Steve Blank

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.

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.

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.

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Part 3 of the Customer Development Manifesto to follow.

Filed under: Customer Development, Customer Development Manifesto | Tagged: Customer Development | 9 Comments »

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

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 it. The 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.

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Part 2 of the Customer Development Manifesto to follow.

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