionable than posing a series of theoretical questions through market research studies. Often it’s not necessary to spend a lot of time or money building prototypes either. Sometimes, a cheap sketch or a simple video can answer the million-dollar question.

This entrepreneurial attitude of stripped-down scarcity may go against the organizational DNA and deep-seated culture of many companies. For corporate leaders, venture thinking may require making uncomfortable changes: constricting time and resources, reducing administrative tasks and clearing calendars in order to get out of the ivory tower and back to the customer frontlines. But once organizations begin to uncover problems worth solving for their customers, the change will be well worth the effort.

Can You Scale It?

Our eighth theme in New Venture Discovery is: “What Works in the Lab Must Also Work at Scale.” On that note, we thought it would be useful to share some considerations to keep in mind when scaling your start-up. The information below was pulled together for a growth company CEO who asked to meet to discuss the challenges he was facing in scaling his (extremely) high growth company. In the meeting, we referred loosely to this “punch list” of topics/questions, focusing on the ones most relevant to his business. While the content is full of opinions and isn’t exhaustive, it may be worth examining as your businesses gains traction…

The Market

Is your market big enough to accommodate your mid-range (~3-5 year) growth plans? Is the addressable market big enough (VCs often state they’re looking for +$1 billion markets) and can you make the case for how you might garner at least 10% of it?

Do you have a good understanding of the key market risks that might impede your ability to scale? Often there are one or two lethal blind spots for a venture. (For more on this, see our Fast Failure Is a Success blog entry, paragraphs three and four). Try hard to determine what yours are and how to mitigate them.

Direction

Do you know where you want to take your company?

Is the vision aspirational, memorable and believable? Is the mission, the hill to take, clearly defined? Does your team know where you want to go and do they believe in it? If we walked around your office and randomly sampled employees, would they consistently play back the vision and mission?

Your Value Proposition

Is your positional advantage clear, real, distinct and compelling to your target market?

Are your company’s resources (people and money) focused on reinforcing and expanding that value proposition? If you listed all the activities your team was working on, what percent of the activities directly further your value proposition? For the activities that do not, is there a compelling reason you’re working on them?

The Growth Phase of Your Company

Are you in the “start-up” phase? What resources are needed to get the flywheel really spinning and prove your business case?

Are you in the “early growth” phase? How much can you afford to invest in order to gain presence, generate trial and establish positional advantage?

Are you in the “scale phase”? Have you developed clear and agreed-upon growth strategies that will allow you grab more market share and to realize quantified efficiencies (scale economies)?

Your Organizational Capabilities & Gaps

Do you know where you are most vulnerable from a people standpoint? Where are your biggest talent gaps? Where are your current organizational “governors”—the key choke points, where work is most impeded due to lack of talent?

In hiring, beware of the very real danger of “settling.” Unfortunately, A’s hire A’s more slowly than B’s hire C’s. It just takes longer to find those gems. So you must resist the urge, especially when you’re in that scale-up stage and need people fast, of hiring warm bodies…

Be ready to open up your checkbook when you find a really talented prospective employee who maps well to one of your key competitive points of differentiation. Don’t be penny wise and pound foolish…

Do you have the right reward structure to recruit and retain top talent? (And it’s not just about the money—it’s also about providing them the autonomy to create and acknowledging a job well done.)

How Fast Should You Go?

Can you truly realize a first mover advantage by investing capital in rapid growth (e.g. the network effect realized by businesses like Apple with their closed music system, Open Table’s platform, eBay’s buyer/seller community, etc.)? Or does a more balanced and deliberate growth rate make more sense?

Have you really identified your growth barriers? Are they around consumer/customer awareness and adoption? Improving customer repeat rates? Gaining access to a key channel of business? Operational through-put issues? Or perhaps human or financial capital needs?

What You Measure

Do you have the right business intelligence tools in place to track measure progress? Areas such as:

  • Your Dashboard / KPIs / Metrics that Matter
  • Do you know your unit economics? Can you effectively measure variable contribution margin?
  • Do you know your customer acquisition cost and your customer’s lifetime value?
  • Do you have the right operational performance metrics in place (especially on service delivery–Net Promoter Score, etc.)
  • Do you have a good understanding of your conversion funnel (and where it leaks)?

Marketing & Selling Strategy

Are you creating powerful selling tools/materials to aid your sales force in their selling efforts? Is the marketing department helping the sales team at the top of the funnel, supplying them with quality lead generation opportunities? Is your sales force incented properly (not just on closing accounts, but on the quality & profitability of their accounts)?

By the way, in our experience, probably the most powerful marketing department is the “customer support department”. We’ve found that it pays to invest in this team, from the quality of your hires to providing them with software tools, effective training, development and performance incentives. See it as a selling/revenue center vs. a cost center.

Keeping the Innovation Wheel Spinning

Have you created an environment conducive to exploring new ideas and taking risks? Is innovation truly valued? Do you have avenues for good employee ideas to receive consideration? How are you creating a “growth mindset” attitude (see Dweck’s Mindset book) in your organization?

It’s awfully hard to work on the future while addressing all the issues you face in the present. This is especially true during the “hot” scale phase. To ensure you don’t ignore the future, you might want to structure your technology development teams around:

  1. Product “antes” (current bugs, core functionality, etc.),
  2. Product “drivers” (important new features and functionality, etc.)
  3. “Testing” (i.e. future differentiators). Be careful—it’s easy to be so focused on executing the core business that test development resources get cut and/or redeployed. The “urgent” often steals resources from the important/not urgent…

Alignment with Investors

Are you aligned with your investors/board on where you need to make investments? Have you brought them along on your key business priorities and where you will be placing your spending bets? Do they understand and agree with your KPI’s / success metrics? Are you diligent about communicating your burn rate?

The answer to all of these questions needs to be “yes”.

A Final Biggie:

The scaling phase is a lot of fun, but it’s also a very stressful time. Be real with yourself on your own vulnerabilities (e.g. do you know your blind spots and allergic reactions?) and how you’re showing up at work. Make sure you have a personal board of directors/mentors you can turn to when you’re under stress and need help.

Finding a Good Problem

By now most people will appreciate that we begin the New Venture Discovery process at Kellogg by focusing on “problems” instead of “solutions”. There are a number of reasons why we take this approach. At the end of the day it boils down to this: there are often a number of different ways to solve any particular problem. Being married to one approach/solution too early will stifle an entrepreneur’s objectivity (and creativity) when it comes to the process of customer discovery and the development of a compelling new offer.

You’ve heard the old adage, “If the only tool you have is a hammer, everything looks like a nail”? Well, if the solution you have in mind an ios app, every potential customer looks like someone who has been waiting with bated breath for a product just like yours to show up in the App Store.

So what makes a good problem?

We’ve taken a shot at trying to frame some criteria that can be helpful when thinking about what makes a good problem on which to build a business. (There are numerous points of view on this – and below we have listed a few articles and blog posts below that are worth checking out).

A good problem is…

1. Sizable

A “sizable” problem is one that it affects a large enough market to build a business around and offers you degrees of freedom (viable options/different paths) in scaling it.

So what constitutes a large enough market? Well – that depends on the business you’re in, what type of entrepreneur you want to be and how you plan to grow.

Small, local businesses for example may be content to grow organically serving only the communities that they are in (think main street/retail). High Growth startups that seek venture funding, by contrast, typically need to be pursuing ≥$1B opportunities. This might come from selling a $2 product to 500M customers, or selling a $1M product to 1000 customers.

For the purposes of New Venture Discovery we are interested in focusing high-growth businesses. We are looking for ideas that can be scaled quickly.

Note: you may believe that the existing addressable market doesn’t appear to be sufficiently large, but that your idea has the potential to expand the pie, by creating a new usage occasion (e.g. couch-surfing with the iPad), increasing purchase frequency (e.g. the ease of Uber), appealing to a new user segment (e.g. the affordable luxury of Lexus in 1990 ) the opening up or expansion into a new channel of business (e.g. Amazon.com, MOOCs) etc. While this is a great way to be thinking about your idea, you’ll have to work hard to make your case to an audience of potential investors. It’s a lot more challenging to make the case that you’re expanding the pie, which is being truly disruptive (and wonderful) than to take market share away from an existing set of competitors.

2. Accessible

“Accessible”, in this context, has a couple of meanings:

Meaning 1 = Can you reach (and actually get in front of) the customers/users you intend to serve? In our opinion, this is one of the BIGGEST SNAGS for start-ups. We’ve seen more ideas go into the scrap heap because of their inability to gain access to the target market, whether it’s due to high user acquisition costs, reticence of users to change existing behavior, or structural entry barriers (e.g. slotting fees in supermarkets), etc. So don’t underestimate the challenge in this key area.

Meaning 2 = Does regulation or other market/non-market forces block a path to entry into this market (this does not include competition – we don’t want you to be afraid of that – at least not at this stage).

Your market must be accessible to you in order for you to properly learn about your customers and commercialize a solution.

3. Un/Under Addressed

So as obvious as it seems, you should focus on opportunities where customer/user needs are being unaddressed, or at the very least under-addressed. These might be functional needs (like wanting something faster, better, cheaper etc. than they are getting it now) or higher-order needs (like feeling less lonely, more confident, more interesting etc.).

We are constantly surprised by how many “better mousetrap” business ideas we see where the entrepreneur has no idea of whether or not users feel like their needs are being adequately addressed by existing offers or not. Of course the entrepreneur feels strongly that an unmet need exists…but does anyone else…especially anyone that will be paying for the product??

The customer discovery process is designed to dive in to this question in detail, but before we get to that level or research there are some quick sniff tests that an entrepreneur can perform to get a sense for whether or not there is a true “there there”.

4. Monetizable

Will someone pay you to solve the problem?

If ‘yes’: you have a business! If ‘no’: you have a charity.

(Along these lines, be careful when you advocate a “freemium” model. We’ve often seen that freemiums stay free—customers don’t easily segue to your paying model…)

5. Conceptual

If the problem that you are trying to solve with a startup is that “kids needs mintier-tasting toothpaste” there is a finite number of approaches to solving it.

The best startup problems are ones that allow the entrepreneur to explore the conceptual macro challenges related to the problem. In other words: problems for which there are number of different potential solutions.

A more conceptual version of the toothpaste problem might be: “how to get kids to bruth their teeth longer or more frequently” or “kids need a toothpaste that makes it more exciting to brush their teeth.” Now we can explore innovations not just with flavors, but also with packaging, experiences, and more. Could be that the end result is not toothpaste at all.

The more conceptual the problem, the more shots-on-goal we get with possible solutions.

6. Hard

Most of the easy problems in the world have already been solved.

If you find yourself saying, “I can’t believe that nobody as thought of this!” chances are that someone has. It could be that the reason you are not aware of this is that it has been tried…and failed for one reason or another.

We don’t mean to sound cynical, but most good, high-growth businesses are built around solving hard problems (technically, commercially, operationally etc.). It’s where true, defensible and lasting value is created. PLEASE resist the temptation to go after a problem you think will be easy to solve. Chances are it is indeed easy….and therefore it has been (or is being) tried. 

7. Personal

The most compelling startup pitches come from entrepreneurs that are passionate about the problem they are solving. In fact the best entrepreneurs are more than “passionate”- they are “obsessed”.

This type of passion/obsession is almost impossible to manufacture. It is usually rooted in a personal connection to the problem, the customer being served or the solution being created.

Too much passion for a particular solution can also be a very dangerous trap for a founder (for many of the reasons touched on above), however passion for a problem or customer segment can be the fire-in-the-belly that fuels an entrepreneur though the inevitable challenges that go hand-in-hand with starting a high-growth business. Those that have this type of connection are unusually able to demonstrate deeper empathy for the customer, which often results in a more compelling and human-centered solution, as well as being more open to exploring multiple ways of solving a particular challenge.

Try to find a problem that you are personally passionate about solving. There is just no substitute for authentic passion.

Other articles and blogs worth checking out on this topic:

Paul Graham: “How to Get Startup Ideas”

Kauffman Foundation: “The Itch”

Forbes: “Tricky 2014 Problems Startups Could Solve”

Mohan Sawhney: “Is Your Startup Solving a Worthwhile Problem?”

The Venturing Mind

Startup Thinking is Not Just for Startups.

We have now been teaching the completely retooled New Venture Discovery class (KIEI 462) at Kellogg for a 2 full years. Between us we have we have taught the course 16 times to over 600 students and have learned a lot about which aspects of the course/curriculum work well, which don’t, and which elements we might change to improve things going forward.

As we reflect, one theme has become clear to us: the process of New Venture Discovery (translating an unmet needs into new offers and business models) is as applicable/useful to non-entrepreneurs as it is to those aspiring to launch new companies. We see evidence of this in a few notable areas:

  1. The makeup of the students that take the class – about 2/3 of which are not sure that they want to be committed entrepreneurs, but find the process of New Venture Discovery interesting and useful
  2. The feedback that past students share from their experiences after graduating. We’re told that they are using these tools and methods and some companies, like Adobe, have their own lean start-up/launch-pad tool suite.
  3. The reaction we’re getting from alumni and other executives when we share the principles of New Venture Discovery with them. We hear quite a bit of: “This is a great approach for any company trying to bring something new to market or innovate on its business model – my company gets bogged down in ‘planning’, and it takes forever to get to the ‘doing’!”

The fact of the matter is that the majority of people we teach, present to and speak with are not, and will never be founders of companies. That being said – many of them are finding it useful to learn how to think like a scrappy, customer-oriented entrepreneur. This pattern has led the two of us to begin to use the term “Venture Mindedness”. It means adopting a discovery-oriented mindset when designing new business models – regardless of whether you are a startup founder, corporate executive, physician, marketer…whatever!

There are three areas of the discovery approach that serve as the foundation of the venturing mind:

The importance of spending time in the field, having first-hand conversations with users/customers

Most businesses fail because they never achieve product-market fit. Most businesses never achieve product market fit because they never fully understand their customers’ needs. Most businesses never understand their customers’ needs because they don’t spend enough time with them – in the proper context (especially when they’re experiencing the product/service)– and asking the right questions.

This is as true for established companies (of all flavors) as it is for startups.

The power of embodying questions with prototypes

“Leave prototyping to the engineers.” At least that is the common belief of most executives and managers. This has, in large part, been born out of the ingrained understanding that ‘prototyping’ is as way of presenting an early version a final product and NOT as a way of asking questions of users.

Our point of view is that a prototype is a “question embodied” – and that we can prototype almost anything (a product concept, services, experiences, business models…you name it).

Again – this way of thinking is as useful and appropriate for large companies attempting to create new business value as it is for founders looking to disrupt an industry. Just because you are big doesn’t meant that you need to spend like it.

Sometimes the cheapest, lowest-fidelity sketch can answer the million dollar question. Why spend more time and money than you need to just to arrive at the same conclusion?

Embrace experimentation, failure and the process of iteration

Those with venturing minds believe that early in new offer’s life action and experimentation are far more useful than planning and forecasting.

The path of achieving product-market fit is never a linear one. Its elliptical, and the more cycles of the ideate-experiment-evaluate-refine cycle you get through the better off the business will be. The key here is to learn as much as you can, as quickly and as cheaply as you can.

With more testing, you encounter failure. Then, with that failure comes new insights, which allow you to create a better idea/plan, leading to more progress… and on it goes…

Because this is the inevitable reality in the actual way a new venture is created (lots of ideas tested that don’t pan out), it’s important to: A) test A LOT; B) test rapidly; C) have an optimistic and resilient attitude, viewing a test that fails not as a “failure” but as a customer or marketplace insight.

New Venture Discovery as much a mindset as it is methodology.

You don’t have to be building a startup to engage your Venturing Mind. This discovery-focused lens is just plain useful for bringing new ideas to market – regardless of if it is a product, service, business model, marketing campaign or a new company.

Best way to test a value proposition? Get out and do it!

There are lots of ways to test a value proposition: elevator pitches, prototypes, A/B testing to name a few.

All of these techniques are useful and can help an entrepreneur shape their offer and positioning prior to launching a business. None of these, however, is quite as good as actually “delivering” the value proposition to your target segment out in the real world.

Here is what I am taking about:

Lets say you are working on a business that is aiming to update the dry cleaning industry for the on-demand generation. You intend to do this by offering a pick-up and delivery service for customers around their schedules using a mobile app as the interface.

What will often happen is that an entrepreneur will first start working on wireframes for the application and then put them in front of users for feedback. If they are ambitious they will compliment this effort with some adwords tests and other techniques to see if the idea resonates with their expected audience. Once they receive what they deem to be sufficient feedback they will quickly move to designing and coding the application.

What rarely happens is an entrepreneur starting the process of developing the solution by actually preforming the service they are intending automate.

In the case of our dry cleaning business, this could be something as simple as working with a few neighborhood dry cleaners and potential local customers – along with text messages and email – and actually picking-up and delivering peoples clothes for a month or so to learn about how the process works (or should work).

Running the business in a low-tech (or no-tech) way provides an entrepreneur with some very crucial insights on his/her business:

  1. It enables them to experience first-hand what the process is like for users on both sides of the business model (in this case: dry cleaners and customers), thereby building greater empathy into the design process
  2. It helps identify some of the “unknown unknowns” that exist in the proposed business model (maybe unexpected steps present themselves, unanticipated resistance based on having people come to their homes, or more attention needing to be paid to the service experience etc.)
  3. It helps you learn the language of the customer – the terms they use, how they refer to their unmet needs, what their workarounds are – all can be crucial when it comes to marketing and positioning in the future
  4. Ideally entrepreneurs running these tests will be PAID for their effort – providing much-needed clarity and certainty around revenue models (as well as perhaps some much-needed cash!) Really – what could be better than telling an investor that you have been running the business in a low-tech way for the past 6 months and are already cash flow positive!?
  5. On the flip side , entrepreneurs will also quickly learn if the revenue model (and costs) indicate a business model worth doing before they invest a single dollar into a line of code. Which leads to the last point…
  6. By performing the value proposition with real customers entrepreneurs will discover whether or not you have in fact found a real problem in need of solution. Many new businesses are in fact “solutions looking for problems” and its best to find out if you fall into this camp sooner rather than later.

The purpose of running these “concierge” tests (to borrow a term du jour) is not to test the business economics at scale, nor is it to be used to validate whether a business can grow quickly, compete with other emerging offers and is worth investing buckets of money in to. The purpose is simply this: to gain authentic insight and rich perspective on product-market fit, and learn what a business model must do in order to deliver its offer effectively to users.

Thanks to Rick Desai for coming in to class last week and inspiring this post.

Calling an Audible

Carter and I were sharing embarrassing stories of our own well-intended presentations gone awry and we decided to write a quick blog about it.

Great quarterbacks in football tend to have a handful of attributes in common, not the least of which are a mastery of the playbook, the ability to read defenses and an on-the-spot ability to improvise based on what they see. (Just watch Peyton Manning make constant play adjustments as he barks orders on the line of scrimmage)

Like quarterbacks, good business leaders (be they entrepreneurs or otherwise) tend to possess similar improvisational qualities. They too have an ability to read their audiences and throw out the playbook and improvise based on what they see going on around them.

It’s this last point that we want to focus on – the ability to read your audience and “call an audible” if you don’t like how your message is being received. In some cases mastery of the playbook and reading an audience can be in direct opposition to each other. Mastery can sometimes become reliance on the playbook, and this can cause problems. Or mastery can lead to overconfidence, resulting in a lack of flexibility in adapting your message to the circumstances you’re facing.

Here are examples from each of us:

David’s recent experience:

This past month I gave a presentation to a group of executives. They were interested in a topic that I’ve spoken on a number of times, and my material on this subject was… if I may say so… pretty damn good.

I had delivered this presentation dozens of times and it had never once failed me.

Things started off decently, but it wasn’t long before I could see that I was losing the audience. I hadn’t adapted my material for their specific interests or vantage point at all, it was a tough time of day to talk to them (after lunch), and I could tell that the one-directional way in which I was delivering the content was not engaging them at all.

 Having read the situation, I had two choices:

  1. Stick to my material and my script and hope that eventually they would join me on my wavelength
  2. Stop what I was doing and change the game plan on the fly with some unrehearsed Q&A, stories or other conversational ideas in an attempt to reengage them

I wish that I could tell you I went with choice B, but I didn’t. I proceeded forward with more-or-less my original plan and probably brought about one-third of the audience along with me while other two-thirds silently stared at their smartphones.

If I were to have a do-over, I clearly would have done it differently. I would have stopped the presentation the moment I saw it going sideways, acknowledged it and asked for the audience to offer-up some stories/examples of their own, or even to share some contrary opinions – just to get a real conversation going. If I were particularly bold, I might even try to throw in some kind of an exercise to get them interacting.

Carter’s recent experience:

Actually I have two: one where I just chugged along (poorly) without making any adjustments, and one where things were going so badly that I did call an audible. In the first example, only a week ago, I delivered what I generally consider to be my best lecture, my signature move. Oh the pearl that were dripping from my lips! Bang! Pow! Zowee! How do you like me now?! There was only one problem: midway through delivering my magic, I noticed that people were giving me this certain “I’m digesting my Thanksgiving meal” look, eyes glazed over, arms crossed over bellies. It was like they were being held hostage to a Kenny G song.

What did I do? Like a person sinking in quick-sand, I thrashed about harder, increasing my decibel level and gesturing about wildly, like I was swatting at a bee. It didn’t work. A student came up to me after the lecture and said, “Professor Cast, that’s a long time to hold our attention in the middle of the afternoon.”

Here’s my second experience. Last fall I was at the Allen Center, delivering a lecture to a group of eMBA students who had just taken their final class exam and were ready to graduate. I’d decided to talk about Joseph Campbell and The Hero Journey. Good stuff, right? What’s not to like about the dragon-slaying message of The Hero Journey to a group of students about ready to walk out into the working world, armed with MBAs?

 Well, in this case I was worried from the get-go. These eMBA students had been celebrating the completion of their curriculum with a glass of wine and they were in a festive mood. I wondered if it was the right time and place to deliver a lecture. Nevertheless, I gamely started. But about eight minutes into my one hour lecture, I noticed that people were swiping through their smartphones, getting up to find more wine, even talking quietly to one another. So I did two things. I first politely asked one fellow in the front row to please remove his feet from the desk and put them back on the ground and then I turned off the projector and said, “This isn’t working. What do you guys want to talk about, if anything?” We ended up having a really good free-form conversation about career management and career direction…

These experiences got us thinking about past presentations, customer meetings, investor interactions and other important “playbook” moments. Funny enough, we both realized that some of our most effective and successful sessions were ones where we allowed ourselves to make unscripted, on-the-fly changes.

No question that these types of “audibles” come with inherent risk, and moving off script can be scary – especially when you’ve rehearsed a lot and feel like you have a really sound playbook. Yet there are few (any?) scripted plays that are more effective than having a genuine connection with the individual or group you’re speaking with, even if it comes at the expense of polish.

Oh well, we live and learn. We both feel like we can’t train for these moments. We just have to stay aware of our surroundings and remain flexible…just like a good quarterback.