In fact, some early adopters of Lean Startups — those who have already bought into the framework to the extent that they’ve applied its practices into their high tech startup — might be a tad disappointed.  They might have to look a little deeper; there’s no vanity steps to success herein.

Why? In the end, this book is not written for them. But rather, like any good entrepreneur, Eric is aiming at the Mainstream market.  According to Geoffrey Moore in Crossing the Chasm, you can’t address the Mainstream market the same way you learned to do in the early adopter market.  (Hence the chasm.)

In my opinion, for example, early smartphone adopters diss’ the iphone, because Apple targeted the Mainstream, not them.

Eric’s intentions are easily discerned from his definition of Startup:

“A human institution designed to create new products and services under conditions of extreme uncertainty.”

This is clearly not intended to speak (only) to high technology startups, but rather to anywhere uncertainty exists. In my opinion, this is the strength of Ries’ book: it is a call to action to anyone inclined to take action to make things better despite facing severe uncertainty.  There is no boundaries to where you can exercise your entrepreneurship.  And though Eric doesn’t state so explicitly, true entrepreneurs are those willing to admit to the uncertainly within the institutions they inhabit AND to develop solutions that solve problems in the face of that uncertainty.

This definition applies to social entrepreneurship, non-profits, education, government, large successful businesses, and any business with technology risk or market risk, including yes, high tech startups.

Think about this for a second.  If true, the problem with the failure to innovate facing many hugely successful businesses is not that they don’t “act like a startup,” but rather that they don’t understand their own uncertainty.  Most people recognize that many governmental institutions face extreme inefficiencies and could benefit from new products and services designed and implemented in new ways.  The roadblock is, perhaps, that in a society overly dependent upon the advice of “experts,” we are unable to admit to the uncertainties we confront and therefore fail to unleash the creativity necessary to build new systems to solve big problems.

Conversely, those who claim to know everything, in other words face no uncertainty, are either not part of a “startup” or simply not truly entrepreneurial.  The arrogance of certainty leads to doing things the way they’ve always been done.

Make no mistake:  there is much here for high tech startups. Entrepreneurs who are still figuring out how to apply the principles to their businesses have much to learn here, but Eric describes less how to do it and more how to think about doing it. (Teach a man to fish and all that.) Personally, I have found that there are multiple layers of understanding to be had in the Lean Startup world and most of us are just scratching the surface. While some will look for more specific action items, Ries’ approach is honest, since there is no such thing as a startup blueprint.  While “Build, Measure, Learn” is easy to grok, the actual practices one has to put into place to create a learning environment that induces change, that produces products that people care about is hard.  No, It’s really hard.  And it’s one thing to do it in a high-tech startup of a couple of people and it’s another thing entirely do to it in a startup environment of 10 people and it’s another universe to do it in static, change-averse cultures that are in the most dire need of disruption.

Eric’s “stuffing the envelope” analogy, for example, is illuminating and one I hadn’t encountered before.  It turns out that stuffing envelopes one at a time is faster than differentiating the tasks and doing them in batch mode.

“What if it turns out that the customer doesn’t want the product we’re building? Working in small batches ensures that a startup can minimize the expenditure of time, money, and effort that ultimately turns out to be wasted.”

When in execution mode — i.e., when uncertainty has been eliminated — you can optimize processes for speed or cost.  When in learning mode, however, crippling inefficiencies can occur if you’ve optimized execution on the wrong parameters and then learn your assumptions were wrong.

Eric offers stories that run against the grain, which lead you to think differently about how to solve problems, such as increasing efficiency through less specialization and the fastidious elimination of metrics that enforce false certainty (vanity metrics).

There’s more to come. Eric briefly tackles the quest to bring disruptive innovation to the enterprise. At this point, I’m not sold on the methods prescribed.  Ries says he aims to “protect the parent organization from the startup” thereby turning the conventional model “on its head.” The premise seems to be that senior management “springs innovation” onto existing managers.

I’m not sure this is the case.  I think it more likely that senior managers are more distrustful of low margin, small market experiments run by kooky internal entrepreneurs then they are of managers who continue to execute on current products.  Futhermore, there is no real head flipping here since these are really two sides of the same coin. Maybe big company departments need protection from fast moving startup people, but startups need “protection” from the problem of being measured by the same criteria (e.g. profit margin) as existing product.  Big company R&D centers are rife with products that never see the light of day.

My take is that big companies are going to look more to startups to solve the problem of disruptive and even sustaining innovation.  An economy bustling with 1000s of Lean Startups is conducive to enterprises waiting for small entrepreneurs to prove the market before the big guys move in.  It will be interesting to see how this plays out.

The Dark Side The book is perhaps a bit heavy on the development side of the house, but for anyone envisioning innovation, this is the right place to start.  Eric’s discussion of applying the “5 Why’s” is instrumental to understanding the implementation of fail-safe processes.  It would be interesting to see  these principles applied to the dark art of sales and marketing.  Instead of traditional loss reports, what would a no-blame-game 5 Why’s look like to dissect a failed sale?  Poor Customer Support?

But this only means that new ideas of how to apply Lean Startup principles need to be tested, validated and shared.  When discussing my book, the Enterpreneur’s Guide to Customer Development, with Steve Blank, he remarked how the school of thought he pioneered “is what it preaches.” Eric’s book demonstrates that.  Not only because Customer Development is an important aspect of Lean Startups, but because Eric’s own vision and elucidation of Lean Startups has evolved tremendously from when I first heard him present his ideas in June of 2009 in China.

The Lean Startup movement is a framework entrepreneurs of all stripes can use to innovate in their industries. All those who adapt and practice it – who make it their own – will continue to advance the Lean Startup framework.

For some reason, it didn’t get chosen.  : )  Actually, it’s a just slide from my You are (not) a Visionary deck I presented at last week’s Wisconsin’s Forward Technology Conference.

A couple of weeks ago, I tweeted:

f***ing hard telling clients maybe their “baby is ugly.” #lsmSF#leanstartupMI#EntrepreneurDownDays

The pause that followed was a deep void.  It was emotional.

During the next week of reflection, a non-early adopter, but loyal user of the product called the founder to  announce that he would not after all, pay for the product. Not at the proposed price, not at the price they had argued for, not at any price.

So he fired himself as Founder and CEO of his company.  And then he fired me.  (“I no longer need your services.  But in the future…”)

We talked briefly about his future, including possible pivots and leaps, but essentially, the gig was up.  I admire his self-awareness and the honesty with which he evaluated his situation.

Can you do that?

Yes, it’s difficult to know when to kill your idea.  Yes, you should be knocking down walls to work.  But the market is the final arbiter, not your hustle.

There’s a whole slice of our society based on non-transparency, on not being totally truthful. It’s necessary for polite society.  You don’t always need to hear your haircut sucks or you look fat in that outfit.  But this is a problem, too, when you really need to hear the straight dope.  As a startup founder, you need to surround yourself with people who are willing to speak the truth.

You need to talk to investors who won’t grinfuck you, e.g., those who makes intros to a bunch of other investors, instead of telling you why he thinks you’re not fundable. You need advisors like Dan Martell, who challenge whether you got the stuff, or Patrick Vlaskovits, who will kick your ass because you’re spending more time documenting your business canvas then actually outside the building testing your business model.  Truth-telling is why I admire Eric Ries, who is willing to challenge the most fundamental media myths surrounding startups and “visionaries.”

Gravity’s Zipper

You will be exposed.  If your idea isn’t what you’ve built it up to be in your mind, it will eventually fail.  Believe in  yourself, be skeptical of your idea.  Surround yourself with truth tellers.

Solution-centralism starts in Customer Discovery.

More often than not I encounter surveys that pay scant homage to the problem, usually has a means of filtering respondents. For example, a typical survey asks “do you have this problem” and if so, how appealing do these solutions sound?  Tweaks to the problem description involve messaging more than understanding.  In other words, the startup team focuses on understanding what words resonate with respect to the problem, as if  the problem itself is fully understood.  Interestingly, the problem continues all the way through to asking pricing questions that evoke dubious responses like “would you be willing to pay?” or “how much would you be willing to pay?”  There is no direct connection to value in these questions.

You hear this in elevator pitches all the time, too.  Egocentric pitches assume the features (and even the benefits) make the problem compelling.

In fact, the opposite is true. The willingness to pay depends on the depth of pain (or passion).

One of my favorite Eric Ries quotes:

If you can’t sell magic, you can’t sell your solution.

Nobody cares about your solution.  They care about solving their problems.

Solution-centralism continues in Customer Validation.

Your product is out the door and you have some market signal, but are still searching for Product-Market Shanggri La.  And you have the feature list and engineering spec that is going to get you there.  Everyone does.  You’re one feature away.  Always.  Your iteration loop has an invisible exit gate.

This is the chasm before The Chasm.  This is where you become the anti-Dropbox, a shattered “tip of the spear.” This is where you become unable to answer who you are:

• too many features;
• features people don’t use;
• features across too many market segments;
• features to keep up w/ Jones’ Widget Co.

Stop.  Please.

Problem-centralism Wins

Be a problem expert. In this age of fast development and no IP protection, whoever “owns” the customer, wins.  You own the customer by understanding and solving their problem better than anyone else.  This is why Customer Development, when properly done, is critical to your success.

• When surveying users early on, focus on problem statements before solution.  (FYI, I am working on an application to help with that.)
• Interviews are critical toward establishing empathy.  Emotion indicates resonance and cues you when to dive deeper, rather than going shallow and broad (like surveys).
• Product demonstrations are not for “show and tell,” but rather is this solving the problem (exercising the passion).
• Messaging/positioning around problem lures the unsuspecting and suspicious alike.
• While iterating product toward what resonates, kill features.

Ultimately your addressable market size depends on amount of pain (passion) in the market, i.e., the size of and number of market segments that share a “big enough” pain (or passion).

Steve Blank speaks to San Diego Tech Founders from Brant Cooper on Vimeo.

Contents:
00:00 My Intro
03:17 Why Accountants Don’t Run Startups
- Old constraints on startups
- Entrepreneurial explosion
- Startups vs Small Businesses vs Large Businesses
- IBM example of big company disruptive innovation
- What did my income statement say in month 1?
- “You’ve just washed ashore on an a deserted island with a knife in your mouth and a loincloth.”
- Searching for a business model, not a business plan
- Customer Development
58:26 Atoms or Bits (New Material)
- Physical vs Online products
- History of Lean
1:03:26 Sloan vs Durant
1:08:41 Q&A
1:29:50 My Conclusion

Be sure to come check out entrepreneur turned investor Mark Suster talk to San Diego Tech Founders March 31.

=> Startups RSVP here.

=> Investors, Service Providers, Professionals RSVP here.

Blank’s Customer Development is critical, otherwise speculating what comprises your startup’s business model is just another academic exercise.  Arguably, one could easily waste as much time documenting assumptions on your business model canvas as documenting them inside a 40 page business plan.  The canvas exposes your hypotthesis and customer development tests them.  It’s a laudable ambition to document and test all of your business model canvas components.

But how much is necessary to get going?

All building blocks are not created equal.  I believe there’s a natural progression towards figuring out your business model and many blocks are directly dependent on prior blocks.  Is it worth the time to document 2nd or 3rd tier blocks before establishing the reality of 1st tier?  The answer, of course, depends on you and your business.  It doesn’t hurt to go as far as you can at the start, unless the activity inhibits you from getting started, i.e., “getting out of the building.”

To use a rather simplistic example, you might presume that your customer is an enterprise-sized business that requires a field sales force and partnerships with highly technical systems integrators.  What if your customer ends up being a medium-sized business that requires SaaS product distribution?  Early customer development might very well point you down the correct path from the outset.  Some business model components flow naturally from validated core hypotheses.

The real dilemma in my mind is, what do you test first? The key to getting started is to nail the validate of the core hypotheses: Customer, Problem, Solution.

Go to the #CustDev White Board

In our book, The Entrepreneur’s Guide to Customer Development, Patrick Vlaskovits and I developed a white board exercise to help think through business model risk in order to determine what to test first.  The key components are:

=> draw the ecosystem around your business as you imagine it, including partners, distributors, customers.

=> determine which are mission critical — in other words, can you get going without any?  Which are absolutely necessary?

=> state the value proposition for each mission critical participant — what determines whether or not they join the ecosystem?

=> list the minimum product functionality necessary to get entities to participate.

=> prioritize the risks (technical and market) based on the above.

Ultimately, what you trying to prioritize is: what’s the quickest way to fail your business model. The “value path” of testing your business model runs through testing the the core value proposition of each of your mission critical ecosystem entities.  Easiest to test means:  what you can test in the shortest time frame.

If building a landing page and driving traffic to it has the potential of killing your present business model hypotheses, then it’s a legitimate “intermediate MVP” and worth testing.  But be careful.  Are you sure you’re not testing your ability to drive some amount of traffic or your positioning?  If a 3rd party API doesn’t provide the hooks you need to develop a critical piece of technology and therefore your business model fails, maybe that’s what you test first.

Documenting the building blocks of your business model = good.  Using the #CustDev White Board exercise in conjunction helps you determine what to document and test first.

How do you determine what to test first?

Here’s a handy graphic illustrating source and bias:

If one looks closely, one can perhaps discern my bias. ; )

Let’s go through these.

1. Those with marketing backgrounds are comfortable speaking with customers in a manner determined by their specific role.  Product Managers talk about road map, collect feature requests and bounce ideas off customers, often in group settings (focus groups, advisory boards, etc.).  Product Marketers communicate features and benefits and elicit feedback, often through surveys.  Corporate marketers practice “branding” and spin.  Feedback goes to info@ email boxes, twitter tweets, and Facebook ‘Likes’ (or not).

2. UX Designers are quick to tell you they invented Customer Development only called it something different.  And frankly, they’re right to a degree.  When it comes to product design.  Or parts of product design.  Anyway, UX Designers are good at observing user behavior and interacting with them in a particular (not peculiar) way to determine if the product is “working.”  This is instrumental to today’s products.  (Not always the case, as I’ll argue in another post.)

3. Engineers, in their lifetime quest to never have to actually speak to a live animal of the “Customer” species, utilizes analytics tools and product instrumentation to produce reams of data on user behavior, i.e., actual user interaction with the product.  Instrumentation is instrumental, too.

4. Penultimately and leastly, are the investors, branders, Madison-Ave marketers, turn-key salespeople, high-tech gadflies and backseat pundits who declare that Vision is the only thing that matters.  All you have to do is be like Apple and Ikea, get it?  Do I have to spell it out for you?  All you have to do is be just like A-P-P-L-E.  There now, go to it.

5. Finally, what is the Customer Development bias?  Customer Development needs all the practices above, but none of them help you understand the problem, the pain, the passion. That’s the final leg or better yet, the first leg of Customer Development.  Empathy.  Whatever walk for mankind you need to do to walk a mile in your customers’ shoes; whatever interview technique, lunch buying, drink toting, teatotaling, karaoke yodeling you must participate in to gain an understanding such that you feel empathy.

Now, then, can’t we all just get along?

Please excuse the hyperbole and generalities and the tongue-in-cheek.  Recuse yourself as you see fit.  Feel free to post vitriol in comments. : )

btw, note that AARRR isn’t exactly sequential… in fact, i’d emphasize Activation & Retention *first*, then go after Acquisition & Referral, then optimize for Revenue

Recently, I have caught a couple of my Customer Development clients optimizing the metrics in the “wrong” order, so Dave’s comment bears repeating and perhaps some expounding upon.

The Pirate Says “AARRR”

The anagram is ordered by user experience:

A – Acquisition – User is directed to your site;

A – Activation – User signs up or is otherwise engaged;

R – Retention – User keeps coming back, i.e., is engaged over time;

R – Referral – User invites others;

R – Revenue – User pays or is otherwise monetized;

This is not, however, the order in which you should optimize your product while building your business.  The order (and truly, the metrics themselves) are dependent upon your business model.

For B2C Free, Say RRAAR

Retention – Nail engagement so that users want to or must come back;

Referral – Your business model requires massive user growth, so your product must require referrals to work or must be so cool it just happens;

Activation – Once your users are here to stay and inviting others, optimize their conversion funnel.

Acquisition – Now you’re ready to blow up acquisition.  (Good time to get investment funding.)

Revenue – Millions of users?  Time to monetize.

For B2C or B2B Freemium, Cheer RRRAA!

Retention – Nail engagement so that users want to or must come back;

Revenue – If your business model requires users or businesses to pay, you need to figure out what they’ll pay for before you blow-up anything;

Referral – Since you’re likely not a true network-effects business, you optimize referral after revenue.  Optimizing referral is actually part retention, part funnel optimization.  Users are so happy they will refer others to your site or provide you testimonials or speak to the press, etc.  Not much sense in blowing up your acquisition, however, until you have that level of passion.

Activation – This refers to Blank’s “Sales and Marketing roadmap.”  Here you understand and optimize your sales funnel.

Acquisition – OK, now you can hire that PR firm.

For Enterprise B2B, Cheer an alternative RRRAA!

R – Revenue – If you’re selling to businesses the number one thing you need to prove is that someone cares enough about what you’re providing to give you money for it.

R – Referral – As above, referral in this context means that your customers are willing to sing your praises publicly.

A – Activation – In this context, activation is understanding your sales and marketing roadmap.

A – Acquisition – After you nail your sales and marketing roadmap, you’re ready to feed the top of the funnel.

R – Retention – In enterprise B2B, you often don’t have a subscription model, but may be charging annually for maintenance and support.

Note that you will always need to do some level of “acquisition” in order to figure out and optimize the other stuff.  But the point is that you’re not concentrating on or optimizing acquisition at the start.  Exact order of AARRR is debatable from one business to another, so use above as guidelines only.

Customer Development does not equal User Acquisition

Customer development is a method for discovering, testing and validating user acquisition and conversion methods.  So that a marketplace suffers from the “Chicken and Egg” problem, i.e., there’s only a true market when they’re both there doesn’t affect Customer Discovery and some amount of Customer Validation.  In other words, you can interview both sides of the market place, show them solution ideas, validate MVP features all without the other side of the marketplace being involved at all.

The pre-development signal you are trying to hone in on is “What will it take minimally for each side of the equation to come to the market?”  In most marketplaces, what you will discover is that one side of the market is actually the product, and the other side is the consumer of the product.

Product vs Consumer

In truth, the “Chicken and Egg” problem doesn’t exist.  I hate to burst your object impermanence bubble, but your local weekend farmer’s market exists even when you don’t go.  ; )  Marketplaces can exist with products, but no customers — just not for long.  One side creates the marketplace, i.e., is the “product”; the other side creates the market, i.e., is the consumer of the product.

To put it another way, the business doesn’t exist without product, but doesn’t succeed without customers.  (Exists, but fails.)   In the groupon example, clearly coupons are the product.  (Groupon doesn’t exist without coupons, Groupon doesn’t succeed without consumers.)  A client of mine had photographers on one side of a marketplace business model and people who need custom photos on the other.  The business doesn’t exist without photographers; doesn’t succeed without people buying photos.

Marketplace User Acquisition

The “Chicken and Egg” dilemma does (potentially) exist, when it comes to converting prospects into customers or users.  ”Network Effect” businesses have a great potential to grow virally  if they nail their value prop, but need the effect to get the effect!  Some marketplaces suffer from the same dilemma: there’s no value to either side until both sides are there and engaged.

BTW, Customer Development doesn’t have a specific process that will instruct you how to get both sides to your product and get them engaged.  Customer Discovery will not tell you how to solve the acquisition and retention chicken/egg problem.  Is this the much-ballyhooed Customer Development “Fallacy?”  (I don’t get what the fallacy is supposed to be.) Like most aspects of building a business, you won’t find an answer in a book.  You actually have to try methods others have used or think up some new ones and SEE WHAT WORKS.

• Namesake has done a good job using a velvet-rope strategy to test, validate and grow its network effect.  They carefully invite early-adopter types to ensure that site activity is consistent and of decent quality so that there is something for new users to engage with;
• Use a tight geographic approach to control environment;
• You have to get product to market, so make it dead simple for the product side of your marketplace to engage.  Not just cheap (or free, initially), but simple. Do the work for them if you must.

I hope you find this helpful!

The number one problem with Customer Development in B2B environments is that startups begin the Customer Development process too late.  The revenue plan has been sold to the board, the product is done or near-done, and a marketing launch date has been chosen.  Despite the increasing popularity of the LeanStartup “movement,” this is, IMO, still standard operating procedure for most B2B startups.  So having skipped Customer Discovery entirely, the company founders have neither validated their problem assumptions nor their proposed solution.  The board eagerly awaits first revenue and to that end, will even help hire the first VP of Sales in order to accomplish this momentous milestone of best-laid plans.

Welcome to the maze of complex B2B sales.  Did you think B2B sales was going to be straightforward; based solely on rational, business-savvy calculations?  Based on the bottom-line?  Most everyone recognizes that the B2C sales process requires appealing to consumer’s emotions.  But believe it or not, business buyers, influencers and users are human, too, and thus are not-exempt from emotional decision making.  Ego, hierarchy, competitiveness, fear, grandstanding, sycophantry join budget, market share, revenue, profits, risk, time, resources in the sale.

The “Status Quo Coefficient” represents that which you must overcome above and beyond the pain your product solves, in order to make a sale.

Pre-Launch Customer Development

If you are practicing Customer Development prior to product launch, then Blank’s The Four Steps to the Epiphany goes into great detail about how to discover and validate your understanding of the complex selling environment.  In less detail, but perhaps with more specific tactics, Vlaskovits and my The Entrepreneur’s Guide to Customer Development is a good resource for executing your Customer Discovery plan.

During Customer Discovery, you are not selling, so you are in a better situation to have “learning conversations” with prospective customers.  Your aim is to establish relationships inside businesses who are likely to be early adopters.  This means you must find your champion.  Your champion will help you understand who your saboteurs are and hopefully, how to navigate around them.  As you build your product and validate your vision with the champion, you empower him or her to sell you inside the organization.

Post-Launch Customer Development

These are tricky waters for the reasons described above.  If you have a sales team in the field, let them go.  If you have a VP of Sales unable to take a learning approach, let him or her go.  If you are fortunate to have a board that has bought into learning before (large scale) selling, perhaps you are able to hire a VP of Customer Development or utilize outside resources.

In 2005, Mark Leslie and Charles Holloway wrote a very #custdev-y paper, called the Enterprise Sales Learning Curve (.doc).  Leslie and Hollow describe the same failures of scaling sales and marketing prior to knowing how market and sell that led Blank to establish the Customer Development methodology.  I highly recommend this paper for B2B startup executives and investors.

Leslie and Holloway advocate hiring a “Renaissance” Sales person to practice Customer Discovery:

The “Renaissance” Sales Rep:    During the initiation phase we would like to hire an individual who is able to facilitate broad based learning by the enterprise.  This individual likely has a deep interest in the technology and in bringing together various customer departments with the appropriate representatives of the company.  The individual is extremely resourceful, able to develop his / her own sales model and collateral materials as needed.

Fundamentally, two approaches exist no matter who you bring on board:  1) go back to Discovery or 2) establish a painstaking process for winning your first five deals.  For a peek out how this approach might be developed, I highly recommend you read this comprehensive interview with Sean Murphy.

So what is it exactly, that you need to learn?

1) Validate Customer-Problem-Solution: No matter what stage your company is in, you need to validate that you have the right combination.

2) Do you have the “whole product?”  Or do you need partners, systems integrators, etc.

3) Identify the buyer’s process and corresponding business tactics.

4) Identify all the player’s in the process: user, influencers, economic buyers, decision makers.

5) What messaging and positioning messages resonate?

6) What does the corporate purchasing process look like?

Non product-specific answers you need:

Are you the decision maker?

Do you have budget?

Who also is involved in decision making?

Is this deal subject to other departments’ approval processes?

Are there compliance issues regarding this deal?

Can legal or purchasing nix the deal?

Do you keep a list of approved resellers/systems integrators?

Are there departments who might disapprove of a deal (are you adversely affecting another department’s budget)?

All things considered, what is the “typical” length of the approval process?

What other user groups/departments will benefit from a deal?

Will a successful pilot assuage naysayers?

Will you sign a contract whereby you purchase upon a successful pilot?

************

The method for obtaining this information doesn’t change significantly between pre- and post- product Customer Development:  You must establish deep relationships.  High-powered, “renaissance” sales people do this through “consultative” sales, whereby they learn what core problems the client needs solving and how they can work together to implement product that does the job.  Either way, you must find an internal champion and developing this relationship is typically a painstaking process that takes months to evolve.

The best way to find internal champions is through your network, no further than 1 link away (i.e., friends of friends).  This means reaching out to the friends, family, and colleagues of you and your co-founders, employees, board members, mentor, advisers, etc., for introductions.

As discussed in The Art of Customer Development Conversations, the answers you seek are not often the result of direct questions, but flow from conversations that grow deeper over time as the fit between problem and solution becomes tighter and trust among principals builds.