This document discusses customer development and business models for startups. It defines different types of startups, including small businesses, social startups, sustaining/disruptive innovation within large companies, and scalable startups. The key aspects of a business model are defined using the business model canvas framework. Customer development is presented as the process startups use to search for an unknown business model, involving customer discovery, validation, and pivoting if needed based on feedback. The minimum viable product and agile development are discussed as ways to test hypotheses. An example pivot from a robotic weeding startup is provided.

1. Customer Development and the Business Model July 16, 2011

2. Welcome to Customer Development Steve Blank Stanford - School of Engineering U.C. Berkeley - Haas School Of Business www.steveblank.com Twitter: sgblank

3. I Write a Blog www.steveblank.com

4. This Talk is Based On Business Model Generation Four Steps to the Epiphany Lean Startup

5. First -What’s A Startup? Five Types of Startups

9. 99.7% of all companies

10. ~ 50% of total U.S. workershttp://www.sba.gov/advo/stats/sbfaq.pdf

12. Social Enterprise: Profitable

16. Acquire - IP- Talent - Product - Customers - Business

17. Scalable Startup Large Company Scalable Startup Search Goal is to solve for: unknown customer and unknown features

19. Total Available Market > $500m -$1B

20. Can grow to $100m/yearScalable Startup

22. Company can grow to $100m/year

23. Business model found

24. Focused on execution and process

26. Typically needs risk capital

28. Total Available Market > $500m -$1B

30. 13% of all public companies

31. 4% of total sales of all U.S. public companies ~$1 trillionSource: Josh Lerner, Harvard: VC and Innovation in Energey

33. Company can grow to $100m/year

34. Business model found

35. Focused on execution and process

37. Buyable Startup Search Sell Scalable Startup $5 to 50M Acquisition Goal is to solve for: Internet and Mobile Apps

38. Buyable Startup Search Sell Scalable Startup $5 to 50M Acquisition Goal is to solve for: Internet and Mobile Apps Sell to larger company

40. i.e. Product/Market fit- Repeatable sales model - Managers hired What’s A Startup? Search Execute A Startup is a temporary organization used to search for a repeatable and scalable business model

41. Next,What’s A Founder?

42. What You and I Saw

43. What Michelangelo Saw

44. What You and I Saw

45. What Van Gogh Saw

46. Founders See Things Others Don’t

47. Founders See Things Others Don’t Founders are Artists. Actually They are Composers. They Create Something From Nothing

48. Founders See Things Others Don’t They Build a Company By Convincing Others To See What They Do

49. Founders See Things Others Don’t The Early Employees Who Join Them Are the Performers

50. I Have a Vision

51. I Know What Needs to Be Done

52. Lets Launch a New Product!

53. Five Ways Founders Fail

54. #1I Know Who The Customer Is

55. #2I Know Exactly the Product They Need

56. #3I Know the Problem They Have

57. #4We Can Fix It After We Ship It All

58. #5 All I Need to Do is Execute the Plan

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

60. Product Introduction Model The Leading Cause of Startup Death Concept/Seed Round Product Dev. Alpha/Beta Test Launch/ 1st Ship

61. Product Introduction Model:Two Implicit Assumptions Customer Problem: known Concept/Seed Round Product Dev. Alpha/Beta Test Launch/ 1st Ship Product Features: known

64. Hire Sales VP

65. Hire 1st Sales StaffSales

67. Hire Sales VP

70. Hire Sales VP

73. Waterfall

74. Q/A

76. Startups Are Not Smaller Versions of Large Companies

77. Startups Are Not Smaller Versions of Large Companies Large Companies Execute Known Business Models

78. Startups Are Not Smaller Versions of Large Companies Startups Search for Unknown Business Models

79. So Search for a Business Model

80. The Business Model: Any company can be described in 9 building blocks

81. CUSTOMER SEGMENTS which customers and users are you serving? which jobs do they really want to get done?

82. VALUE PROPOSITIONS what are you offering them? what is that getting done for them? do they care?

83. CHANNELS how does each customer segment want to be reached? through which interaction points?

84. CUSTOMER RELATIONSHIPS what relationships are you establishing with each segment? personal? automated? acquisitive? retentive?

85. REVENUE STREAMS what are customers really willing to pay for? how? are you generating transactional or recurring revenues?

86. KEY RESOURCES which resources underpin your business model? which assets are essential?

87. KEY ACTIVITIES which activities do you need to perform well in your business model? what is crucial? 59

88. KEY PARTNERS which partners and suppliers leverage your model? who do you need to rely on?

89. COST STRUCTURE what is the resulting cost structure? which key elements drive your costs?

90. value proposition customer relationships key activities customer segments key partners cost structure revenue streams key resources channels 62 images by JAM

91. sketch out your business model

92. But,Realize They’re Hypotheses

93. 9 Guesses Guess Guess Guess Guess Guess Guess Guess Guess Guess

95. The Implementation isAgile Development

97. Customer DevelopmentThe Search For the Business Model Company Building CustomerDiscovery CustomerValidation Customer Creation Pivot

98. Customer Discovery CustomerDiscovery CustomerValidation Company Building CustomerCreation Stop selling, start listening Test your hypotheses Continuous Discovery Done by founders

100. Market Type

101. CompetitionTurning Hypotheses to Facts

103. Customer

104. User

106. Customer

107. User

109. Market Type

111. (Customer)

114. Customer

115. User

117. Market Type

119. (Customer)

124. Testing the MVP (Web Example) Can you get customers to pay for a product that doesn’t yet exist (or barely does)? Interview customers to make sure they have a matching core problem Set up web site landing page to test for conversion See what offers are required to get customers to use the product (e.g. prizes, payment) Use problem definition as described by customers to identify key word list – plug into Google search traffic estimator - high traffic means there is problem awareness Drive traffic to site using Google search and see how deep into a registration process customers are willing to go through

125. Testing the MVP (Non-Web) Can you get customers to pay for a product that doesn’t yet exist (or barely does)? Interview customers to make sure they have a matching core problem Set up web site landing page to test for conversion Set up a Lighthouse Customer Program where potential customers pay to get early access to product prototypes

127. Iteration without crisis

129. How Does This Really Work?Stanford Lean LaunchPad Class 8 Weeks From an Idea to a Business

130. Pivot ExampleRobotic Weeding Talked 75 Customers in 8 Weeks

131. Our initial plan Confidential

133. White Farms, Large Peanut farmer in Georgia

134. REFCO Farms, large grower in Salinas Valley

135. Rincon Farms, large grower in Salinas Valley

136. Small Organic Corn/Soy grower in Nebraska

137. Heirloom Organics, small owner/operator, Santa Cruz Mts

138. Two small organic farmers at farmers market

140. Parks: Stanford Grounds Supervisor, head of maintenance and lead operator (has crew of 6)

141. Toro dealer (large mower manufacturer)

142. User of back-yard mowing system

143. Maintenance Services for City of Los Altos

144. Colony Landscaping (Mowing service for stadiums)Confidential

145. Business Plan Autonomous Vehicles for Mowing & Weeding Dealers sell, installs and supports customer Co. trains dealers, supports dealers - Innovation - Customer Education - Dealer training Mowing - Owners of public or commercially used green spaces (e.g. golf courses) - Landscaping service provider Weeding - Farmers with manual weeding operations We reduce operating cost - Labor reduction - Better utilization of assets (eg mow or weed at nights) - Improved performance (less rework, food safety) - Dealers (Mowing and Ag) - Vehicle OEMs (John Deere, Toro, Jacobsen, etc) - Research labs - Mowing Dealers - Ag Dealers Engineers on Autonomous vehicles, GPS, path-planning Dealer discount COGS seek a 50-60% Gross Margin Heavy R&D investment Asset sale Our revenue stream derives from selling the equipment

146. Autonomous vehiclesWEEDING Dealers sell, installs and supports customer Co. trains dealers, supports dealers - Innovation - Customer Education - Dealer training - Low density vegetable growers - High density vegetable growers - Thinning operations - Conventional vegetables We reduce operating cost - Labor reduction (100 to 1) - Reduced risk of contamination - Mitigate labor availability concerns - Ag Dealers - Ag Service providers - Research labs - Ag Dealers - Ag Service providers Engineers on Machine Vision Two problems: - Identification - Elimination Dealer discount COGS seek a 50-60% Gross Margin Heavy R&D investment Asset sale Our revenue stream derives from selling the equipment

147. 1 Week – 1 CarrotBot Confidential

149. Marketing

150. Demo and customer feedback

151. Farming conventions.

152. Demo, demo, and demo!!

153. Proximity is paramount

154. Organic Farmers

155. Weeding Service Providers

156. Conventional Farmers

157. Cost Reduction

158. Remove labor force pains

159. Eliminate bio-waste hazards

160. Research Labs

161. Equipment Manufacturers

162. Distribution Network

163. Service Providers

164. IP – Patents

165. Video Classifier Files

166. Robust Technology

167. Dealers

168. Direct Service

169. Indirect Service

170. … then Dealers

171. Asset Sale

172. Direct Service with equipment rental

173. … then Asset SaleValue-Driven

175. Marketing

176. Demo and customer feedback

177. Farming conventions.

178. Demo, demo, and demo!!

179. Proximity is paramount

180. Mid/Large Organic Farmers

181. Agricultural corporations

182. Weeding Service Providers

183. Mid/Large Conventional Farmers

184. Cost Reduction

185. Remove labor force pains

186. Eliminate bio-waste hazards

187. Research Labs

188. Equipment Manufacturers

189. Distribution Network

190. Service Providers

191. IP – Patents

192. Video Classifier Files

193. Robust Technology

194. Direct Service

195. Indirect Service

196. … then Dealers

197. Direct Service with equipment rental

198. ($1,500/d; 120d/yr )

199. Low density: $1,500/d

200. High density: $6,000/dValue-Driven

201. World Ag Expo interviews:the need is real and wide spread 10+ interviews at show Everyone confirmed the need Robocrop, UK based, crude competitor sells for $171 K Revenue Stream Mid to small growers prefer a service Large growers prefer to buy, but OK with service until technology is proven Charging for labor cost saved is OK, as we provide other benefits (food safety, labor availability) Confidential

203. Marketing

204. Demo and customer feedback

205. Farming conventions.

206. Demo, demo, and demo!!

207. Proximity is paramount

208. Mid/Large Organic Farmers

209. Agricultural corporations

210. Weeding Service Providers

211. Mid/Large Conventional Farmers

212. Research Labs

213. Equipment Manufacturer

214. Distribution Network

215. Service Providers

216. 2 or 3 Key Farms

217. Cost Reduction

218. Remove labor force pains

219. Eliminate bio-waste hazards

220. IP – Patents

221. Video Classifier Files

222. Robust Technology

223. Direct Service

224. Indirect Service

225. … then Dealers

226. Direct Service with equipment rental

227. Low density: $1,500/d

229. Bill of Materials

230. Training & Service

232. Personal Libraries

233. Insight: No more bookshelves eBooks+150% YoY ‘10 Printed Books -20% YoY ‘10

234. Version 1.0: Personal Libraries

235. Original Idea: Personal Digital Libraries Import, organize and share thousands of digital papers

236. something-something-something.com Original idea Invincible Business Model: Version 1.0 SHORT TERMResearchers Lawyers Scientists LONG TERMAvid book readers Professionals FB/TW posts from users you know Company blog, FB, TW, support forums Import, organize and share thousands of papers Targeted marketing Product development Constant iteration & testing Libraries, Universities, Research Centers Bloggers and media targeting customer segment Academic Database providers Affiliate program SEO/SEM/SM IE/FF/Chrome App Stores Developers Marketers Affiliate program fees Licensing Subscription fees Ad revenue AWS Infrastructure SEM Eng & Marketing OpEx

237. Here’s What We Did Version 1.0: Personal Libraries

238. Got out of the building

242. Extensive Surveys

244. Extensive Surveys

245. 33,000+ Adwords

247. Extensive Surveys

248. 33,000+ Adwords

249. Compete Review

251. Extensive Surveys

252. 33,000+ Adwords

253. Compete Review

254. Market Sizing

256. Extensive Surveys

257. 33,000+ Adwords

258. Compete Review

259. Market Sizing

260. 50 bloggers

262. Extensive Surveys

263. 33,000+ Adwords

264. Compete Review

265. Market Sizing

266. 50 bloggers

267. 6 Social Networks

269. Extensive Surveys

270. 33,000+ Adwords

271. Compete Review

272. Market Sizing

273. 50 bloggers

274. 6 Social Networks

275. Usability Tests

279. Pipelines Optimize

281. Pipelines Optimize

283. Run away from this customer as fast as possible.

284. Run away from this customer as fast as possible. They don’t want to spend money and will incur infinite support and infinite cost.

286. Pipelines Optimize

289. Pipelines Optimize

291. Negative Margins

292. ECM = BoringNo adjacent pivots worked for the team

293. Version 2.0: Trusted Advice

294. something-something-something.com Original idea Invincible Business Model: Version 2.0 Upwardly mobile young professionals making $2-10K of discretionary online purchases a year (excluding travel) FB/TW posts from users you know Company blog, FB, TW accounts Discover online goods recommended by friends at the lowest possible price from trusted vendors Developing trusted advice and advisors Web marketing Affiliate partnerships Constant iteration & testing Bloggers and Media targeting customer segment Retail marketing partners IE/FF/Chrome teams Affiliate Program Providers Affiliate program SEO/SEM/SM IE/FF/Chrome App Stores Developers Marketers Content Library Install base Readership base Affiliate program fees Licensing Subscription fees Ad revenue AWS Infrastructure SEM Eng & Marketing OpEx

295. New Hypotheses

296. Here’s What We Did Version 2.0: Trusted Advice

299. Extensive Surveys

300. Landing Page TestsLanding pages tested on affluent, career aged professionals, approximately 70/30 male/female, N=800+

302. Extensive Surveys

303. Landing Page Tests

305. Extensive Surveys

306. Landing Page Tests

307. Market Research

309. Extensive Surveys

310. Landing Page Tests

311. Market Research

312. Compete Research

314. Extensive Surveys

315. Landing Page Tests

316. Market Research

317. Compete Research

318. Revenue Analysis

319. Two PrototypesInsidely.com wantio.com

321. Extensive Surveys

322. Landing Page Tests

323. Market Research

324. Compete Research

325. Revenue Analysis

326. Two Prototypes

329. Values celebrity trends & friends’ opinions

330. Wants high ticket items at lowest price

332. Hates tedious work

333. Identifies as influencer among friends

336. Version 2.0: Trusted Advice Top ~6M US Influentials (~$9B/year)

337. something-something-something.com Original idea Invincible Business Model: Version 2.0 Upwardly mobile young professionals making $2-10K of discretionary online purchases a year (excluding travel) FB/TW posts from users you know Company blog, FB, TW accounts Discover online goods recommended by friends at the lowest possible price from trusted vendors Developing trusted advice and advisors Web marketing Affiliate partnerships Constant iteration & testing Bloggers and Media targeting customer segment Retail marketing partners IE/FF/Chrome teams Affiliate Program Providers Affiliate program SEO/SEM/SM IE/FF/Chrome App Stores Developers Marketers Content Library Install base Readership base Affiliate program fees Licensing Subscription fees Ad revenue AWS Infrastructure SEM Eng & Marketing OpEx

338. Here’s What We Found Version 2: Trusted Advice

341. High Conversion43% clickthrough on Top Admissions Books for Stanford MBAs article Compare to 0.5% clickthrough on ads ~100x difference

343. High Conversion

344. Needs Addressed See videos at http://factnote.com/c/e245

346. High Conversion

347. Needs Addressed Super easy to install and use. I really did enjoy it! Great idea! I will keep the extension installed because I do think this is practical! I could see myself using this regularly

349. High Conversion

352. High Conversion

355. High Conversion

362. Life is short, focus on big markets

364. How? Customer Development The Process Narrative Interviews Surveys Videos Prototypes Business Model Canvas Scorekeeping Real-time Feedback Physical Reality Checks Skype Face-to-face

365. We Made Students Blog Their Progress It Changed Everything

366. Interview

367. Photos Videos

368. Surveys

369. Interview & Photos

370. Competitive Analysis

371. Key Findings

372. A/B Test Results

373. Key Question

374. Strategy

375. Business Model Canvas as the Scorecard

377. Business Canvas Change Progress 1

378. Business Canvas Change Progress 2

379. Business Canvas Change Progress 3

380. Business Canvas Change Progress 4

381. Business Canvas Change Progress 5

382. Business Canvas Change Progress 6

383. Business Canvas Change Progress 7

384. SidebarMarket Type

385. Product Introduction Conundrum Product introductions aren’t predictable Why? Is it the people that are different? Is it the product that are different? Are there different “types” of startups?

386. Three Markets Types Market Type changes everything Sales, marketing and business development differ radically by market type

390. Carpe Diem www.steveblank.com

391. REVENUE STREAMS what are customers really willing to pay for? how? are you generating transactional or recurring revenues?

392. Market Size

393. Market/Opportunity Analysis How Big is It?: Market/Opportunity Analysis Identify a Customer and Market Need Size the Market Competitors Growth Potential

395. How large is the market be (in $’s) if they all bought?

398. How many people have the money to buy the product

399. How large would the market be (in $’s) if they all bought?

402. How many customers is that?

403. How largeis the market be (in $’s) if they all bought?

405. Identify and talk to channel partners

406. Identify and talk to competitorsTotalAvailableMarket ServedAvailableMarket Target Market

408. Demographic

409. Psychographic variables

410. Behavioral variables

411. Channel

412. etc…ServedAvailableMarket Target Market 182

413. Market Size: Summary Market Size Questions: How big can this market be? How much of it can we get? Market growth rate Market structure (Mature or in flux?) Most important: Talk to Customers and Sales Channel Next important: Market size by competitive approximation Wall Street analyst reports are great And : Market research firms Like Forester, Gartner

414. CUSTOMER SEGMENTS which customers and users are you serving? which jobs do they really want to get done? images by JAM

415. Customers

416. Corporate? Consumer? Business to Business (B to B) Use or buy inside a company Business to Consumer (B to C) Use or buy for themselves Business to Business to Consumer (B to B to C) Sell a business to get to a consumer Other Multi-sided Markets with multiple customers

417. Corporate Customers Business to Business (B to B)

418. What do they want you to do? Increase revenue? Decrease costs? Get them new customers? Keep up with or pass competitors? How important is it?

419. Market Type & Ignoring Customers Existing Market? Resegmenting an Existing Market? niche or low cost New Market? When do I ignore customer feedback?

420. Who’s the Customer in a Company? User? Influencer? Recommender? Decision Maker? Economic Buyer? Saboteur? Archetypes for each?

421. How Do They Interact to Buy? Organization Chart Influence Map Sales Road Map

422. Pass/Fail Signals & Experiments How do you test interest? Where do you test interest? What kind of experiments can you run? How many do you test?

423. How Do They Hear About You? Demand Creation Network effect Sales

424. Consumer Customers Business to Consumer (B to C)

425. What do they want you to do? Does it entertain them? Does it connect them with others? Does it make their lives easier? Does it satisfy a basic need? How important is it? Can they afford it?

426. Market Type & Ignoring Customers Existing Market? Resegmenting an Existing Market? niche or low cost New Market? When do I ignore customer feedback?

427. Consumer Customers Do they buy it by themselves? Do they need approval of others? Do they use it alone or with others?

428. How Do They Decide to Buy? Demand Creation Viral? SEO/SEM Network effect? AARRR (Dave McClure)

429. Pass/Fail Signals & Experiments How do you test interest? Where do you test interest? What kind of experiments can you run? How many do you test?

430. The Consumer Sales Channel A product that’s bits can use the web But getting a physical consumer product into retail distribution is hard Is Wal-Mart a customer? More next week

431. Multi-Sided Markets Business to Business to Consumer (B to B to C)

432. Who’s The Customer? Consumer End Users, Corporate Customers Pay Multiple Consumers Etc.

433. Multiple Customer Segments Each has its own Value Proposition Each has its own Revenue Stream One segment cannot exist without the other Which one do you start with?

434. Customer Relationships Get – Keep - Grow

435. CUSTOMER RELATIONSHIPS what relationships are you establishing with each segment? personal? automated? acquisitive? retentive?

436. “Get Customers” Funnel $ Acquire Activate Getting Customers – Virtual Channel

437. Earned and Paid Media PR “Get Customers” Funnel Viral Mktg SEO $ SEM/PPC Acquire Activate Blogs/Website Affiliate Mktg Advertising Tradeshows Getting Customers – Virtual Channel

438. “Get Customers” Funnel Interest $ Awareness Consideration Purchase Getting Customers – Physical Channel

439. Getting Customers – Physical Channel Earned and Paid Media “Get Customers” Funnel PR Product Reviews $ Awareness Tradeshows Interest Purchase Consideration Blogs/Website Advertising

440. Earned and Paid Media Loyalty Programs Get Customers product updates Awareness Keep Customers Consideration Purchase Interest Customer check-in calls Customer satisfaction survey Keeping Customers

441. Earned and Paid Media Grow Customers Get Customers product updates Loyalty Programs $ Awareness Up-Sell Consideration $ UnBundling Keep Customers Cross-sell Purchase Interest Referrals $ Customer check-in calls customer satisfaction survey Growing Customers