This document discusses customer development and its importance for startups. It argues that product development alone is not enough and that startups need a parallel process focused on customer development from the beginning. This includes discovering customers, validating problems and solutions, creating customers, and building a company around them. Customer development should be iterative and focus on learning rather than linear execution. It is as important as product development for startup success.

2. Customer Development in the
High Tech Enterprise
MBA 295-F/EMBA 295-F
Customer and Agile Development
Steve Blank
sblank@kandsranch.com
2
3/27/10

3. Class 3: Agenda
! Logistics/Questions
! CASE: E-Ink
! Product Development
! Boyd & the OODA Loop
! Customer Development

4. It Started With a Question
If Startups Fail from a Lack of customers
not Product Development Failure
Then why do we have:
• process to manage product development?
• no process to manage customer development?

5. I Started Reading
• Lead User Research - Von Hippel • OODA Loop - Boyd
• Crossing the Chasm - Moore • Question-based Selling - Freese
• Entrepreneurial Mindset - McGrath/MacMillan • Solution Selling - Bosworth
• Innovators Dillema - Christensen • Conceptual/Strategic Selling - Heiman
• Profitable Value - Lanning • Spin Selling - Rackham
• Lanchester Strategy - Yano • US Marine Corps Warfighting Manual
• High Tech Marketing - Davidow • Tipping Point - Gladwell
Customer Customer Customer Company
Discovery Validation Creation Building

6. All We Had Was 30 Years of This
Concept/ Product Alpha/Beta Launch/
Seed Round Dev. Test 1st Ship
Product Development Model

7. What’s Wrong With This?
Product Development
Concept/ Product Alpha/Beta Launch/
Seed Round Dev. Test 1st Ship
- Create Marcom - Hire PR Agency - Create Demand
Marketing Materials - Early Buzz - Launch Event
- Create Positioning - “Branding”
7

8. What’s Wrong With This?
Product Development
Concept/ Product Alpha/Beta Launch/
Seed Round Dev. Test 1st Ship
- Create Marcom - Hire PR Agency - Create Demand
Marketing Materials - Early Buzz - Launch Event
- Create Positioning - “Branding”
• Hire Sales VP • Build Sales
Sales • Hire 1st Sales Staff Organization

9. What’s Wrong With This?
Product Development
Concept/ Product Alpha/Beta Launch/
Seed Round Dev. Test 1st Ship
- Create Marcom - Hire PR Agency - Create Demand
Marketing Materials - Early Buzz - Launch Event
- Create Positioning - “Branding”
• Hire Sales VP • Build Sales
Sales • Hire 1st Sales Staff Organization
Business
• Hire First • Do deals for FCS
Development
Bus Dev

10. 10 Things I Hate About
Product Development
1. Where are the Customers?
2. The Focus on First Customer Ship
3. Emphasis on Execution vs. Learning & Discovery
4. No Customer-centric milestones
5. Product dev. to measure Sales
6. Product dev. to measure Marketing
7. Premature Scaling
8. Death Spiral
9. Three Types of Startups
10. Unrealistic Expectations

11. Chasing The FCS Date
! Sales & Marketing costs are front loaded
" focused on execution vs. learning & discovery
! First Customer Ship becomes the goal
! Execution & hiring predicated on business plan hypothesis
! Heavy spending hit if product launch is wrong
! Financial projections, assumes all startups are the same
=
You don’t know if you’re wrong until you’re out of
business/money

12. An Inexpensive Fix
Focus on Customers and Markets
from Day One
How?

13. Boyd’s OODA “Loop”
Observe Orient Decide Act
Implicit Implicit
Unfolding Guidance Cultural
Guidance
Circumstances & Control Traditions & Control
Genetic
Heritage Analyses &
Observations Feed
Forward
Synthesis Feed Decision Feed Action
Forward Forward
(Hypothesis) (Test)
New
Previous
Information
Experience
Outside Unfolding
Information Interaction
With
Unfolding
Environment
Interaction Feedback
With
Environment Feedback
Orientation shapes observation, shapes decision, shapes action, and in turn is shaped by the feedback
and other phenomena coming into our observing window.
Competitive advantage comes from quickness over the entire “loop,” not just
from the O-to-O-to-D-to-A sequence.

14. Build a Customer Development Process
Product Development
Concept/ Product Alpha/Beta Launch/
Seed Round Dev. Test 1st Ship
Customer Development
? ? ? ?

15. Customer Development is as important
as Product Development
Product Development
Concept/ Product Alpha/Beta Launch/
Bus. Plan Dev. Test 1st Ship
Customer Development
Customer Customer Customer Company
Discovery Validation Creation Building

16. Customer Development is as important
as Product Development
Product Development
Concept/ Product Alpha/Beta Launch/
Bus. Plan Dev. Test 1st Ship
Customer Development
Customer Customer Customer Company
Discovery Validation Creation Building

17. Customer Development Heuristics
! There are no facts inside your building, so get
outside
" Founders in front of customers
! Find a Market for the Product as spec’d
" I.e Develop for the Few, not the Many
! Learning and Discovery versus linear execution
! Earlyvangelists make your company
! Market Types Matter

18. Customer & Product Development
Synchronization
Product Development
Concept/ Product Alpha/Beta Launch/
Bus. Plan Dev. Test 1st Ship
Customer Development
Customer Customer Customer Scale
Discovery Validation Creation Company

19. Product Development
Product Development
Concept/ Product Alpha/Beta Launch/
Bus. Plan Dev. Test 1st Ship
But really, how does this work?

20. Customer Development:
Big Ideas
! Parallel process to Product Development
! Measurable Checkpoints for the entire company
! Not tied to FCS, but to customer milestones
! Iterative to represent reality
! Executed by a small team including CEO

21. It Resulted in a Few Hypotheses
• Startups weren’t small versions of large companies
• They were about learning/discovery, not execution
• Entrepreneurs and their VC’s were executing on
guesses
• But the facts were outside the building

22. Which Turned Into A Model
Product Development
Concept/ Product Alpha/Beta Launch/1st
Bus. Plan Dev. Test Ship
+
Customer Development
Customer Customer Customer Company
Discovery Validation Creation Building

23. Eric Ries Extends the Model
• Took my class at U.C. Berkeley
• Co-founded IMVU
- 1st implementation of Customer Development
- Paired it with an Agile Development Model
• Observed that the sum of the two was powerful

24. Eric Ries: Insight - 1
Startups assumed development was “known”
Concept/ Product Alpha/ Launch/
Seed Dev. Beta Ship
Waterfall
!"#$%&"'"()*+
Solution: known
,"*%-(+
• I understood the problem .'/0"'"()123(+
was unknown Problem: known 4"&%56123(+
• Eric observed the solution 71%()"(1(6"+
was unknown in a startup

25. Eric Ries: Insight - 2
Agile matches the Customer Dev speed
Concept/ Product Alpha/ Launch/
Seed Dev. Beta Ship
Solution: unknown
• Agile was the development
methodology to use when the
solution was unknown

26. Eric Ries: Insight 3
Customer + Agile + Commodity = Lean
• Solving for both unknowns is the “Lean Startup”
Problem: Unknown Solution: Unknown
Source: Eric Ries

27. Jon Feiber @ MDV Insight
Not all Need Customer Development
• Market Risk vs. Technical Risk?
- Web is about customers & markets
- Biotech is about science & invention

28. John Boyd - Insight
The OODA “Loop”
Observe Orient Decide Act
Implicit Implicit
Unfolding Guidance Cultural
Guidance
Circumstances & Control Traditions & Control
Genetic
Heritage Analyses &
Observations Feed
Forward
Synthesis Feed Decision Feed Action
Forward Forward
(Hypothesis) (Test)
New
Previous
Information
Experience
Outside Unfolding
Information Interaction
With
Unfolding
Environment
Interaction Feedback
With
Environment Feedback
Orientation shapes observation, shapes decision, shapes action, and in turn is shaped by the feedback and
other phenomena coming into our observing window.

29. Iteration versus Execution
Iteration Execution
Customer Customer Customer Company
Discovery Validation Creation Building
The Search for a Business The Growth of a Business
Product/Market Fit

30. Iteration versus Execution
Product/Market Fit

31. Business Model
Affects Metrics and Exit Criteria