041310 class 12 and 13

4/15/10 1

Customer Development

Company Building Part 1 & 2

Steve Blank and Eric Ries [email protected]

Agenda

!  Logistics/Questions !  Review !  Matthew Brezina, Xobni !  Company Building

Today Company Building

•  Move from earlyvangelists to mainstream customers

•  Rebuild management •  Rebuild organization & culture

Customer Discovery

Customer Validation

Company Building

Customer Creation

From Earlyvangelists to Mainstream Customers

!  Early customers may not be indicative of later customers

!  Growth into mainstream driven by Market type

From Earlyvangelists to Mainstream

Customers

Manage Sales Growth by Market Type

5

Intermission

Crossing the Chasm

Technology Adoption Life Cycle

!  Innovators !  Early Adopters !  Early Majority !  Late Majority !  Laggards

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

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

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

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

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

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

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

The Problem With Visionaries as Early Customers

Visionaries alienate pragmatists

#  Visionaries lack respect for the value of colleagues experience

#  Visionaries are more interested in technology than their industry

#  Visionaries fail to recognize the importance of existing product infrastructure

#  Visionaries want to get a jump on competition

#  Visionaries will suffer thru a buggy product for an edge

#  Pragmatists value the experience of their colleagues

#  Pragmatists want to talk about industry specific issues

#  Pragmatists expect existing product infrastructure

#  Pragmatists view visionaries as disruptive; they soak up all the budgets for pet projects

#  Pragmatists want a productivity improvement

#  Pragmatists do not want to debug someone else’s product

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

Chasm Crossing Strategies

!  Create the Whole Product !  Focus on only One or Two Segments !  Pragmatists want to buy from market leaders

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

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

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

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

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

New Market Chasm

New Market = Hockey Stick Sales Curve

Existing Market Chasm

Existing Market = Linear Sales Growth

Resegmented Market Chasm

Resegmenting: Existing Market Share Declines as New Market Grows

100% Revenues

% of Existing market Vs New

# Years in business 1 5

Resegmented Market = Complex Sales Growth

Year 2 Year 3 Year 4

Year 5

Year 6

Year 7

New Management and Mission-Centric Culture

!  Founders sometimes cannot get past Learning & Discovery

!  Mission-Centric Culture can be a bridge

Review Management

Develop “Mission-Centric”

Culture

Evolution of Management Strategy

Development Team-centric

Mission-centric Process-centric

Customer Development

Company Building

Large Company

Scalable Startup

Large Company Transition

-  Hypothesis Testing -  Minimum Feature Set -  Pivots

-  Delivers MRD’s -  Feature Spec’s -  Competitive Analysis

The Search for the Business Model The Execution of the Business Model

Customer Development Versus Product Management

Customer Development Product Management

Scalable Startup

Large Company Transition

Startup Metrics -  Customer Acquisition Cost -  Viral coefficient -  Customer Lifetime Value -  Average Selling Price/Order Size -  Monthly burn rate -  etc.

Traditional Accounting -  Balance Sheet -  Cash Flow Statement -  Income Statement

The Search for the Business Model The Execution of the Business Model

Metrics Versus Accounting

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Corporate Mission Statement Template

Mission Element Specifics

Why your employees come to work

! To build CafePress into the world’s largest retailer of customized goods

What they need to do all day

! Make sure customers say we are the only place to go on the web to make and sell CDs, books, and promotional items.

!  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 know they have succeeded

!  Customers say CafePress is the world’s best place to sell and buy custom items

!  Customers get great service for what they consider a fair price. !  Customers come back often (on average once every three weeks).

Corporate revenue and profit goals

!  An average store sells $45 per month.

!  Acquire 25,000 new customers per month. !  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.

Back to Functional Depts

!  Customer Development team = learning and discovery

!  Functional departments = execution

Department Mission

Statement

Department Roles set by Market Type

Customer Development Team Tasks Not Titles

CEO

VP Product Dev Technical Visionary Business Visionary Business Execution

Functional Departments-Silos

CEO

VP Engineering VP Marketing VP Sales VP Bus Dev

Typical Startup

Department Mission Statement Template

Mission Element Specifics

Why department members come to work

• Create end user demand and drive it into the sales channel

• 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 succeeded

• 40,000 active and accepted leads into the sales channel, company and product name recognition over 65% in target market

• Five positive product review per quarter

Contribution to corporate profit goals

• 35% market share in year one

• Headcount of five people, spend under $750K

Mission Centric Management = Agile Company

!  Mission Culture !  Information Culture !  Leadership Culture

Implement Mission-centric

Management

Create an “Information

Culture”

Build a “Leadership

Culture”

Mission-centric Management

$ Mission intention $ Employee initiative $ Mutual trust and communication $  “Good enough” decision making $ Mission synchronization

Information Culture

$ First-hand knowledge $ An overall view $ The view from the eyes of customers and

competitors

Synchronization Customer Development Organization

Mission-Centric Organization

Process-Driven Organization

Who !  Customer-facing teams & product development teams

!  Department-to-department !  Corporate-to-department !  Department-to-corporate

!  Corporate-to-department

Why !  Update hypothesis versus reality

!  Allow entire company to understand and react to change

!  Keep departmental missions aligned with corporate mission

!  Ensure that departmental missions are mutually supportive

!  Ensure that departments tactical moves are in step with the corporate objective(s)

!  Transmit orders and goals from top of the organization downwards

!  Report status from bottom of organization upwards

Decisions

Agile Company

Fast-Response Departments

Employee Initiative

Mission Intention

Trust & Communication

Timely Decisions

Company Mission

Department Mission

OODA Loops

Decentralized Decisions

Information Gathering &

Dissemination

Mission-Centric Management

Leadership

Synchronization

The Agile Company

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

Traditional VC Funding Model

Source: Peter Fenton, Benchmark Capital

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

Customer Development Funding Model

Source: Peter Fenton, Benchmark Capital

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

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

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?

The Traditional VC Pitch

!  Technology !  Team !  Product !  Opportunity !  Customer Problem !  Business Model !  Customers Better

Since You Can’t Answer my real questions here’s the checklist

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

Sequoia Capital’s Business Plan Outline

!  Business ! Company's business ! Mission statement

!  Products ! Product description ! Development schedule ! Differentiation ! Price point

!  Market ! Trends ! Historic and projected size in $’s ! Product match to market definition

!  Distribution ! Sales channels ! Partnerships ! Customers

!  ! Use of proceeds

!  Competition ! Competitors ! Competitive advantages

!  Team ! Background of mgmt ! Board composition

!  Financials ! Historic and projected P&L (1st two years by qtr) ! Projected cash flow (1st 2 yrs by qtrs) ! Current balance sheet ! Proj headcount by function (R&D, sales, marketing, G&A) ! Capitalization schedule

!  Deal ! Amount raised ! Valuation asked

Business Plan Becomes the Funding Slides

Concept Business Plan

Seed or Series A

Fire Founders Execute

“Lessons Learned” Drives Funding

Concept Business Plan

Lessons Learned Series A

Do this first instead of fund raising

Test Hypotheses

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

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

66

IMVU VC Presentation September 2005

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

68

•  Sticky, but... •  No realtime interaction •  Low barrier to entry •  Hard to monetize

Social networks and Communities (Myspace)

2D “paperdoll” avatars

Landscape before IMVU

•  Expressive, but... •  No person-to-person

interaction •  Hard to monetize in US

Social games and virtual worlds

•  Interactive, but... •  Subset of games market,

not superset

69

Social networking with avatars

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

70

Customer Discovery & Validation Q4 2004

•  Product: –  3D IM add-on for hanging out

online with friends •  Piggy back on existing buddy

lists and IM programs

•  Our customers told us: –  Avatar customization is the key

appeal. –  “Add-on” concept is confusing.

They actually want a separate buddy list.

•  So we: –  Ditched the IM add-on idea

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71

Customer Discovery & Validation Q1 and Q2 2005

•  Product: –  3D IM service for hanging out

with friends and meeting people •  Introduced Chat Now feature

(instant matching) •  Our customers told us:

–  Meeting new friends is as important as talking with existing friends (50/50)

–  Not enough people on IMVU –  Retention is a problem

•  So we: –  Scaled up our advertising budget

(to $40/day) –  Learned about retention from

market leaders (Cyworld, Myspace)

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Customer Discovery & Validation Q3 2005

•  Product: –  3D IM service plus avatar home pages

•  Introduced avatar home pages, plus messages, gifts, picture galleries blogs

•  Our customers are telling us: –  Avatar home pages are highly

addictive –  2D and 3D complement each other –  Messages in home pages and realtime

interaction complement each other –  Want more than two avatars per

window: parties and chat rooms –  Fix the bugs; polish

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Execution Phase 1, Discovery Phase 2 Q4 2005 – Q1 2006

•  Execution, Phase I –  Real Board: 2 VCs, CEO, CTO,

and outside member –  Hiring plan: one new hire per

month (currently 11 people) –  Process: Realistic AOP, monthly

books, Bugdb, teams, delegation –  Product metrics: acquisition,

retention, monetization –  Financial metrics: margins,

profitability and growth

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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

74

Execution Phase 1, Discovery Phase 2 Q4 2005 – Q1 2006

•  Discovery, Phase 2 –  Company Vision

•  Big vision (“Avatars everywhere”), two-year focus (“3DIM platform”), bounce off bad ideas (lots)

–  Active Feedback •  Sources: email, survey monkey, direct

outreach, “focus groups,” customer advisory board, developers, forums

•  Business Advisory Board –  Relate product development to

business goals –  Give course-correction feedback,

team synthesizes

–  Agile Development •  Build software for flexibility, change

•  Our customers are telling us: –  What’s next?

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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

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

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

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

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

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

810

1999 - 2004 Revenue

$0

$2

$4

$6

$8

$10

$12

Mill

ions

1999 2000 2001 2002 2003 2004

$27M 2004YTD

$17M 2003 YTD

$9.6M 2002 YTD

$4.7M 2001 YTD

$70K 1999 YTD

$1.4M 2000 YTD

840

Store/Hosting/Manufacturing/Fulfillment

850

($120)

($80)

($40)

$0

$40

$80

Q3-99 Q4-99

Thousands

Revenue Gross Profit Pre-tax Income

0

2

4

6

8

10

Q399 Q499

Thousands

Shops Images Orders Products

$70K 1999 YTD

7K SHOPS

Launched CafePress.com $70,920 Gross

Revenue

Q1 Q2 Q3 Q4 7,000 Shops

860

($800)

($400)

$0

$400

$800

$1,200

Q1-00 Q2-00 Q3-00 Q4-00

Thousands


0

40

80

120

160

200

Q100 Q200 Q300 Q400

Thousands


$1.4M 2000 YTD

80K SHOPS

Q1 Q2 Q3 Q4

VC Funding

10,000 Shops 25,000 Shops 50,000 Shops

Sore Loserman Xoom.com

870

($500)

$0

$500

$1,000

$1,500

$2,000

Q1-01 Q2-01 Q3-01 Q4-01

Thousands


0

100

200

300

400

500

600

700

800

Q101 Q201 Q301 Q401

Thousands


$4.7M 2001 YTD

200K SHOPS

100,000 Shops

Webby Award Winner

200,000 shops Q1 Q2 Q3

Q4

19+ Products Java to .NET

150,000 Shops

880

$0

$1,000

$2,000

$3,000

$4,000

Q1-02 Q2-02 Q3-02 Q4-02

Thousands


0

400

800

1200

1600

2000

Q102 Q202 Q302 Q402

Thousands


$9.6M 2002 YTD`

400K SHOPS

Q1 Q2 Q3 Q4 300,000 Shops

Premium Shops 60+ Products 1Million Products

250,000 Shops

890

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

Q1-03 Q2-03 Q3-03 Q4-03

Thousands


0

500

1000

1500

2000

2500

3000

3500

4000

Q103 Q203 Q303 Q403

Thousands


$17M 2003 YTD

690K SHOPS

Q1 Q2 Q3 Q4

CD Launch

500,000 Shops

Books Launch

1 Million Members

900

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Q1-04 Q2-04 Q3-04 Q4-04

Thousands


0

2000

4000

6000

8000

10000

12000

Q104 Q204 Q304 Q404

Thousands


$27M 2004YTD

1M SHOPS

Q1 Q2 Q3 Q4 Marketplace

New Manufacturing Facility 1 Million Shops

910

1999-2007 Revenue

$0$20$40$60$80$100$120$140$160

1999 2000 2001 2002 2003 2004 2005 2006 2007

Mil

lio

ns

041310 class 12 and 13

Education