- Steve Blank Presentation - Nov 09 San Francisco Lean Startup Circle - Customer Development Past Present Future

2. The Customer Development Model
Past, Present, Future
Lean Startup Circle - San Francisco
19 November 2009
Steve Blank
Stanford School of Engineering /
UC Berkeley, Haas Business School
www.steveblank.com

3. Agenda
• How did we get here?
• Where are we?
• What can the Lean Startup Circle do?

4. Past

5. In the Beginning
Insight - The Chasm

6. No Time To Think
• Eight startups 1978 -1999
– Semiconductors, video games, signals
intelligence, supercomputers, Mac
peripherals, enterprise software
• Training instructor to CEO
• Four IPO’s, one a “go home” and stay

7. It Started With a Question
If Startups Fail from a Lack of customers
not Product Development Failure
Then why do we have:
• process to manage product development?
• no process to manage customer development?

8. All We Had Was 30 Years of This
Concept/ Product Alpha/Beta Launch/
Seed Round Dev. Test 1st Ship
Product Development Model

9. I Started Reading
• Lead User Research - Von Hippel • OODA Loop - Boyd
• Crossing the Chasm - Moore • Question-based Selling - Freese
• Entrepreneurial Mindset - McGrath/MacMillan • Solution Selling - Bosworth
• Innovators Dillema - Christensen • Conceptual/Strategic Selling - Heiman
• Profitable Value - Lanning • Spin Selling - Rackham
• Lanchester Strategy - Yano • US Marine Corps Warfighting Manual
• High Tech Marketing - Davidow • Tipping Point - Gladwell
Customer Customer Customer Company
Discovery Validation Creation Building

10. It Resulted in a Few Hypotheses
• Startups weren’t small versions of large companies
• They were about learning/discovery, not execution
• Entrepreneurs and their VC’s were executing on
guesses
• But the facts were outside the building

11. Which Turned Into A Model
Product Development
Concept/ Product Alpha/Beta Launch/1st
Bus. Plan Dev. Test Ship
+
Customer Development
Customer Customer Customer Company
Discovery Validation Creation Building

12. Eric Ries Extends the Model
• Took my class at U.C. Berkeley
• Co-founded IMVU
- 1st implementation of Customer Development
- Paired it with an Agile Development Model
• Observed that the sum of the two was powerful

13. Eric Ries: Insight - 1
Startups assumed development was “known”
Concept/ Product Alpha/ Launch
Seed Dev. Beta /Ship
Waterfall
Requirements
Design
Solution: known
• I understood the problem Implementa1on
was unknown Problem: known Verifica1on
• Eric observed the solution Maintenance
was unknown in a startup

14. Eric Ries: Insight - 2
Agile matches the Customer Dev speed
Concept/ Product Alpha/ Launch
Seed Dev. Beta /Ship
Solution: unknown
• Agile was the development
methodology to use when the
solution was unknown

15. Eric Ries: Insight 3
Customer + Agile + Commodity = Lean
• Solving for both unknowns is the “Lean Startup”
Problem: Unknown Solution: Unknown
Source: Eric Ries

16. Jon Feiber @ MDV Insight
Not all Need Customer Development
• Market Risk vs. Technical Risk?
- Web is about customers & markets
- Biotech is about science & invention

17. John Boyd - Insight
The OODA “Loop”
Observe Orient Decide Act
Implicit Implicit
Unfolding Guidance Guidance
Cultural
Circumstances & Control Traditions & Control
Genetic
Analyses &
Observations Feed
Forward
Heritage
Synthesis Feed Decision Feed Action
Forward Forward
(Hypothesis) (Test)
New
Information Previous
Experience
Outside Unfolding
Information Interaction
With
Unfolding
Environment
Interaction Feedback
With
Environment Feedback
Orientation shapes observation, shapes decision, shapes action, and in turn is shaped by the feedback
and other phenomena coming into our observing window.

18. Iteration versus Execution
Iteration Execution
Customer Customer Customer Company
Discovery Validation Creation Building
The Search for a Business The Growth of a Business
Product/Market Fit

19. Iteration versus Execution
Product/Market Fit

20. Present

21. Business Model
Affects Metrics and Exit Criteria

22. Appendix B: Business Model
Checklist
• The Four Steps had:
– Business model flow for Enterprise Software
– Business model summary for each step
– Checklist for Enterprise Software
• It said, “modify it to fit your business”

23. The Flow
State Your Hypotheses
Customer & Distribution & Demand Market Type Competitive
Product Pricing
Problem Creation Hypothesis Hypothesis
Hypothesis Hypothesis
Hypothesis Hypothesis
Test Problem Hypothesis
Friendly roblem� Customer Market
First Contacts Presentation Understanding Knowledge
Test Product Hypothesis
First Reality Yet More 1st Advisory
�Product� Customer
Second
Check Reality Check Board
Presentation Visits
Verify the Verify the Iterate or
Verify the
Problem
Product Business Exit Verify
Model

24. Customer Discovery Summary
The Summary
Phase Goals Deliverables
0. Get Buy-In Investors/founders agree on Customer Development, key hires, and values. Buy-In, Core Values
1. State Hypotheses Set product specs, develop detailed hypotheses of product, first customers, channels and Hypothesis Briefs
pricing, demand, market, and competition.
A. Product Hypotheses Get agreement on product features, benefits, and release schedules. Product Brief
B. Customer Hypotheses Describe customers, their problems, and why they will use the product. Customer Brief
C. Channel & Pricing Hypotheses Develop a channel strategy and pricing model. Channel and Pricing Brief
D. Demand Creation Hypotheses Identify demand creation strategy, influencers, and trends. Demand Creation Brief
E. Market Type Hypotheses Describe what market you are in (new, existing, resegmented). Market Type Brief
F. Competitive Hypotheses Develop competitive analysis that fits your Market Type. Competitive Brief
2. Test & Qualify Hypotheses Test hypotheses from phase 1. Understand customers’ “day in the life” Validate
A. First Customer Contacts Create customer list and schedule the first customer contacts. Customer List
B. Problem Presentation Develop presentation of problems, current solutions, product solution. Problem Presentation
C. In-Depth Customer Understand how customers work, their problems and who else influences their decisions. Customer Brief
Understanding
D. Market Knowledge Understand the market: meet w/analysts & media, trade shows, research. Positioning Brief
3. Test & Qualify Prod Concept Test product concept. Do customers’ needs match the product? Hypotheses
A. First Reality Check Review customer/product feedback & test phase 1 customer problem assumptions. Revise Product
Customer Briefs
B. Product Presentation Create product presentation on how product solves customers’ problems. Product Presentation
C. More Customer Visits Expand customer list to include five new potential customers. Customer List
D. Second Reality Check Review product feature feedback and test. Updated Feature List
E. First Advisory Board Members Spot and recruit first advisory board members. Advisors on Board
4. Verify Found the right market? Have a profitable business? Validate
A. Problem Verification Verify that you have identified a problem that a customer wants solved. Problem Statement
B. Product Verification Verify that the product solves customers’ needs and its ROI. Product Requirement Doc
C. Business Model Verification Verify that you have a profitable business model. Updated Revenue/Sales
Plan
D. Iterate or Exit Decide whether you have learned enough to go sell. Business/Prod Plan

25. The Workbook
Customer Validation V e r i f ication: Sales
Customer Discovery Hypothesis: The Customer Worksheet 1-b Worksheet 4-b
Customer & Demand Market Type Competitive Verify the Iterate or
Product
Problem
Distribution &
Creation Hypothesis
Verify the Verify the Verify the
Hypothesis Pricing Hypothesis
Product Sales Channel Exit
Hypothesis Hypothesis
Hypothesis Business
Roadmap Roadmap
Model
Goal of phase 1b: Develop a hypothesis of who the customer is and what problems
they have that will drive them to use your product, before you leave the building. Goal of phase 4b: You’ve gone all around the Customer Validation circle. You
assembled your sales materials, found visionary prospects and tried to sell and close 3
A u t h o r : Business Execution, Business Visionary to 5 customers. In this phase you summarize everything you learned from selling.
Approval: Founding Team and Executive Staff
Presenter: Founding Technical Team Author: Sales Closer, Business Execution
Time/Effort: 3-5 days of authoring by VP Business Execution or Business Approval: A l l
Visionary, day presentation/ strategy meeting with founding team and Presenter: Sales Closer
executive staff Time/Effort: 1-3 days of authoring by VP Business Execution or Business
Visionary, day presentation/strategy meeting with founding team and
1. Define the different types of “customer”
2. W ho will be the actual day-to-day user of the product?
executive staff
3. W ho are the influencers and recommenders?
4. W ho is the “Economic Buyer?” (I.e. whose budget paid for it?) 1. P r o s p ecting
5. Do you think the Economic Buyer has an existing budget for this product or do they need to get 2. H o w easy was it to get an appointment?
one approved? 3. Did customers understand what you wanted to sell?
6 . W ho are the “Decision Makers?”
7 . W ho else needs to approve the purchase? 4 . Presenting
5. Did you understand the real pain the buyers had?
8 . C u s tomer Visionaries understand they have a pain and can visualize that there is a solution. Where do you 6. H o w did your solution match their needs?
think you will find them? 7. Did you understand the impact on others in the company?
9. In what title or function? 8. Did you need a demo or prototype to sell?
10. In what company type? 9. W h e r e the sales materials adequate?
11. In what industry Segment?
12. R eminder: a visionary is a paying customer 10. Customer Organizational Issues
11. Did you identify the right decision makers?
13. Where in an organization you think your first customers are? 12. Did you understand the other key players in the organization?
14. What departments 13. Did you lose deals because others in the organization objected?
15. What are their titles?
16. How do they differ from later customers? (Hint: Lots in a new market, little in an existing 1 4 . Pricing
market.) 15. Did you lose deals over pricing?
16. Do you have the right pricing model?
17. What problem does the customer have? 17. What is the Average Selling Price?
18. What do you think the biggest pain is in how they work? 18. Over the next 3 years how many units will a customer buy?
19. I s it the same on all levels of the company?
20. I f they could wave a magic wand and change anything what would it be? 19. What is the lifetime value of each customer?
21. Since your product doesn’t exist, what do people do today to solve their problem? 20. Was their any objection to your pricing? (If not, your product may be priced too low—you should
D o n’t do it ?Do it badly? Don’t recognize the need? always get a modicum of grumbling.)
21. Besides the absolute price of the product, do you have the right pricing model?
22. Where on the “problem recognition scale” is each type of customer (users, recommenders, economic
buyers) 22. R O I Model
• L a t e nt Need (you recognize that the buyer needs your product but they don’t…yet) 23. Do you understand the ROI for a customer? Revenues? Costs- reduction or containment?
• A c tive Need – the Buyer is in pain (they recognizes a need but doesn’t know how to solve it) Displaced costs? Avoided costs? Productivity improvements? Time-savings? Intangible?
• H a s a vision of a solution (the buyer has a vision of how to solve their problem) 24. Is the ROI demonstrable or provable?
23. What is the organizational impact of this pain? 25. Distribution Model
24. Individual? • Are your assumptions about distribution channel correct?
25. Departmental? 26. What will the cost of the distribution channel be?
1 . C orporate?

26. The Metrics
• Goals to be accomplished to exit steps
• Quantitative
– Talk to 50+ customers in Discovery
– Close 5 orders in Validation
• Qualitative
– Develop product & company positioning
– Choose Market Type

27. Dave McClure - Insight
Metrics for Web Marketing
SEO Campaigns,
SEM PR Contests Biz
Dev
Social
Networks
Blogs Affiliates
Apps
& Direct,
Tel,
Widgets Email TV
Domains
ACQUISITION
Emails
&
Alerts
Blogs,
RSS,
News
Feeds
o n
Re te n ti
Ads,
Lead
Gen, Rev Biz
Dev
System
Events
& Subscriptions,
Time-­‐based
enu
ECommerce
Features
e
$$
Website.com From Dave McClure
http://500hats.typepad.com/
$

28. Maples Investments - Insight
Funding the Lean Startup Model
• Mike Maples was a business school case
• Started a venture firm
– 1st VC adoption of Customer Development
– Introduced Mike to my Stanford Teach Asst
– Ann Miura-Ko now Mike’s partner

29. Business Model Iteration
The Pivot
Strategic
Business
Model
Iteration
Customer Agile Product
Development Development
Tactical
Source: Ann Miura-Ko Maples Investments

30. Market Type
Affects Spending and Sales Curve

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

32. Definitions: 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

33. New Market =
Hockey Stick Sales Curve

34. Existing Market =
Linear Sales Growth

35. Future

36. What Can the Lean Startup Circle
Contribute?
• Enumerate Business Models
- I.e. Dave Cohen/Techstar’s list
http://www.coloradostartups.com/2009/11/07/internet-business-models-of-the-techstars/
• For each Business Model develop:
- Business Model Flow
- Summary
- Checklist
- Metics

37. Book Available on Amazon and Cafepress
www.amazon.com/Four-Steps-Epiphany-Steven-Blank/dp/0976470705
www.cafepress.com/kandsranch
Blogs
Steve Blank www.steveblank.com
Lean Startups http://startuplessonslearned.com/