Peter Skalla's picture

Unfair Entrepreneurship

Entrepreneurs and entrepreneurial communities good at startup ‘discovery’ win

After two trips out to Utah in October, I’ve concluded the state is building an unfair entrepreneurial advantage.    It’s scary how well they’re doing at startup and startup community building.

Utah’s secret is extreme focus on first principles of building successful startups—on what they call discovery.  Their well-developed distinction between the discovery stage and the execution stage of startup building—and organized efforts to embed discovery capability into the DNA of its entrepreneurial community—is having profound results.

Here’s the background.  When visiting Utah in early October I hit the local pitch night event, LaunchUp.  The director of University of Utah’s startup incubator, the Foundry, gave the amp session and threw my world a little off balance with his data.  Accelerator programs on average lower the success rates of their startups.  Incubators that provide deep business infrastructure to startups waste resources.  Lean startup methodologies may or may not be efficacious.  These are serious challenges to the conventional wisdom.

But then it got worse.  One of the program graduates took the stage.

Gary Jense, founder of Zeniick, described his virtual launch of a mid-priced wristwatch line, hitting 1,000 web pre-orders and raising funds for initial production through Kickstarter . . . all during Christmas break 2011 his senior year at the U.  He then described identifying a uniquely cost effective overseas supply strategy, gaining brand identification and loyalty within a large yet tightly defined target customer segment, securing retail distribution channels, attracting a senior designer from Skullcandy, and building on each wave of customer acceptance to find he was hitting some serious sales volume . . . all in the past ten months.  I regularly see entrepreneurs asking “How do I raise capital?” when their product hasn’t yet met its first user.  How do these startups compete with a Zeniick?

Of course I considered a call for legislation to stop this unfair competition.  But I had another trip to Utah last week, so I decided instead to reach out to the Foundry to see if they could fill me in on what they’re doing.  The result was a sit down with Bill Schulze, department chair at the U of U's Eccles School of Business, and Rob Wuebker, Foundry director.  A combined mix of engineer, PhD-academics, strategist, entrepreneurs, department chair, scientist, economist, biker, and pony tail, they were a fire hose of highly relevant insights.  (I consider 2 ‘double asterisk’ take-aways in my notes as an awesome conversation.  This one yielded 8.)  The most significant insight took the form of this diagram which they penned out on a napkin.

 

Here's the Foundry’s secret.  They define startup creation as simply as possible—business model discovery and business model execution.  Then they facilitate the process of entrepreneurs mentoring each other in real world case studies as each seeks to discover a viable business model.  The only entry criteria are bringing an idea and an attitude of being coachable to the group.  By helping entrepreneurs help each other understand how to discover a viable business model, a surprisingly high portion are able to simply, rapidly, cheaply prove they have a business model worth executing.  What struck me is just how much the focus on discovery and putting first things first enables the rest to fall into place.

Startups that focus first on discovery don’t build highly polished products to find they have inadequate market demand.  When they verify the market wants their solution, they put great focus on identifying sales channels to reach customers in scalable and cost effective ways.  They don’t spend their time and energy raising capital before they’ll be received by investors or with investors that are not a good fit for their business model.  They understand when and why they might need to bring in professional management when they’re ready to scale their discovered business model.

It’s not that the execution stage is easy.  Quite the opposite.  But business schools and corporate America have been training people to scale companies for many decades.  The rare skill is discovery.  I’d venture that more than 90% of entrepreneurs, mentors, and entrepreneurial communities don’t differentiate between identifying versus executing a workable business model.  In teaching discovery the Foundry instills the easiest and lowest cost—but also the most rare and most enabling—aspects of startup building.

I think of discovery as:

Identifying and validating

    through significant real world product contact

           with real world customers

       that you have a solution to a problem

    that is deeply held

by many people

    who will pay significantly more for your solution than it costs

        and can be reached through a repeatable and scalable sales process

The delightful thing is, a business model can be discovered or validated for a tiny fraction of the cost of executing or scaling one.  The resources required to execute need not, should not, be raised before the evidence is in that the startup is on target.  Columbus makes an apt analogy.  He was seeking to discover a trading business model through the innovation of westward travel.  He could have approached Queen Isabella with an execution funding request--capital for a fleet of trade ships.  Instead he focused on discovery and asked for just enough to find out if the westward route worked.

As Wuebker pointed out to me, there are many discovery models.  Scientific experiment, drilling a hole in the ground, and focus groups are examples.  The lean startup methodology is a particularly well developed discovery model.  Another model is the “build it and they’ll come” route espoused by some Iowa farmers as well as WebVan.  WebVan built a national warehouse/truck fleet/online logistics system to deliver web-ordered groceries to consumers.  $1.2 billion and an IPO later, they discovered consumers don’t want to do their grocery shopping online and went bankrupt.  I’ll take Zeniick’s wristwatch-Christmas break-Kickstarter discovery model every time.

Radical focus on discovery before execution turns out to be powerful.  Following the scientific method, entrepreneurs make a hypothesis about each interconnected element of their business model and then set out to test each assumption in as simple a manner as possible.  Some hypotheses can be tested at a resource cost of $10 (NetFlix’ founder reportedly mailed a dozen DVDs to himself to test if they’d survive the USPS); others $1,000; and others $1 million.  The point is, a massive amount of risk can be taken out of the equation by tackling (validating) the low cost but critical assumptions first.  If an entrepreneur has already validated six of eight key assumptions and the next experiment will cost $50,000—say, manufacturing the first run of wristwatches to fill pre-orders or building a working software prototype to deliver to an enterprise customer who’s signed an LOI expressing volume interest—the company is an excellent candidate for Angel financing.  There’s risk, but there’s also clarity.

How much risk and uncertainty has the entrepreneur eliminated from his startup when he’s validated his business model?  Think about the third university campus Facebook launched to.  They had another thousand campuses (and a billion users) still in front of them.  But by about number three, they knew they’d discovered a powerful business model—and so did their VC backers.

Most entrepreneurs seek to execute their business model simultaneous with discovery.  Not knowing a better way, it feels pragmatic and purposeful to dig in.  So they build as much of a scaled down version of traditional big company infrastructure as they can.  A sales force, a marketing department, manufacturing, distribution, PR, and full product development teams.  Focusing instead on business model discovery without trying to execute or scale that model until one has truly validated it has powerful economics.  I estimate the discovery first route will typically knock between one and three zeroes and the same number of years off your startup budget.  Entrepreneur-thinkers like Steve Blank, Eric Ries, Nathan Furr, the folks at StartupCompass, and Sean Ellis have shown the world this better way.  But the message isn’t being distilled.  I love how Utah is changing that, one group of entrepreneurs at a time.

* * * *

With Utah’s Foundry cranking out a couple hundred entrepreneurs a year who understand discovery and putting first things first, and I’d guess dozens who understand it deeply and really do it well, the state is racking up a significant entrepreneurial advantage.  This clarity will enable them to approach the level of top tier entrepreneurial ecosystems like Silicon Valley and Boston.

Fortunately, startup communities are all about sharing and the Foundry is no exception.  I sat down to ask Schulze and Wuebker what’s working for them so we can apply it within my community.  Their return challenge: “Don’t replicate the Foundry.  Build something ten times better.”

Ultimately the challenge is about finding better ways to instill discovery into the entrepreneurial ecosystem and to then give a path for entrepreneurs with discovered business models to execute and scale.  I suspect that how well communities rise to this challenge will determine whether they join the fabric of vibrant entrepreneurial communities of the next decade or enter a silicon rust belt of lost potential.

________________

This blog post is being simultaneously published on Startup Finance and the blog of CFOwise, the outsourced  CFO solutions company.  The author works as a startup CFO with CFOwise serving startup companies throughout the country. 

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