Tag Archives: new product development

Entrepreneurship is dead: long live entrepreneurship

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Thomas R. Ulbrich and G. Lawrence Sanders

There are television shows, numerous blogs and endless social media posts all focused on entrepreneurship. It is finally “cool” to be an entrepreneur. Virtually every academic level from grade schools to high school talks about entrepreneurship. So goes the government. All levels of government are jumping on the entrepreneurship bandwagon. Billions of dollars have been thrown at startups and incubators by families, friends, angels, managed funds, universities and the government. Local, state and the federal government also have the ability to give the gift that keeps on giving, tax breaks.

According to research by the Kaufman Foundation, Austin, Miami, Los Angeles and San Francisco, Las Vegas and New York, and Boston have the best startup ecosystems in the world. These ecosystems have the funding, the talent, and competitive density to facilitate new business development.

Despite the fact that the thought of becoming an entrepreneur is more popular than ever, some reports paint a slightly gloomier picture. The bad news is that the startup rate has fallen from 14% to 8% of total companies over the past 30 years. Unicorns, companies with a $1Billion valuation, are also on the decline and a  growing concern. The Financial Times attributes the decline to a lack of access to capital, stifling regulatory requirements, increases in entrepreneurial activity by large companies, and increases in student debt and a very cautious workforce. A recent article in Forbes echoes these sentiments and adds, the Walmartization of America due to Walmart’s infrastructure and buying power.

Part of the decline relates to the nature of the beast. Startups fail. And the workforce is well aware of the situation. It is common to hear of failure rates between 80 and 90%. Other sources paint a somewhat rosier picture.  According to Scott Shane, in Small Business Trends, larger and older companies have a better chance of survival. About half are still around after five years.

Entrepreneurship is not dead.

It is morphing, changing and penetrating every aspect of traditional business as we know it. Marketing, finance accounting, organizational behavior, and operations have assimilated the entrepreneurship. Marketing for startups focuses on engagement via viral and social networking strategies. Startups eschew traditional channels used for legacy and mature products.  Using traditional capital budgeting is just not appropriate for startups. Financial analysis for startups uses a combination of real options theory and qualitative models for evaluation. The ideal composition of startup teams draws on a different literature than traditional team literature. Startups need engagement marketing specialists, product designers and prototyping specialists, experts with infrastructure knowledge for configuring cloud-based applications that are scalable and of course the charismatic visionary. Accounting for startups is all about forecasting and cash-flows. Operations involve a constant struggle to scale production up and down.  And how to leverage and address the Amazonification and Walmartization  of supply chains.

Oh, and don’t forget strategic planning. Traditional planning approaches are confusing, cumbersome, take too long and just not agile. One-page business plans, pitch decks, lean startup approaches and the numerous templates to assist in identifying an opportunity are replacing the traditional strategic planning approaches.  This simplified planning allows entrepreneurs to react quickly in response to customer feedback, providing an iterative process that spirals in on the best products and services.

No, entrepreneurship is not dead. It is being assimilated into every nook and cranny of successful businesses. Many large organizations have embraced entrepreneurship because they understand that products and technologies have a life-cycle, that consumers will always be attracted to the next big- thing, and because large companies have the resources to invest in entrepreneurship.   Being entrepreneurial is the best way to delay and even prevent, the natural decline of business.

Selecting the best start-up idea and project feasibility

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This past year I have had numerous teams that had two or three startup ideas. Some of the teams want me to make the decision on what project to select. Most of them, however, just want some guidance on what questions to ask.

In its simplest form, the questions should relate to the economic, market, financial, operational and technical feasibility aspects of the idea, along with the characteristics of the founder(s). Here is a list of 14 questions to consider when weighing-in on an idea for a start-up (Figure 1).

Startup Potential

Figure 1: Questions related to Start-Up Potential

Questions related to market and business sustainability

Many investors and founders look at the size of the market and the potential profits as the critical criterion for investing in a startup. But a startup must be able to capture part of that market and reach those customers through a marketing campaign. In order to become a viable sustainable business, funds are needed to launch the business, regardless of whether they come from the founders, family, friends or investors. If the startup costs for the business are low relative to the availability of funds then the business may eventually exist as a sustainable entity. The enemy is the burn rate or burning cash and not having funds to pay the bills. Long term sustainability is very difficult unless there is some way to obtain recurring revenues in the form of complementary products and services and refreshing the product line through R&D.

  • Q1.  How large is the market?
  • Q2.  Will the business be able to capture some of the market and realize a profit?
  • Q3.  Can the customers be readily identified and reached?
  • Q4.  Can funds be secured for starting the company?
  • Q5.  Are the startup cost relatively low?
  • Q6.  Is the time till the company is sustainable short?

Questions related to building the product or service

These questions relate to manufacturability, which is the ability of the startup to make the product and in the case of services, to set up processes that will be used to deliver a service.  These questions are related to the ability of a start-up to develop a viable supply chain.   A good indication of degree of manufacturability is whether or not a realistic prototype can be built. The key is to be able to obtain raw materials, components and people and to design processes for delivering a product or service. Scalable business are desirable because they can grow and contract with changes customer preferences and disturbances in the economy.  When a product or service involves emerging technologies then research and development will be an important driver of manufacturability and product design.  Products and services requiring high levels of initial investment of R&D requirements are inherently risky and contribute to cash burn, even though they can be the ticket to hyper-profitability.

  • Q7.  Manufacturability: Is the product or service manufacturable?
  • Q8.  Can a prototype or mockup of a product or service be built?
  • Q9.  Can employees be secured with the necessary expertise and skills?
  • Q10. Are the materials and components available to build the product or service?
  • Q11. Is the business easily scaled for growth and retrenchment?
  • Q12. Are there minimal initial R&D requirements for manufacturability and product design to get the business going?

Questions related to founders and team composition

There is some evidence that the composition of the startup team will have a positive impact on survival. But the evidence is confusing. Diverse teams can in some instances improve firm performance in a very competitive environment. But sometimes, teams that are homogeneous can act quicker when they are well-aligned on strategic decisions. It appears that the team composition should depend on the characteristics of the industry and the product being developed.

Many pundits and academics have identified their own typology of  what founding teams should look like (e.g. go here for blog discussions, here for Steve Blank’s typology and go here for recent academic research). A high-tech startup team might include a founder that is a visionary/strategist, a technologist/engineer founder, a designer/prototyper, and a marketer/hustler (Figure 2). It also appears that founder teams with about 3 or 4 members are more successful than a solo team or teams with more than 4 members.

If the founders are familiar with the product then many of the questions related to the market and the manufacturability of the product or service are answered or at least can be addressed. But sometimes, individuals and companies have to jump to a very dissimilar product or service in order to survive. Hard work, and learning about and exploring new product lines by prototyping can lead eventually to familiarity and insight. And of course, ignorance that is fueled by enthusiasm has fueled many inventions. Never count out enthusiasm, determination and hard work.

  • Q13. Do the founders have the right mix of expertise and do the team members complement each other?
  • Q14. Are the founders enthusiastic and willing to work hard?

How to use the questions

The questions are set up so that if you answered “yes” rather than “no” to a question, there would be less project risk. Lower risk usually means that the project is feasible. But that does not mean that risk aversion is the goal. There is usually a trade-off between the level of risk and potential returns. There are numerous examples where high risk projects produced numerous millionaires and hyper-profitability.

I had thought about developing a simple scoring model where you could compare different projects using the questions, but I think that would also be a mistake. Selecting the project with the highest score might eliminate a project that could change the world or perhaps just lead to financial security.

It is important that we not to eliminate ideas too early by letting preconceived biases get in the way of creativity (see “How to Let 999 flowers Die”).  Sometimes it takes a while to get people to understand what you are trying to do because you have not been a good communicator.  Sometimes, however, it takes a long time for people like me to “get it.”

The march to innovation should be in between a turtle’s and a rabbit’s pace. You have to give the idea time to mature, but not move too slowly because the idea will wilt on the vine. I suspect a kindergartner pace would work best. Just don’t spend too much time pondering the questions and don’t just race from question to question.  Ponder, race, prototype, ponder, race, prototype, ponder race prototype ….

Typology

Figure 2: Potential Areas of Expertise for Founders

Using Thought Experiments to Develop Innovative Products and Business Models

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The most intriguing aspect of Walter Isaacson’s biography on Einstein was his numerous discussions of thought experiments. Einstein conducted many, many thought experiments. Thought experiments helped Einstein to understand and disentangled complex concepts and to develop theories.

“He made imaginative leaps and discerned great principles through thought experiments rather than by methodical inductions based on experimental data. The theories that resulted were at times astonishing, mysterious, and counterintuitive, yet they contained notions that could capture the popular imagination: the relativity of space and time, E=mc2, the bending of light beams, and the warping of space. [2007, W. Isaacson, p. 6]”

“Over the years, he would picture in his mind such things as lightning strikes and moving trains accelerating elevators and falling painters, two-dimensional blind beetles crawling on curved branches, as well as a variety of contraptions designed to pinpoint, at least in theory, the location and velocity of speeding electrons. [2007, W. Isaacson, p. 27]”

Thought experiments need to be rhetorical in a good way.  A good thought experiment should be artful, eloquent, effective and persuasive in conveying the ideas, but not too pretentious or bombastic There is a downside to rhetoric in that the innovator, the scientist or the storyteller may be too good in developing  a colorful and vivid description at the expense of gathering facts and testing the veracity of the theory.  Sometimes thought experiments can actually confuse more than illuminate. The thought experiment may not work because of differences in the eyes of the beholder, because it needs more refinement or because it is invalid. Here are some guidelines for developing your own though experiment in order to tell a clear and cogent story.

  1. You need to be able to explain your concept in 3 or 4 sentences.
  2. You should eventually write your ideas in a paragraph.
  3. You need to use pencil and paper to illustrate your innovation. (Tablets are also Ok, but the interface should not get in the way of your creativity.)
  4. You should try to present your thought experiment on 1 page. It should be self-explanatory.
  5. You should present your thought experiment to many people.
  6. You should refine your thought experiment over and over after you receive feedback.
  7. You should sometimes return to your original iterations and ignore some of the feedback.
  8. You should let your ideas incubate. Layoff the idea for several days and do this often.
  9. You should be obsessed with the project and the compulsive about the details.
  10. Go back to 1, 2, 3, 4, 5, 6, 7, 8 or 9. Remember this is a nonlinear iterative process

I believe that thought experiments are the genesis of all innovations and creative process. This includes new products and new business models. Sometimes scientific thought experiments are verified by real-world experiments, data collection, and mathematical proofs.  The innovator progressively validates a thought experiment with the pitch and the business plan. The plan and the pitch are the refinement and incarnation of the entrepreneur’s thought experiment. The ultimate validation is when the business or the innovation goes live.

Figures 1 and 2 illustrates the migration of a thought experiment involving tracking individuals, pets and expensive assets. The initial drawing and narrative was started on Sunday evening and 3.2 was completed by 7am on Tuesday. Feedback from several individuals helped to refine the drawing.  Most of the time was spent futzing around with the interfaces of the two apps and locating symbols and graphics. The idea was derived from several student projects and from watching my son crack our Wi-Fi password in less than an hour using Backtrack. I think similar cracking code could be implemented in a very small unobtrusive device.  CPU, memory, Wi-Fi, cellular and GPS chipsets are shrinking in size and price. This technology has undoubtedly been developed in some form. But, there is always room for improvement and a thought experiment can be used to drive that process.

Here are some additional references on thought experiments:

  • Walter Isaacson’s 2007 biography entitled Einstein: His Life and Universe, Simon Schuster is one of my favorite books. It does a good job of describing how thought experiments influenced Einstein’s ideas.
  • As expected Wired Magazine has an interesting twist on thought experiments by Greta Lorge
  • Great animations of thought experiments can be found at Brain Pickings. BTW some of these animations don’t really help me to understand the ideas.
  • Very nice overview of thought experiments can be found at the Stanford Encyclopedia of Philosophy
  • Horowitz and Massey present a detailed discussion of how thought experiments have influenced scientific reasoning and philosophy.
  • Here is an interesting discussion of Einstein’s chasing a beam of light thought experiment by John Norton and go here for more of his philosophy of science work.
  • Another good philosophy book on the what, how and whys of thought experiments was written by Roy Sorenson.
  • Here is an illustration of a brute force method for cracking WiFi access points. This type of tool is available on a number of free digital forensics and penetration testing tools such as Backtrack. No, we are not safe from intrusions.

Figure 1: Thought Experiment 1.0

Kidnapping 1.0

Figure 2: Thought Experiment 3.2

Kidnapping 3.2

Design is an Attitude and a Behavior

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Design is the most important activity for the development of products, services, theories, algorithms, recipes, business plans, pizza and homework reports.

In the past 9 months I have read 2 books and watched a video that have forever changed the way I view the design process.

I read and listened to Walter Isaacson’s 2011 biography of Steve Jobs and his 2009 biography entitled Einstein: His Life and Universe.  I also watched the 2009 video Objectified by Gary Hustwit at least five times.

Objectified is an incredible view into the inner workings of contemporary designers. There are many insights to be gleaned from Objectified, but the interview with Joanathan Ive, the Senior VP of Industrial Design and the head of the Human Interface development at Apple is remarkable. I obtained more insight into the Apple Design Lab during that five minute interview than reading all of the magazine stories about the lab. Sir Jonathan Paul Ive is unabashedly obsessed with design and compulsive about details. (BTW Objectified is free to view if you have Amazon Prime.)

Then there are the two biographies by Isaacson. Einstein was obsessed with the physics of matter and energy and compulsive about the details  related to proving his theories. Jobs was obsessed with developing new products and compulsive about  design details. An on/off switch in the wrong place could unleash Job’s Kraken.

The take-away from these books and the video is that we need to be sort-of-obsessed with our projects and sort-of-compulsive about details. Extreme obsessions and compulsions are not good as psychologists will tell you and it appears that Jobs and Einstein had these traits in spades. So let us just scale it back a bit and be sort-of-obsessed and sort-of-compulsive.

There are two other activities that are essential for innovation to occur. Innovative people read and search for solutions and they learn-by-doing. They prototype with paper, objects and even conduct thought experiments, as Einstein did. This is essential. As noted in the last post, the designer uses the prototype to create a virtual product, a virtual service or virtual world.

Designers have to constantly attend to solving two equations when seeking innovation (see Figure 1). They are easy to write, but hard to achieve.

Figure 1: Solve for Innovation

The Best Business Plan Creates a Virtual World

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A good business plan should draw on prototyping to create a virtual world that looks and acts like the real thing. Developing product and process prototypes is the cornerstone of developing a virtual business model because prototypes facilitate the understanding of how the business will work.

I see between 30 and 40 students business plans each year. It is not unusual to hear the following complaints at least five times each year: “They just don’t understand our business model.” or “They just don’t understand what we are doing.” There are many reasons that they do not  understand, including the idea might be flawed, the business idea needs to be refined, or they have simply not communicated their business concept in a clear manner.

The business plan is often the centerpiece of communicating the business model to outsiders such as investors, family, friends and other interested parties (see Figure 1). A more important use of the business plan and the executive summary is that they serve as communications platforms among the founders. It is, after all, the interplay and social dynamics among the founders that are the keys to success ( see Jennifer Houser on How to Build an Insanely Great Founding Team).

The evolution of the business model and the business plan involves hard work, but there are tools that can improve communication and facilitate the process. Prototyping, in one of its various incarnations is the centerpiece of these tools.

Prototypes are usually associated with the development of products and services. With successive iterations, or stepwise refinement, a prototype becomes more and more like a real product or service. Prototyping can also be applied to the development of the business model. With successive iterations, or stepwise refinement, a prototyped business becomes more and more like a real business. It is rarely feasible to build the product, service or entire business without some type of stepwise refinement. The executive summary, the business plan pitch and the business plan itself are not the actual business, but are actually models of what the business will produce and how it will function.

Ideas evolve over time. Prototyping is a very powerful tool because it facilitates learning and understanding and it reduces the length of time of the evolutionary process. Prototyping involves experimentation and encourages the evolution of ideas and leads to insight into the design of a viable product, a service and the business model. A blend of learning-by-doing (prototyping) and learning-about (education, reading, searching and synthesizing) is necessary and the foundation of the creative process. Research has cosnsistently shown that prototyping and collaboration facilitates the mutual and concurrent learning processes of all of the individuals involved and that it results in strong feelings of ownership towards the product, service or business model.

There are a variety of ways that prototyping and stepwise refinement can be used to develop a business model and new products and services. Here is one approach that is characteristic of how prototyping can be implemented.

  1. Initial Prototype: In the early stages, develop a pencil and paper picture of the product, the application or the process. The key is to focus on the vital and essential functions of the product or service.
  2. Review by Interested Parties: Let business stakeholders, family, friends and potential customers provide feedback on the product or service.
  3. Revise and redesign prototype: Use the feedback to refine and improve the design of the product or service. Use more advanced tools as the prototype becomes more refined and detailed. This usually leads to the use of graphics, drawings and mock-up software. Towards the later stages of development, the prototype might be a functioning product or service or an actual application with some level of functionality.
  4. Go back to step 2 after revising and redesigning the prototype.

Services and businesses processes can also be prototyped. There are a number of tools that can be used to conceptualize, design, and test the design of the service including drawings, sketches, scenario analysis and task structuring, mock-ups, storyboarding, systems, Lego mock-ups, and other tools including simulation (see http://www.servicedesigntools.org/repository ). One popular tool for designing services is service blueprinting. It is a visual and descriptive tool for modeling visible customer interactions with employees and processes that also illustrates how the hidden processes support the customer interactions.

In summary, prototyping and prototypes are very effective tools for facilitating the evolution of ideas and for presenting a virtual world, a virtual business, a virtual product or virtual service to interested parties.

In the last couple of years I have focused on having the student groups develop prototypes for their business plans. The results have been outstanding. Check out the business plans and presentations on my SkyDrive here. Also check out Chapters 6 and 7 for additional discussion on the role of prototyping in innovation and creativity.

Figure 1 Innovation, Learning and New Product Development