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Crossing the Lean Startup Chasm

As an early believer in Lean Startup movement, I can perhaps be excused for my unbridled enthusiasm for the release of Eric Ries’ new book, The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses. Not however, for the reasons you might expect.

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.

The #CustDev Whiteboard

Steve Blank and Alex Osterwalder have combined their respective methodologies, Customer Development and Business Model Generation, into a powerful business model generation and testing framework.  There are several good sources for how these two mesh, including this Jan post on Osterwalder's blog, here and most recently, in Blank's SXSW presentation:

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

#CustDev whiteboard imageIn 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?

B2B Customer Development

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.

You Can Outsource Customer Development, You Can't Outsource Learning

The consultants came out in droves to weigh in on Steve Blank's recent post, "Consultants Don’t Pivot, Founders Do." (Myself included.)  Generally, all were in agreement with Blank's primary point:

Founders get out of the building (physically or virtually) to test their hypotheses against reality. There are times when customers are going to tell you something that you don’t want to hear.  Or you’re going to hear something completely unexpected or orthogonal to what you expected.

As I like to say, those that hold the assumptions need to test the assumptions.   In the comments, several of us pointed out that teaching Customer Development is a viable service for which entrepreneurs can hire outside consultants. Sean Murphy:

We work with teams as they prepare for and then execute the customer discovery and validation steps in B2B markets. We helping them rehearse leaving the BatCave, we often go with them on customer discovery interviews or sale calls, we debrief from prospect meetings to formalize lessons learned and adjust the sales presentation or the target prospect definition or sometimes the feature set.

Clearly, there's some value being provided here.  In my experience, entrepreneurs have repeatedly sought help with both Customer Development basics, as well as some of its more nuanced components.  Sean Ellis raises a separate issue, agreeing that consultants can provide value, but wondering how the economics work.

I believe the need is there and most consultants have the expertise to fill the need; the problem is that their cost exceeds their value at this stage.

There is no doubt in my mind that this is a challenge, but there's more that one way to skin a cat, so I'm not sure such a blanket statement is accurate.  (Note that Ellis isn't suggesting that consultants don't provide fair value for their compensation, but that the compensation is likely to be too high for the particular stage the business is in.)

This begs the question, what exactly can be outsourced and at what cost?

What Part of Customer Development Can be Outsourced?

It's worth pointing out that one of the best Customer Development practitioners I know is Cindy Alvarez, who is a Product Manager and not a founder at KISSMetrics. Theoretically, at least, Alvarez could be doing what she does as a consultant, rather than as an employee.  If she had internal assistance (say, a less Senior PM  or a technical marketer), she could potentially have two or to three clients and perhaps make a pretty good living.  And while KISS is likely at or near Product-Market Fit, Cindy has been executing Customer Development for them for quite awhile.

As with employees, the key element to working with consultants is trust.   Further, Founders must process outside information to make decisions.  Is it better, for example, for Founders to pivot based on analytics than Customer Development information provided by a trusted adviser?  If a Founder has a "salesperson mentality," and cannot stop selling when supposed to be listening, does that doom the company?  Or can a trusted adviser steeped in Customer Development best practices provide better information?

The more I reflect, the more I think blanket statements about what can or cannot be outsourced are dubious at best.  Learning must happen.  How it happens is not particularly relevant.  The key measure is willingness to learn.  If you belong to one of the archetypes of anti-lean, you are not likely to do Customer Development anyway.  If you are willing to learn, you can likely learn from a trusted consultant, too.  I do think the level of understanding potentially suffers, however, so the stage of Customer Development you're in should influence who the lead CustDev actors should be and what other roles might benefit the process.

In the book, Entrepreneur's Guide to Customer Development, we break Customer Discovery down into three stages:

  • Problem-Solution fit, i.e., validating your core C-P-S (Customer-Problem-Solution) assumptions:  This is the most important stage for Founders to be heavily involved in.  Consultants might help you articulate your assumptions, define market segments, find prospects to talk to, help prepare the presentation and the presenter, and help analyze results.  I have, in fact, also done the interviews for a Founder with both positive and negative results.
  • MVP development: Best if Founders are still heavily involved with early adopters, since they likely need to hone in on the core value they're providing.  I don't see much value in consultants here, other than help with process,, like coaching Product Managers (and Founders) to not engage in feature mongering.  This phase requires a dedication to minimum viability, and a balance between customer-driven solution and vision.  If the two diverge, a pivot is required and only Founders pivot.
  • Proposed Funnel, i.e., learning your sales and marketing roadmap:  Founders need to be engaged relative to their adamancy regarding their sales and marketing assumptions.  Other business model assumptions are typically exposed here, as well.  I believe consultants can play a larger role in this phase, since many founders can use a lot of help thinking through marketing basics.  Consultants might help with defining market segments, proposing funnel hypotheses, and preparing (or conducting) conversations, surveys, etc., to test and validate assumptions.

Clearly I believe a high level of Founder involvement is necessary.  Founders who actually practice Customer Development themselves are arguably in a better position than those that delegate.  But not only are there parts of Customer Discovery that can be effectively delegated, consultants may have a role as well.  The question remains, however, whether (1) consultants can make a living doing this, and (2) whether startups can afford fees that result in (1).

What Model Works for Outsourcing Customer Development?

I know several individuals who practice customer development as consultants.  Clearly, Sean Murphy has found a model that works for him and his clients; Nick O'Connor is another.  I have helped several clients, though finding the right model has been a challenge.  I am passionate about working with early stage companies and have done so for years as a volunteer mentor at San Diego's CONNECT Springboard program.  Figuring out how to make some money, too, isn't a bad thing and admittedly, I've struggled to find the right model that serves well early stage Founders.

Recently, Patrick Vlaskovits, pointed to me a startup lawyer with a unique business model, Kevin Houchin. Houchin charges a low monthly retainer for a long(ish) range commitment, which allows clients unlimited contact, but not unlimited access.  So I'm trying the same thing. So far, so good!  I haven't solved my scaling problem, but I get to work with some great entrepreneurs who are willing and able to execute on Customer Development principles.  They are high-energy, have bought into Customer Development and truly value (and benefit from) feedback, pointers and actionable recommendations.  For more information, see here.

In light of this more in-depth conversation regarding outsourcing and leaving aside for a moment, the general evils of consultants, what do you think about outsourcing components of Customer Development?

Cement Mixers and Customer Development

Brant and I have finally finished our book, The Entrepreneur's Guide to Customer Development:  A cheat sheet to The Four Steps to the Epiphany, within which we have included interviews from successful entrepreneurs in order see if their startup experiences mesh well with Brant's and my interpretation of and experiences with Customer Development.  (I won't beat around the bush, while our interviewees may not have called it Customer Development per se, they certainly practiced elements of what Steve Blank has codified as Customer Development in almost all but name.  And without exception, they applied fierce and relentless skepticism to all aspects of their businesses.)

We've had the pleasure of speaking with Jeff Smith (Smule), Fabrice Grinda (Zyngy, OLX), Ranjith Kumaran (YouSendIt), and Bruce Moeller (DriveCam).  We've condensed their experiences into case studies which are featured in the book.  However, there was so much great material, we simply could not include all of it.  Therefore, I'd like to take this opportunity to share an insight that came out of our interview with Bruce that we found quite edifying, one that goes to the heart of the Customer Development methodologies.

Background:  DriveCam uses video technology, expert analysis and driver coaching to reduce claims costs and saves lives by improving the way people drive.  From the DriveCam website:

DriveCam's palm-sized, exception based video event recorder is mounted on the windshield behind the rearview mirror and captures sights and sounds inside and outside the vehicle. Exceptional forces such as hard braking, swerving, collision, etc. cause the recorder to save critical seconds of audio and video footage immediately before and after the triggered event.

[Emphasis mine.]

Bruce shared an interesting story about how assumptions made in the lab, based on data and "sophisticated" math undertaken by "sophisticated" analysts, fared in the real world of cement mixer trucks.  Remember, the DriveCam device's core feature is to record audio and video when triggered by exceptional forces such as swerving.  When DriveCam went after the cement mixer truck market, they calibrated their devices based on the assumption that cement mixers would flip only if subject to a large sideways g force.

Seems reasonable, right?  After all, cement mixers are big, heavy trucks, and not to mention, filled with, well, the eponymous cement.

Turns out, not so reasonable after all.

Bruce recounted that when one of their first customer's cement mixer trucks flipped over, the DriveCam device had failed to record what had occurred and what may have caused the accident -- the customer was irate and Bruce was more than a little embarrassed.

Turns out that (outside of the lab!) cement mixers trucks can flip at very low speeds (1-2 mph) while at normal g forces when encountering things in the chaos of the real world, very ordinary and common things such as soft road shoulders.  Bruce's customer knew this and was counting on Bruce and the DriveCam team to know this as well.

Lesson learned:

"My philosophy is you don't know what you don't know and if you were ever right in a given moment, and if your guesses were ever true it would be serendipitous.  You must attack your assumptions at all times. My basic tenet: question yourself, because the world is ever-changing.”

-Bruce Moeller

For more insights that speak directly to the Customer Development processes, please purchase The Entrepreneur's Guide to Customer Development:  A cheat sheet to The Four Steps to the Epiphany.