Death By Competitive Analysis

Trading emails with a startup CEO building an iPhone app, I asked him why potential customers would buy his product.  In response he sent me a competitive analysis. It looked like every competitive analysis I had done for 20 years, (ok maybe better.)

And it made me sad. Looking at the spreadsheet, I realized that competitive analysis tables are one of the ways professional marketers screw up startups from day one. And I had done my share.

Here’s why.

Prove What I Already Believe
Most competitive analyses are: 1) sales documents for investors and/or 2) an attempt to rationalize the founders assumptions.

It’s Part of the Plan
Most investors require you to write a business plan which includes a section called a “competitive analysis” in which you tell potential investors how your product compares to products other companies trying to develop and sell to the same customers. While most investors don’t actually read your business plan for a first meeting, a summary of your competitive analysis usually ends up as a slide or two in your PowerPoint presentation.

Your goal in this slide is to tell investors: 1) you understand the market you are selling to, 2) you understand the other companies selling in your market, and 3) you understand how and why you are better than any of the products currently in the market. You are also implicitly telling potential investors, “These features on our competitive slide mean we will sell a lot of what we are planning to build so invest in us.”

Death by Analysis
I looked at the competitive analysis this startup CEO sent to me. This guy was experienced, he worked at lots of large companies, so the table was thorough, it had lots of rows and mentioned all the competitors.

Not only was it wrong, it would set his company back months and possibly even kill them.

Why?

Competitive Analysis Drives Feature Sprawl
In most startups the competitive analysis feature comparison ends up morphing into the Marketing Requirements Document that gets handed to engineering. The mandate becomes; “Our competitors have these features so our startup needs them too. Get to work and add all of these for first customer ship.”

Product development salutes and gets to work building the product. Only after the product ships does the company find out that customers couldn’t have cared less about most of the bells and whistles.

Instead of optimizing for a minimum feature set (that had been defined by customers) a competitive analysis drives a maximum feature set.

This is not good.

Where Are the Customers?
Here’s the problem: How did the founder know which features to choose on the competitive analysis table? When I was running marketing, the answer usually was, “We’ll put up whatever axes or feature comparisons that make us look best in this segment to potential investors. What else would you choose?”

At its best a competitive analysis assumes that you know why customers are going to buy your product.  At its worst it exists to rationalize the founder’s assumptions about what they are building. This is a mistake – and it is a contributing factor (if not a root cause) of why most startups get their initial feature set wrong.

If you are building a competitive analysis table, do so only after you understand that the features you are listing matter to customers. Most marketers are happy to build feature comparisons. But customers don’t buy features, they usually buy something that solves a real or perceived need. That’s the comparison you and your investors should be looking at –  what do customers say they need or want?

The answer to that question is almost never in your building.

How to Make A Competitive Analysis Useful
A competitive analysis makes sense when your startup is entering an Existing market –  where the competitors are known, the customers are known, and most importantly – the basis of competition is known.

(The basis of competition are the features that customers in an existing market have said, “Yes, this is what is extremely important to me. I will dump my current supplier/manufacturer for your new product because yours is smaller/faster/easier to buy/get to/tastes better, etc.)

You win in an existing market when you are better or faster on those metrics that customers have told you are the basis of competition. Your competitive analysis must be around those metrics.

But most startups are not entering an Existing market. They may be trying to:

  • Take a segment of an existing market by offering a product that
    1) costs less (trading fewer features for a lower price) or
    2) addresses the specific needs of a customer segment that the existing suppliers have failed to address
  • Or they may be creating an entirely new market with a disruptive innovation that never existed before.

In a Resegmented market, a competitive analysis starts with the hypothesis of “Here’s the problem we are solving for customers.” The competitive analysis chart highlights the product features that differentiate your startup from the existing market incumbents because of your understanding of specific customer needs (not your opinion) in this niche.

In a New market a competitive analysis starts with the hypothesis of “We are creating something that never existed before for customers.” The competitive analysis table highlights the product features that show what customers could never do before. It compares your company to groups of products or services.

I asked the CEO to go back to the competitive analysis and tell me whether he really knew what features matter most to potential customers. If not, he should get out of the building and find out.

Lessons Learned

  • Too often competitive analysis drives product requirements in startups.
  • This can lead engineering to build the maximum feature set rather than minimum feature set.
  • You need to get outside the building and figure out what features matter to most customers.
  • No feature lists without facts.

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Death By Revenue Plan

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.

Times Square Strategy Session – Web Startups and Customer Development

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.

Lean Startup

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.

Market Type Affects Spending and Sales Ramp

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.

Slide4

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.

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Customer Development Manifesto: Market Type (part 4)

This series of posts of the “Customer Development Manifesto” describes how the failures of the Product Development model for sales and marketing led to the Customer Development Model. In future posts I’ll describe how Eric Ries and the Lean Startup concept provided the equivalent model for product development activities inside the building and neatly integrates customer and agile development.

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

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

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

They never understood Market Type.

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

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

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

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

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

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

—–

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

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He’s Only in Field Service

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

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

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

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

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

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

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

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

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

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

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

market-type

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

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

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

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

Lessons Learned

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

Listen to the blog post here [audio http://traffic.libsyn.com/albedrio/steveblank_hplewis_073009_FULL.mp3]

Download the podcast here or here

an early version of this story appeared on folklore.org

Customer Development Fireside Chat

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

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

Lessons Learned

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

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Customer Development Talk Startup2Startup

Eric Ries of Lean Startup fame and the author of the Lessons Learned blog joined me at Startup2Startup for a joint Customer Development talk. Thanks to Dave McClure and Leonard Speiser for the opportunity to speak.

The Customer Development talk can be seen here74HGZA3MZ6SV

Part 1

Part 2

Part 3

The slides are here.

If you’ve never seen Eric’s Lean Startup presentation, take a few minutes to at least watch his part. It starts at ~40:30 in the video.

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