At New York Entrepreneur Week, I got a chance to chat with Steve Blank before he went onstage for his keynote speech, “Why Accountants Don’t Run Startups”. The customer development methodologies that Steve pioneered have become trendy with startups, particularly in conjunction with agile development methodologies. This is no surprise, as the right application of these principles can make a business 10x more productive. Yet, despite their widespread popularity and adoption, many entrepreneurs still misunderstand the customer development process. According to Steve, here are some common misapplications of his advice:

1) “Get Out of the Building” does not equate to “Send Out A Survey”’

Entrepreneurs often suffer from the “build it and they will come” delusion. Most startups fail because of lack of customers, not failure of technology, yet so few entrepreneurs put in the effort to understand market potential in a disciplined way.  In The Four Steps to the Epiphany, Steve encourages entrepreneurs to “get out of the building” in order to understand what problems their customers are really facing and how much they’re actually willing to invest in solutions. Unfortunately, many entrepreneurs interpret this to mean that they’ll be done once they send out a survey or two. While surveys can be insightful, customer development is not a virtual process. Entrepreneurs need to do whatever they can to develop a three-dimensional understanding of their customers. This means that on top of surveys, they should go out and have meaningful conversations with prospects, shadow them as they work, and interview them about their problems. Taking customer service calls is critical for understanding where your technology is falling short. There are also a whole stack of services like KissMetrics and UserTesting which provide usability testing tools and different layers of insight into customer behavior

2) Customer development cannot be outsourced

Customer development, if done right, is challenging and time-consuming work. You need to spend quality time to build rapport with customers and really listen to their issues. Tech-centric Founders and CEOs sometimes think they can delegate the process to a VP of Sales. This is almost guaranteed to fail because most people hate admitting that they’re wrong. In the inception stages of a startup, your idea is very likely to be crap.  When your VP of Sales comes back with the unfortunate information that customers hate and will never buy your product, you’ll assume his information is wrong. Instead, you’ll pander to your ego by convincing yourself that he talked to the wrong people or didn’t describe the product right. Face it, you need to hear product feedback from your customers directly so that you, the founder, can develop the right product intuition from the start.

3) Live the strategy,  don’t proselytize the steps

Entrepreneurs can get so focused on execution that they miss the forest for the trees and forget the “why” behind what they’re doing. Steve noticed this overly pedantic approach when some students in his classes would go through the motions of customer development without understanding the purpose behind it. Your ultimate goal as a startup is to find a scalable and repeatable business model and the purpose of customer development is to allow you to take multiple swings at this problem before you run out of cash. The tactical approaches to doing this, whether it be sending out surveys or conducting hordes of interviews, will differ from startup to startup. Customer development is a strategic approach to effective business-building, not just a to-do list.

On the Question of Pivoting

Taking multiple swings at the search for a business model is often called “pivoting”. These days, it’s what all the “cool” entrepreneurs are doing. The term is thrown around so often that I’m sometimes confused by what entrepreneurs really mean by it. After all, true pivoting is an art, not a science, and there’s a fine line between pivoting and quitting prematurely. So, I asked Steve for his thoughts on when it makes sense to pivot. His advice to entrepreneurs is to think of pivoting as making a material change to any of the 9 basic building blocks of your business model. These 9 blocks, according to Alexander Osterwalder’s Business Model Generation, are:

1)      Customer Segments

An organization serves one or many customer segments

2)      Value Propositions

It seeks to solve customer problems and satisfy customer needs with value propositions

3)      Channels

Value propositions are delivered to customers though communication, distribution, and sales channels

4)      Customer Relationships

Customer relationships are established and maintained with each customer segment

5)      Revenue Streams

Revenue streams result from value propositions successfully offered to customers

6)      Key Resources

Key resources are the assets required to offer and deliver the previously described elements…

7)      Key Activities

…by performing a number of Key Activities

8)      Key Partnerships

Some activities are outsourced and some resources are acquired outside the enterprise

9)      Cost Structure

The business model results in the cost structure

Measuring effectiveness in each of these building blocks requires having the right metrics. Since creating these metrics and determining the right critical thresholds in each is quite tough, Steve highly recommends that entrepreneurs seek out advisors. Not only do advisors bring connections and domain expertise, but they help entrepreneurs avoid tunnel-vision by having a separate pair of eyes on the same problems. Determining when to pivot involves deciding the answers to questions such as how many iterations you’re willing to put out, how much cash you can afford to burn to validate your assumptions, and how much patience you have. Entrepreneurs should work with advisors to determine these thresholds as early as possible in life of their startups.

Much thanks is due to Steve Blank and Gary Whitehill of New York Entrepreneur Week for facilitating this interview. I highly recommend you watch Steve’s talk, Why Accountants Don’t Run Startups and check out The Customer Development Manifesto. Also useful are Alexander Osterwalder’s Business Model Generation and The Entrepreneur’s Guide to Customer Development by Brant Cooper & Patrick Vlaskovits. Some cool usability tools include: KissMetrics | ClickTale | UserTesting

Related posts:

1. Steve Blank: The Rise of the Lean VC – Consumer Internet Gets Its Own Investors
2. A Weekend Experiment with The Lean Startup – Part 2: “We did more of a jumpstep than a pivot”