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The Four Steps to the Epiphany


No longer personally involved, I became a dispassionate observer. From this new vantage point I began to detect something deeper than I had seen before: there seemed to be a pattern in the midst of the chaos. Arguments I had heard at my own startups seem to be repeated at others. The same issues arose time and again: big company managers versus entrepreneurs, founders versus professional managers, engineering versus marketing, marketing versus sales, missed schedule issues, sales missing the plan, running out of money, raising new money…Wasn’t it possible the problems in every startup were somehow self-inflicted and could be ameliorated with a different structure? Yet when I talked to my VC friends, they said, “Well, that’s just how startups work. We’ve managed startups like this forever; there’s no other way to manage them… So what is it that makes some startups successful and leaves others selling off their furniture? Simply this: startups that survive the first few tough years do not follow the traditional product-centric launch model espoused by product managers or the venture capital community. Through trial and error, hiring and firing, successful startups all invent a parallel process to Product Development. In particular, the winners invent and live by a process of customer learning and discovery. I call this process “Customer Development,” a sibling to Product Development, and each and every startup that succeeds recapitulates it, knowingly or not. This book describes CD model in detail. The model is a paradox because it is followed by successful startups, yet articulated by no one. Its basic propositions are the antithesis of common wisdom yet they are followed by those who succeed. It is the path that is hidden in plain sight.

The Rabbit Hole is written by Blas Moros. To support, sign up for the newsletter, become a patron, and/or join The Latticework. Original Design by Thilo Konzok.

Key Takeaways

  1. Product Development
    1. The different between winners and losers is simple. Products developed with senior management out in front of customers early and often – win. Products handed off to a sales and marketing organization that has only been tangentially involved in the new Product Development process lose. It’s that simple
    2. The lesson is clear: by listening to potential future customers’, by going out into the field and investigating potential customers needs and market before being inexorably committed to a specific path and precise product specs – the difference between the winners and losers – and that’s the Customer Development Process described in this book 
    3. 10 major flaws of the PD model for startups
      1. Biggest risk is not in the development of the new product but in the development of customers and markets. Startups don’t fail because they lack a product; they fail because they lack customers and a proven financial model. This alone should be a pretty good clue about what’s wrong with using the PD diagram as the sole guide to what a startup needs to be doing. Look at the PD model and ask “where are the customers?” (PD model – concept/seed, PD, alpha/beta test, launch/1st ship)
      2. Focus on first customer ship date – does not mean you understand your customers or how to market or sell to them! Have to first understand who you are selling your product to and why they will buy it
      3. Emphasis on execution instead of learning and discovery – ask questions and learn before you try to sell your product – what are the problems our products solve? how big is the problem? is it a must have?…
      4. Lack of meaningful sales, marketing and BD milestones  – first must focus on reaching a deep understanding of customers and their problems, discovering a repeatable road map of how they buy, and building a financial model that results in profitability. How well do we understand what problems customers have? how much will they pay to solve those problems? do our product features solve those problems? 
      5. The use of a PD methodology to measure sales
      6. The use of a PD methodology to measure marketing
      7. Premature scaling
      8. Death Spiral: the cost of getting product launch wrong
      9. Not all startups are alike. A fundamental truth about startups completely ignored in the PD model is they are not all alike. One of the radical insights guiding this book is that startups fall into one of 4 basic categories:
        1. Bringing a new product into an existing market
        2. Bringing a new product into a new market
          1. Is there a large customer base who couldn’t do “this” before, whether these customers can be convinced they want or need your new product, and whether customer adoption occurs in your lifetime. It also requires rather sophisticated thinking about financing – how you manage the cash burn rate during the adoption phase, and how you manage and find investors who are patient and have deep pockets
        3. Bringing a new product into an existing market and trying to resegment that market as a low-cost entrant
        4. Bringing a new product into an existing market and trying to resegment that market as a niche entrant
          1. Existing market and asks would some part of this market buy a new product designed to address their specific needs? Even if it cost more? or worse perfomance in one particular aspect? Niche goes after the core of an existing market’s profitable business by trying to attempt customers some characteristic of the new product is radical enough to change the rules and shape of an existing market
      10. Unrealistic expectations
  2. Customer Development
    1. Start with what customers want and will pay for. Learning and discovery, from starting the company to scaling the business. 
    2. The CD model starts with a simple premise: learning and discovery who a company’s initial customers will be, and what markets they are in, requires a separate and distinct process from the PD…However, early on, we are neither selling or marketing. Before any of the traditional functions of selling and marketing can happen, the company has to prove a market could exist, verify someone would pay real dollars for the solutions the company envisions, and then go out and create the market. These testing, learning, and discovery activities are at the heart of what makes a startup unique, and they are what make CD so different from the PD process
    3. Winners understand why customers buy. Losers never do
    4. Should get a modicum of grumbling on prices – or else may be too low
    5. What pain does this alleviate? What value does it deliver? Why should I care?
    6. There are 4 parts to the CD Cycle:
      1. Customer Discovery – focuses on understanding customer problems and needs
        1. Founders and PD define the first product and the job of the CD team is to see whether there are customers and a market for that vision
        2. Have we identified a problem customers want solved? does our product solve these customer needs? if so, do we have a viable and profitable business model? have we learned enough to go out and sell?
        3. Meeting customers is not to gather feature requests so you can change the product. Instead, your purpose in talking to customers is to find customers for the product you are already building.
        4. 4 steps – state hypotheses, test problem hypotheses, test product concept, verify
        5. Winners understand why customers buy.
        6. Start by making a lift of 50 potential customers you can test your ideas on. Always ask “who’s the smartest person you know?” 
        7. 3 column table – list of problems, today’s solution, your company’s solution
        8. The “IPO questions” – what is the biggest pain in your work? If you could wave a magic wand and change anything in what you do, what would it be
        9. Always have your list of 3 things you need to learn before you leave. Overtime, these questions will likely change 
        10. Goal is to have a single paragraph feature list that can sell to thousands of customers
        11. Be sure to get to the “who has the money” question 
      2. Customer Validation – developing a sales model that can be replicated
        1. Develop the playbook of the proven and repeatable sales process that has been field-tested by successfully selling the product to early customers. These first two steps corroborate your business model, verifies your market, locates your customers, tests the perceived value of your product, identifies the economic buyer, establishes your pricing and channel strategy, and checks out your sales cycle and process. If, and only if, you find a group of repeatable customers with a repeatable sales process, and then find those customers yield a profitable business model, do you move to the next step (scaling up and crossing the Chasm
        2. These questions must be answered long before the sales organization begins to grow in size 
        3. Existing market – compare product to yoru competitors and describe how some feature or attribute is better or faster – an incremental improvement
        4. New market – too early for customers to understand. Instead, describe the problem your product will solve and the benefits that the customers will get from solving it – a transformation improvement
        5. Resegmented – compare product to your competitors
      3. Customer Creation – creating and driving end user demand
        1. Only turn on heavy marketing spend after the point where a startup acquires its first customers, thus allowing the company to control its cash burn rate and protect its most precious asset
        2. What type of startup are you? What are your positioning messages (based on your deep understanding of who the customers are and what they want?
        3. New Lanchester Strategy
          1. If a single company has 74% of the market, it is an effective monopoly. That’s an unassailable position for a head on assault (think MSFT)
          2. Combined market share for leader and second ranking company is greater than 74% and the first company is within 1.7 times the share of the second, it means the market is held by a duopoly. Unassailable for the startup to attack
          3. Company has 41% market share and at least 1.7 times the market share of the next largest, it is the market leader. Very difficult for startup to enter
          4. Biggest player in a market has at least 26% share, market is unstable with a strong possibility of abrupt shifts. May be some startup opportunities
          5. Biggest player has less than 26% market share, it has no real impact in influencing the market. Startups who want to enter an existing market find these the easiest to penetrate
          6. Your goal is to become number one in something important to your customer. It could be product attribute, territory, distribution chain/retailer, or customer base. Keep segmenting by market (age, income, region,e tc.) and focusing on the competitors’ weak points until you have a battle you can win. You know your segmentation is correct when you have created a niche where you can be number one. Remember, any company can take customers away from any other company – if it can define the battle
        4. 4 building blocks of customer creation
          1. Year one objectives
          2. Positioning: both company and product – answers “what does your company do for me?”
            1. Must be different and credible if an existing market
            2. Communicating a vision and passion of what could be if a new market
          3. Launch: both company and product
          4. Demand creation (advertising, public relations, trade shows, etc.)
      4. Company Building – transitioning the organization from one designed for learning and discovery to a well-oiled machine engineered for execution
        1. Formal departments with VPs of Sales, Marketing, and BD. These executives now focus on building mission-oriented departments exploiting the company’s early market success
        2. Moving from Customer Development (Development Team-Centric), to Company Building (mission-centric), to Large company (process-centric)
        3. In a new market, the goal in this stage is about husbanding resources and passionately evangelizing and growing the market until the market grows large enough for sales revenue to appear. Your experience of selling to earlyvangelists during customer validation will help you answer how many of these types of early customers can yoru company really find in the first few years. This helps inform a realistic sales strategy
  3. Other
    1. Blank had some amazing mentors throughout his 25 year career
    2. Joseph Campbell popularized the notion of an archetypal journey that recurs in the mythologies and religions of cultures around the world. From Moses and the burning bush to Luke Skywalker meeting Obi wan Kenobi, the journey always begins with a hero who hears a calling to a quest. At the outset of the voyage, the path is unclear, and the end is not in sight. Each hero meets a unique set of obstacles, yet Campbell’s keen insight was that the outline of these stories was always the same. There were not a thousand different heroes, but one hero with a thousand faces.
    3. Marketing’s mission
      1. Generate end user demand
      2. Drive that demand into our sales channel
      3. Educate our sales channels
      4. Help engineering understand customer needs
    4. The appendices alone are worth the price of the book 
    5. Early mission statement – tells employees why they come to work, what they need to do, and how they will know when they have. Should also mention revenue and profit. An example of a clearly written mission statement is the one “lived” at CafePress.
      1. At CafePress, our mission is to allow customers to set up stores to sell a wide-range of custom products. (Our goal is to make sure they say we are the best place to go on the web to make and sell CD’s, books, and promotional items). Here’s how we are going to do that:
      2. We are going to give them a variety of high-quality products and good service in an easy-to-use web site (we will know we succeed if an average store sells $45 per month). At the same time, we will help these customers sell by giving them marketing tools to reach their customers
      3. We are going to do it for what they would consider a fair price (yet maintain 40% margins). Next year our plan is to grow to $30m in revenue and be profitable (therefore need 25,000 new customers a month)
      4. We are going to try to be a good citizen of our community (we are going to print on recyclable materials, use environmentally friendly packaging, and use non-toxic inks wherever practical)
      5. We are going to take good care of our employees (full medical, and dental) because the longer they stick around, the better our restaurant will become
      6. We are also going to offer stock options to all employees, because if they’re interested in our profits and long-term success, we’ll all make money
        1. If you read this mission statement sentence by sentence, it tells the employees why they come to work, what they need to do, and how they will know when they’re successful
        2. The litmus test is: can a new employee read the corporate mission statement and understand the company, their job, and what they need to do to succeed?
        3. Mission-centric companies are much better able to deal with two fundamental problems that a startup continually faces: uncertainty and time. Startups index on speed and agility, allowing individual executives to act with initiative and boldness
        4. Mission-centric management has 5 unique parts
          1. mission intention
          2. employee initiative
          3. mutual trust and communication
          4. “good enough” decision making
          5. mission synchronization
    6. One way to nurture maturity is to shift superstars into coaches and role models. This keeps superstars motivated and from leaving your company. However, your company has to protect the mavericks. The long-term tenure, motivation, and contribution of iconoclastic superstars and founders is the ultimate test of a leadership culture

What I got out of it

  1. Running the customer development process in parallel to product development is a must. When framed in the way Blank does – that you have to first deeply understand your customers, what problem you’re solving, how well you’re solving it, and having a repeatable sales roadmap – it seems obvious that this is the way to approach it. Why pour precious dollars on sales and marketing on something you’re not sure will even sell and, if it does sell, how to sell it. 

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