The Sean Ellis 40% rule-of-thumb was quickly invoked as were other ideas.  However, I thought it worthwhile to share one insight that came from an experienced start-up entrepreneur at the table.  While we were talking about triangulating on the various signals available to an entrepreneur as to what constitutes Product-Market Fit, he recounted a story — really an accidental natural experiment — on how he unequivocally learned his start-up hadn’t achieved Product-Market Fit.

To wit, his site had gone down for a few hours, and he hadn’t known about it.  In the interim, there had been nothing but silence.  None of his users had squawked or had made it publicly known that the site was down and they were angry/frustrated/furious/going to switch providers/fed-up-with-this etc., etc.

This lack of frustration/noise is a data-point.  In this case, it meant his start-up had a ways to go on iterating to finding Product-Market Fit.

As a contrast, we might choose to look at what happens when Twitter goes down.

So, for the more intrepid of you out there, perhaps try “accidentally unplugging” your servers and see what happens.  (Clearly, this has significant risks such as alienating users, but it may be a useful signal to know when you don’ t have Product-Market Fit, if you were wondering.)

BTW, I believe Dave McClure has advocated a very similar idea with regard to features.  If I recall correctly, he suggests removing features from a web app and waiting to hear if users complain loudly.  The intensity of the complaint is likely correlated with the usefulness of the feature.

Assume you were asked to take a customer survey for a product you use or are considering using.  The survey is short (fewer than 10 questions) and completely voluntary.

Note: There is a poll embedded within this post, please visit the site to participate in this post's poll.

(For those that prefer text fields, my apologies.) Please let me know why you prefer one over the other in comments.

The size of your sales force, the money you make.

Lean is not how much money you spend,

That you like your product and so does your friend.

To test your guess and iterate,

To kill your favorite feature your customers hate,

To exercise ideas, removing the sheen,

That is what makes a startup lean.

Figure 2. Ries' Lean Startup: Customer and product development interrelatedness

*CPS = Customer-Problem-Solution

As shown in Figure 2, customer development and product development are two distinct, but interrelated and iterative processes. As Eric Ries describes, the Customer Development team works on testing the problem-customer-solution assumptions, while the Product Development team tackles the solution.  The product development process receives input from customers indirectly through customer development, and (in the web world) directly through measurement of product usage.  The product development process actively iterates on the product, releasing new or different functionality directly to the customer as quickly as possible.

The customer development process receives input from customers indirectly through product development reports on feature usage, but also directly from customer development processes and analytics.  The customer development process iterates on core business assumptions, product functionality, and acquisition and conversion assumptions, resulting in updated hypotheses, honed messaging, positioning, marketing tactics, and feature requirements.

In the Customer Discovery context, a lean startup is not one that necessarily uses lean manufacturing precepts per se, but rather one that uses fast, iterative development practices in conjunction with customer development methodologies in order to:

1)       Validate core hypotheses (customer-problem-solution),

2)       Produce an MVP,

3)       Achieve Product-Market fit,

4)       Produce a development and marketing roadmap for scaling.

Creating a proper iteration loop requires you to predefine success and failure for each stage, and a means to measure your progress.  For example, in the web-based world, Dave McClure’s AARRR metrics (Acquisition, Activation, Retention, Referral, Revenue) might be applied to measure the stages from concept to product-market fit.

(BTW, if you are interested in being notified when the book is published, sign up here.)

Have you ever viewed a world map where South is up? It’s a useful frame of reference, since our Eurocentric view of North as “up” and South as “down” is really just an arbitrary one (a sphere has no top or bottom – nor left or right for that matter). Perspective affects our perceptions…

But what if we turn the funnel upside down?

For most entrepreneurs, the top of the [sales] funnel represents the world-at-large.  It’s unfiltered; it’s not segmented.  In a traditional funnel, the mouth at the top is wide open for attracting both suspecting and unsuspecting potential customers (aka suspects) into the sales process.  Marketing’s job is to find and lure live bodies into the top, while sales is responsible for to pushing ‘em through.  Continue Reading

How to avoid being blinded by the idea aura

The glow of a new, sure-fire idea is a wonderful feeling. You feel you’ve discovered something (or some angle) that no one has ever imagined before.  As you expose that idea to the light of the day and begin vetting it and taking it to market, though, that enthusiasm can dim…Your product or solution fights more than just competitors. It also battles all of the other problems your prospective customer faces. While your awareness of the problem and the weight you grant it is relevant, that doesn’t accurately predict how important it is to others – even if they ‘fit your profile.’

you must conquer the “status quo coefficient”

In fact, one of the most difficult dilemmas entrepreneurs face is determining whether fading excitement is part of the natural decay of the creation process or because the idea – ultimately - is a bad one. Continue Reading

The hidden secrets of market research

The last time I checked, the world’s population was around 6.8 billion.  If only 0.1 percent were to visit your website… and if you were to convert only 1 percent of those to paying customers… and they each paid $2 for a Thneed, for example, then revenues would be over $135M. (And everyone knows you could get way more than 2 bucks for a Thneed, which everyone needs!)

I can prove anything by statistics except the truth.

To some, market research only goes as far as finding a really big revenue number to put on the TAM (Total Available Market) slide of their business plan or investment pitch… Continue Reading

Is social media worth your marketing dollars?

As social media has reached mainstream consciousness this year, businesses have been inundated with the message that they must immediately get on board or risk doom and calamity. The hyperbole (and the frenzied buzz it creates) is confusing and many businesses could use a practical guide on how to evaluate social media and how to engage – if it’s appropriate.

It’s amusing to hear that “Word of Mouth” is new.

So the first benefit of using social media in your marketing efforts (and the first thing to keep in mind) is that social media systems are designed to facilitate person-to-person communication, as opposed to traditional media and most first generation web efforts, which are predominately one-way communication.  Continue Reading

The tension comes from learning when to ignore your customers and when to take heed. Custdevguy reminds us that customers have their own agenda, which might not coincide with your own. Steve Blank reminds us that Customer Development is not just collecting web metrics and it’s not about focus groups. I’ve written before that Customers own the pain, Founders own the vision, meaning that as an entrepreneur, you must tailor your vision to solve the customer’s pain. That is the objective of speaking with your customers.

Sean Ellis perhaps says it best, describing the process as “honing in” on the “signal” that is the core value proposition of your product to your customer. What’s valuable about this description to me, is that rather than looking at what you need to ask each customer, it provides a high-level perspective on what your objective should be and how to get there.  It’s talking to enough customer and asking whatever questions necessary to hone in on the core value of the product.

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Back in November, I decided I wanted to go to do something different for the holidays this year; something fun and a little different, and perhaps a little adventurous with my two girls.  I decided that we would go to Seattle to visit my sister and her family, who have kids the same age as mine, and from there we’ll rent a cabin in the woods and go play in the snow.  That was my “vision.”  When I told my kids we were going to visit their cousins in Seattle, they didn’t want to go. Now, I had a pretty good idea why, but I asked anyway and they gave me the ones I guessed, but others I hadn’t thought of:

1. I’d rather just stay home
2. Usually we only get along with the kids the first day
3. What will we do? It’s just boring to hang out there
4. They don’t celebrate Christmas

Now, listening to your kids is part of being a good parent.  Always doing what they want, not so much; you could end up spending an inordinate amount of time, for example, at McDonalds.  I night characterize the 4 objections I received this way:

1. stasis
2. fear
3. features aren’t appealing
4. visions don’t match

As the owner of the vision, I need to somehow deal with each of these, while keeping these particular customers happy.  (If I fail, my vision fails.)

1. I know my customers well.  This is a standard response. Staying where you are is a known experience and for many, that is preferable to the unknown even when the unknown offers big upside. This is definitely not an “early adopter” mentality.
2. Similar to 1), but in this case a there’s a specific problem with a feature that the customer can clearly articulate. Of course, that doesn’t mean it’s true.  In this case it’s not.  I remind my customers of all the great times they have had in the past, they come back with examples of problems, etc.  Actually just talking the issues through, makes my customers feel better.
3. In this particular case, the features weren’t articulated well by mean.  In other words, my messaging was poor.  When I explained that we wouldn’t only be hanging out in Seattle, that we were going to the mountains and the snow, most of the objections went away. I provided a means for my customers to perform a cost-benefit analysis.
4. I honestly hadn’t considered this point and I could see that it was extremely important to my customer.  Was it possible to fix this and maintain the vision?  In the end, it was not difficult to at all.  My sister was happy to celebrate Christmas in the cabin.  While we wouldn’t have a tree, we could hang stockings and exchange a few presents.  We could even have a  White Christmas!  Problem solved.

BTW, we continued to “add features” throughout the trip that required more “customer development.”  Multiple times the adults said “we’re going to do this (go for a walk, snow shoe hike, etc.),” each time met with derision from the kids; each time resulting in a good time for all.  Children, like customers, sometimes must simply be (are looking to be) led.

This is perhaps a silly example, but I thought it illustrates several points:

• Founder owns the vision
• Communication with customers hones the vision, reveals customer pain and exposes emotional objections to features
• Companies must reject some customer requests, e.g. those run counter to the vision
• Companies must effectively message the value of the vision, features, etc.

Hope you all had a great season, I did!  : )

One thing that often strikes me about conversations regarding start-up success is the pervasiveness of the narrative fallacy and hindsight bias.

We can go to Wikipedia’s entry on Taleb for a definition:

Narrative fallacy: creating a story post-hoc so that an event will seem to have an identifiable cause.

Allow me to illustrate.  What caused YouTube to grow at phenomenal rates in 2005/2006, eventually leading to a $1.65 billion acquisition by Google in 2006?

Was the cause:

a)  YouTube had a better UI/UX than their competitors?

b)  YouTube, at the time, decided to largely ignore blatant copyright violations (unlike their competitors)?

c)  the External Player and the viral widget-ization of their platform? (Obvious, right?  We’ll come back to this in a moment.)

d)  YouTube was simply in the right place at the right time?  (Growing popularity of social networking, ubiquity of broadband)

e)  YouTube made novel and smart technology choices by adopting Flash 7?

f)  Mix and match any of the above.

g)  None of the above.  Other.

All of those reasons pulled from a case study story appear entirely plausible, even logical, to me.

That noted, I don’t how accurate any of them really are.  Did/does YouTube have a better UI than the rest of its video-sharing brethren?  Were they the first/only to encourage video-embedding?  Did they have the best underlying technology?

Even if we assume these to be accurate, we still don’t know whether or not they had any sort of causal relationship with YouTube’s growth.

Back to the original question:  What caused YouTube to grow at phenomenal rates in 2005/2006?

My answer:  I don’t know (BTW neither does Brant).

Viral Coefficients and Viral Cycle Time

Just recently I came upon an excellent and interesting post about YouTube, Viral Coefficients and Viral Cycle Time.  After a persuasive discussion of why one should minimize Viral Cycle Time, the author (@BostonVC) notes:

This [an extremely short Viral Cycle Time] explains why YouTube exploded at a faster rate than ever seen before.

Perhaps I am being overly pedantic, but I think it might be more accurate to state:

This explains how YouTube exploded at a faster rate than ever seen before.

In my eyes, the distinction between ‘why’ and ‘how’ is non-trivial and needs to be recognized to avoid distortion by the biases hardwired into my brain.  ‘Why’ implies causation, while ‘how’ implies manner.  And I am of the opinion, that we don’t know why YouTube popped, but we may know how it did.  Again, I repeat, this is non-trivial.  Knowing the difference goes to the heart of the Customer Development methodology.

Please understand me, I am not saying that any of the possible causes I listed above may not have caused YouTube’s spectacular growth, I am simply saying we don’t know if they did.  Not only that we don’t know, but pretending to know, while natural, is not cost-less.  As start-up founders in efforts to duplicate such astronomical success/growth, all the while pretending to know its true cause, we are prone to draw the wrong lessons, likely to result in wasted money, and more importantly, time.  Not to mention the proverbial blood, sweat and tears.

This is why I am of the mind that founding (and investing in) a start-up with the intent of enjoying a future extra-normal financial success is best likened to maximizing one’s exposure to positive Black Swan Events.

As defined by Taleb:

What we call here a Black Swan (and capitalize it) is an event with the following three attributes.

First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.

Second, it carries an extreme impact.

Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.

I stop and summarize the triplet: rarity, extreme impact, and retrospective (though not prospective) predictability.

One could argue that startup founders are trying manufacture positive Black Swan Events, but if we accept Taleb’s definition, this would be a contradiction in terms.  (Nivi at Venture Hacks writes about how raising money for your startup is tantamount to searching for Black Swans.)

For the moment, let’s assume Taleb and I are right.  We cannot manufacture Black Swan Events, so then how do we, as startup founders, maximize our exposure to positive Black Swan Events?

First and foremost, I posit that we would be better off by thinking about startups through such a lens and accepting the sad fact that we, as humans, are born with cognitive biases (such as the narrative fallacy and confirmation error).

These cognitive biases are evolutionary adaptations that served us well for day-to-day activities prevalent during the Paleolithic, but unfortunately, aren’t appropriate for understanding the nature of technology startups.

Second, by rigorously but not dogmatically, employing Customer Development framework and methodologies which are intentionally constructed such that they correct for and recognize the existence of these distorting cognitive biases.

As Steve Blank writes:

The mistake isn’t having a vision and taking risks.  The mistake is assuming you are a Black Swan and continuing to ignore the facts as they pile up in front of you.

Not to mention ignoring a lack of facts as well!

If you haven’t read The Black Swan yet, I suggest reading it (a thoughtful review can be found here).  The implicit philosophical overlap and synergy between The Black Swan and The 4 Steps to the Epiphany are stunning.

In the meantime, I hope you have prosperous 2010 and hope you are exposed to a positive Black Swan Event sometime soon!

Thank you for your participation in the survey, especially if you were kind enough to tweet about it.  (While the raffle is over, if you haven’t responded, the survey is still open.) The purpose of the survey was two-fold.

First, we thought it would be interesting to see a little detail about who is involved with Customer Development. You can see those results here.

While the survey results add a bit of color to who is implementing Customer Development methodologies or thinking about doing Customer Development, I wouldn’t draw any hard conclusions from the data.  BTW for the those who read 4 Steps to the Epiphany, n ≈ 33.  For those who didn’t read 4 Steps to the Epiphany, n ≈ 28.

Second, we are thinking about tools, templates, and other resources to help people understand and implement Customer Development in their business ventures. Stay tuned, for in the coming months, we plan to make some of these resources available to you.

Almost forgot!  Our two winners of the random raffle are: Dave Concannon and Kevin Donaldson.

Thanks again to everyone.  Happy holidays!