Steve Blank Customer Development

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

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.

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

Make No Little Plans – Defining the Scalable Startup

Posted on January 4, 2010 by steve blank

Make no little plans. They have no magic to stir men’s blood…
Daniel Burnham

A lot of entrepreneurs think that their startup is the next big thing when in reality they’re just building a small business. How can you tell if your startup has the potential to be the next Google, Intel or Facebook? A first order filter is whether the founders are aiming for a scalable startup.

Go For Broke
A few years ago I sat on the board of IMVU when the young company faced a choice my mother used to describe as “you should be so lucky to have this problem.” For its first year IMVU had funded itself with money from friends and family. Now with customers and early revenue, it was out raising its first round of venture money. (Not only did their sales curve look like a textbook case of a VC-friendly hockey stick, but their Lessons Learned funding presentation was an eye-opener.)

Staring at us in the board meeting were three term-sheets from brand name VC’s and an unexpected buy-out offer from Google. In fact, Google’s offer for $15 Million was equal to the highest valuation from the venture firms. The question was: what did the founders want to do?

Will Harvey, Eric Ries and the other founders were unequivocal – “Screw the buy-out, we’re here to build a company. Lets take venture capital and grow this thing into a real business.”

The Scalable Startup
Will and Eric implicitly had already made six decisions that defined a scalable startup.

Their vision for IMVU was broad and deep and very big – 3D avatars and virtual goods would eventually be everywhere in the on-line world. They wanted to build an industry not just a product or a company.
Their personal goal wasn’t to have a company that stayed small and paid them well. Nor did they think flipping the company to make a few million dollars would be a win. They believed their vision and work was going to be worth a lot more – or zero.
They envisioned that their tiny startup was to going to be a $100 million/year company by creating an entirely new market – selling virtual goods.
They used Customer and Agile development to search for a scalable and repeatable business model to become a large company. It reduced risk while allowing them to aim high.
They hired a world-class team with co-founders and early employees who shared their vision.
They fervently believed that only they were the ones who could and would make this happen.

These decisions guaranteed that the outcome of the board meeting was preordained. Selling out to Google would mean that someone else would define their vision. They were too driven and focused to let that happen. A few million dollars wasn’t their goal. Taking venture money was just a means to an end. Their goal was to get profitable and big. And risk capital allowed them to do that sooner than later. Venture money also meant that the VC’s goals of obscene returns were aligned with the founders. For the entire team, turning down the Google deal was equivalent to burning the boats on the shore. (One founder quit and joined Google.) After that, there was no doubt to existing employees and new hires what the company was aiming for.

Take No Prisoners
A “scalable startup” takes an innovative idea and searches for a scalable and repeatable business model that will turn it into a high growth, profitable company. Not just big but huge. It does that by entering a large market and taking share away from incumbents or by creating a new market and growing it rapidly.

A scalable startup typically requires external “risk” capital to create market demand and scale. And the founders must have a reality distortion field to convince investors their vision is not a hallucination and to hire employees and acquire early customers. A scalable startup requires incredibly talented people taking unreasonable risks with an unreasonable effort from the founders and employees.

Not All Startups are Scalable
The word entrepreneur covers a lot of ground. It means someone who organizes, manages, and assumes the risks of a business. Entrepreneurship often describes a small business whose owner starts up a company i.e. a plumbing supply store, a restaurant, a consulting firm. In the U.S. 5.7 million companies with fewer than 100 employees make up 99.5% of all businesses. These small businesses are the backbone of American capitalism. But small businesses startups have very different objectives than scalable startups.

First, their goal is not scale on an industry level. They may want to grower larger, but they aren’t focused on replacing an incumbent in an existing market or creating a new market. Typically the size of their opportunity and company doesn’t lend itself to attracting venture capital. They grow their business via profits or traditional bank financing. Their primary goal is a predictable revenue stream for the owner, with reasonable risk and reasonable effort and without the need to bring in world-class engineers and managers.

The Web and Startups
The Internet has created a series of new and innovative business models. Herein lies the confusion; not every business on the web can scale big. While the Internet has enabled scalable Internet startups like Google and Facebook, it has also created a much, much larger class of web-based small businesses that can’t or won’t scale to a large company. Some are in small markets, some are run by founders who don’t want to scale or can’t raise the capital, or acquire the team. (The good news is that there is an emerging class of investors who are more than happy to fund and flip Web small businesses.)

Scalable Startup or Small Business – Which One is Right?
There’s nothing wrong with starting a small business. In fact, it is scalable startups that are the abnormal condition. You have to be crazy to make the bet the IMVU founders did. Unfortunately the popular culture and press have made scalable startups like Google and Facebook the models that every entrepreneur should aspire to and disparages technology small businesses with pejoratives like “lifestyle business.”

That’s just plain wrong. It’s simply a choice.

Just make it a conscious choice.

Lessons Learned

Not all startups are scalable startups

6 initial conditions differentiate a scalable startup from a small business;

Breadth of an entrepreneurs’ vision

Founders’ personal goals

Size of the target market

Customer and Agile development to find the business model

World-class founding team and initial employees

Passionate belief and a reality distortion field

Understand your personal risk profile/ don’t try to be someone you’re not

Which one is “right” is up to you, not the crowd

Filed under: Corporate/Gov't Innovation, Customer Development, Technology, Venture Capital | 21 Comments »

Customer Development is Not a Focus Group

Posted on November 30, 2009 by steve blank

On first description, hearing the “get out of the building and talk to customers” precept of Customer Development leads people to say, “Oh, I get it. Customer Development is all about gathering a list of what features customers want by talking to them, surveying them, or running “focus groups.”

It’s not.

One of the times I screwed this up it left a legacy of 25 years of questionable design in microprocessor architecture.

Little Indians and Big Indians
At MIPS Computers, my second semiconductor company, I was the VP of Marketing and defacto head of Sales. As the engineers were busy rearchitecting the original Stanford MIPS chip into a commercial product, one of my jobs was to find out what features customers wanted. One of the specific requests from our chip architects was to find out whether customers would want the chip to have data stored as big-endian or little-endian.

“Endianness” refers to the byte order of data stored in external memory. Data can be stored with the most significant byte at the lowest memory address – big-endian, or it can be stored with the least significant byte at the lowest memory address – little-endian.

Different computers used different endianness. The leading minicomputer of the day, the DEC VAX, used little-endian, as did microprocessors such as the Intel 8086 (used in the IBM PC) and the Mostek 6502 (used in the Apple II.) On the other hand, the Motorola 68000 microprocessor (used in the Sun and Apollo engineering workstations) and the IBM 360/370 mainframes were big-endian.

The term “endian” came from Jonathan Swift’s Gulliver’s Travels. In it the Lilliputians argue over how they should eat their hard boiled eggs. One group ate from the little end first – little-endians while the other ate theirs from the big end – big-endians. This turned into a dispute over the “right way” and led to war – just like it did for generations of computer architects.

Just Add Every Feature
As I surveyed potential customers on which version of “endiannes” they wanted, prospects who had their data on VAX minicomputers or IBM PC’s were unequivocal. “It has to be little-endian or we won’t design your chip into our systems.” And when I heard from those who had data on Sun or Apollo workstations or IBM mainframes, the answer was equally unambiguous. “It has to be big-endian or we’ll never adopt your microprocessor.” I still remember the day I talked to Ram Banin, the head of engineering of Daisy Systems (a maker of Electronic Design Automation workstations) and he said, “Steve, you’ll never make every potential customer happy. Why don’t you tell your engineers to build both byte-orders into your new chip?”

What a great idea. Now I didn’t have to decide or figure out whether one set of customers was more valuable than the other. I ran back to the company and said customers had told us, “We have to do both little and big endian.” The reaction from the chip circuit design guys was, “OK, we could do that. We can put both little- and big-endian in the chip, and it won’t cost us more than 1,000 gates.” The reaction from our software guys was a little less kind. “Are you out of your !? *x! minds? Do you understand you are doubling the amount of work you are going to make for generations of software engineers?

No, not really. I was just in marketing.

All I had done was proudly go out and get customer input. Isn’t that what I was supposed to do?

No.

Customer Development is about Testing the Founder’s Hypothesis
Any idiot can get outside the building and ask customers what they want, compile a feature list and hand it to engineering. Gathering feature requests from customers is not what marketing should be doing in a startup. And it’s certainly not Customer Development.

In a startup the role of Customer Development is to:

test the founders hypothesis about the customer problem
test if the product concept and minimum feature set solve that problem

This is a big idea and worth repeating. Customer Development is about testing the founder’s hypothesis about what constitutes product/market fit with the minimum feature set. Thereby answering the questions, “Does this product/service as spec’d solve a problem or a need customers have?” Is our solution compelling enough that they want to buy it or use it today? You know you have achieved product/market fit when you start getting orders (or users, eyeballs or whatever your criteria for success was in your business model.)

The time to start iterating the product is if and only if sufficient customers tell you your problem hypotheses are incorrect or point out features you missed that would cause them not to buy. If you’re lucky you’ll find this out early in Customer Discovery or if not, when no one buys in Customer Validation.

The Jury is Still Out
At MIPS I was out collecting feature requests.

We put both byte orders into the MIPS chip. It’s been there for 25-years.

Lessons Learned

Startups begin with hypotheses about a customer problem or need

Founders talk to customers to discover and validate whether the total solution solves that problem or addresses that need

If, and not only if, there are no “buy signs” from the customer or customers repeatably point out missing features, does the product change

Collecting feature lists and holding focus groups are for established companies with existing customers looking to design product line extensions

Filed under: Customer Development, MIPS Computers | 29 Comments »

Customer Development: Past, Present, Future

Posted on November 23, 2009 by steve blank

The Lean Startup Circle is a Google discussion group (anyone can join) centered on Customer Development/Lean Startup strategy, tactics and implementation. They were kind enough to sponsor a meet-up in San Francisco.

The Times Square Strategy discussion I had with Eric Ries, was still top of mind, so instead of my standard Customer Development lecture, I offered my thoughts on: the origin of Customer Development, where we are today, and where does Customer Development go, and how you can help get it there.

The video below was my presentation to the group.

The slides below go with the video. Just click through them as you watch the video. Extra credit if you know the back-story of slide 1 and why it’s appropriate for founders and their team.

.
……………
Thursday is Thanksgiving Day in the U.S. I’ll have a non-entpreneuership post about family and reflection.

Filed under: Customer Development, Customer Development Manifesto | 8 Comments »

Times Square Strategy Session – Web Startups and Customer Development

Posted on November 16, 2009 by steve blank

One of the benefits of teaching is that it forces me to get smarter. I was in New York last week with my class at Columbia University and several events made me realize that the Customer Development model needs to better describe its fit with web-based businesses.

Dancing Around the Question
Union Square Ventures was kind enough to sponsor a meetup the night before my class. In it, I got asked a question I often hear: “What if we have a web-based business that doesn’t have revenue or paying customers? What metrics do we use to see if we learned enough in Customer Discovery? And without revenue how do we know if we achieved product/market fit to exit Customer Validation?”

I gave my boilerplate answer, “I’m a product guy and I tend to invest and look at deals that have measurable revenue metrics. However the Customer Development Model and the Lean Startup work equally well for startups on the web. Dave McClure has some great metrics…” It was an honest but vaguely unsatisfying answer.

Union Square Ventures
The next morning I got to spend time with Brad Burnham, partner at Union Square Ventures talking about their investment strategy and insights about web-based businesses. Bill and his partner Fred Wilson have invested in ~30 or so companies with 27 still active.

They’re putting money into web services/business – most without early revenue. It’s an impressive portfolio. By the time the meeting was over I left wondering whether the Customer Development model would help or hinder their companies.

Eric Ries in Times Square
For any model to be useful it has to predict what happens in the real world – including the web. I realized the Customer Development model needs to be clearer in what exactly a startup is supposed to do, regardless of the business model.

Luckily Eric Ries was spending a few days in New York, so we sat down in the middle of Times Square and hashed this out.

What we concluded is that the Customer Development model needs an additional overlay.

Four Questions
Just as a reminder, the Customer Development has four simple steps: Discovery, Validation, Creation and Company Building. But it also requires you to ask a few questions about your startup before you use it.

The first question to ask is: “Does your startup have market risk or is it dominated by technical risk?” Lean Startup/Customer Development is used to find answers to the unknowns about customers and markets. Yet some startups such as Biotech don’t have market risk, instead they are dominated by technical risk. This class of startup needs to spend a decade or so proving that the product works, first in a test tube and then in FDA trials. Customer Development is unhelpful here.

Use the Lean Startup – When There’s Market Risk

The second question is: “What’s the “Market Type” of your startup? Are you entering an existing market, resegmenting an existing market, or creating an entirely new market?” Market Type affects your spending and sales ramp after you reach product/market fit. Startups who burn through their cash, usually fail by not understanding Market Type.

The third question (and the one Eric and I came up with watching the people stream by in Times Square): “What is the “Business Model” of your startup?” Your choice of Business Model affects the metrics you use in discovery and validation and the exit criteria for each step.

Business Model Affects Metrics and Exit Criteria

Web-based Business Model Exit Criteria
In a web-business model you’re looking for traffic, users, conversion, virality, etc – not revenue. Dave McClure’s AARRR metrics and Andrew Chen‘s specifics on freemium models, viral marketing, user acquisition and engagement both offer examples of exit criteria for Customer Discovery and Validation for startups on the web.

Eric and I will be working on others.

Filed under: Customer Development, Customer Development Manifesto, Market Types | 21 Comments »

“Lessons Learned” – A New Type of Venture Capital Pitch

Posted on November 12, 2009 by steve blank

I joined the board of Cafepress.com when it was a startup. It was amazing to see the two founders, Fred Durham and Maheesh Jain, build a $100 million company from coffee cups and T-shirts.

But Cafepress’s most memorable moment was when the founders used a “Lessons Learned” VC pitch to raise their second round of funding and got an 8-digit term sheet that same afternoon.

Here’s how they did it.

Fail Fast and Cheap
Fred and Maheesh had started 9 previous companies in 6 years. Their motto was: “Fail fast and cheap. And learn from it.” Cafepress literally started in their garage and was another set of experiments only this time it caught fire. They couldn’t keep up with the orders.

Tell the Story of the Journey
The company got to a point where additional capital was needed to expand just to keep up with the business (a warehouse/shipping center collocated with UPS, etc.) Rather than a traditional VC pitch I suggested that they do something unconventional and tell the story of their journey in Customer Discovery and Validation. The heart of the Cafepress presentation is the “Lessons Learned from our Customers” section. Their presentation looked like this:

Market/Opportunity
Lessons Learned Slide 1
Lessons Learned Slide 2
Lessons Learned Slide 3
Why We’re Here

Telling the Cafepress Customer Discovery and Customer Validation story allowed Fred and Maheesh to take the VC’s on their journey year by year.

After these slides, these VC’s recognized that this company had dramatically reduced risk and built a startup that was agile, resilient and customer-centric.

The presentation didn’t have a single word about Lean Startups or Customer Development. There was no proselytizing about any particular methodology, yet the results are compelling.

The VC firm delivered a term sheet for an 8-digit second round that afternoon.

Your results may vary.

Filed under: Business Model versus Business Plan, Customer Development, Customer Development Manifesto, Venture Capital | 15 Comments »

Relentless – The Difference Between Motion And Action

Posted on November 9, 2009 by steve blank

Never mistake motion for action.
-Ernest Hemingway

One of an entrepreneur’s greatest strengths is their relentless pursuit of a goal. But few realize how this differs from most of the population. Watching others try to solve problems reminded me why entrepreneurs are different.

Progress Report
Last week I happened to be sitting in my wife’s office as she was on the phone to my daughter in college. Struggling with one of her classes my daughter had assured us that she was asking for help – and was reporting on her progress (or lack of it).

She had sent several emails to the resource center asking for help. She was also trying to set up a meeting with her professor. All good, and all part of the “when you’re stuck, ask for help” heuristic we taught our kids. But the interesting part for me was learning that in spite of her efforts no one had gotten back to her.

She believed she had done all things that could be expected from her and was waiting for the result.

I realized that my daughter had confused motion with action.

This reminded me of a conversation with one of my direct reports years before my daughter was born.

Status Report
At Ardent the marketing department was responsible for acquiring applications for our supercomputer. This required convincing software vendors to move their applications to our unique machine architecture. Not a trivial job considering our computer was one of the first parallel architectures, and our compiler required specific knowledge of our vector architecture to get the most out of it. Oh, and we had no installed customer base. I had hired the VP of marketing from a potential software partner who was responsible to get all this 3^rd party software on our computer. Once he was on board, I sat down with him on a weekly basis to review our progress with our list of software vendors.

Think Different
I still remember the day I discovered that I thought about progress differently than other people. Our conversation went like this:

Me: Jim, how are we doing with getting Ansys ported?
Jim: Great, I have a bunch of calls into them.
Me: How are we doing on the Nastran port?
Jim: Wonderful, they said they’ll get back to me next month.
Me: How about Dyna 3D?
Jim: It’s going great, we’re on their list.

The rest of the progress report sounded just like this.

After hearing the same report for the nth week, I called a halt to the meeting. I had an executive who thought he was making progress. I thought he hadn’t done a damn thing.

Why?

The Difference Between Motion and Action
One of Jim’s favorite phrases was, “I got the ball rolling with account x.” He thought that the activities he was doing – making calls, setting up meetings, etc. – was his job. In reality they had nothing to do with his job. His real job – the action – was to get the software moved onto our machine. Everything he had done to date was just the motion to get the process rolling. And so far the motion hadn’t accomplished anything. He was confusing “the accounting” of the effort with achieving the goal. But Jim felt that since he was doing lots of motion, “lots of stuff was happening.” In reality we hadn’t gotten any closer to our goal than the day we hired him. We had accomplished nothing – zero, zilch, nada. In fact, we would have been better off if we hadn’t hired him as we wouldn’t have confused a warm body with progress.

When I explained this to him, the conversation got heated. “I’ve been working my tail off for the last two months…” When he calmed down, I asked him how much had gotten accomplished. He started listing his activities again. I stopped him and reminded him that I could have hired anyone to set up meetings, but I had brought him in to get the software onto our machine. “How much progress have we made to that goal?” “Not much,” he admitted.

Entrepreneurs are Relentless
Jim’s goal was to get other companies to put their software on an unfinished, buggy computer with no customers. While a tough problem, not an insurmountable one for an entrepreneur focused on the objective, not the process.

This was my fault. It had taken me almost two months to realize that other people didn’t see the world the same way I did. My brain was wired to focus on the end-point and work backwards, removing each obstacle in my path or going around them all while keeping the goal in sight. Jim was following a different path.

Focused on the process, he defined progress as moving through a step on his to-do list, and feeling like progress was being made when he checked them off. The problem was his approach let others define the outcome and set the pace.

The difference between the two ways of thinking is why successful entrepreneurs have the reputation for being relentless. To an outsider it looks like they’re annoyingly persistent. The reality is that their eyes are on the prize.

Teaching Moment
If you’re not born with this kind of end-goal focus, you can learn this skill.

My wife and I called our daughter back, declared a family “teaching moment,” and explained the difference between motion and action, and asked her what else she could do to get help for class. She realized that more persistence and creativity was required in getting to the right person. The next day, she was in the resource center having figured out how to get the help she needed.

Lessons Learned

Most people execute linearly, step by step

They measure progress by “steps they did”

Entrepreneurs focus on the goal

They measure progress by “accomplishing their goals”

Filed under: Ardent, Customer Development, Family/Career/Culture | 45 Comments »

Raising Money Using Customer Development

Posted on November 5, 2009 by steve blank

Getting “funded” is the holy grail for most entrepreneurs. Unfortunately in early stage startups the drive for financing hijacks the corporate DNA and becomes the raison d’etre of the company. Chasing funding versus chasing customers and a repeatable and scalable business model, is one reason startups fail.

This post describes how companies using the Customer Development model can increase their credibility, valuation and probability of getting a first round of funding by presenting their results in a “Lesson Learned” venture pitch.

It should go without saying that this post is not advice, nor is it recommendation of what you should do, it’s simply my observation of how companies using Customer Development positioned themselves to successfully raise money from venture investors.

Product Development – Getting Funded as The Goal
In a traditional product development model, entrepreneurs come up with an idea or concept, write a business plan and try to get funding to bring that idea to fruition. The goal of their startup in this stage becomes “getting funded.” Entrepreneurs put together their funding presentation by extracting the key ideas from their business plan, putting them on PowerPoint/Keynote and pitching the company – until they get funded or exhausted.

What are Early Stage VC’s Really Asking?
When you are presenting to a VC there are two conversations going on – the one you are presenting and the one that investors are thinking as they are listening to your presentation. (If they’re not busy looking at their Blackberry’s/iPhone’s.)

A VC listening to your presentation is thinking, “Are you going to blow my initial investment, or are you going to make me a ton of money? Are there customers for what you are building? How many are there? Now? Later?” Is there a profitable business model? Can it scale?” And finally, “Is this a team that can build this company?”

The Traditional VC Pitch
Entrepreneurs who pursue the traditional product development model don’t have customer data to answer these questions. Knowing this venture firms have come up with a canonical checklist of what they would like to see. A typical pitch to a venture firm might cover:

Technology/Product
Team
Opportunity/Market
Customer Problem
Business Model
Go to Market Strategy
Financials

Given that the traditional pitch has no hard customer metrics, (and VC’s don’t demand them,) you get funded on the basis of intangibles that vary from firm to firm: Do you fit the theme or thesis of the venture firm? Did the VC’s like your team? Do they believe you have a big enough vision and market. Did the partner have a good or bad day, etc. Tons of advice is available on how to pitch, present and market your company.

I believe all this advice is wrong. It’s akin to putting lipstick on a pig. The problem isn’t your pitch, it’s your fundamental assumption that you can/should get funded without having real customer and product feedback. No amount of learning how to get a VC meeting or improving your VC demo skills will fix the lack of concrete customer data. You might as well bring your lucky rabbits foot to the VC meeting.

Customer Development – Getting Funded After You Find a Repeatable Model
In contrast, if you are following a Customer Development process you have a greater chance of getting listened to, believed and funded.

Just as a refresher. The first step in Customer Development was Customer Discovery; extracting hypotheses from the business plan and getting the founders out of the building to test the hypotheses in front of customers. Your goal was to preserve your cashwhile you turned these guesses into facts and searched for a repeatable and scalable sales model. Your proof that you have a business rather than a hobby comes from customer orders or users for your buggy, unfinished product with a minimum feature set.

If you’re following Customer Development you are now raising money because even with this first rev of the product you think you’ve found product/market fit and you want to scale.

What VC’s Really Want But Don’t Know How to Ask For or Get
Mike Maples at Maples Investments observes that the quality of pitches from entrepreneurs get better as you climb the “Hierarchy of Proof.”

On the bottom, and least convincing are statements about your “idea.”
Next are hypothesis – “I think customers will care about x or y “
Better are facts from customers – “We interviewed 30 customers with 20 questions”
Even better is “Customer Validation”– “We just got $50K from a customer” or “we got 100,000 users spending x minutes on our site”
Finally if you’re ever so lucky – “Everyone’s buying in droves and we’re here because we need money to scale and execute”

If you’ve actually been doing Customer Development at a minimum you’re at step 3 or 4. If not, you don’t have enough data for a VC presentation. Get out of the building, get some more customer feedback, spin your product and go back and read the book.

“Lessons Learned” – A New Type of VC Pitch
A Customer Development fundraising presentation tells the story of your journey in Customer Discovery and Validation. While your presentation will cover some of the same ground as the traditional VC pitch, the heart of the presentation is the “Lessons Learned from our Customers” section. The overall presentation looks something like this:

Market/Opportunity
Team
Lessons Learned Slide 1
Lessons Learned Slide 2
Lessons Learned Slide 3
Why We’re Here

IMVU’s Original VC Presentation – Will Harvey & Eric Ries

Here’s What We Thought, What We Did, What We Learned
Notice that each of the “Lessons Learned” slide has three major subheads and a graph:

“Here’s What We Thought.”
“Here’s What We Did.”
“Here’s What Happened.”
A Progress Graph

Here’s What We Thought is you describing your initial set of hypotheses. Here’s What We Did allows you to talk about building the first-pass of the products minimum feature set. Here’s What Happened is the not so surprising story of why customers didn’t react the way you thought they would. A Progress Graph on the right visually shows how far you’ve come (in whatever units of goodness you’re tracking – revenue, units, users, etc.)

Telling the Customer Discovery and Customer Validation story this way allows you to take VC’s on your journey through all the learning and discovery you’ve done. After three of these slides, smart VC’s will recognize that by iterating on your assumptions you have dramatically reduced risk– on your nickel, not theirs. They will realize that you have built a startup that’s agile, resilient and customer-centric.

Your presentation doesn’t have a single word about Lean Startups or Customer Development. There is no proselytizing about any particular methodology, yet the results are compelling.

This is a radical departure from a traditional VC pitch. It will blow the minds of 70-80% of investors. The others will throw you out of their office.

Guaranteed Funding – Not
Will this type of presentation guarantee you funding? Of course not. Even if you have the worlds best Lessons Learned slides you might find out that your particular market (i.e. consumer Internet) might have a really, really high bar of achievement for funding.

In fact, just trying to put three Lessons Learned slides together showing tangible progress will make most startups realize how hard really doing Customer Development is.

Try it.

Filed under: Business Model versus Business Plan, Customer Development, Customer Development Manifesto, Venture Capital | 28 Comments »

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