1. Engineering 245 The Lean LaunchPad Session 1: Overview/Business Models/Customer Development Professors Steve Blank, Ann Miura-Ko, Jon Feiber http://e245.stanford.edu/

2. Agenda “ Is This the Right Course for Me?” Course Objectives/teams/project Introductions Class Logistics Building a “Lean Startup” –Idea –Sizing the Opportunity –Business Models –Customer Development Break: Stay If You Want to Be in the Class Class “Culture” and Next Steps

3. Course Objectives Understand the real world aspects of Entrepreneurship by getting out of the building –Analyze and assess an opportunity –Build the product –Get orders –Work with a team Learn whether entrepreneurship is for you

4. What Will you Learn? Opportunity evaluation Search for a Business Model Customer Discovery and Validation Operating and decision making in chaos with insufficient data Teamwork

5. The Course ‘By the Numbers’ 3/4 Units of Credit 3 Instructors, 2 CAs, 25+ Mentors, 8 Lectures 8 Weekly 10-minute presentations 1 Final 30 minute presentation 3 Textbooks 5 -10 hours of work a week outside the classroom

6. Course Reading Business Model Generation Four Steps to the Epiphany Founders at Work copies available at the bookstore

7. This Class is Hard You can’t pass by attending the class Your grade is determined by the work you do outside the class There’s a lot of it You are dependent on teamwork and teammates – communication is critical

8. Teams Suggested team size is 4 people –Deadline for team formation is Jan 6 th –Must contact your mentors by Jan 7 th Present Weekly and for Final –Weekly lessons learned –Final is demo and summary Class is about teamwork, discovery and fast iteration

9. Team Projects Any for-profit scalable startup If you are a domain expert, that’s your best bet (but not required) If you pick a web project, you have to build it (and there needs to be some novelty)

10. Team Deliverables Each Week –Lessons Learned presentation 10 minutes –Updated blog/wiki –10’s of hours of “outside the building” progress Final Presentation –30 minute Lessons Learned Summary

11. Grading Individual - 20% Participation in class 20% Team - 80% Weekly summary and out of the building progress 50% Final Presentation 30%

12. Introductions

13. Steve Blank, Ann-Miura-Ko, Jon Feiber 8 startups in Silicon Valley Semiconductors Supercomputers Consumer electronics Video games Enterprise software Military intelligence sblank@kandsranch.com twitter sgblank www.steveblank.com Yale BS EE McKinsey and Co. Charles River Ventures Stanford Ph.D MS&E TA: E145, Mayfield Fellows, MS&E 273 V.C. @ Floodgate ann@floodgate.com @annimaniac BS CS/Astro Physics U of Colorado VP Networking SUN V.C. @ MDV since 1991

14. Steve Blank, Ann-Miura-Ko, Jon Feiber 8 startups - 32 years in Silicon Valley Semiconductors Supercomputers Consumer electronics Video games Enterprise software Military intelligence Teach: Stanford, Berkeley, Columbia Details at www.steveblank.com Yale BS EE McKinsey and Co. Charles River Ventures Stanford Ph.D MS&E V.C. @ Floodgate ann@floodgate.com @annimaniac BS CS/Astro Physics U of Colorado VP Networking SUN V.C. @ MDV since 1991

15. Steve Blank, Ann-Miura-Ko, Jon Feiber 8 startups - 32 years in Silicon Valley Semiconductors Supercomputers Consumer electronics Video games Enterprise software Military intelligence Teach: Stanford, Berkeley, Columbia Details at www.steveblank.com Yale BS EE McKinsey and Co. Charles River Ventures Stanford Ph.D MS&E V.C. @ Floodgate ann@floodgate.com @annimaniac BS CS/Astro Physics U of Colorado 50 th employee, VP Networking @ Sun V.C. @ MDV since 1991 jdf@mdv.com

16. Felix Huber Course Assistant (CA’s) MS MS&E 2010 Google Translate Product Mgr CA’s role: Class/lecture questions, Grading and attendance Thomas Haymore B.A. in Political Science Stanford Law (‘06) J.D. Stanford Law (‘12) thomas.haymore@gmail.com huberfelix@gmail.com

17. Felix Huber Volunteer Course Assistant (CA’s) MS MS&E 2010 Google Translate Product Mgr CA’s role: Class/lecture questions, Grading and attendance Thomas Haymore B.A. in Political Science Stanford Law (‘06) J.D. Stanford Law (‘12) thomas.haymore@gmail.comhuberfelix@gmail.com

18. Mentors Mentors are Venture Capitalists or Entrepreneurs Mentors role is to: –Help you “Get you out of the building” –Share contacts –Offer “Real-world” entrepreneurial advice –Critical feedback You arrange your schedule for the mentors, not the other way around

19. Class Logistics

20. How the Class Works ClassTopicDeliverable for the Next Week (Submit interview notes, present results, update wiki/blog) January 4 th Class 1 Business Model and Customer Development - Hypotheses for each part of business model. - Test for whether your business is worth pursuing (market size) - Test for each of the hypotheses - What constitutes a pass/fail signal for the test (e.g. at what point would you say your hypotheses wasn’t even close to correct)?

21. How the Class Works ClassTopicDeliverable for the Next Week (Submit interview notes, present results, update wiki/blog) January 4 th Class 1 Business Model and Customer Development - Hypotheses for each part of business model. - Test for whether your business is worth pursuing (market size) - Test for each of the hypotheses - What constitutes a pass/fail signal for the test (e.g. at what point would you say your hypotheses wasn’t even close to correct)? January 6 th Team Mixer- Teams by midnight Jan 6 th

22. How the Class Works ClassTopicDeliverable for the Next Week (Submit interview notes, present results, update wiki/blog) January 4 th Class 1 Business Model and Customer Development - Hypotheses for each part of business model. - Test for whether your business is worth pursuing (market size) - Test for each of the hypotheses - What constitutes a pass/fail signal for the test (e.g. at what point would you say your hypotheses wasn’t even close to correct)? January 6 th Team Mixer- Teams by midnight Jan 6 th January 11 th Class 2 Testing the Value Proposition - - Name your team. - - What are your value proposition hypotheses? - - What did you discover from customers?

23. How the Class Works ClassTopicDeliverable for the Next Week (Submit interview notes, present results, update wiki/blog) January 18 th Class 3 Testing Customers /Users / Payers - What were your user/customer hypotheses? - Did you learn anything different? - Anything change about Value Proposition? - - What are your customer acquisition costs? - What are the direct benefits (economic/other)? - Who is the decision maker, how large is their budget? What are they spending it on today? - - How will this buying decision be made? - - What resonates with customers? - - For web startups, start coding the product. - - Setup Google or Amazon cloud infrastructure

24. How the Class Works ClassTopicDeliverable for the Next Week (Submit interview notes, present results, update wiki/blog) January 18 th Class 3 Testing Customers and Users - What were your user/customer hypotheses? - Did you learn anything different? - Anything change about Value Proposition? - - What are your customer acquisition costs? - What are the direct benefits (economic/other)? - Who is the decision maker, how large is their budget? What are they spending it on today? - - How will this buying decision be made? - - What resonates with customers? - - For web startups, start coding the product. - - Setup Google or Amazon cloud infrastructure January 25 th Class 4 Testing Demand Creation - Anything change about Value Proposition or Customers/U sers or Channel? - Present and explain your marketing campaign. - What worked best and why?

25. How the Class Works ClassTopicDeliverable for the Next Week (Submit interview notes, present results, update wiki/blog) Feb 1 st Class 5 Testing Sales Channel For web teams: Get working website/analytics up. - Track where visitors are coming from, how behavior differs. - What were your hypotheses about site results? - Anything in Value Proposition or Customers/Users? For non-web teams: Interview 10 people in channel - Anything change in Value Proposition, Channel or Customers/Users? - Does your product extend/replace existing channel revenue? - What’s the “cost” of your channel/ it’s efficiency vs. product selling price. For Everyone: What is your customer lifetime value? - What feedback did you receive from your users? - What are the entry barriers?

26. How the Class Works ClassTopicDeliverable for the Next Week (Submit interview notes, present results, update wiki/blog, build website) Feb 1 st Class 5 Testing Sales Channel For web teams: Get working website/analytics up. - Track where visitors are coming from, how behavior differs. - What were your hypotheses about site results? - Did anything change about Value Proposition or Customers/Users? For non-web teams: Interview 10 people in channel - Did anything change about Value Proposition or Custom ers/Users? - Does your product extend/replace existing channel revenue? - What’s the “cost” of your channel/ it’s efficiency vs. product selling price. For Everyone: What is your customer lifetime value? - What feedback did you receive from your users? - What are the entry barriers? Feb 8 th Class 6 Testing Revenue Model - Assemble income statement for your business model. - Lifetime value calculation for customers.

27. How the Class Works ClassTopicDeliverable for the Next Week (Submit interview notes, present results, update wiki/blog, build website) Feb 15 th Class 7 Testing Partners - Any change of Value Proposition, Customers/Users, Channel, or Demand Creation? - What are the partners incentives/impediments?

28. How the Class Works ClassTopicDeliverable for the Next Week (Submit interview notes, present results, update wiki/blog, build website) Feb 15 th Class 7 Testing Partners - Any change of Value Proposition, Customers/Users, Channel, or Demand Creation? - What are the partners incentives/impediments? Feb 22 nd Class 8 Testing Key Resources and Cost Structure - Assemble a “resources assumptions” spreadsheet. - Include people, hardware, software, prototypes, financing, etc. - - When will you need these resources?

29. How the Class Works ClassTopicDeliverable for the Next Week (Submit interview notes, present results, update wiki/blog, build website) Feb 15 th Class 7 Testing Partners - Any change of Value Proposition, Customers/Users, Channel, or Demand Creation? - What are the partners incentives/impediments? Feb 22 nd Class 8 Testing Key Resources and Cost Structure - Assemble a “resources assumptions” spreadsheet. - Include people, hardware, software, prototypes, financing, etc. - - When will you need these resources? March 1 st Class 9 Present! - Group 1 – 30 Minute Presentations March 8 th Class 10 Present! - Group 2 – 30 Minute Presentations

30. How the Class Works ClassTopicDeliverable for the Next Week (Submit interview notes, present results, update wiki/blog, build website) Feb 15 th Class 7 Testing Partners - Any change of Value Proposition, Customers/Users, Channel, or Demand Creation? - What are the partners incentives/impediments? Feb 22 nd Class 8 Testing Key Resources and Cost Structure - Assemble a “resources assumptions” spreadsheet. - Include people, hardware, software, prototypes, financing, etc. - - When will you need these resources? March 1 st Class 9 Present! - Group 1 – 30 Minute Presentations March 8 th Class 10 Present! - Group 2 – 30 Minute Presentations March 11 th Funding! - Optional presentations at VC firm for funding

31. How to Build A Startup Idea Size Opportunity Business Model Customer Development

32. How to Build A Startup Idea Size of the Opportunity Business Model(s) Customer Discovery Customer Validation

33. How to Build A Startup Idea Size of the Opportunity Business Model(s) Customer Discovery Customer Validation TheoryPractice

34. How to Build A Startup Idea Size of the Opportunity Business Model(s) Customer Discovery Customer Validation Web startups get the product in front of customers earlier

35. How to Build A Startup Idea Size of the Opportunity Business Model(s) Customer Discovery Customer Validation

36. Idea

37. We’re Engineers Darn It! Aren’t companies all about product? I have a great technology idea Teach me how to make a company around it Just like Facebook and Google (or Intel or Apple) Stanford

38. Sources of Startup Ideas? Technology shifts –Moore’s Law –Disruptive tech –Research Market changes –Value chain disruption –Deregulation Societal changes –Changes in ways we live, learn, work, etc. –The world is flat (outsourcing) Dinosaur factor –Arrogance –Deadened reflexes Irrational exuberance –Undervalued assets

39. An Idea is _Not_ a Company

40. Size of Opportunity

41. This Class is about Scalable Startups Not all startups are designed to scale Small business startups have different goals  They are done by normal people Scalable startups are designed to grow big  Typically require venture capital This means the size of the opportunity needs to be $100’s of millions to billions

42. Small Business Startup - Business Model found - Profitable business - Existing team < $1M in revenue Small Business Startups

43. Small Business Startup - Business Model found - Profitable business - Existing team < $10M in revenue Small Business Startups 5.7 million small businesses in the U.S. <500 employees 99.7% of all companies ~ 50% of total U.S. workers http://www.sba.gov/advo/stats/sbfaq.pdf

44. Scalable Startup Large Company >$100M/year - Total Available Market > $500m - Company can grow to $100m/year - Business model found - Focused on execution and process Scalable Startup

45. Scalable Startup Large Company >$100M/year - Total Available Market > $500m - Company can grow to $100m/year - Business model found - Focused on execution and process - Typically requires “risk capital” Scalable Startup In contrast a scalable startup is designed to grow big Typically needs risk capital What Silicon Valley means when they say “Startup”

46. Small Business Startup - Business Model found - Profitable business - Existing team < $10M Scalable Startup Large Company - Total Available Market > $500m - Company can grow to $100m/year - Business model found - Focused on execution and process - Typically requires “risk capital” Very Different Startup Goals

47. Small Business Startup Scalable Startup Large Company Venture Firms Invest in Scalable Startups

48. Market/Opportunity Analysis How Big is It?: Market/Opportunity Analysis  Identify a Customer and Market Need  Size the Market  Competitors  Growth Potential

49. How Big is the Pie? Total Available Market Total Available Market peopleHow many people would want/need the product? How large is the market be (in $’s) if they all bought? How many units would that be? How Do I Find Out? Industry Analysts – Gartner, Forrester Wall Street Analysts – Goldman, Morgan

50. How Big is My Slice? Served Available Market How many people need/can use product? How many people have the money to buy the product How large would the market be (in $’s) if they all bought? How many units would that be? How Do I Find Out? Talk to potential customers Served Available Market Total Available Market

51. How Much Can I Eat? Target Market Who am I going to sell to in year 1, 2 & 3? How many customers is that? How large is the market be (in $’s) if they all bought? How many units would that be? How Do I Find Out? Talk to potential customers Identify and talk to channel partners Identify and talk to competitors Total Available Market Target Market Served Available Market

52. Total Available Market Segmentation Identification of groups most likely to buy 52 Served Available Market Target Market Geographic Demographic Psychographic variables Behavioral variables Channel etc…

53. Market Size: Summary Market Size Questions:  How big can this market be?  How much of it can we get?  Market growth rate  Market structure (Mature or in flux?) Most important: Talk to Customers and Sales Channel Next important: Market size by competitive approximation  Wall Street analyst reports are great And : Market research firms Like Forester, Gartner

54. Business Model

55. What Is a Business Model? Diagram of flows between company and customers Scorecard of hypotheses testing Rapid change with each iteration and pivot Founder-driven * Alex Osterwalder

56. 9 building blocks of a business model:

57. CUSTOMER SEGMENTS which customers and users are you serving? which jobs do they really want to get done?

58. VALUE PROPOSITIONS what are you offering them? what is that getting done for them? do they care?

59. CHANNELS how does each customer segment want to be reached? through which interaction points?

60. CUSTOMER RELATIONSHIPS what relationships are you establishing with each segment? personal? automated? acquisitive? retentive?

61. REVENUE STREAMS what are customers really willing to pay for? how? are you generating transactional or recurring revenues?

62. KEY RESOURCES which resources underpin your business model? which assets are essential?

63. 63 KEY ACTIVITIES which activities do you need to perform well in your business model? what is crucial?

64. KEY PARTNERS which partners and suppliers leverage your model? who do you need to rely on?

65. COST STRUCTURE what is the resulting cost structure? which key elements drive your costs?

66. 66 images by JAM customer segments key partners cost structure revenue streams channels customer relationships key activities key resources value proposition

67. sketch out your business model

68. building block building block building block building block building block building block building block building block building block building block building block building block

69. But, Realize They’re Hypotheses

70. 9 Guesses Guess

71. How Do Startups Search For A Business Model? The Search is called Customer Development The Implementation is called Agile Development

72. Customer Development Solving For Customer Risk

73. Customer Development Get Out of the Building The founders ^

74. More startups fail from a lack of customers than from a failure of product development (focus on “who” more than “what”)

75. Customer Development Concept/ Bus. Plan Product Dev. Alpha/Beta Test Launch/1st Ship Product Introduction Model Customer Development Company Building Customer Discovery Customer Validation Customer Creation Pivot

76. Stop selling, start listening Test your hypotheses Continuous Discovery Done by founders Customer Discovery Customer Validation Company Building Customer Creation Pivot

77. Test Hypotheses: Product Market Type Competition Turning Hypotheses to Facts

78. Test Hypotheses: Problem Customer User Payer

79. Test Hypotheses: Channel

80. Test Hypotheses: Problem Customer User Payer Test Hypotheses: Demand Creation Test Hypotheses: Channel Test Hypotheses: Product Market Type Competitive Test Hypotheses: Pricing Model / Pricing Test Hypotheses: Size of Opportunity/Market Validate Business Model Test Hypotheses: Channel (Customer) (Problem)

81. Test Hypotheses: Problem Customer User Payer Test Hypotheses: Demand Creation Test Hypotheses: Channel Test Hypotheses: Product Market Type Competitive Test Hypotheses: Pricing Model / Pricing Test Hypotheses: Size of Opportunity/Market Validate Business Model Test Hypotheses: Channel (Customer) (Problem) Customer Development Team Agile Development

82. Test Hypotheses: Problem Customer User Payer Test Hypotheses: Demand Creation Test Hypotheses: Channel Test Hypotheses: Product Market Type Competitive Test Hypotheses: Pricing Model / Pricing Test Hypotheses: Size of Opportunity/Market Validate Business Model Test Hypotheses: Channel (Customer) (Problem) Customer Development Team Agile Development

83. The Pivot The heart of Customer Development Iteration without crisis Fast, agile and opportunistic

84. Break

85. Our “Culture” for E245 Show up on time and stay ‘til we’re done Keep your commitments (in class and out) Step outside if you must call, email, skype, twitter, chat, surf the web, or do anything unrelated to E245 Entrepreneurship is a team sport –80% of your grade depends on working with others

86. What Lies Ahead: “To Do” List Check web site for admission lists – attendance is mandatory in session 2 –waitlist (if any) will be cleared at beginning of class Form full teams by Session 2 – mixer on Thursday, 5:15 at Thornton 110 Team deliverable by next week: Hypotheses for each part of business model. - Test for whether your business is worth pursuing (market size) - Test for each of the hypotheses - What constitutes a pass/fail signal for the test (e.g. at what point would you say your hypotheses wasn’t even close to correct)?