Customer development or why 9/10 startups fail

/disapprove by striatic at Flickr (CC)

Why do startups fail? Is it for the ambitious technology that simply couldn’t be built? Is it for the lack of capital? Or is it because nobody wanted to buy what the company was offering?

According to Steve Blank, a lecturer at Stanford and a serial entrepreneur, 9 out of 10 startups fail from the lack of customers. Put more simply, nobody wanted to buy what they were making. Or as Marc Andresseen puts it, the companies never got to product/market fit. The difference between a successful startup and a failed startup is that the successful ones get out of the office and talk to the customers, study them, the market, competitors and by doing so validate everyone of their guesses (product, customer, market, channel, pricing, competition, positioning and so on) until they know exactly what they are offering and how to turn it into a successful business.

Isn’t this common sense? Isn’t absolutely vital that the top management of the startup intuitively understands what the customers are willing to pay for?

So why don’t we all have a process for developing all that customer insight? Why don’t we all have that process running next to the product development process? I don’t know why, but luckily Steve Blank is helping us to correct this fatal mistake. He offers the Customer Development Process, an iterative process running side by side with the product development process.

From Steve Blank’s Customer Development presentation at Slideshare.

I found about Steve’s work thru Eric Ries (he is the former CTO of IMVU). I’ve been an avid follower of his blog Startup Lessons Learned. IMVU was one of the first companies to implement the Customer Development Process and you can say they did it with great success as IMVU now claims over 20 million registered users and over a million dollars sold each month in virtual goods trade. Eric has also been contributing to the development of Steve’s process, and his diagram shown below nicely highlights the symbiotic relationship of these two vital processes:

From Eric Ries’ Customer Development Engineering presentation at Slideshare

I really like Eric’s diagram because he calls it like it is: in a startup, the problem we are trying to solve is unknown (we have a visions, which by definition are imaginary or even hallucinatory) and our solution is as well unknown. Until we have customers on a mass scale paying us with honest-to-god money, we simply do not know what those customers really want. Best confront this truth and do something about it. That is what Customer Development is really about.

I’m halfway thru Steve’s self-published book The Four Steps to the Epiphany, which is an excellent book if you give it the time and love it deserves. It is also a book sorely in need of a good publisher (it deserves to be re-published) and a great editor to turn it from a raw diamond into the jewel it really is. Personally the book and the Customer Development Process is a godsent as it directly applicable to the situation I and my company are at this very moment (early stage venture). I’m working thru the book, doing the exercises, applying the learnings and I feel confident that our business will be a lot better for it.

Eric Ries does a great job of distilling the essence of the book in his blog post What is customer development? Here’s a quick summary from Eric, slightly tweaked by me:

1. Get out of the building. Very few startups fail for lack of technology. They almost always fail for lack of customers.
2. Theory of market types. Existing market, re-segmented market, new market: a theory that helps explain why different startups face wildly different challenges and time horizons.
3. Finding a market for the product as specified. Find the minimum feature set required to get early customers.
4. Phases of product & company growth. The book takes its name from Steve’s theory of the four stages of growth any startup goes through: Customer Discovery, Customer Validation, Customer Creation and Scale the Company
5. Learning and iterating vs. linear execution. Applying iterative & agile practices to the whole business, not just product development

The next step after Eric’s blog is to grab a hot cup of a coffee and sit down to watch Steve’s presentation at Stanford University’s Entrepreneurship course.

As an entrepreneur finding something this profound and useful exactly at the time you need it is absolute, pure gold. I’m putting what I’m learning from this to practice and I strongly believe our startup will be a lot more successful if we are able to apply the customer development process. If you are running a startup or bringing products to market, you owe it to yourself and your company to give this some serious thought.

Further resources

Learn more (many of items listed are from SKMurphy’s blog):

• Steve Blank’s presentation slides TIE20091709.pdf
• Handouts from the Technology Entrepreneurship course Blank is teaching this fall with Tom Kosnik
• Four Steps to the Epiphany at Amazon and CafePress (which is $10 cheaper).
• Eric Ries’ Customer Development Engineering blog post and slides
• Eric Ries’ Customer Development explained blog post
• Eric Ries’ Principles of Lean Startups blog post and slides
• Marc Andresseen’s blog post on Product/Market Fit.
• SKMurphy’s post on Customer Development for Startups from January 2008
• SKMurphy’s post Steve Blank’s August 2007 talk at TiE
• Mark Duncan and SKMurphy’s “Crucial Marketing Concepts for Startups”
  • Long Version (includes Book Reviews)
  • Short Version (just crucial marketing concepts)

If you find further resources for Customer Development, please let everybody know at the comments.

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Tags: agile, business, customer development, early stage, startup

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