Ny entprenenurial week lecture 111210 customer development

Why Accountants Don’t Run Startups

Steve Blank

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Five Short Stories

Not All Startups Are Equal

Small Business

Startup

Small Business Startups

• Serve known customer with

known product

• Feed the family

Small Business

Startup

Exit Criteria

- Business Model found

- Profitable business

- Existing team

< $1M in revenue


• known customer

known product

• Feed the family

Small Business

Startup


- Profitable business

- Existing team

< $10M in revenue


• 5.7 million small businesses in the U.S. <500 employees

• 99.7% of all companies

• ~ 50% of total U.S. workershttp://www.sba.gov/advo/stats/sbfaq.pdf

ScalableStartup

Large Company>$100M/year

Scalable Startup

Goal is to solve for:

unknown customer and

unknown features

ScalableStartup


Exit Criteria

-Total Available Market > $500m

- Can grow to $100m/year

- Business model found

- Focused on execution and process

Scalable Startup

ScalableStartup


-Total Available Market > $500m

- Can grow to $100m/year

- Business model found

- Focused on execution and process

- Typically requires “risk capital”

Scalable Startup

• In contrast a scalable startup is designed to grow big

• Typically needs risk capital

• What Silicon Valley means when they say “Startup”

ScalableStartup

Large Company

-Business Model found

- i.e. Product/Market fit

- Repeatable sales model

- Managers hired

What’s A Startup?

A Startup is a temporary organization used to

search for a scalable business model

Search

ScalableStartup

Large Company

Transition

-Founders depart

- Professional Mgmt

- Process

- Beginning of scale

What VC’s Don’t Tell You:

The Transition – Founders Leave

Build ExecuteSearch

TransitionLarge

CompanyScalableStartup

Sustaining Innovation

•Existing Market / Known customer

•Known product feature needs

Large Company Sustaining Innovation

Large Company Disruptive Innovation

New Division TransitionLarge

Company

Disruptive Innovation

• New Market / Unknown customer needs

• New tech / Unknown product features

• Looks like a scalable startup

Why Startups Are Not Small

Versions of Large Companies

ScalableStartup

Large Company

Transition

Business Model found

- customer needs/product features found

i.e. Product/Market fit

- Found by founders, not employees


- Managers hired

The Search for the Business Model

Startups Search and Pivot

ScalableStartup

Large Company

Transition

-Business Model found

- Product/Market fit


- Managers hired

- Cash-flow breakeven

- Profitable

- Rapid scale

- New Senior Mgmt

~ 150 people

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

Startups Search, Companies Execute

ScalableStartup

LargeCompany

Transition

Traditional Accounting

-Balance Sheet

- Cash Flow Statement

- Income Statement

The Execution of the Business Model

Metrics Versus Accounting

ScalableStartup

LargeCompany

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


Metrics Versus Accounting

ScalableStartup

LargeCompany

Transition

Sales

-Sales Organization

- Scalable

- Price List/Data Sheets

- Revenue Plan


Customer Validation Versus Sales

ScalableStartup

LargeCompany

Transition

Customer Validation

- Early Adopters

- Pricing/Feature unstable

- Not yet repeatable

-“One-off’s”

- Done by founders

Sales

- Sales Organization

- Scalable

- Price List/Data Sheets

- Revenue Plan


Customer Validation Versus Sales

ScalableStartup

Large Company

Transition

Product Management

- Delivers MRD’s

- Feature Spec’s

- Competitive Analysis

- Prod Mgmt driven


Customer Development Versus

Product Management

ScalableStartup

Large Company

Transition

Customer Development

- Hypothesis Testing

- Minimum Feature Set

-Pivots

-Founder-driven


Customer Development Versus

Product Management

Product Management

- Delivers MRD’s

- Feature Spec’s

- Competitive Analysis

ScalableStartup

Large Company

Transition


Engineering Versus

Agile Development

Engineering

- Requirements Docs.

- Waterfall Development

- QA

- Tech Pubs

ScalableStartup

Large Company

Transition

Agile Development

- Continuous Deployment

- Continuous Learning

- Self Organizing Teams

- Minimum Feature Set

- Pivots


Engineering Versus

Agile Development

Engineering

- Requirements Docs.

- Waterfall Development

- QA

- Tech Pubs

ScalableStartup

Large Company

Transition

- Plan describes “knowns”

- Known features for line extensions

- Known customers/markets

- Known business model


Startups Model, Companies Plan

ScalableStartup

Large Company

Transition

-Unknown customer needs

- Unknown feature set

- Unknown business model

- Model found by iteration


Startups Model, Companies Plan


-Plan describes “knowns”

- Known features for line extensions

- Known customers/markets

- Known business model

ScalableStartup

Large Company

Transition

-Pains in the butt

- Always looking at something different

- Doesn’t get with the program

Startups Protect Mavericks,

Companies Fire Mavericks


ScalableStartup

Large Company

Transition

-Pains in the butt

- Always looking at something different

- Doesn’t get with the program


Startups Protect Mavericks,

Companies Fire Mavericks


- CEO of your company

-Finds your next market

ScalableStartup

Large Company

Transition


- Product/Market fit


- Managers hired

- Cash-flow breakeven

- Profitable

- Rapid scale

- New Senior Mgmt

~ 150 people

Startups Don’t Last Forever

You failif you remain a startup!

Plan versus Model

Business Plan

• A document your investors make you write that they

don’t read

• A useful place for you to collect your guesses about

your business

- Size of Opportunity

- Customers

- Channel

- Demand Creation

- Revenue/Expenses/Profit

• The template to look like everyone else when you

present to VC’s/Management

No Business Plan survives first

contact with customers

So Search for a Business Model

What Is a Business Model?

• Diagram of flows between company and customers

• Scorecard of hypotheses testing

• Rapid change with each iteration and pivot

• Product Management-driven

* Alex Osterwalder

VALUE

PROPOSITION

COST

STRUCTURE

CUSTOMER

RELATIONSHIPTARGET

CUSTOMER

DISTRIBUTION

CHANNELVALUE

CONFIGURATION

CORE

CAPABILITIES

PARTNER

NETWORK

REVENUE

STREAMS

gives an overall view of

a company's bundle of

products and services

portrays the network of

cooperative

agreements with other

companies

describes the channels

to communicate and

get in touch with

customers

describes the

arrangement of

activities and resources

explains the

relationships a

company establishes

with its customers

sums up the monetary

consequences to run a

business model

describes the revenue

streams through which

money is earned

describes the

customers a company

wants to offer value to

outlines the capabilities

required to run a

company's business

model

INFRASTRUCTURE CUSTOMER

OFFER

FINANCE

Business Model = Keeping Score in a Startup

But,

Realize They’re Hypotheses

9 Guesses

Guess Guess

Guess

Guess

Guess

Guess

Guess

GuessGuess

How Do Startups Search For A

Business Model?

• The Search is called Customer Development

• The Implementation is called Agile Development

The Lean Startup

Customer

Development

Solving For Customer Risk:



Get the Hell Out of the Building

The founders

^

More startups fail from

a lack of customers than from a

failure of product development

Traditional Product Introduction:Two Implicit Assumptions

Concept Product Dev.

Alpha/Beta Test

Launch/1st Ship

Customer Problem: known

Product Features: known

Tradition – Hire Marketing

Concept/Seed Round

Product Dev.

Alpha/Beta Test

Launch/1st Ship

- Create Marcom Materials

- Create Positioning

- Hire PR Agency- Early Buzz

- Create Demand- Launch Event- “Branding”

Marketing

Tradition – Hire Sales

Concept/Seed Round

Product Dev.

Alpha/Beta Test

Launch/1st Ship





• Build Sales Organization

Marketing

Sales • Hire Sales VP• Hire 1st Sales Staff

Tradition – Hire Bus Development


Alpha/Beta Test

Launch/1st Ship





• Hire Sales VP• Pick distribution Channel

• Build Sales Channel / Distribution

Marketing

Sales

• Hire FirstBus Dev

• Do deals for FCSBusiness

Development

Tradition – Hire Engineering/

Product Mgmt


Alpha/Beta Test

Launch/1st Ship





• Hire Sales VP• Pick distribution Channel

• Build Sales Channel / Distribution

Marketing

Sales

• Hire FirstBus Dev

• Do deals for FCSBusiness

Development

Engineering/

Product Mgmt

• Write MRD • Waterfall • Q/A •Tech Pubs


Concept/Bus. Plan

Product Dev.

Alpha/Beta Test

Launch/1st Ship

New Product Introduction Model

CustomerDevelopment

CompanyBuilding

CustomerDiscovery

CustomerValidation

Customer Creation

• Stop selling, start listening

• Test your hypotheses

• Continuous Discovery

• Done by founders

Customer Discovery

CustomerDiscovery

CustomerValidation

CompanyBuilding

CustomerCreation

Test

Hypotheses:

•Product

• Market Type

• Competition

Turning Hypotheses to Facts

Test

Hypotheses:

•Problem

• Customer

• User

• Payer

Test Hypotheses:

•Channel

Test

Hypotheses:

•Problem

• Customer

• User

• Payer

Test

Hypotheses:

•Demand

Creation

Test Hypotheses:

•Channel

Test

Hypotheses:

•Product

• Market Type

• Competitive

Test Hypotheses:

•Pricing Model / Pricing

Test Hypotheses:

•Size of Opportunity/Market

• Validate Business Model

Test

Hypotheses:

•Channel

• (Customer)

• (Problem)

Test

Hypotheses:

•Problem

• Customer

• User

• Payer

Test

Hypotheses:

•Demand

Creation

Test Hypotheses:

•Channel

Test

Hypotheses:

•Product

• Market Type

• Competitive

Test Hypotheses:


Test Hypotheses:



Test

Hypotheses:

•Channel

• (Customer)

• (Problem)Customer

Development

Team

Agile

Development

Test

Hypotheses:

•Problem

• Customer

• User

• Payer

Test

Hypotheses:

•Demand

Creation

Test Hypotheses:

•Channel

Test

Hypotheses:

•Product

• Market Type

• Competitive

Test Hypotheses:


Test Hypotheses:



Test

Hypotheses:

•Channel

• (Customer)

• (Problem)Customer

Development

Team

Agile

Development

The Pivot

• The heart of Customer Development

•Iteration without crisis

•Fast, agile and opportunistic

Speeding Up Cycle Time

•Speed of cycle minimizes cash needs

•Minimum feature set speeds up cycle time

• Near instantaneous customer feedback

drives feature set

Sidebar

There Are Three Types Of Startups

The Role of Market Type

New Product Conundrum

• Product introductions aren’t predictable

– Why?

– Is it the people that are different?

– Is it the product that are different?

• Are there different “types” of startups?

Three Types of Markets

• Existing Market

– Faster/Better = High end

• Resegmented Market

– Niche = marketing/branding driven

– Cheaper = low end

• New Market

– Cheaper/good enough = creates a new class of product/customer

– Innovative/never existed before

Existing Market Resegmented

Market

New Market

So What Does Engineering Do?

Customer Problem: known

Product Features: known

Waterfall / Product ManagementExecution on Two “Knowns”

Requirements

Design

Implementation

Verification

Maintenance

Source: Eric Ries

http://startuplessonslearned.blogspot.com

Problem: Known Solution: Unknown

“Product Owner” or

in-house customer

Agile - Customer Problem is KnownExisting Company/Market

Source: Eric Ries


Unit of progress: a line of working code

Problem: Unknown Solution: Unknown

Lean StartupCustomer Problem + Product Features are Unknown

Source: Eric Ries


6

Customer Creation

• Creation comes after proof of sales

• $’s for scale

• Lean Startups are not cheap startups

CustomerDiscovery

CustomerValidation

CompanyBuilding

CustomerCreation

Company Building

CustomerDiscovery

CustomerValidation

Customer Creation

CompanyBuilding

• (Re)build company’s organization & management

• Re look at your mission

Why Startups Aren’t Run By

Accountants

ScalableStartup

Large Company

Transition

Inventor of the Modern Corporation

ScalableStartup

Large Company

Transition

Inventor of the Modern Corporation

Alfred P. Sloan

ScalableStartup

Large Company

Transition

Alfred P. Sloan

General Motors, President/Chairman

- Cost Accounting

- MIT Sloan School

- Sloan Foundation

- etc.

ScalableStartup

Large Company

Transition

Founder of General Motors

ScalableStartup

Large Company

Transition

Founder of General Motors

Billy Durant

ScalableStartup

Large Company

Transition

Billy Durant

- Leader in horse-drawn buggy’s

-Fired by board, starts Chevrolet

- Regains control of GM

-Fired by board, GM ~$3.6 billion*

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

ScalableStartup

Large Company

Transition

Durant Versus Sloan

Durant Versus Sloan

•Dies, rich, honored and famous

Durant Versus Sloan

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

Durant Versus Sloan

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

Accountant

ScalableStartup

Large Company

Transition

You are here

Summary

• Companies execute business models

• Startups searchfor business models

• Business Model / Customer Development /

Agile Development is the solution stack for

startups

Thanks

www.steveblank.com

One More Thing…

• International Business Model Competition

• $50K prizes

• Jan 24th 2011

• http://www.businessmodelcompetition.com/

Education

Ny entprenenurial week lecture 111210 customer development