Ardent War Story 4: You Know You’re Getting Close to Your Customers When They Offer You a Job

In 1985 Ardent Computer was determined to create a market niche for personal supercomputers. To understand our potential markets, we started by analyzing the marketing literature from Cray Research then crisscrossed the country talking to prospective customers – scientists and researchers in advanced corporate R&D centers and universities – to understand their needs.

A week might start with a visit to the MIT Media Lab, the next day at Princeton in the Aerospace Engineering department, then off to General Motors’ advanced research group, across to the computer science department at the University of Illinois, up to Minneapolis to meet with ETA, Control Data and Cray, and across the country to Seattle to speak with Boeing’s advanced propulsion group before returning to to the geophysics department at Stanford.

Simulation applications
After six months, we hypothesized that our most likely customers were scientists and engineers who used one of five applications: computational fluid dynamics, finite element analysis, computational chemistry and seismic data processing and reservoir simulation.

At Boeing we had learned aircraft designers needed to calculate the airflow and turbulence around wings and engines. Instead of building a new wing to test designs, numerical simulation would allow them to use a supercomputer to build a virtual model of a wing on the screen and use an application called computational fluid dynamics to watch the resulting airflow without ever flying a plane. If they didn’t like what they saw (say the wing had more drag than expected), they could change the design and rerun the simulation.

At General Motors we heard from mechanical engineers who needed to calculate the strength, breaking point and failure modes of structures – everything from piston rods to bumpers. Their interest was easy to understand. Before computer simulation, they would test real objects until they physically broke (or get sued when something important broke, blew up, or collapsed.) Now applications called finite element analysis could calculate these stresses and failure modes on a computer screen.

A third simulation market, this one new and just emerging, allowed biologists to examine how drugs would interact by simulating them on a computer.  A precursor to today’s biotech revolution, these computational chemistry applications allowed the active docking sites of potential drugs to be modeled and tested on a computer screen rather than in a test tube.

Finally, we could see that petroleum engineers at oil companies like Chevron and Exxon were using computers in exploration and extraction with seismic data processing and reservoir simulation, applications which were moving oil companies into the supercomputer age.

Traveling around the country had helped me begin to understand how these customers currently did their work, what journals they read, where they got their funding, what other software they ran on their machines, etc. I came back to the company and described the day-in-the-life of each type of customer.

This was one of the happiest times in my life as a marketer. I had known nothing about supercomputers and numerical simulation applications; now there wasn’t a day that went by that I wasn’t learning something new. As I traveled to some of the most arcane trade shows and conferences (AIAA, SPE, MSC, etc.), my hotel room was stacked with the journals and textbooks about each vertical market just to keep up with the people we were meeting. (I was a marketer, not an engineer and most of the fine points were way over my head – and probably not just the fine points. But reading their literature allowed me to discuss the problems and opportunities with customers.)

My Velvet Painting Period

My Velvet Painting Period

You Know You’re Getting Close to Your Customers When They Offer You a Job
I believed that good marketers used their own products. I got facile enough with a few of the applications that I could even run some of them myself. I could build simple finite element models with Patran and set up a run of the Nastran analysis codes.

Later on in the company’s life I went to give a lunch-time seminar to Chevron’s La Habra research center on the use of graphics supercomputers in petroleum applications. I spoke about the state of the art in computational reservoir simulation and what could be accomplished using finite difference and finite element methods on the new class of machines that were coming from companies like ours.  During the question and answer session my heart was in my throat since like any good marketer, my depth of knowledge was no more than one level away from being a complete idiot. At the end of the talk the head of the research facility came up to me and said, “That was a great talk. We’re glad your company hired a real petroleum engineer to come speak to us. We hate when the sales and marketing types come down and try to get us to buy something.”

For one of the few times in my life I was at a loss for words, and I was completely unprepared for what came next.  “Here’s my card, if you ever want to consider a career in Chevron research. We’d be happy to talk to you.”

Marketing was really fun.

Lessons learned:

  • To sell to customers you need to understand them:  how they work, what they do and what problem you will solve for them.
  • You can’t understand customers from inside your building.

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Vertical Markets 4: Putting it All Together

This post makes sense when you read the previous three vertical markets posts first.

In the last three posts, we drew the relationship of market risk and invention risk with vertical markets and pointed out verticals where customer development would be useful.

Customer Development by Vertical - Click to Enlarge

Customer Development by Vertical - Click to Enlarge

(As a reminder, the Customer Development process says your business plan is just a series of untested hypothesis (unless you’re a domain expert.)  In contrast to simply executing your business plan, the Customer Development process is built on low-cost and continuous learning and iterating.  You take your product vision and get out of your building to turn your hypothesis into facts.  Ultimately you want to see if you can find customers and a market for the product as specified – as early as possible.

Execution by Vertical Market
As the class progressed, students asked how the activities/functions of a startup; (Sales, Marketing, Business Development, Product Development, etc.) would look in each of the verticals. For example, How does sales differ from one market to another?  Is marketing different if you’re in the cleantech business versus medical devices?  How does product development differ in communications hardware versus enterprise software, etc.

Startup activities/functions
So we started by listing the basic startup activities/functions we thought that might differ by vertical market.  Some of these are questions that would be addressed in a business plan.  Others you need to know when you execute the plan.

Here is the list of basic startupactivities/functions our class discussion generated:

  • Opportunity – How big? Where do the ideas come from?
  • Innovation Business Model?  Technology?
  • Customers – Who are the Users? Who are the economic buyers?
  • Market Type – Existing/Sustaining? Niche? Low Cost? New/Disruptive?
  • Competition – Who is the competitor?  Who is the Complementor?
  • Sales – What Channel to reach the customer?
  • Marketing – How do you create end user demand?  Brand?
  • Business Development – What type of partnership or whole product is needed?
  • Customer Development Steps – How do we iterate with customers?
  • Business and Revenue Model – How do we organize to make money?
  • Intellectual Property/Patents – Strategic or Tactical, timing?
  • Regulatory Issues – What are they?
  • Time to Market – How long? 
  • Product Development – How do you engineer it? Waterfall, Agile, Lean?
  • Manufacturing – How do you build it?  Where?
  • Seed and Follow-on Financing – How do your finance it? How much? When?
  • Liquidity – How?  M&A, IPO?

(These are just my checklist list items for students, your list doesn’t have to look like this.)

Building a Chart
We realized that if we wrote the names of the vertical markets across the top of the board, and then the startup functions on the left of the board, we could make a chart that could visually compare what differs across the vertical markets.  Then it would be to discuss the optimum strategy for each of these market segments.

Each week, as the students learned something new about their particular project (what sales channel they should use, who the customer were, what type of manufacturing was appropriate, etc.) we added what they learned to each cell under their market. (This chart is not complete, just representative of what I’m using to teach and will be filling in over time.)

Vertical Market Chart

Template Table 2But even with a partially filled-in chart, you can see what used to be disconnected information is now sorted by vertical market. At a glance, you can see how startup capital needs differ by markets, how distribution channels and demand creation activities differ by market, and even how VC’s assess risk and reward by market. 

It seem evident that success in a startup requires:

  • domain specific knowledge and/or hard won experience
  • and a methodology to acquire that knowledge or experience.

As an exercise, try filling in the chart for your market.

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    Vertical Markets 3: Reducing Risk in Startups

    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.

    Customer Development Diagram

    The Customer Development Model

    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.

    Customer Development by Vertical - Click to Enlarge

    Customer Development by Vertical - Click to Enlarge

    (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.

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    Vertical Markets 2: Customer/Market Risk versus Invention Risk

    This post makes sense when you read the previous vertical markets post first.

    Customer/Market Risk Versus Invention Risk
    One day I was having lunch with a VC sharing what I learned from my students. “Steve,” he said, “you’re missing the most interesting part of vertical markets.  Our firm has a portfolio of companies across a broad range of markets and the way we look at it is pretty simple – the deals fall into two types: those with customer/market risk and those with invention risk.”

    Markets with Invention Risk are those where it’s questionable whether the technology can ever be made to work – but if it does customers will beat a path to the company’s door. 

    Markets with Customer/Market Risk are those where the unknown is whether customers will adopt the product.

    Based on this insight, I updated my earlier diagram to look like this.  (The line is just a first approximation, nothing hard and fast about it.)

    Invention Risk

    Market Risk vs. Invention Risk - Click to Enlarge

    For companies building web-based products, product development may be difficult, but with enough time and iteration engineering will eventually converge on a solution and ship a functional product – it’s engineering, not invention. The real risk in markets like Web 2.0 is whether there is a customer and market for the product as spec’d.  In these markets it’s all about customer/market risk.

    There’s a whole other set of markets where the risk is truly invention. These are markets where it may take 5 or even 10 years to get a product out of the lab and into production. (Whether it will eventually work no one knows, but the payoff could be so large, investors will take the risk.)  If the product does work, and say we’ve developed a drug that cures a type of cancer, your only problem is how big is the licensing deal going to be – not about whether there will be customers. In these markets it’s all about invention risk.

    A third type of market has both invention and market risk.  For example, complex new semiconductor architectures, (i.e. a new type of graphics architecture, or a new communications chip architecture) mean you may not know if the chip performs as well as you thought until you get first silicon.  But then, because there might be entrenched competitors and your concept is radically new, you still need to invest in the customer development process to learn how to get design wins from companies who may be happy with their existing vendors.

    The implications for entrepreneurs is that each of these (market risk versus invention risk,) require radically different financing models, a different type of venture investor, different timing for hiring sales and marketing, etc.

    I now advise entrepreneurs to add these questions to their checklist when they start a company:

    • Am I in a “customer/market risk” company?
    • Am I in a company with “invention risk?
    • Or does my company have both types of risk?
    • How would that change my company strategy?

    We’ll talk about how to reduce risk in each type of market in the next post.

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    Vertical Markets 1: Bad Advice – All Startups are the Same

    In the past entrepreneurship was viewed (and taught) as a single process, with a single approach to creating a business plan and securing funding for a startup.  The best entrepreneurship textbooks and blogs assume that advice to startups is generalizable.  But as I learned from my students this “one-size-fits-all” approach does not work for all startups.  Different market opportunities present radically different startup risks and costs.

    Capital Requirements
    In my class students form teams and spend a semester building a detailed plan for a company. When I started teaching I launched project teams with this advice: All you need is a half a million dollars to start a company and at most a few million more to scale the company.” And the students nodded, OK, yes sir, and they wrote down, “a half a million bucks to start.”

    The next week in class a project group raised their hands and said, “Hey, Professor Blank, we found out the common wisdom in the biotech business is that “we need $10-20 million just for the R&D phase and 100’s of million to get through clinical trials.”

    “Of course,” I said, “Life science is completely different. The time to product and scale of investment is radically different than other startup markets.”

    Intellectual Property
    At the next class I said, “You all ought to get out and start talking to customers on day one, and get early feedback on your idea. You don’t need to worry about any Intellectual Property (IP) issues. Just get out of the building.”

    The next week another team, working on a new type of solid oxide fuel cell, remarked, “Professor Blank, in our industry there’s a ton of patents and stuff and people tell us we shouldn’t be out there unless we start patent protecting all our IP.”

    “Oops,” I said, “you’re right.  In clean tech nanomaterials you guys need to be talking to patent attorneys.  Don’t share the details of your manufacturing process with customers until you’ve locked up your intellectual property.”

    Government Regulations
    I turned to the class and said, “The rest of you can keep building your company and shipping your product because you don’t need to worry about government regulations. You’re a startup, just get your product out the door.”

    The next week another group raised their hands, “Professor Blank, we’re building a medical device and there’s something called the 510K that the FDA requires, and that’s a two-year process.”

    Verticals Are Different
    I began to realize that entrepreneurs (and their professors) act like every vertical market and industry has the same set of rules. The guidelines I had originally proposed to my students worked for enterprise software or Web 2.0 startups, but medical device, biotech and cleantech startups required radically different approaches.

    So the first heuristic is: do not assume the startup rules are the same for all vertical markets.

    Now when my students begin their team projects, I list 13 vertical markets on the whiteboard.  Just for discussion, the markets I chose were:

    • Web 2.0,
    • enterprise software
    • enterprise hardware
    • communications software
    • communications hardware
    • consumer electronics
    • games software
    Vertical Markets

    Vertical Markets - Click to Enlarge

    • semiconductors
    • Electronic Design Automation (EDA)
    • clean tech
    • medical devices
    • life sciences
    • personalized medicine

    There’s nothing special about this list other than it represents a diverse set of markets.  If your market is missing, just add it as we go through this discussion.

    Entrepreneurs who have experience in the vertical market they’re entering do this analysis automatically. If you don’t have deep knowledge of the domain you are about to start a business in, you need to begin by understanding the answers to questions like these:

    • What vertical market are you in?
    • Do you have domain expertise in your market?
    • Do you have advisors who are domain experts in your market?
    • Do your potential investors understand your market?
    • What is it that’s unique about the market I’m in?

    We’ll talk about the implications of what vertical market you’re entering in the next few posts. 

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