Improving Your Entrepreneurial Odds: the Customer Development Process

Improving Your Entrepreneurial Odds: the Customer Development Process

Steve Blank

Some Definitions

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- Business Model found - Profitable business -  Existing team < $10M in revenue

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•  5.7 million small businesses in the U.S. <500 employees •  They employ 99.5% of our workforce

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-  Total Available Market > $500m -  Company can grow to $100m/year -  Known business model -  Focused on execution and process

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•  In contrast a scalable startup is designed to grow big •  It typically needs risk capital •  These are what Silicon Valley means when they say “Startup”

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- Business Model found - Profitable business -  Existing team < $10M

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-  Total Available Market > $500m -  Company can grow to $100m/year -  Known business model -  Focused on execution and process

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- Business Model found - Profitable business -  Existing team < $10M

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-  Total Available Market > $500m -  Company can grow to $100m/year -  Known business model -  Focused on execution and process

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-  Founders depart -  Professional Mgmt -  Process -  Beginning of scale

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

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A Startup is the organization you use to search for your scalable business model

OUR COMPANY

Resources

Product

•  Device •  Software •  IP •  Services

•  Networks - 

Technology - Customer - Partner •  Data

•  Employees

Users

Sales & Distribution

Design

Manufacturing

Components

OUR COMPANY

Resources

Product

•  Device •  Software •  IP •  Services

•  Networks - 

Technology - Customer - Partner •  Data

•  Employees •  Knowledge

•  EE •  System •  Mechanica

l •  Industrial

•  Standard •  Tooled •  Critical

Users

Customers

Sales & Distribution

Demand Creation

-'

-'

-'

Design

Components

OUR COMPANY

Resources

-'

-'

-'

Product

•  Device •  Software •  IP •  Services

•  Networks - 

Technology - Customer - Partner •  Data

•  Employees Manufacturin

g

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

- Cash-flow breakeven - Profitable - Rapid scale - New Senior Mgmt ~ 150 people

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You fail if you remain a startup!

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

- Cash-flow breakeven - Profitable - Rapid scale - New Senior Mgmt ~ 150 people

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

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How Do Startups Search For A Business Model?

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More startups Fail from a Lack of Customers than from

a Failure of Product Development

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?

All We Had Was 30 Years of This

Concept/ Seed Round

Product Dev.

Alpha/Beta Test

Launch/ 1st Ship

Product Development Model

It Resulted in a Few Hypotheses

•  Startups weren’t small versions of large companies •  They were about learning and discovery, not

execution of a business model •  Entrepreneurs and their VC’s were executing on

guesses •  But the facts were outside the building

Which Turned Into A Model

Concept/ Bus. Plan

Product Dev.

Alpha/Beta Test

Launch/1st Ship

Product Development

Customer Development

Company Building

Customer Discovery

Customer Validation

Customer Creation

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Customer Development: Key Ideas

•  Parallel process to Product Development

•  Measurable Checkpoints

•  Not tied to FCS, but to customer milestones

•  Notion of Market Types to represent reality

•  Emphasis is on learning & discovery before

execution

•  Stop selling, start listening –  There are no facts inside your building, so get outside

•  Test your hypotheses –  Two are fundamental: problem and product concept

Customer Discovery: Step 1

Customer Discovery

Customer Validation

Company Building

Customer Creation

Customer Discovery: Exit Criteria

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

•  Does your product concept solve them? –  Do customers agree? –  How much will they pay?

•  Draw a day-in-the-life of a customer (archetypes) –  before & after your product

•  Draw the org chart of users & buyers

Customer Validation: Step 2

Customer Discovery

Customer Validation

Customer Creation

Company Building

•  Develop a repeatable and scalable sales process

•  Only earlyvangelists are crazy enough to buy

•  Pivot back to Discovery if no customers

Pivot

Customer Validation: Exit Criteria

•  Can you draw your business model? –  Acquisition costs, path to profitability?

•  Do you have a proven sales roadmap? –  Org chart? Influence map?

•  Do you understand the sales cycle? –  ASP, LTV, ROI, etc.

•  Do you have a set of orders ($’s) validating the roadmap?

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Customer Creation: Step 3

•  Creation comes after proof of sales

•  Creation is where you “cross the chasm”

•  It is a strategy not a tactic

Customer Discovery

Customer Validation

Company Building

Customer Creation

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Customer Creation Big Ideas

!  Big Idea 1: Grow customers from few to many

!  Big Idea 2: Four Customer Creation activities: "  Year One objectives "  Positioning "  Launch "  Demand creation

!  Big Idea 3: Creation is different for each of the three types of startups

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Company Building: Step 4

Customer Discovery

Customer Validation

Customer Creation

Company Building

•  (Re)build your company’s organization & management

•  Re look at your mission

Customer Development in the High-Tech Enterprise October 2008 35

Company Building: Big Ideas

!  Big Idea 1: Management needs to change as the company grows "  Founders are casualties "  Development centric ! "  Mission-centric ! "  Process-centric

!  Big Idea 2: Sales Growth needs to match market type

Iteration versus Execution

Customer Discovery

Customer Validation

Iteration

The Search for a Business

Company Building

Customer Creation

Execution

The Growth of a Business

Product/Market Fit

What They Didn’t Teach You at Haas

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-  Hypothesis Testing -  Minimum Feature Set -  Pivots

-  Delivers MRD’s -  Feature Spec’s -  Competitive Analysis

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

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Customer Development Product Management

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Startup Metrics -  Customer Acquisition Cost -  Viral coefficient -  Customer Lifetime Value -  Average Selling Price/Order Size -  Monthly burn rate -  etc.

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

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

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-  Hypothesis testing -  Experiential -  Hands-on -  Chaotic -  Leadership

-  Execution -  Accounting -  Management

Business School

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Entrepreneurship School

Books Available on Amazon and Cafepress

Blog www.steveblank.com

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