Startup Guru Steve Blank Says It’s Time for E-Schools, Not B-Schools

3/9/11Follow @wroush

A few weeks ago I had very long lunch at Vitrine with Steve Blank, who’s famous in entrepreneurship circles as the originator of the “customer development” methodology for getting a technology startup off the ground. Here at Xconomy, we’ve been cross-posting Blank’s blog posts for a few months, but the lunch was my first chance to meet him in person, and we had a long, winding, enlightening conversation about Steve’s own history as an entrepreneur, the origins of the customer development framework, and his current thinking about the state of business training for entrepreneurs.

In short, the retired co-founder of E.piphany—who lives with his family in Pescadero, CA, about 45 minutes south of San Francisco—thinks that startups are unique animals that grow according to their own rules, and that those rules don’t have much to do with what MBA students learn at business school. He thinks it’s time for a new generation of “entrepreneurship schools” to spring up alongside traditional business schools, with their own unique curricula emphasizing things like customer development, agile software development, and business model generation. It’s a provocative argument, and while a few traditional business schools such as Babson College have been vigorously promoting their own degree programs as foundations for entrepreneurial careers, startups are so different from traditional corporations that Blank may well be right—it could be time for a total reboot of business education.

I recorded our conversation, and my plan is to publish parts of the transcript over the next couple of weeks. The recording is an hour and a quarter long altogether, and the text below represents only the first 15 minutes or so, which gives you an idea of how fast Blank talks and how many ideas he processes per minute. Before you dive in, it helps to know that Blank’s book, The Four Steps to the Epiphany, first came out in 2003, and that the eponymous four steps consist of customer discovery, customer validation, customer discovery, and company building. You can learn more about those steps from this Slideshare slide deck and from Eric Ries’ excellent summary of Blank’s book. Ries, who first met Blank as a student in Blank’s class at the Haas School of Business at Berkeley, is famous these days for his own “lean startup” methodology, which is often conjoined with the customer development inside Web 2.0 startups; in coming segments of this interview, Blank discusses Ries and his contributions in detail.

Xconomy: Clearly you could be doing many things with your time. Why put so much energy into helping entrepreneurs and promoting entrepreneurship?

Steve Blank: One of the things about me, first, is that my career was [built] on—in hindsight, and only in hindsight—intense curiosity. And ironically, intense curiosity about fields I had absolutely no competence in initially. If you look back at the startups I did—they were two semiconductor companies, a supercomputer company, a video game company, an enterprise software company, on and on—[with] each one of them, the way I learned to become a good entrepreneur was to become the customer. Meaning, it wasn’t just write a data sheet. You had to understand what they did. At the supercomputer company, our customers were essentially Cray’s customers. People doing computational fluid dynamics, computational chemistry, reservoir simulation. You had to actually know what they did on a daily basis, and for me, that meant being able to demo the code and the simulations.

I’m going to answer your question, but my career was one of waking up in the morning, driving down 101, to whatever the company was, and I can remember multiple times, saying “I can’t believe they pay me for this,” because if they knew how much I loved it, I should have been paying them. The only time in my entire career when I didn’t feel that way was when I was cratering Rocket Science. I couldn’t even go to work in the morning. And that was such an exception, it stands out in my twenty years.

X: That was Rocket Science Games, the video game company.

SB: Yes. I did two craters so deep they left their own iridium layer. Those were Rocket Science, where I was the CEO, and Ardent, where I was part of the founding team. At Rocket there was no one else, other than me, screwing that up. But in any case, that was the exception.

And so when I retired [in 1999], I retired because when Epiphany went public, I had more money than I had ever dreamed of. My parents were immigrants, and I grew up in a 600-square-foot apartment in New York City. And so this was way past what I had ever expected. And to be honest, I’m not confused about this—the bubble added probably two zeroes at least to Epiphany’s market value. It was a serious company with a valuable product, but probably would have had a fraction of the valuation [without the Internet bubble]. But I looked at my kids, and they were seven and eight at the time, and decided that I wanted to see them grow up.

By this time, I had watched a lot of guys who were my mentors and role models be world-class executives and scientists and engineers whose kids grew up to hate them. Since we had had kids late in our life, we had already set a set of rules about—in fact, it’s a blog post called “Epitaph for an Entrepreneur.” If you haven’t seen it, it’s one of the best-read ones. It had nothing to do with technology, but how a serial entrepreneur manages a family life and the rules we set.

So this was not just wordsmithing, it was the reason I decided to put the startup life down, because I kind of said, is my life just about other startup, or is there a life involved? I said, “I don’t need to do this, let me take a break.” Like everything, I threw myself into a couple of other passionate endeavors. Some of them take up a good bit of my time. Non profits. I’m also a public official in the State of California, on the Coastal Commission. And so I now have a diverse set of interests.

But my first job in Silicon Valley was as a training instructor, which got me into some other exciting places, but I loved to teach, so I got invited to be a guest speaker at Berkeley, and teaching reconnected with my initial passion.

Now at the same time I retired, as I was searching for what to do next, I took the family skiing like we had done a couple of times, in Tahoe, and while the girls and Alice, my wife, were out skiing, I decided it was a great time to write my memoirs. You know, “20 years as an executive, Steve’s brilliant whatever, and here’s the lessons I learned out of that.” I got 80 pages into it and I realized two fundamental things. One is, I’d have to pay my children to read this thing. Two is, 20 years and I never recognized it, but there was a pattern. These were not discrete and separate stories. I said “Oh my god, there is something going on here that I never even recognized.”

And I still remember sitting in that cabin watching it snow, and I’m going wait a minute…by that time, I’m on the advisory boards of a ton of companies. I’m on a couple of public company boards. My friends are now VCs as well as entrepreneurs. I went, “Oh my god, this is a pattern that goes on in other companies.” It wasn’t just me. The pattern was how startups failed and succeeded. I said, “World-class VCs must know this, but obviously I’m not reading the right books, because this must have been written about.” In the next year and a half I must have read every marketing and strategy and whatever book. And I realized that every book on strategy and execution was written about large companies. And in fact there was no body of literature about startups. Every writer was describing a startup as a small version of a large company. And the pattern I was recognizing was, “Uh oh, no they’re not.”

X: Are you dramatizing a little bit here? You’re in the cabin in the snow and this is the first time in your life you’ve wondered about whether there are some repeatable lessons to growing a startup, when you’ve already done five of them?

SB: Every entrepreneur—maybe not today, because I’ve poisoned the well here—says their startup is unique. I think in the ’70s and ’80s when I was doing startups, every one of them was unique. And VCs were these brilliant sources of wisdom. Not that they shared what the pattern recognition skills were, but they could predict in some form—”Oh, I’ve seen that problem before, that’s Heuristic Number Whatever.” But no one ever wrote that down.

And so I started writing. To make a long story short, what I managed to extract, easily, was the four steps. When I say easily, I mean a year or two. I must have read everything written about corporate strategy. My head was spinning. But what took another year and half was that the model only worked about a third of the time when you tried to apply it to companies. This notion of market type, which was another signal on top of it, was a little more obscure. Understanding the difference between executing in an existing market, where the customers are known, versus executing in what Clay Christiansen would call a disruptive market and what I would call a new market, even though the customers were known [is important]. Even though you’ve got four steps, how you do them and how much money you spend dramatically changes the nature of the company. And in fact, it explains the Internet bubble. People were spending money like they were in an existing market, when in fact the Internet, in almost all its forms, in 1999, was a new market. We had just proven that infinite cash could not accelerate adoption. We actually ran that experiment, without actually having the words. So customer development, I would say, had a three or four year gestation, as I was literally trying to create a pattern.

X: Were you trying to retroactively test the model on stories you knew about, or applying it to people you know who were in business at the time?

SB: Yes and yes. The first question was, does this explain any of those war stories that I had been through myself. Second was, does it explain any of the technology companies where I was a board advisor. Third was, I had some friends—Bill Davidow, Jon Feiber, Kathryn Gould at Foundation Capital, people who have been around since if not the beginning of VC at least the second generation of VC—who you could get to tell twenty or thirty years of war stories. I would say, “Bill, how do you know this?” and he’d say “Well, we’ve seen it a million times,” and I’d say, “Well have you guys written it down?” and they’d say, “Why would we do that?” Which was another observation. I think there should be a war crimes trial for VCs for lack of sharing of knowledge. When you push them, of course, they say “Well, that’s not our business.”

X: They’re holding on to their trade secrets.

SB: I’ve been making the argument—and now people are starting to believe it—that if we enrich the pool, then their trade secrets will move up the stack [to paraphrase Blank here: if venture partners shared their basic tricks more freely, they would go on to find more elaborate ways to offer value to entrepreneurs and investors]. That’s why I’m teaching these classes at Stanford and Berkeley, and they’re also finally catching on.

I’ve had a bigger insight, 10 years later, about what customer development actually was. I never would have described it this way until the last year, and it was only due to the work of Eric Ries—and I’ll skip that for a second, but I just want to give him immense credit. Eric’s observation as my student, and when I was on his board, was “Steve, customer development is great, but it needs to be paired with an agile development model for engineering. You can’t just assume that this works with waterfall, because you know that’s great but they’ll ignore you for a year and a half.” [Speaking very roughly, the "waterfall" software development model emphasizes a sequential process of defining requirements, designing, implementing, verifying, and maintaining. In agile software development, by contrast, requirements and solutions are defined iteratively in collaboration with users.] So now we have customer development and agile development. But really, what we’ve done is we’ve started to replicate an entrepreneurial management science stack of tools and techniques that parallel an MBA.

It’s a big idea. And the insight I’ve had in the last year or two—it might be wrong, but I think it’s right—is companies were around since the 1600s. The East India Company, whatever. But the first MBA in the United States was not until Harvard in 1908. So it wasn’t that companies were sitting around waiting for some university to codify management science. We had it anyway. But it wasn’t for a couple of hundred years that we took all that knowledge and said wait a minute, we could now teach executives a course stack—finance, strategy, accounting, management, et cetera.

I’ll contend that entrepreneurship in its modern form with venture capital has only been around for 40 years. And up until now we’ve kind of assumed that all the skills and science we needed was just like an MBA. And the observation I’m making is that customer development was the first piece of a new stack that’s education, management knowledge, that is completely different from an MBA. I’ll suggest: agile development, business model generation (Alexander Osterwalder‘s stuff), user-centric design, HR for small companies, finance and metrics. We could take that equivalent stack and say “What is it that we’re going to build not for a B-school but for an E-school.”

And so my prediction is, E-schools are emerging. And I’m doing everything I can now to be a catalyst, a Johnny Appleseed. And Eric is doing the same at incubators, venture firms, universities, et cetera, to [help people] recognize that this is not an MBA with different features, this is a unique stack, because of this second insight: Corporations execute a known business model. Startups search for a business model. Startups, when they find a business model, eventually become execution machines. But the search requires different skills. That’s the underlying distinction. (By the way, if you stay a startup forever in the search mode, you’re a failed startup. There’s no such thing as a 12-year-old startup. There’s a two-year-old startup and a 10-year-old failure.)

So a startup is, I have found, a temporary organization designed to search for a repeatable and scalable business model. Now we have a definition of a startup. So all the tools and techniques of customer development and agile development and business model design are all around that search.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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