The Bigger the Problem, the Bigger the Opportunity. Lessons Learned From a Trip to Silicon Valley

Table of Contents

Preface

List of Figures

List of Tables

List of Abbreviations

Table of Contents

1. Introduction

2. Top 5 Key Learnings
2.1 From Idea to Enterprise
2.2 Launching the Company and Team Building
2.3 Diversity in Entrepreneurship
2.4 Driving Innovation
2.5 On Becoming an Entrepreneur

3. Conclusion

Works Cited

Preface

Entrepreneurs establish new businesses in the face of risk and uncertainty by identifying significant opportunities and assembling the resources needed to capitalize on them, with the ultimate aim of achieving profits and growth. Accordingly, the identification and evaluation of opportunities is one of the entrepreneur’s most important tasks. Emerging needs can often be identified through an examination of social, technological, and economic trends. To be sure, good opportunities are associated with market needs. Once a clear understanding of the problem not currently addressed by the market has been obtained, ideas must be formed to solve the problem. Investors are particularly drawn to ideas that solve big problems, as they often represent large opportunities. Iterative prototyping and testing in collaboration with users can furnish a better understanding of user needs. A minimum viable product can then be developed and offered to users. This ‘Design Thinking’ approach helps to clarify the problems faced by key prospective users.

The main objective of this paper is to summarize the key insights I obtained during my study trip in San Francisco in 2019. Most of the insights I present here are applicable to everyday business circumstances, regardless of whether one is an entrepreneur, intrapreneur, manager, leader or rank-and-file employee.

In the introduction, the terms entrepreneur, entrepreneurship and design thinking are described. In the following section, the top five key learnings of the study tour are discussed in detail (Section 2). ‘From Idea to Enterprise’ (Section 2.1) describes the core issues around deciding to pursue an entrepreneurial vision and the characteristics vital to success. ‘Launching the Company and Team Building’ (Section 2.2) talks about putting together a solid financial plan for the enterprise, including funding strategies. The team building process is described using the case ProjectSHED. ‘Diversity in Entrepreneurship’ (Section 2.3) discusses challenges faced by female entrepreneurs and the opportunities for mixed-gender founder teams. ‘Driving Innovation’ (Section 2.4) describes the concept of innovation potential within a company. The last day of the study trip focused on the skill set needed by an entrepreneur (Section 2.5). The essential findings are summarized in the concluding section (Section 3).

Date: 20th October 2019 Sebastian Peneder, BA, MA, MBA

List of Figures

Figure 1: Creativity Process

Figure 2: Product/Market Fit Pyramid

Figure 3: An entrepreneur’s guide to the big issues

Figure 4: Start-up entrepreneur focus

Figure 5: Elevator Pitch – Position statement format

Figure 6: The four stages of transforming an idea into a business

Figure 7: Sources of funding for Inc. magazine’s five thousand fastest-growing US companies in 2014

Figure 8: The flow of venture capital

Figure 9: ZOPA Zone

Figure 10: Vasper System

Figure 11: Elements of a scenario

List of Tables

Table 1: Basic five-step process of evaluating an opportunity

Table 2: Cultural differences between the EU and Silicon Valley

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1. Introduction

“Entrepreneurship is the pursuit of opportunity, without regard for resources currently controlled.” – Professor Howard Stevenson

Professor Howard Stevenson is the godfather of entrepreneurship studies at Harvard Business School. ‘Pursuit’ implies a singular, relentless focus. As business opportunities often fleeting, with a short window of opportunity, entrepreneurs typically have a sense of urgency that is seldom seen in established companies, which usually pursue growth strategies in a different manner. ‘Opportunity’ may entail becoming a pioneer with a truly innovative product; devising a new business model; creating a better or cheaper version of an existing product; or promoting an existing product among a new set of customers. ’Without regard for resources currently controlled’ implies that there are inevitably resource constraints. Moreover, entrepreneurs face considerable risks, which come in four types (Eisenmann 2013):

- Demand risk relates to a prospective customer’s willingness to adopt the solution envisioned by the entrepreneur.
- Technology risk is high when engineering or scientific breakthroughs are required to bring a solution to fruition.
- Execution risk relates to the entrepreneur’s ability to attract employees and partners who can implement the venture’s plans.
- Financial risk relates to whether external capital will be available on reasonable terms.

I was introduced to this quote and the associated explanations on 1 October 2019 while attending a design thinking class at Stanford University’s d.school, to which I was invited by Professor Perry Klebhan. Professor Kelbhan explained that a startup company needs to achieve a Product/Market Fit as quickly as possible, by relying on a minimum viable product (MVP). An MVP represents the easiest to release version of a product that allows one to rigorously test a business model. There are three core elements necessary to have an MVP, which are (1) the customer derives value from using the product; (2) the customer pays for the product; and (3) the product is sufficient to start a customer feedback loop, in which the customer can iterate toward an increasingly better product. The odds of success are higher if the entrepreneur can get something that works into the customer’s hands quickly, even if this product does not have all the functionality the entrepreneur would eventually like to include. The goal is to make a list of all of key assumptions and then to narrow down the assumptions to the most important, put them into a product the customer can use, and see if they will buy it (Aulet, Libava, Gerber and Gillman 2013: 237).

Professor Kelbhan’s lecture focused on Design Thinking and Lean Startup Methodology. Design Thinking is a human-centered design approach that starts with understanding the needs of the customers in order to integrate considerations related to viability and feasibility. At the heart of Design Thinking is an empathetic understanding of the user; the product development team closely assesses the potential customer’s statements, as well as his or her omissions. The overarching goal is to gain insights into the thoughts and feelings of users. In this way, Design Thinking centers on exploring the problem first, before thinking about a solution. To have a common understanding of the problems faced by key users, it is important to look at the problem from different perspectives and using a wider lens. This helps frame the problem from the user’s context before narrowing the focus to the key problem for the user. In other words, the ‘why’ question of the development initiative should be answered before thinking about the ‘how’ and ‘what’. Once the entrepreneur has a clear understanding of the problem, he or she seeks to formulate ideas about how to solve it. Prototypes are developed and tested in collaboration with the user, thus allowing the product idea to be further refined in line with user feedback. By virtue of numerous iterations, the team not only moves closer to the solution, but also has an even better understanding of the user’s needs (Alam 2019: 6 et seq.). Often a collaborative process is used to generate creative ideas for solving a problem. A typical creative process flow is shown in figure 1. The first step is to describe the problem. Next comes the incubation period, where the entrepreneur observes, studies, and gathers insights into the problem. This is followed by a brainstorming session, in which numerous potential solutions are elaborated in a small group setting. The next step is to develop additional insights and explore alternative inventive options. This step facilitates the construction of prototype that can be shared with potential customers. Failure at this stage can segue into rebooting the process. The entrepreneur continues around the loop until the prototype product solves the problem (Byers, Dorf and Nelson 2015: 164).

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Creativity Process (Source: Based on Byers, Dorf and Nelson 2015: 165)

Design Thinking is a process that is best practiced with the following mindsets (Alam 2019: 9):

- Human-centered
- Mindful of process
- Culture of prototyping
- Show, do not tell
- Radical collaboration
- Bias toward action

The Design Thinking approach developed by the d.school at Stanford consists of five main steps, namely (1) Empathize; (2) Define; (3) Ideate; (4) Prototype; and (5) Test. The iterations should be as short as possible in order to gain consistent feedback (d.school: Hasso Plattner Institute of Design at Stanford 2019):

- Empathize (i.e. understand the users): Before you build anything, take the time to really understand the customer, their needs, and their problem situation. Do not build anything until you fully understand (and have developed deep empathy with) the customer and what that customer cares about. Empathy is crucial to a human-centered design process like Design Thinking, because it allows you to set aside your own assumptions about the world and gain real insight into users and their unmet needs.
- Define the problem: After fully understanding the customer and market, what insights have we uncovered? What problems do customers have that no one is solving for them today? In this phase, you accumulate the information you created and gathered during the empathize stage.
- Ideate (i.e. develop ideas and solutions): Brainstorming – that is, come up with ideas on how to solve customers’ problems. No ideas should be considered stupid at this point in the process. The solid knowledge base from the first two phases means you can start to think outside the box, consider for alternative ways to view the problem and identify innovative solutions.
- Prototype: In this stage, you build a prototype of your solution. Start by prototyping with words. Show it to prospective customers. Get their input. Gain insight by watching their reaction. This is an experimental phase. The aim is to identify the best possible solution for each of the problems. Scaled-down versions of the products allow you to investigate the problem solutions generated in the previous stage.
- Test and iterate: Make refinements and show it again. Iterate and test, iterate and test, iterate and test: That is how great products are built. This is the final phase of the model, but in an iterative process such as Design Thinking, the results generated are often used to redefine one or more further problems.

A startup company is a catalyst that transforms ideas into products. As customers interact with those products, they generate feedback and data. Feedback can be both qualitative (such as what they like and do not like) and quantitative (such as how many people use it and find it valuable) (Ries 2011:75). In my opinion, design thinking is very valuable for determining customer needs and their biggest challenges. Professor Tom Byers of Stanford University lectures on the topics of high-growth entrepreneurship and technology innovation. In the first lecture I attended on 30 September 2019, entitled ‘From Idea to Enterprise’, he asserted the following: ‘The bigger the problem, the bigger the opportunity’. Global challenges can present huge opportunities. This begs the question: what will be the biggest challenge three years from now?

Professor Tom Byers believes you should apply the following three criteria to evaluate a potential venture:

1. Big Market: Is the market big enough and growing?
2. Great Product or Service: Do you offer a product or service that is ten times better (10x) than the competition?
3. Excellent Team: Do you have a team with technical and business knowledge onboard?

Good opportunities have the potential to solve important and timely problems. They also have the potential to be profitable and can be pursued under a favorable regulatory and industry context. Table 1 outlines a five-step process to quickly weed out unpromising ventures and thus conserve energy and time for promising ones (Byers, Dorf and Nelson 2015: 40).

Abbildung in dieser Leseprobe nicht enthalten

Table 1: Basic five-step process of evaluating an opportunity (Source: Based on Byers, Dorf and Nelson 2015: 42)

Dr. Jeffrey Bleich, the founder of Baxano Inc. and Counterspace, explained that an amazing product needs to have the Product/Market Fit, Growth Hack, Virality, and Retention. ‘Product/Market Fit’ means being in a good market with a product that can satisfy that market. Accordingly, you have to build a product that creates significant customer value. A framework that describes how to achieve Product/Market Fit is the Product/Market Fit Pyramid. As illustrated in figure 2, this pyramid consists of five key components, namely (1) your target customer, (2) your customer’s underserved needs, (3) your value proposition, (4) your feature set, and (5) your user experience (UX). Each component represents a layer of the pyramid. The market is the bottom section of the pyramid, consisting of two layers. The product is the top section, consisting of three layers. Within the product and market sections, each layer depends on the layer immediately beneath it. The Product/Market Fit lies between the top and bottom section of the pyramid (Olsen 2015: 3 et seq.).

Abbildung in dieser Leseprobe nicht enthalten

Figure 2: Product/Market Fit Pyramid (Source: Based on Olsen 2015: 4)

For many years I have been interested in ‘looking under the hood’ of the Silicon Valley ecosystem in order to see how business works in this epicenter of innovation. While it is theoretically possible to build a successful company almost anywhere, Silicon Valley startups and companies are animated by a different culture that often enables extremely rapid growth. How do massively influential companies arise seemingly overnight? What is needed to start a successful enterprise in Silicon Valley? How do entrepreneurs raise capital? I was curious to know whether the answers to these questions could inform my work. Could I potentially inject some of the magic of Silicon Valley into our operations?

2. Top 5 Key Learnings

On Sunday, September 29, we started our study program with a kick-off tour, riding a school bus to the oldest park in San Francisco, Buena Vista Park. This park has a rich history and has long been a hub for community gatherings. Until the late 1970s an estimated 100,000 followers of the hippie movement converged on the neighborhood and virtually occupied the park on a permanent basis. Hippies, also called flower children, were a countercultural group that rejected traditional values, embraced drugs, particularly LSD, as a tool for spiritual awakening, and were opposed to the Vietnam War. Buena Vista Park provides excellent views of the city from several lookout points; it is like a window onto the rest of the city.

I was intrigued to learn about the uniquely liberal atmosphere that prevailed in the Bay Area in the 1960s and 70s, and wondered to what extent this era paved the way for the innovative spirit that animates Silicon Valley today. While on the bus tour, I also thought about the parallels between the hippies – who migrated from around the US to San Francisco in order to discover a new way of life – and our group, which had travelled nearly 6,000 miles to learn about business practices in Silicon Valley. Like the hippies, we were throwing ourselves into an unfamiliar and potentially uncomfortable situation in order to learn and grow. This reminded me that to innovate and develop – whether personally or in business – it is imperative to step outside of your comfort zone; a failure to adapt to changing circumstances is a recipe for stagnation and death. Entrepreneurs are unique because they actively take on this challenge; they never settle or lose sight of their dreams – and, in pursuing them, are willing to take significant risks.

After the short visit at Buena Vista Park, we walked to a café named Coffee to the People near Haight Street, which was an epicenter of the hippie movement. The menu items had clever names, such as ‘Flower Power Coffee’.

Once we were adequately caffeinated, we drove to a hill called Twin Peaks, which offered a spectacular 360 degree view of the city. From the viewing area next to the parking lot at the top, we could see many of San Francisco’s famous landmarks, such as the Golden Gate Bridge, Alcatraz, the Bay Bridge, and Golden Gate Park.

In addition to visiting the Golden Gate Bridge, many of us took the Alcatraz tour as well. I was struck by the fact that this former prison is now a recreational park and home to several protected bird species. Everything changes over time. Think about the iPhone: It is now difficult to imagine that this smartphone did not exist in 2006? Big Data, the digital transformation, intelligent communication systems, artificial intelligence, machine learning, globalization, and demographic changes all means rapidly changing conditions for companies. Enterprises need to become more and more agile and innovation is one important key to success in today’s fast-changing world (Blum and Gabathuler 2019: 75).

Lifelong learning and a continuous willingness to develop one's abilities are a basic prerequisite for successfully mastering the digital transformation. Executives of the future will increasingly take on the role of a facilitator and coach. In this connection, one key task is to instill a sense of self-awareness and responsibility in employees. In corporate cultures where self-responsibility for one's own health is emphasized, employees are more likely to work both sustainably and efficiently (Majkovic and Negri 2019: 5).

This section highlights the key findings of the study trip in 2019.

2.1 From Idea to Enterprise

On Monday, September 30, we met together with our program director, at a great location near Union Square. The first activity was a mock ‘networking’ session. The goal was to make yourself interesting, such that your conversational partner ‘wants to hear more’. We had to describe our personal motivation for participating in this study trip within one minute. After this ‘pitch training’, we discussed the cultural differences between the EU and Silicon Valley in terms of entrepreneurial spirit. These differences were explored in a brainstorming session during the lecture and are summarized in table 2.

Abbildung in dieser Leseprobe nicht enthalten

Table 2: Cultural differences between the EU and Silicon Valley (Source: Author’s representation)

During the afternoon lecture, Professor Tom Byers explained his definition of entrepreneurship. In his view, entrepreneurship means a capacity and willingness to develop, organize and manage a business venture, including a willingness to face associated risks, in order to generate profits.

This definition is very similar to that offered by Scarborough and Cornwall (2012: 21), who assert that an entrepreneur creates a new business in the face of risk and uncertainty for the purpose of achieving profit and growth by identifying significant opportunities and assembling the necessary resources to capitalize on them.

In the opinion of Professor Byers, there are seven questions that must be answered by entrepreneurs when starting a business:

1. Why is your venture a true opportunity?
2. What is your strategy and competitive positioning?
3. What is the major risk?
4. How much cash do you have right now? What are your major sources of additional capital?
5. What steps are you taking to turn your group into an effective and innovative team?
6. Which of your personal entrepreneurial skills needs improvement?
7. How are you ‘making meaning’ and ‘scaling your vision’ at your venture?

Amar Bhide defined a framework that helps entrepreneurs to pose useful questions, identify important issues, and evaluate solutions. This framework, which works at almost any point in a venture’s evolution, consists of a three-step sequence of questions. The first step clarifies the entrepreneur’s current goals; the second evaluates their strategies for attaining those goals; and the third step helps them assess their capacity to execute their strategies. The hierarchical organization of these questions forces entrepreneurs to confront the basic, big-picture issues before they think about refinements and details (Bhide 1996). Figure 3 describes these questions in greater detail.

Abbildung in dieser Leseprobe nicht enthalten

Figure 3: An entrepreneur’s guide to the big issues (Source: Based on Bhide 1996)

The decision to start a company is unto itself a monumental step, for often it means abandoning the security offered by a traditional corporate job. In this way, an ability to define and focus on ‘big’ decisions is one of the most important fundamental skills an entrepreneur can develop. Figure 4 describes the decision-making focus that is required of entrepreneurs. Many entrepreneurs give too much attention to decisions that have marginal consequences for the future of the start-up. In this connection, it should be noted that entrepreneurs may define success in different ways. Some think that success in business merely means surviving, while others believe success means creating a sustainable or sellable company (Yagnik and Chandra 2019: 20).

Abbildung in dieser Leseprobe nicht enthalten

Figure 4: Start-up entrepreneur focus (Source: Based on Yagnik and Chandra 2019: 20)

In my opinion, an entrepreneur cannot differentiate between personal and business goals. They naturally go hand in hand or overlap with each other. Accordingly, one should consider personal goals before setting any business goals. In this regard, there were naturally a great deal of ambiguity or uncertainty. For this reason, an entrepreneur must develop an ability to successfully navigate or tolerate unclear circumstances or outcomes.

Entrepreneurs in rapidly growing companies often do not consider exit strategies seriously. Encouraged by short-term success, they continue to reinvest profits in an unsustainable business until all they have left is memories of past success. However, investors desire an exit strategy, like a buyout by management, an acquisition by another company, an IPO, or similar. In most cases, they don’t want their investment to be illiquid over the long term (Harvard Business Review 2018: 99).

Tom Byers told us about the ‘Elevator Pitch’ and introduced us to a method for positioning our ideas. The elevator pitch should answer three questions – namely, Why this?; Why now?, and Why us?. The positioning of a product enables the firm to create a clear identity for that product in the minds of customers. It is a marketing effort to clearly communicate the nature and unique selling point of the product to target customer groups. The positioning of a product focuses on a few key attributes of the value proposition. Once a product position has been developed, a powerful product offering must be assembled. A product offering communicates the key values of the product and describes its benefits for the customer. The unique selling proposition (USP) is a statement of the key benefits that differentiate the product from the competition. The positioning template shown in figure 5 helps to provide orientation in this area (Byers, Dorf and Nelson 2015: 188).

[...]