Entrepreneur vs Entrepreneurship

Entrepreneurs can be vital agents of innovative change whose actions lead to the creation of
new firms. They can also transform existing firms to exploit economic and socially beneficial
opportunities. In the popular media, entrepreneurs are often presented playing a key role in
promoting economic development.
Entrepreneurs and their businesses can generate wealth and jobs, which can enable social and
regional inequality to be reduced. They challenge the conventional and search for new
solutions. In most of the societies, Entrepreneurship is very strong connected with
o innovation
o economic growth
o employment
o renewal of companies

The expectation that entrepreneurs can provide the panacea to economic ills may be an
unrealistic one. Joseph Schumpeter warned that while entrepreneurial acts ‘create’ new
sources of competitive advantage, products and services, firms, industries, jobs, and wealth, at
the same time they also ‘destroy’ firms and jobs in now out-of-date activities. In the popular
mindset entrepreneurs are often portrayed as heroic yet maverick individuals, single-handedly
and relentlessly pursuing opportunity and enjoying exotic lifestyles as a result. The dominant
popular entrepreneur image relates to a Western heroic white male figure exhibiting aggression
and assertiveness to create or discover business opportunities. But, when businesses close,
with people losing their jobs and nefarious activities being revealed, some of the same
entrepreneurs are then castigated as villains. So entrepreneurs can be heroes and villains,
sometimes both at the same time depending on your point of view.

Because of the widely held belief about the contribution of entrepreneurs to the generation of
economic and social well-being, international agencies and governments worldwide are
promoting entrepreneurship policies. Venture capital (VC) firms operate to fund entrepreneurs
in the belief that they can generate high financial returns. National research bodies,
universities, and specialized research centers, as well as research foundations, have been keen
to support research based on the assumption that this will help further the role of
entrepreneurship in invigorating economic, technological, and social progress.

Entrepreneurs have been catapulted into the consciousness of the wider media through their
high-profile activities, which help change fundamentally the rules of the game in a market. For
example, Stelios Haji-Ioannou and easyJet transformed the airline industry in Europe, James
Dyson’s bagless cleaner changed the vacuum cleaner market, and Bill Gates’s Microsoft and
Steve Jobs’s Apple, in their different ways, transformed the personal computing,
communications, and entertainment markets.

Prime-time television programs showing entrepreneurs and inventors pitching their ideas to
rich investors have helped popularize entrepreneurs to a wide audience. Originating in Japan,
this concept has itself proved to be highly entrepreneurial. Entrepreneurship-related shows are
shown worldwide under different names, such as Shark Tank in the United States, Dragons’ Den
in the UK, and Fikr wa Talash in Afghanistan.

Some students have made significant wealth from their new ventures. Alex Tew conceived The
Million Dollar Homepage to raise money for his university education. The home page consisted
of a million pixels arranged in a 1,000 × 1,000 pixel grid. The image-based links on it were sold
for US$1 per pixel in 10 × 10 blocks. The purchasers of these pixel blocks provided tiny images
to be displayed on them, a uniform resource locator (URL) to which the images were linked,
and a slogan to be displayed when hovering a cursor over the link. The aim of the website was
to sell all of the pixels in the image. With the last 1,000 pixels being put up for auction on eBay,
a final total of $1,037,100 was grossed.

Other students have dropped out to pursue major entrepreneurial ideas that have germinated
at college. Mark Zuckerberg famously dropped out of Harvard in his sophomore year to
complete the Facebook project, which he launched from his dormitory room.

Entrepreneurship

Entrepreneurship is about what entrepreneurs do. ‘Entrepreneur’ is a French word first

appearing in the 1437 Dictionnaire de la langue française. Three definitions were listed in the
dictionary, with the most common meaning referring to ‘a person who is active and achieves
something’. The verb ‘entreprendre’ means ‘to undertake something’. At the beginning of the
17th century, an entrepreneur in France was viewed as ‘a person who takes risks,’ but not all
people who undertook risks were considered entrepreneurs. During the 18th century, a person
who was contracted to perform a certain large task, generally for the state, for a fixed price was
regarded as an entrepreneur.

Today, there continues to be no agreed definition of entrepreneurs and entrepreneurship. The

Organization for Economic Co-operation and Development (OECD) adopts a broad definition
where entrepreneurship appears in both some small and large firms, in some new firms and
established family firms, in private firms focusing on profit and social enterprises seeking to
generate broader social and environmental benefits, in the formal and informal economy, in
legal and illegal activities, in innovative and more conventional concerns, and in all regions and
economic sub-sectors.

Distinguishing Two Distinct Types of Entrepreneurship

1. Small and Medium Enterprise (SME) Entrepreneurship

The first type of entrepreneurship is small and medium enterprise entrepreneurship (SME). This
is the type of business that is likely started by one person to serve a local market and grows to
be a small or medium-size business that serves this local market. It is most often closely held,
likely a family business, where close control of a small business is important. The business
“rewards” for these founders are primarily in the form of personal independence and cash flow
from the business.
These businesses generally do not need to raise as much money, so when money is injected
into these businesses, the resultant increase in revenue and jobs created is relatively rapid.
Such enterprises can be geographically dispersed and the jobs they create are for the most part
“non-tradable” in that they cannot be outsourced to someplace else to reduce costs.
Frequently these businesses are service businesses or retailers of other companies’ products.
The key distinguishing factor is their focus on local markets.

2. Innovation-Driven Enterprise (IDE) Entrepreneurship

Innovation-driven enterprise (IDE) entrepreneurship is the more risky and more ambitious of
the two. IDE entrepreneurs are aspiring to serve markets that go well beyond the local market.
They are looking to sell their offering at a global or at least at a regional level.
These entrepreneurs usually work in teams where they build their business off some
technology, process, business model, or other innovation that will give them a significant
competitive advantage as compared to existing companies. They are interested in creating
wealth more than they are interested in control, and they often have to sell equity in their
company to support their ambitious growth plans.
While they are often slower to start, IDE entrepreneurs tend to have more impressive
exponential growth when they do get customer traction (See Table below). Growth is what they
seek, at the risk of losing control of their company and having multiple owners. While SME
companies tend to grow up and stay relatively small (but not always), IDE companies are more
interested in “going big or going home.” To achieve their ambitions, they have to become big
and fast-growing to serve global markets.

SME Entrepreneurship IDE Entrepreneurship

• Focus on addressing local and
regional markets only.
• “Innovation is not necessary to SME
establishment and growth, nor is
competitive advantage.
• “Non-tradable jobs”—jobs generally
performed locally (e.g., restaurants,
dry cleaners, and service industry).
• Most often family businesses or
businesses with very little external
capital.
• The company typically grows at a
linear rate. When you put money
into the company, the system
(revenue, cash flow, jobs, etc.) will
respond quickly in a positive manner.
• Focus on global/regional markets.
• The company is based on some sort of
innovation (tech, business process, model)
and potential competitive advantage.
• “Tradable jobs”—jobs that do not have to
be performed locally.
• More diverse ownership base including a
wide array of external capital providers.
• The company starts by losing money, but if
successful will have exponential growth.
Requires investment. When you put money
into the company, the revenue/cash
flow/jobs numbers do not respond quickly.
The Focus of This Course

A healthy economy consists of both types of entrepreneurship and both have their strengths
and weaknesses. Neither is better than the other. But they are substantively different enough
that they require different mindsets and different sets of skills to be successful. The focus of
this course is IDE Entrepreneurship or simply Technopreneurship.

Innovation vs Innovator

What Is Innovation?
Innovation has become an increasingly clichéd term, but it has a simple definition. According to
Bill Aulet:
Innovation = Invention * Commercialization

If there is commercialization but no invention (invention = 0), or invention but no

commercialization (commercialization = 0), then there is no innovation.

The invention (an idea, a technology, or some sort of intellectual property) is important, but the
entrepreneur does not need to create the invention. In fact, the inventions that lead to
innovation-driven companies often come from elsewhere. Such was the case with Steve Jobs,
who identified others’ inventions (the computer mouse created by Xerox PARC is the most
famous example) and commercialized them effectively through Apple. Likewise at Google,
which has made most of its money through AdWords, the text-based, keyword-driven
advertisements on their search results pages. A different company, Overture, had invented
such advertisements, but Google was successful through its commercialization of Overture’s
invention.

These examples show that the capability to commercialize an invention is necessary for real
innovation. An entrepreneur, then, serves primarily as the commercialization agent. Innovation
is not only limited to technology and can come in many varieties including technology, process,
business model, positioning, and more.

Some of the most exciting innovations of our time, such as Google, iTunes, Salesforce.com,
Netflix, Zipcar, AirB&B, Uber, and many more are, at their core, business model innovations.
They are enabled by technology, yes—Zipcar would find it difficult to maintain its large network
of cars without keyless-entry technology for its members. But at its core, Zipcar’s innovation is
treating a rental car as a substitute for owning a car, rather than as temporary transportation
for car owners and business travelers visiting far-flung areas. Zipcar doesn’t have to understand
the intricacies of its technology to be successful, but it has to understand what it means for its
customers to “collaboratively consume.”

As technology becomes more and more commoditized, you will see more business model
innovations that leverage technology. There will still be many opportunities for technology-
driven innovation in areas like energy storage, power electronics, wireless communications, and
much more, but this is not the sole definition of innovation.

Entrepreneural Process

An entrepreneur is someone who perceives an opportunity and creates an organization

to pursue it. The entrepreneurial process includes all the functions, activities, and actions
that are part of perceiving opportunities and creating organizations to pursue them.

There is almost always a triggering event that gives birth to a new organization. Perhaps the
entrepreneur has no better career prospects. Sometimes the person has been passed over for a
promotion or even laid off or fired. For some people, entrepreneurship is a deliberate career
choice.
Where do would-be entrepreneurs get their ideas? More often than not it is through their
present line of employment or experience. A study found that 57% of the founders got the idea
for their new venture in the industry they worked in and an additional 23% got it in a related
industry. That is not surprising because it is in their present employment that entrepreneurs
will get most of their viable business ideas. Some habitual entrepreneurs do it over and over
again in the same industry.

Can the art and science of entrepreneurship be taught?

Clearly, professors and their students believe that entrepreneurship can be taught and learned
because it is one of the fastest growing new fields of study in higher education.
That transformation in higher education — itself a wonderful example of
entrepreneurial change—has come about because a whole body of knowledge about
entrepreneurship has developed during the past two decades or so. The process of creating a
new business is well understood. Yes, entrepreneurship can be taught. No one is guaranteed to
become a Bill Gates any more than a physics professor can guarantee to produce an Albert
Einstein or a tennis coach can guarantee a Venus Williams. But students with the aptitude to
start a business can become better entrepreneurs.

What factors influence someone to embark on an entrepreneurial career?

Like most human behavior, entrepreneurial traits are shaped by personal attributes and
environment. There is no neat set of behavioral attributes that allows us to separate
entrepreneurs from non-entrepreneurs. A person who rises to the top of any occupation,
whether an entrepreneur or an administrator, is an achiever. Granted, any would-be
entrepreneur must have a need to achieve, but so must anyone else with ambitions to be
successful.

Personal Attributes

It does appear that entrepreneurs have a higher internal locus of control than non-
entrepreneurs, which means that they have a stronger desire to be in control of their own fate.
This has been confirmed by many surveys in which entrepreneurs said independence was a very
important reason for starting their businesses. The main reasons they gave were independence,
financial success, self-realization, recognition, innovation, and roles (to continue a family
tradition, to follow the example of an admired person, to be respected by friends). Men rated
financial success and innovation higher than women did. Entrepreneurship, Interestingly, the
reasons that nascent entrepreneurs gave for starting a business were similar to the reasons
given by non-entrepreneurs for choosing jobs. The most important characteristics of successful
entrepreneurs are summarized below:
Dream Entrepreneurs have a vision of what the future could be like for them and their
businesses. And, more important, they have the ability to implement their
dreams.
Decisiveness They don’t procrastinate. They make decisions swiftly. Their swiftness is a key
factor in their success.
Doers Once they decide on a course of action, they implement it as quickly as possible.

DeterminationThey implement their ventures with total commitment. They seldom give up,
even when confronted by obstacles that seem insurmountable.
Dedication They are totally dedicated to their businesses, sometimes at considerable cost to
their relationships with friends and families. They work tirelessly. Twelve-hour
days and seven-day workweeks are not uncommon when an entrepreneur is
striving to get a business off the ground.
Devotion Entrepreneurs love what they do. It is that love that sustains them when the
going gets tough. And it is love of their product or service that makes them so
effective at selling it.
Details It is said that the devil resides in the details. That is never more true than in
starting and growing a business. The entrepreneur must be on top of the critical
details.
Destiny They want to be in charge of their own destiny rather than dependent on an
employer.
Dollars Getting rich is not the prime motivator of entrepreneurs. Money is more a
measure of success. Entrepreneurs assume that if they are successful they will be
rewarded.
Distribute Entrepreneurs distribute the ownership of their businesses with key employees
who are critical to the success of the business.

Environmental and Sociological Factors

Perhaps as important as personal attributes are the external influences on a would-be

entrepreneur. It’s no accident that some parts of the world are more entrepreneurial than
others. The most famous region of high-tech entrepreneurship is Silicon Valley. Because
everyone in Silicon Valley knows someone who has made it big as an entrepreneur, role models
abound. This situation produces what Stanford University sociologist Everett Rogers called
‘‘Silicon Valley fever.’’ It seems as if everyone in the valley catches that bug sooner or later and
wants to start a business. To facilitate the process, there are venture capitalists who
understand how to select and nurture high-tech entrepreneurs, bankers who specialize in
lending to them, lawyers who understand the importance of intellectual property and how to
protect it, landlords who are experienced in renting real estate to fledgling companies,
suppliers who are willing to sell goods on credit to companies with no credit history, and even
politicians who are supportive.
Knowing successful entrepreneurs at work or in your personal life makes becoming one yourself
seem much more achievable. Indeed, if a close relative is an entrepreneur, you are more likely
to want to become an entrepreneur yourself, especially if that relative is your mother or father.
Another factor that determines the age at which entrepreneurs start businesses is the trade-off
between the experience that comes with age and the optimism and energy of youth. As you
grow older you gain experience, but sometimes when you have been in an industry a long time,
you know so many pitfalls that you are pessimistic about the chance of succeeding if you decide
to go out on your own. Someone who has just enough experience to feel confident as a
manager is more likely to feel optimistic about an entrepreneurial career. Perhaps the ideal
combination is a beginner’s mind with the experience of an industry veteran. A beginner’s mind
looks at situations from a new perspective, with a can-do spirit.

What makes the Entrepreneur successful?

Timmons and Spinelli indicated that the successful entrepreneur needs to have both creative
aptitude and management skills. The figure below depicts the four categories of business
people on these two scales: entrepreneur, inventor, manager/administrator,
and promoter. Many graduate students with science and engineering backgrounds may be
eligible to be inventors, while graduate students from management and administration
departments may become managers or administrators. However, note that in order to become
entrepreneurs or start their own companies, engineers should improve their management
skills.

Ingredients for a Successful New Business

The great day has arrived. You found an idea, wrote a business plan, and gathered your
resources. Now you are opening the doors of your new business for the first time, and the
really hard work is about to begin. What are the factors that distinguish winning
entrepreneurial businesses from the also-rans? Rosabeth Kanter prescribed Nine Fs for
entrepreneurial success.

Founders Every startup company must have a first-class entrepreneur.

Focused Entrepreneurial companies focus on niche markets. They specialize.
Fast They make decisions quickly and implement them swiftly.
Flexible They keep an open mind. They respond to change.
Forever- They are tireless innovators.
innovating
Flat Entrepreneurial organizations have as few layers of management as possible.

Frugal By keeping overhead low and productivity high, entrepreneurial companies

keep costs down.
Friendly Entrepreneurial companies are friendly to their customers, suppliers, and
employees.
Fun It’s fun to be associated with an entrepreneurial company.
First and foremost, the founding entrepreneur is the most important factor. Next comes the
market. This is the ‘‘era of the other,’’ in which the fastest-growing companies in an industry
will be in a segment labeled ‘‘others’’ in a market-share pie chart. By and large, they will be
newer entrepreneurial firms rather than large firms with household names; hence,
specialization is the key. A successful business should focus on niche markets.

The rate of change in business gets ever faster. The advanced industrial economies are
knowledge based. Product life cycles are getting shorter. Technological innovation progresses
at a relentless pace. Government rules and regulations keep changing. Communications and
travel around the globe keep getting easier and cheaper. And consumers are better informed
about their choices. To survive, let alone succeed, a company has to be quick and nimble. It
must be fast and flexible. It cannot allow inertia to build up. Keep your organization flat. It will
facilitate quick decisions and flexibility and will keep overhead low.

Small entrepreneurial firms are great innovators. Big firms are relying increasingly on strategic
partnerships with entrepreneurial firms in order to get access to desirable R&D. The trend is
well under way. In the 1980s, IBM spent $9 billion a year on research and development, but
even that astronomical amount of money could not sustain Big Blue’s commercial leadership.
As its market share was remorselessly eaten away by thousands of upstarts, IBM entered into
strategic agreements with Apple, Borland, Go, Lotus, Intel, Metaphor, Microsoft, Novell,
Stratus, Thinking Machines, and other entrepreneurial firms for the purpose of gaining
computer technologies.

But no matter what you do, you probably won’t be able to attain much success unless you have
happy customers, happy workers, and happy suppliers. That means you must have a friendly
company. It means that everyone must be friendly, especially anyone who deals with
customers. Having fun is one of the keys to keeping a company entrepreneurial.

Most new companies have the Nine Fs at the outset. Those that become successful and grow
pay attention to keeping them and nurturing them. The key to sustaining success is to remain
an entrepreneurial gazelle and never turn into a lumbering elephant and finally a dinosaur,
doomed to extinction.
Traditional Model

A product-centric new product introduction model popular in manufacturing industries.

Introduction

The traditional new-product introduction model outlined in Figure 1.1 illustrates the process of
getting a new product into the hands of waiting customers. A new product moves from
development to customer testing (alpha/beta test), and using feedback from this initial testing,
the product engineers fix technical errors in the product until the product launch date and first
customer ship.

This new-product introduction model is a good fit for an existing company where the customers
are known, the product features can be specified upfront, the market is well-defined, and the
basis of competition is understood.

Figure 1.1 New Product Introduction Diagram

As for startups, a scant few fit these criteria. Few even know who their customers are. Yet many
persist in using the new-product introduction model not only to manage product development
but as a roadmap for finding customers and setting the timing for the startup’s sales, launch
and revenue plans. Investors use the new-product introduction diagram to set and plan
funding. All parties involved in the startup use a roadmap leading toward a very different
location, yet they’re surprised to end up lost.

Stage 1: Concept and Seed

At the concept and seed stage, founders capture their passion and vision for the company,
sometimes on the back of a napkin, and turn them into a set of key ideas, which becomes the
outline for the business plan.

Next, issues surrounding the product are defined. What is the product or service concept?
What are the product features and benefits? Can it be built? Is further technical research
needed? Who will the customers be, and where will they be found? Statistical and market
research and a few customer interviews fuel the evaluation and business plan.
This step also brings forth a first guess at how the product will ultimately reach the customer,
including discussions of competitive differences, distribution channels, and costs. An initial
positioning chart would explain the company and its benefits to venture capitalists and
investors. The business plan now gets market-size, competitive and financial sections,
forecasting revenue and expenses. The seed phase targets in convincing an investor to fund the
company or the new product.

Stage 2: Product Development

In product development stage, everyone stops talking and starts working. The respective
departments go to their figurative corners as the company begins to specialize by function.
Marketing refines the size of the market defined in the business plan and begins to target the
first customers. In a well-organized startup the marketing folk might even run a focus group or
two on the market they think they’re in and work with Product Management on a market
requirements document (MRD) for engineering to specify the product’s final features and
functions. Marketing starts to build a sales demo, writes sales materials (websites,
presentations, data sheets). In this stage, or by alpha test, the company traditionally hires a VP
of Sales.

Meanwhile, Engineering focuses on specifying and then building the product. The simple box
labeled “Product Development” typically expands into a “waterfall” or “spiral” or incremental
process of interlacing steps, all focused on minimizing development risk of a defined feature set
(Figure 1.2). This process starts with the founder’s vision, which may be expanded into an MRD
(and a product requirements document), and expands further into detailed engineering
specifications. With those in hand, Engineering begins implementation. Once a waterfall
process starts, the proverbial train has left the station and the product is nearly impossible to
revise. As a rule, the “train” can run almost nonstop for 18 or perhaps 24 months or more,
uninterrupted by changes or new ideas no matter how good they might be for the business.

Figure 1.2 The Product Development Waterfall Model

Stage 3: Alpha/Beta Test

In stage three, Engineering continues building along the classic waterfall development model,
working toward the first customer ship date. And, by beta test time, working with a small group
of outside users to test the product and ensure that it works as specified. Marketing develops a
complete marketing communications plan, sets up the corporate website, provides Sales with a
full complement of support materials, and starts the public relations bandwagon rolling. The PR
(press relations) agency polishes the positioning and starts contacting the long-lead-time press
and blogs, while Marketing starts the branding activities.

Sales signs up the first beta customers (who may volunteer to pay for the privilege of testing a
new product), begins to build the selected distribution channel, and staffs and scales the sales
organization outside headquarters. The sales VP works toward achieving the revenue plan as
specified in the business plan. Investors and board members start measuring progress by the
number of orders in place by first customer ship. The CEO hits the streets and the phone or the
parent-company headquarters, searching for additional capital.

Stage 4: Product Launch and First Customer Ship

With the product presumably working, the company goes into “big-bang” spending mode. The
product and the company are launched. The company has a large press event, and Marketing
launches a series of programs to create end-user demand. In anticipation of sales, the company
hires a national sales organization; the sales channel has quotas and sales goals. The board
begins measuring company performance based on sales execution against its business plan,
albeit one typically written at least a year earlier, when the company first sought investment.

Building a sales channel and supporting marketing burn a lot of cash. Assuming no early
liquidity event for the company, more fund-raising is often required. The CEO looks at the
product-launch activities and the scale-up of the sales and marketing team and goes out yet
again to the investor community. This operational model no doubt sounds familiar to many:
a product and process-centric model used by countless startups to take their first products to
market.

Customer Development Model

The Customer Development model is an iterative and incremental approach to new product
introduction. It will take several iterations of each of the four steps to get it right. While each
step has its own specific objectives, the process as a whole has one overarching goal:
discovering the repeatable, scalable, and ultimately profitable business.

Introduction

In the Customer Development model, each step is represented as a circular track with recursive
arrows in order to highlight that each step is iterative. It’s a polite way of saying, “Startups are
unpredictable. We will have failures and we will screw it up several times before we get it
right.” In contrast, a traditional product introduction plan makes no provision for moving
backward. To do so would be considered a failure. No wonder most startup founders are
embarrassed when they’re out in the field learning, failing, and learning some more.

Meanwhile, the Customer Development model embraces the way startups actually work, with
moving backward playing a natural and valuable role in learning and discovery. Startups will
cycle through each step of the Customer Development process until they achieve “escape
velocity”—enough measurable progress in finding the business model as defined by board and
team—to propel forward to the next step.

The Customer Development model assumes it will take several iterations of each of the four
steps to get it right. The philosophy of “It’s not only OK to screw it up—plan to learn from it” is
the core of the process.

Figure 2.1 breaks out all the customer-related activities of an early-stage company into four
easy-to-understand steps. The first two steps of the process outline the “search” for the
business model. Steps three and four “execute” the business model that’s been developed,
tested, and proven in steps one and two. The steps:
1 Customer discovery first captures the founders’ vision and turns it into a series
of business model hypotheses. Then it develops a plan to test customer
reactions to those hypotheses and turn them into facts.
2 Customer validation tests whether the resulting business model is repeatable
and scalable. If not, you return to customer discovery
3 Customer creation is the start of execution. It builds end-user demand and
drives it into the sales channel to scale the business
4 Company-building transitions the organization from a startup to a company
focused on executing a validated model.

Figure 2.1 Customer Development Process

In search, you want a process designed to be dynamic, so you work with a rough business
model description knowing it will change. The model changes because startups use customer
development to run experiments to test the hypotheses that make up the model. And most of
the time these experiments fail. Search embraces failure as a natural part of the startup
process. Unlike existing companies that fire executives when they fail to match a plan, we keep
the founders and change the model.

The product execution process – managing the life cycle of existing products and the launch of
follow-on products – is the job of the product management and engineering organizations. It
results in a linear process where you make a plan and refine it into detail. The more granularity
you add to a plan, the better people can execute it: a Business Requirement document (BRD)
leads to a Market Requirements Document (MRD) and then gets handed off to engineering as a
Functional Specifications Document (FSD) implemented via Agile or Waterfall development.

Note that each of the four steps has a stop sign at its exit. That’s simply a reminder to think
through whether enough has been learned to charge ahead to the next step. It’s a place to stop
and summarize all the learning and, of course, to candidly assess whether the company has
reached “escape velocity.”

Step 1: Customer Discovery

Customer discovery translates a founder’s vision for the company into hypotheses about each
component of the business model and creates a set of experiments to test each hypothesis. To
do this, founders leave guesswork behind and get out of the building to test customer reaction
to each hypothesis, gain insights from their feedback, and adjust the business model. Of all the
lessons of Customer Development, the importance of getting out of the building and into
conversations with your customers is the most critical. Only by moving away from the comforts
of your conference room to truly engage with and listen to your customers can you learn in
depth about their problems, product features they believe will solve those problems, and the
process in their company for recommending, approving and purchasing products. You’ll need
these details to build a successful product, articulate your product’s unique differences and
propose a compelling reason why your customers should buy it.

Customer discovery is not about collecting feature lists from prospective customers or running
lots of focus groups. In a startup, the founders define the product vision and then use customer
discovery to find customers and a market for that vision. The initial product specification
comes from the founders’ vision, not the sum of a set of focus groups.

Customer discovery includes two outside-the-building phases. The first tests customer
perception of the problem and the customer’s need to solve it. Is it important enough that the
right product will drive significant numbers of customers to buy or engage with the product?
The second phase shows customers the product for the first time, assuring that the product
(usually a minimum viable product or MVP) elegantly solves the problem or fills the need well
enough to persuade lots of customers to buy. When customers enthusiastically confirm the
importance of both the problem and the solution, customer discovery is complete.

Pivots may happen in the customer discovery phase. Failure will happen. It is a normal part of
the startup process. Misunderstanding or just getting wrong key assumptions about your
business model happen often: who your customers are, what problems they needed to solve,
what features would solve them, how much customers would pay to solve them, etc. Pivots are
a response to these mistakes. A pivot is a major change to one of the nine business model
hypotheses based on learning from customer feedback. Pivots happen often in the Customer
Development process. A pivot is not a failure. In fact, embracing the fact that startups regularly
fail and pivot along the way is perhaps one of the greatest insights in this book.

Step 2: Customer Validation

Customer validation proves that the business tested and iterated in customer discovery has a
repeatable, scalable business model that can deliver the volume of customers required to build
a profitable company. During validation, the company tests its ability to scale (i.e., product,
customer acquisition, pricing and channel activities) against a larger number of customers with
another round of tests, that are larger in scale and more rigorous and quantitative. During this
step, a startup also develops a sales roadmap for the sales and marketing teams (to be hired
later) or validates the online demand creation plan. Simply put, does adding $1 in sales and
marketing resources generate $2+ of revenue (or users, views, clicks, or whatever the metric
may be)? The resulting roadmap will be field-tested here by selling the product to early
customers.

In web/mobile apps, customer validation calls for the deployment of a “hi-fidelity” version of
the MVP (HIFI MVP) to test key features in front of customers. Customer validation proves the
existence of a set of customers, confirms that customers will accept the MVP, and validates
serious, measurable purchase intent among customers.

Depending on the business model, validation is measured by “test sales” that get customers to
hand over their money (or become actively engaged with the product). In a single-sided
market (one where the user is the payer), a steady stream of customer purchases validates the
concept far more solidly than lots of polite words. There’s no surrogate for people paying for a
product. In a “two-sided” or ad-supported business model, a customer base of hundreds of
thousands that’s growing exponentially usually implies that the company can find a set of
advertisers willing to pay to reach those users.

In essence, the first two steps in the Customer Development model—customer discovery and
customer validation—refine, corroborate, and test a startup’s business model. Completing
these first two steps verifies the product’s core features, the market’s existence, locates
customers, tests the product’s perceived value and demand, identifies the economic buyer (the
person who writes the check to buy the product), establishes pricing and channel strategies,
and checks out the proposed sales cycle and process. Only when an adequately sized group of
customers and a repeatable sales process that yields a profitable business model are clearly
identified and validated is “escape velocity” achieved. At that point, it’s time to move on to the
next step: scaling up, also known as customer creation.

A Customer Development Bonus: Minimum Waste of Cash and Time

The first two Customer Development steps limit the amount of money a startup spends until it
has tested and validated a business model and is ready to scale. Instead of hiring sales and
marketing staff, leasing new buildings or buying ads, startup founders get out of the building to
test the business model hypotheses, and that costs very little in cash.

When paired with agile engineering, Customer Development reduces the amount of wasted
code, features or hardware. Agile development builds the product in small increments, allowing
the company to test and measure customer reactions to each new iteration of the product. It
won’t take three years to find out that customers don’t want or need or can’t use the features
the team labored lovingly over.

Since the Customer Development model assumes that most startups cycle through discovery
and validation multiple times, it allows a well-managed company to carefully estimate and
frugally husband its cash. It also helps “husband” founders’ equity, since the closer a company
is to a predictable, scalable business model, the higher its likely valuation—preserving more
stock for the founders at fundraising time.

Step 3: Customer Creation

Customer creation builds on the company’s initial sales success. It’s where the company steps
on the gas, spending large sums to scale by creating end-user demand and driving it into the
sales channel. This step follows customer validation, moving heavy marketing spending after a
startup has learned how to acquire customers, thus controlling the cash burn rate to protect a
most precious asset, cash.

Customer creation varies by startup type. Some startups enter existing markets well-defined by
their competitors, others create new markets where no product or company exists, and still
others attempt a hybrid by re-segmenting an existing market as a low-cost entrant or by
creating a niche. Each market-type strategy demands different customer creation activities and
costs. Market type is addressed in depth later in the course.

Step 4: Company-Building
“Graduation day” arrives when the startup finds a scalable, repeatable business model. At this
point it’s fundamentally no longer the temporary search-oriented organization known as a
startup—it’s a company! In a sometimes-bittersweet transition out of startup mode, company-
building refocuses the team’s energy away from “search” mode and to a focus on execution,
swapping its informal learning- and discovery-oriented Customer Development team for formal,
structured departments such as Sales, Marketing and Business Development, among others,
complete with VPs. These executives now focus on building their departments to scale the
company.

This is where the entrepreneurs’ version of a Shakespearean tragedy often takes center stage,
as venture capitalists (VCs) realize they have a “hit” with potential for a large return on their
investment. All of a sudden, the passionate visionary entrepreneur is no longer deemed the
right person to lead the now-successful company he or she has nurtured from cocktail napkin to
high-trajectory. The board—graciously or not—ousts the founder and all his or her innate
customer understanding, trading him or her in for a “suit,” an experienced operating executive.
There goes the neighborhood, as the company declares success, the entrepreneurial spark
often sputters, and process often drowns energy.