This post makes sense when you read the previous two vertical markets posts first.
Reducing Risk – Simulation versus Customer Development
If you remember the first part of this discussion, startups face two types of risk; invention risk and/or customer/market risk. In either type of startup you want to put in place processes in place to reduce risk.
Simulation to Reduce Invention Risk
If you’re in a vertical where “invention risk” is dominant, then you want to do everything you can to manage and reduce those risks. Simulation allows you to build test, fail, and iterate without actually building the physical device. (You can use static methods like Monte Carlo simulation, or dynamic methods using continuous or discrete simulation.) But however you do it, in companies with invention risk you want to simulate as much of process as possible, as early as possible. For some markets you can design a model of your product on a computer and conduct experiments with the computer model to understand whether it will work, long before you actually build it. For example, in the semiconductor business engineers spend enormous time, money and effort on simulation, the process of actually building the chip in software and running tests to see how well it will perform – well before they ever get to first silicon. And the holy grail of the biotech business is another simulation process called computer aided drug discovery, which someday might be used to streamline the drug discovery and development process.
Customer Development to Reduce Risk
Conversely, if you’re in a startup where the greatest set of risks are about failing to find the right customers/markets you would look for processes to reduce those risks. The Customer Development Process I teach and write about is designed to do just that.
The Customer Development model says that when you start your company customer needs are unknown. You may have a set of hypothesis about them but you really don’t know. The Customer Development process puts you in continuous contact with customers to test your concept, fail, and iterate way before you actually ship the product. It allows you to systematically replace each business-critical hypothesis with facts.
(When I wrote the Four Steps to the Epiphany, the Customer Development text, I hadn’t yet thought about what vertical markets it might be appropriate for.)
Since my class was using the Customer Development text, I updated this diagram on to reflect in which markets the process was appropriate. For example, I told my students doing life sciences projects it would be 5-10 years before they needed to worry about customers. However, for the Web 2.0 companies they needed to start the Customer Development process now.
(As a reminder, if you’ve slogged you way through the Customer Development textbook, you know the Customer Development process says your business plan is just a series of untested hypothesis (unless you’re a domain expert.) So starting with the vision of your product, get out of the building, and see if you can find customers and a market for the product as specified. In contract to the linear execution via business plan, the Customer Development process is built on low-cost and continuous learning and iterating.)
Two Sides of the Same Coin
Simulation and Customer Development are simply two sides of the same coin. They both have offer startups a path of getting it wrong often and early without go out of business.
The next Vertical Markets post will put all the pieces together.