Customer Development

Jun 14 2013

Opportunity Cost

Let me tell you two stories.

Bob and Misha are both entrepreneurs. They each have startups in the software-as-a-service (SaaS) space. Each started with the same initial investment of their own money. They started their companies at the same time. They both had trouble finding product/market fit, and they each spent 3 months iterating, trying to develop a service customers would pay for.

Bob was determined to persevere, and kept his burn rate low and his company running for 6 months on his initial investment before eventually running out of runway and failing to find product/market fit. He finally shut down the business and moved on to his next project.

Misha took a different approach. After the first 3 months, Misha hired a few people to help him with customer development. He paid higher advertising and staff costs, and he ran lots of experiments quickly. After just one month, Misha determined that there wasn’t actually a need for his product. He shut down his company, having spent nearly all of his initial funds, and was ready for the next challenge.

Which entrepreneur would you rather be?

Bob’s company floundered for nine months as he tried to find product market fit. Misha’s only lasted four months, and he ended up at the same place. In fact, by the time Bob’s company failed, Misha was 5 months into his next project.

When you’re thinking about the costs of running a startup, don’t forget to factor in the cost of your own time – and how you could be spending it.

Photo Credit: ToniVC via Compfight cc

May 30 2013

How to Pick a Customer Segment

Customer Service Desk — Photo Credit: nffcnnr

In a lean startup, we like to say that it is better to pick the customer you want to serve and figure out what problems they have than to come up with a solution and then figure out who needs it. Entrepreneurs following this advice often ask me how they should decide which customer to choose and whether they should worry about targeting something too narrow. Specificity is good. Picking a small segment (e.g., parents of grade school aged children in the Washington, DC area) so that you can get enough penetration to start seeing network effects is usually better than biting off a segment that is too large for you to have any real impact (e.g., parents). With regard to what segment to choose, there are a few different approaches:

market sizing,
customer development, and
passion.

I’m going to lay them out from most to least traditional, ending with my favorite method.

Market Sizing

This is your traditional business school approach. Find some research on the sizes of various markets, maybe take a look at which ones already have similar offerings floating around, and pick whichever market has the best combination of size and untapped potential. As a baseline, this is not a bad way to go, but I prefer focusing on either customer development or passion as a way to pick your market.

Customer Development

Form a hypothesis about which market has the biggest problem doing whatever you’re good at doing. For instance, if you’re offering an online service to help customer find places to buy widgets, ask yourself who has trouble finding information about local stores, catalogs, and places to shop. Then, before building anything, go talk to some customers in that segment and ask them about how they currently find the information that you hope to offer, and whether that method satisfies them. Don’t tell them about your solution; just see if they actually have a problem with their current solution. If they don’t, you’re going to have a hard time getting them to use your option. If your first hunch about a market doesn’t pan out, try a few more and see which one yields the most frustrated customers. Start with that market, because it will be easier to attract your early adopters if they are actively looking for a solution.

Passion

The third school of thought, and the one I most often favor, is a variant of following your passion. Let’s take as a given that, barring lottery-like success, you will be working hard on this startup for 5-10 years before you see real returns. If that’s the case, who do you want to spend that time with? Which customer segment is the one you want to spend 5-10 years talking to, learning about, and empathizing with? When you pick a customer whom you like, you’re much more likely to stick with the startup long enough to find the right formula. If, for example, you hate sculptors but love musicians, you probably already know who you want your customers to be.

This post was adapted from an answer I wrote to a user’s question on Quora.

Apr 14 2013

The Ideal Profile of an Early Adopter

When you’re doing customer development, you are specifically NOT trying to understand and satisfy all of your possible users, or the total addressable market. You can deal with the whole market after you get off the ground, but you’ll never get there unless you understand and satisfy (or better yet, thrill) your early adopters. You need to find the people with your problem who feel it so acutely that they are willing to try your imperfect solution, and to help you see where it needs to be improved. These early customers are worth their weight in gold once you find them. They will be your greatest source of insight into why the product isn’t working, the most supportive when it seems like you’ll never get it right, and your loudest evangelists when you finally nail it.

Portrait of an Early Adopter

To find people with the problem you’re solving, look for five simple criteria:

They have the problem,
They know they have the problem,
EITHER they are paying for a solution currently
OR they have hacked their own together,
AND they are still unsatisfied.

If you’re talking to people who don’t meet all of these criteria, they are probably not your early adopters. They might be future customers. They might think they’ll buy your product at some future point, but that point may never come. If they aren’t willing to buy until the product is perfect, you can’t afford to focus on building the product just for them. Keep looking until you find the people who need your solution so badly they will climb on board with you before you’ve finished building the boat.

Feb 21 2013

The Three Biggest Risks to Your Startup

Starting any new venture is risky. Before we can limit or manage the risk, we have to understand it.

Most startup (or new product) risk can be divided into three buckets:

Tech Risk
Market Risk
Ego Risk

Tech Risk

Tech risk is what entrepreneurs (or intrapreneurs, for those starting something within an existing structure) most often think about when starting a new venture. Can I build this thing? Is it scalable? Do I have enough servers? The irony is that, especially for consumer web startups, this risk is usually negligible. Most web startups aren’t doing anything that hasn’t been done before, unless it involves patentable algorithms. It may not be easy, but there’s high certainty that it can be done, given sufficient resources.

Market Risk

Market risk is the antithesis of the idea that “if you build it, they will come.” Do people have this problem? If we can deliver the solution, will people even want it? Can we reach the people who will buy this product? Do people believe that our solution is credible? Entrepreneurs should be thinking carefully about market risk.

Ego Risk

The final type of risk facing any new venture is ego risk – and it’s probably the most important and the least discussed type of risk. Ego risk is the chance that an entrepreneur can’t get out of her or his own way, pay attention to the data, overcome cognitive biases, and avoid falling prey to a reality distortion field.

With so much risk, it’s a wonder any new venture survives (many of them don’t). But researchers and entrepreneurs have worked hard on each of these types of risks, and there are strategies for ameliorating each one.

Tech Risk + Agile

Tech risk is often mitigated with some implementation of Agile methodologies. I sat down with Agile expert Elliot Susel to ask him how entrepreneurs can get started with Agile. Listen to that interview here: See the Full Transcript.

Market Risk + Lean Startup

Minimizing market risk is the driving force behind much of the lean startup movement. By making a set of small bets in the form of lightweight experiments, entrepreneurs can validate market demand before investing in building a system to deliver a solution or product. Plus, talking to customers often helps entrepreneurs identify problems they had not originally imagined. Sometimes those new problems are more pressing for the customer, and lead to a new product with less market risk.

Ego Risk + ?

Ego risk is the final and most difficult hurdle. There’s no clear-cut answer to this challenge. Religions and philosophers have been focused on ego for millennia. But a meditation or mindfulness practice can be particularly useful in helping us step back from our impulsive reactions to external stimuli (e.g. data that challenges our preconceived notions, particularly if our self-worth is invested in being right, or in one particular self-image.)

Of course, even a zen-master-like separation from the ego doesn’t completely protect us from cognitive biases, nor does a higher IQ or more awareness of these effects. In fact, there is some evidence to suggest a correlation between higher IQ and higher susceptibility to cognitive biases. We don’t yet have any proven methods for overcoming biases, but the Wikipedia page on mitigation is very interesting reading, and a good starting point for learning more.

Feb 01 2012

Startup Risk and the Ego

Usually when we talk about risk at a lean startup event, it goes something like this:

There are two types of risk: market risk and technological risk.
Agile methodologies are used to reduce technological risk, and lean startup (and customer development) helps reduce market risk.

The discussion continues when someone adds:

Web startups don’t really have technological risk. We know we can build it. We don’t know if anyone wants it.
Biotech companies typically have tech risk, but no market risk. Everyone wants a cure for cancer, but we don’t know how to build it (yet).

But I found myself in the middle of a very interesting conversation at last week’s DC Lean Startup Circle. We were talking about a third type of risk that is critical for startups, what Ben Willman calls “ego risk.”

From what I’ve seen, the vast majority of people working in startups have a tendency to want our work to be as good as possible before we show it to people. This instinct runs counter to the concept of a Minimum Viable Product.

We all get attached to our clever solutions, sometimes even after we’ve discovered that they solve the wrong problem (or no problem at all). Ego is why we get attached to our solutions and stop questioning, and why we want to avoid customers until it’s perfect. It’s why we conflate our sense of self-worth with the success of our product or startup.

Ben Horowitz (of Andreessen Horowitz) has written that the most difficult skill for CEOs is to manage their own psychology. He also points out that it’s almost taboo to talk about personal psychology. It’s too easy for founders or CEOs to get in their own way and prevent themselves from executing with objectivity and mindfulness.

We talk about the technical and market risks facing a startup. Why don’t we talk about this more important risk? We need to acknowledge and address ego risk.

Startups have tech risk (can we build it?), market risk (will they buy it?), and ego risk (can I get out of my own way?).

If you want to join the conversation, come check out Ben Willman’s presentation on the subject at the next DC Lean Startup Circle.