Lean Startup Operating Manual (Customer Development at Work)

The Lean Startup Operating Manual Steve Blank Stanford School of Engineering / UC Berkeley, Haas Business School www.steveblank.com

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

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

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

Lean Startup Strategy ! Analyze Opportunity ! Validate Customers/Business Model ! Execute Agile

Analyze: Checklist !Opportunity/Resources ! Market or Technology Risk ! Market Type ! Domain Experience ! Proof

Analyze Opportunity/Returns

Do Capital Needs Match Return? • Large VC = your deal = 3x their fund • Angels = ? • What’s the potential return? • Size the market…

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)

+ Market Sizing

!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"@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

Target market = College Students

Analyze Market/Technolgy Risk

Market/Technology Risks • There are no average startups • Startups do differ (sometimes dramatically) by vertical market • Average advice is non-optimal

What Kind of Risk? • Market Risk? • Technology Risk? • Customer + Technology Risk? • What are the quot;fundamental drivers of growth?”

A Plethora of Opportunities

Market Risk vs. Invention Risk

Execution: Lots to Worry About

Execution: Very Different by Vertical

Market Risk Reduction Strategy

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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)

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

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

Analyze Domain Expertise

Are You a Domain Expert? • You’ve been an observer • You’ve been a user • You’ve built this before

+ Pain Points in Inter-District Development of Curricula

What does the customer need? 65% of 315 respondents said they would buy our product

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

Analyze Market Type

Market Type? • Existing Market • Resegment a Niche • Resegment on Low Cost • New Market

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

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

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

Validate Customer/Business Model

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

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

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

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 Customer Customer Company Discovery Validation Creation Building • Develop a repeatable and scalable sales process • Only earlyvangelists are crazy enough to buy

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?

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)

+ 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

+ 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

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

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

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

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

Execute Agile Product Development

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.?()4 !quot;#$%&'%()&*)+,,-%1%6#quot;+%&'%7&)8#quot;*%2&/+ “Product Owner” or in-house customer Problem: Known Solution: Unknown Source: Eric Ries

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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

Further Reading www.cafepress.com/kandsranch Blog www.steveblank.com

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Lean Startup Operating Manual (Customer Development at Work)

by steve blank on May 20, 2009

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Lean Startup Operating Manual (Customer Development at Work) Presentation Transcript