Burn the Business Plan

by Carl J Schramm

  Entrepreneurial planning involves learning how to make critical decisions quickly, mostly about matters never anticipated, likely while relying on incomplete information. For entrepreneurs, planning is a real-time event much more often than it is a process of deliberate steps to be taken in a formulaic sequence. Entrepreneurs intuitively know that they have to be ready to recognize an unanticipated opportunity and make their own good fortune.

  Becoming an entrepreneur involves acquiring experiential knowledge that only comes with practice. Someone aspiring to write a symphony can study music theory and orchestral composition in a conservatory but, to become a composer, you must write music. Surgeons often say they became surgeons on the day that they were first on their own in an operating room with no supervising senior surgeon present. Likewise, you never became a competent driver until you internalize the needed skills when driving by yourself, without an instructor.

  Ewing Kauffman’s observation rings true once again. There is no way you can know if you really are an entrepreneur, or can become one, by comparing your imagined talents or the quality of your innovation against other entrepreneurs. Rather, you must start a company. Then, whether your startup is successful depends on your ability to learn by doing and to understand the dynamic situation in which you have placed yourself, where every decision counts. Your startup has to survive long enough so that you can find your way to scale growth, and then you must manage your company so it becomes profitable and allows you to flourish. All of this requires a period of intense self-education.

  You Will Become an Entrepreneur All by Yourself

  It is impossible to find an entrepreneur who does not reflect on his years building a company as the most intense learning experience of his life. Like Kauffman, every successful business founder learns every day how to build and grow his business. The learning and planning processes are inseparable. While the entrepreneur is learning-by-doing, he is determining his startup’s future. Every step that the new organization takes is informed by what you have learned.

  An entrepreneur’s journey is essentially one of self-education, the acquisition of specific knowledge needed to be successful. Psychologists call this “inherent” knowledge, sometimes “the knowledge in your hands and head,” which is learned only by experience. Just as in learning how to write music, do surgery, or drive, you must internalize the lessons needed for success.

  This learning-by-doing model is the most effective way that any of us learn anything. Apple, one of the most innovative companies in history, recently rebuilt its educational support model around this insight. Many years ago, Steve Jobs launched the Apple Classrooms of Tomorrow program to maximize the impact of computers on student performance in the sciences. The effort relied on access to personal computers for every student and, as it developed, Internet connectivity in every classroom. After nearly two decades of experience, Apple learned that it wasn’t enough to make the classroom a computer-rich environment with instant access to relevant information. The expected breakthrough in the learning process just wasn’t happening, and student scores in the STEM subjects weren’t improving. What was the problem?

  Apple found that the most significant impediment was the traditional classroom method in which all students are expected to learn the same thing at the same time, with the teacher controlling the pace. Apple examined over twenty years of classroom performance data and engaged panels of educators from all over the country to work on the problem. The effort resulted in a second generation of the Classrooms of Tomorrow, one based on a new pedagogy model called Challenge Based Learning (CBL).

  CBL enables individual students to teach themselves by identifying an educational challenge, a topic that holds particular interest or that a student just wants to know more about. The CBL model’s effectiveness derives from every student coming to see her learning in the context of solving an important question, often contributing to the store of knowledge about the topic she chooses to study. The CBL approach has been proven to be a significantly more effective education model. And, as we will see, it reflects the way that successful entrepreneurs actually learn and plan.

  Mark Nichols, the “father of CBL” who oversaw Apple’s analysis and the discussions with its cadre of distinguished educators, told me that all of us learn the most useful things that we know by putting ourselves in circumstances where we must quickly acquire knowledge in order to make decisions. He used the example of the parents of a child who is beset by a debilitating medical condition. Using the Internet, the parents can quickly learn as much, sometimes more, than their child’s doctors about the causes of the disease and its possible treatment, often becoming comanagers of their child’s care and even strong advocates for new treatments or drugs.

  Applying the CBL method, students set personal learning objectives to confront big questions, problems that anyone in the role of a student—which certainly includes a startup founder—might want to solve. The goal might involve building a rocket or designing and starting a company that sells specially formulated snack bars for sailors that both provide nutrition and prevent seasickness. By using a trial-and-error approach, learning what’s needed to master the next step, the student or entrepreneur keeps adding to what he needs to know. Eventually, he reaches a solution that works or fails, sending him down a different path. The rocket flies or he goes back to the drawing board to redesign it; the nutrition bar is reformulated until some combination actually works.

  Nichols believes that CBL’s learning-by-doing method describes the innovative process that is implicitly employed at Apple when conceiving of breakthrough products. Many Apple innovations begin by someone describing a seemingly impossible challenge, a “stretch goal,” something that is beyond what state-of-the-art technology permits. Steve Jobs was famous for asking—insisting—that Apple’s engineers and designers create products that had never been thought of before and were impossible to make. The iPad is a perfect example. Most technical experts thought it impossible to sufficiently miniaturize computer technology to support its capability. Having established the undoable as its goal, however, Apple engineers had to deliver. Those who were involved said it was an exhilarating period of intense learning.

  Apple’s creative teams learn how to solve challenges by identifying, gathering, and applying the resources needed to achieve the required next insight. Along the way, of course, innovators recognize subsidiary problems and challenges that may themselves become new product opportunities that were never anticipated. The collateral innovation process reflects what the biologist Stuart Kauffman has called seeing “the adjacent possible,” something that Michael Levin found when he realized that the software tool he developed to automate his new steel-trading business was the product that the market actually wanted.3

  At Apple, Nichols points to a new program, its iOS Developer Academy, where CBL is being used to help students in several countries create new cell phone businesses. These students—all without any previous knowledge or experience with programming but who want to invent money-making phone apps—use CBL techniques to teach themselves iOS, the coding language of iPhone apps. Research shows that these students acquired iOS proficiency at least twice as quickly as students who learned iOS in conventional classroom settings. Many of the self-learners have created cell-phone apps, including games, and educational tools including one that teaches deaf people how to play the piano, that now are sold through the App Store.4 Others have created their own application design businesses. Two years after completing Apple’s CBL program in Brazil, one entrepreneur now runs an app support business in the city of Porto Alegre that employs fourteen people.

  After studying students who used CBL to learn programming and start new businesses, Nichols believes that most entrepreneurs implicitly use the CBL technique. “It’s an intuitive process, not one bounded by formal plans that cannot possibly anticipate exogenous events or circumstances.” Nichols says that planning and learning are inseparable and codependent. In business,
an entrepreneur, like any motivated student, is constantly compiling what he’s learned to inform his next move. Planning is not a set of steps that are prescribed in advance to achieve success, but a dynamic, just-in-time process of learning and adapting.

  Fast Learning, Planning, Acting

  No one knew this better than the late John Boyd, a brilliant Air Force fighter pilot who flew in the Korean War. Early in that conflict Boyd became frustrated that the North Koreans were routinely beating the United States in aerial combat. Boyd concluded that the Russian-built MIGs used by North Korea were simply better planes. Given that nothing in the way of improved aircraft was coming through the American military pipeline anytime soon, Boyd, a squadron commander, decided the only way to win was to train American pilots to become better at fighting the Korean MIGs.5 Perhaps, he reasoned, if pilots could make better decisions in the midst of combat, they could improve their chances of shooting down their adversary before being shot down themselves.

  Boyd devised a learning-decision approach known as the “OODA Loop.” This involved the pilot observing the entirety of the situation around him, each factor that might influence his decision-making in combat. In aerial engagements before radar guidance, for example, weather conditions played a much bigger role than they would today. Second, the pilot had to orient himself relative to his opponent. What information could he assemble on how that enemy pilot was making tactical decisions? After a few encounters, was it possible to predict his opponent’s next move? Next, informed by what he had seen as the air battle wore on, he needed to decide on his strategy, what his next steps would be. And, finally, he had to act repeatedly—pursuing and firing, adjusting his tactics each time using lessons he had only just learned.

  As air combat in that era involved two planes closing in on one another at over 1,000 miles per hour, shooting seldom was on target during the first attempts.6 As their duels continued, the OODA method helped American pilots learn and process sufficient information about their opponents to predict behaviors that improved their chances of success with each encounter. Boyd’s method gave us the idea of learning through feedback, adding observations into an accruing framework by which to improve subsequent decision making.

  Boyd, who never started or ran a business, realized the need for dynamic learning to improve performance and results. His methods are consistent with Apple’s Challenge Based Learning Method in which, once a student envisions his big idea, he has to research possible paths to a solution, testing to see which approach is most likely to work, then choosing one and seeing if he can convince others of its value.

  Both the OODA Loop and Apple’s CBL rely on continuous iteration. As an entrepreneur, what you’ve learned so far can inform your next decision, helping you to assess your options against your evolving view of your startup’s destiny, circling back to repeat and expand decisions and actions that work, or abandoning those that don’t so you can try another approach. Applied in the context of starting a business, the Boyd-CBL approach describes a four step planning model used to manage four required resources needed for entrepreneurial success.

  Vision-Platform-Product Testing-Scale

  Every successful startup continuously iterates among four processes: vision, platform, product testing, and scale. These basics can be thought of as a circle where, once the goal of the new business is laid down and a company is formed, they serve as a platform for testing ideas in the market that will lead the company to discover opportunities for scale growth.

  Every company starts with the articulation of a vision, usually a new product or service. The entrepreneur or innovator sees the need for the “new” as a means to perform an existing process better, faster, or cheaper. His startup exists to manufacture the new product or provide the new service. In the case of a franchise, the idea is to bring an already tested concept to a new locale where customer needs are not yet satisfied. Whether it’s your idea or one you rent, your new business operates as an instrument for sharing the benefits of a new idea with customers whose lives it will improve in some way.

  No one knows at the outset, however, exactly how her idea will be valued by customers. Thus, every startup becomes a platform on which to develop and test the utility of an evolving product. This is where the bit-by-bit process of transforming an idea into a useful product takes place—a period of testing potential customer reaction. As we saw in the cases of Howard Head and James Dyson, hundreds of prototypes led them to their successful skis and vacuum cleaners. At the beginning, their companies, like every startup, were really workshops where their ideas continued to develop depending on how potential customers reacted to the functionality, convenience, and looks of their emerging products.

  After what might be months or years of exposing your product to potential customers to improve it, the next step is to seek scale growth for your company. It is only by achieving size that you can secure your company’s future and become self-sustaining. How long will this take? As we have seen in the statistics cited throughout this book, and in the stories of the entrepreneurs recounted here, knowing whether your startup will survive and then flourish generally takes from seven to ten years.

  Managing Four Necessary Resources For Success

  To make these four processes most productive, you will have to simultaneously manage four resources: innovation, the people you work with, capital, and your company’s competence in communicating with its market. The relative importance of these resources, one to the other, will vary over time. Situational planning involves knowing how to value and manage resources at a given moment.

  Many people believe that success depends on one breakthrough idea. In fact, a fully formed market-ready product idea seldom springs from an inventor’s head. And, as we have seen, more likely than not, entrepreneurs are building on and combining the previous insights and work of others. This is one reason that an aspiring entrepreneur who doesn’t as yet have a compelling idea should consider taking a job in an existing company that has a track record of innovation. He will be up close to the process of innovation and in a context where he is more likely to see the need for an improvement or innovation in an existing product or process.

  Because innovation itself is a progressive process, it must be managed. If your startup is formed around your own idea, it is imperative that you appreciate that, however wonderful you believe it is, it is unproven until it is exposed to potential customers. Your idea is never fully developed, even when it makes it to the market. When you bought your iPhone 5, you thought it was the last word in innovation. Even before its release, however, Apple already had set a challenge for itself: how to improve on its own most recent product. And it did the same with the iPhone 6.

  The second resource you must manage is people. As your company starts, human resources play a role second only to your innovation. Without employees, you cannot make your idea into a concrete reality, something you can describe to investors. In the first days, you will have no capital goods such as machines to make things, nor will you have inventory or sales people to recruit customers. A startup is you and the first people you hire to make your idea take form.

  Your people will and should command more attention than any other resource. With no room for error, you have to select and manage your first hires with great care. A few universal guidelines can help your planning by doing in this regard. As previously mentioned, you will likely confront the temptation to hire family members and friends whom you know, versus hiring strangers who might be better suited to the needs of your startup, but who seem higher risk precisely because you don’t know them. There is no easy answer, but keep in mind, as already suggested in chapter 2, employees who are relatives and friends almost always present special challenges, particularly if they believe, based on their relationship with you, that they can claim a birthright to a job, along with outsized influence and outsized returns.

  In a startup, you do not have time or resources to remediate employees who are not contributing as you h
ad hoped and expected they would. Every successful entrepreneur learns to fire people quickly if they do not meet expectations, fit the culture of your organization, or can’t grow their value to the company fast enough. You simply do not have time or the spare energy to deal with personnel dramas.

  You should be reluctant to share ownership in the company with employees until they have proven their value over a long period of time. I am an investor in a growing startup where a talented CFO came to the company via another small company that the startup had acquired. After a few months of watching his new employer growing at an annualized rate of about 400 percent, the CFO proposed that he be recognized as a cofounder and insisted on an award of ten percent of the company’s stock, which would have made him the first employee-shareholder. My advice to the entrepreneur was to fire him. Generally speaking, CFOs are fungible. More important, however, the implicit statement being made in his demands to the growing startup’s owners was that their future success would depend on his input on every major decision.

  Loyalty is a paramount consideration in deciding to keep an employee. Startups are yeasty places that breed ambition. You must be watchful that a highly self-regarding employee doesn’t attempt to run away with your idea, customers, co-workers, or investors. Any seasoned investor, myself included, has seen a variation of this scenario enough times to know that honest dealing does not always pertain in startups.

  Capital is your critical third resource for success. As we have seen, your initial stake most likely came from your savings, or from friends and family members who believe in you. As a result, it is imperative that you carefully manage your operating capital. Decisions about how you spend your operating capital—dividing it among product design and development, manufacturing, advertising, and sales, and on overhead, including rent and administrative costs—will decide the ultimate success or failure of your company.