clearing the land before planting

This week I met a good friend for a drink near the White House – not a bad place to think about strategy.  And Ryan is a good strategic thinker, so I wanted to let him in on my nascent business idea and hear his feedback.  He listened patiently.  Then he asked a simple, but powerful question:   

What do you think is the biggest challenge to making your idea a reality?

I thought for a moment.  The answer seemed obvious...it was money.  “Getting enough investment to build our company and open our first store,” I responded.  I couldn’t have been more wrong.

Ryan acknowledged that investment would be an important challenge, given the need for cash to get any startup company off the ground.  We talked about options to avoid a cash crunch, e.g., partnering first with another “brick & mortar” business instead of paying our own rent.  Then he shared a book recommendation: The Four Steps to the Epiphany by Steve G. Blank.  Ryan had heard rave reviews from a colleague and thought it might help me think about who my customers are.

I downloaded a preview of The Four Steps yesterday, and I quickly realized that my response to Ryan’s earlier question was dead wrong.  Steven Blank would argue that my “getting enough investment to build the company and open our first store” was the same kind of flawed thinking that led to the dot-com crash of 2000.  Yikes.  I thought my MBA would have taken me further than that.

Blank gives colorful examples of startups that were extremely successful at attracting investment – to the tune of hundreds of millions of dollars – and building spectacular companies.  Sadly, many imploded within months of launching their product.  Cash burned.  Executive heads rolled.  Giant companies, some with multi-billion-dollar market capitalization, went bankrupt and took unsuspecting employees and stockholders down with them.  Why?  The answer is painfully simple.  These companies didn’t understand their customers.  They were too busy developing their products.

Blank was a serial entrepreneur.  He led many successes, but also failures.  Eventually, he joined a venture capital firm as an advisor.  From this outside perspective, he watched other startups grapple with the same problems he faced.  He came to see that “the path of a startup is well worn, and well understood."  Blank writes:

"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.”

Blank calls this path Customer Development, an iterative process of customer learning and discovery.  In short, it is trial and error, but on small enough scale, and early enough in the startup process, that the errors are constructive rather than destructive (i.e., they don’t waste cash). 

Customer Development is more art than science.  It is not marketing or sales in the traditional corporate sense of those disciplines.  Instead, it is all about getting key people, including founders and product developers, out of the office and in front of potential customers.  They need to present their stripped-down product, see if it meets an important customer need, validate the customer’s willingness to pay, adjust the offering based on reliable feedback, and then create a replicable and profitable business model.  Building a full-scale company before taking these steps is just a roll of the dice.

Ryan, thanks for the great book recommendation.  You and Steve Blank have definitely helped me to "clear the land before planting."