Customer Development Steve Blank Stanford
- School of Engineering U.C. Berkeley - Haas School Of Business www.steveblank.com Twitter: sgblank Lean Startup Intensive at Web 2.0 Expo

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Early-Stage Ventures

What’s A Startup? Scalable Startup
Large Company Transition <ul><li>Business Model found </li></ul><ul><li>i.e. Product/Market fit </li></ul><ul><li>- Repeatable sales model </li></ul><ul><li>- Managers hired </li></ul>A Startup is the organization used to search for a scalable business model

Startups Search and Pivot Scalable
Startup Large Company Transition <ul><li>Business Model found </li></ul><ul><li>i.e. Product/Market fit </li></ul><ul><li>- Repeatable sales model </li></ul><ul><li>- Managers hired </li></ul>The Search for the Business Model

Startups Search, Companies Execute Scalable
Startup Large Company Transition <ul><li>Business Model found </li></ul><ul><li>Product/Market fit </li></ul><ul><li>- Repeatable sales model </li></ul><ul><li>- Managers hired </li></ul>- Cash-flow breakeven - Profitable - Rapid scale - New Senior Mgmt ~ 150 people The Search for the Business Model The Execution of the Business Model

How Do Startups Search For
A Business Model? <ul><li>The Search is called Customer Development </li></ul><ul><li>The Implementation is called Agile Development </li></ul>

Customer Development

More startups Fail from a
Lack of Customers than from a Failure of Product Development

<ul><li>Then why do we have:
</li></ul><ul><li>process to manage product development? </li></ul><ul><li>no process to manage customer development? </li></ul>

Product Development Model Concept/ Seed
Round Product Dev. Alpha/Beta Test Launch/ 1 st Ship

Tradition – Hire Marketing Concept/
Seed Round Product Dev. Alpha/Beta Test Launch/ 1 st Ship Product Development <ul><li>Create Marcom </li></ul><ul><li>Materials </li></ul><ul><li>- Create Positioning </li></ul>- Hire PR Agency - Early Buzz - Create Demand - Launch Event - “Branding” Marketing

Tradition – Hire Sales Concept/
Seed Round Product Dev. Alpha/Beta Test Launch/ 1 st Ship Product Development <ul><li>Create Marcom </li></ul><ul><li>Materials </li></ul><ul><li>- Create Positioning </li></ul>- Hire PR Agency - Early Buzz - Create Demand - Launch Event - “Branding” <ul><li>Build Sales Organization </li></ul>Marketing Sales <ul><li>Hire Sales VP </li></ul><ul><li>Hire 1 st Sales Staff </li></ul>

Tradition – Hire Bus Development
Concept Product Dev. Alpha/Beta Test Launch/ 1 st Ship Product Development <ul><li>Create Marcom </li></ul><ul><li>Materials </li></ul><ul><li>- Create Positioning </li></ul>- Hire PR Agency - Early Buzz - Create Demand - Launch Event - “Branding” <ul><li>Hire Sales VP </li></ul><ul><li>Pick distribution Channel </li></ul><ul><li>Build Sales Channel / Distribution </li></ul>Marketing Sales <ul><li>Hire First Bus Dev </li></ul><ul><li>Do deals for FCS </li></ul>Business Development

Tradition – Hire Engineering Concept
Product Dev. Alpha/Beta Test Launch/ 1 st Ship Product Development <ul><li>Create Marcom </li></ul><ul><li>Materials </li></ul><ul><li>- Create Positioning </li></ul>- Hire PR Agency - Early Buzz - Create Demand - Launch Event - “Branding” <ul><li>Hire Sales VP </li></ul><ul><li>Pick distribution Channel </li></ul><ul><li>Build Sales Channel / Distribution </li></ul>Marketing Sales <ul><li>Hire First Bus Dev </li></ul><ul><li>Do deals for FCS </li></ul>Business Development Engineering <ul><li>Write MRD </li></ul><ul><li>Waterfall </li></ul><ul><li>Q/A </li></ul><ul><li>Tech Pubs </li></ul>

Two Startup Fallacies <ul><li>Assumes customer
problem is known </li></ul><ul><li>Assumes engineering solution is known </li></ul>

Consequences <ul><li>Sales and Marketing costs
are front loaded </li></ul><ul><li>Execution </li></ul><ul><li>Announcement is the goal </li></ul><ul><li>Hiring and revenue per “plan” </li></ul><ul><li>Iterate plan by firing execs </li></ul>

Conundrum <ul><li>Processes to manage product
development </li></ul><ul><li>No processes to manage customer development </li></ul>

An Inexpensive Fix <ul><li>Test Customer/Market
Hypotheses </li></ul><ul><li>Use an Engineering Process for Unknowns </li></ul><ul><li>How? </li></ul>

Customer Development Concept/ Bus. Plan
Product Dev. Alpha/Beta Test Launch/1st Ship Product Development Customer Development Company Building Customer Discovery Customer Validation Customer Creation +

Customer + Agile Development Agile
Development + Customer Development Company Building Customer Discovery Customer Validation Customer Creation

Key Ideas <ul><li>Tests unknowns in
Business Model </li></ul><ul><li>Parallel process to Product Development </li></ul><ul><li>Measurable Checkpoints </li></ul><ul><li>Not tied to shipment , but customer milestones </li></ul>

<ul><li>Stop selling, start listening </li></ul><ul><li>Test
your hypotheses </li></ul>Customer Discovery Customer Discovery Customer Validation Company Building Customer Creation

Hypotheses <ul><li>Problem/Need </li></ul><ul><ul><li>Magnitude </li></ul></ul><ul><ul><li>Organizational impact
</li></ul></ul><ul><ul><li>ROI Justification </li></ul></ul><ul><ul><li>Problem Recognition </li></ul></ul><ul><li>Pricing </li></ul><ul><ul><li>Revenue Model </li></ul></ul><ul><ul><li>Pricing </li></ul></ul><ul><ul><li>Demand Creation </li></ul></ul><ul><li>Market Type </li></ul><ul><ul><li>Existing </li></ul></ul><ul><ul><li>New </li></ul></ul><ul><ul><li>Resegment </li></ul></ul><ul><li>Customer </li></ul><ul><ul><li>Archetype(s) </li></ul></ul><ul><ul><li>A Day in the Life </li></ul></ul><ul><li>Distribution </li></ul><ul><ul><li>Channel </li></ul></ul><ul><ul><li>Sales Cycle/Ramp </li></ul></ul><ul><ul><li>Channel strategy </li></ul></ul><ul><ul><li>Organization Map </li></ul></ul><ul><ul><li>Demand Creation </li></ul></ul><ul><li>Product </li></ul><ul><ul><li>Minimum Feature Set </li></ul></ul><ul><ul><li>Dependency Analysis </li></ul></ul><ul><ul><li>Benefits </li></ul></ul><ul><ul><li>Intellectual Property </li></ul></ul><ul><ul><li>Total Cost of Ownership </li></ul></ul>

Discovery: Exit Criteria <ul><li>Customers top
problems ? </li></ul><ul><li>Product concept solve them ? </li></ul><ul><li>A day-in-the-life of a customer (archetypes) </li></ul><ul><li>Draw the org chart of users & buyers </li></ul>

Customer Validation Customer Discovery Customer
Validation Customer Creation Company Building <ul><li>Repeatable and scalable business model ? </li></ul><ul><li>Passionate earlyvangelists ? </li></ul><ul><li>Pivot back to Discovery if no customers </li></ul>Pivot

Earlyvangelists Budget Put Together a
Solution out of Piece Parts Actively Looking For a Solution You Know They Have A Problem They Know They Have a Problem

Customer Validation: Rules <ul><li>Sales roadmap,
not sales staff </li></ul><ul><li>No sales staffing until the roadmap is proven </li></ul><ul><li>Tested customer acquisition model </li></ul><ul><li>Goal: prove a profitable business model </li></ul>

Customer Development is a Search
for a Business Model

The Search for a Business
Model <ul><li>No Business Plan survives first contact with customers </li></ul><ul><li>A Business Model diagrams how a company creates, delivers and captures value </li></ul><ul><li>Or in English: How a company makes money </li></ul>

Emphasis On Hypotheses Testing

Startups Continually Pivot (Iterate)

Validation: Exit Criteria <ul><li>Draw your
business model ? </li></ul><ul><li>Understood sales cycle & sales roadmap? </li></ul><ul><li>Proven customer acquisition model? </li></ul><ul><li>Orders ($’s) validating the business model? </li></ul>

Customer Creation <ul><li>Creation comes after
proof of sales </li></ul><ul><li>$’s for scale </li></ul><ul><li>Lean Startups are not cheap startups </li></ul>Customer Discovery Customer Validation Company Building Customer Creation

Customer Creation Big Ideas <ul><li>Grow
customers from few to many </li></ul><ul><li>Positioning </li></ul><ul><li>Launch </li></ul><ul><li>Demand creation </li></ul><ul><li>Different for each of the Market Types </li></ul>

Sidebar Market Type

Product Introduction Conundrum <ul><li>Product introductions
aren’t predictable </li></ul><ul><ul><li>Why? </li></ul></ul><ul><ul><li>Is it the people that are different? </li></ul></ul><ul><ul><li>Is it the product that are different? </li></ul></ul><ul><li>Are there different “types” of startups ? </li></ul>

Three Types of Markets <ul><li>Type
of Market changes EVERYTHING </li></ul><ul><li>Sales, marketing and business development differ radically by market type </li></ul>Existing Market Resegmented Market New Market

Type of Market Changes Everything
<ul><li>Market </li></ul><ul><ul><li>Market Size </li></ul></ul><ul><ul><li>Cost of Entry </li></ul></ul><ul><ul><li>Launch Type </li></ul></ul><ul><ul><li>Competitive Barriers </li></ul></ul><ul><ul><li>Positioning </li></ul></ul><ul><li>Sales </li></ul><ul><ul><li>Sales Model </li></ul></ul><ul><ul><li>Margins </li></ul></ul><ul><ul><li>Sales Cycle </li></ul></ul><ul><ul><li>Chasm Width </li></ul></ul><ul><li>Finance </li></ul><ul><ul><li>Ongoing Capital </li></ul></ul><ul><ul><li>Time to Profitability </li></ul></ul><ul><li>Customers </li></ul><ul><ul><li>Needs </li></ul></ul><ul><ul><li>Adoption </li></ul></ul>Existing Market Resegmented Market New Market

Three Types of Markets <ul><li>Existing
Market </li></ul><ul><ul><li>Faster/Better = High end </li></ul></ul><ul><li>Resegmented Market </li></ul><ul><ul><li>Niche = marketing/branding driven </li></ul></ul><ul><ul><li>Cheaper = low end </li></ul></ul><ul><li>New Market </li></ul><ul><ul><li>Cheaper/good enough = creates a new class of product/customer </li></ul></ul><ul><ul><li>Innovative/never existed before </li></ul></ul>Existing Market Resegmented Market New Market

Company Building Customer Discovery Customer
Validation Customer Creation Company Building <ul><li>(Re)build company’s organization & management </li></ul><ul><li>Re look at your mission </li></ul>

What VC’s Don’t Tell You:
The Transition Scalable Startup Large Company Transition Search Build Grow

What VC’s Don’t Tell You:
The Transition – Founders Leave Scalable Startup Large Company Transition <ul><li>Founders depart </li></ul><ul><li>Professional Mgmt </li></ul><ul><li>Process </li></ul><ul><li>Beginning of scale </li></ul>

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Backup

So What Does Engineering Do?

Traditional Product Development Unit of
progress: Advance to Next Stage Problem: known Solution: known Waterfall Requirements Design Implementation Verification Maintenance Source: Eric Ries http://startuplessonslearned.blogspot.com

Agile Unit of progress: a
line of working code Problem: Known Solution: Unknown “ Product Owner” or in-house customer Source: Eric Ries http://startuplessonslearned.blogspot.com

Product Development at Lean Startup
Unit of progress: validated learning about customers ($$$) Problem: Unknown Solution: Unknown Source: Eric Ries http://startuplessonslearned.blogspot.com