The Customer Development

Methodology

Engineering 140A
Management of Technology Ventures
Session 7 - April 24, 2007

Steve Blank
sblank@kandsranch.com

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 Presentation Goals

„ A new model for execution in early stage ventures

„ Introduce the Customer Development model

E 140A Management of Technology Ventures Spring 2007 2

IMVU Case

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 IMVU Questions

„ What were the three operating principles of the

IMVU Owners Manual?
„ How long do you think the development cycle for
each release of the IMVU software was? Why?
„ What strategy should IMVU pursue and why?

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 Build It And They Will Come

„ Only true for life and death products

‹ i.e. Biotech Cancer Cure
‹ Issues are development risks and distribution,
not customer acceptance
„ Not true for most other products
‹ Software, Consumer, Web
‹ Issues are customer acceptance and market
adoption

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

„ We have process to manage

product development

„ We have no process to manage

customer development

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 Product Development

Product Development

Concept/ Product Alpha/Beta Launch/

Bus. Plan Dev. Test 1st Ship

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 What’s Wrong With This?

Product Development

Concept/ Product Alpha/Beta Launch/

Seed Round Dev. Test 1st Ship

- Create Marcom - Hire PR Agency - Create Demand

Marketing Materials - Early Buzz - Launch Event
- Create Positioning - “Branding”

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 What’s Wrong With This?

Product Development

Concept/ Product Alpha/Beta Launch/

Seed Round Dev. Test 1st Ship

- Create Marcom - Hire PR Agency - Create Demand

Marketing Materials - Early Buzz - Launch Event
- Create Positioning - “Branding”

• Hire Sales VP • Build Sales

Sales • Hire 1st Sales Staff Organization

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 What’s Wrong With This?

Product Development

Concept/ Product Alpha/Beta Launch/

Seed Round Dev. Test 1st Ship

- Create Marcom - Hire PR Agency - Create Demand

Marketing Materials - Early Buzz - Launch Event
- Create Positioning - “Branding”

• Hire Sales VP • Build Sales

Sales • Hire 1st Sales Staff Organization

Business
• Hire First • Do deals for FCS
Development
Bus Dev

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 Chasing The FCS Date
„ 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

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 Traditional Funding Model

Source: Peter Fenton, Benchmark Capital

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 Traditional Funding Assumptions

„ A company's risk decreased by hitting milestones

„ Which raises its valuation
„ Product delivered after long development cycle
„ Additional funding needed at each milestone
„ High level of financial investment until results
„ Lack of iteration meant you didn’t know if you
succeeded or failed until late in the game

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 An Inexpensive Fix

Focus on Customers and Markets

from Day One

How?

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 Customer Development:
Big Ideas

„ Parallel process to Product Development

„ Measurable Checkpoints

„ Not tied to FCS, but to customer milestones

„ Notion of Market Types to represent reality

„ Emphasis is on learning & discovery before

execution

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 Customer Development vs.
Product Development

Product Development

Concept/ Product Alpha/Beta Launch/

Bus. Plan Dev. Test 1st Ship

Customer Development

Customer Customer Customer Company

Discovery Validation Creation Building

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 Customer Development
Product Development

Concept/ Product Alpha/Beta Launch/

Bus. Plan Dev. Test 1st Ship

Customer Development
Customer Customer Customer Scale
Discovery Validation Creation Company

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 Customer Discovery

Customer Customer Customer Company

Discovery Validation Creation Building

„ Stop selling, start listening

„ Test your hypotheses

‹ Two are fundamental: problem and product concept

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 Customer Discovery:
Exit Criteria

„ What are your customers top problems?

‹ How much will they pay to solve them

„ Does your product concept solve them?

‹ Do customers agree?
‹ How much will they pay?

„ Draw a day-in-the-life of a customer

‹ before & after your product

„ Draw the org chart of users & buyers

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 Customer Validation

Customer Customer Customer Company

Discovery Validation Creation Building

• Develop a repeatable and scalable sales process

• Only earlyvangelists are crazy enough to buy

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 Customer Validation:
Exit Criteria
„ Do you have a proven sales roadmap?
‹ Org chart? Influence map?

„ Do you understand the sales cycle?

‹ ASP, LTV, ROI, etc.

„ Do you have a set of orders ($’s) validating

the roadmap?

„ Does the financial model make sense?

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 Customer Creation

Customer Customer Customer Company

Discovery Validation Creation Building

• Creation comes after proof of sales

• Creation is a strategy not a tactic
• Creating customer value not noise

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 Customer Creation
Big Ideas
„ Big Idea 1: Grow customers from few to many

„ Big Idea 2: Four Customer Creation activities:

‹ Year One objectives
‹ Positioning
‹ Launch
‹ Demand creation

„ Big Idea 3: Creation is different for each of the three

types of startups

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 Company Building: Step 4

Customer Customer Customer Company

Discovery Validation Creation Building

• (Re)build your company’s organization &

management

• Re look at your mission

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 Company Building:
Big Ideas
„ Big Idea 1:
Management needs to change as the company grows
‹ Founders are casualties
‹ Development centric ⇒
‹ Mission-centric ⇒
‹ Process-centric

„ Big Idea 2:
Sales Growth needs to match market type

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Customer Development Funding Model

Source: Peter Fenton, Benchmark Capital

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 Customer Development
Funding Assumptions

„ A company's risk decreased by shipping as early

as possible
„ Continual product iteration
„ 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

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 Further Reading

www.cafepress.com/kandsranch
or
www.amazon.com
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