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Building a Billion Dollar Company
How Do You Build a Billion Dollar Company? Rob Ryan knows the answer. Ryan runs Entrepreneur America, a business boot camp where new and experienced entrepreneurs learn how to build and scale companies through a process known as the Sun Flower Matrix. The Sun Flower Matrix helps entrepreneurs focus on three areas: Core competencies (the flower), Product Markets (the petals), and Driving Force (stem). Through Entrepreneur America, Rob is involved in coaching Entrepreneurs as they build and scale their companies. Rob’s expertise has not only benefited several entrepreneurs, but also has allowed him to build his own company, Ascend Communications, which sold for $24.5 billion.
Alan: Welcome back, I’m here today with Rob Ryan. Rob is the founder of Ascend Communication, and a Silicon Valley entrepreneur. Who is now running Entrepreneur America. Rob, welcome to today’s show.
Rob: Thank you.
Alan: Rob, can you give me some of your background of Silicon Valley and how you got to where you are today?
Rob: Basically, I have degrees in physics and mathematics from Cornell University and then a higher degree from the University of Wisconsin at Madison. And then I worked at different companies, for Dick Burroughs I worked at Digital Equipment Corporation where I was involved in all their networking protocols. Then Intel Corporation where I helped write what became known as the blue book for Ethernet; it specified the ethernet network for the world to actually implement. And then with a company, my first startup, Ungerman Bass where I was head of engineering and it was ethernet company and then after that I did my first company. It was called Soft Conn, and it was doing ethernet we were doing the ethernet controllers; this is way back when ethernet was first becoming known and we were bought Hayes Microcomputer. So I sold the company to Hayes Microcomputer, they were the leading modem manufacturer at that point in time and I worked there as their West Coast division head for several years and then I started Ascend Communications. And we originally started Ascend with one idea, which quickly developed into a bad idea because the driving forces, the underlying driving forces, all changed. The telephone company didn't deploy the services that we were building equipment for, so we had equipment for no services. And we quickly changed ourselves, the board gave us a second chance, we used the sunflower to actually remodel ourselves and in our remodeling, we decided that perhaps this thing called the Internet might, might have some opportunity. This was actually 1990, to frame things for you, and we started to do investigations inside the Internet with the Internet service providers. And we began to realize that the Internet service providers had an economic problem. Every time they were trying to add more users they could only charge X amount, $30 a month to the users, by almost, by federal prescription, but the cost of adding users was $1000 per user. Well, that doesn't really compute, they get $360 a year from user and it costs them $1000 to get them on the Internet, so they had an economic challenge to actually expand the Internet. What we realized when we were talking to them is, that we could solve this problem with technology, by changing their infrastructure equipment and being much more efficient on the infrastructure equipment. And we started to build better equipment and they liked what we built and then we, you know, the company basically exploded along the lines of the same way the Internet was exploding over the years. It went from zero million to, it was 16,000,000 when we changed directions and it grew 16, 40, 180, 580 million, 1.2 billion 2.6 billion, just kept going up and we built a whole series of products for the inside of the Internet, the infrastructure. In fact, we've had about 80% market share across the world inside the Internet and then we built customer equipment so that people could get on the Internet. So, little boxes that would be in your home or home office or, or corporate office.
Alan: So, in that, in the Entrepreneur America you use something called the Sunflower Matrix, what is that?
Rob: So in doing Ascend, I realized that we had developed a process during our product planning. And product planning is so essential for a company, if you get it wrong you're really not in existence, especially if you’re a small-company. Even for a large company, if you get it wrong you’re in trouble. And it's a very emotional thing, product planning; it pulls in a lot of different people and they all have emotions and generally the decision-making is very poor. So I had developed a, based on reading a paper in the Harvard Business Review, C.K. Prahalad, and he did a paper on core competencies, specifically I remember the core competencies was around Honda. And he showed the following, he said Honda does lawnmowers, weed wackers, automobiles they do motorcycles they do generators, they do a lot of things. So what are they, a weed wacker company that got confused and started to do a car, or car company that did a lawnmower? And the answer is none of the above, what they are is, the center of their sunflower, the center of their sunflower is engines, combustion engine small to medium-size engines, the pedals on the sunflower, are all those products that I named. So, they leveraged the core competency that they had in engine making. They probably had other core competencies but I’m going to stick with that one for a moment, and then they figured out every possible place they, that an engine is required. And that's product areas that they did, so their company grew prosperous, because all of the revenue streams coming from these pedals built a very prosperous company. It wasn't dependent on one revenue stream; it had many, many revenue streams.
Alan: I’m visiting here today with Rob Ryan. Rob is the founder of Entrepreneur America, he's also helping to coach companies today in the sunflower model. Rob, we need to take a quick break, we'll be right back at these messages. And I wanted, when we come back, I want to talk about the three-step process to the sunflower model.
Alan: Welcome back. We’re visiting here today with Rob Ryan, Rob is a Silicon Valley entrepreneur and running a program they call Entrepreneur America, where he’s teaching companies how to scale businesses and part of that is what’s called the sunflower matrix. Now Rob, before the break we, we talked about your background, but I want to go back into this sunflower matrix a little deeper. There's a three-step process, can you outline the process for this sunflower matrix?
Rob: Sure, so have an image of the sunflower in your head, so you have a center to the sunflower you have pedals and it actually has the stem on it. So keep that in mind, so, when we’re, when we start, we start with the center, or the core. So what we begin with is, I start drilling down to the core competencies of my team. I'm not interested in learning about their product at first. In fact, the product is one of the pedals, we quickly put it up when we write it up a sunflower, a picture on a whiteboard. We put the name of their products on some of the pedals and say, we’ll get back to those later. Now, I want to go and I want to strip away everything and try to find out what is what, do you have a unique competitive advantage, on what do you differentiated on? What, what has great value of the underlying, it may be an algorithm, that may be a process? In Honda's case, that was they had special sauce, was their ability to build these very efficient small engines and medium-size engines. From my company Ascend, our special sauce or core competency was we new digital dialing. Now you say, what is digital dialing, well it was dialing into different services it, all around the world independent of the protocol independent of who the switch manufacturer was, was it AT&T, Verizon? It didn't matter, we could do it, it turned out that, that was a pretty unique skill, that was our underlying core competency for Ascend. One of them, so how did we exploit that? Now, I’m going to talk about the second step, or the pedals. So we took our core competency, and then asked the question where, in what industry or what market with that core competency represent about two thirds of all the work you would have to do in order to build the product for that area. So when we asked that question, Internet popped out, we said, well you have to dial into the Internet, so I guess that Internet became one of our categories that we were going to explore. How about small offices, corporate offices dialing into the home office? Well, that was called remote access. Well, that was an area so that becomes another potential petal, if you will. What about telecommuters? These are people that work at home dialing in, that became a third petal. How about video, where corporations were videoing between offices that was a dialed facility, so we had four or five petals around our core competency. The stem, by the way, is the driving forces, it’s the underlying nourishment, if you will, that if you take that nourishment away or if I take scissors and I clip that, what happens? The sunflower falls over, so the driving forces are critical but very rarely understood. In fact, let's look at the driving forces for one second for Ascend. The driving forces were that the carriers would produce these dialed services they would have them priced and charged properly so that people would use them. And by the way, applications would want to be built, otherwise our communications equipment would make no sense because we wouldn't be able to connect to a service and it wouldn’t be priced right if any of those conditions weren’t right then our business would be chopped right off and our whole sunflower would wilt. So, it's important in the early stages of a company to understand how the driving forces either help you or could cut your legs out from under you or cut the sunflower; that’s the third step.
Alan: And when should a business change its core?
Rob: When should a business change its core? You know, you know, you either come to a business with some form of core competency, but I frequently find is that it's incomplete; the core competencies are incomplete and that, as they begin to analyze it, and this is where the matrix comes in. What is a matrix? It’s nothing more than the team putting a set of criteria down to judge their core competency and another set of criteria to judge the pedals, which are their possible product offerings. So what is criteria? Criteria’s things like uniqueness, differentiation, competitiveness, value. When, when a team starts to put that down in the form of you know a spreadsheet, if you will. And they begin to have these criteria ranking against their core competencies, they begin to discover that their core competencies aren't as strong as they thought, that they’re actually missing core competencies. Or, when they are ranking their pedals from, remember my pedals were remote access the Internet, telecommuting. We couldn’t do all those things simultaneously, so we had to figure out which one should we devote our energy to. Well, the way we did that is we put down a set of criteria, and by the way, the team argued about the criteria quite a long time; to judge the merit of which one we were going to do first which area were we going to embed ourselves in. Was it the Internet? Was it remote access? Was it telecommuting? When we did that, and we ranked all of that and scored it, we discovered that the Internet was the number one ranked one, remote access number two, video number three and telecommuting number four. And we actually did those businesses in that order. We started the Internet business. We did products for that, we realized that wow, this is going real well this process is going real. Well, why don't we do the second one, remote access. In the end the Internet business was a multibillion-dollar business, the remote axis was three or 400 million in revenue, video was about 100 million in revenue. So we had the rankings correct, you know, we ended up doing that correctly and we took all the emotion out of the product planning. It was all about criteria in scoring with the team, rather than their favorite thing to do or favorite direction to go.
Alan: Rob, we need to take a quick break. This is fascinating on the sunflower model and the three-step process. I like to go more into this in terms of what your processes evaluating companies. We need to take a quick break and we’ll be right back after these messages
Alan: Welcome back I’m visiting here today with Rob Ryan. Rob’s a Silicon Valley entrepreneur and the Founder of Entrepreneur America. And I should correct that because Silicon Valley was a past life, you’re in Montana on the Roaring Lion Ranch right now. And what a beautiful place you have up here.
Rob: Thank you. I love it.
Alan: Rob, before the break we were, were talking about the sunflower matrix and three-step process into, you know drilling down. I guess it’s outlined as: you drill down to your core, you find your petals and then you find out what the driving forces of the business are. I want to walk through a couple questions though. An entrepreneur has a great idea, says; “I need Rob, I need this sunflower model”. What does, how do you go through a market assessment to see if a particular company will fit your sunflower matrix, that you want to work with them?
Rob: Really good question Alan. So, if I only had almost like an elevator amount of time, let’s say it’s a very tall building. I’d be doing a couple of things I be trying one, to assess the entrepreneur and if I only have one question for that I’d ask them to tell me about all their entrepreneur activities when they were young, you know, very young. When did they start being an entrepreneur when they had their paper route? You know, or were they selling lemonade you know? I don't really care what it was I want to understand how really they started being an entrepreneur and then I would ask one question in the elevator tell your value equation? What is that? Most entrepreneurs actually scratch their head at that point. Value equation is how much money do you save or make for your customer. Not for you after you and the company but for your customers how much money do make or save and if I find an entrepreneur that can answer that question and he'll say I save about $800,000 a year for my customer because of the following reasons: Blah, Blah, Blah, Blah, Blah. I know I have a good one and that is one I'm going to explore and go deeper with. But most people have no clue as to what the value equation is for their product or their service. They’ll just scratch their head or their wave their hands you know in a circle or something or they’ll say it goes faster I'm sure there is a value equation but I don't know what it is. Those are less interesting to me, the people that have taken the time to actually explore and work with customers to know where their pain is the customer's pain and how much that pain is costing them that’d be one if, if I had one question to ask and only one question to ask, that would be it.
Alan: I'm an aspiring entrepreneur but I just need an idea for my business. Okay, how would you go about coaching an entrepreneur to come up with a great idea?
Rob: That happens to me all the time, by the way. And it sounds funny but people Say I want to be an entrepreneur but I don't have an idea you say wow, that's a conundrum but here's how I would go about doing it I would sit down with you Allen and say; tell me what you're really good at, tell me what you're really good at and what you're passionate about your talented and good at now what I'm trying to do is drill down to your personal core competencies you might say I'm really good at well I just had a bartender recently you know I'm really good at doing mixed drinks. I really enjoy running a bar. Okay, we’ll start with that, you know. That's a little core competency or a software person would say I'm really really talented at doing mobile apps and I really enjoy the whole world of hearing, I'm a pianist and stuff and I think I understand the whole audio side of things. So I would say great, you have two core competencies one is you know a lot about audio and two, is you know a lot about doing droid or an iPhone app. And I said okay that's what we’re going to start with those are our ingredients to figure out what our idea comes out. So, at that point now I've got a whole bunch of ingredients and now we start saying well give me every possible idea you can think of that would use these ingredients don't rank them don't prejudice them in any manner if it was a team effort we would have a team in here I'd say no one can belittle anyone else, every idea’s good at this point we’re very democratic here, the ideas would all go up as little petals around the sunflower. Latter on were going to actually expose those petals to more critiquing through our criteria but at the, at this point in time they’re all good, we just put them up there so if you’re doing this with a team, the only thing I would say is whatever your idea is, it has to use that core competency or one of the core competencies or both of the core competencies or all five if you had five core competencies that were there. That's the only condition so that’s, you know, and that by the way, would take me about an hour or two and we’d come up with a whole list of ideas.
Alan: Where do you suggest entrepreneurs go when there's seeking mentoring?
Rob: Interesting question, where would they go? First of all I would suggest that they go to the real deals people that have actually built companies from zero to presumably very successful companies also have companies that fail because you learn from both your failures as well as your successes and then people they should try to find people that can communicate well and can respect them because it’s, this is not a surrogate CEO relationship this is a mentoring relationship you know you're going to be the CEO the surrogate is going to, you know, the mentor’s going to be the mentor guiding and there has to be a lot of respect for that guidance to occur you know the person, the mint tea if you will, has to respect the person doing the mentoring. They're all over you can find them in all walks of life some of them hide in Silicon Valley some of them are out in Montana.
Alan: Why is it good for a company to have a good value proposition?
Rob: The value proposition reflects on, on the pain point inside the customer. So let me give you an example, very quickly. I have a software company, they, in the airlines industry. And airlines have pain points in a lot of different areas but compliance, to all the regulations, you can imagine there's quite a few regulations. So inside the airlines, they would have documents that were 10 books worth that were changing on an every 10 day basis. New pages would be put in these and old pages taken out and this paper was flowing all around and would have to be read by pilots machinist and everyone else have to be signed. This, just the paper, just the paper in an airline might be $3-$4 million a year not to, not to mention all the confusion that goes on with the paper shuffling. So there's the pain point, there’s the value equation, $4 million a year. Plus, by the way, if you don't follow the regulation something bad happens with the plane, you get sued – right? So, the pain goes even higher. So now, if you're building software to this and you're going to solved that problem for them. Do you charge a one time fee of $2000 or do you charge to the pain point? The pricing of your product and service is priced to the pain point. For it, for the $4 million we charge $40,000.00, $50,000.00 a month for our software and you rent the software over a five-year window. So, a contract for an airlines would be two or $3 million. Well, they’re not going to give you two or $3 million for renting your software unless they're saving a lot of money my, my normal ratio 6 to 1, so they must be saving $15 million you know in, in headaches you know, along, along the way roughly.
Alan: I'm visiting here today with Rob Ryan. Rob is the Founder of Entrepreneur America. We’re at the Roaring Lyon Ranch here in Montana. Rob, we need to take a quick break we’ll be right back after these messages.
Alan: Welcome back. I’m visiting here today with Rob Ryan at the Roaring Lion Ranch in, near Hamilton Montana. And Rob, we've been talking about the Sunflower Model, basically a three-step process drilling down to the core, finding your petals, what are the driving forces to your business. And I'm sure that a lot of aspiring entrepreneurs out there are saying, how do I get to work with Entrepreneur America and the Sunflower Model? So Rob, how do, how does an entrepreneur get up to the Roaring Lion Ranch to work with you?
Rob: Most of them contact me by email. On my website, Entrepreneur-America.com, my email is there. And when, I suggest to them that when they contact me, I don't want a business plan. I'm adverse to reading anything over two pages. What I want is to learn about the essence of their, of their business and a little bit of the essence of themselves as entrepreneurs. So what I always suggest to them is buy my first book Entrepreneur America, go to chapter 3 the sunflower chapter, try to absorb the principal and then in the little one page of that or two pages that they send me, do their little sunflower. Drill down to their core competency, tell me what that is, tell me what some of their petals are or their product right, because they'll have a product or product idea. And then tell me about what they think the driving force is? And then answer that question which is one of my criteria, what is the value equation? How much money does it make or save for your customer, for your customer? So in that question, by the way, you have to tell me do you have a customer, have you talked to customers and do you understand what their pain point is in the form of money? And if they fill that out and also fill out a little bit of their own background, when did they start becoming an entrepreneur when they were eight years old with the lemonade stand or did it occur just a year ago. I then take that in, I absorb that and then I'll schedule a Skype call with people that I'm interested in. If I see something in their sunflower or their value equation and in their background that I like, then we'll set up a Skype session. If the sniff test on the Skype session goes well and they get an invite up to the to the ranch, but the dropout on the, on the Skype session is probably 10 to 1, you know. Only one comes up to the ranch out of, out of ten.
Alan: I hear you’re not easy on, on aspiring entrepreneurs, you really go through a processes to screen them then.
Rob: I do, I do and I give them homework assignments to do and if I miss, if you're rejected in the nine I say you know, this is not a permanent rejection. But you have to do homework and here's your homework. And by the way, some of them actually go around, go away and do their homework. Three months, four months later they come back and say, everything you asked me to do, I’m done, I'd like to, I'd like to show it to you. And then I’ll have another Skype session with them, if I'm impressed with all the work that they've done, you know now, now they've got me on the line you know now we’re moving towards coming up to the, coming up to the ranch.
Alan: What advice do you have for an early stage company that needs to go out and seek financing such as either angel or venture capital?
Rob: So my advice if you are seeking angel or venture capital is don't! Woo, you say don’t, did I hear that correct? You heard it correctly, what I would like to see you do instead, because there's only a certain number of hours in the day, is I'd like you to spend your time building that little prototype. And then going around to customers seeing if you can get customer endorsements. In fact, if you're really good at this, you even get conditional orders. You can get customers to give you orders to finish the product on a purchase order. Now think how powerful that is, if a customer does that, because now with these things, if you're really, really good and if you can even get them to pay you a little bit upfront before you’ve actually build the product. I know because I did all of these things and I've seen other entrepreneurs do that. Now what happens right, now I don't have to go out for that seed money do I? Because I've got some seed money and now I'm starting to live off the cash flow generated by customers. At some point I will need angel or venture capital when I'm trying to explode this business, but the best way early on is build the little prototype, go out to the customer. So, how do you build the prototype? That's what mom and dad and friends are for, they give you the little seed money which should be very little and you should be very careful with it because it's your mom and dad. You don't want to spend their money foolishly. But I wouldn't go running around with a little rice cup to a venture capitalist with just your little idea. I would go much further than the idea before I ever went to a venture capitalist or an angel or a super angel or any other type of entity
Alan: Rob, where does a person find out more information on Entrepreneur America and the Sunflower Model?
Rob: So, Entrepreneur America is on Entrepreneur-America.com is a website you can get more information my email is RRyan@EA.com, EA for Entrepreneur America. And again, do your homework before you start wishing to be up here your because you won't you won't get past the first cut we take companies by the way from zero to even companies that have as much as 100 million in revenue that are trying to get to the next stage so it isn't just raw startups in fact most of our companies have revenue. When they have revenue you have already proven to me and my partners that you, you're an entrepreneur you are able to build something and you could go out and sell it because that's the only way you could have revenue. And by the way, I'm going to insist that you prove to me that you're an entrepreneur, so you might as well do it anyhow if you come up with just the raw idea the very first thing I’m going to do is send you back to do that homework that we talked about earlier so save some time and do it.
Alan: I’ve been visiting here today with Rob Ryan, Founder of Entrepreneur America we’re here at the Roaring Lion ranch. Rob, it’s been a pleasure having you here on today’s show.
Rob: Thank you.
Alan: We’ll be right back after these messages.
About Rob Ryan:
Rob Ryan founded Ascend Communications in 1989. Rob served as President, CEO, and Chairman of Ascend, taking it public Friday the thirteenth of May, 1994, at $13.00 per share. In 1995 Rob and Terry started Entrepreneur America.
Rob gained his first experience in Local Area Networking as a Systems Analyst at Lawrence Livermore Lab in the mid-seventies working on the first non-military extension of Arpanet, the precursor to the Internet.
He became a principle architect of Dec Net with Digital Equipment Corp. in the late seventies, then authored the Intel portion of the Ethernet Specification which set the local area network standard in the early eighties. He joined Ungermann-Bass as Director of Engineering in 1982, leaving in 1983 to found his first company, SoftCom, which was sold to Hayes Microcomputer in 1984. In 1989, Rob left Hayes with three engineers to found Ascend.
Under Rob's leadership, Ascend became the leading manufacturer of Point of Presence boxes (POPS) for Internet providers. Rob describes Ascend's business as selling the picks and shovels for the Internet gold rush. Ascend has grown from zero sales in 1989 to over 500 million sales in 1996. In 1995, the last year Rob served as CEO of Ascend, the stock was acknowledged as the best performer of the year on all of Wall Street returning a whopping 721% (Business Week, December 25, 1995; pp. 126-127). If you had invested in Ascend two months after the IPO, you would have gained 3,223% one and three quarters years later (Investors Business Daily August 30, 1996; p. A3). At the end of 1995, Rob won the Ernst and Young Entrepreneur of the Year award for Northern California (including Silicon Valley). Rob was selected as the Cornell University Entrepreneur of the Year for 2002.
Rob Ryan's current focus is his Entrepreneur America facility in Montana. In this Rocky Mountain setting Rob mentors promising entrepreneurs, assisting with focusing product ideas, writing business plans, sharpening presentations, and raising venture capital.