Brexit – What’s a MN (or any other) Start-up To Do?

I sit here in Minnesota pondering the effects of Brexit on our start-up community. It’s really a broader question of “What effect do macroeconomic factors have upon start-ups?”

It’s tempting to say the power of a good idea will drive success under any economic condition. My optimistic entrepreneurial side says, “Brexit is too far away to matter”. The little “Dale Downer” on my opposite shoulder says otherwise.

There is an excellent discussion here (see 2^nd post down the page by Paul Cohn) on the phases of venture capital investment and the effects macroeconomics play on venture investing during these phases. The effect is NOT zero.

Can anyone spot the '08/'09 recession in venture offering valuations?

For an early stage start-up, the most current need, behind customers, is often the availability of fresh capital. You may be able to find investors with a long-term view and belief that the economic bad news is temporary and therefore of no real impact to a growth venture.  The most aggressive investors may even see a “buy low” opportunity.  That assumes however they have “dry powder”/cash on hand to invest. This is where the real problems arise as markets get jittery. At today’s lowered valuations, who wants to (or can) trade out another asset to buy a piece of your business?

The punchline is…things just got a bit harder for start-ups everywhere (especially in the UK). Smart money’s been spooked a bit by Brexit. There are new unknowns for investors. Risk is not in vogue today and long term investors who can look beyond the short term turmoil in the markets may not be, or have the potential to be, as liquid as they were pre-Brexit.

If you’re not getting the business results or market reaction you expected when you first launched your venture, and your cash stash is getting thin, it might be time to:

1. Pour extra thought into a serious “pivot” (see http://theleanstartup.com/principles), or
2. Think about how you can lengthen your runway by managing your costs, or
3. Find some new activity that can shore up your cash flow in the short term   

Knocking “Dale Downer” off my shoulder, I believe Brexit’s effects on most start-ups will be minor. For those who are actively running a start-up today, you’re likely to do nothing different today then you did last Thursday. Above all else, remember the fundamentals of selling a startup’s promise are the “honey and lemon” for this “cold”:

They include:

• Having a strong value proposition for clearly identified customers and knowing that they are still in a buying mood
•  Targeting a sector with significant unmet needs. Sectors that benefit from the current low interest rate environment are an added plus. Areas currently getting press as good bets for investors: Technology, Consumer Discretionary and Healthcare. For some more specific technologies where sentiment is positive, this list is a year old, but still has some appealing themes.
• Execute, execute, execute. Businesses that deliver on what they say in a turbulent environment are more likely to be seen by investors as being insulated from the market’s effects.

No bearings, no problem: Eric Severson's journey towards a more efficient future

Eric Severson, PhD

Eric has been at the University of Minnesota since 2005, graduating with a bachelor's degree in electrical engineering in Fall 2009 before going on to complete his PhD in June 2015. This past year, he has worked as a post-doc this past year in Ned Mohan's lab, a professor with a high interest in renewable energies and clean technology. Through his research in Mohan's lab as a PhD candidate, Eric began developing an innovative bearingless motor that has potential to increase efficiency and reduce energy consumption in a major way. He then collaborated with NTNU in Trondheim, Norway to develop the first prototype and spent a year there building and testing it.

This past fall, Eric took MIN-Corps's Startup course in an effort to bring his revolutionary product to market. We caught up with him to see how things have progressed since the end of the class:

What initially compelled you to pursue the bearingless motor idea?

The bearingless motor technology came out of my PhD research on flywheel energy storage. According to the US Department of Energy, large electric motors used in industry make up 10% of the US electric consumption and are wasting up to 80% of that energy. This is a big problem for us as a society -- and for the owners of these machines. I was intrigued by the possibility of using my bearingless motor technology to dramatically reduce this energy consumption.

How has the university environment and the Startup class in particular affected the path of this idea?

The university environment has been especially helpful in developing both the technology and the plan for commercialization. On the technology side, this idea requires expertise in several different engineering disciplines and it has been amazing to be able to knock on the doors of researchers in other departments (faculty and grad students) to get advice or brainstorm on how to solve challenges. On the business side, going through the Startup class was key -- it got me to hone in on a target market and test assumptions that I had about what customers want, what their "pains" and "gains" are. At the beginning of the course I had a list of about 20 different markets that would see value in my idea. This was great and got me very excited about the business potential, but also made it very difficult for me to focus. The instructors of the course, and mentors that they paired me with, helped me to evaluate these markets and pick a single market to pursue as a "beachhead". The course also provided a lot of highly needed guidance on how to interview customers, put together key ideas for a business plan (using a business model canvas), and provided me with a small amount of seed money which I have used to travel to a trade show and a Smart City Summit has proven to be extremely helpful in meeting customers and potential investors.

How has your idea evolved since the conclusion of the Startup class?

I have continued to develop the business case, talk to customers, and prepare to launch a startup company. I remain focused on the beachhead market I selected in the Startup course: aeration blower systems for wastewater treatment where my technology offers a huge energy efficiency improvement, but I plan to eventually expand into the other markets. Using the results of my customer interviews, I have a much clearer understanding of what customers actually want and I am now using the information to go back to my technology and develop a MVP (minimum viable product) to show customers.

Take a look at a demo of Eric's original MVP here:

Four Differentiating Capabilities of Great Innovation Leaders

 

Entrepreneurship involves searching for a viable business model for an idea or IP.  As discussed in previous posts, this startup search process is iterative and requires us to make and test assumptions, learn from mistakes, and refine or pivot quickly en route to a viable business model.  Eric Ries, author of The Lean Startup,  has pointed out that the only way to win is to learn faster than anyone else.

So how do we lead this search process to learn and adapt better and faster than our competitors?  It requires a lean startup mindset and tool set along with the right skill set. As I pointed out in my previous post, entrepreneurs seldom are lone geniuses who have all the answers.  Instead, they have to be effective innovation leaders who connect, engage and collaborate with others who have strength and expertise in areas they don’t. The MIT Leadership Center has identified four capabilities that distinguish the best leaders from the rest, especially in situations of uncertainty.  And entrepreneurship is, by definition, a process of translating uncertainty and initial assumptions into vision, clarity, and a path forward.  Let’s briefly explore the MIT Four Capabilities Model and it’s relevance to innovation leadership. 

 

MIT Four Capabilities Leadership Model from “Leading in an Age of Uncertainty” 

by Deborah Ancona.

First, note that all four capabilities are characterized as being verbs.  This suggests they are not actions per se, but rather a state of being.  In an uncertain world, leaders must constantly BE relating, sensemaking, visioning, and inventing.  Let’s briefly explore each of these four capabilities and their critical role in entrepreneurship.

The first critical capability is RELATING.  This involves identifying key stakeholders and developing inclusive, credible and trusting connections to understand each others’ purposes, interests and concerns and find common ground. If a stakeholder perceives that you are unaware or disrespectful of his or her purposes, concerns and circumstances, he or she will consider you a threat.  He or she will likely avoid, resist, and undermine any perceived threat.  This creates waste.  By contrast, when someone perceives that you are aware and respectful of his or her purposes, concerns, and circumstances, he or she will join you in conversation.  He or she will share information, co-invent solutions, and move into action. This creates value.   

To be successful, entrepreneurs must relate early and often with target customers to understand the job(s) the customers are trying to get done and their current pains and desired gains.  Because there often are multiple “buying influences” that can make or break the sale of a product or service, entrepreneurs must relate to each of these stakeholders and search for common ground as well as understand potential “show stopper” issues that could sabotage success of a venture.  Additional stakeholders may include technical experts, regulatory officials, investors, and development team members.  Entrepreneurs must relate with each of these stakeholders effectively to (1) find common ground, (2) sustain trust, and (3) gain commitment versus mere compliance or resistance.  This is why Steve Blank reminds us often to “get out of the building” and talk to customers.  Additionally, we need to connect early and often with all other critical stakeholders to sustain learning and commitment.  Without committed stakeholders even brilliant ideas are dead on arrival.

In the process of relating with key stakeholders, entrepreneurs are constantly SENSEMAKING—learning about needs, desires, concerns, constraints, legal requirements and other factors that will make or break the success of a venture. 

Sensemaking can be broken down into the five discovery skills identified as "The Innovator's DNA" in research by Jeff Dyer, Hal Gergerson, and Clay Christensen:

Observing, networking, questioning, associating, and experimenting.  It is through relating iteratively with key stakeholders and making sense of their sometimes conflicting purposes, interests and concerns that the entrepreneur is able to learn and adapt—identify patterns and common ground, connect important dots, test assumptions, and pivot as needed.  This learning and adapting is the key to success in the search for a viable business model. 

As a result of relating and sensemaking with key stakeholders, entrepreneurs are able to translate their initial vision of the idea and the business model into a shared vision that is credible and compelling to all critical stakeholders.  This iterative process of VISIONING adapts the initial vision into a validated shared vision or “product-market fit”—a value proposition that resonates with each critical customer segment and buying influence based on a validated set of functional, social and/or emotional benefits it delivers.

Through the iterative process of relating, sensemaking, and visioning, the entrepreneur is able to start INVENTING a validated business model and path forward.   Some new ventures are relatively straightforward to implement once the business model has been defined and needed resources have been obtained.  Others, like medical and healthcare technologies that require clinical trials and regulatory approval have a more complex and lengthy path to success.  In all cases, however, entrepreneurs must invent a business model and a path forward while learning and adapting along the way.

Leading yourself and your key stakeholders along the path from idea to impact—while you are continuously reinventing the path--is fraught with trials and tribulations, fits and starts, and a myriad of emotions.  

 

Almost none of us can “go it alone” and come out a winner.  By BEING a leader who is constantly relating, sensesmaking, visioning and inventing, the odds of winning are significantly improved.