As we enter the Thanksgiving season we should take pause and be grateful for the things we have and have been handed down. I wasn’t aware that my heritage included strong entrepreneurial genes – until my seven siblings and I came across this letter from my father’s memoirs. My great grandfather, John A. Currie, started an elevator business in 1902 in Philadelphia at 2nd and New St. (Sadly, the business closed in 1977, but that's another post!)
Early elevators were called “dumbwaiters” back then, and all big brownstone row houses needed a way to move dishes and laundry up and down their many floors easily and quickly. So they were very common, based on ropes and pulley “technology”. My great grandfather built this business from nothing into a nice little business with 50 employees. I also found the original stock certificates for the incorporation of this business.
This letter is his retirement address, and it certainly captures some elements of his entrepreneurial spirit and driven nature. My father was born to John A.’s son (John F.) two years after he wrote this this, and my grandfather John F. took over the business in 1927. Comments welcome!
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(reprinted) Retirement Address by John A. Currie from Energy Elevator Co., 1927
April 2, 1927
214 New St.
To the Stockholders of Energy Elevator Co.
You will see from the report of the Treasurer that the year 1926 was the most profitable we ever had, and it looks as though the present year will be a good one, too, but owing to the general slowing down throughout the country, it is unlikely to equal the year just closed.
I am now asking you to let me retire from the Presidency, as the wear-and-tear of a long, active life makes it necessary for me to take a rest.
During all my time, bringing the Company up fro a working force of one boy to the present force of about 50, I was never obliged to be absent on account of sickness, except to nurse a cold for a day or two at a time, and I thank God for such a wonderful period of good health.
I might also mention the fact that during this entire period I did not take a vacation. This may have been a mistake on my part, as I do not disapprove of vacations and have seen that everybody else had them, but it may also be that this close attention helped in the gradual, steady growth of the business to its present prosperous state.
I know I am leaving the company in good hands and it will go on from year to year paying fair dividends so that each of you can invest part of your earnings in good securities and by middle life have enough put by to insure you a living from outside investments, as I have now. Get started at this early and you will be surprised at the way it will grow.
When I die, the Energy shares will be apportioned so you three boys will each hold one-third, from which you will see that your efforts to make it a go will all come back to you in the end. In this connection I would advise taking moderate salaries so as not to overload the payroll, and take it out in extra dividends when the surplus warrants it. I think your surplus at the present time is ample and need not be increased.
I thank you for the fine support you have given me. May God bless you. As a final word, let me remind you that absolute harmony is the key to success. Also, do not have too many irons in the fire and do not try to cover too wide a field; rather have a good narrow field and push it hard.
(sign.) John A. Currie
As I become more experienced in executing "Lean Start-up" practices, I believe there is one critical metric that all early stage entrepreneurs need to add to their priorities. How Many Validation Interviews Did You Do This Week?
"Lean" Principles, coupled with the post-2008 start-up bust, have taken solid root across the country (even NSF!), and entrepreneurs are oriented to the realities of "Raise Customers, not Investors". Investors are not really that interested in your technology, your business concept, nor your 'growth market' assumptions. Only the evidence matters to them - the outcomes of your assumptions. Which customers or partners have you signed on as true evidence?
Do you have a good answer to the question - How Many Interviews? (Note: I'm not separating the important sequence of 1st - Problem Validation, and 2nd- Solution Validation. This post is all about QUANTITY of interviews.] The answer to the "Quantity" question is critical, for many reasons ....
o Not enough conversations signals a red flag. Lack of commitment? Not connected enough in your industry or sector? Un-compelling approach or message? Does anyone care about the problem? Figure out the reason and fix it.
o Plenty of conversations - but not enough data. If you find yourself in this situation, it means that you haven't done the necessary preparation to dig out the pain, and debrief work to assess what you've learned. Each conversation needs to be scripted, and debriefed with the Team, to insure that on the next conversation, mistakes don't happen a 2nd time. if you leave one conversation and don't have all the data you expected -- debrief, understand why not, change script, and (be sure to) check the result. I believe there is a lot of new ground to be covered in how to execute these interviews to capture the right data.
o Too many conversations, or too much data is a great problem to have. (btw - there is no such thing as 'too many') Too much data means you probably have multiple options to pursue. And critical decisions to make. You should have emerging patterns and multiple people saying the same thing.
The answer to the question also tells investors if you are a believer in "Lean" Principles, which most investors subscribe to nowadays. Why? Because "Lean" makes Investors' life a lot easier. Investors love "Lean" because it forces the rigor, making due diligence easier. Investors are attracted to entrepreneurs who have Validated a Problem, Validated their Technology/Solution, and Validated their revenue Model. You have taken out (most of) the risk and hard work of validation for them. Most investors are willing to pay a premium for this work.
Remember that IN-Validation is as valuable as Validation! And don't you want to prove out your assumptions BEFORE you take investors cash? Steve Blank writes a great post on this, "How Do You Want to Spend the Next 4 Years of Your Life?" www.steveblank.com. I've heard that half of the 400 NSF i-Corps. Teams have IN-valided their original commercial assumptions! Which
It's OK to tell investors that you've had many conversations, but are still assessing the data collected on the Problem to develop a winning Solution. It's a lot better to say, "The 10 Companies are budgeting $xx to solve this big Problem." - than the traditional business plan assumptions - "We predict X # of companies will buy our product, based on the market research numbers in this article." Some investors do like to work very early with entrepreneurs who have validated a Problem, and helping in crafting the initial Solution (which has yet to be Validated).
So having lots of Interview DATA to assess is a great place, and necessary place, to be. In that data lies the answer to taking your 1st dollar. Ideally what happens next is that Paid Pilots result, real orders, Benjamins, and a credible revenue forecast that you can stand behind. This is the definition of Traction.
And what happens after Paid Pilots start? You have to execute on Operational issues to deliver the goods, great ROI, your promised value proposition. Executing on operational issues starts to show the holes and warts of your operational assumptions - the next phase of your business. "Operations" is rarely your critical path for getting INTO business. Now it's time to find some supply partners right? Let's be clear - you have not yet delivered the evidence of scale yet - but you are on your way to doing so.
In summary - do you see how you are making investor's life a lot easier by practicing and executing "Lean"? It's all about Validation. You 1st validate the Problem, and then you Validate the Solution. Then you Validate the Operation. If you stay focused on these processes, you are creating real value in your company. If you are traversing the globe (or city) doing professional begging for funding to go tackle your Assumptions, you are not creating any value in your company. Welcome comments!
DESCA - Delaware Sustainable Chemistry Alliance - invited me to present and discuss "Lean Startup Principles" at their December Lunch 'n Learn session last week. It was a well-attended event and it prompted me to think about a follow-up to the "Lean" post I wrote three months ago. This post is the 1st of a two-part series. Today we'll tackle the Problem Interview, and next post we'll discuss the Solution Interview.
The backdrop ..... "Lean" has gotten serious traction as the standard start-up practice/ framework/ methodology, particularly now that NSF iCorps and Steve Blank have trained over 300 scientific teams. I feel that any remaining pushback is due to what I believe to be the hardest part of "Lean" - Validating the Problem. So I want to write about that. I have to give credit to a similar post by Ash Maurya, another of the top Lean evangelists, who describes "the Achilles Heel of Lean" here: http://practicetrumpstheory.com/2011/08/customer-development-getting-started/.
Lean's premise -"Get Out of the Bulding" is obvious. But many scientists don't know what to say, and aren't comfortable or skilled at leading communications. And many who are comfortable in leading communications were trained in outdated or corporate sales tactics and fall back on what they know best. Following the discipline of the "Lean" framework that a 2-step process [Problem 1st, THEN Solution] is counter-intuitive, and truly works faster. We need to dig deeper into how to execute this critical 1st step of How to Validate the Problem.
The Problem Interview is the tool we use, coupled with the small task of executing 10 to 50 of them. (YES 50!) The process is evidence-based, all tied to data. You've got to capture enough data about the Problem so you can assess the different parts of the elephant. Only then should you design your Solution (Step 2). So let's break the Problem Interview process down into 4 distinct steps so you can execute 10 of them this month.
First comes Preparation. You need to prepare your script, handout, and "approach". Some people prefer open-ended interview questions, Like, "What is the single-most pain point you struggle with?" I prefer a handout method, because it gives you the credibility that you know about the space, and you get to stack the deck towards certain pain points. This task requires some real thought, because you may not know all the pain points, and you have to think hard about how narrow or broad you design the pain points. Why I like the handout method is the forced rank-ordering of pain, and the ability to have a follow-on conversation about the order. The handout sheet is really just a tactic to have a conversation about "Why is ____ #1?"
2nd comes "Approach" - Getting the Interview. This is a difficult task, because we are all busy people. So you really have to think hard about what you are offering targets, in return for spending 30 minutes of their valuable time. Most start with friends and people in their immediate network. They are great for practice, and stress to them to be brutally honest. Your real test will come from attracting strangers and key prospects who don't know you. Here's a simple phone or email script that works for me with high conversion rates: "Our venture is innovating in <space> and we have a great team of scientists. Before we go too far down the development path, we need to insure that we are tackling the right problem. Since you are personally a recognized leader in the space, I'm hoping you will grant us 30 minutes to discuss innovation in this space." Simple, quick. to the point. It's really in their best interest to know what is going on, and if your team has the right technical chops, they should be motivated to REALLY understand what you are doing.
Next is Conduct the Interview. A script needs to be developed, refined, and practiced - unless it's your 10th interview and you have become very comfortable executing them. All interviews follow the same outline, and it's important to stick to this discipline! The opener is al about relating, perhpas picking out something in common or who you both know. If the person is all business, get right down to business. Your opening statement is the same statement that got you the meeting (above). Give them the handout and ask them to rank-order the list. Most will do this very quickly. Some may push-back and criticize your list. That's OK - run with it, ask them how they would structure the list of pain points - they are helping you with serious learning about the space. Then - ask them to rank order THEIR list! Once you have the ranking, it's a matter of getting 5 important questions answered for each challenge:
Next month – we’ll discuss How to Conduct Solution Interviews. Now get out of the building!
Subtitle: Great Technology in Search of a Business Problem Rarely Gets Funded
This post is about a (relatively) new movement that's been dramatically changing the start-up world - Lean Startup Principles. Since my world is mostly scientists, I know that many of you may roll your eyes and say, “Lean” is for those Internet guys. We're very different, in that we're making new materials or chemicals -- and that costs millions of $ of investment." If that’s what you’re thinking, then this column is intended for YOU. The others who are already on-board with "Lean" - no need to read any further as I'm preaching to the choir.
I'll start with the punch line. When the NSF (National Science Foundation) formed the iCorps 2 years ago and hired Steve Blank to evangelize and proliferate the ‘Lean’ methodology, it's a big deal. And there's a simple reason – R&D commercialization metrics, measured by Govt. research IP that crosses the chasm over to the commercial marketplace is, let's just say, under-performing. The NSF wants to get more out of its R&D investments.
Steve Blank, the pioneer in this area, recently wrote about this in LinkedIn and was celebrated by a Harvard Business Review article: http://hbr.org/2013/05/why-the-lean-start-up-changes-everything/ar/1. While I was writing this, Blank just published another great post on Linked In on why Lean applies to drug discovery and medical devices: Reinventing Life Science Startups – Evidence-based Entrepreneurship http://www.linkedin.com/influencers/20130821141757-95015-reinventing-life-science-startups-evidence-based-entrepreneurship?trk=vsrp_people_res_infl_post.
Steve Blank is a serial entrepreneur and now educator at Stanford. Eric Ries must also be mentioned, another pioneer in this area, entrepreneurship author (The Lean Startup), who learned under Steve Blank. They both wanted to know why is it that certain ventures made it and so any others don’t. They studied thousands of tech ventures and discovered an important sequence of events to follow - a methodology - all based on DATA, that strongly suggests WHY certain ventures make it, and HOW they execute the process of making it.
"Lean Startup Principles" was born from their books, and it's now taught by virtually every accelerator in the county (now 200+), most entrepreneurship University curricula, and now the NSF. The NSF is using it as a gate-keeping step entrepreneurs must pass through to win later-phase SBIRs. What the Lean Process does is force the entrepreneur to discover real business problems and potential customers BEFORE their solution is presented. Enough about the WHY. Let's explore the WHAT .... What is "Lean" and how is it different?
The Business Model Canvas is the tool or framework that you use to work through taking your innovation to the market. It’s non-proprietary and several versions are out there. It's the Cliff's Notes to the sequence of events that you are following to get some traction with customers and partners. They all accomplish the same thing - VALIDATION, without spending a lot of money. Fail fast, pivot, adapt. The variation which I prefer is different than Steve Blank’s (www.steveblank.com) and based on Ash Maurya’s canvas (www.practicetrumpstheory.com)
Lean also requires a deep understanding of market segmentation, and how the value chain of that industry works. Focusing on one segment is a key part to the Canvas - because each segment articulates a problem differently …. And those differences ripple all the way through the 9 elements of the canvas. Here are the 9 elements of the canvas:
1 – Segment 2 – Problem 3 – Unique Value Proposition
4 – Unique Solution 5 – Channels 6 – Revenue Model
7 – Cost Structure 8 – Key Metrics 9 – Unfair Advantage
A start-up is a temporary organization that goes out on a Customer Discovery expedition. And it’s searching for a repeatable and scalable model. The canvas forces constant testing of your key elements (assumptions) in the real world. Once you find (believe you have found) your Customer, the next step - Customer Execution - involves scaling processes - bringing on more people, putting processes in place, developing better metrics.
Bottom line: It is a ton of work to go through the 2 major steps of Lean as Blank details in The Startup Owners Manual. But you can’t ask for money until you’ve done the work. Most investors know about this process and follow it for their portfolio companies. So when they ask about traction, you should describe how far into the Lean Customer Discovery or Customer Execution phase you are. Your venture’s Valuation maps directly onto these stages.
I can vouch for the process as someone who has been bringing complex technologies to many markets for many years. I have way too many scars with "technology in search of a business problem". With the ones that struggled (and are struggling), we were not clear about the problem we were solving. They all ended badly. I'm a super-convert - this process works.
The tech start-up community knows how hard it is to raise VC funding, particularly with 1st-time start-up CEO's. I'm a big proponent of 1st-time start-up CEO's, and they usually discover pretty quickly that few VC's will take the risk in investing in them. The "no" will be shrouded in other phrases, like "too early" or "not enough traction". But many times it really boils down to, "This is your 1st venture, and you have to prove yourself before I will take that risk."
So many start-ups must figure out how to work with players in their value chain. You are "David", and I would argue that you CAN do a deal with "Goliath". This post is to help you think about strategizing and executing that process.
There are five clear steps you can follow to successfully partner with a Goliath:
1. Develop a clear picture of your VALUE CHAIN.
2. Focus on the analogy of a JIGSAW puzzle.
3. INTELLIGENCE is paramount.
4. Create Customized VALUE PROPOSITIONS.
5. Create OPTIONS for yourself.
Value Chain. Everyone starts their journeys and adventures with a road map. No different with your start-up. Who you are selling to, who are your customer's customer, and who are your suppliers, are all part of the roadmap. The segments and the companies need to be written down, preferably in a war room or collaboration virtual space for all to see and interact with. "Your market space" is a constantly moving/evolving organism and needs to be tracked in realtime. You need to know who the top "gangs" are, and the companies that make them up. Not only does it take significant to complete, but a good chunk of every executive's time should be spent on updating this proprietary roadmap.
Jigsaw Puzzle pieces. Many of us like a good jigsaw puzzle, particularly us analytical types. The analogy of jigsaw puzzle pieces is a great way to think about partnering with bigger players. Being an innovator, you the start-up usually has a piece that should fit into your customers' puzzles. The problem with jumping over 2nd teir players to the top tier, 800-lb. gorrillas - true "Goliaths" - is that they usually look for major chunks of puzzle pieces, not just one piece (i.e. mid-size company acquisitions). That's why it's tough to get their attention. That's why it more logical and natural to go to the 2nd teir players, closer to you in the chain.
This jigsaw analogy is a good way to think about "getting traction" - how easily, and with how many, does your puzzle piece drop into other players in your value chain? Corrollary: "Getting traction" in the sentence above can be replaced with "EXIT options" - something investors take particular notice of.
Intelligence. "Information" regarding the companies in your value chain is the critical component you must figure out how to get to advance your start-up. Most critical are the partner companies' weaknesses - missing puzzle pieces that companies needs. Companies rearely share share any of their weaknesses publically, so you can't expect to make a few phone calls and have executives spill their guts on this topic. Professional networking is the way to get this information - requesting introductions to key executives by trusted colleagues. The 'trusted' part gets you credibility so you may be able to get a secret need or two out of the conversation. This is the blocking and tackling work that is not easy and takes a long time. Hey, if it was easy everybody would do it.
Value Propositions. Let's review ... you are an early stage, (relatively) unproven company with a new "anti-gravity machine" and you need cash. You must create customized compelling value proposition for your partners up the value chain, or clearly showing how easily your puzzle piece fits into their puzzle. It's amazing how few founders and entreprenurs understand this, believing that the features of their A-G Machine will sell themselves. It's usually a lot of work for companies to integrate puzzle pieces. And we all know how those larger companies hate to do work if they can help it. So guess who has to do that work? Or, have a super-compelling proposition for them to take on the work.
Options. There's an old adage ... Doing a deal with one partner is the same as "no deal". Your partner will figure this out quickly in negotiations. If they don't have to make a move, why would they? It's better to just "monitor", and continue on their own "build it" options. (Or "check" if you're a poker fan.) Creating options for yourself is critical to closing a deal. This is all about creating scarcity - a negotiating tactic that pays to learn to master. Someone will get the puzzle piece and others will not.
Examples abound in every segment, but that will be another post. To summarize, you (David) can absolutely take down a Goliath. It's just 'work". :-) I hope this post leaves you with a few take-aways you can apply immediately to close some deals and better develop your partnerships. Email me if you'd like me to dive into more details on any particular tactics:
o Is your VALUE CHAIN clear to you - and the critical 5-8 companies to target?
o Do you know how to drop in your PUZZLE PIECE smoothly?
o Are you sufficiently networking for sources of critical INTELLIGENCE?
o Have you crafted and customized a VALUE PROPOSITION for each partner?
o Do you have OPTIONS? Are negotiating with more than one partner?
Entrepreneurs and early stage tech CEO's all need money and spend an awful lot of time seeking it. But so few actually get it. How come? Perhaps it’s because they haven’t taken the required creative deal-making steps in their own value chain. Just like bank financing, CEO’s have a better shot at attracting funding if they can tell investors, "We don't need your money." It may seem counter-intuitive, but when you really think about it, it's not that strange. Let me explain.
Investors only want to know a few key things:
1. That you are an entrepreneur and a good business person.
2. That you can influence / convince / recruit people over to your vision, despite the risks.
3. That your technology works as advertised.
What better way to do all 3 than convince a strategic partner or a big customer with a creative revenue or royalty sharing deal? By orchestrating and crafting a deal with a key player in your value chain, you immediately communicate that you are a serious player in the segment, and proved you are a real entrepreneur at the same time. Demonstrating business savvy with a win-win for both the David and Goliath is no small feat. Investors MUST take notice now - particularly any investors who are seriously playing in that segment!
An article about fashion eyeware e-commerce co. Warby Parker highlighted this phenomenon and said it best .... "The more we tell these guys we don't need their money, the more they want us", co-founder David Gilboa said, as reported in WSJ.com in 2011. http://online.wsj.com/article/SB10001424052702303654804576347170689688438.html
I’m not suggesting that you be arrogant and communicate this “We don’t need your money” phrase verbatim. The way you communicate it to investors is very important. For example, you have to show your financials and how they look after your creative deal with a partner. You could suggest that a new revenue (or profit) line, with $1M of funding, could look like this. But you are proving that you are able to make a small amount of money on your own accord.
I know that you might be thinking, “I can convince so-and-so it's a great play". Well stop thinking about convincing investors, and start thinking more about convincing customers. Why? Because Investor so-and-so only wants to hear about how you are doing with partners in your value chain!
In summary, the more energy you put into crafting and customizing that early strategic customer/ partner deal, that energy translates into real valuation. And guess what happens next, investors actually start pursuing you. Go figure.