A strange thing started happening to me about two years ago. I would be at a social event, probably a user’s group, and someone would start talking about either their startup idea, or, perhaps, the idea of startup ideas — specifically, The Lean Startup. The next steps were usually consistent: The person would describe the lean startup with superlatives (“awesome” and “amazing” are common), would find out I had not read the book, then refuse to actually explain it (“it’s too much, you must read the book”). Toward the end of the conversation, they would find out that I had my own business and assume that I had not read the book and must be doing it wrong.

After a couple of years of this I went out and bought the book.

And yes, for what it’s worth, there is plenty of good stuff. I do think I can explain it in the course of a conversation — at least in enough depth to recognize how it is different than other approaches.

Let’s get started.
Defining the “Startup”

Early in the book Eric Reis, the author, defines the term startup as a  ”human institution design to create a new product or service under conditions of extreme uncertainty.”  The two key terms here are new and uncertainty. The rest of book makes clear that new might be an understatement; the product is not really defined, much less built. Meanwhile the conditions of uncertainty mean you don’t know if the customers would buy the product if you made it.

That means the first thing you need to do is figure out if you are on the right track. The Lean Startup term for this is “customer validation mode”; you want to make sure that if you build it, they will come.

Now you might actually build the product, in which case you are going to build a Minimum Viable Product, or MVP. It’s more likely that you create an experiment to figure out if customers will buy. If your product is something people will immediately understand, you might purchase a hundred dollars of Google AdWords for the product and a price point, so see how many people will click through. If lots of people click through, you’ll use that $100 pretty quick, but the answer only cost you a hundred bucks. If they don’t, you didn’t waste any time building a product no one will buy — at least, you know they won’t buy it online at that price point.

You conduct the experiment to get data, and get the data in order to make a better decision. The Lean Startup term for this is “validated learning”, where you test your vision for the company. If it fails, you can pivot, or change direction.

That’s the heart of the lean startup concept. There are some other details worth mentioning, even in a nutshell post, but first you need to hear about Eric Reis.

Why You Should Listen To This Guy

More seriously, in the book, Eric tells how his original startups (including IMVU, the great success) all started with a founders vision, and the adage “if you build it, they will come.”  The problem was that the founders never did any sort of market research to figure out if customers actually would come; they never conducted any experiments to validate the market. He even tells stories of focus groups where the potential customers were pushing him in a specific direction, and telling the staff that the focus groups were with the wrong people; that they needed to do focus groups with the right “demographic.”

Eventually, he started listening to his customers, changed the product the IMVU was offering (the “pivot”) and started validating every business assumption like mad. One big piece they did was A/B split work, finding what marketing and sales tactics worked (cheaply) before purchasing a large block of ads or building a product. For example, they might try the Google AdWords trick with two different features; clicking through might do as little as bring you to a “coming soon” page. Whatever gets the most clicks get built, and if all the results are poor, eventually, the company considers a pivot.

The Lean Part

The heart of the lean startup is the Build -> Measure -> Learn -> Build Again loop, in the bottom left of the image. Reis suggests minimizing time through the loop. That means focusing on getting one thing done at a time, instead of batching features up into a set and releasing a big set every, say, nine months. To make sure that happens, Ries favors limiting work in progress — you can’t go analyzing a new feature until the previous feature gets to done-done; that speeds up the loop. It is these ideas that make the lean part of the lean startup, and they are similar to lean concepts in manufacturing.

Another big piece of the lean startup is that Minimum Viable Product, or MVP.  The purpose of the MVP is not to “sell the smallest thing we can make money on”, but to develop something even smaller.  The goal with an MVP isn’t to make money, it is to validate the market, to learn what you could build that customers would actually pay money for.  This means you might give away the MVP, or call it a free beta, or even pay people to sit down for an hour to use it, to give you feedback to build the real product.  This is a radically different approach than operating in ‘stealth mode’ or ‘radio silence’ in order to develop the perfect product then sell it.

The Final Analysis

After finishing the book, I still don’t know what people mean by “doing” lean startups.  My take on the book was more of  a reminder to conduct experiments, to validate your work, to defer decisions.  W. Edwards Deming called that “Plan->Do->Check->Act.”  Reis does add some interesting wrinkles, on how to measure the value of your experiments, and how to learn from experiments, to adjust your plan.

It would be impossible to cover the entire book in one post, but I did try to cover the main themes.   At this point, if you are interested, you might consider getting the book yourself.

Then again, if you have read the book, I’m sure you can tell me the critical piece that I’m leaving out, or perhaps explain what it means to be “doing” The Lean Startup.

Please, tell me how I’m doing it wrong. It’s okay. You’ll actually help the readers, and at this point, for me, it’s basically a hobby.

 I just got into Sweden for a conference, and I am immediately struck by how efficient the place is.  My room, which might be described as a small American room, had two additional roll-away twin sides beds in it.  When I asked the front desk what they were, the one person on duty (that is the standard shift size) explained that the room is so big that it usually fits three. The hotel had some extra space available, so they gave me a free upgrade.

There is also no storage space.  No dressers, just a one-foot-wide desk-like surface that goes the length of one wall, and a space wide enough for shirts with six inches of depth, a bar, and four hangers.

Most of the lights in the hotel are motion-sensitive; they waste no power.  In order to turn on the lights in my room, I have to insert my key-card.  If I want to get back in the room, I need to take my key-card out — making it impossible for me to accidentally leave the lights on.

Assuming you made your reservation right, sign-in is with a kiosk, not a person.

All of these efficiencies  make it possible for the company to have more guests per employee, to compete on price.

In a sense, that is a wonderful thing. The Swedish people are hard-working and view efficiency as a virtue.  The waste-basket is tiny because they don’t waste — these are the people that invented IKEA.

The downside is that this drive for efficiency destroys jobs.

That’s not new either; the luddite riots, when the “machines are taking our jobs away”, actually happened in 1812.

Unlike 1812, though, I do see some  forces at work that are a little troubling.

The IT Jobs Story

Companies get more efficient over time.  The mom and pop video store fell to blockbuster an the big-box retailers.  In April 2010, Blockbuster filed for backruptcy as it fell to Netflix.  Walden books, the store I spent half my youth in, recently disappeared, and was followed by its parent company, Borders, which filed for bankruptcy in February of 2011.  Amazon, which was widely considered the victor, might have followed, if they had not chosen to create the Kindle.

Amazon didn’t suffer for the Kindle, but traditional publishers certainly did.

In addition to efficiencies, employers have wised up  about redundancies.  When two companies merge, they can not only cross-sell, but generally end up with HR, legal, and IT departments that are smaller than the combined size of the original departments — saving money by eliminating real estate, consolidating data centers, and, yes, layoffs.

All that would be fine.  Efficiency is good.  Employees that don’t have to be on the assembly line can go do other valuable work for the company.

Even if you lay them off, the world still has the same goods and services as it did before – and now it has a surplus of time.  At the very least, the now-laid-off former employee should be able to go create a tech support company, or do yard work, or clean houses, or do laundry, or … something, right?  Each of those companies can make life just a little easier for other people in society.

But there is a problem.

The political and social climate does not favor small business.

There are facts to support this; a recent poll shows that 55% of small business owners would not start again today in this current business climate.

But we don’t need stats to prove that. I know the reactions of my friends and neighbors when I went independent, and I can drive the streets and see the pain of small business and victory of chains and franchises.

There’s More to Talk About

The opening sequence of Issac Asmov’s “The Caves of Steel” is scene of open revolt.  There is high unemployment; robots have just become automated enough to fit, size, and sell shoes.

When I checked in to the hotel today, at the Kiosk, after getting tickets from a kiosk, and riding a train without ever seeing a human, I have to worry, a bit, about what the singularity might really be.

It might not require a computer to become self-aware and tell us all what to do.  Instead, it might be a more graduatal separation of a producing class, a service class, and the folks who don’t fit in, Sadly Out of Luck (SOL).

But that’s a horrible, incomplete picture drawn on limited information.

Right now, I see two real choices:  Find ways to stay relevant as companies continue to merge and change, or get serious about that small business thing.

Over the next few months, I intend to cover both on this blog.

For tomorrow, though, I’m going to enjoy Sweden.  If you’d like me to blog some pictures, just ask.

Ian Rutherford is a technie; someone just comfortable enough in IIS, SQL Server, HTML and ASP to make a ‘real’ e-commerce site – or at least comfortable enough to learn.

Last time we talked about Ian’s back story, and left him with a tech support position at Pizza Hut Corporate Headquarters in Texas, learning the skills he would later use to start his own business.

Iwanted to ask Ian how he decided to move to colorado, start his own business and how it went.

It’s time for part II of our story.

Matt Heusser: How did you find yourself becoming CTO of the Catholic Store in Denver? How large was the IT department, and what was it like?

Ian Rutherford: Back in 1999 while I was working at Sprint Paranet doing website development I decided that I liked doing web and database integration but I really wanted to do something faith-based. I had already been working on websites since 1994 and  after watching Amazon take off, I figured that there wasn’t any reason that a Catholic store couldn’t have the same success on  a slightly smaller scale.I, with the eyebrow-raised agreement of my wife, decided to leave Sprint and start my own Catholic store since the technological world didn’t end in 2000. I decided to work on a fulfillment warehouse model to keep my costs low so I approached the largest Catholic bookstore in Denver about doing fulfillment for this  website I was going to build. The owner instead offered me a job building his website which I made into the largest on-line Catholic store in two years. When I arrived I increased the size of the IT department from zero to one and that is how it stayed until I left in 2002. We actually brought in a T1 and hosted the website on servers in an office closet.

Matt Heusser: Somewhere along the way, you and family decided to start your own Catholic store. What was that like? Would you consider it a vocation or a calling? How do you know that you made the right choice?

AquinasAndMore.com today

Ian Rutherford: When I decided to start Aquinas and More I was excited. I really thought that this was my calling. I wouldn’t call it a vocation, that’s what my family is. There was very little competition and I had the technical know-how (if not the business savvy). My family was supportive and my Mom, who I will never be able to repay, worked as a volunteer for countless hours while we did mind-numbing data entry. At the time, hardly any of our vendors were on-line so getting digital pictures, descriptions or any other promotional assets was almost impossible. We opened in October of 2002 with an initial investment of $12,000 and a 144 square foot office twenty miles from town. I’ll get back to you on the right choice when I’m more sure of the answer.

Matt Heusser: 2002 to 2012 is a long time. Can you tell us about the process of starting the business, especially the early years? Did you have any doubts?

Ian Rutherford: In early 2002, the owner of The Catholic Store told me that my contract was up and that I could reapply for my job but that he was looking for someone else who wouldn’t cost as much. I decided that wasn’t a good situation to be in so I decided it was time to part ways and start up my own business like I had planned to in the first place. I had about three months to build the customer-facing component of the site from scratch before we opened in October. Those were some very long days and nights of code writing and I am sure that a code reviewer would have nightmares about some of the legacy code still in the system. When we first started in our tiny office my team consisted of my Mom, a family friend and me. We had a web server, a database server, three workstations, a flatbed scanner and some utility shelves for product. We had also purchased an old jewelry case from a local church. We spent weeks just writing descriptions for items and learning the rudiments of using a digital scanner. During that first year we would wait for orders to print as they were placed and had our first “big break” when a publisher reprinted Bishop Fulton Sheen’s Wartime Prayerbook. We sold several hundred in a matter of weeks.

We finished part two of the interview with Ian taking the risk of his life; an on-line-only web store. Next week we close our adventure, with Ian taking the store to profitability, and even opening a a physical bookstore – with a lot of help from family and friends, and a few adventures along the way. We’ll also cover the advice he has for folks who see the path but have concerns about making the leap.

Last time we took at look at HP’s situation through a different lens – the lens of management consulting.

Today I’d like to take a different approach; on based on history.

But first, a story.

A Long Time Ago

There was a very large, international company.  Once known for being innovative and shining, the company grew large and slow.  Over time, the company’s personal computer business grew from wildly profitable to essentially a loss-leader, a sort of “yeah we also do that” thrown in so that the company could sell more expensive, high-end servers.  Finally, the company developed an operating system that was technically superior, yet came too late to market.  After a brief, painful struggle, the company abandoned it’s shiny new operating system

What company am I writing about?

It could be HP, formerly known as Hewlett-Packard, sure, but it might also be IBM, formerly known as International Business Machines.  With IBM, the operating system was called OS/2, and, believe it or not, yes, IBM used to sell personal computers, finally exiting that business in 2005, selling it’s ThinkPad division to Lenovo.

Most people credit IBM’s turnaround to Lou Gerstner, the CEO who came to IBM from American Express, and  transformed the company from one that made it’s money selling hardware to one that makes money on services and software.   He even wrote a book on the subject; “Who says Elephants Can’t Dance?”

Today more than 80% of IBM’s revenues come from services and software; it right there on page 11 of the 2010 IBM annual report.  To get to those kind of numbers, the company needed to make sweeping changes to it’s organizational structure, cut fat, sell of divisions, and invest massively in software and services companies, trying to grow through acquisition.

By the end of it, the company that emerged was different, perhaps a little smaller, perhaps a little more nimble.  OS/2 may have died, but IBM survived.

But what about HP?

Oh yes.  That other company, once known as Hewlett-Packard with a struggling PC business, that spent a great deal of money to purchase palm and the WebOS.  They had the intention of developing a tablet computer, and did … then scuttled that program after a month of sales.

Now HP is talking about purchasing software companies and, possibly, selling off it’s PC divisions.

Doesn’t this sound awfully familiar?

HP may just be trying to pull an IBM.

Except, of course, things are a little bit different today than they used to be.

In 1993, when IBM started buying software companies, the web was new, “shipping software” usually involved selling discs in boxes at CompUSA, and there just weren’t that many software companies out there.

Today the market is huge, the key players are big, have deep pockets, are reluctant to sell, would be expensive … and HP doesn’t have that much cash in the bank.  In fact, HP ended July 2011 with $13 billion in the bank, and made an offer to purchase Autonomy Software for $10 Billion.  At that rate, HP won’t be able to afford many software companies.

It is possible that HP survives.  It is hard, after all, to stop something that big in motion; the law of inertia holds.  If HP does survive, the company that will emerge will be different, perhaps a little smaller, perhaps a little more nimble.  WebOS may have died, but HP will survive … or parts of it.

You see, HP has intellectual property that is valuable.  Somebody will buy the PC business from HP, though perhaps at firesale prices.  Your support contracts, your parts, and your existing software from HP is certainly safe.

If it is purchased, though, like Lenovo, these pieces will likely be purchased by an organization intent on making the business profitable, perhaps by cutting costs.  In general, “cheaper operations” means, well, less support, less often, perhaps for more money.

And if you do business with HP or are considering it … that’s certainly something to think about.

It’s certainly been an interesting few months.

First HP Fires Mark Hurd; choosing to hire Leo Apotheker, an executive with an all-software background.  ( Shortly thereafter, Apotheker makes a bid to purchase Autonomy Software for 10 billion dollars while looking for buyers for it’s PC business.

Meanwhile the company shuts down it’s touchpad division forty-nine days after it’s release.

To paraphrase one recent Wall Street Journal staff writer, you couldn’t come up with a better plan to ruin the company and take it out of business if someone paid you.

Stop.

Wait.

Yes, clearly, something is rotten in Denmark.  Yet somehow I doubt that these people are all actually insane, trying to destroy the very company they are charged with protecting.  It’s much more likely that something else is going on, some system of forces beyond our perception, that makes each individual move seem like a good choice, even as the company slowly lurches toward the brink.

If we take the approach of trying to understand the decision, we have a chance of learning something, perhaps things we can apply at our own little companies.

First, let’s talk about HP’s strategy.

Strategy

Most of us know that the really big companies aren’t structured like Ford in the 1920′s.  Instead of one big chain-of-command, conglomerates are more like a portfolio.  Instead of owning stock, the headquarters unit owns entire companies, providing services for them like HR, and computing and the web site.

Structured this way, the biggest part of the CEO’s job is managing the portfolio — selling some business units, buying others, and finding ways to get them to work together.  There are lots of ways to figure out what to buy and sell, but perhaps the most popular is the Strategy Matrix made famous by the Boston Consulting Group:

The BCG Strategy Matrix

Holding this handy-dandy cheat sheet, a CEO can split his business units up into cash cows (making money but not growing), dogs (losing money and not growing), question marks (not growing but the market is) and stars (owning a lot of an increasing market.)

From there, the decision is simple: Sell your dogs, harvest the cash cows (and sell the husks when harvest is over), purchase stars, and figure out ways to make the question marks perform … or ditch ‘em.

Let’s think about the classic business units HP works in: Servers are the cash cows, laptops are the dogs, the TouchPad was a question mark, and enterprise software and services are the new stars.  (For that matter,  Apotheker actually knows how to manage software groups.  That’s got to be a plus.)

From this point of view, all of HP’s recent moves make sense.  Instead of getting embroiled in an expensive advertisement and price war they could not win, they pulled the plug on the TouchPad early.

If  Apotheker has any regrets, it’s likely that he didn’t pull the touchpad earlier, but, c’mon, the guy was new, the plans were advanced, and HP is a big company, so changes of direction happen slowly.

This matrix is simple and it’s easy to follow.  Nearly anyone of modest intelligence could use it to analyze HP and come up with a strategy for managing the portfolio.  After all, it’s sort of like a game of dice, where some of the dice are rigged, and, based on your throws, you get to decide which dice to invest in, right?

The only problem is that it doesn’t work.

A Portfolio is Not a Game of Craps

Framed this way, the role of the CEO is to acquire and merge all day long, selling off bad investments and purchasing more of the good.

Done without insight or vision, the strategy works just like it would in the stock market: You end up paying too much for the companies you buy (because they are “hot”) and selling your dogs for a big loss, because they are “not.”

More than that, the mergers and aquisitions have transaction costs; real human lives that are laid off, real businesses that are disrupted.

It also turns out that while executives are in merger meetings, looking busy, the one thing they are not doing is running a business — giving the competition time to catch up, and sometimes pass you.

Have you noticed that Apple Computer doesn’t do a lot of these mergers, acquisitions, spinoffs and layoffs?  They are too busy running the business.

In the end, the matrix can be used to make effective choices, if the decision makers understand the history of the market, it’s system of forces, and where things are headed enough to make accurate predictions.

I will give the folks at HP one thing:  At least as far as products are concerned, they know that whatever they were doing before wasn’t working, and more of it likely won’t help.  So they have decided to try something new.

It looks, to me, like they are trying to pull an IBM.

More to come.