Venture capital & failure presentation by professor eli zelkha
The Art of Failure Monterey Institute of International Studies Eli Zelkha [email protected].
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Transcript of The Art of Failure Monterey Institute of International Studies Eli Zelkha [email protected].
The Art of FailureAdminstrative
E-mail: [email protected]
Tel: 650-218-6789
Address: 573 Patrol RoadWoodside, CA 94062
The Art of FailureAgenda - Saturday
Introduction Failure & Customer Discovery & Development – Steve Blank
Class Exercise
Building India’s First Coffee Shop Chain - Sashi Chimala
Frameworks of Failure
Student Self-Diagnostics
Samasource – Claire Hunsicker
The Art of FailureAgenda - Sunday
Introduction
Starting a Y Combinator Company - Matthew Brezina
Student Discussion: Y Combinator & Failure
Failure & Entrpreneurship – Ariel Poler Psychology of Failure
Lessons of Failure & the Concepto Venture Model Eli Zelkha & Simon Birrell Global Failure & Success in Technology & Social Ventures - Kamran Elahian
Closing
The Art of FailureSteve Blank
• Serial entrepreneur - 30 years of experience in high tech
• Professor at UC Berkeley School of Business, and a Lecturer at Stanford Graduate School of Engineering.
• Founder or participant in eight Silicon Valley startups since 1978.
E.piphany; two semiconductor companies (Zilog and MIPS Computers); a workstation company (Convergent Technologies); a supercomputer firm (Ardent); a computer peripheral supplier (SuperMac); a military intelligence systems supplier (ESL) and a video game company (Rocket Science Games).
• Boardmember of CafePress.com, an on-line marketplace, and IMVU, a 3D IM social network.
• "Four Steps to the Epiphany" is the definitive work on Customer Development and is one of the foundations of Lean Startups.
The Art Of Failure
1. Describe your closest encounter(s) with Failure. (Objectively what happened? How did it feel? Consequences?
Class Exercise & Discussion
The Art Of Failure
1. Describe your closest encounter(s) with Failure. (Objectively what happened? How did it feel? Consequences?
2. Reflecting on this and other experiences, do you notice any patterns in your past "failures"?
Class Exercise & Discussion
The Art Of Failure
1. Describe your closest encounter(s) with Failure. (Objectively what happened? How did it feel? Consequences?
2. Reflecting on this and other experiences, do you notice any patterns in your past "failures"?
3. How did you recover from this experience?
Class Exercise & Discussion
The Art Of Failure
1. Describe your closest encounter(s) with Failure. (Objectively what happened? How did it feel? Consequences?
2. Reflecting on this and other experiences, do you notice any patterns in your past "failures"?
3. How did you recover from this experience?
4. What if anything did you learn from the experience?
Class Exercise & Discussion
FailureInspiring Quotations
• “Failure is the foundation of Success, and the means by which it is achieved.”
- Lau Tzu
• “I have not Failed, I have learnt 9,999 ways that won’t work.”- Thomas Edison
• “People don’t Fail, it is the Plan, Strategies and Tactics that Fail.”- Paul Mc.Kenna
FailureFear of Failure
• One of the greatest fears people have
• Related to Fear of Criticism or Rejection
• Incapacitates unsuccessful people
• Unable to take action
• Leads to ‘failure of omission”
FailureFear of Failure – Another View
• Successful people look at mistakes as outcomes or results, not failure
• Unsuccessful people look at mistakes as permanent and personal
• FoF is self-limiting – fear even trying for fear of failure
“There Is No Failure, Only Feedback”
FailureFear of Failure – Overcoming
1. Take Action2. Perist3. Don’t take failure personally4. Do things differently5. Don’t be so hard on yourself6. Treat the experience as opportunity to learn7. Look for possible opportunities that result
from the experience8. Fail forward, fast
Failure as a Balancing Act
• Two Conflicting Risks:
1. Taking risks beyond our ability to recover• Russian roulette
2. Avoiding any risk (fear of failure)• Home bound paranoid
Is it possible to create life transforming ventures while limiting oneself to “manageable risks”
Failure as a Balancing Act
Too Much Risk(Russian Roulette)
Too Little Risk(Homebound)
The Comfort Zone
Models of Failure• The Innovator’s Dilemma
– Ignore disruptive technologies at your peril
• Engineering model: – FMEA (Failure Modes & Effects Analysis)
• Disease model:– Collins “How the Mighty Fall”
• Scenario model: – Scenario based planning
• Venture incubator model:
–YCombinators “18 Mistakes that Kill”
Innovator’s Dilemma• Technology sometimes outpaces the market
Resulting in so-called "disruptive" technologies
• Disruptive technologies are often the standards of
the futureIgnore disruptive technologies at your peril
• Traditional thinking misallocates resources
Managers must be extreme advocates of new technologies in order to allocate sufficient resources to their development
Innovator’s Dilemma“Sustaining” vs. “Disruptive” innovation
• “Sustaining” – Makes products more appealing to existing customers– Faster, cheaper, more capable– Functionally equivalent, but fills same customer needs– Manager’s trained to focus on “sustaining” R&D
• “Disruptive”• Established customers have no use for it (yet)• Usually simpler, based on breakthrough or repurposed technology• Must find new customers to sell • Doesn’t make sense – until it’s too late• Look for them in emerging markets
Innovator’s DilemmaDisruptive Technology – Example
8-Inch Disk Drives vs. 5.25-Inch Drives• 1980’s 8-inch drives – industry standard• Seagate developed 5.25-inch drive
• Less efficient, slower, and more $ / megabyte
• Existing (minicomputer) customers did not want 5.25-inch
• Emerging desktop computer makers needed smaller, lower-cost drive • Didn’t mind less efficient and slower
• 8-inch drive makers “held captive” by customers• Seagate won the day
Innovator’s DilemmaAddressing Disruptive Technologies:
• Develop a strategy to address disruptive technologiesEither learn to retreat up-market, build your own, or imitate competitors with disruptive technologies
• Separate disruptive technology development from the rest of the firmSeparate these groups in order to focus their work and create proper incentives for success
• Recognize the value of disruptive technologiesConservative initial marketing practices and product redevelopment will eventually yield value
FMEAFailure Modes and Effects Analysis
DEFINITIONA methodology to analyze and discover:(1) All potential failure modes of a system, (2) The effects these failures have on the
system and(3) How to correct and or mitigate the failuresor effects on the system. [The correction andmitigation is usually based on a ranking ofthe severity and probability of the failure]
Source: NASA Lewis Research Center
FMEAFailure Modes and Effects Analysis
Benefits of FMEA• FMEA is one of the most important tools of reliability
analysis. If undertaken early enoughin the design process by senior level personnel it can have a tremendous impacton removing causes for failures or of developing systems that can mitigate the effects of failures.
• It provides detailed insight into the systems interrelationships and potentials for failure.
• FMEA and CIL (Critical Items List) evaluations also cross check safety hazard analyses for completeness.
Source: NASA Lewis Research Center
FMEAFailure Modes and Effects Analysis
Source: NASA Lewis Research Center
Procedure Flowchart
Design
Get System
Overview
Perform FMEA, ID
Failure Modes
Establish Failure Effect
Determine Criticality
Revise Design
How the Mighty Fall
Adapted from: Jim Collins, “Hoe the Mighty Fall and Why Some Companies Never Give In”
Stage 2: Undisciplined
pursuit of more Building from
stage one is people chasing goals that take
them away from their core, their
competitive advantage all in
the name of growth, or the grand strategy.
Stage 3Denial of risk
and peril chasing things
that are not part of your core, fail to see the
problems..
Stage 4: Grasping for salvation
The silver bullet, abandoning the
flywheel and chase things outside the
core. Stage 4: Grasping for salvation
The silver bullet, abandoning the
flywheel and chase things outside the
core.
How the Mighty Fall
Stage 1Hubris Born of
Success
Stage 2Undisciplined
Pursuit of More
Stage 3Denial of Risk
and Peril
Stage 4Grasping for
Salvation
Stage 5Capitulation to Irrelevance or
Death
Adapted from: Jim Collins, “How the Mighty Fall and Why Some Companies Never Give In”
• Arrogance• Entitlement• Lose sight
of what made success
• Role of luck
How the Mighty Fall
Stage 1Hubris Born of
Success
Stage 2Undisciplined
Pursuit of More
Stage 3Denial of Risk
and Peril
Stage 4Grasping for
Salvation
Stage 5Capitulation to Irrelevance or
Death
Adapted from: Jim Collins, “How the Mighty Fall and Why Some Companies Never Give In”
• Overreaching• Stray from
disciplined creativity
• Leaps into unknown
How the Mighty Fall
Stage 1Hubris Born of
Success
Stage 2Undisciplined
Pursuit of More
Stage 3Denial of Risk
and Peril
Stage 4Grasping for
Salvation
Stage 5Capitulation to Irrelevance or
Death
Adapted from: Jim Collins, “How the Mighty Fall and Why Some Companies Never Give In”
• Ignore negative data
• Spin• Outsized risks• Risk denial
How the Mighty Fall
Stage 1Hubris Born of
Success
Stage 2Undisciplined
Pursuit of More
Stage 3Denial of Risk
and Peril
Stage 4Grasping for
Salvation
Stage 5Capitulation to Irrelevance or
Death
Adapted from: Jim Collins, “How the Mighty Fall and Why Some Companies Never Give In”
• Previous risks become apparent
• “Radical transformation”
• “Cultural revolution”
How the Mighty Fall
Stage 1Hubris Born of
Success
Stage 2Undisciplined
Pursuit of More
Stage 3Denial of Risk
and Peril
Stage 4Grasping for
Salvation
Stage 5Capitulation to Irrelevance or
Death
Adapted from: Jim Collins, “How the Mighty Fall and Why Some Companies Never Give In”
• Accumulated setbacks
• Eroded financial strength
• Abandon hope
How the Mighty Fall
Stage 1Hubris Born of
Success
Stage 2Undisciplined
Pursuit of More
Stage 3Denial of Risk
and Peril
Stage 4Grasping for
Salvation
Adapted from: Jim Collins, “How the Mighty Fall and Why Some Companies Never Give In”
Recovery and
Renewal
Scenario Planning
Eli Zelkha & Simon Birrell
Managing Partners, Concepto Ventures
Stanford School of Engineering
3rd Novermber 2010
The Background: Deal at Philips• Corporate venture capital and strategy for a
major global consumer electronics player
Deliverables• Strategic plan unifying disparate units• High impact strategic venture capital investments• Forge strategic alliances• Develop transformative vision of industry future• Visionary “projects on the edge”
Background: Deal at Philips• Corporate venture capital and strategy for a
major global consumer electronics player
Scenario Planning: An Overview
TODAY
+10%-10%
Forecast Based PlanningKnowns and trends
Knowns
TODAY
Scenario Based PlanningUnknowns and uncertainties
Unknowns
Unknowns
UnknownsKnowns and trends
• Scenarios are alternative visions of the future
• Scenarios are generated by analysis of what we don’t know, not just what we do
• Scenarios are used to envision and “try out” multiple futures
• Scenarios are used to work backwards in time to today TODAY
Scenario Based PlanningUnknowns and uncertainties
Unknowns
Unknowns
UnknownsKnowns and trends
Scenario Planning: An Overview
CONFIDENTIAL - 45
Rethinking Industry Dynamics
• Philips has a sophisticated way of planning for the future when operating in a mature industry environment
• But there are emerging forces that threaten to disrupt--and recycle-- the entire industry, and the current view of dynamics
• Forecast-planning is sufficient for a mature industry. But it’s inadequate when industry transformation is taking place
Embryonic Growth Mature Aging
Indu
stry
Sa l
es
Time
Breaking Out of our Preconceptions
• They are stories that help suspend disbelief in possible futures
• We have a tendency to fixate on one future, or at most, two
• Scenarios are a powerful tool for forcing us to abandon previously fixed ideas
• Scenario-based planning allows managers to deliberately try to break the rules of their business
• Scenarios are about the world, not about us
How they help us
• They enable us to “practise” for different futures
• They are a tool for envisioning, not predicting• They suggest the strategies, deals and alliances
that we would need to prosper in different worlds
• The process of creating scenarios makes you smart about a space
Scenarios• Tool for embracing uncertainty• Tool for play & provocation• Tool for envisioning value creation & migration
Tool for upsetting the world(within our minds & outside)
& strategic transformation
Common Types of Failure
Seth Godin
• Design Failure. If your product or service is misdesigned, then people don’t understand it, don’t purchase it, or may even harm themselves when they use it, and you have failed.
• Failure of Opportunity. If your assets are poorly deployed, ignored, or decaying, it’s as if you are destroying them, and you have failed.
• Failure of Trust. If you waste stakeholders’ goodwill and respect by taking shortcuts in exchange for short-term profits, you have failed.
• Failure of Will. If your organization prematurely abandons important work because of internal resistance or a temporary delay in market adoption, you have failed.
Common Types of Failure
Seth Godin
• Failure of Priorities. If your management team chooses to focus on work that doesn’t create value, that’s like sending cash directly to your competitors, and you have failed.
• Failure to Quit. If your organization sticks with a mediocre idea, facility, or team too long because it lacks the guts to create something better, you have failed.
• Failure of Respect. If you succeed without treating your people, your customers, and your resources with respect and honesty, you have failed.
• Failure to See. And, of course, the most self-referential form of failure is the failure to see when you’re failing
Learning From Failure
IdeaInception
Create/Evaluate Alternative
Approaches
ChooseAlternative
The Traditional Way
Learning From Failure
IdeaInception
Create/Evaluate Alternative
Approaches
ChooseAlternative
Build Full Product
and
Go To Market
The Traditional Way
Learning From Failure
IdeaInception
Create/Evaluate Alternative
Approaches
ChooseAlternative
Build Full Product
and
Go To Market
The Traditional Way
Range OfOutcomes
Learning From Failure
IdeaInception
Create/Evaluate Alternative
Approaches
ChooseAlternative
Build Full Product
and
Go To Market
The Traditional Way
Feedback Too LateNo Resources left
No Fallback PositionNo Useful Learning
Range OfOutcomes
“Fast Failure”
• Failure = Normal = Good. • Reward excellent failure. • Punish mediocre success.• Fail faster. Succeed sooner.• Fail. Forward. Fast.• Educate for Risk-taking, Creativity,
Independence.• The Great Comeback• Video Link
Source: Tom Peters
The “New” Way
“Fail Early and Often”
• Theory of Small Failures• Test components, not the whole thing• Control the environment – don’t risk everything,
e.g. small test markets• Expect failure• Gain feedback• Redesign component• Embrace market reality by testing assumptions
against realities• Save resources for fallback position!
The “New” Way
Intelligent, Fast Failure
Inception
Idea Genera
tion
Rapid Prototyping
Choose
The “New” Way
CustomerFeedback
CustomerFeedbackc
CustomerFeedback
Intelligent, Fast Failure
Inception
Idea Genera
tion
Rapitd Prototyping
Choose/Test
Choose/Re-Design/
Re-Test
CustomerFeedback
The “New” Way
CustomerFeedback
CustomerFeedback
CustomerFeedback
CustomerFeedbackc
CustomerFeedback
Intelligent, Fast Failure
Inception
Idea Genera
tion
Rapid Prototyping
Choose/Test
Choose/Re-Design/
Re-Test
Go To Market
Range OfOutcomes
The “New” Way
CustomerFeedback
CustomerFeedback
CustomerFeedback
CustomerFeedback
CustomerFeedbackc
CustomerFeedback
Intelligent, Fast Failure
Inception
Idea Genera
tion
Rapid Prototyping
Choose/Test
Choose/Re-Design/
Re-Test
Go To Market
Range OfOutcomes
Fallback Strategy
The “New” Way
CustomerFeedback
CustomerFeedback
CustomerFeedback
CustomerFeedback
CustomerFeedbackc
CustomerFeedback
Agile Software DevelopmentTraditional Development Process
• Customers only involved at beginning and end of process
• No Iterations
• Takes a long time.
• “Make-or-break”
• Rarely deliver according to plan
Agile Software DevelopmentGuiding Principles
• Our highest priority is to satisfy the customerthrough early and Involvement
• Welcome changing requirements.• Deliver working software frequently.• Business people and developers must work
together .• Build projects around motivated individuals. • Face-to-face conversation. • Working software is the primary measure of progress. • Agile processes promote sustainable development. • Continuous attention to technical excellence
and good design enhances agility. • Simplicity is essential. • Self-organizing teams. • Constantly tuning of processes.
Agile Software DevelopmentCustomer Involvement and Rapid Iterations
Plan out 1-4 weeks work
Improve process
Review product
Create product needs
Meet daily
Strategic planning
Agile Software DevelopmentCustomer Involvement and Rapid Iterations
•Markets•Customers•Biz Models•Strategy•Portfolios•Funding
•Customers•Sales•Marketin
g•Support•Upgrades•EOL/
EOS
75
Venture CapitalHow It Works
Raise a Fund
(Pension, Families, Corporations)
Invest (Evaluate, due diligence,
close…)
Harvest(IPO, mergers,
management buyout)
Raise pools of capital from institutional and individual investors
- Finance new and rapidly growing companies; - Purchase preferred equity securities and take board positions; - Add value to the company through active participation
Make $$$ via M&A or IPO
Management Fees (typically 2-2.5% of AUM)Charge a management fee to cover the costs of managing the committed capital.
Carried Interest (typically 20-25%)"Carried interest" is the term used to denote the profit split of proceeds to the general partner.
Example $100m fund 4x return and 2 and 20%$2m per year in management fee(($100m x 4) - $100m) * 20% = $60m in carried interest
Venture CapitalHow It Works
Venture CapitalThe Real Story
Venture capitalists talk of accepting failure …
But they are financially motivated only for success – the “Home Runs”
They get their large management fees come rain or shine
They get no compensation for “Failures, Living Dead.”
They get trivial compensation for “Base Hits.”
They make their big money from “Home Runs.”
They can’t risk the big pay day by “Embracing Failure.”
Silicon Valley Hype on Failure
• “We embrace failure” BUT• “one failure is OK, serial failures are death”• Just try failing and see where it gets you in the
valley• You become a pariah• The successful are rewarded and the failures
are shunned like the plague
Frameworks of Failure
Failure Modes & Effects AnlysisCollins: How th Mighty Fail
Scenario PlanningFast, Intelligent Failure
Agile ModelGladwell Model
Venture Capital & Failure
FailureWhat The Famous Have To Say ….
• “Failure is the foundation of Success, and the means by which it is achieved.”- Lau Tzu
• “I have not Failed, I have learnt 9,999 ways that won’t work.”- Thomas Edison
• “Failure is simply the opportunity to begin again, this time more intelligently.” - Henry Ford
• “Only those who dare to Fail Greatly can ever Achieve Greatly.”- Robert F. Kennedy
• “My Failures are as much a blessing from God as my Successes and I lay them both at his feet.”
- Mahatma Gandhi
• “People don’t Fail, it is the Plan, Strategies and Tactics that Fail.”- Paul Mc.Kenna
Introduction
FailureThe Traditional View
• Avoided At All Costs• Disaster• Career-Ending• Company-Ending• Personal Catastrophe• End-Of-the-Road
Introduction
FailureThe Traditional View
• Avoided At All Costs• Disaster• Career-Ending• Company-Ending• Personal Catastrophe• End-Of-the-Road
FailureThe Road To Success
• Fact Of Life• Use To Our Advantage• Builds Knowledge• Learn – Don’t Repeat• Plan For It• Start of Next Step