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The Future of Corporate Innovation and Entrepreneurship by steveblank Almost every large company understands it needs to build an organization that deals with the ever-increasing external forces of continuous disruption, the need for continuous innovation, globalization and regulation. But there is no standard strategy and structure for creating corporate innovation. We outline the strategy problem in this post and will propose some specific organizational suggestions in follow-on posts. ---- I’m sitting at the ranch with Alexander Osterwalder, Henry Chesbrough and Andre Marquis listening to them recount their lessons-learned consulting for some of the world’s largest corporations. I offered what I just learned from spending a day at the ranch with the R&D group of a $100 billion corporation along with the insights my Startup Owners Manual co-author Bob Dorf who has several Fortune 100 clients. (Full disclosure. I’m recovering from a reading spree of Chandlers Strategy and Structure, Gary Hamel’s The Future of Management and The Other Side of Innovation by Trimble and Govindarajan, Henry Chesbrough’s Open Innovation, as well as The Innovator's DNA from Dyer, Gregersen and Christensen. So some or most of this post might be that I’ve overdosed on business books for the month.) Collectively we’re beginning to see a pattern and we want to offer some concrete suggestions about Corporate Management and Innovation strategy and the structural(i.e. organizational) changes corporations need to make. If we’re right, it will give 21st companies a way to deal with innovation – both sustaining and disruptive – as a normal course of business rather than by exception or crisis. Companies will be organized around Continuous Innovation. Strategy and Structure in the 21st CenturyWhile companies have existed for the last 400 years, their modern form is less than 150 years old. In the U.S. the growth of railroads, telegraph, meat packers, steel and industrial equipment forced companies to deal with the strategies of how to organize a complex organization. In turn, these new strategies drove the need for companies to bestructured around functions (manufacturing, purchasing, sales, etc.) 90 years ago companies faced new strategic pressures as physical distances in the United States limited the reach of day-to-day hands-on management. In addition, firms found themselves now managing diverse product lines. In response, another structuralshift in corporate organization occurred. In the 1920’s companies restructured from monolithic functional organizations (sales, marketing, manufacturing, purchasing, etc.) and reorganized into operating divisions (by product, territory, brand, etc.) each with its own profit and loss responsibility. This strategy-to-structure shift from functional organizations to operating divisions was led by DuPont and popularized by General Motors and quickly followed by Standard Oil and Sears. General Motors Organization Chart ~1925 In each case, whether it was organizing by functions or organizing by operating divisions, the diagram we drew for management was an organization chart. Invented in 1854 by Daniel McCallum, superintendent of the New York and Erie railroad, the org chart became the organizing tool for how to think about strategy and structure.   It allowed companies to visually show command and control hierarchies – who’s responsible, what they are responsible for and who they manage underneath them, and report to above them.  (The irony is that while the org chart may have been new for companies, the hierarchies it described paralleled military organization and had been around since the Roman Legion.) While org charts provided the “who” of a business, companies were missing a way to visualize the “how” of a business. In the 1990’s Strategy Maps provided the “How.” Evolved from Balanced Scorecards by Kaplan and Norton, Strategy Maps are a visual representation of an organization’s strategy. Strategy Maps are a tool to translate the strategy into specific actions and objectives to measure the progress of how the strategy gets implemented (but offer no help on how to create new strategies.). Strategy Maps from Robert Kaplan By the 21st century, organizations still lacked a tool to create and formulate new strategies.  Enter the Business Model Canvas. The canvas describes the rationale of how an organization creates, delivers, and captures value (economic, social, or other forms of value). The canvas ties together the “who and how” and provides the “why”. External to the canvas are the environmental influences (industry forces, market forces, key trends and macro-economic forces.)  With the business model canvas in hand, we can now approach rethinking corporate innovation strategy and structure. Management Innovation in the 21st CorporationExisting companies and their operating divisions implement known business models. Using the business model canvas, they can draw how their organization is creating, delivering, and capturing value. A business model for an existing company or division is not filled with hypotheses, it is filled with a series of facts. Operating divisions executethe known business model. Plans and processes are in place, and rules, job specifications, revenue, profit and margin goals have been set. Forecasts can be based on a series of known conditions. Inside existing companies and divisions, the business model canvas is used as a tool to implement and continuously improve existing business models incrementally. This might include new products, markets or acquisitions. A New Strategy for Entrepreneurship in the 21st Corporation Yet, simply focusing on improving existing business models is not enough anymore. To assure their survival and produce satisfying growth, corporations need to invent new business models. This challenge requires entirely new organizational structures and skills. This is not unlike the challenges corporations were facing in the 1920's. Companies then found that their existing strategy and structures (organizations) were inadequate to respond to a changing world. We believe that the solution for companies today is to realize that what they are facing is a strategy and structure problem, common to all companies. The video below (from Strategyzer.com) emphasizes that companies will need to have an organization that can do two things at the same time:  executing and improving existing models and inventing  - new and disruptive - business models. We propose that corporations equipped for the challenges of the 21st century think of innovation as a sliding scale between execution and search. For companies to survive in the 21st century they need to continually create a new set of businesses, by inventing new business models. Most of these new businesses need to be created outside of the existing business units. The exact form of the new business models is not known at the beginning. It only emerges after an intense business model design and search activity based on the customer development process. Companies will have to maintain a portfolio of new business model initiatives, not unlike a venture capital firm, and they will have to accept that maybe only 1 out 10 initiatives might succeed. To develop this new portfolio, companies need to provide a stable innovation funding mechanism for new business creation, one that is simply thought of as a cost of doing business Many of the operating divisions can and should provide resources to the new businesses inside the company We need a new organizational structure to manage the creation of new businesses and to coordinate the sharing of business model resources. Some of these new businesses might become new resources to the existing operating units in the company or they could grow into becoming the new profit generating business units of the company’s future. In future blog posts we’ll propose a specific structure for Entrepreneurship andContinuous Innovation in the 21st Corporation. Lessons Learned Continuous disruption will be the norm for corporations in the 21st century Continuous innovation - in the form of new businesses-  will be the path for long term corporate survival Current corporate organizational models are inadequate for the task We will propose some alternatives steveblank | December 3, 2012 at 6:00 am | Categories: Big Companies versus Startups: Durant versus Sloan, Business Model versus Business Plan, Customer Development | URL:http://wp.me/prGQZ-3m5

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The Lean LaunchPad at Stanford – The Final Presentations

Posted on May 10, 2011 by steveblank

The Stanford Lean LaunchPad class was an experiment in a new model of teaching startup entrepreneurship. This last post – part nine – highlights the final team presentations. Parts one through eight, the class lectures, are here, Guide for our mentors is here. Syllabus is here.

This is the End
Class lectures were over last week, but most teams kept up the mad rush to talk to even more customers and further refine their products. Now they were standing in front of us to give their final presentations. They had all worked hard. Teams spent an average of 50 to 100 hours a week on their companies, interviewed 50+ customers and surveyed hundreds (in some cases thousands) more.

While the slide presentations of each team are interesting to look at, that’s actually the sideshow. What really matters are the business model canvas diagrams in the body and appendix of each presentation. These diagrams are the visual representation of the how and the what a team learned in the class – how they tested their hypotheses by getting out of the building using the Customer Development process and what they learned about each part of their business model.

By comparing the changes the teams made week-to-week-week in their business model canvas diagrams, you’ll see the dynamics of entrepreneurship, as they iterate and Pivot over time. We believe these are the first visual representations of learning over time.

Team Agora

If you can’t see the Agora slides above, click here.

Team Autonomow

If you can’t see the Autonomow slides above, click here.
(p.s. they’re going to make a company out of this class project, and they’re hiring engineers.)

Team Blink Traffic

If you can’t see the Blink traffic slides above, click here.

Team D.C. Veritas

If you can’t see the D.C. Veritas slides above, click here.

Team Mammoptics

If you can’t see the Mammoptics slides above, click here.

Team OurCrave

If you can’t see the OurCrave slides above, click here.

Team PersonalLibraries

If you can’t see the PersonalLibraries slides above, click here.

Team PowerBlocks

If you can’t see the PowerBlocks slides above, click here.

Team Voci.us

If you can’t see the Voci.us slides above, click here.

———

Why Did We Teach This Class?Many entrepreneurship courses focus on teaching students “how to write a business plan.” Others emphasize how to build a product. We believe the former is simply wrong and the later insufficient.

Business plans are fine for large companies where there is an existing market, existing product and existing customers, but in a startup all of these elements are unknown and the process of discovering them is filled with rapidly changing assumptions. Experienced entrepreneurs realize that no business plan survives first contact with customers. So our goal was to teach something actually useful in the lives of founders.

Building a product is a critical part of a startup, but just implementing build, measure, learn without a framework to understand customers, channel, pricing, etc. is just another engineering process, not building a business. In the real world a startup is about the search for a business model or more accurately, startups are a temporary organization designed to search for a scalable and repeatable business model. Therefore we developed a class to teach students how to think about all the parts of building a business, not just the product.

There was no single class to teach aspiring entrepreneurs all the skills involved in searching for a business model (business model design, customer and agile development, design thinking, etc.) in one quarter. The Lean LaunchPad was designed to fill that void.

What’s Different About the Class?The Lean LaunchPad class was built around the business model / customer development / agile development solution stack. Students started by mapping their assumptions (their business model) and then each week they tested these hypotheses with customers and partners outside in the field (customer development) and used an iterative and incremental development methodology (agile development) to build the product.

The students were challenged to get users, orders, customers, etc. (and if a web-based product, a minimum feature set) all delivered in 8 weeks. Our goal was to get students out of the building to test each of the nine parts of their business model, understand which of their assumptions were wrong, make adjustments and continue to iterate based on what they learned.  They learned first-hand that faulty assumptions were not a crisis, but a learning event called a pivot —an opportunity to change the business model.

What Surprised Us?

1. The combination of the Business Model Canvas and the Customer Development process was an extremely efficient template for the students to follow – even more than we expected.
2. It drove a hyper-accelerated learning process which led the students to a “information dense” set of conclusions. (Translation: they learned a lot more, in a shorter period of time than in any other entrepreneurship course we’ve ever taught or seen.)
3. The process worked for all types of startups – not just web software but from a diverse set of industries – wind turbines, autonomous vehicles and medical devices.
4. Insisting that the students keep a weekly blog of their customer development activities gave us insight into their progress in powerful and unexpected ways. (Much more on this in subsequent blog posts.)

What Would We Change?

1. In this first offering of the Lean Launchpad class we let students sign up without being part of a team. In hindsight this wasted at least a week of class time. Next year we’ll have the teams form before class starts. We’ll hold a mixer before the semester starts so students can meet each other and form teams. Then we’ll interview teams for admission to the class.
2. Make Market Size estimates (TAM, SAM, addressable) part of Week 2 hypotheses
3. Show examples of a multi-sided market (a la Google) in Week 3 or 4 lectures.
4. Be more explicit about final deliverables; if you’re a physical product you must show us a costed bill of materials and a prototype. If you’re a web product you need to build it and have customers using it.
5. Teach the channel lecture (currently week 5) before the demand creation lecture (currently week 4.)
6. Have teams draw the diagram of “customer flow” in week 3 and payment flowsin week 6.
7. Have teams draw the diagram of a finance and operations timeline in week 9.
8. Find a way to grade team dynamics – so we can really tell who works well together and who doesn’t.
9. Video final presentations and post to the web. (We couldn’t get someone in time this year)

It Takes a VillageWhile I authored these blog posts, the class was truly a team project. Jon Feiber of Mohr Davidow Ventures and Ann Miura-Ko of Floodgate co-taught the class with me (with Alexander Osterwalder as a guest lecturer.) Thomas Haymore was our great teaching assistant. We were lucky to get a team of 25 mentors (VC’s and entrepreneurs) who selflessly volunteered their time to help coach the teams. Of course, a huge thanks to the 39 Stanford students who suffered through the 1.0 version of the class. And finally special thanks to the Stanford Technology Ventures Program; Tom Byers, Kathy Eisenhardt, Tina Selig for giving us the opportunity to experiment in course design.

E245, the Lean LaunchPad will be offered again next Winter.  See you there!

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Filed under: Business Model versus Business Plan, Lean LaunchPad, Teaching

« The LeanLaunch Pad at Stanford – Class 8: Key Resources, Activities and Expense Model

The Lean LaunchPad at Stanford – The Final Presentations « Steve Blank

The Lean LaunchPad at Stanford – The Final Presentations « Steve Blank

Cash is king: 8 tips for optimizing your startup financing strategy - Fortune Finance

Cash is king: 8 tips for optimizing your startup financing strategy

April 26, 2011 10:37 am

How startup CEOs can optimize their funding strategies and avoid the common cash management pitfalls.

By David Skok, contributor

All smart CEO's know that they need to focus on building a compelling product, hiring a great team, maximizing sales and making their customers happy. For many first-time CEO's, focusing on these extremely important topics may distract them from another very important task: ensuring that the company can continue to raise funding at ever increasing valuations.

In practice this means that CEO's should:

• Make sure that they understand when their cash runs out
• Understand what milestones have to be achieved to get a higher valuation
• Create the right plan to achieve those milestones in the right timeframe

Managing to your cash out date introduces some very strict time deadlines into the equation, and requires you to examine which specific milestones you plan to achieve before that date.

1. Understand how startups are valued.

To understand why milestones are so important, let's take a look at how startup valuations change over time. First time entrepreneurs should be forgiven for thinking that their valuation will just increase linearly over time since their last round. After all, they have been putting in a ton of late nights and weekends working to make progress. However in practice, things typically don't work that way:

Like other investments, startup valuations are based on a calculation of risk and reward. Valuations increase as the level of risk goes down (or as the size of the perceived eventual reward goes up). In practice, risk is not reduced linearly over time, but instead changes in big increments when particular milestones are reached. These milestones could be things like customer traction, the hiring of a strong management team or, in the case of an Internet business, when a monetization strategy is proven to work.

Usually the single biggest way to show that risk is being reduced is to show evidence of increasing traction with paying customers. If a significant number of customers are willing to pay for a product, that tells an investor many positive things:

• The company has reached product/market fit
• The monetization strategy is working
• The technology works
• The team has shown some ability to execute

However this can be a hard milestone to reach on one round of funding, so investors will look for intermediate milestones that help to tell them that risk is being reduced. Here are some steps along the way to full customer traction that increasingly de-risk a startup:

1. You have shown a wireframe mockup of the application to a significant number of customers and they are willing to talk to investors and tell them that they plan to buy the product when it ships.
2. You have shipped a beta of the product to some customers
3. Your beta customers are testing the product and reporting success
4. You have a large number of free users, and their engagement with the product is high
5. You have sold the product to a small number of paying customers
6. Your paying customers have put the product into production usage, and are reporting success
7. Your customers are coming back and re-ordering, and recommending the product to their friends

Readers of one of my earlier blog posts, Setting the Startup Accelerator Pedal, will know that I like to think of the lifecycle of a startup in three phases. The first phase is the search for product/market fit. Increasing customer traction is the best way to prove to investors that you have reached product/market fit. The second phase is the search for a repeatable and scalable sales model. Reaching this milestone will greatly increase valuation and attract growth stage investors who like to invest in companies that are ready to scale.

Once a startup enters the third phase -- scaling the business, it will usually start to see its valuation increase linearly as a multiple of revenues or profitability.

Other milestones that impact valuation are:

• Hiring a great CEO with a proven track record
• Hiring a strong management team
• Reaching profitability
• Becoming the clear market leader

2. Identify your specific risks

In the early days of a startup, the nature of the risks can vary greatly from one startup to the next. For example, if your startup is promising to deliver a new battery for electric cars that can hold 10x more energy, there is little risk that you will be able to sell the battery. Usually with this kind of startup, the major risk is whether the technology will work.

Another startup might have significant execution risk, and their valuation might increase if they are able to hire proven A player executives that have a track record of great execution. For example, if a company is started by a strong business founder, but requires great software to be developed, that startup would become both more likely to get funding, and a higher valuation, if the business founder were able to attract a proven technical co-founder.

Another type of startup might have shown great customer traction for its free product, but not yet have proven that it can figure out how to charge those customers. (e.g., the early days of Google, Twitter and Facebook.) Proving that it can monetize effectively would increase valuation.

Other startup risks include:

• Team: unproven team. Not clear if they can execute.
• Competitive: crowded marketplace with significant competitors
• Market timing: you're confident about the long term market prospects, but it is not clear when the market will take off.

3. Look for quick ways to litigate risks before fundraising

If your company is about to raise funding, and you have very little time available, there are likely some quick steps you can take to decrease investor risk, and therefore increase your chances of success, plus get a higher valuation.

• The best example of this would be a company looking to raise a Seed or Series A round. Even in this early stage of the business, any proof of customer traction can greatly de-risk your startup and increase valuation. This could be accomplished by sketching wireframes of the application, and showing them to customers. The goal would be to get enough customers to validate that this meets a real need so that they are keen to start using it as soon as it ships, and willing to pay for it. If you were able to walk into an investor meeting with a list of 20 customer that were willing to talk to investors, or had provided you with a written statement to that effect, your chances of getting funded would go up substantially, and your valuation would likely increase.
• In our battery example above, the major risk was technical. A quick way to mitigate the risk (but not totally eliminate it), would be to get the top technical expert in the particular area of science to take a look at the scientific problem you were aiming to solve, and have them render an opinion that this technical approach should work.

4. Either aise enough cash to match the milestones...

When raising a round of funding, identify the next target milestone that you'd like to reach to significantly de-risk the business. Reaching this will enable you to raise an up-round (up-round = round raised at a higher valuation than the post-money of your previous round).

As an example, let's say you have just raised your Seed or Series A round. Your next most important milestone will be ship the product and get enough customers using the product to start to demonstrate evidence that you have product/market fit. The more customers the better, and if they are paying, that is even better.

Once you have identified that milestone, do some hard thinking on how long it will take you to reach that point with some conservatism built in. Then add three months of cushion for the time it will take to meet with investors to get the next round raised.

Knowing that time frame will allow you to figure out how much money to raise.

Remember, company success is far more important than dilution. A common mistake that entrepreneurs make is to focus too heavily on avoiding dilution by raising less money. Another common problem is failure to build in enough cushion for the unexpected. It's pretty common for product development to take longer than planned, or for sales to take longer to ramp than hoped. Raising more cash to provide a cushion is often a very smart way to decrease overall dilution, as it will allow you to optimize the subsequent round.

The diagram below shows where most startups fail. If you are financing to get through this zone and have any level of concern, it pays to take more cash.

5. ... or match your milestones to available cash

If you have already raised cash, you will want to figure out what milestones could be reached before you hit your cash out date. You may well find that your current strategy is targeting a milestone that cannot be completely achieved with the cash you have in hand. If that is the case, you could be setting yourself up for a down round.

The best strategy here is to do one of two things:

1. Reduce your burn rate to allow you to complete the milestone before you run out of cash.
2. Pick a different intermediate milestone, and ask investors if reaching that will allow you to successfully raise an up-round.

As an example of #2, let's go back to our battery company. It may have been working towards shipping the product before reading this post, but now realizes that it doesn't have enough cash runway to achieve that milestone. Investors are going to look at that company as not having de-risked the business.  The solution could be to build a working prototype that proves that the technology risk has been overcome.

As another example, I have been working with several Tech Stars companies that have funding that lasts only three months. For certain types of companies, three months is enough time to build a product and get some customer traction. However for other startups, three months is not enough time to get a minimum viable product built. As are result, they will not be able to show either a finished product, or customer traction. No customer traction will make it very hard to raise their next round. They on getting customers excited enough about wire frame mock ups to tell investors that they would likely purchase the product when it finally ships. Reaching that milestone will be more important than showing a product that is not far enough along to put into customers' hands. Recognizing this can dictate a change in strategy, and help with deciding where to allocate scarce resources.

6. Validate your milestone / valuation targets with investors

Validate with investor friends that the milestones you have picked to accomplish prior to your next fund raising will be good enough to warrant the valuation increase you are hoping for.

7. Focus all energies on reaching those milestones

As a startup CEO, one of your key roles is to provide clarity and focus to the whole organization. The exercise above will bring great clarity to the milestones that the company has to achieve. Executing to these milestones should become the primary focus of the company. Don't allow yourself to get distracted! The cost of failure is usually a down round, but can sometimes result in the closing of the company.

8. Avoid down rounds at all costs

Down rounds are a serious problem for a startup. Word usually gets around that the company is not performing according to expectations, and that can have a significant negative effect on hiring, sales, etc.  The damage to morale can be considerable.

Such deals also bring serious dilution. Not only are you raising money at a lower valuation, but you will also trigger the anti-dilution clause from your previous investment round.

Down rounds happen because you failed to reach the milestones needed to grow into the valuation set by the post-money of your last round. Right after closing that round, your company would have been able to justify that post-money valuation because of the cash sitting in the bank. But as that cash gets spent, your valuation will drop, unless you reach the next milestone (see diagram below).

Most of the time down rounds are caused by a failure to execute. That is why it is so important to plan correctly, and then execute according to plan. This seems so obvious that it doesn't need to be stated. However I have personally seen this problem happen over and over again. When speaking with the CEO's after the fact, most would tell you that, in retrospect, they would have lowered their burn rate, hiring fewer people, to give them the runway they needed to get to the next milestone.

Sometimes down rounds can be caused by raising money at an unrealistic valuation that can't be justified no matter how good the execution. Entrepreneurs who have lived through bubbles understand this well.

It is surprisingly easy to get a high valuation in today's funding environment because of the over supply of investors, and the shortage of supply of really interesting deals. My strong advice to entrepreneurs is to make sure that they are not setting unrealistic expectations for how they will execute, as failure to meet those expectations will come back and bite you in the next round.

If you are going to raise money at a crazy high valuation, ideally make sure it will last you through to cash flow breakeven. If you have to raise money again at a lower valuation, the negative company stigma and dilution usually far outweigh the benefits. You would have been better off to take a lower, more realistic, valuation, and be in a position to do an up round next time round.

To quote Andy Verhalen, one of the most experienced partners in our firm: "The best way to optimize for dilution is not to try to optimize a single round, but rather over the long haul (i.e. the whole series of rounds).  To do this, you want to space your fund-raising after appropriate milestones (with a cushion) so that valuation increases monotonically. Serious dilution occurs in down rounds, not in slightly under-priced rounds."

Conclusion

My goal was to highlight how startup valuations change based on milestones that significantly de-risk the business. Armed with this information, entrepreneurs should talk to investors to understand how they see the risks and milestones. Then plan and manage their business around achieving desired milestones before hitting their cash out date.

The most important takeaways are:

1. Take the time to think this through and build a plan.
2. Make following the plan a very high priority.

I have one final comment: Success at raising money does not equal business success. I have generally found that it is far easier to raise money than it is to get paying customers. If you have just raised a round at a great valuation, don't confuse this with real success in business. That only comes from selling your product to lots of customers!

David Skok is a five time serial entrepreneur turned venture capitalist at Matrix Partners. He blogs here.