On Alex Payne’s “business madness”…

Alex Payne is a software engineer (& Scala fan), an early Twitter employee, and now an angel investor: he writes succinctly and well, while pulling few punches. His excellent recent post “On Business Madness” tries to nail a number of Big Bad Ideas floating around the startup business noosphere. I’ll Powerpointify his major points first so I can get on to discussing them properly. 🙂

(1) Payne berates all “the chest-beating sound bites fed to hungry reporters” (what Eric Ries, bless ‘im, calls “success theatre”), and thinks that nobody in startups has any real idea what they are doing: “we mistake dumb luck for a machine that produces success”.

(2) He thinks VCs try to justify their herd behaviour by somewhat laughably calling their decision-making process “pattern matching” when it’s nothing of the kind (well, to a computer scientist, anyway).

(3) He thinks startups who believe tech clusters cause success (a foolishness even the UK government has promoted to the level of national policy in the last 12 months) have got it Just Plain Wrong.

(4) He thinks that Eric Ries’s Lean Startup, Steve Blank’s Customer Development, and even 37signals’ methodology are “process cults”, more useful for finding like-minded co-founders than for building proper businesses.

(5) He concludes by dismissing Facebook’s “hacker way” as a soon-to-be-discredited heir to such business cults as Taylorism & Japanese management theory, and thinks that the only probable business essentials are “a good idea, great people, the willingness to work hard, and an absolute shit-ton of luck.”

Nick’s thoughts:

–> (1) As generally practised, startup success theatre is deeply insincere: this promotes unsustainable relationships not just between between entrepreneurs and the press, but also between entrepreneurs and investors. Here in the UK, business angels routinely (and openly) divide projections given to them by entrepreneurs by three or more, numerically encouraging entrepreneurs to give them ever more inflated figures to compensate for this systematic pessimism. Similarly, somewhere along the line angels now routinely expect to see slideware pitches telling them of their likely 10x or 20x return, as if every single startup they’ll see is going to be that 1-in-a-1000 outlier!

Yet if as an entrepreneur you try to break this cycle, you can quickly find yourself accused of lacking ambition or – worse still! – of pitching a niche business. Though I have always tried to be utterly honest about my own startup’s situation, assets, and potential, I can’t help but wonder whether I’m missing the Painfully Big Inference: that lying slideware has become so endemic to the startup ecology that honesty in pitching actually moves you backwards.

–> (2) (As a UK entrepreneur, I have no real opinion on VCs. You might as well ask me what I think about Peruvian microbiologists – they have just about as much to do with early stage startup investment as Euro VCs do.)

–> (3) In my opinion, tech clusters are more likely to be the sign of a tech neighbourhood dying off than of being born (i.e. it’s a trailing indicator rather than a leading indicator), and in particular of rents rising to a level that non-vanity startups can’t afford: so I agree with Alex Payne. It all seems far more likely to me to be a logical fallacy: that success leads to tech clusters than tech clusters lead to success.

–> (4) Don’t get me started on process cults (particularly the whole Lean Startup thing) – tiny techy tails trying to wag big complex dogs, driven by people brandishing back-to-front telescopes all claiming to have invented a new way of seeing the business world. Yup, Alex pretty much nailed this one too. 🙂

–> (5) Here’s where I diverge slightly (but not actually too much). I personally think luck is something entrepreneurs contrive to make – or, more precisely, that a startup is best seen as an arena carefully laid out to enable lucky things to happen within. Entrepreneurs who try to define success in terms of their monolithic Business Plan are Big Fat Fakes, because life never, ever works that way: rather, the best business plans are ones that have wide-open holes large enough for Fate to enter through.

Hence, I think the only real question to answer when assessing a business proposal is: does this leave plenty of space for luck to happen, or is it determinedly driving into a wall it will never be able to break through? Of course, no angel would ever openly agree that this is right because their thinking is still so hugely dominated by the Oh-So-Foolish Cult of the Business Plan. But perhaps they might get better results from their portfolios if they did…

Applying “Five Whys” to The Lean Startup itself…

The biggest shadow hanging over nearly every business book is the ghost of unwarrantable universalism. Which is a fancy way of saying that, whenever any business writer claims “Methodology X worked for me, so it will work for you [despite the fact that your situation is almost certainly completely different]“, you know that pretty much every bullshit warning bell in your head should go off.

To be precise, this is because every single business success story is a particular historical narrative (i.e. of what actually happened), not a general scientific template (i.e. of what might happen in a hypothetical business): and in fact, given the terrifically small number of startups that achieve success with a high-growth development curve (often with numerous strokes of luck generously helping them on their way), such rare businesses are almost all outliers in the business landscape. Yet the temptation to post-rationalize all that ‘outlieritudinosity’ and to promote the particular approach you took as being a universal entrepreneurial path to success is apparently overwhelming: for if bookshops were taxed on the number of glowingly-confident head-shots of cashed-out entrepreneurs they had on their shelves, they’d surely all fold within a day, mmm-hmm?

As far as Lean Startups go, Eric Ries is a smart, sharp guy, one who is amply self-aware and reflective enough to know all the above… but he still persists in making universal claims. Using one of his favourite Lean techniques (the “Five Whys”), we might therefore probingly ask a series of five ‘Why’ questions, aiming to get to the root of this issue rather than getting mired in the surface details.

Firstly, why is he so certain that his consulting recommendations for startups (which in turn were built largely on his personal experience at a single company, IMVU) are well founded enough to drive a global ‘movement’?

I suspect the answer is that Ries is mainly talking about Internet businesses with a framework you can use to carry out rapid customer experiments. Even though he used to talk the Lean Startup up as an extension of Steve Blank’s Customer Development, Ries’s book actually seems to have pivoted round to the quite different idea that the customer doesn’t know best, but performing lots of A/B experiments on them helps you learn from their aggregate behaviour what path to follow. So, Ries’s certainty seems to stem from his experience at IMVU using the process of engineering statistical experiments on microtransactions (even if the early-pipeline currency is ‘attention’ rather than ‘dollars’) to learn genuine data about its customers, and his belief that it was this process that led to its success.

But why (the second why of five) does he think his personal experience at IMVU just happened to give him a unique view of startup business truth? From his account, IMVU made plenty of mistakes early on and was manifestly not customer-led or even really customer-engaged: Ries’s eventual epiphany seems to have been the realization that his company was in a position to use tech to improve itself, not just its product. And so the answer to [why #2] would seem to be that Ries’ view of the Lean Startup was as something that uses tech to institutionalize a kind of ‘customer awareness therapy’, i.e. that numbers from experiments can help your company ‘Get Real’. Essentially, it’s a tech answer to a social awareness problem that enabled IMVU to drop its stealth-mode conceptual baggage and get on with the real business of engaging with people and satisfying their needs with avatars that don’t walk. 🙂

But why (3/5) does Ries think his particular tech solution is a universal solution to the social problem of customer development? I suspect the honest answer would be that this opinion came from his background as a CTO: the answer he developed relied on appropriating tech tools to develop knowledge of IMVU’s customers. He was apparently amazed to find that the tech tools he just happened to have in his hands already were able to help his company get what it wanted, and this amazement has somehow driven his quest to help other people use their own tech tools to get what their companies want. It’s the joy of techs: a kind of engineer empowerment exercise.

But why (4/5) does Ries think engineers should be empowered in this way? Again, given that he started as an engineer and that most of his effort over the last few years seems to have been involved outreaching to countless other engineers, it seems that his Lean Startup movement is actually just a collective business land-grab by software engineers. By trying to reduce social problems to technical problems, the idea is to turn everything into an engineering exercise, a conceptual business structure where you don’t need to know about product or marketing or PR or personal relationships, your customer experiments will (eventually) tell you all that, by way of pings on a learning metric chart. As a result, it’s resolutely anti-theoretical, and indeed anti-pretty-much-everything-that-isn’t-engineering: even his “anti-waste” angle is supported only by a few carefully selected narrative tales of the unexpected. Does he have any real data to back up his assertion that non-Lean-Startup businesses are wasteful? What he manifestly fails to mention is that Lean Startup development often takes a lot, lot longer: sure, you may waste less physical resources, but you can end up wasting a vast amount of time to do so. Time never really gets factored into the economics equation: it’s somehow assumed you have plenty of it. (Errr… no, you don’t].

But why (5/5) waste all this effort on driving what is essentially a business land-grab by engineers? The biggest universal claim implicit in Lean Startup is that startups only need engineers: and that reeks to me of a parochial engineering-centric mindset being extended far beyond its genuine validity. I suspect what Lean all comes down to is that Eric likes engineers, and wants them to prosper: but surely promoting his particular experience as a universal way of running startups is a bit of an extreme way of doing that?

Really, should you lean on him?

If Lean Startups went to the movies…

…how would they make films?

First of all, they wouldn’t do anything so consciously planned as write a script – oh no, that would be far too deterministic and control freakish. Only an MBA trapped in the early 1970s would start with a plot treatment, let alone a shooting script, right?

No, the #1 thing Lean Startups would do is to “get out of the building” to meet lots of film-goers (customers), form tentative hypotheses (themes), and try them out – excuse me sir/madam, we’re planning a remake of George Méliès’ iconic (1902) “Le Voyage Dans La Lune“, does that sound great to you? No… well how about “Thelma & Louise 2“? Yes, we do know they both died at the end, but… oh, OK, then. Finally, what about “Cats Wearing Dresses Beat Dogs With Sticks“? It’s just a working title, but… sorry? You do like the sound of that? Oh, OK… thanks for your feedback!

Oh, and we’re thinking of casting Colin Firth? Keanu Reeves? Paris Hilton? Oh, you really like her, do you? That’s great. Thanks again!

So, having pivoted and iterated several more times for good measure, they’d then take their well-researched title to film production companies, who would say – OK, but how are you going to write the script? You can’t get filmgoers to write it for you, that would be just plain idiotic. Aha, they’d reply, but we’re Lean and customer responsive, and our customers are always right, so we are indeed going to ask them to write all the best lines which we’ll then stitch together, iterating in the edit suite until it works. Having A/B tested our home page three hundred and fifty eight times, we’re now certain that this will end up with the biggest viral coefficient since Jaws. Everyone’s going to talk about it, it can’t fail!

There’s a pause, as a sudden cold draught ripples across the room (even though it’s in Malibu): the film production guys look warily at the Lean Startup film schmucks and say – even though you’re even bigger schlemiels than we first thought, maybe-just-maybe you’re on the money here. And that’s not because of but in spite of this so-called ‘Lean’ bass-ackwards way you’re going about this. So, just this once, we’ll put the money in, see if you can make a big success of “Cats Wearing Dresses Beat Dogs With Sticks” starring Paris Hilton as a psychopathic catwoman leather fetishist going on a bullet-time Hong Kong martial arts quest to revenge the death of her pet mouse Iggy…

* * * * * * *

…of course, you probably already know that the above isn’t entirely fictional . The 2006 film “Snakes on a Plane“, despite having languished in production limbo for over a decade, got built up into an Internet sensation with many lines of (often foul-mouthed) dialogue suggested by enthusiastic pre-release fans actually added to the film. Samuel Jackson’s most famously quotable line was subsequently ‘dubbed-down’ for US TV into the hilariously Puritan “Enough is enough! I have had it with these <monkey fighting> snakes on this <Monday to Friday> plane!”

But none of this is actually a tribute to Customer Development, Lean Startups, or indeed Lean in any way. It was all basically an Internet marketing stunt by New Line Cinema, to see if they could get film-goers to ‘pre-cult-ify’ what was no more than a B-movie – they had already wrapped the shooting, but then came back to add five more days of the (largely potty-mouthed) dialogue suggested online.

However, despite all that hype and fuss, the film still “only” grossed $62m worldwide, which for New Line made it a bit of a disappointment. In fact, it turns out that the key demographic who really, really wanted to watch the film was young teenage boys, who found themselves unable to get into the now-“R”-certificate movie (restricted because of all the, ummm, boisterous language added). So the whole exercise may have actually served to lose New Line Cinema money overall.

To be honest, the Non-Lean lessons I learned from this whole story are very much like the ones I learned from my own startup. Pre-adopters may be vocal and loud, but they’ll happily encourage you to overfocus your efforts on their particular corner of the world, rather than on your real customers. If you take Lean too literally, don’t be surprised if your startups end up as a Web 2.0 version of “Cats Wearing Dresses Beat Dogs With Sticks“.

Like searching for a ring swallowed by an elephant, you’re likely to hit a glint of gold eventually, but don’t be so sure that every bit of feedback that passes your way is of immense value… 😉

Lean Startups suck. Here are 10 reasons why…

Eric Ries’ 2011 book “The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses” has garnered lots of attention, and indeed plenty of favourable reviews. He’s a thoughtful guy, who has been gradually building up interest in his “Lean Startup” ideas over the last few years: if you haven’t really heard of it, it’s basically an abstract conceptual toolkit aimed at very young companies that offers plenty of sensible-sounding advice, with very little to obviously disagree with.

But even so, I think that Lean Startups still suck. And here are ten big reasons why:-

(1) The “Lean Startup” approach is not a science. In fact, even though much of it is couched in terms such as “empirical” and “hypothesis”, it’s not even properly scientific. What it offers is a load of consulting-style models mixed in with contemporary truisms about business presented as hypotheses, which Ries hopes you will then go out and test for yourself. Why? Because despite all his evangelism, so few businesses have actually tried being lean startups that he hasn’t yet got enough data points to construct convincing arguments for his book. Which is why he so wants you to go test his ideas for him with your money and your business on your customers. If his ideas were scientific, they would have been tested already: but because they’re not, they’re merely hypothetical, which is a different thing altogether.

(2) “Lean Startup” is not a Scientific Management theory. I’ve seen Eric Ries talk, and he likes to claim Scientific Management as a (retrospectively adopted?) parent of Lean Startups, but in practice that’s simply not so. True, he likes metrics (and Frederick Taylor’s ghost would surely approve of that): but metrics and dashboards have been in high management theory vogue for well over a decade, so they are merely things that Ries has appropriated rather than devised in any useful way.

(3) “Lean Startup” is not a Quality System for R&D. The core of Ries’s claims is that his Lean Startup ideas provide a more productive way of getting to “product/market fit”. However, in its current state it is not even remotely close to an ISO-9001 approach for systematizing R&D: as a general rule, I’d say quality systems are a poor fit for R&D companies. Rather, the key test Ries applies to everything is relentlessly Darwinian: is your product a good market fit yet? (If not, iterate and try again). But as far as I know, there is as yet no substantive academic research on whether relying so utterly on customer feedback is in fact a good way to design new things: it could be argued just as strongly that it’s merely an effective way of making incremental design changes.

(4) Lean Startups are unfundable by angels. I estimate that 95%+ of current business angels (oh, and 99%+ of VCs, too) would not currently invest in any lean startup. This is because the Lean Startup toolkit has a single operating model: a Zen state of sustained-yet-aggressive ignorance while you intuitively develop some kind of tentative product-market fit by repeatedly bouncing things off enthusiastic early customers. Even though this may be in some ways inevitable if you’re trying to build a startup using your own savings, it is anathema to almost everyone looking to back a startup. I’ve talked with 130+ business angels, and almost without exception I would say that they want to put money into small, highly productive teams who have the self-belief that they already know what they are doing, so that those people can get on with executing their plans and making them work. Angels don’t want to fund your industrial education, they want to fund your market-focused business.

(5) Lean Startups are not lean. That is, as far as I can tell the ‘lean’ part of the title was merely appropriated from “Lean Manufacturing”, which – I would argue – bears almost no relationship to Eric Ries’s customer development ideas (which were instead built to a very large degree on Steve Blank’s Customer Development ideas). In fact, Ries’s idea’s correct title should probably be “The Learn Startup” because it is 100x more to do with learning than with reducing process waste and quality management: it’s certainly not to do with doing things cheaply or even fast, because educating yourself into a constantly changing market via progressive iteration can take an entire lifetime, and can happily absorb every penny you care to throw at it.

(6) Lean Startups makes little sense outside Web 2.0 startups. If you are considering setting out as a “lean startup” manufacturer, I’d urge you to think again. Iterate with your customers all you like, but you still need to pony up heavy-duty capital when setting up a manufacturing process, and the Lean Startup consulting toolkit is of little use when funding or developing this kind of thing. Regardless, you’d probably be better off reading up on mechatronics development, because this covers an awful lot of the same area (did I mention that it’s not new?) without telling you that you need to iterate in order to build worthwhile things.

(7) “Lean Startup” ideas have not yet been tested. Look, anyone – and I do mean anyone – can assemble a set of contemporary-sounding statements about how best to run a business, and then claim that the multiple similarities between those statements and carefully-selected details of the runaway success of { Google | Facebook | whatever } form cast-iron proof that your overall theory works universally. Eric Ries knows (and indeed points out) that this does not amount to any kind of real wisdom: however, because he has as yet amassed no real data, I think this is exactly what his ‘Methodology’ reduces to.

(8) Lean lacks cojones. Or “bravery”, if you wish. By delegating design decisions purely to the result of customer iterations, it encourages startups to produce incremental me-too wannabe products that appeal only superficially to customers, and to make design decisions based more on incrementalism than disruption. As such, it is a way of developing things that is intrinsically anti-engineering. Yet I would argue that to build company value and have lasting societal impact, startups need to be (quite literally) revolting.

(9) Lean is not a movement. It is not even a popular revolution. It’s one guy touring the world telling developers telling them how smart they are, and selling them an unsustainable dream – that it is in their power to build their own company cheaply and effectively by iteratively running prototype product versions past early adopter customers. It’s a tempting notion – after all, it’s the same basic dream that fills hot desk seats in Old Street and all the other tech hotspots worldwide. But ‘ought’ doesn’t make it ‘true’, no matter how many times you say it to audiences who would like it to be true.

(10) It would be nice if Lean was truly as good as Ries claims. But it’s not. In some idealized parallel universe, it might well possibly be true. But in this particular universe, it is at best no more than a technical hack for trying to avoid really big customer-facing design mistakes. So, unless you (and your optimistic co-founders) can entirely self-fund your killer startup through a (probably very prolonged) lean development phase, I would strongly advise taking your Lean Startup noodle soup with a large pinch of salt.

Update: you might also consider what a disaster it would be if you applied Lean Startup principles to your Real Life…

Fred Destin miniseedcamp lecture, ohhhhh dear… :-(

As recommended yesterday by Ben Markland on the London OpenCoffee meetup forum, here’s a video from July 2011 you might enjoy: a 50-minute lecture + Q&A session by Fred Destin at Miniseedcamp Ljubljana. Fred’s a smart guy, and manages to squeeze in the whole lifecycle of startups: founders (the magic number is two), funding, launch, build, the Chasm, scaling, all the way to maturity. As a rapid precis of currently accepted startup wisdom presented by a communicative ex-Euro VC (now in Boston), you’d think it would be hard to beat.

Except that, as a unified body of knowledge, it really sucks – basically, the pieces don’t fit together .

Here’s the paradox: even though Fred really likes lean startups (he lauds Steve Blank’s Customer Development Cycle and Eric Ries’ Lean Startup Movement), he clearly doesn’t believe that lean scales up – at some point, you have to put your lean ways behind you and go “fat”, he says. So do you think smart, well-connected VCs who are anything like him would make VC-scale investments in lean startups while they are still lean? No chance.

So, the lesson to be learned from that would seem to be: Lean Is Good, Except If You’re Pitching To VCs.

But that’s only half the paradox. Here we have a top-flight VC exhorting a roomful of startup people to go lean, even though he personally wouldn’t invest in them while they’re still lean. Clearly, he must be expecting other investors – specifically business angels – to step in and fund lean startups, to build them to the point where they can sensibly exit and pass the equity baton onwards to eager VCs.

But those seed funding rounds are clearly problematic, and Fred is well aware of the problems of getting funding going: he discusses (in the Q&A) the initial “funding no-man’s land” many startups get stuck in , and advises entrepreneurs to “always move the company forward”, and not to get caught in a waiting-for-funding-rather-than-actually-doing-stuff “death trap”.

Yet the problem is that by endorsing Lean as the best startup methodology of the day, I’d say he’s making that initial funding no-man’s land wider. I like lean, but it comes with an implicit set of values, pretty much all of which are antithetical to angel investing principles:-

• We don’t initially know what to do, but we plan to keep failing fast until the market teaches us
  (Angels want to put their money into building something, not funding your education)
• We don’t have a business plan, just a set of vague market opportunities we’re trying to incrementally build into
  (Angels want a business plan and cash flow forecast to negotiate the equity value of their investment)
• We don’t see any division between customer development and product development: we constantly (micro-)pivot
  (Angels like to work with people who put their money to a specific use, not changing their mind all the time)
• We wear many hats simultaneously, and the business side is tightly interwoven with the development side
  (Angels prefer dealing with non-business-savvy entrepreneurs, who are more ‘coachable’ and ‘malleable’)

How on earth can angels price investment into Lean Startups? In fact, “are there any ‘Lean Angels’ out there?” I asked Eric Ries a while back, “And since engineers already ‘get’ Lean so readily [probably because it’s so much like mechatronics development], why are you lecturing them rather than angels?” He didn’t really have an answer then (beyond “well, there are a few… in the US”), and sadly I don’t think he’s got one now. There is no Lean Funding Movement. Unless someone can explain to me otherwise, I assert that Lean is basically unfundable by the current generation of angels (and I’ve met more than 130), unless you dress it up as something that it ain’t.

Fred is right about the importance of the pre-funding quagmire: I suspect this has got worse of late because angels’ and entrepreneurs’ focuses have progressively diverged – angels want more certainty before putting their money in (though still with a 10x return, ha!), while entrepreneurs are trying to find cost-effective ways of managing product/market uncertainties (e.g. Lean). There is – at least in the UK – less shared conceptual ground between these two camps than ever.

Right now, the only lean path to huge growth seems to be patient bootstrapping over an extended period – basically, to self-fund beyond the point that lean is a central part of the business mix. (Sure, feel free to set lean sweat teams in motion later, but that’s the icing on a cake you’ll have already baked by then.) And where do angels and VCs fit into that business landscape? Angels and VCs love evangelists, customers, traction, metrics, virality: but the kind of patient, bootstrapped, self-reliant, compact development that’s at the heart of Lean is a terrible fit for their explosive, percussive business models.

Ultimately, a lean business is not an angel business, nor is it a VC business. What a mess! 😦

Your new job title: Chief Opportunism Officer!

Opportunity is rather a strange thing. In many ways, it’s the life-blood of business: but what kind of entrepreneur would have the cojones to pierce the pretence of business strategy and put their job title down as “Shameless Opportunist“? [To be honest, I did try it for a while, but got bored and moved on].

Perhaps we collectively need to kill the stigma attached to “opportunism”, to rescue it from the shadowy depths business theorists have relegated it too, and instead declare: I’m proud to be an opportunist. I’d say that Steve Blank and Eric Ries don’t go nearly far enough with iteration and customer development: the real point of running a startup is not to pivot until you get motion sickness, but rather to do everything you can to prepare it to grasp with both hands whatever near-workable opportunities come its way.

In fact, I’d go so far as to say that luck in business is perhaps more of a skill, comprising extensive scenario preparation and a certain kind of glinty wide-eyed-ness quick to alert you to analogous chances you can take advantage of. Yes, ‘business luck’ is 50% preparation and 50% opportunism – the new reality of startups.

Might this also point to what is so wrong with the implicit contract between angels and entrepreneurs, that foolishly seems to assume (as business schools like to insist) that sheer force of intellectual will can bend reality sufficiently to force a commercial opportunity to come into being? Strategy is dead, long live opportunism!

Similary, the high failure rate of startup investments is often explained away in terms of eventual market luck. But rather, isn’t the real point of seed stage research is not to find a single mega-opportunity (i.e. a single ostrich egg to put into your creaky basket, VC-stylee), but to instead make sure that the proposed venture is sitting squarely in the middle of a field vigorously blooming with multiple opportunities? (Not knowing which one will ultimately work for you goes with the territory)

All in all, if you were to be brutally honest about what what you actually need to do to succeed as an entrepreneur, the real job title on your business card would be Chief Opportunism Officer, no more and no less. So march over to the nearest window and shout your new mantra to the world outside: Opportunity-Ready Is Investment-Ready!

Business Plans v2.0… what would they look like?

As I blogged here a while back, there’s broad agreement amongst the startup chatterati that traditional business plans are dead. MBA thinking is (allegedly) useless for entrepreneurs, bootstrapping (and low-end funded) companies are stuck at the front end of the [necessity—–strategy] spectrum, everyone is talking about Eric Ries’ “Lean Startups” (even if nobody yet knows how to fund them, grow them, or exit them) while Steve Blank’s customer development allegedly beats out old-school product development, etc etc. So far so loosely consensual.

Yet the problem with this is that nobody has stepped forward with an alternative – really, what should Business Plans V2.0 look like? As per normal, pointing out that something doesn’t work is a pathetically easy game to play: coming up with a viable alternative is much, much harder.

All the same, this isn’t just some temporary post-credit-crunch glitchette. At heart, a business plan should be designed as a precursor to substantive investment discussion between the parties – so even if you chortle knowingly at its hockey stick graphs and its optimistic market presumptions, it is an object designed to help channel the raw collaborative urge to form a relationship, to ‘get it on‘ (whatever ‘it’ is).

The problem with this is that, though always somewhat wobbly, the arrangement between angels, banks, and entrepreneurs has been pulled so taut of late that it has now has more holes than substance: the parties’ interests have diverged. What kind of business contract could ever equitably cover the post-sales angle of bank finance, the post-traction obsession of UK angels, and the late-prototype focus of UK entrepreneurs all at the same time? And what kind of business plan could possibly lay down a set of guidelines to bring such parties to any kind of agreement, when right now they don’t even seem to be in the same building as each other?

Putting startup theatre to one side, I’ll be honest: this is a difficult question to which I haven’t (yet) got a proper answer. Though I despair of the sub-MBA grandstanding most business plan templates are built on, these remain the de facto standard for the simple reason that they give you a pragmatically dull way of presenting loads of genuinely useful information. The reason I’m thinking about this right now is that I’ve been asked for an up-to-date business plan by some interested investors, but frankly I’m struggling to bring it all together in any kind of traditional format.

However, what I want to say is quite different from what all the templates seem to suppose – what kind of generic template has the cojones to say “if angels don’t invest in the next couple of months, I’ll negotiate a customer-funded deal within my industry instead, because that’s basically how damn close to market my startup is”? It’s all gone so far beyond the “here’s a nice little idea, will you fund it?” stage (you know, the one that government advisors think that all startups are at) that it’s just not funny any more.

So how can a pitch document ever communicate this urgency – how can it manage to get the core message across that “this is your last chance“? Though I’ve met so many great individual angels over the last 18 months, perpetually coming in second (as almost all of them habitually do) is perhaps the most effective procrastination tool yet devised – for with nobody to come in first while EIS is so heavily stacked against other ways of investing, ‘nobody leads‘ means ‘nobody invests‘, period. The single reason angels can even conceive of a 10x ‘home run’ on any startup investment is that they have to come in early – that’s the deal, that’s how it works. It’s not exactly an ISA, is it?

So, how best to present this? As always, I’ve got plenty of ideas: but even so, it’s a tough nut to crack. And yes, I’ve already had a trawl through various “business plan v2.0” sites (such as this one, PlanHQ, and even the rather laconic icon-based business plan summarizer from Rotterdam), but haven’t yet found anything that comes particularly close. Have I missed something really important? Leave a comment below, tell me what to look at!

Advanced Manufacturing Growth Summit in London…

This Tuesday (25th January 2011), I’ll be off to rub cheeks [*] with the great and the good of UK manufacturing at a BIS-chaired summit in London. That ultra-lean micro-manufacturers (such as my startup Nanodome) can sensibly share governmental mindspace with über-politicized macro-manufacturers (such as Land Rover, Jaguar, etc) may at first seem paradoxical, but then again we’re all waist-deep in the same financial quagmire, so what the hey. The rationale for the summit is that there’s a government manufacturing review due in time for the coming Budget, hence the question Vince Cable, Mark Prisk et al would like attendees to help answer is simply: what can government reasonably do to assist, preferably without spending any money?

Unlike most mainstream media pundits, I’m a big fan of coalition governments, because they frequently have to iterate and compromise their way towards workable policies, a process which I happen to believe yields better results than traditional high-level, opaque, ideology-driven politics. This oddly mirrors Steve Blank’s “Customer Development” loop, for the ‘customer’ of governmental manufacturing policy is indeed manufacturers: so let’s all raise a glass (not half-empty but half-full) to plenty of positive half-steps forward, rather than the full-steps backwards and sideways we’ve seen for so long.

But, you may say, UK manufacturing, really? Well, few people realize that the UK still produces lots of stuff, with (perhaps surprisingly) global pharma players such as AstraZeneca and GlaxoSmithKline now massive contributors to the manufacturing sector. Even though UK manufacturing has been declining for decades, its position in the world manufacturing tables has slipped from #1 only to #6 (last time I looked). Hence two of the biggest issues are of low national self-esteem (yes, the UK really is a major manufacturer, so why do investors cough politely when I say that’s what my company does?) and lack of skills support (no, a liberal arts degree doesn’t really tick any industrial hiring checkbox, why on earth would anyone think it might?).

Yet over the same period, the UK’s per-worker productivity vastly increased, largely (and unsurprisingly) due to a combination of automation and outsourcing. However, the boom in Far East outsourcing rode on the back of import-favourable currency shifts and a soft bank financing regime at home, both of which are now long gone: to my eyes, the future of manufacturing lies in ‘IDFLA’ (“industrial design for late assembly”, i.e. a middle position between “pure” in-house manufacturing and “pure” outsourced contract manufacturing) and in new ways of financing working capital, because the collapse in access to finance has squeezed most of the inventory out of distribution channels.

People often think of manufacturing as somehow dull: but actually it’s an area that’s full of design challenges, problem-driven innovation and product iteration. Design-driven manufacturers (i.e. with their own Intellectual Property) face the challenge of financing both high-risk technological R&D and low-risk working capital simultaneously, at a time when the European appetite for any kind of funding is extraordinarily limited. Which is why at the summit I’ll be heading for the 3pm breakout session on Access To Finance with Andy Rose, Head of the Infrastructure Finance Unit.

Which is, errrm, where exactly? Well… if you didn’t know, the IFU is the part of HM Treasury in charge of handling Private Finance Initiative (PFI) contracts, such as the (‘achromatic elephantine’) £10bn Future Strategic Tanker Aircraft project: yet quite how governments can lecture businesses about off-balance-sheet financial engineering when PFI has become such an active part of their post-Maastricht funding activities I don’t know, even if the Coalition rightly doesn’t like PFI solutions much. At the same time, the IFU has (in Andy Rose’s words) an infrastructure-funding-related mandate “to get involved where private sector capital is not available”, so seems to cover both sides of this particular funding coin.

Personally, I think funding manufacturing has indeed become an infrastructure issue: for with the disappearance of supply chain inventory, who now funds building things? What all the Just-In-Time supply chain optimization MBAs never really thought through was that in the end, the clunkiest part of the chain becomes the manufacturer – and because nobody else ever needs to hold stock, distribution effectively becomes virtual. And if you then join this up with a fully disintermediated worldview, distribution disappears and the manufacturer then becomes the chain, all the way from banker to retailer.

The long-term trend, then, is surely for manufacturers to become micro-banks: in which case their funding suppliers should be major infrastructural bodies such as the European Investment Bank. (Incidentally, I worked on-site for a week at the EIB a few years ago – it had the best canteen I’ve ever been to, highly recommended!) Nobody now really believes that high street banks will have any serious interest in funding manufacturing companies for the next decade, so where’s it all coming from?

The challenge with policy formulation is, in the words of Wayne Gretzky, to “[play] where the puck is going to be” – that is, to anticipate rather than to Band-Aid, while at the same time not anticipating too far ahead (i.e. to run way ahead of the puck). Trend-wise, my opinion is that macro-manufacturing is dead in the water, and that the big trend is the growth of micro-manufacturing and late assembly: but despite countless quotes from Vince Cable that superficially seem to align with this way of seeing the world, I’m struggling to see how what I do even remotely fits the practicalities of government policy.

My guess is that, for once, the government’s instincts for emerging trends may well be spot-on, but that it has little practical idea how to evolve its current line-up of industrial support into something that will genuinely support advanced manufacturers with their growth plans. Let’s see how the summit plays out!

I hope to see at least some of you there – please feel free to introduce yourself, and/or to leave a comment here.

[*] errm… depending on how spacious the networking area is, I suppose

Customer development and “Blank cheques”…

I’m confused and angry: for heaven’s sake, what’s a startup guy supposed to do?

On the one hand you’ve got Steve Blank proposing his Customer Development startup loop, Eric Ries proposing his Lean Startup development loop, and (one you may not have read about) Alex Osterwalder’s Business Model Generation loop. These three dovetail neatly into a kind of ‘zeitgeisty’ continuously-pivoting startup worldview that says: hey, business plans are for MBA robots, building stuff without a business model and customers is a bozo recipe for failure, so just keep looping and eventually you’ll have learned enough to be pretty sure of not failing.

On the other hand you’ve got 99.9% of angel investors and VCs in the world, who say: why on earth do you think I would open-endedly fund your startup when you tell me right from the start that you have no idea what your market is, who your customers are & what your product will be, and that you have no solid plan moving forward, just a deeply-felt desire to iterate and pivot repeatedly until such time as the process of bouncing ideas/demos/prototypes off your customers helps reveal one to you, at which time you’ll need to raise yet more money from me to actually execute things based on what you’ve already spent so long learning at my expense? Do you honestly expect me to fund your University of Me while you “get real”? Since when was I your parent?

There’s a bit of a conflict here.

Why, then, is it only me that seems to see this kind of funding request for (let’s call it) a “Blank cheque” as somehow genuinely unreasonable from an investor’s point of view? It’s not that I’m an apologist for MBAs, business schools and accountants (far from it!), it’s just that I can’t honestly see how focusing on iterative customer development to the exclusion of everything else helps build any kind of workable middle ground between entrepreneurs and financiers, between (in Blank’s slightly pejorative terminology) the worlds of Billy Durant and Alfred Sloan.

Note that it’s really not that I don’t understand the Blank / Ries / Osterwalder weltanschauung: on the contrary, I think I probably understand it better than most, in that their ideas closely match the ways I’ve actively developed my own company over the last three years. However, there’s a hugely strong case to be made that almost all lean startups may well be intrinsically unfundable. Though making a strength out of a weakness is a great rhetorical exercise (often used in job interviews, of course), I don’t think it translates well into the higher-level arena of funding persuasion – for how is a financier supposed to tell the difference between a “learning startup” and a “know-nothing startup”?

Can somebody please tell me why it only seems to be me who has taken the red pill?

Steve Blank’s “Four Steps to the Epiphany”…

Just as Stephen Hawking’s “A Brief History of Time” had an extraordinarily high (buy:read) ratio, Steve Blank’s influential self-published book “Four Steps to the Epiphany” (first three chapters are online here) has an extraordinarily high (cite:buy) ratio – almost everyone relies on online summaries of what it says, rather than actually read it for themselves.

In some ways, this is a good thing because – as even arguably its #1 fan Eric Ries felt compelled to point out – the book is a tad leaden. Yet even so, Blank’s core idea (that customer development-based iteration should be at the heart of nearly every startup’s overall business development, with product development very much a secondary process) is the kind of thing that has swung strongly into startup fashion over the last few years, for the simple reason (I think) that it’s solid gold. The days of “if you build it they will come” are now thought to be long gone: if anything, the business compass has spun right around to Jim Coudal’s (2005) “if they come, you will build it” – basically, build the audience before you build the product. Incidentally, Coudal mentions “design entrepreneurship” as a specific influence here, which is pretty much exactly what I do (though “industrial design entrepreneurship” is arguably even closer).

Without much doubt, for certain industries such as book publishing (I also run my own niche publishing house, so know plenty about that), I’d say this is an excellent model. In fact, for several years I’ve advised non-fiction authors to blog extensively before writing a word, so as to build up their personal audience – it’s as much about your finding out about them as about their finding out about you. As a general rule of thumb, I’d say your blog needs to get roughly a million visits (and to have roughly a thousand people subscribed to it) before the economics of book publishing begin to work in your favour. Doubtless this is true for many other industries too.

But… is it true for tech startups?

I think the root of the opposite position – non-listening MBA-centric business plans, such as the disastrous WebVan roll-out Blank cheerily cites – lies in a kind of mid-century Father-Engineer-Knows-Best industrial paternalism. And that would be a bit of a straw man for Blank to argue against in 2011, as contemporary entrepreneurs (though possibly not business schools en masse) have become very much savvy to the idea that their customers somehow hold most of the important answers.

Yet even Blank doesn’t go as far as Coudal seems to have gone: having got tired of being the work-for-hire mindshare guru (temporarily wedged between the product guy and early customers), Coudal’s personal epiphany seems to have been that mindshare holds pretty much all the value in the equation, and the rest is mere execution. That is, he redrafted the seating arrangement such that the product guys became the work-for-hire gurus working for him.

Plan, execution, mindshare, customers: for Coudal, the mindshare comes first (plan? what plan?), while I suspect Blank is more about execution – ultimately, he just wants customers into the overall loop to help iterate the plan right. So, to me Blank’s epiphany seems more about looping, which is the part Eric Ries seems to have taken most on board for his Lean Startup ideas.

But does this tell the whole story? In the end, I suspect that Locard’s exchange principle (from the field of forensic science) is even more revealing. Edmond Locard theorized that “with contact between two items, there will be an exchange”: its relevance here is that I think every startup should see its contacts with customers as a two-way street. That is, you don’t meet customers in order to change them, you meet them in order to exchange with them. What Blank highlights is arguably only half of the traffic (i.e. what you learn from customers, how they change you): but at the same time, they do learn from you, and their buying behaviour may well change as a result – but not necessarily in the way that you hope.

In many key ways, I’m sold on Steve Blank and Eric Ries’s worldview – repeatedly bumping things up against customers is pretty much the only way to build things that really work for them – but that’s just an industrial design principle, not necessarily a business development principle. The open (and extraordinarily problematic) question remains this: whether Blank/Ries-style learning startups can ever satisfactorily be funded by business angels. Without some best guess as to when you’ll have learnt enough to ship, how can you ever agree a funding arrangement?

Much as I admire them, I can’t help wondering: by encouraging entrepreneurs to iterate and grow their startups through learning, are Blank and Ries unwittingly creating a generation of unfundable startups? Where’s the Lean Funding Movement to match their high principles?