This document discusses customer development and company building. It covers moving from early adopters to mainstream customers by managing sales growth based on market type. It also discusses crossing the chasm between early adopters and mainstream pragmatists. Strategies for crossing the chasm include creating a "whole product", focusing on one or two market segments, and becoming a market leader in a niche. The document also discusses evolving management and developing a mission-centric culture as a company grows.

1. Customer Development
Company Building Part 1 & 2
Steve Blank and Eric Ries
sblank@kandsranch.com
4/15/10 1

2. Agenda
! Logistics/Questions
! Review
! Matthew Brezina, Xobni
! Company Building

3. Today
Company Building
Customer Customer Customer Company
Discovery Validation Creation Building
• Move from earlyvangelists to
mainstream customers
• Rebuild management
• Rebuild organization & culture

4. From Earlyvangelists to
Mainstream Customers
! Early customers may not be indicative of later
customers
! Growth into mainstream driven by Market type
From Earlyvangelists Manage Sales
to Mainstream Growth by
Customers Market Type

5. Intermission
Crossing the
Chasm
5

6. Technology Adoption Life Cycle
! Innovators
! Early Adopters
! Early Majority
! Late Majority
! Laggards

7. The Chasm
! Between any two groups there is a gap
! The disassociation between the two groups is the difficulty
any group will have accepting a new product if its
presented in the same manner as it was to the group to its
immediate left
Geoff Moore; Crossing the Chasm

8. Early Adopters
Innovators: The Technology Enthusiasts
! The first people to adopt technology
" The gatekeepers for technology
" Moore believes they’re key to any high-tech
marketing effort
! In large companies buys one of anything
! In small companies “designated techie” in IT
! Want to try it just to see if it works

9. Early Adopters:
The Visionaries
! Highly motivated and driven by a dream
! Want a fundamental breakthrough
" Value not from technology but from the strategic leap
! The least price-sensitive of any segment
" Can provide up front money for additional development
" Can alert the business community to advances
" Will serve as visible references
! Like project orientation - want to start with a pilot
! Represent an opportunity early in a life cycle to generate
a burst of revenue and gain visibility
" Gives high-tech companies their first big break

10. Mainstream Markets
Early Majority: The Pragmatists
! Dollars are in the hands of the pragmatists
! Wants to make incremental, measurable progress
" Hard to win over, but loyal once won
" Care about; your company, product quality, “Whole Product”
! Interested in knowing what others in their industry think
" References and relationships are important
! They like competition, reasonably price sensitive
! Selling to pragmatists takes time

11. Late Majority:
The Conservatives
! Against discontinuous innovation
! Like to buy preassembled packages with
everything bundled at heavily discounted prices
! Great opportunity to take low cost trailing edge
technology components are repackage them into
single function systems

12. Laggards: The Skeptics
! Do not participate in the high tech marketplace
except to block purchases
! Continually point to the discrepancies between
the sales claims and the delivered product

13. Why is There a Chasm?
! Markets are made of people who reference each
other during the buying decision
! Moving from segment to segment in the life cycle
we may have references, but not of the right sort
! The chasm is between visionaries and pragmatists
" Visionaries talk to enthusiasts
" Conservatives look to pragmatists
" Therefore no referenceable customer base when making the
transition to the new segment

14. The Problem With Visionaries
as Early Customers
Visionaries alienate pragmatists
# Visionaries lack respect for # Pragmatists value the experience
the value of colleagues of their colleagues
experience # Pragmatists want to talk about
# Visionaries are more industry specific issues
interested in technology than # Pragmatists expect existing
their industry product infrastructure
# Visionaries fail to recognize # Pragmatists view visionaries as
the importance of existing disruptive; they soak up all the
product infrastructure budgets for pet projects
# Visionaries want to get a # Pragmatists want a productivity
jump on competition improvement
# Visionaries will suffer thru a # Pragmatists do not want to debug
buggy product for an edge someone else’s product

15. Crossing the Chasm
Entering the Mainstream is an Act of Aggression
! Transition to a strategic target in the mainstream market
" Focus on a single beachhead and a single target niche market
" Pick one you can dominate from the outset
" Force the competitor out of your targeted niche markets
" Then take over additional market segments
" Develop a solid base of references, collateral and procedures &
documentation

16. Chasm Crossing Strategies
! Create the Whole Product
! Focus on only One or Two Segments
! Pragmatists want to buy from market leaders

17. Create the Whole Product
! When something is left out the solution is
incomplete, the selling promise is unfilled, and the
customer is unavailable for referencing
" To secure references, ensure that the customer gets not just
the product, but the whole product
" But make them sparingly and strategically - leveraging them
over multiple sales

18. Focus on only 1 or 2 Segments
! Word of mouth is the #1 source of reference
" Winning 1 or 2 customers in 5 or 10 segments
will not create word of mouth
" 4 or 5 customers in one segment will
! Lack of word of mouth makes it harder to sell
" Sales driven will get it much later if at all

19. Pragmatist want to Buy from Market
Leaders
! Whole products grow up around market leaders
" To be a leader you need the largest market
share (over 40%) in your segment
! Take a “big fish, small pond” approach
" Focus on achieving a dominant position in one or
two narrowly bounded market segments

20. Chasm Issues
! Goal is to take a niche market approach to
crossing the chasm
! Most CEO’s won’t make niche commitments
" Won’t stop pursuing any sale for any reason
" Sales driven not marketing driven
! The sole goal during this phase of the company
should be to secure a beachhead
" And get a referenceable pragmatist customer base

21. Beyond Niches
! Longer term vision guides the immediate
tactical choices
" Select strategic target market niches – these
are entry points into larger segments

22. End of Intermission
22

23. New Market Chasm

24. New Market =
Hockey Stick Sales Curve

25. Existing Market Chasm

26. Existing Market =
Linear Sales Growth

27. Resegmented Market Chasm

28. Resegmenting: Existing Market Share
Declines as New Market Grows
100%
Revenues
% of Existing market
Vs New
1 5 # Years in business

29. Resegmented Market =
Complex Sales Growth
Year 7
Year 6
Year 5
Year 3 Year 4
Year 2

30. New Management and
Mission-Centric Culture
! Founders sometimes cannot get past
Learning & Discovery
! Mission-Centric Culture can be a bridge
Develop
Review
“Mission-Centric”
Management
Culture

31. Evolution of Management
Strategy
Customer Company Large
Development Building Company
Development Mission-centric Process-centric
Team-centric

34. Customer Development Versus
Product Management
The Search for the Business Model The Execution of the Business Model
Scalable Large
Transition
Startup Company
- Delivers MRD’s
- Hypothesis Testing
- Feature Spec’s
- Minimum Feature Set
- Competitive Analysis
- Pivots
Customer Development Product Management

35. Metrics Versus Accounting
The Search for the Business Model The Execution of the Business Model
Scalable Large
Transition
Startup Company
Startup Metrics Traditional Accounting
- Customer Acquisition Cost - Balance Sheet
- Viral coefficient - Cash Flow Statement
- Customer Lifetime Value - Income Statement
- Average Selling Price/Order Size
- Monthly burn rate
- etc.

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40. Corporate Mission Statement Template
Mission Element Specifics
Why your To build CafePress into the world’s largest retailer of customized goods
!
employees
come to work
Make sure customers say we are the only place to go on the web to
!
make and sell CDs, books, and promotional items.
What they need
to do all day ! Give sellers marketing tools to reach their customers
! Try to be a good citizen of our community. Print on recyclable
materials, use environmentally friendly packaging, and use non-toxic
inks wherever practical.
How they will Customers say CafePress is the world’s best place to sell and buy
!
know they have custom items
succeeded ! Customers get great service for what they consider a fair price.
! Customers come back often (on average once every three weeks).
Corporate ! An average store sells $45 per month.
revenue and ! Acquire 25,000 new customers per month.
profit goals ! Grow to $30 million in revenue by the end of next year.
! Maintain 40% profit margin.
! Take good care of the employees. Provide stock options and full
medical and dental benefits.

41. Back to Functional Depts
! Customer Development team =
learning and discovery
! Functional departments = execution
Department Department Roles
Mission set by Market Type
Statement

42. Customer Development Team
Tasks Not Titles
CEO
VP Product Dev Technical Visionary Business Visionary Business Execution

43. Functional Departments-Silos
Typical Startup
CEO
VP Engineering VP Marketing VP Sales VP Bus Dev

44. Department Mission Statement Template
Mission Element Specifics
Why department members • Create end user demand and drive it into the sales channel
come to work • Educate the channel and customers about why our products are
superior
• Help Engineering understand customer needs and desires
What th ey need to do all day • Demand -creation activities (advertising, PR, tradeshows,
seminars, web sites, etc.)
• Competitive analyses, channel and customer collateral (white
papers, data sheets, product reviews)
• Customer surveys, market requirements documents
How will they know they have • 40,000 active and accepted leads into the sales channel,
succeeded company and product name recognition over 65% in target
market
• Five positive product review per quarter
Contribution to corporate profit • 35% market share in year one
goals • Headcount of five people, spend under $750K

45. Mission Centric Management =
Agile Company
! Mission Culture
! Information Culture
! Leadership Culture
Implement Create an Build a
Mission-centric “Information “Leadership
Management Culture” Culture”

46. Mission-centric Management
$ Mission intention
$ Employee initiative
$ Mutual trust and communication
$ “Good enough” decision making
$ Mission synchronization

47. Information Culture
$ First-hand knowledge
$ An overall view
$ The view from the eyes of customers and
competitors

48. Synchronization
Customer Mission-Centric Process-Driven
Development Organization Organization
Organization
Who ! Customer-facing ! Department-to-department ! Corporate-to-
teams & product ! Corporate-to-department department
development ! Department-to-corporate
teams
Why ! Update hypothesis ! Keep departmental missions ! Transmit orders and
versus reality aligned with corporate goals from top of
! Allow entire mission the organization
company to ! Ensure that departmental downwards
understand and missions are mutually ! Report status from
react to change supportive bottom of
! Ensure that departments organization
tactical moves are in step upwards
with the corporate
objective(s)

49. The Agile Company
Agile
Company
Company
Mission
Mission-Centric
Management
Department Mission
Decisions
Mission Timely Employee
Intention Decisions Initiative
Synchronization Trust &
Communication
Fast-Response
Departments
OODA Information
Decentralized Gathering &
Loops Decisions Dissemination
Leadership

50. Summary
! Management strategies need to change as the
company grows
" Development-team centric ! Mission-centric !
Process-centric
! Mission-oriented culture is the “bridge” culture
" Unanimity and clear understanding of purpose, focus
and direction
" Adaptability, empowerment, initiative

51. Customer Development In the
Real World
The VC Presentation
51

52. Traditional VC Funding Model
Source: Peter Fenton, Benchmark Capital

53. Traditional VC Funding Assumptions
! Company's risk decreased by hitting milestones
! Which brought about a jump in its valuation
! Additional funding was needed at each milestone
! Resulting in a high level of financial investment
! Lack of iteration meant resolution of success or
failure was delayed

54. Customer Development Funding Model
Source: Peter Fenton, Benchmark Capital

55. Customer Development
Funding Assumptions
! Company's risk decreased by shipping as early
as possible
! Continual product iteration assumed
! Capital burn kept low until adoption onset
! Additional funding needed refine the model and
more to scale a proven model
! Time and cost between the founding and
success/failure is greatly decreased

56. Customer Development meets
the Real World
! I’m a believer, but…
" How to do I convince others?
" How do I so without proselytizing?
" Yet how do I make the benefits compelling?
! Venture Capitalists are an early audience

57. What are Early Stage VC’s
Really Asking?
! Are you going to:
" Blow my initial investment?
" Or are you going to make me a ton of money?
! Are there customers for what you are building?
" How many are there? Now? Later?
! Is there a profitable business model?
Can it scale?

58. The Traditional VC Pitch
Since You Can’t Answer my real questions here’s the checklist
! Technology
! Team
! Product
! Opportunity
! Customer Problem
! Business Model
Better ! Customers

59. Kleiner Perkins
Business Plan Outline
! The opportunity
" company mission, vision
! Team
" Backgrounds, board, advisors
! Market
" Target customer segments, market size & need
! Technology
" Architecture, IP, measurable differentiation
! Go to market strategy
" Bus model, distribution, pricing, partnerships/slingshots?
" Alternatives, competition, comparisons
! Financial & operating plan
" Funding and use of funds
" Milestones

60. Sequoia Capital’s
Business Plan Outline
! Business ! Competition
! Company's business ! Competitors
! Mission statement ! Competitive advantages
! Products ! Team
! Product description ! Background of mgmt
! Development schedule ! Board composition
! Differentiation ! Financials
! Price point ! Historic and projected P&L
! Market (1st two years by qtr)
! Trends ! Projected cash flow (1st 2 yrs by qtrs)
! Historic and projected size in $’s ! Current balance sheet
! Product match to market definition ! Proj headcount by function
! Distribution (R&D, sales, marketing, G&A)
! Sales channels ! Capitalization schedule
! Partnerships ! Deal
! Customers ! Amount raised
! ! Use of proceeds ! Valuation asked

61. Business Plan Becomes the
Funding Slides
Business Seed or Fire
Concept Plan Series A Execute Founders

62. “Lessons Learned” Drives Funding
Business Test Lessons
Concept Plan Hypotheses Learned Series A
Do this first instead of fund raising

63. Credibility Increases Valuation
! Customer Development and the Business Plan
" Extract the hypotheses from the plan
" Leave the building to test the hypothesis
" Present the results as:
“Lessons Learned from our customers”
" Iterate Plan

64. IMVU
Background
64

65. Founding IMVU
• Customer Discovery and Validation
– Founded company in April 2004
– Sat in this class Fall of 2004
– Shipped in 6 months
– Charged from Day 1
– No press releases
– First and last press of 2004/5: The Wired article
65

66. IMVU
VC Presentation
September 2005
66

67. Earlier Lessons Learned
• Sandcastle
– Solve a big enough problem
– Don’t confuse technology with a business
• There.com
– Keep it real small until the hockey-stick
– Don’t scale without customers
– Don’t confuse your passion with “customers will
get it later”
– Don’t bring in the suits until it’s just execution 67

68. Landscape before IMVU
Social networks and 2D “paperdoll” avatars Social games and
Communities (Myspace) virtual worlds
• Sticky, but... • Interactive, but...
• No realtime interaction • Subset of games market,
• Low barrier to entry • Expressive, but... not superset
• Hard to monetize • No person-to-person
interaction
• Hard to monetize in US 68

69. Social networking with avatars
Customizable home pages with avatar pictures
Messages, gifts, blogs, picture galleries, rankings,
stickers, wish lists, etc. 69

70. Customer Discovery & Validation
Q4 2004
• Product: 9,000 $8,000
– 3D IM add-on for hanging out 8,000 $7,000
online with friends 7,000
$6,000
• Piggy back on existing buddy
6,000
lists and IM programs $5,000
• Our customers told us: 5,000
$4,000
– Avatar customization is the key 4,000
$3,000
appeal. 3,000
– “Add-on” concept is confusing. 2,000
$2,000
They actually want a separate $1,000
1,000
buddy list.
0 $0
• So we:
Dec-04
Feb-05
Apr-05
Nov-04
Jan-05
Mar-05
May-05
Aug-05
Jul-05
Jun-05
– Ditched the IM add-on idea
70

71. Customer Discovery & Validation
Q1 and Q2 2005
• Product: 9,000 $8,000
– 3D IM service for hanging out 8,000 $7,000
with friends and meeting people 7,000
$6,000
• Introduced Chat Now feature
(instant matching) 6,000
$5,000
• Our customers told us: 5,000
$4,000
– Meeting new friends is as 4,000
important as talking with existing $3,000
3,000
friends (50/50)
$2,000
– Not enough people on IMVU 2,000
– Retention is a problem 1,000 $1,000
• So we: 0 $0
– Scaled up our advertising budget Dec-04
Feb-05
Apr-05
Nov-04
Jan-05
Mar-05
May-05
Aug-05
Jul-05
Jun-05
(to $40/day)
– Learned about retention from
market leaders (Cyworld,
Myspace)
71

72. Customer Discovery & Validation
Q3 2005
• Product:
9,000 $8,000
– 3D IM service plus avatar home pages
8,000 $7,000
• Introduced avatar home pages, plus
messages, gifts, picture galleries blogs 7,000
$6,000
• Our customers are telling us: 6,000
$5,000
– Avatar home pages are highly 5,000
addictive 4,000
$4,000
– 2D and 3D complement each other $3,000
3,000
– Messages in home pages and realtime $2,000
2,000
interaction complement each other
$1,000
– Want more than two avatars per 1,000
window: parties and chat rooms 0 $0
Dec-04
Feb-05
Apr-05
Nov-04
Jan-05
Mar-05
May-05
Aug-05
Jul-05
Jun-05
– Fix the bugs; polish
72

73. Execution Phase 1, Discovery Phase 2
Q4 2005 – Q1 2006
• Execution, Phase I
– Real Board: 2 VCs, CEO, CTO, $90,000
and outside member
$80,000
– Hiring plan: one new hire per
month (currently 11 people) $70,000
– Process: Realistic AOP, monthly $60,000
books, Bugdb, teams, delegation $50,000
– Product metrics: acquisition,
$40,000
retention, monetization
– Financial metrics: margins, $30,000
profitability and growth $20,000
$10,000
$0
6/1/05 7/1/05 7/31/05 8/30/05 9/29/05 10/29/05 11/28/05 12/28/05 1/27/06 2/26/06
73

74. Execution Phase 1, Discovery Phase 2
Q4 2005 – Q1 2006
• Discovery, Phase 2
– Company Vision $90,000
• Big vision (“Avatars everywhere”),
two-year focus (“3DIM platform”), $80,000
bounce off bad ideas (lots)
– Active Feedback
$70,000
• Sources: email, survey monkey, direct $60,000
outreach, “focus groups,” customer
advisory board, developers, forums $50,000
• Business Advisory Board $40,000
– Relate product development to
business goals $30,000
– Give course-correction feedback,
team synthesizes $20,000
– Agile Development
$10,000
• Build software for flexibility, change
• Our customers are telling us: $0
6/1/05 7/1/05 7/31/05 8/30/05 9/29/05 10/29/05 11/28/05 12/28/05 1/27/06 2/26/06
– What’s next?
74

75. Vision Lessons Learned – IMVU
• Principles
– Big vision: Avatars everywhere
– Two year focus: 3D instant messaging with home pages
– Bounce off bad ideas: E.g., piggy back IM
• Process
– Ship a product early; get real reactions from real customers
– Expect to iterate
– No artificial barriers or dependencies
75

76. Agile Development
• “Our highest priority is to satisfy the customer through early and
continuous delivery of valuable software.” -
http://agilemanifesto.org/
• Embrace Change
– Build what you need today
– Process-oriented development so change is
painless
• Prefer flexibility to perfection
– Ship early and often
– Test-driven to find and prevent bugs
– Continuous improvement vs. ship-and-maintain
76

77. Growth Strategy
• No launch until we’re ready
– (Not even a press release for our VCs)
– Metrics tell us when we’re ready: acquisition,
retention, monetization
• Stay focused on profitability
– Manage for margins as well as gross numbers
– Profitability monotically harder to achieve with
each non-profitable day and each new hire
• Partnerships
– Seek win-win relationships with other community 77
sites and products

78. Financing Lessons Learned –
IMVU
• Seed: Self funded $300k
– Low interest note
– Small, self-sufficient team of founders (5)
– Viewed financing as a bridge to profitability
• Series A: Angel funded $600k
– Great advisory board of 8 people (“BAB”)
• Series B: VC funded $8MM
– Go for World Class VC’s at the Hockey-Stick
– Negotiate to sell some Founders’ stock in Series A, and more in
Series B
78

79. Financing Results
• Series B: VC funded $8MM
– Go for World Class VC’s at the Hockey-Stick
– Negotiate to sell some Founders’ stock in
Series A, and more in Series B
79

80. 80

81. 1999 - 2004 Revenue
$12
Millions
$27M
$10 2004YTD
$8
$17M
$6 2003 YTD
$9.6M
2002 YTD
$4
$4.7M
$2 $1.4M 2001 YTD
$70K 2000 YTD
1999 YTD
$0
1999 2000 2001 2002 2003 2004
810

82. 820

83. 830

84. Store/Hosting/Manufacturing/Fulfillment
840

85. Revenue Gross Profit Pre-tax Income
$80
Thousands
$70K
$40 1999 YTD
$0
($40)
($80)
($120)
Q3-99 Q4-99
Shops Images Orders Products
10
Thousands
8
7K
6 SHOPS
4
2
0
Q399 Q499
Launched
$70,920 Gross
CafePress.com
Revenue
Q1 Q2 Q3 Q4 850
7,000 Shops

86. Revenue Gross Profit Pre-tax Income
$1,200
$1.4M
Thousands
$800 2000 YTD
$400
$0
($400)
($800)
Q1-00 Q2-00 Q3-00 Q4-00
Shops Images Orders Products
200
Thousands
160
120
80 80K
SHOPS
40
0
Q100 Q200 Q300 Q400
VC
Funding Xoom.com Sore Loserman
Q1 10,000 Shops Q2 25,000 Shops Q3 50,000 Shops Q4 860

87. Revenue Gross Profit Pre-tax Income
$2,000
Thousands
$4.7M
$1,500 2001 YTD
$1,000
$500
$0
($500)
Q1-01 Q2-01 Q3-01 Q4-01
Shops Images Orders Products
800
Thousands
700
600
500
400
300
200K
200
SHOPS
100
0
Q101 Q201 Q301 Q401
19+ Products Java to .NET
Webby Award
Q1 Q2 Q3 Winner
100,000 Shops 150,000 Shops Q4
870
200,000 shops

88. Revenue Gross Profit Pre-tax Income
$4,000
$9.6M
Thousands
2002 YTD`
$3,000
$2,000
$1,000
$0
Q1-02 Q2-02 Q3-02 Q4-02
Shops Images Orders Products
2000
Thousands
1600
1200
800
400K
400 SHOPS
0
Q102 Q202 Q302 Q402
1Million
Products Premium Shops 60+ Products
Q1 Q2 Q3 Q4 880
250,000 Shops 300,000 Shops

89. Revenue Gross Profit Pre-tax Income
$7,000
Thousands
$6,000 $17M
$5,000 2003 YTD
$4,000
$3,000
$2,000
$1,000
$0
Q1-03 Q2-03 Q3-03 Q4-03
Shops Images Orders Products
4000
Thousands
3500
3000
2500
2000
1500
1000 690K
500 SHOPS
0
Q103 Q203 Q303 Q403
CD Launch Books Launch
Q1
500,000 Shops
Q2 Q3 Q4 890 Million
1
Members

90. Revenue Gross Profit Pre-tax Income
$12,000
Thousands
$10,000
$27M
2004YTD
$8,000
$6,000
$4,000
$2,000
$0
Q1-04 Q2-04 Q3-04 Q4-04
Shops Images Orders Products
12000
Thousands
10000
8000
6000
4000
2000 1M
SHOPS
0
Q104 Q204 Q304 Q404
New Manufacturing
Facility 1 Million Shops
Q1 Marketplace Q2 Q3 Q4 900

91. 1999-2007 Revenue
$160
Millions
$140
$120
$100
$80
$60
$40
$20
$0
1999 2000 2001 2002 2003 2004 2005 2006 2007
910