Download - 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
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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
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IMVU VC Presentation September 2005
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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
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• 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
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Social networking with avatars
Customizable home pages with avatar pictures Messages, gifts, blogs, picture galleries, rankings, stickers, wish lists, etc.
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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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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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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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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
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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
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1999 - 2004 Revenue
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$2
$4
$6
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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
820
830
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
Revenue Gross Profit Pre-tax Income
0
40
80
120
160
200
Q100 Q200 Q300 Q400
Thousands
Shops Images Orders Products
$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
Revenue Gross Profit Pre-tax Income
0
100
200
300
400
500
600
700
800
Q101 Q201 Q301 Q401
Thousands
Shops Images Orders Products
$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
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Revenue Gross Profit Pre-tax Income
0
400
800
1200
1600
2000
Q102 Q202 Q302 Q402
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Shops Images Orders Products
$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
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$6,000
$7,000
Q1-03 Q2-03 Q3-03 Q4-03
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Revenue Gross Profit Pre-tax Income
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500
1000
1500
2000
2500
3000
3500
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Q103 Q203 Q303 Q403
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Shops Images Orders Products
$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
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Revenue Gross Profit Pre-tax Income
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2000
4000
6000
8000
10000
12000
Q104 Q204 Q304 Q404
Thousands
Shops Images Orders Products
$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