Customer Development for Web Startups

Posted on February 25, 2010 by steve blank

Customer Development is a technique startups use to quickly iterate and test each part of their business model.  How you execute Customer Development varies, depending on your type of business. In my book, “The Four Steps to the Epiphany” I use enterprise software as the business model example.

Ash Maurya, the CEO of WiredReach, has extended my work by building a model of Customer Development for Web Startups.

I think his process models are pretty good. Go read both of his posts on Discovery and Validation for web startups. His two key slides are at the end of this post but the details on his blog are worth reviewing.

Customer Development In Context
Your startup is an organization built to search for a repeatable and scalable business model.


Your job as a founder is to quickly validate whether the model is correct by seeing if customers behave as your model predicts. Most of the time the darn customers don’t behave as you predicted.

Customer Development is the process startups use to quickly iterate and test each element of their business model. Agile Development is the way startups quickly iterate their product as they learn. A Lean Startup is Eric Ries’s description of the intersection of Customer Development, Agile Development and if available, open platforms and open source.

Diving into the Customer Development diagram inside the diagram above, we see that the first two steps, Customer Discovery and Customer Validation are all about iteration and testing of your business model.

How you actually do Customer Discovery and Validation depends on what type of business you are in. What makes sense for startups selling Enterprise Software may not work for startups on the web. Therefore you need different versions of the actual steps of Customer Development for different types of businesses.

The Customer Discovery step for Enterprise Software Startups
The first step in the Customer Development is Customer Discovery: testing your hypotheses. The flow for Customer Discovery for an enterprise software company was described in the Four Steps to the Epiphany. It looked like this:


.

The Customer Discovery step for Web Startups
Ash Maurya‘s version of the Discovery step of Customer Development for a web startup looks like this:

.

Customer Validation for Enterprise Software Startups
The next step in the Customer Development process is Customer Validation – making sure that there really is a repeatable and scalable revenue and business model before you turn up your cash burn rate.  My version of Customer Validation for an enterprise software company looked liked this:

.

Customer Validation for Web Startups
Ash Maurya‘s version of the Valdiation step of Customer Development for a web startup looks like this:

Lessons Learned

  • A startup is an organization built to search for a repeatable and scalable business model.
  • Customer Development is a technique startups use to quickly iterate and test each part of their business model.
  • You need different versions of the actual steps of Customer Development for different types of businesses.
  • This post illustrates a version of Customer Development for startups on the web.

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Filed under: Customer Development, Customer Development Manifesto | 43 Comments »

No Accounting For Startups

Posted on February 22, 2010 by steve blank

Startups that are searching for a business model need to keep score differently than large companies that are executing a known business model.

Yet most entrepreneurs and their VC’s make startups use financial models and spreadsheets that actually hinder their success.

Here’s why.

Managing the Business
When I ran my startups our venture investors scheduled board meetings each month for the first year or two, going to every six weeks a bit later, and then moving to quarterly after we found a profitable business model.

One of the ways our VC’s kept track of our progress was by taking a monthly look at three financial documents: Income Statement, Balance Sheet and Cash Flow Statement.

If I knew what I knew now, I never would have let that happen.  These financial documents were worse than useless for helping us understand how well we were (or weren’t) doing.  They were an indicator of “I went to business school but don’t really know what to tell you to measure so I’ll have you do these.”

To be clear – Income Statements, Balance Sheets and Cash Flow Statements are really important at two points in your startup.  First, when you pitch your idea to VC’s, you need a financial model showing VC’s what your company will look like after you are no longer a startup and you’re executing the profitable model you’ve found.  If this sounds like you’re guessing – you’re right – you are.  But don’t dismiss the exercise.  Putting together a financial model and having the founders understand the interrelationships of the variables that can make or break a business is a worthwhile exercise.

The second time you’ll need to know about Income Statements, Balance Sheets and Cash Flow Statements is after you’ve found your repeatable and profitable business model.  You’ll then use these documents to run your business and monitor your company’s financial health as you execute your business model.

The problem is that using Income Statement, Balance Sheets and Cash Flow Statements any other time, particularly in a startup board meeting, has the founding team focused on the wrong numbers.  I had been confused for years why I had to update an income statement each board meeting that said zero for 18 months before we had any revenue.

But What Does a Business Model Have to Do With Accounting in My Startup?
A startup is a search for a repeatable and scalable business model.  As a founder you are testing a series of hypotheses about all the pieces of the business model: Who are the customers/users? What’s the distribution channel? How do we price and position the product? How do we create end user demand? Who are our partners? Where/how do we build the product? How do we finance the company, etc.

An early indication that you’ve found the right business model is when you believe the cost of getting customers will be less than the revenues the customers will generate. For web startups, this is when the cost of customer acquisition is less than the lifetime value of that customer.  For biotech startups, it’s when the cost of the R&D required to find and clinically test a drug is less than the market demand for that drug.  These measures are vastly different from those captured in balance sheets and income statements especially in the near term.

What should you be talking about in your board meeting? If you are following Customer Development, the answer is easy.  Board meetings are about measuring progress measured against the hypotheses in Customer Discovery and Validation. Do the metrics show that the business model you’re creating will support the company you’re trying to become?

Startup Metrics
Startups need different metrics than large companies.  They need metrics to tell how well the search for the business model is going, and whether at the end of that search is the business model you picked worth scaling into a company. Or is it time to pivot and look for a different business model?

Essentially startups need to “instrument” all parts of their business model to measure how well their hypotheses in Customer Discovery and Validation are faring in the real world.

For example, at a minimum, a web based startup needs to understand the Customer Lifecycle, Customer Acquisition Cost, Marketing Cost, Viral Coefficient, Customer Lifetime Value, etc.  Dave McClure’s AARRR Model is one illustration of the web sales pipeline.

At a web startup, our board meetings were discussions of the real world results of testing our hypotheses from Customer Discovery.  We had made some guesses about the customer pipeline and now we had a live web site.  So we put together a spreadsheet that tracked these actual customer numbers every month.  Every month we reported to our board progress on registrations, activations, retained users, etc. They looked like this:

User Base

  • Registrations (Customers who completed the registration process during the month)
  • Activations (Customers who had activity 3 to 10 days after they registered.  Measures only customers that registered during that month)
  • Activation/Registrations %
  • Retained 30+ Days
  • Retained 30+/ Total Actives %
  • Retained 90+ Days
  • Retained 90+/Total Actives %
  • Paying Customers (How many customers made $ purchases that month)
  • Paying/(Activations + Retained 30+)

Financials

  • Revenue
  • Contribution Margin

Cash

  • Burn Rate
  • Months of cash left

Customer Acquisition

  • Cost Per Acquisition Paid
  • Cost Per Acquisition Net
  • Advertising Expenses
  • Viral Acquisition Ratio

Web Metrics

  • Total Unique Visitors
  • Total Page Views
  • Total Visits
  • PV/visit

A startup selling via a direct sales force will want to understand: average order size, Customer Lifetime Value, average time to first order, average time to follow-on orders, revenue per sales person, time to salesperson becomes effective.

Regardless of your type of business model you should be tracking cash burn rate, months of cash left, time to cash flow breakeven.

Tell Them No
If you have venture investors, work with them to agree what metrics matter.  What numbers are life and death for the success of your startup?  (These numbers ought to be the hypotheses you’re testing in Customer Discovery and Validation.) Agree that these will be the numbers that you’ll talk about in your board meeting.  Agree that there will come times that the numbers show that the business model you picked is not worth scaling into a company. Then you’ll all agree it’s time to pivot and look for a different business model.

You’ll all feel like you’re focused on what’s important.

Lessons Learned

  • Large companies need financial tools to monitor how well they are executing a known business model.
  • Income Statements, Balance Sheets and Cash Flow Statements are good large company financial monitoring tools.
  • Startups need metrics to monitor how well their search for a business model is going.
  • Startups need metrics to evaluate wither the business model you picked is worth scaling into a company.
  • Using large company financial tools to measure startup progress is like giving the SAT to a first grader.  It may measure something in the future but can only result in frustration and confusion now.

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Filed under: Corporate/Gov't Innovation, Customer Development | 44 Comments »

Not All Those Who Wander Are Lost

Posted on February 18, 2010 by steve blank

It’s been a year since I’ve been blogging.   The 100 or so posts add up to about 300 pages of text.

One of the downsides to a large number of blog posts is that older stories tend to get buried and hidden. Categories and indexes on the web pages aren’t quite the right metaphor or substitute for random access.  So bowing to popular demand the 2009 blog posts are now available on Amazon on a portable device which provides instant and random access to any post and does not require power or an internet connection.

Now available on Amazon

Recursive History
These blogs began as an attempt to explain why a “book” I wrote wasn’t a book.  And now they’re a book of their own. (Confused? Read on.)

After I retired, I began teaching Customer Development, a theory of how to reduce early stage risk in entrepreneurial ventures. The first time I taught the class at the Haas Business School, U.C. Berkeley, I had a few hundred pages of course notes. Students began to ask for copies of the notes so I threw a cover on them and self-published the notes as a “book” at Cafepress.com.

As a pun on my last company as an entrepreneur, E.piphany, I called the book The Four Steps to the Epiphany.

Two years later, Eric Ries mentioned that I could list the book on Amazon. I never imagined more than a few hundred copies would be sold to my students. 15,000 copies later, the horrifically bad proofreading, design and layout is now a badge of honor. You most definitely read the book for the content. (Congratulations to all of you who actually managed to slog through it.)

You tell much better stories than you write
A few years later my teaching assistants at Stanford and Berkeley said, “You tell much better stories than you write.”  They suggested that sharing those stories on the web was the best way to illustrate some of the more salient points of what even I will admit is a difficult text.

My blog also allowed me to indulge my interest in a few other subjects: The Secret History of Silicon Valley, thoughts on a career as an entrepreneur, observations about family and startups, etc.

It Wasn’t Just Me
It’s possible to read this past year of posts and think that I was the only one at these companies. Nothing could be further from the truth.  I’ve been lucky enough to work with, around and near some extraordinary people: Bill Perry, Allen Michels, Rob Van Naarden, John Moussouris, John Hennessy, Skip Stritter, Jon Rubenstein, Gordon Bell, Glen Miranker, Cleve Moler, Tom McMurray, John Sanguinetti, Alvy Ray Smith, Chris Kryzan, Karen Dillon, Margaret Hughes, Peter Barrett, Bruce Leak, Jim Wickett, Karen Richardson, Ben Wegbreit, Greg Walsh, John McCaskey, Roger Siboni, Bob Dorf, Steve Weinstein, Fred Amoroso, Fred Durham, Maheesh Jain, Will Harvey, Eric Ries, Kathryn Gould, Jon Feiber, Mike Maples, Ann Miura-Ko and many, many more.

Getting Organized
These blog posts were written as I thought about them, with little thought about organization by topic.

This new “book,” Not All Those Who Wander Are Lost, attempts to remedy that by organizing the 2009 blog posts in a coherent fashion.

Not All Those Who Wander Are Lost:

Table of Contents

Startup Culture
Am I a Founder? The Adventure of a Lifetime…………….. 3
Agile Opportunism – Entrepreneurial DNA………………..5
Faith-Based versus Fact-Based Decision Making……….. 8
The Sharp End of the Stick…………………………………… 12
Preparing for Chaos – the Life of a Startup……………….. 15
Speed and Tempo – Fearless Decision Making for Startups….. 16
Killing Innovation with Corner Cases and Consensus….. 18
The “Good” Student……….. 20
Touching the Hot Stove – Experiential versus Theoretical Learning……. 22
Burnout……….. 24
The Road Not Taken……….. 28
Ask and It Shall be Given……….. 31
Selling with Sports Scores……….. 34
Love/Hate Business Plan Competitions……….. 39
The Elves Leave Middle Earth – Sodas Are No Longer Free……….. 41

Stories from the Trenches
Raising Money Using Customer Development……….. 47
Lessons Learned – A New Type of Venture Capital Pitch……….. 52
Can You Trust Any VC’s Under 40?………………. 56
Are Those My Initials?……………………………… 60
They Raised Money With My Slides?!……………. 62
The Best Defense is a Good IP Strategy………….. 65
Elephants Can Dance – Reinventing HP……….. 69

Customer Development Manifesto
The Leading Cause of Startup Death: The Product Development Diagram. 75
Reasons for the Revolution (Part 1)……….. 79
Reasons for the Revolution (part 2)……….. 84
The Startup Death Spiral……….. 87
Market Type……….. 90
The Path of Warriors and Winners……….. 93

Customer Development In the Real World
Customer Development is Not a Focus Group……….. 99
Lean Startups aren’t Cheap Startups……….. 102
Times Square Strategy Session – Web Startups and Customer Development……….. 105
Coffee With Startups……….. 108
He’s Only in Field Service……….. 110
Let’s Fire Our Customers……….. 113
Durant Versus Sloan……….. 116

Family – This Life Isn’t Practice For the Next One
Lies Entrepreneurs Tell Themselves……….. 121
Epitaph for an Entrepreneur……….. 124
Thanksgiving Day……….. 129
Unintended Lessons……….. 137

Ardent – Learning How To Get Out of the Building
Supercomputers Get Personal……….. 141
Get Out of My Building……….. 145
Supercomputer Porn……….. 148
You Know You’re Getting Close to Your Customers When They Offer You a Job……….. 151
The Best Marketers Are Engineers……….. 154
Listen more, talk less……….. 157
Closure……….. 160

SuperMac – Learning How To Build A Startup Team
Joining SuperMac……….. 165
Facts Exist Outside the Building, Opinions Reside Within –……….. 167
Customer Insight Is Everyone’s Job……….. 174
Repositioning SuperMac – “Market Type” at Work……….. 176
Strategy versus Relentless Tactical Execution —  the Potrero Benchmarks… 179
Building The Killer Team – Mission, Intent and Values……….. 184
Rabbits Out of the Hat – Product Line Extensions……….. 189
Cats and Dogs – Admitting a Mistake……….. 194
Sales, Not Awards……….. 196
The Video Spigot……….. 200
The Curse of a New Building……….. 205

Rocket Science Games – Hubris and the Fall
Drinking the Kool-Aid……….. 211
Hollywood Meets Silicon Valley……….. 214
The Press is Our Best Product……….. 216
Who Needs Domain Experts……….. 219
Rocks in the Rocket Science Lobby……….. 223

The Secret History of Silicon Valley
If I Told You I’d Have to Kill You……….. 227
Library Hours at an Undisclosed Location……….. 248
Happy 100th Birthday Silicon Valley……….. 254
Every World War II Movie was Wrong……….. 258
We Fought a War You Never Heard Of……….. 263
A Wilderness of Mirrors……….. 270
The Rise of Entrepreneurship……….. 271
Stanford Crosses the Rubicon……….. 279
The Rise of “Risk Capital” Part 1……….. 285
The Rise of “Risk Capital” Part 2……….. 289

“Not All Those Who Wander Are Lost” is now available on Amazon

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Filed under: Customer Development | 14 Comments »

Death By Revenue Plan

Posted on February 16, 2010 by steve blank

In my last post I described what happened when a company prematurely scales sales and marketing before adequately testing its hypotheses in Customer Discovery.  You would think that would be enough to get wrong, but entrepreneurs and investors compound this problem by assuming that all startups grow and scale by executing the Revenue Plan.

They don’t.

The Appendix of your business plan has one of the leading cause of death of startups: the financial spreadsheets you attached as your Income Statement, Balance Sheets and Cash Flow Statements.

Reality Meets the Plan
I got to see this first hand as an observer at a board meeting I wish I could have skipped.

We were at the board meeting of company building a radically new type of communication hardware. The company was going through some tough times. It had taken the company almost twice as long as planned to get their product out the door. But that wasn’t what the heat being generated at this board meeting was about. All discussion focused on “missing the revenue plan.”

Spread out in front of everyone around the conference table were the latest Income Statement, Balance Sheets and Cash Flow Statements. The VC’s were very concerned that the revenue the financial plan called for wasn’t being delivered by the sales team. They were also looking at the Cash Flow Statement and expressed their concern (i.e. raised their voices in a annoyed investor tone) that the headcount and its attendant burn rate combined with the lack of revenue meant the company would run out of money much sooner than anyone planned.

Lets Try to Make the World Match Our Spreadsheet
The VC’s concluded that the company needed to change direction and act aggressively to increase revenue so the company could “make the plan.”  They told the CEO (who was the technical founder) that the sales team should focus on “other markets.” Another VC added that engineering should redesign the product to meet the price and performance of current users in an adjacent market.

The founder was doing his best to try to explain that his vision today was the same as when he pitched the company to the VC’s and when they funded the company. He said, “I told you it was going to take it least five years for the underlying industry infrastructure to mature, and that we had to convince OEMs to design in our product. All this takes time.” But the VC’s kept coming back to the lack of adoption of the product, the floundering sales force, the burn rate – and “the plan.”

Given the tongue-lashing the VC’s were giving the CEO and the VP of Sales, you would have thought that selling the product was something any high-school kid could have done.

What went wrong?

Revenue Plan Needs to Match Market Type
What went wrong was that the founder had built a product for a New Market and the VC’s allowed him to execute, hire and burn cash like he was in an Existing Market.

The failure of this company’s strategy happened almost the day the company was funded.

Make the VC’s Happy – Tell Them It’s a Big Market
There’s a common refrain that VC’s want to invest in large markets >$500Million and see companies that can generate $100M/year in revenue by year five. Enough entrepreneurs have heard this mantra that they put together their revenue plan working backwards from this goal. This may actually work if you’re in an existing market where customers understand what the product does and how to compare it with products that currently exist. The company I observed had in fact hired a VP of Sales from a competitor and staffed their sales and marketing team with people from an existing market.

Inconsistent Expectations
The VC’s had assumed that the revenue plan for this new product would look like a straight linear growth line. They expected that sales should be growing incrementally each month and quarter.

Why did the VC’s make this assumption? Because the company’s initial revenue plan (the spreadsheet the founders attached to the business plan) said so.

What Market Type Are We?
Had the company been in an Existing Market, this would have been a reasonable expectation.

Existing Market Revenue Curve

But no one (founders, management, investors) bothered to really dig deep into whether that sales and marketing strategy matched the technical founder’s vision or implementation.  Because that’s not what the founders had built.  They had designed something much, much better  – and much worse.

The New Market
The founders had actually built a new class of communication hardware, something the industry had never seen before.  It was going to be the right product – someday – but right now it was not the mainstream.

This meant that their revenue plan had been a fantasy from day one. There was no chance their revenue was going to grow like the nice straight line of an existing market.  More than likely the revenue projection would resemble the hockey stick like the graph on the right.

New Market Revenue Curve

(The small hump in year 1 is from the early adopters who buy one of anything. The flat part of the graph, years 1 to 4 is the Death Valley many companies never leave.)

Companies in New Markets who hire and execute like they’re in an Existing Market burn through their cash and go out of business.

Inexperienced Founders and Investors
I realized I was watching the consequences of Catch 22 of fundraising. Most experienced investors would have understood new markets take time, money and patience. This board had relatively young partners who hadn’t quite grasped the consequences of what they had funded and had allowed the founder to execute a revenue plan that couldn’t be met.

Six months later the VC’s were still at the board table but the founder was not.

Lessons Learned

  • Customers don’t read your revenue plan.
  • Market Type matters. It affects timing of revenue, timing of spending to create demand, etc.
  • Make sure your revenue and spending plan matches your Market Type.
  • Make sure the founders and VC’s agree on Market Type strategy.

Filed under: Corporate/Gov't Innovation, Customer Development, Market Types | 13 Comments »

It Must Be A Marketing Problem

Posted on February 11, 2010 by steve blank

The Customer Development process is the way startups quickly iterate and test each element of their business model, reducing customer and market risk. The first step of Customer Development is called Customer Discovery. In Discovery startups take all their hypotheses about the business model: product, market, customers, channel, etc. outside the building and test them in front of customers.

At least that’s the theory. Helping out some friends I got to see firsthand the consequence of skipping Customer Discovery.

It’s A Marketing Problem
After I retired I would get calls from VC’s to help with “marketing problems” in their portfolio companies. The phone call would sound something like: “We have a company with great technology and a hot product but at the last board meeting we determined that they have a marketing problem. Can you take a look and tell us what you think?”

A week later I was in the conference room of the company having a meeting with the CEO.

We Have a Marketing Problem
“So VC x says you guys have a marketing problem. How can I help?” CEO – “Well, we’ve missed our sales numbers for the last six months.”  Me – “I’m confused. I thought you guys have a marketing problem.  What does this have to do with missing your sales plan? CEO – “Well our VP of Sales isn’t making the sales plan and he says it’s a marketing problem, and he’s a really senior guy.”

Now, I’m intrigued. The CEO asks the VP of Sales to join us in the conference room. (Note that most VP of Sales’ have world-class antenna for career danger. Being invited to chat with the CEO and an outside consultant that a board member brought in creates enough tension in a room to create static discharge.)

No One is Buying Our Product
“Tell me about the marketing problem.” VP of Sales – “Marketing’s positioning and strategy is all wrong.” Me – “How’s that?” VP of Sales – “No one is interested in buying our product.”

If you’ve been in marketing long enough you recognize the beginning of the sales versus marketing finger pointing.  (It usually ends up bad for all concerned.) Sales’ is on the hook for making the numbers and things aren’t looking good.

Six is a Proxy for Burn Rate
“How many salespeople do you have?” VP of Sales – “Six in the field, plus me.”  Later I realized six salespeople without revenue to match was a proxy for an out of control burn rate that now had the boards serious attention.

There’s Always One in Boston
“Is there a salesperson in Boston?” VP of Sales – “Sure.”  Me – “What sales presentation is he using? VP of Sales – “The corporate presentation. What else do you think he’d be using?”  Me – “Let’s get him on the phone and ask.”

Sure enough we’d get the sales person on the phone and find out that he stopped using the corporate presentation months ago. Why?  The standard corporate presentation wasn’t working, so the Boston sales rep made up his own. (I asked for the Boston sales rep because in the U.S. they’re furthest from the Silicon Valley corporate office and any oversight.)

We call the five other sales people and find that they are also “winging it.”

Early Orders Were a Detriment
I learned that the founders received their initial product orders from their friends in the industry and through board members personal connections. These “friends and family orders” made the first nine months of their revenue plan. With that initial sales “success” they began to hire and staff the sales department per the ”plan.”  That’s how they ended up with seven people in sales (plus three more in marketing.)

But now the bill had come due. It turned out that these “friends and family orders” meant the company really hadn’t understood how and why customers would buy their product. There was no deep corporate understanding about customers or their needs. The company had designed and built their product and assumed it was going to sell well based on their initial early orders. Marketing was writing presentations and data sheets without having a clue what real problems customers had.  And without that knowledge, sales essentially was selling blind.

Advice You Don’t Want to Hear
My report back to the VC?  Missing the sales numbers had nothing to do with marketing. The problem was much, much worse. The company had failed to do any Customer Discovery. Neither the CEO, VP of Sales or VP of Marketing had any idea what a repeatable sales model would look like before they scaled the sales force. Now they had a sales force in Brownian motion in the field, and a marketing department changing strategy and the corporate slide deck weekly. Cash was flowing out of the company and the VP of Sales was still hiring.

I suggested they cut the burn rate back by firing all the salespeople in the field, (keeping one in Silicon Valley,) and get rid of all of marketing. The CEO needed to get back to basics and personally get out of the building in front of customers to learn and discover what problems customers had and why the company’s product solved them.

The VC’s response?  “Nah, it can’t be that bad, it’s a marketing problem.”

I’ll leave it to you to guess what the VC’s did six months later.

Lessons Learned

  • Premature Scaling of sales and marketing is the leading cause of hemorrhaging cash in a startup.
  • Scale sales and marketing after the founders and a small team have found a repeatable sales model.
  • Early sales from board members or friends are great for morale and cash but may not be indicative of learning and discovering a business model.

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Filed under: Corporate/Gov't Innovation, Customer Development, Venture Capital | 44 Comments »

Emulating Empathy

Posted on February 8, 2010 by steve blank

One of the hardest problems for engineers in founding roles in a startup is interacting with customers up close and personal. Over the years I’ve found the best way to learn to do this is by emulating empathy.

The Problem
I was having dinner in Palo Alto with some of my Stanford engineering students and one of the subjects they were most interested in talking about was “how do you really get out of the building and talk to customers.”  Listening to them reminded me how terribly painful it had been for me.

Data Driven
I was always curious about technology and how things worked, but early in my career, this curiosity didn’t extend to people. I was more comfortable with data.

In my first company, ESL, I sat in secure locations and taught complex intelligence gathering systems to a classroom of maintenance and/or operations students. I was essentially responsible for imparting a fire hose of technical information efficiently. At my next company, Zilog, it was the same – I taught microprocessor system design to engineers. It was all about the efficient transfer of knowledge. High bandwidth, low noise.

But later at Zilog I moved into marketing. While I learned how to write data sheets, product marketing at Zilog was very little “listen to customers” and much more “talk at customers.”  It wasn’t until my next company, Convergent Technologies, that I began to understand the value of customer interaction.  As a product marketing manager, I traveled to customers at the behest of our sales people to impart the latest technical wisdom from the factory. Traveling with these salesmen was eye opening – they were comfortable having conversations with strangers and knew how to build rapport, relationships and trust. These guys explained to me that most people were happy to talk about themselves. My job was just to get the conversation started. Our products improved as our salesmen made customers comfortable enough to share their needs and issues. (As I would find out, every one of these salesmen had been design engineers in their past.  Yet most of the time, they artfully hid how much they knew.)

Emulation
I began to understand that while my brain was wired to dive into technical minutia and exchange product information at high speed, this wasn’t what most potential customers (and most people who had a modicum of social skills) wanted to do. In fact, unbelievably (to me) most people would trade valuable time in a meeting for social niceties.

Although these social cues were something that still didn’t come naturally to me, I concluded that to get much further in my career, I was going to have to have to learn. Over time, I watched how the best sales people did it and emulated their behavior. I learned how to smile, shake hands, make eye contact rather than stare at my shoes, talk about sports, ask customers about their jobs, their families, etc. and evidence apparent interest in people I didn’t know way before we got to chat about products. I’d even go out to lunch or dinner and manage to hold a conversation. The two hardest things to learn were: how to speak in front of a group and to make “cold calls” by myself. (Every once in awhile I’d run into a customer wired like me who’d say, “Can we cut the chatter and get down to business?” I’d laugh, and we’d do a high-speed data transfer.)

Surprisingly, I learned that listening to customers and others made me more creative. My best ideas started coming from brainstorming with others, something just not possible when communication was a one-way street.

Fast forward a few companies – MIPS and Ardent – I was still learning (at times painfully) to appreciate that facts were outside the building and not between my ears. After a decade in Silicon Valley, I had finally learned to emulate empathy.

Emulating Empathy
By the time I got to SuperMac, the transformation had taken hold. It was here that I began to teach others what I had learned.

I had inherited a manager of technical marketing, much smarter than me but with zero instinct or feel for customers. He was completely data driven, and our sales department wanted him nowhere near customers. I felt like I had just met my doppelganger from ten years ago. We established that his world view was not shared by most customers. And he understood that if he wanted a bigger role in marketing, he was going to have to change. So I ran the first of what would be many “how to emulate empathy” classes.

I described how getting closer to customers was at first going to be a cerebral rather than gut activity. With no instinct to guide him, he would have to consciously precompute what kind of response each situation called for and play them back when appropriate. He was going to have to sign up for public speaking classes. He was going to go on the road with our sales people, but this time he was going to have to watch what they do and start to copy them. I found him a mentor in a salesman who appreciated his technical skill and was willing to let him tag along.

As expected, the first couple of months was tough – on him, sales and customers. We’d debrief after many of his road trips and calls and course correct as necessary.  (At times I’d feel like I was talking to some earlier version of myself.) But by the end of the year, he had learned enough that the VP of Sales asked whether he could move permanently into a presales support role.

Repeatability
Over the next ten years in startups, I repeated this process with others. Today I remind my engineering students that empathy, while seemingly a foreign language, is possible to learn.

As for me, what I had emulated became second nature. Most of the time I can’t tell which mode is running.

Lessons Learned

  • Customer metrics are not the same as customer interaction.
  • Customer interaction is necessary for startup founders.
  • For some it is extremely difficult.
  • If it’s not instinctual customer empathy is a skill that can be taught and learned.

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Memo From the Monastery

Posted on February 4, 2010 by steve blank

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Incentives and Legends

Posted on February 1, 2010 by steve blank

Entrepreneurs and the early startup team all need to be motivated by a shared vision, passion and desire to build a large company.  Yet it’s the company legends that live on.

Fund Raising
Rocket Science, our little startup was less than a year-old.  We had been busy assembling our team and had just hired the last member of our exec staff.  We had also just closed our Series B financing with a major overseas partner.  The financing felt like a real validation of our strategy. In truth, it was only proof that our reality distortion field worked in Asia as well.

My Wife Thinks I Deserve a Bonus
One of the new hires was Jim Wickett, my VP of Business Development.  He knew so little about technology that I used to say he needed a manual to operate a light switch, but I hired him because a small voice said, “He’ll do extraordinary things.”

He did.  And still does.

Jim, among other things ran the fundraising for us in Asia and worked with an outside firm that had great connections in Japan to drag us around Tokyo and get the deal closed.  As in raising $10Million dollars kind of closed.

Everyone at our startup was working on startup starvation salaries, and Jim had taken a large pay cut to join us. When the Japanese partner deal was done, Jim said,  “Steve, I deserve at least a $10,000 bonus.  I haven’t been home in weeks, and I pulled off a financing even you admit was unbelievable.”

I patiently explained that this type of miraculous event was the norm for startups. The engineers were pulling off miracles on a daily basis, we were all taking fumes for salaries, but our payoff will be when our stock is worth something.  Until then, tell your wife you’ll get $10,000 when hell freezes over. No bonuses in a startup. To his credit Jim said while he understood, he was going to hear about it at home for not being appreciated.

Dinner
Since our management team hadn’t met each others’ spouses, I thought the financing would be a great reason to get everyone together for a low key celebratory dinner.  We picked a restaurant in Palo Alto down the street from the company and got a private room.

We drank lots of wine, had a nice dinner and after the dinner plates had been cleared I made a speech about teamwork, startup, passion, commitment, blah, blah.

I then congratulated the outside firm that Jim had used in Japan. I had invited their CEO and his wife and handed him a check for their retainer bonus for their help in the deal. Jim kept glancing at his wife who was giving him frosty looks and was very clearly not happy.

The New Briefcase
I then announced that it was unfair that Jim shouldn’t go unrecognized for his hard work so I had an award for him as well. The atmosphere around Jim’s wife began to thaw.  I said, “Jim had carried the same old beat up leather briefcase he had since law school and I knew he wouldn’t trade it for anything but I think its time he had something more professional looking.  So Jim, on behalf of the company, we bought you a new briefcase.”

The look on both Jim’s face and his wife’s went from happy to disbelief, to “I can’t believe you’re working for this idiot” on his wife’s face to “I can’t believe I work for this idiot” on Jim’s face.

I said, “Your new briefcase is under the table by your feet.  Why don’t you just put it on the table.”  Jim rooted around a bit and found the briefcase and put it on the table. It was the ugliest and cheapest briefcase you will ever see.

Everyone was now looking slightly embarrassed, all thinking that perhaps they had the most obtuse CEO in Silicon Valley. I thought Jim’s wife was going to throw a steak knife across the table.  I made another speech about how great Jim was and then sat down and said, “Lets get the waiter for coffee and desert.”

The ugly briefcase with its implicit statement sat on the table virtually steaming.

Legend
“Oh, one more thing,” I said.  “Jim, can you open up the briefcase and dump the papers on the table. We should clear out the stuffing so you can put your papers from your old briefcase in it.”

With almost an audible sigh, Jim unlatched the briefcase, held it upside down over the table and dumped out the contents.

In slow motion, dollar bills began to tumble out of the new briefcase.  And they kept coming out.  And they started making a pile of bills in front of Jim and his wife and the rest of the executive staff.

15,000 dollars in dollar bills.

Jim’s wife started crying.

I said, “Extraordinary work in a startup is the norm, but you performed even beyond my expectations. In my startups that’s worth recognizing.”

Rewards for extraordinary effort became part of the company’s legend.

Epilogue
Lest you think only salespeople are motivated by cash in a startup, over the life of the company we sprung the same surprise on engineers who did deliver the impossible. And at Christmas we gave out hundred dollar bills to each employee. While this small token of appreciation would have been dismissed if it had been a check, it had our engineers showing these bills to their friends in other companies.

In three or so years these cash incentives added up to no more than $50K. While everyone understood the theory that we were working to make the stock valuable, the cash reminded them that we cared and noticed.

Lessons Learned

  • Cash has a much greater affect than a check.
  • Awards for critical contributions can make a lasting impact.
  • Small amounts spread through the company can be a great motivator.
  • Done correctly it turns incentives into legends.

Filed under: Family/Career/Culture, Rocket Science Games | 16 Comments »