Jul 30, 2012
Table of contents:
The Startup Owner’s Manual is a complete reference guide for starting a company written by Steve Blank and Bob Dorf. It is based upon the theory of Customer Development and Agile and Lean engineering that has been pioneered over the last decade within the startup and entrepreneurial community. In fact it was Blank’s last book, The Four Steps to the Epiphany that first proposed that the old methodologies of starting a business were wrong. Over the decade since The Four Steps to the Epiphany was first published, thousands of entrepreneurs have used the Customer Development methodology to start their own companies. The Startup Owner’s Manual is therefore a realisation that the vision of The Four Steps was in fact correct and builds upon previous work to offer a complete guide to starting a company.
The first insight to understand is, the way big businesses are run is completely different to how a startup should be run. In a big business, the products, customers and the business model are all known facts. In a startup, none of this information is available to the entrepreneur and so a startup can be defined as an organisation that is in search of a repeatable and scalable business model. This requires a very different methodology than that for running a large established company. Business plans, projections and the traditional departments of marketing and sales are not relevant to a company still in search mode.
A startup must focus on Customer Development to find a problem and a market. Agile or Lean engineering should be utilised to ensure that time and money is not wasted building superfluous product features. The company must also be constantly looking to change or pivot, depending on the feedback from their Customer Development.
One of the greatest examples of a startup following the wrong methodology for starting a company is Webvan. Webvan was touted as one of the first killer applications of the Internet, a one-click solution to grocery shopping that would be used by every household in America. Webvan built extremely well engineered distribution centres and an intuitive website that could handle orders, send them to the warehouses and then have the most efficient route to the customer calculated for delivery. Webvan raised around $400 million in Venture Capital and $400 million from an IPO just 60 days after officially launching. When you look back at Webvan’s execution of their business plan, everything went right. Webvan had the finest engineers, management and an experienced CEO. They built innovate technology and had the resources to realise such a big vision. Yet 24 months after the initial launch, Webvan was bankrupt, burning through $800 million.
In hindsight, it’s easy to see where Webvan went wrong. Webvan was a disruptive technology that looked to take advantage of the new paradigm the Internet was creating. This was the first time this had ever been attempted and so the business model, customers and size of market were all just assumptions of a business plan. Webvan however approached the opportunity like a sustaining innovation and quickly built out large sales and marketing departments that quickly burned through cash without the demand to service. The business plan also predicted sales starting from the initial launch, a target that was almost guaranteed to miss.
The traditional “New Product Introduction Diagram” is as follows;
Concept -> Seed -> Product Development -> Alpha / Beta Test -> Launch / 1st ship
This seems like a logical progression and quite correctly forms the basis for launching sustainable products within a company that knows it’s market and customers. However, this is completely the wrong approach for startups that are searching for the answers to all of these questions. The problem with this methodology is that it is based on assumptions that are never proven wrong until the day of launch. Engineering starts off with a vision and the course is never adjusted based on customer feedback. A small selection of customers are generally consulted during the Alpha / Beta test stage, but by then it is too late. Traditional departments, like marketing and sales are built at a far too early stage because it mimics that of large companies. Huge amounts of cash is wasted on sales and marketing materials, campaigns and staff because these types of people are hired to execute a defined plan. No business plan survives the first contact with customers and nearly all assumptions can usually be proven wrong. A business plan will follow a logical set of steps to launch a product, but there is no time for testing and iterating based upon Customer Development and feedback.
This all leads a startup to launch a product without market fit and without the customers required to meet the sales targets of their original business plan.
The Customer Development methodology for startups is quite different to the traditional New Product Introduction methodology that is found in large companies. Customer Development advocates testing, learning, iterating and pivoting based upon customer feedback and appreciates failure as a journey to finding the right answers. This is in stark contrast to the traditional New Product Introduction Diagram above that moves from left to right and has no time for learning or iterating based upon feedback.
The Customer Development model is made up of the following four steps.
Unlike the traditional model, a founder cannot move to the next step until they have completed the current step. This forces the startup to get things right through an iterative process of pivots to find a scalable business model before moving on. This means that the startup has a solid, profitable way of building the company before they need to hire sales and marketing and build out the traditional departments of a big business.
A business plan is a document of guesses and estimations used to impress an investor or bank manager. No business plan survives the first contact with the customer and so we must use a better way to plan and track progress. The Customer Development Manifesto is a 14 point guide for conducting your Customer Development initiative at the founding of your startup. Getting outside the building, agile development and celebrating failure are just a couple of the rules and things to remember when seeking out evidence to prove or disregard your startup’s hypotheses. The Customer Development Manifesto is essentially an overview guide of how to approach and tackle Customer Development. From actionable tasks you should undertake, to the outlook and learning and vision your Customer Development should take on, these 14 points will ensure your Customer Development initiative puts you on the right path to find a scalable and repeatable business model.
It is this Customer Development Manifesto that provides the foundation for much of The Startup Owner’s Manual.
The first step in Customer Development is Customer Discovery. This is where you take your initial vision and start breaking down the elements into hypotheses that you will test with real potential customers. Based on the feedback from these customers, you then prove your hypothesis as either a pass or fail. You then adjust your hypotheses to account for this market feedback. During this stage you must develop a Minimal Viable Product (MVP) to show to your potential customers so they can give you feedback. The development of your first product should be restricted to the bare-minimum features that will convince your potential customers to pay for your product. You should also use an Agile engineering methodology to ensure you make changes iteratively and based on the knowns gathered from your Customer Discovery.
Customer Discovery is a process of taking your hypothesis, conducting an experiment and then making a decision on your future actions based on the results of that experiment. You only move on to the next stage of Customer Development once you have found a market and found a fit for your product. If you feel like you haven’t gathered enough clear evidence of product / market fit, you simply start the process again to find an opportunity worth pursuing.
The second critical stage of Customer Discovery is to get out of the building and understand the problems of your potential market. This process takes your MVP and discovers whether your vision will solve the problems of the target customer.
In the third and fourth phases of Customer Discovery, you continue to gather customer and market data and you assimilate all of your data and learnings to come to some hard conclusions. Customer Discovery is an iterative process for finding product / market fit, customers and a business model. If you reach the end of Customer Discovery without solid answers to these key areas, you simply start again and use what you have learnt so far to alter your approach. It is this final “Pivot or Proceed” phase that is so vitally important to the Customer Development methodology.
Once you have successfully completed Customer Discovery, it is now time to move on to Customer Validation. Customer Validation is the process of making the first sales and refining your proposition and positioning before scaling the company. It is during this phase that you begin to start selling your product to your customers.
The first phase of Customer Validation is preparing to sell. It is during this stage that you ready your MVP for sales. During Customer Discovery, you found a big enough problem to solve and found earlyvangelist customers who were looking for a solution. During the Customer Validation period, you begin selling your MVP to your contact list of earlyvangelist customers and you start to build a repeatable and scalable sales roadmap.
Customer Validation is still an intense period of learning, experimenting and testing your hypotheses to find solid concrete evidence and answers. You need to be getting out of your office to find, interact and talk with potential customers so you can build a repeatable process to sell your product once you reach the end of Customer Validation.
Customer Validation is hard because it forces you to get results. You need to take the assumptions of how you will get, keep and grow customers and prove that these are viable strategies. You need to be continually talking to potential customers and you need to keep on refining what you are learning to get more specific answers for your future Customer Creation strategy.
The final stage of Customer Validation is probably the hardest part of the Customer Development process so far. It is now where you objectively look through all of the data and information that you have collected so far and make a decision whether you pivot or proceed. Are customers desperate for your product or are you struggling to make sales? Are you solving an important enough problem? Do you have a clear way of acquiring new customers to satisfy your revenue projections?
If there are any lingering doubts about your future strategy or product, now is the time to turn back and go through the process once again. All would-be Entrepreneurs will be desperate to just forge ahead, but you are likely going to go down the path of failure. It is far easier to re-do the process and refine the areas of your business that aren’t quite right yet, then it is to fail.
The next stage of Customer Development is Customer Creation. During this stage you start executing your business plan instead of searching for answers. By this stage you should know exactly who your customers are, how you are going to acquire them and how are you going to grow and scale your company. If you do not fully complete the Customer Discovery and Customer Validation stages first, you are likely to waste a lot of money and ultimately kill your company during the Customer Creation stage.
It is at the Customer Creation stage where you should raise Venture Capital to fuel your growth. To an investor, you are a much safer bet because you have already done all the required searching to find a repeatable and scalable business model, and a product that solves a problem and a market that is ready to be attacked.
The Startup Owner’s Manual is a complete guide to starting a company and will take you step-by-step through the exact processes you need to build a successful business. The book is a manual, rather than a book that should be read from cover to cover and so it is designed to allow a startup founder to quickly read the suggested strategy to their current problem.
The Customer Development methodology is in stark contrast to the traditional New Product Introduction strategy that has failed many previous startup founders. Customer Development is based upon find answers and dispelling assumptions before you begin to scale your company. By following the Customer Development methodology, you can find a scalable and repeatable business model that is far more likely to be a success once it reaches scale.
The Lean Startup movement has been heavily influenced by the work of Steve Blank and is based upon the same principles.
The Founders Dilemmas is kind of like the opposite book to The Startup Owner’s Manual as it gives no practical advice, but will prepare you for the decisions you will be confronted with along the way.
I believe that The Startup Owner’s Manual is a critical investment to the future success of a startup. For people about to begin their journey, it gives you a clear roadmap and practical advice for what you should be doing at each step of the way. For current startup founders, you are almost guaranteed to find the answers to your problems within this manual.
Buy The Startup Owner’s Manual on Amazon (Affiliate link).