3. Startups Are Not Smaller Versions of
Large Companies
Large Companies Execute
Known Business Models
4. Startups Are Not Smaller Versions of
Large Companies
Startups Search for
Unknown Business Models
5. What’s A Startup?
Search Build Execute
A Startup is a temporary organization
used to search for a repeatable and
scalable business model
Startup
Large
Company
Transition
6. Startups Search and Pivot
The Search for the Business Model
Scalable
Startup
Large
Company
Transition
7. Startups Search and Pivot
The Search for the Business Model
Scalable
Startup
Large
Company
Transition
Search for a Business Model
- customer needs/product features
i.e. Product/Market fit
- Found by founders, not employees
- Repeatable sales model
8. Startups Search, Companies Execute
The Search for the Business Model The Execution of the Business Model
Scalable
Startup
Large
Company
Transition
9. Startups Search, Companies Execute
The Search for the Business Model The Execution of the Business Model
Scalable
Startup
Large
Company
Transition
Execution
- Profitable
- Repeatable
- Scale
- Job spec’s
- Process
10. Learning Metrics Vs Accounting/KPI’s
Scalable
Startup
The Execution of the Business Model
Large
Company
Transition
11. Learning Metrics Vs Accounting/KPI’s
Scalable
Startup
The Execution of the Business Model
Large
Company
Transition
Accounting/KPI’s
- Balance Sheet
- Cash Flow Statement
- Income Statement
- Return on Net Assets
- Return on Capital
12. Learning Metrics Vs Accounting/KPI’s
The Search for the Business Model
Scalable
Startup
Large
Company
Transition
Startup Metrics
- Customer Acquisition Cost
- Viral coefficient
- Customer Lifetime Value
- Average Selling Price/Order Size
- Monthly burn rate
- etc.
13. Customer Validation Versus Sales
Scalable
Startup
The Execution of the Business Model
Large
Company
Transition
Sales
- Sales Organization
- Scalable
- Price List/Data Sheets
- Revenue Plan
14. Customer Validation Versus Sales
The Search for the Business Model
Scalable
Startup
Large
Company
Transition
Customer Validation
- Early Adopters
- Pricing/Feature unstable
- Not yet repeatable
-“One-off’s”
- Done by founders
15. Customer Development Versus
Scalable
Startup
Product Management
The Execution of the Business Model
Large
Company
Transition
Product Management
- Delivers MRD’s
- Feature Spec’s
- Competitive Analysis
- Prod Mgmt driven
16. Customer Development Versus
Product Management
The Search for the Business Model
Scalable
Startup
Large
Company
Transition
Customer Development
- Hypothesis Testing
- Minimum Feature Set
- Pivots
- Founder-driven
17. Scalable
Startup
Engineering Versus
Agile Development
The Execution of the Business Model
Large
Company
Transition
Engineering
- Requirements Docs.
- Waterfall Development
- QA
- Tech Pubs
18. Engineering Versus
Agile Development
The Search for the Business Model The Execution of the Business Model
Scalable
Startup
Large
Company
Transition
Agile Development
- Continuous Deployment
- Continuous Learning
- Self Organizing Teams
- Minimum Feature Set
- Pivots
Engineering
- Requirements Docs.
- Waterfall Development
- QA
- Tech Pubs
19. Startups Model, Companies Plan
Scalable
Startup
The Execution of the Business Model
Large
Company
Transition
Business Plan
- Plan describes “knowns”
- Known features for line extensions
- Known customers/markets
- Known business model
20. Startups Model, Companies Plan
The Search for the Business Model
Scalable
Startup
Large
Company
Transition
Business Model
- Unknown customer needs
- Unknown feature set
- Unknown business model
- Model found by iteration
The Execution of the Business Model
21. Startups Protect Mavericks,
Companies Fire Mavericks
Scalable
Startup
The Execution of the Business Model
Large
Company
Transition
- Pains in the butt
- Always looking at something different
- Doesn’t get with the program
22. Startups Protect Mavericks,
Companies Fire Mavericks
The Search for the Business Model
Scalable
Startup
Large
Company
Transition
- CEO of your company
- Finds your next market
24. 1870’s: Organize by Functions
• Problem Companies going from local to regional to national.
Specialized skills needed
• Strategy Separate ownership from professional management
• Structure Organize into functions: Sales, Mfg, Finance, Marketing
• Tools Organization Chart
• Leaders U.S. Steel, Standard Oil, Pennsylvania Railroad
25. CEO
Organize by Functions
Sales Marketing
Engineering Finance
…
…
…
…
…
…
…
…
…
…
…
…
Mfg
…
…
…
26. 1920’s: Organize by Divisions
• Problem Companies have dissimilar products and/or national
geography - functional organization not efficient
• Strategy Group similar products together by regions or channels
• Structure Organize companies into self-contained divisions.
Add corporate staff for shared functions
• Tools Distributed Accounting, Bus School, Consulting Firms
• Leaders DuPont, General Motors, Sears, Standard Oil
27. CEO
Organize by Divisions
Bus Div A Bus Div B
Bus Div C Bus Div C
…
…
…
…
…
…
…
…
…
Replicate functions
inside separate
divisions
28. CEO
Organize by Divisions
Add Corporate Staff
Adv R&D CIO CMO M&A CFO Legal
Bus Div A Bus Div B
Bus Div C Bus Div C
29. 1960’s: Organize by Matrix
• Problem Companies have complex, short term projects
• Strategy Temporary organization driven by project
• Structure Project mgmt across functions as needed by project
• Tools Gantt Charts, Project Management
•Leaders NASA, Lockheed, Northrup, Boeing,…
30. CEO
Organize by Project
(Matrix)
Projects Engineering
Q/A Finance
Project Mgr Eng 1
Eng 2
Eng 3
…
…
…
…
…
…
Mfg
…
…
Project Mgr …
Project Mgr
Functional Mgmt Functional Mgmt Functional Mgmt Functional Mgmt
31. 21st Century Corporate Issues
• Continuous and unrelenting disruption
– China
– Globalization
– Transparent pricing
– Plummeting cost of entry
– Internet, mobile…
32. 21st Century Corporate Structure Issues
• Current forms of corporate organizations are
designed for execution
• Attempts to “add” innovation break these structures
– KPI’s, Processes, financials, HR, Bus Units, etc
35. Types of Corporate Innovation
Types of Corporate Innovation
Disruptive
Innovation
Continuous
Innovation
Process
Innovation
36. Process Innovation
• Improve part of an existing business model
– Cost, revenue, service, etc
• Can be done by an individual part time
• Domain of the general manager
37. Business Model (Continuous)
Innovation
• Requires existing business unit resources
• Uses internal business unit incubator and Investment
Readiness Level
• Domain of the general manager
Example: Pepsi buying Frito Lay/Quaker Oats, Exxon buying
XTO ($41B)
38. Disruptive Innovation
• Requires new & existing business unit resources
• Uses corporate incubator or Skunk Works
• Domain of the CEO and board
Example: Amazon and AWS, Apple and iPod, iPhone
39. Corporate Innovation Portfolio
• To run these innovation projects:
– corporation’s innovation is a portfolio of projects
– occurs inside Bus Units and Functional Org
– As well as outside
40. Innovation Portfolio
Innovation Portfolio
Disruptive
Innovation
Continuous
Innovation
Process
Innovation
• Build
• Buy
• Partner
• Open
Types of Corporate Innovation
41. Buying Innovation
What Can You Acquire?
Disruptive
Innovation
Continuous
Innovation
Process
Innovation
• Revenue
• Product Line + Users
• Product Line
• Teams
• Intellectual Property
Why Acquire?
Innovation Portfolio
• Build
• Buy
• Partner
42. Building Innovation
Where Do You Build It?
Disruptive
Innovation
Continuous
Innovation
Process
Innovation
• Skunk Works
• Advanced R&D
• Functional Org
• Divisional Engineering
• Intellectual Property
Type of Innovation
Innovation Portfolio
• Build
• Buy
• Partner
43. Issues
Structure and Tools for Execution
are not
Structure and Tools for Innovation
44. Current Corporate Metrics Focus on
Execution
• Finance focus
– Return on Net Assets, Return on Capital and Internal
Rate of Return
– minimum rate of return on a project or investment
• Execution focus
– Customer acquisition cost, sales per rep, etc
Christensen HBR 6/13
45. CEO
M&A/Strat
Finance Legal CTO/R&D CMO
egy
HR
• Hiring policies
• Promotion Policies
• Termination Policies
• Bonus/Incentives
• …
• Return on Net Assets
• IRR
• Hurdle Rates
• Net/Gross Margin
• operating income
• …
• Contracts
• Compliance
• Governance…
Bus Div A Bus Div B Bus Div C Bus Div C
•market share
•quote to close ratio
•sales per rep
•customer
acquisition/activation
cost
•average selling price
• customer lifetime value
• churn/retention
• sales per square foot
• inventory turns
• …
• Strategic/Operational fit
• Accretion/Dilution
• Total Shareholder Return
• Economic Margin
• Market Value Added
•…
• Tech Strategy
• Future Direction
• Chief Architect
•…
• …
46. Corporate Innovation Quandary
• Tools to manage execution are destructive for
innovation
• Innovation metrics are different
• How do we manage to do both without killing the
core business?
48. Start With Lots of Small Wins
• Develop an experimentation and prototyping culture
• Use Lean Startup methodology
– Early Market Testing
– Fast Iterations
– Fast Go/No Go Decisions
50. Corporate Innovation By Design
• Start Small
• Aim High
• Iterate Fast
• Fail fast, learning
• Innovation as incremental but permanent change
All require cultural change
CEO/Exec Staff buy-in
57. There Are No Facts Inside The
Building, So Get the Heck Outside
58. 3. Build Incrementally & Iteratively
• Frame Hypotheses
• Test Hypotheses
• Build the product
incrementally &
Iteratively
Business Model
Customer Development
Agile Engineering
59.
60. Encourage Multi-Disciplinary Teams
• Pure tech teams lack customer perspective
– Tend to push the product rather than understand the
problem
• Pure business teams lack tech reality/judgment
61. Core Team of Innovation Managers
• Office of Chief Innovation Officer
• They manage the Innovation Cycle
– Logistics
– Administration
– Assessment
– Training
62. CEO
Chief
M&A/Strat
Finance Legal CMO
Innovation
Officer
egy
HR
Add Corp Innovation Staff
Bus Div A Bus Div B Bus Div C Bus Div C
63. Chief Innovation Officer
• Training
– Integral to the projects
– Lean LaunchPad/I-Corps Curriculum
• Mentors
– Integral to the projects
– Corporate and divisions
• Open Innovation
– Integral to the projects
64. Core Business + Disruptive Projects
• Run Process & Business Model innovation in
Business Units/Functional Organization
• Run Disruptive projects in corporate
• Bottoms up + Top Down innovation
65. CEO
Chief
M&A/Strat
Finance Legal CMO
Innovation
Officer
egy
HR
Add Divisional Lean Innovation Projects
Bus Div A Bus Div B Bus Div C Bus Div C
• …
Lean Project 1
Lean Project 2
Lean Project n
Lean Project 1
Lean Project 2
Lean Project n
Lean Project 1
Lean Project 2
Lean Project n
Lean Project 1
Lean Project 2
Lean Project n
66. CEO
Chief
M&A/Strat
Finance Legal CMO
Innovation
Officer
egy
HR
Add Corporate Lean Innovation Projects
Bus Div A Bus Div B Bus Div C Bus Div C
• …
- Disruption
Lean Project 1
Lean Project 2
Lean Project n
Lean Project 1
Lean Project 2
Lean Project n
Lean Project 1
Lean Project 2
Lean Project n
Lean Project 1
Lean Project 2
Lean Project n
Lean Project 1
Lean Project 2
Lean Project n
67. CEO
M&A/Strat
Finance Legal CTO/R&D CMO
egy
HR
• Hiring policies
• Promotion Policies
• Termination Policies
• Bonus/Incentives
• …
• Return on Net Assets
• IRR
• Hurdle Rates
• Net/Gross Margin
• operating income
• …
• Contracts
• Compliance
• Governance…
Add Innovation Policies and
Processes to each function
Bus Div A Bus Div B Bus Div C Bus Div C
•market share
•quote to close ratio
•sales per rep
•customer
acquisition/activation
cost
•average selling price
• customer lifetime value
• churn/retention
• sales per square foot
• inventory turns
• …
• Strategic/Operational fit
• Accretion/Dilution
• Total Shareholder Return
• Economic Margin
• Market Value Added
•…
• Tech Strategy
• Future Direction
• Chief Architect
•…
• …
68. Innovation As Incremental but
Permanent Change
• Each innovation win needs to permanently change the
corporation
– New KPI’s
– New policies
– New procedures
– New comp plans
• Every time an innovation project wins an exception to an
existing process, institutionalize the exception
69. Can Start Multiple Ways
• Top down – CEO mandate
• Chief Innovation Officer Initiatives
• Divisioanal projects
70. Common Corporate Innovation
Language and Metric
• Innovation needs a common corporate language
• All the support functions: HR, IT, Finance, Legal
need to develop innovation processes and
procedures
74. NASA/DOD Technology Readiness
Levels 3 & 4
Research to prove Feasibility
• Experimental proof of concept
• Breadboard validation in lab
Research
Concept
75. NASA/DOD Technology Readiness
Levels 5 & 6
Demo Prototype
• Breadboard validation outside the building
• System demo in real-world
Demo
Research
Concept
76. NASA/DOD Technology Readiness
Levels 7, 8, 9
Deployment
• System Development
• System deployed in real-world
Demo
Research
Concept
77. What Can We Do
With All This Data?
The Investment Readiness Level
83. Investment Readiness:
Levels 3 & 4
Problem / Solution Fit
• Problem Solution fit
• Low fidelity MVP
Problem/Solution
Hypotheses
84. Investment Readiness:
Levels 5 & 6
Validate
• Product/Market fit
• Right side of canvas
Product/Market fit
Problem/Solution
Hypotheses
85. Investment Readiness:
Levels 7 & 8
Validate
• Left side of canvas
Product/Market fit
Problem/Solution
Hypotheses
86. Investment Readiness:
Levels 9
Metrics That Matter
Left side of the canvas
Product/Market fit
Problem/Solution
Hypotheses
87. Technology
Readiness Level
Investment
Readiness Level
Metrics that Matter
Validate
Left side of Canvas
Validate
Right side of Canvas
Product/Market Fit
Problem/Solution
Hypotheses
88. Summary
• 20th century corporate structures focused on
execution
• Continuous disruption requires continuous
innovation
• We need a new model for innovation
92. Medical Device: Cheap DNA Testing
110K
5% MARKET SHARE
HOW COULD YOU
IMPROVE THIS
BUSINESS MODEL?
5.5M
2.8M
1.2M
1M
$1,000/ DEVICE
FIXED COST
50% COMMISSION
$225/DEVICE
Source: alexander osterwalder
93. Medical Device: Cheap DNA Testing
110K
5% MARKET SHARE
5.5M
2.8M
1.2M
1M
$1,000/ DEVICE
FIXED COST
50% COMMISSION
$225/DEVICE
Source: alexander osterwalder
94. Medical Device: Cheap DNA Testing
110K
5.5M
2.8M
1.2M
1M
5% MARKET SHARE
24.8M
$75/ STRIP
$7/ STRIP
2.3M
Source: alexander osterwalder
96. Buy IP
Buy Product
Line
Buy Teams
Buy Product
Line +
Users/Payers
Buy Revenue
Acquisition Intention
New Venture Phase: Search versus Execution
Types of Innovation Acquisitons
97. Acquisitions: Searching or Executing?
Buy IP
Buy Product
Line
Buy Teams
Buy Product
Line + Users
Buy Revenue
Acquisition Intention
New Venture Phase: Search versus Execution
Searching
Executing
98. Acquisition Integration Strategy
Buy IP
Buy Product
Line
Buy Teams
Buy Product
Line + Users
Buy Revenue
Acquisition Intention
Acquirer Strategy
Integrate
Independent
Integrate
Apple: 700K apps for iPhone & iPad / 25B downloads
Google: 600K / 10B downloadeds
of the retail videos accessed by a mobile device, 70% are accessed by an Apple device
Apple App store generates $5.4M/day for top-200 apps
Google generates just $679K for top-200 apps
Apple: 700K apps for iPhone & iPad / 25B downloads
Google: 600K / 10B downloadeds
of the retail videos accessed by a mobile device, 70% are accessed by an Apple device
Apple App store generates $5.4M/day for top-200 apps
Google generates just $679K for top-200 apps
Apple: 700K apps for iPhone & iPad / 25B downloads
Google: 600K / 10B downloadeds
of the retail videos accessed by a mobile device, 70% are accessed by an Apple device
Apple App store generates $5.4M/day for top-200 apps
Google generates just $679K for top-200 apps
Apple: 700K apps for iPhone & iPad / 25B downloads
Google: 600K / 10B downloadeds
of the retail videos accessed by a mobile device, 70% are accessed by an Apple device
Apple App store generates $5.4M/day for top-200 apps
Google generates just $679K for top-200 apps