On this week’s episode of Inside Outside Innovation, we sit down with the legendary Steve Blank. Steve is the author of the Startup Owner’s Manual and we also know him as the father of modern entrepreneurship. Steve and Brian had a chance to talk about the evolution and changes since the inception of the lean startup movement, as well as some of the coming changes we see in the world of work, education, government, and more.
Inside Outside Innovation is the podcast that brings you the best and the brightest in the world of startups and innovation. I’m your host Brian Ardinger, founder of insideoutside.io, a provider of research events and consulting services that help innovators and entrepreneurs build better products, launch new ideas, and compete in a world of change and disruption. Each week we’ll give you a front row seat to the latest thinking, tools, tactics, and trends in collaborative innovation.
Interview Transcript with Steve Blank, Father of Modern Entrepreneurship and Author of the Startup Owner’s Manual
Brian Ardinger: Welcome to another episode of Inside Outside Innovation. I’m your host, Brian Ardinger. And as always, we have another amazing guest. Today with me we have Steve Blank. Welcome to the show, Steve.
Steve Blank: Thanks for having me, Brian.
Brian Ardinger: Steve Blank I’m so excited to have you on board because you have led the way when it comes to lean startup and all the methodologies around that. For the two people in my audience who haven’t heard of you, I’m going to give a quick bio. You’re a serial entrepreneur turned educator. We know you as the father of modern entrepreneurship. You’re part of creating the lean startup movement, which changes the way startups are built. How we teach entrepreneurship and how we commercialize science. How companies and governments look at this whole space. You’re author of a couple of books called The Four Steps to the Epiphany and the Startup Owner’s Manual.
Both of which I recommend highly to my clients and startups. You also teach at Stanford and Columbia and the list goes on and on. So, I’m super excited to have you on the show. But I thought we’d start off going back to 2013. You wrote an article in the Harvard Business Review titled why the Lean Startup Changes Everything. And it was one of those quintessential articles that I think kicked off a movement and kicked off a lot of conversation around innovation. What surprised you the most since you wrote that article and what surprised you during that journey?
Steve Blank: That’s a great question. You know, the lean startup big insight was that the startups weren’t the smaller versions of large companies. For the seven years, since the HBR article, we’ve discovered that companies aren’t larger versions of startups. Meaning that corporations started adopting startup methodologies because they were seeing disruption by startups and globalization and China, and then new technology and said, Hey, we can run incubators and accelerators and we could just operate just like that.
But in fact, what I think we’ve created in the last seven years is mostly innovation theater, rather than innovation in large companies. And not because anybody is being stupid, but because we’re learning, what people have been talking about for 20 years, is that 99% of your company is actually doing execution. That is executing that known business model. And all the processes and procedures and OKR and KPIs are designed for execution. But those things tend to strangle innovation in its crib.
And unless you’re going to fix all those processes. And that is specifically create what was labeled in the 20th century, the ambidextrous organization, that is one that could innovate and execute. You’re going to end up having great posters and coffee cups about innovation, but not much innovation because what’ll happen is, you’ll create these islands of innovations as innovation activities, but they really won’t be connected to the rest of the corporate infrastructure. The output of those incubators will die. And it’s again, not due to malice, but due to the fact that you really need to make some more fundamental changes, if you want that to happen. Or you just need to acquire companies rather than try to do it internally.
Why Aren’t Companies Ready for Disruption?
Brian Ardinger: It speaks to an interesting point. So, for years, we’ve seen major shifts coming on the horizon, whether it’s the rise of startups, accelerating technologies. Now we have a pandemic. Why do you think companies are still getting caught flat footed when it comes to disruption and being better able to handle the new next?
Steve Blank: If you really think about who runs large companies, if you’re great at managing hundreds or thousands or tens of thousands of people, you’re a world-class executer. There are very few companies that are still run by their innovators or by innovators. You know, the ones that are, we see both the good and the bad. The canonical poster child right now is the Elon Musk. Created industries from scratch and as certifiably insane. There’s good news about working at Tesla and there’s bad news in directly reporting to Elon. And before him, the poster child was Steve Jobs. Created industries from scratch and probably, you know, a horrible human being to work for.
Versus working in a stable corporation where there are processes and procedures and things unfold in a regular basis, and you can know what to expect when you show up in the work. That works great when your competitors are operating the same way, and it’s a steady state world outside. That’s in fact exactly who you need is an executer. Well, when things are chaotic and disruptive or technology has changed or something else, those world-class executor’s have a real hard time figuring out what innovation looks like.
And in fact, the worst case that I see, and I don’t mean it as a dis, but you sometimes will even get the innovation head nod from those leaders. Is that you’ll try to describe to them what they need to do inside their corporation, and they’ll nod and “Oh yes, you know,” in fact, sometimes they’ll even say, “Oh, innovation is third pillar of our agency and whatever.”
And then, okay, well where’s the exec staff table. “Oh, it’s three layers down in our org.” Well, have you changed any of your HR or security or policy or anything else or “no.” Or do you have a 10% contingency for unplanned innovation? “Oh no innovation stands in line for next year at the budget table.” And then you realize it’s gotten nice words, but it’s really not a part of the DNA.
You know, I’m not a believer that everyone in the company needs to be an innovator. I believe that we need to understand that the people who do world-class innovation and world-class execution come to work for very different reasons. And we can build innovation processes into existing P & Ls in divisions for what McKinsey used to call horizon one and two. We also need horizon three people who are working on disruptive stuff.
And as I said, some companies just can’t change their culture to do that. So they need a process to acquire innovation, whether it’s people or product line, or P & L, etc. But again, as some of those companies run into problems, when they try to integrate those acquisitions, they tend to kill innovation. Google, and all the robotics acquisitions or Google and Nest are great case studies of what happens to innovation companies when they meet execution organizations.
Steve Blank’s Advice on Discovering New Opportunities
Brian Ardinger: So now we’re living in this pandemic and I think you’ve called this a mass extinction event for a lot of companies. Whatever business model you are working on in January of 2020 is probably not the same or is obsolete or definitely needs taking a look at. The problem that I see is a lot of the companies, they don’t have anything to pivot to. They’ve never really thought about the model beyond what their original model. So do you have any advice or thoughts on how companies can better discover new opportunities or plan for a future that doesn’t exist? You know, something entrepreneurs do daily, but something big companies don’t do.
Steve Blank: Just a couple of thoughts. One is you could pray for V-shape recovery, which I do think evidence says that’s probably unlikely in the United States. And by the way, in some industries it’s just been done to you, regardless of what you think. If you’re in travel or hospitality or whatever your business has gone down by 90 some odd percent and more importantly, the assets that were important before now, albatrosses, you know, there’s a couple of things to think about it is there’s some business that just unrecoverable. Meaning people who booked in your hotel, you can’t get that lost business back.
There’s some business that’s pent up, meaning it will come back. It’s just delayed, and it might come back. It could double. But if you’ve been a world-class executer and you’re in a large company or a company with more than 10 people, sitting inside of your organization, are innovators who, in fact, if you unleash them, they actually are pretty good at figuring out new business models. This might be the innovators finest hour. I would make the problem a corporate wide problem and say, Hey, anybody has any ideas about new businesses that we could go into or how to repurpose or our channel or physical assets, or is there a way to do what we’ve been doing physically, virtually?
I have to tell you the most interesting example I’ve seen is a very small business. That would have been dead. There were these women who did kids’ birthday party entertainment, and we went well, that’s over, right? You can’t show up at somebody’s house and put on the clown nose or do the balloons or whatever. And they were like, okay, we’re you know, going on unemployment, until they realize that no parents were now stuck at home with kids who really did need to be entertained. Well, what the heck, let’s try it on Zoom. And they discovered that well, it didn’t have obviously the proximity and they couldn’t throw things to the kids. They could do more events per day virtually and parents were just happy to have entertainment events, that their business actually doubled.
And I used that as a proxy of who would have thought if you would have told these same people pre-pandemic that you could do kids’ entertainment birthday parties via video conferencing. You would have got laughed out of the room. Because the other thing to think about is that the pandemic has now educated hundreds of millions, if not billions of people, about new forms of work, new forms of communication, new forms of entertainment that would have taken decades for us to become aclimatized to.
I’ll give you a specific example, is that, well, I think we’ve now proven, at least for a first sales meeting, a video conference is probably just fine. Subsequent meetings for high dollar sales probably do require in person calls, but I think everybody’s kind of understood no a get to know you video conference is probably good enough. Boy, that’s going to change travel. That’s going to change cost of sales. That will change productivity. And I don’t think he could have ever convinced people that.
Same thing with showing up at work. We’ve in general concluded that you know what you really don’t need to drive 45 minutes to go to work, to sit there all day to do email and video conferences and drive back home, five days a week. But I think we’ve also discovered that human beings need proximity to each other for socialization and being able to read body language, etc. And so, the nature of work might be you show up and one or two days a week inside a physical location.
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Steve Blank on COVID’s Impact on Learning
Brian Ardinger: We’ve been talking a little bit about remote work or the future of work in general, but the other big industry that’s going through disruption is universities and the world of education. What are your thoughts on that and how COVID will impact the way we learn?
Steve Blank: Well, it’s very funny, as you mentioned, I teach at Stanford and Columbia and at least this fall at Stanford, it’s still going to be mostly a virtual university and we’re now going to four quarters year round and a lot of my students are just taking a gap year or going, you know, I didn’t sign up for this. You know, I want not only the education and the brand, but I also want the socialization and what that means. And here’s the punchline is boy, there’s a bunch of schools you probably couldn’t have never gotten into before.
I’d be applying now. The first year might be virtual, but you might be getting in the schools that actually you’re going to be happy you applied for. I think this is all also acclimatized, a lot of people to online education. And for those, who’ve had young kids at home. You’re hoping that ends yesterday because just having those kids under foot are kind of difficult. And more importantly, none of the classes are standard. That is your second grader has a different package than your fourth grader. And boy, they don’t have it. So you’re trying to figure this out, but same is true for universities. I think a lot of people are discovering that some learn just as well online than in person.
I happen to be an in person to learner, but some people might actually get a lot out of it. And it’s done not the top tier research universities that are gonna get hit, but people who were paying, you know, tens of thousands of dollars for mid and lower tier universities might be going. Well, wait a minute. You Udacity or EdX or some of these online universities, Arizona, that actually have standardized online classes. Like what’s the difference. And so, I think we’re might see is some impact on not on the top tier schools, but on the mid and bottom tier schools.
And the other part of the impact that goes unsaid though, the schools certainly understand that. Is somewhere between 10 and 40% of depending on the school, enrollment are international students who can no longer come into the United States, but when you cut that out and that was, kind of the reason why a good number of them were still in business in the 21st century, when in fact the economics didn’t work with just U.S. students. And that might be the biggest killer. I think the combination of foreign students not being able to show up and the opportunity of online learning.
The other thing is online learning allows you to do is think about new careers in a way that you never could have pivoted before. If all of a sudden, you’re thinking about, do I really want to spend my life building fart apps versus maybe I could go into medicine or something else, given all this social justice things going on around us or all the healthcare things. It’s pretty easy to test some of this stuff by taking some online classes and thinking about maybe I ought to think about a new career.
Global Centers of Innovation
Brian Ardinger: That’s an interesting point, especially when it comes to startups. So Silicon Valley has been the epicenter of a lot of innovation technology and that. You’re seeing with methodology like Lean Startup, pushing the rise of the rest and these things can spin up pretty much anywhere. Do you think that Silicon Valley will remain the epicenter of technology innovation?
Steve Blank: Silicon Valley is no longer the epicenter of innovation. When I came out here in the seventies, it was between Silicon Valley and Boston. Silicon Valley then dominated. But in since then, obviously, I’d say there’s now maybe 10 or so centers of innovation with two of them, at least two of them in China. You know, Northwest Beijing and the Pearl River Valley. New York City was literally architected by Bloomberg in its second incarnation of a innovation ecosystem. Boston and San Diego emerged as life science. You know, we’ve talked about tech, but there’s a parallel universe in therapeutics and diagnostics devices, digital health. So, I’d say Boston and San Diego. Israel invented themselves from scratch from a socialist country into an innovation ecosystem. You know, I would have said London, but I think they shot themselves in the head with Brexit.
We could argue if there’s any others in Europe. At the scale for me, innovation ecosystem, just by the way, for your listeners, it’s no longer where does innovation occur and where are entrepreneurs, entrepreneurs are everywhere. And in fact, angel funding is almost everywhere. I mean, like in your grandmother’s basement, you could find, you could find a seed round, but the question is how many places in the world can you raise a hundred million dollars for a crazy idea?
And then when I say innovation cluster, you really think about it. A cluster requires innovators, but risk capital, angel and venture capital at scale. And that’s the word at scale. And the other definition of a cluster is that it’s a magnet, not a jobs creation program for local residents. That is people come from around the world to that location. And then as I said, there’s probably about 10 of them in the world. I’d probably throw in Singapore as well, but there’s not too many. Now to answer your question, you know, will Silicon Valley continue to dominate, I think it will continue to dominate the U.S. In hardware and software. But I think the, the notion of as a physical place, that’s a different conversation because I think we’ve discovered you no longer need to live in San Francisco.
And it’s a meta question of do you know, no longer need to live in an urban area. And will the urban areas that were magnets for innovation clusters like New York and San Francisco and whatever, still be those dominant places where innovation occurs versus where the risk capital lives. Does that make sense?
Startup and Corporate Collaboration
Brian Ardinger: Yeah Absolutely. The last core topic I wanted to talk about is this idea of startup and corporate collaboration. And how do you see the world changing with new technologies spinning up? The effect of COVID and that? Are you seeing more startup collaboration with corporates? How do you see the two different worlds living together?
Steve Blank: The thing I’m most hopeful for is the collaboration between government and startups. You know for the last 200 years, ever since Washington crossed the Delaware in a leaky boat, they’ve been arguing about what’s called acquisition. It’s how does the government buy stuff.
And you know, ever since that leaky boat, they’ve been arguing about what’s the best way to buy things from private industry and from the government. And historically it was, well, we’ll give you a spec. We’ll try to think of all the features way before we actually need them and here go bid on it and then deliver it. And of course, by the time you got it, the need is changed or you’re late or something else. By the way, the reason we asked for it is so we could operate it and use it to do whatever we want.
And therefore, you had a design manual, so our soldiers could operate it, etc. But now people realize about 40% of what the government, particularly the military needs could be bought by outcomes rather than things. And by outcomes. I mean, If you think about it, you know, the government was building their own rockets first through contractors. And then they started going out to people like Space X and Blue Origin and buying, you know, their rockets until someone said, well, wait a minute. Why do we even like, want the rockets? Rockets are just a means to an end, which is we want to put stuff in orbit. So why don’t we just buy outcomes? Which says, no, no, no, we’ll pay you when you deliver this payload. You guys operate the rockets and you guys do something.
Imagine we were buying outcomes. And in fact, NASA has kind of led the way in this. One of the latest procurements was something called the Gateway, which was a space station around the moon. And a very short description was no, no, no, we’ll pay you when you deliver the space station in lunar orbit. Whoa. Wow. That’s a really insightful…then of course you can’t buy everything that way, but you know, I can imagine someone in the Navy waking up and say, gee, for 50 years, we had submarines and unmanned vehicles trying to map temperature and salinity to figure out where Thermo climbs were, etc.
Just imagine if the Navy I said, no, no, no, here’s a $10 billion business here. We’re going to create. All we want is that data. And we could actually start an entire startup ecosystem if we said no, no, no, we’re buying thermocline data for the South China Sea. Anybody who wants to bid on that? That’s all we care about is the outcome.
And I’m using that as examples. And by the way, obviously that will apply to companies dealing with startups as well. I might not want to buy the thing. I might want to buy the service. And in fact, you know, Amazon Web Services is a kind of instintation of that is we no longer think that we need a server closet or a server room or data center. We kind of buy outcomes of having those machines. You know, at some point we’re going to buy outcomes of having results. You know, I don’t care about having all that customer data. All I care about is upsell or cross sell or lift. That’s an outcome versus the data. Does that make sense?
Steve Blank on Being Optimistic
Brian Ardinger: Oh, absolutely. The last question I want to talk about is we’re living in uncertain times. But what are you most optimistic or excited about.
Steve Blank: That the sun comes up every morning and that, you know, in uncertain times, we forget that most of our history has been lived in uncertain times and that the stable times are actually anomaly. Out of that crisis almost always comes opportunity. And that if you’re an entrepreneur, you’re going to be looking around going well, things have changed. And some of them are permanently altered for sure. People’s behavior has been changed. And the question is how much of that will stick. And how much is that an opportunity for our new set of things to occur?
I think that’s true just for businesses, but also for the way, you know, for social justice and other parts of our lives. The world who kind of looks a little different. I’m old enough to have lived through a couple of these things. And for most part, it is made our country and our economy better and more inclusive. But when they occur, they’re painful. But as I said, out of chaos and crisis comes opportunity.
Brian Ardinger: Yeah. The more problems we have, the more solutions we can find to solve those particular problems.
Steve Blank: As long as the sun comes up the next morning.
For More Information on Steve Blank
Brian Ardinger: Steve Blank, I want to thank you so much for being on Inside Outside Innovation. Coming and sharing your insights and that. It’s been an honor. I’ve obviously looked up to you and all your work. And appreciate you coming on and sharing that with our audience. If people want to find out more about yourself, about your books, about what you’re working on, what’s the best way to do that?
Steve Blank: I have a website called SteveBlank.com and it has some pretty interesting blog posts and tabs on top that are worth exploring. And hopefully I’ll see your listeners there.
Brian Ardinger: Excellent. Steve Blank, thanks again for being on Inside Outside Innovation. Look forward to continuing the conversation.
Steve Blank: Take care. Thanks for having me.
Brian Ardinger: That’s it for another episode of Inside Outside Innovation. If you want to learn more about our team, our content, our services, check out InsideOutside.io or follow us on Twitter @theIOpodcast or @Ardinger. Until next time, go out and innovate.
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