Personal Entrepreneurship

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Wrap-Up: Putting the Pieces Back Together (with Geoffrey Moore)

Good morning everybody and welcome. I couldn’t be more overjoyed to have a chance to finally summarize after five great workshops, and to put all the pieces back together again.

Let me set an expectation first: you can’t really summarize five workshops that each had two hours of great participation by the students without the students here. Many of them are away because of exams. All the materials went live today, so you can go find the videos and slides up on the site, but they don’t capture the true spirit we witnessed over the last six months or so, which was the engagement of the students. Still, I’ll try to give you a sense of what we covered and a taste of some of the interactions with some embedded videos.

A couple of things people said to me as I went through these workshops really touched me. One was that the soft stuff is really the hard stuff. What they meant was that starting a company, finding the right team, and putting that together with a culture that makes it possible to build a real company is actually really hard. The other thing I hear is that when you take your product to market, all the things you hope for, like everybody beating a path to your door because you have the best mousetrap, don’t really pan out that way. That is why it’s so great to have Geoffrey Moore here today. I’m a student of his and I’ve really enjoyed learning from him. Although this is entitled the wrap-up for Geoffrey Moore, it’s really the warm-up for Geoffrey Moore, as you’ll see when he comes on.

It Starts With a Value Proposition

We started with a very simple thought: you can’t start a company unless you have a value proposition. So the first workshop focused on what problem is it that you really want to solve. I wanted to teach people to fish, so we developed a gain/pain ratio over a couple of decades in my various companies to help evaluate a problem.

I want to thank Adam Berry, who helped me with some of this. I always think in very black and white terms, so he came up with the idea of finding a problem that is blatant and critical as opposed to latent and aspirational. If you’re a consumer marketer you might need to go into the bottom left, but I’m mostly focused on B2B because that’s my experience, and we look for blatant, critical problems where the pain and need is so urgent you have to address it.

If you’re going to solve a fundamentally worthwhile problem, there are at least four “U”s we could think of. First, is it really unworkable, something fundamentally broken, so when you go in you’re fixing something that delivers value right from the get-go. Better still, is it unavoidable. In the audience today is one of our companies that was a case study, Reval. They provide derivatives accounting, which is totally unavoidable because of the SEC and totally unworkable on spreadsheets because it has gotten so complicated. It has a very urgent need, because if you get caught out, as a few companies like GE did, it can cost you hundreds of millions if not billions of dollars of market cap. The last piece, finding underserved markets and how to segment them, became a whole subject in the go-to-market workshop.

We then talked about what kind of solution makes a real impact. You want a discontinuous innovation; something marginal isn’t going to cut it. You also want something that becomes defensible and is disruptive as a business model too. So often when we help entrepreneurs get going, we find they always think about technology first, but early on, thinking about the business model and how to interweave it with your technology can make a big impact.

Then we gave people a sense of how to evaluate their own idea. If you can bring it to life for the customer, you can be the voice of the customer and your own best critic. Obviously you want gain for the customer, but they also have pain to go through to implement your solution. Many people forget this. They think if I have an incredible product, customers will just implement it. The reality is there are painful things customers have to do just to find you if you’re a small startup. But the big one people ignore, and it catches them out over and over, is inertia. As a startup you don’t carry any credibility and rarely carry any brand. So how do you overcome the do-nothing alternative? Or if you’re going to displace something, how do you make it incredibly clear why the gain of displacing you is worth the pain of taking the existing solution out of play? One thing we heard time and again is that people struggle to put gain/pain into numeric form, into a scorecard. We agreed on something that won’t surprise anybody: unless you have at least an order of magnitude impact on your potential customer, you probably won’t get over that inertia and the risk they feel in taking a startup into their organization.

I wasn’t doing all the talking. Really I was just a shell to get the case studies in play. I want to thank Apperian, some of whom are here, Carlos and Alan and Reinhardt, who shared their own gain/pain evaluation. When we first invested, they had an enterprise app store. Enterprises don’t want to put their apps on the iTunes store, because they don’t want everybody using a credit card to buy them, especially when Procter and Gamble has tens of thousands of users or Cisco has 60,000 users. They just want them rolled out to the sales force securely. There was a real, fundamental need, but the customer’s pain in implementing was huge: they had to go through Apple, get credentials, install the thing, and it typically took about 10 days. We weren’t getting adoption; we were hand-holding customers through it. To their credit, the team sat down and said we’re getting nothing other than focus on “Live in Five,” building a product you could go to on the web and in five minutes have your app store up and running, letting companies instantly upload and manage the entire lifecycle of their applications for iPads, iPods, or Android devices. Their business took off, entirely because of their own evaluation of the gain/pain equation. They gave a great case study of how Estée Lauder is getting a 40% uplift at all 17,000 of their stores around the world with an application that guides people through what makeup they should buy. It turns out people trust iPads more than they trust humans. Great bottom-line savings, too.

I learned a ton myself. This was our blackboard after the first session. What I learned, because I’m a different generation to those coming up in this always-on world, is that community is having more impact than anything else in evaluating products. Who are the influencers in your community? We’ve all gotten used to social reviews and ratings, and it’s becoming an important part of how you change buyer behavior.

Company Formation: The Soft Stuff Is the Hard Stuff

We then went to company formation. Ten teams started out quite intensely going after their ideas, and there were many we couldn’t even get to. This was the softer piece that turned out to be harder for people to grasp. We were talking about a framework for how to build an enduring company. People asked what steps to think about along the way to realizing their vision of owning and dominating a marketplace. It’s certainly not going to get done in four workshops, and it could be as simple as hire the right people who know how to execute, because execution counts for so much. All the theory I might share comes down more than anything else to hiring the right people and having the conviction, passion, and persistence to pursue that vision with the execution it takes to become a leader.

It starts with people, so we talked about what helps you get the right kind of people. I’m a big fan of Geoffrey, who helped me with the first ideas of how to iterate things, and now people like Eric Ries have come up with pivoting, which Geoffrey and I were just saying is a classic change in lingo but the same theory coming over again. But there’s one area I firmly believe you don’t pivot, and someone in the audience got the answer I was looking for: culture. Change is a constant, and co-founders can change, but I feel culture is so important because it’s really hard for people to join a company if they don’t understand what its culture is and what it stands for. If they join and it changes, they’re probably going to leave. It’s like deciding to be a Red Sox fan and then finding the Red Sox decide they want to play basketball. Probably not going to be great at it, and it’s going to be hard for you to follow them.

We see cultural consistency in our startups. The company we just took public last quarter, Demandware, had the same culture from day one. It was focused on making the customer successful, and they even built it into their business model with a shared revenue model. I was at their conference yesterday with hundreds of customers and partners, and the one thing you’d pick up is that they know they have a shared success with us. That cultural consistency went through everything: hiring, execution, vision, how they defined their products, the business model, and everything.

To have some fun with it, I pointed out that culture starts with the word “cult,” and asked if anyone had ever been in a cult. Tom, in the audience, admitted to the Rocky Horror Picture Show at midnight in San Francisco, dressing up, throwing rice, and squirting squirt guns. It takes somebody of strength and character to admit that. But that’s one of the things we took away: if culture is genuine, it really makes a big difference.

Why is it important? Some of the softer things are harder to measure, so I brought some research. From the Fortune tech survey of the top 100 places to work, I took the top five tech companies. If you read the article, you’ll find these companies have distinct cultures. Google’s culture is very distinct, very different from SAS’s, which is owner-run and owner-managed, which is very distinct from Zappos, which is very execution-focused. But they all have a single culture; they don’t have ten cultures running around the company. And it makes a genuine value impact: these companies outperform their peers by 300%. So this might be soft stuff, but it makes a big difference.

Acquia went to the trouble of putting a video together to share their culture, with team members describing it: fast-paced, entrepreneurial, challenging, and a lot of fun. “Acquia’s founding changed my life… helping to build one of the fastest-growing startups in Boston.” “I looked at the vision for Drupal and I said this is the future and I want to be part of that.” “The important thing when you’re hiring people is to look not so much for raw experience, what the resume shows, but instead at who they are as a person.” “We’re on a company that is just a rocket ship. It’s really a tidal wave that I’m happy to be riding.”

The Three A’s (and Three Pluses) of an A Player

I always hear from students, “We hear people want to hire A players. What does an A player look like?” People hire on one A, which is ability, and there’s nothing wrong with getting people who are off the charts in ability. But there are at least two other A’s that are just as important, sometimes more. One is aptitude, because by the very nature of a startup you’re changing things and making breakthroughs, and when you break through you go into unknowns. I don’t care what anybody’s abilities were in the past; what are they going to do in the unknown? They better have the aptitude. Then the third A is attitude to deal with that.

Even Google now wants A-plus players, so what are the pluses? Also three. Authentic: salespeople are good at selling themselves, so in an interview you’ll find out nothing of the truth unless you ask a basic question like “what are your hobbies,” to get them outside what they can sell about. One person said a candidate read the specs so well he sold the whole spec, then was asked why he was a fit for it, and the whole interview changed. Awareness, in particular self-awareness. If I observe one thing about great entrepreneurs, it’s that the older I get, the more I realize how little I know and how much I have to learn. If you can say, “I love doing X, Y, Z, but why am I lousy at A, B, C, and I need help there,” you open everybody around you to team with you and fill in those attributes. And the last is what we call CQ: are people going to be additive to your culture, or dilutive to it? I’ve seen people hire great engineers early on who are off the charts in some dimension but have no interest in participating in the team, and they’re dilutive to the culture, and you end up with more problems than the value of their abilities.

A learning from the audience: you should hire all your stakeholders early on. Hire your first customers the same way, be careful who they are, and get the same out of your partners, because they’ll have to be aligned in your supply chain and in supporting your breakthroughs. David gave us a nice line: “We had about seven different term sheets, so it came down to deciding who we wanted to work with. The deal process gave us confidence in Northbridge. In fact, we even took a lower valuation to get you guys.” I didn’t know he took a lower valuation, but thank you, David.

My single favorite interview question, if I only have a little time, is one I’ll keep asking until I get to the depths of it: what are you passionate about? That signals people’s real aptitudes and intentions and what they have conviction to pursue. Chris from Acquia put it this way: “It starts with passion. I asked one of our engineers who’d been with us a year how work was going. He said, ‘Work? I don’t work. I come here because I love it.’ None of us should feel like it’s a single day of work.” In the true style of Harvard, I also cold-called someone from the Acquia team to see if they’d reflect the culture Tom wanted: “Acquia has by far exceeded my expectations, because not only can you learn, but you’re expected to. If I want to test something out, I’m empowered and encouraged to do that.” So it’s a learning culture, and learning cultures are a great basis for people to feel good, because nobody wants to stand still in their career.

Business Model: Core vs. Context, Multipliers and Levers

We then moved to business model, which people say VCs get all hung up on. I didn’t want to turn it into a financial discussion; I wanted people to see how a business model can make an impact: finding something disruptive, something that leverages, as Geoffrey would say, the core rather than the context, to get advantage from what I’d call multipliers and levers. The perfect startup storm: a disruptive technology plus a breakthrough business model plus a really focused segment you can uniquely serve. Many people who started with technology business models came back and said they really had a data business model. One peer-to-peer learning company realized their real value was data.

I dated myself with an example. The week I built this workshop, I was invited to the Symantec 20-year reunion (30 years, if you do the math). John Bruce, in the audience today, was on the team with me. We were starting a business in the UK with 16 or 17 products, from Mac to PC, languages to databases. A tough business, hard to get above the noise. Then one of our sales guys started to really kill it, and all he was doing was selling one product: Symantec Antivirus for the Macintosh, because that was where the easy money was. People didn’t want to lose their data, and it became a whole data security campaign. But we still hadn’t changed the game. What really changed the game was stopping selling software. That same sales guy said, why don’t we give the software away, because when the PC version came out the real challenge became keeping up with the virus definitions. The software was just a platform to get virus definitions out there; the valuable thing was the subscription service. If you look at Symantec’s history, the inflection point where the company took off was that change in business model. We went public, blew through a few hundred million, and it seemed like we jumped to a billion dollars. That is not a unique example.

I credit Geoffrey for one of my favorite startup examples. In one of our first discussions, he looked at our product in the analytics space. We did real-time inline analytics, and we did it uniquely and incredibly well. But analytics is like an iceberg: getting the data there and organizing it (ETL, OLAP, and all sorts of things) was a whole industry. Geoffrey helped me realize how important it is to create the whole product model, and that if we did, we could slip into a partnership and quickly become at the core exactly what would change the game. That’s what we did. We increased our revenue as part of a bigger solution, initially with Hyperion and later with IBM, who ended up acquiring us. We got reach through their sales force and channels, and reduced our time to market because we weren’t developing the entire stack, only the core piece we did so well.

People asked how to do that without giving away your whole value, for example in an OEM deal. We came up with Russian Doll packaging: build different versions for different channels, or build them in progressive disclosure so users get a first small taste and then take more bytes as they want to. Trying to build one indigestible huge product right from the get-go doesn’t work; it’s not effective in going to market and is difficult in business models.

My acronym for taking friction out of products going to market was SLIPPERY: make your product really easy to install, adopt, integrate, and use, so obviously valuable that customers say “why can’t I have this,” not “why would I have this.” Demandware was the first company to create an e-commerce platform on demand, as a service, so retailers didn’t have to take on the pain of infrastructure and could get straight to merchandising and marketing. But “whole product” means different things to different people; some need Power Reviews, some need analytics like Omniture, and in the back office there’s tax and logistics. Even though we thought we had a complete platform, the ecosystem didn’t, and the team responded quickly. In their words: “In the early going it was one of those very shallow curves, and then all of a sudden, once you prove the value, it spiked quickly. Because of our disruptive business model of on-demand and shared success, and because all these technologies are revenue-generating, it boosts things for customers. Yesterday there were over 100 partners bidding for spots to be at the conference, paying us money, after years of us having to pay to be part of platforms, because it had reached critical mass.”

I always wanted to position myself with one statement: giving my entrepreneurs unfair competitive advantage. It’s great to have disruptive innovations, but if it’s so disruptive that customers have a hard time adopting it, that’s a problem. The best big-world example of disruptive innovation made non-disruptive to adopt is VMware, which took server utilization from the teens up to 80 or 90% without changing the applications, just by virtualizing them. In the startup world, Xkoto provided it. David shared how they built one to two orders of magnitude performance improvement for customers without changing a line of code. Their customer Name.com had people literally dropping out of the purchasing process because querying whether a domain name was unique took too long; now it’s fractions of a millisecond and their revenues doubled. Non-disruptive adoption, very disruptive output.

We brought it down to measuring the cost of acquiring customers and whether it’s in balance with the lifecycle value. It’s not just lifetime value, because it’s important to keep customers engaged, and re-engagement needs to be built into the process. Having just been through three SaaS IPOs this year, one in registration, the single most effective point of leverage in the financial model is upsell: a 2% increase in upsell generates about a 28% increase in your market cap. If you have a SaaS model with customers locked in and can re-engage them cheaply, you can have a huge impact on your bottom line.

I have a company in the relatively boring middleware space, Active Endpoints, that sells middleware in a slippery fashion and reduces the cost of customer acquisition. In their words: “Plymouth Rock Energy, traditionally an old supplier of coal and oil, transformed into a broker of energy and uses Salesforce.com for new customer signups. Signing up a new energy customer, specifying supplier, distribution channel, whether they pay a premium for green sources, was a very complex process. We met a gentleman at a Salesforce event in New York on Wednesday. The following Monday we gave him a demo via GoToMeeting; he got on our cloud-hosted product and started building his little process wizard. By the end of the week he had it working, and the following month he placed the order. Having the Salesforce integration is both a lever, because it reduces our marketing cost since we know who our market is, and a multiplier, because we increase revenue by so many users.” This is a company generating not six but seven-figure deals over the phone, no external sales reps, selling very complex middleware.

Go To Market: Brand, Barriers, Segmentation, and the Buying Cycle

We then moved to go-to-market. It’s such a big area that I was open up front we wouldn’t cover it fully, but we talked about breaking down your cycle from awareness through purchase, strategies and tactics, inbound, channels, and how to segment and target your audience. Adam Berry, our entrepreneur in residence, gave a passionate speech on the essence of brand: “It’s a single core idea that unifies everything you do.” A learning: a lot of people have a product called one thing and a company called another. That’s tough, because now you have two things to promote. If you can line them up from the get-go, you have one brand to promote.

On positioning, everybody wants to be in the top right of a two-by-two and find white space, but the real learning was to define axes that create barriers. What’s usually wrong with the charts isn’t the diagram, it’s that it’s easy for someone to say “I’m faster, cheaper, better,” and break through and compete with you, especially when you don’t have the resources to compete with larger players. We had fun talking about barriers you just couldn’t cross. In this day and age, if someone constantly has to install and update their software, they’ll have a tough time keeping up with a cloud solution, especially in industries with fast-moving regulations that require continuous innovation. One company came up with a brilliant idea: use downtime from suppliers in their industry to capture capacity and get scale to compete with larger players, then create a barrier by locking up agreements with the key players.

On segmentation, I brought a brutally honest example about why mobile apps are a tough business. Instead of a generic app interesting to anybody with a mobile phone, what if you said it’s for mobile professionals, actually field workers in services, specifically servicing medical equipment sold to hospitals that saves lives? Now you’re well-defined and mission-critical. That’s a real case study: our company Antenna didn’t get it right to start, but is now the giant in that industry. Along the way they consolidated $117 million of venture capital from six other companies that had generic mobile platforms in the first era, and we bought them for $12 million. That tells you what happens when you get segmentation wrong.

Geoffrey taught me long ago not to be afraid to focus, building beachheads. People want to do too much. I ask one question: would you rather build on success, or downsize and contract on failure? We see the latter much more often. Get one thing absolutely right, target it so it can be a success even in the narrowest segment, and build on it, ideally where it can be referenceable. James, Demandware’s head of marketing, shared how they focused: “We had an e-commerce platform. Who do you sell it to? B2C or B2B2C? Which retailers? A big part of why we were successful was segmentation: segments within segments within segments. The particular segment that became so successful was high fashion brands, because they all love to talk to each other, they’re very competitive, you can geographically cluster them in New York, and groups like Jones have many brands within them, so it became a multiplier in our business model.”

Startups also struggle with the buying funnel, assuming you’re selling to one customer. The visionary at the top who buys is rarely the same person writing the check. Along the way you meet technocrats, DevOps people who implement it, influencers with political reasons, and the ultimate decision-makers. You have to get the persona of those people into your buying cycle. Sitting in the boardroom, the number one issue I deal with is “the pipeline’s stuck,” and a top reason is that people haven’t thought about who they’re selling to, at what stage, and what value proposition moves them from one step to the next. The truth is you don’t control a lot of this. It’s like driving, except all you own is the gears; the customer owns the accelerator, the brake, and the clutch.

The web changes everything and makes it a closed loop; you can measure everything and see the impact of your campaigns. Unidesk gave a whole guerrilla marketing pitch about how, nine months before they even had a product, they created influence and awareness: “We have very passionate customers who want to tell their story. It gives customers confidence that if I go with Unidesk, I’m part of this growing community. We identified who to target, how to message them, how they performed with VMware, and our unique value. You needed to be crisp; you had to have your buyer personas baked.” The bottom line: if you can’t measure it, you can’t manage it. It’s about results-oriented, metrics-driven execution. We even held a dinner on the new challenge for CMOs, and heard that CMOs are having to become almost data scientists who architect their own measurement platforms. Unidesk brought an incredibly detailed spreadsheet: “Measure everything you do, refine it, then when you think you’ve measured enough, go a level deeper.” The number of times we’ve found a sticking point because we didn’t measure somewhere else.

Thank You, and the Pitch Competition

If I have any criticism of myself, it’s that next time I’d cut the content in half and start the workshops with twice as much time. Thank you to all the companies from my portfolio, and MC10 from the materials group, and all the mentors and coaches who kept volunteering their time and coaching behind the scenes, and the judges, many CEOs and one of my partners. Interestingly, the entrepreneurs were much more brutal about themselves than we would be, and I learned we should get more entrepreneurs into our partner meetings.

From the pitch competition: “Really challenge yourself to think about what is 10 times better.” Sarah, whose research at the School of Public Health focuses on infectious diseases and how they’re transmitted, raised $16,000: “The value proposition and business model on the health agency part was very clear… there’s an opportunity to package that information and slice and dice it in a way meaningful to the customer.” Regina raised $48,000: “When you look around and ask what’s the most amazing technology in the room, the answer is biology, because these are the most advanced machines in the world.” Eric Kelsey raised $39,000. Catherine Wolf pitched OrganJet: “OrganJet helps patients get organ transplants faster, which saves lives, saves money, and improves efficiency by increasing the supply of transplants through a profitable business.” A judge: “There was no question in my mind what problem you’re solving, and you oriented us to a credible team. I didn’t need the extra six slides on the problem statement.” Catherine and Cecilia raised $58,000: “Less than 10% of grants get funded, and around 40% of scientists’ time is spent submitting grants, so we envision a channel for researchers to crowdfund their ideas through the public.” Our winner, Ahmed, raised $69,000, with three tickets: “May the Red Sox thrash the Yankees in your honor.”

There was no workshop without you. The great entrepreneurs find what their passion is and pursue it with the conviction it takes to make something impactful in the world. No amount of sharing or learning makes any more difference than you finding out what that is. A big thank you to the iLab: to Jody, Neil, and Gordon for enabling this.

Geoffrey Moore: Escape Velocity

Geoffrey needs no introduction, but personally: he’s officially an author and advisor, but behind the scenes an all-around great human being. He started as an English lit major, and you can tell in his writing. When he got into Regis McKenna and worked with so many startups, he realized there was a fundamental problem: why startups weren’t making it to the promised land. Instead of just watching, he did something about it and put in a framework that has made a huge impact.

Geoffrey Moore: I kind of feel like you’ve already gotten your money’s worth. What Michael was doing, and what’s so important about the startup world, is that frameworks really count, because at the beginning that’s all you’ve got. There’s no data, no history, no inertial momentum; there are only projections into the future. Using frameworks to create common vocabulary is how you navigate in a startup. That active mind that loves startups begins to be selected against as organizations get larger, and that creates a new set of problems reflected in the title of this book I’ve been working on.

For the first 10 years of my career I worked almost entirely with startups around disruptive innovation. I got to know Clay Christensen and the Innovator’s Dilemma. The late 90s we call the time of the great happiness. Then the bubble popped, and the companies left standing were the established large enterprises, and we began working with them. Crossing the Chasm and Inside the Tornado were about taking your first enterprise all the way through the life cycle. This new book is about a new challenge. The old challenge was leveraging disruptive innovations, breaking into developed markets, navigating the life cycle. A lot of it is emotional; what was cool about Michael’s last hour is that it’s your life. The new challenge is different: it’s harder to have that personal energy in a company of 10,000 people. But society needs these companies; we can’t all just be startups. The world wants some things to scale, and if the innovations you bring to market are going to have the biggest impact, they must scale. So we have to figure out a new set of issues.

The challenge now is how established enterprises break out, not break into. In the 90s we were breaking and entering; now we’re trying to escape the gravitational field of your past, and solve for what Clay called the innovator’s dilemma. He wrote that in 1997; it’s been 15 years, you’d think we might solve for it. That’s what Escape Velocity is focused on.

Here’s a list of companies that did not escape, many headquartered within 50 miles of where we’re standing. These were not bad companies; this was the best of the best. This was us. When I put up that list, people say, “Jeff, wrong century, wake up, 21st century.” So I’ll share six slides comparing 10-year histories in this century of major established companies to the NASDAQ. The orange line is always the NASDAQ; the blue line is the company. Over the last 10 years the NASDAQ went up about 60%. Microsoft went up maybe 4 to 9%. Intel went down a little. SAP tracked almost exactly to the NASDAQ. Cisco underperformed the NASDAQ recently; IBM outperformed; Nokia took a header with the iPhone coming; Adobe had a good run. HP had good stock volatility that came right back; Oracle had a sustained run because people believe their consolidation pitch is real added value; EMC and NetApp are helped by their categories. Google is still on their first run. eBay had a big run then came down. And then there are Amazon and Apple, and the Apple axis goes to 5,000%.

The conventional wisdom is “the winners outperform their peers.” But what does outperform mean? I know the companies that did not outperform the NASDAQ, and I’ll tell you those are some of the most remarkable performance cultures you will ever see. I was very close to Cisco and SAP for the last 10 years; really, really strong performance capabilities. My belief is that this is not about performance, which is a little anathema since I’m on boards and shareholders believe in performance and I’ll probably get fired. If the delta in stock price is not about performance, what is it about? I think it’s about power. Changes in power affect changes in stock price because investors care about your future performance; they value a share of stock as a share of future earnings, not past earnings. When Microsoft is dead flat, it doesn’t mean Microsoft isn’t performing; it means Microsoft is not outperforming its own past. It’s captured in the gravitational field of its own past. The P in power is the P in the P/E ratio. Why is Apple worth 50 times more than 10 years ago? The iPod, iTunes, iPhone, iPad. They added three net new earnings engines to a fourth that got revitalized by the other three, where 15 years ago, when Steve came back in 97, arguably they had none.

In a startup there is only power; there is no performance. There are PowerPoints, but that’s pretty much it. If you invest in startups, you’re only investing in power. In large established companies things get reversed: people look at quarterly returns, the classic metrics of performance, and try to guide the future based on them. If you don’t perform, you need to pay attention to them; they’re not unnecessary, but they’re insufficient. The performance dialogue has become so articulate, and MBA curriculums so effective at managing performance, that we’re wildly out of balance. It’s a yin and yang: you create power in order to consume it through performance, in order to create returns to invest in more power. When we talk about power in large corporations, the conversation goes from postgraduate to third grade, and it sucks. The intent of this book, and my work for the last five years, is to have a more articulate conversation.

This framework says when you talk about business power, you need to sub-segment it into five kinds of power, and this is the order of importance. First, category power: the most determinative predictor of your future returns is what category you’re in. Do you want to be in printing, or search, or storage, or desktop PCs? You could be the best house in a bad neighborhood or a mediocre house in a great neighborhood. For a large company the challenge is: could we get into a new category, because category moves a whole bunch of money into a new place? Large companies are world-class at not being able to do this. Second, company power: are you the go-to company in your category? Do the partners in your ecosystem bring the business to you first? If not, you’re swimming uphill. Third, market power: if I can’t be the gorilla, I need some market that’s a home where I can grow, where the market itself protects me and my customers defend me against competitors because they’re that loyal, because I made a deep commitment to a problem that’s unique to them (that pain/gain thing Michael talked about) and made a whole-product commitment nobody else was willing to make. I was so little it looked big to me, but to the big guys it looked like sand in their shoe. Apple was around to do the 5,000% because it had incredibly loyal customers who carried it through a very tough patch. Fourth, offer power: the thing itself, the price, the performance, the 10x effect Michael talked about. Offers are ephemeral, they come and go, but they’re the only thing on this list that customers can actually buy, so they’re darn important. Fifth, execution power. You’d think performance and execution are the same, but where I don’t think they are is with any strategic initiative that requires you to cross a tipping point. Large corporations are extremely good at execution problems they’ve done before, but in the class of problems where you have to change state and pass a tipping point, they’re very bad, and that’s a huge problem.

The whole red book is organized around those five powers, one chapter each, told from the point of view of a large company trying to do this. Two reasons for entrepreneurs to still open it: you might get acquired by one of these guys, and then you’ll learn about a phrase called an earn-out. When you marry off your only child to someone, you care about the future of that child, so if your company gets acquired, you’re going to care.

On execution power and the arc of execution: you’re inventing something, at some point you deploy at scale, and eventually you optimize. The consulting ideas about deploying and optimizing are 30 to 45 years old, extremely good, and based on data. The stuff on scaling still has to be based on frameworks, because you’re inventing the future. In this model there’s a tipping point, and prior to it, every day is actually harder than the day before. It’s like bicycling up a hill: until you reach the top, every next 10 yards you perform worse than the prior 10. If I look at you through a performance lens, I’ll say “Jeff, you’re not much of a bicyclist, get off the bike, we’re not funding it.” That’s what happens to strategic initiatives. The key concept: until you’ve reached the tipping point, no performance metric matters unless it’s related to getting to the tipping point. Return on invested capital, operating ratios, every operating metric the corporation runs its annual planning around, it’s not that they’re irrelevant, they’re toxic. That’s why there is a venture industry: venture raises capital with the understanding that operating metrics aren’t important until after the tipping point. That’s the fundamental contract with the limited partner. It is not the contract with a public shareholder, so if you run a large corporation you have a real challenge. We can say that’s their problem, except we live in a society that needs jobs, and large corporations have a lot of jobs.

Why tipping points? Adoption is social; people do what they see other people doing. It’s the junior high dance problem: boys on one side of the gym, girls on the other. “I’m not going out there,” and then at some point everybody’s out there and “oh my God, I’ve got to get out there.” It leads to two mirror-image phenomena: the chasm (“I’m not going out there”) and the tornado (“I’m not standing back”). Both are peer pressure. Pre-tipping point, no progress is sustainable; post-tipping point, there’s no going back. I kept challenging managers: do you manage to the tipping point? Do you have any metrics for where you think it is? One CEO said, “Jeffrey, stop. Tipping points are easy to see in retrospect.” Right, but how do you see them looking forward? You have to use frameworks, make guesses, even arbitrarily invent it: we believe 250 customers will have passed the tipping point, and if 18 of those cross-reference to another customer, or if 30% of customers come back more than once a week and stay more than six minutes. Who knows what it is, but you have to have something to drive to.

In the B2B world, the crossing-the-chasm model is a great model: innovators, early adopters, early majority, late majority, laggards. The key was that the first two groups secede from the bell curve and create the early market, but the pragmatists hang back, creating the chasm. If you find a focused subset of pragmatists (remember Michael’s circles down to field service personnel for medical equipment in critical care), we called them pragmatists in pain, who convert before pragmatists in general. Eventually the killer app for pragmatists in general creates the tornado, a mass-market phenomenon, then you reach mainstream. The key lesson: when you start an innovation you have to do it twice; the first flames out. When you think you’ve lit the fire, you’ve lit the pre-fire. That’s what Steve Blank was telling us with Four Steps to the Epiphany and Eric Ries with pivot: pre-chasm entrepreneurship. You light the fire the first time on optimism (look at all the wonderful things this technology can do), and the second time on pessimism (look how deep the soup is you’re standing in, and I can get you out). That’s why whole product became so important to the second one.

But four or five years ago students started giving me deflecting comments: “Crossing the Chasm, that was a great book. Google, Facebook, YouTube, Instagram, where was the chasm? Instagram got a billion dollars, what chasm?” So we came up with a companion model for B2C. The entrepreneur is like a starter motor trying to start a tornado. On the web you have to acquire traffic, hopefully at low or no cost. Then you have to engage that traffic so they participate and value you. Then monetize (in many models this comes very late). Then enlist people to help you acquire the next traffic, whether an upsell of yourself or referring a friend. Think of Zynga getting your friends to play FarmVille. Engagement is you participating; enlistment is when you get other people to come play too.

Two of these gears are performance gears: acquisition and monetization, the ones investors measure. The other two, engagement and enlistment, are the power gears that determine future performance. Enlistment has a simple metric, the Net Promoter Score: how likely, one to ten, are you to refer this to a friend? Nine or ten is positive virality, seven or eight neutral, six or less is churn, negative virality. Look at LinkedIn: acquisition off the charts, enlistment strong (people tell you to get on LinkedIn), monetization strong (recruiters alone monetize it), but engagement is their concern. Facebook: acquisition 900 million, engagement people live on it, enlistment your relatives tell you to get on it, but monetization on desktop not so bad, on mobile a disaster waiting to happen, which is what will hit the valuation this week. And 50% of Facebook’s traffic is mobile.

We have a slowest gear theory: prior to the tornado, one gear is probably slower than the other three. Identify the slowest gear, focus everyone on speeding it up, but don’t take your eye off the other three. This is where “serial entrepreneur” doesn’t work; you have to keep all four gears spinning. Repeat every quarter until the tornado happens or you run out of gas.

(Discussion with the audience.) On B2B vs. B2C: the four-gears model is more of a B2C model, large numbers of people acting on their own, versus B2B where you have to get many constituencies aligned. On jumping the early adopters: if your innovation is discontinuous enough, and the consumer doesn’t have to change their behavior, that gives you enormous leverage against whoever does have to change. Apple gave iTunes to users, so from the user’s point of view there was no technology adoption (just go get your songs, even though Napster had them for free), and that power forced the entire music industry, which did not want to change, to change. In B2C it’s not about chasms and bowling pins; it’s about going straight to the tornado. B2B is more predictable; B2C, when they win, is more lucrative but still somewhat mystical. On sustainability: B2C is a fad business to a large degree; look at movies and music. Some sustain (McDonald’s), but many don’t, and you can’t institutionalize it (DreamWorks won’t always create hits). On the cadence: repeating every quarter is probably too slow for a startup; weekly is a better fix, and if you have a large user funnel you can iterate five times a day testing hypotheses. The point isn’t a specific cycle of time; it’s how fast you can close the loop and expect to learn something, then move on. On the “solid stupid people” wasting time online with Zynga: put more honor in it; all of human culture is going online (education, health care, war, love, literature, film, music, art, sports, news, being a citizen and being a criminal), and it’s becoming more online. Zynga is a good example of wasting time, and we all waste time online, usually standing in line at Starbucks. The scary thing is the model was monetized by media advertising, and we haven’t cracked the code on small mobile screens. On adoption support from partners: the reason monetization comes late in media is that advertisers and agencies don’t at first know how to use it; the ad unit and the interaction take time. Always look for the inherent inertial resistance to the new phenomenon. On delight: engagement isn’t just time spent. Google’s goal is to get you off the results page as fast as possible; that’s a delighter, triggering pleasure by getting you in, out, and on with your life, whereas Zynga keeps you in the game all the time. On minimally viable product: a lot of startups got obsessed with what is really a B2B idea, MVP. In B2C, “viable” sounds like you’re still in the ICU, and nobody wants to hang out with people in the ICU. It’s like a minimally viable bouquet on Valentine’s Day; if she sees the cellophane and it’s from Kroger’s, probably not the romance winner. On different markets: you apply the framework in each market, but a different gear may be the constraint. When LinkedIn went to Japan, the enlistment gear runs at the speed of a glacier; just think about Japanese culture and reaching out to another business person to tell them to join LinkedIn. So they have an engagement gear problem in the US and an enlistment problem in Japan.

Finally, the last piece, from time in boardrooms making myself unpopular. Category power again: the great place for big companies is the B section of the curve, no adoption problems, you just scale it. The C is where you worry about optimizing margins. The D is where you risk a Kodak moment (and Kodak was one of the five best brands in the world for most of my life). When you reinvent yourself, you’re not trying to re-cross the chasm; that’s too small. You want to get into a new category on the right side of the chasm and scale it up. At a $10, 20, 30, or 40 billion company, by the law of large numbers you can’t change your stock price until you have a new earnings engine earning several billion dollars; $100 million is a rounding error.

The key to understanding a large corporation is three investment horizons that interact to cause the innovator’s dilemma. Horizon 1: if I spend money on this I make it back this year (hire more salespeople, revenue goes up). Large corporations are world-class at this. Horizon 3: I’ll get a return, but not anytime soon, out of a capex budget, the corporate tax we spend on the future. The labs in large corporations have way cool stuff; venture would kill to get it and often does. Think of Xerox PARC; Silicon Valley dined off it for two decades. The problem is Horizon 2: we’ll spend money out of working capital this year, get nothing this year, something next year, and something exciting the year after. This is absolutely fatal to innovation. Performance management is all about Horizon 1: making your numbers quarter after quarter. You cheat, you lie, you steal, and you hoard resources because there’s too much variability. Then H2 comes and wants the same resources H1 uses, in particular the same sales, go-to-market, marketing, and professional-service resources, all the customer-facing stuff. During annual planning, H1 gets first dibs on all resources; by the time H2 gets to the table there are no A players left, maybe a few lingering B’s. H3 gets stars, but weird, wonderful people not useful in H1. The H1 manager says “I can support as many H2 initiatives as you want, if you don’t want me to make my number.” It’s blackmail that works both ways because the CEO has been pounding him to make his number. This is not an R&D problem; it’s a go-to-market problem. The big aha: innovation is not a funnel, it’s an hourglass. You can have as many things as you want in H3 and H1; H2 is the problem statement, the narrow neck.

If you’re going to move those stock charts, you have to create a net new earnings engine, somewhere between 5 and 10% of total revenues, probably going to 15 to 20%. Below 1% you can hide, effectively a Horizon 3 play. So the journey is to grow one order of magnitude, and how much time will a large public corporation give you? They’ll give you one year (no chance), reluctantly two (probably no chance), and grudgingly a third year if you make enough progress, but not a fourth. So you take on the assignment already three to six quarters behind. Horizon 2 is not a stable state; you either get through it or you die, which is the venture-like thing here, because venture is not a stable institution either. At some point those nice friendly VCs are not so friendly.

The “money slide”: how would you play this game to win? First, how many Horizon 2 initiatives can you do at the same time? One. Only one. I don’t care if you’re a $100 billion corporation. It’s a one-lane highway; put two cars on it and neither gets through. Second, when do you plan and budget for it? One quarter before everyone else, because once the real annual planning starts, the knives are out, it’s a zero-sum game, and the H2 guy has zero chance of surviving. Third, what structure? A venture-like structure. The reason venture-backed companies routinely kick large corporations’ tails is fast cycle time. In a startup, the customer says this doesn’t work, the engineer hacks something together, “can you give me a demo by Tuesday?” In a large corporation it’s “which Tuesday? I’m booked for two Tuesdays.” During the order-of-magnitude race, the business has to report to a single entrepreneurial GM who can move resources on a dime, but you can’t let it persist at scale; it has to melt back into the functional organization once it reaches Horizon 1 scale (sales back to the sales force, engineering back to engineering, support back to support), so there’s no empire building. Fourth, metrics: tipping-point metrics. Crossing the chasm for B2B, four gears for B2C. Fifth, compensation, the one that gets me kicked out. Obviously you compensate the GM of the H2 business with high variable comp on getting to material size. The ultimate sponsor has to be the CEO, with a big part of variable comp riding on getting the H2 initiative to material scale. And the painful one: everyone who reports to the CEO also has all their variable comp ride on the success of this one business unit they did not fund, do not believe in, and whose GM they may not even like. People say that violates every concept of compensation. My reply: we don’t have a good existence proof for doing it the other way, and are you really telling me that if your entire variable comp for three years depended on this business, you could do nothing to improve it? You’re greedy individuals; you’ll think of a way to introduce them to a customer, get past an objection, tell an account guy this comes first. You can make it happen faster than venture, kicking venture’s tail, particularly in a performance-driven culture.

Three things it takes: a focus on power, not performance (the two go together, but we have to think in a committed way about power and not keep coming back to the numbers); more pressure on leadership than management (management is the key to performance, leadership is the key to power, a yin and yang); and it’s got to be about the tipping point before the ROI. It’s been 15 years since Clay threw down the gauntlet; somebody’s got to pick it up. So let’s go.