Announcer: Broadcasting live from the Raleigh Convention Center at the CED Tech Venture Conference. Here are your Business RadioX hosts, Lee Canter and Stone Payton.
Lee: Lee Canter with Stone Payton at the 29th Annual CED Tech Venture Conference, the premier technology venture conference in the Southeast. Stone, last interview of the day.
Stone: Yeah, I know we’re rounding things down, but it has been quite a day. I really have had a terrific time. I’ve learned a lot. I caught up with some old friends, made some new ones, and this conversation is going to be a lot of fun. I know you’ve been looking forward to it all day. Please join me in welcoming the author of The Startup Owner’s Manual, Mr. Bob Dorf. How are you doing man?
Bob: I’m doing great thanks.
Stone: We are delighted to have you. Lee, I know you’ve got all kind of questions to ask this guy. What’s your first?
Lee: Well, The Startup Owner’s Manual, you wrote it with Steve Blank. Can you talk a little bit about how the idea for the book bubbled up? I know you guys are active in the startup world, but can you talk about that?
Bob: Sure. Well, I mean, truth be told, I try to tell that at least once in a while.
Stone: Hey, listen. Lee brought the cheap microphones so you’ve got to talk right into the very end of it. You can’t even look at him when you’re talking to him.
Lee: We have a beautiful woman in here so just focus on her.
Bob: That will keep me focused. Stone: So tell us about this book now?
Bob: This book is 98 percent Steve Blank’s vision of how to build startups differently and maybe 72 percent of my perspiration and Steve perspired plenty too. This book is built on the back of Steve’s first book published in 2003 called “Four Steps to the Epiphany” that laid out the principles of gee, nothing really matters to a startup other than can it get customers and how might it go about figuring that out before it spends the last dime in the checkbook.
Steve got a lot of feedback from entrepreneurs in these seven or eight years since he wrote that book about how valuable the concept of the methodology was. How do you turn that into a roadmap or a really step-by-step methodology? Steve and I go back about 20 years, and I guess about four years ago, he grabbed me and said, you’ve written one of these business method books before. You know a lot about startups, and we work well together. Shake my hand and be my partner. Let’s put this all down on paper.
Stone: And it’s quite a book. This is not a read in an hour kind of book.
Bob: This is not a curl up for a weekend in your favorite hammock. This is more, the way I lovingly think of it, it’s more like the book you get when you buy a riding lawn mower or a chainsaw. Not something you read on your vacation or relaxation. When you hear a pop or something doesn’t work on your riding mower or your chainsaw, you want to know exactly where that book is and be able to navigate your way through it to figure out what the hell do I do now.
Lee: Do you have a favorite chapter or two that you really like to lean on or that was more fun to write?
Bob: The two that were the most fun to write for me were the… one was sort of the finance piece of this. How do you… in fact, we lovingly talk about it as this will get you thrown out of any business school’s finance course in North America, because it’s really startup math. Startup math isn’t… what’s the three year going forward forecast, P and L fully loaded blah, blah, blah. It’s how am I going to keep from running out of money? What do I do? Where do I cut expenses? Where do I add? Steve is a freaking genius when it comes to startups. If there is one thing that is not his strong suit, he knows how to make the money. He just doesn’t know quite how to… he’s not a math whiz.
Lee: Because like in the startup world, it’s a race against money, isn’t it?
Bob: Your number one enemy is this ferocious man eating or woman eating thing called the zero bank balance. A startup with no traction, the closer it gets to that zero bank balance, the closer it gets to its funeral. You’re in this perpetual race against the clock. The chapter we developed was let’s look at three typical startups and what simple back of the envelop math can the startup do to get some sense of whether it’s going to survive bank balance zero by demonstrating enough traction to some investor to get another sort of lease on life.
We took a physical products company that made handy dandy gardening implement, because that’s sort of the simplest way to look at a business. It has fundamentally two channels, direct retail and web commerce. How do I as the founder think of my first year or two in a fragile business like that? The second one was an ad-supported website where the weight to revenue is a frightening long time. The third was a sort of more typical e-commerce or social media kind of a business. That was really fun to write, because it’s one thing to do the spreadsheet for what does the first, second, third quarter look like, but when the numbers are ugly, okay, what is a entrepreneur to do?
Lee: Exactly. That’s real life. What do you do now?
Bob: Okay, how do you like Ramen Noodles really? Can you do three more months of Ramen Noodles?
Lee: And do you have any tips for managing your spouse in the book or that’s the next sequel?
Bob: That’s another book. It’s probably longer than The Startup Owner’s Manual which is I think as I recall 117,000 words. In fact, the only tip we have for managing your spouse is do not do a startup with him or her.
Lee: So now you guys talk a lot about customer development. Can you talk about that a little bit and maybe for some of the people in the room here, ways that they can attack that?
Bob: Well, sure. I mean this whole… this again… this is all Steve’s brilliance and the heart of his initial thinking was nothing really matters to a startup. No opinions, no votes. Nothing matters other than do your concept… does the vision of your startup resonate with your customers? Because without customers, you’ll never get investors. You’ll never get traction. You’ll never have revenue. Why would you ask your professor, your advisor, your investors what do that like and what they don’t like?
Lee: Because their opinion is kind of not relevant at this point?
Bob: Right and typically we all go and show these things to our friends and our roommates, and our classmates, and our relatives, and they all know the answer we want to hear. So it’s oh yeah. It’s great.
Lee: Great idea!
Bob: I’d love to buy it. It’s like, can your startup pass the ugly baby test? If you bring the ugliest baby on the planet to Christmas dinner, everyone in the family will find something positive to say. You bring the ugliest startup on the planet to a room full of your friends, everybody will find something positive to say, because they know that’s what you want to hear.
The way you use your friends in customer development is gee, can you introduce me to anyone who’s an enterprise software buyer in the financial services space, or do you know any lawyers who I can talk to, who may owe me 20 minutes as a favor to you, my friend, but don’t owe me, “Oh, it’s wonderful. I love it.” That maybe the world’s ugliest baby to some, but to me it’s gorgeous kind of that.
Lee: Now how do you… you’re a professor, so how do you deal with the kids that are like, “I have a great idea. I have a great idea.” Like they think that the idea is this thing.
Bob: I say two things to them. The most important thing I say to them is my opinion doesn’t matter at all. I give them the only opinion that matters, the opinion of people who might give you money for purchases.
Lee: Who will write you a check, right?
Bob: But be careful, because they say, “Oh, you mean I’ve got to get investors to love it.”
Lee: You’ve got to sell something.
Bob: Investors aren’t going to love it unless customers are going to love it.
Lee: You’ve got to sell something. Right. So you’ve got to sell your first one, and then let’s talk…
Bob: Right and the other thing I tell them is that entrepreneurs love to go and show their product or their prototype to people so they can come home and say, “Oh, look at this. I showed it to 12 people. Three of them thought it was fabulous. Two of them threw me out of their office, but I did a lot today.”
Lee: Right.
Bob: Step one in customer development is what I lovingly call the give a crap test. Don’t talk about your product at all. Go out and talk to people who you suspect might be interested in buying it and don’t’ talk about your company or your product or your idea. Talk only about the problem that your product solves or the need it fills. Is this a problem you worry about every night before you go to sleep and it keeps you up for two hours? Are you worried about going broke, losing your spouse, losing your house, losing your job? Because if you’re not solving a thorny problem particularly in B to B sales, nobody is going to buy it.
Then you need to either rethink who you’re selling to or the way you’re describing the problem or the actual problem you’re solving and see if you can recalibrate it so that more people say, “Oh my God, I worry about that all the time. Yeah, if you can solve that problem for me, I’d buy anything you had.”
Stone: You’re an author. Are you an investor and/or are you actively involved in starting companies up as well or what you do most of your time?
Bob: Not any more. I’ve made a total of 35 startup investments. Seven in companies that I was personally the founding CEO of, 27 where I just wrote checks and was somehow involved as an advisor board member, whatever.
Lee: And you still have hair. I want our listening audience to know this guy still has hair.
Bob: I’ve got hair, but I’ve got scars on my back that go from my hairline to my butt cheeks. The way I think about it is 27 angel or seed investments, 7 IPOs, 6 DTTs, my new acronym that somebody coined actually earlier today, Direct to Toilet investments. That’s where you learn the most, because when you have a homerun, the whole founding team gets together, drinks, pats each other on the back, talks about how brilliant we are. The only real introspection you get, and I remember twice walking across the yard to my wife’s office in this little cottage way from our house.
Twice I had to walk in there and tell her, “Honey, we lost a million dollars today of our money.” The first time that I told her that, she had the perfect answer for the loving, supportive wife of 25 years of an entrepreneur which was, “Don’t worry about it. You’ll figure it out.” I was like… so that actually allowed me to lose a million dollars five times and only tell her about it twice. Anyway, the point when you’re teaching entrepreneurs, it’s very hard to also invest. Because when I’m giving a lecture and I’m talking about this great company, am I hyping the stock or when I’m beating up a team of entrepreneurs, is it so I can take them out for a drink after the beating. Say, “Well, now that I told you how horrible your company is, I’d like to invest at this very…” So it’s too many conflicts, and I think 35 investments in 42 years is enough anyway.
Stone: Now, in your portfolio of investments, obviously, you had winners and you had losers. At the beginning stages of each, could you tell, like was there a hint or any red flags when you’re looking back and doing an autopsy on the losers or the winners, is there anything that maybe you could have seen… or that it’s very difficult to tell until you actually start doing something?
Bob: There have been a couple of clues. I constantly beat up Steve Blank about why didn’t you write this damn book in ’98 instead of ’02. You would have saved me a couple of trips to the wood shed to talk to my wife. I think the places where I can look back and spot the most glaring mistakes were people mistakes.
I still remember sitting across the table from this founding CEO, and then I said, “Gosh, I love this business model, but I don’t like this guy at all. I don’t trust this guy. I had two co-investors and they badgered me. This was the future of information gathering, blah, blah, blah. Oh God, we lost a bunch of money on that guy.” I mean let’s face it. Entrepreneurs and investors don’t invest in things they aren’t orgasmically excited about on the way in and hindsight doesn’t do you much good once the check clears. You sort of bury your wounded or you dead, and you just move on…
Stone: Keep moving.
Bob: I remember one in the peak of the bubble… in the second half of ’99, I remember one $425,000 investment I made personally where it was, “We need to close by Friday, because the ship’s coming in or whatever.” Know that there is no diligence material. What did I say? I said, “Okay, you’re telling me you’re in for a lot more than I am, and you’ve studied this company, and you worked with these people? Where do I wire the money? Not smuck. You’re going to give $425,000 to this guy you know but don’t really totally trust on his word that this is a good deal? And I got what I deserved, which is about zero back. It was also an incredibly weird frothy time where bagofpoop.com went from a dollar a share to 40 overnight.
Stone: Right. A lot of systems look good in those bull markets. Bob: Absolutely. You know rising tides lifts all boats, whatever.
Stone: Now you have The Startup Owner’s Manual, how does the Lean Startup fit into this?
Bob: They’re almost one and the same. I think ‘The Lean Startup‘ which is a wonderful book by a really smart guy named Eric Reis, who as Steve Blank loves to say, was one of the smartest students Steve ever had in his classroom. ‘The Lean Startup’ suggests that you need three things to do a lean startup: customer development, a business model instead of a business plan, and agile development. Eric’s contribution to the field, which is critically important is you can’t do good customer development unless you are also building using agile development.
Because, otherwise, if you’re out in the field everyday talking to customers getting ideas about what to drop, add, change, improve in your product, and you go back to the development team that’s working on a traditional waterfall development plan, they say, “Well, those are nice thoughts. We’ll talk about those in six months when we get through with Rev 3 and start Build 4.” That was a really critical addition to the whole customer development process, that you have to have a software or product development methodology that is as agile as your nimble and…
Stone: Right, because this pivoting, as you learn, is an important component so then the infrastructure has to pivot as well and has to be as nimble.
Bob: Right. You have to be able to rip 10,000 lines of code out, throw it on the floor, and race like hell to get 2000 new lines in a week. Get them up, get them tested, QA’d and so forth.
Stone: Now there’s a get out the building theme of the book. Can you talk a little about that and why that’s important for the entrepreneur?
Bob: Well, it’s where facts live. The mantra of the book is get out of the building. It’s really the hue and cry of the lean startup movement, of the customer development movement that there are no facts in your office. The only facts are in the heads of your customers, and you’ve got to get out of the building and talk to them. Now just to take that one step further, there’re two other associated rules, if you will. Number one, that you is not some 25-year-old kid in marketing. It’s not some McKinsey person or some ad agency person or a focus group. It is the founder who has to get this feedback in his or her face, who has to see whether the customer is lighting up or falling asleep when they talk about the product and how it works.
The founder has to do much of this himself or herself. The other rule is no surveys, no focus group. You need to see people’s pupils dilate. See them jump across the table at you and say, “God, can I get this like right now?” Or yawn, ho hum, polite, lukewarm interest and you can’t really sense that unless you’re out of the building where your customers are face to face, and we have sort of a… I haven’t had to honor this promise yet but come close. Any student of mine at Columbia University who gets arrested for doing hyper-aggressive customer discovery gets automatic honors plus praise, plus bail money.
Stone: I like it. Because you want to get it out of their head, right? It’s not, “look how smart I am in my head and let me show you these smart theories that I have.” I need real data from real people that have actually touched this and used this and have an opinion that matters and not me and my buddies in a conference room brainstorming amongst ourselves.
Bob: You must have read a little of this book, because you really have hit the heart of it. It’s every business plan ever written looks brilliant and every entrepreneur’s idea ever hatched is brilliant to that entrepreneur. That’s nice, but as Steve Blank loves to say, “No business plan ever survives its first contact with the customer, because the customer didn’t read it, didn’t know they were supposed to buy three of them for themselves, one to give as a Christmas present. One to save for the end of the world or a rainy day. Customers do what the hell they want. If you don’t’ understand what they’re going to do, it’s all fairytales.
Stone: Right. It’s like Mike Tyson says, “Everybody has a plan until I hit them in the face.”
Lee: So what’s next for you? You got another book coming out? You’re going to put some energy into developing a new course curricular, or what do you got in mind?
Bob: I’m not quite sure yet. We are still in… The book is out about a little less than 18 months. It’s about a third of the way through being published all over the world. It’s been out. It’s out now in seven or eight languages. Brazilian Portuguese comes out next week. Spanish comes out first week of October. It’s a best seller in Russia, in China, and Japan already. We have about eight or nine more countries yet to go. We already have a fabulous four-and-a-half hour absolutely free online course, which is Steve in a nine-part customer development series on udacity.com. There’s no advertising. It’s not selling anything. We try to open source everything we do and make sure that it’s out there and available for the entrepreneurial community.
I think my next two personal projects, I do a lot of international training of teams of startups, 20 or 30 teams at a time. I’ve done that a couple of times in Latin America. I’m going back to Moscow in October for round 4. I have one of those brewing in Poland. One in Brazil. Oh, and a big one is supposed to start right in January in Mexico where we try to torture 25 startup teams at a time and get them to businesses with traction in 8 or 10 weeks. It is the most exciting fun thing for an old guy to do to watch the lights go on. Have a team report back in week 6 that they just got their twelfth customer, or in one of the groups I did with the government of Columbia where we only work on startups that can walk past their customs dog.
Stone: But the book works for every kind of business though, right?
Bob: Entrepreneurs are creative, assertive people, but out of 25 teams, eight of the teams had customer revenue in eight weeks. I was just so amazed and so proud. And that 8 weeks is what startups often spend writing the stupid business plan that’s a whole bunch of fairytales anyway.
Stone: Yeah, it must be so rewarding for you to see this book become the defacto owner’s manual for startups all over the world like this and how much of the economy is going to be built on the backs of these entrepreneurs, because that’s what’s going to get us out of this tough economic time.
Bob: I hope you’re right. I mean I worry that a lot of people today call themselves entrepreneurs mostly because they can’t find a job with a W2 and healthcare and…
Stone: Well, they used to call themselves consultants. Now they call themselves entrepreneurs.
Bob: Right, and we always forget that a critical piece of an entrepreneur’s DNA is passion and tenacity, and willingness to work 80, 90, 100 hours a week, week after week after week, because they believe in what they do, and they have confidence that those ridiculous work hours are getting them somewhere.
Stone: Right.
Bob: And now you have this crop of entrepreneurs who say, “Well, this is a 9 to 5 job and because I’m taking risks, I deserve to be rich. Look, it worked for Mark Zuckerberg.” I think there’s going to be some kind of a shake out here as the true entrepreneurs rock it forward and some of the others hopefully get that 9 to 5 job at a bank or an insurance company or wherever they’d be much more truly, honestly comfortable.
Stone: All right. Where can our listeners get their hands on this book if they don’t have it already? And where can they go to learn more about this entire body of work?
Bob: Well, they can get the book, the easiest place of all amazon.com. It’s in eBook and it’s in a physical book. The greatest resource of all is www.steveblank.com, which has hundreds and hundreds of articles, hundreds of links to resources for entrepreneurs, like free tools for everything from online research or wire framing or AB testing, and links to hundreds, if not thousands of powerpoint text, videos, lectures, things like that. It’s an incredible treasure trove for entrepreneurs. There’s no ads on it. There’s not paid links or anything. This is Steve’s entrepreneurship. It treated Steve real well. This is his gift back to the entrepreneurial world that helped his launch eight startups, a couple of them sort of traveling to the moon.
Stone: But if they want to learn more about you, you have doorfrontstartups.wordpress.com?
Bob: Yeah, well doorfrontstartups or bobdorf.co is more about just me.
Lee: All right. Bob Dorf, co-author and author and inspiration to all of us. Thanks so much for joining us.
Bob: My pleasure. Thanks for having me.
Lee: All right. I think that’s a wrap. Lee, Stone Payton for Lee Cantor, the entire Business RadioX family, we will find you again in the morning from the floor of CED Tech Venture 2013.