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Mr. Blank, to start with tell us
about your latest book and why
should an entrepreneur buy it?
Yup, so my latest book is The Startup Owner's Manual, and
The Startup Owner's Manual is a desktop reference, not a book.
It's actually kind of an encyclopedia
of all the things an entrepreneur needs to know how to do to build
a successful company, and one of the things we've learned over the last
ten years is that we've gotten startups wrong, startups
are not smaller versions of large companies.
There's plenty of tools and books and manuals for
companies, that is, if I'm a large company
or if I'm Google or Facebook and if I want to learn how to launch
the next product, plenty of those books, but there are very few books
that talk about the first year or two, when startups are actually searching for
a business model, and this book fits right into that category, what do I do
the day I get started?
Mm-hm. What sort of book is it, how is it structured?
Is it case studies, is it a number of tools, is it a set of
practices and rules?
Yeah, so the book is all about the search for the business model, and that really brings up
two interesting things, is what the heck is a business model, and
brings us even earlier, to be honest.
What's a startup, and
out of first principles I had to define, for myself
and then for other entrepreneurs, what's a startup? A startup is a temporary
organization designed to search for
a repeatable and scalable business model, and that's kind of a new
interesting definition, because the first thing you encounter is the word temporary.
It means there's no such thing as a ten-year-old startup, there's a two-year-old
startup attached to an eight-year-old failure, The goal of a startup is to be a company
not to stay as a startup. And the next word you encounter is search
what the heck is that? I thought my job is to build the product, or sell the product.
It turns out, no, those are just parts of the things you need to do, you need to
build the product, you need to sell it, you need to understand customers and pricing
and partners and channels and all that is actually what
a business model is about, and so the book combines
defining what a business model is and how to articulate your
hypotheses about the model, and then how to search, and that search
process is called customer development, and the customer development
process is fairly detailed. How do I first articulate my
hypotheses? How do I then test the problem I think
customers have or they need, and then how do I test my solution
that is my service or product I'm offering, and then how do I get
early orders before I scale, and so the whole purpose of the book
is built around this customer development business model canvas idea
which says, we now have cracked the code for entrepreneurship.
It's not about war stores, it's not about
doing what large companies did. We are doing something unique in the
early stages of a venture, and this book tells you what it is.
Alright, that's cool. Let's
say I'm an entrepreneur somewhere in the middle of Russia.
I bought the book, I'm doing a
minimal viable product in some software service
thing, so the question is
how can I apply what's in the book
without being close to a customer?
Without having the real conversation, like, do you think it is
something that you would advice to do, or?
Yes, so one of the mistakes particularly when I travelled to Russia is
one it was just great to see capitalism in Russia, but two
is entrepreneurs seem to have
a fund-raising mentality that said, here's my idea
now give me $50000 please. That's not entrepreneurship.
I don't know what that is, but that's not how you do a business. You
start with your idea, but to be honest, my dog has ideas
but my dog isn't raising money, and I use that to
point out the goal is not to have an idea and raise money, the goal is to first
test whether your idea is valid at all. And by validation I mean
does anybody care other than you and your roommate? And before
anybody cares, I mean before you
raise money, you need to prove to yourself and others that somebody other than
you cares, and by cares we mean do they have a problem
that people will pay for? Do they have a need? Social networks
satisfy emotional needs. Accounting packages
solve problems, right. Problem or need. In either case, you've
written some code but who cared? And so before I would go out and raise money, I'd be
trying to understand, you know,
are there customers for this?
Mm-hm. Let's say for an entrepreneur who
is in Russia, and let's say they're not raising money right now,
what are the things that they cannot do, or
are limited in doing compared with an entrepreneur
who is here?
Oh, I think the biggest thing is cultural,
rather than physical. That is,
in the United States, we're learning to what I call get out of the
building, that is get out of our own comfort zone and stop talking to each other, and try to
get early feedback, as early as possible
for customers. This really is a cultural issue, because
somehow in some countries and some cultures, it's, well,
I'm the smartest person in the room therefore I don't need to ask anybody, and there's a
intellectual arrogance, about well, if I built it I
was smart enough and therefore people would just line up around my building
and I could just be figuring out where the data goes later
and it doesn't work like that.
It doesn't even work like that in the U.S. First it is a mental change,
the mental change says the smarter you are, the more likely
that you're wrong. That's a big idea. You're more likely
that you're wrong, because you will sit in your office
and code away and think, well, I'll just have to figure out where to put the
bag of Rubles, you know, when people line up. It doesn't work
like that, and so the first one is kind of
bringing down the barrier of how smart you are and assuming
that perhaps I ought to get other people to tell me how smart I am, and by
how smart I am, really is, I want this product, or I can't wait till
you finish it, or holy cow this is the right track, and so I think the
biggest problem really is, and again, we have it here in the States, but we're
now learning to stop thinking how smart we are, and think that the people who
actually write us cheques or use the product are the ones who are smart.
Well, another area that I think would be interesting to get
a comment on, I think the Russian entrepreneurs
that have Russian background, especially those that live in Russia
have so much, like
I'm building a company with all the company elements, like
hierarchy, can you comment on that?
Yes, so one of the things we have learnt
here is not to confuse search with execution.
So, keywords. Two keywords, execution are what
existing companies do. What do they do? They build organization charts,
and there's the President and there's the Vice-President and here you are, they have
product management people, they hire sales people, they hire marketing
people, this whole organization assumes one big thing.
It assumes you know what you're doing, right, and it
assumes - no, it's no joke - it assumes not only do you know what you're doing, it assumes
you know so much what you're doing that you're ready to burn money
to go hire those people, put those organizations in place and build a
company. Now, eventually, you do wanna do that. The
big idea about customer development, and this whole business model canvas
says perhaps we ought to verify
that we're ready to go do that first. Well, I wrote the plan, and here's my slide and here's my code,
of course I need to do a company, that's wrong.
That's gonna put you out of business, that's gonna make you fail very early.
The first thing you need to assume is while I'm
passionate and I have a vision, the odds are, you're probably wrong.
So, big idea. Most startups fail
and in fact, most startups go from failure to failure
inside the company until they're smart enough to listen and go,
oh the customers are asking for this, oh wait a minute the customers aren't
men 18-25, they're women in, you know, in Siberia
over here who are bored, oh wait a minute, well maybe the pricing
shouldn't be Freemium because I can never get them to upgrade, maybe I should have a subscription
model. You won't have a company until you go through
those iterations. Almost no company , none,
get their initial idea right, and that's what it ends up as.
They typically go from almost jumping from
iceflow to iceflow on the frozen river until they get to the end.
Most of them fall in. Most startups do not succeed.
90% in Silicon Valley, after we've done
this for a 50 years, 90% or more fail.
It's a big idea. Even the venture-backed companies who
venture capitalists understand how to pick wonders, over 90% fail, and
here's the big message. Almost none of them fail because
of the technology, right. It's not because you didn't code
enough, right, it's in fact, it's that you probably coded too much
and you didn't listen. Oh, I'll add every, I'll add more features.
That's not the problem, right. Twitter isn't about
all the features, right. The iPhone isn't about every possible feature
you could have packed into that device. It's about an
astute understanding about the match between product,
what we call value proposition, and customer
segment, and those two are what are called the
product-market fit, and those are just two of the many things that you need
to understand, and The Startup Owner's Manual, back to the book, actually gives you
kind of this step by step, oh wait a minute, I'm supposed to worry about channel?
Yes. Oh am I supposed to worry about pricing? Yes. Am I supposed to worry about customers?
Yes, yes and yes. Does this help?
Yeah, I know that you've been co-operating with
the Deep Dive program participants for a bit.
If you learn about the participants profile,
about their personalities, about the work that they do, startups that they
are trying to put together, what
do you think are the typical, like, top three mistakes that they do?
Customers, customers, customers. And I mean,
and maybe it's a residue of old Russia, but
kind of this command and control
attitude of, you know, I know best, and therefore I will build
the product and people will do as I say, and you know, maybe there's some part of Russia where that still
works, but it's this kind of hybrid capitalist system, no they don't have to
buy your product anymore, so welcome to capitalism. You actually
need to build things that people want to use, and we're used to that
here in the States, and I find it very,
both amusing and happy to watch Russians learn this as well.
because in capitalism, people voted by not buying your product, you can't
mandate the product, you can't say this is the one tube of toothpaste that you now get
and especially with Android and iPhone apps, you will have
thousands or ten thousand choices, and now the question is, did you build something
that match people's passion or heart or needs?
And you cannot do that by telling me how smart you are.
Worse, you can't tell me about how much money you raised, it doesn't matter, it just
means that you found an idiot as a venture capitalist
which Russia has an enormous
amount, because there's a lot of dumb money in the first wave of venture
capital.
Well, talking about fundraising,
there'll be two questions. One question is, compared with
like, year 2000 or ten years ago
so, let's say, when I came to the United States and first
time I visited Silicon Valley, I was like, oh that's a place you just
stay with like a sign, I'm a startup, and
investors will drive around, they just write
a cheque and throw it out there. I was wrong
and, still, it was easier, much easier, there were less expectations to
raise money, but now it looks like
it's a very fierce competition, you have to have so many metrics
to even raise $500000. What has changed
and why it's going on, what are the reasons other than the
cost of getting this?
In the last bubble, what happened
was we could achieve liquidity, and that's if you were an investor,
you could take the company public by just having the word
e or i, you know, internet or something, in front of the name
because remember during a bubble, investors aren't building companies, they're actually being financial
engineers. All they care about is can they get a liquidity event? When the bubble crashed,
venture capitalists needed to go back to what they used to know
how to do, which is teaching entrepreneurs actually how to build companies.
That's different from building financial events, is that distinction clear?
So if you need to build a company, well, to last for
the long term, oh, instead of worrying about how do I take this public or how
do I merge it, you're gonna have to understand how do I get profitable?
Oh, and then work backwards on that. Profitable? I need customers!
Instead of needing Wall Street, I now need customers. Well, how do I get
customers? And so we had to go learn the first principles yet again
in the new environment, which is mobile apps, web apps, cloud apps
about how do you build profitable businesses over time rather than how do I just
exploit the stupidity of Wall Street at the time to buy
anything that had internet in it. Does that?
Yes, but could you add something on the expectations of investors?
So nowadays, at least here in the Silicon Valley
showing up with here's my idea, or here's my
plan, is no longer good enough, because
investors are finally admitting they really don't read business plans.
And worse, business plans are a single point in time, they're
static. In fact, I have smart students at Stanford, they could go write you the
world's best business plan in a weekend in a library, but that really is no
indication of, do they actually know anything. What you really wanna hear about, I think, is their journey.
Here was my original idea, here's who the customers were, here's what I
and so, here's my idea, here's what I did, then here's what happened. No one came to the site.
So here's what I did, I changed this, I changed that, and oh, I got tons of people at the site but no one
activated. Okay, I got lots of activation, but I figured
I had a Freemium model but no one was upgrading. And
maybe you tell that story very quickly three or four times and
until you finally get, but now I have 10000 users and I'm gaining, you know,
5000 users a week, and I'm here because I need some money for
scale. Boy, that's a much interesting story, much more
than here's my idea. You know, you tell me which one's gonna get
funded. So I think the level of sophistication of investors
about tell me about what you've learned, and it's not just
the metrics, tell me how you got here, because if you're gonna tell me
you were a genius from day one, you're simply lying to yourself and me.
No one does that. Or if you're the rare one out a million
who do that, then a bag of money is gonna fall by your feet as well.
If you're a normal person, you'll have been on a journey, and it's the journey
that we really need to hear, because it will tell us a lot about how
quickly you learn, what you're learning, are you on the right trajectory
etc. So the level of sophistication of VC, here's what I wanna hear, is much different than here's my idea
give me $50000.
Alright, yeah. That makes sense.
Have you ever thought about how this aspect of entrepreneurs versus investors
will look like, this relationship will look like, let's say 10 years from now?
Yup, you know it's very interesting. Venture capital in Silicon Valley
has undergone a fairly radical set of transitions
in the last 30 years. It used to be in the late
1960s and the 70s when venture capital emerged as a business, they
invested in things with electrons. By electrons, I mean Silicon, or computers or whatever. In 1980 a
company called Genentech went public, which was the first life sciences company. Now
all of a sudden venture capital bifurcated, split. You have the guys
who invested in electrons, and now you have the guys who invested in cells, living things.
While some of them might have still stayed under the same roof, the same company, these people did not
go back and forth. You weren't one day
investing in a Silicon company, and the next day knowing about Amjet.
Very rarely, but those were distinct
expertise. It wasn't until about 2002 that there was another
partial split, and that was clean
tech investments. Yeah, you could say some of those electron guys understood
but the capital requirements were different, the regulatory requirements were different
so there were some investors who kinda focused on clean tech.
But in the last 5 years, something even more
exciting has happened.
So what happened in the last 5 years for venture capital is really interesting, is that the venture
capital community split once again, is that startups and web,
mobile and cloud no longer need millions of dollars, and they move
at speeds that are 10x faster than traditional
VCs were used to dealing with, so a whole new class of VCs
emerged, super angels that could deal with $100000 investments
rather than needing to put 4, 5, 10 million dollars
at work because they have a billion dollar fund, and so that changed the venture
community one more time.
Mm-hm. What do you think about this communtity profile
ten years from now?
It's interesting. I think venture capital will continue to emerge as
startups continue to emerge, you know, venture capital was just
reacting to the fact that web, mobile and cloud were a new class of activities that
didn't quite match the traditional investment activities, and I think we'll see changes I can't even predict.
Like, maybe like a billion dollar fund that would throw money
away just on a very simple qualification?
No I think more like Kickstarter and Crowdsourcing as a potential.
I think it's interesting Y-Combinator experimenting on the fact that
we don't even care about their idea, we're just funding teams, those are nice Science
experiments, and which ones of those experiments actually
turn into hard data and, we don't know, but I
just want to point out, we're experimenting a lot here. The Valley is a continual experiment.
Great, well, Mr. Blank, thank you very much. It was a pleasure to have you, and best of luck with your
future endeavours.
Alright, best of luck to you. Thank you.