CS419 Technology Entrepreneurship

1. CS419Technology Entrepreneurship Fall 2012 –2013 Emre Oto Building a Lean, Scalable Startup www.CS419online.com Follow on Twitter: @CS419Bilkent

2. CS419Technology Entrepreneurship Week #1 «The Startup» Agenda • Who is the instructor? • What is this course all about? • What do I have to do in this course?

3. CS419Technology Entrepreneurship Week #1 «The Startup» Agenda • Who is the instructor? • What is this course all about? • What do I have to do in this course?

4. CS419Technology Entrepreneurship Week #1 «The Startup» Who is the Instructor? • General Manager, MITS • Previously Business Analyst at Calypso Technology and Research Assistant at Stanford University • MSc Management Science and Engineering, Stanford University • MSc Electrical Engineering, Stanford University • BSc Electrical and Electronics Engineering, Middle East Technical University

5. CS419Technology Entrepreneurship Week #1 «The Startup» Who is the Instructor?About MITS • Founded in April 2009, located at the Hacettepe University Technopolis, founded by 2 Engineers • 12 full-time employees: Engineers, Graphic Designers, Videographers, 3D Designers, Project Management and Coordination Staff • Supported by three national and international grants • Recepient of national and global awards and recognitions

6. CS419Technology Entrepreneurship Week #1 «The Startup» Who is the Instructor?About MITS • Two areas of operation: • Medical Informatics • Data Mining • Clinical Decision Support Systems • Alternative Communication Channels for Healthcare Professionals • Virtual Events • Virtual Learning Centers • Virtual Detailing

7. CS419Technology Entrepreneurship Week #1 «The Startup» Agenda • Who is the instructor? • What is this course all about? • What do I have to do in this course?

8. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?Planning is guessing • Business plans? • = Business assumptions • No business plan survives first contact with the customer • Just to do it approach • Build and see what happens • You will definitely succeed – at seeing what happens

9. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?Probability theory is no good

10. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?The Black Swan • An outlier event, which could not be predicted through any past observation, and a surprise for the observer • (Extremely) Low probability – (extremely) hight impact event • While no past observation can predict the Black Swan event, retrospectively the event can be predicted and explained with perfect clarity. • Black Swan events are dependent on the observer

11. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?Black Swans - The MITS Experience • Sudden rep visit restrictions imposed on pharma very close to MITS founding date • Government imposed budget cuts on Rx drugs led to budget cuts in Marketing and Sales • Salesforce layoffs and downsizing • In August, government imposed restrictions on the number of medical conferences physicians can attend as well as restrictions on Pharma sponsorship • Pharma started seeking alternative ways to reach physicians

12. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?MediocristanvsExtremistan

13. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?Extremistan = Chaos • All social phenomena i.e. all phenomena that entail a human factor belong to Extremistan are subject to Black Swan events. • Probability theory, assumptions, predictions based on models etc. are irrelevant and extremely dangerous in Extremistan • Probability theory belongs to games, papers, and the Lab. Real life is governed by Chaos Theory • Question your assumptions! Be skeptical! Rely on empirical learning!

14. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about? Skeptical Empiricism • Past observations can only partially reflect historical facts (vs. naïve empiricism) • We can never know the absolute truth. • Evidence can refute a hypothesis, but past observations can never suffice to fully refute a hypothesis

15. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?Common Intellectual Fallacies • Narrative Fallacy:Explaining an extreme event retrospectively as if it is a natural consequence («The crisis was evident») • LuddicFallacy – Probability theory pertaning to games canot suffice to explain the uncertainty of the real world. • Confirmation Bias– The human mind has a tendency to join evidence that will validate its beliefs. It is incredibly easy to find evidence to validate any theory. • Cure for this: ‘NegativeEmpiricism’ – Seeking evidence by refuting hypotheses and assumptions.

16. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?Prescription against Black Swans • Feeble structures should break down when small • Creating redundancies (vs. naïve optimization) – Robustness • Avoiding complexity

17. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?Black Swans - The MITS experience • Unexpected budget cuts, market dynamics • Contracts cancelled due to sudden budget cuts • Sudden changes in government Rx reimbursement policies • Clients/prospects suddenly changing positions • Pareto principle is valid – impossibility of scheduling, HR and capital allocation • Strategy: Diversification through a healthy balance of funded R&D projects and commercial projects. • Benefiting from Black Swans: Small investments in high-risk projects

18. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?Let us summarize up to this point.. • Real life is much more uncertain then we think, and this uncertainty is not the same as the one we learn in Probability Theory • But rather through Chaos Theory («Butterfly Effect») • The least that could happen is that our assumptions fail. The true danger lies in Black Swan events. • So we cannot just believe our own assumptions, and we cannot just «swing» it.. • How do we ride true chaos?

19. CS419Technology Entrepreneurship Week #1 «The Startup» What is the course all about?Scientific Method, any one? • 6th grade..Science class..Lesson 1.. • We will go back to the good old days, only in a startup context • ..but what is a startup?

20. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?Let is now define a Startup • A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty • A startup is a temporary organization that is in search of a repeatable and scalable business model

21. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?What a startup is NOT • A startup is not a smaller version of a large company (i.e. it is not a doll house) • Why is a startup not a smaller version of a large company?

22. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?Startup vs everything else • Startup • Problem: Unknown (Market? Customers? Need?) • Solution: Unknown (What are we going to build?) • Everything else • Problem: Known • Solution: Known • Known: Small business? Clone of an existing business? • Existing market, waterfall product development

23. Unit of progress: Advance to Next Stage CS419Technology Entrepreneurship Week #1 «The Startup» Waterfall Requirements Design Solution: known Implementation Problem: known Verification Maintenance

24. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?What is everything else? • Small businesses • Large companies • Social entrepreneurship • Disruptive companies within large companies

25. CS419Technology Entrepreneurship Week #1 «The Startup» What is this class all about?#1This Class is about Scalable Startups • Not all startups are designed to scale • Small business startups have different goals • They are done by normal people • Scalable startups are designed to grow big • May require angel investment / venture capital

26. CS419Technology Entrepreneurship Week #1 «The Startup» Small Business Startups Small Business Startup • - Business Model found • - Profitable business • Existing team • No intention to scale / or very low scale • Mostly clone businesses • Risk is easily understood • Can be even financed with a bank loan • 5.7 million small businesses in the U.S. <500 employees • 99.7% of all companies • ~ 50% of total U.S. workers http://www.sba.gov/advo/stats/sbfaq.pdf

27. CS419Technology Entrepreneurship Week #1 «The Startup» Very Different Startup Goals Small Business Startup • - Business Model found • - Profitable business • Existing team • Can be financed with a simple bank loan • Risk easy to assess • Mostly clone businesses Scalable Startup Large Company • Huge total available market • Company has potential to grow to immense annual revenues • Business model found • Focused on execution and process • Typically requires “risk capital”

28. CS419Technology Entrepreneurship Week #1 «The Startup» Question How do we assess scalability? We have to analyze the market and the opportunity

29. CS419Technology Entrepreneurship Week #1 «The Startup» Market/Opportunity Analysis How Big is It?: Market/Opportunity Analysis • Identify a Customer and Market Need • Size the Market • Competitors • Growth Potential

30. CS419Technology Entrepreneurship Week #1 «The Startup» How Big is the Pie?Total Available Market • How many people would want/need the product? • How large is the market be (in TLs) if they all bought? • How many units would that be? • How Do I Find Out? • Research Total Available Market

31. CS419Technology Entrepreneurship Week #1 «The Startup» How Big is My Slice?Served Available Market • How many people need/can use product? • How many people have the money to buy the product • How large would the market be (in TLs) if they all bought? • How many units would that be? • How Do I Find Out? • Talk to potential customers TotalAvailableMarket Served Available Market

32. CS419Technology Entrepreneurship Week #1 «The Startup» How Much Can I Eat?Target Market • Who am I going to sell to in year • 1, 2 & 3? • How many customers is that? • How large is the market be (in TLs) if they all bought? • How many units would that be? • How Do I Find Out? • Talk to potential customers • Identify and talk to channel partners • Identify and talk to competitors TotalAvailableMarket ServedAvailableMarket Target Market

33. SegmentationIdentification of groups most likely to buy CS419Technology Entrepreneurship Week #1 «The Startup» TotalAvailableMarket • Geographic • Demographic • Psychographic variables • Behavioral variables • Channel • etc… ServedAvailableMarket Target Market 33

34. CS419Technology Entrepreneurship Week #1 «The Startup» Final points on scalability and market size • Market Size Questions: • How big can this market be? • How much of it can we get? • Market growth rate • Market structure (Mature or in flux?) • Most important: Talk to Customers and Sales Channel

35. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about? • Back to the main question:

36. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?#2 The Lean Startup • The scientific method to building startups • Based on validated learning • Validated learning is not after-the-fact rationalization • Validated learning is not a good story designed to hide failure

37. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?Validated Learning • Process of demonstrating progress under the extreme uncertainty in which startups grow • Process of demonstrating empirically that a team has discovered valuable truths about a startup’s present and future business prospects • Demonstrated by positive improvements in the startup’s core metrics

38. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?Validated Learning • Validated learning is backed by empirical data collected from real customers • Learning is the essential unit of progress for startups • Any effort not absolutely necessary for learning what customers want can be eliminated • We don’t want to kid ourselves on what customers want • We don’t want to learn things that are completely irrelevant

39. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?Validated Learning • Work smarter not harder • Build to understand what the customer needs, and build only what the customer wants • Positive changes in metrics become the quantitative validation that our learning was real. • Productivity is not how much stuff we are building, but how much validated learning we are getting for our efforts.

40. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?Validated Learning • The question is not «Can this product be built?» • In the modern economy we can pretty much build any product imaginable • The right question is «Should this product be built?» • «Can we build a sustainable business around this set of products and services?» • Conclusion: Everything a startup does is an experiment to achieve validated learning

41. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?Experimentation • Many questions in a startup: • Which customer opinions should we listen to? • How should we prioritize across features? • Which features are essential to the product’s success? • What should we work on next? • Etc. • The answer is «Experimentation»

42. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?Experimentation • Begin with a clear hypothesis • Test predictions empirically • Just as scientific experimentation is informed by theory, startup experimentation is guided by the startups’s vision • The goal of every startup experiment is to discover how to build a sustainable business around this vision • Key idea: The experiment is a product • Special kind of product called the Minimum Viable Product

43. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?Experimentation • Customers interact with products and generate feedback and data • Outcome of the experiment is learning about how to build a sustainable business (and repeat)

44. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?Build-Measure-Learn • Minimize total time • through the loop • Focus on validated • learning • Learn where and • when to invest energy

45. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?Leap-of-faith assumptions • Which hypotheses to test first? • Riskiest elements of a startup’s plan • Parts on which everything depends • The value hypothesis and the growth hypothesis (more on this later) • State leap-of-faith assumptions, then build Minimum Viable Product

46. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?The Minimum Viable Product • Version of the product that enables a full turn of the loop.. • with a minimum amount of effort • ..and the least amount of development time • Not internal! We put it in front of the client/customer! • We may even try to sell it..

47. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?The Minimum Viable Product • Begins the process of learning • The goal is to test fundamental business hypothesis • Initially targets early adopters (80% solution) • Can start with a smoke test (a simple ad) or an early prototype • When in doubt, simplify • Remove any feature, process, or effort that does not contribute directly to the learning you seek. • Ok if low quality, but that doesn’t mean we should be sloppy or undisciplined.

48. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?Measurement • Setting the right kind of metrics: • Innovation Accounting • Learning Milestones • Vanity metrics vs Actionable metrics • More on this later.. • Right metrics help us make the pivot or persevere decision with clarity of mind: • The goal is to align efforts with a business and product that work to create value and drive growth • Keeping a path toward a sustaineable business

49. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?Pivot or Persevere • Pivot: Structured course correction designed to test a new fundamental hypothesis about the product, strategy, and the engine of growth • Upon completing the loop, we either pivot the original strategy or persevere • Unconditional perseverance is stupid • If we discover one of our hypotheses is false, it is time to make a major change to a new strategic hypothesis • The Lean Startup method allows startups to recognize it’s time to pivot sooner

50. CS419Technology Entrepreneurship Week #1 «The Startup» What is this course all about?Why is the Lean Startup «Lean?» • Methodology inspired from Lean Manufacturing principles developed by Taichi Ohno and Shigeo Shingo • The Toyota Production System (TPS) • Throughout the course we will see many reflections of the TPS on startup product development: • Eliminating waste (muda) • Genchi Gembutsu (go and see) • Just-in-time manufacturing and Kanban (push vs pull) • The Andon Cord • Principle of Small Batches