Rethinking Entrepreneurship

The Emerging Entrepreneurship Paradigm in Action

On Monday I hosted the first international business model competition at Brigham Young University with Steve Blank and Alex Osterwalder as guest judges. This competition represents a flag on the mountain of how entrepreneurship is changing. The competition represents a 180 degree shift from a business plan competition (see more of what I have written at the official competition site on the blog) and a demonstration of the new management science of entrepreneurship in action. Below is the post I wrote after finishing the competition. You may also find my post about lessons learned in the process interesting as well.

As a preview, not only will we pivot to make the competition even better next year, our goal is to make this a truly international competition by partnering with leading institutions around the world to create a network of business model competitions. Please contact me if you are interested.

Lessons Learned at the First International Business Model Competition

The first BMC held Monday was a great success for many reasons. The student teams prepared amazing presentations of validated business models. The event brought together thought leaders like Steve Blank and Alex Osterwalder who added immense value and perspective to the competition. Most importantly, the business model competition clearly showed the world that a different approach than a business plan approach can succeed and produce fantastic results. Every one of the finalist teams got outside the building, tested their assumptions, and discovered surprises. For example, TextWaiter scraped below the surface of what appeared to be positive customer feedback to find that their real customers wanted something different, pivoting several times until they discovered a SAAS business model for restaurant-customer relationships. Kalood turned an interesting everyday problem into a solution that may turn the retail advertising business on its head. MealDrop showed the power of product pivots to solve the problem of queuing in cafeteria settings. And finally Gamegnat mastered the use of a business model canvas to discover an opportunity in gaming information portals.

These teams demonstrated how far we can come in a short time to a process where we rapidly test and validate a market with a real solution. The judges (Steve Blank, Alex Osterwalder, and myself) all agreed that the level of validation, actionable facts, and the resulting likelihood of success far exceed those we have seen in traditional business plan approaches. Specifically in a typical business plan competition, students often spend a great deal of time discussing the size of the market pain, highlighting that their product is a perfect solution, demonstrating they have made progress in building the product, and touting the financial projections and team to build the business. The problem is that these are all guesses or progress based on guesses. How often in a business plan presentation do you get evidence from customers that the pain is real? How often do you get the nitty gritty evidence for how a product satisfies the user? How frequently do you get to skip the rather artificial “team” slide and just hear where went wrong and the surprises the team discovered?

In contrast, the BMC we found students bringing real evidence of customer pain to the table: statements from customers, in-the-field tests with customers, even a live testimonial from a major retailer customer of Kalood! Furthermore, student teams took prototypes into the field and methodically tested them to discover the features needed to succeed. These students inevitably found that their original idea had been wrong and made multiple changes to land at a validated solution for the market. The results were inspiring and truly this represents a great moment in the shifting entrepreneurial paradigm.

Of course, despite all the progress, sometimes old habits die hard. The traditional business plan competition led some students to be confused about why one team placed higher than another. Let me say a few words about this. First, remember, the BMC was founded to reward the process of identifying your assumptions, testing those assumptions outside the building with your customers, and then acting on those validated facts (either by pivoting or moving forward). The goal is the validated learning about the facts, not a glossy story without the facts.

The higher placing teams did a better job of 1) robustly breaking down their assumptions (using Alex’s business model canvas really helped to identify and communicate these assumptions), 2) testing their assumptions robustly (for example, some students had a two-sided market problem and may have robustly tested one-side of the market but failed to test the other side), 3) tested the most critical assumptions (customer pain and solution) first and most robustly, 4) taking time to think through the assumptions that may be addressed in future tests but that are lower priority (for example validating revenue models).

At the same time, the teams were fabulous and the entire experience emphasized more than ever that the entrepreneurial paradigm really is changing. One investor attending the competition stated that “this is going to change how we invest.” More importantly, this will change how we think about being an entrepreneur. The business model competition represented a real leap forward for this message and a demonstration of how an e-school / Durant school approach differs from a b-school / Sloan approach.

In a previous post I argued that there is a paradigm shift occurring in entrepreneurship and it is coming from the grass roots up. Specifically, practicing entrepreneurs have begun to argue that the existing theories of management don’t apply well in settings where problems and solutions are unknown, like startups or other types of new ventures. Indeed, most academics see entrepreneurship as just a “context,” but as I hope to prove, entrepreneurial problems are more than a context—they require a new set of theories and practices like those espoused in Customer Development, Lean Startup, and, in my own work, Nail It then Scale It.

But what does a changing paradigm mean? What do we do? I argue that we need to change our practice, our teaching, and our theory. I know this is a bold claim and of course the baby doesn’t have to go out with the bathwater but there are some profound differences and changes that need to occur. What does the change look like and how does it happen?

Practice:

The transformation of practice has already begun to occur. As I mentioned, in Customer Development, Lean Startup, Business Model Generation, Nail It then Scale It, and similar perspectives are already transforming practice. For example, take a look under the covers at YCombinator or Tech Stars—you will see a similar method and that is the secret of their success, not the many factors people often point to.

Teaching:

I’m advocating, along with Steve Blank, a change in educational approaches to train a new breed of entrepreneurs, Durant entrepreneurs, who are imaginative, lean, flexible, and successful. Every business school in the world has an entrepreneurship program but I would argue it is based more or less to some degree on the Sloan management paradigm. I’m currently trying to restructure a major university’s entrepreneurship program to become a Durant School of Entrepreneurship. I’m also launching an international Business Model Competition to test these ideas. I’ll share more about this effort.

Theory:

I’m developing a theory article to show where our theories have gone amiss and a research project with Eric Ries, the Lean Startup Research Project, to test these ideas and provide some empirical evidence for the theory.

I’m open to your thoughts and feedback on how to push these ideas further.

In the previous post, I talked about the motivation for a new approach to entrepreneurship which Steve Blank and I are calling the Durant School of Entrepreneurship. In this post I provide some more insight into why the management training we have doesn’t work well in entrepreneurial firms or firms pursuing entrepreneurial activities.

From the Managerial to the Entrepreneurial Revolution

In the previous post, I argued that management training is largely focused on training managers for large firms, or what I called Sloan managers. The problem is that as business schools focused on training generations of Sloan managers, the training of the Durant entrepreneurs fell to the wayside. In many ways the focus on Sloan managers was defensible: rates of entrepreneurship fell steadily for almost a century and the sheer need for managers justified a focus on training Sloan managers for the managerial revolution (indeed the President of Harvard University noted that by 1900 half of all graduates were going into business). However, in the 1970s, a new wave of innovation, deregulation, and social mobility transformed the landscape and the rate of entrepreneurship began to rise. Later, rapid waves of innovation in information technology, biotechnology, communications, and clean technology as well as increasing industry disaggregation, open innovation, modularization, and standardization further accelerated both the number and impact of entrepreneurs. As economies began to be transformed by entrepreneurs, the rapid proliferation of entrepreneurship in business schools and national policy agendas demonstrated that an entrepreneurial revolution had begun to challenge the managerial revolution.

The Misfit Managerial Paradigm

But how was the growing body of entrepreneurs learning how to be entrepreneurs? As the need to educate entrepreneurs grew, increasingly business schools borrowed ideas from the management of large firms and applied them in a startup setting to fill the teaching and theoretical gap. Strategic planning in large firms was transposed into business plans in startups, corporate marketing was transformed into entrepreneurial marketing, and product development model subtly became the process for launching a business.

However, in the process of borrowing from existing management theories, most people overlooked a fundamental problem: startups aren’t just small versions of large companies. They are completely different entities. Large firms bring massive resources to bear on a known opportunity by divisionalizing work and exploiting opportunities through efficiency and optimization, in settings that are often well-known, stable, and comparatively low risk. In contrast, startups have minimal resources, and engage in an almost wild search for opportunity in settings that are often unknown, unstable, and high risk. A comparison between the character of a startup and a large firm might be analogous to comparing jet skis to oil tankers, caterpillars to butterflies, or children to adults. Although in the dark ages people believed children were simply little adults, today we recognize that treating children as adults is counterproductive. Unfortunately, by applying large company theories in startups we are doing just that and the proof of the misfit managerial paradigm is evident in the radically high failure rates of startups, the lack of correlation between business plans and success, and even in the struggles of large firms to repeatedly innovate.

A New Entrepreneurial Paradigm: Durant School of Entrepreneurship

Despite the value that Sloan managers add to society, the world needs the brash innovativeness of Durant entrepreneurs to create the next wave of innovation. But the tools, tactics, and training to be a Durant entrepreneur are very different from those taught in business schools. In the dissonance between management-based entrepreneurship and what successful serial entrepreneurs actually do, a new paradigm has begun emerge among entrepreneurs, seed accelerators, and a handful of universities, which we call the Durant School of Entrepreneurship (DSE). In contrast to traditional entrepreneurship education which begins with a business plan, the Durant School of Entrepreneurship begins with a focus on creativity and innovation, multiple rapid prototypes to validate assumptions, and inexpensive techniques to reach customers rapidly. It takes as its mantra the goal to fail fast and change when needed in an effort to find the right opportunity. At the end, entrepreneurs don’t emerge with a business plan, but instead emerge with a repeatable business model. An example of how the new paradigm differs from the existing paradigm is the customer development model, which demonstrates how traditional ideas about how to start a business need to be radically reformed by testing product hypotheses early with customers (see customer development sidebar).

What Does the DSE Mean for Entrepreneurs as well as Managers?

                This emerging paradigm suggests an urgent need to rethink how entrepreneurs are trained. The next generation of Durant entrepreneurs needs “e-schools” not b-schools, which means that either business schools will have to adapt or a new generation of e-schools will need to be created. But this new entrepreneurial paradigm also has profound implications for managers at large firms. For generations, managers have wrestled with how to be more innovative. But part of the answer lies in entrepreneurial management and in many cases, applying the tactics of the new entrepreneurial school to new opportunities. So for example, managers in large firms may think about exploring new market opportunities using a lean startup approach or replacing a strategic plan with a customer development process. Whatever the case, developing the new entrepreneurial paradigm is a crucial priority in transforming startups, existing businesses, and the economies in which they reside.

In the next few posts I intend to highlight how this new entrepreneurial management differs from traditional management, the emerging research that provides an alternative, and the curriculum as well as methodology for the Durant School of Entrepreneurship (DSE).

Steve Blank has been talking about the Durant School of Entrepreneurship and how entrepreneurship education needs to change. I’m helping him to push these ideas forward and will be posting frequently about this radical paradigm shift occurring in entrepreneurship. But what is the Durant School of Entrepreneurship (DSE)? I suggest you take a look at Steve’s posts on Billy Durant and on entrepreneurial finishing school but here is the basic idea.

Durant versus Sloan

Alfred Sloan is best known as the executive who transformed General Motors into the model business of its era. His steady management approach and insights regarding decentralized management have influenced generations of managers. But few people have heard about Billy Durant, the imaginative entrepreneur who made millions in buggy manufacturing before founding General Motors.   It was Billy Durant who creatively developed new lines of cars until his wild entrepreneurial style led the board to kick him out of the company. But that didn’t stop Durant. Instead he founded Chevrolet and used the Chevrolet line to reacquire the majority share and control of General Motors again. Unfortunately, always the talented entrepreneur but not quite the capable manager, the board kicked Durant out for a second time, handing the reigns to Sloan. GM was already worth $3.6B in today’s dollars when Durant left, but Sloan, in contrast to Durant, was an exacting manager who by managing for efficiency transformed the business into one of the largest, most successful corporations in history. Due to his success managing the large corporate empire, Sloan became known as the father of the modern corporation while Durant died virtually unknown, managing a bowling alley in Flint, Michigan.

Business Schools and Management Training

Although a tragic tale, the Durant versus Sloan provides insight into the problematic source of many of our ideas about entrepreneurship.  Business schools and management as a discipline didn’t exist before the industrial revolution, when most businesses were small, entrepreneur-owned enterprises. But the invention of new technologies in the industrial revolution rapidly transformed the scale of business, leading to the vast firms of the industrial revolution, which were followed by the regulated giants of the post-depression era, and then by the global conglomerates of the post-war era. These massive firms required an army of managers to operate and to fill their ranks business schools were founded to train a generation of “Sloan” managers—individuals who could coordinate massive enterprises with efficiency and accuracy. The theory and techniques for such education came from the theory of large firms. Strategic planning became business models, product development became the process to build a business, and financial budgeting became financial projections for a startup.

Startups are Radically Different

The problem is that startups are radically different from large firms. Kind of like a child needs different things than an adult, a startup, because it is dealing with high risk, high uncertainty, high change, low knowledge and low resources (contrast this with a large firm which is different in every way) requires different techniques, practices, and theory than what is appropriate for a large firm. Startups and the entrepreneurs in them need a different kind of school to teach these techniques, a school to produce Durant entrepreneurs: The Durant School of Entrepreneurship.

I’ll be writing much more about how our current ideas don’t fit well in entrepreneurial settings, how our ideas are changing and the DSE.