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had [the answer] in the analog [version]” Sony’s Walkman was the analog. Jobs then had to face the fact that although people were willing to download music, they were not willing to pay for it. “Napster was an antilog. That antilog had to lead him to address his business in a particular way,” Komisar says. “Out of these analogs and antilogs come a series of unique, unanswered questions. Those are leaps of faith that I, as an entrepreneur, am taking if I go through with this business venture. They are going to make or break my business. In the iPod business, one of those leaps of faith was that people would pay for music.” Of course that leap of faith turned out to be correct.4

Beyond “The Right Place at the Right Time”

There are any number of famous entrepreneurs who made millions because they seemed to be in the right place at the right time. However, for every successful entrepreneur who was in the right place in the right time, there are many more who were there, too, in that right place at the right time but still managed to fail. Henry Ford was joined by nearly five hundred other entrepreneurs in the early twentieth century. Imagine being an automobile entrepreneur, trained in state-of-the-art engineering, on the ground floor of one of the biggest market opportunities in history. Yet the vast majority managed to make no money at all.5 We saw the same phenomenon with Facebook, which faced early competition from other college-based social networks whose head start proved irrelevant.

What differentiates the success stories from the failures is that the successful entrepreneurs had the foresight, the ability, and the tools to discover which parts of their plans were working brilliantly and which were misguided, and adapt their strategies accordingly.

Value and Growth

As we saw in the Facebook story, two leaps of faith stand above all others: the value creation hypothesis and the growth hypothesis. The first step in understanding a new product or service is to figure out if it is fundamentally value-creating or value-destroying. I use the language of economics in referring to value rather than profit, because entrepreneurs include people who start not-for-profit social ventures, those in public sector startups, and internal change agents who do not judge their success by profit alone. Even more confusing, there are many organizations that are wildly profitable in the short term but ultimately value-destroying, such as the organizers of Ponzi schemes, and fraudulent or misguided companies (e.g., Enron and Lehman Brothers).

A similar thing is true for growth. As with value, it’s essential that entrepreneurs understand the reasons behind a startup’s growth. There are many value-destroying kinds of growth that should be avoided. An example would be a business that grows through continuous fund-raising from investors and lots of paid advertising but does not develop a value-creating product.

Such businesses are engaged in what I call success theater, using the appearance of growth to make it seem that they are successful. One of the goals of innovation accounting, which is discussed in depth in Chapter 7, is to help differentiate these false startups from true innovators. Traditional accounting judges new ventures by the same standards it uses for established companies, but these indications are not reliable predictors of a startup’s future prospects. Consider companies such as Amazon.com that racked up huge losses on their way to breakthrough success.

Like its traditional counterpart, innovation accounting requires that a startup have and maintain a quantitative financial model that can be used to evaluate progress rigorously. However, in a startup’s earliest days, there is not enough data to make an informed guess about what this model might look like. A startup’s earliest strategic plans are likely to be hunch- or intuition-guided, and that is a good thing. To translate those instincts into data, entrepreneurs must, in Steve Blank’s famous phrase, “get out of the building” and start learning.

GENCHI GEMBUTSU

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