cs419 technology entrepreneurship building a lean, scalable startup fall 2012 –2013 emre oto ...

CS419 Technology

Entrepreneurship

Building a Lean, Scalable Startup

Fall 2012 –2013Emre Oto

www.CS419online.comFollow on Twitter: @CS419Bilkent

http://www.eng491bu.org/



Agenda Who is the instructor? What is this course all about? What do I have to do in this course?

CS419 Technology EntrepreneurshipWeek #1 «The Startup»

Who is the Instructor? General Manager, MITS

Previously Business Analyst at Calypso Technology and Research Assistant at Stanford University

MSc Management Science and Engineering, Stanford University

MSc Electrical Engineering, Stanford University

BSc Electrical and Electronics Engineering, Middle East Technical University


Who is the Instructor?About MITS

Founded in April 2009, located at the Hacettepe University Technopolis, founded by 2 Engineers

12 full-time employees: Engineers, Graphic Designers, Videographers, 3D Designers, Project Management and Coordination Staff

Supported by three national and international grants

Recepient of national and global awards and recognitions


Who is the Instructor?About MITS

Two areas of operation: Medical Informatics

Data Mining Clinical Decision Support Systems

Alternative Communication Channels for Healthcare Professionals Virtual Events Virtual Learning Centers Virtual Detailing


What is this course all about?Planning is guessing

Business plans? = Business assumptions

No business plan survives first contact with the customer

Just to do it approach Build and see what happens You will definitely succeed – at seeing what

happens


What is this course all about?Probability theory is no good


What is this course all about?The Black Swan An outlier event, which could not be predicted through any

past observation, and a surprise for the observer (Extremely) Low probability – (extremely) hight impact event While no past observation can predict the Black Swan event,

retrospectively the event can be predicted and explained with perfect clarity.

Black Swan events are dependent on the observer


What is this course all about?Black Swans - The MITS Experience

Sudden rep visit restrictions imposed on pharma very close to MITS founding date

Government imposed budget cuts on Rx drugs led to budget cuts in Marketing and Sales Salesforce layoffs and downsizing

In August, government imposed restrictions on the number of medical conferences physicians can attend as well as restrictions on Pharma sponsorship

Pharma started seeking alternative ways to reach physicians


What is this course all about?Mediocristan vs Extremistan

Mediocristan Extremistan

Nonscalable Scalable

Mild or type 1 randomness Wild (even superwild) or type 2 randomness

The most typical member is mediocreThe most “typical” is either giant or dwarf, i.e., there is no typical member

Winners get a small segment of the total pie Winner-take-almost-all effects

More likely to be found in our ancestral environment More likely to be found in our modern environment

Impervious to the Black Swan Vulnerable to the Black Swan

Subject to gravity There are no physical constraints on what a number can be

Corresponds (generally) to physical quantities, i.e., height Corresponds to numbers, say, wealth

As close to utopian equality as reality can spontaneously deliver

Dominated by extreme winner-take-all inequality

Total is not determined by a single instance or observation Total will be determined by a small number of extreme events

When you observe for a while you can get to know what’s going on

It takes a long time to know what’s going on

Tyranny of the collective Tyranny of the accidental

Easy to predict from what you see and extend to what you do not see

Hard to predict from past information

History crawls History makes jumps

Events are distributed* according to the “bell curve” (the GIFT) or its variations

The distribution is either Mandelbrotian “gray” Swans (tractable scientifically or totally intractable Black Swans


What is this course all about?Extremistan = Chaos

All social phenomena i.e. all phenomena that entail a human factor belong to Extremistan are subject to Black Swan events.

Probability theory, assumptions, predictions based on models etc. are irrelevant and extremely dangerous in Extremistan

Probability theory belongs to games, papers, and the Lab. Real life is governed by Chaos Theory

Question your assumptions! Be skeptical! Rely on empirical learning!


What is this course all about? Skeptical Empiricism Past observations can only partially reflect

historical facts (vs. naïve empiricism)

We can never know the absolute truth.

Evidence can refute a hypothesis, but past observations can never suffice to fully refute a hypothesis


What is this course all about?Common Intellectual Fallacies

Narrative Fallacy: Explaining an extreme event retrospectively as if it is a natural consequence («The crisis was evident»)

Luddic Fallacy – Probability theory pertaning to games canot suffice to explain the uncertainty of the real world.

Confirmation Bias – The human mind has a tendency to join evidence that will validate its beliefs. It is incredibly easy to find evidence to validate any theory.

Cure for this: ‘Negative Empiricism’ – Seeking evidence by refuting hypotheses and assumptions.


What is this course all about?Prescription against Black Swans Feeble structures should break down when

small

Creating redundancies (vs. naïve optimization) – Robustness

Avoiding complexity


What is this course all about?Black Swans - The MITS experience

Unexpected budget cuts, market dynamics Contracts cancelled due to sudden budget cuts Sudden changes in government Rx reimbursement policies Clients/prospects suddenly changing positions

Pareto principle is valid – impossibility of scheduling, HR and capital allocation

Strategy: Diversification through a healthy balance of funded R&D projects and commercial projects.

Benefiting from Black Swans: Small investments in high-risk projects


What is this course all about?Let us summarize up to this point..

Real life is much more uncertain then we think, and this uncertainty is not the same as the one we learn in Probability Theory But rather through Chaos Theory («Butterfly Effect»)

The least that could happen is that our assumptions fail. The true danger lies in Black Swan events.

So we cannot just believe our own assumptions, and we cannot just «swing» it..

How do we ride true chaos?


What is the course all about?Scientific Method, any one?

6th grade..Science class..Lesson 1.. We will go back to the good old days, only in a

startup context ..but what is a startup?


What is this course all about?Let is now define a Startup

A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty

A startup is a temporary organization that is in search of a repeatable and scalable business model


What is this course all about?What a startup is NOT A startup is not a smaller version of a

large company (i.e. it is not a doll house)

Why is a startup not a smaller version of a large company?


What is this course all about?Startup vs everything else Startup

Problem: Unknown (Market? Customers? Need?) Solution: Unknown (What are we going to build?)

Everything else Problem: Known Solution: Known

Known: Small business? Clone of an existing business?

Existing market, waterfall product development


Problem: knownSolution: known

Waterfall

Unit of progress: Advance to Next Stage

Requirements

Design

Implementation

Verification

Maintenance


What is this course all about?What is everything else? Small businesses

Large companies

Social entrepreneurship

Disruptive companies within large companies


What is this class all about?#1 This Class is about Scalable Startups

Not all startups are designed to scale

Small business startups have different goals They are done by normal people

Scalable startups are designed to grow big May require angel investment / venture capital


Small Busines

sStartup

- Business Model found- Profitable business- Existing team- No intention to scale / or very low scale- Mostly clone businesses-Risk is easily understood-Can be even financed with a bank loan

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


Small Busines

sStartup

- Business Model found- Profitable business- Existing team- Can be financed with a simple bank loan- Risk easy to assess- Mostly clone businesses

ScalableStartup

Large Company

- Huge total available market- Company has potential to grow to immense annual revenues- Business model found- Focused on execution and process- Typically requires “risk capital”

Very Different Startup Goals


Question

How do we assess scalability?

We have to analyze the market and the opportunity


Market/Opportunity AnalysisHow Big is It?: Market/Opportunity Analysis

Identify a Customer and Market Need

Size the Market

Competitors

Growth Potential


How Big is the Pie?Total Available Market

Total Available Market

• How many people would

want/need the product?

• How large is the market be (in TLs) if they all bought?

• How many units would that be?

How Do I Find Out?

• Research


How Big is My Slice?Served Available Market

• How many people need/can use product?

• How many people have the money to buy the product

• How large would the market be (in TLs) if they all bought?


How Do I Find Out?

• Talk to potential customers

Served Available

Market

TotalAvailableMarket


How Much Can I Eat?Target Market

• Who am I going to sell to in year

1, 2 & 3?

• How many customers is that?

• How large is the market be (in TLs) if they all bought?


How Do I Find Out?

• Talk to potential customers

• Identify and talk to channel partners

• Identify and talk to competitors

TotalAvailableMarket Target

Market

ServedAvailableMarket


TotalAvailableMarket

SegmentationIdentification of groups most likely to buy

33

ServedAvailableMarket

Target Market

• Geographic• Demographic• Psychographic variables• Behavioral variables• Channel• etc…


Final points on scalability and market size

Market Size Questions:

How big can this market be? How much of it can we get?Market growth rateMarket structure (Mature or in flux?)

Most important: Talk to Customers and Sales Channel


What is this course all about?

Back to the main question:


What is this course all about?#2 The Lean Startup The scientific method to building startups

Based on validated learning

Validated learning is not after-the-fact rationalization

Validated learning is not a good story designed to hide failure


What is this course all about?Validated Learning Process of demonstrating progress under the

extreme uncertainty in which startups grow

Process of demonstrating empirically that a team has discovered valuable truths about a startup’s present and future business prospects

Demonstrated by positive improvements in the startup’s core metrics


What is this course all about?Validated Learning

Validated learning is backed by empirical data collected from real customers

Learning is the essential unit of progress for startups

Any effort not absolutely necessary for learning what customers want can be eliminated We don’t want to kid ourselves on what customers

want We don’t want to learn things that are completely

irrelevant



Work smarter not harder Build to understand what the customer needs,

and build only what the customer wants

Positive changes in metrics become the quantitative validation that our learning was real.

Productivity is not how much stuff we are building, but how much validated learning we are getting for our efforts.



The question is not «Can this product be built?» In the modern economy we can pretty much build any product

imaginable

The right question is «Should this product be built?»

«Can we build a sustainable business around this set of products and services?»

Conclusion: Everything a startup does is an experiment to achieve validated learning


What is this course all about?Experimentation

Many questions in a startup: Which customer opinions should we listen to? How should we prioritize across features? Which features are essential to the product’s

success? What should we work on next? Etc.

The answer is «Experimentation»


What is this course all about?Experimentation

Begin with a clear hypothesis

Test predictions empirically

Just as scientific experimentation is informed by theory, startup experimentation is guided by the startups’s vision

The goal of every startup experiment is to discover how to build a sustainable business around this vision

Key idea: The experiment is a product Special kind of product called the Minimum Viable Product


What is this course all about?Experimentation Customers interact with products and generate

feedback and data Outcome of the experiment is learning about how to

build a sustainable business (and repeat)


What is this course all about?Build-Measure-Learn

• Minimize total time through the loop

• Focus on validatedlearning

• Learn where and when to invest energy


What is this course all about?Leap-of-faith assumptions Which hypotheses to test first?

Riskiest elements of a startup’s plan Parts on which everything depends

The value hypothesis and the growth hypothesis (more on this later)

State leap-of-faith assumptions, then build Minimum Viable Product


What is this course all about?The Minimum Viable Product

Version of the product that enables a full turn of the loop..

with a minimum amount of effort

..and the least amount of development time

Not internal! We put it in front of the client/customer!

We may even try to sell it..


What is this course all about?The Minimum Viable Product

Begins the process of learning

The goal is to test fundamental business hypothesis

Initially targets early adopters (80% solution)

Can start with a smoke test (a simple ad) or an early prototype

When in doubt, simplify Remove any feature, process, or effort that does not contribute

directly to the learning you seek.

Ok if low quality, but that doesn’t mean we should be sloppy or undisciplined.


What is this course all about?Measurement

Setting the right kind of metrics: Innovation Accounting Learning Milestones

Vanity metrics vs Actionable metrics

More on this later..

Right metrics help us make the pivot or persevere decision with clarity of mind:

The goal is to align efforts with a business and product that work to create value and drive growth

Keeping a path toward a sustaineable business


What is this course all about?Pivot or Persevere Pivot: Structured course correction designed to test a

new fundamental hypothesis about the product, strategy, and the engine of growth

Upon completing the loop, we either pivot the original strategy or persevere Unconditional perseverance is stupid

If we discover one of our hypotheses is false, it is time to make a major change to a new strategic hypothesis

The Lean Startup method allows startups to recognize it’s time to pivot sooner


What is this course all about?Why is the Lean Startup «Lean?»

Methodology inspired from Lean Manufacturing principles developed by Taichi Ohno and Shigeo Shingo The Toyota Production System (TPS)

Throughout the course we will see many reflections of the TPS on startup product development: Eliminating waste (muda) Genchi Gembutsu (go and see) Just-in-time manufacturing and Kanban (push vs pull) The Andon Cord Principle of Small Batches


http://en.wikipedia.org/wiki/Shigeo_Shingo

What is this course all about?Eliminating Muda (Waste) Muda is non value-added work

Any other work other than to test our specific hypotheses about the customer to generate validated learning is waste


What is this course all about?Genchi Gembutsu

This is the most important for us this semester

Genchi Gembutsu means «go and see for yourself»

Business decisions must be based on deep first-hand knowledge

You cannot be sure you really understand any part of any business model unless you go and see for yourself firsthand.

It is unacceptable to take anything for granted or to rely on the reports of others


What is this course all about?Facts lie outside the building

Metrics and institutions are «people»

No plan/assumption/hypothesis survives first contact with the customer

Startups need excessive contact with potential customers to understand them

Get off your chair, get out of the building, and get to know your customers, your market, suppliers, channels, etc.

Sitting in an office and overanalyzing is stupid

Sitting in a lab and executing an untested plan is also stupid


What is this course all about?Anatomy of a Lean Startup

CustomerDevelopment

CustomerDevelopment


What is this course all about?#3 Customer Development

We will break the Lean Startup method into two and focus on the client facing part We will get out of the building and practice

Customer Development

We will study Agile Development in theory with examples


56

IfStartups Fail from a Lack of customersnot Product Development Failure

Then Why Do we have: process to manage product development

no process to manage customer development


57

An Inexpensive Fix

Focus on Customers and Markets from Day One

How?


58

Build a Customer Development Process


? ? ? ?

Concept/Seed Round

Product Dev.

Alpha/Beta Test

Launch/1st Ship

Product Development


CompanyBuilding


CustomerDiscovery

Customer Development is as important as Product Development

Concept/Bus. Plan

Product Dev.

Alpha/Beta Test

Launch/1st Ship

Product Development

CustomerValidation

Customer Creation


60

Customer Development: Big Ideas

Parallel process to Product Development

Measurable Checkpoints

Notion of Market Types to represent reality

Emphasis is on learning & discovery before execution


61

Customer Development Heuristics

There are no facts inside your building, so get outside

Develop for the Few, not the Many

Earlyvangelists make your company

The goal for release 1 is the minimum feature set for earlyvangelists


62

Stop selling, start listening There are no facts inside your building, so get

outside

Test your hypotheses Two are fundamental: problem and product concept

Customer Discovery: Step 1

CustomerDiscovery

CustomerValidation

CompanyBuilding

CustomerCreation


63

Customer Discovery: Exit Criteria

What are your customers top problems? How much will they pay to solve them

Does your product concept solve them? Do customers agree? How much will they pay?

Draw a day-in-the-life of a customer before & after your product

Draw the org chart of users & buyers


Customer Validation: Step 2

CustomerDiscovery

CustomerValidation

Customer Creation

CompanyBuilding

• Develop a repeatable sales process

• Only earlyvangelists are crazy enough to buy


CS419 Technology EntrepreneurshipWeek #1 «The Startup»65

Customer Validation: Exit Criteria

Do you have a proven sales roadmap? Org chart? Influence map?

Do you understand the sales cycle? ASP, LTV, ROI, etc.

Do you have a set of orders ($’s) validating the roadmap?

Does the financial model make sense?

66

Customer CreationStep 3

CustomerDiscovery

CustomerValidation

Customer Creation

CompanyBuilding

• Creation comes after proof of sales

• Creation is where you “cross the chasm”

• It is a strategy not a tactic


67

Customer Creation Big Ideas

Big Idea 1: Grow customers from few to many

Big Idea 2: Four Customer Creation activities: Year One objectives Positioning Launch Demand creation

Big Idea 3: Creation is different for each of the three types of startups


68

New Product Conundrum New Product Introduction methodologies

sometimes work, yet sometimes fail Why? Is it the people that are different? Is it the product that are different?

Perhaps there are different “types” of startups?


69

Three Types of Markets

Existing Market Resegmented Market

New Market


70

Three Types of Markets

Who Cares? Type of Market changes EVERYTHING Sales, marketing and business development

differ radically by market type Details next week


New Market


Type of MarketChanges Everything

Market Market Size Cost of Entry Launch Type Competitive

Barriers Positioning

Sales Sales Model Margins Sales Cycle Chasm Width


New Market

• Finance• Ongoing Capital• Time to Profitability

• Customers• Needs• Adoption


Definitions: Three Types of Markets

Existing Market Faster/Better = High end

Resegmented Market Niche = marketing/branding driven Cheaper = low end

New Market Cheaper/good enough can create a new

class of product/customer Innovative/never existed before


New Market


Company Building: Step 4

CustomerDiscovery

CustomerValidation

Customer Creation

CompanyBuilding

• (Re)build your company’s organization & management

• Re look at your mission


74

Company Building: Big IdeasBig Idea 1:

Management needs to change as the company grows

Founders are casualties Development centric Mission-centric Process-centric

Big Idea 2:

Sales Growth needs to match market type


Company Building: Exit Criteria

Does sales growth plan match market type?

Does spending plan match market type?

Is your team right for the stage of company?

Have you built a mission-oriented culture?


76

Customer Development: Summary Parallel process to Product Development

Hypothesis Testing

Measurable Checkpoints

Not tied to FCS, but to customer milestones

Notion of Market Types to represent reality

Emphasis is on learning & discovery before execution


Idea Size of the Opportunity

Business Model(s)

Customer Discovery

Customer Validatio

n

What is this course all about?How to Build a Startup


Idea Size of the Opportunity

Business Model(s)

Customer Discovery

Customer Validatio

n

Theory Practice



IdeaSize of the Opportunit

y

Business Model(s)

Customer Discovery

Customer Validatio

n



Diagram of flows between company and customers

Scorecard of hypotheses testing Dynamic: Allows rapid change with each

iteration and pivot Founder-driven

* Alex Osterwalder

What is this course all about?What is a business model again?


What is this course all about?Business model - 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?

88

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?

91images by JAM

customer segments

key partners

cost structure

revenue streams

channels

customer relationships

key activities

key resources

value proposition

sketch out your business model


building

blockbuildingblock

buildingblock

buildingblock

buildingblock

building

block

buildingblock

buildingblock

building

block

buildingblock

buildingblock

buildingblock


9 Guesses

Guess Guess

Guess

Guess

GuessGuess

Guess

GuessGuess


Test Hypotheses:• Problem• Customer• User• Payer

Test Hypotheses:• Demand Creation

Test Hypotheses:• Channel

Test Hypotheses:• Product• Market Type• Competitive

Test Hypotheses:• Pricing Model / Pricing

Test Hypotheses:• Size of Opportunity/Market• Validate Business Model

Test Hypotheses:• Channel• (Customer)• (Problem)


Test Hypotheses:• Problem• Customer• User• Payer

Test Hypotheses:• Demand Creation

Test Hypotheses:• Channel

Test Hypotheses:• Product• Market Type• Competitive

Test Hypotheses:• Pricing Model / Pricing

Test Hypotheses:• Size of Opportunity/Market• Validate Business Model

Test Hypotheses:• Channel• (Customer)• (Problem) Customer

Development Team

Agile Development


The Pivot

• The heart of Customer Development

• Iteration without crisis

• Fast, agile and opportunistic


What do I have to do in this course?Roadmap

Form a team

Find a disruptive business idea, justify that it is disruptive and scalable

Formulate your hypotheses

Get out of the building and test your hypotheses

Build and iterate your Minimum Viable Product

Document progress on www.leanlaunchlab.com

«Continuous deployment»


What do I have to do in this course?For next week

Form a team

Think about whether your business idea is worth pursuing (market size)

Prepare two Powerpoint slides Elevator pitch of your business List of the 3 core assumptions of your business

model

Start your www.leanlaunchlab.com account


http://www.leanlaunchlab.com/

What do I have to do in this course?Syllabus

www.CS419online.com

Syllabus already in your bilkent.edu.tr e-mail addresses

Ground rules are important


http://www.CS419online.com/



See you next week!

Next episode: Disruptive Innovation


cs419 technology entrepreneurship building a lean, scalable startup fall 2012 –2013 emre oto ...

Documents

startup slide

calypso technology

cs419bilkent slide

black swan events

black swan subject

scalable startup fall

black swanvulnerable

extremistan probability