1. 1 Confidential - for classroom use only The Startup Owner’s Manual Steve Blank and Bob Dorf The Step-by-Step Guide for Building a Great Company (K&S Ranch, Inc. Publishers: 2012)

2. 2 Confidential - for classroom use only Definition of a Startup A startup is not a smaller version of a large company. A startup is a temporary organization in search of a scalable, repeatable, profitable business model. At the outset, the startup business model is a canvas covered with ideas and guesses, but it has no customers and minimal customer knowledge.

3. 3 Confidential - for classroom use only Types of Startups Small Business Entrepreneurship: In the United States, the majority of entrepreneurs and startups are found among 5.9 million small businesses that make up 99.7 percent of all U.S. companies and employ 50 percent of all nongovernment workers. These are often service-oriented businesses like drycleaners, gas stations and convenience stores, where entrepreneurs define success as paying the owners well and making a profit…. Scalable startups are the work of traditional technology entrepreneurs. These entrepreneurs start a company believing their vision will change the world and result in a company with hundreds of millions if not billions of dollars in sales. The early days of a scalable startup are about the search for a repeatable and scalable business model. “Buyable” startups are a new phenomenon. With the extremely low cost of developing web/ mobile apps, startups can literally fund themselves on founders’ credit cards and raise small amounts of risk capital, usually less than $ 1 million. These startups (and their investors) are happy to be acquired for $ 5 million to $ 50 million, purchased by larger companies often to acquire the talent as much as the business itself. Large Company Entrepreneurship: Large companies have finite life cycles. Most grow by offering new products that are variants of their core products (an approach known as sustaining innovation). They may also turn to disruptive innovation, attempting to introduce new products into new markets with new customers. Social entrepreneurs build innovative nonprofits to change the world.

4. 4 Confidential - for classroom use only The Lean Startup Lean Startup is a combination of Customer Development and Agile Development popularized by Eric Ries: Customer Development: 1.Customer discovery first captures the founders’ vision and turns it into a series of business model hypotheses. Then it develops a plan to test customer reactions to those hypotheses and turn them into facts. 2.Customer validation tests whether the resulting business model is repeatable and scalable. If not, you return to customer discovery. 3.Customer creation is the start of execution. It builds end-user demand and drives it into the sales channel to scale the business. 4.Company-building transitions the organization from a startup to a company focused on executing a validated model. Agile Development: 1.the engineering method used to develop products (hardware, software or services) iteratively and incrementally with flexibility to react to customer feedback 2.recognizes that customer needs and the final product spec cannot be fully defined a priori; agile is the antithesis of Waterfall Development

5. 5 Confidential - for classroom use only The Customer Development Process The Customer Development process gathers customer feedback about product, channel, price, and positioning, all of which can be modified and tested in near- real time, and uses it as immediate feedback to iterate and optimize. As a result, web/ mobile channel startups can move forward at “Internet speed,” an impossibility with physical distribution channels and products. The core of Customer Development is blissfully simple: Products developed by founders who get out in front of customers early and often, win. Products handed off to sales and marketing organizations that are only tangentially involved in the new-product development process will lose. The mix of Customer Development and Agile engineering dramatically increases the odds of new product and company success, while reducing the need for upfront cash and eliminating wasted time, energy, money and effort.

6. 6 Confidential - for classroom use only Limits to Lean Startup Methods When Mistakes Must be Limited A hypothesis-driven approach relies on the ability to make and learn from mistakes. However, new ventures do not always operate in environments where mistakes are tolerable. Three such situations are especially salient: when there is no post-launch ability to correct mistakes; when mistakes would impact customers' mission-critical activities; and when there is limited societal tolerance for mistakes. When Demand Uncertainty is Low With strong unmet demand for a new product, there is less need to seek feedback about customers' needs. This would be the case for a low-cost cancer cure that produced no adverse side effects. Similarly, there would be strong demand from utilities for a low cost, re liable, "green” solution for generating electricity that did not produce unpredictable, off-peak spikes in output requiring expensive power storage facilities - a limitation of solar and wind energy. With such new products, entrepreneurs should still follow a hypothesis-driven approach to testing alternative engineering approaches, but it is not imperative to launch early and often to get feedback about customer demand. When Demand Uncertainty is High but Development Cycles are Long Intrinsically long product development cycles, which are endemic to entrepreneurial projects that require engineering breakthroughs or massive infrastructure deployment, make it impossible to launch early and often. If demand uncertainty is low, this doesn't pose a major problem. But what if development cycles are intrinsically long for a radically innovative product for which there is considerable uncertainty about customer demand? Consider the case of Segway. Until the company had a working prototype of its two-wheeled "personal transportation system," could anyone accurately predict how early adopters would react to the product? In this context, there is no possibility of putting a real product in the hands of real customers, early in the product development process. But the entrepreneur should s till use hypothesis-testing methods whenever possible to gain insight on target customers' needs. Thomas Eisenman, et. al., Hypothesis-Driven Entrepreneurship: The Lean Startup Harvard Business School Background Note: 2011)

7. 7 Confidential - for classroom use only Short YouTube Videos Customer Development: 1.https://www.youtube.com/watch?v=xr2zFXblSRMhttps://www.youtube.com/watch?v=xr2zFXblSRM Customer Discovery: 1.https://www.youtube.com/watch?v=ewEtBz9SST4&index=10&list=PLw540Wq5kay8RCvYu7D5r5wZcedug-kZOhttps://www.youtube.com/watch?v=ewEtBz9SST4&index=10&list=PLw540Wq5kay8RCvYu7D5r5wZcedug-kZO 2.https://www.youtube.com/watch?v=FRzz9JJ6iiI&index=8&list=PLw540Wq5kay8RCvYu7D5r5wZcedug-kZOhttps://www.youtube.com/watch?v=FRzz9JJ6iiI&index=8&list=PLw540Wq5kay8RCvYu7D5r5wZcedug-kZO 3.https://www.youtube.com/watch?v=iUrrwxOG9uU&index=5&list=PLw540Wq5kay8RCvYu7D5r5wZcedug-kZOhttps://www.youtube.com/watch?v=iUrrwxOG9uU&index=5&list=PLw540Wq5kay8RCvYu7D5r5wZcedug-kZO Customer Validation: 1.https://www.youtube.com/watch?v=ewEtBz9SST4&index=10&list=PLw540Wq5kay8RCvYu7D5r5wZcedug-kZOhttps://www.youtube.com/watch?v=ewEtBz9SST4&index=10&list=PLw540Wq5kay8RCvYu7D5r5wZcedug-kZO Market Size Analysis: 1.https://www.youtube.com/watch?v=QBfLsXhRYPc&list=PLw540Wq5kay8RCvYu7D5r5wZcedug-kZO&index=14https://www.youtube.com/watch?v=QBfLsXhRYPc&list=PLw540Wq5kay8RCvYu7D5r5wZcedug-kZO&index=14 2.https://www.youtube.com/watch?v=CHh49_ZtY8I&index=11&list=PLw540Wq5kay8RCvYu7D5r5wZcedug-kZOhttps://www.youtube.com/watch?v=CHh49_ZtY8I&index=11&list=PLw540Wq5kay8RCvYu7D5r5wZcedug-kZO 3.https://www.youtube.com/watch?v=_-N5u7i_Vgk&index=12&list=PLw540Wq5kay8RCvYu7D5r5wZcedug-kZOhttps://www.youtube.com/watch?v=_-N5u7i_Vgk&index=12&list=PLw540Wq5kay8RCvYu7D5r5wZcedug-kZO Agile Development: 1.Minimum viable product: https://www.youtube.com/watch?v=joNKkWPafZs&list=PLw540Wq5kay8RCvYu7D5r5wZcedug- kZO&index=6https://www.youtube.com/watch?v=joNKkWPafZs&list=PLw540Wq5kay8RCvYu7D5r5wZcedug- kZO&index=6 2.Pivot: https://www.youtube.com/watch?v=p9AuCQTzbgo&index=7&list=PLw540Wq5kay8RCvYu7D5r5wZcedug-kZOhttps://www.youtube.com/watch?v=p9AuCQTzbgo&index=7&list=PLw540Wq5kay8RCvYu7D5r5wZcedug-kZO

8. 8 Confidential - for classroom use only Entrepreneurial Ideation 1.Immersion. Creativity usually follows from deep immersion in a problem. For some problems, especially in consumer markets, an entrepreneur's own interests and life experiences are adequate guides for ideation. To identify unmet needs and potential solutions for business-to-business markets, however, an entrepreneur typically must tap the domain knowledge that follows from years of industry experience. If she lacks such experience, the entrepreneur will benefit from closely observing and interacting with customers and/or domain experts, playing the role of anthropologist. 2.Obsession. Creative individuals become obsessed with the problems on which they are working. They are not however, unduly devoted to provisional solutions that they conceive during the ideation process; they remain open to new ideas, willing to reconsider their assumptions and prepared to abandon flawed concepts-no matter how much effort they have invested in them. Those that succeed know that early solutions are likely to be wrong or incomplete and that failure is a natural part of the process. 3.Incubation. Inventors often spend years on a problem before they get an epiphany about a solution; the subconscious remains engaged in problem solving even when inventors frustrated by barriers or distracted by other priorities-set their work aside for long periods. The notion that solutions may come into focus slowly can be difficult to accept for aspiring entrepreneurs, especially those who commit to launching a startup before they have a vision for what it will do. Thomas Eisenman, et. al., Hypothesis-Driven Entrepreneurship: The Lean Startup Harvard Business School Background Note: 2011)

9. 9 Confidential - for classroom use only Entrepreneurial Ideation (contd.) 4.Recombination. New ideas often result from connecting seemingly unrelated concepts. Creative individuals are curious; they put themselves in situations of planned serendipity where they will be exposed to diverse ideas in order to harness their associative thinking abilities. They may do this through the variety of contacts they keep in the real world or through the subject matter experts they follow online. 5.Clarification. Many inventors employ processes to keep track of and refine their ideas. Design thinkers often rely on journals and Post-It notes, but some entrepreneurs find that writing blog posts not only forces them to integrate and sharpen their ideas but also invites helpful responses. Some founders also find that group "white boarding" sessions provide a helpful way to generate, clarify, and prioritize their ideas. 6.Collaboration. Researchers have dispelled the myth of the lone genius inventor. The prolific American inventor Thomas Edison, for example, surrounded himself with brilliant and determined collaborators in his Menlo Park, New Jersey laboratory. Most great creative work is done in small teams: think of Lennon and McCartney, Jobs and Wozniak, or Brin and Page. One collaborator will say something that triggers another's ideas, and cofounders will support each other emotionally when the creative process stalls. Thomas Eisenman, et. al., Hypothesis-Driven Entrepreneurship: The Lean Startup Harvard Business School Background Note: 2011)

10. 10 Confidential - for classroom use only Two Practices of Design Thinkers Experts on creativity reject the notion of a playbook for innovation, but entrepreneurs engaged in ideation would be wise to copy two practices of design thinkers. a.First, entrepreneurs should learn how to run a good brainstorming session. This entails generating as many ideas as possible, in particular, wild ones; building connections between ideas; and avoiding negative evaluation of ideas. b.Second, entrepreneurs should familiarize themselves with the ways in which design thinkers use crude prototypes. Thomas Eisenman, et. al., Hypothesis-Driven Entrepreneurship: The Lean Startup Harvard Business School Background Note: 2011)

11. 11 Confidential - for classroom use only Blue Ocean Strategy W. Chan Kim and Renee Mauborgne, “Blue Ocean Strategy” in Harvard Business Review (October, 2004)

12. 12 Confidential - for classroom use only Red Oceans and Blue Oceans … the business universe consists of two distinct kinds of space, which we think of as red and blue oceans. Red oceans represent all the industries in existence today-the known market space. In red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are well understood. Here, companies try to outperform their rivals in order to grab a greater share of existing demand. As the space gets more and more crowded, prospects for profits and growth are reduced. Products turn into commodities, and increasing competition turns the water bloody. Blue oceans denote all the industries not in existence today – the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. There are two ways to create blue oceans: 1.In a few cases, companies can give rise to completely new industries, as eBay did with the online auction industry. 2.But in most cases, a blue ocean is created from within a red ocean when a company alters the boundaries of an existing industry.

13. 13 Confidential - for classroom use only W. Chan Kim and Renee Mauborgne, “Blue Ocean Strategy” in Harvard Business Review (October, 2004)

14. 14 Confidential - for classroom use only Blue Ocean Creations

15. 15 Confidential - for classroom use only Differentiation and Low Cost at the Same Time What kind of strategic logic is needed to guide the creation of blue oceans? To answer that question, we looked back over 100 years of data on blue ocean creation to see what patterns could be discerned. Our research shows several common characteristics across strategic moves that create blue oceans. We found that the creators of blue oceans, in sharp contrast to companies playing by traditional rules, never use the competition as a benchmark. Instead they make it irrelevant by creating a leap in value for both buyers and the company itself. Perhaps the most important feature of blue ocean strategy is that it rejects the fundamental tenet of conventional strategy: that a trade-off exists between value and cost. According to this thesis, companies can either create greater value for customers at a higher cost or create reasonable value at a lower cost. In other words, strategy is essentially a choice between differentiation and low cost. But when it comes to creating blue oceans, the evidence shows that successful companies pursue differentiation and low cost simultaneously. A rejection of the trade-off between low cost and differentiation implies a fundamental change in strategic mind-set – we cannot emphasize enough how fundamental a shift it is. The red ocean assumption that industry structural conditions are a given and firms are forced to compete within them is based on an intellectual worldview that academics call the structuralist view, or environmental determinism. According to this view, companies and managers are largely at the mercy of economic forces greater than themselves. Blue ocean strategies, by contrast, are based on a worldview in which market boundaries and industries can be reconstructed by the actions and beliefs of industry players. We call this the reconstructionist view.

16. 16 Confidential - for classroom use only Four Actions Framework To achieve value innovation, Kim and Mauborgne propose an analytical tool they call the Four Actions Framework. These four key questions challenge an industry’s strategic logic and established business model: 1.Which of the factors that the industry takes for granted should be eliminated? 2.Which factors should be reduced well below the industry standard? 3.Which factors should be raised well above the industry standard? 4.Which factors should be created that the industry has never offered? In addition to value innovation, Kim and Mauborgne propose exploring non- customer groups to create Blue Oceans and tap untouched markets. Alexander Osterwalder and Yves Pigneur, Business Model Generation (John Wiley and Sons: 2010)

17. 17 Confidential - for classroom use only Exercise: The Four Actions Framework First, choose an industry. Ask four key questions that challenge an industry’s strategic logic and established business model: 1.Which of the factors that the industry takes for granted should be eliminated? 2.Which factors should be reduced well below the industry standard? 3.Which factors should be raised well above the industry standard? 4.Which factors should be created that the industry has never offered? Additional questions: Can you identify non-customer groups or markets which could be reached by an extension of the industry’s current products/services? Alexander Osterwalder and Yves Pigneur, Business Model Generation (John Wiley and Sons: 2010)