Customer Development Process for High Tech Startups

Customer Development in the
High Tech Enterprise

Customer Development

Steve Blank
sblank@kandsranch.com

Agenda

! Logistics/Questions
! Market vs. Technology Risk
! Boyd & the OODA Loop
! Customer Development
! CASE: IMVU
! CASE: WebVan

Customer Development in the High-Tech Enterprise Fall 2009

Startup Checklist – 1
What Vertical Market am I In?

! Web 2.0 ! Semicondutors
! Enterprise Software ! Electronic Design
! Enterprise Hardware Automation
! Communciaton Hdw ! Cleantech
! Communication Sftw ! Med Dev / Health Care
! Consumer Electronics ! Life Science / Biotech
! Game Software ! Personalized Medicine


A Plethora of Opportunities


Startup Checklist - 2

! Market Risk?
! Technical Risk?
! Both?


Market Risk vs. Invention Risk


Startup Checklist - 3

! Opportunity Where does the idea come from?
! Innovation Where is the innovation?
! Customer Who is the User/Payer?
! Competition Who is the competitor/complementor?
! Sales What is the Channel to reach the customer?
! Marketing: How do you create end user demand?
! What does Biz Dev do? Deals? Partnerships? Sales?
! Business/Revenue Model(s) How do we organize to make money?
! IP/PatentsRegulatory Issues? How and how long?
! Time to Market How long does it take to get to market?
! Product Development Model How to you engineer it?
! Manufacturing What does it take to build it?
! Seed Financing How much? When?
! Follow-on Financing How much? When?
! Liquidity How much? When?


Execution: Lots to Worry About


Execution: Very Different by Vertical


Market Risk Reduction Strategy


Boyd’s OODA “Loop”
Observe Orient Decide Act
Implicit Implicit
Unfolding Guidance Cultural
Guidance
Circumstances & Control Traditions & Control

Genetic
Analyses &
Feed
Observations 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.

Competitive advantage comes from quickness over the entire “loop,” not just
from the O-to-O-to-D-to-A sequence.


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


Product Development Model

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


What’s Wrong With This?

Product Development


- Create Marcom - Hire PR Agency - Create Demand
Marketing Materials - Early Buzz - Launch Event
- Create Positioning - “Branding”



Product Development



• Hire Sales VP • Build Sales
Sales • Hire 1st Sales Staff Organization



Product Development



• Hire Sales VP • Build Sales
Sales • Hire 1st Sales Staff Organization

Business
• Hire First • Do deals for FCS
Development
Bus Dev


Chasing The FCS Date
! Sales & Marketing costs are front loaded
" focused on execution vs. learning & discovery
! First Customer Ship becomes the goal
! Execution & hiring predicated on business plan hypothesis
! Heavy spending hit if product launch is wrong
! Financial projections, assumes all startups are the same
=
You don’t know if you’re wrong until you’re out of
business/money


An Inexpensive Fix

Focus on Customers and Markets
from Day One

How?


Build a Customer Development Process

Product Development



? ? ? ?


Customer Development is as important
as Product Development

Product Development

Bus. Plan Dev. Test 1st Ship


Customer Customer Customer Company
Discovery Validation Creation Building


Customer & Product Development
Synchronization
Product Development

Bus. Plan Dev. Test 1st Ship

Customer Customer Customer Scale
Discovery Validation Creation Company


Customer Development Heuristics

! There are no facts inside your building, so get
outside
! Develop for the Few, not the Many
! Earlyvangelists make your company
" And are smarter than you

! Focus Groups are for big companies, not startups
! The goal for release 1 is the minimum feature set
for earlyvangelists


Big Ideas

! Parallel process to Product Development

! Measurable Checkpoints for the CEO

! Not tied to FCS, but to customer milestones

! Iterative to represent reality

! Executed by a small team including CEO


Customer Development is about
Action

! Never, ever confuse it with a “planning process”
! Never, ever confuse it with “focus groups”

Customer Development is about putting the
Founders in Continuous Contact and
Engagement with the customer


Customer Development in the High Tech
Enterprise

Customer Discovery: Part 1

Steve Blank
sblank@kandsranch.com

Customer Discovery: Step 1

Existing Market: 1 Month – 1 Year

Resegmenting a Market: 6 Months – 3 Years

New Market: 1 Year – 3 Years




Existing : 1-6 Months

Resegmenting: 3-12 Months

New: 1-2 Years


Methodology

! Customer Development can take months or years
! Each Step has a set of phases
! Plan what you need to learn in writing so everyone knows:
" what they should be doing

" when they should do it

" If they succeeded

" If they need to do more

! These are checklists, not the inviolable commandments


Before You Start

! Board and Management Buy-In
" Learning and discovery not execution
! Customer Development Team
" Not traditional hires
! Sufficient funding for 2-3 passes


Modify the Process for
Your Company
! Text Example = Enterprise Software Co.
! You need to develop your own
" Specifically for your company/market

! Don’t quibble about details but understand there is a process


Discovery = Hypothesis Testing

! What are Hypothesis?
! Where do Hypothesis come from?
! Why Test them?
! How do you test them?




! Stop selling, start listening

! Test your hypotheses
" Two are fundamental: problem and product concept


Customer Discovery

Customer Phase 3 Phase 4
Discovery Test Verify, Iterate &
Product Expand
Hypothesis

To Validation

Phase 1
Phase 2 Author
Test Hypothesis
Problem
Hypothesis


Customer Discovery
Hypotheses
Product Customer Distribution Demand Market Type Competitive
Hypothesis & Problem & Pricing Creation Hypothesis Hypothesis
Hypothesis Hypothesis Hypothesis

Test “Problem” Hypothesis
Friendly “Problem” Customer Market
First Contacts Presentation Understanding Knowledge

Test “Product” Hypothesis
First Reality “Product” Yet More Second
Check Presentation Customer Reality Check
Visits
Verify

Verify the Verify the Verify the Iterate or
Product Problem Business Exit
Customer Development in the High-Tech Enterprise
Model Fall 2009

Customer Discovery
Hypotheses
Product
Hypothesis Inside the Building
Customer
& Problem
Hypothesis
Distribution
& Pricing
Hypothesis
Demand
Creation
Hypothesis
Market Type
Hypothesis
Competitive
Hypothesis

Test “Problem”
Friendly
First Contacts
Hypothesis
“Problem”
Presentation
Customer
Understanding
Market
Knowledge

Outside the Building
Test “Product” Hypothesis
First Reality “Product” Yet More Second
Check Presentation Customer Reality Check
Verify Visits

Verify the Verify the Verify the Iterate or
Product Problem Business Exit
Customer Development in the High-Tech Enterprise
Model Fall 2009

Phase 1: Author Hypothesis

Phase 3
Product
Phase 4
Iterate &
! One-time writing exercise
Concept Expand
Testing ! All other time spent in
front of customers
Phase 1 ! Assumes you’re smart but
Phase 2
Test Author guessing
Problem
Hypothesis Hypothesis


Hypothesis

! Product
! Customer/Problem
! Distribution/Pricing
! Demand Creation
! Market Type
! Competition

Product Customer Distribution Demand Market Type Competitive
Hypothesis & Problem & Pricing Creation Hypothesis Hypothesis
Hypothesis Hypothesis Hypothesis


Product Hypotheses

! Features
! Benefits
! Product Delivery Schedule
! Intellectual Property
! Total Cost of Ownership
! Dependency Analysis


Customer/Problem Hypotheses

! Types of Customers
! Magnitude of the problem
! Visionaries
! A Day in the Life of a customer
! Organizational impact
! ROI Justification
! Problem Recognition
! Minimum Feature Set


Distribution/ Pricing Hypotheses

! Distribution Model
! Distribution Diagram
! Sales Cycle/Ramp
! Channel strategy
! Pricing (ASP, LTV)
! Customer Organization Map
! Demand Creation


Demand Creation Hypotheses

! How do competitors create demand?
! How will you?
" Viral

" Advertising

" PR

" Trade shows

! Who are influencers/recommendors?
! Key trade shows?
! Key trends?
! Start assembling advisory board


Type of Market Hypotheses

! Positioning and Differentiation
" Existing Market
# The product is the basis of competition
" New Market
# Creating the market is the basis of competition
" Redefine Existing Market
# Resegment the existing market is the basis of
competition


Competition Hypotheses

! Who is out there?
! Why are they important?
! How do customers use them today?
! What don’t customers like about them?


Intermission

The Customer Development Team

Traditional organizations
and titles Fail
Typical Startup
CEO

VP Engineering VP Marketing VP Sales VP Business Dev

! People equate their titles with their functions
" But standard titles describe execution functions
" We need new titles = learning & discovery functions


Customer Development Team
Tasks Not Titles
Driven Startup

CEO

VP Product Dev Technical Visionary Business Visionary Business Execution

In Front of Customers


Customer Development Process for High Tech Startups

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