Engineering 245: The Lean Launchpad

Engineering 245
The Lean LaunchPad

Session 1: Overview/Business
Models/Customer Development
Professors Steve Blank, Ann Miura-Ko, Jon Feiber
http://e245.stanford.edu/
Agenda
Is This the Right Course for Me?
Course Objectives/teams/project
Introductions
Class Logistics
Building a Lean Startup
Idea
Sizing the Opportunity
Business Models
Customer Development
Break: Stay If You Want to Be in the Class

Class Culture and Next Steps
Course Objectives
Understand the real world aspects of
Entrepreneurship by getting out of the building
Analyze and assess an opportunity

Build the product
Get orders
Work with a team
Learn whether entrepreneurship is for you
What Will you Learn?
Opportunity evaluation
Search for a Business Model
Customer Discovery and Validation
Operating and decision making in chaos with
insufficient data
Teamwork
The Course By the Numbers
3/4 Units of Credit

3 Instructors, 2 CAs, 25+ Mentors,
8 Lectures
8 Weekly 10-minute presentations
1 Final 30 minute presentation
3 Textbooks
5 -10 hours of work a week outside the classroom
Course Reading
Business Model Generation
Four Steps to the Epiphany
Founders at Work
copies available at the bookstore
This Class is Hard

You cant pass by attending the class
Your grade is determined by the work you do
outside the class
Theres a lot of it
You are dependent on teamwork and teammates
communication is critical
Teams
Suggested team size is 4 people
Deadline for team formation is Jan 6th
Must contact your mentors by Jan 7th
Present Weekly and for Final

Weekly lessons learned
Final is demo and summary
Class is about teamwork, discovery and fast

iteration
Team Projects
Any for-profit scalable startup
If you are a domain expert, thats your best bet
(but not required)
If you pick a web project, you have to build it
(and there needs to be some novelty)
Team Deliverables
Each Week
Lessons Learned presentation 10 minutes
Updated blog/wiki
10s of hours of outside the building progress
Final Presentation
30 minute Lessons Learned Summary
Grading
Individual - 20%
Team - 80%
Participation in class 20% Weekly summary and out of
the building progress 50%
Final Presentation 30%
Introductions
Steve Blank, Ann-Miura-Ko, Jon Feiber
8 startups in Silicon Valley

Semiconductors
Supercomputers
Consumer electronics
Video games
Enterprise software
Military intelligence
sblank@kandsranch.com
twitter sgblank
www.steveblank.com
Yale BS EE
McKinsey and Co.
Charles River Ventures
Stanford Ph.D MS&E
TA: E145, Mayfield Fellows,
MS&E 273
V.C. @ Floodgate
ann@floodgate.com
@annimaniac
BS CS/Astro Physics U of
Colorado
VP Networking SUN
V.C. @ MDV since 1991
8 startups - 32 years in Silicon Valley

Semiconductors
Supercomputers
Video games
Enterprise software
Yale BS EE
McKinsey and Co.
Stanford Ph.D MS&E
V.C. @ Floodgate
Teach: Stanford, Berkeley, Columbia

Details at www.steveblank.com
ann@floodgate.com
@annimaniac
BS CS/Astro Physics U of
Colorado
VP Networking SUN
8 startups - 32 years in Silicon Valley

Semiconductors
Supercomputers
Video games
Enterprise software
Teach: Stanford, Berkeley, Columbia
Details at www.steveblank.com
Yale BS EE
McKinsey and Co.
Stanford Ph.D MS&E
V.C. @ Floodgate
ann@floodgate.com
@annimaniac
BS CS/Astro Physics U
of Colorado
50th employee, VP
Networking @ Sun
jdf@mdv.com
Course Assistant (CAs)
Thomas Haymore
B.A. in Political Science

Stanford Law (06)
J.D. Stanford Law (12)
thomas.haymore@gmail.com
Felix Huber
MS MS&E 2010
Google Translate Product Mgr
huberfelix@gmail.com
CAs role: Class/lecture questions, Grading and attendance
Volunteer Course Assistant (CAs)
Thomas Haymore
B.A. in Political Science
Stanford Law (06)
J.D. Stanford Law (12)
thomas.haymore@gmail.com
Felix Huber
MS MS&E 2010
Google Translate Product Mgr

huberfelix@gmail.com
CAs role: Class/lecture questions, Grading and attendance
Mentors
Mentors are Venture Capitalists or Entrepreneurs
Mentors role is to:
Help you Get you out of the building

Share contacts
Offer Real-world entrepreneurial advice
Critical feedback
You arrange your schedule for the mentors, not

the other way around
Class Logistics
How the Class Works

Class
Topic
Deliverable for the Next Week

(Submit interview notes, present results, update wiki/blog)
January 4th
Class 1
Business Model and

- Hypotheses for each part of business model.

- Test for whether your business is worth
pursuing (market size)
- Test for each of the hypotheses
- What constitutes a pass/fail signal for the
test (e.g. at what point would you say your
hypotheses wasnt even close to correct)?
How the Class Works

Class
Topic

January 4th
Class 1
Business Model and


- Test for whether your business is worth
January 6th
Team Mixer
- Teams by midnight Jan 6th
How the Class Works

Class
Topic

January 4th
Class 1
Business Model and

Customer Development - Test for whether your business is worth
January 6th
Team Mixer
- Teams by midnight Jan 6th
January 11th
Class 2
Testing the Value

Proposition
- Name your team.

-- What are your value proposition hypotheses?
-
- What did you discover from customers?
How the Class Works

Class
Topic

January 18th
Class 3
Testing Customers / - What were your user/customer hypotheses?

Users / Payers
- Did you learn anything different?
- Anything change about Value Proposition?
- What are your customer acquisition costs?
- What are the direct benefits (economic/other)?
- Who is the decision maker, how large is their
budget? What are they spending it on today?
- - How will this buying decision be made?
- - What resonates with customers?
- - For web startups, start coding the product.
- - Setup Google or Amazon cloud infrastructure
How the Class Works

Class
Topic

January 18th
Class 3
Testing Customers
and Users
- What were your user/customer hypotheses?

- Did you learn anything different?
- Anything change about Value Proposition?
- What are your customer acquisition costs?
- What are the direct benefits (economic/other)?
- Who is the decision maker, how large is their
budget? What are they spending it on today?
- - How will this buying decision be made?
- - What resonates with customers?
- - For web startups, start coding the product.
- - Setup Google or Amazon cloud infrastructure
January 25th
Class 4
Testing Demand
Creation
- Anything change about Value Proposition or

Customers/Users or Channel?
- Present and explain your marketing campaign.
- What worked best and why?
How the Class Works

Class
Topic

Feb 1st
Class 5
Testing
Sales
Channel
For web teams: Get working website/analytics up.

- Track where visitors are coming from, how behavior differs.
- What were your hypotheses about site results?
- Anything in Value Proposition or Customers/Users?
For non-web teams: Interview 10 people in channel
- Anything change in Value Proposition, Channel or
Customers/Users?
- Does your product extend/replace existing channel revenue?
- Whats the cost of your channel/ its efficiency vs.
product selling price.
For Everyone: What is your customer lifetime value?
- What feedback did you receive from your users?
- What are the entry barriers?
How the Class Works

Class
Topic

(Submit interview notes, present results, update wiki/blog, build website)
Feb 1st
Class 5
Testing
Sales
Channel
For web teams: Get working website/analytics up.

- Track where visitors are coming from, how behavior differs.
- What were your hypotheses about site results?
- Did anything change about Value Proposition
or Customers/Users?
For non-web teams: Interview 10 people in channel
- Did anything change about Value Proposition or
Customers/Users?
- Does your product extend/replace existing channel revenue?
- Whats the cost of your channel/ its efficiency vs.
product selling price.
For Everyone: What is your customer lifetime value?
- What feedback did you receive from your users?
- What are the entry barriers?
Feb 8th
Class 6
Testing
Revenue
Model
- Assemble income statement for your business model.

- Lifetime value calculation for customers.
How the Class Works

Class
Topic

Feb 15th
Class 7
Testing
Partners
- Any change of Value Proposition, Customers/Users,

Channel, or Demand Creation?
- What are the partners incentives/impediments?
How the Class Works

Class
Topic

Feb 15th
Class 7
Testing
Partners

Feb 22nd
Class 8
Testing Key
Resources
and Cost
Structure
- Assemble a resources assumptions spreadsheet.

- Include people, hardware, software, prototypes,
financing, etc.
- - When will you need these resources?
How the Class Works

Class
Topic

Feb 15th
Class 7
Testing
Partners

Feb 22nd
Class 8
Testing Key
Resources
and Cost
Structure
- Assemble a resources assumptions spreadsheet.

- Include people, hardware, software, prototypes,
financing, etc.
March 1st
Class 9
Present!
Group 1 30 Minute Presentations
March 8th
Class 10
Present!
How the Class Works

Class
Topic

Feb 15th
Class 7
Testing
Partners

Feb 22nd
Class 8
Testing Key - Assemble a resources assumptions spreadsheet.

Resources - Include people, hardware, software, prototypes,
and Cost
financing, etc.
Structure
March 1st
Class 9
Present!
March 8th
Class 10
Present!
March 11th
Funding!
Optional presentations at VC firm for funding
How to Build A Startup

Idea
Size Opportunity
Business Model

Idea
Size of the
Opportunity
Business
Model(s)
Customer
Discovery
Customer
Validation

Idea
Size of the
Opportunity
Theory
Business
Model(s)
Customer
Discovery
Practice
Customer
Validation

Idea
Size of the
Opportunity
Business
Model(s)
Customer
Discovery
Customer
Validation
Web startups get the product

in front of customers earlier

Idea
Size of the
Opportunity
Business
Model(s)
Customer
Discovery
Customer
Validation
Idea
Were Engineers Darn It!

Stanford
Arent companies all about product?

I have a great technology idea
Teach me how to make a company around it
Just like Facebook and Google (or Intel or
Apple)
Sources of Startup Ideas?

Technology shifts
Moores Law
Disruptive tech
Research
Market changes
Value chain disruption
Deregulation
Dinosaur factor
Arrogance
Deadened reflexes
Irrational exuberance
Undervalued assets
Societal changes
Changes in ways we live, learn, work, etc.
The world is flat (outsourcing)
An Idea is _Not_ a Company
Size of Opportunity
This Class is about Scalable Startups
Not all startups are designed to scale

Small business startups have different goals
Scalable startups are designed to grow big
They are done by normal people

Typically require venture capital
This means the size of the opportunity needs to

be $100s of millions to billions
Small Business Startups
Small
Busines
s
Startup
Business Model found

- Profitable business
- Existing team
< $1M in revenue
-
Small Business Startups
Small
Busines
s
Startup
- Business Model found
- Existing team
< $10M in revenue
5.7 million small businesses in the U.S. <500 employees

99.7% of all companies
~ 50% of total U.S. workers
http://www.sba.gov/advo/stats/sbfaq.pdf
Scalable Startup
Scalable
Startup
- Total Available
Large
Compan
y
>$100M/ye
ar
Market > $500m

- Company can grow to $100m/year
- Business model found
- Focused on execution and process
Scalable Startup
Scalable
Startup
Large
Compan
y
>$100M/ye
ar
- Total Available Market > $500m

- Typically requires risk capital
In contrast a scalable startup is designed to grow big

Typically needs risk capital
What Silicon Valley means when they say Startup
Very Different Startup Goals

Startup
- Business Model found
- Existing team
< $10M
Small
Busines
s
Large
Compan
y
Scalable
Startup
- Total Available Market > $500m
- Typically requires risk capital
Venture Firms Invest in

Scalable Startups
Startup
Small
Business
Scalable
Startup
Large
Compan
y
Market/Opportunity Analysis
How Big is It?: Market/Opportunity Analysis
Identify a Customer and Market Need

Size the Market
Competitors
Growth Potential
How Big is the Pie?

Total Available Market
How many people would want/need

the product?
How large is the market be
(in $s) if they all bought?
Total Available Market
How many units would that be?
How Do I Find Out?

Industry Analysts Gartner, Forrester
Wall Street Analysts Goldman, Morgan
Total
Available
Market
How Big is My Slice?

Served Available Market
How many people need/can use product?
How many people have the money to
buy the product
Served
Available
Market
How large would the market be (in $s)

if they all bought?
How Do I Find Out?

Talk to potential customers
How Much Can I Eat?
Total
Served
Available Available
Market Market
Target Market
Who am I going to sell to in year 1, 2 & 3?
How many customers is that?
How large is the market be
(in $s) if they all bought?
Target
Market
How Do I Find Out?

Talk to potential customers
Identify and talk to channel partners
Identify and talk to competitors
Segmentation
Identification of groups most likely to buy
Geographic
Demographic
Psychographic variables
Behavioral variables
Channel
etc
Total
Available
Market
Served
Available
Market
Target
Market
Market Size: Summary
Market Size Questions:

How big can this market be?
How much of it can we get?
Market growth rate
Market structure (Mature or in flux?)
Most important: Talk to Customers and Sales Channel

Next important: Market size by competitive approximation
Wall Street analyst reports are great

And : Market research firms Like Forester, Gartner
Business Model
What Is a Business Model?
Diagram of flows between company and customers

Scorecard of hypotheses testing
Rapid change with each iteration and pivot
Founder-driven
* Alex Osterwalder
9 building blocks of a
business model:
CUSTOMER SEGMENTS
which customers and users are you serving?

which jobs do they really want to get done?
VALUE PROPOSITIONS
what are you offering them? what is that

getting done for them? do they care?
CHANNELS
how does each customer segment want to be

reached? through which interaction points?
CUSTOMER RELATIONSHIPS
what relationships are you establishing with each

segment? personal? automated? acquisitive? retentive?
REVENUE STREAMS
what are customers really willing to pay for? how?

are you generating transactional or recurring
revenues?
KEY RESOURCES
which resources underpin your business model?

which assets are essential?
KEY ACTIVITIES
which activities do you need to perform well in

your business model? what is crucial?
63
KEY PARTNERS
which partners and suppliers leverage your

model?
who do you need to rely on?
COST STRUCTURE
what is the resulting cost structure?

which key elements drive your costs?
key
activities
value
proposition
customer
relationships
key
partners
customer
segments
cost
structure
revenue
streams
key
resources
channels
66
images by JAM
sketch out your

business model
building
block
building
block
building
block
building
block
building
block
g
buildin
block
building
block
building
block
build
ing
block
building
block
building
block
building
block
But,
Realize Theyre Hypotheses
9 Guesses
Guess
Guess
Guess
Guess
Guess
Guess
Guess
Guess
Guess
How Do Startups Search For A

Business Model?
The Search is called Customer Development

The Implementation is called Agile Development
Customer
Development
Solving For Customer Risk
The founders
^
Get Out of the Building
More startups fail from

a lack of customers than from a
failure of product development
(focus on who more than
what)
Product Introduction
Model
Concept/
Bus. Plan
Product
Dev.
Alpha/Bet
a Test
Launch/1s
t Ship
Customer
Discovery
Customer
Validation
Pivot
Customer
Creation
Company
Building
Customer Discovery
Customer
Discovery
Customer
Validation
Pivot
Stop selling, start listening

Test your hypotheses
Continuous Discovery
Done by founders
Customer
Creation
Company
Building
Turning Hypotheses to Facts
Test
Hypotheses:
Product
Market Type
Competition
Test
Hypotheses:
Problem
Customer
User
Payer
Test Hypotheses:
Channel
Test
Hypotheses:
Channel
(Customer)
(Problem)
Test
Hypotheses:
Product
Market Type
Competitive
Test
Hypotheses:
Demand
Creation
Test
Hypotheses:
Problem
Customer
User
Payer
Test Hypotheses:
Channel
Test Hypotheses:
Size of Opportunity/Market
Validate Business Model
Test Hypotheses:
Pricing Model / Pricing
Test
Hypotheses:
Channel
(Customer)
(Problem)
Agile
Development
Test
Hypotheses:
Product
Market Type
Competitive
Customer
Development
Team
Test Hypotheses:
Test
Hypotheses:
Demand
Creation
Test
Hypotheses:
Problem
Customer
User
Payer
Test Hypotheses:
Channel
Test Hypotheses:
Test
Hypotheses:
Channel
(Customer)
(Problem)
Agile
Development
Test
Hypotheses:
Product
Market Type
Competitive
Customer
Development
Team
Test Hypotheses:
Test
Hypotheses:
Demand
Creation
Test
Hypotheses:
Problem
Customer
User
Payer
Test Hypotheses:
Channel
Test Hypotheses:
The Pivot
The heart of Customer Development
Iteration without crisis

Fast, agile and opportunistic
Break
Our Culture for E245

Show up on time and stay til were done
Keep your commitments (in class and out)
Step outside if you must call, email, skype,
twitter, chat, surf the web, or do anything
unrelated to E245
Entrepreneurship is a team sport
80% of your grade depends on working with others
What Lies Ahead:

To Do List
Check web site for admission lists
attendance is mandatory in session 2
waitlist (if any) will be cleared at beginning of class
Form full teams by Session 2

mixer on Thursday, 5:15 at Thornton 110
Team deliverable by next week:

Hypotheses for each part of business model.
- Test for whether your business is worth pursuing (market size)
- What constitutes a pass/fail signal for the test (e.g. at what point
would you say your hypotheses wasnt even close to correct)?

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Engineering 245

The Lean LaunchPad

Break: Stay If You Want to Be in the Class

Analyze and assess an opportunity

Learn whether entrepreneurship is for you

What Will you Learn?

The Course By the Numbers

3/4 Units of Credit

5 -10 hours of work a week outside the classroom

copies available at the bookstore

This Class is Hard

Present Weekly and for Final

Class is about teamwork, discovery and fast

Steve Blank, Ann-Miura-Ko, Jon Feiber

8 startups in Silicon Valley

Steve Blank, Ann-Miura-Ko, Jon Feiber

8 startups - 32 years in Silicon Valley

Teach: Stanford, Berkeley, Columbia

Steve Blank, Ann-Miura-Ko, Jon Feiber

8 startups - 32 years in Silicon Valley

Course Assistant (CAs)

B.A. in Political Science

CAs role: Class/lecture questions, Grading and attendance

Volunteer Course Assistant (CAs)

Google Translate Product Mgr

CAs role: Class/lecture questions, Grading and attendance

Help you Get you out of the building

You arrange your schedule for the mentors, not

How the Class Works

Deliverable for the Next Week

Business Model and

- Hypotheses for each part of business model.

How the Class Works

Deliverable for the Next Week

Business Model and

- Hypotheses for each part of business model.

- Teams by midnight Jan 6th

How the Class Works

Deliverable for the Next Week

Business Model and

- Teams by midnight Jan 6th

Testing the Value

- Name your team.

- What did you discover from customers?

How the Class Works

Deliverable for the Next Week

Testing Customers / - What were your user/customer hypotheses?

How the Class Works

Deliverable for the Next Week

- What were your user/customer hypotheses?

- Anything change about Value Proposition or

How the Class Works

Deliverable for the Next Week

For web teams: Get working website/analytics up.

How the Class Works

Deliverable for the Next Week

For web teams: Get working website/analytics up.

- Assemble income statement for your business model.

How the Class Works

Deliverable for the Next Week

- Any change of Value Proposition, Customers/Users,

How the Class Works

Deliverable for the Next Week