This post makes more sense if you read the previous post – The Leading Cause of Startup Death: The Product Development Diagram.
After 20 years of working in startups, I decided to take a step back and look at the product development model I had been following and see why it usually failed to provide useful guidance in activities outside the building – sales, marketing and business development.
Every startup has some methodology for product development, launch and life-cycle management. At their best, these processes provide detailed plans, checkpoints and milestones for every step in getting a product out the door: sizing markets, estimating sales, developing marketing requirements documents, prioritizing product features. Yet at the end of the day even with all these processes 9 out of 10 of new products are failures.
So what’s wrong the product development model? The first hint lies in its name; this is a product development model, not a marketing model, not a sales hiring model, not a customer acquisition model, not even a financing model (and we’ll also find that in most cases it’s even a poor model to use to develop a product.) Yet startup companies have traditionally used this model to manage and pace not only engineering but also non-engineering activities.
In this post I’m going to describe the flaws of the product development model. In the next few posts that follow, I’ll describe more specifically how this model distorts startup sales, marketing and business development. And how thinking of a solution to this commonly used model’s failures led to a new model – the Customer Development Model – that offers a new way to approach startup activities outside the building. Finally, I’ll write about how Eric Ries and the Lean Startup concept provided the equivalent model for product development activities inside the building and neatly integrates customer and agile development.
1. Where Are the Customers?
To begin with, the product development model completely ignores a fundamental truth about startups and new products. The greatest risk in startups —and hence the greatest cause of failure—is not the technology risk of developing a product but in the risk of developing customers and markets. Startups don’t fail because they lack a product; they fail because they lack customers and a profitable business model. This alone should be a pretty good clue about what’s wrong with using the product development diagram as the sole guide to what a startup needs to be doing. Look at the Product Development model and you might wonder, “Where are the customers?”
The reality for most startups today is that the product development model focuses all their attention on activities that go on inside a company’s own building. While customer input may be a checkpoint or “gate” in the process, it doesn’t drive it.
2. The Focus on a First Customer Ship Date
Using the Product Development model also forces sales and marketing to focus on the end point of the process – the first customer ship date. Most sales and marketing executives hired into a startup look at the “first customer ship date,” look at the calendar on the wall, and then work backwards figuring out how to do their job in time so that the fireworks start the day the product is launched.
The flaw in this thinking is that “first customer ship” is simply the date when engineering thinks they “finished” the 1.0 release of the product. The first customer ship date does not mean that the company understands its customers, how to market or sell to them or how to build a profitable business. (Read the preceding sentence again. It’s a big idea.)
Even worse, a startup’s investors are managing their financial milestones by the first customer ship date as well.
The product development model is so focused on building and shipping the product that it ignores the entire process of testing your basic hypothesis about your business model (customers, channel, pricing, etc.) before you ship. Not testing these hypotheses upfront is a fundamental and, in many cases, fatal error most startups make.
Why? Because it isn’t until after first customer ship that a startup discovers that their initial hypotheses were simply wrong (i.e. customers aren’t buying it, the cost of distribution is too high, etc.) As a result the young company is now saddled with an expensive, scaled-up sales organization frustrated trying to execute a losing sales strategy and a marketing organization desperately trying to create demand without a true understanding of customers’ needs.
As Marketing and Sales flail around in search of a sustainable market, the company is burning through its most precious asset—cash.
3. The Focus on Execution Versus Learning and Discovery
The product development model assumes that customers needs are known, the product features are known, and your business model is known. Given this certainty, it’s logical that a startup will hire a sales and marketing team to simply execute your business plan. You interview sales and marketing execs for prior relevant experience and their rolodexes, and hope they execute the playbook that worked for them in prior companies.
All of this is usually a bad idea. No one asks, “Why are we executing like we know what we are doing? Where exactly did the assumptions in our startup business plan come from?” Was the sales revenue model based on actually testing the hypotheses outside the building? Or were they a set of spreadsheets put together over late night beers to convince an investor that this is going to be a great deal?
No newly hired sales and marketing exec is going to tell a founder, “Hey my prior experience and assumptions may not actually be relevant to this new startup.” Great sales and marketing people are great at execution – that’s what you hired for. But past experience may not be relevant for your new company. A new company needs to test a series of hypothesis before it can successfully find a repeatable and scalable sales model. For startups in a new or resgemented market, these are not merely execution activities, they are learning and discovery activities that are critical to the company’s success or failure.
4. The Focus on Execution Versus Agility
The product development diagram has a linear flow from left to right. Each step happens in a logical progression that can be PERT charted with milestones and resources assigned to completing each step.
Anyone who has ever taken a new product out to a set of potential customers can tell you that the real world works nothing like that. A good day in front of customers is two steps forward and one step back. In fact, the best way to represent what happens outside the building is more like a series of recursive circles—recursive to represent the iterative nature of what actually happens in a learning and discovery environment. Information and data are gathered about customers and markets incrementally, one step at a time. Yet sometimes those steps take you in the wrong direction or down a blind alley. You find yourself calling on the wrong customers, not understanding why people will buy, not understanding what product features are important. Other times potential customers will suggest a new use for the product, new positioning or even a much better idea.
The ability to learn from those missteps, to recognize new opportunities, and to rapidly change direction is what distinguishes a successful startup from those whose names are forgotten among the vanished.
5. The Outsourcing of Founders Responsibility
The Product Development model separates founders from deeply understanding their customers and market. The responsibility for validating the founders original hypotheses is delegated to employees – the sales and marketing team.
This means the founders are isolated from directly hearing customer input – good, bad and ugly. Worse, founders really won’t understand whether customers will buy and what features are saleable until after first customer ship.
When an adroit and agile founder gets outside the building and hears for the nth time that the product is unsellable they will recognize, regroup and change direction. A process to give the founders continuous customer interaction – from day one – is essential.
6. The Focus on a Finished Product Rather than a Minimum Feature Set
The passion of an entrepreneur coupled with the product development diagram drives you to believe that all you need to do is build the product (in all its full-featured glory) and customers will come. A Waterfall development process reinforces that inanity. The reality is quite different. Unless you are in an Existing Market, (making a better version of what customers are already buying) you’ll find that your hypothesis about what features customers want had no relationship to what they really wanted.
Most startup code ends up on the floor.
7. Investor Focus on a Broken Model
Ask VC’s why they use the Product Development model to manage a startup and you get answers like, “It’s the way my firm has always done it. Why change something that has worked so well over the last three decades?” Or, “Look at our returns, its always worked for us.” Or at times an even more honest answer, “My senior partners say this is the only way to do it.”
Some firms correctly point out that, “It’s fine if 8 out of 10 of our companies fail if the remaining two return 20x our money. That’s a better return than having 10 out of 10 companies succeed and each return 2x our money. Therefore we don’t want startups doing anything but swinging for the fences.”
The fallacy is that the product development model is the most efficient model for new ventures swinging for the fences– this year, last year, last decade, or since the first startup met their first investor.
Venture portfolio companies don’t succeed because they used the Product Development model they succeeded in spite of using it. The fact is most successful startups abandon the product development model as soon as they encounter customers.
Today, startups using the product development model iterate and learn and discover by burning investor cash. When cash is tight, they go out of business – or they adopt a more efficient model.
Part 2 of the Customer Development Manifesto to follow.