The Four Steps to the Epiphany

The Four Steps to the Epiphany The Four Steps to the Epiphany Successful Strategies for Products that Win Steven G. Blank Second Edition Third Edition Copyright © 2006 Steven G. Blank All rights reserved. No part of this book may be reproduced in any form whatsoever without permission, except in case of brief quotations embodied in critical articles or reviews. Published 2006 Printed by Lulu.com Third revised printing Acknowledgments | i Acknowledgments In my 25 years as a technology entrepreneur I was lucky to have three extraordinary mentors, each brilliant in his own field: Ben Wegbreit who taught me how to think, Gordon Bell who taught me what to think about, and Allen Michels who showed me how to turn thinking into direct and immediate action. I was also extremely fortunate to be working in Silicon Valley when three of its most influential marketing practitioners and strategists were active. As a VP of Marketing I was strongly influenced by the customer-centric books of Bill Davidow, former VP of Marketing of Intel and founder of Mohr, Davidow Ventures and consider myself fortunate to have had him on my board at MIPS Computers. Regis McKenna was already a PR and marketing legend with his own firm when I started my career, but his thinking and practice still resonates in my work. Finally, I still remember the hair rising on the back of my neck when I first read Geoff Moore and the notion of a “chasm.” It was the first time I realized that there were repeatable patterns of business behavior that could explain the heretofore unexplainable. At U.C. Berkeley Haas Business School, Jerry Engel, director of the Lester Center on Entrepreneurship, was courageous enough to give me a forum to test and teach the Customer Development Methodology to hundreds of unsuspecting students. Professor John Freeman at Haas has offered valuable insight on the different sales cycles by Market Type. Finally my long-suffering teaching partner at Haas, Rob Majteles, ensured that not only did my students get my enthusiasm, but also got a coherent syllabus and their papers graded and back on time. At Stanford, Tom Byers, Mark Leslie, Audrey Maclean and Mike Lyons were gracious enough to invite me to teach with them in the Graduate School of Engineering and hone my methodology as they offered additional insights on new product selling cycles. Finally, Columbia Business School allowed me to inflict the course and this text on their students in their joint MBA program with the Haas Business school. In the venture capital world in addition to funding some of my startups, John Feiber at MDV and Katherine Gould at Foundation Capital have acted as stalwart sounding boards and supporters. My friends Steve Weinstein, Bob Dorf, Bernard Fraenkel, Todd Basche and Jim Wickett have made innumerable and valuable comments and suggestions. Will Harvey and Eric Ries of IMVU were the first corporate guinea pigs to implement some or all of the Customer Development Methodology. This book was required reading for every new hire at their company. Fred Durham at CafePress allowed me to sit on his board and watch a world-class entrepreneur at work. Besides running engineering at IMVU Eric Ries also moonlighted as copyeditor and helped eliminate the embarrassing typos of the first revision. This book would be much poorer without all of their contributions. Finally, my wife Alison Elliott not only put up with my obsession with finding a methodology for early stage Customer Development, and my passion for teaching it, she added her wise counsel, insight and clarity to my thinking. This book would not have happened without her. Table of Contents ACKNOWLEDGMENTS I THE HERO’S JOURNEY iii WINNERS AND LOSERS V CHAPTER 1 THE PATH TO DISASTER: THE PRODUCT DEVELOPMENT MODEL 1 CHAPTER 2 THE PATH TO EPIPHANY: THE CUSTOMER DEVELOPMENT MODEL 15 CHAPTER 3 CUSTOMER DISCOVERY 27 CHAPTER 4 CUSTOMER VALIDATION 67 CHAPTER 5 CUSTOMER CREATION 101 CHAPTER 6 COMPANY BUILDING 133 BIBLIOGRAPHY 171 APPENDIX A CUSTOMER DEVELOPMENT TEAM 175 APPENDIX B CUSTOMER DEVELOPMENT CHECKLIST 181 ABOUT THE AUTHOR 231 The Hero’s Journey | iii Preface The Hero’s Journey A legendary hero is usually the founder of something—the founder of a new age, the founder of a new religion, the founder of a new city, the founder of a new way of life. In order to found something new, one has to leave the old and go on a quest of the seed idea, a germinal idea that will have the potential of bringing forth that new thing. — Joseph Campbell, Hero with a Thousand Faces Joseph Campbell popularized the notion of an archetypal journey that recurs in the mythologies and religions of cultures around the world. From Moses and the burning bush to Luke Skywalker meeting Obi wan Kenobi, the journey always begins with a hero who hears a calling to a quest. At the outset of the voyage, the path is unclear, and the end is not in sight. Each hero meets a unique set of obstacles, yet Campbell’s keen insight was that the outline of these stories was always the same. There were not a thousand different heroes, but one hero with a thousand faces. The hero’s journey is an apt way to think of startups. All new companies and new products begin with an almost mythological vision–a hope of what could be, with a goal that few others can see. It’s this bright and burning vision that differentiates the entrepreneur from big company CEOs and startups from existing businesses. Founding entrepreneurs are out to prove that their vision and business are real and not some hallucination; to succeed they must abandon the status quo and strike out on what appears to be a new path, often shrouded in uncertainty. Obstacles, hardships and disaster lie ahead, and their journey to success tests more than financial resources. It tests their stamina, agility, and the limits of courage. Most entrepreneurs feel their journey is unique. Yet what Campbell perceived about the mythological hero’s journey is true of startups as well: however dissimilar the stories may be in detail, their outline is always the same. Most entrepreneurs travel down the startup path without a roadmap and believe that no model or template could apply to their new venture. They are wrong. For the path of a startup is well worn, and well understood. The secret is that no one has written it down. Those of us who are serial entrepreneurs have followed our own hero’s journey and taken employees and investors with us. Along the way we’ve done things our own way; taking good advice, bad advice, and no advice. On about the fifth or sixth startup, at least some of us began to recognize that there was an emerging pattern between our successes and failures. Namely, that there is a true and repeatable path to success, a path that eliminates or mitigates the most egregious risks and allows the company to grow into a large, successful enterprise. One of us decided to chart this path in the following pages. Discovering the Path ”Customer Development” was born during my time spent consulting for the two venture capital firms who between them put $12 million into my last failed startup. (My mother kept asking if they were going to make me pay the money back. When I told her they not only didn’t want it back, but were trying to see if they could give me more for my next company, she paused for a long while and then said in a very Russian accent, “Only in America are the streets paved with gold.”) Both venture firms sought my advice for their portfolio companies. Surprisingly, I enjoyed seeing other startups from an outsider’s perspective. To everyone’s delight, I could quickly see what needed to be fixed. At about iv | The Four Steps to the Epiphany the same time, two newer companies asked me to join their boards. Between the board work and the consulting, I enjoyed my first-ever corporate “out-of-body experience.” No longer personally involved, I became a dispassionate observer. From this new vantage point I began to detect something deeper than I had seen before: there seemed to be a pattern in the midst of the chaos. Arguments that I had heard at my own startups seem to be repeated at others. The same issues arose time and again: big company managers versus entrepreneurs, founders versus professional managers, engineering versus marketing, marketing versus sales, missed schedule issues, sales missing the plan, running out of money, raising new money. I began to gain an appreciation of how world-class venture capitalists develop pattern recognition for these common types of problems. “Oh yes, company X, they’re having problem 343. Here are the six likely ways that it will resolve, with these probabilities.” No one was actually quite that good, but some VCs had “golden guts” for these kinds of operating issues. Yet something in the back of my mind bothered me. If great venture capitalists could recognize and sometimes predict the types of problems that were occurring, didn’t that mean that the problems were structural rather than endemic? Wasn’t something fundamentally wrong with the way everyone organizes and manages startups? Wasn’t it possible that the problems in every startup were somehow self-inflicted and could be ameliorated with a different structure? Yet when I talked to my venture capital friends, they said, “Well, that’s just how startups work. We’ve managed startups like this forever; there is no other way to manage them.” After my eighth and likely final startup, E.piphany, it became clear that there is a better a way to manage startups. Joseph Campbell’s insight of the repeatable patterns in mythology is equally applicable to building a successful startup. All startups (whether a new division inside a larger corporation or in the canonical garage) follow similar patterns—a series of steps which, when followed, can eliminate a lot of the early wandering in the dark. Looking back on startups that have thrived reflect this pattern again and again and again. So what is it that makes some startups successful and leaves others selling off their furniture? Simply this: startups that survive the first few tough years do not follow the traditional product- centric launch model espoused by product managers or the venture capital community. Through trial and error, hiring and firing, successful startups all invent a parallel process to product development. In particular, the winners invent and live by a process of customer learning and discovery. I call this process “Customer Development,” a sibling to “Product Development,” and each and every startup that succeeds recapitulates it, knowingly or not. This book describes the “Customer Development” model in detail. The model is a paradox because it is followed by successful startups, yet articulated by no one. Its basic propositions are the antithesis of common wisdom yet they are followed by those who succeed. It is the path that is hidden in plain sight. Winners and Losers | v Introduction Winners and Losers What if everything you think you know about taking products to market is wrong? What would you do differently if you realized that only 1 out of 10 new product introductions result in a profitable business? Would you continue to operate the same way, week after week, year after year? The surprising fact is that companies large and small, established corporate giants as well as brand new startups, fail in 9 out of 10 attempts to launch their new products. They unnecessarily burn through billions of dollars as they try to force their new products into markets where no one is waiting to buy. Yet time and again they all return to the same processes that produce failure. The phenomenon occurs over and over again in every product category, whether high tech, low tech, consumer products, or business-to-business products. Some new product disasters have become the stuff of legend: • Volkswagen Phaeton. Volkswagen took all of Toyota’s lessons in launching it’s high-end Lexus brand and ignored them. Cost to date: $500 million • Kodak’s Photo CD. Kodak offered film camera customers the ability to put their pictures on a compact disc and view them on their TV’s. It was 10 years ahead of its time and marketed to customers who were not ready for it. Viable early adopter market in corporate marketing departments ignored. Cost: $150 Million • Segway. Thought their market was everyone in the world who walked and confused world class public relations with customers with checkbooks. Still searching for their real markets. Cost to date: $200 million. • Apple’s Newton. They were right about the Personal Digital Assistant market but five years too soon. Yet they spent like they were in an existing market. Cost: $100 Million • Jaguar X-Type. Created a Ford-type, low-end product and slapped the Jag name on it, alienating their high-end customers. Cost: $200 million • Webvan. Groceries on demand: the killer app of the internet. The company spent money like a drunken sailor. Even in the Internet Bubble costs and infrastructure grew faster than the customer base. Loss: $800 million. • Sony’s MiniDisc players. A smaller version of the CD wildly popular in Japan. The US isn’t Japan. Cost to date: $500 million after 10 years of marketing. • R.J. Reynolds’ Premier and Eclipse smokeless cigarettes. Understood what the general public (nonsmokers) wanted, but did not understand that their customers didn’t care. Cost: $450 million • Motorola’s Iridium satellite-based phone system. Engineering triumph and built to support a customer base of millions. No one asked the customer if they wanted it. Cost $5 billion. Yes, billion. Satellites are awfully expensive. I could go on and on. And you probably have your own favorites you could add to the list. What if I told you that such disasters can be avoided? What if I told you that there are new product introduction methods available that dramatically increase the odds of a new product finding a home -- and at a minimum that guarantee that there will be a ready, willing, and paying customer base just waiting to get their hands on that new, new thing being lovingly grown in the R& D greenhouse? The methods I’m advocating in this book -- are easily explained and understood, but they run counter to the way most companies operate. There aren’t many managers around who are willing to reject the conventional wisdom that guides most firms in their quest to take new products to market. Those managers and entrepreneurs who do follow this different path find that there are eager customers for their products. To name a few who did it right in their recent, very successful product launches: vi | The Four Steps to the Epiphany • Proctor & Gamble’s Swiffer. A swiveling, disposable mop-on-a-stick. Sophisticated planning and consumer research have resulted in a $2.1 billion market in 2003 that could double by 2008. • Toyota’s Prius. They’ve found a profitable niche for their electric hybrid car. As a classic disruptive innovation, sales will grow and Toyota will continue to eat the existing US car companies for lunch. In its first five years sales grew to $5 billion. By 2015 hybrids could make up 35% of U.S. car market. • General Mills’ Yoplait GoGurt. Yogurt in a tube. The goal was to keep their yogurt consumer base of toddlers and little kids for as long as possible. Research led to the tube packaging, making yogurt easier to consume on the go. The Difference between the Winners and Losers Every company has some methodology for product development, launch and life-cycle management. These processes provide detailed plans, checkpoints and goals for every step in getting a product out the door; sizing markets, estimating sales, developing marketing requirements documents, prioritizing product features. Yet at the end of the day even with all these procedures the embarrassing fact is that 9 out of 10 of new products are failures. The difference between the winners and losers is simple. Products developed with senior management out in front of customers early and often - win. Products handed off to a sales and marketing organization that has only been tangentially involved in the new product development process lose. It’s that simple. The reality for most companies today is that existing product introduction methodologies are focused on activities that go on inside a company own building. While customer input may be a checkpoint or “gate” in the process it doesn’t drive it. This book is not another set of product development processes that are simple extensions of what already exists. New product mortality rates tell us that doesn’t work; the emperor simply has no clothes. Existing new product launch processes don’t offer prediction and guidance of customer behavior, therefore we need to build a new set of product development processes that will. What this book offers is a radical reexamination of the entire new product introduction process. It makes clear that companies need a parallel process to product development; one dedicated to bringing customers and their needs head first into the new product introduction process – before the product is ever launched or shipped. The lesson is clear: by listening to potential future customers’, by going out into the field and investigating potential customers needs and markets before being inexorably committed to a specific path and precise product specs – the difference between the winners and losers – and that’s the Customer Development Process described in this book. Who Is This Book For? When I first started writing this book, I thought its audience would be small and its applicability would be narrow. I first believed that my readers would be startup entrepreneurs. With this audience in mind, I went out to talk to venture capital firms and their portfolio company startups to test the Customer Development concepts. Many of these startups were past the “we’re just starting out” stage. At first, I thought the Customer Development model might be interesting reading for them, but not particularly germane to CEOs and other executives who were in the midst of building a company. This group had real day-to-day operational problems to solve, and the last thing on their minds was to read some abstruse text about what they should have done last year. But the more I talked to these startups and spent time understanding their issues, the more I realized that they were all under pressure to solve a common set of problems: Where is our market? Who are our customers? How do we build the right team? How do we scale sales? These issues are at the heart of the Customer Development methodology. Winners and Losers | vii Not surprisingly, there is a large body of literature on the success and failure of new products in large companies. The more I read and then talked to large corporations, the more I became convinced that the Customer Development model is even more applicable to existing companies attempting to launch new products into new markets. The challenge of understanding customers and finding a market is the same for a large company as for a startup. But large companies have established well- defined processes and procedures that are the antithesis of the Customer Development model. In other words, the guidelines for startin