Ardent 2: Get Out of My Building

Some of the most important business lessons are learned in the most unlikely ways. At Ardent I learned many of them with a sharp smack on the side of the head from a brilliant but abusive boss. Not a process I recommend, but one in which the lessons stuck for a lifetime. (Read the previous Ardent post for context.)

Lessons to Learn
By the time I joined Ardent I thought I was an experienced marketer, but I’ll never forget my first real lesson in what it meant to understand customers and product/market fit.

We were sitting in our conference room in our first “system-planning meeting”  trying to define the specifications of our new supercomputer and make the trade-offs between what was possible to build, and what customers in this new market would actually want and need. The conversation that day would become one of my professional watermarks.

Marketing is Heard From
Engineering was discussing how sophisticated the graphics portion of our computer should be, debating cost and time-to-market tradeoffs of arcane details such as double-buffering, 24 versus 32-bits of color, alpha channels, etc. I was pleased with myself that not only did I understand the issues, but I also had an opinion about what we should build. All of a sudden I decided that I hadn’t heard the sound of my own voice in a while  so I piped up:  “I think our customers will want 24-bits of double-buffered graphics.”

Silence descended across the conference table. The CEO turned to me and asked “What did you say?” Thinking he was impressed with my mastery of the subject as well as my brilliant observation, I repeated myself and embellished my initial observation with all the additional reasons why I thought our customers would want this feature. I was about to get an education that would last a lifetime.

Picture the scene: the entire company (all 15 of us) are present. For this startup we had assembled some of the best and brightest hardware and software engineers in the computer industry. My boss, the CEO, had just come from a string of successes at Convergent Technologies, Intel and Digital Equipment, names that at that time carried a lot of weight. Some of us had worked together in previous companies; some of us had just started working together for the first time.  I thought I was bright, aggressive and could do no wrong as a marketer. I loved my job and I was convinced I was god’s gift to marketing. Now in a voice so quiet it could be barely heard across the conference table our CEO turns to me and says, “That’s what I thought you said. I just wanted to make sure I heard it correctly.”  It was the last sentence I heard before my career trajectory as a marketer was permanently changed.

Get Out of My Company
At the top of his lungs he screamed, “You don’t know a damn thing about what these customers need!  You’ve never talked to anyone in this market, you don’t know who they are, you don’t know what they need, and you have no right to speak in any of these planning meetings.”  I was mortified with the dressing down in front of my friends as well as new employees I barely knew. Later my friends told me my face went pale. He continued yelling, “We have a technical team assembled in this room that has more knowledge of scientific customers and scientific computers than any other startup has ever had. They’ve been talking to these customers since before you were born, and they have a right to have an opinion. You are a disgrace to the marketing profession and have made a fool of yourself and will continue to do so every time you open your mouth. Get out of this conference room, get out of this building and get out of my company; you are wasting all of our time.”

I was stunned by the verbal onslaught. At that moment I felt so small I could have walked out of a room underneath the crack in a closed door.

Facts Not Opinions
The shock quickly wore off as I processed the gist of what he told me. He was right.  I personally didn’t have any facts, and if we were counting opinions, there were a bunch more educated opinions in that room than I had. All I had been doing was filling the air with marketing noises.

I was convinced that I had just been humiliatingly fired – 90 days into our new company.

Get Out of the Building
As I got up to leave the room, the CEO said, “I want you out of the building talking to customers; find out who they are, how they work, and what we need to do to sell them lots of these new computers.” Motioning to our VP of Sales, he ordered: “Go with him and get him in front of customers, and both of you don’t come back until you can tell us something we don’t know.”

And he was smiling.

My career as marketer had just begun.

Lessons learned:

  • Corporate culture is either set by fiat, by default, or by consensus. But regardless of how it gets set, it gets set early
  • An intelligent opinion is still a guess
  • The dumbest person with a fact trumps anyone with an opinion
  • There are no facts inside the building so get the heck outside

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to FurlAdd to Newsvine

Customer Development Manifesto: The Path of Warriors and Winners (part 5)

The first four posts of the Customer Development Manifesto described the failures of the Product Development model. This post describes a solution – the Customer Development Model. In future posts I’ll describe how Eric Ries and the Lean Startup concept provide the equivalent model for product development activities inside the building and neatly integrates customer and agile development.

Most startups lack a process for discovering their markets, locating their first customers, validating their assumptions, and growing their business. A few successful ones do all these things. The difference is that the ones that succeed invent a Customer Development model. This post describes such a model.

The Customer Development Model
Customer Development is designed to solve the problems of the Product Development model I described in the four previous posts.  Its strength is its rigor and flexibility. The Customer Development model delineates all the customer-related activities in the early stage of a company into their own processes and groups them into four easy-to-understand steps: Customer Discovery, Customer Validation, Customer Creation, and Company Building. These steps mesh seamlessly and support a startup’s ongoing product development activities. Each step results in specific deliverables.

The Customer Development model is not a replacement for the Product Development model, but rather a companion to it.  As its name should communicate, the Customer Development model focuses on developing customers for the product or service your startup is building.

The Customer Development Model

The Customer Development Model

Four Steps
While startups are inherently chaotic (and will never be run from a spreadsheet or checklist inside your building,) the Four Steps of Customer Development are designed to help entrepreneurs leverage the chaos and turn it into actionable data;

  • Customer Discovery focuses on testing hypotheses and understanding customer problems and needs – in front of customers – by the founders
  • Customer Validation is where you develop a sales model that can be replicated and scaled
  • Customer Creation is creating and driving end user demand to scale sales
  • Company Building transitions the organization from one designed for learning and discovery to a well-oiled machine engineered for execution.

Market Type
Integral to the Customer Development model is the notion that Market Type choices affect the way the company will deploy its sales, marketing and financial resources. Market Type changes how you evaluate customer needs, customer adoption rate, how the customer understands his needs and how you should position the product to the customer, etc. As a result different market types modify what you do in in each step of Customer Development.

Customer Development is Iterative
Learning and discovery versus linear execution is a major difference between this model and the traditional product development model. While the product development model is linear in one direction, the customer development model is a circular track with recursive arrows.The circles and arrows highlight the fact that each step in Customer Development is iterative. That’s a polite way of saying, “Unlike product development, finding the right customers and market is unpredictable, and we will screw it up several times before we get it right.” (Only in business school case studies does progress with customers happen in a nice linear fashion.) The nature of finding a market and customers guarantees that you will get it wrong several times.

The Customer Development model assumes that it will take several iterations of each of the four steps until you get it right. It’s worth pondering this point for a moment because this philosophy of “It’s OK to screw it up if you plan to learn from it”  is the heart of the methodology.

The Facts Reside Outside Your Building
Customer Development starts by testing your hypotheses outside the building. Not in planning meetings, not in writing multiple pages of nicely formatted Marketing Requirements Documents, but by getting laughed at, ignored, thrown out and educated by potential customers as you listen to their needs and test the fundamental hypotheses of your business.

Failure Is an Option
Notice that the circle labeled Customer Validation in the diagram has an additional iterative loop going back to Customer Discovery. As you’ll see later, Customer Validation is a key checkpoint in understanding whether you have a product that customers want to buy and a road map of how to sell it. If you can’t find enough paying customers in the Customer Validation step, the model returns you to Customer Discovery to rediscover what you failed to hear or understand the first time through the loop.

Customer Development is Low Burn by Design
The Customer Development process keeps a startup at a low cash burn rate until the company has validated its business model by finding paying customers. In the first two steps of Customer Development, even an infinite amount of cash is useless because it can only obscure whether you have found a market. (Having raised lots of money tempts you to give products away, steeply discount to buy early business, etc., all while saying “we’ll make it up later.”  It rarely happens that way.) Since the Customer Development model assumes that most startups cycle through these first two steps at least twice, it allows a well-managed company to carefully estimate and frugally husband its cash. The company doesn’t build its non-product development teams (sales, marketing, business development) until it has proof in hand (a tested sales road map and valid purchase orders) that it has a business worth building. Once that proof is obtained, the company can go through the last two steps of Customer Creation and Company Building to capitalize on the opportunity it has found and validated.

Customer Development is For Winners and Warriors
The interesting thing about the Customer Development model is that the process represents the best practices of winning startups. Describe this model to entrepreneurs who have taken their companies all the way to a large profitable business, and you’ll get heads nodding in recognition. It’s just that until now, no one has ever explicitly mapped their journey to success.

Even more surprising, while the Customer Development model may sound like a new idea for entrepreneurs, it shares many features with a U.S. war fighting strategy known as the “OODA Loop” articulated by John Boyd and adopted by the U.S. armed forces in both Gulf Wars – and by others.

The next post provides more details about each of the four steps in the Customer Development model.

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to FurlAdd to Newsvine

Customer Development Manifesto: Market Type (part 4)

This series of posts of the “Customer Development Manifesto” describes how the failures of the Product Development model for sales and marketing led to the Customer Development Model. In future posts I’ll describe 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.

13. Not All Startups Are Alike
There’s an urban legend that Eskimos-Aleuts have more words to describe snow than other cultures. While that’s not true, it is a fact that entrepreneurs only have one word for “startup.”  This post points out that the lack of adequate words to describe very different “types” of startups can lead not only to confusion in execution but also at times to disaster.

The product development model treats all startups like they are in an Existing Market – an established market with known customers. With that implicit assumption, startups hire a VP of Sales with a great rolodex and call on established mainstream companies while marketing creates a brand and buzz to create demand and drive it into the sales channel (web, direct salesforce, etc.)

Most startups following the Product Development Model never achieve their revenue plan and burn through a ton of cash not knowing what hit them.

They never understood Market Type.

Why does Market Type matter?
Depending on the type of market it enters, a startup can have very different rates of customer adoption and acceptance and their sales and marketing strategies would be dramatically different. Even more serious, startups can have radically different cash needs.  A startup in a New Market (enabling customers to do something they never could before,) might be unprofitable for 5 or more years, (hopefully with the traditional hockey stick revenue curve,) while one in an Existing Market might be generating cash in 12-18 months.

Handspring in a Existing Market
As an example, imagine it’s October 1999 and you are Donna Dubinsky the CEO of a feisty new startup, Handspring, entering the billion dollar Personal Digital Assistant (PDA) market.  Other companies in the 1999 PDA market were Palm, the original innovator, as well Microsoft and Hewlett Packard.  In October 1999 Donna told her VP of Sales, “In the next 12 months I want Handspring to win 10% of the Personal Digital Assistant market.”  The VP of Sales swallowed hard and turned to the VP of Marketing and said, “I need you to take end user demand away from our competitors and drive it into our sales channel.”  The VP of Marketing looked at all the other PDAs on the market and differentiated Handspring’s product by emphasizing its superior expandability and performance.  End result?  After twelve months Handspring’s revenue was $170 million.  This was possible because in 2000, Donna and Handspring were in an Existing Market.  Handspring’s customers understood what a Personal Digital Assistant was. Handspring did not have to educate them about the market. They just need to persuade customers why their new product was better than the competition – and they did it brilliantly.

Palm in a New Market
What makes this example really interesting is this: rewind the story 4 years earlier to 1996. Before Handspring, Donna and her team had founded Palm Computing, the pioneer in Personal Digital Assistants. Before Palm arrived on the scene, the Personal Digital Assistant market did not exist. (A few failed science experiments like Apple’s Newton had come and gone.) But imagine if Donna had turned to her VP of Sales at Palm in 1996 and said, “I want to get 10% of the Personal Digital Assistant market by the end of our first year.”  Her VP of Sales might had turned to the VP of Marketing and said, “I want you to drive end user demand from our competitors into our sales channel.” The VP of Marketing might have said, “Let’s tell everyone about how fast the Palm Personal Digital Assistant is and how much memory it has.”  If they had done this, there would have been zero dollars in sales.  In 1996 no potential customer had even heard of a Personal Digital Assistant.  Since no one knew what a PDA could do, there was no latent demand from end users, and emphasizing its technical features would have been irrelevant. What Palm needed to do first was to educate potential customers about what a PDA could do for them. In 1996 Palm was selling a product that allowed users to do something they couldn’t do before. In essence, Palm created a New Market. In contrast, in 2000 Handspring entered an Existing Market. (“Disruptive” and “sustaining” innovations, eloquently described by Clayton Christensen, are another way to describe new and existing Market Types.)

The lesson is that even with essentially identical products and team, Handspring would have failed if it had used the same sales and marketing strategy that Palm had used so successfully. And the converse is true; Palm would have failed, burning through all their cash, using Handspring’s strategy.  Market Type changes everything.

Market Type Changes Everything
Here’s the point. Market Type changes how you evaluate customer needs, customer adoption rate, how the customer understands his needs and how you should position the product to the customer. Market Type also affects the market size as well as how you launch the product into the market. As a result different market types require dramatically different sales and marketing strategies.

As a result, the standard product development model is not only useless, it is dangerous. It tells the finance, marketing and sales teams nothing about how to uniquely market and sell in each type of startup, nor how to predict the resources needed for success.

—–

Next: Part 5 of the Customer Development Manifesto – why your goals and those of your venture investors may not be the same –  the last post on what’s broken in the Product Development Model.

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to FurlAdd to Newsvine

The Customer Development Manifesto: The Startup Death Spiral (part 3)

This post is part 3 of the “Customer Development Manifesto” series and makes more sense if you read part 1 and part 2.

This post describes how following the traditional product development can lead to a “startup death spiral.”  In the next posts that follow, I’ll describe how this model’s failures led to the Customer Development Model – offering a new way to approach startup sales and marketing activities. 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.

12. The Startup Death Spiral: The Cost of Getting Product Launch Wrong
By the time of first customer ship, if a startup does not understand its market and customers, failure unfolds in a stylized ritual, almost like a Japanese Noh play.

Three to six months after first customer ship, if Sales starts missing its numbers, the board gets concerned. The VP of Sales comes to a board meeting, still optimistic, and provides a set of reasonable explanations – “our pipeline looks great, but orders will close next quarter” or “we’ve got lots of traffic to our site, we just need to work on conversion.” The board raises a collective eyebrow. The VP of Sales goes back and exhorts the troops to work harder.

To support sales, Marketing tries to “make up a better story,” and the web site and/or product presentation slides start changing (sometimes weekly or even daily). Morale in Sales and Marketing starts to plummet.

Meanwhile, if you have a direct sales force smart salespeople realize that the sales strategy and marketing materials the company headquarters provided don’t work. Each starts inventing and testing their own alternatives about how to sell and position the product. They try different customers, different customer contacts, different versions of the presentations, etc. Instead of a Sales team and organized to sell with a consistent and successful sales roadmap generating revenue, it is a disorganized and unhappy organization burning lots of cash.

You’re Just Not Selling it Right
By the next board meeting, the VP of Sales looks down at his shoes and shuffles his feet as he reports that the revenue numbers still aren’t meeting plan. Now the board collectively raises both eyebrows and looks quizzically at the CEO. The VP of Sales, forehead bathed in sweat, leaves the board meeting and has a few heated motivational sessions with the sales team.

Fire the First VP of Sales
By the next board meeting, if the sales numbers are still poor, the stench of death is in the air.  No one wants to sit next to the VP of Sales. Other company execs are moving their chairs to the other side of the room. Having failed to deliver the numbers, he’s history. Whether it takes three board meetings or a year is irrelevant; the VP of Sales in a startup who does not make the numbers is called an ex-VP of Sales.

Now the company is in crisis mode. Not only hasn’t the sales team delivered the sales numbers, but now the CEO is sweating because the company is continuing to burn cash at what now seems like an alarming rate. Why is it only alarming now? Because the company based its headcount and expenses on the expectation that the Sales organization will bring in revenue according to plan. The rest of the organization (product development, marketing, support) has been burning cash, all according to plan, expecting Sales to make its numbers. Without the revenue to match its expenses, the company is in now danger of running out of money.

Blame it On Marketing
In the next 3-6 months, a new VP of Sales is hired. She quickly comes to the conclusion that the company’s positioning and marketing strategy were incorrect. There isn’t a sales problem, the problem is that marketing just did not understand its customers and how to create demand or position the product.

Now the VP of Marketing starts sweating. Since the new VP of Sales was brought on board to “fix” sales, the marketing department has to react and interact with someone who believes that whatever was created earlier in the company was wrong. The new VP of Sales reviews the sales strategy and tactics that did not work and comes up with a new sales plan. She gets a brief honeymoon of a few months from the CEO and the board.

In the meantime, the original VP of Marketing tries to come up with a new positioning strategy to support the new Sales VP. Typically this results in conflict, if not outright internecine warfare. If the sales aren’t fixed in a short time, the next executive to be looking for a job will not be the new VP of Sales (she hasn’t been around long enough to get fired), it’s the VP of Marketing—the rationale being “We changed the VP of Sales, so that can’t be the problem. It must be Marketing’s fault.”

Time for an Experienced CEO
Sometimes all it takes is one or two iterations to find the right sales roadmap and marketing positioning that connects a startup with exuberant customers ready to buy. Unfortunately, more often than not, this is just the beginning of an executive death spiral. If changing the sales and marketing execs doesn’t put the company on the right sales trajectory, the investors start talking the “we need the right CEO for this phase” talk. This means the CEO is walking around with an unspoken corporate death sentence. Moreover, since the first CEO was likely to have been one of the founders, the trauma of CEO removal begins. Typically, founding CEOs hold on to the doorframe of their offices as the investors try to pry their fingers off the company. It’s painful to watch and occurs in a majority of startups with first-time CEOs after First Customer Ship.

In flush economic times the company may get two or three iterations to fix a failed launch and bad sales numbers. In tougher times investors are tighter with their wallets and make the “tossing good money after bad” calculations with a more frugal eye. A startup might simply not get a next round of funding and have to shut down.

Any of this sound familiar? Part 4 of the Customer Development Manifesto to follow.

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to FurlAdd to Newsvine

The Customer Development Manifesto: Reasons for the Revolution (part 2)

This post makes more sense if you read part 1 of the Customer Development Manifesto.

This post describes how the traditional product development model distorts startup sales, marketing and business development.  In the next few posts that follow, I’ll describe how thinking of a solution to this model’s failures led to the Customer Development Model – that offers a new way to approach startup sales and marketing activities. 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.

8. The Lack of Meaningful Milestones for Sales, Marketing and Business Development
The one great thing about the product development methodology is that it provides an unambiguous structure with clearly defined milestones. The meaning of alpha test, beta test, and first customer ship are pretty obvious to most engineers. In contrast, sales and marketing activities before first customer ship are adhoc, fuzzy, and don’t have measurable, concrete objectives. They lack any way to stop and fix what’s broken (or even to know if it is broken.)

What kind of objectives would a startup want or need for sales and marketing? Most sales executives and marketers tend to focus on execution activities because at least these are measurable. For example, some startup sales execs believe hiring the core sales team is a key objective. Others focus on acquiring early “lighthouse” customers (prominent customers who will attract others.) Once the product begins to ship, startup sales execs use orders and revenue as its marker of progress in understanding customers. (Freemium models have their own scorekeeping.) Marketers believe creating a killer web presence, corporate presentation, are objectives. Some think that hiring a PR agency, starting the buzz and getting coverage in hot blogs or on  the cover of magazines at launch are objectives.

While these objectives provide an illusion of progress, in reality they do little to validate the business plan hypotheses about customers and what they will buy. They don’t help a startup move toward a deep understanding of customers and their problems, discovering a repeatable road map of how they buy, and building a financial model that results in profitability.

9. The Use of a Product Development Model to Measure Sales
Using the product development diagram for startup sales activities is like using a clock to tell the temperature. They both measure something, but not the thing you wanted.

Here’s what the product development diagram looks like from a sales perspective.

Sales

A VP of Sales looks at the diagram and says, “Hmm, if beta test is on this date, I’d better get a small sales team in place before that date to acquire my first ‘early customers.’ And if first customer ship is on this date over here, then I need to hire and staff a sales organization by then.” Why? “Well, because the revenue plan we promised the investors shows us generating customer revenue from the day of first customer ship.”

I hope this thinking already sounds inane to you. The plan calls for selling in volume the day Engineering is finished building the product. What plan says that? Why, the business plan, crafted with a set of hypotheses now using the product development model as a timeline for execution. This approach is not predicated on discovering the right market or learning whether any customers will actually shell out cash for your product. Instead you use product development to time your readiness to sell. This “ready or not, here we come” attitude means that you won’t know if the sales strategy and plan actually work until after first customer ship. What’s the consequence if your stab at a sales strategy is wrong? You’ve built a sales organization and company that’s burning cash before you know if you have demand for your product or a repeatable and scalable sales model. No wonder the half-life of a startup VP of Sales is about nine months post first customer ship.

“Build and they will come” is not a strategy, it’s a prayer.

10. The Use of a Product Development Model to Measure Marketing
The head of Marketing looks at the same product development diagram and sees something quite different.

Marketing

For Marketing, first customer ship means feeding the sales pipeline with a constant stream of customer prospects. To create this demand at first customer ship, marketing activities start early in the product development process. While the product is being engineered, Marketing begins to create web sites, corporate presentations and sales materials. Implicit in these materials is the corporate and product “positioning.” Looking ahead to the product launch, the marketing group hires a public relations agency to refine the positioning and to begin generating early “buzz” about the company. The PR agency helps the company understand and influence key bloggers, social networks, industry analysts, luminaries, and references. All this leads up to a flurry of press events and interviews, all geared to the product/web site launch date. (During the Internet bubble, one more function of the marketing department was to “buy” customer loyalty with enormous advertising and promotion spending to create a brand.)

At first glance this process may look quite reasonable, until you realize all this marketing activity occurs before customers start buying—that is, before the company has had a chance to actually test the positioning, marketing strategy, or demand-creation activities in front of real customers. In fact, all the marketing plans are made in a virtual vacuum of real customer feedback and information. Of course, smart marketers have some early interaction with customers before the product ships, but if they do, it’s on their own initiative, not as part of a well-defined process. Most first-time marketers spend more of their time behind their desks inside the building then outside talking to potential customers.

This is somewhat amazing since in a startup no facts exist inside the building – only opinions.

Yet even if we get the marketing people out from behind their desks into the field, the deck is still stacked against their success. Look at the product development diagram. When does Marketing find out whether the positioning, buzz, and demand creation activities actually work? After first customer ship. The inexorable march to this date has no iterative loop that says, “If our assumptions are wrong, maybe we need to try something different.”

11. Premature Scaling
The Product Development model leads Sales and Marketing to believe that by first customer ship, come hell or high water, they need fully staffed organizations leads to another disaster: premature scaling.

Startup executives have three documents to guide their hiring and staffing; a business plan, a product development model and a revenue forecast.  All of these are execution documents – they direct the timing and hiring of spending as if all assumptions in the business plan are 100% correct. As mentioned earlier there are no milestones that alert a startup to stop or slow down hiring until you have proven until you understand you customers. Even the most experienced executives succumb to the inexorable pressure to hire and staff to “plan” regardless of the limited customer feedback they’ve collected to this point in Alpha and Beta test.

Premature scaling is the immediate cause of the startup Death Spiral.  More on this in the next post.

——————-

Part 3 of the Customer Development Manifesto to follow.

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to FurlAdd to Newsvine

The Customer Development Manifesto: Reasons for the Revolution (part 1)

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.

Product Development Diagram

Product Development Diagram

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 itThe 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.

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to FurlAdd to Newsvine

The Leading Cause of Startup Death – Part 1: The Product Development Diagram

When I started working in Silicon Valley, every company bringing a new product to market used some form of the Product Development Model.  Thirty years later we now realize that its one the causes of early startup failure. This series of posts is a brief explanation of how we’ve evolved from Product Development to Customer Development to the Lean Startup.

The Product Development Diagram
Emerging early in the twentieth century, this product-centric model described a process that evolved in manufacturing industries. It was adopted by the consumer packaged goods industry in the 1950s and spread to the technology business in the last quarter of the twentieth century. It has become an integral part of startup culture.

At first glance, the diagram, which illustrates the process of getting a new product into the hands of waiting customers, appears helpful and benign.  Ironically, the model is a good fit when launching a new product into an existing, well-defined market where the basis of competition is understood, and its customers are known.

The irony is that few startups fit these criteria. (None of mine did.)  We had no clue what our market was when we first started. Yet we used the product development model not only to manage product development, but as a road map for finding customers and to time our marketing launch and sales revenue plan. The model became a catchall tool for all schedules, plans, and budgets. Our investors used the product development diagram in our board meeting to see if we were “on plan” and “on schedule.” Everyone was using a road map that was designed for a very different location, yet they are surprised when they end up lost.

Product Development Diagram

Product Development Diagram

To see what’s wrong with using the product development model as a guide to building a startup, let’s first examine how the model is currently used to launch a new product. We’ll look at the model stage-by-stage.

Concept and Seed Stage
In the Concept and Seed Stage, founders capture their passion and vision for the new company and turn them into a set of key ideas, which quickly becomes a business plan, sometimes on the back of the proverbial napkin. The first thing captured and wrestled to paper is the company’s vision.

Then the product needs to be defined: What is the product or service concept? What are the features and benefits? Is it possible to build? Is further technical research needed to ensure that the product can be built?

Next, who will the customers be and where will they be found? Statistical and market research data plus potential customer interviews determine whether the ideas have merit.

After that there’s a discussion of how the product will reach the customer and the potential distribution channel. The distribution discussion leads to some conclusions about competition: who are they and how they differ. The startup develops its first positioning statement and uses this to explain the company and its benefits to venture capitalists.

The distribution discussion also leads to some assumptions about pricing. Combined with product costs, an engineering budget, and schedules, this results in a spreadsheet that faintly resembles the first financial plan in the company’s business plan. If the startup is to be backed by venture capitalists, the financial model has to be alluring as well as believable. If it’s a new division inside a larger company, forecasts talk about return on investment.  in this concept and seed stage, creative writing, passion, and shoe leather combine  in hopes of convincing an investor to fund the company or the new division.

Product Development
In stage two, product development, everyone stops talking and starts working. The respective departments go to their virtual corners as the company begins to specialize by functions.

Engineering focuses on building the product; it designs the product, specifies the first release and hires a staff to build the product. It takes the simple box labeled “product development” and makes detailed critical path method charts, with key milestones. With that information in hand, Engineering estimates delivery dates and development costs.

Meanwhile, Marketing refines the size of the market defined in the business plan (a market is a set of companies with common attributes), and begins to target the first customers. In a well-organized startup (one with a fondness for process),  the marketing folk might even run a focus group or two on the market they think they are in and prepare a Marketing Requirements Document (MRD) for Engineering. Marketing starts to build a sales demo, writes sales materials (presentations, data sheets), and hires a PR agency. In this stage, or by alpha test, the company traditionally hires a VP of Sales who begins to assemble a sales force.

Alpha/Beta Test
In stage three, alpha/beta test, Engineering works with a small group of outside users to make sure that the product works as specified and tests it for bugs. Marketing develops a complete marketing communications plan, provides Sales with a full complement of support material, and starts the public relations bandwagon rolling. The PR agency polishes the positioning and starts contacting the long lead-time press while Marketing starts the branding activities.

Sales signs up the first beta customers (who volunteer to pay for the privilege of testing a new product), begins to build the selected distribution channel, and staffs and scales the sales organization outside the headquarters. The venture investors start measuring progress by number of orders in place by first customer ship.

Hopefully, somewhere around this point the investors are happy with the company’s product and its progress with customers, and the investors are thinking of bringing in more money. The CEO refines his or her fund-raising pitch and hits the street and the phone searching for additional capital.

Product Launch and First Customer Ship
Product launch and first customer ship is the final step in this model, and the goal the company has been driving for. With the product working (sort of), the company goes into “big bang” spending mode. Sales is heavily building and staffing a national sales organization; the sales channel has quotas and sales goals. Marketing is at its peak. The company has a large press event, and Marketing launches a series of programs to create end-user demand (trade shows, seminars, advertising, email, and so on). The board begins measuring the company’s performance on sales execution against its business plan (which typically was written a year or more earlier, when the entrepreneur was looking for initial investments).

Building the sales channel and supporting the marketing can burn a lot of cash. Assuming no early liquidity (via an IPO or merger) for the company, more fund raising is required. The CEO looks at the product launch activities and the scale-up of the sales and marketing team, and yet again goes out, palm up, to the investor community. (In the dot-com bubble economy, the investors used an IPO at product launch to take the money and run, before there was a track record of success or failure.)

The Leading Cause of Startup Death
If you’ve ever been involved in a startup, the operational model no doubt sounds familiar. It is a product-centric and process-centric model used by countless startups to take their first product to market.  It used to be if you developed a plan on model that looked like this your investors would have thought you were geniuses.

In hindsight both you and your investors were idiots. Following this diagram religiously will more often than not put you out of business. The diagram was developed to be used by existing companies doing product line extensions – not startups creating new markets or resegmenting existing ones. Most experienced entrepreneurs will tell you that the model collapses at first contact with customers.

VC’s who still believe in the product development model in the 21st century offer no value in building a company other than their rolodex and/or checkbook.

Coming next Part 2: What’s Wrong with Product Development as a Model?

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to FurlAdd to Newsvine

Coffee With Startups

I’ve just met four great startups in the last three days.

An Existing Market
All four were trying to resegment an “Existing Market.” An existing market is one where competitors have a profitable business selling to customers who can name the market and can tell you about the features that matter to them. Resegmentation means these startups are trying to lure some of the current or potential customers away from incumbents by either offering a lower cost product, or by offering features that appealed to a specific niche or subset of the existing users.

Some of the conversations went like this:

Startup 1
Entrepreneur -“I’m competing against Company x and have been following the Customer Development process and I’ve talked to lots of customers.”
Me – “Have you used Company x’s product? Do you know have they distribute their product? Do you know how they create demand? Do you know how many units they are selling? Do you know the archetype of their customers?
Entrepreneur -“Well no but my product is much better than their product and I have this great idea….”

Rule 1: In an existing market Customer Development means not only understanding potential customers, but your competitors in detail – their product features, their sales channels, their demand creation strategy, their business model, etc.

Startup 2
Entrepreneur -“I’m competing against Company x and we are going to offer a lower-cost, web-based version. We’re about to ship next week.”
Me –“That’s a great hypothesis, do customers tell you that they’d buy your version if it was cheaper or on the web?
Entrepreneur -“Well no but my product is much cheaper and everyone’s on the web and I have this great idea….”

Rule 2: In an existing market Customer Development means understanding whether your hypothesis of why customers will buy match reality. This is easy to test. Do this before you write code you may end up throwing away.

Startup 3
Entrepreneur -“I’m competing against Large Company x and we solve problems for a set of customers – I’ve talked to many of them and they would buy it.”
Me – “So what’s the problem?”
Entrepreneur – “We just started letting early customers access the product and adoption/sales isn’t taking off the way we thought it would. We only have 20 customers, and Large Company x has millions.”
Me – “How are you positioning your product?”
Entrepreneur – “We tell potential customers about all our features.”

Rule 3: In an existing market directly compare your product against the incumbent and specifically describe the problems you solve and why Company x’s products do not.”

Startup 4
Entrepreneur -“I have something really, really new. No one has anything like it.”
Me – “Isn’t it kind of like Twitter but better?”
Entrepreneur – “You don’t get it.”

Rule 4: You may want to think twice positioning as a New Market. If customers immediately get an analogy for your product, don’t dissuade them. Save the “New Billion Dollar Market” positioning for the investors, not customers.

Lessons Learned

  • Deeply understand the incumbents that make up the Existing Market
  • The “hypotheses tested to lines of code written” ratio ought to be high
  • Position against the incumbents weaknesses – their customers will tell you what they are
  • Existing Markets adoption rates are measured in % market share gained, New Markets have adoption rates which may occur in your company’s lifetime

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to FurlAdd to Newsvine

Touching the Hot Stove – Experiential versus Theoretical Learning

I’m a slow learner.  It took me 8 startups and 21 years to get it right, (and one can argue success was due to the Internet bubble rather then any brilliance.)

In 1978 when I joined my first company, information about how to start companies simply didn’t exist. No internet, no blogs, no books on startups, no entrepreneurship departments in universities, etc.  It took lots of trial and error, learning by experience and resilience through multiple failures.

The first few months of my startups were centered around building the founding team, prototyping the product and raising money. Since I wasn’t an engineer, my contribution was around the team-building and fund raising.

I was an idiot.

Customer Development/Lean Startups
In hindsight startups and the venture capital community left out the most important first step any startup ought to be doing – hypothesis testing in front of customers- from day one.

I’m convinced that starting a company without talking to customers is like throwing your time and money in the street (unless you’re already a domain expert).

This mantra of talking to customers and iterating the product is the basis of the Lean Startup Methodology that Eric Ries has been evangelizing and I’ve been teaching at U.C. Berkeley and at Stanford. It’s what my textbook on Customer Development describes.

Experiential versus Theoretical Learning
After teaching this for a few years, I’ve discovered that subjects like Lean Startups and Customer Development are best learned experientially rather than solely theoretically.

Remember your parents saying, “Don’t touch the hot stove!”  What did you do?  I bet you weren’t confused about what hot meant after that. That’s why I make my students spend a lot of time “touching the hot stove” by talking to customers “outside the building” to test their hypotheses.

However, as hard as I emphasize this point to aspiring entrepreneurs every year I usually get a call or email from a past student asking me to introduce them to my favorite VC’s.  The first questions I ask is “So what did you learn from testing your hypothesis?” and “What did customers think of your prototype?”  These questions I know will be on top of the list that VC’s will ask.

At least 1/3 of the time the response I get is, “Oh that class stuff was real interesting, but we’re too busy building the prototype. I’m going to go do that Customer Development stuff after we raise money.”

Interestingly this response almost always comes from first time entrepreneurs.  Entrepreneurs who have a startup or two under their belt tend to rattle off preliminary customer findings and data that blow me away (not because I think their data is going to be right, but because it means they have built a process for learning and discovery from day one.)

Sigh.  Fundraising isn’t the product.  It’s not a substitute for customer input and understanding.

Sometimes you need a few more lessons touching the hot stove.

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to FurlAdd to Newsvine

He’s Only in Field Service

The most important early customers for your startup usually turn out to be quite different from who you think they’re going to be.

He’s Only in Field Service
When I was at Zilog, the Z8000 peripheral chips included the new “Serial Communications Controller” (SCC). As the (very junior) product marketing manager I got a call from our local salesman that someone at Apple wanted more technical information than just the spec sheets about our new (not yet shipping) chip. I vividly remember the sales guy saying, “It’s only some kid in field service. I’m too busy so why don’t you drive over there and talk to him.”  (My guess is that our salesman was busy trying to sell into the “official” projects of Apple, the Lisa and the Apple III.)

Zilog was also in Cupertino near Apple, and I remember driving to a small non-descript Apple building at the intersection of Stevens Creek and Sunnyvale/Saratoga. I had a pleasant meeting and was as convincing as a marketing type could be to a very earnest and quirky field service guy, mostly promising the moon for a versatile but then very buggy piece of silicon. We talked about some simple design rules and I remember him thanking me for coming, saying we were the only chip company who cared enough to call on him (little did he know.)

I thought nothing about the meeting until years later. Long gone from Zilog I saw the picture of the original Macintosh design team. The field service guy I had sold the chip to was Burrell Smith who had designed the Mac hardware.

The SCC had been designed into the Mac and became the hardware which drove all the serial communications as well as the AppleTalk network which allowed Macs to share printers and files.

Some sales guy who was too busy to take the meeting was probably retired in Maui on the commissions.

Your Customers are Not Who You Think
For years I thought this “million unit chip sale by accident” was a “one-off” funny story. That is until I saw that in startup after startup customers come from places you don’t plan on.

Unfortunately most startups learn this by going through the “Fire the first Sales VP” drill: You start your company with a list of potential customers reading like a “who’s who” of whatever vertical market you’re in (or the Fortune 1000 list.) Your board nods sagely at your target customer list.  A year goes by, you miss your revenue plan, and you’ve burned through your first VP of Sales.  What happened?

What happened was that you didn’t understand what “type of startup” you were and consequently you never had a chance to tailor your sales strategy to your “Market Type.” Most startups tend to think they are selling into an Existing market – a market exists and your company has a faster and better product. If that’s you, by all means hire a VP of Sales with a great rolodex and call on established mainstream companies – and ignore the rest of this post.

Market Type
But most startups aren’t in existing markets.  Some are resegmenting an existing market–directed at a niche that an incumbent isn’t satisfying (like Dell and Compaq when they were startups) or providing a low cost alternative to an existing supplier (like Southwest Airlines when it first started.) And other startups are in a New Market — creating a market from scratch (like Apple with the iPhone, or iPod/iTunes.)

(“Market Type” radically changes how you sell and market at each step in Customer Development. It’s one of the subtle distinctions that at times gets lost in the process. I cover this in the Four Steps to the Epiphany.)

market-type

Five Signs You Can Sell to a Large Company
If you’re resegmenting an existing market or creating a new market, the odds are low that your target list of market leaders will become your first customers. In fact having any large company buy from you will be difficult unless you know how to recognize the five signs you can get a large company to buy from a startup:

  • They have a problem
  • They know they have a problem
  • They’ve been actively looking for a solution
  • They tried to solve the problem with piece parts or other vendors
  • They have or can acquire a budget to pay for your solution

I advise startups to first go after the companies that aren’t the market leaders in their industries, but are fighting hard to get there. (They usually fit the checklist above.) Then find the early adopter/internal evangelist inside that company who wants to gain a competitive advantage. These companies will look at innovative startups to help them gain market share from the incumbent.

Sell to the Skunk Works
The other place for a startup to go is the nooks and crannies of a market leader.  Look for some “skunk works” project where the product developers are actively seeking alternatives to their own engineering organization.  In Apple’s case Burrell Smith was designing a computer in a skunk works unbeknownst to the rest of Apple’s engineering.  He was looking for a communications chip that could cut parts cost to build an innovative new type of computer – which turned out to be the Mac.

Lessons Learned

  • Early customers are usually not where you first think they are
  • Where they are depends on Market Type
  • Look for aggressive number 2’s or 3’s who are attacking a market leader
  • Look for a “skunk works” inside a market leader

Listen to the blog post here

Download the podcast here or here

an early version of this story appeared on folklore.org

Customer Development Fireside Chat

I did a fireside chat with a few entrepreneurs interested in Customer Development at Draper Fisher Jurvetson, the venture firm behind such Skype, Baidu, Overture, ….

Ravi Belani was nice enough to set it up, blog about the talk and film it.  The relevant part starts about 4:30 into the video (wait for it to download.)

Lessons Learned

  • Most entrepreneurs start a company with hypothesis not facts
  • None of these hypothesis can be tested in the building
  • Therefore – Get out of the building
  • “Market Types” matter
  • Find a market for the product as specified

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to FurlAdd to Newsvine

Convergent Technologies: War Story 1 – Selling with Sports Scores

When I was a young marketer I learned how to listen to customers by making a fool of myself.

Twenty eight years ago I was the bright, young, eager product marketing manager called out to the field to support sales by explaining the technical details of Convergent Technologies products to potential customers.

The OEM Business
Convergent’s business was selling desktop computers (with our own operating system and office applications) to other computer manufacturers – most of them long gone: Burroughs, Prime, Monroe Data Systems, ADP, Mohawk, Gould, NCR, 4-Phase, AT&T.  These companies would take our computers and put their name on them and resell them to their customers.

Business customers were starting to ask for “office automation solutions” – word processing, spreadsheets, graphing software on a desktop.  This was just before the IBM PC hit the desktop so there were no “standard” operating systems or applications for desktop platforms. Computer hardware companies were faced with their customers asking for low-cost (relatively) desktop computers they had no experience in building. Their engineering teams didn’t have the expertise using off-the-shelf microprocessors (back then “real” computer companies designed their own instruction sets and operating systems.) They couldn’t keep up with the fast product development times that were enabled by using standard microprocessors. So their management teams were insisting that they OEM (buy from someone else) these products.  Convergent Technologies was one of those OEM suppliers.

Their engineers hated us.

I was traveling with the regional sales manager who had called on these companies, gotten them interested and now needed someone from the factory to provide technical details and answer questions about how the product could be configured and customized.

See How Smart I Am
As the eager young marketer on my first sales call, as soon as we shook hands I was in front of the room pitching our product and technical features. I knew everything about our operating system, hardware and applications – and I was going to prove it.  I talked all about how great the new products were and went into excruciating detail on our hardware and operating system and explained why no one other than our company could build something so brilliantly designed. (This being presented to another company’s proud engineering team who was being forced to buy product from us because they couldn’t build their own in time.)  After I sat down I was convinced the only logical conclusion was for the customer to tell us how many they wanted to buy.

The result wasn’t what I expected. The customers didn’t act particularly excited about the product and how brilliantly I presented it. I do believe some actually rolled their eyes.  They looked at their watches, gave our sales guy a quizzical look and left.

After the meeting our sale rep took me aside and asked if “perhaps I wouldn’t mind watching him on the next call.“

Sports Scores
The next day, as I drove to our next meeting the sales guy was intently reading the sports section of the newspaper and as I glanced over he seemed to be writing down the scores.  I wondered if he had a bookie.  When we got to the meeting he reminded me to be quiet and follow his lead.

We shook hands with the customers, but instead of launching into a product pitch (or better, letting me launch into the pitch) he started asking how their families were.  He even remembered the names of their wives and kids and some details about schools or events. (I couldn’t believe it, here we were wasting precious time and the dumb sales guy is talking about other stuff.)

Just as I thought we were going to talk about the product, he then mentioned the previous nights football game. (Damn, another five minutes down the tube as the whole room chimed in with an opinion as we talked about something else unimportant.)

The Customer is a Genius
Then instead of talking about our products he segued the conversation into their products. He complemented their elegantly designed minicomputers and made some astute comment about their architecture (now I’m rolling my eyes, their computers were dinosaurs) and asked who were the brilliant designers.  I was surprised to see that they were in the room.  And soon the conversation were about architectural tradeoffs and then how customers didn’t appreciate the elegant designs and how the world was going to hell in a handbasket because of these commodity microprocessors.  And our sales guy was agreeing and commiserating.  (And I’m thinking why is he doing all this, just tell these idiots that the world has passed them by and they need to buy our stuff and lets get an order.)

The engineers spoke about all the pressure they were getting from management to build desktop personal computers rather than their traditional minicomputers. And that their management wanted these new systems on a schedule that was impossible to meet. Then our sales guy says something that makes me stop breathing for a while.  “I bet if your management team would give you guys the resources you guys could build desktop computers better than anyone, even better than us.”  There’s a unanimous agreement around the table about how great they were and how bad management was.

The Consultative Sale
Our sales guy then quietly asked if there was any way we could help them.  (Help them?!! We’re here to sell them our stuff, why can’t we just present what we got and they’ll buy it.)  The VP of Engineering says, “well we don’t have the resources or time, and as long as you know we could build better computers then you guys, why don’t you tell us the details about your computers.”

I had just watched a master of the consultative sale.

Engineers as Salesmen
I thought (and still do) that this sales guy walked on water. He had spent 12 years at DEC, first as a hardware engineer designing part of the PDP-16, then as the marketing manager for the LSI-11 and then into sales.

Making sales calls with him taught me what a world class salesperson was like.  It also made me understand what kind of support sales people needed from marketing and what marketing programs were wasted motion.

It also made me realize that there are times you don’t want any sales people in your company.

Startups and Sales
If you read this post you can come away with the impression that every startup with a direct salesforce needs a consultative sales team.  Not true.

The answer depends on your answer to two questions:

  1. which step in the Customer Development process are you on?
  2. what Market Type is your startup?

Customer Development and Selling Strategy
If you’ve just started your company you are in customer discovery.  If you’ve tried to slog your way through my book on Customer Development you know that I’m insistent that the founders need to be the ones getting outside the building (physically or virtually) to validate all the initial hypotheses of the business model and product.  If you hire a VP of Sales with the idea that they can do customer discovery you violated the first principle of Customer Development – this isn’t a step the can be outsourced to a non-founder.

Customer Development DiagramHiring a VP of Sales in customer discovery typically sets a startup back. It’s only after you’re done with customer discovery and are in the final steps of customer validation (building a repeatable and scalable sales process) that you start hiring a sales executive.

The next thing you need to do is match your sales team with your market type.

Market Type and Sales Teams
If you remember from a previous post, startups fall into four Types of Markets. You need to hire the right type of sales people for the type of market.

market-typeIf you are in a New Market, (delivering what Clayton Christensen calls disruptive innovation) the market doesn’t even have a name and customers have no clue on how your product works or how it could help them.  This market cries out for a sales force that can help educate and guide the market to making the right choices.  Your sales team is an extension of your marketing department.  The same is true if you are in an existing marketing and trying to sell to a niche or a segment of the market based on your knowledge of their particular needs.  Both New Markets and Resegmented Niche Markets required a skilled consultative sales force.

This is very different from the sales team you would hire to sell in an existing market or a cheaper product.

If you’re in an existing market and you have a superior product, by all means tout your features and specifications.  However, your product itself will be doing a lot of the selling.  If it is demonstrably better as you claim your marketing department needs to communicate that competitive advantage and your sales curve should look linear as you take share from the existing incumbents.

If you are resegmenting an existing market a product with a cheaper alternative, by all means tout your price.  Your marketing department should be all over this.  In both cases you really don’t need a skilled/consultative sales force.  A sales team with a great rolodex will do.

Sales by Market Type

Sales by Market Type

Lessons Learned

  • Get out of the building (physically or virtually)
  • Sales calls aren’t your IQ test or PhD defense
  • Stop talking and listen to the customers problem
  • Hire a sales team at the Customer Validation step
  • Match the sales team to market type

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to FurlAdd to Newsvine

Faith-Based versus Fact-Based Decision Making

I’ve screwed up a lot of startups on faith.

One of the key tenets of entrepreneurship is that you start your company with insufficient resources and knowledge.

Faith-based Entrepreneurship
At first, entrepreneurship is a Faith-based initiative.  There is no certainty about a startup on day-one.  You make several first order approximations about your business model, distribution channels, demand creation, and customer acceptance. You leave the comfort of your existing job, convince a few partners to join you and you jump off the bridge together.

At each startup I couldn’t wait to do this.  No building, no money, no customers, no market?  Great, sign me up.  We’ll build something from scratch.

You start a company on a vision; on a series of Faith-based hypotheses.

Fact-based Execution
However, successfully executing a startup requires the company to become Fact-based as soon as it can.

Think about all the assumptions you’ve made to get your business off the ground.  Who are the customers?  What problems do they have?  What are their most important problems?  How much would they pay to solve them?  What’s the best way to tell them about our product?…

Ad infinitum. These customer and market risks need to be translated into facts as soon as possible.

You can blindly continue to execute on faith that your hypothesis are correct.  You’ll ship your product and you’ll find out if you were wrong when you run out of money

Or you can quickly get out of the building and test whether your hypothesis were correct and turn them into facts.

In hindsight, when I was young, this where I went wrong.  It’s a lot more comfortable to hang on to your own beliefs than to get (or face) the facts.  Because at times facts may create cognitive dissonance with the beliefs that got you started and funded.

Customer Development
This strategy of starting on faith, and quickly turning them into facts is the core of the Customer Development process.


Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to FurlAdd to Newsvine

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.

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to FurlAdd to Newsvine

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.

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to TwitterAdd to TechnoratiAdd to FurlAdd to Newsvine

Follow

Get every new post delivered to your Inbox.

Join 149,950 other followers