why fighter pilots run startups 090511

Why Fighter Pilots Run Startups

Steve BlankStanford - School of Engineering

U.C. Berkeley - Haas School Of Business

www.steveblank.comTwitter: sgblank

I Write a Blog www.steveblank.com

This Talk is Based OnBusiness Model GenerationFour Steps to the Epiphany

The Lean Startup

The Life of an Entrepreneur

Top Gun dogfight scene

First -What’s A Startup?

Six Types of Startups

Startup

Lifestyle Startups Work to Live their Passion

• Serve known customer with known product

• Get paid for their passion

Small BusinessStartup

Small Business StartupsWork to Feed the Family

• Serve known customer with known product

• Feed the family


Exit Criteria- Business Model found- Profitable business- Existing team< €100K in revenue

Small Business StartupsWork to Feed the Family

• known customer known product

• Feed the family


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

Small Business Startups

• 5.7 million small businesses in the U.S. <500 employees

• 99.7% of all companies

• ~ 50% of total U.S. workershttp://www.sba.gov/advo/stats/sbfaq.pdf

ScalableStartup

Large Company

Scalable Startup

Goal is to solve for: unknown customer and

unknown features

Search

ScalableStartup

Large Company

Exit Criteria- Business model found- Total Available Market > €300m- Can grow to €50/year

Scalable StartupBorn to Be Big

Search Execute

ScalableStartup

Large Company

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

Scalable StartupBorn to Be Big

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

Search Execute

ScalableStartup

Large CompanyTransition

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

The Transition – Founders Leave

BuildSearch Execute

ScalableStartup

€3 to 30M Acquisition

Buyable StartupBorn to Be Sold

Goal is to solve for: Internet, Mobile, Gaming Apps

Search Sell

ScalableStartup

€3 to e0M Acquisition

Buyable Startup

Goal is to solve for: Internet and Mobile Apps

Search Sell

Sell to larger company

ScalableStartup

Large Company

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

What’s A Startup?

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

Search Execute


ScalableStartup

Large Company

Venture Firms Invest in Scalable and Buyable Startups

Transition Large Company

ScalableStartup

Sustaining Innovation

• Existing Market / Known

customer• Known product feature needs

Large Company Sustaining InnovationInnovate or Evaporate

Large Company Disruptive Innovation

New Division Transition Large

Company

Disruptive Innovation

• New Market• New tech, customers, channels

Large Company Disruptive Innovation

New Division Transition Large

Company

Disruptive Innovation• Build• Partner• Acquire - IP - Talent - Product - Customers - Business

Large Non-Profit

Social Startup

Social Entrepreneurship Startups

• Solve pressing social problems• Social Enterprise: Profitable• Social Innovation: New Strategies

Search Versus Execution

Why Accountants Don’t Run Startups

ScalableStartup


Searching for the Business Model- customer needs/product features i.e. Product/Market fit- Found by founders, not employees- Repeatable sales model

The Search for the Business Model

Startups Search and Pivot

ScalableStartup

Large Company

Transition

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

Executing a known Business Model- Known customers, and product- Profitable~ 150 people

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

Startups Search, Companies Execute

ScalableStartup

LargeCompany

Transition

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

Metrics Versus Accounting

The Execution of the Business Model

ScalableStartup

LargeCompanyTransition

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

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


Metrics Versus Accounting


ScalableStartup


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


Customer Validation Versus Sales

ScalableStartup


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

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


Customer Validation Versus Sales

ScalableStartup



Engineering Versus Agile Development

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

ScalableStartup


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


Engineering Versus Agile Development

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

ScalableStartup


Business Plan- Plan describes “knowns”- Known features for line extensions- Known customers/markets- Known business model


Startups Model, Companies Plan

ScalableStartup


Business Model- Unknown customer needs- Unknown feature set- Unknown business model- Model found by iteration


Startups Model, Companies Plan


- Plan describes “knowns”- Known features for line extensions- Known customers/markets- Known business model

All I Need to Do is Execute the Plan

Product Introduction Model

Concept/Seed

Round

Product Dev.

Alpha/Beta Test

Launch/1st Ship

Product Introduction Model

Concept/Seed

Round

Product Dev.

Alpha/Beta Test

Launch/1st Ship

The Leading Cause of Startup Death

Product Introduction Model:Two Implicit Assumptions

Customer Problem: known

Product Features: known

Concept/Seed

Round

Product Dev.

Alpha/Beta Test

Launch/1st Ship

Tradition – Hire Marketing

Concept/Seed Round

Product Dev.

Alpha/Beta Test

Launch/1st Ship

- Create Marcom Materials- Create Positioning

- Hire PR Agency- Early Buzz

- Create Demand- Launch Event- “Branding”

Marketing

Tradition – Hire Sales

Concept/Seed

Round

Product Dev.

Alpha/Beta Test

Launch/1st Ship




• Build Sales Organization

Marketing

Sales• Hire Sales VP• Hire 1st Sales Staff

Tradition – Hire Bus Development

Concept Product Dev.

Alpha/Beta Test

Launch/1st Ship




• Hire Sales VP• Pick distribution

Channel

• Build Sales Channel /

Distribution

Marketing

Sales

• Hire First Bus Dev

• Do deals for FCSBusiness Development

Tradition – Hire Engineering

Concept Product Dev.

Alpha/Beta Test

Launch/1st Ship




• Hire Sales VP• Pick distribution

Channel

• Build Sales Channel /

Distribution

Marketing

Sales

• Hire First Bus Dev

• Do deals for FCSBusiness Development

Engineering • Write MRD

• Waterfall • Q/A • Tech Pubs

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

Then why do we have:

• process to manage product development?

Then why do we have:

• process to manage product development?

• no process to manage customer development?

No Business Plan survives first contact with customers

So Search for a Business Model

The Business Model:

Any company can be described in 9 building blocks

CUSTOMER SEGMENTS

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

VALUE PROPOSITIONS

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

CHANNELS

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

CUSTOMER RELATIONSHIPS

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

REVENUE STREAMS

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

revenues?

KEY RESOURCES

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

54

KEY ACTIVITIES

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

KEY PARTNERS

which partners and suppliers leverage your model?

who do you need to rely on?

COST STRUCTURE

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

57images by JAM

customer segments

key partners

cost structure

revenue streams

channels

customer relationships

key activities

key resources

value proposition

Solving For Customer Risk:Customer Development

Get the Hell Out of the Building

Solving For Customer Risk:Customer Development

Get the Hell Out of the Building

Country

Customer Development

Concept/Bus. Plan

Product Dev.

Alpha/Beta Test

Launch/1st Ship

Product Development

Customer Development

CompanyBuilding

CustomerDiscovery

CustomerValidation

Customer Creation

+

• Stop coding, stop selling, start listening

• Test your hypotheses

• Continuous Discovery

Customer Discovery

CustomerDiscovery

CustomerValidation

CompanyBuilding

CustomerCreation

Customer Validation

Customer

Discovery

CustomerValidatio

n

Customer Creation

CompanyBuilding

• Repeatable and scalable business model?

• Passionate earlyvangelists?

• Pivot back to Discovery if no customers

Pivot

The Pivot

• The heart of Customer Development

• Iteration without crisis

• Fast, agile and opportunistic

Pivot Cycle Time Matters

• Speed of cycle minimizes cash needs

• Minimum feature set speeds up cycle time

• Near instantaneous customer feedback drives feature set

The Minimum Viable Product (MVP)

• Smallest feature set that gets you the most …

- orders, learning, feedback, failure…

Pivot ExampleRobotic Weeding

Talked 75 Customers in 8 Weeks

Our initial plan

Confidential

20 interviews, 6 site visits…We got OUR Boots dirty

WeedingVisited two farms in Salinas Valley to better understand problem

Interviewed:• Bolthouse Farms, Large Agri-Industry in Bakersfield• White Farms, Large Peanut farmer in Georgia• REFCO Farms, large grower in Salinas Valley• Rincon Farms, large grower in Salinas Valley• Small Organic Corn/Soy grower in Nebraska• Heirloom Organics, small owner/operator, Santa Cruz Mts• Two small organic farmers at farmers market• Ag Services of Salinas, Fertilizer applicator

MowingInterviewed:• Golf: Stanford Golf course • Parks: Stanford Grounds Supervisor, head of maintenance and

lead operator (has crew of 6)• Toro dealer (large mower manufacturer) • User of back-yard mowing system• Maintenance Services for City of Los Altos• Colony Landscaping (Mowing service for stadiums)

Business Plan Autonomous Vehicles for Mowing & Weeding

We reduce operating cost- Labor reduction- Better utilization of assets (eg mow or weed at nights)- Improved performance (less rework, food safety)

Mowing- Owners of public or commercially used green spaces (e.g. golf courses)- Landscaping service provider

Weeding- Farmers with manual weeding operations

Dealers sell, installs and supports customer

Co. trains dealers, supports dealers

- Mowing Dealers- Ag Dealers

- Innovation- Customer Education- Dealer training

Dealer discount COGS seek a 50-60% Gross MarginHeavy R&D investment

- Dealers (Mowing and Ag)- Vehicle OEMs (John Deere, Toro, Jacobsen, etc)

- Research labs

Asset saleOur revenue stream derives from selling the equipment

Engineers on Autonomous vehicles, GPS, path-planning

Found weeding in organic crops is HUGE problem; 50 - 75% of costs

Crews of 100s-1000

Back-breaking task

(Ilegal) labor harder to get

1-5 weedings per year/field

$250-3,500 per acre and increasing

Food contamination risk

Decision to make – mowing vs weeding

Application If ROI is < 1 yr they will

buy

Labor costs significant?

Autonomous would solve

problem?

TAM

Mowing of large fields

Yes.Professionally

run organizations

Yes Yes Adjusted up toxxx

Weeding in Agriculture

Agri Industry: YES!

Large Growers: Yes

Small Growers: No

YES! for organic crops

They are spending $500/ac!

Not necessarily

Key need is weed vs. crop differentiation

TAM increased to $2.6 B (Total

organic)

Target Market (organic

specialty) 162 M/yr

18%/yr growth

Autonomous vehicles WEEDING

We reduce operating cost- Labor reduction (100 to 1)- Reduced risk of contamination- Mitigate labor availability concerns

- Low density vegetable growers- High density vegetable growers- Thinning operations- Conventional vegetables

Dealers sell, installs and supports customer

Co. trains dealers, supports dealers

- Ag Dealers- Ag Service providers


Dealer discount COGS seek a 50-60% Gross MarginHeavy R&D investment

- Ag Dealers- Ag Service providers

- Research labs

Asset saleOur revenue stream derives from selling the equipment

Engineers on Machine VisionTwo problems:- Identification- Elimination

1 Week – 1 CarrotBot

Confidential

CARROTBOT

Machine Vision data collection platform Monochrome & Color

Cameras Laser-line sweep

(depth measurement)

Encoders (position/velocity)

Onboard data acquisition & power

CarrotBot 1.0

The Business Plan Canvas Updated

• Research Labs

• Equipment Manufacturers

• Distribution Network

• Service Providers

• Technology Design

• Marketing• Demo and

customer feedback

• Cost Reduction

• Remove labor force pains

• Eliminate bio-waste hazards

• IP – Patents• Video

Classifier Files

• Robust Technology

• Farming conventions.

• Demo, demo, and demo!!

• Proximity is paramount

• Organic Farmers

• Weeding Service Providers

• Conventional Farmers

• Dealers• Direct Service• Indirect

Service• … then

Dealers• Asset Sale• Direct Service

with equipment rental

• … then Asset Sale

Value-Driven

Visit Highlights

Above: Organic Carrots, 7wks. Top right: Conventional carrotsBottom Right: Very weedy. Will require multiple passes of hand weeding

Visit Highlights

Carrot vs. WeedsDue to small root systems, carrots have no chance against

weeds

Visit Highlights

Organic Broccoli, closely cultivated. Weeds close to plants are hand-picked

Visit Highlights

State of the Art in Weeding Technology for Organic Crops

Customer Hypothesis

Hypothesis Confirmed• Growers interested in own

equipment • Industrial (10,000s of acres) • Large (1,000s of acres)• Willing to pay $100k for one

unit

• Smaller growers (100s of acres) usually subcontract the labor services or rent equipment

• All purchases through local dealers• Customer service is essential

Pre-Test

Post-Test

Customer Map #1 – Industrial Growers

Example: Bolthouse Farms – Large Industrial Carrot Producer – 8K acres/yr

• Equipment Operator

• Director, Ag Technology

• Justin Grove, interviewed

• VP, Growing Operations

• CFO, CEO (Jeff Dunn)

• Local Farm Mgr• Cliff Kirkpatrick, visited

Equipment Operator

Cliff, Farm Mgr

Customer Map #2 – Service Providers

Example: Ag Services – Service Provider, Salinas Valley

• Equipment Operator

• Service Mgr

• ?? (service mgr’s boss)

Me (left), Marty (middle, Service Mgr), Doug (right, Grower)

• Grower


• Research Labs

• Equipment Manufacturers





customer feedback

• Cost Reduction




Classifier Files





• Mid/Large Organic Farmers

• Agricultural corporations


• Mid/Large Conventional Farmers

• Direct Service• Indirect

Service• … then

Dealers

• Direct Service with equipment rental

• ($1,500/d; 120d/yr )• Low density:

$1,500/d• High density:

$6,000/d

Value-Driven

World Ag Expo interviews:the need is real and wide spread

• 10+ interviews at show– Everyone confirmed the need– Robocrop, UK based, crude

competitor sells for $171 K

• Revenue Stream– Mid to small growers prefer a

service– Large growers prefer to buy, but

OK with service until technology is proven

– Charging for labor cost saved is OK, as we provide other benefits (food safety, labor availability)

Confidential


• Research Labs

• Equipment Manufacturer



• 2 or 3 Key Farms



customer feedback

• Cost Reduction




Classifier Files





• Mid/Large Organic Farmers

• Agricultural corporations


• Mid/Large Conventional Farmers

• Direct Service• Indirect

Service• … then

Dealers

• Direct Service with equipment rental

• Low density: $1,500/d

• High density: $6,000/d

Value-Driven• R&D• Bill of Materials• Training &

Service• Sales

Autonomous weeding - Final

We reduce operating cost- Labor reduction (100 to 1)- Reduced risk of contamination- Mitigate labor availability concerns

- Low density vegetable growers- High density vegetable growers- Thinning operations- Conventional vegetables

Direct- Provide high quality service at competitive price

Direct - Alliance with service providers- Eventually sell through dealers


Costs for service provisionCOGS seek a 50-60% Gross MarginHeavy R&D investment

- Ag Service providers

- Research Institutes (eg UC Davis, Laser Zentrum Hannover)

- 3-4 key farms

Service provision- Charge by the acre with modifier according to weed density - Eventually move to asset sale

Engineers on Machine VisionTwo problems:- Identification- Elimination

Why Fighter Pilots Run Startups

No Surprises in an Airline

ScalableStartup


Scheduled Airline

• Scheduled• Routine• Burn rate preplanned

Air-Air Combat is Constant Surprise

ScalableStartup


Air-Air Combat

• Uncertain environment • Rapid, unanticipated changes • Changes lead to disorientation• Burn rate (time, fuel, bullets,

$’s) limits window of opportunity

Observe, Orient, Decide and Act:OODA Loop

John Boyd

Observe, Orient, Decide and Act:OODA Loop

• Agility requires continuous interactions with the environment

• Winning requires constant assessment of change and ways to mitigate risk

• Iterating faster than competitors yields substantial advantage

= Victory

92

Boyd’s OODA Loop

FeedForward

Observations Decision(Hypothesis)

Action(Test)

CulturalTraditions

GeneticHeritage

NewInformation Previous

Experience

Analyses &Synthesis

FeedForward

FeedForward

ImplicitGuidance& Control

ImplicitGuidance& Control

InteractionWith

EnvironmentInteraction w/Environment

OutsideInformation

UnfoldingCircumstances

Observe Orient Decide Act

Customer Development = OODA Loop

Observe Orient ActDecide

OODA Loop is Not an Intelligence Test

• It’s about Agility

• It’s about Resilience

• It’s not about winning arguments inside the company

• Fighters pilots vs. military intelligence

Am I Fighter Pilot For a Startup?

Am I an Entrepreneur?Startup Personal Checklist

• Are you comfortable with:– Chaos– Uncertainty

• Are you:– Curious– Resilient– Agile– Passionate– Driven– Articulate– Tenacious

Entrepreneurship Your Role in a Startup

• Founder• Co-founder• Early Employee• Late Employee

They don’t require the same risk/personality profile

Decreasing chaos/reward

One candidate got a C in macroeconomics. “That’s troubling to me,” Ms. Mayer says. “Good students

are good at all things.”

Marissa MayerGoogle

February 28, 2009

The “Good Student”

• Will go to work for Google, Microsoft, NokiaIBM or Apple

• Successful tech entrepreneurs and grades have at best zero correlation

The Following People Would Never Have Been Hired by Marissa Mayer and Google

Thanks

www.steveblank.com

why fighter pilots run startups 090511

Education

business model customer

scalable business model

known product

larger company

search executea startup

product customers

familyknown customer

pivotthe search