Unit 7

Startup Methods - II
 Why do startups fail?
• Most startups die — likely upon contact
with customers.

• Good ideas can die the moment they hit

the market because it may not be the
right time or right place.

• Thus, flexibility, speed and the ability

to find out product-market fit are
critical.
Business Plans (vision) (why)
(Red Circle in slide 5)
People
Team, capabilities,
attitude, reputation

Deal Resources
Risks and Rewards, Business Financial, physical,
incentives, ownership plan intellectual
(Red Circle
in slide 5)

Opportunity
Customers, strategy,
business model
(Pink Circle in
slide 5)
Source: William A. Sahlman
 The Scalable Business Model
• Business plan > Business model
• Business plan (vision) (why) is a document presenting
the company's strategy and expected financial
performance for the years to come.
• Few business plans survive in the first contact with
customers.
• The business model is at the center of the business plan.
• A business model (How) is the mechanism through which
the company generates its profit.
• A business model diagrams how a company creates,
delivers, and captures value, or (simply) how a company
makes money.

Reference: Ann Miura-Ko and Steve Blank

  Thinking of the business model and plan, where do lean startup
methods fit in?

 The primary objective of a startup is to validate its business model

hypotheses until it finds one that is repeatable and scalable (it
continues to iterate and pivot until it does or runs out of time/money).

 Then it moves into execution mode. It’s at this point the startup needs
a business plan, a document that articulates the model, market,
competition, operating plan, financial requirements, forecasts, and
other well-understood management tools.

 Once a company has found a business model (meaning that it knows

its market, customers, product/service, channel, pricing, etc.), the
organization “graduates” from startup status and moves from search
mode to execution.

Source: Steve Blank

© The Board of Trustees of the Leland Stanford Junior University, 2015-2016. All rights reserved.
 Product Development Model (PDM)

Steve Blank: Customer Development in the High-Tech Enterprise, September 2008

© The Board of Trustees of the Leland Stanford Junior University, 2015-2016. All rights reserved.
 Review the traditional development model

Product development- a classic model of

business development from concept/seed
round through product development, alpha/beta
launch, and the launch/first shipment.

The questions here are about how customer

acceptance and market adoption will occur
and whether they are addressed in the
Product Development Model (PDM) or not.

© The Board of Trustees of the Leland Stanford Junior University, 2015-2016. All rights reserved.
 What is Wrong with the Product Development
Model (PDM)?

1. Lack of customer acceptance (where are the customers?)

2. Focus on a “First Customer Shipment Date” instead of
focusing on testing the business model
3. The Focus on Execution instead of focusing on Learning &
Discovery
4. Lack of Meaningful Milestones for Sales & Marketing
5. Lack of market adoption
1. Where Are the Customers?

To begin with, the product development model completely ignores

a fundamental truth about startups and new products.

The greatest risk in startups — and hence the greatest cause of

failure—is not the technology risk of developing a product but in
the risk of developing customers and markets.

Startups don’t fail because they lack a product; they fail because
they lack customers and a profitable business model.

This alone should be a pretty good clue about what’s wrong with
using the product development diagram as the sole guide to
what a startup needs to be doing.
Source: Steve Blank

© The Board of Trustees of the Leland Stanford Junior University, 2015-2016. All rights reserved.
Look at the Product Development model and you
might wonder, “Where are the customers?”

The reality for most startups today is that the product

development model focuses all their attention on
activities that go on inside a company’s own
building.

While customer input may be a checkpoint or

“gate” in the process, it doesn’t drive it.

Source: Steve Blank

© The Board of Trustees of the Leland Stanford Junior University, 2015-2016. All rights reserved.
 2. The Focus on a First Customer Ship Date

Using the Product Development model also forces sales

and marketing to focus on the end point of the process –
the first customer ship date.

Most sales and marketing executives hired into a

startup look at the “first customer ship date,” look at the
calendar on the wall, and then work backwards figuring out
how to do their job in time so that the fireworks start the
day the product is launched.

Source: Steve Blank

© The Board of Trustees of the Leland Stanford Junior University, 2015-2016. All rights reserved.
  The flaw in this thinking is that “first customer ship” is simply the
date when engineering thinks they “finished” the 1.0 release of the
product.

 The first customer ship date does not mean that the company
understands its customers, how to market or sell to them or how to
build a profitable business.

 The product development model is so focused on building and

shipping the product that it ignores the entire process of testing
your basic hypothesis about your business model (customers,
channel, pricing, etc.) before you ship.

 Not testing these hypotheses upfront is a fundamental and, in

many cases, fatal error most startups make.

Source: Steve Blank

© The Board of Trustees of the Leland Stanford Junior University, 2015-2016. All rights reserved.
 Why? Because it isn’t until after first customer ship that a
startup discovers that their initial hypotheses were simply
wrong (i.e. customers aren’t buying it, the cost of distribution
is too high, etc.)

As a result the young company is now saddled (burdened or

loaded) with an expensive, scaled-up sales organization
frustrated trying to execute a losing sales strategy and a
marketing organization desperately trying to create demand
without a true understanding of customers’ needs.

As Marketing and Sales flail (wave) around in search of a

sustainable market, the company is burning through its most
precious asset—cash. Source: Steve Blank

© The Board of Trustees of the Leland Stanford Junior University, 2015-2016. All rights reserved.
3.The Focus on Execution Versus Learning and Discovery

 The product development model assumes that customers

needs are known, the product features are known, and your
business model is known.

 Given this certainty, it’s logical that a startup will hire a sales
and marketing team to simply execute your business plan.

 You interview sales and marketing execs for prior relevant

experience and their rolodexes, and hope they execute the
playbook that worked for them in prior companies.

Source: Steve Blank

© The Board of Trustees of the Leland Stanford Junior University, 2015-2016. All rights reserved.
 4. The Lack of Meaningful Milestones for Sales, Marketing and
Business Development

 The plan calls for selling in volume the day Engineering is finished
building the product.

 Why, the business plan, crafted with a set of hypotheses now using the
product development model as a timeline for execution.

 This approach is not predicated on discovering the right market

or learning whether any customers will actually pay for the product.

 Instead it uses a product development timeline to determine your

readiness to sell.

Source: Steve Blank

© The Board of Trustees of the Leland Stanford Junior University, 2015-2016. All rights reserved.
 The concept of
“Build It and They Will Come”
The concept of “Build It and They Will Come” is:
• Only true for life & death products
› e.g. Biotech Cancer Cure
› Focus on Product development and distribution,
not customer acceptance and market adoption

• Not true for most other products

› Software, Consumer, Web
› Focus on customer acceptance and market adoption

• The concept of “ready or not, here we come” means that

you won’t know if the sales strategy and business plan
actually work until after “First Customer Shipment Date”.
 If startups fail from a Lack of Customers
not Product Development failure,

then why do we have:

• A process to manage Product Development Model

(PDM)?

• No process to manage Customer Development Model

(CDM)?

Steve Blank: Customer Development in the High-Tech Enterprise, September 2008

An In-expensive Fix
• The default in Product Development
Model (PDM) has been fixed by introducing
an in-expensive model called Customer
Development Model (CDM)?

• Customer Development Model (CDM):

focus on Customers and Markets from
Day One.

How?
Build a Customer Development Process

© The Board of Trustees of the Leland Stanford Junior University, 2015-2016. All rights reserved.
Customer Development in the High-Tech Enterprise September 2008
  Lean start ups use a “Get out of the building”
approach called Customer Development to test their
hypotheses and collect evidence about whether they
are true of false.

 They go out and ask potential users, purchasers,

and partners for feedback on all elements of the
business model, including product features, pricing,
distribution channels, and affordable customer
acquisition strategies.

Source: Steve Blank

© The Board of Trustees of the Leland Stanford Junior University, 2015-2016. All rights reserved.
Customer Development is as Important
as Product Development
Product Development

Customer Development in the High-Tech Enterprise, September 2008

© The Board of Trustees of the Leland Stanford Junior University, 2015-2016. All rights reserved.
 The Customer Development model breaks out all the customer-related
activities of an early stage company into four steps.

1. Customer discovery first captures the founders’ vision and turns it

into a series of business model hypotheses. Then it develops a plan
to test customer reactions to those hypotheses and turn them into facts.

2. Customer validation tests whether the resulting business model is

repeatable and scalable. If not, the team returns to customer discovery.

3. Customer creation is the beginning of execution. It builds end-user

demand and drives it into the sales channel to scale the business.

4. Company building transitions the organization from a startup to a

company focused on executing a validated model.

Source: Steve Blank

© The Board of Trustees of the Leland Stanford Junior University, 2015-2016. All rights reserved.
 Comparison between the models:
Customer Development Model (CDM) and
Product Development Model (PDM)

• CDM has a parallel process to PDM.

• CDM has Measurable checkpoints.

• CDM is not tied to “First Customer Shipment Date”, but

tied to customer milestones.

• CDM focus on market types to represent reality.

• CDM focus on on learning & discovery before execution.

© The Board of Trustees of the Leland Stanford Junior University, 2015-2016. All rights reserved.
 Customer Development Model (CDM): Big Ideas
The Customer Development model of a startup
starts with a simple premise:

Learning and discovering who a company’s

initial customers will be, and what markets
they are in, requires a separate and distinct
process from product development.

The sum of these activities is Customer

Development.
Source: Steve Blank

© The Board of Trustees of the Leland Stanford Junior University, 2015-2016. All rights reserved.
 Customer Development Model (CDM): Big Ideas,…

The Customer Development model is intended to be

everything the product development diagram is not.

• Where product development is focused on first

customer ship, the Customer Development model
moves learning about customers and their problems
as early in the development process as possible.

• In addition, the model is built on the idea that every

startup has a set of definable milestones that no
amount of funding can accelerate. More money is helpful
later, but not now.

Source: Steve Blank

© The Board of Trustees of the Leland Stanford Junior University, 2015-2016. All rights reserved.