Customer Development/Lean Startup 020210 Class 3

3/27/10 2

Customer Development in the High Tech Enterprise

MBA 295-F/EMBA 295-F

Customer and Agile Development

Steve Blank sblank@kandsranch.com

Class 3: Agenda

!  Logistics/Questions !  CASE: E-Ink !  Product Development !  Boyd & the OODA Loop !  Customer Development

It Started With a Question

If Startups Fail from a Lack of customers not Product Development Failure

Then why do we have: •  process to manage product development?

•  no process to manage customer development?

I Started Reading •  Lead User Research - Von Hippel •  Crossing the Chasm - Moore •  Entrepreneurial Mindset - McGrath/MacMillan •  Innovators Dillema - Christensen •  Profitable Value - Lanning •  Lanchester Strategy - Yano •  High Tech Marketing - Davidow

•  OODA Loop - Boyd •  Question-based Selling - Freese •  Solution Selling - Bosworth •  Conceptual/Strategic Selling - Heiman •  Spin Selling - Rackham •  US Marine Corps Warfighting Manual •  Tipping Point - Gladwell

Company Building

Customer Discovery

Customer Validation

Customer Creation

All We Had Was 30 Years of This

Concept/ Seed Round

Product Dev.

Alpha/Beta Test

Launch/ 1st Ship

Product Development Model

7

What’s Wrong With This?

Concept/ Seed Round

Product Dev.

Alpha/Beta Test

Launch/ 1st Ship

Product Development

-  Create Marcom Materials - Create Positioning

- Hire PR Agency - Early Buzz

- Create Demand - Launch Event - “Branding”

Marketing

What’s Wrong With This?

Concept/ Seed Round

Product Dev.

Alpha/Beta Test

Launch/ 1st Ship

Product Development

-  Create Marcom Materials - Create Positioning

- Hire PR Agency - Early Buzz

- Create Demand - Launch Event - “Branding”

•  Build Sales Organization

Marketing

Sales •  Hire Sales VP •  Hire 1st Sales Staff

What’s Wrong With This?

Concept/ Seed Round

Product Dev.

Alpha/Beta Test

Launch/ 1st Ship

Product Development

-  Create Marcom Materials - Create Positioning

- Hire PR Agency - Early Buzz

- Create Demand - Launch Event - “Branding”

•  Hire Sales VP •  Hire 1st Sales Staff

•  Build Sales Organization

Marketing

Sales

•  Hire First Bus Dev

•  Do deals for FCS Business

Development

10 Things I Hate About Product Development

1.  Where are the Customers? 2.  The Focus on First Customer Ship 3.  Emphasis on Execution vs. Learning & Discovery 4.  No Customer-centric milestones 5.  Product dev. to measure Sales 6.  Product dev. to measure Marketing 7.  Premature Scaling 8.  Death Spiral 9.  Three Types of Startups 10.  Unrealistic Expectations

!  Sales & Marketing costs are front loaded

"  focused on execution vs. learning & discovery

!  First Customer Ship becomes the goal

!  Execution & hiring predicated on business plan hypothesis

!  Heavy spending hit if product launch is wrong

!  Financial projections, assumes all startups are the same

= You don’t know if you’re wrong until you’re out of

business/money

Chasing The FCS Date

An Inexpensive Fix

Focus on Customers and Markets from Day One

How?

Boyd’s 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.

Feed Forward

Cultural Traditions

Genetic Heritage

New Information Previous

Experience

Analyses & Synthesis

Feedback

Feedback

Orient

Decision (Hypothesis)

Feed Forward

Implicit Guidance & Control

Decide

Action (Test)

Unfolding Interaction

With Environment

Act

Competitive advantage comes from quickness over the entire “loop,” not just from the O-to-O-to-D-to-A sequence.

Feed Forward Observations

Implicit Guidance & Control

Unfolding Interaction

With Environment

Outside Information

Unfolding Circumstances

Observe

Build a Customer Development Process

Customer Development

? ? ? ?

Concept/ Seed Round

Product Dev.

Alpha/Beta Test

Launch/ 1st Ship

Product Development

Company Building

Customer Development

Customer Discovery

Customer Development is as important as Product Development

Concept/ Bus. Plan

Product Dev.

Alpha/Beta Test

Launch/ 1st Ship

Product Development

Customer Validation

Customer Creation

Company Building

Customer Development

Customer Discovery

Customer Development is as important as Product Development

Concept/ Bus. Plan

Product Dev.

Alpha/Beta Test

Launch/ 1st Ship

Product Development

Customer Validation

Customer Creation

Customer Development Heuristics

!  There are no facts inside your building, so get outside "  Founders in front of customers

!  Find a Market for the Product as spec’d "  I.e Develop for the Few, not the Many

!  Learning and Discovery versus linear execution !  Earlyvangelists make your company !  Market Types Matter

Customer & Product Development Synchronization

Concept/ Bus. Plan

Product Dev.

Alpha/Beta Test

Launch/ 1st Ship

Product Development

Scale Company

Customer Development

Customer Discovery

Customer Validation

Customer Creation

Product Development

Concept/ Bus. Plan

Product Dev.

Alpha/Beta Test

Launch/ 1st Ship

Product Development

But really, how does this work?

Customer Development: Big Ideas

!  Parallel process to Product Development

!  Measurable Checkpoints for the entire company

!  Not tied to FCS, but to customer milestones

!  Iterative to represent reality

!  Executed by a small team including CEO

It Resulted in a Few Hypotheses

•  Startups weren’t small versions of large companies •  They were about learning/discovery, not execution •  Entrepreneurs and their VC’s were executing on

guesses •  But the facts were outside the building

Which Turned Into A Model

Concept/ Bus. Plan

Product Dev.

Alpha/Beta Test

Launch/1st Ship

Product Development

Customer Development

Company Building

Customer Discovery

Customer Validation

Customer Creation

+

Eric Ries Extends the Model

•  Took my class at U.C. Berkeley •  Co-founded IMVU

-  1st implementation of Customer Development -  Paired it with an Agile Development Model

•  Observed that the sum of the two was powerful

Eric Ries: Insight - 1 Startups assumed development was “known”

Solution: known

Waterfall

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Problem: known

Concept/ Seed

Product Dev.

Alpha/ Beta

Launch/Ship

•  I understood the problem was unknown

•  Eric observed the solution was unknown in a startup

Eric Ries: Insight - 2 Agile matches the Customer Dev speed

Concept/ Seed

Product Dev.

Alpha/ Beta

Launch/Ship

•  Agile was the development methodology to use when the

solution was unknown

Solution: unknown

Eric Ries: Insight 3 Customer + Agile + Commodity = Lean

Problem: Unknown Solution: Unknown Source: Eric Ries

•  Solving for both unknowns is the “Lean Startup”

Jon Feiber @ MDV Insight Not all Need Customer Development

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

John 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.

Feed Forward

Cultural Traditions

Genetic Heritage

New Information Previous

Experience

Analyses & Synthesis

Feedback

Feedback

Orient

Decision (Hypothesis)

Feed Forward

Implicit Guidance & Control

Decide

Action (Test)

Unfolding Interaction

With Environment

Act

Feed Forward Observations

Implicit Guidance & Control

Unfolding Interaction

With Environment

Outside Information

Unfolding Circumstances

Observe

Iteration versus Execution

Customer Discovery

Customer Validation

Iteration

The Search for a Business

Company Building

Customer Creation

Execution

The Growth of a Business

Product/Market Fit

Iteration versus Execution

Product/Market Fit

Business Model Affects Metrics and Exit Criteria