So You Want to Control Your Own Destiny, Do You?

Founder motivations and control for impact entrepreneurs

Lean Startup  is great for finding scale opportunities, quickly, You make assumptions, discover your customer needs, run some tests, and you can quickly get feedback that you’re either on the right track, or need to start again.

Yet one thing that tends to stop founders from even asking the right questions in the first place is the reason why they are starting a business.

Why are you doing what you are doing? What’s your motivation?

I like to ask this question of very new founders. I got to ask this question twice last week:  at NYC Media Lab’s kickoff of their intensive customer discovery program, The Combine, and at in my two week Lean class at NYU ITP.

There are two basic patterns in the answers – and often the two answers coming from the same founders:

1] I want autonomy. I don’t want anyone looking over my shoulder. I want to control my own destiny.

2]  I want to see my technology/product/service reach as many people as possible (only a few publicly admit to seeking wealth but will acknowledge this in private).

Yet these two motivations set up a dilemma, The Founder’s Dilemma, to be precise, as researched by Noam Wasserman. A Harvard Business School professor, Wasserman studied tens of thousands of companies to understand founder motivations and the high rates of entrepreneurial failure.

He found that entrepreneurs often make choices that do not maximize their wealth.Founders are often torn between wanting to control their company, and wanting to grow their company.

“The need to negotiate a trade-off between wealth and control, between building financial value and maintaining a grip on the steering wheel… founders’ early choices can have delayed and unexpected but significant effects, sometimes because natural inclinations such as passion, optimism and conflict avoidance lead to shortsighted decisions.”   – Noam Wasserman

In Wasserman’s analysis, you can aim to be “King” – seeking complete control over your company, self-funding and maximizing your ownership stake. Or you can aim to be “Rich”  – seeking external investment, and sharing equity to attract and motivate cofounders and employees. Control-oriented companies tend to achieve well below their potential because they fail to attract capital, and also fail to attract strong co-founders and world-class employees.

Meanwhile, founders seeking to build for financial value have a higher hit rate for reaching their potential.

I’ve loved Wasserman’s work ever since I read the findings of his early research. I’m a recovering control freak and have learned how my own desire for control has limited my upside.

But I’ve been struggling with Wasserman’s Rich Verses King concept when working with a the new crop of impact entrepreneurs. These are founders who want to grow and scale their businesses, but they have defined a core purpose beyond financial outcomes. They want to help people. They want to restore the planet.

Rich v. King

 

When we talk about the Rich vs. King dilemma, they want to consciously choose King. The path of Rich means making decisions oriented towards maximizing wealth. Yet these founders find this goal tantamount to greed, which they define as the root cause of much of the capital industrial system they aim to disrupt and unwind.

More critically, they fear the motives of investors who may not share their same values, or who may want them to simply maximize shareholder value, and not seek a social impact goal. They are researching B-Corp status, LC3, and even considering not-for-profit structures in order to protect their mission, and vision from the likes of misaligned investors.

When we break it down further, these impact entrepreneurs do not follow the classic control pattern. They are open and willing to attract strong equity-sharing co-founders, and want to give decision rights and control to employees. Specifically it’s the fear of investors who want a different outcome that limits their growth. They tend to self-fund and bootstrap, and aim for a corner of their market, rather than go for the biggest possible impact.

The double dilemma of the impact entrepreneur

The desire to control the destiny of the company leads to avoiding external funding, which limits the company’s potential. Impact entrepreneurs settle for a smaller corner of a market, a known problem, and may even compete with non profits in the space. More critically, they fail to make the big, disruptive shifts that would manifest the world they want to see.

“The best problems to work on are often the ones nobody else tries to solve.” – Peter Thiel, Zero to One.

What’s the way out of this? My cynical, Wall Street self says, “That’s the way business works. The spoils go to those who seize the power, and maximize for their personal wealth. The markets are geared to find the most efficient financial returns.” But my meditation-and-yoga-practice-self sees a new possibility.

We are witnessing a grassroots movement of entrepreneurs, globally, seeking to contribute to a  better world, by creating a business. They are motivated by the act of creation, they want to be connected to their community, and to the world.

There will always be enough money to chase wealth maximizing business ideas. But my bet is that we’ll see a new form of capital, with more evolved expectations.

We we can hope for: We can encourage impact entrepreneurs to aim big. To go after those problems we can’t figure out how to solve. To back these high potential, high impact companies to private investors with aligned values. We can see a future where high impact companies get the backing and support they need to grow and attract the best talent. To trust that giving up control will lead to the greatest outcome. We may then become clear about what it truly means to flourish and prosper.

The Rules of the Game are Changing

 

Exploring how our changing expectations for capital, met with near zero marginal cost technology, is completely changing the rules of the game, over at Reason Street:

Innovation

3 Questions to Predict Who Will Survive in 2026

The faulty dominant logic mindsets that keep the big companies from actually finding exponential models for growth. Innovation and the Non-Linear Growth Competency Gap. Looking at the recent Ford and GM’s move into the Uber/Lyft space.

Can We Change the Rules of the Game?

Are the rules always set for a winner-take-all outcome? In an era of connected, complex, and connected webs of business and relationships, can we imagine different rules of the game?

The Fed Rates Rose: Let’s Panic!

The 1 reason why smart business leaders don’t have to worry:

If you have a solid plan to get to profitability and growth, or you’re already there (how quaint) then you will likely attract the funding you need. Business fundamentals and smart thinking about how you will actually make money, or grow without losing tons of money, will soon become valuable again. There is no need panic about the rise in rates – money is always attracted to strong business fundamentals. So sleep well tonight, you deserve it.

 

 

Lean at ITP Workshop 2016

Changing to a workshop format this year to scale it up!

What: Lean @ ITP
When: Two weeks in January, 11-22
Location: NYU ITP 421 Waverly 4th Floor

Lean ITP

We embrace a creative, iterative, and collaborative approach to making things — but launching a product out into the world takes a somewhat different set of skills. How does one make sure people want to use what they make? How does one figure out how to support an idea with the right business structure? Is the idea strong enough to turn into a job — or a career? Enter Lean at NYU ITP – the experiential workshop in entrepreneurship.  (Please note:  this is a non-credit opportunity, it does not provide degree credit toward the ITP degree).

Who is this for: any student who wants to pursue a path to entrepreneurship, or work in an entrepreneurial company.

Format: 2 intense but fun-filled weeks in January with daily 1.5 hour orientation sessions and feedback each day, followed by outside in field ethnography and customer research.

Fee: Cost for the workshop: $200. Student fees will be pooled into a prototyping and marketing experiment fund – to run those first critical tests on the path to user growth and revenue. The fund will be made available to those student teams that show focus, commitment, and progress towards understanding their customer.

Modeled after Steve Blank’s Lean LaunchPad and the NYU Summer
LaunchPad Accelerator, we are applying the curriculum developed at
Stanford and Berkeley for the NYU community. This workshop has been
developed with support from the NYU Entrepreneurship Initiative, and
aims at mixing the best of the methods from the Lean LaunchPad
methodology with the spirit of ITP’s emphasis on exploring the
imaginative use of technology to augment people’s lives.Over a two week program in January, student teams participate in an
iterative approach to startup development, a combination of customer
development + business model design + personal exploration to
determine the most viable business scenario for their ideas. Alexander
Osterwalder’s Business Model Generation is used as the basic framework
for business model development, and we utilize interaction design
methods and tools to ground students in an understanding of how to
successfully move through the early generative stages of product
development.We will facilitate and organize student teams of 3-4 to develop the
company concept and business model over the two week course. The
primary focus of the course is the work of customer development,
speaking directly to potential customer to help define opportunities
that the startup is designed to solve, and early stage product
development. The ITP curriculum will augment the Lean method with
additional approaches from generative design, UX, and ethnography to
accelerate the understanding of both explicit pain points and more
latent or hidden challenges that people face, in their jobs and their
lives.

Participants from the NYC Venture Capital community and leading
successful startup entrepreneurs will serve as mentors and advisors to
student teams. The workshop is open to all enrolled NYU students.

Please indicate interest by signing up here (official registration to follow)

or email Jen van der Meer at jd1159 at nyu dot edu with questions.

Finding Your Customer Pain Points: How Far Do You Go

faces

One of the first jobs in unlocking a business model is to define a customer segment, and figure out customer “pain points.” You know you’ve struck gold when you uncover a “hair on fire” problem that is so tremendously painful the customer will work with your earliest version of the product just to douse the flames.

The belief about pain points is reinforced by investors, incubators, accelerators, and entrepreneurship curricula like Lean LaunchPad. I teach a version of Lean at NYU ITP, and like all good entrepreneur coaches, I too encourage founders to get out of the building, discover customers, and find the pain points that need to be solved.

The easiest shortcut is to “scratch your own itch” – solve a problem that you, the founder have. You’re an “n of one,” or sample size of one, and your job then is simply to make sure that you’re not the only one with that problem – that you’ve found a pain point that if solved would form into a nice exponential growth curve for your company.

The challenge with the scratch / itch formula is that founders who skew younger, and male, tend to go for the superficial itch and not the deeper underlying pain points. Entrepreneurs seem to be stuck in a logic error that never satisfies our need for time, love, food, or money. For our own lives, and the lives of the people we are trying to serve.

There’s been a call recently to encourage for profit, growth seeking startups to tackle the “real problems” that face our culture – but we seem trapped in a circular logic that keeps us stuck in superficial, temporary needs.

How do we get to big ideas when so many founders are encouraged to simply solve for the known, obvious pain points. And how do you find any competitive advantage when solving for the known knowns?

Defining customer needs, it turns out, is an art, and a science. Pursuing hypotheses through customer interviews is a great way to validate early thinking and save precious time ensuring that there is an actual market need a solution. But how you go about conducting interviews, what do you ask? How and when do you talk about your solution? When do you stop searching for the pain, and how do you prioritize that first list of features to launch your idea?

We’ll be conducting a series of online courses at Reason Street to explore the art and science of customer fit. If you’re interested in learning how to get underneath the obvious truths, and find out how to position your business to solve deeper human needs, sign up for our upcoming class, with an A/B tested title that seems to fit your real pain points about business models:

Screen Shot 2015-11-04 at 3.35.49 PM

 

 

Why Growth? Pitchfest Workshops at New Inc.

What’s more fun than working with a bunch of world changing tech founders who see themselves as future unicorns?

Working with artist entrepreneurs at New Inc.

In module 1 of a Pitchfest Workshop series, we covered why you might want to grow big, and have huge scale, as an exercise in imagining your impact.

We are here:  Module 1: Why Growth

Module 2: Storyline (and business model help)

Module 3: Pitch Practice, Feedback, Development

Pitchfest will help you create a growth narrative for your company. The goal of the workshop: construct your company narrative to get useful and constructive feedback from growth investors. We’re focused on the shortest story, the “short deck.” You’ll need a longer deck if you are actually pursuing investors.

You may decide to pursue a fast growth model, or you may decide to pursue more of a steady state plan for generating revenue – but at least you will have invested time to understand the potential for your business.

Prework: Make sure you have recently spoken to at least 10 potential customers before coming to the Pitchfest to present your idea.

Pitch Practice: 2 minutes each, no visual aids.

Why Growth?

Impact. Scale. Envisioning Big Outcomes. If it is clear enough and compelling enough AND BIG ENOUGH it will attract the SCALE AND IMPACT-SEEKING people and resources (VCs, angels, future partners and team members)

What does it mean to seek a 10x return?

My current revenues of _______ would have to grow to ____________ in 5 years to be considered worthy of a venture capital investment.

Trick question – why?

Angel Targeted Returns 5 to 10 times $ in 4 to 8 years

Multiple
 

 

Years to Exit

5x 6x 7x 8x 9x 10x
4 50% 57% 64 68 73% 78%
5 38% 43 48 55 55 58%
6 31% 35 38 44 66 47%
7 26% 29 32 37 37 39%
8 25% 25 28 30 32 33%

For some early angels in Facebook, returns = 62,000%

What % of startups fail? ___________

Why Not Growth?
Control. Creative Control. Ownership Stake. Lifestyle.

Smaller market size – but compelling.

Rich vs. King.

Trade-Off by Noam Wasserman at HBR.org

The Founder’s Dilemma at HBR.org.

 

Prep for Next Time:

Purpose. Know why you are driven to do this.

Motivation. Know what drives you? Are you trying to control your own destiny? Or dominate the world? Create a dent in the universe?

Further orientation:

Spend time going over VC classic recommendations for how to build a pitch deck:

Sequoia Cooley Co Polaris New York Angels Criteria

For lots of examples PitchEnvy The exact Pitch Strategy I’ve used to Raise $125 MM since 2011.

1. Choose a story line arc.
Module 2 is storyline for the pitch – covering the personal motivation/inspiration to start the company, the current market need, the vision for growth, the potential financial outcome.
If you haven’t seen Kurt Vonnegut’s failed master’s thesis – he outlines the different storylines perfectly. For a startup pitch – the Creation/Cinderella arc works well, but also consider the “Man in Hole” storyline – more room to be compelling if you had a story of struggle. No Kafka!
Vonnegut on Open Culture.
2. Assemble any unknown data for your pitch.
Here are examples of VC recommendations for pitches – you don’t have to follow these but they are showing you what investors tend to look for. Not all investors are the same – and in a first meeting you are better off intriguing them than you are having every question answered.
What you’ll need in your story –
_You, your origin/background story, your motivation. (Spear in the chest moment).
_The huge, pressing problem that people are suffering from today.
_The size of that first market – your customer segment / target / nice.
_How big the market could be eventually.
_Your extraordinary solution.
_Your secret sauce.
(And have as backup competitive difference, financial projections, and business model hypotheses for how this idea will make an investor a 10x+ return in 5 years).
3. Create your storyline for a verbal 1-2 minute pitch.
We’re practicing for demo day – but this is the pitch you would make before you start showing the demo, or along side the demo. But I recommend developing a pitch that would work with just your words, so that you’ll be able to make a compelling intro to your business anywhere, in any circumstance.
You don’t seem like a shy crowd so just jump in, it will be fun and we an workshop any questions next week.

Designing for Climate Action

Join me and my students from SVA’s Products of Design Program at Design for Climate Action @svaPoD for an evening of open innovation. Inspire a group of students who have the skills we need to start pushing the right levers of change (systems thinking, design, programming, communications, everything that I should have learned in grad school). Wednesday, September 30th, in NYC.

DCA_LOGO

 

Get Tickets Here ($10)

Event Description: Designing Climate Action is an open-innovation forum for entrepreneurs, designers, scientists, and activists to collaborate to accelerate climate action. Through an iterative and participatory workshop hosted by the Products of Design community, the event will bring together industry leaders with activists to foster inter-disciplinary partnerships and seed endeavors. Select ideas generated during the event will be developed by Products of Design masters students throughout the fall semester, and publicly presented in December 2015 to align with with COP21 proceedings. Products of Design is a Masters degree program at the School of Visual Arts.

Who should attend: Designing Climate Action calls for participation from entrepreneurs and business leaders building new more sustainable economies, designers and communicators creating movements to mobilize consumer action on climate and social justice, scientists working to foster urgency on climate change, and community activists whose stories should be front and center in the climate conversion.

A call to action: For the workshop please bring your challenges, ideas, and opportunities which can only be achieved through collective action. By pulling together this network of experts and activists, the Products of Design community hopes to create a forum to collaborate with you and/or your organizations to realize projects with high potential to galvanize action on climate change, by incubating them throughout the fall before releasing them to the public.

The Promises and Perils of the Hollywood Style Pitch

How can organizations quickly and effectively gain support for new business ideas?

Hollywood

Hollywood wheeler-dealers are famous for pitching new movies to studios with a formula that combines two successful old movies. Robert Altman’s 1992 comedy The Player fictionalized pitchmen who proposed such fantastic ideas as “Out of Africa meets Pretty Woman” and “Ghost meets The
Manchurian Candidate
.”

Technology companies are also prone to ridiculous-sounding analogies when touting their potential. A recent survey of startups on AngelList, the angel investment platform, brought up these combinations:

Slack meets Kickstarter

Yelp meets Tindr meets Instacart

A Spotify with Pandora on top

eBay + Soundcloud

Think Flipboard and Hootsuite in one

The aim of these formulas is to simplify a complex idea and at the same time fasten it to the outsize growth and wealth-creation potential of wildly successful former startups that pioneered new business models.

Investors are just as likely to latch onto this kind of business-model combination when giving advice. If they’re trying to grasp your idea quickly, then they too have to lean on shorthand descriptions of its power and growth potential. They call this skill “pattern matching.”

Startup-technology-company value is driven mostly on this “comp”—the comparison between a company that has yet to show any revenue or profit and similar ones that have already unlocked massive growth potential. (“It’s like Netflix meets Pinterest.”)

Even big, fearless, world-changing public companies get prompted by large investors to mash up their business models. Morgan Stanley Equity analyst Adam Jonas recently increased his Tesla stock price target $280 to $465 by predicting how Tesla could become another Uber. He even gave the concept he envisioned a name, Tesla Mobility, an “app-based, on-demand mobility service.”

Jonas’s “Tesla meets Uber” idea would allow the carmaker “to conceivably more than triple the company’s revenue potential by 2029.”

Jonas’s analysis came after a question of his went unanswered during Tesla’s most recent second-quarter-earnings announcement call with analysts:

Jonas: Hey, Elon, Deepak. First question. Steve Jurvetson was recently quoted saying that Uber CEO Travis Kalanick told him that if, by 2020, Tesla’s cars are autonomous, that he’d want to buy all of them. Is this a real—I mean, forget like the 2020 for a moment—but is this a real business opportunity for Tesla, supplying cars to ridesharing firms, or does Tesla just cut out the middleman and sell on-demand electric mobility services directly from the company on its own platform?

Musk: That’s an insightful question.

Jonas: You don’t have to answer it.

Musk: I think—I don’t think I should answer it.

Jonas: Okay. Let’s move on. Second question is, there’s been—sometimes you can tell more from the non-answer than from the answer.

Jonas’s idea is far from crazy. After all, Tesla has a software expertise that positions the company well ahead of other automakers; it’s in the process of figuring out the complexities of electric charging and fleet management; and it is run by Elon Musk.

But what’s maddening to public-company executives and startup founders is the brazenness and the oversimplicity of these mashups:

Tesla meets Uber

Netflix meets AngelList

Quirky meets Zirtual

Still, as ridiculous as this shorthand may sometimes sound, it can be extraordinarily powerful—and thus extraordinarily frustrating to a company whose successful business model has been reduced to a clever portmanteau.

What’s valuable about business-model combinations

Clear and persuasive elevator-timeframe communication

By coming up with a quick description that compresses a complex idea into an understandable analogy, you open the door to a deeper, more nuanced discussion when time permits. The biggest benefit of an elevator pitch is that it gets you invited to explain more.

Business-model combination and replication

The growth of the Lean Movement and the widespread adoption of Osterwalder’sBusiness-Model Canvas have fueled the thinking of a new generation of entrepreneurs focused not just on product/service innovation but on novel business-model approaches as well. Large companies that have advanced far beyond startups engage in business-model combinations when they launch new services and acquire new companies. In fact, 90 per cent of all business-model innovations recombine existing ideas and concepts from other industries. (St. Gallen Business Model Navigator Survey. Gassman, Frankenberger, Karolin. 2014).

By creating a shorthand way of thinking about business models, innovators quickly demonstrate how a new business-model combination might unlock new value.

What’s frustrating about the Hollywood-style elevator pitch

Comparing an already successful company to something that doesn’t exist yet

Reducing business models to mere company mashups can mislead investors. The most often cited companies—Netflix, Amazon, Google, Facebook—are successful because they have a huge customer base, a well defended competitive advantage, and a profit formula that works well for them.

But each of them began business-model formulas that are completely different from the ones that describe them today.

Looking at business-model combinations vis-à-vis where you are today

So don’t just say that you want to Netflix your business, or that you’re worried that you’re about to be Netflixed. You need to be more specific. The company is a world-class business-model experimenter that’s constantly combining new business models with its already proven and successful original model.

Netflix started with a direct-to-consumer subscription model, delivering its goods in the mail. It then cannibalized part of its business when its switched to streaming video, frustrated customers with a change in the pricing model, but later weathered the storm and continued to grow. Netflix uses its enormous data-collection capabilities to optimize further sales—“If you liked My Little Pony, then you’ll like Strawberry Shortcake”—and to enhance its predictive algorithms as they apply to its original-content business (“House of Cards meets Orange Is the New Black”).

Every one of the company’s new business-model combinations creates further lock-in with the customer base.

So when your boss or board asks, “Have you thought about a model that’s more Netflix?” make sure that you know which combination of Netflix business models you’re being requested to consider. When a startup describes itself as “Kickstarter meets Spotify,” it may not fully comprehend the hurdles it will encounter starting a two-sided marketplace plus a social network plus an advertising model.

At Reason Street we’ve launched a Business Model Library for people who want to build their knowledge of how businesses work. Has someone told you to go Netflix or Spotify or to Uber your business, leaving you struggling to understand how? What business models are you thinking about? Let us know what business model or company you want analyzed, and we’ll add it to our growing library. We also conduct business-model-combination workshops to free up your thinking in constructive ways and put you on the path to business-model innovation.

Google’s Dominant-Logic Problem

Dominant Logic Monster

 

Google’s Dominant-Logic Problem

Google has announced that it will become Alphabet, a conglomerate—that old-fangled complex corporate structure popular in the 1970s.

Could the conglomerate structure, as Google is defining Alphabet, represent the boldest and most innovative move yet within the entire class of super-tech companies?

Google is not the first company to confront the dominant-logic problem, which can cause successful companies to self-destruct, but it is doing so in a way that both challenges and appeals to Wall Street.

The Catch-22 of doing what the Street wants a publicly traded company to do

Google just had its best quarter ever; the announcement led to the biggest stock gain in a day in history. When Google unveiled the new conglomerate structure, the stock bumped up yet again. In just one month the company’s market valuation has increased by more than $100 BILLION dollars (as of today). Take that, unicorns.

But prior to this breakout quarter, Google’s stock had suffered 18 months of flatlining.

GOOGL from Google Finance 3 Months

A flat stock was a real danger. Google’s senior management was being lured away to better performing companies, like Facebook, and newly formed private companies with mere billion-dollar valuations but more promise of upside.

What was going on during these 18 dismal months? It looked like Google was following the business-school playbook in organizing to capitalize on its core competency, but then got dinged in the process.

While Google has made a number of high-risk “moon-shot” bets—self-driving cars, autonomous drones, life-extension projects, and more—it had put most of its financial and human capital into the cash-generating part of the business. Even back in 2008, as it began making riskier bets, it acknowledged that “we don’t put many people on those things; 90% work on everything else. So that’s not a big risk.

But that wasn’t reassuring enough for Wall Street, which likes clean valuations and highly predictable revenue.

The Street was discounting Google’s core business because of the moon shots.

There is a reason that Silicon Valley suffers from IPO phobia.

Wall Street was telling Google to stick to its knitting—to keep doing what it was already good at, to stay with the “dominant logic.” But just doing what you are already good at can kill you in the long term.

The dominant-logic problem

Dominant logic is the disease that killed Kodak, Blockbuster, and Nokia, and it threatens every successful large-scale company facing disruption—which is all of them, including Google. The danger isn’t so much the disruption itself, a product of fierce new competition and shifts in the technology landscape; it’s the faulty mindset that hampers senior management when it’s preparing for and responding to non-linear change.

“Dominant logic consists of the mental maps developed through experience in the core business and sometimes applied inappropriately in other businesses.”—C.K. Prahalad, The Dominant Logic: a New Linkage Between Diversity and Performance (paywall).

Prahalad was researching the failure of diversified conglomerates in 1986, when voguing was in vogue and conglomerates were all the rage, when he reached that conclusion. He found that a top executive group’s ability to manage a diversified firm is limited by the dominant general-management logic it already knows.

If the companies in the conglomerate are similar in type and from the same industry, as, for example, at P&G, then this logic—applied to spending on R&D, product development, marketing, and organizing and incentivizing employees—can work to its advantage. But when the companies in the conglomerate are deeply diversified, the situation gets complicated.

As Prahalad observed, “Typically, the dominant logic in diversified firms tends to be influenced by the largest business or the ‘core business’ which was the historical basis for the firm’s growth. The characteristics of the core business, often the source of top managers in diversified firms, tend to cause managers to define problems in certain ways and develop familiarity with, and facility in the use of, those administrative tools and are particularly useful in accomplishing the critical tasks of the core business.”

When management’s mind-set favors the core business at the expense of preparing for technological, market, and social/cultural change, its dominant logic can undermine the company’s chances for survival.

Anyone working in the innovation department of a Fortune 1000 company knows in their bones that the dominant business model can kill breakthrough growth ideas.

The thinking goes like this: “You can tinker with our product, spend countless hours investigating corporate ethnography, or design thinking exercises, drum circles, and lean-start-up experiments. That’s fine. But as soon as you mess with the way we’ve been making money, you will be escorted swiftly out of the building.”

Prahalad also foresaw what had begun to happen at Google: the management team that grew up around search tended to favor product-development ideas that made the core business stronger.

Google X and the moon-shot wagers amounted to little more than rounding errors in the company’s financial results, mere experiments with uncertain outcomes or upsides for the employees involved.

This strategy was never enunciated outright by Larry Page and Sergey Brin, who were in fact the biggest proponents of the moon-shot investments. But the very organizational design of housing these experiments within Google, where the dominant-logic problem reigned, made everything else pale in comparison.

Perhaps the founders simply weren’t satisfied with Wall Street’s definition of success: mastering the shift in advertising to web and mobile. The uppermost limit for Google was a larger share of the advertising pie.

“If you’re changing the world, you’re working on important things. You’re excited to get up in the morning.”—Larry Page

I can empathize with billionaires who find advertising limiting as a life’s pursuit. I can see why it would be hard to get up in the morning when that’s your only goal.

How Alphabet addresses the dominant-logic elephant in the room

Google’s newly hired CFO, Ruth Porat, likely had a heavy hand in creating the new structure, which separates YouTube, Android, and Google’s core search business from all the other riskier, less profitable companies. Wall Street is happier because now it can properly value the entire structure.

Dealbreaker said that splitting up these businesses “is akin to injecting steroids into Google’s P/E ratio.” (That’s price/earnings ratio, the prediction of a company’s future value based on its current earnings.) “It is A) The kind of thing that Silicon Valley doesn’t really do, and B) The kind of thing that Ruth Porat can think up in her sleep.”

Alphabet is the ultimate homage to pension managers and hedge funders. “We also like that it means alpha-bet (Alpha is investment return above benchmark), which we strive for!” Larry Page wrote on the Google Blog on August 10.

Google Glass, the drone-mounted wind turbines, and other experiments will no longer have to justify themselves as adding revenue to the core business. Hooray. The potential upside =for those working on the experiments, with a number of CEOs building quasi-independent companies, will makes it easier to attract and retain talent.

To be sure, this new structure might create more problems than it solves. There have been predictions of infighting among top talent as newly minted CEOs within Alphabet vie for their share of the investment pie.

The comparison to Berkshire Hathaway notwithstanding, Page and Brin now have to develop an operating style, financial controls, and rules for this new game board. Warren Buffett sets up financial filters for Berkshire Hathaway’s acquisitions, then stays completely out of the way and lets the companies run on their own. Will Alphabet adopt this approach?

Organizational design is a start, but it’s not enough. Google will have to address the investment criteria, structure, and valuation of its innovation portfolio. Its famous hiring processes and its HR management will be put to the test; so will the operational practices for which the company has become famous.

But by addressing the dominant-logic elephant in the room, Google may have pulled off the most pro-innovation bet that a leading tech company has ever played.

How about you? Are you inside a company struggling to innovate in the grip of a dominant logic? Are you in a start-up seeking to disrupt an industry ruled by dominant logic? How has dominant-logic thinking hampered your creativity or limited your success?

For more about dominant logic, the reasons that innovation is sometimes regarded as a dirty word, and business-model news, sign up for our newsletter at Reason Street.

3 Business Model Myths Debunked

When is the best time to begin thinking about your business model?

Now.

growing a business model


If you are wondering about how your business will generate revenue and profitability to grow, then start if you haven’t already. But first let’s clear up some myths that plague early stage founders and intrapreneurs when they start tinkering with a new idea:

1. “Thinking about business models in the beginning is a waste of time and energy. Build something big that people love, and the business model will follow.”

We’ve heard this objection frequently when we suggest that now is the time to start thinking about your business model. We’ve heard this objection from a particular type of Venture Capitalist who invests in consumer internet businesses that are only valuable after they achieve large user growth and engagement. These kinds of investors encourage founders to build first, postpone the business model discussion – because they know that ultimately, advertising, or some form of freemium/paid model, will be the default business model. “If you get that kind of user growth and engagement there will be some way to monetize” is a common refrain.

Let’s be clear: the mantra is “user growth first, monetize later” – but by all means start thinking and planning for your long game.

Facebook User Growth vs. Revenue

So as long as you acknowledge that you are in one of these businesses, then focus on user growth first. But don’t be upset when one day you realize you are actually in advertising.

2. “Business model thinking will cramp our creativity.”

One of the most popular tech events in New York City, NY Tech Meetup, forbids audience participants to ask about business models. Demo night is for demonstrations of technology, and you will receive a boo or hiss if you ask the demoers how they might imagine making money from their idea. We still go to NY Tech Meetup, and we suffer, silently.

NY Tech Meetup: A Place Where the Business Model Question is Forbidden

For prototyping, side projects, art projects, explorations of code and ideas – don’t cramp your creative thinking with business model scenarios. But as soon as you get a hint that your exploration might become your livelihood; start thinking about the business model. We’re not suggesting you do something so uncool as to mention the business model on a stage where such concepts have been forbidden, but be ready to invite potential interested backers and partners and valuable customer discovery that will follow you after a successful demo.

3. “It’s all imaginary at the beginning, why bother figuring out the business model now, it’s going to be a complete guess.”

We counter by saying to you that it’s all imaginary at the beginning. But how you form your business will be shaped by the thoughts you choose to think, and the methods you adopt at the start. Your estimates of your total addressable market may be off by a factor of 10, your pricing estimates for subscription fees may be off by a factor of 100. But by putting some numbers out there, and seeing the shapes and contours of what might become will give you a sense of where to focus, and what to build and test first.

Top 20 Reasons Why Startups Fail by CB Insights

Mark Suster, one of the more prolific and wise blogging VCs, even encourages you to create a financial model.

“Here’s why. Your financial model tells a story. Let’s take your revenue line. It should talk about how many customers you think you will acquire and how much you’ll charge for your product. If you can’t estimate the former then I would suggest you haven’t done your homework before building the product. Do you really want to spent $100k building a product to discover through Customer Development that the market is too small?”

If you are asking us, no, you don’t want to do that.

In sum, the best time to start thinking about business models is soon after you form the initial vision of an idea. What kills many early stage startups and corporate innovation projects – they are solutions in search of a market need that does not exist. Most of the other reasons for failure, such as “ran out of cash” “get outcompeted” and “pricing/cost issues” are components of a business model.

So get started, now. Join the Reason Street Business Model Adventure, where we

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