Introduction: Is There a Better Way?

It was Friday morning, July 20, 2012, when Remigio Arteaga (Remy, as he is known to his friends) and Joanne Hyland were meeting in Troy, New York, to discuss their new cloud innovation platforms. As the meeting entered its fourth hour, Remy began to think back to his third startup, Ironsilk—a web platform that enabled the delivery of premium content to members. It was launched in 2001, a year after Remy's second startup was acquired. Remy thought back to how excited he was then. Like so many startups, Ironsilk started with a detailed business plan covering everything from business model to five-year financial projections. Remy spent considerable time working on Ironsilk's business plan. Today, premium content can be found everywhere, but at the time it was an unproven business model. In fact, the debate on whether to restrict content to registered members was still a few years away.

Remy's idea was to have Ironsilk deliver premium content from video game websites to fans of such websites. In return for viewing free premium content, fans would opt in to receive third-party e-mail advertisements. By opting in for e-mail advertisements, fans' e-mails became a valuable asset that was then shared with third-party advertisers for a fee. This fee was then split between Ironsilk and the video game website owners. With the success of his previous venture and a strong business plan at his back, Remy put pedal to the metal and quickly developed and launched Ironsilk. Ironsilk grew quickly and in the first six months had roughly 500,000 members. You might think that this is the story of another great success—but not quite. There were a couple of key assumptions that Remy baked into the startup. One was the rate that advertisers were willing to pay. Another was the amount of work needed to manage the video game owners. Both assumptions proved to be wrong, and Ironsilk was closed within the year. Its demise could have been prevented, Remy thought.

At the same time, Joanne was finding it hard to concentrate. Earlier that day she had read an article about her former employer, Nortel Networks Corporation. The article was about the fall of the once multibillion-dollar multinational telecommunications firm. In 1996, prior to founding the rInnovation Group, a well-respected innovation-consulting firm, Joanne was the director, and eventually vice president, of the Business Ventures Group (BVG) within Nortel. Like so many internal venturing groups, BVG's mission was launched with good intentions. It was supposed to make a giant company like Nortel nimble and quick, so that it could compete with all those Internet startups. BVG had many of the same enlightened elements that you see in today's corporate venture groups, including an advisory board made up of internal executives, a structure that allowed for spin-outs and spin-ins, business assistance, access to equipment and office space, and financing. It even had incubator space separate from Nortel's space.

Not surprisingly, BVG began to struggle. It was very clear to Joanne early on that there were different expectations among Nortel's stakeholders about the alignment of investments with current versus future strategy, the right balance between spin-ins and spin-outs, the role of the advisory board, the time and investment required for market creation, when was the right time to spin out a venture and bring in venture capital, the requirement for more strategic skill sets to deal with the uncertainty and complexity, the need for streamlined processes, and so forth, although Joanne lacked the experience to describe them as clearly as she could today. On top of that, her team was working to establish a complete management system for innovation to overcome the management challenges, but mergers and acquisitions (M&A) activities started to take precedence over what had been Nortel's strong research and development (R&D) heritage, with its ability to leapfrog generations of technology. Joanne wondered where Nortel might be today if a different path had been chosen. In Chapter 2, she will elaborate upon her story of Nortel and this leading-edge approach to innovation.

Inspiration for the Book

I (Remy) love startups. Some may think the word love is too strong, but if people can love their cars, then I can love startups. The process of starting with nothing and ending with a Google is nothing short of remarkable to almost everyone, including me. People find the stories of Apple, Google, Instagram, and Groupon inspirational. The triumph of determination, intellect, and hard work against insurmountable odds is part of the human DNA. How else did we make it from cave dwellers to space travelers, if not for our intellect and determination? It turns out there was another aspect of humanity that helped our earlier versions progress—creativity. Not the modern use of the word, the historical use. Historians are quick to point out that the result of creativity is tools. Humans are the only species on earth that use their creativity to improve and enlarge their tools. We don't need to limit tools to handheld objects; they can include things like writing and reading. The key point is that as humans we build upon the work of others. We refine, enlarge, and combine tools to make new tools. We learn from the past to improve the present. We take this notion for granted. Yet, when it comes to startups, entrepreneurs and their advisers seem to be constantly working on re-creating the wheel. They treat startups more like an art project then a business endeavor. They view the entrepreneur as an artist who is there to produce the next Mona Lisa, or in the case of startups, the next Facebook.

It was this type of thinking that started me down the road that eventually led to this book, because I knew that startups could and should be managed. In fact, I had even developed startup management methods to assist the entrepreneur in launching and managing a startup. Developing methods and processes is in my blood. My first job after graduating from college was at General Motors (GM). My job at GM was to develop new product development methods based on the latest research and best practices. To do this I had to synthesize information, detect subtle patterns, and connect the dots. This came naturally to me and I thoroughly enjoyed my job. Since then, I have been on a path to do the same thing with startup management. It took time—nearly two decades of being an entrepreneur, being around entrepreneurs, studying entrepreneurs, and studying innovation—for the stars to align. When I was presented with the opportunity to write the book, I immediately contacted Dr. Gina O'Connor about contributing to the book because of her outstanding research in studying corporate entrepreneurs. She suggested that I coauthor the book with Joanne, who is a world-class innovation consultant, and I agreed. Joanne has spent about as much time studying and working with corporate startups as I have spent working with startups, and our two methodologies are based on the same type of thinking.

The inspiration for this book comes down to our desire to change the way startups are managed, from a “go with your gut” approach to a more methods-based approach of managing the uncertainties that every startup faces.

How We Got Here

Joanne and I met in 2004 at Rensselaer Polytechnic Institute (RPI), when Joanne was a guest lecturer at my MBA innovation class. I approached her after the class and asked her what it would take to launch a consulting business. I was passionate about how innovation methods could be applied to startups. I knew from firsthand experience that traditional management methods did not work.

As I mentioned earlier, my first experience with innovation came at GM, of all places. It was my first job after graduating with an electrical engineering degree from the University of Rochester. I was selected to be part of an internal group that served as a quasi think tank or consulting group for a division of GM. The mission of our group was to change the way GM did business—quite a lofty mission for a group of very young engineers (the oldest at the time this group launched was 26). But I was young and did not understand how big a mountain we had to climb. My job was to develop new product development methods based on customer needs and competitive analysis. This was the mid-1980s, well before books on competitive analysis, Quality Function Deployment (QFD), or six sigma became commonplace. There I was meeting with experienced engineers and scientists, telling them that their approach to new product development was wrong. Needless to say, they did not welcome me with open arms. Over time, though, many groups began to implement these new methods; unfortunately, most groups did not, and by now we all know what happened to GM.

I could see even then that applying traditional management techniques to the development of truly different new products did not work. Unknowingly, our group developed methods that had learning built into them. The discovery methods that we developed had many of the elements that author Frans Johansson wrote about in The Medici Effect,¹ a book on how people develop ideas. After GM, I went on to launch or be the CEO of seven startups. It was during this time that I came to appreciate fully the fact that traditional management techniques should not be applied to startups. I realized that the myths perpetuated by the media, of entrepreneurs succeeding because of natural-born talent, persistence, and sheer will were just that—myths. We've all heard these myths and we want to believe them, because they are great stories. The stories of Steve Jobs, Bill Gates, or Mark Zuckerberg all making it big on one idea and their gut instincts make us all believe that if we can just come up with that one idea we too can create the next Facebook. But reality is more complicated than that.

Over the past couple of years, I have worked as an entrepreneur in residence and program director of the Entrepreneurship Center at RPI. During this time I have mentored more than 100 student and faculty startup teams. I have seen how strong the desire to put the pedal to metal is. Eric Reis in his book The Lean Startup² writes about how entrepreneurs are taught to just do it. I couldn't agree more. In my career, I have had that same desire to just build it. Ironsilk was a classic case of moving too quickly, of being too focused and of executing too well. Focus on executing a plan gets rewarded in mature firms like GE and IBM, but will kill most startups. Why? The answer is that most entrepreneurs are focused on the wrong things. Instead of focusing on testing the underlying assumptions that their startup is based on, they are focused on executing business plans that are filled with untested assumptions. In my experience, I find that entrepreneurs do this in an attempt to fit traditional management techniques to a startup environment. I too have found myself following the advice of seasoned corporate executives who never launched a successful startup in their lives. These well-meaning corporate advisers attempt to mold the startup in the image of their corporate experience, only to find that it doesn't work. The famed psychologist Abraham Maslow once wrote, “If you only have a hammer, you tend to see every problem as a nail.”³ To these well-meaning advisers, a traditional management technique is their hammer. They are unaware that focus and execution on a plan are great for a mature business with little uncertainty, but fail miserably in an uncertain environment. Later in this book we will discuss how every startup is faced with numerous uncertainties based on assumptions. We will delve into how to identify these uncertainties and ultimately how to reduce the level of uncertainty surrounding your new venture.

Let's revisit the Ironsilk story. After 18 months of working around the clock, I learned that advertisers were willing to pay less than I expected and that Ironsilk's partners took up more face-to-face time than I expected. Naturally, I wanted to modify Ironsilk (i.e., pivot). Unfortunately, by this time we had exhausted all our funds and patience. I had failed. I remember asking my wife and partner, Barbi, if we could have figured this out sooner. At the time I wasn't sure. I was a few years away from putting the pieces together. I sometimes forget my successes, but I never forget a failure. I never forgot Ironsilk. I promised myself that I would never put myself in that position again, so, with my wife's blessing, I went back to school to get my MBA. It was at RPI that I met Dr. Gina O'Connor, who is now the associate dean of the MBA program at RPI, and Dr. Lois Peters, an associate professor at RPI. During one of their first joint lectures on breakthrough innovation, a lightbulb went off in my head. During this lecture, everything seemed to connect—my experience at GM, my startup experience, and innovation theory. It all made sense, and I knew my future lay in adapting innovation concepts to startup management. I have spent the past eight years doing just that and in the process developed an approach to entrepreneurship.

What follows is Joanne's road to this point.

I (Joanne) have always been a fairly independent thinker and driven by what is new or different as well as representing the underdog. Even on my first day of school, I wanted to take the bus and meet my mother there, a good example of this early independence. In my formative years, I was very involved in sports as a player, as a referee or umpire, and as a coach. I believe these roles provided me with the skills to assess what is fair, encourage the development of teams, and become an inspiring leader. It wasn't always easy being independent since I did not fit in easily to any group, especially during those challenging years of high school. At the time, I experimented in many ways to test the limits of what was possible. However, this helped me to build more emotional intelligence and develop increasing sensitivity to the resource and organization issues dominant in more established companies. Once I embarked on my career, I went from one series of firsts to another—from introducing a new calling card format in response to unprecedented long distance fraud, leading a team of close to a thousand people across Canada to introduce a new signaling technology and database for 800 service, negotiating and being the marketing chair of a multilateral international alliance for the financial industry, bringing the Netscape business opportunity to Canada through our membership in Bellcore, building the internal venturing program at Nortel, and so forth. Of course, I did not do this on my own and it was only made possible by all the talented people I worked with.

Based on my 18 years in industry, combined with my personal ambitions to make a difference in this world, I embraced the RPI model for innovation because I saw it as the right path forward for companies. The road has not been easy, because change in companies takes time and is fraught with organizational resistance, especially considering that while we have come a long way in what we have learned about how to build a systematic capability for innovation, we still have further to go. In my time working with companies and teaching today, I am firmly convinced that we have cracked the code or the principles for how to make innovation work as the basis for propelling companies into the future and as a key source of country competitiveness. When I left for Nortel in 1996, my New Business Opportunities team gave me a plaque (still in my office today) that says, “Excellence can be attained if you…Care more than others think is wise, Risk more than others think is safe, Dream more than others think is practical, and Expect more than others think is possible.” For me, this is what innovation is all about, and it requires courage. It is accomplished through passionate people, within the right culture and support structure that enables them to conceive of opportunities, experiment with them in the market to reduce uncertainty, and then proceed to the commercialization process.

The Book Is Not…

I (Remy) often get asked if I've ever read The Lean Startup by Eric Reis. The answer is yes. In fact it was one of the two required texts for one of my startup classes, the other being the Steve Jobs biography by Walter Isaacson.⁴ Bear with me as I delve into some business-speak here, as it is needed to fully understand how this book differs from Eric's book.

There are decades of books and academic research on innovation. You might think after all these years that people would have a clear definition for innovation, and you would be wrong. One only needs to Google the phrase “what is innovation” to see how many definitions there are. However, there does appear to be a general consensus that innovation is not an invention or idea (see the first sidebar, “What Is Innovation?”). In order for an invention or idea to be of value, it must move through the innovation process and be commercialized. I use the word commercialized in the broadest sense to mean that an idea or invention has been transformed into some product, process, or service that people are using. Creating a prototype is also not enough since it is not in commercial use. Joanne and our academic contributors view innovation as an emerging discipline in more established companies with an enabling process, and not as an outcome. If you think of innovation as a discipline, then the failure to commercialize doesn't mean innovation hasn't occurred. I agree; however, I want to emphasize that for the startup, the startup process is the innovation process. It evolves to a discipline only once it becomes a systematic capability in the startup ecosystem. This takes us away from innovation as an outcome and suggests that we need to think about the future of innovation as a discipline in the startup world as well.

Another area that has gotten a great deal of attention is the type of innovation. One will often hear terms like disruptive, discontinuous, breakthrough, game-changing, radical, evolutionary, incremental, and more in any innovation discussion. We believe that innovation lies on a continuum from incremental (small changes) to breakthrough (very large changes).

This book does not deal with incremental changes. In the corporate environment, incremental changes are handled by traditional management techniques such as a phase gate process. In the noncorporate environment, small business owners who open up a restaurant or store handle incremental changes. As an innovation becomes more of a breakthrough, the level of uncertainty dramatically increases. One can tell when the level of uncertainty is high by the number of assumptions that the new business plan is based on. For example, opening up a State Farm insurance office has some degree of uncertainty centered mainly on the organization and market, but such a level is nothing when compared to what the entrepreneur deals with. In addition to technical uncertainty, the entrepreneur deals with organization, market, and resource uncertainties. The goal, then, for any entrepreneurship method is to help the entrepreneur manage and reduce the uncertainties.

There also appears to be a general consensus by innovation specialists that there are phases that ideas and inventions go through to be transformed into a product, service, or solution. We believe those phases to be Discovery, Incubation, and Acceleration, or, as featured in this book, Plant, Pivot, and Propel. These three phases make up the innovation process and discipline described in Chapter 2. Plant is where ideas come to light and a business vision is seeded. It is the phase where the entrepreneur or corporate entrepreneur decides on what business opportunity he or she will proceed with (see the second sidebar, on nonprofits and social ventures). Notice that we use the word business, not product. Unlike the inventor, the entrepreneur is concerned with innovating, which means that entrepreneur is concerned with developing a business. The same holds true for the corporate entrepreneur, yet within the company. Therefore, before moving on to the Pivot or Incubation phase, both entrepreneur types must have a business or opportunity concept. It is during the Pivot phase that the entrepreneur begins to incubate the concept by going through a validated learning process that reduces the uncertainty.

Now back to The Lean Startup. We believe that The Lean Startup deals primarily with Incubation, while this book deals with all three phases. Also, The Lean Startup appears to us to deal mainly with lower levels of uncertainty and not with breakthrough-type innovations. In fact, applying any type of lean methodology to breakthrough innovations will most certainly result in failure. We do owe Eric Reis our thanks for spreading the concept of validated learning to such a wide audience. Eric, along with others, is part of a movement that has been dissatisfied with the “pedal to the metal” approach to entrepreneurship. This movement recognizes that learning methodologies have a real-world impact on the probability of success. Joanne Hyland, Dr. Gina O'Connor, and Dr. Lois Peters have been preaching the value of validated learning since 2001. According to the book Technology Ventures,¹⁰ the concepts of validated learning date back to the early 1980s, when Tom Peters and Robert Waterman wrote about “Ready, Fire, Aim” in their best-selling book In Search of Excellence.¹¹ In Technology Ventures the authors put forth their own validated learning model of Act—Review and learn—Fix and adjust. In a 1995 paper entitled “Critical Assumption Planning,”¹² Sykes and Dunham wrote, “Corporate managers of existing businesses are judged against meeting plan. In growing new businesses, however, strict adherence to ‘the plan’ can lead to business failure. To manage business development risk, venture managers must learn to deal with uncertainty. Whereas managers of mature businesses practice the ethic of predictability, venture managers must follow a learning ethic.” Sykes and Dunham were right on target!

How the Book Is Organized

The book is organized into chapters that cover individual startups and corporate startups separately. While there is certainly agreement on the management concepts between the individual entrepreneur and the corporate entrepreneur, each has enough of its own challenges and methodologies that we felt it was important to deliver separate chapters focused on each.

The book is divided into four parts: Part One, “The Tale of Two Entrepreneurial Worlds”; Part Two, “Plant = Discovery—The Business Vision”; Part Three, “Pivot = Incubation—The Missing Link”; and Part Four, “Propel = Acceleration—The Business Ramp-Up.”

“The Tale of Two Entrepreneurial Worlds” covers the foundational concepts of the book. This part makes the case for why traditional management techniques fail in a startup environment. It covers fundamental concepts like innovation, uncertainty, and assumptions. The goal is not to make you an expert in this field, as there are many other books that do this; instead, we want the reader to feel comfortable with innovation concepts. We also discuss the differences and similarities between the entrepreneur and the corporate entrepreneur.

“Plant” is considered the first phase of innovation. It is the Discovery phase where ideas are generated and opportunities identified. In this part, we cover how to define a business or opportunity concept, and we touch on the Open Innovation imperative. We introduce the Big XYZ framework, a unique approach to stating a business concept, and discuss how to identify the problem, define the startup's vision, and determine the addressable market. In addition, we cover how to identify the best market opportunity for a technology or platform. From the corporate perspective, we cover how to conceptualize an opportunity and communicate its organizational value. We also highlight the importance of the business vision for keeping the game in play.

“Pivot” is the second phase of innovation and includes all Incubation activities. It covers our market-learning framework for the corporate entrepreneur known as the Learning Plan. We also delve into our market-learning framework for entrepreneurs known as The Pivot Startup methodology. We cover issues like identifying uncertainties and creating experiments that convert assumptions into knowledge. This is the phase where startups often pivot, if they haven't already run out of money. We cover methods that empower entrepreneurs to get answers quickly, so they can get to the pivot point with plenty of time and money to spare. On the corporate side, teams work through learning loops as they experiment and evaluate learning outcomes in terms of staying the course or pivoting.

“Propel” is the last phase of innovation, when a startup is ready to grow quickly and scale. Move from Pivot to Propel too quickly and you risk failure. Move too slowly and you risk missing the opportunity. We cover methods that help the corporate startup integrate with product development processes and transition into business units smoothly and effectively.

Let's move now to Chapter 1 and challenge this “pedal to the metal” mind-set.

Notes

1. Frans Johansson, The Medici Effect (Boston: Harvard Business School Press, 2006).

2. Eric Reis, The Lean Startup (New York: Crown, 2011).

3. Abraham Maslow, The Psychology of Science (New York: Harper & Row, 1966).

4. Walter Isaacson, Steve Jobs (New York: Simon & Schuster, 2011).

5. UK Department of Trade and Industry (DTI), “The Innovation Report,” December 2003.

6. “Innovation,” Wikipedia, http://en.wikipedia.org/w/index.php?title=Innovation&oldid=519961810.

7. Brian S. Cumming, “Innovation Overview and Future Challenges,” European Journal of Innovation Management 1, issue 1 (1999): 21–29.

8. Rosanna Garcia and Roger Calantone, “A Critical Look at Technological Innovation Typology and Innovativeness Terminology,” Journal of Product Innovation Management 19, issue 2 (March 2002): 110–132.

9. Dan Olofsson, “Radical Product Innovations,” IDP, January 15, 2003.

10. Thomas Byers, Richard Dorf, and Andrew Nelson, Technology Ventures: From Ideas to Enterprise (New York: McGraw-Hill, 2010).

11. Thomas J. Peters and Robert H. Waterman Jr., In Search of Excellence (New York: Harper & Row, 1982).

12. Hollister B. Sykes and David Dunham, “Critical Assumption Planning: A Practical Tool for Managing Business Development Risk,” Journal of Business Venturing 10 (1995): 413–424.