By Peter Lindfield, published in the Telegraph-Journal 9th August 2012
The success of Silicon Valley was in no small part because of unintended consequences involving outward-facing research universities building Cold War weapons systems with the assistance of massive U.S. government R&D. In 1979, regulatory change accelerated the involvement of venture capital when changes in the U.S. Employee Retirement Income Security Act resulted in a dramatic increase in pension funds investment.
We know today that we cannot perfectly duplicate Silicon Valley’s success. But there are lessons we can learn about innovation and building startups even without Cold War funding. Many of these lessons are changing our fundamental perceptions of how innovation, startups and entrepreneurship work.
As in the early Silicon Valley days, 90 per cent of startups still fail in their first five years, representing an enormous waste of productive potential. We once believed that creating an innovative product or service, establishing a 5-year financial forecast and executing a business plan was all that was necessary for startups to succeed. Marketing and sales would follow demand. Many universities continue to teach entrepreneurship around these assumptions. There is growing evidence that this process fails because startups are not simply smaller versions of large or established companies.
Steve Blank, author of The Startup Owner’s Manual moved from being a Silicon Valley serial entrepreneur to teaching entrepreneurship at Stanford University. He is emblematic of the new thinking about how startups succeed and fail.
Today we know that many more startups fail from a lack of customers than from a deficiency of innovation, lack of investment capital or failure of product development. Startups are still being built with business tools from the 1950’s. According to Mr. Blank, established companies execute a plan because customer characteristics are known. A startup is a temporary organization designed to search for a repeatable and scalable business model. Discovering and validating customers happens before the development of a business plan and before salespeople are hired.
Companies build value for themselves while delivering products or services to its customers. This is achieved through key partners, resources, customer relationships and segments and appropriate channels. Ultimately, these elements create revenue streams and profit margins. But at the startup stage, much of this is hypothetical. Potential customers cannot easily put a value on innovative products and services and research tells us conclusively that no business plan survives first contact with customers. A key task for startups is to transform these guesses into facts. Universities such as Stanford, the University of California at Berkeley and Columbia have transformed their entrepreneurship teaching programs to reflect this new Silicon Valley model. The results have been encouraging with far fewer failures and stronger growth.
Even under this new Silicon Valley model, government is still a cornerstone of entrepreneurship development. Although the roles of universities, industry associations and venture capital firms remain critical, government is central to the development of a successful entrepreneurship ecosystem. The requirements of this ecosystem also point to what government can do. It can encourage a “fail fast and move fast” culture. It can encourage the growth of private sector-led entrepreneurial centers such as accelerators and incubators. It can review incentives for risk capital to locate in close proximity to these centers. It can task universities with the responsibility to become more outward-facing and encourage them to develop a 21st century entrepreneurship curriculum. It can rationalize its own policies and processes to encourage small business initiatives – whether startup, early stage or established — to consistently adopt these new entrepreneurship practices. And this approach of government policies, funding and tactics will not cost taxpayers more than they are paying today.