SM: Could you contrast your proposed process to a business plan?
RK: With a business plan, in a more conventional process, somebody would have identified a solution. It may not even be a solution to a real problem.
SM: Solutions looking for problems are a real problem in Silicon Valley.
RK: Absolutely true! I see it every single day. People come in with a plan next to their solution. Their plan has line items, volume, pricing, and revenues. By the way, every single one of those plans is based on a set of assumptions that takes place before I have a product, customer or market. Those assumptions are flawed by definition.
The premise of our book is that Plan A most often fails. We need to design businesses that get to Plan B, which is really just a placeholder. You need to design a business that is always getting to the next plan; B, C, D, E, F, and G. Unless we start with the premise that Plan A is going to fail, we are building businesses the wrong way. We are building businesses that execute against a set of assumptions that are built without any primary knowledge of the market and often without understanding any secondary information from proxies.
We are building these businesses into a straightjacket where we cannot measure the business until a year or two down the road because it takes us that long to be operational enough to measure those assumptions. When that happens we end up with a disconnect between the investors and founders, because they are hitting on some assumptions and missing on others. Nobody really knows if the business is working or valuable.
The dashboarding process is flexible and innovative. It is iterative and based on empirical information. The business plan is built on assumptions that are made too early in the marketplace and creates the wrong dialogue between the constituents. The dashboard is designed to get firsthand information after going through proxies to resolve everything you can on the backs of others first. The process of innovation described in the book is based on identifying a problem and asking the right question versus identifying a solution and delivering a set of assumptions.
SM: What you are describing is applicable to both big and small problems. The key is to have a problem.
RK: It works for any problem. It works for big companies looking to establish a new venture inside their company. I presented the book to Intuit a month ago. Last week one of the executives came in and showed me the dashboard process he was using successfully, measurably, within his organization. This book is intentionally global.
SM: This iterative process takes time, yet entrepreneurs want to do it as fast as possible. I am of the school of thought that you want to fail fast and not waste years of your life doing stupid things with your business. If you are doing a lot of iterations within the framework of a venture financed company, you are gradually losing control of the equity.
RK: It is interesting you say that. I can see why you say it, but I am not sure that is always the case or even the likely case. If you run this process correctly, you should be able to resolve a lot of these questions more cheaply and quickly than you could if you were simply executing to a plan.
SM: I agree with that. What I mean is that you must do the validation before you go out and raise money. Bootstrap the validation process so that by the time you go to the VCs, you have answered the questions and you have a validated business idea to finance.
RK: I don’t disagree with that, with the following two caveats: one, the process does not end when you go to the VCs. You still need to work this process and establish the right expectations with your financiers that you are in the process of getting to the right Plan B rather than getting to the hypothetical Plan A. Two, in some cases the venture capitalist can help you resolve those validation questions.
SM: I have a huge problem with the second point. People from that school of venture capitalists are few and far between these days.
RK: I think that is true. I agree with that on two levels. Most do not have operating experience and certainly do not have entrepreneurial experience.
SM: They also do not have positioning experience, which is clearly what you are talking about.
RK: I’ll give you an example. About four years ago I funded a company called Pinger which is now on Plan C and doing quite well. Plan A had to do with using voice SMS. They came in with a plan that said they would need $8 million to $9 million over the course of 18 months in order to build the platform to test the assumptions.
We said that we had a very good relationship with one of our portfolio companies, Tellme, and that we would ask them to give us a sandbox to try this faster. We did it with $1 million What we did as venture capitalists saved them a year of infrastructure development to test assumptions. That allowed them to get onto Plan B and C very quickly. They would be out of business if they had executed on Plan A.