Tuesday, June 11, 2013

Entrepreneurs and Innovators Need Ninja Action and Customer Development

The Commonwealth Club invited Steve Blank and Gary Shapiro to talk about "Startups, Entrepreneurs, and Ninja Innovation" last night.  I've heard Steve Blank talk previously at the first-ever Veterans Hackathon in 2012 and I got an autographed copy of his book The Startup Owner's Manual.  I definitely had to hear what these two tech dudes had to say about ninjas.  There weren't any ninjas on hand to demonstrate proper throwing star techniques.  The bottom line was that ninjas were flexible, stealthy, and able to win against overwhelming odds.  Entrepreneurs should behave the same way.  My recollections of what they said are interspersed below with my random thoughts thrown in for flavor.

I wanted to hear more about Steve's advocacy of the Customer Development methodology and how it led to Eric Ries' Lean Startup Movement.  Steve writes about it at his site and there are plenty of other references in the public domain.

I agree with these guys that big companies don't reward risk very well.  There was an oblique mention of Steve Jobs starting some secret development group with Apple.  I've never heard of that one.  I have heard of the text book case of how 3M developed sticky notes pretty much by accident after they thought a weak adhesive was a product failure.

It's cool that companies are recognizing the importance of innovation by establishing senior "VP of Innovation" titles.  I am skeptical of our two panelists' assertions that new market creation is more important than market share.  I've written before that an "innovation premium" based on forecasts of future growth is an unsatisfactory way to assess the value of innovation.  IMHO the ability to innovate is an important part of a SWOT analysis, along with factors external to the firm like barriers to entry and switching costs.

The panelists also think that following other innovative companies is a bad strategy.  Really?  I think Samsung is doing a heck of a job developing cheaper tablet computers that will eventually take market share from Apple's iPad.

These guys are totally correct that even lean startups need to master a knowledge base of business skills.  That's why it's great to see so much open-source material on customer development and lean startups.  I also think Gary is onto something by pushing for the serendipity of attending trade shows to learn an industry's structure and make connections.  I have learned tons of things from attending investment conferences and trade shows in Northern California.  I have not attended Gary's Consumer Electronics Show but if it means I get to see some Las Vegas showgirls then I'll mark my calendar.

I like the comment that vaporware head fakes constitute a ninja-esque tactic.  Microsoft did this a lot in the 1990s with announcements of phantom products that never made it to store shelves.  It works if it induces a competitor to spend precious R&D money and market research time to counter a product that doesn't exist. Marrying this with the panelists' admonition that entrepreneurs should hire people who complement their weaknesses begs an interesting question.  What would happen if an startup CEO hires a "VP of Innovation" just to churn out vaporware, while the real innovation gets done in a secret product development group?  Media attention would focus competitors on the high-profile VP while the real products get developed under the radar.

The panelists were skeptical of stealth-mode startups because they deny developers the input from the customer development process that makes the final product work.  Okay, I get it, customer development creates a feedback loop.  IMHO some things may have to be developed in secret, but if they don't work they might be good candidates for the vaporware cover story.  BTW, the US military has a hard time learning that troops who use new equipment should be involved in development from the start.

I found it very interesting that the panel thinks patents may be inhibiting innovation if they engender lawsuits.  Wow, somebody from inside the startup priesthood finally calls out patent trolls who buy patents just to sue other innovators out of existence.  I agree with them but it's hard to take financial incentives out of lawfare while still protecting IP under the law.  Getting rid of patent control regimes needs a cost-benefit analysis.  The benefit is a revolution in open-source innovation, with people copying designs everywhere for their home 3D printers.  The cost is a dearth of large-scale capital formation because successful innovators will have no economic moat behind which they can accumulate capital.

Steve and Gary noted that VCs push out founding CEOs in favor of COOs because they want someone who creates repeatable business processes that will drive growth.  I don't think that's all bad.  The founding CEOs should accept this reality and recognize how it frees them to start another enterprise.  Serial entrepreneurship is wealth creation.  I lament together with our panelists that large VC funds' "2 and 20" compensation makes them apathetic.  Okay, just get rid of the 2% annual management fee for undeployed capital.  Institutions like CalPERS can police up their multi-strat philosophies to weed out the VCs who just sit in cash without investing it.  Something tells me that won't happen voluntarily.  The success of crowdfunding could be the big change that forces VCs to wake up and compete for dollars.

I also think Steve and Gary have inadvertently discovered a business opportunity by remarking that VCs are supposed to be good at recognizing patterns of successful entrepreneurs.  If VCs are so terrible at articulating this pattern recognition skill set, there's a data mining opportunity for startups that develop knowledge management interfaces.  Attention startups!  Grab NVCA's membership list and offer custom-tailored deep dives into their deal histories that map technology life cycle S-curves for each enterprise and array them against sector growth, founder personalities, and other factors.  You heard it here first.

I need to hang out with more people like Steve and Gary.  That means more hackathons, trade shows, conventions, and Commonwealth Club appearances are in my immediate future.