Steve Blank/Eric Ries Customer Development / Lean Startup Class 1 at Haas Business School 012610

1. Customer Development in High Tech:
Sales, Marketing & Business Development in a Startup
MBA & EMBA 295-F
Three Types of Markets
Steve Blank and Eric Ries
1/26/10 1

2. Class 2: Agenda
 Scalable Startups
 Case: In N Out
 Market Type
 Definitions
 Examples
 Risks
2

3. Scalable Startup
3

4. Small Business vs. Scalable Startup
 Small business = reasonable risk and return
 Scalable startup = unreasonable risk and return
 Vision of large market or new market
 Willing to make a large bet of time and money
 Reality Distortion field
4

5. Small
Business
vs.
Scalable
Startup
Small
Startup
Business
Scalable
Large
Startup
Company
>$100M/year

6. Small
Business
vs.
Scalable
Startup
Small
Startup
Business
-­‐
Business
Model
found
-­‐
Profitable
business
-­‐
ExisEng
team
<
$10M
Scalable
Large
Startup
Company
>$100M/year
-­‐
Total
Available
Market
>
$500m
-­‐
Company
can
grow
to
$100m/year
-­‐
Known
business
model
-­‐
Focused
on
execuEon
and
process

7. Scalable
Startup
to
Company
The
TransiEon
Scalable
TransiEon
Company
Startup

8. Scalable
Startup
Exit
Criteria
Scalable
TransiEon
Company
Startup
- Business Model found
- Product/Market fit
- Repeatable sales model
- Managers hired

9. TransiEon
to
Company
Exit
Criteria
Scalable
TransiEon
Company
Startup
- Business Model found - Cash-flow breakeven
- Product/Market fit - Profitable
- Repeatable sales model - Rapid scale
- Managers hired - New Senior Mgmt
~ 150 people

10. What
is
a
Startup:
DefiniEon
a
startup
is
an
organiza-on
formed
to
search
for
a
repeatable
and
scalable
business
model.

11. What
is
the
Purpose
of
a
Startup?
The Search for the Business Model The Execution of the Business Model
Scalable
TransiEon
Company
Startup
- Business Model found - Cash-flow breakeven
- Product/Market fit - Profitable
- Repeatable sales model - Rapid scale
- Managers hired - New Senior Mgmt
~ 150 people

12. What is a Scalable Startup:
Definition
A
startup
is
an
organiza-on
formed
to
search
for
a
repeatable
and
scalable
business
model.
So
what’s
a
Business
Model?

13. Business
Model
=
Keeping
Score
itomorrow’s organization. today.
n
a
Startup
INFRASTRUCTURE PARTNER CUSTOMER CUSTOMER
NETWORK RELATIONSHIP
OFFER
CORE TARGET
explains the
CAPABILITIES portrays the network of
relationships a company
CUSTOMER
cooperative agreements
VALUE establishes with its
with other companies
PROPOSITION customers
outlines the capabilities
describes the customers
required to run a
a company wants to
company's business
offer value to
model DISTRIBUTION
VALUE gives an overall view of
CONFIGURATION a company's bundle of CHANNEL
products and services
describes the describes the channels
arrangement of to communicate and get
activities and resources in touch with customers
sums up the monetary describes the revenue
consequences to run a COST FINANCE REVENUE streams through which
business model STRUCTURE STREAMS money is earned

14. Where
Does
this
Class
Fit?
Scalable Startup
Customer Development
Hypotheses, Data,
TransiEon
Company
Experiments Feedback,
, Insights
Insights
Agile Development

15. Where
Does
this
Class
Fit?
This is what our class is about
Scalable Startup
Customer Development
Hypotheses, Data,
TransiEon
Company
Experiments Feedback,
, Insights
Insights
Agile Development

16. In-N-Out Case
16

17. In-N-Out Secret Menu
 X by Y  Grilled Cheese
 X meat patties and Y slices of cheese  Two slices of melted cheese, tomato,
(for example, a 3 by 3 or a 2 by 4) lettuce and spread on a bun, with no meat.
 Double Meat  Extra Everything
 Two meat patties without cheese.  Adds extra spread, tomato, lettuce, and
 Triple Meat onions (regular or grilled).
 Three meat patties without cheese.  Fries "Light"
 Animal Style  Almost raw fries that are cooked for less
time.
 A mustard cooked beef patty served on a
bun with pickles, lettuce, tomatoes, extra  Fries "Well" (aka "Wellies")
spread and grilled onions. Any burger  Fries that are cooked longer to be extra
(including veggie and grilled cheeses) may crisp.
be made this way.  Cheese Fries
 Flying Dutchman  Fries with two slices of melted cheese
 Two meat patties, two slices of melted placed on top.
cheese and nothing else.  Animal Style Fries
 Protein Style  Fries with cheese, spread, and grilled
 Instead of a bun, the burger is wrapped in onions.
lettuce. Any burger (including veggie and  Neapolitan Shake
grilled cheeses) may be made this way.
 All three shake flavors (strawberry, vanilla
 Veggie Burger (Wish Burger) and chocolate) combined in one shake.
 A burger without the meat and cheese.
17

18. In-N-Out Meat Factory
18

19. Further Reading
19

20. Market Type
Who Cares?
20

21. So Why Are We Talking About This?
Existing Market Resegmented New Market
Market
21

22. Type of Market
Changes Everything
Existing Market Resegmented New Market
Market
 Market Sales

• Customers
 Market Size  Sales Model • Needs
 Cost of Entry  Margins • Adoption
 Launch Type  Sales Cycle
Competitive  Chasm Width
 • Finance
Barriers • Ongoing Capital
 Positioning • Time to Profitability
22

23. Definitions: Three Types of Markets
Existing Market Resegmented New Market
Market
 Existing Market
 Faster/Better = High end
 Resegmented Market
 Niche = marketing/branding driven
 Cheaper = low end
 New Market
 Cheaper/good enough can create a new
class of product/customer
 Innovative/never existed before
23

24. Existing Market Definition
 Are there current customers who would:
 Need the most performance possible?
 Is there a scalable business model at this point?
 Is there a defensible business model
 Are there sufficient barriers to competition from
incumbents?
24

25. Existing Market
Performance! Our Company!
Existing!
Companies!
25

26. Oops, forgot about Time
Performance! Our Company!
Existing!
th
Companies!
an ce Grow
Today!
any Perform
Existin g Comp
Time!
26

27. Existing Market Risks
 “Better/Faster” is an engineering driven axiom
 Incumbents defend high-end, high-margin
businesses
 Factor in:
 Network effect of incumbent
 Sustaining innovation of incumbent
 Industry (or you own) “standards”
 “They’ll never catch up” is not a business strategy
 Established companies almost always win
27

28. Resegmented Market Definition (1)
Low End
 Are there customers at the low end of the market
who would:
 buy less (but good enough) performance
 if they could get it at a lower price?
 Is there a business profitable at this low-end?
 Are there sufficient barriers to competition from
incumbents?
28

29. Low-end Resegmentation
“Good Enough” Performance
Performance!
Existing!
th
Companies!
an ce Grow
Today!
a ny Perform
Existin g Comp
Our Company!
At the Low-end!
Time!
29

30. Resegmented Market Definition (2)
Niche
 Are there customers in the current market who
would:
 buy if it addressed their specific needs
 if it was the same price?
 If it cost more?
 Is there a defensible business model at this point?
 Are there barriers to competition from incumbents?
30

31. Niche Resegmentation
“Branding” has its place
Existing Customers!
Performance! New Niches!
ny
ew Compa
for a N
Niche
ny
ew Compa
for a N
Niche
y
gCompan
Existin
Time!
31

32. Resegmented Market Risks
 “Cheaper” is a sales-driven axiom
 Incumbents abandon low-end, low-margin
businesses
 For sometimes the right reasons
 Low-end must be coupled with a profitable
business model
 Up migration
32

33. New Market Definition
 Is there a large customer base who couldn’t do
this before?
 Because of cost, availability, skill…?
 Did they have to go to an inconvenient, centralized
location?
 Are there barriers to competition from
incumbents?
33

34. New Market
Customers That Don’t Yet Exist
Existing Customers!
New Niches!
Performance!
New Customers!
New Markets!
pan y
g Com
Existin
t
New Marke
Time!
34

35. New Market Risks
 “New” is a marketing-driven axiom
 New has to be unique enough that:
 There is a large customer base who couldn’t do
this before
 They want/need/can be convinced
 Adoption occurs in your lifetime
 Company manages adoption burn rate
 Investors are patient and have deep pockets
35

36. Hybrid Markets
 Some products fall into Hybrid Markets
 Combine characteristics of both a new
market and low-end resegmentation
 SouthWest Airlines
 Dell Computers
 Cell Phones
 Apple IPhone?
36

37. Market
Type

38. New Product Conundrum
 New Product Introduction methodologies
sometimes work, yet sometimes fail
 Why?
 Is it the people that are different?
 Is it the product that are different?
 Perhaps there are different “types” of startups?
38

39. Business
Model
ExecuEon
Differs
by
“Market
Type”
organization. today.
tomorrow’s
INFRASTRUCTURE PARTNER CUSTOMER CUSTOMER
NETWORK RELATIONSHIP
OFFER
CORE TARGET
explains the
CAPABILITIES portrays the network of
relationships a company
CUSTOMER
cooperative agreements
VALUE establishes with its
with other companies
PROPOSITION customers
outlines the capabilities
describes the customers
required to run a
a company wants to
company's business
offer value to
model DISTRIBUTION
VALUE gives an overall view of
CONFIGURATION a company's bundle of CHANNEL
products and services
describes the describes the channels
arrangement of to communicate and get
activities and resources in touch with customers
sums up the monetary describes the revenue
consequences to run a COST FINANCE REVENUE streams through which
business model STRUCTURE STREAMS money is earned

40. Lean
Startup
ExecuEon
Differs
by
“Market
Type”
organization. today.
tomorrow’s
Customer Development
Hypotheses, Data,
Experiments, Feedback,
Insights Insights
Agile Development

41. Next Week
 Read
 CASE: E.Ink and E.Ink 2005
 Boyd – OODA Loop PowerPoint slides
 Fast Company : The Strategy of a Fighter pilot
 McGrath & MacMillan: Entrepreneurial Mindset
Chapter 10 pages 231-245
 Blank – Four Steps to the E.piphany Chapter 2
41