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.

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.

I think it’s important to understand that there is a new startup reality, that this reality is not based on fads, but represents a fundamental shift — i.e., there is no going back.

First, startups are a global phenomenon. If you don’t believe me, hitch a ride on one of Dave McClure’s Geeks on a Plane trip or note the different languages used to tweet about Lean Startups.  Not only are entrepreneurs creating new startups around the world, but the ability to hire quality resources and manage remote teams improves every year.

Second, startups are cheaper to start. By now this is stating the obvious, but with open source platforms and tools, the relative ease of building product (including hardware) compared to a decade ago, the emergence of social media and marketing analytics, and again, inexpensive global resources, mean that founders can get up and running toward proving elements of their business model for thousands of dollars.

Third, startups are social. Back in the day, the sole purpose of networking events was to exchange business cards and exercise ego.  It was about “what can you do for me.”  Today, it’s about “what can I do for you.”  In my experience, entrepreneurs today embrace the ethos of “providing value,” with the belief that value will someday, somewhere be provided back.  There is a desire for real entrepreneurial community that creates an incredibly fertile environment.

Fourth, startups are data-intelligent. While there’s always the risk of drowning in data, the fact is that entrepreneurs have an incredible amount of intelligence about their customers.  From resources that today seem incredibly mundane like dead-simple survey tools, to narrow, but powerful apps to test and measure user experience and interface design, to sophisticated analytics around marketing funnels and product feature usage, startups are able to “build, test, measure” like never before.

Fifth, startups are savvy.  By this I mean, that they are a smarter about building startups.  Not because they are more intelligent, but because they have 1-4 above.  They are more worldly-wise, they are open, they share, they are eager to learn and they have access to incredible mentoring.

Barring some global catastrophe like, I don’t know, the ice caps melting or something, none of the above is reverting back to the way it was in the past anytime soon.  Unable to predict the future, I’ll leave open whether bigger trends emerge.  But so given the above, what can we discern?

The macro changes described above have created a perfect storm for disruption to the startup environment.  It has given rise of the “super angel.”  Is has resulted in an explosion of incubators, accelerators, co-working spaces and mentorship programs.  It has enabled the successful emergence of the Lean Startup methodology. While in the micro- sense, as individuals, Eric Ries and Steve Blank are changing how startups are build and Dave McClure is helping change the investor landscape, from a macro- point of view, they are the result of disruption, not the cause.

I point this out not to diminish their accomplishments, but on the contrary, to argue 1) criticisms of their activity largely miss the real point; and 2) we don’t know yet how the environment will look, only that it won’t be the way it was before.

So with that, I will go ahead and predict where I think we’re headed.

Already, college students worldwide graduate believing they will launch a startup.  Go to any Startup Weekend or Lean Startup Machine event and listen to interesting pitches being made by weekend warriors.  It’s incredible.  Hundreds of thousands of would be startup entrepreneurs emerging globally every year.  We are witnessing a fundamental shift in power from investors to entrepreneurs.  Local communities are forming everywhere with entrepreneurship as their focus.  These ecosystems are emerging to support “grassroots entrepreneurship.”

All these startups cannot be funded by institutional investors.  Friends and family investors is already an accepted first effort, though VCs were preaching otherwise as recent as a couple of years ago.  Perhaps some still do.  The rise of early stage (even 5-10K) investments through wealthy individuals, angels and incubators is already occurring.

No matter how much some bemoan “dipshit” companies, sorry brother, they are here to stay.

The fall of the “big win” is permanent.  Investors, find a new model.  You can’t just bet on the needle in the ever-growing haystack.

The role of M&A will increase.  Big companies will struggle to keep up with both sustaining and disruptive innovation.  Acquisition is their only hope.  Secondary equity markets to merge synergistic startups will rise in prominence.

On the entrepreneurs’ side, Founders will continue to need to prove business models to get funding, so the use of Lean Startup or Lean Startup-like methodologies will accelerate, as well bootstrapping and crowdsourcing.

While some of this may seem obvious and some wild speculation, the fundamental factors driving the disruption are pretty indisputable.  And it’s important to distinguish between what we can do and changes we can drive versus what is changing us.  Such a perspective can help us at the very least, to picture the forest if not actually see it.

What is being created, in my estimation, is an innovation machine.   High-powered Lean Startups — fast pivoting toward product-market fit and capital efficient — are like “Moore’s Law for Startups”: increasing output on decreasing input, over time.  Imagine an environment where we embrace dozens of startups attacking similar problems, but with different solutions and targeting different segments.  Large businesses are perhaps constructed from small wins.  Big businesses innovate through acquisition.  Such an environment can only lead to more and faster disruptive innovation.

The real question then becomes, perhaps, how does society handle an increasing rate of disruptive innovation?

Right or wrongly, Thomas Robert Malthus (1766-1834) is held out as a representative of inevitable doom and gloom scenarios involving human existence.  Critics often point to technological advances as examples of how humans continually postpone, if not vanquish, Malthus’ scenarios.  There will always be those ready to declare, The End is Near! But there’s no denying the world faces extraordinary problems.  And I can’t help but feel that when you have a powerful groundswell of entrepreneurship occurring on the one hand, and an absurd peak of celebrating ignorance in our society on the other, that we are perhaps reaching toward the next epoch of innovation and enlightenment.

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.

• surveys
• automated customer feedback mechanisms (e.g., uservoice, get satisfaction, et. al.)
• embedded product use analytics
• marketing analytics
• feature request mechanisms
• sales calls
• product demo
• usability testing
• focus groups

Each has its place in the Customer Development process, but without live Customer Development Conversations, you are likely compromising your ability to learn your way to Product-Market fit or startup scaling.  What you seek to learn evolves over time, as do the tactics you employ, but every step of the way should be grounded in real time conversations.

Generally speaking:

Pre-Problem-Solution Fit, you concentrate on learning as much as you can about the problem, who are the real customers (user? buyer? boss?), and possible solutions.

Pre-Minimum Viable Product, you concentrate of learning, developing and testing the minimum features and functionality required o solve the problem to a degree the customer will buy.

Pre-Product-Market Fit, you concentrate on learning about funnels, testing messaging and positioning, and likely iterating on product and market segment in search of P-M fit.

The conversation itself is difficult for many. The key to effective conversations is in developing the conversation around your objectives for the discussion.  Establish 3 or 4 “must learns” for each conversation.  Depending on what you’re trying to learn, you can use “open-ended” questions and direct questions.  Use your conversations to calibrate your other tactics.  Are you asking the right questions in your surveys?  Do responses gibe?  Are product demos necessary from the buyer’s perspective?   Are users using the product the way they say they want to?

I thought I’d share some recent experiences my clients have had with customer development conversations to help illustrate conversation tactics.

1. Talk problem first, not solution.

Client: “I can’t stop talking about the solution.  It’s how the conversation starts.”

Clearly, whenever you meet someone for the first time, you need to introduce the space your product is in.  You must provide a context for the conversation.   You need to be able to state what you’re about succinctly, so you can move on to the purpose of the meeting.  Otherwise, you spend the whole time trying to explain what you’re doing.  This is why the elevator pitch is so important.   In a conversation, you don’t necessarily repeat the pitch verbatim, but you use components of it to steer the conversation.  So, for example, if you are testing your problem assumptions, use a classic sales cold call method of “flipping” the conversation from talking about yourself (solution) to the customer (problem):

Hi, I’m Brant Cooper from Market By Numbers, and I teach Founders Customer Development principles to help get their startups off the ground; (intro that provides context)

I often hear from startup CEOs like yourself, (The Flip)

That they have trouble figuring out how to prove their business model and how to prioritize what they should be working on; (problem hypotheses)

Do you experience this at all? (Open ended question)

Follow up questions depend on the answer.  If answer is no, you might say: “That’s great, it sounds like you have things under control. “What are the primary issues you face as CEO?” or “Do you hear other CEOs that talk about these issues?”

2. Except when that doesn’t work.

Client: “I couldn’t get her to describe her pain.  She kept wanting to know how she could help me!”

The contact was a senior person in the exact type of company needed to confirm a key hypothesis.  My solution would help her company’s relationship with its clients, but I couldn’t get her to talk about that.  Instead, she talked about problems her clients had and the opportunities available to solve them.  I asked if she was a sales person and it turns out she was.    I said it sounds like she’s a good sales person, who understands the needs of her clients, and a good contact, but not his customer. I suggested my client ask her to refer him to her company’s product managers who would be more likely to be interested in his ideas.  “More contacts to speak with” should always be a core objective.

If a problem statement doesn’t resonate, either your problem statement is not articulated correctly, is flat out wrong, or you are not talking to the your customer.

3. This is not feature mongering.

Client: “Conversation inevitably turns to features discussion.”

If you are talking about features, see 1. above.  If your contact or customer is talking features, slow it down by by asking why.  Use the same 5-whys approach Eric Ries talks about to discover a problem in your development process to figure out what is driving the feature request.  Continue to ask why the customer wants specific functionality until they are able to tell you the actual problem they’re trying to solve.  This helps you consider a couple of things.  First, is the feature a high priority to the customer?  Second, are you building the right Minimum Viable Product?  Obviously, one data point is not enough to draw conclusions, but it contributes to the analysis.

4. How to test messaging.

Client: “Can’t I just A/B test?”

It’s fine to use split testing to test messaging, but it’s most effective when you’re optimizing your funnel. If you do it too early, you actually don’t know if you are optimizing for the right product and market.  Also, you can find out that one message works better than another, but you can’t learn why.  In a live conversation, not only can you ask why a message doesn’t work, but you can test several iterations in the same conversation.   When testing messages live, I like to use the “pause method.”

5. Ask them.

Client: “Everyone says I need Facebook, Twitter, a blog.  How do I know?”

If there are two things the world doesn’t need more of, they are Internet Marketers and Social Media Gurus. It’s easy to get caught up in the excitement and clearly Internet and social media marketing can be effective.  But their effectiveness depends less on which expert you hire than whether your customer and their buying process intersect with your online tactics.  I spoke with a CEO recently who had two B2B deals in pilot for his new startup.  He had personally orchestrated the sales process through 1-1 relationship building in a carefully honed market segment. Yet his marketing plan called for Internet and social media marketing that didn’t jive with his experience.  He immediately described a shotgun approach to figure out what the right online channels would be.  While it might be the case that online marketing would be successful and even necessary to scale, at that time all evidence pointed to offline methods.  Using the “Flipping the Funnel” idea, I recommended he Ask his existing customers!  Here’s a question you can ask straight out to your contacts:  Do you belong to social networks?  Do influence your buying decisions? What blogs do you read, etc.

I hope you find this helpful.  What issues do you encounter during your Customer Development Conversations?

The more one adopts these principles, the more one can find ways to adopt them in all areas of life — they become “meta,” as Patrick Vlaskovits would say — and this event was no exception.  It was Lean Startup Machine’s Minimum Viable Product.

By all accounts (that I’ve heard), the event was a rousing success.  Here are some more or less random thoughts about the weekend, some of which I hope to cover in more depth soon:

1) I’m blown away by the people who attended: smart, opinionated, creative, dedicated team-players with some really interesting ideas.  And they all want to be startup founders.  Many will scoff at whether this is a good thing or not, but I think it’s great.

2) Customer Development is a great conflict resolution tool.  When you reach a loggerhead, formulate opposing opinions as hypotheses and go test them.

3) While there was reluctance among some and a few Engineers stayed inside completely, whole teams hit the streets of NYC to engage customers.  It was awesome to see!  I can’t wait for the video.

4) Clearly enterprise B2B ideas are at a disadvantage when it comes to weekend customer development.  But B2C rocked it and B2SMB took advantage of New York’s vast number of local businesses.

5) Good team balance was essential.  Those teams with naturally social members kicked customer development butt.  People were making phone calls to business owners across the country, setting up Craigslist ads, conducting surveys, interviewing by telephone and pounding the pavement for person-to-person discussions.  There was more combined customer development in one weekend than most startups do in a year!

6) Customer Development is hard.  Several assumptions were crushed over the weekend and for the more brutal failings, there were no easy follow on steps.  It’s one thing for a market segment to fail, it’s another when a core idea is roundly  rejected.  But it happened.   It’s easy to become demoralized by negative validation, but the teams pressed on.

7) We saw some amazing pivots, product mockups that reflected the changes, and then customer validation of the pivots!  That’s pretty amazing for a weekend’s work.

8 ) Some people had a tough time understanding the difference between seeking evidence for their idea and testing their assumptions.

9) This event has great potential.  There were some rough spots, but no major problems and the learning that went on was tremendous.

10) It will be interesting to hear more feedback, but my general impression is that this was the first real encounter with customer development for most of the participants and that the experience they gained was invaluable.  My belief is that to truly grok customer development, you must “get a win;” meaning you need to experience first hand the empowerment that comes from customer validated ideas.  I think we had a lot of that!

If there’s something in particular you’d like to hear more about the weekend, please let me know in comments.

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.

Figure 2. My interpretation of 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.)

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!