Startup Weekend: How to Take a Company From Concept to Creation in 54 Hours (15 page)

While our judges always like smooth answers to their questions, try to be honest if you don't know something. It is hard to really get a handle on all of these questions in one weekend. Demonstrate at least that you as a team have the ability and inclination to find out. We want you to accomplish as much as you can in a weekend (or any amount of time), but remember that Sunday night doesn't have to be the end of the project. Rather, those 54 hours can be the beginning of a much bigger experience.

Chapter 4

The Startup Business Model: Adapt, Stay Lean, and Reiterate

Since the beginning of time, people have started businesses. Some caveman somewhere invented the wheel, and then some other caveman thought, “Hey, that's worth something. Bet I can get some berries or a nice tender piece of woolly mammoth in exchange for it.” This went on for thousands of years, even though it wasn't until 1910 that Harvard offered the first MBA degree. But that doesn't mean the MBA didn't add anything. The master's of business administration was the beginning of the formation of a body of knowledge about exactly what it sounds like: how to administer businesses.

People began to formally study a variety of subjects, including marketing, hiring, and finance. They started to look at different tools and models for organizing businesses more effectively. They asked questions like: Who should manage these companies? How much input should employees have? How much inventory should they keep? How do they keep their old customers happy while gaining new customers? How can they adapt to changes in the market?

These were and still are profoundly important questions. However, they are also questions that the MBA curriculum historically addressed for businesses that already existed. They didn't have to be huge corporations, but they had to be somewhat established. Until 30 or 40 years ago, there wasn't really a formula or even much in the way of practical advice for people starting up new businesses. There weren't many books on the subject. And these lessons certainly weren't provided in any kind of classroom setting.

Successful entrepreneurs were considered to be either geniuses or very lucky—people who happen to strike on the right idea at the right time. They didn't have a particular degree or any kind of formal training. They were renegades who saw into the future, knew where the market was headed, realized something about technology or communication or politics, and they pounced. And they probably had to have a little change in their pockets, too—because until recently, very few people found investing in someone else's entrepreneurial ventures to be a particularly good use of their money.

However, the second half of the twentieth century brought the emergence of what we now know as Silicon Valley. It became a home to all sorts of electronics engineering, from radio to television, then on to computers, and now to every kind of high-tech business imaginable. The area also became a sort of laboratory for startup businesses. Because the technology that people were developing there was often brand new, and because so many young people were trying to get their start in the area (many coming out of nearby Stanford University), the region became a center for entrepreneurial activity. And the people who came there didn't necessarily have MBAs or training in larger companies, for that matter. Many were blank slates when it came to an understanding of traditional business practices.

Steven Blank was one such individual who came to Silicon Valley in the late 1970s in the middle of one of the area's booms, during a kind of renaissance for startups. Looking back, he says, “It wasn't that people weren't doing startups when they invented the wheel. It's the combination of technology, entrepreneurship, and risk capital [that become] the ‘modern era of entrepreneurship.’”

Blank went on to work for and launch eight different technology companies, including one called Epiphany that developed software to manage customer relationships; two semiconductor companies; a supercomputer firm; a military intelligence systems supplier; and a video game company. Looking back on his career, he says his “total score” was “two large craters, one dot-com-bubble home run, and several base hits.”

What really determined the ultimate success or failure of these enterprises? It wasn't until after Blank had left most of this behind that he began to think about the patterns that startups and their leaders seemed to follow. Maybe it wasn't all dumb luck that allowed entrepreneurs to succeed. And maybe the successful ones weren't all geniuses.

But why did success for entrepreneurs seem so completely unpredictable? The reason, Blank says, is that everyone was using the business school model. “Everybody made a fatally bad assumption: that startups were simply smaller versions of large companies.” However, according to Blank, “Once you make that assumption, all other bad stuff follows.” That means the individuals who launch them manage their startups like miniature models of large companies. But the difference, according to Blank, is really profound: “Large companies execute known business models; startups search for business models.”

What does that mean? In short, Blank says, “When you execute, you have [tactics]. You have processes. You have business plans. You hire people to execute, and any failure is a failure of competence. But when we're searching, there is no plan; in fact . . . failures are part of the process.” People are particularly uncomfortable with that part about failure. How do you explain that to employees? How do you explain that to your customers? How do you tell them you are looking for a business model? It's not a phrase that inspires confidence.

Having witnessed his own and other startup problems for years, Blank says, “The same issues arose time and again: big company management styles versus entrepreneurs wanting to shoot from the hip; founders versus professional managers; engineering versus marketing; marketing versus sales; missed schedule issues; sales missing the plan, running out of money, [or having to] raise new money.” He says he “began to gain an appreciation of how world-class venture capitalists develop pattern recognition for these common types of problems. ‘Oh yes, company X, they're having problem 343. Here are the six likely ways that it will resolve, with these probabilities.’”

Well, maybe it's not
that
exact. Blank talked to a few of his friends in the venture capital business who acknowledged that they had noticed these problems over the years. They had developed a pretty good sense of which firms were going to succeed and which would fail based on these patterns. “But why didn't you tell us?” Blank asked half-joking. “That's not our job,” they laughed. And it's true, Blank says now; venture capital firms aren't in the habit of teaching entrepreneurs how to do their jobs. But still, he thought,
someone
should. Blank was one of the pioneers of this new curriculum, and we'll get to the important ideas he developed in a moment.

We want our Startup Weekend participants to understand the patterns present in successful startups. We want them to realize that success is not entirely based on luck and that you don't have to be prescient or a genius in order to make a go of entrepreneurship. In this chapter, we'd like to explain something about those patterns and talk about some of the methodologies that have been created in order to make sure that today's entrepreneurs can avoid some of the pitfalls of their entrepreneurial forefathers.

We don't want you to see entrepreneurship as something you try once, and then decide is too much of a risk. We also want to remove some of the risk for you, and part of doing that is offering participants some sense of the most effective entrepreneurship techniques. There are plenty of books, articles, and blogs written about the ideas we talk about in this chapter. And we have included a list of references for further reading at the end of the book. But if you're at a Startup Weekend or you're trying to start a business for the first time—and quickly—this chapter gives you a primer on these ideas. If you're already familiar with these methodologies, then Startup Weekend will be a great opportunity for you to try some of them out and see which ones work for you.

The Startup Weekend team strongly believes that businesses flourish or die because of their business
model
—their business plan. Traditional business settings emphasize revenue generation and cash flows. Cutting-edge business trends, however—like those championed by Steve Blank and some of the other thought leaders mentioned in this chapter—urge founders to concentrate on the quality of their ideas and products; and they encourage them to do this, not through the lens of profitability, but by focusing on the overall vision, framework, and team. That's why we discourage people from presenting some ridiculous growth curve for their revenue during their final presentations. We're much more interested in the team, the overall vision, and who has bought into the idea.

The Customer Development Revolution

Steve Blank developed his theory of
customer development
in response to the patterns he saw in startup successes and failures. He began to explain the keys to this idea in his classes at Berkeley and Stanford. The first and most important: Leave the building. Talk to customers. Don't go too far down any road, and don't spend too much time developing any product until you
know what the customers want
.

Blank says that one of the major mistakes startup enterprises make is confusing the founder's vision and passion (which he says is “essentially a faith-based enterprise on Day One”) with actual, concrete facts. People who have agreed to work on a startup believe that the founder somehow implicitly understands the customer's problems and needs. They have signed on to do the work because they have a great deal of faith in the business's underlying concept. As we've discussed before, the team and team leader are the elements who should make people want to join—not the idea. Remember: Ideas are a dime a dozen. No founder, no matter how smart, can read customers' minds. And if people confuse their confidence in the founder with their confidence in the idea, then they make the next fatal error. They simply take the founder's vision at face value and conclude, as Blank puts it: “Now I should simply start building the product as per my vision, and when I'm done, I'm going to release it, ship it, and money will just start rolling in.”

Customer development essentially states that this is not going to work unless you are randomly lucky or are somehow
the
expert in a particular domain. And the probability that you actually, truly
know
customers' problems and needs on the first day of work is extremely low. So, Blank says, “Why don't we establish a process that eliminates waste and makes learning and discovery an integral part of what you do from its very early stages?”

In Chapter 3, we discussed some suggestions for gauging what people want out of a product. At Startup Weekend, people do quick electronic surveys or walk around the room; however, we also encourage them to literally
leave the building
. It is easy at Startup Weekend or in any startup environment to get so attached to your desk that you never get any fresh input, and the feedback that you get from friends and family will naturally be skewed. (Even if your mother is often critical, she's mostly on your side, right?) So don't just depend on the opinions of those in your immediate circle. Go interview people you don't know and find out what they want. Go to a coffee shop or a nail salon—someplace where people have a little time on their hands. Or stand on the street corner. Eventually, someone will stop to talk.