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Sharpening Your Skills: Starting a Business

Sharpening Your Skills dives into the HBS Working Knowledgearchives to bring together articles on ways to improve your business skills.

Questions to be answered:
y Should I keep control of my company? y How do I turn potential into profit? y How can a resource-challenged start-up grow? y What legal mistakes should I watch out for in starting a new company?

Should I keep control of my company?
Rich or Royal: What Do Founders Want? It's a fundamental tension many entrepreneurs face, the conflict between wanting to become rich and wanting to keep control of their new company. Few can have both. Professor Noam Wassermandiscusses his research into the motivations of entrepreneurs and the people who invest in them.

Key concepts include:

y Entrepreneurs are often motivated by the potential of money and control, but very few ever achieve both. y A fundamental tension between "rich and regal" starts to develop as entrepreneurs look to attract resources to
grow their ventures.

y Investors need to understand the motivations of the entrepreneurs they back to make sure their goals are
aligned.

How do I turn potential into profit?
Turning High Potential into Real Reward Transforming high-potential ventures into high-performance ventures, says professor Joseph Lassiter, depends on combining what, how, and who you know.

Key concepts include:

y Successful entrepreneurs look ahead and say, "Two or three years from now, this is exactly the customer and
exactly the product, and this is exactly why they're going to be compelled to buy."

y A key issue is who do you do business with initially who lets the venture start moving down the "right" product
road map?

y Turning high-potential ventures into high-performance ventures is always an elegant combination of know what,
know-how, and know who!

How can a resource-challenged start-up grow?
How Can Start-Ups Grow? For new ventures a lack of resources makes growth difficult to come by²just ask those nine out of ten fledgling firms that fail. Professor Mukti Khaire says the key may be in acquiring intangible resources such as legitimacy, status, and reputation.

Key concepts include:

y Small companies can grow by developing intangible social resources such as legitimacy, status, and reputation. y In some cases the location of a new venture is a critical facilitator of success because of the symbolic benefits
offered by an office address that is legitimate in the minds of stakeholders.

y Firms have to work at maintaining their status in the hierarchy, while legitimacy is a critical issue only in the
early stages of firms' lives.

y For new firms in established industries, there is value to doing some nontechnical, symbolic things in the
manner that is widely accepted and to adhering to industry norms and culture.

What legal mistakes should I watch out for in starting a new company?
Top Ten Legal Mistakes Made by Entrepreneurs The life of a startup can be precarious, a wrong turn disastrous. Harvard Business School professorConstance Bagley discusses the most frequent legal flops made by entrepreneurs, everything from hiring the wrong lawyer to puffing up the business plan.

Key concepts include:

y Entrepreneurs tend to delegate too much to the lawyers. y Lawyers are risk averse; delegating to them can often compromise business objectives.

From SpinPop to SpinBrush: Entrepreneurial Lessons from John Osher
Published: March 31, 2011 Author: Dennis Fisher

Executive Summary:
At a panel discussion on entrepreneurship, professorWilliam A. Sahlman and several successful start-up veterans discussed the case of John Osher, father of Dr. John's Products, Ltd., and the wildly popular battery-powered toothbrush, the SpinBrush. Key concepts include:

y y y y

Look for gaps in the existing market or product lines to exploit. Anticipate product knockoffs and plan accordingly. Raise money when you don't need it, so you'll have it when you do. Be quick to market with the initial product and improve as you go along.

John Osher is one of those casually and spectacularly successful people who make serial entrepreneurship look like a
cakewalk. He began racking up wins at an early age²starting and selling both a vintage clothing store and an earring outlet before he was out of college²and then embarked on one of the more eclectic business careers of the last few decades.

His entrepreneurial journey culminated (at least temporarily) in the sale of his electric toothbrush company to Procter & Gamble for almost a half-billion dollars. Not bad for a former plumber, cabdriver, and carpenter who took seven years to finish college.

"We want to play offense, we want to innovate, pilot, template it, build for scale, and go." ²Mark Norman, Zipcar
The meandering and seemingly random path that Osher took in his career and the lessons it holds for other executives and entrepreneurs looking to succeed in today's difficult economic climate was the subject of a panel discussion at Harvard Business School recently. The discussion, part of a one-night event called "Entrepreneurship During an Uncertain Time," featured four highly successful executives. The event was hosted by HBS and The Economist.

HBS professor William Sahlman, who studied Osher's career and wrote the case study on his company, Dr. John's Products, Ltd., said in an introduction that while much of Osher's success might look from the outside to have been the result of a series of happy accidents or lucky breaks, it was in fact the product of a sharp intellect and dozens of lessons learned over the course of a long career.

"He's a street-smart guy, and he has this observational power. He had in mind designing the perfect company, which included the lesson of, 'Don't make the same mistakes I did,' " Sahlman told the audience of HBS alumni and Executive Education participants. "He hated having to manage employees, so he built a big company with very few employees."

Dr. John's was the third major venture that Osher built from the ground up and brought to a successful and lucrative exit. ConServ was his foray into energy conservation and baby products in the 1970s and '80s, followed by Cap Toys, offering toys and candy, in the 1980s and '90s. The latter venture, which produced the uniquely American and insanely popular SpinPop battery-powered lollipop, would later serve as the blueprint and inspiration for Dr. John's huge hit, the SpinBrush

After his successes with SpinPop and various baby products, Osher discovered that one of the keys to building a successful company and creating a product that people love is to find and exploit a gap in the existing market. The SpinBrush was designed from the beginning to sit in the enormous space between cheap manual toothbrushes and ultra-high-end electrics produced by companies such as Gillette and Johnson & Johnson. Osher wanted his offering to sell for about six dollars, work for three months on the included batteries, and clean teeth as well as the premium models.

It was a simple plan, but one that would be quite difficult to execute with Osher's limited budget and small team. But, as several of the panelists acknowledged, the small, agile nature of Dr. John's in fact may have been an advantage in the end.

Small is good
"Big companies get stuck on analysis paralysis, and they look for the perfect answer. In my company, we iterate very quickly," said Sheila Lirio Marcelo (HBS MBA 1998), founder and CEO of Care.com a website for providers and users of child care, senior care, and other related services. "Large companies look for the perfect solution [and] analyze everything to a T, as opposed to putting something in production, getting it going, and analyzing off of that."

"He found a gap that was the size of the Grand Canyon." ²William A. Sahlman
That's the template that Osher followed with Dr. John's, basing the idea for the SpinBrush on the proven design of the SpinPop, getting an early product on the shelves, and then improving it from there. The first iteration of the product was a success right from the beginning, selling as many as 6,000 units a day in grocery stores, drugstores, and large retailers including Walmart and Target.

Osher had taken for granted from the start that SpinBrush would be copied quickly by other companies. As a result of that planning he had designed Dr. John's to work on a short product cycle, able to respond very quickly to shifts in the market.

The SpinBrush had its problems, though. It had a tendency not to last as long as Osher and his team had planned, and there was an issue with the way the spinning bristles worked with the stationary bristles. But consumers were so taken with the SpinBrush's design and value for the price that sales didn't suffer while the Dr. John's team worked out the kinks. The

company didn't have a huge war chest, but Osher had raised additional capital after the company's launch in order to pay for additional inventory once the product took off. There's a clear lesson there for today's business leaders.

"A lot of companies spend a lot of resources playing defense. We want to play offense, we want to innovate, pilot, template it, build for scale, and go," said Mark Norman (HBS MBA 1994), president and COO of Zipcar, the time-sharing car service. "Raise money when you don't need it, while you're figuring things out."

As SpinBrush continued to gain market share, Osher's little company began to attract the attention of big players in the market: P&G, Colgate, Johnson & Johnson, to name a few. Osher held discussions with P&G about licensing the Crest brand for the SpinBrush.

"He knew it would be knocked off, so he had a two- to three-year product plan," Sahlman said. "He built this company to flip, not to last. It was organized to be sold."

The SpinBrush became a huge success for P&G, helping revive the Crest brand, while Osher and his team pocketed $475 million.

While the number of huge opportunities like the one that Osher exploited may be limited, the lessons he learned over the years and the methods he employed still can be applied in a wide variety of situations and industries.

"He found a gap that was the size of the Grand Canyon," Sahlman said. "But you have to be realistic. Sometimes you can confuse a rising tide with genius."

Operating in a downturn
The panelists and Sahlman agreed that today's economic climate is not only a challenging one for entrepreneurs interested in launching new companies, but also for those who already are in business and looking for ways to keep their heads above water and preparing for the turnaround.

"During periods of randomization, make it so that you do something different going forward," Sahlman said.

Don Young (HBS MBA 1984), president and CEO of Aspen Aerogels, observed that downturns can be opportunities for the well prepared. "Those economic disruptions, as long as you have money in the bank, can be opportunities to succeed," he said.

For example, during good times it can be difficult for small companies to get into large accounts where the vendors are established and the corporate focus is on growth. But when the economy begins to slow down, he said, companies start looking for ways to streamline operations and save money, and that can be a way in.

Teaching a 'Lean Startup' Strategy
Published: April 11, 2011 Author: Carmen Nobel

Executive Summary:
Most startups fail because they waste too much time and money building the wrong product before realizing too late what the right product should have been, says HBS entrepreneurial management professor Thomas R. Eisenmann. In his new MBA course, Launching Technology Ventures, Eisenmann introduces students to the idea of the lean startup²a methodology that has proven successful for many young high-tech companies. Key concepts include:

y

Rather than spending months in stealth mode, a lean startup launches as quickly as possible with a "minimum viable product" (MVP), a bare-bones product that includes just enough features to allow useful feedback from early adopters. The company then continues hypothesis testing with a succession of incrementally refined product versions. Lean startup executives do not invest in scaling the company until they have achieved product market fit (PMF); that is, the knowledge that they have developed a solution that matches the problem. In lean startup lingo, "pivoting" refers to a major change in a company's direction based on user feedback. Eisenmann's students discuss how entrepreneurs can stay true to their vision while still maintaining the flexibility to pivot. Adhering to a lean startup strategy is especially challenging for companies that require a great deal of time to launch a workable product, such as clean-tech or biotech companies.

y y y

A dozen years ago, it seemed like all it took to launch a successful technology company was a vague idea, a PowerPoint
presentation, a trade-show booth with a sexy spokesmodel, and a URL. Then the dot-com bubble burst and investors got wiser and warier. Gone are the days when entrepreneurs could spend years burning through venture capital while they figured out their strategy. These are the days of the lean startup.

"Most startups fail not because they can't build the product they set out to build, but because they build the wrong product, take too long to do that, waste a lot of money doing that, and waste a lot of money on sales and marketing trying to sell that wrong product," says Tom Eisenmann, a professor in the Entrepreneurial Management Unit at Harvard Business School. "It takes a lot of time, time equals money, the money runs out, and the startup fails painfully."

"Lean startups don't try to scale up the business until they have product market fit, a magical event-more easily recognized in retrospect than in the moment-when they finally have a solution that matches the problem."
Eisenmann has developed a new MBA elective course called Launching Technology Ventures (LTV), offered as a half-course at the beginning of the term, with some students continuing on to work on a field-based project during the second half. The course focuses on the "lean startup" methodology, created by HBS Entrepreneur-in-ResidenceEric Ries and serial entrepreneur and Stanford/UC Berkeley lecturer Steve Blank. The "lean" in lean startup has its roots in theToyota Production System ; hence, the lean startup methodology is all about avoiding waste, in terms of both time and money.

For starters, it nixes the traditional idea of a company spending several months in stealth mode while perfecting a fullfeatured product and planning an expensive launch party at a Las Vegas trade show. Rather, the lean startup launches as quickly as possible with what Ries calls a "minimum viable product" (MVP), a product that includes just enough features to allow useful feedback from early adopters. This makes it easier for the company to speed to market with subsequent customer-driven versions of the product. And it mitigates the likelihood of a company wasting time on features that nobody wants.

"The MVP is a controversial idea because it can be perceived as something thrown together with shoestring and bubblegum," Eisenmann says. "But through a series of MVPs, a lean startup can validate a specific and comprehensive set of hypotheses about what the business is, where it's going, and what it has to do."

In the LTV course, Eisenmann teaches cases on cloud storage company Dropbox and the social search service Aardvark. Both firms' founders were early practitioners of the lean startup method.

The Dropbox team initially announced a bare-bones version of its service on the website Hacker News. The company collected reams of immediate feedback from site readers, and continued to incorporate feedback into several successive product launches-each of which added only a couple of new features. While the feature additions were gradual, they were rapid, as was company growth: Dropbox increased its user base from 100,000 to 4 million in the course of 15 months.

Aardvark, which enables users to garner answers to questions via an extended network of friends' friends, used a Wizard-ofOz-inspired method in its early days. Rather than building out the technology infrastructure to make their idea a reality, the team launched the service with humans routing users' questions "behind the curtain" instead of computers. This allowed the company to observe how and what users were asking²and thenspend time and money on a technology backbone that would best meet their needs.

"Lean startups don't try to scale up the business until they have product market fit [PMF], a magical event²more easily recognized in retrospect than in the moment²when they finally have a solution that matches the problem," Eisenmann says. "And after you have that solution you can step on the gas pedal."

"What we're learning in the course is that pivoting is really hard."
Of course, in carving a path to the PMF, startups may find that they have to shift the company in a completely new direction. In lean startup lingo, it's a process known as "pivoting."

"Pivoting simply means making a major change of some sort," Eisenmann explains. "In lean startup logic, it's something you do, ideally, after you've run some decisive test to disprove a hypothesis. It can be changing the target customer segments by narrowing or broadening them. It can be changing the product itself, either by adding features or by taking features away. It can be a dramatic change: 'We were going business-to-consumer, but we should be going business-to-business.' Or it can be a change in business model: 'We were doing transaction-based pricing, but we've realized we should be doing subscriptionbased pricing.' The notion of a pivot is to make a change, and ideally, after you pivot, you have a new set of assumptions and hypotheses that you're going to test. And what we're learning in the course is that pivoting is really hard."

There's a core problem inherent in pivoting²the risk of looking disloyal to the company vision. A startup's founders have worked so hard to sell employees, investors, customers, and partners on an idea that switching gears can feel almost like a betrayal.

"So much of what a CEO has to do is talk people into things," Eisenmann says. "If you have to take people away from what you sold them on, that's hard. A fascinating issue for the students has been, how do you square the need to do that with the need to be flexible and pivot?"

Eisenmann was surprised by students' fascination with this issue, and modified class discussions accordingly.

"In many ways I'm using the lean startup strategy. A lot of the course is cobbled together²it's an MVP in itself," he says. "When you teach a case for the first time you're often surprised at what does and doesn't work. So this issue of the tension between vision and feedback is something I had thought about a little. But the students really seized on the question: When is the product shaped by the founder's vision, and when is it shaped by market feedback?"

Eisenmann acknowledges that the lean startup methodology is easier to apply in the field of web-based startups than in the clean tech and biotech fields, both of which often require a great deal of time and capital to create any workable product. The same is true of the transportation industry²inventor Dean Kamen's Segway, for example, or startup Terrafugia's flying car. "It's the nature of some products that you have to spend a whole lot of money before you know if the product is going to work," he says.

To that end, Eisenmann teaches the cases "Predictive Biosciences" and "Aquion Energy." In studyingPredictive, a venturebacked, "pee-in-a-cup," cancer diagnostic testing company, students ask themselves whether lean startup principles are applicable at all. With Aquion , they talk about the "clean-tech valley of death"²meaning that a firm is able to raise enough money to fund the bench science, but not enough money to build a workable prototype.

Eisenmann hopes to sell students on the idea of first working as high-tech product managers before jumping into CEO roles.

"I would love Harvard Business School to crank out a 100 high-tech product managers per year," he says. "Nobody reports to the product manager, so there's very little direct authority. But there's lots of responsibility. It's their job to figure out what the product should look like. It's their job to persuade the engineers that this is what they need to build, and to persuade the sales team that this is what they need to sell. It's a wonderful job²perfect for an MBA who wants an early general management role."