Lean Startup Operating Manual (Customer Development at Work)

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Here's the checklist for a startup wanting to get started with Customer Development part of the Lean Startup

Lean Startup Operating Manual (Customer Development at Work)

  1. The Lean Startup Operating Manual Steve Blank Stanford School of Engineering / UC Berkeley, Haas Business School www.steveblank.com
  2. The Economy Before • Cash was readily available • Follow on financing was readily available Now • Debt markets are tight • IPO & M&A window closed • most VC!s haven!t made money for a decade
  3. State of Startups • High burn rate • Swing for the fences • Full management teams • Assume customer is known • Assume features are known • Assumes growth is by execution Traditional startups are fighting yesterday’s war
  4. The Lean Startup • Continuous customer interaction • Revenue goals from day one • No scaling until revenue • Assumes customer and features are unknowns • Low Burn by Design - Not Crisis
  5. Lean Startup Strategy ! Analyze Opportunity ! Validate Customers/Business Model ! Execute Agile
  6. Analyze: Checklist !Opportunity/Resources ! Market or Technology Risk ! Market Type ! Domain Experience ! Proof
  7. Analyze Opportunity/Returns
  8. Do Capital Needs Match Return? • Large VC = your deal = 3x their fund • Angels = ? • What’s the potential return? • Size the market…
  9. sizing up the market $123 billion tourism industry inside the U.S. $1 billion English travel guides sold annually $210 million 20-35 year old travelers SF (Initial test market)
  10. + Market Sizing
  11. !quot;##quot;$%&'$##() *++$),-%quot;,./012%,-(##. -./0&1+234&5*+67'43&4)4583*+(56&'93:48 !quot;#$%&'())(*+, Our target market is the Flat ;./0&;(<4&*=&->&'93:48 Panel display market. !quot;A%%&'())(*+B, Target products: Camcorders, DVD -93?48&/:80&quot;@AA&'())(*+B players and recorder, digital cameras, Apex: ! 3.5M computer monitors, LCD and Plasma TV OLED TV market will grow to $15.29 billion by 2015 YEAR 1 PROJECTIONS Units sold : 1,000,000 Price per unit : $700 - $1,000 Revenue from Royalties (assuming .5-1.0% of shelf price): Worst case = $3,500,000 Best Case = $10,000,000
  12. Target market = College Students
  13. Analyze Market/Technolgy Risk
  14. Market/Technology Risks • There are no average startups • Startups do differ (sometimes dramatically) by vertical market • Average advice is non-optimal
  15. What Kind of Risk? • Market Risk? • Technology Risk? • Customer + Technology Risk? • What are the quot;fundamental drivers of growth?”
  16. A Plethora of Opportunities
  17. Market Risk vs. Invention Risk
  18. Execution: Lots to Worry About
  19. Execution: Very Different by Vertical
  20. Market Risk Reduction Strategy
  21. '''@!'quot;*5%$+%'H6)'I*(#& &%5/$6quot;67- ,#$8H#5&8)%2 90#quot;quot;%)'E68&%) !)6285& :J4K; 560?#$*%+ N*+&)*.8&6)+ *%'F%&7%#)G :OK4;P *%'I*$2+6) ,%)8 !)6285& N%quot;*A%)- !quot;#$%&'(#&&%)*%+ :PJ4S= ,#- E%&#*quot;'9&6)%+ .%'&/% *4%4'(%+&'(8-G'Q)-R+ +#0% 1$2 3+%) :;<= 9#quot;% >6)?6)#&%'@$A%+&6)+ •!#)&$%)')68&%)'560?#$*%+ •@$&%quot;'B&/%-'#)%'*$&%)%+&%2'*$ 1$2'3+%)+ C*)%quot;%++'&%5/$6quot;67-D *4%4'56quot;quot;%7%'+&82%$&+ B9%%'#??%$2*L'1'H6)'M78)%+D
  22. Bird’s Eye View of our Business Model Hardware ($155) Online Distribution • Own website ($208+.3x) Customer • Amazon.com ($40+32x) • eBay ($300+25x) Acquisition Target Market Cost: ($41) Demand Creation Viral MyNote • SEO/SEM ($156.00) Marketing • Blogs • Forums • Bookstore promotion • Sales force • Viral marketing Offline Distribution • Website $399.99 • College bookstores ($0.02) Software (in-house) ($1.00)
  23. Licensed Partners: • Sony Consumer electronics • Samsung • Flat Screen TVs through (Other possibilities - LG, Toshiba, Panasonic, DuPont) Fry’s, Best Buy, Magnolia, etc IP . C Patents 3(%-4(5,-)quot;%6 'quot;7,)quot;8-9$% :2,(quot;# 1 D 2 patents owned by Apex! Partners’ distribution channels • Technology patent - SOLED • Sony • Long-Brite and inkjet printing process • Samsung (Other possibilities - LG, Toshiba, Panasonic, DuPont) Dollar flows: Wages: founders & Consultants C. IP Costs: Lawyer . C License fees E- F1 & Patent costs. E; 1 Royalties Premises: Dev’t labs. D
  24. BUSINESS MODEL iPhone Application Subscription Based Service $ 2.99 (x.7) $ 5/month Year 1: $ 40K END-USERS END-USERS Year 1: $ 50K Year 2: $1M Year 2: $1.2 M E IC SE E RV NU RV RE SE VE I CE VE RE Third N Nightlife UE party venues affiliates CITYBEATS.COM Two Revenue Streams March | 2011 Total Revenue (year 1) = $ 90 K Critical Mass: 500,000 users Total Revenue (year 2) = $ 2.2 M
  25. Analyze Domain Expertise
  26. Are You a Domain Expert? • You’ve been an observer • You’ve been a user • You’ve built this before
  27. + Pain Points in Inter-District Development of Curricula
  28. What does the customer need? 65% of 315 respondents said they would buy our product
  29. TEAM ROLES AND CORE COMPETENCIES Building the Team Incentives • Current Team • Equity • Title and Responsibilities Vision Execution • Culture Shruti – Young, trendy atmosphere Business Gwen – Connected Stephan – Creative Amara Technology Horrace • Skills Needed – Technical Execution » Ruby on Rails, Perl, AJAX, Html, CSS, Clean designer • Future Team Members – Programmers – Sales Force – Interns Slide 29
  30. Analyze Market Type
  31. Market Type? • Existing Market • Resegment a Niche • Resegment on Low Cost • New Market
  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. 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
  34. END USER WILLINGNESS TO PAY Number of Respondents Willing to Pay Per Service 100 95 80 75 60% of respondents willing 71 Nightlife Promotions to pay for these services Friend Locator 60 58 40 30 20 15 12 6 0 $0 $1-$5 $5-$10 $10+ Slide 34
  35. Validate Customer/Business Model
  36. Customer Development and Product Development Product Development Concept/ Product Alpha/Beta Launch/1st Bus. Plan Dev. Test Ship Customer Development Customer Customer Customer Company Discovery Validation Creation Building
  37. Customer Development: Key Ideas • Parallel process to Product Development (agile) • Measurable Checkpoints • Not tied to FCS, but to customer milestones • Notion of Market Types to represent reality • Emphasis is on learning & discovery before execution
  38. Customer Discovery: Step 1 Customer Customer Customer Company Discovery Validation Creation Building • Stop selling, start listening – There are no facts inside your building, so get outside • Test your hypotheses – Two are fundamental: problem and product concept
  39. Customer Discovery: Exit Criteria • What are your customers top problems? – How much will they pay to solve them • Does your product concept solve them? – Do customers agree? – How much will they pay? • Draw a day-in-the-life of a customer (archetypes) – before & after your product • Draw the org chart of users & buyers
  40. Customer Validation: Step 2 Customer Customer Customer Company Discovery Validation Creation Building • Develop a repeatable and scalable sales process • Only earlyvangelists are crazy enough to buy
  41. Customer Validation: Exit Criteria • Do you have a proven sales roadmap? – Org chart? Influence map? • Do you understand the sales cycle? – ASP, LTV, ROI, etc. • Do you have a set of orders ($’s) validating the roadmap? • Does the financial model make sense?
  42. distribution and demand creation ! Unique Idea: website and iPhone app form symbiotic relationship Travel AdWords App traffic Listing TravelSpy.co iPhone App m traffic Blogs (ex. Magazines Travelblog.org)
  43. + Sales Ecosystem Discussion channel Mandate channel Sale Superintendant Another District district IT Director Engagement (Early Stages) School Dept. Head Another school in the district Teacher Teacher
  44. + Demand Creation quot; State-by-state rollout: educational standards quot; Continuous iteration of feedback CA Pilot Broad Grow Adoption Adoption quot; Hypotheses: Will quot; Hypotheses: Will quot; Hypothesis: How they adopt, use, they buy hands- well does it sell and pay? off? Can it scale? itself? quot; 10 schools f2f: quot; CA telemarket quot; All telemarket quot; Sales: $1,066 quot; F2f elsewhere quot; $533/dist quot; Travel: $1,000
  45. Distribution Channels • Online Distribution (DIRECT SALES) ! Own website quot; Set-up and server cost = $1500 quot; Server maintenance = $200/mo quot; Internet Merchant Fee = $8/unit ! eBay # Anchor subscription quot; Monthly Subscription Fee = $300 quot; Variable Fee = $25/unit ! Amazon.com # Pro Merchant seller quot; Monthly Subscription Fee =$39.99 quot; Variable Fee = $32/unit
  46. Distribution Channels • Offline Distribution (CHANNEL SALES) ! College Bookstores, e.g. Stanford Bookstore quot; Booth/Stall outside – Free quot; In-store vendor – $50 co-op dollars/mo ! Shelley Hughes, Manager of Computer Sales “I hope this project is actually realized…it sounds like a device that would do well!” • Future Channels/Partners ! Retailers such as Best Buy, Office Depot, Fry’s
  47. Manufacturing Partners • Contacted original design manufacturers (ODMs) in Asia to determine our supplier: • Lucky Light Electronics Co. Ltd. (Shenzhen, China) • Hon Hai Precision Industry, ie. Foxconn Electronics (Taiwan) • Compal Electronics (Taiwan) • Hipsley Ltd. (Hong Kong) Slide 49
  48. Cost of Goods Sold Specification Cost/piece Single light LCD panel $25 Motherboard (w/ WiFi and Bluetooth function) $60 RAM 512 MB $3 Wacom A5 (tablet sheet) $20 SDHC slot (expandable storage) $6 USB socket $0.50 Plastic casing (for panel and motherboard) $20 Rechargeable battery + ACDC power supply $15 Assembly cost $5 Software embedding $1 Shipping cost ($2000 for 5000 pieces in 20ft $0.40 container) Total Hardware Cost $155.5o Slide 50
  49. Execute Agile Product Development
  50. -39G(2*+9)&C3*G758&H4I4)*J'4+8 !quot;#$%&'%()&*)+,,-%./01quot;2+%$&%3+4$%5$1*+ Waterfall !quot;#$%&quot;'quot;()* +quot;*%,( Problem: known Solution: known -'./quot;'quot;()012( 3quot;&%45012( 60%()quot;(0(5quot; Source: Eric Ries
  51. .?()4 !quot;#$%&'%()&*)+,,-%1%6#quot;+%&'%7&)8#quot;*%2&/+ “Product Owner” or in-house customer Problem: Known Solution: Unknown Source: Eric Ries
  52. C3*G758&H4I4)*J'4+8&98&K49+&;89387J !quot;#$%&'%()&*)+,,-%016#/1$+/%6+1)quot;#quot;*%19&:$%2:,$&;+),%<===> Problem: Unknown Solution: Unknown Source: Eric Ries
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  54. K49+&;89387J&P&Q(368&;84J6 • Decide on business model – What are the quot;fundamental drivers of growth” • Create a decision loop (build-measure-learn) • Write your hypotheses down (3 diagrams) – Business model, distribution channel, demand creation • Prove it in micro-scale • Fact-based culture, built to learn
  55. Further Reading www.cafepress.com/kandsranch Blog www.steveblank.com

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