How start-ups can stay lean and mean and survive the crisis

Now could be a good time for new ideas, says entrepreneur and author Steve Blank

Steve Blank: ‘When the asteroid hit the earth and wiped out the dinosaurs, it was the mammals who prospered and filled the empty niches’

Steve Blank: ‘When the asteroid hit the earth and wiped out the dinosaurs, it was the mammals who prospered and filled the empty niches’

 

As the father of the lean start-up movement, whose ideas have inspired many of this generation’s most disruptive innovators, Steve Blank is well known for his advice about the need to “get out of the building”. The thinking is that you seek early customer feedback to an idea rather than locking yourself away, designing what you often mistakenly think is the perfect product or service.

Ironically, Blank says, now is the perfect time to do this. In the midst of the Covid-19 lockdown, “getting out” is by necessity a virtual experience right now, but the Silicon Valley serial tech entrepreneur, author and academic still sees it as an ideal time for innovators to garner feedback on their ideas.

“The potential people that you want to talk to are going nowhere and, more importantly, their gatekeepers are not home. With the secretaries and PAs hunkered down somewhere else, you could probably get to some very influential people you’d never usually have access to. Just be respectful and you might be pleasantly surprised,” he tells The Irish Times.

Not that Blank is in any way underestimating the scale of the unfolding crisis. Blogging a month ago, he said that businesses needed to get a handle on whether this was going to be a three-month, one-year or three-year problem for their business. This week, he says, it is clear that this is an issue that won’t go away any time soon.

“I think it is a case of preparing for a mass extinction event and this will be a nuclear winter for many sectors. It is going to be longer and deeper than many of us expect. What is worse is when the authorities say ‘all clear’ – are you going to run out and have dinner in a tightly packed restaurant? While some in their 20s might say well say ‘yes’, those of us in our 50s and over I suspect will say ‘no way’ until they find a vaccine. Will you fly economy class packed in a plane with a lot of other people? The answer to that is also likely to be age-related,” he says.

We’re in a war so don’t overthink it. Set up a war room with your chief financial officer and top management

Blank’s 21-year Silicon Valley career included multiple tech start-ups, in sectors as diverse as semiconductors, military intelligence systems and video games. His last start-up, E.piphany, a customer relationship management solutions company, floated on NASDAQ in 1999 when Blank retired from business to concentrate on writing and teaching. He is now an adjunct professor at Stanford University and is co-author with Bob Dorf of the widely acclaimed bestseller The Startup Owner’s Manual.

Unique models

Blank is recognised for developing the customer development method that launched the lean start-up movement with others such as Eric Ries. This now widely adopted approach first highlighted that start-ups are not smaller versions of large companies but require their own unique models and tools.

Having learned from both success and failure in his entrepreneurial career, Blank says the most important thing for established businesses to do right now is to act decisively rather than to get caught in the headlights.

“We’re in a war so don’t overthink it. Set up a war room with your chief financial officer and top management. Contact your largest customers and get a handle on where you stand with them. Most CEOs are optimistic and are designed to grow their businesses. They are often not built to handle full-time crisis so they need to rapidly reorient themselves and micromanage for survival. Rapid and urgent are key words to have in your lexicon right now.”

Based on what can be forecast, businesses need to right-size themselves. What were considered fixed costs should be reviewed and renegotiated where possible. Salaries should be sliced, beginning at the top level. If headcount needs to be cut, Blank says cut once and as deep as you think may be necessary.

“If you do that in increments it becomes death by a thousand cuts and you paralyse the entire organisation as everybody wonders if they are going to be next and the focus shifts to their resume and next job. I am not suggesting randomly axing whole swathes of the organisation, and you need to protect the most vulnerable. But when you do it, you need to do it with urgency.”

Maths formula

Blank expresses the current need for urgent action as a maths formula. “Survival equals the speed of making decisions, times the number of decisions, times the magnitude of those decisions.”

Right now, what matters is cash in the bank. Blank adds that debtors’ ledgers should also be treated somewhat sceptically and that you shouldn’t assume that every invoice will be paid.

As an established company you need to figure out a two-year cash runway. Start-ups have nothing like that degree of luxury, he notes. For start-ups and early stage innovators, business models need to be totally revisited. What was relevant as recently in March may be pointless today.

“If I were in a start-up with a head of sales who had given me a revenue forecast, I would want to personally dial through all of those customers and numbers. It’s not that the person in that position would be hiding anything. It’s just that they have a habit of being overly optimistic.”

A veteran of venture capital funding, Blank says that those looking for funding need to see things from the perspective of potential investors.

“Start-ups need to understand that VCs are also playing lifeboat strategy with their portfolio. If you are raising money from angel investors they may have got creamed in the stock market, and while they may still be fogging a mirror they may not be writing cheques.”

When you are talking to investors, Blank says that there are two very specific things you should quiz them on.

There are smart investors who realise there will be a 2021 and 2022. Those are the people you want to find

“Firstly, can you make investment decisions over Zoom, and secondly, tell me the number of cheques that you have written in the last 30 days. If the answer is ‘no’ or ‘zero’ to those questions, thank them politely but take them off your list.

“It’s not that there’s malice involved but some of them are still figuring out how you assess companies over Zoom and some have decided to shut down this type of investment. They never quite tell you that so you just have to be that bit more aggressive by asking these questions.”

Cash piles

On a more positive note, Blank says that, ironically, some VCs may be sitting on cash piles right now and if you can find the ones that have “dry powder” left, it could be an ideal time to secure funding.

“Did that VC just raise a billion-dollar fund? If so, I’d be calling them. It may be the case that they might have intended using that capital to support their later-stage deals which may be their most valuable but whose bottom may have just fallen out. Airbnb, for example, is worth half of what it was two months ago. There are smart investors who realise there will be a 2021 and 2022. Those are the people you want to find. You need to ask what they are you looking for now.”

Blank says that while the Covid-19 crisis will lead to a massive global recession, it will also herald opportunities for others.

“When the asteroid hit the earth and wiped out the dinosaurs, it was the mammals who prospered and filled the empty niches. I think we will see the same thing here. New types of businesses are created when others are running away. Smart investors who have access to capital will see opportunities for innovation. There will be a dawn. It won’t be a zombie apocalypse for everyone.

“For companies that do have resources, it’s an enormously productive time to pick up people and assets you could never acquire, because everyone else is dumping them on the street. If you are lucky enough to be a business that has cash, this is an interesting time,” he concludes.

Blank’s canvas

1. Double down on lean methodology right now. Customer feedback is more important than secrecy when developing a business model.
2. Existing companies execute a business model. Start-ups need to discover their model.
3. Founders tend to fall blindly in love with their business ideas. Test your hypothesis, validate, tweak, pivot or abandon.
4. Every crisis creates opportunity. Engage your team to look for appropriate market gaps and how you might adjust your business model to fill them.
5. Your career will only last 14,000 days. Think about your contribution to society and your legacy.

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