Steve Blank is the closest thing Silicon Valley has to a guru.
The serial entrepreneur turned writer and professor has a big theory: entrepreneurship is a skill that can be taught.
At Stanford and Berkeley, Blank teaches scientists to get out of their labs and find real customers for their ideas — without getting bogged down in the traditional MBA weeds of spreadsheets and revenue models.
Blank and a few other like minds traveled a lonesome road earlier this decade, but now their ideas are broadly admired, and they help inspire the current crop of startups coming out of the Valley — and the angel investors and VCs who fund them.
We caught up with the outspoken professor to talk about the state of the tech business today.
Highlights from our conversation:
- The LinkedIn IPO “absolutely” marks the beginning of a bubble — and he thinks it’s going to be great. He likens it to the Netscape IPO in August 1995 that kicked off four years of boom times, but notes that this time VCs actually know how to build real companies with real revenue and profit.
- Crazy investors — not geeks — are what makes Silicon Valley unique. Without the “crazy” financiers willing to take big risks in hopes of chasing “obscene” returns, the valley would just be “a bunch of smart scientists and entrepreneurs sitting in their labs and their garages.”
- Microsoft will start to fail within six quarters. Blank put a timeline on Microsoft suffering the kind of huge loss that drove IBM to restructure itself back in 1993: six quarters from now. He thinks Steve Ballmer is a “miserable failure” and that the board should be blamed for not replacing him. He also suggests that buying Nokia and installing Stephen Elop as CEO might be a solution.
- But Larry Page is doing the right thing at Google. By letting the geeks run the show, Page is following in the footsteps of one of the earliest Silicon Valley pioneers: Fairchild Semiconductor in the 1950s.
Here’s a lightly edited transcript of the full interview.
Business Insider: Let’s start with the big LinkedIn IPO this week. Do you think we’re at the beginning of another big tech boom like the 90s?
Steve Blank. Absolutely. Tech boom and bubble. Away we go. I think it’s going to be great.
BI: So you’d call it a bubble?
SB: Oh absolutely. There’s no rational basis for the valuations. It doesn’t mean it’s a bad company, it just means that we’re now into buying things because we think the sector’s going to be hot and there’s going to be more to follow.
I also think we’re much smarter this time. Last bubble, we didn’t say it was a bubble. We said it was the new normal. Now at least journalists and financial analysts are being smart and asking “what does this mean and when does it end?” I think it’s not March 2000, I think it’s August 1995 — Netscape’s IPO. It’ll bring a lot of cash and innovation into technology clusters.
BI: Other than the fact that people recognise it as a bubble, do you see any other differences between what’s happening today and what was happening in the late ’90s?
SB: It may be instructive to remember what happened before the late ’90s. VCs tutored their companies on how to grow revenues and how to get customers. Up to August ’95, you couldn’t take a company public through any of the boutique technology players, the Hambrechts, the Robertsons, the Montgomerys, without having five quarters of increasing profitability and revenue.
August ’95 through March 2000, the rules changed because there was an unending appetite in the financial markets — VCs didn’t have anything to do with it, it was the investment banks and the public. So venture capitalists — because they’re smart and organised to optimise profits for their limited partners — stopped being company builders and started becoming financial engineers. Startups and Silicon Valley companies were no longer building revenue or profits, they were building slideware and concept and hype. If it had the letter “e” or “Internet” it was a concept IPO.
Post-crash, VCs picked through the rubble and spent the last decade building companies. This bubble is beginning not with hype, but built on the rubble on the last one. These first 10, 20, 50 companies coming out that have filed have real revenue, real profits, real customers. I think that’s dramatically different between this bubble and the last. I’m not concerned about the first wave of companies.
We also know now, which we didn’t 10 years ago, how to eliminate the egregious infant mortality risks. It used to be war stories. Now I can probably say “talk to me about your customers” after 6 months. If you can’t do that, I can’t guarantee you’re going to fail but you’re sure not on a high probability trajectory.
“Tell me what you found outside the building.” “Oh, we’re still working on the spec.” Not a good sign.
BI: So explain your concept of lean startups, what that is and why it works.
SB: Venture capital and technology entrepreneurship is at best 50 years old in its modern form. What we did for the first 50 years of startups was get it wrong. We treated startups as smaller versions of large companies. We said “everything you do for these large companies — business plans, you need to write one. VPs of sales — you need to have one. Revenue plans — you need to execute that. Everything they do at IBM, you need to do in your startup, just a smaller version.”
It took 50 years to realise why that’s wrong. Large companies execute known business models, while startups search for a business model. The distinction between execution and search is huge. People who execute are incredibly uncomfortable in a chaotic environment, and people who are wonderfully comfortable in chaos go crazy in an execute environment. Business plans, which are great for your second and third product in a large company, are a joke in a startup when it’s all a series of unknowns.
My work, Alexander Osterwalder, Eric Ries, and others are now creating the equivalent of a parallel stack — what you learned in business school for execution, we’re now teaching what you learn for search.
BI: I’ve heard some people criticise the angel model in that it encourages small ideas and small exits. Would you like to see more startups going for big, groundbreaking, home run ideas?
SB: I think that’s people looking through the wrong end of the telescope. Those observations are wrong. Big ideas haven’t gone away — VCs writing $10 million checks haven’t gone away. Even clean tech hasn’t gone away. Adam Grosser raising $2 billion for a clean tech fund out of Silverlake. Elon Musk isn’t putting rockets into space for 100 grand or doing Tesla [for cheap]. These are big money ideas.
We now have a methodology, we know how to time the money, so there’s very few business cases where you should be taking tens of millions of dollars on day one, even for big ideas.
For example Facebook — they could have raised a ton of money up front, but you don’t need it up front, you need it in the back.
BI: What about big established companies like Google and Microsoft? How can they overcome the innovator’s dilemma and recapture some of the energy of the startup world?
Next Page: Microsoft Is Toast.
SB: Christensen [author of “The Innovator’s Dilemma“] 15 years ago nailed it. In the lifecycle of a company, why companies go out of business is that customers change, technology changes, competition changes. Even the most dominant player doing wonderful sustaining innovation can be blindsided by changes outside their control.
Google is a great case. They own search. They owned the Web. One day they wake up and a company with an idea that never even existed before — Facebook — has disrupted their business.
There are two major strategies. You either build, or you buy. What do you buy? You can buy IP, you buy teams and people, product lines, companies, P&Ls, bottom line. I think Google has tended to focus on teams and products. If you look at their most innovative counter to disruption, Android, it had nothing to do with the company, they bought it. Not only did they buy the technology, they bought the individual who’s the driving force between what might keep them in business. The one thing they haven’t figured out how to either build or buy is to counter Facebook.
You look at Microsoft going through this — Microsoft is the living dead. Microsoft is a standing joke now in the technology business.
The one game you could see playing out is they buy Skype, they buy Nokia, Steve Elop finally injects some life into the company and replaces Ballmer and Microsoft reinvents itself. Elop is a great politician and a great IT guy, and maybe they could reinvent themselves along that axis. But it wil never happen as long as Steve Ballmer is Bill Gates’s best friend.
Microsoft is the new Wang. Remember Wang? It was a dedicated piece of word processing hardware. Or they’re the new Data General or the new DEC. The wings fell off but their trajectory kept them going for a couple years until they plummeted to earth because there was nothing underneath them anymore.
SB: But remember how they did that? They brought somebody in from the outside that said “fuck everything you know, I’m going to fire a shitload of people.”
The problem with Microsoft is not Ballmer, it’s the board. Microsoft has failed any fiduciary test by any rational means and it’s simply because Bill Gates has refused to acknowledge that his friend has been a miserable failure in replacing him. This isn’t very complicated. Microsoft needs to be reinvented. Your analogy of Lou Gerstner who came in and said “fuck your 100 years of history, you’re going out of business unless we do this shit, and here’s who we’re going to become.” I can see somebody doing that to Microsoft, otherwise they’re going to become some kind of asterisk. And who would have thought that?
BI: Microsoft hasn’t had that big loss like IBM did in ’92 and ’93. That’s what really made them wake up.
I predict six quarters from now. Tablets are going to change their business. The Wintel duopoly is over. Intel is scrambling not to be replaced by ARM. Microsoft has kicked the apple cart over and I give it six more quarters.
BI: Do you think what Larry Page is doing at Google makes sense?
SB: I think Larry Page is channeling Gordon Moore. Silicon Valley, people forget that Fairchild Semiconductor, the first large scale semiconductor company, was run not just by engineers, but by scientists. And what these scientists had to do in 1958 to 1965 essentially, they had to teach themselves how to run a business. It’s a big idea, it had never happened in the United States or anywhere before. These are hardcore scientists who had to learn how to run a business, and man did Moore and Noyce figure that out. That’s the core of what Silicon Valley really brought to the game.
Page might be capable of doing that. Time will tell.
BI: You’ve written about the secret history of Silicon Valley. What makes this place unique for entrepreneurs?
SB: Do you know what they call a failed entrepreneur here? Experienced.
Anywhere else in the world you’ve got to change your name. You’ve got to leave your town. Think about any conversation you’ve had with a failed entrepreneur. Here you tell somebody “I just blew through a couple million dollars” and what’s the next question your friend asks you? “So what company are you doing next?”
Silicon Valley was a physical place, it extended from Santa Clara, Sunnyvale, Mountain View. Now it’s a state of mind that essentially extends from San Jose to San Francisco. We’ve become a company town focused on innovation and entrepreneurship.
The United States and other places in the world have clusters of industry. Milan is fashion. Detroit used to be cars. Hollywood was movies. Silicon Valley — we do one thing here. We do innovation. This is more like Athens or more like Paris in the 20s or Florence in the Middle Ages. The rules change when you get off the aeroplane or drive across the Golden Gate Bridge. Failure equals experience. Risk equals progress. There are no wrong answers.
BI: How do you set that up elsewhere? What’s unique here? Did it come out of UC and Stanford? Is it the climate, is it something in the water?
SB: People write about the entrepreneurs because they’re exciting and they’re interesting. But people forget the core of the valley isn’t entrepreneurs. It’s a combination of entrepreneurs and a set of equally crazy people who are risk-capital investors. Silicon Valley would be a bunch of smart scientists and entrepreneurs sitting in their labs and their garages without having an equally capable, equally crazy financial asset class.
Where else can a bunch of financial people say to their investors “there’s one thing I can guarantee you: I’m gonna lose 90% of your money.”
“I should probably take it to Las Vegas. Why should I give you my money?”
“Because the other 10% is probably going to make you 10x.”
Now of course some smartass is going to say “why don’t I give you only the 10%.” The problem is we still don’t know which one, although we’re getting smarter.
What people keep forgetting, this is a Valley based on enormous greed. I don’t mean greed in a nasty way. Why do VCs exist? Obscene returns. Not OK returns. Obscene returns. It’s the infrastructure that allows that to happen.
You go to Argentina or Chile — it takes years to shut down a company. Here you shut down a company in a week and a half. What’s the capital gains rate? Somewhere else it’s 90%. Well fuck you, why should I have a venture capital firm? I’m working for the government.
Usually it’s helpful to have an outward-facing university, one that encourages students and professors to leave rather than stay and doesn’t cross their arms and look at you askance when you leave.
BI: Last question — if you could give an entrepreneur one piece of advice, what would it be?
SB: There are no facts inside the building so get the hell out.