- So I did eight startups in 21 years,
all of them in the 20th century.
And the only tool I had as a founder
was this thing, anybody recognize this?
Says Business Plan.
Business Plan was the book when venture capitalists
said go write a plan, you kind of looked at
what everybody else was doing and basically
a business plan was what you thought you were gonna do.
And it had a great appendix, Appendix A
which had a five year forecast
and surprisingly all of them said $100 million by year five.
(audience laughing)
And in fact, if you really think about it,
a business plan still to today makes all the sense
in the world for your second, third or fifth product
in a large corporation because you have a series of knowns.
But a business plan for a startup is really
kind of different because in a startup you don't have a
series of knowns, you have mostly a series of unknowns.
And this is a big idea because the only people
in the 20th century to require a five year plan
for a series of unknowns were venture capitalists
then the Soviet Union.
(audience laughing)
That's a joke, okay.
Write that down.
So one of the other things we recognize as entrepreneurs
was that no business plan survived first contact
with customers yet this was the only tool we had
and it kind of made sense because most venture capitalists
at the last quarter of the 20th century were
either MBAs or financial types and that what they
grew up with, and what's interesting was there
was clearly no distinction between the tools
of what a startup would need versus what a large
company would need, we didn't even have a language
to distinguish the two.
So when I retired after doing eight of these,
I started to contemplate, what worked and what didn't.
And what I realized was we never even were able
to articulate something as simple as this.
Startups Are Not Smaller Versions of Large Companies.
This believe it or not, which seems like duh,
was a heretical idea 16 years ago.
And even more so, this was heretical,
Large Companies Execute Known Business Models.
Alright, a large company knows it's customers,
knows it's competitors, knows it's channel,
knows pricing, it knows that 'cause that's how it got large.
Yes, stuff will change but yes, we're large because
we know all that and we do a great job of executing it.
But here was the distinction,
startups don't execute known business models,
Startups Search for Business Models.
This distinction between search and execution
in the history of entrepreneurship
had never been written down.
If you would have asked practitioners,
they would have said yeah, we know something's different,
we keep getting fired or our company keeps not working
but we don't know why.
And the mistake we were making as entrepreneurs were
assuming that everything we wrote in that plan,
somehow magically translated into facts
when all we had were a series of untested hypotheses.
And we were failing because we were confusing what
we should have been doing which was searching for
business models but instead we were executing them.
And so I realized that startups needed their own tools,
different from those used in existing companies.
And so we came up with this idea called the Lean Startup,
which is simply a risk reduction
methodology for early stage ventures.
Nowadays, not only for startups but inside of large
companies as well and as you'll see later,
inside the government.
And the Lean Startup has three simple components,
one is let's take all our hypotheses, who are our customers
who are the stakeholders, who are the regulators,
what are we building for them?
What are their needs?
What jobs do they want to get done?
What pains or gains?
This, who are the customer and what are you building
are the two most important things in any market
you need to figure out and it has a special name
called product market fit.
The mistake very bright founders make is believing
that because you implicitly think you understand
the problem on day one, you take some money and you go
build the solution and you ship the product.
And the smarter you are,
the deeper the hole you tend to dig.
One of the things I've learned painfully is that
as smart as you are, there is no way you're smarter
than the collective intelligence of your
potential customers and they don't exist inside
your building, so therefore there are no facts
inside your building so get the heck outside.
We use this thing called The Business Model Canvas
by Alexander Osterwalder to kind of frame
the core commercialization hypotheses early stage
ventures need to worry about.
It's not all of them, but it's the core.
Customers, value proposition, how you're gonna make money,
what are your costs, what are partners,
activities, resources, etc.
But then, we say you need to get out of the building
and test those hypotheses and by test them,
I don't just mean here's a product, do you want to buy it?
That's selling, I mean getting out and understanding
deeply what are the customer problems,
what are their needs and what kind of solution
might actually solve them.
And so not only do you talk to those customers,
you build something called minimum viable products,
because the third piece of Lean is using
agile engineering to instead of specing an entire
solution and then building it and shipping it
and finding out people don't want it,
you build the product incrementally and iteratively
and you continually interact with those customers
trying to understand whether you're on the right track.
These three components, business model design,
customer development and agile engineering
is the Lean Startup.