Learning that a hypothesis is wrong is not a crisis.
In Will’s and Eric’s pre-IMVU startup, their CEO and board forced them to wait three years and spend $30 million to perfect the product with minimal customer feedback. By contrast, IMVU launched a buggy early product roughly 120 days after it was founded. Amazingly, some customers loved the buggy product enough not only to pay for it, but also to give the founders what they wanted: feedback (and money).
The IMVU team used customer feedback relentlessly to drive the enhancement, addition and deletion of features that “heavy users” liked or didn’t. One critical pricing discovery led to a 30 percent increase in revenue. When teenagers bemoaned their lack of access to credit cards, IMVU reacted quickly by allowing users to pay IMVU via gift cards distributed through 7-Eleven and Walmart, online, and via other major retail channels.
A Customer Development Bonus: Minimum Waste of Cash and Time
The first two Customer Development steps limit the amount of money a startup spends until it has tested and validated a business model and is ready to scale. Instead of hiring sales and marketing staff, leasing new buildings or buying ads, startup founders get out of the building to test the business model hypotheses, and that costs very little in cash.
When paired with agile engineering, Customer Development reduces the amount of wasted code, features or hardware. Agile development builds the product in small increments, allowing the company to test and measure customer reactions to each new iteration of the product. It won’t take three years to find out that customers don’t want or need or can’t use the features the team labored lovingly over.
Since the Customer Development model assumes that most startups cycle through discovery and validation multiple times, it allows a well-managed company to carefully estimate and frugally husband its cash. It also helps “husband” founders’ equity, since the closer a company is to a predictable, scalable business model, the higher its likely valuation—preserving more stock for the founders at fundraising time. The IMVU founders, for example, only hired product development teams (not sales, marketing, or business development) until they had proof in hand of a business worth building. With that proof, the company can move through the third and fourth steps, customer creation and company-building, to capitalize on the opportunity.
Step 3: Customer Creation
Customer creation builds on the company’s initial sales success. It’s where the company steps on the gas, spending large sums to scale by creating end-user demand and driving it into the sales channel. This step follows customer validation, moving heavy marketing spending after a startup has learned how to acquire customers, thus controlling the cash burn rate to protect a most precious “green” asset, cash.
Customer creation varies by startup type. Some startups enter existing markets well-defined by their competitors, others create new markets where no product or company exists, and still others attempt a hybrid by re-segmenting an existing market as a low-cost entrant or by creating a niche. Each market-type strategy demands different customer creation activities and costs. (Market type is addressed in depth in Chapter 3.)
Initially, IMVU ran a wide range of low-cost customer segmentation experiments. Soon they identified two distinct customer segments—teens and moms—and spending ramped up to underwrite two entirely different customer creation efforts.
Step 4: Company-Building
“Graduation day” arrives when the startup finds a scalable, repeatable business model. At this point it’s fundamentally no longer the temporary search-oriented organization known as a startup—it’s a company! In a sometimes-bittersweet transition out of startup mode, company-building refocuses the team’s energy away from “search” mode and to a focus on execution, swapping its informal learning- and discovery-oriented Customer Development team for formal, structured departments such as Sales, Marketing and Business Development, among others, complete with VPs. These executives now focus on building their departments to scale the company.
This is where the entrepreneurs’ version of a Shakespearean tragedy often takes center stage, as VCs realize they have a “hit” with potential for a large return on their investment. All of a sudden, the passionate visionary entrepreneur is no longer deemed the right person to lead the now-successful company he or she has nurtured from cocktail napkin to high-trajectory. The board—graciously or not—ousts the founder and all his or her innate customer understanding, trading him or her in for a “suit,” an experienced operating executive. There goes the neighborhood, as the company declares success, the entrepreneurial spark often sputters, and process often drowns energy.
At IMVU, the founders saw the company rapidly scaling beyond their skill set. But instead of being fired, they recognized the need for a seasoned operating executive, recruited a skilled CEO, and named themselves chairmen of the board and active board members. Their new CEO was skilled at managing the transition from searching for a business to execution and grew the company steadily.
The Customer Development Manifesto
BEFORE DIVING HEADFIRST INTO THE DETAILS of the Customer Development process, it’s crucial to review the 14 rules that make up The Customer Development Manifesto. Embrace them. Review them regularly with the team and (maybe after the IPO) consider perhaps even etching them in marble at world headquarters.
Rule No. 1:
There Are No Facts Inside Your Building, So Get Outside.
On Day One, the startup is a faith-based enterprise built on its founders’ vision and a notable absence of facts. The founders’ job is to translate this vision and these hypotheses into facts. Facts live outside the building, where future customers (prospects, really) live and work, so that’s where you need to go. Nothing is more fundamental to Customer Development, and nothing is harder to do. It’s much easier to write code, build hardware, have meetings and write reports than it is to find and listen to potential customers. But that’s what separates the winners from the losers.
Facts live outside the building, where future customers live and work…
In Customer Development, the founders gather firsthand experience about every component of the business model. The team can support the founders, but firsthand experience by definition cannot be delegated. This customer research must be done by founders because:
Key customer feedback points are random, unpredictable, and often painful to hear. Employees hate to deliver bad news to higher-ups
Employees have far less at stake and seldom listen as acutely, and they don’t get heard adequately when they report back. It’s too easy to dismiss their findings as “hearsay” or to ignore critical points of feedback
Consultants have even less at stake than employees and often color their commentary to either tell the client what he wants to hear or deliver messages that can lead to extended consulting relationships. This is also second- or third-hand feedback and too diluted or diffused to provide value
Only a founder can embrace the feedback, react to it, and adeptly make the decisions necessary to change or pivot key business model components.
Rule No. 2:
Pair Customer Development