Venture Hacks

Steve Blank: “What I began to realize is that we teach entrepreneurship like every vertical market and industry has the same set of rules. So the first heuristic I want to offer is that — even in this class — there really is no common ‘these rules work’ for all vertical markets and industries.”

Listen to this excerpt from the second class of Steve’s customer development course for the rest of this wonderful lesson.

Audio: Vertical markets (mp3)

Slides: Vertical markets (pdf)

Here’s a transcript of the lesson.

We teach entrepreneurship like every vertical market has the same set of rules

Steve Blank: How many are in Web 2.0? Like the social something web. How many are in enterprise software? Anybody in semiconductors? EDA? OK. Is there a biotech guy still here? Oh!

One of the interesting things about when I put up the fact that there are different industries or markets, everybody goes, “Well, yeah. Of course.” I’m going to tell you a very funny story.

When I started teaching in the engineering school of the school not-to-be-named down south, but it starts with an “S,” I formed teams just like you guys are going to do for projects. And I’d always say, “Listen, anybody can start a company. All you need is a half a million bucks.” OK, yes, sir, a half a million bucks. Write that down.

Next week there’s always a group that looks like these three people, that says, “Startup, half a million dollars.” It’s a divide by zero problems here, because in our business they’d come back and say, “Hey, Professor Blank, in our business the common wisdom is $100 million.”

And then I’d go, “Oh, well, yes of course, you’re in the life sciences, that’s completely different.” The next week I’d say, “Except for these guys who need $100 million, you ought to get out and start selling your product on day one, because you don’t need to worry about any IP at all. Web 2.0. Just go out and get out there.”

The next week someone raises their hand and says, “Professor Blank, in our industry there’s a ton of patents and stuff and people tell us we shouldn’t be out there unless we start patent protecting all our stuff.”

And I went, “Oh, oh, oh, you’re in a different vertical market. In that vertical market you’re absolutely right. But OK, let’s keep going on with the class. The rest of you guys can keep going out because you don’t need to worry about anything, about government regulation or anything. It’s a startup. Just go out there. There’s no regulation to worry about.”

The next week it’s a group that comes up and says, “Professor Blank, we’re doing a medical device and there’s something called the 510K, and that’s a two-year process.” And I go, “Oh, oh, for those of you in medical devices…”

And what I began to realize is that we teach entrepreneurship like every vertical market and industry has the same set of rules. So the first heuristic I want to offer is that even in this class, there really is no common “these rules work” for all vertical markets and industries.

And the first heuristic I want you to think about is, when you hear common advice from friends or other people who’ve done startups, always ask what industry were they in, and was that particular advice relevant for me or not.

So for example, here’s a checklist of — I just randomly picked these. Web 2.0, enterprise software, enterprise software, communications software, communications software, consumer electronics, games software, semiconductors, EDA, clean tech, medical devices, life sciences, and personalized medicine.

I think, I’ve probably screwed up a startup in almost every one of these. That was a joke.

Did I miss anybody’s vertical market? Anybody here who I didn’t kind of get? All right. So this is not meant as a comprehensive list, but usually it takes about 95% of those students in the room.

Technical risk vs. market risk

Steve Blank: Now what’s interesting is if I ask you, Eric, in your biotech startup, what’s your greatest risk? What is it?

Eric: Our team is working on an asthma inhaler.

Steve: Right. So what’s the biggest risk?

Eric: The efficacy.

Steve: Right. The efficacy of what?

Eric: The efficacy of the drug and its impacts. That’s a big risk.

Steve: So whether the product, as envisioned, works at all.

Eric: Right. And even if it works, are the adverse effects….

Steve: Does it kill you?

Eric: Yeah. Not to put too fine a point on it.

Steve: It’s a very nice clinician’s way of saying did it kill him or did he grow a third arm. How about you guys, do you have a particular drug or product in mind?

Student: The technology similar to some medical devices, the bio-monitoring… interactions.

Steve: So whether biomarkers are predicted, for a predictor from an assay you’re thinking about making.

Student: Yes.

Steve: So it’s a technical risk, right?

Student: Yes.

Steve: How many of you are thinking about a Web 2.0 startup? Great. What’s the risk, Josh? What’s the product?

Josh: It’s a digital media company.

Steve: Perfect. What’s the technical risk?

Josh: Finding the engineers.

Steve: Right. Is that a risk in Silicon Valley?

Josh: There’s not a lot of risk.

Steve: What’s the risk?

Josh: Getting people to use it.

Steve: Interesting. If our drug works for asthma, or your friends drug, does he have a customer problem?

Josh: No.

Steve: Why?

Josh: Because there are a lot of people that need….

Steve: If you’re running out of air, you’re going to probably want your drug, right? But you have a different problem. You could almost say, unless we really are stupid, we’re not going to screw up the technology. Wouldn’t you love it, if you were these guys, to be able to say that?

Josh: Yeah.

Steve: Big idea here. It’s a big idea, one that I’ve never heard articulated before at all with startups, yet world-class VCs know this on day one. There are some industries where the risk is purely customer in market.

And by purely I just mean, in Silicon Valley we take for granted digital media and web, with all due respect, for the hard work your software engineers are going to do getting it up, it’s not invention.

It’s, gee, did, they do it efficiently or did the Oracle salesman convince them to buy half a million bucks of software they didn’t need. But it’s not invention.

There’s a whole other set of industries where it truly is invention. Where it truly is, we should be so lucky to get this product working. Because if we get an asthma drug or an oncology for cancer curing drug, our only problem is how big is the licensing deal going to be? And not whether customers are going to want this.

Is this distinction clear? When you start a company, question one to self. Memo to self. Am I in a market risk company? Or am I in an invention risk company?

Hybrid risks

Steve Blank: And by the way, I said this in the first class, I’ll remind you again, though. I’m happy to have every one of you in the class, but if you are in an invention risk company, now I’ll talk about hybrid companies in a second. Invention risk company, this class can offer you nothing.

To the extent that, what customer development is about, is how to dramatically reduce market risk. It is not how to reduce invention risk. So if I lose three of you next week. But you’re more than welcome, I just want to understand…

Student: I’m a hybrid.

Steve: I’m sorry?

Student: I’m a hybrid.

Steve: You’re a hybrid. And I’ll talk about hybrids in a second. Is that clear so far? Memo to self, duh! Can we assume the technology works and our problem is whether the product and market fit is correct? Or is in fact, the product itself the risk factor. But I have something says both.

Give me an example of a vertical market or an industry that has both risks.

Student: Semiconductor?

Steve: Perfect. Why?

Student: Because the technology is fairly advanced. There’s a lot of new insight there. But then the customers are very finicky, maybe, in the type of devices…

Steve: Let’s get specific. What kind of semiconductors do you have in mind? That has technology risk.

Student: Say, consumer electronics or…

Steve: Give me more specific than that. Anyone else in the semiconductor business? You raised your hands in the beginning, now you’re hiding. Yes?

Student: Yes, the industry I work in, we target what the customers want.

Steve: Right, so give me a specific case of technology risk in semiconductors.

Student: Like a high speed serial interface.

Steve: Perfect. OK. Or better, a new graphics architecture, or a new CPU architecture, or you’re making a new IBM cell architecture. Yeah, that’s on the bleeding edge. We don’t even know if the architecture is going to work. Right? I just want to be clear.

Semiconductors, if you’re just making a faster version of some one else’s chip, you’re not taking too much technical risk, are you? I mean, whether you can push it faster.

But typically in semiconductors, if you’re taking architectural risk, if you really have some insight you believe, or communications hardware.

Pushing the envelope is usually about how deep you can go into packet inspection, to how fast and et cetera. Those are some pretty serious trade-offs. You don’t know if this stuff works until you get first use out of the way. Is that fair?

Student: Yep.

Steve: That’s the technical risk. What’s the market risk in that kind of semiconductor business? What’s the customer risk there? Anybody? You don’t even have to be in the semiconductor business. Yes.

Student: For example, they could really mean technology. They could build a chip.

Steve: Yes.

Student: But for some reason, in benchmarking for the system provider assistance is another. Another vendor. Or even more, the old standard just doesn’t pick up.

Steve: Right. So you could have a neat, new architecture, but your competitor could kick your butt. By convincing all the platform people who have to design your product in, “Oh, listen. That’s so incompatible. It uses 62 Hz, rather than 60 Hz of electricity. You’ll never be able to use it.” By the way, I once convinced an entire industry of that, but that’s another story.

So you could win on technical risk, and lose in market risk in hybrid technology. Give me another example. I picked Semiconductors. What’s another one?

Student: I used to do R&D groups with Blu-ray.

Steve: Perfect, talk to me.

Student: I don’t know much about it, but basically from a technical stand point, it seems like you’re pretty similar technology. But it obviously, Sony and company convinced the company prior to movie studios that they’re better off just shipping their content with Blu-ray rather than the DVD medium.

Steve: So this was the next standard for DVD’s. Right? For the last three or four years. Huge battles over who would be the supplier. Lots of chess games, lots of technical risk.

Because even at the end, they were still playing games with the spec and adding more security layer and what ever. At the end of the day, Blu-ray won. Didn’t win on technology, it won because they finally got a critical mass of people to design in the product.

Now the irony is, who do you think might actually, ultimately win? Who may undercut?

Student: Streaming Hi-Def?

Steve: Streaming Hi-Def. Right? It might be that the current DVD standard might have been the last one that sold upon these that it is. Most people, certainly my kids, don’t go out and ever buy DVD’s.

They download stuff to their iPods or Macs or some thing else, or to streaming video. Oops. They’re all an investment. You might have just built the product that no one else wants.

So I just want to point out that when you look at a startup, ask those fundamental questions on day one. What problem do we think we have besides who are we, what business are we in, and what ever. It’s like, are we going to be risking trying to understand our customers and we ought to try to focus on that.

Or is the focus truly inside the building. Because Steve, it doesn’t matter what customers think unless we really nail this technology. None of this matters.