customer development: the second decade by bob dorf

Customer Development: The Second Decade(aka Why Accountants Don’t Run Startups)

Bob Dorfserial entrepreneur, startup advisor, partner, “supporting author”

www.steveblank.com

©2010 K+S Ranch Consulting Inc.

http://www.steveblank.com/

…Is there a roadmap?

ScalableStartup

Large CompanyTransition

- Business Model found- i.e. Product/Market fit- Repeatable sales model- Managers hired

What’s A Startup?

A Startup is the temporary organizationused to search for

a scalable business model (c)2010 K+S Ranch Consulting Inc.

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ScalableStartup

Large Company>$100M/year

- Total Available Market > $500m- Company can grow to $100m/year- Business model found- Focused on execution and process- Typically requires “risk capital”

Scalable Startup

• Designed to grow big• Typically needs risk capital• How this room defines “Startup”

(c)2010 K+S Ranch Consulting Inc.

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Small BusinessStartup

ScalableStartup

Large Company

Venture Firms Invest in Scalable Startups


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ScalableStartup


- Founders depart- Professional Mgmt- Process- Beginning of scale

What VC’s Don’t Tell You:The Transition – Founders Leave


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not quite the beginning of startups, but…

100 Years Ago in Detroit

ScalableStartup


Inventor of the Modern Corporation

Alfred P. Sloan


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ScalableStartup


Alfred P. Sloan

General Motors, President/Chairman• Cost Accounting• MIT’s Sloan School• Sloan Kettering• Kettering Institute


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ScalableStartup


Founder of General Motors

Billy Durant


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ScalableStartup


Billy Durant

- Leader in horse-drawn buggys- Fired by board, starts Chevrolet- Regains control of GM - Fired again, GM ~$3.6 billion*

* GM Net sales in 1921 $304.5M = $3.6 Billion today


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ScalableStartup


Durant vs Sloan


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Durant vs. Sloan

• Dies, rich, honored and famous


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Durant vs. Sloan

• Dies, rich, honored and famous• Dies penniless…

…managing a bowling alley


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Durant vs. Sloan

• Dies, rich, honored and famous• Dies managing a bowling alley

Accountant


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ScalableStartup


You are here


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50 Years Ago in Detroit…

ScalableStartup


GM Owns the U.S. Car Market

Roger B. Smith


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ScalableStartup


Roger B. Smith

General Motors, President/Chairman- GM >50% market share- Knew what the customer wanted- 5 years to bring a car to market- Huge inventories eliminate stoppages


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ScalableStartup


Founder of Toyota and Lean Production

Kiichiro ToyodaTaiichi Ohno


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ScalableStartup


Toyoda and Ohno

• Taught by Americans post WWII• Couldn’t afford inventory like US

auto companies• Toured GM plants and…• Built Kaizen/lean manufacturing• Toyota Lean Production System


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ScalableStartup


1960: Agile, Lean, Customer Centric

• Short runs vs. Long option lists• Agile Product Development• Lean Manufacturing• Continuous Improvement• Customer Development … talk about ”a day in the life”


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Toyoda/Ohno vs. Smith

• Integrate Customer Development vs. Options• Agile Development plus Lean Manufacturing• U.S. Market share goes from 0 to 20%


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• Buys $35 billion of Japanese robots to “fix” GM

• Market share drops 50% to <25%


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Accountant


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You are here


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10 Years Ago in Silicon Valley…

More startups fail from a lack of customers than from a failure of product development

Yet All We Had WasThis…

Concept/Seed

Round

Product Dev.

Alpha/Beta Test

Launch/1st Ship

New Product Introduction Model


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Traditional Product Introduction:Two Implicit Assumptions

Concept Product Dev.

Alpha/Beta Test

Launch/1st Ship

Customer Problem: known

Product Features: known


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This Was A Plan For Failure

• Long-term “lockdown” of Product Development/Engineering• Assumed we understood customer problem/product solution

– But they are hypotheses– the facts were outside the building

• Sales & Marketing focused on execution to First Customer Ship– Costs and burn rate became front loaded– Execution & hiring predicated on business plan hypothesis

• Financial projections assume success– Heavy spending hit if product launch is wrong– Failure always a bad reflection on Management, Board, Investors

You don’t know if you’re wrong until you’reout of business, out of money, or (usually) both!

8 Startups later,Steve Blank Drew This…

CustomerDiscovery

CustomerValidation

Company Building

Customer Creation

“Do-Over”

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Which Turned Into A Model

Product Introduction Model

became

Concept Product Dev.

Alpha/Beta Test

Launch/1st Ship

Customer Development

CompanyBuilding

CustomerDiscovery

CustomerValidation

Customer Creation


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Customer Development:“one (great) entrepreneur’s theory,” 2001-2003

CustomerDiscovery

CustomerValidation

Company Building

Customer Creation

Pivot

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Customer Development: happy 10th birthday…extensive “real world” deployment…morphed, tested, debated: CE0s, CM0s, VCs, MBAs…and a “slight” investment cycle change since ‘01-3!

CustomerDiscovery

CustomerValidation

Company Building

Customer Creation

Pivot

…a very short Customer Development overview

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• Stop selling, start listening• Test your hypotheses• Continuous Discovery and Feedback• Done by founders…OUTSIDE the building!

Customer Discovery

CustomerDiscovery

CustomerValidation

CompanyBuilding

CustomerCreation


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Customer Validation

Customer

Discovery

CustomerValidatio

n

Customer Creation

CompanyBuilding

• Repeatable and scalable business model?• Passionate Earlyvangelists?• Return to Discovery absent passionate customers

Do-Over


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The “Do It Again” Loop

• Iteration was at the heart of Customer Development

• Fast, agile and opportunistic

• (Almost) celebrate failure…whenever it’s instructive

• But it didn’t have a name “Do over” is just so juvenile

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Customer Creation

• Creation comes after proof of sales

• Spend to scale based on FACTS, not Hypotheses

• Begins only with repeatable, scalable processes for sales, marketing, demand creation

CustomerDiscovery

CustomerValidation

CompanyBuilding

CustomerCreation


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Company Building

CustomerDiscovery

CustomerValidation

Customer Creation

Company

Building

• (Re)build company, management, infrastructure• (Re)visit the mission• Go Global• Get a Porsche (or a Towncar)rganization & management

• Re look at your mission(c)2010 K+S Ranch

Consulting Inc. www.steveblank.com

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So what’s new since 2003??

• Customer Development startups have surged

• Customer Development “Rules” emerged

• Key Customer Development approaches have

converged

• Product Development cycle times submerged

• …and easy money has been purged

5 Years Ago…

(c)2010 K+S Ranch Consulting Inc. www.steveblank.com

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Eric Ries Extends the Model

• Took Steve’s class at U.C. Berkeley • Co-founded IMVU

- Ditched Waterfall and paired Customer Development with an Agile Development Model

- Used off-the-shelf commodity software stack

Eric Ries: Insight 1Engineering acts as if features are “known”

Solution: known

Waterfall

Requirements

Design

Implementation

Verification

Maintenance

Problem: known

Concept/Seed

Product Dev.

Alpha/Beta

Launch/Ship

• Eric observed the solution was unknown in a startup• Waterfall process could only build known features

Eric Ries: Insight #2Match Agile Dev to Customer Dev speed

Concept/Seed

Product Dev.

Alpha/Beta

Launch/Ship

• Agile was the development methodology to use when the product solution was unknown

Solution: unknown


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New #1: Eric Ries: Insight 3

Customer + Agile + Commodity = Lean

Problem: Unknown Solution: Unknown

Source: Eric Ries

• Solving customer + feature unknowns is the “Lean Startup”

New #2: Reduced Cycle TimesJohn Boyd Insight: The OODA “Loop”

Orientation shapes observation, shapes decision, shapes action, and in turn is shaped by the feedback and other phenomena coming into our observing window.

FeedForward

CulturalTraditions

GeneticHeritage

NewInformation Previous

Experience

Analyses &Synthesis

Feedback

Feedback

Orient

Decision(Hypothesis)

FeedForward

ImplicitGuidance& Control

Decide

Action(Test)

UnfoldingInteraction

WithEnvironment

Act

FeedForwardObservations

ImplicitGuidance& Control

UnfoldingInteraction

WithEnvironment

OutsideInformation

UnfoldingCircumstances

Observe

Speed Up Cycle Time

• Speed of cycle minimizes cash needs

• Minimum feature set speeds up cycle time

• Near instantaneous feedback drives feature set(c)2010 K+S Ranch


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New #3: Jon Feiber @ MDV

Not all Startups Need Customer Development

• Market Risk vs. Technical Risk?- Web is about customers & markets- Biotech is about science & invention


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New #4: Dave McClure

Different Metrics for (Web) Startups

Website.com

Revenue $

$$

Biz DevAds, Lead Gen, Subscriptions, ECommerce

Retention

Emails & Alerts

System Events & Time-based Features

Blogs, RSS, News Feeds

REFERRALEmails & widgets

Affiliates, Contests

Viral LoopsACQUISITION

SEOSEM

Apps & Widgets

Affiliates

Email

PR Biz DevCampaigns, Contests

Direct, Tel, TV

Social Networks

Blogs

Domains

From Dave McClurehttp://500hats.typepad.com/

ScalableStartup

LargeCompanyTransition

Startup Metrics- Customer Acquisition Cost- Viral/Unique/Session Growth- Customer LTV change- Average Selling Price/Order Size- Monthly burn rate

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

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

More Helpful Startup Metrics


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New #5: Business Model, Not PlanFront-end to Customer Development

• Business Plans are Rigid, Static• “No Business Plan Survives First

Contact with Customers” who don’t read them --Steve Blank

• The Four Steps had:– Business model flow for Enterprise Software– Business model summary for each step– Checklist for Enterprise Software

• It said, “modify it to fit your business”• Now we can


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images by JAM

customer segments

key partners

cost structure

revenue streams

channels

customer relationships

key activities

key resources

value proposition

Osterwalder’s Business Model - Insight


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KEYPARTNERS

OFFER

CHANNELS

CUSTOMER RELATIONSHIPS

CUSTOMERSEGMENTS

REVENUE STREAMSCOST STRUCTURE

KEYACTIVITIES

KEYRESOURCES

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buildingblock

buildingblock

buildingblock

buildingblock

building

block

buildingblock

buildingblock

building

block

buildingblock

buildingblock

buildingblock

Business Model Canvas – Any Business

building

block

…and The Pivot Gets A Name

• Fueled by Customer Feedback

• Heard by Founders, Not Consultants

• The heart of Customer Development

• Iteration without crisis

• Fast, agile and opportunistic(c)2010 K+S Ranch


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A few rules from the “Blank Manifesto”

1. Align all parties upfront…prepare to lose termsheets

2. No VPs, no factories…MVP to the “champagne cork”

3. No more business plans!

4. Commit to Iterate and Pivot, “celebrate,” tolerate

failure when it propels you forward

5. Integrate Customer Development with Agile

Manufacturing

6. Agree to very different benchmarks and metrics

7. Faster Cycle Times say Run like hell* 57

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When Doesn’t Customer Development work?

• Lack of “honest” commitment to Customer Development

• Progress over Passion• Oops…we promised to ship on…• Oops…the factory is about to open• Founders delegate Discovery and Validation• Too many times ‘round the barn• Pharmaceuticals, regulation, innovation risk• Too many MBA’s, not enough failure celebration

So What Happens Next?

50 Years After Toyota Invents Lean: …The Next Big Lean Revolution


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50 Years Later

• Customer & Agile Development change the rules for Consumer Internet startups– Economics– Development Cycle Time– Easy, Overnight MVPs, Iterations, even Pivots– Oceans of Fast, Cheap Feedback– Time to market– “No Money Down”


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50 Years Later – Full Circle

• Customer & Agile Development will change the rules in all industries– Enterprise Software– Consumer Hardware– Everything else

Where to learn more:www.steveblank.com

Thanks…Now Go PIVOT!

[email protected]

customer development: the second decade by bob dorf

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