How to Fail Less: Steve Blank on the Secrets of Start-Ups

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"We've cracked the code. We can say that we know how to make start-ups fail less."

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Suddenly, innovation, creativity, and entrepreneurship are the most powerful ideas in not just the business world, but also on the New York Times best-seller list and in Congress, that infamous dungeon of inspiration, where good ideas go to die. These are distinct, if overlapping terms. Not all creativity leads to innovation and not all innovation is done by entrepreneurs. But you can learn a lot about the first two terms by studying the third.

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And so, for The Atlantic's week-long special report on innovation, I wanted to talk to one of the smartest and most commonsense thinkers I know on starting a company and harnessing creativity for start-ups. That's Steve Blank, a teacher, blogger, Atlantic contributor, and serial entrepreneur whose breakthrough ideas about customers and epiphanies have inspired both entrepreneurs I know personally and the U.S. government. We spoke yesterday about Steve Jobs, the character of Silicon Valley, and why Steve believes entrepreneurship is teachable.

Here's a lightly edited transcript:

It seems to me that enthusiasm for start-ups lags behind a clear understanding of how start-ups work and why some are successful. What have we learned recently about the character of successful start-ups?

The modern corporation can be traced back to the East India Company in 1600. The corporation evolved to its modern form over 300 years. Business men learned on the job about accounting, and human resources, and team building.

It wasn't until 1908 that some people at Harvard University realized that nobody was teaching an advanced course on how to teach a manager. Harvard came up with a Masters in Business Administration, an MBA. It was a two-year course on how to execute existing companies.

For the next 50 years, the MBA dominated the American Century. It became the gold standard. There's nothing wrong with an MBA. It just teaches you execution. When the first investors came out to Silicon Valley they looked at these tech companies and said, "We'll take everything we know from business school about how to organize companies." But they didn't understand the big idea: Start-ups aren't smaller version of large companies. You can't put execution strategy on top of a start-up and expect to succeed.

Learning to manage a company seems categorically different from learning to come up with ideas that grow into companies. That skill feels more elusive. Can you really teach entrepreneurship?

Many people say you can't. They're ignorant. But it was true that we didn't know how to teach entrepreneurship for decades, because we didn't understand how start-ups were different from large companies.

Large companies execute. Start-ups in their early stage don't execute. They search. And for a long time, we had no tools for search. But in the last few years, we've started to build the equivalent of an execution plan for start-ups. We've cracked the code for early stage ventures. We can say that we know how to make start-ups fail less.

Tell me how you teach entrepreneurship. What does it mean to learn how to search?

The old entrepreneurship class was: Let's write a business plan do a PowerPoint presentation for the investors. But that plan is a static item. It says, "Here's my idea. Here's the opportunity. Here's the team. Here's the forecast." It has no learning. I teach at Stanford and Berkley. Let me tell you, the smartest kids in the world can put together a great plan with no bearing on reality.

So I came up with the idea of a "Lean Launchpad." It's been picked up by various universities and the US government. The Lean Launchpad says: We don't care about your initial hypotheses. The hypothesis is just a thought. The safest bets are probably all wrong. Your initial guess about customer and price are going to be wrong. About 950 of the 1000 best start-ups don't execute their first plan.

The old process -- Does you hypothesis seem good? Here's a grade. -- is great for professors because we can grade it. In my class, you test these hypotheses. You talk to 15 customers a day. You're doing constant iterations. Every once in a while, you come up against the facts just don't match. That major change is called the pivot.

A pivot sounds terrifying for a team that put months and thousands of hours into executing what they thought was a great idea.

It is scary. But embracing the pivot is neat way to look at things. In the old days, we fired the VP of sales and the VP marketing if the plan didn't work. Our thinking is, don't fire the people first. Fire the plan first. Your first start-up ideas are just guesses you pulled out of somewhere. They're probably wrong. The new way to teach is as hypothesis-testing.

What's the most common mistake your best students make after they graduate?

First, if you've never done a start-up, some of these lessons feel like a nice set of facts. They get filed away along with a Celsius-to-Fahrenheit conversion tables. Until you've experienced failure, customer development is just a nice to learn thing.

Second, people do entrepreneurship because they have a vision and a passion to do something that will go from failure to failure. And yet! That vision and passion sometimes distracts you from the little voice that I'm trying to insert that maybe you are a little bit wrong and should have a process that tests it. This is counter to the drive of an entrepreneur.

One lesson many people took from the Steve Jobs story is that great entrepreneurs can anticipate what their customers want even before they ask for it. You ask your students to constantly get customer feedback. How do you reconcile the two?

That Steve Jobs line is a myth, and it's truly destructive.

Steve Jobs lived about half a mile from my Apple store, and so did I. Once a month, I would see him in the Apple store. Do you think Steve couldn't get a computer delivered to his house? No. He was visiting to talk to people. Steve Jobs was not sitting in a lotus position thinking great ideas out of nothing. Yes, he was the best intersection of art and science since Edison. But he wasn't cut off from customer input. It's just that his instincts of what to do with customer input were incredibly attuned.

If you're trying to enter into an existing market, not talking to customers is suicidal. If you're trying to create something new, asking questions might get you blank stares. But at least you'll see how people solve the problems you're trying to address. They tell you what technologies you are trying to displace.

One of my roommates is an entrepreneur and the other is a Swiss citizen. They had a debate the other day about whether the United States, and in particular Silicon Valley, was the best place in the world for starting a company. If you can't tell me what one country is the best for entrepreneurs, can you explain what makes Silicon Valley so special?

Do you know what we call a failed entrepreneur? Experienced. In most foreign countries, that's crazy. But our comfort with failure is a big deal and it's pervasive. You don't appreciate how good our bankruptcy laws are in the United States until you go somewhere like Chile and find people in bankruptcy proceedings for a decade. Look at Russia. They might have smarter math people than we do. There's more venture money in Moscow than in San Francisco. But there's no stable system. So we have both a culture, we have stability.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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