Customer Development is Not a Focus Group

On first description, hearing the “get out of the building and talk to customers” precept of Customer Development leads people to say, “Oh, I get it. Customer Development is all about gathering a list of what features customers want by talking to them, surveying them, or running “focus groups.”

It’s not.

One of the times I screwed this up it left a legacy of 25 years of questionable design in microprocessor architecture.

Little Indians and Big Indians
At MIPS Computers, my second semiconductor company, I was the VP of Marketing and defacto head of Sales. As the engineers were busy rearchitecting the original Stanford MIPS chip into a commercial product, one of my jobs was to find out what features customers wanted.  One of the specific requests from our chip architects was to find out whether customers would want the chip to have data stored as big-endian or little-endian.

“Endianness” refers to the byte order of data stored in external memory. Data can be stored with the most significant byte at the lowest memory address – big-endian, or it can be stored with the least significant byte at the lowest memory address – little-endian.

Different computers used different endianness. The leading minicomputer of the day, the DEC VAX, used little-endian, as did microprocessors such as the Intel 8086 (used in the IBM PC) and the Mostek 6502 (used in the Apple II.)  On the other hand, the Motorola 68000 microprocessor (used in the Sun and Apollo engineering workstations) and the IBM 360/370 mainframes were big-endian.

The term “endian” came from Jonathan Swift’s Gulliver’s Travels. In it the Lilliputians argue over how they should eat their hard boiled eggs. One group ate from the little end first – little-endians while the other ate theirs from the big end – big-endians. This turned into a dispute over the “right way” and led to war – just like it did for generations of computer architects.

Just Add Every Feature
As I surveyed potential customers on which version of “endiannes” they wanted, prospects who had their data on VAX minicomputers or IBM PC’s were unequivocal. “It has to be little-endian or we won’t design your chip into our systems.” And when I heard from those who had data on Sun or Apollo workstations or IBM mainframes, the answer was equally unambiguous. “It has to be big-endian or we’ll never adopt your microprocessor.”  I still remember the day I talked to Ram Banin, the head of engineering of Daisy Systems (a maker of Electronic Design Automation workstations) and he said, “Steve, you’ll never make every potential customer happy.  Why don’t you tell your engineers to build both byte-orders into your new chip?”

What a great idea. Now I didn’t have to decide or figure out whether one set of customers was more valuable than the other. I ran back to the company and said customers had told us, “We have to do both little and big endian.” The reaction from the chip circuit design guys was, “OK, we could do that. We can put both little- and big-endian in the chip, and it won’t cost us more than 1,000 gates.” The reaction from our software guys was a little less kind.  “Are you out of your !? *x! minds?  Do you understand you are doubling the amount of work you are going to make for generations of software engineers?

No, not really.  I was just in marketing.

All I had done was proudly go out and get customer input. Isn’t that what I was supposed to do?

No.

Customer Development is about Testing the Founder’s Hypothesis
Any idiot can get outside the building and ask customers what they want, compile a feature list and hand it to engineering. Gathering feature requests from customers is not what marketing should be doing in a startup. And it’s certainly not Customer Development.

In a startup the role of Customer Development is to:

  1. test the founders hypothesis about the customer problem
  2. test if the product concept and minimum feature set solve that problem

This is a big idea and worth repeating.  Customer Development is about testing the founder’s hypothesis about what constitutes product/market fit with the minimum feature set. Thereby answering the questions, “Does this product/service as spec’d solve a problem or a need customers have?” Is our solution compelling enough that they want to buy it or use it today?  You know you have achieved product/market fit when you start getting orders (or users, eyeballs or whatever your criteria for success was in your business model.)

The time to start iterating the product is if and only if sufficient customers tell you your problem hypotheses are incorrect or point out features you missed that would cause them not to buy.  If you’re lucky you’ll find this out early in Customer Discovery or if not, when no one buys in Customer Validation.

The Jury is Still Out
At MIPS I was out collecting feature requests.

We put both byte orders into the MIPS chip. It’s been there for 25-years.

Lessons Learned

  • Startups begin with hypotheses about a customer problem or need
  • Founders talk to customers to discover and validate whether the total solution solves that problem or addresses that need
  • If, and not only if, there are no “buy signs” from the customer or customers repeatably point out missing features, does the product change
  • Collecting feature lists and holding focus groups are for established companies with existing customers looking to design product line extensions

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Thanksgiving Day

Thursday is Thanksgiving Day in the United States.  Families gather from across the country to spend time with each other and feast on a traditional turkey dinner.

Since our kids were little our Thanksgiving tradition was to head to Hawaii with friends and eat Thanksgiving dinner under the palm trees to the sound of the waves next to the warm ocean. (Imu turkey can’t be beat if you’re trying to exceed any rational amount of salt intake.) This year, with the kids grown, their choice was to fly up from Southern California and spend the holidays at our ranch.  My brother and sister in-law, niece and nephew are here, and we’re all going to spend Thanksgiving morning creating a new tradition -  an extended family scavenger hunt that will take us across the ranch trails. Hopefully we won’t run into any wildlife bigger than us (other than our assortment of rattlesnakes, rabbits, deer, bobcats, wild boar, and mountain lions). Our friends who run the state park surrounding our ranch will join all of us for Thanksgiving dinner.

So no post today on entrepreneurship, Secret History of Silicon Valley, Customer Development, Lean Startups, etc. Just a reflection on my family and hopes for our children.

A Few Thoughts for Thanksgiving

  • On this day it’s hard not to be grateful and give thanks for the things that matter – family, friends, our health, and feel blessed for all the things that have come to us. It’s harder to remember that we have no perpetual rights to them, they aren’t our due, but they’re gifts.  We try our best to give back to our community and country and always wonder – is it enough?
  • We’ve taken the kids to enough places in the world to realize the United States still remains a country of opportunity and hope. For all its flaws, America is still a beacon of liberty and justice. My parents were immigrants who came through Ellis Island with nothing but the clothes on their backs – but they believed in the American dream. They worked hard their entire lives so their children could have a better life. Each year I teach hundreds of students from around the world who come to America to pursue their version of this same dream.
  • This year as American families face economic hardships, (one out of eight Californian’s are unemployed,) we remember that as a nation we are still a generous people, willing to share and give to others less fortunate then ourselves – both at home and abroad. I hope we managed to teach our children compassion and charity for others. And as they find their own way in life, they will continue to give back to others.
  • I’m grateful to those who serve our country and remember that people sleep peaceably in their beds at night only because rough men stand ready to do violence on their behalf. I hope our children remember that freedom needs to be earned and that they too find their way to serve their country.

Happy Thanksgiving

Steve

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Customer Development: Past, Present, Future

The Lean Startup Circle is a Google discussion group (anyone can join) centered on Customer Development/Lean Startup strategy, tactics and implementation. They were kind enough to sponsor a meet-up in San Francisco.

The Times Square Strategy discussion I had with Eric Ries, was still top of mind, so instead of my standard Customer Development lecture, I offered my thoughts on: the origin of Customer Development, where we are today, and where does Customer Development go, and how you can help get it there.

The video below was my presentation to the group.

The slides below go with the video. Just click through them as you watch the video. Extra credit if you know the back-story of slide 1 and why it’s appropriate for founders and their team.


.
……………
Thursday is Thanksgiving Day in the U.S.  I’ll have a non-entpreneuership post about family and reflection.

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Closure

For those that know me, I’m kind of a “life is too short” kind of guy. I liked to fail fast, move on, and not look back.

However, in catching up with the VP of Sales of Ardent last night, I was reminded one of the few times I did return for closure.

National Supercomputer Centers
For a decade starting in 1985, the National Science Foundation (NSF) established and spent a pile of money (~$50 million/year) on four supercomputing centers in the U.S. – Cornell University; University of Illinois, Urbana-Champaign; the Pittsburgh Supercomputing Center at Carnegie Mellon University; and the San Diego Supercomputer Center at the University of California at San Diego. The ostensible goal of these centers was to allow scientists and researchers access to supercomputers to simulate commercial phenomena that were too expensive, too dangerous or too time consuming to physically build.

The reality was that the U.S. Nuclear Weapons Laboratories used supercomputers to run their hydrodynamics codes for nuclear weapon design and the National Security Agency used them to decrypt codes. But with the cold-war winding down these agencies could no longer be counted on to provide Cray Research with enough business to sustain the company. Commercial applications needed to be found that could take advantage of this class of computers.

The search for commercial supercomputer applications was good news for Ardent, as this was our business as well. But bad news was that the supercomputing centers had concluded that they could justify their existence (and budget) only by buying the biggest and most expensive supercomputers Cray Research made.

We Lost the Deal
At Ardent we were building a personal supercomputer powerful enough to run and display numerical simulations just about the time the National Science Foundation was funding these centers. I remember that the Pittsburgh Supercomputing Center had put out a request for a proposal for a supercomputer to replace the Cray X-MP they installed in 1986. In reading it, there was no doubt that it was written only in a way that Cray could respond.

I realized that given the amount of money the Supercomputing Center wanted to spend on buying the new Cray Y-MP (list price $35 million,) we could put an Ardent personal supercomputer next to every scientist and researcher connected to the university. I responded to their RFP by proposing that Ardent build the Pittsburgh Supercomputing Center a distributed supercomputing environment with hundreds of Ardent personal supercomputers rather than a monolithic Cray supercomputer.

As one could imagine this was the last thing the supercomputer center management wanted to hear. All their peers were buying Cray’s, and they wanted one as well. We had support from the scientists and researchers who had bought one of our machines and were beginning to see that distributed computing would ultimately triumph, but bureaucracy marched on, and we lost the bid.

In my career I’ve been involved with lots of sales deals, and for some reason losing this was the one deal I never forgot. Maybe because a win here would have meant success rather than failure for the company, perhaps because I really believed we could make the impossible happen and win. For whatever reason, I hated that particular Cray that got installed in Pittsburg.

Closure
Fast forward 15 years. Retired for a year, I ran across an article that said, “$35 Million Dollar Supercomputer For Sale for Scrap.”  It was the Pittsburgh Supercomputing Center Cray Y-MP that had beaten me at Ardent.  It was for sale on Ebay.

I bought the Cray.

It took two semi-trailers to deliver it.

It sat in my barn next to the tractors and manure for five years. I had the only farm capable of nuclear weapons design.

Cray called two years ago and bought it back for parts for an unnamed customer still running one.

Closure.

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Times Square Strategy Session – Web Startups and Customer Development

One of the benefits of teaching is that it forces me to get smarter. I was in New York last week with my class at Columbia University and several events made me realize that the Customer Development model needs to better describe its fit with web-based businesses.

Dancing Around the Question
Union Square Ventures was kind enough to sponsor a meetup the night before my class. In it, I got asked a question I often hear: “What if we have a web-based business that doesn’t have revenue or paying customers? What metrics do we use to see if we learned enough in Customer Discovery? And without revenue how do we know if we achieved product/market fit to exit Customer Validation?”

I gave my boilerplate answer, “I’m a product guy and I tend to invest and look at deals that have measurable revenue metrics. However the Customer Development Model and the Lean Startup work equally well for startups on the web. Dave McClure has some great metrics…”  It was an honest but vaguely unsatisfying answer.

Union Square Ventures
The next morning I got to spend time with Brad Burnham, partner at Union Square Ventures talking about their investment strategy and insights about web-based businesses. Bill and his partner Fred Wilson have invested in ~30 or so companies with 27 still active.

They’re putting money into web services/business – most without early revenue. It’s an impressive portfolio. By the time the meeting was over I left wondering whether the Customer Development model would help or hinder their companies.

Eric Ries in Times Square
For any model to be useful it has to predict what happens in the real world – including the web. I realized the Customer Development model needs to be clearer in what exactly a startup is supposed to do, regardless of the business model.

Luckily Eric Ries was spending a few days in New York, so we sat down in the middle of Times Square and hashed this out.

What we concluded is that the Customer Development model needs an additional overlay.

Four Questions
Just as a reminder, the Customer Development has four simple steps: Discovery, Validation, Creation and Company Building.  But it also requires you to ask a few questions about your startup before you use it.

The first question to ask is: “Does your startup have market risk or is it dominated by technical risk?”  Lean Startup/Customer Development is used to find answers to the unknowns about customers and markets. Yet some startups such as Biotech don’t have market risk, instead they are dominated by technical risk. This class of startup needs to spend a decade or so proving that the product works, first in a test tube and then in FDA trials.  Customer Development is unhelpful here.

Lean Startup

Use the Lean Startup - When There's Market Risk

The second question is: “What’s the “Market Type” of your startup? Are you entering an existing market, resegmenting an existing market, or creating an entirely new market?” Market Type affects your spending and sales ramp after you reach product/market fit. Startups who burn through their cash, usually fail by not understanding Market Type.

Market Type Affects Spending and Sales Ramp

The third question (and the one Eric and I came up with watching the people stream by in Times Square): “What is the “Business Model” of your startup?” Your choice of Business Model affects the metrics you use in discovery and validation and the exit criteria for each step.

Slide4

Business Model Affects Metrics and Exit Criteria

Web-based Business Model Exit Criteria
In a web-business model you’re looking for traffic, users, conversion, virality, etc – not revenue. Dave McClure’s AARRR metrics and Andrew Chen‘s specifics on freemium models, viral marketing, user acquisition and engagement both offer examples of exit criteria for Customer Discovery and Validation for startups on the web.

Eric and I will be working on others.

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“Lessons Learned” – A New Type of Venture Capital Pitch

I joined the board of Cafepress.com when it was a startup. It was amazing to see the two founders, Fred Durham and Maheesh Jain, build a $100 million company from coffee cups and T-shirts.

But Cafepress’s most memorable moment was when the founders used a “Lessons Learned” VC pitch to raise their second round of funding and got an 8-digit term sheet that same afternoon.

Here’s how they did it.

Fail Fast and Cheap
Fred and Maheesh had started 9 previous companies in 6 years.  Their motto was: “Fail fast and cheap. And learn from it.” Cafepress literally started in their garage and was another set of experiments only this time it caught fire.  They couldn’t keep up with the orders.

Tell the Story of the Journey
The company got to a point where additional capital was needed to expand just to keep up with the business (a warehouse/shipping center collocated with UPS, etc.) Rather than a traditional VC pitch I suggested that they do something unconventional and tell the story of their journey in Customer Discovery and Validation.  The heart of the Cafepress presentation is the “Lessons Learned from our Customerssection. Their presentation looked like this:

  • Market/Opportunity
  • Lessons Learned Slide 1
  • Lessons Learned Slide 2
  • Lessons Learned Slide 3
  • Why We’re Here

Cafepress Sequioa Pitch-1Telling the Cafepress Customer Discovery and Customer Validation story allowed Fred and Maheesh to take the VC’s on their journey year by year.

Cafepress Sequioa Pitch-2After these slides, these VC’s recognized that this company had dramatically reduced risk and built a startup that was agile, resilient and customer-centric.

Cafepress Sequioa Pitch-3The presentation didn’t have a single word about Lean Startups or Customer Development. There was no proselytizing about any particular methodology, yet the results are compelling.

The VC firm delivered a term sheet for an 8-digit second round that afternoon.

Your results may vary.

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Relentless – The Difference Between Motion And Action

Never mistake motion for action.
-Ernest Hemingway

One of an entrepreneur’s greatest strengths is their relentless pursuit of a goal. But few realize how this differs from most of the population. Watching others try to solve problems reminded me why entrepreneurs are different.

Progress Report
Last week I happened to be sitting in my wife’s office as she was on the phone to my daughter in college. Struggling with one of her classes my daughter had assured us that she was asking for help – and was reporting on her progress (or lack of it).

She had sent several emails to the resource center asking for help. She was also trying to set up a meeting with her professor. All good, and all part of the “when you’re stuck, ask for help” heuristic we taught our kids. But the interesting part for me was learning that in spite of her efforts no one had gotten back to her.

She believed she had done all things that could be expected from her and was waiting for the result.

I realized that my daughter had confused motion with action.

This reminded me of a conversation with one of my direct reports years before my daughter was born.

Status Report
At Ardent the marketing department was responsible for acquiring applications for our supercomputer. This required convincing software vendors to move their applications to our unique machine architecture. Not a trivial job considering our computer was one of the first parallel architectures, and our compiler required specific knowledge of our vector architecture to get the most out of it. Oh, and we had no installed customer base. I had hired the VP of marketing from a potential software partner who was responsible to get all this 3rd party software on our computer. Once he was on board, I sat down with him on a weekly basis to review our progress with our list of software vendors.

Think Different
I still remember the day I discovered that I thought about progress differently than other people. Our conversation went like this:

Me: Jim, how are we doing with getting Ansys ported?
Jim: Great, I have a bunch of calls into them.
Me: How are we doing on the Nastran port?
Jim: Wonderful, they said they’ll get back to me next month.
Me: How about Dyna 3D?
Jim: It’s going great, we’re on their list.

The rest of the progress report sounded just like this.

After hearing the same report for the nth week, I called a halt to the meeting. I had an executive who thought he was making progress. I thought he hadn’t done a damn thing.

Why?

The Difference Between Motion and Action
One of Jim’s favorite phrases was, “I got the ball rolling with account x.” He thought that the activities he was doing – making calls, setting up meetings, etc. – was his job. In reality they had nothing to do with his job. His real job – the action – was to get the software moved onto our machine. Everything he had done to date was just the motion to get the process rolling. And so far the motion hadn’t accomplished anything. He was confusing “the accounting” of the effort with achieving the goal. But Jim felt that since he was doing lots of motion, “lots of stuff was happening.” In reality we hadn’t gotten any closer to our goal than the day we hired him. We had accomplished nothing – zero, zilch, nada. In fact, we would have been better off if we hadn’t hired him as we wouldn’t have confused a warm body with progress.

When I explained this to him, the conversation got heated. “I’ve been working my tail off for the last two months…” When he calmed down, I asked him how much had gotten accomplished. He started listing his activities again. I stopped him and reminded him that I could have hired anyone to set up meetings, but I had brought him in to get the software onto our machine. “How much progress have we made to that goal?”  “Not much,” he admitted.

Entrepreneurs are Relentless
Jim’s goal was to get other companies to put their software on an unfinished, buggy computer with no customers. While a tough problem, not an insurmountable one for an entrepreneur focused on the objective, not the process.

This was my fault. It had taken me almost two months to realize that other people didn’t see the world the same way I did. My brain was wired to focus on the end-point and work backwards, removing each obstacle in my path or going around them all while keeping the goal in sight. Jim was following a different path.

Focused on the process, he defined progress as moving through a step on his to-do list, and feeling like progress was being made when he checked them off. The problem was his approach let others define the outcome and set the pace.

The difference between the two ways of thinking is why successful entrepreneurs have the reputation for being relentless. To an outsider it looks like they’re annoyingly persistent. The reality is that their eyes are on the prize.

Teaching Moment
If you’re not born with this kind of end-goal focus, you can learn this skill.

My wife and I called our daughter back, declared a family “teaching moment,” and explained the difference between motion and action, and asked her what else she could do to get help for class. She realized that more persistence and creativity was required in getting to the right person. The next day, she was in the resource center having figured out how to get the help she needed.

Lessons Learned

  • Most people execute linearly, step by step
  • They measure progress by “steps they did”
  • Entrepreneurs focus on the goal
  • They measure progress by “accomplishing their goals”

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Raising Money Using Customer Development

Getting “funded” is the holy grail for most entrepreneurs. Unfortunately in early stage startups the drive for financing hijacks the corporate DNA and becomes the raison d’etre of the company. Chasing funding versus chasing customers and a repeatable and scalable business model, is one reason startups fail.

This post describes how companies using the Customer Development model can increase their credibility, valuation and probability of getting a first round of funding by presenting their results in a “Lesson Learned” venture pitch.

It should go without saying that this post is not advice, nor is it recommendation of what you should do, it’s simply my observation of how companies using Customer Development positioned themselves to successfully raise money from venture investors.

Product Development – Getting Funded as The Goal
In a traditional product development model, entrepreneurs come up with an idea or concept, write a business plan and try to get funding to bring that idea to fruition. The goal of their startup in this stage becomes “getting funded.” Entrepreneurs put together their funding presentation by extracting the key ideas from their business plan, putting them on PowerPoint/Keynote and pitching the company – until they get funded or exhausted.

Fund Raising.jpg

What are Early Stage VC’s Really Asking?
When you are presenting to a VC there are two conversations going on – the one you are presenting and the one that investors are thinking as they are listening to your presentation. (If they’re not busy looking at their Blackberry’s/iPhone’s.)

A VC listening to your presentation is thinking, “Are you going to blow my initial investment, or are you going to make me a ton of money? Are there customers for what you are building? How many are there?  Now?  Later?” Is there a profitable business model? Can it scale?”  And finally, “Is this a team that can build this company?”

The Traditional VC Pitch
Entrepreneurs who pursue the traditional product development model don’t have customer data to answer these questions. Knowing this venture firms have come up with a canonical checklist of what they would like to see.  A typical pitch to a venture firm might cover:

  • Technology/Product
  • Team
  • Opportunity/Market
  • Customer Problem
  • Business Model
  • Go to Market Strategy
  • Financials

Given that the traditional pitch has no hard customer metrics, (and VC’s don’t demand them,) you get funded on the basis of intangibles that vary from firm to firm: Do you fit the theme or thesis of the venture firm? Did the VC’s like your team? Do they believe you have a big enough vision and market. Did the partner have a good or bad day, etc.  Tons of advice is available on how to pitch, present and market your company.

I believe all this advice is wrong. It’s akin to putting lipstick on a pig.  The problem isn’t your pitch, it’s your fundamental assumption that you can/should get funded without having real customer and product feedback. No amount of learning how to get a VC meeting or improving your VC demo skills will fix the lack of concrete customer data. You might as well bring your lucky rabbits foot to the VC meeting.

Customer Development – Getting Funded After You Find a Repeatable Model
In contrast, if you are following a Customer Development process you have a greater chance of getting listened to, believed and funded.

Just as a refresher.  The first step in Customer Development was Customer Discovery; extracting hypotheses from the business plan and getting the founders out of the building to test the hypotheses in front of customers. Your goal was to preserve your cash while you turned these guesses into facts and searched for a repeatable and scalable sales model. Your proof that you have a business rather than a hobby comes from customer orders or users for your buggy, unfinished product with a minimum feature set.

If you’re following Customer Development you are now raising money because even with this first rev of the product you think you’ve found product/market fit and you want to scale.

Customer Development Fund Raising

What VC’s Really Want But Don’t Know How to Ask For or Get
Mike Maples at Maples Investments observes that the quality of pitches from entrepreneurs get better as you climb the “Hierarchy of Proof.”

  1. On the bottom, and least convincing are statements about your “idea.”
  2. Next are hypothesis – “I think customers will care about x or y “
  3. Better are facts from customers – “We interviewed 30 customers with 20 questions”
  4. Even better is “Customer Validation”– “We just got $50K from a customer” or “we got 100,000 users spending x minutes on our site”
  5. Finally if you’re ever so lucky – “Everyone’s buying in droves and we’re here because we need money to scale and execute”

If you’ve actually been doing Customer Development at a minimum you’re at step 3 or 4.  If not, you don’t have enough data for a VC presentation.  Get out of the building, get some more customer feedback, spin your product and go back and read the book.

“Lessons Learned” – A New Type of VC Pitch
A Customer Development fundraising presentation tells the story of your journey in Customer Discovery and Validation.  While your presentation will cover some of the same ground as the traditional VC pitch, the heart of the presentation is the “Lessons Learned from our Customerssection. The overall presentation looks something like this:

  • Market/Opportunity
  • Team
  • Lessons Learned Slide 1
  • Lessons Learned Slide 2
  • Lessons Learned Slide 3
  • Why We’re Here
IMVU's Original VC Presentation - Will Harvey & Eric Ries

IMVU's Original VC Presentation - Will Harvey & Eric Ries

Here’s What We Thought, What We Did, What We Learned
Notice that each of the “Lessons Learned” slide has three major subheads and a graph:

  • “Here’s What We Thought.”
  • “Here’s What We Did.”
  • Here’s What Happened.”
  • A Progress Graph

Here’s What We Thought is you describing your initial set of hypotheses. Here’s What We Did allows you to talk about building the first-pass of the products minimum feature set. Here’s What Happened is the not so surprising story of why customers didn’t react the way you thought they would. A Progress Graph on the right visually shows how far you’ve come (in whatever units of goodness you’re tracking – revenue, units, users, etc.)

Telling the Customer Discovery and Customer Validation story this way allows you to take VC’s on your journey through all the learning and discovery you’ve done. After three of these slides, smart VC’s will recognize that by iterating on your assumptions you have dramatically reduced risk– on your nickel, not theirs.  They will realize that you have built a startup that’s agile, resilient and customer-centric.

Your presentation doesn’t have a single word about Lean Startups or Customer Development. There is no proselytizing about any particular methodology, yet the results are compelling.

This is a radical departure from a traditional VC pitch. It will blow the minds of 70-80% of investors.  The others will throw you out of their office.

Guaranteed Funding – Not
Will this type of presentation guarantee you funding? Of course not. Even if you have the worlds best Lessons Learned slides you might find out that your particular market (i.e. consumer Internet) might have a really, really high bar of achievement for funding.

In fact, just trying to put three Lessons Learned slides together showing tangible progress will make most startups realize how hard really doing Customer Development is.

Try it.

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Lean Startups aren’t Cheap Startups

At an entrepreneurs panel last week questions from the audience made me realize that the phrase “Lean Startup” was being confused with “Cheap Startup.”

For those of you who have been following the discussion, a Lean Startup is Eric Ries’s description of the intersection of Customer Development, Agile Development and if available, open platforms and open source.

Lean Startups aren’t Cheap Startups
A Lean Startup is not about the total amount of money you may spend over the life of your startup. It is about when in the life of your company you do the spending.

Over its lifetime a Lean Startup may spend less money than a traditional startup. It may end up spending the same amount of money as a traditional startup. And I can even imagine cases where it might burn more cash than a traditional startup.

Lets see why.

The Price of Mistakes are Inversely Proportional to Available Capital
In times of abundant venture capital if you miss your revenue plan, additional funding from your investors is usually available to cover your mistakes – i.e. you get “do-overs” or iterations without onerous penalties (assuming your investors still believe in the technology and vision.) In times when venture capital is hard to get, investors extract high costs for failure (down-rounds, cram downs, new management teams, shut down the company.)

The key contributors to an out-of-control burn rate is 1) hiring a sales force too early, 2) turning on the demand creation activities too early, 3) developing something other than the minimum feature set for first customer ship. Sales people cost money, and when they’re not bringing in revenue, their wandering in the woods is time consuming, cash-draining and demoralizing. Marketing demand creation programs (Search Engine Marketing, Public Relations, Advertising, Lead Generation, Trade Shows, etc.) are all expensive and potentially fatal distractions if done before you have found product/market fit and a repeatable sales model. And most startup code and features end up on the floor as customers never really wanted them.

Therefore when money is hard to come by, entrepreneurs (and their investors) look for ways to reduce cash burn rate and increase the chance of finding product/market fit before waste you bunch of money. The Customer Development process (and the Lean Startup) is one way to do that.

Repeatable and Scalable Sales Model
In Customer Development your goal is not to avoid spending money but to preserve your cash as you search for a repeatable and scalable sales model and then spend like there is no tomorrow when you find one.

This is the most important sentence in this post and worth deconstructing.

  • Preserve your cash: When you have unlimited cash (internet bubbles, frothy venture climate,) you can iterate on your mistakes by burning more dollars. When money is tight, when there aren’t dollars to redo mistakes, you look for processes that allow you to minimize waste. The Customer Development process says preserve your cash by not hiring anyone in sales and marketing until the founders turn hypotheses into facts and you have found product/market fit.
  • As you search: Customer Development observes that when you start your company, all you and your business plan have are hypotheses, not facts –and that the founders are the ones who need to get out of the building to turn these hypotheses into customer data. This “get out of the building” activity is the Customer Discovery step of the Customer Development Model.
Customer Development

Customer Development Model

  • Repeatable: Startups may get orders that come from board members’ customer relationships or heroic, single-shot efforts of the CEO. These are great, but they are not repeatable by a sales organization. What you are searching for is not the one-off revenue hits but rather a repeatable pattern that can be replicated by a sales organization selling off a pricelist or by customers coming to your web site.
  • Scalable: The goal is not to get one customer but many – and to get those customers so each additional customer adds incremental revenue and profit. The test is: If you add one more sales person or spend more marketing dollars, does your sales revenue go up by more than your expenses?
  • Sales model A sales model answers the basic questions involved in selling your product: “Is this a revenue play or a freemium model going for users? Something else? Who’s the customer? Who influences a sale? Who recommends a sale? Who is the decision maker? Who is the economic buyer? Where is the budget for purchasing the type of product you’re selling? What’s the customer acquisition cost? What’s the lead and/or traffic generation strategy? How long does an average sale take from beginning to end? Etc.”
    Finding out whether you have a repeatable, scalable sales model is the Customer Validation step of Customer Development. This is the most important phase in customer development. Have you learned how to sell your product to a target customer? Can you do this without running out of money?
  • Scale like there is no tomorrow The goal of an investor-backed startup is not to build a lifestyle business. The goal is to reach venture-scale (~10x return on investment.) When you and your board agree you’ve found a repeatable and scalable sales model (i.e. have product/market fit,) then you invest the dollars to create end user demand and drive those customers into your sales channel.

If you confuse Lean with Cheap when you do find a repeatable and scalable sales model, you will starve your company for resources needed to scale. Customer Development (and Lean) is about continuous customer contact/iteration to find the right time for execution.

The Customer Development Venture Pitch
At this point I often hear entrepreneurs say, “We don’t have the money to scale. We’ve been running on small investments from friends and family or angels. How do we raise the big bucks?”

How to raise real money with a Customer Development presentation in the next post.

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