Business Models and Entrepreneurial Strategy at Parsons The New School for Design

Excited to teach a revised and redesigned version of Lean at Parsons The New School for Design’s BBA program.

Parsons

Here’s the syllabus:

BUSINESS MODELS AND ENTREPRENEURIAL STRATEGY

Course Code: PUDM4322 CRN: 7370 | Section: A

Instructor: Jen van der Meer

 

Fall / 2016

Monday / 9:00 AM

Location: 6 East 16th Street, Room 1108

Course Description

This course prepares students with a hypothesis-driven approach to company formation. Students will work in teams to generate a business concept, and then validate business model risks in direct collaboration with customers. This course is offered in conjunction with the Senior Project studios and allows the students to compare and analyze different business models and strategies for their Senior Project concepts. Students develop storytelling and financial skills to lead early stage companies from concept through launch.

Open To: Open to: BBA in Strategic Design and Management students; Seniors only; others by permission of BBA in Strategic Design and Management program.

Pre-requisites: Co-requisite(s): PUDM 4120 Senior Project 1. Pre-requisite(s): PUDM 3409 Financial Management

Learning Outcomes

By the successful completion of this course, students will be able, at an introductory level, to:

  1. DEMONSTRATE FAMILIARITY WITH hypothesis-driven innovation methodologies practiced in “real world” startup environments (Lean Startup, Business Model Canvas development, Minimum Viable Product/Proposition).

  2. DEMONSTRATE FAMILIARITY WITH presentation and storytelling skills necessary for early stage startup strategy, team formation, and capital raising.

  3. DEMONSTRATE FAMILIARITY WITH financial literacy, learning the basic building blocks of innovation accounting, generating financial assumptions and forecasts, marketing sizing, term sheets, and capitalization tables.

  4. DEMONSTRATE COMPETENCE IN developing realistic business model evolution scenarios, and ability to create, analyze, combine business model archetypes.

  5. DEMONSTRATE COMPETENCE IN business model validation: the practical strategy of identifying unique customer segment(s) and an early stage value proposition through real world customer discovery interviews and early stage prototype tests.

Course Outline

Business Models and Entrepreneurial Strategy

Week
Date
Class Theme and Activities
Assignment Due
Week 1
Aug 29
Class intro / concept formation
(None)
Week 2
Sep 12
Team formation, intro to the Business Model Canvas (BMC) and customer discovery
Early stage company concepts
Week 3
Sep 19
Customer discovery, customer validation, Market Size Analysis (Total Addressable Market, Served Addressable Market, Target Market or TAM, SAM, TM)
Company BMC analysis results
1 Business model archetype analysis
Week 4
Sep 26
Value, value propositions, and the purpose of business, team forms initial BMC hypothesis v 1.0, team develops customer interview plan
Team BMC 1.0, TAM, SAM,TM
1 Business model archetype analysis
Oct 3
No Classes – Rosh Hashanah
Week 5
Oct 10
Personal value, motivation, vision, and team, team continues to plan customer interviews
Customer discovery interview results, BMC 2.0
2nd Business model archetype analysis
Week 6
Oct 17
Customer relationships, channels, initial value proposition test
Competition, disruptive innovation theory. Innovation accounting
Customer discovery interview results, BMC 3.0 + Lessons learned
3rd Business model archetype analysis
Week 7
Oct 24
How to analyze
Customer discovery interview results, BMC 4.0
4th Business model archetype analysis
Week 8
Oct 31
Midterm: validated “front stage” of the business model, competitive analysis, initial value proposition
Midterm presentations, including BMC 5.0
Week 9
Nov 7
“Back stage” of the business model: Resources, Activities, Partners
Customer discovery interview results, BMC 6.0
5th Business model archetype analysis
Week 10
Nov 14
The money: revenues, costs, how to create financial scenarios 3 years out
Business model scenarios
Unit economics
3 year financial assumptions
7th Business model archetype analysis
Week 11
Nov 21
Investment strategy, cap tables, term sheets
Validated unit economics
8th Business model archetype analysis
Week 12
Nov 28
Turning customer discovery insights into a Minimum Viable Product
Draft cap table, term sheet, investment plan
9th Business model archetype analysis
Week 13
Dec 5
Storytelling and pitch clinic, how to create a “teaser” presentation and a longer form presentation for investors, employees, partners
MVP sketch
Week 14
Dec 12
Pitch practice
Short form presentation
Week 15
Dec 19
Lessons Learned – Final
Long form presentation

 

Assessable Tasks

 

The students will work in self-formed teams to simulate the experience of developing a startup from scratch.

Key tasks, all as group work:

 

  • Presentations: weekly presentation of lessons learned, updated Business Model Canvas versions based on customer interview findings, formulation of new hypotheses to test (over 10 weeks).
  • Field research: customer discovery interviews (at least 30 interviews per team or until key business model hypotheses are sufficiently validated).
  • Financial analysis and industry analysis: market sizing (total addressable market, served addressable market, target market estimations.
  • Value proposition test and test results for midterm
  • Financial scenario development, calculating and validating unit economics, investment strategy, cap table, term sheet
  • Pitch development and delivery.
  • Final lessons learned presentation.

Final Grade Calculation

10% participation in class, giving constructive feedback to your peers

30% progress in customer validation, customer interviews

20% midterm validation test and presentation

20% financial analysis, scenarios, and projections

20% final pitch and lessons learned

Extra Credit Policy

No extra credit

Required Reading

Textbooks may be purchased (new or used), rented, or downloaded through standard sources such as Amazon, Barnes & Noble, or Chegg. Be sure to use the ISBN number in order to ensure that you are ordering the correct edition.

Book available on directly from the publisher:

Lean Analytics, Alistair Croll and Ben Yoskovitz, 2013

Articles, Papers:

The End of Competitive Advantage, by Rita Gunther McGrath, HBR, 8, 2013.

What is Disruptive Innovation? By Clayton Christensen, Michael E. Raynor, and Rory McDonald, HBR, December 2015

A Friedman Doctrine–; The Social Responsibility of Business is to Increase Its Profits, by Milton Friedman, The New York Times, 9, 1970. (paywall)

The Founder’s Dilemma by Noam Wasserman, HBR, 2008

The Role of the Business Model in Capturing Value from Innovation: Evidence from Xerox Corporation’s Technology Spinoff Companies Henry Chesbrough and Richard S. Rosenbloom, Oxford University Press, 2002

Why the Lean-Startup Changes Everything, by Steve Blank, HBR, 2013

Recommended Reading

The following two books are recommended for your reference and for help in writing and conducting research:

Business Model Generation, Alexander Osterwalder and Yves Pigneur

Talking to Humans, Giff Constsable and Frank Rimalovski (fre download)

Interviewing Users: How to Uncover Compelling Insights, Steve Portigal, 2013

Traction: How Any Startup Can Achieve Explosive Customer Growth, Gabriel Weinberg, 2015

The Founder’s Dilemma, Noam Wasserman, 2013

Value Proposition Design, by Alexander Osterwalder

Resources

Lean LaunchPad videos on Udacity by Steve Blank

Lean Startup video by Eric Reis

 

Admit it, No One Likes Failure

But there is Joy in Trying

Miss

In Silicon Valley, failure is “accepted, even encouraged.”

Not according to my sample size of Uber drivers.

I’m in San Francisco today, where Uber drivers are the new bartenders, and represent potential bellweather for what’s really going on in the Bay Area. From a sample size of 4 Uber drivers, representing an average of 200 rides each, I learned that the primary themes discussed with their rides were bankruptcy, lack of funding, or fear of running out of cash. If you can’t tell the truth to your investor or fellow co-working-space co-workers, then maybe the dark confessional of the Toyota Camry is your only outlet.

Let’s face it, we really don’t want to fail, but we do want to learn.

Perhaps we just need a few more words to describe failure, so that we know what we’re talking about.

The Failure Learning Curve:

Failure of Not Trying

Let’s start with a true form of failure: the failure to not even try. All would agree that there is cowardice in not showing up.

Ooops

Did you make an oops? A clumsy blunder? Did you swing, and miss? Well then fear not – we all do, and in fact this is the kind of mistake we should celebrate. See Ben Zander coaching a young cellist to say “how fascinating!” with each flub rather than wince and shut down emotionally.

Starting at the 11 minute mark in this video:

Disqualify

Did you try something, expecting a specific outcome, but you found out you were wrong? Well that’s reason to celebrate. You have invalidated your assumptions. The next time you present your results to your team, make sure to include all of the assumptions you have dutifully disqualified – proof that you are saving time and focusing your energy on more promising paths. Answer the most important question – what insights do you have now that you didn’t before, and what did you learn?

“An inventor fails 999 times, and if he succeeds once, he’s in. He treats his failures simply as practice shots.” ~Charles F. Kettering

Strike Out

Did you uncover a big opportunity, an opening to go big or go home? But then did you swing big and strike out? This is the kind of failure embraced by many in Silicon Valley. Investors are taking big risks, and are willing to let nine out of ten porfolio companies fail in order to see one company get exponentially substantial returns.

When you play on this particular game board, you will be asked to speed up your product timelines, spend more on marketing and sales, and go for the ultimate prize: being the winner that takes all in the category you are creating. If you strike out under these conditions, well they were worth the effort.

The Epic Failure

Did you build a giant business plan, model out five year financials, and burn through millions or even billions of dollars without vetting the risks? Did you march your team forward refusing to listen to your customer or to market signals? Did it take you many months to get your first version to market, only to attract few customers  at launch? Well then, that is failure. It’s epic failure. Feel the shame.

If you are recovering from a major failure and get back on that learning curve as you try again. You will have to shift from the false comforts of planning through Powerpoint, and learn how to cultivate new business models. Allow yourself a few more moments of “oops” this time, focus your efforts and disqualify bad ideas, and hunt down the bigger opportunities. And you’ll have much more fun.

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.

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.

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

Now.debunk current business model thinking and explain how business models work. Share your email to get the latest in business model news.

NYU ITP Pitchfest Workshop 1

June 1: 2015

Why we do this

Get an audience outside of the cozy world of ITP Thesis feedback

Respond to genuine interest from investors

Help you understand how to launch ideas that just need to exist in the world

Which means we’ve expanded our aim – we are not just seeking high growth, high scale companies.

We welcome everyone that has a compelling concept

What we need from you

Purpose.

Know why you are driven to do this.

Motivation.

Know what drives you? Are you trying to control your own destiny? Or build the biggest thing that you can build? Or pay off your loans as soon as possible?

Vision. Vision First.

If it is clear enough and compelling enough it will attract the right people and resources.

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)

 

How we get ready

 

June 1: First pitch. No visual aids. Concept review.

June 8: Purpose

June 15: Business model fun

June 17: PITCH

Whether or not you are seeking a scalable opportunity – spend the next few days going over investor pitch deck recommendations:

Sequoia

Cooley Co

Polaris (links to the first Foursquare pitch)

New York Angels Criteria

For lots of examples PitchEnvy

All will require you to know who your customer is. Talk to 10 per week for the next 2.5 weeks. (25 total). If you do not know how to do this, read Talking to Humans. It’s free.
Inspirational: Two Dots a Year Later

“What’s particularly great about the increase in revenue, is our team found a way to make money while sticking to our values, ensuring we’re always keeping our players’ interests and overall “fun” of the game front and center. Instead of looking for a quick win, we’re working to build our business and revenue responsibly by adding content and features that players (hopefully) find valuable enough to buy.”