CBI-dagen Bob Dorf

Customer Development:

The Second Decade

(aka Why Accountants Don’t Run Startups)

Bob Dorf serial entrepreneur, startup advisor, partner, “supporting author”

www.steveblank.com

©2010 K+S Ranch Consulting Inc.

http://www.steveblank.com/

…Is there a roadmap?

ScalableStartup

Large CompanyTransition

- Business Model found- i.e. Product/Market fit- Repeatable sales model- Managers hired

What’s A Startup?

A Startup is the temporary organizationused to search for

a scalable business model (c)2010 K+S Ranch Consulting Inc.

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Small BusinessStartup

ScalableStartup

Large Company

Venture Firms Invest in Scalable Startups

(c)2010 K+S Ranch Consulting Inc.

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not quite the beginning of startups, but…

100 Years Ago in Detroit

ScalableStartup


Alfred P. Sloan:Inventor of the Modern Corporation

General Motors, President/Chairman• Cost Accounting• MIT’s Sloan School• Sloan Kettering• Kettering Institute


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ScalableStartup


Billy Durant

Leading horse-drawn buggy maker


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Durant vs. Sloan

• Dies, rich, honored and famous


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Durant vs. Sloan

• Dies, rich, honored and famous• Dies penniless…

…managing a bowling alley


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Durant vs. Sloan

• Dies, rich, honored and famous• Dies managing a bowling alley

Accountant


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ScalableStartup


WE are here


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ScalableStartup


50 years ago: Roger B. Smith

General Motors, President/Chairman- GM >50% market share- Knew what the customer wanted- 5 years to bring a car to market- Huge inventories eliminate stoppages


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ScalableStartup


Toyoda and Ohno

• Taught by Americans post WWII• Couldn’t afford inventory like US

auto companies• Toured GM plants and…• Built Kaizen/lean manufacturing• Toyota Lean Production System


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ScalableStartup


1960: Agile, Lean, Customer Centric

• Short runs vs. Long option lists• Agile Product Development• Lean Manufacturing• Continuous Improvement• Customer Development … talk about ”a day in the life”


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Toyoda/Ohno vs. Smith

• Integrate Customer Development vs. Options• Agile Development plus Lean Manufacturing• U.S. Market share goes from 0 to 20%


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• Buys $35 billion of Japanese robots to “fix” GM

• Market share drops 50% to <25%


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Accountant


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WE are here


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10 Years Ago in Silicon Valley…

More startups fail from a lack of customers than from a failure of product development

Traditional Product Introduction:Two Implicit Assumptions

Concept Product Dev.

Alpha/Beta Test

Launch/1st Ship

Customer Problem: known

Product Features: known


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This Was A Plan For Failure

• Long-term “lockdown” of Product Development/Engineering• Assumed we understood customer problem/product solution

– But they are hypotheses– the facts were outside the building

• Sales & Marketing focused on execution to First Customer Ship– Costs and burn rate became front loaded– Execution & hiring predicated on business plan hypothesis

• Financial projections assume success– Heavy spending hit if product launch is wrong– Failure always a bad reflection on Management, Board, Investors

You don’t know if you’re wrong until you’reout of business, out of money, or (usually) both!

8 Startups later,Steve Blank Drew This…

CustomerDiscovery

CustomerValidation

Company Building

Customer Creation

“Do-Over”

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Which Turned Into A Model

Product Introduction Model

became

Concept Product Dev.

Alpha/Beta Test

Launch/1st Ship

Customer Development

CompanyBuilding

CustomerDiscovery

CustomerValidation

Customer Creation


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Customer Development: happy 10th birthday…extensive “real world” deployment…morphed, tested, debated: CE0s, CM0s, VCs, MBAs…start of a new “entrepreneurial science” syllabus with its own library

CustomerDiscovery

CustomerValidation

Company Building

Customer Creation

Do-Over

…a very short Customer Development overview

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• Stop selling, start listening• Test your hypotheses• Continuous Discovery and Feedback• Done by founders…OUTSIDE the building!

Customer Discovery

CustomerDiscovery

CustomerValidation

CompanyBuilding

CustomerCreation


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Do-Over

Customer Validation

Customer

Discovery

CustomerValidatio

n

Customer Creation

CompanyBuilding

• Can I avoid the “land of the living dead?”• Repeatable and scalable business model?• Passionate Earlyvangelists who “gotta have it?”• Return to Discovery without passionate customers


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Do-Over

The “Do Over” Loop

• Iteration was at the heart of Customer Development

• Fast, agile and opportunistic

• (Almost) celebrate failure…whenever it’s instructive

• But it didn’t have a name “Do over” is just so juvenile

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Do-Over

Customer Creation

• Creation comes after proof of sales

• Spend to scale based on FACTS, not Hypotheses

• Begins only with repeatable, scalable processes for sales, marketing, demand creation

CustomerDiscovery

CustomerValidation

CompanyBuilding

CustomerCreation


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Company Building

CustomerDiscovery

CustomerValidation

Customer Creation

Company

Building

• (Re)build company, management, infrastructure• (Re)visit the mission• Go Global• Get a Porsche (or a Towncar)rganization & management

• Re look at your mission(c)2010 K+S Ranch

Consulting Inc. www.steveblank.com

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100 Startups: National Science Foundation

• Apply Customer Development principles to 100 top funded NSF innovators—pay’em!

• “Short Course” at Stanford, midterm update• Remote Mentoring for 25 teams/quarter• Finals: VC “bakeoff”

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So what’s new since 2003??

• Customer Development startups have surged

• Customer Development “Rules” emerged

• Key Customer Development approaches have

converged

• Product Development cycle times submerged

• …and easy money has been purged

Eric Ries: Insight Engineering acts as if features are “known”

Solution: known

Waterfall

Requirements

Design

Implementation

Verification

Maintenance

Problem: known

Concept/Seed

Product Dev.

Alpha/Beta

Launch/Ship

• Eric observed the solution was unknown in a startup• Waterfall process could only build known features

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New #1:Customer + Agile + Commodity = Lean

Problem: Unknown Solution: Unknown

Source: Eric Ries

• Solving customer + feature unknowns is the “Lean Startup”

#2: Cycle Times Speed Up

• Speed of cycle minimizes cash needs

• Minimum feature set speeds up cycle time

• Near instantaneous feedback drives feature set(c)2010 K+S Ranch

Consulting Inc. www.steveblank.com

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New #3: Jon Feiber @ MDV

Not all Startups Need Customer Development

• Market Risk vs. Technical Risk?– Web is about customers & markets– Biotech is about science & invention– Absolutely valid for .com, social…but differently


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New #4: Dave McClure

Different Metrics for (Web) Startups

Website.com

Revenue $

$$

Biz DevAds, Lead Gen, Subscriptions, ECommerce

Retention

Emails & Alerts

System Events & Time-based Features

Blogs, RSS, News Feeds

REFERRALEmails & widgets

Affiliates, Contests

Viral LoopsACQUISITION

SEOSEM

Apps & Widgets

Affiliates

Email

PR Biz DevCampaigns, Contests

Direct, Tel, TV

Social Networks

Blogs

Domains

From Dave McClurehttp://500hats.typepad.com/

ScalableStartup

LargeCompanyTransition

Startup Metrics- Customer Acquisition Cost- Viral/Unique/Session Growth- Customer LTV change- Average Selling Price/Order Size- Monthly burn rate

Traditional Accounting- Balance Sheet- Cash Flow Statement- Income Statement

The Search for the Business Model The Execution of the Business Model

Startups Need the Right Metrics


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New #5: Business Model, Not Plana Front-end to Customer Development

• Business Plans are Rigid, Static• “No Business Plan Survives First Contact with

Customers” who don’t read them --Steve Blank

• The Four Steps had:– Business model flow for Enterprise Software– Business model summary for each step– Checklists for Enterprise Software

• It said, “modify it to fit your business”• Now we can


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images by JAM

customer segments

key partners

cost structure

revenue streams

channels

customer relationships

key activities

key resources

value proposition

Osterwalder’s Business Model - Insight


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KEYPARTNERS

OFFER

CHANNELS

CUSTOMER RELATIONSHIPS

CUSTOMERSEGMENTS

REVENUE STREAMSCOST STRUCTURE

KEYACTIVITIES

KEYRESOURCES

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buildingblock

buildingblock

buildingblock

buildingblock

building

block

buildingblock

buildingblock

building

block

buildingblock

buildingblock

buildingblock

Business Model Canvas – Any Business

building

block

Test Hypotheses:• Product• Market Type• Competition

Turning Hypotheses to Facts

Business Model Practice Session:Let’s all be Steve Jobs for 15 minutes

• “I’m thinking about Apple tv”• “Surely it’s not just another tv set”• “Is it an ecosystem somehow?”• “How will it help all of Apple grow?”• “What will make it as distinct as the iPhone?...

or the iPod…or the iPad?FOCUS ON THREE BOXES OF THE CANVAS:VALUE PROPOSITION: features, benefits, competitive, priceCUSTOMER SEGMENTS: who will most want to buy it?CHANNEL: where should I let them buy it?


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9 Guesses

Guess Guess

Guess

Guess

GuessGuess

Guess

GuessGuess

A few rules from the “Blank Manifesto”

1. Align all parties upfront…prepare to lose termsheets

2. No VPs, no factories…MVP to the “champagne cork”

3. No more business plans!4. Commit to Iterate and Pivot, “celebrate,” tolerate

failure when it propels you forward

5. Integrate Customer Development with Agile

Development

6. Agree to very different benchmarks and metrics

7. Faster Cycle Times say Run like hell*45

QUESTIONS!!OK, Bob, slow down for a minute….

A Deeper Look atCustomer Discovery

CustomerDiscovery

Phase 1AuthorHypothesis

Phase 2TestProblemHypothesis

Phase 4Verify, Iterate & Expand

Phase 3TestProductHypothesis

To Validation

• Stop selling, start listening• Develop your Key Hypotheses• Test “Problem” Hypotheses with Customers• Then test the GEMx “Solution• Confirm Discovery Completion

Customer Discovery

CustomerDiscovery

CustomerValidation

CompanyBuilding

CustomerCreation

The Discovery Methodology

• Remember: “Search” vs. “Execute” This is SEARCH!• Customer Discovery can take months or years• Each Vertical(some Geographies) have a set of phases• Each Discovery mission follows the same 4 steps

– Identify and Adjust the “Variable Hypotheses”– Test/Validate the PROBLEM with customers– Test/Validate the product SOLUTION with customers– Determine How/When Discovery is complete

• Put the Plan in writing: who, what, when, “success”• Be prepared for lots of wrong and left turns

Test “Problem” Hypothesis

Customer Discovery

Demand CreationHypothesis

Market TypeHypothesis

Product Hypothesis

Customer& ProblemHypothesis

Distribution & PricingHypothesis

CompetitiveHypothesis

Hypotheses

MarketKnowledge

FriendlyFirst Contacts

“Problem”Presentation

CustomerUnderstanding

SecondReality Check

First RealityCheck

“Product”Presentation

Yet MoreCustomerVisits

Test “Product” Hypothesis

Iterate orExit

Verify the Product

Verify theProblem

Verify theBusiness Model

Verify

Inside the Building

Outside the Building

Before You Start: #1

• Know your stuff:– Lots of casual, “deep dive” conversations– You’ll be “trading knowledge,” so it’s good to have some– Know the vertical to ask good questions, process

answers– Bring technical experts to key technical conversations

• Do your Homework:– Market knowledge a key Discovery element– Customer sizes, current behavior is important– Start early to “network” your way to the right folk– Keep detailed records on all interactions

Before You Start: #2

• Capture History/Learning from predecessors:– Industry knowledge among team members– Public, available information resources– Consolidate learning experience-to-date

• GET ORGANIZED to– Capture/organize/summarize findings– Which customers address which hypotheses– Find people willing to talk to you

Phase 1: Author Hypotheses

• One-time writing exercise

• All other time spent in front of customers

• Assumes you’re smart but guessing

Phase 1AuthorHypotheses


Phase 4Iterate & Expand

Phase 3ProductConceptTesting

Step 1: Develop Your Hypotheses

• What are Hypotheses?• Where do Hypotheses come from?• Why Test them?• How do you test them?• Why not test them all?

What’s a Hypothesis?

• My (well) educated “best GUESS”• …in a one-page bullet point list• Based on Knowledge:

– …of the Vertical and/or Geography– …of similar Markets/Verticals/Countries– …that I’ll confirm with the RIGHT types/number of customers

• Goal: One Page of Bullets Per Hypothesis– NO long-winded narratives– NO jargon, simple to understand– Use appendices for detailed product, other specs– Be sure the team agrees– Create a “matched set” of Hypotheses for the vertical/market

MBA295-F Customer Development in the High-Tech Enterprise Spring 2009

Hypotheses to Focus on:5 Will Change Most Often

1. Product/Value Proposition

2. Customer/Problem

3. Distribution/Pricing

4. Competitive Hypothesis

5. Demand Creation

CompetitiveHypothesis

Demand CreationHypothesis

Product Hypothesis

Customer& ProblemHypothesis

Distribution & PricingHypothesis

1. Product Hypotheses aka Value Proposition

• Features we’re trying to sell exactly what we’re building

• Benefits vary widely by customer type, need, behavior

• Product Delivery Schedule flex for big opportunities

• Total Cost of Ownership differs by customer, for sure

• Other typical elements you can “ignore:”– Product Cost/Manufacturing– Long-term sales volume(at least for now)– Long-term product plan– Minimum Viable Product

2. Customer/Problem Hypotheses

• Define the Problem price vs performance vs power vs

pretty? • Magnitude of the problem how much does anybody

care?

• Types of Customers/Archetypes may questions here:– Customer type: specifier/buyer/decisionmaker/saboteur types to watch for– Distinct types: Earlyvangelist vs. mainstream; Direct vs. Indirect; Rent vs Buy– Archetypes: draw me the profile of the ideal customer in this vertical– “Multi-sided:” engineers, architects, consultants, other referrers/validators

• Visionaries who are the Earlyvangelist candidates/why

• Who will grab me and say “I need this now.”

• A Day in the Life of a customer know their business

• Customer Organization Map

3. Distribution/Pricing Hypotheses

• Distribution Model who sells, services, delivers in vertical

• Distribution Diagram how it “works,” who “owns” what

• Channel strategy best approach for market/vertical/geography

• Sales Cycle/Ramp direct, referrals, viral growth

• Pricing and channel costs

4. Competitive Hypotheses

• Key Product Benefits/Attributes • Variations on Benefits by customer type• Who is out there in this vertical or geography?• Why are they important? How do they sell?• Which customers use them today? How?• What are their weaknesses?

5. Demand Creation Hypotheses

• Marketing: it’s all about Sales Leads. Period.• How do competitors create demand?• How will you create demand in this vertical?• Who are influencers/recommenders?• Key trade shows? Industry groups/events?• Key trends where your product fits, leads?

Phase 2: Test & Qualify Problem

Hypothesis

• Get out of the building• Test the problem• Become the customer• Solve a real problem





Test & Qualify the Problem: 1. Plan First Contacts ALWAYS

Warning: this step may not be needed everywhere!• “Let’s talk about your problems, not the product”• Build a Rolodex• Research Industry Associations, Publications• Other relationships with company/geographies• Develop “Innovators” list• Create reference story/sales script• Schedule Customer Visits

Test & Qualify the Problem: 2. Create Problem Presentation LIKELY

• Absolutely Not a Sales Pitch:– Tests your understanding of the customer’s problem– Determine how serious a problem you’re solving(demand)– Learn about customers: how they work, how they buy

• Learn to Listen, not to Talk or Present– This is a discussion, not a pitch– Avoid large group meetings where possible– Begin to Validate Hypotheses: pain, gain, how they buy– Probe for the customer’s ‘win’

• Talk about “possible” Problems/Solutions • Capture missing market, competitive, marketing data

Test & Qualify the Problem: 3. Customer Understanding ALWAYS

• Become a Domain Expert• Understand their “Day-in-the Life”• Understand their problems/pain• Get a feel of how this impacts their

life/work• Who has similar products to solve this

problem• How do customers learn about new

solutions• Can they be helpful later

Test & Qualify the Problem: 4. Market Knowledge ALWAYS

• Get a feel for the “lay of the land”• Build a complete “data set” on market,

players• Adjacent Market players• Industry Influencers• Key Analysts• Attend Key Conferences/Tradeshows

Discovery: The PROBLEM

• What is the problem? • Who has the problem?• How important is solving the problem to

this customer? • Where do they turn for solutions?• How valuable is the solution to this

customer?• Can I turn interest into an order before I

retire?• …and does he or she have the clout to

help?

Phase 3: Test Product Hypothesis

• First reality check w/team

• The product hits the street

• Lots of customer visits• More doses of reality

EVERYONE does this in EVERY MARKET…but it may be combined with “problem”

Hypothesis test.

Phase 1HypothesisPhase 2

Test& QualifyHypothesis



Test Product Hypothesis: 1. First Reality Check

• How did “Problem” Discovery change the Hypotheses?• Do any changes yield Pivots? Pricing? Product?• Build a Workflow Map of customer

– First: preliminary sales roadmap– Second: life before and after the new product

• Problem scale• Key insights• How did the product spec match needs?• Re-review product feature List• Re-review competitive analysis

Test Product Hypothesis: 2. Product Presentation

• Start with Problem Presentation• Then describe the Product• Demo if possible

Test Product Hypothesis: 3. More Customer Visits: SOLUTION

• Set up More Calls• Validate Solution• Validate Product• Validate Positioning• Understand Customer and Organizational Pain• Validate Pricing and Budget• Understand “Whole Product” needs• Understand Approval Process/sales cycle

TIME OUT: What’s your Discovery Plan?

• WHO do you need to talk to?• HOW will you find them?• WHAT “problem” questions do you have?• WHAT “solution” questions do you have?• WHEN will you be done?


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Phase 4: Where/When are we done with Customer Discovery?

CustomerDiscovery





To Validation

Customer Discovery: Exit Criteria

• Consistent answers from “enough” people?

• What are the customers’ top problems?– How much will they pay to solve them

• Is there high demand for your solution?– Do customers agree? – How much will they pay? When?

• Draw a day-in-the-life of a customer• Draw the org chart of users & buyers• Enough feedback? How much is that?

When You’re Finished……do it all again: Validation!

CustomerDiscovery





To Validation

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CBI-dagen Bob Dorf

Business

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