27,99 €
Mehr erfahren.
- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
The bestselling classic that launched 10,000 startups and new corporate ventures - The Four Steps to the Epiphany is one of the most influential and practical business books of all time. The Four Steps to the Epiphany launched the Lean Startup approach to new ventures. It was the first book to offer that startups are not smaller versions of large companies and that new ventures are different than existing ones. Startups search for business models while existing companies execute them. The book offers the practical and proven four-step Customer Development process for search and offers insight into what makes some startups successful and leaves others selling off their furniture. Rather than blindly execute a plan, The Four Steps helps uncover flaws in product and business plans and correct them before they become costly. Rapid iteration, customer feedback, testing your assumptions are all explained in this book. Packed with concrete examples of what to do, how to do it and when to do it, the book will leave you with new skills to organize sales, marketing and your business for success. If your organization is starting a new venture, and you're thinking how to successfully organize sales, marketing and business development you need The Four Steps to the Epiphany. Essential reading for anyone starting something new. The Four Steps to the Epiphany was originally published by K&S Ranch Publishing Inc. and is now available from Wiley. The cover, design, and content are the same as the prior release and should not be considered a new or updated product.
Sie lesen das E-Book in den Legimi-Apps auf:
Seitenzahl: 584
Veröffentlichungsjahr: 2020
Ähnliche
The Four Steps to the Epiphany
Successful Strategies for Products that Win
Steve Blank
Fifth Edition
Copyright © 2020 by Steve Blank. All rights reserved.
The cover, design, and content are the same as the prior release and should not be considered a new or updated product.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
The Four Steps to the Epiphany, fifth edition was originally published by K&S Ranch Publishing Inc., K&S Ranch Publishing Division in 2013.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002.
Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand.
If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.
ISBN 971119690351 (Hardcover)
ISBN 971119690283 (ePDF)
ISBN 971119690375 (ePub)
CONTENTS
Cover
The Hero's Journey
Introduction
Chapter 1 The Path to Disaster: The Product Development Model
The Product Development Model
What's Wrong With This Picture?
So What's The Alternative?
Chapter 2 The Path to Epiphany: The Customer Development Model
The Four Steps To The Epiphany
The Four Types Of Startup Markets
Synchronizing Product Development And Customer Development
Summary: The Customer Development Process
Notes
Chapter 3 Customer Discovery
The Customer Discovery Philosophy
Overview Of The Customer Discovery Process
Phase 0: Get Buy-In
Phase 1: State Your Hypotheses
A. State Your Hypotheses: The Product
B. State Your Hypotheses: Customer Hypotheses
C. State Your Hypotheses: Channel and Pricing Hypotheses
D. State Your Hypotheses: Demand Creation Hypotheses
E. State Your Hypotheses: Market Type Hypotheses
F. State Your Hypotheses: Competitive Hypotheses
Phase 2: Test And Qualify Your Hypotheses
B. Test and Qualify Your Hypotheses: The Customer Problem Presentation
C. Test and Qualify Your Hypotheses: In-Depth Customer Understanding
D. Test and Qualify Your Hypotheses: Market Knowledge
Phase 3: Test And Qualify The Product Concept
A. Test and Qualify the Product Concept: First Company Reality Check
B. Test and Qualify the Product Concept: Product Presentation
C. Test and Qualify the Product Concept: Yet More Customer Visits
D. Test and Qualify the Product Concept: Second Company Reality Check
E. Test and Qualify the Product Concept: First Advisory Board Members
Phase 4: Verify
A. Verify the Problem
B. Verify the Product
C. Verify the Business Model
D. Iterate or Exit
Notes
Chapter 4: Customer Validation
The Customer Validation Philosophy
Overview of the Customer Validation Process
Phase 1: Get Ready to Sell
Phase 2: Sell to Visionary Customers
Phase 3: Develop Positioning for the Company and Its Product
Phase 4: Verify
Chapter 5: Customer Creation
The Customer Creation Philosophy
Overview of the Customer Creation Process
Phase 1: Get Ready to Launch
A Note on “First Mover Advantage”
For an Existing Market
For a New Market
For Resegmenting a Market
Phase 2: Position the Company and Product
For an Existing Market
For a New Market
For Resegmenting a Market
Phase 3: Launch the Company and Product
For an Existing Market: Onslaught Launch
For a New Market: Early Adopter Launch
For Resegmenting a Market: Low -cost or Niche Launch
Phase 4: Create Demand
Notes
Chapter 6 Company Building
The Company-Building Philosophy
Building a Mainstream Customer Base
Building the Company's Organization and Management
Creating Fast-Response Departments
Overview of Company Building
Phase 1: Reach Mainstream Customers
Phase 2: Review Management and Build a Mission-Centric Organization
Phase 3: Transition the Customer Development Team into Functional Departments
Phase 4: Build Fast-response Departments
Notes
Bibliography
Entrepreneurial Management Stack
Must-Read Books
Strategy Books for Startups
Innovation and Entrepreneurship in the Enterprise
“War as Strategy” Books
Marketing Communications Books
Startup Law and Finance
Silicon Valley/Regional Clusters
Venture Capital
Startup Nuts & Bolts
Startup Textbooks
Manufacturing
Presentation and Product Design
Culture/Human Resources
Business History
Silicon Valley – Books
Books/Articles on the Entrepreneurial University
Appendix A: The Customer Development Team
Background: The Death Of The Departments
Appendix B: Customer Development Checklist
Acknowledgments
About The Author
Eight startups in 21 years
End User License Agreement
List of Tables
Chapter 2
Table 2.1
Table 2.2
Chapter 3
Table 3.1
Chapter 4
Table 4.1
Table 4.2
Table 4.3
Table 4.4
Table 4.5
Chapter 5
Table 5.1
Table 5.2
Table 5.3
Table 5.4
Table 5.5
Table 5.6
Table 5.7
Table 5.8
Table 5.9
Chapter 6
Table 6.1
Table 6.2
Table 6.3
Table 6.4
Table 6.5
Table 6.6
List of Illustrations
Chapter 1
Figure 1.1 The Product Development Model
Figure 1.2 The View from the Sales Organization
Figure 1.3 The View from the Marketing Organization
Figure 1.4 The Technology Life Cycle Adoption Curve
Chapter 2
Figure 2.1 The Customer Development Model
Chapter 3
Figure 3.1 Earlyvangelist Characteristics
Figure 3.2 Customer Discovery: Overview of the Process
Figure 3.3 Customer Types
Figure 3.4 ROI Calculation for ABC Bank
Figure 3.5 Distribution Channel Alternatives
Figure 3.6 Example of a Competitive Diagram
Figure 3.7 Example of a Market Map
Figure 3.8 Customer Problem Presentation
Chapter 4
Figure 4.1 Customer Validation: Overview of the Process
Figure 4.2 Direct Book-Publishing Food Chain
Figure 4.3 Indirect Book-Publishing Food Chain
Figure 4.4 Channel Responsibility Map
Figure 4.5 Channel Discounts
Figure 4.6 Channel Financials
Figure 4.7 Support and Approval Matrix
Figure 4.7a Example of an Influence Map
Figure 4.8 Example of an Access Map
Figure 4.9 Example of an Organizational Map
Figure 4.10 Example of a Selling Strategy
Figure 4.11 Example of a Sales Roadmap
Chapter 5
Figure 5.1 Customer Creation: Overview of the Process
Figure 5.2 Example of a Customer Market-Type Questionnaire
Figure 5.3 Example of an External Audit Questionnaire
Figure 5.4 Multiple Audiences: Your Target Audience Is Reached Via Messengers
Figure 5.5 Demand Creation's Role in the Sales Roadmap
Chapter 6
Figure 6.1 New Market Versus Existing Market Sales Growth Curves
Figure 6.2 Technology Life Cycle Adoption Curve and Customer Development
Figure 6.3 Stages in the Evolution from Startup to Large Company
Figure 6.4 Company Building: Overview of the Process
Figure 6.5 The Chasm in a New Market
Figure 6.6 New Market Sales Growth—The Hockey Stick
Figure 6.7 The Chasm in an Existing Market
Figure 6.8 Sales Growth in an Existing Market
Figure 6.9 The Chasm in a Resegmented Market
Figure 6.10 Sales Growth in a Resegmented Market
Figure 6.11 Template for Drafting a Corporate Mission Statement
Figure 6.12 Sample Mission Statement for a Marketing Department in a New Market
Figure 6.13 Fast-Response Departments, Mission-Centric Management & the Agile Company
Guide
Cover
Table of Contents
Preface
Pages
i
ii
v
vi
vii
ix
x
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
156
157
158
159
160
161
162
163
164
165
166
167
168
169
170
171
172
173
174
175
176
177
178
179
180
181
182
183
184
185
186
187
188
189
190
191
192
193
194
195
196
197
198
199
200
201
202
203
204
206
207
208
209
210
211
212
213
214
215
216
217
218
219
220
221
222
223
224
225
226
227
228
229
230
231
232
233
234
235
236
237
238
239
240
241
242
243
244
245
246
247
248
249
250
251
252
253
254
255
256
257
258
259
260
261
262
265
266
267
268
269
270
271
272
273
274
275
276
277
278
279
280
281
282
283
284
285
286
287
288
289
290
291
292
293
294
295
296
297
298
299
300
301
302
303
304
305
306
307
308
309
310
311
312
313
314
315
316
317
318
319
320
321
322
323
324
325
326
327
328
329
330
331
332
333
334
335
336
337
338
339
340
341
342
343
344
345
346
347
348
349
350
351
352
353
354
355
356
357
358
359
360
361
362
363
364
365
366
367
368
369
370
PREFACEThe 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 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 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 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 there was an emerging pattern between our successes and failures. Namely, 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 that 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 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 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 the problems were structural rather than endemic? Wasn't something fundamentally wrong with the way everyone organizes and manages startups? Wasn't it possible 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 there is a better 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. 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.
Introduction
Think Different
— Steve Jobs
When I wrote The Four Steps to the Epiphany over a decade ago, I had no idea I would be starting the Lean Startup revolution. Newly retired, with time to reflect on what I had learned from my 21 years as an entrepreneur, I was struggling to reconcile the reality of my experience with the then-common advice about how to start a company. Investors, VCs and educators all taught entrepreneurs to use the same process used in an established company. To be successful, you wrote a plan, raised money and then executed to the plan, all in a very linear direction.
My experience suggested that they were all wrong.
I spent several years working through a different approach to building startups. This became the Customer Development process and the idea of Market Types. In hindsight, I now realize that while educators and startup investors had adapted tools and processes useful for executing a business model, there were no tools and processes to search for a business model. It seemed obvious to me that searching is what startups actually do, but it was a pretty lonely couple of years convincing others.
Over time necessity – not investors or educators – drove the adoption of the Customer Development process. The emerging web, mobile and cloud apps, built with small teams already using agile development, needed a much faster process to acquire customer feedback. This new generation of entrepreneurs were rapid early adopters of customer development as it helped them reduce the odds of failing – by getting them out of the building to get early customer feedback – as they built their product incrementally and iteratively.
About a decade ago, after The Four Steps was published, I began teaching the Customer Development process as a full-semester course at U.C. Berkeley. A student in my first Berkeley class, Eric Ries, became the first practitioner and tireless evangelist of the process at IMVU, iterating and testing the process as I sat on his board. His insight coupled customer development to the emerging agile engineering practice, and together the two methodologies helped founders to rapidly iterate their products, guided by customer feedback.
A few years later, Alexander Osterwalder's business model canvas provided the Customer Development process with a much-needed front end to organize all of a startup's hypotheses into a simple framework that serves as a baseline and a scorecard for teams as they move through Customer Development.
These new ideas have coalesced into what has today become the Lean Startup movement. And hundreds of thousands of books later, the core ideas of The Four Steps have spread from startups to large corporations and the Lean Startup methodology has become the standard for commercializing scientific research in the U.S. It's taught in most major universities and in thousands of entrepreneurial programs around the world.
And it all started with this one book.
Who would've thought?
This third edition of The Four Steps to the Epiphany is substantively the same as the 2003 version. A few typos were corrected and unfinished sentences completed. The “update” to The Four Steps is The Startup Owner's Manual, published in 2012 with Bob Dorf. While The Four Steps remains the uber text, The Startup Owner's Manual builds on that work with a step-by-step process for building great companies using the business model canvas and the Customer Development process.
CHAPTER 1The Path to Disaster: The Product Development Model
… for the gate is wide and the road broad that leads to destruction, and those who enter through it are many.
— Matthew 7:13
EVERY TRAVELER STARTING A JOURNEY MUST decide what road to take. The road well traveled seems like the obvious choice. The same is true in the search for startup success: Following a path of common wisdom—one taken by scores of startups before—seems like the right way. Yet for most startups, the wide road often leads straight to disaster. This chapter looks at how and why this is so.
Let me begin with a cautionary tale. In the heyday of the dot-com bubble, Webvan stood out as one of the most electrifying new startups, with an idea that would potentially touch every household. Raising one of the largest financial war chests ever seen (over $800 million in private and public capital), the company aimed to revolutionize the $450 billion retail grocery business with online ordering and sameday delivery of household groceries. Webvan believed this was a “killer application” for the Internet. No longer would people have to leave their homes to shop. They could just point, click, and order. Webvan's CEO told Forbes magazine Webvan would “set the rules for the largest consumer sector in the economy.”
Besides amassing megabucks, the Webvan entrepreneurs seemed to do everything right.
The company raced to build vast automated warehouses and purchased fleets of delivery trucks, while building an easy-to-use website. Webvan hired a seasoned CEO from the consulting industry, backed by experienced venture capital investors. What's more, most of their initial customers actually liked their service. Barely 24 months after the initial public offering, however Webvan was bankrupt and out of business. What happened?
It wasn't a failure of execution. Webvan did everything its board and investors asked. In particular, the company religiously followed the traditional Product Development model commonly used by startups, including “get big fast,” the mantra of the time. Its failure to ask, “Where Are the Customers?” however, illuminates how a tried-and-true model can lead even the best-funded, best-managed startup to disaster.
The Product Development Model
Every company bringing a new product to market uses some form of Product Development Model (Figure 1.1). Emerging early in the 20th century, this product-centric model described a process that evolved in manufacturing industries. It was adopted by the consumer packaged goods industry in the 1950s and spread to the technology business in the last quarter of the 20th century. It has become an integral part of startup culture.
Figure 1.1 The Product Development Model
At first glance, the diagram appears helpful and benign, illustrating the process of getting a new product into the hands of waiting customers. Ironically, the model is a good fit when launching a new product into an established, well-defined market where the basis of competition is understood, and its customers are known.
The irony is that few startups fit these criteria. Few even know what their market is. Yet they persist in using the Product Development model not only to manage Product Development, but as a roadmap for finding customers and to time their sales launch and revenue plan. The model has become a catchall tool for every startup executive's schedule, plan, and budget. Investors use the Product Development model to set and plan funding. Everyone involved uses a roadmap designed for a very different location, yet they are surprised when they end up lost.
To see what's wrong with using the Product Development model as a guide to building a startup, let's first look at how the model is currently used to launch a new product. We'll view the actions at each step in two ways: in general practice and in the specific example of Webvan, which managed to burn through $800 million in three years. Then we will dissect the model's toxic consequences for startups.
What's wrong with the old model in general, and how did Webvan compound those wrongs in their billion-dollar implosion? Let's look at the model stage-by-stage.
Concept and Seed Stage
In the Concept and Seed Stage, founders capture their passion and vision for the company and turn them into a set of key ideas, which quickly becomes a business plan, sometimes on the back of the proverbial napkin. The first thing captured and wrestled to paper is the company's vision.
Next, issues surrounding the product need to be defined: What is the product or service concept? Is it possible to build? Is further technical research needed to ensure the product can be built? What are the product features and benefits?
Third, who will the customers be and where will they be found? Statistical and market research data plus potential customer interviews determine whether the ideas have merit.
Step four probes how the product will ultimately reach the customer and the potential distribution channel. At this stage companies start thinking about who their competitors are and how they differ. They draw their first positioning chart and use it to explain the company and its benefits to venture capitalists.
The distribution discussion leads to some basic assumptions about pricing. Combined with product costs, an engineering budget, and schedules, this results in a spreadsheet that faintly resembles the first financial plan in the company's business plan. If the startup is to be backed by venture capitalists, the financial model has to be alluring as well as believable. If it's a new division inside a larger company, forecasts talk about return on investment. Creative writing, passion, and shoe leather combine in hopes of convincing an investor to fund the company or the new division.
Webvan did all of this extremely well. Founded in December 1996, with a compelling story, and a founder with a track record, Webvan raised $10 million from leading Silicon Valley venture capitalists in 1997. In the next two years, additional private rounds totaling an unbelievable $393 million would follow before the company's IPO (initial public offering).
Product Development
In stage two, Product Development, everyone stops talking and starts working. The respective departments go to their virtual corners as the company begins to specialize by functions.
Engineering designs the product, specifies the first release and hires a staff to build the product. It takes the simple box labeled “Product Development” and using a Waterfall development process makes detailed critical path method charts, with key milestones. With that information in hand, Engineering estimates delivery dates and development costs.
Meanwhile, Marketing refines the size of the market defined in the business plan (a market is a set of companies with common attributes), and begins to target the first customers. In a well-organized startup (one with a fondness for process) the marketing folk might even run a focus group or two on the market they think they are in and prepare a Marketing Requirements Document (MRD) for Engineering. Marketing starts to build a sales demo, writes sales materials (presentations, data sheets), and hires a PR agency. In this stage, or by alpha test, the company traditionally hires a VP of Sales.
In Webvan's case, Engineering moved along two fronts: building the automated warehouses and designing the website. The automated warehouses were a technological marvel, far beyond anything existing grocery chains had. Automated conveyors and carousels transported food items off warehouse shelves to workers who packed them for delivery. Webvan also designed its own inventory management, warehouse management, route management, and materials handling systems and software to manage the customer ordering and delivery flow processes. This software communicated with the Webvan website and issued instructions to the various mechanized areas of the distribution center to fulfill orders. Once a delivery was scheduled, a route-planning feature of the system determined the most efficient route to deliver goods to the customer's home.
At the same time, planning began for a marketing and promotion program designed to strengthen the Webvan brand name, get customers to try the service in the first target market, build customer loyalty, and maximize repeat usage and purchases. The plan was to build Webvan's brand name and customer loyalty through public relations programs, advertising campaigns, and promotional activities.
Alpha/Beta Test
In stage three, alpha/beta test, Engineering works with a small group of outside users to make sure the product works as specified and tests it for bugs. Marketing develops a complete marketing communications plan, provides Sales with a full complement of support material, and starts the public relations bandwagon rolling. The PR agency polishes the positioning and starts contacting the long lead-time press while Marketing starts the branding activities.
Sales signs up the first beta customers (who volunteer to pay for the privilege of testing a new product), begins to build the selected distribution channel, and staffs and scales the sales organization outside the headquarters. The venture investors start measuring progress by number of orders in place by first customer ship.
Hopefully, somewhere around this point the investors are happy with the company's product and its progress with customers, and the investors are thinking of bringing in more money. The CEO refines his or her fund-raising pitch, and hits the street and the phone searching for additional capital.
Webvan began to beta-test its grocery delivery service in May 1999 to approximately 1,100 people. At the same time, the marketing buzz started with a PR blitz as hundreds of articles appeared touting the newest entrant in the online grocery business. Private investors poured hundreds of millions of dollars into the company.
Product Launch and First Customer Ship
Product launch and first customer ship mark the final step in this model, and what the company has been driving for. With the product working (sort of), the company goes into “big bang” spending mode. Sales is heavily building and staffing a national sales organization; the sales channel has quotas and sales goals. Marketing is at its peak. The company has a large press event, and Marketing launches a series of programs to create end-user demand (trade shows, seminars, advertising, email, and so on). The board begins measuring the company's performance on sales execution against its business plan (which typically was written a year or more earlier, when the entrepreneur was looking for initial investments).
Building the sales channel and supporting the marketing can burn a lot of cash. Assuming no early liquidity (via an IPO or merger) for the company, more fund raising is required. The CEO looks at the product launch activities and the scale-up of the sales and marketing team, and yet again goes out, palm up, to the investor community. (In the dot-com bubble economy, investors used an IPO at product launch to take the money and run, before there was a track record of success or failure.)
If you've ever been involved in a startup, the operational model no doubt sounds familiar. It is a product-and process-centric model used by countless startups to take their first product to market.
Webvan launched its first regional Webstore in June 1999 (just one month after starting beta test) and filed for its public offering 60 days later. The company raised $400 million and had a market capitalization of $8.5 billion the day of its IPO—larger than the top three grocery chains combined.
What's Wrong With This Picture?
Given that the Product Development model is used by almost every organization launching a new product, asking what's wrong with it might seem as heretical as asking “What's wrong with breathing?” Nevertheless, for Webvan and thousands of other startups, it has failed miserably.
The first hint lies in its name. The Product Development model is not a marketing, sales hiring, customer acquisition, or even a financing model. Yet startup companies have traditionally used a Product Development model to manage and pace all these non-engineering activities. In fact, there are 10 major flaws to using the Product Development model in a startup.
1. Where Are the Customers?
To begin with, the Product Development model ignores the fundamental truth about startups and all new products. The greatest risk—and hence the greatest cause of failure—in startups is not in the development of the new product but in the development of customers and markets. Startups don't fail because they lack a product; they fail because they lack customers and a proven financial model. This alone should be a pretty good clue about what's wrong with using the Product Development model as the sole guide to what a startup needs to be doing. Look at the Product Development model and ask, “Where are the customers?”
2. The Focus on First Customer Ship Date
Using the Product Development model forces sales and marketing to focus on the first customer ship date. Most competent sales and marketing executives look at the first customer ship date, look at the calendar, and then work backwards figuring out how to do their job in time so the fireworks start the day the product is launched.
The flaw in this thinking is that “first customer ship” is only the date when Product Development thinks they are “finished” building the product. The first customer ship date does not mean the company understands its customers or how to market or sell to them. (Read the preceding sentence again. It's a big idea.) Yet in almost every startup, ready or not, the sales, marketing, and business development people are busy setting their departmental watches to the first customer ship date. Even worse, a startup's investors are managing their financial expectations by this date as well.
Investors say: “Why of course that's what you do. Getting the product to market is what sales and marketing people do in startups. That's how a startup makes money.” This is deadly advice. Ignore it. Focusing only on first customer ship results in a “Fire, Ready, Aim” strategy. Obviously, your new division or company wants to get a product to market and sell it, but that cannot be done until you understand who you are selling your product to and why they will buy it. The Product Development model is so focused on building and shipping the product that makes the fundamental and fatal error of ignoring the process I call Customer Discovery.
Think about every startup you've been in or known about. Haven't the energy, drive, and focus been on finishing the product and getting it to market? Think about what happens after the first customer ship party is over, the champagne is flat, and the balloons are deflated. Sales now must find the quantity of customers the company claimed it could find when it first wrote its business plan. Sure, Sales may have found a couple of “beta” customers, but were they representative of a scalable mainstream market? (A mainstream market is where the majority of people in any market segment reside. They tend to be risk-averse, pragmatic purchasers.) Time after time, only after first customer ship, do startups discover their early customers don't scale into a mainstream market, the product doesn't solve a high-value problem, or the cost of distribution is too high. While that's bad enough, these startups are now burdened with an expensive, scaled-up sales organization getting increasingly frustrated trying to execute a losing sales strategy, and a marketing organization desperately trying to create demand without a true understanding of customers’ needs. And as Marketing and Sales flail around in search of a sustainable market, the company is burning through its most precious asset—cash.
At Webvan, the dot-com mania may have intensified their inexorable drive to first customer ship, but its single-minded focus was typical of most startups. At first customer ship, Webvan had close to 400 employees. It hired over 500 more during the next six months. By May 1999 the company opened its first $40 million distribution center, built and scaled for a customer base it could only guess at, and had committed to 15 more distribution centers of the same size. Why? Because the Webvan business plan said that was the goal—regardless of whether the customer results agreed.
3. An Emphasis on Execution Instead of Learning and Discovery
In startups the emphasis is on “get it done, and get it done fast.” So it's natural that heads of Sales and Marketing believe they are hired for what they know, not what they can learn. They assume their prior experience is relevant in this new venture. They assume they understand the customer problem and therefore the product that needs to be built and sold. Therefore they need to put that knowledge to work and execute the product development, sales and marketing processes and programs that have worked for them before.
This is usually a faulty assumption. Before we can build and sell a product, we have to answer some very basic questions: What are the problems our product solves? Do customers perceive these problems as important or “must-have”? If we're selling to businesses, who in a company has a problem our product could solve? If we are selling to consumers how do we reach them? How big is this problem? Who do we make the first sales call on? Who else has to approve the purchase? How many customers do we need to be profitable? What's the average order size?
Most entrepreneurs will tell you, “I know all the answers already. Why do I have to do it again?” It's human nature that what you think you know is not always what you know. A little humility goes far. Your past experience may not be relevant for your new company. If you already know the answers to the customer questions, the Customer Development process will go quickly and reaffirm your understanding.
A company needs to answer these questions before it can successfully ramp up sales. For startups in a new market, these are not merely execution activities; they are learning and discovery activities critical to the company's success or failure.
Why is this distinction important? Take another look at the Product Development model. Notice it has a nice linear flow from left to right. Product Development, whether it is intended for large companies or consumers, is a step-by-step, execution-oriented process. Each step happens in a logical progression that can be PERT charted (a project management technique for determining how much time a project takes to complete), with milestones and resources assigned to completing each step.
Yet anyone who has ever taken a new product out to a set of potential customers can tell you a good day in front of customers is two steps forward and one step back. In fact, the best way to represent what happens outside the building is with a series of recursive circles—recursive to represent the iterative nature of what actually happens in a learning and discovery environment. Information and data are gathered about customers and markets incrementally, one step at a time. Yet sometimes those steps take you in the wrong direction or down a blind alley. You find yourself calling on the wrong customers, not understanding why people will buy, not understanding what product features are important. The ability to learn from those missteps is what distinguishes a successful startup from those whose names are forgotten among the vanished.
Like all startups focused on executing to plan, Webvan hired a vice president of merchandising, a vice president of marketing and a vice president of product management—to head three groups oriented around executing a sales strategy, not learning and discovering customer needs. Sixty days after first customer ship these three groups employed over 50 people.
4. The Lack of Meaningful Sales, Marketing and Business Development Milestones
The one great thing you can say about Product Development using a Waterfall methodology is that it provides an unambiguous structure with clearly defined milestones. The meaning of requirements documents, functional specifications, implementation, alpha test, beta test, and first customer ship are obvious to most engineers. If the product fails to work, you stop and fix it. In stark contrast, sales and marketing activities before first customer ship are ad hoc, fuzzy, and absent measurable, concrete objectives. They lack any way to stop and fix what's broken (or even to know if it is broken, or how to stop at all).
What kind of objectives would a startup want or need? That's the key question. Most sales executives and marketers tend to focus on execution activities because these are measurable. For example, in sales, revenue matters most. Sales uses revenue as its marker of progress in understanding customers. Some startup sales execs also believe hiring the core sales team is a key objective. Others focus on acquiring early “lighthouse” customers (prominent customers who will attract others). Marketers believe creating corporate presentations, data sheets, and collateral are objectives. Some think hiring a PR agency, starting the buzz and getting on the covers of magazines at launch are objectives.
In reality none of these is the true objective. Simply put, a startup should focus on reaching a deep understanding of customers and their problems, their pains, and the jobs they need done to discover a repeatable roadmap of how they buy, and building a financial model that results in profitability.
The appropriate milestones measuring a startup's progress answer these questions: How well do we understand what problems customers have? How much will they pay to solve those problems? Do our product features solve these problems? Do we understand our customers’ business? Do we understand the hierarchy of customer needs? Have we found visionary customers, ones who will buy our product early? Is our product a must-have for these customers? Do we understand the sales roadmap well enough to consistently sell the product? Do we understand what we need to be profitable? Are the sales and business plans realistic, scalable, and achievable? What do we do if our model turns out to be wrong?
Webvan had no milestones saying “stop and evaluate the results” (2,000 orders per day versus 8,000 forecasted) of its product launch. Before any meaningful customer feedback was in hand, and only a month after the product started shipping, Webvan signed a $1 billion deal (yes, $1,000,000,000) with Bechtel. The company committed to the construction of up to 26 additional distribution centers over the next three years. Webvan leapt right over learning and discovery in its rush to execution. There is a big difference between a process that emphasizes getting answers to the fundamental questions I've listed above and a process using the Product Development model to keep early sales and marketing activities in sync with first customer ship. To see what I mean, consider the Product Development model from the perspective of people in sales and marketing (Figure 1.2).
Figure 1.2 The View from the Sales Organization
5. The Use of a Product Development Methodology to Measure Sales
Using the Product Development Waterfall diagram for Customer Development activities is like using a clock to tell the temperature. They both measure something, but not the thing you wanted.
Figure 1.2 shows what the Product Development model looks like from a sales perspective. A VP of Sales looks at the diagram and says, “Hmm, if beta test is on this date, I'd better get a small sales team in place before that date to acquire my first ‘early customers.’ And if first customer ship is on this date over here, then I need to hire and staff a sales organization by then.” Why? “Well, because the revenue plan we promised the investors shows us generating customer revenue from the day of first customer ship.”
I hope this thinking already sounds inane to you. The plan calls for selling in volume the day Engineering is finished building the product. What plan says that? Why, the business plan, which uses the Product Development model to set milestones. The consequence of selling isn't predicated on discovering the right market or whether any customers will shell out cash for your product. Instead the Product Development model times your readiness to sell. This “ready or not, here we come” attitude means you won't know if the sales strategy and plan actually work until after first customer ship. What's the consequence if your stab at a sales strategy is wrong? You've built a sales organization burning cash, cash that needs to be redirected in a hurry. No wonder the half-life of a startup VP of Sales is about nine months post-first customer ship. “Build it and they will come,” is not a strategy; it's a prayer.
Webvan had this problem in spades. After first customer ship, Webvan had a nasty surprise waiting for it. Customers refused to behave the way the Webvan business plan said they would. Six months after Webvan's June 1999 launch, the average daily volume of orders was 2,500. Sounds pretty good? Not bad for a startup? It was. Unfortunately, the Webvan business plan had forecast 8,000 orders per day, a number necessary for the company to achieve profitability. This meant the distribution center (designed to process product volumes equivalent to approximately 18 supermarkets) was operating at less than 30% of capacity. Oops.
6. The Use of a Product Development Methodology to Measure Marketing
The head of Marketing looks at the same Product Development Waterfall diagram and sees something quite different (see Figure 1.3). For Marketing, first customer ship means feeding the sales pipeline with a constant stream of customer prospects. To create this demand, marketing activities start early in the Product Development process. While the product is being engineered, Marketing starts creating corporate presentations and sales materials. Implicit in these materials is the “positioning” of the company and product. Looking ahead to the product launch, the marketing group hires a public relations agency to refine the positioning and begin generating early “buzz” about the company. The PR agency helps the company understand and influence key industry analysts, luminaries, and references. All this leads up to a flurry of press events and interviews geared to the product launch date. (During the Internet bubble, one more function of the marketing department was to “buy” customer loyalty with enormous advertising and promotion spending to create a brand.)
Figure 1.3 The View from the Marketing Organization
At first glance this process may look quite reasonable, except for one small item: All this marketing activity occurs before customers start buying—that is, before Sales has had a chance to test the positioning, marketing strategy, or demand-creation activities in front of real customers. In fact, all the marketing plans are made in a virtual vacuum of real customer feedback and information. Of course, smart marketers have some early interaction with customers before the product ships, but if they do, it's on their own initiative, not as part of a well-defined process. Most first-time marketers spend a large part of their time behind their desks. This is somewhat amazing, since in a startup no facts exist inside the building, only opinions. Yet even if we get the marketing people out from behind their desks and into the field, the deck remains stacked against their success. Look at the Product Development model. When does Marketing find out whether the positioning, buzz, and demand creation activities actually work? After first customer ship. The inexorable march to this date has no iterative loop that says, “If our assumptions are wrong, maybe we need to try something different.”
This “marketing death march” happened at Webvan. In its first six months of business, Webvan acquired an impressive 47,000 new customers. However, in those six months 71% of the 2,000 orders coming in per day were from repeat customers. This meant Webvan needed more new customers, and it needed to reduce the number of customers who ordered once and never used the service again.
These facts contradicted the marketing assumptions in the original business plan. As happens in most startups, those assumptions were wrong. Yet Webvan had scaled its spending (particularly on building and operating large distribution centers) on these unverified guesses.
7. Premature Scaling
Having Sales and Marketing believe that by first customer ship, come hell or high water, they need fully staffed organizations leads to another disaster: premature scaling.
Startup executives have three documents to guide their hiring and staffing: a business plan, a Product Development model and a revenue forecast. All are execution documents – they document spending and hiring as if success is assured. As mentioned earlier there are no milestones saying, “Stop or slow down hiring until you understand customers.” Even the most experienced executives succumb to the inexorable pressure to hire and staff to “plan” regardless of early customer feedback. In Webvan's case premature scaling was an integral part of the company culture and the prevailing venture capital “get big fast” mantra. Webvan spent $18 million to develop proprietary software and $40 million to set up its first automated warehouse before it had shipped a single item. Premature scaling had dire consequences since Webvan's spending was on a scale that ensures it will be taught in business school case studies for years to come.
As customer behavior continued to differ from the predictions in Webvan's business plan, the company slowly realized it had overbuilt and over-designed. The business model made sense only at the high volumes predicted on the spreadsheet. The average daily volume of orders was significantly below the capacity the company needed to achieve profitability. To have any hope of achieving favorable gross margins, Webvan had to find a way to substantially increase its volume, number of customers, number of orders placed by its customers, and average order size.
8. Death Spiral: The Cost of Getting Product Launch Wrong
Premature scaling is the immediate cause of the Death Spiral. Premature scaling causes the burn rate to accelerate. Sales, salaries, facilities, infrastructure costs, recruiting fees, and travel expenses start cutting into the company's cash flow. The pressure for revenue grows exponentially. Meanwhile the marketing department is spending large sums on creating demand for the sales organization. It is also spending “credibility capital” on positioning and explaining the company to the press, analysts, and customers.
By the time of first customer ship, if the company does not understand its market and customers, the consequences unfold in a startup ritual, almost like a Japanese Noh play. What happens when you fully staff sales and marketing and you haven't nailed who your customers are and why they should buy your product? Sales starts missing its numbers. The board gets concerned. The VP of Sales comes to a board meeting, still optimistic, and provides a set of reasonable explanations. The board raises a collective eyebrow. The VP goes back to the field and exhorts the troops to work harder.
Meanwhile, the salespeople start inventing and testing their own alternatives—different departments to call on, different versions of the presentations. Instead of following a methodology of learning and discovering, the sales team has turned into a disorganized and disgruntled mob burning lots of cash. Back in the home office, the product presentation slides are changing weekly (sometimes daily) as Marketing tries to “make up a better story” and sends out the latest pitch to a confused sales organization. Morale in the field and in Marketing starts to plummet. Salespeople begin to believe, “This product cannot be sold; no one wants to buy it.”
By the next board meeting, the sales numbers still aren't meeting plan. The VP of Sales looks down at his shoes and shuffles his feet. Now the board raises both eyebrows and looks quizzically at the CEO. The VP of Sales, forehead bathed in sweat, leaves the board meeting and has a few heated motivational sessions with the sales team. By the next board meeting, if the sales numbers are still poor, the writing is on the wall. Not only haven't the sales numbers been made, but now the CEO is sweating the company's continued cash-burn rate. Why? Because the company has based its headcount and expenditures on the expectation Sales will bring in revenue according to plan. The rest of the organization started to burn more cash, expecting Sales to make its numbers. Now the company is in crisis mode. Here two things typically happen. First, the VP of Sales is toast. At the final board meeting no one wants to stand next to him. People move their chairs to the other side of the room. Whether it takes three board meetings or a year is irrelevant; the VP of Sales in a startup who does not make the numbers is called an ex-VP of Sales (unless he was a founder, and then he gets to sit in a penalty box with a nebulous VP title).
Next, a new VP of Sales is hired. She quickly concludes the company did not understand its customers and how to sell to them. She decides the company's positioning and marketing strategy were incorrect. Now the VP of Marketing starts sweating. Since the new VP of Sales was brought on board to “fix” sales, the marketing department has to react and interact with someone who believes whatever was created earlier in the company was wrong. The new VP of Sales reviews the original strategy and tactics and comes up with a new sales plan. She gets a few months’ honeymoon from the CEO and the board. Meanwhile, the original VP of Marketing tries to come up with a new positioning strategy to support the new Sales VP. Typically this results in conflict, if not outright internecine warfare. If the sales aren't fixed in a short time, the next executive to be looking for a job is not the new VP of Sales (she hasn't been around long enough to get fired), it's the VP of Marketing—the rationale being, “We changed the VP of Sales, so that can't be the problem. It must be Marketing's fault.”
Sometimes all it takes is one or two iterations of finding the right sales roadmap and marketing positioning to get a startup on the right track of finding exuberant customers. Unfortunately, more often than not, this marks the beginning of an executive death spiral. If changing the sales and marketing execs doesn't put the company on the right sales trajectory, the investors start talking the “we need the right CEO for this phase” talk. This means the CEO is walking around with an unspoken corporate death sentence. Moreover, since the first CEO was likely to have been one of the founders, the trauma of CEO removal begins. Typically, founding CEOs hold on to the doorframe of their offices as the investors try to pry their fingers off the company. It's painful to watch and occurs in more than half of the startups with first-time CEOs.
In flush economic times the company may get two or three iterations around a failed launch and bad sales numbers. In tougher times investors are tighter with their wallets and make the “tossing good money after bad” calculations with a frugal eye. A startup might simply not get a next round of funding and have to shut down.
In Webvan's case, the Death Spiral was public and messy, since none of this was occurring in the intimate enclosure of a private company. The consequence of going public was the sea of red ink was printed quarterly for all to see. Rather than realize the model was unrealistic and scale back, the company continued to invest heavily in marketing and promotion (to get more customers and keep the ones they had) and distribution facilities (building new ones in new parts of the country to reach more customers). By the end of 2000 Webvan had accumulated a deficit of $612.7 million and was hemorrhaging cash. Seven months later, it was bankrupt.
9. Not All Startups Are Alike
A fundamental truth about startups ignored in the Product Development model is they are not all alike. One of the radical insights guiding this book is that startups fall into one of four basic categories:
Bringing a new product into an existing market
Bringing a new product into a new market
Bringing a new product into an existing market and trying to resegment that market as a low-cost entrant
Bringing a new product into an existing market and trying to resegment that market as a niche entrant
These differences will be developed in detail in subsequent chapters. What's important to know now is the traditional Product Development model at times succeeds in getting a product out the door into a known market with known customers (first category). Executing past practices in this Market Type may work if the market is similar to that of past experiences. However, since most startups are not going after known markets (falling into the second and third categories), they don't have a clue where their customers are.
Webvan fell into the fourth category—bringing a new product (online grocery ordering and same-day delivery) into an existing market (the grocery business), and trying to create a niche of that market. One could even argue that Webvan's idea was so radical the company fell into the second category of startups—bringing a new product into a completely new market. In either case, Webvan's ability to predict customer acceptance and widespread usage was not based on facts, just untested business plan hypotheses. (Modeling customer adoption rates using traditional quantitative models like Bass Curve are impossible at first customer ship for category 2 and 3 companies. There aren't sufficient initial sales data to make valid sales predictions.)
