I have long viewed my role as an investor and board member with startups as that of a product manager, where the “product” is the company itself, not the product the company sells to its customers.
Using this metaphor, the product’s features become things like its business model, gross margins, cash collection cycle, etc. The product’s brand becomes its corporate identity, its customer list, etc. The most important product features are, of course, the entrepreneurial team members.
New research from Stanford now demonstrates an empirical basis for my metaphorical approach. In “How Do You Explain a New Product Category?”, Jesper Sørensen of Stanford’s Graduate School of Business explains that a startup’s potential customers usually care more about who they believe the company is, and how they feel about the company and its leadership, than they care about the product offered by that company. One excerpt:
Truly innovative products are often the ones that bring ideas across categorical boundaries. But doing so creates potential confusion, and people devalue what confuses them. The solution, difficult as it may seem, is to adopt a crisp identity instead. After all, staking a claim on your identity is a key element of the entrepreneurial “bet”: When introducing an entirely new product into the marketplace, make a choice about who you are.
Read the full article here.
(image by Norbert von der Groeben Photography)
Adding fuel to a long-running debate, a new Stanford research study shows that startup founders with technical backgrounds are more likely to be successful than those with business degrees:
A Stanford study highlights the critical importance of strong technical skills in launching tech ventures, casting doubt on the conventional wisdom that a founding team with diverse business skills is the best approach.
The study, led by assistant professor Chuck Eesley in Stanford University’s Department of Management Science and Engineering (disclaimer: I am also an adjunct faculty member in the same department), has been published online by the journal Strategic Management.
A key takeaway from the study is that technically-focused founders can more quickly reach market milestones, from design and prototype completion – all the way to product launch.
The full article by Michael Pena from Stanford News is here.
Last week’s Schumpeter column in the Economist had an interesting report on a recent management conference in Vienna. Rising interest in how to manage “big data” and complexity across global organizations reflects the speed and volume of information gathered in real-time:
Businesspeople are confronted by more of everything than ever before: this year’s Global Electronics Forum in Shanghai featured 22,000 new products. They have to make decisions at a faster pace: roughly 60% of Apple’s revenues are generated by products that are less than four years old. Therefore, they have a more uncertain future: Harvard Business School’s William Sahlman warns young entrepreneurs about “the big eraser in the sky” that can come down at any moment and “wipe out all their cleverness and effort”.
The article does a nice job of articulating two different views on how best to manage this complexity. The first approach is to leverage self-organization to manage via networks instead of hierarchies. Think Kickstarter, Kiva, AirBnB, or AngelList.
The second approach is to impose simplicity, articulating a few simple areas of clear focus for the entire business organization to rally around. Companies like Coca-Cola, McDonald’s and the German Mittelstand companies are examples of this approach.
I found the article interesting although I disagree with its contention that these two approaches are in competition with each other. I believe that the most successful and innovative growth companies today are those that use _both_ of these approaches. They pursue simplicity of focus, and articulate this simple vision to an organization that is network-based instead of hierarchical. In fact, in my view, it’s hard to imagine the success of AngelList, AirBNB, etc without having both ingredients.
In any case, the full one-page article is worth the read. You can access it here.
At Flywheel Ventures, we invest in entrepreneurs with solutions to the world’s greatest challenges in information technology and urban systems. We often refer to our strategy for finding those entrepreneurs as “fishing where everyone else isn’t.” While looking in non-traditional geographies is a component of that strategy, it also refers to our search in markets and technology sectors that other venture capital investors rarely pay attention to. Very frequently, this strategy finds success in cities across the American West with vibrant creative cultures and strong university, corporation, or national laboratory R&D organizations. Nearly all of Flywheel’s 40+ portfolio company investments have been made in such contexts, with over 2/3 of our investments specifically having origins in R&D organizations, and about 1/3 having explicit technology licensing agreements or equity ownership arrangements with those initial R&D development organizations where intellectual property (IP) was created. Illustrative of our commitment to this investing formula are our recent investments in Tribogenics (a licensee and spin-out of UCLA), Lotus Leaf (a licensee and spin-out of the University of New Mexico), and TerraEchos (a spin-out of a predecessor entity’s R&D work funded by S&K Technologies).
Given our focus and experience in technology spin-out investments at Flywheel, then, the title of this post may seem odd. Certainly, it is intentionally provocative. However, it synthesizes a key lesson I have learned in this deep experience of entrepreneurs building companies at the intersection of global markets and technology commercialization. That lesson is, quite simply, that technology commercialization is both misleadingly-named and vastly-overrated as a strategy for entrepreneurial success. Instead, I believe that “people transfer,” not “technology transfer,” is a much more accurate descriptor for a successful approach. Great companies are built by great entrepreneurs - period, full stop.
Now, it is certainly true that there are segments in which the “technology transfer” or “technology commercialization” strategy has merit, i.e. biotechnology or advanced materials science. If someone in an R&D organization somewhere has truly developed a new pharmaceutical molecule that cures a specific form of cancer, a successful company can likely be built based on the exclusive license to that molecule, regardless of the entrepreneur strengths of the team. Since Flywheel does not invest in life sciences-based companies or entrepreneurs, my expertise in that specific arena is limited.
However, in the areas of IT and urban systems where Flywheel does invest, I am generally in the camp of believing that IP is vastly overrated in general. In the information technology arena, IP is not only useless but, in my view, actually detrimental. There is a movement to eliminate patents on software completely and I am supportive of that movement: http://en.swpat.org/wiki/Software_patents_wiki:_home_page
None of this is to suggest that relationships with R&D organizations aren’t valuable to Flywheel or other VC investors. Specifically with Flywheel, over 2/3 of our investments have had origins inside of R&D organizations. Less than half of those, however, involved any sort of IP license agreement. The more important value from our relationships with R&D organizations – from the Flywheel perspective – is getting to know the _people_ inside the technology R&D organizations. While most will, by definition, not be commercially-viable entrepreneurs, there are always a handful who discover after some time in the non-commercial R&D world that the commercial world is where they passionately belong.
This is also not to suggest that those technologists who decide to leave the safety and comfort of a non-commercial R&D setting to test the entrepreneurial waters will necessarily be the right CEO or other founding executive. Often, they take a founding Chief Scientist, Chief Technology Officer, VP Engineering, or similar technical role, and hire more experienced entrepreneurial business managers for the CEO and other executive positions. Also not infrequently, they may only take an entrepreneurial leave of absence for a year or two, working with the company in a technical advisory capacity to assist the transition from laboratory setting to commercial production. All of these roles are quite legitimate and appropriate.
In the end, however, great companies are built by great entrepreneurial teams. As I have articulated in other posts, the quality of the entrepreneurial team is the most important criteria in my investment decision - and outweighs all other criteria put together.
As a result, then, in the IT and urban systems sectors where Flywheel invests, “technology transfer” or “technology commercialization” is at best an initial, baby step. The initial technology or IP can serve as a useful organizing “seed crystal” around which a world-class entrepreneurial team self-organizes or is formed (often with our assistance). However, any investment is ultimately going to be primarily based on the quality of that team, regardless of the initial technology. Too often, the organizations charged with “technology commercialization” fail to realize this - or, more often, they are not provided the resources or scope of mission to implement this - and they are left wondering why their impressive collection of patent filings and IP assets seems to sit on proverbial shelves, gathering dust. If, instead, they viewed (or were provided the resources and scope of mission to view) technology commercialization as only the first step in a broader “entrepreneurial team formation” process - and measured their success in these broader terms - I believe a lot more R&D would end up in the commercial marketplace.
So, while I purposely titled this post to be thought-provoking and controversial, by all means, there is tremendous value in investigating, protecting, and publicizing the technology and IP assets inside of R&D organizations. That does provide a useful service, but it is only a starting point. The “commercialization” process is not done until a world-class entrepreneurial team has been formed - and, in most cases, it doesn’t even really start until the team formation. Until the “people transfer” process is complete, the “technology transfer” or “technology commercialization process” will remain useless.
As a seed- and early-stage venture capital investor, I nearly always invest in companies that have proven technology and maybe even a working product prototype, but haven’t yet achieved any critical mass or “traction” with commercial customers. As they go through the process of iteration in search of commercial customers to generate meaningful revenue, I have watched nearly every company make the same basic mistake, which I would describe as “taking far too long to make a moderately-better set of decisions about target market selection.”
Instead, a successful company selects a narrow target/segment focus and puts “all the wood behind the arrow” in firing at that target, even if it isn’t yet fully clear that it is the right target. Obviously some amount of thinking should support the selection of an initial market segment to target. Once that choice is made, however, the entrepreneurs should shut down any further effort to re-open the decision or incrementally “convince” doubters of the wisdom of that selection, until the company has experimented with full focus on that effort. Instead, the company should insist on a culture, first coined by Intel, of “disagree, then commit.”
The most important decision is not in the choice of an initial target market segment, but rather, in forcing the shift to an execution-oriented mindset in the sales and marketing effort, which can only really be done well once everyone in the company understands _precisely_ who they are attempting to sell to, and what the value proposition is thought to be. Of course, these will often be wrong - but the more important decision is to define how the company will measure the success of the initial market effort, and then quickly “pivot” or iterate when the evidence demonstrates the need to do so.
As a side note, I think the actual definition of the initial target segment needs to be much narrower than most entrepreneurs intuitively believe. It cannot be something like “manufacturers/OEMs.” Both marketing theory and my own experience have shown that the most successful sales efforts result from the narrowest targeting of prospective customers. This is often counter-intuitive to entrepreneurs who naturally want to be able to sell to the widest possible customer base. That will come, in time, but you can’t sell widely to a large number of customers until you can successfully, repeatedly and predictably sell to a small set of very specific and well-defined customers.
For example, rather than targeting “OEM manufacturers,” I’d suggest a strategy that narrowly targets a defined segment such as “U.S.-based OEM manufacturers with $50-500 million annual revenue that have at least 50 dedicated field support employees and that make electromechanical products that sell for at least $25,000 per product and have at least 1,000 individually-sourced components.” The beauty in doing this is that you will end up with just a few hundred or even a few dozen targets – and then you can put laser focus on winning a meaningful percentage of those accounts with a set of marketing and sales materials, and value proposition messages, that sound to the prospects as though you only exist to serve exactly them. (At some level, this is just a rehash of Geoff Moore’s pioneering work on technology marketing strategy as articulated over 20 years ago in Crossing the Chasm).
The wisdom in forcing this very narrow segmentation is NOT that you will absolutely turn out to be right, or that it will necessarily work. The wisdom is that it is the only real way to really find out whether or not it is right or wrong, and if it is wrong, you can pivot that much sooner.
Too many entrepreneurial companies (in my experience) end up failing, or succeeding sub-optimally, because they take too long to make the highest-quality right decision. If your company is building a medical device for heart implants or control software for airliners, that strategy would be appropriate. However, most technology entrepreneurs aren’t making a product that affects life and death. As a result, I would rather see a company make the _wrong_ decisions much, much faster, and then couple that decision speed with a set of clearly-defined-in-advance metrics for how you will judge whether it was the right decision or not. Once it becomes clear that a certain decision was wrong, you simply change paths and iterate.
The importance of decision speed was nicely captured in the famous “OODA Loop” decision-analysis framework, first developed by US Air Force Colonel John Boyd to improve the way combat fighter pilots made successful decisions. His analysis was that the best pilots do not make better decisions, on average, than the worst pilots. In fact, they often make *more* mistakes than the worst pilots. However, they have much greater _speed_ at which they make decisions (right or wrong) and then quickly evaluate, iterate, and make another decision. The full concept is described adequately on Wikipedia here (http://en.wikipedia.org/wiki/OODA_loop) and there are lots of complete management books devoted to the concept.
In conclusion, most entrepreneurs would benefit from spending far _less_ time trying to make the right decision up-front about what set of customers to target, and far more time narrowing the focus, then launching the sales and marketing effort to see if it works or not. Once you plant the stake in the ground and proceed based on those decisions, and apply well-thought-out metrics and analysis for whether or not the strategy is succeeding, you can change course much more rapidly according to those initial results.
“The only decisions an entrepreneur makes that truly matter in the long run are those that involve deciding who to trust."
Every other week or so, I am introduced to an entrepreneur who immediately sends me a non-disclosure agreement and asks me to sign the NDA before we talk further. Among other signals, this indicates that the entrepreneur has failed do almost any homework on the process of raising venture capital investment, as the blogosphere is full of well-articulated posts about the process in general and about NDAs specifically. In short, venture capitalists never sign NDAs.
My well-known VC industry colleague and prolific industry blogger Brad Feld summarizes this industry norm as follows:
“Asking the venture capitalist to sign a nondisclosure agreement, or NDA… is a stupid idea perpetuated by lawyers. Most venture capitalists will not sign an NDA, so all you’re doing is putting up a barrier to get their attention and demonstrating your naivety.”
Despite the excellent treatment elsewhere in the VC blogosphere, many of the entrepreneurs that Flywheel encounters have not been exposed to these norms. As a result, I occasionally find it useful to re-articulate the rationale here, so today I thought I would do so again. Of course, this post does not constitute legal advice.