Even Virgin pivoted its business model

Early stage entrepreneurs are not the only ones practicing the art of pivoting business models to find more lucrative opportunities. I've previously posted about the necessity for a business to change (or 'pivot') its business model until it has a business that might be somewhat lucrative. Yet, this is not a practice that is just for startups.

Richard Branson, founder of Virgin, has moved through more businesses than most can imagine. In more recent decades, these have largely been partnerships for the purposes of moving into new markets: Virgin invests the brand, and another partner brings some expertise and money. In the early years, the strategy was more centered around finding the bigger opportunity that naturally flowed from a smaller opportunity that Virgin was already doing business in.

Branson started first publishing a student newspaper in London, UK. Through the paper, Branson realized that he could sell mail-order music across the UK. Pretty soon, Virgin was selling mail-order music through a number of different newspapers and publications. It was a good business that only got better when a disaster stuck -- a three month postal strike in 1971. This led Branson to open a shop on Oxford Street as the only way of continuing to sell records. Branson redefined music retailing. Until then, music stores had been much like libraries: serious and dull. At Virgin's record stores, consumers could lounge on couches and listen to music through in-store music systems with headphones. Virgin's record stores quickly expanded across the country.

Branson's next move - the next pivot - was simple and insightful. He looked that the records that he was selling in the stores and realized that his cut from the price of the goods sold was small compared to what others in the value chain were getting. On this basis, he decided to open a music studio that bands could use to record music. Again, he differentiated the studio. Called The Manor, it was a mansion in the countryside, rather than a closet in a city block. Bands could spend weeks there, refining and recording their music.

Watching artists come and go through the countryside mansion, it was here that Branson's team spotted Mike Oakfield, a backing artist whose own records had been rejected by every record company in the UK. Virgin released Tubular Bells, the success of which rocketed Virgin into position from which it first could become a global music icon, and then a global brand.

The story of how Virgin moved from selling music mail-order through newspapers to signing big-star artists such as Janet Jackson is a familiar story of how entrepreneurs pivot business models.

An insightful poem about stress

A definition, friends, of stress:
Your own reaction to a mess
Stresses may be large or small
Sometimes they're not perceived at all
Examples: Say a lack of cash;
A just-avoided freeway crash;
An allergen that's in the air;
The barber says you're losing hair;
Fifty on a spavined horse;
Attorney's letter re divorce;
Wetness, dryness, heat or cold;
Callow youth or getting old
Stress from pains to pleasures range
The common element is change
Adapt or die, and that's a fact
And so our bodies must react:
The heart speeds up, the gut slows down
Facial muscles snarl or frown
Bronchial tubes expand and then
The blood absorbs more oxygen
Widened pupils search the void
Adrenal glands secrete steroid
Serum glucose starts to climb
More insulin works overtime
Stressed physically or mentally
Muscles tense to fight or flee
The midbrain boils with rage and fear
While cortex plans to save your rear
The point is, stress is not unique
It doesn't mean you're dumb or weak
A part of mankind's constitution
Bequeathed to us by evolution
Common both to man and beast
It proves you're still alive, at least.

By William Goldsmith, MD. in Permanente Journal, Fall 2001

A month later, a bank account is opened

A month ago, I was struggling to get a company bank account opened. To do so required completing a paper work trail that makes a grown man almost want to cry. To open a company bank account, an Illinois tax number is necessary for the business. This in turn requires a Federal Employer Identification Number (FEIN), with requires the person applying to have a Taxpayer Identification Number or Social Security Number. A Taxpayer Identification Number could take 12 weeks, I was told!

Company bank account
Illinois Tax number
Federal Employer Identification Number (FEIN)
Taxpayer Identification Number or Social Security Number

Perhaps because the IRS wants to collect taxes first and foremost, I've been able to short-circuit some of the process. A phone call to this government agency revealed that perhaps I did not need Taxpayer Identification Number or Social Security Number to get an FEIN. "We'll just mark that field as foreigner," they said. It's a shame you can't do that in the online application. By the end of the call I had a FEIN.

A similar story unfolded with the Illinois Department of Revenue, "If you come by one of our offices, we can sort this out". At their W Randolph St office in central Chicago, an office that looked more like a mall than anything else, their looked through the paperwork. "This is the simplest kind of business possible," said the man behind the desk. "Don't tell the competitors," I replied. Given that I don't sell goods, I don't have to pay sales tax - so it transpires I don't need an Illinois Tax number.

Yesterday, the bank swiftly went through the documents I had accumulated and opened the bank account.

A product for everyone?

It is perhaps a sign of my own business naiveness that, before business school, I thought the goal of any business should be to gain as many customers as possible. Why not try and convert as many people as possible into one of your customers? Isn't that the essence of marketing and sales -- to create as many customers as possible?

As I learned in Prof Grayson's MKTG430 Marketing Management class, sometimes it is better to target a small number of people in a market, creating a more valuable product that this small segment is willing to pay a larger premium for. Revenue is, after all, price x units sold. It is easy to get caught up with trying to figure out how to maximize units sold, when perhaps instead we could be trying to figure out how to increase price. What would you have to add or do differently to compel customers to want to pay higher a price?

Some inspirational quotes

Sometimes you just need some inspiration. Here are some of mine.

"Skill to do comes of doing." - Ralph Waldo Emerson

"Ninety percent of all those who fail are not actually defeated.
They simply quit." - Paul J. Meyer

"We are what we repeatedly do.
Excellence, then, is not an act, but a habit." - Aristotle

Technology transfer to developing countries. An entrepreneurial opportunity?

Rich and poor share many similar problems, particularly in areas such as disease control, energy, agriculture, water and the environment. Yet many technological advances that help the rich struggle to reach the poor. An example of this is the availability of antiretroviral drugs (ARVs) for the treatment of HIV/AIDS.

As Avert discusses, the first antiretroviral drug, HAART, became available in 1996 and reduced death rates for people with HIV/AIDS in developed countries by 84% within 4 year. However, at a price level of US$10,000-15,000 per person per year, it was far too expensive to reach many HIV infected people in the poorest countries. Only in 2000, when an Indian generic drug manufacturer, Cipla, introduced generic ARVs, did prices drive down to $295 per person per year. This was only possible because Indian companies did not have to abide by TRIPS legislation, intellectual property law affecting all members of the WTO.

HIV/AIDS treatments is just one example of how advances available to the rich struggle to reach the poor. Efforts such as the Global Health Initiative (GHI) at Northwestern attempt to narrow the gap. Through GHI, medical device companies partner donate intellectual property that Northwestern uses to develop products that could be viable for distribution in developing countries. Nevertheless, there is room for further innovate approaches in this space.

Reflecting on my business school plan (and what really happened)

Yesterday I posted a graphic describing my experience to date in starting a company at business school. I use a version of that graphic in investor pitches and other places where I have to explain "the story so far". In reality, while it tells a great story, it is hugely simplified. Things have changed a lot over the past 18 months. The version of the graphic I'm posting today, while still simplified comparative to reality, gives a better glimpse of how things have developed.

Reflecting on my business school plan (and what I tell people happened)

I've been revisiting some of my ealier posts -- including "the business school plan", versions one and two. These two posts describe what I intended to accomplish while at business school.

How do they compare to what has actually happened to date? Well, the chart below describes the story I portray in business plans and other places where I have to present the business. Tomorrow, I'll describe some of what actually happened.

How did Bill Gates win resources as an entrepreneur?

So if entrepreneurship is the pursuit of opportunity beyond the resources you currently control, with an emphasis on winning resources for your project -- who do you actually go about winning these resources?

A fictitious Bill Gates cartoon I posted last year offers some clues. If you can win tentative support from one party, it might be enough to win more than tentative support elsewhere. Pretty soon, everyone is less tentative and more supportive. However, another Bill Gates story, one that is less fictitious, offers perhaps a more interesting lesson in winning resources.

Bill Gates' mother, Mary Gates, sat on the board of directors of United Way, a charity in the Seattle King County area. Also sat on this board was John Akers, a senior IBM executive who would eventually become IBM's CEO. At the time, IBM only partnered with large companies. It is said that Mary Gates and John Akers had a discussion about IBM partnering with smaller computer firms that were emerging at the time. Several weeks later, IBM was enquired with Microsoft about buying an operating system from them for use in IBM's personal computers. Microsoft furnished them with MS-DOS, IBM personal computers went mainstream, and the rest is history.

What is the lesson from this story? Perhaps another way to win resources is ally yourself with powerful brokers (connectors) who can introduce you to the resources you need. In Bill Gates' case, it was his mother.

How macro-level changes create startup opportunities

At last year's Excelerate Lab's demo day, Jeff Hoffman, the founder of Priceline.com, explained how he brainstormed new ideas. He said he would look at newspapers, and all kinds of other sources, every day -- looking for changes in laws, technology and trends that might open up for a new way to solve an existing problem. In this way, he noticed that technology now allowed consumers to name their own price. This would never have been possible previously - say in the 1980s. It would have been infeasible for an airline to ask every consumer to name their price and pick the ones it wanted to serve. Since then, technology has progressed and changed the rules.

Macro-level changes, such as changes in technology, are sometimes so subtle and come about so slowly, it's hard to appreciate how much the world really has changed. We only have to look at this cool little video from 1983 to realize how stark the difference is between the world as it was then and as it is now. What products and services are still stuck in that era, waiting for for a startup to reinvent it knowing what we now do about the world?

Why I keep a copy of my classmates' resumes on my desktop.

I've previously hailed the value of having a few good mentors. Back then, I thought having mentors was about people giving you a helping hand, helping move your venture along. I have since realized that there is yet another purpose for having mentors -- having people who can help you make fewer mistakes, and ultimately better decisions.

Inevitably, coming at a problem with only my own perspectives and experience, I sometimes miss things. I make assumptions about how things work, or what is reasonable. For example, I once thought that I needed to hire a sales guy to generate some sales. Following conversations with various people, I realized I need not do so fast. I first needed to develop and prove a sales model. With that in place, it is reasonable to hire a sales person to execute on it.

These types of mentors -- the ones who help you make less mistakes -- come in many forms. Some are peer students who've happened to have gone through it all before. With a student body as diverse as the one we have, someone likely has gone through it before. To find such people, I keep a copy of all my classmates' resumes on desktop. It's incredibly useful.

Other mentors include alumni. The Kellogg Venture Community is an exciting and experienced group of alumni. When speaking to them, even though some are only three or four years out, it is apparent that they have an order of magnitude more insight and experience that the full time students. Finally professors too, as I had mentioned in my original post, have provided feedback good. It was a professor who first suggested that I needed to speak to 30 alumni to understand my target customer. He was right when he said, "by the time you speak to the 20th person, you'll know what they're going to say before they say it".

Building consumer facing products and services is hard

I think it is hard to build a brand new consumer facing product or service. Why? Because that product or service has to strike a chord with not just a handful of people, but the masses.

To strike a chord with the masses, it really requires
  • A deep understanding of the target customer, and belief that the insights you have about the customer apply to the larger population, but that these insights have not been noticed yet by others.
  • A shared vision among everyone that is working on it. This is despite the product being so new that what you are building is intangible and could be interpreted numerous ways by numerous people.
  • A product that satisfies consumers' needs in ways they might not have anticipated, and which is currently not done so by other offerings.
  • A world class team that can develop each aspect of the product or service to the highest possible standard for the consumer experience sought.
  • Technology, and other supply components, that are mature enough to provide the quality that is necessary for the product to be successful.

A consumer facing product that does all this, and more, is of course the iPad.

About $1 trillion is spent every year on this critical marketing investment.

One out of every nine people who are fully employed in the United States is a salesperson. About $1 trillion is spent every year on this critical marketing investment. Salespeople have been known to out-earn their managers and even the CEO. Why? Because they drive the top line. Every senior management team must deliver its revenue and profit numbers. The team looks to its sales forces to help it achieve this objective.
It looks like Kellogg is at last reintroducing a bona-fide sales management course. The above quote is from the course description for MKTG463 Sales Force Management, offered in Spring Quarter. Kellogg counts Andris Zoltners among its faculty, whose Executive Education program has wowed enough people for it to have been mentioned to me when I was at the MIT Sales Conference last year. Professor Zoltners founded ZS Associates. It appears that Dr Isaac, who is teaching MKTG463, is freshly out of ZS. Hopefully some of Prof Zoltners' magic rubs off on Dr Isaac.

How do you know you have the right business model?

The Steve Blank model for developing a business is centered around "pivoting" (i.e. evolving) the company's business model until you hit the right one. When you reach that magic moment, you can focus on scaling the business model. But how do you know when you've hit that moment? How do you know if you've got a good business concept, or whether you need to keep adapting it? These have been some of the questions that have been running through my head.

I stumbled across one possible answer to these questions on Will Price's blog. Lars Leckie, guest posting on Will's blog, gives a formula that Josh James (CEO of Omniture) uses for calculating the "Magic Number". The Magic Number helps you determine the effectiveness of your sales/marketing spend and your likely quarter on quarter growth.
QRev[X] = Quarterly Recurring Revenue for period X
QRev[X-1] = Quarterly Recurring Revenue for the period preceding X
ExpSM[X-1] = Total Sales and Marketing Expense for the period preceding X
Magic Number = (QRev[X] – Qrev[X-1])*4/ExpSM[X-1]
The key, of course, is in interpreting the number:
Fundamentally, the key insight is that if you are below 0.75 then step back and look at your business, if you are above 0.75 then start pouring on the gas for growth because your business is primed to leverage spend into growth. If you are anywhere above 1.5 call me immediately.
PreScouter, the business that I'm working on, is a long way from having quarter-on-quarter financial data. However, as we think about modelling how the scaled up business could work, the Magic Number provides some guidance as to whether we even have the right business model to begin with.

Do fledgling startups need cash?

During Winter 2010, I managed to win a small amount of seed funding for my startup project - several thousands of dollars. It was a major milestone. A huge weight lifted off my shoulders. But then I had a problem: what was I going to spend this money on?

As I made the shopping list, I realized that all the things that I was trying to get for free, I was now thinking of spending money on. I realized that when you have cash for a startup, all you are ever doing is converting cash into other goods or services, such as a web developer to work on your project or a PC to host your website. If you can get to the goods and services you need without spending money, it's even better: you don't have to give away equity, or worry about the tax man.

So what is the best use of money? Ultimately what you do have to pay for is the living expenses (rent, food etc) of anyone working full-time on your project who has no other source of income. In my opinion, you only start doing this when you have enough of a tangible concept that it merits having people working on it full time.

As I approach the end of my time at Kellogg, I am again looking at raising money - a far larger amount than previously. This time it's to pay for the living expenses of a few people who will work on the company full time with the purpose of scaling it up. I think the concept is tangible enough. Hopefully investors will agree.

The trend in startups that enable sharing and swapping

For those of you with 17 minutes, Rachel Botsman explains how technology is allowing for the emergence of businesses that allow people to share the things they own in more and more efficient ways.

Differences in framing lead to differences in performance

Fraction of games won versus difference in score at half-time.
"[N.C.A.A. basketball] teams that are behind by one point at halftime are actually more likely to win than teams that are one point ahead," writes Justin Wolfers on the Freakonomics blog. He continues, "Notice what happens when we contrast teams that are one point behind at halftime with teams that are one point ahead: the chances of winning suddenly fall by 2.4 percentage points, instead of rising by 8 percentage points: Losing can lead to winning because of the strong motivating effects of being close to your goal."

This case of the basketball teams, which we covered in our MORS430 class, is just one illustration of framing and the dramatic differences a frame can have on human performance. Being tangibly close to achieving a goal drives greater performance than being ahead or significantly behind.

The greater insight is that to really win, you have to get ahead. Once you are ahead, you need to maintain as much motivation and performance as when you are slightly behind, though the urge might be to relax a little. In this respect, rather than comparing your performance to others -- to who you are a few points ahead of or behind -- it is perhaps better to set your own standard and compare your performance to that.

The pursuit of opportunity beyond the resources you currently control

There are many definitions of entrepreneurship. For example, Wikipedia defines it as:
"one who undertakes innovations, finance and business acumen in an effort to transform innovations into economic goods"
whereas Merriam-Webster defines it as:
one who organizes, manages, and assumes the risks of a business or enterprise
The one that resonates most with me is the one coined by HBS professor Howard H. Stevenson:
The pursuit of opportunity beyond the resources you currently control.
So why do I like this definition? Because it rings more true of my experience than any of the other definitions. It does so in the following ways:
  • It actually is a pursuit. You have to wake up every day and make things happen. It doesn't happen to you by chance. If you're a one-man-band, sometimes this can be difficult -- but you have to persist and keep moving things along.
  • Of course, there is opportunity -- something you've spotted that you think has not been taken advantage of. It's an opportunity you think will change the world, or at least your bank balance.
  • As may be apparent from other posts, I like the resource-centric perspective of how businesses are organized. Any business is a configuration of resources.
  • The key part, however, is the phrase "beyond the resources you currently control". Everything you are trying to do is through leveraging resources that you don't own. If you had complete control to everything you needed, it would be easy. Since you do not, I believe the real skill in entrepreneurship is in figuring out ways to access and use other peoples' resources -- other peoples' time, money, relationships or whatever else you may need to build your business.
This is just my perspective. You may better enjoy Stevenson's far more formal explanation to this definition of entrepreneurship:
The first attribute is pursuit of opportunity. Strategic orientation is driven either by identifying new opportunities or by the resources you currently control. The second is quick commitment—getting there fast versus developing a yearlong strategic plan. The third is a multistaged commitment process, which is best described as the difference between a fighter bomber and a ballistic missile. The fighter bomber can take evasive action, choose its targets of opportunity, and sometimes just cut and run when the odds are overwhelming. The ballistic missile is carefully aimed to arrive on target; it's going to follow that course even with a Scud missile approaching. The fourth attribute, the use of others' resources, contrasts with the idea that you ought to own or employ everything you need. For example, good entrepreneurial firms often hire the most specialized talent on a temporary basis. The fifth, managing through networked relationships, contrasts with the old paradigm that "management is what you do to the people who work for you." The final attribute is rewards based on value created rather than position in a hierarchy.

Why would anyone pay for news content? Here is why they might.

Will consumers actually pay for digital content? This still seems to be a question that lingers in many people's minds, particularly in the journalism world. The idea of paying for news content has been scoffed at from the Nieman Lab to Fast Company and beyond.

Back in 2003, Apple launched an online music service that charged 99 cents a song. Rational thinkers were perplexed -- why would anyone pay for online music when it's available for free through file sharing services such as Kazza? CNN put the point directly to Steve Jobs, "it's like a lot of things on the Net, Steve, in the sense that when people are accustomed to getting it for free, will they make the move and pay for it".

Although it did not seem so at the time, in hindsight Jobs' response was compelling:
JOBS: Well, let me give you an observation that's really interesting. If you go to Kazaa and you try to find a song, you don't find a single song. You find 50 versions of that song, and you have to pick which one to try to download, and usually it's not a very good connection. You have to try another one, and by the time you finally get a clean version of the song you want, it takes about 15 minutes. If you do the math, that means that you're spending an hour to download four songs that you could buy for under $4 from Apple, which means you're working for under minimum wage.
Jobs' insight is not that people would pay for the content. His insight was that people would pay for the convenience. This, and not the content, is what Apple is actually selling to consumers.

What part of the online news experience will people pay for? What is causing people to "work" for under minimum wage? What problem can an online news outlet solve for its consumers?

Applications, applications, applications...

I have now written sixteen different applications or proposals of some sort relating to the business that I am working on. They span the period of almost a year, from February 2010 to just this past week. Looking back at them a few patterns emerge.

Most of the proposals are to request money. A few have been to report back to parties that have given me money. One or two were just for PR purposes, such as the first "proposal" I came up with -- a pitch I gave to Kellogg Startup Lab in February 2010.

In hindsight, I can now see that my earlier proposals were quite poor. They seemed clever at the time. Now, without those rose-tinted glasses, I see that I overestimated and I was overconfident. In my more recent proposals, the ideas have evolved. It may be that the proposals are still be poor. I may still be overestimating and overconfident.

In more recent proposals there is, however, a crucial difference I can take pride in: I can now say, "We tried this out with X people, and we got Y. We now want some money to take it to more X people to get more Y". As simple a sentence as this is, it accounts of not just hours or work or even tens of hours of work, but hundreds of hours of work. Hopefully this is not lost among all the other visionary verbage these proposals call for.

Commercializing university technologies. An entrepreneurial opportunity?

"This is a big problem. I'm glad there is someone from Kellogg working on this." For an entrepreneur looking for an opportunity, a response such as this from a potential customer just warms the heart. So what is this "big problem" that I'm working on through the startup?

US government funded research programs have played a key role in many technological advances, such as nuclear energy and even Lyrica, the Northwestern University developed drug contributing over $200M in annual licensing revenue to the university. Nevertheless, total income generated by all US universities through licensing research is a mere $2.4Bn a year, despite almost $50Bn a year in investment by the US government. Innovations developed in academia struggle to reach the market.

Through a Kellogg marketing research class, we interviewed 36 practitioners in industry about their experiences with technology transfer. A central theme emerged: While the "blue sky" nature of university research means it has the potential to create large scale impact, companies have difficulty in determining how university technologies can be commercialized into tangible products and services. The mechanics that make Lyrica effective for neuropathic pain, for example, were only determined accidentally during industrial development.

For companies, the royalties and upfront fees that universities demand is unreasonable for the investment they must make to find a market for unproven technologies. The price is too high. Yet, particularly in times of recession, such as the current time, universities are an untapped source of new product innovations.

University startups can work from unique resources

In MGMT431 Business Strategy, we learned that Enterprise, the car rental company, hires "from the half of the college class that makes the upper half possible". Continues Donald L. Ross, the company's chief operating office, "We want athletes, fraternity types--especially fraternity presidents and social directors. People people." From these hiring practices Enterprise has developed a resource that gives them competitive advantage. While other firms employ unionized workers, Enterprise has cultivated workers willing to work long hours for appropriate incentives and even take less pay for the work input they put in.

As I have previously noted, starting a company out while at University produces has the potential to help a business develop unique approaches that are not as easily accessible to other firms. In the case of PreScouter, I see this starting to materialize. We are looking at Phd students as a potential source of specialist expertise that can contribute to the work that we do for our clients. Since we are based at a university, coming up with this solution was relatively straightforward. If we were based elsewhere, this would perhaps not have been as obvious a solution, and we may have taken a different route.

The questions that usually follow from the resources you start with are of the capabilities and competitive advantages these resources give you. We still have to determine what Phd students mean from these perspectives, but we may find out over the coming months.

Simple moments can sometimes change everything

I've found it interesting that we can wander through life and not realize the life-changing moments that can pass us by. At Kellogg we have to bid on classes. I was on the wait-list for a very expensive class, in terms of the number of points that was bid on the class. There was a rumor that the professor was going to expand the class and let everyone in. I turned up to the first class and it the room was packed out. I figured there was not much chance I would get in. I turned around and decided to go to another class for which I was higher on the waitlist. On my way there, I walked past the professor for the expensive class -- he greeted me with a 'hello'. I stopped to think, "Hmm... Maybe I should have stuck around in that class? Maybe I could have got in? Maybe we'd have ended up best friends and he'd give me a million bucks?" After a little thought, I decided not to head back to the overpacked classroom where with the expensive professor. Was this a mistake? Had I just made the wrong life changing decision?

Another simple moment came about last quarter was when a class project team I was working with asked, "are we doing market research or are we doing sales?" The team I was on for the MKTG450 Marketing Research class last quarter graciously agreed to work on my startup as the class project. However, there was still some uncertainty about whether we should throw in a final question to the interviews we were planning to do with the participants. The question was, "would you be interested in doing a (paid) trial". At the time we weren't even sure whether, at that stage, we had a valuable product. In hindsight, the question turned out to be quite important - generating some leads for developing the business. On another day I might not have been enthused and not been as insistent that we include the question. On that day, I did and the team was (fortunately) happy to do so.

It transpires the "expensive professor" did not let anyone on the waitlist into the class. It was not such a life changing moment after all. Perhaps more obviously, he probably wouldn't have given me a million bucks either. If only we could figure out a way to determine which moments are life-changing and which are not.

Why I choose B2B over B2C for my startup

A broken prototype of a community news site, my initial shot at a startup while at Kellogg.
When I first arrived at Kellogg, I had an idea for a business -- a community driven news site. The idea was that people in local communities would write news for each other. For example, there are already a number of bloggers at the Kellogg School. Why not aggregate their content? Beyond those who blog, why not allow contributions directly on the community news site from anyone in this community (verified with their email address, for example). I was so excited by the idea, I even got a prototype together, which is limping along to this day.

I had some ideas about how to make money. In hindsight, these ideas were all just fantasy, because I had not even got the opinion of the stakeholders these ideas relied on. My ideas included charing everyone: advertisers who wanted to target the Kellogg community, writers who wanted to promote their work into more prominent positions on the site and even charging readers, who might be offered extra "premium" content. As my first quarter at Kellogg came to close, reality hit me.

If I was really going to create revenue - enough to create a sustainable business - I would need lots and lots of users - whether they be advertisers, writers or readers. I would also need all these users to pay money. But how much would they really pay? $5 once a year? Except perhaps a few advertisers, I had a hard time imagining users imparting as much as even $500 on an annual basis. If I was really going to create revenue, I need a business where the users - the customers - are willing to pay a lot of money, and I also not need many of them to generate a decent level of revenue.

During my second quarter at Kellogg, I started looking at B2B businesses. I realized that in B2B environments, though making a single sale might be more difficult, many of these single sales could lead to a reasonable level of revenue in a reasonable period of time. B2C is sexier - you're building businesses with consumer facing brand recognition. Who doesn't want to be building a brand such as Google? For my purposes, though, I just need a business with a reasonable chance of creating a reasonable level of revenue.

What would I have done differently?

If I were to start my new venture journey over from scratch, what would I do differently? First, I think I would look to work with other people's problem (and the respective solution they are working on), rather than look for my own problem and solution. There is enough work involved in building a business without having to "own" the problem-solution. Secondly, I think I would actively partner more to develop the business. Nevertheless, I have no regrets about where things are at the moment with the business that I have developed. I just think that these steps - in hindsight - would have helped moved things along faster.

I think coming up with your own problem-solution means you need a really good feedback system (of other people) to tell you what is good and bad about your business proposition. Mine was probably reasonable, but I can be stubborn and only really have taken the advice of prospective customers when deciding when things do and don't work. I think people look at their own problem-solution's with rose tinted glasses. It makes it more difficult to properly assess the proposition. I also think that there are many, many people with their own problem-solutions -- there never seems to be a shortage of people with ideas. To look at what they are doing and carefully evaluate may, I think, mean needing to pivot the business model less often.

Working on someone else's problem-solution also brings the advantage of having someone you can partner with and have carry some of the work load. My approach has been to work largely on my own while getting lots of help from various student teams from different classes. This has worked well, but I wonder if a stable core team would help things work even better. At a university, there are many researchers working on so many problem-solutions. These researchers actually bring substantially different skills to business to what an MBA will. They also bring the possibility of IP protection for the solution they have developed.

I have no regrets about where I am at the moment with the business that I have been developing. However, the next time I start a business, I will experiment with these two ideas.

Pivoting a business model to learn from failure

"Lean startups", particularly the type with origins in Silicon Valley, have already learned the lesson from my previous post -- the lesson that that failure is valuable. In fact, I would dare to even say that it has been taken to an extreme by the lean startup world, which consists mostly of software businesses.

With software businesses, particularly internet-based software businesses, it is easy to fail fast. This is optimized by the idea of "pivoting" a business model, as Steve Blank describes it. Starting with an initial hypothesis of what the business model is, the startup team builds a simple version of a product and gets "outside of the building" to test it against real customers in the real world.

I've been following Blank's model somewhat, and the business model has already pivoted once. It was quite painful at the time, because it meant resetting expectations with stakeholders and answering lots of "what's wrong with what we're currently doing" questions. Over the coming quarter we need to look again at what we currently have and figure out if it is really working, or whether we need to learn more from failure. "Pivoting" is such a nicer way to describe it.

Blank points to a great example of how Xobni pivoted five times:

Thinking of building a better mousetrap? Look First to Failure.

Henry Petroski is a professor at Duke University, specializing in failure analysis. He makes a particularly interesting assertion: Things work because they work in a particular configuration, at a particular scale, and in a particular culture. Without due consideration for all these dynamics, things simply just fail.

The MKTG465 Introduction of New Products and Services course, taught by Professor Razeghi, starts with a fun little reading by Petroski, "Look First to Failure". I like this excerpt from this article:
John Roebling, master of the suspension bridge form, looked for inspiration not to successful examples of the state of the art but to historical failures. From those he distilled the features and forces that are the enemies of bridges and designed his own to avoid those features and resist those forces. Such failure-based thinking gave us the Brooklyn Bridge, with its signature diagonal cables, which Roebling included to steady the structure in winds he knew from past example could be its undoing.
But when some bridge builders in the 1930s followed effective models, including Roebling’s, they ended up with the Tacoma Narrows Bridge, the third-longest suspension bridge in the world and the largest ever to collapse in the wind. In the process of “improving” on Roebling’s design, the very cables that he included to obviate failure were left out in the interests of economy and aesthetics.
When a complex system succeeds, that success masks its proximity to failure.
This gives us food for thought, as we think about building that "better mousetrap" -- that better way of solving whatever customer pain we are striving to resolve with our new products and services.

The value of schooling

I've noticed that the first time that I do anything, it takes a little longer. There is anxiety, uncertainty and doubt. Will I do this the right way? Will I be successful? What will happen? Because of all this fear and uncertainty, sometimes it's easier to revert to old behaviors, procrastinate and just simply delay the activity.

The value of business school, or any kind of schooling, is perhaps that it throws you into practicing skills that you might not otherwise think about delving into. We might not leave school as supreme experts in a particular area, but we know a enough about a variety of areas that we can choose to develop those skills further if we wanted to.

In an early stage startup environment, I think you need to be - and need to have - people who are a "jack of all trades". People who have already done something once to have gone through the procrastination and uncertainty in enough different areas be able to work quicker when working on the startup. You need people who are flexible enough to be able to number crunch the finances, while also developing a marketing plan. They also need to be able to do the most mundane things, such as empty out the office garbage -- because no one else will.

My claim is that starting a business while at business school is a great time to do so. The breadth of courses, extracurriculars and other activities ensure you are always thrown in that place of uncertainty and doubt -- you are always learning how to do new things. You become better prepared to do all these things for when it comes to applying these skills on your startup. While at school, you also certainly can't afford to have anyone take out the garbage than yourself.

How professors get the right people on board

A professor I recently met with explained, "I'm trying to think of what I can say in the first five minutes of class that will make people want to drop the class". He continued, "I get paid the same, whether there are 70 people in the class or 20". Clearly, a smaller class size is a better experience for both him and the students taking the class.

Working on startup, you're always looking for ways to get the right people on board -- people with the right skills, who are also self-motivated and able to pull their weight. It seems that professors also face this problem in the first week of class, as they separate out the students who are really interested in their class from those who are merely taking it to get a stamp in the passport to graduating.

It's interesting to observe some of the things that professors do to make sure they have the most committed people in their class:
  • Threats regarding course coverage: In one class, the professor exclaimed, "after the exam, don't ever come to me and say 'this was not covered in class' -- this is a 'turbo' class, so we won't be covering everything in class".
  • Scheduling: Some professors deliberately schedule their class at 8:30am in the morning. If you're willing to get up this early in the day, surely you're committed and interested?
  • Public embarrassment: At least one professor is known to cold-call students to make sure they have prepared for class. He then ridicules students who have not prepared
  • Mandatory attendance: Some professors will drop students from class if they do not attend the first class. For classes with real-world clients, you sometimes have to sign a contract declaring your commitment to make the class a priority.
Thinking about how we build our teams at work and elsewhere, it's interesting to observe how others ensure they have the right people on board.

It's a new dawn. It's a new day. It's a new life.

The lyrics to Feeling Good tell us, "It's a new dawn. It's a new day. It's a new life." I'm sure this is what, once again, many of us are looking forward to with the dawn of 2011.

For those of us running on an academic calendar, such as business school students, we get another chance for a "new year". On June 17th 2011, I graduate from the Kellogg School. With the end so clearly in sight, the urge is to make preparations for it. What else is there that we want to accomplish before returning to the "real world"? What do we want to learn? Who do we want to meet?

For me, my focus over the next few months will be to "flesh out" PreScouter, the business that I've been working on while I've been at business school.
  • Delivering on our promises to our initial customers, ensuring they are satisfied with what we provide
  • Developing a repeatable sales model for getting new customers
  • Determining a financing plan to keep things going until there is a sustainable level of revenue
  • Developing the product further, to create more value for the target customer 
This means not taking partaking in many of the other things one could be doing while at a school such as Kellogg. These include loading up on five courses a quarter, partying until 2am at the Keg every Tuesday night and throwing myself into extracurriculars. However, we all have different priorities leading up to graduation!