Steve Blank

Sometimes what sounds like bad news when talking to customers might be your finest hour.

Hypothesis Testing
As we started E.piphany, we got out of the building to test our hypotheses by talking to potential customers in and around Silicon Valley. On one of our most memorable visits, we met with Joe DiNucci, the VP of Marketing at Silicon Graphics who was generous enough to brainstorm the types of problems corporate marketers had. At the time Silicon Graphics – with 2+ billion dollars in sales of 3d workstations – was one of the hottest hardware companies in Silicon Valley.

The conversation seemed to click as he checked off every one of the issues we thought might define our product:  no closed-loop between expensive marketing activities and results, lack of department and corporate wide visibility to real-time sales and marketing data, browser versus client-server application, etc. We came up with a rough estimate of how much Silicon Graphics could save if they had a way to solve these problems, and together did a back of the napkin ROI (Return on Investment) analysis. Next we started enumerating what form a solution might take and what kind of features a product should have. Amazingly we came up with a feature list that was pretty close to the one we were building.  I was feeling like a genius so I went to the next step and I asked Joe: “It sounds like Silicon Graphics might be interested in working with us to be an early customer?”

My Bubble Burst
The answer was not what I expected.  “No not at all.”  Say, what?  Why?  “We also decided that this was an important problem to solve, and since we couldn’t find any vendor selling it, my director of marketing wrote the software to do it. We’ve built and deployed the product throughout Silicon Graphics. It’s called Mine Your Own Business.”

Talk about feeling your bubble deflate fast. I went from feeling the high of believing that I might have an early customer in an innovative company to the low in realizing that they’d never buy anything from us. And worse, what we had envisioned as a product so unique that no one had thought of it, someone had already built. We wouldn’t be the first. We were doomed.

I left Silicon Graphics feelings discouraged. But on the drive back to E.piphany a few things hit me.

• A credible customer told me that we had hit on a high-value problem
• They couldn’t find commercial software to solve this problem.
• It was an important enough problem that they invested effort to write their own software.
• It had been deployed inside their company and there were real world users
• I could now point potential investors and visionary customers to the widespread use of the product inside SGI as a proxy for our product

The more I thought about it, the better I felt. This was a validation of our ideas not a negation.

Take No Prisoners
The next day I called the VP of Marketing back and asked him if I could get a demo of their software. Soon I was in the office of John McCaskey, the director of Silicon Graphics Science Industry Marketing who wrote Mine Your Own Business. As he went through the demo, I realized I was looking at working code for a big part of what we had spec’d as our first release.

I told John he ought to join our startup. “How many of you are there?” he asked. “Three, I said. “Including me. Four if we count you.” John rolled his eyes and tried to change the subject. I said, “We’re three now, but if we do this right we could be selling $100 million dollars a year of your software. Wouldn’t you rather be doing that than working at a big company?” That got his attention. “Well who’s funding you?” My turn to pause, “Well no one yet, but every VC thinks it’s a great idea.”

Watching someone rolling their eyes twice is not a good sign you’re going to close the deal, so I grabbed the phone and called Bill Davidow, a legendary VC whose office I had just left. “Bill, do me a favor,” I asked, “Can you tell this guy how big the enterprise software market can get?”  I don’t know who was more surprised, Bill Davidow in getting a call from me (since he had just told me he wasn’t going to invest in our new company – his firm having funding Rocket Science, the previous company I had just cratered) or John having watched me get the VC on the phone on the first ring (pure and unadulterated luck.) Bill was kind enough to spend a couple of minutes educating John about the opportunities for a startup like ours, and enough of a gentleman not to mention he had passed on our deal.

Thirty days later John became the fourth co-founder of E.piphany.

Sixty days later we convinced Silicon Graphics to license us all of John’s code for a dollar. (During the craziness of the Internet bubble E.piphany’s market cap would be greater than Silicon Graphics.)

John’s boss, Joe DiNucci, the VP of Marketing of Silicon Graphics became E.piphany’s VP of Sales.

Lessons Learned

• Finding that a potential customer wrote their own software (or hardware) to solve a problem is good news, not bad
• It’s a strong sign that there’s a high-value problem
• ABR – Always Be Recruiting

Filed under: E.piphany | 10 Comments »

In my 21 years of startups, I had my ideas “stolen” twice. See part one for the first time it happened. This time it was serious.

As a reminder, this post is not legal advice, it’s not even advice. It’s just a story about what happened to me.

Customer Development
We were starting Epiphany, my last company. I was out and about in Silicon Valley doing what I would now call Customer Discovery trying to understand how marketing departments in large corporations worked. The initial hypothesis for Epiphany (from my much smarter partner Ben) was that as departments in the enterprise (manufacturing, finance, customer support sales) became automated, the marketing department would eventually get its turn.

I remember presenting our ideas for Marketing Automation to one VP of Marketing in a large Silicon Valley company. His enthusiastic response was, “This will revolutionize marketing departments!” He continued: “I’d like to convince my boss so our company can be your first customer.” I should have been suspicious when he said, “I’d like to take a copy of your presentation to show him.” Caught up in the enthusiasm of hearing what a great idea we had, I violated one of my cardinal rules, and left him a hard copy.

Fast Forward
Fast forward nine months. After talking to tons of customers and almost as many VC’s, we got Epiphany funded as a company that was going to automate Marketing Departments. After a ton of unreturned phone calls, I had written off the enthusiastic VP of Marketing who wanted to show my slides to his boss and moved on with building our company.

By now we had found a few customers and learned a lot more about the market from them and other prospects. Our business model changed as we realized that to become a large company, we needed to automate more than just a few marketers. As we were out looking for our Series B round, our company had gotten the attention of “name of big VC firm here” who wanted a play in enterprise software.

Are These Your Slides?
During the due-diligence process, I sat down with one of the partners who pulled out a set of slides and asked me: ”Have you seen these?”  I quickly leafed through them and replied, “Sure they’re our original slides. Why?” He said, “Look again.” They had all my words from a year ago, but hey wait a minute, there’s someone else’s logo on my slides?! What’s going on?  He said, “That’s what we’re trying to figure out.  These guys just got funded, and they sound a lot like you guys.”  Luckily I had the original slides and could prove who came first. Still the fact was a competitor had raised money using our idea and our slide deck.

And who was this competitor? The VP of Marketing who a year earlier had wanted a hard copy of our slides. He was now CEO of a new company in our market.

I felt like I had just been kicked in the stomach.

Disbelief, Anger, Resignation and Acceptance
My cofounders and I went through the stages of disbelief, anger, resignation and acceptance. Here was a competitor who had appropriated our idea and gotten funded. (Welcome to the Internet bubble.) There was lots of venting as we talked about lawsuits and issuing nasty press releases.

We consciously didn’t ask potential customers to sign a Non-Disclosure Agreement (NDA). In Customer Discovery we were learning as much from them as they did from us. And we figured that unless litigation was going to be our business strategy, NDA’s would have inhibited the back-and-forth that made us smarter. We concluded that, at least for us in this market, an NDA would be a bigger impediment than asset. Now we started asking ourselves, “Did we make a mistake?  Would have getting a signed confidentially agreement deterred this person?” On further reflection, (and their track record since) not in the least. But that still left us with a problem. What should we do about this competitor copying our strategy?

Finally, we concluded, “You can’t drive forward by looking in the rear-view mirror.”

Our competitor was executing on hypotheses we had developed 9 months ago, and their strategy remained static. We on the other hand, had moved on. We had discovered detailed information about what customers really needed and wanted and turned our original hypotheses into facts. We had validated our new assumptions by a set of orders, and we had pivoted on our business model. Our original idea had been nothing more than an untested set of hypotheses. Truth be told, we were no longer the company in those stolen slides.

While the common wisdom said that our success was going to be determined by which company executed better, the common wisdom was wrong. In a startup success isn’t about just execution, it’s how well we could take our original hypothesis and learn, discover, iterate and execute.

Never Get Even, Get Ahead
With a set of orders from brand name customers, we had growing confidence that we had achieved product/market fit. We were within three months of formally announcing our company and products at a major industry trade show. We made sure our competitor knew this. In fact, we made sure they knew what day at the show we were going to announce. Just as we predicted, they picked the day before us for their announcement in an effort to preempt our company launch with theirs. We made sure they heard how shocked and upset we were that they were going to beat us to an announcement in our market.

Our competitor announced on a Monday solidifying their position in the small market we had abandoned because we realized it was unprofitable and would not scale.

We announced the next day, positioned as a player in a much larger and broader market with new positioning, strategy and customers.

Our copycat competitor was now publicly locked into a company and product strategy that was obsolete and untenable.

Over the next two years we left them in the dust.

———

While how you iterate and execute your idea is more important than the idea itself, there are parts of your intellectual property a startup does need to protect. More on this in the next post.

Lessons Learned

• Your business concept is not a company. Lots of people have ideas. Typically they are just a set of untested hypotheses.
• Successful companies are about the learning, discovery, iteration on your initial ideas. If someone can do a better job iterating hypotheses and executing than you can, you deserve to fail.
• No business plan survives first contact with customers
• The real value is finding the product/market fit.  That’s not found in a set of slides.

Filed under: E.piphany | 27 Comments »