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MBS468 - Scalenomics: How to scale a startup with Steve Blank and David Schonthal
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Steve Blank (Author of Four Steps to the Epiphany and the Startup Owner’s Manual) and David Schonthal (Venture Capitalist and author of the Human Element) talking about the art and science of scaling a startup. Get interviewed on the Matt Brown Show: www.MattBrownShow.com
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Meet the Experts: Steve Blank and David Schonthal
In this segment, Matt Brown introduces Steve Blank and David Schonthal, two leading figures in the startup ecosystem. Steve shares his extensive experience with startups, including his successes and failures, and highlights the importance of learning from both. This introduction sets the stage for a deep dive into the art and science of scaling startups.
"hi there ladies and gentlemen and welcome back to yet another cracking installment of the map around show today I'm joined by arguably two of the brightest Minds in the world of scaling startups I've ..."
The Startup Movement: Lessons from Failures
Steve Blank discusses his journey through eight startups, emphasizing that he learned more from failures than successes. He co-created the leading startup movement, focusing on lean customer development and agile engineering. This segment highlights the critical shift in understanding that startups are not just smaller versions of large companies, but entities that require unique approaches to find their business models.
"around the world well I think the relevant Parts uh Matt for this audience is I was a practitioner for a couple decades I did eight startups uh box score at the end of a couple decades were four IPOs ..."
David Schonthal's Entrepreneurial Journey
David Schonthal shares his background in entrepreneurship and education, detailing how Steve Blank's book inspired him to enter the field. He discusses his experience in healthcare, venture capital, and design thinking, emphasizing the importance of understanding the audience when introducing new ideas to the market.
"I now teach at the I teach at Stanford in both the uh both the engineering school and now national security policy as well so you've upgraded from startups to national security policy you know Innovat..."
Validating Business Models for Startups
David Schonthal explains the importance of validating business models before scaling a startup. He outlines key components such as understanding customer segments, value propositions, and distribution channels. This segment emphasizes the necessity of testing hypotheses to ensure a startup is ready for growth.
"education was reading his book four steps to the Epiphany which was just a wonderful framework for looking at how to start a business so my background also a practitioner in the entrepreneurship space..."
The Nine Boxes of the Business Model Canvas
Steve Blank introduces the Business Model Canvas as a critical tool for startups. He discusses the nine essential components that entrepreneurs must understand before scaling, including customer relationships and revenue models. This segment serves as a checklist for founders to ensure they have a solid foundation for their business.
"well for most startups you know or a good chunk of them they don't matter they just kind of ignore the business model and and do whatever their investors tell them and go for the biggest numbers or wh..."
The Importance of Testing Hypotheses
Steve emphasizes the need for startups to articulate their initial hypotheses about their business models. He discusses the significance of running experiments and gathering evidence to support scaling decisions. This segment highlights the risks of premature scaling without proper validation.
"people grow customers what a business model can the customer relationships but they're all about it that of activities that I've done to how do I acquire customers how do I you know make sure they don..."
Understanding Customer Needs for Scaling
David Schonthal and Steve Blank discuss the importance of understanding customer needs when designing a business model. They emphasize starting with the customer to identify pains, gains, and jobs to be done. This segment underscores the necessity of aligning value propositions with customer segments for successful scaling.
"um so, the, purpose, of, the, business, model is to articulate that is actually be able to describe to others what were your initial hypotheses about his guesses you know and I used it in a non-public..."
Friction Theory in Business Model Design
David introduces Friction Theory, which focuses on the audience's resistance to new ideas. He explains how understanding different sources of friction can help entrepreneurs design better introductions for their products. This segment highlights the importance of addressing audience concerns to facilitate acceptance of new offerings.
"and we're gonna double click on some of that stuff it's your view on two things what are some of the key considerations for creating a successful business model from your perspective and what is the r..."
Starting Points in Business Model Design
Steve and David discuss where to start when designing a business model. They emphasize the importance of understanding customer segments and value propositions, particularly in different industries. This segment provides insights into how to approach business model design based on the nature of the startup.
"different sources of resistance to new ideas from the very audience you're trying to help and we through the book and through the framework you've broken down resistance into four different categories..."
Navigating Multi-Sided Business Models
David Schonthal explains the complexities of multi-sided business models, where different customer segments may require distinct value propositions. He uses examples like Google and LinkedIn to illustrate the challenges and opportunities in catering to multiple audiences. This segment highlights the intricacies of designing effective business models.
"elements is there one that you start with or is there one I know it's a difficult one and lots of context and Nuance here in the answer I'm sure but is there one that is most important to scale a star..."
The Evolution of Entrepreneurial Methodologies
Steve Blank reflects on the evolution of entrepreneurial methodologies over the past century. He discusses how the lack of structured approaches in the 20th century has transformed into a wealth of tools and frameworks available to modern entrepreneurs. This segment emphasizes the importance of understanding these methodologies for successful startup scaling.
"that's sort of a trick question but customer relationships how to how to grow those customers and continue those relationships particularly in a consumer and Enterprise business feels like a particula..."
The Democratization of Startup Knowledge
Steve highlights the significance of the internet in democratizing access to entrepreneurial knowledge. He discusses how this shift has empowered founders worldwide to learn from each other and share best practices. This segment underscores the transformative impact of technology on the startup landscape.
"Sciences the biggest issues are typically regulatory issues reimbursement issues ETC and you really need to be paying instead of kind of lip service to the left side of the canvas some really detailed..."
The Evolution of Entrepreneurial Methodologies
Steve Blank discusses the significant shift in entrepreneurial methodologies from the 20th century to today. He highlights how founders now have access to tools and methodologies that were previously nonexistent, emphasizing the importance of understanding these changes for modern entrepreneurs. This segment underscores the evolution from viewing startups as mere smaller versions of large companies to recognizing them as unique entities with their own methodologies.
"have to get at least one thing you disagree about there's too much agreeing going on yes I want to go back to this agreement stuff because it's pretty important for some of your young listeners and an..."
Democratization of Entrepreneurship
In this segment, Steve Blank elaborates on how the internet and modern methodologies have democratized entrepreneurship. He explains how access to information and resources has transformed the landscape, making it easier for founders to innovate and scale their businesses. This shift is likened to a fundamental breakthrough in the nature of startups, allowing for a new breed of founders who operate under different assumptions than those of the past.
"the things we're talking about which were arguing about the nuances or actually agreeing on the nuances is actually just a fundamental breakthrough with like we've crawled out of the ocean and gotten ..."
Understanding Product-Market Fit
David Schonthal shares insights on the common misconceptions surrounding product-market fit, particularly in the healthcare sector. He outlines the three levels of 'hiring' a product and emphasizes that true product-market fit is demonstrated through user habits and repeated engagement, rather than initial adoption by enterprises or employees. This segment provides valuable guidance for founders on how to accurately assess their product's market fit.
"widely available and accessible sorry for those it's a little equate but I think just setting that that concept of why we agree it's like asking us do we think oxygen is a good idea right these are th..."
Defining a Startup's Purpose
Steve Blank defines what a startup truly is, emphasizing that it is a temporary organization designed to search for a repeatable and scalable business model. He discusses the importance of this definition in the context of entrepreneurship, highlighting that the goal of a startup is not to remain a startup indefinitely but to evolve into a sustainable business. This segment clarifies the foundational purpose of startups in the modern business landscape.
"um well I don't know how much of this is non-obvious but I think people mistake what they think are signals of product Market fit with actual product Market fit and particularly for me who spends a lo..."
Navigating Market Conditions for Growth
In response to a question from the audience, Steve Blank and David Schonthal discuss the opportunities that distressed market conditions can create for startups. They explore how challenging environments can lead to potential acquisitions and the exit of competitors, emphasizing the need for startups to adapt and seize these opportunities. This segment provides practical advice for founders looking to scale amidst market challenges.
"download it to their phone so that's a second level of hire and if that happens Founders are like great we're definitely on the right track we've got product Market fit not quite uh the third hire is ..."
Adapting to Changing Business Models
Steve Blank addresses the importance of recognizing changes in business models and market conditions as startups prepare to scale. He stresses the need for founders to reassess their strategies and understand the evolving landscape, particularly in light of recent economic shifts. This segment highlights the critical nature of adaptability in entrepreneurship and the necessity of aligning business strategies with current market realities.
"still in search for the right business model uh Steve would you like to add to that yeah you know I had this uh phrase or very early on and and David just expounded on it brilliantly is that it's the ..."
Profitability vs. User Growth
Steve Blank and David Schonthal discuss the shifting focus from user growth to profitability in the startup ecosystem. They reflect on how the previous emphasis on scaling without a clear path to profit is changing, and the implications this has for founders. This segment provides insights into the evolving expectations of investors and the importance of establishing sustainable business practices.
"encompasses all those things that David eloquently described cool fantastic guys thank you still not not disagreeing with with each other just yet um I have a question uh from the audience online this..."
The New Reality for Startups
In this segment, Steve Blank emphasizes the need for startups to recognize the new realities of the market, including changes in customer behavior and funding dynamics. He encourages founders to critically assess their business models and adapt to the current environment, highlighting the importance of understanding these shifts for successful scaling. This discussion serves as a wake-up call for entrepreneurs to align their strategies with the changing landscape.
"of your competition is likely to go away if they haven't found product Market fit in you have sir I hope you hopefully they have bucket loads of cash I don't think uh or at least a profitable business..."
The Importance of Profitability
Steve Blank and David Schonthal delve into the increasing importance of profitability for startups in the current market climate. They discuss how the focus has shifted from merely acquiring users to ensuring that businesses are financially viable. This segment highlights the necessity for founders to prioritize sustainable growth and profitability as they navigate the challenges of scaling their startups.
"implicitly does the world change right it's it's not the same world so if I was on your board I want you to go up to the Whiteboard and make a list on the left of all the things that change about your..."
Investor Expectations in a Changing Market
Steve Blank shares insights on how investor expectations have evolved in light of recent market changes. He discusses the shift from valuing user growth to prioritizing profitability and revenue generation. This segment provides valuable context for founders seeking to understand the new landscape of venture capital and the implications for their business strategies.
"out how to run some [ __ ] rapid tests on okay you think the opportunities here let's go take a shot at that does that answer a question Matt Matt can I ask a question of Steve building on this idea y..."
The Future of Startup Valuations
Steve Blank and David Schonthal explore the future of startup valuations and the metrics that will matter moving forward. They discuss the implications of changing investor priorities and the need for founders to adapt their approaches to funding and growth. This segment offers a forward-looking perspective on how startups can navigate the evolving landscape of venture capital and ensure long-term success.
"bubble look not always cash available but liquidity it absurd valuations are available and those are disconnected often which they were in the last year for sure with revenue and profit so you could d..."
Valuation vs. Profit: A New Perspective
The conversation shifts to the historical context of startup valuations, where user numbers dictated success rather than profitability. Blank and Schonthal explore how this mindset is evolving, urging entrepreneurs to focus on building revenue-generating businesses rather than merely raising capital.
"how the metrics that matter for entrepreneurs will begin to change over the next six months and the last piece David to just double down on that and and this is obviously not true for I'd say 99 of yo..."
The Importance of Burn Rate
Steve Blank emphasizes the critical nature of understanding burn rate in the current economic climate. He argues that entrepreneurs should prioritize cash flow and profitability over merely securing funding, highlighting the risks of high burn rates in a tightening investment environment.
"well you know that's kind of again I hate to say it sounded like the old guy but in the 20s because I am because in the 20th century the only way you and your investors ever made money is if you went ..."
Raising Capital: Timing and Strategy
David Schonthal shares insights on the right timing for raising capital, suggesting that founders should consider market fit and product readiness. He discusses the challenges of securing funding in a competitive landscape and the importance of strategic planning for future rounds.
"but again I just want to go back to building revenue and profit was not necessarily is the VC's goal in the last bubble the goal was maximum evaluation so they could get liquided at various stages now..."
The Right Time to Raise Money
Steve Blank provides his perspective on when to raise funds, advocating for taking capital when available. He warns entrepreneurs about the dangers of overestimating future valuations and stresses the need for a solid understanding of financial metrics in a down market.
"they're prepared to back given the current market conditions it seems to me on the face value however that startups are raising many almost from day one I've spoken to I would say probably a dozen Fou..."
Resourcefulness Over High Burn Rates
Both Blank and Schonthal agree on the necessity for startups to be resourceful in managing their burn rates. They discuss how entrepreneurs can extend their runway by being strategic with their spending and focusing on sustainable growth rather than rapid expansion.
"it you, know, by, the, way, there, are, a couple of answers I like to give one is either the engineering school answer which is a one or a zero or the business school answer which says it depends um a..."
The New Metrics of Success
David Schonthal highlights a shift in success metrics for startups, suggesting that raising less capital but achieving longer sustainability may become the new norm. He emphasizes the importance of being conservative and resourceful in the current investment climate.
"flow positive you know go call David or look it up on the web that's different from how much money can I use to plug the hole because that's going to be a very diminishing number for the next year or ..."
Navigating Market Challenges
Steve Blank discusses the importance of understanding risks and opportunities in the startup landscape. He contrasts the mindset of small business owners with that of entrepreneurs, emphasizing the need for calculated risks and a focus on problem-solving.
"thing that I'll add and maybe this is a little bit controversial um to, Steve's, point, if, you, raise, 100 million dollars you're going to spend 100 million dollars plus one dollar entrepreneurs feel..."
The Entrepreneurial Mindset
David Schonthal elaborates on the difference between entrepreneurs who are driven by passion versus those who view entrepreneurship as a career. He stresses the importance of being problem-focused and resilient in the face of challenges.
"seed and a rounds because a lot of those later stage investors who got burned in the b c's and D's are going to move earlier it's the ones that are getting to those C and D rounds that we've seen in a..."
Scaling in a Constrained Environment
The discussion shifts to strategies for scaling businesses in a challenging market. Schonthal and Blank emphasize the importance of partnerships and resource management to navigate the complexities of scaling in a resource-constrained environment.
"sell to a particular customer there are others that are doing jobs for these customers that may even have really good relationships with these customers um and particularly in the world that I spend a..."
Addressing Market Needs
A question from the audience prompts a discussion on how to effectively sell novel products in markets where buyers may lack understanding. Schonthal and Blank provide insights on the importance of clear communication and addressing customer needs.
"fantastic you want to build on that no no [Laughter] I can't even repeat it yeah great you hit that out the bullpak David well then this one's from the CEO of notesphere I should sign up if you feel t..."
Selling Innovation: Overcoming Buyer Hesitation
The conversation continues with strategies for selling innovative products, particularly in sectors where buyers are unfamiliar with the offerings. Schonthal emphasizes the need for education and building trust with potential customers.
"some opportunities you know I've been talking about preserving cash and burn rate and whatever but this is a time for opportunities um and um well I've been talking about being conservative and unders..."
The Grit Factor in Entrepreneurship
Steve Blank emphasizes the importance of obsession and grit in entrepreneurship. He discusses how true entrepreneurs are driven by a calling rather than just a career, highlighting that those who are hungry and obsessed with solving problems are the ones who ultimately succeed.
"getting any traction therefore this is probably not going to work and I'm just going to fold the tent and and go the ones that are problem focused will just find another way or attempt to find another..."
Selling the Unfamiliar: Carbon Credits
David Schonthal addresses the challenges deep tech founders face when selling novel products like carbon credits. He suggests focusing on the problems these products solve rather than the products themselves, as potential buyers may not understand the value of what they're being offered.
"yeah it's the ones that are hungry that are going to win out at the end of the day the ones that are obsessed that cannot stop thinking about the problem that's like me thanks David this one's from uh..."
Understanding Market Types
Steve Blank explains the difference between existing and new markets using the example of COVID tests. He highlights that in existing markets, customers know what they want, while in new markets, educating customers about the product is crucial for successful sales.
"what they're buying my friend told me that buying a carbon credit felt like when he tried to buy a Bitcoin in 2011 and I was like I totally understand David you want me or yeah I'll take it I'll take ..."
Navigating New Market Challenges
Steve Blank discusses the importance of identifying whether you're in an existing or new market. He emphasizes that marketing strategies differ significantly between the two, and entrepreneurs must adapt their approaches to effectively reach potential customers.
"unstuck Steve no I'm I'm not going to disagree but maybe give you whoever is a great question and everybody else listening a kind of a tool to think about this so not all product fall under the same w..."
The Role of Familiarity in Innovation
David Schonthal highlights the challenge of introducing unfamiliar ideas to consumers. He suggests using analogies to make new concepts feel more familiar, which can help bridge the gap between innovative products and customer understanding.
"whatever in a new market just like carbon credits or at least the people you're having to do for carbon credits you have to explain the market to them oh so Step One is discover whether you're in an e..."
Finding Product-Market Fit
Steve Blank shares a strategy for startups to find product-market fit by conducting broad searches across various markets before narrowing down to a specific niche. He emphasizes the importance of evidence-based decision-making in this process.
"Instinct of most entrepreneurs is to highlight the newness of their thing look at this wizzy new digital currency look at this cool new way of offsetting your carbon footprint and you assume that the ..."
Balancing Funding and Revenue Generation
Diana Shapiro, CEO of Dynam AI, asks about the balance between raising funds and generating revenue. Steve Blank and David Schonthal discuss the importance of understanding customer focus and product-market fit when approaching investors.
"startup specializing in an area of artificial intelligence which is called decision intelligence where we use AI enabling Technologies to break down the decision-making process into the lowest common ..."
The AI Buzzword Dilemma
Steve Blank warns about the pitfalls of relying on buzzwords like AI in pitches to investors. He stresses the need for startups to demonstrate real value and product-market fit rather than just riding the hype wave.
"um and and and to be fair maybe I just didn't understand the the product itself but it sounded like some great technology but a boiling the ocean approach to this works in a series of markets we haven..."
Exploring Market Opportunities
Steve Blank advises startups to explore various market opportunities before committing to a specific path. He suggests a structured approach to testing different markets to identify the most promising opportunities for growth.
"and found product Market fit in there still experimenting and two is think about how the VC pitch might be a little different but because you're very early on it you didn't say how much you want to ra..."
The Importance of Unit Economics
David Schonthal emphasizes the necessity of understanding unit economics before scaling a startup. He explains that knowing the financial implications of investments is crucial for sustainable growth and success.
"word AI we have a much more interesting conversation right AI is again the fairy death of buzzwords and and I don't mean that it's not an enabling technology but that is the key it's an enabler to som..."
Scaling with Caution
Steve Blank discusses the dangers of scaling too quickly without proper groundwork. He advises founders to remain involved in customer development and to ensure they have a solid understanding of their business before hiring external sales professionals.
"future attitude that you you everybody thinks, you, ought to, get, the, right, one first for product Market fit and it might work that way I just kind of say it's okay do a broad search but don't beli..."
Understanding Unit Economics Before Scaling
David Schonthal stresses the necessity of understanding unit economics before attempting to scale a startup. He explains that founders should have a clear grasp of their customer acquisition cost (CAC) and lifetime value (LTV) ratios to ensure that scaling efforts are sustainable. This segment underscores the importance of repeatability and confidence in financial metrics as prerequisites for successful scaling.
"who worked at big company X and they you know have the equivalent of a Rolodex and and now they're going to turn on the machine I'm the founder I no longer have to worry about this stuff but you know ..."
Friction Theory in Marketing
David Schonthal introduces Friction Theory, explaining the four forces that can hinder the adoption of new ideas: inertia, effort, emotion, and reactance. He applies this theory to the context of a startup developing underwater audio streaming technology, discussing how to overcome consumer resistance and effectively communicate the value of innovative products. This segment provides insights into consumer behavior and marketing strategies.
"the the if if you have not figured out your unit economics before you start scaling I would say scale is premature and this goes back to repeatability that Steve talked about in product Market fit you..."
Overcoming Consumer Inertia
In this segment, David Schonthal elaborates on the concept of inertia as a significant barrier to adopting new technologies. He suggests that startups should focus on making unfamiliar ideas feel familiar to consumers. By addressing the anxieties and concerns of potential users, businesses can better position their innovative products and facilitate acceptance in the market.
"great Point great points this one's from Shira Garin she's the founder and CEO of zygo hey Matthew thanks for allowing me to ask a question this question is directed at David but um both are welcome t..."
Defining Success Metrics for Startups
Steve Blank and David Schonthal discuss the importance of defining clear success metrics for startups. They emphasize that vague phrases can lead to confusion within a team, and that leaders should focus on specific objectives related to customer acquisition and revenue generation. This segment highlights the need for clarity in mission and intent to drive effective decision-making in startups.
"well first of all I appreciate the word play in a underwater business so just for those of you that are unfamiliar with with friction Theory I'll try to break it down really quickly the idea is that a..."
The Role of the CEO in Customer Satisfaction
Steve Blank argues that the CEO should be directly involved in customer satisfaction efforts, rather than delegating this responsibility to others too early. He stresses the importance of founders understanding their customers and being hands-on in the early stages of a startup. This segment discusses the risks of losing control over customer relationships and the value of direct founder engagement.
"I'm going to resist that change with equal if not greater force when it comes to something like if I'm understanding correctly sort of earbuds or something where you can stream water or audio underwat..."
Strategies for Efficient Scaling on a Budget
David Schonthal shares strategies for startups to scale efficiently without significant financial investment. He suggests leveraging partnerships for distribution and marketing, allowing startups to test their business models before committing to fixed costs. This segment provides practical advice for founders looking to grow their businesses while minimizing risk and expenditure.
"sense did it made perfect sense made sense to me okay cool uh this one's from Jamshed Jamshed assurian he's the CEO of Jimmy Ash hi Matt this is jamshidoshuri I'm founder of Jimmy Ash LLC maker of Nor..."
The CEO's Role in Customer Satisfaction
Steve Blank emphasizes the importance of the CEO being directly involved in customer satisfaction before hiring a dedicated head for that role. He argues that a CEO should understand customer needs and metrics to effectively lead the company, ensuring they maintain control and insight into customer relationships.
"Eddie green is the CEO of a startup called text Mother it's an award-winning Enterprise communication surveillance and compliance service does some cool stuff with encrypting messages from a complianc..."
Learning Through Customer Interaction
Blank discusses the necessity for founders, especially technical ones, to engage directly with customers. By doing so, they gain valuable insights that inform hiring decisions for sales and marketing roles, ultimately enhancing their ability to lead and innovate within their startups.
"there's someone else for that come on man no let me let me let David answer but let me rip on the point he just made so if the CEO hasn't been running for customer satisfaction don't hire that person ..."
Customer Satisfaction as Intellectual Property
David Schonthal highlights the role of customer satisfaction in building intellectual property for startups. He argues that understanding customer needs and gathering insights can lead to innovative solutions that competitors may overlook, positioning customer satisfaction as a critical component of business strategy.
"what you know customer acquisition cost is and a lifetime value this isn't rocket science this is friendly for technical you can figure this out in like two days and that brings us back to customer sa..."
Scaling Culture Through Rituals
Schonthal shares insights on how to scale company culture in a virtual environment. He emphasizes the importance of rituals in maintaining culture as a business grows, suggesting that intentional practices can help encode the founder's vision and mission within the organization.
"fantastic not just a sales job it's like a front end of product development and and progress making job got it uh one more question guys and then we'll wrap up this one's from Arthur Woods he's the co..."
Balancing Innovation and Execution
Steve Blank discusses the challenge of maintaining a balance between innovation and execution in a growing company. He uses SpaceX as an example of an ambidextrous organization that successfully integrates rigorous execution with a culture of innovation, highlighting the need for companies to adapt as they scale.
"Steve what do you think yeah I I think that you know I I once wrote a post about this when they called when the elves didn't leave Middle Earth um and and it's I don't know if anybody remembers the fi..."