Steve Blank

Steve Blank

On: 2012-09-13 14:17:22 | Guest: Steve Blank


Basel: Hi, this is Basel with TechSparks. I have with me Steve Blank, one of the most popular figures in the lean startup world, and also the author of "The Four Steps to the Epiphany". Welcome to the show, Steve.
 Steve: Thank you. I`m glad to be here.
 Basel: Let`s start by asking you the first questions, which is about the book, "The Four Steps to Epiphany". You covered all subjects, from bringing an idea to[market execution. The book also offers some insights into what makes the startup succeed, and also leaves other selling furniture. Can you please tell us some key points about that?
Steve: Sure. So, "The Four Steps to the Epiphany" is probably the first handbook written particularly for entrepreneurs. It`s very different from the things that you learn if you went to business school and got an MBA. If you actually go to business school you learn, essentially, how to manage and administer large corporations. You learn about HR, and finance, and manufacturing, and operations. In fact, you learn everything about executing an existing business model.
 What we didn`t understand for the last 50 years in Silicon Valley until I wrote this book and then others that followed, is that startups are not about the execution of a business model. Startups are about the search for a business model. What "The Four Steps to the Epiphany" does is point out the specific things that entrepreneurs searching for a business model need to do. The biggest one is around the fact that there are no facts inside your building. So, you need to get outside, and get some customer input before you start spending the long march in building your product.
 Basel: Phenomenal. Looking at your background, you participated, personally, in eight start-ups, and you co-founded those companies. Looking closely at Pixar, you said that it had an obscure origin. Can you please comment on that?
 Steve: Yeah. Pixar was not one of the eight. I happen to be consulting for Pixar between the eight. I was at Pixar when they were a hardware company. Pixar actually spun out of Lucas Film with a device called the image computer, which was a way to manipulate movie resolution film.
There was just a small group there, who was interested in making movie shorts, and then animated TV commercials, but secretly harbored a vision of, someday, actually, getting enough computing horsepower to make a movie. That of course was John Lasseter`s group. Over the years, Pixar abandoned hardware, and then abandoned commercials, and then abandoned everything else to become the company we now know as the preeminent animation and movie company in Hollywood.
 Basel: So, it`s often that we have a process to manage product development, but we have no process to manage customer development. Your fix to this is to build a customer development process. Again, can you please give us some insights about that?
Steve: Sure. The customer development process, basically says, again, there are no facts inside the building. What you really need is to organize your thoughts about the start-p. What we now believe, is that every startup, every large company, in fact every company has implicit in it, a business model.
 Now, it used to be, you`d get three professors in a room and then you`d walk out with 12 definitions of what a business model is. Over the last couple of years we`ve now, kind of, standardized, at least, here in the Silicon Valley, that a business model is the one that`s described in Alexander Osterwalder`s book, "Business Model Generation".
 He says, "Look, any startup, you`ve got nine things you need to worry about. What are you building?" That is, what are you offering customers? We call it the value proposition. What`s the service or product? Two is: who are the customers? Oh, good. We`ve got to figure those out. Three is: how are you going to reach those customers? What channel? Is it direct on the web? Are you going to have a sales force? How are you going to create demand? He calls that customer relationships.
 Then, what`s your revenue model, or pricing strategy? Then, do you have any partners? Do you need any key resources? Do you have any special activities you need to do? And then, what`s your expense model?
 These nine boxes are the first step that we suggest, that any entrepreneur needs to do. We call this, extracting your hypothesis. That is, hypothesis, by the way is a fancy word we use at Stanford and Berkeley, because students pay a lot of money, but outside the building it`s actually called guesses.
 We`re actually going to now make you take all of your guesses, write them down, put them up on a white board, and stare at them for a while. In the old days, that`s all we would do, because then you`d go back and code. We now know that all you have are guesses.
We take all those guesses, we let you keep writing, but we call them minimum viable product, that is the first core piece of what hypothesis you want to test about your product. Then, you get outside the building, and you start testing each one of the business model hypotheses with a formal process called customer development. That customer development process is, again, the core of what "The Four Steps to the Epiphany", the book about that testing process is. What this does is just eliminate tens or hundreds of the early mistakes most startups make because implicit in that customer development process is two or three key ideas.
One is this thing I alluded to before called the minimum viable product. Instead of building the entire product, shipping it and getting customer feedback, we now say, "No, no, no. Build the smallest unit of something that will get you feedback or orders. You`re looking for the smallest thing you can do. Maybe, you can get the website up and see if you can get people to even push a button that says `push me`, just to test whether you can get them there."
Then, the second key idea is this notion of a pivot. A pivot is really a startup centric concept that says: do you know in startups, we don`t actually go from success to success like a big company. We actually go from failure to failure. If you actually think about how startups really work when people never told each other is that most of them aren`t succeeding most of the time. They`re actually running a series in the past of unconscious experiments. Now, we`re just going to make them conscious.
We`re going to say: listen: we want you to try this and don`t worry if it fails. We`ll just know that it`s going to fail, but we`re going to learn from everyone of them. And so, we do a series of hypothesis tests, most of them which aren`t right, so we`ll either iterate which means slightly change or pivot. My definition of a pivot is when we substantively change one or more of our business model components.
The way we get to a pivot is we get a lot of customer feedback, and no customer says you need to pivot, it`s the data that comes back to the entrepreneur. If they`re great, they will extract an insight, and it will be one of these moments where you go, "Oh, this is what they`re trying to tell us. What if we actually talk to a different customer? What if we did freemium versus subscription, or what if we did something else? That`s when those pivots end.
And then, the third piece is speed that entrepreneurs are all about fast and rapid testing and iteration and hypothesis testing and etc. Speed eliminates cash burn, or it dramatically compresses the amount of cash at the time you need it which is the enemy of startups.
Basel: So, if you were to name a few companies in the tech space right now, who are doing that?
Steve: To me, the best examples are Groupon and Zynga. Zynga is just a machine and iterated on customer feedback. Groupon essentially started with a customer development process.
Basel: Sure. Could you check for both of us around the frame? Sometimes, we happen to move around.
Unknown: You`re good.  
Basel: OK. Great. So, jumping to a subject within the cycle that you mentioned, the product launches, some of them succeed and some fail. Why is that?
Steve: Well, it turns out that for years and even still today, startups somehow think they need to launch their product, just like a big company. Big companies have launches, so therefore, I need to have a launch. Well, big companies launch because they already have existing customers when you typically see a company launch. It`s about the second, third or fourth product, but for a startup to launch, it sometimes doesn`t make any sense at all. Do you remember Google`s launch?
Basel: Absolutely.
Steve: You do? Yeah? They never had one.
Basel: Absolutely.
Steve: Google never had a launch. The point is that startups sometimes confuse that you want your mother to read about you versus getting customer demand to your site. So, you should really deconstruct what it is you want to do with what you call a launch. Are you looking for funding? Are you looking for demand creation? Are you looking for business press? Are you looking for ego gratification?
It turns out a lot of incubators force their startups through peer pressure to launch, but no one ever backs up and says: what exactly are we doing because the problem is you never get a chance at launching twice. The press doesn`t cover you again when you say, Oh, remember our initial idea? We made a mistake." No, what you want to do is spend the time getting it right. Figure out why you want to create demand and who you want to create it for and then launch.
Basel: So, my next question is about product development. I know we touched up on that already but mainly for web startup. What is the product development like for such a company?
Steve: Sure. So, web startups have it incredibly easy. Nowadays you can develop on your Laptops. You can use Amazon Web Services or RackSpace or something in the cloud where you could off load the cost of normally having to buy work stations or computers or hardware, etc. You`re just buying computing as a utility, but really the goal for a web startup and an entrepreneur which usually confuses them is they always tend to think: oh, no, no, no. I have my entire vision. We`re building my vision now. We`re building all the features. We`re arguing about the UI. We`re arguing about the buttons.
No, that`s not what you`re doing if I’m involved. What we`re building at first is what I call a low fidelity website. I want you to test your assumption of what the problem is and then show me what you think a solution would look like cheaply. Oh, I think the problem is people really want to go do X. Good. Get me a couple of those people to the website and just put up: we do X. If you`re interested, push here and see if you can anybody to agree with you about your assumption of their problem.
And so, what we do if you`re following a customer development process on the web, is test all the key assumptions in your business model. We`re solving this problem. Great. So, you`re solving that problem, so if I get people to your site and you say that, you should have hundreds or thousands of people pushing this button that says I agree taking them to the next page. Oh, absolutely. And, of course, the answer never works out like that.
What we do is construct, at least, in my model a website based on these minimum kind of feature set ideas rather than engineering the entire product end to end, which is very different from the "let`s argue about whether the button should be blue or green or whether the UI is perfect". I actually go: you know, those are important, but they`re second order effects to, are we solving a problem or satisfying a need that people have identified or feel that`s important.
Basel: Let`s talk about the Lean Launch Pad. How has that been so far, and if you have any plans for going global with it?
Steve: So, the Lean Launch Pad is a class that I first taught at Stanford University in the engineering school. It has now been adopted by UC Berkeley Business School as well as the Columbia Business School, and then in 2011 was adopted by the U.S. National Science Foundation to teach scientists and engineers.
What it really is, is simply a class that takes students, forms them in teams and from day one has them constructing a business model, a business model diagram, building their product in the class, whether it`s hardware or software, and then getting out of the building and marching through, who are our customers; can we create demand; what`s the channel, etc?
If you`re building a web-based product, the goal is in eight weeks to get orders. The record so far is - I have had a consumer products company get a million and a half dollars in orders in the middle of the class.
Basel: Wow. That`s phenomenal.
Steve: And the last class that just finished, 21 hard core science and engineering teams, making graphene and chlorine sensors, real science and engineering. We would have been happy if three out of the 21 teams would decide to move forward as a company. We were kind of stunned and a little embarrassed that 19 out of the 21 have decided to continue forward to get funding and become entrepreneurs.
In this case, they weren`t 21-year-old software web people. They were, average age was 46-year-old full professors at universities. So, I think we might have discovered a process that`s pretty exciting.
Basel: Absolutely. That`s got a great potential overseas as well.
Steve: I think so, too. There`s nothing U.S. centric about the process. The only thin that U.S. and Silicon Valley centric is what we have in the Silicon Valley, which is now actually more of a state of mind than it is what we physically do here. It`s the peninsula that extends south from San Francisco to a city called San Jose. Our key industry now is now web or hardware or anything. What we do best here is just innovation and entrepreneurship, I mean, just in general because what we know how to do here…
Do you know what we call a failed entrepreneur in Silicon Valley? It`s a special name. Do you know what we call them? Experienced. That`s unique in this cluster. It`s even unique in the United States. We don`t call them failures. We call them experienced, and so the only limitation in expanding entrepreneurship overseas is one, is there a culture that accepts that failure equals experience. Two is, is there a culture that`s willing to adopt commercially new technologies, and are there markets sufficient to support it? If those two conditions exist, then you have the beginning of something exciting.
Basel: how do you see the U.S. market in general? I know other cities have been popping up like New York and Boston and other cities. What`s your take on that, and also do you see something like this happening overseas in different markets?
Steve: So, the secrets of Silicon Valley is a talk that your viewers can find on YouTube. It was given both at the Computer History Museum, and I was invited to talk at Google. It was how Silicon Valley actually had its roots in World War II in the United States, but one of the things that people don`t realize about entrepreneurial clusters, in general, they`re not engineered to provide jobs for the local populace. That is, they eventually do that but, in fact, great clusters like Silicon Valley, New York and Boston are magnets, are attracters first. That is, they attract people to come there because they are hot beds of entrepreneurship.
If world wide, people are not coming to your city or region or town because it is the exciting place to be, then the odds of it taking off as a cluster is probably low. But if, in fact, people are coming to Jordan or Lebanon or Saudi Arabia or Egypt to be entrepreneurs because they`re something exciting in that city or region or town, then you have good odds of this thing happening.
Basel: What pointers can you give to our target audience who want to make it not necessarily big but actually make it through the startup phases?
Steve: The biggest pointer is an entrepreneur needs to have a set of characteristics that`s almost worth remembering. It`s a personal check list. Number one is you have to have a vision if you want to be a founder, not just if you want to be an employee. A founder of a startup has to see something in the distance that no one else can quite see. I see what this thing looks like in a couple of years, and they have to be good enough and articulate enough to attract other people and say: no, no, no. Look over here. Let me explain to you, and those other people really can`t see it. Start believing as well.
So, one is they have to have vision. They have to have passion. They have to have the ability to attract other people, and they have to be resilient because entrepreneurship doesn`t happen like in the movies. It`s not like you have an idea, you get funded and you make a billion dollars. You fail a lot. In fact, if you would average all the salaries of entrepreneurs worldwide, you probably would have been better off getting a construction job, but the outliers are the ones that change the world.
So, you have to be resilient about failure, and you have to be agile and opportunistic. I think there`s a core in every population. This isn`t an American thing. This isn`t a Chinese thing. This is just something that`s innate. Some percentage of human beings happen to be resilient and opportunistic and agile. And then, for your local economy you have to be realistic about: is there an available market? Are there customers here that I could attract, here today, or within my lifetime of either me physically or, at least, my investor`s lifetime of being interested.
I think there is just a wave of untapped opportunities in the Arab world to certainly know American and know Chinese and figure it out. I think these startups are going to merge and change the face of entrepreneurship.
Basel: Thank you so much for your time. This has been really insightful, and we look forward to listening to you again in the future.
Steve: Great. I hope to visit you guys overseas.
Basel: Great. Thank you so much.
Steve: Thank you. Take care.

About the Guest:

After 21 years in 8 high technology companies, Steve retired in 1999. He co-founded his last company, E.piphany, in his living room in 1996.His other startups include two semiconductor companies, Zilog and MIPS Computers, a workstation company Convergent Technologies, a consulting stint for a graphics hardware/software spinout Pixar, a supercomputer firm, Ardent, a computer peripheral supplier, SuperMac, a military intelligence systems supplier, ESL and a video game company, Rocket Science Games.


After Steve retired, He took some time to reflect on his experience and wrote a book about building early stage companies called "Four Steps to the Epiphany". His latest book, The Startup Owners Manual integrates 10 years of new knowledge.


Steve moved from being an entrepreneur to teaching entrepreneurship to both undergraduate and graduate students at U.C. Berkeley, Stanford University and the Columbia University/Berkeley Joint Executive MBA program.

Interview Segments:

Handbook For Entrepreneurs

Obscure Origin For Pixar

Customer Development

Cycle of Product Launch

Product Development

Lean Launch Pad

US Market & other Markets

Pointers to Entrepreneurs

Comment on the Interview:

Steve Blank

Steve Blank, a serial entrepreneur and one of the most popular figures in the lean startup world and also the author of "The Four Steps to the Epiphany".

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