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Joan Michelson

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ARPA-E on the Practical Side of (Energy) Innovation

Posted: 03/ 7/2012 4:50 pm

Leaders talk about growing a green economy and developing clean energy solutions, but the (mostly-male) talent trolling the halls of the Gaylord National Harbor Convention Center for the ARPA-E 2012 Innovation Summit last week was filled with folks actually doing it.

One of the keynote speakers who brought the engineers face-to-face with reality was Steve Blank, a serial entrepreneur who boasts of losing $40-some-odd millions for investors until he earned $1 billion each for investors in his last venture, and wrote "Start-Up Owner's Manual" to share his wisdom. Now he teaches budding entrepreneurs how to do it at Stanford, Columbia University and University of California at Berkeley, and works with the National Science Foundation's Innovation Corps (I-Corp).

Since innovation is a team sport, here are six tips distilled for aspiring entrepreneurs from Blank and others at the summit:

Don't hire Corporate Executives: So many entrepreneurs think the "best" team members to hire are those who hail directly from big companies, but Blank says that's a big mistake. Big Company executives lack the appropriate skills for the start-up stage, because they are used to "knowns" -- known pricing, established business model and sales channels and to having a sales team. Start-ups have none of those things though, so the Big Company exec is out of their element. Big Company "VPs know how to execute," Blank said, but not how to create the system or the sales channel from whole cloth, much less create new prospects with no track record, established brand or sales support.

"Fire the plan": Business school 101 teaches you that a business needs a business plan, so often that's the first task an entrepreneur embarks upon. But Blank says a business plan for a start-up "is really creative writing." Instead, Blank recommends a "canvas" of all the components of your business, which he believes reflects the interrelatedness of the various aspects of the business in a way that is more usable for start-ups (outlined in his book).

What business are you in?: Blank says start with defining what business you're in, that is, "what is your value proposition?" I'd describe it as, "what need are you filling in the marketplace?" What makes you different?

Hear your market & pivot: Before you try to "sell" your product or service, understand your target market thoroughly through interviewing them about your concept to test the viability of your product/service and develop a viable business model. Entrepreneurs are naturally excited to get started making money off their "amazing idea that will change the world." However, slow down, Blank says, and "don't sell anything." "Experiment... test your initial hypothesis and get feedback in real time" with a small scale product/service, keeping overhead low. "It's amazing what happens when people touch and feel it," he said. Listen carefully -- don't just collect "data" -- and "pivot" in response to the insight from the market feedback to develop "a repeatable, scalable business model."

An example of this from the government's clean energy "incubation" effort, U.S. Department of Energy -- Clean Energy Alliance Small Business Partnership, is a young company named LoadIQ. LoadIQ developed software that enables end-users to literally see how much energy is being used by each of their appliances in real time. It began as "two scientists working part-time on a hardware system targeting single family homes the residential market," said their mentor John Argo from Nevada Institute for Renewable Energy Corporation (NIREC) working with them under the DOE-CEA partnership. Based on market feedback, LoadIQ pivoted to the commercial market and multi-unit operations, such as quick serve businesses, and has beta test contracts with Siemens and a national fast-food chain.

Forecasting? Hah!: The dirty little secret is that most of those great numbers in their business plan are derived from thin air. It's especially tough to develop realistic numbers when you're introducing a disruptive product -- that is, completely new to the market, such as the computer or iPhone years ago. Shingal Mavengere of Ernst & Young's government contracts sector said that you can estimate the market based on "comparables." When you define the need you're filling and how it's being filled currently, you have a basis for deriving the market potential, but start small. What got you into this idea in the first place?

However, when you're introducing a product that the market doesn't know it needs, you have to factor in a lag time to educate the market. For example, take the neighborhood electric vehicle NEV), which serves local, short-drive transportation needs. That need is being filled by cars of course, but also by bicycles, trolleys, public transportation, cabs, and even walking. You can't expect all those folks to buy your NEV, though so find a small segment, such as retirement communities.

Your idea is not a company: One of the biggest mistake entrepreneurs make is thinking their idea is a company, Blank says. "It's hubris." A business requires the infrastructure to build the product, get it to market, generate the sales, manage the finances, and that "A start-up is a temporary organization designed to search for a repeatable business model," so run it accordingly, Blank adds. "There's no such thing as a 10-year old start-up."

Bottom line? Listen to your market, especially when it tells you what you don't want to hear, but "Pick the customer segments and pricing tactics that drive your business model," Blank says.

In other words, the customer may be right, but it's important to pick the right customer.