dru


Getting to Plan B

by Dru Wynings. Average Reading Time: about 23 minutes.

Randy Komisar joined Kleiner Perkins Caufield and Byers as a partner in 2005. Several years prior, Komisar partnered with entrepreneurs creating businesses with leading edge technologies.

Transcript:

Randy Komisar: Yeah, I’ve been a janitor and a baker and a heating maintenance man. When I graduated from Brown a long time ago, I worked in a couple of different areas. I was a rock promoter. I worked in community development. I help run a community development program for the city of Providence, Rhode Island. I taught Economics at a small college in Rhode Island, and from there I went on to law school, which was actually sort of a diversion, it turns out for me, distraction. I went to law school. I went to Harvard Law School.

When I graduated Harvard Law School, I thought I was going to go back into the music business. But instead, I got very intrigued by technology. I found myself first practicing law as a litigator in Boston and then coming out here to the West Coast, where I practiced first as a litigator in an emerging field at that time in the early ’80s, sort of a revolution of the PC as a technology lawyer, which meant that I fundamentally just worked in intellectual property transactions between software and hardware. I went to Apple Computer where I was Senior Counsel and did a lot of business deals and then went off to found Claris Corporation, which was a software company in the ’80s that we spun out of Apple.

After that, I went to do another startup called GO Corporation, which was a Kleiner Perkins-backed start-up, first time I work with Kleiner Perkins. That was one of the pioneers of pen computing. It didn’t go so well with GO Corporation. We sold that to AT&T and I went off to run LucasArts Entertainment, as the CEO for George Lucas. So I got back in the entertainment business for a few years.

I moved from there to Crystal Dynamics, another KP company. I ran that for KP. And so reinvented myself, as something called a Virtual CEO. It’s the heyday of the Internet. There are a lot of great ideas, a lot of young entrepreneurs, not a lot of seasoned management that was available to guide these early companies.

And so I sort of invented this new role where I could help manage a portfolio business. I did WebTV, TiVo, Mondo Media, a variety of businesses at that time, some of which did very well, some less well, but fundamentally the model worked. I then took that model into social ventures after year 2000. I got out of the for-profit venture business around 1999. It was just before my book came out. I had been writing about what was going on Silicon Valley, with ‘The Monk and the Riddle’. The book was about sort of heart and soul of entrepreneurship and how we are losing it. It foretold what we saw in 2000. I thought things were going to crash and they crashed. I bet with my dollars and got out of the market in 1999, started doing social venture work, and started teaching with my good partner Tom Byers. We started teaching here at Stanford in hi-tech entrepreneurship. I did that for almost eight years.

In the interim, I was invited to bring my practice in mentoring and guiding young start-ups to Kleiner Perkins. So I joined Kleiner Perkins as a partner in 2005 and I’ve been there ever since. Great! Well, when I recognized in fact that your new book that just came out with John Mullins, ‘Getting to Plan B.’ Now, the interesting about that book is that the assumption is that all business plans are really Plan A, and it’s very unlikely that they are going to succeed.

So are all business plans a work of fiction? You know, it’s interesting I want to take one step back on John Mullins because John Mullins was brought to me by Tom Byers. John Mullins was here from London School of Business about 2006 or 2007. And he was working on a thesis around business models, and he came to me with this idea that there was a way to sort of methodically map business models for start ups. I doubted that. So we ended up in a debate and the debate became this Plan B phenomenon, which fundamentally was around the notion of, could you actually build the business plan before there was a product? Could you build the business plan before there was a customer?

In my experience, that didn’t work very well. So we went out and did the research. The research suggested that in fact, the vast majority of Plan A’s fail. The vast majority of successes we think about out there, the Google’s of the world, the Facebook’s of the world, the Intuit’s, the Sun’s, the Apple’s of the world, they didn’t succeed with Plan A. That’s sort of a little know fact. Most people sweep that under the carpet and sort of talk about these companies as if they had executed well from the idea to conception, from conception to product, and product to costumer, from customer to business. That’s not the way it normally goes.

So the premise behind Plan B, ‘Getting to Plan B’, the new book that I just brought with John Mullins, is that if Plan A is most often failed, which they empirically do. Then, should we have a different methodology for how we in fact run start ups and get to the right plan, Plan B. So, if we assume that Plan A is something that has to be very changeable, then, what are the things that you should really make sure are in Plan A even though you know things are going to change? Plan A is useful for a number of reasons.

One of the questions always gets asked is, if you don’t believe Plan A is going to succeed, why create it? The process of creating Plan A is important in and of itself. The reason it’s important is that it forces you to confront your assumptions. It forces you to have to have to model out your challenges. It forces you to half to deal with mitigating your risks. It also allows you to start to create a language that you can share with other people in the business community, the language of the business plan, the language of revenues, of profitability, of growth, of customers, and customer value and pricing. This language is really important and it starts to translate your idea into a business. So, it is important to have Plan A, and it’s important because it allows you to tell the story well and to begin to call out your assumptions and your risks. That’s where this getting to Plan B process starts.

Do most venture capitalists think the way that you do? I mean, when they are looking at a team, are they saying, okay, this is Plan A, but we need to sort of look around the corner, what’s going to be Plan B, C and D? I mean, are they evaluating the team based on their ability to change, based on the data they get? Sadly, I have to say to that is no. I would say that the venture capital industry is an industry. Mind you, there’s a big industry and there’s lots of different players and some are very good and some are less good, and lots of people have different approaches. But I’d say in general, they’re complicit with the Plan A problem. They tend to want to fund the Plan A, execute against Plan A, and consider it a failure if Plan A changes.

One of the reasons that I wrote this book was because I wanted to empower entrepreneurs in a dialogue with their constituents – including their investors – around what the process really was. And help the entrepreneurs find the right backers who could live through that flexible and experimental process of innovation. Yeah. I’m always fascinated and most impressed by those companies who really do, are able to change when they see things aren’t working. In fact, I was talking last night with the Pinger founders, somewhat how they have basically changed so many times. Well, I love that story. Yeah, you want to tell that? I love that story.

This is a company that I incubated at Kleiner Perkins in my first year, 2005, and they were too very seasoned entrepreneurs that came out of the Handspring and Palm companies, early smartphone companies. They’d been very successful there. They had been looking at what had been going on texting in 2005, and in the U.S. actually, in 2005 texting was still pretty small. Europe was large. We’re looking at texting and saying, “You know this is a weird interface. You know, using your thumbs to sort of their triple-tap the keys in order to text seemed like a very odd interface for a device that was designed around voice. So, couldn’t we design a better voice interface for the chatting that goes on in texting? That was the premise. That was the problem we were trying to solve. We put together a plan to do that.

The plan started with the requirement about $9 million just to build the base technology and I consider that to be way too much to experiment with. So we went to TellMe and TellMe gave us a sandbox of their technology – for free – to try this out. Why did they do that? Because if it worked, they wanted to have a relationship with it; they really wanted to see whether that consumers would begin to use something other than texting.

So, for a couple of million dollars, we were able to go out and test that premise. It brought wonderful product and it failed to catch on. Now mind you, this is pre-smartphone, SMS is just taking off in the U.S. There are a lot of circumstances around this. Fundamentally, the customers aren’t buying the value proposition. They, only having spent a few million dollars and not having run out of money yet, they retreat. They’re measuring constantly to see who’s using what, testing our hypothesis. They see it’s not working.

They come back and they say, you know, we actually see a lot of social behaviors going on here. Maybe we can harness those. So they build an application for a feature phone, not a smartphone, that has a whole bunch of things and including voice but also some texting. Well, they go out with this on a feature phone and guess what, it works pretty well but they’re measuring very, very carefully and they found out that what’s working is texting.

So, rather than sort of fight the facts, they decide that they’re going to retreat one more time and design an application for smartphones specifically around texting. And they design the first product for the iPhone. It takes off. They design a second product for the iPhone. It takes off. They have now launched 15 products, 13 of which have been in the top ten on the Apple iPhone, that’s out of 150,000 applications. They are cash-flow positive. They’re continuing to improve upon the platforms they’ve built around monetization and promotion that allows them to add not just communications products, but a variety of other products. They become the master publisher. They’re one of the top five producers for all of the iTunes store.

That’s a fascinating story because if that company had been run wrong. If they had invested too much money in any one of those early experiments, if they had failed to measure, they would have been out before they ever got a chance to taste success. Now, I just love the fact that they were constantly willing to experiment and reinvent themselves, and reinvent themselves, and reinvent themselves until they finally hit the ball out of the park. Yeah.

So I love the fact in the book that you talk about analogs. I mean, one of the things that is most powerful is that you say companies can use these analogs to give them some indication about where they’re going to find success. Can you tell us about that?

Yeah. So, the premise of getting to Plan B is, of course, that Plan A’s most often fail. What is the right process to start this flexible innovations goal of, you know, experiment. I start with defining the problem. The bigger the problem, the better, but define the problem. A lot of times, believe it or not, people come to me with the technology that’s a solution without telling me what the solution is for. Because they can make the dog jump, they somehow think that somebody wants a jumping dog. This is very, very frequent in the start-up business. So, I basically say, stop, go back one step. What’s the problem? What problem are you trying to solve here? That problem by the way could be a customer delight. It could be something that it’s just so wonderful that people want to use it. Cooliris is a product like that, by the way, another business that we incubated at Kleiner Perkins. Then, basically, I say, okay, now tell me what your solution is, a defensible solution, something that is unique in the market place.

Once you got that, I ask you to go look at what’s going on in the market place and give me your analogs and antilogs. Why do I do that? Because you can learn an awful lot without actually having to spend a nickel by watching what others have done. Yes, everybody comes and tells me what they’re doing is absolutely novel. Nobody has ever done it before. I’ve never seen anything like it. It is revolutionary. If I hear that term again in a pitch I’m going to walk out. Everything is “revolutionary”. It’s “unique”. It’s “one-of-a-kind”. That’s wrong. Everything is drawing upon and synthesizing upon something else. There’s some behavior out there. There’s some application, there’s some solution, there’s some service that has touched upon this in some way. You know, when Apple decided to proceed with the iPod, they were operating on the backs of what Sony had done before with the Walkman. They could learn a ton from what had gone wrong at Napster. They were able to take a look at the small digital devices that had come after that then at that point they were doing digital storage and see what was wrong with them. They had all that advantage. There’s no reason to sort of start from scratch.

So analogs are looking at those things that are similar that had worked in the past. Antilogs are looking at those things that had failed in the past, and try to distinguish them from what you’re doing. It’s a key to learn as much as you can from others before you start down the path spending your own time and money. Very interesting. Now, can you give us an example? Well, I think the iPod is a very interesting one; it’s in the book. The iPod, of course, was revolutionary in the sense that it changed the way in which we all started to listen to music, buy music. Probably, the more important revolution there, it was on how we bought music. But, what’s interesting about it is that it didn’t have to answer some key questions. If you came in to me and we didn’t know that the iPod existed, we never knew the Walkman existed, and you said, “I have a device for listening to music in public on headphones.” There’s a critical question that needs to get asked. “Will people actually listen in an antisocial way, in a public setting, to music?” Now, you might say that’s a dumb question. It’s only dumb because we already know the answer, not because it’s a dumb question. That question was answered by Sony, and by the way, when Sony had answered the question, it was a really hard question. Sony had to wrestle with whether or not people are going to buy and listen to music in public settings on headphones. So, Apple had that analog to work with. On the other hand, it had the Napster problem. We know that people are downloading digital music not to digital portable players but to the PC, but we didn’t know they would pay for it. Apple had to answer that question to the affirmative to have a business. Because without iTunes, a legitimate way for music to get sold, they were going to suffer the same fate that Napster did. They were going to get sued into oblivion by the labels for piracy. So that’s an example on how to think about the analog and antilogs in these ventures.

So, you talk about avoiding leaps of fate. On the other hand, we think of entrepreneurs as those people who are willing to take leaps and take some risk. So, how do you reconcile that? I mean, you know, I’m going to guess you don’t want to invest in people who are willing to try things that haven’t been tried before. Well, it’s not avoiding leaps of fate. In fact, I think that once you’ve done your analog and antilogs, the next thing to do is identify leaps of fate. The issue is not to avoid them, but to correctly define them. To correctly sort of say, “Okay, this is what I know about the world from my analog and antilogs. I understand that people will download digital music. I don’t know if they’ll pay for it.” That’s a leap of fate question. “I understand that people will listen to music in public settings, but they do it off of CD. I don’t know if I can actually put together a device that is digital, that’s going to have enough storage, enough battery power, and an interface that is going to work for people.” So you end up with these leaps of fate that have to be defined. The key to a leap of faith, though, is understanding the priority of leaps of faith. Why leaps of faith important? Because they focus you by understanding the key things you need to answer in order to prove whether your idea is going to work and prioritizing those.

You are focusing all of your time and effort on the things that will kill you or make your business work. Pinger for instance, had to figure out with that first voice product how much they were going to invest in a scalable back-end. Which, by the way, did not address the leap of faith. We know we could develop a scalable back-end if we have enough money. Versus, how much are they going to invest in the voice product itself to see whether or not people like it. So, what the ‘Getting to Plan B’ process recommends is, focusing in on no more than three leaps of faith that are definitive of your opportunity. Focusing everything you’ve got and getting is much information about those empirically, empirically from the marketplace. Then, once you can answer it in the affirmative, moving on; in the negative, course correcting, and then bringing up the next question, a rolling set of questions. Now, there’s a lot of talk these days about the lean start-up, then doing things with really small amounts of resources to test things. I guess, obviously, it’s easy to do when you’ve got a Web 2.0 company. You can put up a website, see if people are interested.

But what about in capital intensive companies or how do you do those quick and dirty experiments to test the market? They’re not as quick and they’re not as dirty but the process is the same. For us to go off and test a biofuels company, requires tens of millions of dollars of early risk elimination. That doesn’t change the process of analogs and antilogs. It doesn’t change the process of identifying leaps of faith. It doesn’t change the process of creating a dashboard, where you can go and collect immediate information about it. In fact, what’s interesting about it is, and you know this from your background, these are the sorts of players, the people who are building things like syngas companies.

These are the sorts of players who are actually take to these dashboard leaps of faith process best. Why? It looks like a lab experiment process. It’s a quasi-scientific process. The more comfortable you are in the lab, the more your roots are in the lab, the more obvious this process is to you, which is you’re going to run a set of experiments. You’re going to measure, you’re going to test, you’re going to course correct, and you’re going to double down against your positive results and you’re going to have to change course on your negative results. So, that’s a really interesting point though, because there is an escalation of commitment that you have once you’ve put more money, much more effort, much more time into a project. In fact, entrepreneurs know that often times you’re going to have to go through walls to make things happen.

So, when do you stay with your commitment and when you decide to change? I mean, that’s got to be one of the hardest decisions? I think it’s the hardest decision. In retrospect, it’s always easy, sort of, you know, almost everybody says they change course too late. In retrospect, once you change course, you wish you’d done it earlier. All the data, when you go back and look at, you know, jeez, I should have known this answer. But it doesn’t make the decision any easier. And the dashboarding process, the idea of taking leaps of faith questions and executing against your questions rather than against a revenue line, a gross margin line, an expense line. That does help you focus because at least you’ve got good metrics coming through.

If you talk to the companies, Aggregate Knowledge is one of the companies that I incubated that’s in the book as well. If you talk to them about their process, yes, they wish they would have changed course faster every time, but they’re thankful that they had the data that allowed them to change to course in time, because they were able to change course before it was too late because they were measured. But as a venture capitalist, you’ve got your companies coming in and they are changing course, and then changing course, and then changing course. How many times do you let them do it? I mean, there has to be a point which you say, “All right, enough already.” Well, in a way, what you’re doing is you renew your vows every time. Okay. Because what they’re doing is they’re coming back to you with data and so what you’re doing now is rather than investing in an idea, you’re investing in real data. When they come back, and say, “We’re changing course to build this SMS product for the iPhone,” you’re not just saying, “This is great. This is a very cool idea, some interesting entrepreneurs, I think I’ll back them and see where it goes.” You say, “Show me the data that says that this is worth my doing.” The data convinces them. It convinces you as an investor or it doesn’t.

So, how often should a company, an individual, be checking the dashboard? I mean is it daily, weekly, monthly, hourly? How often should be we reassessing? It depends on what you’re measuring. If you’re measuring the efficiency of a syngas conversion of cellulose, you might be measuring that monthly because it may take you that long to sort of get to the next step function. If you’re measuring whether consumers are engaging with your product, adapting it and using it, you’re maybe measuring by the minute. Pinger today has a set of dashboards and dials that they are running on both the adoption side and monetization side, every few minutes, like quotrons.

So, is there an analog for this in our own lives? Do you use this? I mean, do you have analogs and antilogs and a dashboard? Well, you can certainly think back to the experience of probably lot of people in this room. As you begin to think about what you’re going to do with your life, you know. What’s your major? What are you going to do after you graduate? How are you going to go to graduate school or are you going to go into business? What sort of business? The process is not that different than a venture. The unknowns predominate over the knowns as you begin to look at these questions in your lives. So what do you draw upon? I think you draw upon the experience of others, the analogs and the antilogs out there. Your draw upon those leaps of faith questions that are really critical to you in your life right now, and then you begin to see how those map against the opportunity, something like the dashboard process. So, I don’t think it’s very different. I think this is a process that adds a discipline to sort of a natural way of thinking about problems when you have insufficient information and when you’re on a path to get more data. Great! I want to give you a heads-up that I’m going to be opening up to questions in a couple minutes. So, if you have any question, get them formulated because you will have an opportunity to ask them to Randy.

So, with all this in mind, what are the things that entrepreneurs should keep in mind when they’re coming to pitch to you? You get in touch upon this as you describe the Plan B process and the venture process. Every venture capitalist says, “I invest in people.” Every one of them. It’s almost a cliche. I don’t even know what that means for half of them. Getting to Plan B taught me a little bit of what it means for me. Exactly as you said earlier, finding people who are flexible, finding people who will in fact respond to metrics, finding people who have the tenacity and dedication to course correct in the near term against the bigger idea. And who can separate the big idea from the immediacy of the reactions are getting from the marketplace, or from the immediacy of the staging of the product ideas that they need to get to Plan B. Finding a group of people with the curiosity that’s going to continue them thinking about their big idea, not just keep them wedded to an idea that is built upon assumption, upon assumption, upon assumption without any good metrics. The team that can actually respond to the market and as their idea gets morphed by the market, that’s we are looking for.

So do you actually have these discussions in the board room? Do you sit there with your colleagues and say, “This person is flexible. This person is working toward the big idea.” I certainly do. Whether other venture capitalists do or not, I don’t know. But certainly, I do when I’m looking at these, my founders or my candidate founders, when I’m beginning to think about what the venture needs next in its business. What sort of leadership and team it needs. How to build a complimentary team. Those questions are important to me. How is somebody responding to change?

Randy Komisar, Kleiner Perkins Caufield & Byers – Getting to Plan B .