The Customer Development MethodologyPresentation GoalsAn Analytical View of Early-Stage VenturesMIPSBuild It And They Will ComeMore startups fail from a lack of customers than from a failure of product developmentProduct Development ModelWhat’s Wrong With This?Slide 9Slide 10An Inexpensive FixBuild a Customer Development ProcessCustomer Development is as important as Product DevelopmentCustomer Development: Big IdeasCustomer Discovery: Step 1Customer Discovery: Exit CriteriaCustomer Validation: Step 2Customer Validation: Exit CriteriaSidebarThree Types of MarketsSlide 21Slide 22Existing Market DefinitionExisting Market ChasmExisting Market = Linear Sales GrowthResegmented Market Definition Low EndResegmented Market Definition NicheResegmented Market ChasmResegmented Market = Complex Sales GrowthNew Market DefinitionNew Market ChasmNew Market = Hockey Stick Sales CurveSlide 33Slide 34Customer Creation Step 3Customer Creation Big IdeasCompany Building: Step 4Company Building: Big IdeasCompany Building: Exit CriteriaFurther Reading Course Text at: www.cafepress.com/kandsranch or www.amazon.comThe Customer DevelopmentMethodologySteve [email protected] ENGINEERING 140AManagement of Technology Ventures Session 7 - April 25, 2006Presentation Goals •A new model for early stage ventures •Introduce the Customer Development modelAn Analytical View of Early-Stage VenturesMIPSBuild It And They Will Come•Only true for life and death products•i.e. Biotech Cancer Cure•Issues are development risks and distribution, not customer acceptance•Not true for most other products•Software, Consumer, Web, Services•Issues are customer acceptance and market adoption•Market Risk vs. Technology RiskMore startups fail from a lack of customers than from a failure of product development•We have process to manage product development•We have no process to manage customer developmentProduct Development ModelConcept/Seed RoundProduct Dev.Alpha/Beta TestLaunch/1st ShipWhat’s Wrong With This?Concept/Seed RoundProduct Dev.Alpha/Beta TestLaunch/1st ShipProduct Development- Create Marcom Materials- Create Positioning- Hire PR Agency- Early Buzz- Create Demand- Launch Event- “Branding”MarketingWhat’s Wrong With This?Concept/Seed RoundProduct Dev.Alpha/Beta TestLaunch/1st ShipProduct Development- Create Marcom Materials- Create Positioning- Hire PR Agency- Early Buzz- Create Demand- Launch Event- “Branding”• Build Sales OrganizationMarketingSales• Hire Sales VP• Hire 1st Sales StafWhat’s Wrong With This?Concept Product Dev.Alpha/Beta TestLaunch/1st ShipProduct Development- Create Marcom Materials- Create Positioning- Hire PR Agency- Early Buzz- Create Demand- Launch Event- “Branding”• Hire Sales VP or Country Manager• Pick distribution Channel• Build Sales Channel / DistributionMarketingSales• Hire First Bus Dev• Do deals for FCSBusiness DevelopmentAn Inexpensive FixFocus on Customers and Markets from Day OneHow?Build a Customer Development ProcessConcept/Bus. PlanProduct Dev.Alpha/Beta TestLaunch/1st ShipProduct DevelopmentCustomer Development? ? ? ?CompanyBuildingCustomer DevelopmentCustomerDiscoveryCustomer Development is as important as Product DevelopmentConcept/Bus. PlanProduct Dev.Alpha/Beta TestLaunch/1st ShipProduct DevelopmentCustomerValidationCustomer CreationCustomer Development: Big Ideas•Parallel process to Product Development•Measurable Checkpoints•Not tied to FCS, but to customer milestones•Notion of Market Types to represent reality•Emphasis is on learning & discovery before execution•Stop selling, start listening•There are no facts inside your building, so get outside•Test your hypotheses •Two are fundamental: problem and product conceptCustomer Discovery: Step 1CustomerDiscoveryCustomerValidationCompanyBuildingCustomerCreationCustomer Discovery: Exit Criteria•What are your customers top problems?•How much will they pay to solve them•Does your product concept solve them?•Do customers agree? •How much will they pay?•Draw a day-in-the-life of a customer•before & after your product•Draw the org chart of users & buyersCustomer Validation: Step 2CustomerDiscoveryCustomerValidationCustomer CreationCompanyBuilding•Develop a repeatable sales process•Only earlyvangelists are crazy enough to buyCustomer Validation: Exit Criteria•Do you have a proven sales roadmap?•Org chart? Influence map?•Do you understand the sales cycle?•ASP, LTV, ROI, etc.•Do you have a set of orders ($’s) validating the roadmap?•Does the financial model make sense?SidebarMarket Type The Three Types of StartupsThree Types of MarketsExisting Market Resegmented MarketNew MarketThree Types of Markets•Market Type effects everything you do in this step•Positioning•Branding•Spending•LaunchExisting Market Resegmented MarketNew MarketExisting Market Definition•Are there customers in the current market who:•Need the most performance possible?•Existing Market•Faster/Better = High endExisting Market ChasmExisting Market = Linear Sales GrowthResegmented Market DefinitionLow End•Are there customers at the low end who:•Would buy less (but good enough) performance •if they could get it at a lower price?•Resegmented Market 1•Cheaper = low endResegmented Market Definition Niche•Are there customers in the current market who:•buy the same product if it addressed their specific needs •if they could get it at the same price?•If it cost more?•Resegmented Market 2•Niche = marketing/branding drivenResegmented Market ChasmResegmented Market = Complex Sales GrowthYear 1Year 2Year 3Year 4Year 5Year 6Year 7New Market Definition•Is there a large customer base who couldn’t do this before?•Because of cost, availability, skill…?•New Market•Cheaper/good enough can create a new class of product/customer•Innovative/never existed beforeNew Market ChasmNew Market = Hockey Stick Sales CurveEnd of SidebarMIPSCustomer CreationStep 3CustomerDiscoveryCustomerValidationCustomer CreationCompanyBuilding•Creation comes after proof of sales•Creation is where you “cross the chasm”•It is a strategy not a tacticCustomer Creation Big Ideas•Big Idea 1: Grow customers from few to many•Big Idea 2: Four Customer Creation activities:•Year One objectives•Positioning•Launch•Demand creation•Big Idea 3: Creation is different for each of the three types of startupsCompany Building: Step