00:04Stanford University hello in this third
00:10video for you 145 technology
00:13entrepreneurship I'll be talking about
00:15some frameworks for thinking about the
00:17entrepreneurial process I'll be
00:20presenting you with nine different key
00:22models and frameworks and like any
00:25framework or model these are all
00:27imperfect representations of the real
00:30world but they all emphasize one aspect
00:33or the other of entrepreneurship and
00:36during the rest of the course I'd like
00:38you to be thinking about how each of
00:40these models relates to entrepreneurship
00:43and I'll be referring back to them
00:45throughout the course so I wanted to
00:47present all of them to you now you'll
00:49see some contradictions between them and
00:52partly that's the fact that we're still
00:54learning about the process of
00:55entrepreneurship and in my talks and and
00:59what you hear from some of the speakers
01:00there are going to be different points
01:02of view and different ideas and so it's
01:06hope it's my hope that in the course of
01:09doing this that you'll get a better
01:11sense for some of the current debates
01:13and alternative viewpoints on how to go
01:16through the startup process so our first
01:19framework comes from the division in the
01:22class between opportunity recognition
01:25and the pursuit of new opportunities and
01:27so we can think about entrepreneurship
01:29as essentially these two steps in the
01:32first step you see some disconnect you
01:36see some mission missing link between a
01:40need in the market and some new product
01:43or service that could be provided to
01:45fill that need and so the essential task
01:48of opportunity recognition is to fill in
01:52this link between some needs some
01:55unfulfilled problem something that is
01:59not quite being delivered to the market
02:01that customers are saying that they want
02:02and some new technology that can deliver
02:06a product or create a new service that
02:09can then fill this need in the market
02:11and so this could come in in either
02:13direction this could come from first
02:15recognizing a new technology or creating
02:18a new product and then figuring out what
02:21is the market need that this fulfills
02:23who are the customers and consumers that
02:25care about this most or it could come
02:28from the opposite direction of starting
02:30with knowledge of a market need and then
02:32going out and trying to either find or
02:35invent the technology and the product
02:37that can fulfill that market need so you
02:40can go in either direction and there are
02:42downfalls or advantages to each side but
02:46this essential link has to be made to
02:48recognize a new opportunity the second
02:50step once you've then identified the
02:53opportunity is then the pursuit of
02:55opportunity and so that's going to
02:57involve both putting together the set of
03:00people the co-founders and early hires
03:02as well as the rest of the
03:05organizational structure that's going to
03:07enable you to pursue that opportunity
03:09and it's also going to require some
03:10resources in capital and so the pursuit
03:14of opportunity is going to involve
03:15raising financing and bringing together
03:18any other type of resource such as an
03:21organizational partner or a distribution
03:23channel that might be necessary to
03:26pursue that opportunity so that's our
03:28first framework and it represents the
03:31basic division in the class between the
03:32first half and the second half of the
03:34course is wha so our second key
03:36framework comes from the textbook that
03:38we're using for the class technology
03:39ventures and this framework talks about
03:44the entrepreneurship process is
03:46essentially proceeding in three stages
03:48starts with having an initial vision and
03:52then you proceed from that vision to
03:55creating the strategy that you'll use in
03:58the venture and then executing on that
04:01strategy and so we have three essential
04:04steps vision strategy and execution so
04:06the fundamental questions under the
04:09vision step are what do we as the
04:11founders want to achieve in this
04:13business you have to think through what
04:15business are we in what's what's the
04:18story of the business and what are the
04:19shared vision and goals that you're
04:21entering into together as co-founders so
04:25venture ideas even if you haven't
04:28think about what business are you really
04:30in what's the broader vision that's
04:32motivating this business so a couple of
04:34prominent examples for Yahoo were they
04:37an internet directory way of
04:40categorizing information on the web what
04:42about for Google this is a little
04:44trickier are they fundamentally a search
04:47company is their mission to categorize
04:50and make accessible the world's
04:53information there must be some broader
04:55vision that's motivating them beyond
04:58simply being a company that presents
05:00search results alongside a set of ads
05:03often in entrepreneurship to motivate
05:05all the long hours and hard work you
05:08really have to have a bigger vision
05:09that's driving you to be successful in
05:12this business and driving you to want to
05:14go through all the hard work to create
05:16it so think through in your own examples
05:18what's your vision and then moving down
05:20to the strategy once you're clear on the
05:22vision that's then going to inform how
05:25you'll proceed with the strategy what
05:27resources will you need to achieve that
05:29vision and on the other side what kind
05:33of teammates are good are you going to
05:35need what co-founders should you put
05:37together to be able to pursue this
05:39vision what early hires are you going to
05:42have to make and this is all going to be
05:44driven by this question of what's the
05:47firm's distinctive competencies so
05:49you've had this vision
05:50what distinctive capabilities are you
05:52going to need to be able to execute on
05:55that on that vision so then these
05:57distinctive competencies then drive
05:59creating what your business strategy is
06:02going to be and this business strategy
06:04is partly going to be based on the
06:05industry context and partly it's going
06:08to be based on what level of innovation
06:10or novelty you have in the venture once
06:13you've thought through your strategy
06:14then it's all coming down to execution
06:16and executing on that strategy so you
06:19need to put in place some set of
06:20processes and you need to bring together
06:22the talent need to embed them in some
06:24sort of organizational structure that's
06:26actually going to get the work done and
06:28this one hopes will lead to a profitable
06:31business and so our fundamental
06:32questions under strategy or who's going
06:35to buy what are we selling
06:37why are we better than the competition
06:39essentially do we have the right
06:40strategy fundamental questions under
06:42execution or what resources do we need
06:45what's our blueprint what's our plan
06:47going forward how can we adapt what
06:50unanticipated things might happen and
06:52what are we going to do in response who
06:54do we need to execute on this on this
06:56business key framework number three
06:58comes from Bill Solomon and his concept
07:01of fit so this essential idea here is
07:04that the business plan must all fit
07:06together so the business plan is made up
07:09of four essential elements there's the
07:11people there is the deal the opportunity
07:14and the resources so these things must
07:16fit together so if you're going to go
07:19after a particular opportunity say an
07:22ecommerce opportunity on the web then
07:24you're going to need certain resources
07:26they might be server space certain
07:29bandwidth they might be fit some
07:31financial resources to be able to hire
07:33programmers and so this must fit with
07:35the team who is it that you're going to
07:37need to commercialize this e-commerce
07:40opportunity what capabilities and what
07:44kind of reputation are they going to
07:45look for and this might drive what your
07:48resource needs are and then the deal if
07:50you are gathering some type of financial
07:53resources then you have to offer
07:55something in return so you have to know
07:57something about what the rewards and
07:59what the risks are to this venture what
08:01are the incentives of these resource
08:03providers to give you these resources
08:05this has to fit with both the people who
08:09are executing on it are they up to the
08:10task and it has to fit with the
08:13opportunity is the market large enough
08:16to be able to provide the rewards
08:19financially that you're hoping and so
08:21there's essentially has to be a fit
08:23between all of these elements key
08:25framework number four comes from Randy
08:27Komisar his book the monk in the riddle
08:29so he talks about three questions that
08:32every venture capitalist wants to know
08:33the answer to these are is it a big
08:36market do we have a winning strategy if
08:40why do we think that this is a winning
08:41strategy and is it an excellent team so
08:45if you can provide the answers to these
08:49these are the fundamental building
08:50blocks of the venture so we'll be
08:52talking in much more detail about each
08:54of these but I just want to briefly
08:55present these frameworks to you now
08:58framework number five is that
09:01entrepreneurship is essentially about
09:03risk reduction in each and every step so
09:06you start out a new venture and it's
09:08going to be risky in a number of
09:10different ways it can have let's say
09:13technology risk is the technology going
09:16to work can we develop it does it solve
09:18the problem there could be team risk can
09:21we put together the right team can we
09:23recruit the people we're going to need
09:24there's capital risk can we raise the
09:26capital that we need to be able to
09:29create the venture and finally there's
09:31market risk is there really a market for
09:33this product do customers really want to
09:36buy it do they really have this
09:38unfulfilled need that we say they do
09:39so each venture is going to have
09:42different levels of each type of risk so
09:46you might imagine if you're doing a
09:47biotech it's going to have a lot of
09:49technology risk or a clean-energy
09:51company will the technology actually
09:54produce this amount of energy at this
09:56cost these types of ventures might also
09:58have more capital risk can we raise the
10:01amount of money that we need to do this
10:04level of R&D on the other hand you might
10:06imagine a mobile or mobile application
10:10or a web startup where there might be
10:12more market risk are people actually
10:15going to come to this website do they
10:17have the need for this web service but
10:20the technology risk might actually be
10:21lower in this case we can program the
10:24website we can create it easy enough but
10:26the real risky part is will people
10:29actually want it and in this case the
10:31capital risk might be lower because you
10:33might not need as much money to really
10:34get started and so you can imagine
10:36entrepreneurship as a sequential process
10:39of reducing risk that you start with the
10:42riskiest aspect and little by little you
10:46start taking risk out of the venture if
10:48you recruit the initial couple of
10:50co-founders you've taken out some
10:52technology with or some team risk if you
10:55raise a bit of money you've taken out
10:57some capital risk if you sign up the
10:59first 50 customers you've taken out some
11:02market risk if you continue to develop
11:06the technology and create a new feature
11:09the customers want you've taken out some
11:11technology risk and so eventually little
11:14by little you D risk the venture and you
11:16create and established a large
11:17organization that's framework number
11:20five framework number six comes from
11:23Jeffrey Moore's book crossing the chasm
11:25and that is that all entrepreneurial
11:27ventures must cross this chasm in the
11:31market and so the difficult part of
11:33entrepreneurship is getting to the main
11:36majority part of the market if you have
11:39some new product or some new technology
11:41then it's likely you can get a few other
11:43innovators to give it a try try it out
11:46because they're their innovators they
11:48like to try something new for that you
11:50might be able to get a few early
11:51adopters to try the product people who
11:54like to just try new things out they
11:56don't really care too much if it works
11:57they're just like kind of tinkering and
12:00trying out new technologies and the
12:02difficult problem comes in moving from
12:05having a few early adopters using your
12:07product to having the early majority the
12:10early majority is a little bit more
12:12skeptical they're not necessarily
12:14necessarily willing to waste time and
12:17money trying out just any new technology
12:19that comes along they want to really see
12:22that this provides value to them and so
12:25can you cross this chasm can you make
12:27this leap from the early adopters to
12:30people who are a bit more skeptical and
12:32only willing to try something if it
12:34really provides value to them there's
12:36then the late majority or only gonna
12:38sign up once they see that a number of
12:40other people are using it finally there
12:43are the laggards in the market who are
12:45only going to adopt technology once they
12:47really have to and once it's a necessity
12:49for them and so we'll talk a bit more in
12:53the entrepreneurial marketing session of
12:57the class about this bowling-alley
12:58theory of how it is that you go about
13:01this process of moving to progressively
13:04more difficult segments of the market
13:08key framework number seven is Steve
13:11blanks view of the customer development
13:14and this is written about in his book
13:17called the four steps to the Epiphany
13:18and so Steve blanks view is very similar
13:22to the view that we're taking this class
13:23that entrepreneurship is about
13:25hypothesis testing and experimentation
13:29the view is that parallel to running
13:34you must also run what he calls a
13:36customer development process so this
13:39involves starting out by identifying a
13:43set of customer needs and problems and
13:45so you talked to several potential
13:47customers we try and see what their
13:50unmet needs or what their problems are
13:53try and see if you can find some
13:55solution it might be a new technology
13:57new product or new service that would
13:59meet these customer needs you can then
14:01take an initial version of this to the
14:04customer validation step customer
14:07validation is going out and seeing if
14:09you can verify that it wasn't only these
14:11few people who you talk to who have this
14:13problem but there are actually a large
14:16number of other customers so can you
14:18talk to another 20 people who also share
14:21the same problem and who see this
14:24potential technology or product that
14:26you've developed as a solution to it so
14:28if you fail to find those next 20
14:30customers then you've got to iterate and
14:33circle back to the first step and try
14:37and see if you can come up with either a
14:39different unmet need or problem or a
14:41different solution to that problem and
14:44then come back and see if you can again
14:47verify that there are a larger set of
14:50customers who also share this problem
14:52that it wasn't only these initial people
14:54if you can do that then you can progress
14:56along to the customer creation step in
14:58this step you begin to develop greater
15:02level of user demand if you pass this
15:05step then you can move on to more of the
15:07company building step in creating a more
15:10repeatable scalable sales and marketing
15:14plan and so the core of the idea here is
15:17that you start with an initial
15:18hypothesis for what the needs are and
15:21what the potential solution is you then
15:24want to create small-scale tests of that
15:27hypothesis to see if it's true in the
15:30broader market and only then do you
15:32progress on to later stages in the
15:35company building process otherwise you
15:38go back and you run a different
15:39experiment with either a different set
15:42of needs or a different potential
15:44solution to them so this whole process
15:46requires not just dreaming up ideas in
15:51your dorm room or at home but actually
15:54getting out and talking to people to run
15:56these experiments to see if there's
15:58actually a customer need for your
16:00product framework number eight comes
16:03from Gerry Kathleen's book startup and
16:06it's kaplan startup race so the idea
16:10here is that a start-up is essentially a
16:13race against time to reduce risk and
16:16create value so this is somewhat similar
16:19to our model of reducing risk at each
16:22step but it points out that we also have
16:26to create value along the way so the
16:29steps are initially there's a founding
16:30the entrepreneur begins with a vision
16:33and create some shares of stock and a
16:37new venture the entrepreneur then trades
16:39that stock for three things ideas money
16:42investment and people to join other
16:46co-founders or early employees so we
16:48then enter the seed stage so venture
16:51capitalists or angel investors might
16:53provide money and return for some of
16:55that stock employees join and will earn
16:58stock options as a result ideas become
17:01the intellectual property which creates
17:03the initial value in the company so
17:05further growth doesn't happen until we
17:07start hitting some additional milestones
17:09these milestones are either going to
17:11reduce risk or generate additional value
17:14as we achieve milestones we reach the
17:16growth stage we need more money ideas
17:19and people but the advantages since
17:21we've already reduced some risk and
17:24we've already created some value in the
17:26company we don't have to trade as much
17:28stock at this stage to get the to get
17:31that money ideas or people and so as you
17:34reduce risk and build value
17:37you have the benefit that you trade less
17:39stock less percentage ownership in the
17:41company for more resources as the
17:43company it's further milestones and
17:45begins earning cash and creating their
17:48own revenues to finance further
17:50development then we can create more
17:52value and get to the potential exit
17:55stage so in the exit stage you might
17:58have an initial public offering or a
18:00merger and acquisition and we'll talk
18:02more about these terms later in the
18:04course at this stage if there's an
18:06initial public offering or if there's an
18:08acquisition then the entrepreneur our
18:11investors and employees can cash in can
18:14trade in their stock for money viable
18:16company's been created and the
18:18entrepreneur can either continue to
18:20build the company retire or start the
18:23game again the idea of the startup race
18:26that if you run out of time or run out
18:29of money before getting far enough to
18:31create more value or to reduce risk then
18:35the startup fails and ends but if you
18:38can create value and reduce risk fast
18:40enough then you can continue on in the
18:43path 9 is known as effectuation and this
18:47was created by Syrah serves about the
18:49university of virginia
18:51notice that this model essentially
18:53reverses our model that we started with
18:57in this model you don't start with the
18:59vision similar to Steve blanks ideas of
19:02customer development you start by doing
19:05some things you start by thinking about
19:07what resources do I currently have what
19:10can i potentially do with them and you
19:12begin to execute you see what works and
19:15what doesn't and from those initial
19:17experiments you start to see what's
19:20working and you develop your strategy
19:22and then from your strategy you begin to
19:24realize what your broader vision for the
19:26company is this is actually the startup
19:29model rather than starting with a fully
19:31fledged vision you can start by running
19:34a few experiments and seeing what you're
19:36getting traction on in the market and
19:38then begin to develop a broader strategy
19:40so this is an alternative framework for
19:43thinking about the startup process
19:44that's it for video number three I've
19:47given you nine different key models and
19:50for thinking about the startup process
19:53for more please visit us at stanford.edu