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.

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 fill 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…