Why Accountants Don’t Run Startups

Steve Blank Stanford - School of Engineering

U.C. Berkeley - Haas School Of Business

www.steveblank.com Twitter: sgblank

I Drew This

Customer Discovery

Customer Validation

Company Building

Customer Creation

Pivot

I Called It: Customer Development

Customer Discovery

Customer Validation

Company Building

Customer Creation

Pivot

I Wrote This

A Few People Read It

I Write a Blog www.steveblank.com

When the Student is ready, the Master appears.

Buddhist proverb

When the Student is ready, the Master appears.

Buddhist proverb

When the Master is ready, the Student appears.

Steve Blank proverb

Five Short Stories

Tectonic Shifts in Entrepreneurship

The Silicon Valley Funding Pyramid

Small VC Funds ($50-250M)

Union Square Ventures First Round Capital

Traditional VC Funds (>$250M)

Benchmark Sequoia

Angels & Incubators ($0-10M)

Y-Combinator TechStars

Seed Funds ($10-50M)

SoftTech (Clavier) Floodgate Felicis (Senkut) SV Angel (Conway)

Source: Dave McClure 500hats.com

Innovation in Financing

Small VC Funds ($50-250M)

Traditional VC Funds (>$250M)

Angels & Incubators ($0-10M)

Seed Funds ($10-50M)

Source: Dave McClure 500hats.com

Innovation is happening here

New Trends In Silicon Valley

•  Internet startups - $500K is the new $5M –  Driven by the top of the pyramid

•  Seed Funds providing entrepreneurial education* –  Ycombinator, TechStars, SeedCamp, LaunchBox, etc

•  Customer Development/Lean Startup adoption –  Methodology to test hypothesis and business model

*~100 startup accelerator programs: http://blog.shedd.us/321987608/

Not All Startups Are Equal

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Small Business Startups

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

Small Business Startups

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- 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. workers

http://www.sba.gov/advo/stats/sbfaq.pdf

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

Small Business Startup: Internet Edition

•  The Internet allows a new class of Small Businesses •  Not all businesses on the Internet are “Scalable Startups”

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Scalable Startup

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-  Total Available Market > $500m -  Company can grow to $100m/year -  Business model found -  Focused on execution and process

Scalable Startup

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

Scalable Startup

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

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

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

Very Different Startup Goals

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Silicon Valley Venture Firms Invest in Scalable Startups

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What VC’s Don’t Tell You: The Transition

Search Build Grow

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

What VC’s Don’t Tell You: The Transition – Founders Leave

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

What’s A Startup?

A Startup is the organization used to search for a scalable business model

Plan versus Model

No Business Plan survives first contact with customers

So Search for a Business Model

The Search for a Business Model

•  A Business Plan is static

• A Business Model diagrams how a company creates, delivers and captures value – it’s dynamic

•  Or in English: How a company makes money

Emphasis On Hypotheses Testing

Startups Continually Pivot (Iterate)

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

The Search for the Business Model

Startups Search and Pivot

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

- Cash-flow breakeven - Profitable - Rapid scale - New Senior Mgmt ~ 150 people

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

Startups Search, Companies Execute

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

The Execution of the Business Model

Metrics Versus Accounting

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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

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

Metrics Versus Accounting

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

The Execution of the Business Model

Customer Validation Versus Sales

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

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

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

Customer Validation Versus Sales

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Product Management -  Delivers MRD’s -  Feature Spec’s -  Competitive Analysis

The Execution of the Business Model

Customer Development Versus Product Management

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Customer Development -  Hypothesis Testing -  Minimum Feature Set -  Pivots

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

Customer Development Versus Product Management

Product Management -  Delivers MRD’s -  Feature Spec’s -  Competitive Analysis

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The Execution of the Business Model

Engineering Versus Agile Development

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

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

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

Engineering Versus Agile Development

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

How Do Startups Search For A Business Model?

•  The Search is called Customer Development •  The Implementation is called Agile Development

The Lean Startup

•  The Search is called Customer Development •  The Implementation is called Agile Development

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

- Cash-flow breakeven - Profitable - Rapid scale - New Senior Mgmt ~ 150 people

Startups Don’t Last Forever

You fail if you remain a startup!

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Leadership Versus Management

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Leadership Versus Management

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Leadership Versus Management

Search

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Leadership Versus Management

Build Search

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Leadership Versus Management

Build Grow Search

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Inventor of the Modern Corporation

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Inventor of the Modern Corporation

Alfred P. Sloan

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Alfred P. Sloan

General Motors, President/Chairman -  Cost Accounting -  MIT Sloan School -  Sloan Foundation -  etc.

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Founder of General Motors

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Founder of General Motors

Billy Durant

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Billy Durant

-  Leader in horse-drawn buggy’s -  Fired by board, starts Chevrolet -  Regains control of GM -  Fired by board, GM ~$3.6 billion*

* GM Net sales in 1921 $304.5M = $3.6 Billion today

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Durant Versus Sloan

Durant Versus Sloan

•  Dies, rich, honored and famous

Durant Versus Sloan

•  Dies, rich, honored and famous •  Dies managing a bowling alley

Durant Versus Sloan

•  Dies, rich, honored and famous •  Dies managing a bowling alley

Accountant

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You are here

E-School instead of B-School

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-  Execution -  Strategy -  Accounting -  Products -  Engineering -  Management -  Administrative

Business School

Business School Versus Entrepreneurship School

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Business School Versus Entrepreneurship School

Entrepreneurship School

-  Hypothesis testing -  Business Model testing -  Customer Development -  Agile Development -  Metrics -  Venture Finance -  Hands-on

-  Execution -  Accounting -  Products -  Engineering -  Management -  Administrative

Business School

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Business School

Business School Courses Versus Entrepreneurship Courses

Courses -  Managerial Finance/Accounting -  Managing Groups and Teams -  Financial Accounting -  Operations -  Modeling for Optimization -  Global Value Chain Strategies

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Courses -  Entrepreneurial Management -  Creativity and Innovation -  Technology Entrepreneurship -  Patent Law for Entrepreneurs -  Global Entrepreneurial Marketing -  Entrepreneurial Finance

Business School

Business School Versus Entrepreneurship Courses

Entrepreneurship School

Courses -  Managerial Finance/Accounting -  Managing Groups and Teams -  Financial Accounting -  Operations -  Modeling for Optimization -  Global Value Chain Strategies

E-School Will Emerge

•  Entrepreneurial Education will change radically

•  E-School Students are not B-School Students

•  Y-Combinator/Techstars first inkling

•  Today ~100 startup accelerator programs

*~100 startup accelerator programs: http://blog.shedd.us/321987608/

E-School – Let’s Help Build It

• Startup Accelerators - great coaching/networking but minimal methodology

• Lean/Customer Development - great methodology but no education

• Need to be connected to Engineering School

•  Stanford, Harvard and others get it…but…

*~100 startup accelerator programs: http://blog.shedd.us/321987608/

Durant School of Entrepreneurship

The Durant School of Entrepreneurship

http://www.cafepress.com/durantschool

The Durant School of Entrepreneurship

http://www.cafepress.com/durantschool

The Durant School of Entrepreneurship

http://www.cafepress.com/durantschool

Thanks

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