Columbia lecture 111210 customer development

Why Accountants Don’t Run Startups

Steve Blankwww.steveblank.com

Twitter: sgblank

I Write a Blog www.steveblank.com

This Presentation Combines

www.businessmodelgeneration.comwww.steveblank.com

Five Short Stories

Not All Startups Are Equal

Small BusinessStartup

Small Business Startups

• Serve known customer with known product

• Feed the family

Small BusinessStartup

Exit Criteria- Business Model found- Profitable business- Existing team< $1M in revenue

Small Business Startups

• known customer known product

• Feed the family

Small BusinessStartup

- Business Model found- Profitable business- Existing team< $10M in revenue

Small Business Startups

• 5.7 million small businesses in the U.S. <500 employees• 99.7% of all companies• ~ 50% of total U.S. workers

http://www.sba.gov/advo/stats/sbfaq.pdf

Small BusinessStartup

- Business Model found- Profitable business- Existing team< $10M in revenue

Small Business Startup: Internet Edition

• The Internet allows a new class of Small Businesses• Not all businesses on the Internet are “Scalable Startups”

ScalableStartup

Large Company>$100M/year

Scalable Startup

Goal is to solve for: unknown customer and

unknown features

ScalableStartup

Large Company>$100M/year

Exit Criteria- Total Available Market > $500m- Can grow to $100m/year- Business model found- Focused on execution and process

Scalable Startup

ScalableStartup

Large Company>$100M/year

- 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 CompanyTransition

- Founders depart- Professional Mgmt- Process- Beginning of scale

What VC’s Don’t Tell You:The Transition – Founders Leave

Build ExecuteSearch

Transition Large Company

ScalableStartup

Sustaining Innovation

• Existing Market / Known customer• Known product feature needs

Large Company Sustaining Innovation

Large Company Disruptive Innovation

New Division Transition Large 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 CompanyTransition

Business Model found- customer needs/product features found i.e. Product/Market fit- Found by founders, not employees- Repeatable sales model- Managers hired

The Search for the Business Model

Startups Search and Pivot

ScalableStartup

Large CompanyTransition

- Business Model found- Product/Market fit- Repeatable sales model- 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

LargeCompanyTransition

Traditional Accounting- Balance Sheet- Cash Flow Statement- Income Statement

The Execution of the Business Model

Metrics Versus Accounting

ScalableStartup

LargeCompanyTransition

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

ScalableStartup

LargeCompanyTransition

Sales- Sales Organization- Scalable- Price List/Data Sheets- Revenue Plan

The Execution of the Business Model

Customer Validation Versus Sales

ScalableStartup

LargeCompanyTransition

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

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

Customer Validation Versus Sales

ScalableStartup

Large CompanyTransition

Product Management- Delivers MRD’s- Feature Spec’s- Competitive Analysis- Prod Mgmt driven

The Execution of the Business Model

Customer Development VersusProduct Management

ScalableStartup

Large CompanyTransition

Customer Development- Hypothesis Testing- Minimum Feature Set- Pivots - Founder-driven

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

Customer Development Versus Product Management

Product Management- Delivers MRD’s- Feature Spec’s- Competitive Analysis

ScalableStartup

Large CompanyTransition

The Execution of the Business Model

Engineering Versus Agile Development

Engineering- Requirements Docs.- Waterfall Development- QA - Tech Pubs

ScalableStartup

Large CompanyTransition

Agile Development- Continuous Deployment- Continuous Learning- Self Organizing Teams- Minimum Feature Set- Pivots

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

Engineering Versus Agile Development

Engineering- Requirements Docs.- Waterfall Development- QA - Tech Pubs

ScalableStartup

Large CompanyTransition

- Plan describes “knowns”- Known features for line extensions- Known customers/markets- Known business model

The Execution of the Business Model

Startups Model, Companies Plan

ScalableStartup

Large CompanyTransition

- Unknown customer needs- Unknown feature set- Unknown business model- Model found by iteration

The Search for the Business Model

Startups Model, Companies Plan

The Execution of the Business Model

- Plan describes “knowns”- Known features for line extensions- Known customers/markets- Known business model

ScalableStartup

Large CompanyTransition

- Pains in the butt- Always looking at something different- Doesn’t get with the program

Startups Protect Mavericks, Companies Fire Mavericks

The Execution of the Business Model

ScalableStartup

Large CompanyTransition

- Pains in the butt- Always looking at something different- Doesn’t get with the program

The Search for the Business Model

Startups Protect Mavericks, Companies Fire Mavericks

The Execution of the Business Model

- CEO of your company- Finds your next market

ScalableStartup

Large CompanyTransition

- Business Model found- Product/Market fit- Repeatable sales model- Managers hired

- Cash-flow breakeven- Profitable- Rapid scale- New Senior Mgmt~ 150 people

Startups Don’t Last Forever

You fail if 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

9 building blocks of a business model:

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CUSTOMER SEGMENTS

images by JAM

which customers and users are you serving? which jobs do they really want to get done?

40

VALUE PROPOSITIONS

images by JAM

what are you offering them? what is that getting done for them? do they care?

41

CHANNELS

images by JAM

how does each customer segment want to be reached? through which interaction points?

42

CUSTOMER RELATIONSHIPS

images by JAM

what relationships are you establishing with each segment? personal? automated? acquisitive? retentive?

43

REVENUE STREAMS

images by JAM

what are customers really willing to pay for? how? are you generating transactional or recurring

revenues?

44

KEY RESOURCES

images by JAM

which resources underpin your business model? which assets are essential?

45

KEY ACTIVITIES

images by JAM

which activities do you need to perform well in your business model? what is crucial?

46

KEY PARTNERS

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which partners and suppliers leverage your model?

who do you need to rely on?

47

COST STRUCTURE

images by JAM

what is the resulting cost structure? which key elements drive your costs?

48images by JAM

customer segments

key partners

cost structure

revenue streams

channels

customer relationships

key activities

key resources

value proposition

sketch out your business model

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But,Realize They’re Hypotheses

9 Guesses

Guess Guess

Guess

Guess

GuessGuess

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

The Two Reasons Startups Fail

Yet All We Had WasThis…

Concept/Seed

Round

Product Dev.

Alpha/Beta Test

Launch/1st Ship

New Product Introduction Model

Traditional Product Introduction Model: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

- 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

Tradition – Hire Bus Development

Concept Product Dev.

Alpha/Beta Test

Launch/1st Ship

- Create Marcom Materials- Create Positioning

- Hire PR Agency- Early Buzz

- Create Demand- Launch Event- “Branding”

• Hire Sales VP• Pick distribution

Channel

• Build Sales Channel / Distribution

Marketing

Sales

• Hire First Bus Dev

• Do deals for FCS

Business Development

Tradition – Hire Engineering/Product Mgmt

Concept Product Dev.

Alpha/Beta Test

Launch/1st Ship

- Create Marcom Materials- Create Positioning

- Hire PR Agency- Early Buzz

- Create Demand- Launch Event- “Branding”

• Hire Sales VP• Pick distribution

Channel

• Build Sales Channel / Distribution

Marketing

Sales

• Hire First Bus Dev

• Do deals for FCS

Business Development

Engineering/Product Mgmt

• Write MRD

• Waterfall

• Q/A • Tech Pubs

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

Customer Development

Get the Hell Out of the BuildingThe founders

^

Customer Development

Concept/Bus. Plan

Product Dev.

Alpha/Beta Test

Launch/1st Ship

Product Development

Customer Development

CompanyBuilding

CustomerDiscovery

CustomerValidation

Customer Creation

+

Pivot

• 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:• Pricing Model / Pricing

Test Hypotheses:• Size of Opportunity/Market• Validate Business Model

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:• Pricing Model / Pricing

Test Hypotheses:• Size of Opportunity/Market• Validate Business Model

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 Rieshttp://startuplessonslearned.blogspot.com

Problem: Known Solution: Unknown

“Product Owner” or in-house customer

Agile - Customer Problem is KnownExisting Company/Market

Source: Eric Rieshttp://startuplessonslearned.blogspot.com

Unit of progress: a line of working code

Problem: Unknown Solution: Unknown

Lean StartupCustomer Problem + Product Features are Unknown

Source: Eric Rieshttp://startuplessonslearned.blogspot.com

84

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

Company

Building

• (Re)build company’s organization & management

• Re look at your mission

Why Startups Aren’t Run By Accountants

ScalableStartup

Large CompanyTransition

Inventor of the Modern Corporation

ScalableStartup

Large CompanyTransition

Inventor of the Modern Corporation

Alfred P. Sloan

ScalableStartup

Large CompanyTransition

Alfred P. Sloan

General Motors, President/Chairman- Cost Accounting- MIT Sloan School- Sloan Foundation- etc.

ScalableStartup

Large CompanyTransition

Founder of General Motors

ScalableStartup

Large CompanyTransition

Founder of General Motors

Billy Durant

ScalableStartup

Large CompanyTransition

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 CompanyTransition

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 CompanyTransition

You are here

Summary

• Companies execute business models• Startups search for 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/