Fast Failure is a Success

This phrase sounds like it came right out of a positive psychology seminar, doesn’t it? It’s nestled right alongside “Love your frailties as much as your strengths…” Oh well—it’s a fairly common phrase and is well-intended. While it might be more palatable to some if it’s re-phrased “Learn fast”, tying the concepts of success and failure together is worth commenting on.

The phrase “Fast Failure is a Success” consists of two parts: 1) moving fast–running mission critical experiments early in the life of your venture so you kill bad ideas quickly and don’t burn a lot of precious time and money; 2) equating failure with success–learning how to re-frame the notion of “failure” makes sense, simply because setbacks and failures come along with the territory of being an entrepreneur. If you can’t digest and rationalize failure as part of the learning process (and part of the hero’s journey inherent in entrepreneurship), you will get so depressed you’ll stay under the covers in the morning.

Regarding the first point (moving fast), in the early stage of your venture, how can you determine the critical experiments to run? There are not only a whole bunch of unknowns, there are even quite a few “unknown unknowns” (or “unk-unks”), where you don’t know what you don’t know. What’s a person to do? Well, the worst thing you can do is to engage in a free form jazz improvisation exploration, or embark on a fishing expedition, where you conduct consumer/customer research without a well-articulated set of hypotheses to prove or disprove. Instead, start by trying to pinpoint your most critical hypotheses or assumptions. These should be based on your binding constraints. As you may recall from your high school math classes, a constraint is a condition of an optimization problem that the solution must satisfy. Drawing from your decision sciences class, in linear programming, a binding constraint is a critical factor on which the solution is dependent. If you change it, the optimal solution will change. (A non-binding constraint doesn’t affect the optimal solution and can be changed without changing it.) So, as your write down your key assumptions or hypotheses, you need to do your best to determine what your binding constraints are. In our experience, they usually are centered around three areas: a) category dynamics (where your venture concept fits within the existing market structure and its value chain); b) category and concept economics (particularly where your concept’s unit economic model may be vulnerable) and c) consumer/customer behavior (is there a real problem and does your proposed solution truly solve it). For example, in category dynamics a binding constraint may be your ability to gain access to key suppliers or re-sellers. In concept economics, a binding constraint may be your end-to-end product delivery costs in B2C eCommerce. In consumer behavior, a binding constraint may be customer readiness to embrace a DIY medical healthcare records system or the true likelihood that consumers will take the extra step in food preparation that is necessary to enjoy your product.

So, based on your binding constraints, what key hypotheses are critical to prove or disprove to know if your venture concept has potential? Once you have identified them, do your “smoke-testing” – conduct interviews and develop early provocations/prototypes that your potential users can react to. Concept boards, positioning statements, sketches, storyboards, crude prototypes, etc.

Regarding the second point (equating failure with success) the research is clear: entrepreneurs generally fail multiple times before they launch a successful venture. So you’d be well served to learn to re-frame the concept of failure so you don’t get too discouraged when things get rough. The best way to do this, in our opinion, is to view your failures as experiments that provide an opportunity to learn, which is exactly what they are. As Thomas Edison said, “”I have not failed. I’ve justfound a thousand ways that won’t work.” You too are in the lab, experimenting. Each experiment that doesn’t work teaches you something vitally important. The trick is to make sure you draw learnings from each experiment and apply them, so you continue to get smarter. As American political theorist Benjamin Barber said, “I don’t divide the world into the weak and the strong, or the success and the failures. I divide the world into the learners and the non-learners.”

I’ll wrap it up with two sort of existential thoughts on “failure.” First, real failure isn’t failure in the activity itself. Real failure lies in not doing the things you should do because you don’t have the guts. Real failure is the failure to act. Second, remember that ultimately these everyday so-called “failures” make us more real, more genuine. They teach us to let go of false self-images and superficial ego-directed goals and desires. They give us grit and resilience, deepen our humility and broaden our compassion.

Want to Add To Your Startup’s Value? Start by Subtracting Risk

Here is the golden rule of startups:  Value goes up, as risk of failure goes down.  As a result, one of the primary goals of founding teams should be removing risk from a new venture.

There are lots of flavors of risk when it comes to startups – and they vary from industry to industry.  Some sectors (such as healthcare and financial services) are fraught with regulatory risk.  Others must deal with risks around intellectual property, taxes and duties, environmental issues and more.  There are a few risk varieties however, that are nearly universal for startups in any industry.

Adoption Risk

Simply stated – this is the risk that customers won’t buy your finished product; and we can’t think of a business in which failure in this category is not a complete company-killer.

More often than not, encountering this problem is related to a lack of properly understanding customer needs, the competitive landscape and market dynamics.  Creating a beautiful product or service that nobody wants to buy is not a “business”, thus it is the job of early-stage companies to quickly get out and prove to themselves and investors that there is indeed a market of willing customers ready to buy (literally) their value proposition.

We can make great strides in removing adoption risk from our business by (wait for it…) talking to our potential customers! The earlier we do this in the business-building process the better.  As mentioned in earlier posts there are some key assumptions we all make about our customers when we start a new company and its incumbent upon founders to get out and test these assumptionswith real customers – as soon as possible.

Removing adoption risk by getting out in front of customers and experts and talking through their pain, and learning about the competition and market dynamics is one of the fastest and cheapest activities we can do to remove risk from our startup – all the more reason to do it first!

Product Risk

This is pretty much the opposite reciprocal of adoption risk.  What good is a hungry market full of early-adopters if you can’t deliver them a decent and desirable product to use. The key questions here are things like: “Can it be made?”(i.e. is it feasible), and at minimum, “Does it adequately kill the customer’s pain or create a worthy gain (i.e. is it desirable)”.

These are the types of risk that can be mitigated significantly by the use of prototyping.

Testing desirability is Job 1 in this category.  Like adoption risk – it tends to be fast and inexpensive to arrive at high-level answers to questions about adoption.  You might not get all of the information you need with a low-fidelity prototype, but you will certainly get a long way in understanding if a customer will buy the finished product – even if they need to squint their eyes a bit to imagine what the final version might look/behave like in the wild.  The key here is to develop a prototype with just enough detail to gain clarity of whatever question you need answered – and no more.  (More will be written about this topic in future blog posts)

Feasibility is a different story and often a bit harder to test.   The basic idea is that in order to be feasible, a product can’t be based on magic at its core. Cold fusion is great – and no doubt there is a market for it – but is it possible to actually deliver its value in a product?

Feasibility can be validated by speaking with subject matter and technical experts early on in the development of your business.  At worst, an early conversation about technical feasibility might let you know what constraints you should keep in mind as you go out in the world to test desirability of a possible offer.

On the flip side, whale staplers are totally a totally feasible product to deliver on, but are they desirable to a large enough segment to create a high-growth business?

This question brings is to…

Business Viability Risk

In a nutshell, a business’ viability is a measure of whether or not the venture can make money.  As we all recognize these days, “viability” is no longer a synonym for profitability or revenue. In some cases all it takes for a business to be viable is attracting a critical mass users to its platform (see Instragram) or achieving proof-of-concept for its technology so that it can be acquired by a strategic buyer (as is the case with many of medical technology companies).

Today, there are many business are “built to sell” and not “built to grow”.  We will not argue in favor of one model over another, but regardless of the model and metric one uses to assess viability, it is very likely that that some of the core assumptions underlying the business model can be tested early and cheaply!

If you are starting a business that is built to sell, get out and learn about the metrics and proof points that drive desirability in your chosen sector.  Is it the number of eyeballs on your website or app, your revenue, number of repeat users, profit, achieving technical milestones, a certain regulatory approval? Learning which of these create compelling value for your ultimate customer is something that is possible to learn as early as the other elements of desirability mentioned above.

If you are starting a company that is built to grow, evaluating the strength of your business model should quickly follow your tests of desirability and feasibility (often its hard to evaluate “viability” until you know exactly what you are building and for whom). Viability should exist at the “unit level” as well as at scale.

Tools you can you to test viability range from conversations with experts to the good-old excel model.  The latter is a great tool with which to run  “if, then” scenarios.  Don’t simply use your pro forma and cash flow statement to highlight what the future for your successful company might look like, use them test different scenarios and sensitivities related to your business model.  Think about it like a financial simulator.  The more honest you are about your inputs in these simulations the more valuable your outputs will be in helping you asses viability risk.

Execution Risk

Finally we come to execution risk. It is exactly what it sounds like – can you and your team actually deliver?  This one is the most difficult to “test”, and is more something that needs to be demonstrated through action.

One way to mitigate execution risk is to have people on your team that are experienced operators with a track record of accomplishment and “getting stuff done”.  Ideally they will have done this in the context of another growth business, but a demonstrated track record at a larger organization within the domain is a close-second. Having an experienced team will instill confidence in outsider go along way in alleviating many of the typical concerns that investors will have about a startup’s ability to realize its business model.

Though tricky to test, it is possible (and recommended) to speak to potential investors about the gaps they may see in your management team and what execution-proof-points they would require before making an investment.  This will at least give you some guidance on the gaps that may exist, and investors may even provide recommendations and connections to people that can help you fill them.  Worst-case scenario – its good to be aware of the market’s concerns, and have thoughts prepared to address them when they come-up during sales and investment presentations.

So as you can tell – there is a common theme forming on this blog.  Get out and test ideas in the wild!  The value of your business and your limited time depend on it!

Forming Startups with MBA Classmates

One of my students sent me this HBR blog (recommending that business school classmates not start companies together) and asked for my thoughts.  I thought I would share them here – in case others are interested:

The Article: http://blogs.hbr.org/2013/11/dont-start-a-company-…

My Opinion:

I think that many of the the points made in this blog are valid – but I don’t think that they are exclusive to business school.

People start companies all of the time with individuals whom they only know along a single dimension (friends, co-workers, family etc.). I would argue that all of these situations, in one form or another, expose you to many of the same risks that the author points out about b-school classmates.  Starting a business with someone is much like getting married.  And like marriage you would ideally want to get a sense for multiple dimensions of that individual before you commit to a long-term, risk-sharing and financially impactful relationship (values, financial views, work-life balance preferences, acceptable outcomes, hiring others, strategic direction etc.)

That being said – in any of these situations, I think that its important to talk about these important things early on in the process of starting a business. Get things like personal risk profiles, biases, preferences for exit, company culture, individual financial situations out on the table. The sooner that this tough (and often awkward) stuff is discussed the better.  Outputs and understandings can then be woven into founders agreements and other charter docs that help prevent issues from arising later on – or if they do – have clearer outcomes.

Its better to have tough conversations about important topics early (even though they may be a bit uncomfortable and seem like a ways-off from being an issue).  The alternative could mean the demise of the company, friendships and even family ties.

David

MBAs in the Valley

A Kellogg student recently emailed me the following question: “I subscribe to Quora’s weekly digest and came across the question: “Are top MBAs looked down upon in Silicon Valley? If so, why?” Most responses said  they were. What are your thoughts, Professor?”

Here is the response I gave:

On the question you posed on how MBAs are viewed in the Valley, I think some of the responses on Quora were quite insightful. I would say, when I was in the Bay Area scene anyway (mid-90’s through 2007), there may have been the perception that fancy MBA’s (i.e. top five or so schools) will:

  • Be really expensive (“Hey, maybe I hire two associates from Cal undergrad instead!”)
  • Be hard to manage — they’ll posture that they know it already, they won’t take feedback well, etc.
  • Bother you within 9 mo. in the new job about getting promoted
  • Will not offer a pointed perspective—instead will try to cover all the bases, hiding behind jargon, decks and frameworks. (“And another way of looking at this is…” Meanwhile, Rome is burning…)

Did I encounter any of the above while in the Valley, working with MBAs?” Yes I did, BUT, getting an MBA from a top school says a lot – about motivation, smarts, etc. – and I definitely hired a lot of sharp MBAs over the years (and hired plenty of Kellogg MBAs because of their well-earned reputation for having a broad-based skill set and working well in teams). Nonetheless, I must admit that I was on a watch-out for these tendencies.

My advice to you fancy MBA types (and remember, I too was one back in the late 40’s) is to counter this perception by:

  • Showing humility. Don’t act like you know it all. You don’t. I certainly don’t—I’m still trying to figure out the questions. Bo don’t. Jack Welch don’t. Even Buddha don’t—well maybe Buddha do…So don’t brag and self-promote. People will realize you’re good quite quickly. Every kid in high school knows who the smart kids are…the same goes in business.
  • Listening well. This goes hand-in-hand with humility. Don’t act like you’re listening when in fact you’re just re-loading. Don’t do the “yeah-but” on people when they’re talking. Just listen openly and actively, asking clarifying questions along the way. Try not to strive for congruence too soon– just listen and mull over what you’re hearing without responding with a declarative statement. Good listening is so rare! Those who do it well enter some sort of kingdom of goodness.
  • Placing an emphasis on learning. You do this by reaching out to others, listening and asking questions. (Use lunch as a time to ask people out from other departments to understand their perspectives and learn about their priorities.) You also do this by digging into the guts of the business. Learn how to do data pulls in the BI Tool. Comb over the 10K, the balance sheet and the P&L and know the latter at a line item level. Dig into the secondary data — Comscore/Forrester/Nielsen, etc. Examine the conversion funnel in Omniture. Listen in on analyst calls. Very few will do these things. You will.
  • Leading by example. Be of service to the business. Put your head down and do stuff that needs doing–don’t say stuff. Always move toward action. I love the word “Activate!” I think of “Wonder twin powers, activate!” (Sorry—old person cartoon reference.) Your good work will speak for itself. Every once in a while your personal brand may need a little nudge in terms of brand visibility, but not as often as you’d think…
  • Having a point of view that’s measured and considered, express it succinctly, then stop talking.

With that, I’ll stop talking.

Carter

 

 

The Starting Point : The Science of New Venture Creation 

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(Photo: State Library of Victoria)

The way that we think about new venture creation in our class at the Kellogg School of Management is a lot like basic science.

In chemistry for instance, researchers begin with a series of hypotheses (educated guesses) about what they believe to be scientific truths (Chemical A will react with Chemical B in the following way and will result in the best drug for male pattern baldness ever!).  Our scientist then designs and runs a series of experiments to discover if his/her hypotheses are in fact…well…”fact”.  Based on the outcome of the experiment, the researcher will either proceed down the originally-planned development path to hair-growth-glory, or create revised hypotheses informed by the learnings from the last round of experiments. This cycle then repeats itself until either the researcher discovers a desirable, evidence-based answer (maybe the one they are looking for, but sometimes not*), or decides to throw in the towel and try again down the road.

Our belief is that effective new venture discovery (the fuzzy front–end of creating a new business) is very much the same process as scientific discovery.

Startups often begin as a bunch of hypotheses about what an entrepreneur believes to be a “commercial truth”. – a hypothesis about a certain customer problem, an idea for a solution, a belief about how money will be made, how users will be reached etc.  The issue is that few first-time entrepreneurs recognize that the things they believe to be truths are nothing more than guesses or assumptions, often laden with biases from a founder’s own personal experiences, but not necessarily indicative of the market at large.  As a result – much like in science, the best way to validate the core hypotheses behind a new venture is to systematically design and execute a series of experiments to help learn the real commercial truths around a venture.  And just like in the case of our chemist, depending on the outcome of our experiments, the entrepreneur will either revise the venture’s underlying hypothesis to reflect what has been learned as a result of the testing (and repeat the cycle again…and again) or, with singed eyebrow, decide that the safest place might be away from the Bunsen burner.

What’s that you say?  “What types of experiments can an entrepreneur run to discover commercial truths early on in the process of creating a new venture?”  Glad you asked!  Future posts on BNT will cover this topic in detail – so stay tuned!

– David + Carter

 * This is a key point – particularly in venturing.  Often, it’s unexpected discoveries in building a new business model that generate the most valuable insights for a startup.  Examples include lots of billion-dollar companies we know today: Groupon, Google, Facebook – even blockbuster drugs like Propecia (coming full circle on the pattern baldness reference) began their life as ventures focused on different problems then what they evolved into.  It was the process of experimentation, iteration, and discovery that let these companies to their eventual “Eureka!” moments where problem, solution, and business model all gelled together.

For more on this topic check out the blogs of some of these luminaries of Customer Development and Lean Startup.

“Proprioception”

Carter here.

In the spirit of SNL’s Deep Thoughts by Jack Handy, I’d like to share an interesting word I just ran across—“proprioception.” Literally, it means an awareness of the position of one’s own body. Figuratively, it can beg an examination of some worthwhile questions such as: “Am I self-aware right now? Am I well-oriented to the situational context in which I find myself? Am I in touch with what I’m projecting to others?” The word makes me think of being both the participant & observer simultaneously—having a healthy detachment from the moment, as I’m experiencing the moment. (This is stuff the Buddhists and Stoics advise us to do to maintain our equanimity.) Huh?—earth to Carter—what does this have to do with entrepreneurship? Here’s just one example of its application…In my venture capital job, on quite a few occasions, I’m at the receiving end of a pitch where entrepreneurs deliver a Phil Spector Wall-of-Sound monolog, not allowing me the opportunity to ask questions about their venture and explore ideas with them. Pitching is a dance and they don’t include me as their partner. In other words, the entrepreneur wants so badly to deliver their value proposition message and communicate why I should invest, that they lose their sense of proprioception.

Isn’t that a great word?

P.S. Note the Resources+ Tools section, which we’ve loaded up and will discuss more in days to come…

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