Martin: Welcome to the business owners’ podcast where we throw aside taboos and share strategies for growing, protecting and exiting your business. My name is Martin Checketts and I represent Mills Oakley’s Private Advisory team.
So, hi there everybody – we’re in number two now of the series about disruption and innovation and I’d like to welcome back our expert panel Steve Glaveski and Simon Quirk! Welcome gents!
Both: Thank you Martin!
Martin: Just to do a quick introduction for the guys – Steve is the co-founder of Collective Campus which is an organisation that exists to help mature businesses with innovation. Simon is the founder of a number of start-up businesses, including Strategy Fusion and VidVersity, and is also a strategy consultant.
Okay gents, so to recap on our first episode of the season we really took some time just to set the scene around the current inflection point that we’re seeing in business and in life generally around particularly technological change – and how that’s going to create a number of very significant risks and opportunities for our business owner clients. We spoke in particular around how the existing business models for current mature businesses of all types are in one sense the very thing that holds them back from innovating. Because these business models have been very successful doing things the old, traditional way, remuneration structures are set up to reward these types of behaviours and to take risks on start-ups, etc, just doesn’t fit with those traditional models.
So having set that scene I now want to talk about what we can do about it, and Steve I’ll start with you because you’ve built a whole business on this. This is exactly what Collective Campus does. If I’m a business owner out there listening to this podcast, what are some of the things that I could do?
Steve: Sure. So, the first thing is you need to accept the fact that, or, just acknowledge that you don’t throw the baby out with the bathwater. So picking up where I left off in episode one, it’s not about completely fundamentally changing your current business model. It’s about perhaps allocating 5% of your current resources towards doing things differently. McKinsey talk about this in terms of Horizon 1 which is basically incremental innovation, just improving what you do today. Horizon 2 which is adjacent innovation – it’s like, having a look at what’s happening in other industries and maybe applying that to yours – and then Horizon 3, which is disruptive, breakthrough innovation, just trying all sorts of crazy stuff, throwing stuff up against the wall and seeing if it’ll stick.
Now, we’re not suggesting that you allocate all of your resources to Horizon 3. This is where you only allocate 5% of your resources – and if your existing business was not built, and we’ve touched on this point, so what organisations need to think about is how can you take that outside the building? How can you build a small skunk works or external innovation program which has a team that have their own KPIs, their own resources, processes, systems, values, that encourage them to take risks, to experiment, to fail small. You’re not going to be able to do that within the confines of an established organisation with its established ways of doing things, with incentives that don’t encourage that kind of thing. We’ve seen that recently with the Mills Oakley Accelerator which we’ll talk about a little bit later where a traditional law firm, like you’ve touched on Martin, not necessarily built to innovate – same business model for the last hundred years, it’s not going to do this stuff internally. So, partnering with external organisations, taking innovation outside the building and placing it in an environment where you can take those risks, and if you’re going to do that internally then you really need to back it. You need that top > down commitment if you’re going to fund, say, a small team internally – just let them do their own thing. Give them x amount of dollars, 5% of your normal R&D to just run lots of experiments. But the thing is, and this is what I must stress, there’s a lot of rhetoric out there about failure and fail-fast and all that sort of stuff. Now, we need to shift that and say learn-fast instead of fail-fast, and learning fast can be done with small investments. A few hundred dollars is enough to determine in many cases whether or not the problem you think is a problem, the market thinks is a problem as well. It doesn’t cost tens of millions of dollars. And what’s the risk? What’s the cost of not taking this approach where you learn fast? The risk is you have these multi-million dollar cost blowouts where you build something that you think the market wants and they don’t. And so, you’ve just ended up wasting months if not years and millions of dollars like many more established, mature organisations do, because they haven’t taken small steps to learn fast and figure out what the market wants.
Martin: Thanks Steve, and again, there are so many lessons in all of that. I might try and work through a few of them! Taking innovation outside the building, to me, is a really critical one. I think that would be a lesson that our clients could heed well. Simon, could you give me some examples either when you’ve seen people try to keep innovation in-house, in their current model – or when you’ve seen people take it externally and some of the experiences that you’ve seen in that regard.
Simon: Yeah, sure. One that really comes to mind that I’m dealing with at the moment with a good friend of mine who is in the building industry, he’s been asked to partner with a firm that’s spent two years as an architectural firm, spent two years building these amazing financial models about how they’re going to have a hugely scale-able modular business that you know, is going to be worth $50m dollars in 5 years … and then going to go global … he’s got a very successful building business itself, he was going to partner with these guys and just ride the coat tails. He was sold on this dream. The interesting thing is, he came in and said, can you tell me if that’s right or wrong. I said, well, I’ve got a lot of reservations around how infinitely scale-able a business like building is, but, I’m not going to come in here and say, like a 20th century consultant would have, “that’s wrong, that’s wrong, I’ve got all the answers”. What I will tell you is, that those people have built this in their office and they’ve not gone out and done any learning at all. So that’s the red flag for me.
So that’s just a recent example as I’m actually this afternoon going to help him work through all of this, so, that’s an example of the old way of doing things where you spend millions of dollars. Their failure where one has wound down their architectural practice and countless hours and weekends and time away from the kids and its very likely, I think, because he hasn’t done any learning he’s going to get (*) on the nose. So we’ve been talking about the big corporates and those kind of structures but this is a small business and some of our listeners will be in that medium category as well, so that’s an example where they’ve wasted a huge amount of resources and time and there’s no learning. So Steve said, which is one of my favourite quotes, in Collective Campus which we’ll talk about a little bit in a moment, I’ve spend a bit of time – my favourite quote is one by Eric Rees who wrote The Lean Start Up and it essentially said, maybe not word for word, “the start-ups that are most successful and the ones that learn the fastest” and that’s what Steve said. I think we’re getting into a really good mindset discussion here. It’s that ability to go out and to learn, but to learn within a structure and we’ll get to solutions in a minute and how the lean start-up works and that methodology. So, that’s one where I’ve seen a very good example of where they’re already going out there and there’s a major crisis because all their assumptions around the, literally the encyclopaedia of plans are going out and they’re starting to learn, hey – this is not working out, and they’re in a tail spin. So that’s a very good example of just staying inside and thinking that you know it all without actually going out there and learning. Now the learning at the moment, the great thing about this phase that we’re in, it’s so cheap and it’s so easy as Steve just said before, to go out and learn. There are so many platforms and channels where you can go out and test things – there are people who are very, very happy to go out and hear you on a pitch night or whatever and give you a critique, and I think the people that are really attracted to the start-up area are the people who love learning and it’s a great ecosystem in that way I’m sure you’ll agree Steve, is that the people who are really passionate about start-ups are the people who love learning and love the innovation journey and seeing other people on that journey it’s very, very supportive, as well as all the other platforms, technology platforms you can use to learn. So there’s a lot of potential out there and opportunity to learn. So, and getting back to your other point, we’ve seen it go and be successful outside of the building, well I think there’s a lot of these, even the corporate accelerators that have worked really well, we’re going to talk a little bit maybe in a subsequent episode in a bit more detail about the Mills Oakley Accelerator which is in its early stages and is very exciting – and what we’re dealing with there in terms of the teams and opportunities that we’ve got. The things that we have, because I’ve been working with Mills Oakley for a number of years, been very lucky to, but we’ve been talking about these sorts of things for years and years and it’s never happened because we are very good at exporting our current business model. So I think what we’re seeing with the Mills Oakley Accelerator in a very emerging area we’ve already seen some great teams and some great things coming through. There’s one inside where people have stayed inside that I’m meeting with this afternoon and then you’ve got the outside ones, and Steve could probably talk to a number of these accelerators as well, he’s been involved in – or external initiatives that have really made huge strides.
Martin: That’s great Simon, so clearly taking it outside is a strategy worth looking at. You mentioned the lean start-up Simon and Steve you’ve also mentioned you know, fail quickly fail fast, etc. And this goes, I think, to the heart of start-up methodology or best start-up practice. A number of people listening to this I think won’t be across some of those lean start-up methodologies. Steve, could you give me a quick overview of lean start-up best practice?
Steve: Sure, happy to. And this goes back to what we touched on at the start of the very first episode where we’re moving from an environment of certainty to uncertainty. Five year plans, financial projections, all of that stuff worked when we could reliably predict what the world would look like. When we can’t predict what the world will look like we need to embrace learning, we need to embrace creative thinking, and the lean start-up helps us do that by helping us build fast, learn fast, measure fast, rinse and repeat. So, if I have an idea – I just need to map out what my initial business model looks like and that could, and will, most likely, if I’m going to find product market fit, fundamentally change over the course of a few months or years. But what I need to determine first and foremost is ‘what’s my problem?’, ‘what’s the solution?’, ‘who am I targeting?’. Outside of that you’re going to look at what are your costs, what do your revenues look like, potential distribution channels and customer requisition channels, you’ve got basically the bare bones of a business model there. But based on that you want to pull out what are my key assumptions here? What are my make or break assumptions? So, in the case of, say, a company that I love talking about called Rent the Runway. They’re an online company that allows people to rent designer clothing. Now, this was started by two girls in university in their early 20’s about 5 years ago. Now if you’re building that type of business, what’s your make or break assumption? Martin, do you want to have a stab at it?
Martin: That people would be happy to rent clothing rather than own it.
Steve: Yes, that’s one – Simon?
Simon: Hmm, that they’d pay for it.
Steve: Yep and what’s the number one consideration if I’m renting clothes off the internet that I can’t …
Both: Try them on, they’ve got to fit
Steve: Exactly. So how do you test this? One option is to just go out and say okay we’re going to build a website, we’re going to buy 1,000 dresses, we’re going to organise our supply chain, marketing, throw a tonne of money at it, that’s the old-school way, and we’re going to base our financial projections on how we’re going to be a several hundred million dollar company in 5 years’ time. What they did is they just said okay, we’ve identified our assumptions, are people going to pay to rent designer dresses and are they going to rent dresses without trying them on? And so they hired out a room at Harvard University and put posters up all over campus and said hey we’re Rent the Runway, come down we’re renting out these designer dresses, check it out. And so they wanted to determine for every 100 people that turned up, how many would rent dresses without trying them on. They actually ran two tests. The first time they ran this experiment and they found that 10 for every 100 people, 10% that turned up rented a dress and on this occasion they were able to try the dresses on. The other thing they were also testing was would people return the dresses in good fashion? Because all of us that have been at the races know that when you go the races in the morning people look very different in the afternoon, but that’s a different story. And then they found that 10% rented the dresses. They ran the test again at a different university, I believe it was Yale, and this time they didn’t let the girls come in along to the test site to rent dresses. That number fell to 3 out of 100, which, for an online business with millions of people as a captive audience, that’s quite a high number. Quite successful ecommerce businesses have a conversion rate of about 2 or 3%. And so they said okay, our key assumptions are validated and it gave them the confidence to move forward and I believe today at last count, Rent the Runway was worth more than $1billion. So it’s all about mapping out your core business model, pulling out your key assumptions, finding a way, or, determining your key metrics (what are you looking to test and what does success look like to you?), building a prototype, and that prototype could look something like the Rent the Runway experiment, it could just be a one-page website where you’re testing the problem or the solution. It could just be ads that you run on Facebook, it could be Google search ads, maybe those ads that you see on different websites where you’re targeting people. Say for example, we recently ran a test for an insurance company and they had a product or an idea that they wanted to test and the problem we were testing in this case was that people in the hospitality industry haven’t got time to take care of themselves. That was the problem and there was a proposed solution. So what did we do? We simply ran Facebook ads targeting people who work in the hospitality industry between the age of 25 to 35 from Melbourne and Sydney which was the target customer demographic, and in the ads we would say something like “no time to take care of yourself?” and you’d have a picture in there of a chef or a barista or something like that, and we were able to determine of – for every 100 people who saw this ad, which was our target audience, what percentage clicked? And our target metric for success was 1% or more. It kind of gives us some confidence to move forward that this is a problem that’s worth exploring. And if we got success there, they were directed to our website which talked about the solution, and we just made it really simple, not too much text, most people leave a website within the first 3 seconds of visiting these days, so you really need to capture them. If you’ve worked hard enough to get them to your website, make sure that your design keeps them there. So we’ve made it really simple what the solution was, and if people were interested they could click ‘find out more’, leave their email address and again, we had our metrics of what success looked like around the solution. And what happened was we found the numbers weren’t as high as we would have liked, so we started tweaking things. We started running lots of different ads to test different problems. To target different customer segments. To target different solutions and see what resonated the most and we actually found that blue collar workers found that this was a much bigger problem than people who worked in hospitality, and the solution changed fundamentally as well – but, this whole process we ran for 4 weeks and it cost less than $10,000. The amount of learnings that this company extracted was phenomenal. If they had taken the old-school approach to things, they would have thought oh, this is a great idea, let’s go out and build it and drop a million dollars on it, if not way more, and then figure out hey, no one wants this.
Martin: Wow, my mind is just racing after that Steve, and you’re right, it’s such a head shift isn’t it, versus the old ‘build it and they’ll come’ type of mentality – which is, as you’ve illustrated, is so risky. In terms of your time, your resources, and if you get it wrong at that point, you know, wowee.
Simon: And what Steve has done with that particular example and the rental of the dresses is that you’re looking at your most risky and most important assumptions and the whole way I’d like to articulate is you’ve got your business model on a page and you’re constantly looking at what are the risky areas we haven’t nailed down before, how can we do that in the quickest most cost effective way possible before we actually start to move onto the next stage and commit any more time and funds than we actually need to. Another thing for our listeners, a key thing that came out of what Steve was talking about is the assumptions. When people actually do adopt this approach, I think a mistake that they do make is not actually having some clear assumptions around what they need to see, because what will happen is, you need to avoid the human vices come into play and you get a bit of nice feedback and you want it to work, this is your dream and your vision. So you need to make sure that you go in there before you start to get the feedback and start to feel like oh, someone liked it! Or, they liked it they came on and bought it, we’re onto something! You need to say no, no, no – we’re not onto something until we’ve met our target.
Steve: A bit of that confirmation bias as well.
Simon: Right, absolutely.
Martin: That really resonates with me because of course you want it to work, and I’ve fallen into that trap, that kind of shiny thing syndrome and of course you’re personally excited by it, but to have actually some objective assumptions rather than to get revved up by the first positive piece of feedback, that’s really important.
So gents we’ve talked about taking innovation external because as middle-aged or Gen X or Baby Boomer business owners maybe that’s not our core skill of focus. We’ve spoken about a lean start-up methodology so, you know, the opposite of ‘build it and they’ll come’, instead, make little experiments, learn, pivot, and do so inexpensively.
What about a portfolio approach? Because it seems to me that if you’re only doing this with one little idea, well, it may very well come to nothing and we’ve all heard the stats about how many start-ups fail. Steve, any comments on that?
Steve: Definitely. Companies should be taking a portfolio approach and the lean start-up helps us do that. If you look at venture capitalists their whole business model is about one in 10. One in 10 investments are likely to generate a return to cover the losses and generate that profit, right? And that’s why we’re seeing a venture capital of the firm setting up funds of funds where they partner with other firms and collectively they invest in hundreds of start-ups, because you get a few Ubers and Facebooks out of that and it more than covers the losses. The thing about the lean start-up is, as I alluded to earlier, you can spend a few hundred or a few thousand dollars testing one idea, so, you can times 5 or times 10, so not only have you spend $50,000, you’ve tested 10 ideas, and you’ve found the one that works and that’s worth investing further dollars into. But – if you take the traditional approach and invest several hundred thousand or a million dollars on the one idea and it fails, not only have you failed big but maybe you haven’t got money left to continue investing in things or maybe you’ve completely devastated morale in the company or maybe you just don’t have the guts anymore, the hubris to give it another shot because of this big failure. We’re about failing small by adopting the lean start-up, by running short, small, low fidelity experiments you can take a portfolio approach and you can figure out which idea is worth investing in. Similarly, taking a portfolio approach within ideas as I mentioned earlier where I said look, we’re testing this for hospitality but at the same time, lets run these ads across different customer segments, different problem sets, and what was a hospitality solution ended up being a blue collar product.
Simon: I can give you an example of a portfolio approach even within VidVersity – we’ve just recently launched and we’re getting good traction in enterprise, it’s a slow excel – you do a trial, they love it, they want it, and then comes the hoops you’ve got to go through for decision making, but we’re starting to close now within two months which is really good for enterprise software. We ran an experiment by going last week to Adelaide to a higher education technology conference for Asia, New Zealand and Australia because we thought what better place to go, set up a booth and learn whether, while we concentrate on building – which is going very well in the enterprise team, whether we do have another portfolio or another segment in this area. And if we don’t, that’s fine – otherwise, because if we don’t do that we’ve got to wait another year for this conference. So we went over there, probably not expecting it to be too, you know, do a bit of learning. So now we’ve got a problem that we’ve got 100 trials that we’re trying to support and we’re getting people on board to help us do that. We went over there not committing to it, that was a cheap way for us to get years learning all in two days and we got it, so – that’s why we went, it wasn’t that we were going to build a whole arm there, it was just to learn whether we had an attraction in that segment or not.
Martin: And just an example in our business, for a long time we’ve been looking at the aged care sector because of the demographic aspect and the value that we believe that we can provide as lawyers to our clients and particularly business owner clients and individual clients. I as a lawyer assumed, and I guess it’s natural, I thought that the areas of highest legal risk would be the areas in which our clients would be most interested and for me in this area of aged care and elder law it was around granny flat arrangements which I perceive are very risky from a legal perspective where somebody – mum or dad – moves in with the children, they become financially wedded together, what happens if the kids can’t afford the mortgage and the house needs to be sold, what happens if the children get divorced and the house becomes part of a matrimonial settlement, what happens if there’s no meeting of minds around the stage where mum should go into aged care, etc, etc. I see that as a highly risky scenario, but we started experimenting with some Google ads and it went absolutely nowhere. People did not perceive that to be a risk, rightly or wrongly. I think wrongly! But what I think doesn’t matter, right?
Steve: You’re a lawyer!
Martin: Well, exactly right! And talk about give a child a hammer and every problem’s a nail, you know – but it was in fact the offer that did get a lot of traction is in fact some extent outside our core expertise which is all around the financial planning aspects of aged care, and it’s about how am I going to fund the bond, and do I sell my home or don’t I sell my home? What are the upsides and downsides of that? Do I borrow from my children to fund the bond? Or don’t I? and of course there’s a legal aspect to play in that, there’s doing the loan agreements, there’s reviewing the contracts, but it was in fact quite different to my initial assumption, and luckily and thankfully and having sought guidance from both of you gents, yes, we were able to establish that fairly quickly and cheaply.
Well look, thank you Simon thank you Steve, we’ve got some great messages today about how business owners with mature businesses can innovate – in particular they can take innovation externally, they can apply leaner start-up principles and they can have a portfolio approach which sees them make a number of little bets rather than one big bet.
Next time we’re going to do a case study of a specific example of taking innovation externally, which is one that’s close to my heart – the Mills Oakley Accelerator. So thanks, gents, and I look forward to the next episode!
Both: Thanks Martin.