ContentsSpecialThanks

Foreword

Introduction

Chapter1:StartupRevolutionWhichIstoSay,DisruptionHurtsAndCuetheLeanStartupLeanStartup,PleaseMeettheLeanEntrepreneur

Chapter2:Vision,Values,andCultureVisionandValuesLeanintoIt:TheLeanStartupCultureOvertheHorizon:AFramework

Chapter3:AlltheFishintheSeaKnowYourAudience:WhySegmentationMattersMarketSegmentPersonas:CreateaFakeCustomerChoosingaMarketSegment

Chapter4:WadingintheValueStreamArticulatingtheValueStreamValue-StreamDiscovery

Chapter5:DivingInListentoYourCustomers—orNot

CustomerInteraction

Chapter6:ViabilityExperimentsTheInfamousLandingPageConciergeTestWizardofOzTestCrowd-FundingTestPrototyping

Chapter7:Data’sDouble-EdgedSwordNewProductsExistingProducts

Chapter8:TheValleyofDeathMinimumViableProduct

Chapter9:RealVisionariesHaveFunnelVisionInnovatetheFunnelGrowthWaves

Chapter10:TheFinalWord

Acknowledgments

AbouttheAuthors

Index

Coverimage:@FAKEGRIMLOCKCoverdesign:C.WallaceCopyright©2013byBrantCooperandPatrick

Vlaskovits.Allrightsreserved.PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.

PublishedsimultaneouslyinCanada.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedinanyformorbyanymeans,electronic,mechanical,photocopying,recording,scanning,orotherwise,exceptaspermittedunderSection107or108

ofthe1976UnitedStatesCopyrightAct,withouteitherthepriorwrittenpermissionofthePublisher,orauthorizationthroughpaymentoftheappropriateper-copyfeetotheCopyrightClearanceCenter,Inc.,222RosewoodDrive,Danvers,MA01923,(978)750-8400,fax(978)646-8600,orontheWebatwww.copyright.com.RequeststothePublisherforpermissionshouldbe

addressedtothePermissionsDepartment,JohnWiley&Sons,Inc.,111RiverStreet,Hoboken,NJ07030,(201)748-6011,fax(201)748-6008,oronlineat

www.wiley.com/go/permissions.Forgeneralinformationonourotherproductsandservicesorfortechnical

support,pleasecontactourCustomerCareDepartmentwithintheUnitedStatesat(800)762-2974,outsidetheUnitedStatesat(317)572-3993orfax(317)572-

4002.Wileypublishesinavarietyofprintandelectronicformatsandbyprint-on-

demand.Somematerialincludedwithstandardprintversionsofthisbookmaynotbeincludedine-booksorinprint-on-demand.Ifthisbookreferstomedia

suchasaCDorDVDthatisnotincludedintheversionyoupurchased,youmaydownloadthismaterialathttp://booksupport.wiley.com.Formoreinformation

aboutWileyproducts,visitwww.wiley.com.LibraryofCongressCataloging-in-PublicationData:Cooper,Brant.

Theleanentrepreneur:howvisionariescreateproducts,innovatewithnewventures,anddisruptmarkets/BrantCooper,PatrickVlaskovits.—1

p.cm.Includesindex.

ISBN978-1-118-29534-2(cloth);ISBN978-1-118-33408-9(ebk);ISBN978-1-118-33523-9(ebk);ISBN978-1-118-33186-6(ebk)1.Entrepreneurship.2.

Successinbusiness.I.Vlaskovits,Patrick.II.Title.HB615.C64952013658.4’21—dc23

2012035450

ForRivaandEliza—BC

ForKati,Shane,andthetwinkleinmyeye—PV

SpecialThanksWithoutourearlyadopters,whobelievedenoughinTheLeanEntrepreneurtopre-orderabookwhenitwasmerelyalanding

pagewithasillyvideo,wemightnothavesurvivedtheprocessofwritingandpublishing

thisbook.Theirearlyfeedbackoncontentandexercisesforcedustosimplify,focus,and

homeinonhowtomovetheneedleforthem.

Thankyou,Brant&Patrick

TheLeanEntrepreneurEarlyAdopters*:

@$H0K@WojKwasiAalapParikhAbrahamWilliamsAdalsteinnOttarssonAdamGibsonAdamJongAdvancedVAAkiliKingAlBsharahAlShawAlanDavidRojasYacolcaAlanLattimoreAlanTurnerAlbertoJrAlexWolfe

Alexander Bastien Alexander Ginsberg Alexander Konowka AlexanderOsterwalderAlexandreMarcondesAlexandreZamarionCepedaAlfredLoAlfredoOsorioAlisonAnthoineAlisonGibbinsAllineWatkinsAlonGorenAmielZwierAndersenAndreAndreaAmedeoAndreasCemVogtAndreasKlingerAndresAriasAndresBuriticaAndresRiggioniAndrewHemsleyAndrewKorfAndrewMohebbiAndrewPayneAndrewWhiteAndreyGridnevAnitaLeffelAntonioLucenadeFariaArdenGradyArmandoMaldonadoArthurDodgeArturoGarridoBasilElwayBeatGoetschiBeckySmithBeihuaYuBenjaminBiddelBenjaminPatockBergsonFogacadeOliveiraBernardLebelleBernardoMazziniBillCarverBillKenney

BrendanBakerBrentonO’BrienBrittanyLynchBrunnoCruzBryanHallCCrouchCamiloZamoraCarolGunbyCaseyArmstrongCassianoPorrecaCatherineColganChanKeungChandanKanodiaChantalBotanaChinEugeneChonchayongTrairatkeyoonChrisElamChrisGalloChrisHealyChristianFahlkeChristianKramerChristopherConreyClaudioPerroneClaytonLeveringColinTuggleCraigAronCristianValbuenaCvHarquailDElleyDaleLarsonDamienSaundersDamonD’AmoreDanKaplanDanMattrazzoDanielDonadoDanielFulepDanielHaranDanielHorowitzDanielJamesScottDanielPolitzerDannyBeckettJr.DannyCurrie

DarrenFehrmannDaveBlackmanDavidAndujoDavidDrakeDavidFishmanDavidHootonDavidStevensDavorinGabrovecDaylinBreenDeaneSloanDennisCabarroguisDesiderioGutierrezDmitriLeonovDonnaKlymDr.ErnieDrewSanockiEduardoBurgelElioMagginiEmilyCotterEmmanuelDevriesEnekoBilbaoEricFaderEricGalenEricPanteraErichBuriErickHerringErikSaltwellErikaCallahanErinMcclartyEstebanQuijanoFarezRahmanFerencFeketeFernandoLabastidaFernandoSaenz-MarreroFerranGionesFrancescMutgeFrancescoFulloneFrankDaleFuatKoroGabrieleLana

GarthHumbertGaryChiuGaryHellenGaryMarcosGaryPercyGavinHeerGeertBollenGeorgeKomotoGerardCharlotGibranAbarcaGideonWalkerGijsbertKorenGilDoukhanGilbertBagaoisanGilesFarrowGiorgioCasoniGlennMarcusGonzaloSantosGrahamKehilyGuilhemBertholetHampusJakobssonHaoChenHelgeHannisdalHendrikBohnHiroshiMenjoHowardIiiIraHermanIrenElisabethOvsteboIvanRapin-SmithIyasAlqasemJacobTaylorJakeWaxenbergJakubMusialekJamesGagelJamesKatzenbergerJamesLevineJamesManiasJamesMcGilvrayJamesSutherlandJanBelke

JaneGarrityJaredHardyJasonBowserJasonFittsJasonFraserJasonHJHJasonYipJayBeechamJayCranmanJayGrievesJeannePiJeffChenJeffreyHowellJeffreyMohrJeffreyPooleJeffreyTingleJennieEnholmJeremyGeorgeJesseNowlinJimChesebroJMBonthousJoannaPiotrowskaJoeBaileyJoeGerberJoeWaltmanJoelAbrahamJoelGascoigneJoelJenkinsJohnAsaloneJohnBeadleJohnCarterJohnHalpernJohnHolcroftJohnHornbaker

JohnMorrowJohnT.ChapmanJohnWarkJohnWolpertJonGoldJonLawrenceJonatanAlavaJonathanBuccellaJonathanDrillingsJonathanGrayJonathanTarudJonathanYorkJonathonSchusterJonnyLennonJordanaAdlerJosephDraschilJosephMorganJosephVandervestJoshuaKerievskyJoshuaLewisJoshuaSteimlejozi9JuergenAnkeJustinCoetseeJustinHomkowJustineLamKahlilCorazoKangtaoChuangKarinLehnerKarlShaikhKathleenMeairsKeenahnJungKeironMccammonKelvinThamKenHejmanowskiKentMcdonaldKimSilvaKirkLashley

KutluKazanciLarsKristianAasbrennLarsTeigenLawrenceSchoonover,DDSLeeHeathfieldLeeMunroeLeslieHunterLindseyNagyLordFernandezLouisGalipeauLowellLindstromLowellWinerLuigiMatroneLuigiMontanezLuisLuengoLukasFittlLukeScoatesLynnPearceLynnRasmussenMKeeffeMaciejCzarnikMakotoMiyagawaMarcHavenerMarceloPimentaMarkHoroszowskiMarkMorrisMarkoVasiljevicMartinAlcalaRubiMartinGiorgettiMartinHrdlickaMatiasWaesMatthewAMatthewBellowsMatthewDallyMatthewOwnbyMauricioMontillaMelissaFosterMelissaNavarroMengWongMichaelGrassottiMichaelHawkins

MichaelLiraMichaelMaretzkeMichael PetronaciMichael PorcelliMichael ThompsonMichaelYevdokimovMichelGelobterMicheleBattelliMichelleHoangMikhailNikolaevMilaVukojevicMitchellVillaniMorganLintonMrO’FlynnMrsOliverNadavWilfNicholasWichertNickTippmannNicolasTognoniNikhilThomasNikolaosSourisNinaAlterNirEyalNorbertSchwagmannOanaCalugarOlafLewitzOlafMyklebustOlegMysykOlgaPavlovskyOlinHydeOlivierVerbekeOriolPascualOskariKettunenPaoloLorenzoniParulSinghPatrickBuechnerPatrickSmithPaulConnaghanPaulGomezPaulMerinoPaulReichmanPedroCarmoOliveiraPedroRochaPerSahlin

PeterCooperPeterHargittayPeterHongPeterTroastPiotrDurlejPrudencioHerreroRBowaterRachelWillmerRahulGuptaRakDheva-AksornRammohanReddyRandallMinchewRayHallareReginaldNilesRegisRehelReidMcgregorRene-MartinTudykaRicardoDoradoRichardAckermannRichardKroonRichardPrestRickPerreaultRickyJuarezRindranirinaRamamonjisonRobLintonRobertBowmanRobertFanRobertFentonRobertoMagnificoRodneyRumfordRodolfoAngelLomascoloSzittyayRodrigoLudwigRogerWeberRossO’LochlainnRoyceHamanoRukeshPatelRyanFujiuRyanPoissantSalimViraniSamuelGoldbergSamuelParker

SashCatanzariteScottAustinScottGillespieScottKurlandScottRoehrickScottSteeleSeanAmmiratiSeanCraftsSeanTaylorSeanTierneySebastienArbogastSergioMarreroShawnArnwineShawnPurcellSimoneBrunozziSonThanhLeStephenRhyneStephenWoodStevenCraigStevenMcilvennaSunshineMakarowSylvainMontreuilTakashiTsutsumiTalRachleffTanyaRoss-LaneTheodoreBarnettTheodoreShivdasaniThomasLinThomasNeigerThomasPridhamTimKastelleTimothyLombardoToddWereliusTomPhilipTomYandellTomaszRudolfTomerSharonTravisMccutcheonTrevorOwensVeeralShahVenkateshRaoVidarBrekke

VikChadhaVishalBaggaVivekRamanWilliamLoeberWilliamMcbrideWiroKuipersYoungLeeYukiSekiguchiYvesHanoulleZoinerTejada

*to view this list of names online, please visithttp://leanentrepreneur.co/earlyadopters.

ForewordWhenIfirststartedblogginginAugustof2008,Ihadnoideawhat toexpect.Startup blogging was hardly “cool” back then. Plenty of venture capitalistsadvisedmeagainstit.Mypersonalbackgroundwasasanengineerandmycompanieshadbeenweb-

basedstartups,sothatiswhatIwroteabout.Strugglingtoexplainthesuccessesand failures of those companies, I discussed principles like continuousdeployment, customer development, and a hyper-accelerated form of agile.When I delved into lean manufacturing, I discovered the concepts andterminologydovetailed.Theresult:anewideaIcalledTheLeanStartup.I startedwith some basic theory: that a startup is an institution designed to

thriveinthesoilofextremeuncertainty;thattraditionalmanagementtechniquesrooted in forecasting and planning would not work well in the face of thatuncertainty.Therefore,weneededanewmanagementtoolkitdesignedexplicitlyforiteration,scientificlearning,andrapidexperimentation.At the time, I viewed it as incidental that the theory might be tied to a

particularindustry,suchashigh-techstartupsorweb-basedenvironments.Lean,after all, emerged from Toyota, a huge automobilemanufacturing company. Isimplystatedmybelief thatLeanStartupprincipleswouldworkinothertypesofstartupsandinotherareasofbusinesswhereuncertaintyreigned.Boy,wasIunpreparedforwhathappenednext.Iwashopeful thatwewould

changethewaystartupsarebuilt—butIdidn’tknow.Fast-forwardmorethanfouryearsandI’mastoundedbywhathasemerged.A

nascentcommunityhasblossomedintoafull-fledgedmovement.Entrepreneurs,both new and experienced, proudly share their Lean Startup learning in casestudies, conferences, and many, many blogs. Books, workshops, and coursesauthoredbypassionatepractitionersrelateexperience,share insight,andcreatetools to teach studentsways tomakeLeanStartupprinciples theirown.Manyinvestors, advisors, mentors, and even celebrity entrepreneur icons speak theLeanStartuplanguage.It’sabigtent.Westandontheshouldersofgiants:customerdevelopment,the

theory of disruptive innovation, the technology life-cycle adoption theory, andagile development. Complementary lines of thinking, such as that of user

experience professionals, design thinking practitioners, and the functionaldisciplinesofsales,marketing,operations,andevenaccounting,cometogethertosharepracticesthatliftusall.LeanStartuphasgonemainstream.IwishIcouldsaythatthiswasallpartof

somemasterplan,thatIknewallalongthatcompaniesofallsizes—eventhosefar outside the high-technologyworld—would embraceLeanStartup. Iwish Ihad foreseen thatwithin a year of publishingTheLean Startup:HowToday’sEntrepreneurs Use Continuous Innovation to Achieve Radically SuccessfulBusinesses, many large organizations, including such monsters as the UnitedStatesFederalgovernment(!)wouldhaverecognizedthattocopewithtoday’sworld—faster, more competitive, and inundated with data—new methods areneededtokeepup.The truth is thatallof thischangehashappenedfasterandmorethoroughlythananyofusimagined.And—asyou’reabouttosee—we’rejustgettingstarted.That’swhy I am so excited by this book you hold in your hands.TheLean

Entrepreneurisaboutthesenewmethods.BrantCooperandPatrickVlaskovitsareamongtheearliestadoptersofnewideassuchasLeanStartupandcustomerdevelopment.Theirnewworkturnstheirlensonthreeprimaryfocalpoints:howtointeractwithcustomers,runexperiments,anduseactionabledatatomovetheneedleofanyuncertainbusinessendeavor.Aswithalloftheirwork,theirsisnotjustabookoftheory.BrantandPatrick

providegreattacticaldepthineachoftheseareas.They endeavor to answer the question: No matter where you are as an

organization,howdoyouknowwheretofocusyourLeanStartupactivities?TheLean Entrepreneur offers new thinking, tools, and activities that helporganizations identify and act upon business model challenges in a waste-eliminatingmanner. Following the precepts of traditional lean thinking, Brantand Patrick introduce the value stream discovery process, which helpsorganizations hypothesizewhat theymust do, including product development,marketing,andsalesinordertocreatevalue.Thesebusinessmodelassumptionsarethenripefortesting,measuring,anditeratingupon.Further, the value you create ismeaninglesswithout a customerwho needs,

wants,desires,and,ultimately,determinesthefinalvalueofyourcreation.Brantand Patrick spend considerable time helping you think through your customersegments.Cleverly,andinthespiritofthescientificmethod,theyevenhelpyoudiscoverwhereyourcustomertheoryiswrong.Everyone likes a good story; Brant and Patrick interviewed dozens of

entrepreneursanddocumentednumerouscasestudiesbothinsideandoutsideofhigh-tech,inbothstartupsandlargeenterprises.There’sevenaclassicWizardofOzminimumviableproductthatdatesbackto1998!Makenomistake:BrantandPatrickhavebeenheresincethebeginning.They

self-publishedTheEntrepreneur’sGuide toCustomerDevelopment inAprilof2010.From the outset, they were both practitioners and mentors, urging

entrepreneurs not to follow a paint-by-numbers approach, but rather to thinklean: fast, agile, and continuously learning. Over the last two years they’vetraveledaroundtheworldspeaking,advising,andteachingLeanStartup.The Lean Entrepreneur is an important addition to the growing library of

principles and practices designed to improve how we tackle innovation anduncertainty, be it inhigh-tech startups,Fortune100companies, non-profits, orgovernmentoffices.IconsidermyselfluckytocountBrantandPatrickasfriendsandcolleagues.It

is my hope that from this book you will gain valuable insights, make LeanStartup your own, and—much more importantly—that you are successful inchangingtheworldforthebetter.

EricRies

SanFranciscoJanuary2013

Introduction

WhatIsTheLeanEntrepreneur?It’shardtoknowwhereyouliveonthecurve.Asfaraswecantell,thearrowoftime moves in one direction. You can never step in the same river twice(Heraclitus)andallthat.Changeisn’tconstant.Wechangeconstantly,butatdifferentrates,depending

where we are on the curve. Fast change comes in times of cheapexperimentation. Massive new life emerged on Earth during time periods inwhich a convergence of foundational platforms, like the different aspects ofEarth’s biosphere, favored the emergence of diverse species, most of whichfailed.Massivenewtechnologiesemergewhenthediscoveryandextractionofmassiveamountsofresources(water,minerals,fuel)provideslow-costindustrialexperiments,mostofwhichfail.Althoughournarrativesofthepastrevealerasofbigchange,thosewholived

duringthosetimeslikelydidn’tseeitthatway:“Heybro,prettycool,we’relivingintheAgeofRenaissance,yeah?”“BeatstheMiddleAges,dude.”“Word.”

Thelifeyoulivedefinesnormalcy.

Is change big or little? Dramatic or incremental? Permanent or cyclical?Disruptiveorsustaining?No one can pinpoint where we exist on the curve. Is change over or just

beginning?Areweataninflectionpoint?Upordown?Istheendnigh,oristheAgeofAquariusapproaching?Abrokenclockisrighttwiceaday.How can we know when we are amid big change? Listen to experts and

incumbents.Ifyouhearalotofthis,thenbeforewarned—“Thetimestheyarea-changin’”:

“Don’tworry,it’sjustthebusinesscycle;or,inotherwords,thenextbustopickusupwillbebyinfiveminutes.”“Willxbeubiquitous?Ohthat’sridiculous;xisexactlywhatisalreadyconsumingyourmarket.‘It’sjustanormalcycle,we’llbeback.’”“Piracyiskillingus!”

TheLeanEntrepreneurisaboutnavigatingbigchange.Whetherwhat’semergingisconsideredthepostindustrialage,aninformation

society, or an experience economy, The Lean Entrepreneur aims to help youcreateproductspeoplewant, innovatewithnewventures, anddisruptmarkets.Withbigchangecomesbigopportunity.We’llprovideyouwithgroundedwaystomarket test your ideas with the rightmarket segment; we’ll give you real,tangibleexamplesofhowsuccessful entrepreneursaredoing so; andwe’llgetyoustartedrightnowandgetyouuptospeedquickly.WethinkofTheLeanEntrepreneurasafieldguidebecauseit isdesignedto

bebroughtintothefield,whetherthatisyouroffice,thelocalco-workingspace,yourclient’splaceofbusiness,orthelocalcoffeeshopasyousurfcyberspace,planning your conquest. Whereas a traditional naturalist field guide helpsoutdoorsmen identify the plants and animals of a certain geography, our fieldguidewillhelpyouidentifyconceptsandideasinthegeographyofinnovation.At first blush, some of these ideas may not appear to be applicable to yourbusiness,butwithanopenmindandaspiritofcreativity,wewilldemonstratehow these concepts can andwill radically reshape how you bring products tomarketand,ultimately,toyourbusiness.TheLeanEntrepreneurisabookofsynthesis,ofrecombination,and,wehope,

of inspiration. It isasynthesis in thatwewill showwhereseveralpre-existingideasabouthowtoinnovate,whichinitiallyappeartobevirtualislandsstrewnacrossasea,actuallyshareconnectionsandcomplementeachother.Andifwe

havedone thiswell,a larger,morecomplete,andmorecomprehensivemapofthechangescomingandhowtoinnovatenowwillhaveemergedforyou.As Henry Ford recombined existing technologies from different domains

(interchangeableparts,theassemblyline,theelectricmotor)intoawhollynovelanddisruptivesetofinnovationsresultinginthemanufactureanddistributionofthe first durable, mass-market automobile, we hope to inspire vis-à-vis ourinterpretations of several big ideas, which will result in a new approach thatscales well for disruptive innovators and entrepreneurs, from small, value-producingbusinessestotheFortune500.Theproductdevelopmentmethodologiesandinnovationframeworksespoused

byTheLeanEntrepreneurareheavilyinfluencedbytrulybigthinkers,suchasSteve Blank and Eric Ries, creators ofCustomerDevelopment and The LeanStartup, respectively.However, other, rather similar, innovationmethodologiessuchasdesignthinkinganddiscovery-drivenplanningalsoexist.Alltheaforementionedframeworkstendtobedrivenbyprinciple,ratherthan

byasetofcut-and-driedtactics,andaretypifiedbyiterative,customer-centric,data-informedapproachesresemblingthescientificmethod;andwe,asnatural-bornbricoleurs,happilyborrowfromideasthatwedeemappropriateaswellasdiscardorignorewhatwedeemunhelpful.Weurgeyou,thereader,todothesamewithideasandapproachespresentedin

thisbook.

WhyRead(Be)TheLeanEntrepreneur?OurmissioninwritingTheLeanEntrepreneuristhreefold:

1. To describe why our economy is primed for a new wave ofentrepreneurshipusingnewmethodsofdisruptiveinnovation.2. To provide you real-world examples of how entrepreneurs are creatingnewmarketsanddisruptingothers.3.Toshowyouhowyoucangetstartedcreatingvalue.ThecontextofTheLeanEntrepreneur isan iterative,customer-centric,data-

informed business development approach in the face of market uncertainty.Although, to some degree, all businesses operate in conditions of marketuncertainty,allsuchconditionsarenotcreatedequal.Marketuncertaintycanbedescribedby an innovation spectrum stretching from lessermarket uncertaintywhen undertaking sustaining innovation to greater market uncertainty when

pursuingtrulydisruptiveinnovation.Uncertainty and innovation are a duality. Without the former, there is no

opportunity for the latter. True disruptive innovation can only happen inenvironments in which the final product, and its value proposition, price,marketing, sales channels, and, most importantly, its customer are, at best,educatedguessesbut,morethanlikely,almostcompletelyunknown.The inverse is also true: If one is developing products for which the value

proposition,price,marketing,saleschannels,andmarketsegmentsareknownorverylikelytobeknown;theniterative,customer-centric,data-drivenapproachesasespousedbyTheLeanEntrepreneurmaybesuboptimal.Suffice it to say, when the value proposition is known and successfully

deliveredbyabusinesstoaknowncustomer,themethodsofexecutionusedbyitsownersandemployeesaregoodenough,atleastfornow.Perhapstheycouldbecomemoreefficientorlesswasteful,buttoinstructsuccessfulbusinessesonhowtobemoreefficientisnotourambition.Asyou readTheLeanEntrepreneur,we’llmake the case that innovating in

uncertaintyrequiresahighlyiterativeapproach.We’llalsomakethecasethatadisproportionate part of your business model is ultimately determined not bycommand-and-control diktats from the executive offices of your company orevenyourownpersonaldesiresbutimplicitlybythemarketsegmentyouhopetoprovidevaluefor.Thesooneryougrokthatyourcustomershavesignificantde facto control over the destiny of your business, the better for you, yourcustomers, your employees, your colleagues, your shareholders, and otherstakeholdersinyourbusiness.Tobelaborthepoint,itisyourmarketsegment,notyou,thatdetermineshow

you distribute your product, how much they are willing to pay, what sort ofmessagingtheyrespondto,andforwhatjobtheyareinneedofhiringaproduct.In other words, other than the fact that you can choose whether to serve aparticularsegment,itisuptothesegmenttodecidewhetheryoushouldbegivenashot.Since iterative, customer-centric, data-informed product development

approaches to creating value predate this book, is this simply a gussied-uprehashofpreviousthinking?Shortanswer:No.WeheartimeandtimeagainthatthegreatestcontributionmadebyEricRies

andtheLeanStartupisthelexicon.Itprovidesalanguageforanyonepracticing

entrepreneurshipto talkabouthowtodomeaningful innovation.Thepointhasneverbeenaboutwhocameupwithwhat,but, rather,howcanwe learn frompastsuccessestomakefutureendeavorsmorepredictable.

Wefeelthatwearenowwitnessingaphasemarkedbyradicaldisequilibriumand fundamental changes in innovation and entrepreneurship enabled by ajuggernautoftechnologicalandculturaltrends.Thebestwaytonavigatethenearfutureistohyperfocusoncreatingvaluefor

customersandmovingatthespeedoftheInternet.We’llshowyouhow.

WhoIstheLeanEntrepreneur?We’d like to answer that question like most entrepreneurs who are asked todefinetheirmarket:Everyone!However, inorder todemonstrate thatwedrinkour own Kool-Aid, we have spoken to and worked with many differentindividualsaswewrotethisbook.Hereareourmarketsegments:

Scalablestartupfounders—Ifyouarehopingtobuild“thenextbigthing.”Lifestylebusinessfounders—Wedon’tthinkthetermisderogatoryintheleast.Ifyou’retryingtobuildarealbusinessthatprovidesvalueto

customers,we’retalkingtoyou.Intrapreneurs—Ifyouaretryingtochangeyourbusiness,whateversize,tomoveatthespeedoftheInternetreadon.Educators—Yourecognizethatentrepreneurshipneedstobetaughtdifferently.GovernmentChangeAgents—If,likeentrepreneurstryingtodrivechangeinsidebigbusinesses,youaretryingtodrivechangeinhowgovernmentsoperate,we’reheretohelp.Investors—Ifyoucouldusehelpfindingandprovidingassistancetotherightstartups.

Althoughwe’dliketothinkthisbookwillbenefiteveryonetosomedegree,thisbookislikelylessthanoptimalforthesemarketsegments:Small-businessfounderswhoarestartingcompaniesforwhichthereisalreadyaknownmodel—Typicallythesearethetypesofbusinessesfoundinmalls:drycleaners,retailers,franchises,andsoforth.Lifestylebusinessowners—Ifyou’vealreadybuiltyourbusinessandaregenerallysatisfiedwithwhatyou’veachieved,congratulations!Youprobablydon’tneedus.Solopractitioners—Ifyou’retryingtogenerateapersonalorfamilyincomestreamvia“projects”orsmall-scaleproductsorserviceswethinkthat’sgreat!Thereareprobablybetterbooksforthat.

Generally speaking, if you’ve read Eric Ries’s The Lean Startup and arelookingformoretacticalapplicationoftheprinciplesespousedthere,thisistherightbookforyou.Ifyouhaven’treaditandneedconvincingthataleanstartupistherightthingforyouandyourorganization,wewillmakethecase—butyoureallyshouldreadEric’sbook.Ifyou’vereadTheFourSteps to theEpiphany, ourEntrepreneur’sGuide to

CustomerDevelopment,orBlank’sTheStartupOwner’sManual,youwill findnewtoolsandmethodologiesforapplyingtheprinciplesyoualreadybelievein.Thereisnotalotofduplicationhere.Ifyouarewellintotheleanstartupmovement,aheavyreaderofAshMaurya,

CindyAlvarez, SeanMurphy, and others,we firmly believewe have excitingnewmaterialyoucanusetogrowyourbusiness.

HowtoUseTheLeanEntrepreneurThis book hopes to not only teach you and inspire you, but also to showyou

somefunalongtheway.Tothatend,we’veengagedatalentedentrepreneurandartistwhogoesbythe

name of Fake Grimlock. Fake Grimlock has created an expressive set ofillustrations just for The Lean Entrepreneur. The illustrations tell a story andservetoamplifyconceptsfromthebook.You’ll find them a bit whimsical at times, but be prepared to think deep

thoughtsasyoutakethemin.We’ve made them available for you for reuse and remix, subject to the

CreativeCommonslicense.Ifyouwanttodownloadtheillustrationstousetheminyourpresentationsor

blog posts or in other interesting ways, please do.* You can access them athttp://LeanEntrepreneur.co/illustrations or e-mail us atpics@leanentrepreneur.co.Our writing style aims to get to the heart of the matter quickly. Experts in

specific domains will notice, probably much to their irritation, that we willintentionallyglossoversomeofthefinerpointswediscuss.Thisisnotbecausewedon’tthinkthedetailsmatter;theydo,buttheydon’tmatterforthecontextofthisbook.TheLeanEntrepreneurisdividedinto10chapters:1. StartupRevolution—Abrief redux onwhat’s going on now thatmakesleanstartup therightmethodology toapply toyourbusiness, regardlessofsizeorsector.2.Vision,Values,andCulture—Wedescribewhata leanstartuplookslikeinthestartupworldandintheenterprise.3.All theFish in theSea—Wehelpyoufigureoutwhatcustomers to fishfor.4.WadingintheValueStream—Weexplainhowtopositthevalueyouarecreating.5. Diving In—We introduce various methods of customer interaction tolearn.6. Viability Experiments—We talk about various methods of runningexperimentstode-riskyourmarket.7. Data’s Double-Edged Sword—We help you not drown in data, whilefindingtheinformationnecessarytomovetheneedle.8.TheValleyofDeath—Weguideyouthroughtherequisiteupsanddownsoftraversinguncertainty.

9. Real Visionaries have Funnel Vision—We break down marketing andsales.10.TheFinalWord—Weendwithacalltoaction.Throughout, we include examples of real companies applying lean startup

principlesandsucceeding.Wehopeyougainlearningandinspirationfromthesecompanies,manyofwhomdon’tusethetermleantodescribethemselves.Each chapter also includes exercises and templates you can use to help you

think through your businessmodel. Althoughwe don’t believe a step-by-stepapproachtosuccessexists,wethinkmanywillfindourexercisesbeneficial.Learnthecraft,thenmakeityourown.

* We’ve licensed the illustrations withhttp://creativecommons.org/licenses/by-sa/3.0/.We’d loveforyou touseandshare them, just remember to attribute “The Lean Entrepreneur by BrantCooper and PatrickVlaskovits with illustrations by FakeGrimlock”with alinktohttp://LeanEntrepreneur.co.Thanks!

Chapter1

StartupRevolution

TheMythoftheVisionary(Take1)Visdorffeelssummonedtotheforestforunknownreasons.Alas,heisreluctanttogo.Thefeelinghascomeuponhimbeforebutneverlikethis,neversostrong.Heshakeshisheadandreturnshisgazetothemysteriousprosebeforehim.Hetriestofocusonthebitsofhistoricaltextrequiringmentalgymnasticsandre-imagination.Hismindblursandthewordsspinuponthepageasifinamagicalvortex.“Blastitall!”heexclaimsasheslamsshutthesturdyvolume.“Cursethisinfernalvision!”Withaheavysigh,Visdorfpusheshimselfawayfromthesturdydiningtableandstandsup.Heturnstolookoutthewindowinthedirectionoftheforest.Theremainingdaytimelightispulledtowardthehorizon;hisdimshadowmovesslowlyalongthewalluntilitisloomingbeforehimastheflickeringlightfromthereadingcandlebecomespredominant.“Donotmockme,oldfriend,”Visdorfsaysaloudtohisdarkvisage.His

mindmadeup,hestridespurposefullytowardthefrontdoor,grabshispackandbedroll,andheadsoffintotheearlyevening.Hisstepsfallheavyonthedirtroadleadingtotheedgeoftown.Hewalkswithpurpose,thoughhisownmindisnotleading.Thelastofdaylightarcsacrosshisbackandthenightenvelopshim.Heleansforward.

*Astheedgeoftheforestnears,Visdorfhearsmerrymusicemanatingfromthelastricketybuildingamidsttheseveredtrunksofoncemassivetrees.Hestopsbeforethepathleadingtowardtherevelry,andwishesnothingmorethantojoinhiscomradesinside.Onesonicvoicerisesinsongabovetheothers:“Chantmetheriveroftimeflowingnigh!“Betrayedbymylovers,thestarsinthesky!”“Mysweetfriend,TachNah,”Visdorfsaystohimself,asheturnsawaytowardthenarrowtrailthatleadsintothethicknessofuncutAncients,thesourceofallthatsustainsandseverslifeinthislandofforebodinguncertainty.JustthenthedoorofthepubburstsopenandoutspillsTachNah,andseveralotherinebriatedrabble-rousers.Visdorfdoubleshispace.“Whatclumsygoongoesthere?”yellsoutTachNah.Visdorfstops,hislargeframebarelyvisible.“Why,itcouldonlybeonemisshapenbeast,Iknow,”shesayslaughing.“Le’sgoget‘im,”saysKlandor,oneofthedrunkenmenatherside.Hestumblesforward,onlytobesenttumblingtothegroundwithaheavyshovefromTachNah.“Shutyourface,youdumbdrunk.That’sourfriendVizzy!”Visdorfreturnsafewsteps.“Yes,itisI,yourfriendVisdorf.”“You’vedecidedthen?”asksTachNah,suddenlylucid.“HeadingtotheClearingbyyourself.Atnight.Withoutyourcomrades?”“YouknowaswellasI,thisisatripImusttakemyself.”“Youareafool.”ShestaresfiercelyintotheeyesofVisdorf,wholooksaway.“Bethatasitmay.”Visdorfturns.“Wait.”TachNahsoftenshergaze.

“It’sdecided.I...Imust—”“Wewillgotoo!Backtogetheragain!”saysTachNah.Theothers:“Here!Here!”Visdorfpauses.Hestandstall,loomingabovethem;adarkershadowthanthenight’s.“Temptingasitmaybe,”Visdorfspitswhilesteppingmenacinglytowardthem,“todragyoudrunkensopsintotheforestandsacrificeyoutothewaitingVekwolves,Ishallnot.IfyouwishtojourneytotheburningpitsofHell,thenbyallmeansdoso.Butnotwithme!Findyourowndamnedswirlingorbsofinternalfireandtorment!Followyourownragingbeast.IshallfellAncientsifImust,slaywolveswiththeirownbone!”Visdorfyellsasheslashesthenightwithhisglisteningsteelblade.Heturnsfromhisshockedfriendsanddisappearsintothedarkwoods.

*Visdorfstaresupintothenightsky.Hehasfoundasmallmeadowandhasmadespaceforhimselftorest.Thestarsabovearedense.Theymovewhenhisminddrifts,butarestillwhenhelookscarefully.Hethinksofhisfriends.Heknowshewastoohardonthem.He’snotsurefromwherehisviciouswordssprang.“Fear,perhaps,”hereasons.“Ihadtoprotectthem.ButfellingAncients?SlayingVekwolves?Withthis?”Visdorfmockshimself,holdinguphiswolfbone–handledknife.Hehadwalkedforhours.Theanimalpathhefollowedguidedhimtothemeadow.Thiswasnot,however,theClearingTachNahhadmentioned.“Iamsureofthat,”hesaystohimself.Thoughhehadneverseenitbefore.TheClearing,aslegendhadit,washeavilyguardedbyVekwolvesandthelivingAncients.NoonesurvivesthejourneybuttheAncientsthemselvesandthosewhofighttheirwayin.“AndhereIamandso...”Visdorf’seyesgrowheavyandthestarsdanceagain.“Theirdanceisfamiliar,”Visdorfthinksashedriftsofftosleep.

*Visdorfawakeswithastart.Inaninstantheisonhisfeet,hisbladedrawn.Thewindshiftsacrossthemeadow,asifundecided;ananimal’swarmbreath,apant.Itistoodark,whatlightfromthestarsgonebehindalowhaze.Heturnsslowly,staringintentlyintothebrush,hisheartbeatinginhischest.Hefeelsalowwhoosh.Visdorfiswithinhimself.Heiscrouched,eyesclosedandarmshanging

looselyathisside.Heturnsfromhisfeet,avortexthatbeginswiththeground.Hepivots,historsorotates,thenhisshoulders,andthenlikethetailofawhip,hisarmsriseup,hisbladeslashingthroughtheair.ThebuttoftheknifestrikestheribcageofaleapingVekwolf,sufficientlyknockingitoffcourse,itsteethgnashingpastVisdorf’sheadasitcrashesintohim.Visdorffallstothegroundandthewolfisinstantlyuponhimagain,lockingontohisleftarm,whichVisdorfoffersinlieuofhisneck.Twistingandrollingtohisleft,VisdorfplungeshisbladeintotheVekwolf’sside.Thewolfletsoutadisruptingcryandfallstotheground.Visdorfstrugglestohisfeet,onlytoseetwomorewolvesstalkinghim.AgainVisdorfhearsthesoundsofcuttingair,butthistimeaquietwhistleandthenasecond,andathird.Withquietefficiencythreearrowsland,oneatVisdorf’sfeet,andseveralmomentslater,thesecondandthirdcutdeeplyintothebacksofthewolves’heads,pinningthemunceremoniouslytotheground.WhileVisdorfisstilltryingtograspwhathadjustoccurred,helooksuptoseeTachNahstepintotheclearing,bowinhand.“Drunkensop?Really,thatgoestoofar,”shesayswithaplafyulgrin.“Hencethefirstarrow?”Visdorfquicklyrejoins.“Wantedyoutowonderforatleastamoment.”Theyshareanervouslaugh.Thehazebeginstobreakandthestarsonceagainemerge.Asifwarned,Visdorflookstothesky.“Thisisn’ttheClearing,isit?”“No,Idon’tbelieveso,”TachNahsays,examininghisarm.“Youarelucky.”“Howso?”Visdorfasksangrily.Helooksather.“YoucallVekwolveslucky?”“Youareluckytheyalldon’tattackatonce,butinsteadfollow.”“Thisisthetruth,Isuppose,”hesays,wipinghisbladeonhispantleg.“What’snext,Visdorf?Wheredowegofromhere?”“We?”hechallenges,butthensoftens.“Welooktothestars.”Theybothlookupagaintotheheavens.Visdorfrubshiseyes.“Iamfatigued.”TachNahdoesn’trespond,hereyeslockedskyward.Helooksatherandupagain.“Youseethis,too?”Shenodssilently.LikethevortexVisdorfsawwhenreadinghismysterioushistoryvolume,

thestarsandgalaxiesandplanetsofthenightskyturn;amagicallightshowformedfromthepast,butrevealingsomethingnew.Andthenasquicklyasitstarted,itisdone.Inablinkthestarsareastheywere.Oralmost.Apatternrevealsitself.AdozenstarsVisdorfhadnevernoticedbeforeglimmerbrighterthanever,formingapictureinthesky,likeamaptothefuture.“AreyouseeingwhatI’mseeing?”Visdorfwhispers.“Yes,”TachNahsays,“andthisistheway.”Shepointsacrossthemeadow.“Iseenow.Iseewhatmustbedone.”VisdorfpicksuphispackandbedrollandtogethertheystartthelongjourneytowardtheClearing.

TheMythoftheVisionary(Take2)Withbrowfurrowedandfingerscallusedfromincessantscribblingsandendlesscalculationsnotedinhisweathered,leathernotebook,andwiththedimlightinhisworkshopgrowingfainter,Henrysetsdownhiswell-wornnubofapencilandleansbackinhischair.Hesmileswearilytohimself.Hehasrunthenumbersforthehundredthtimeandtheywork.Heisfinallysurehehassolvedallthepiecestotheproductdesignpuzzlehehasbeenworkingonformonths.Closinghiseyesandtiltinghisheadback,heraiseshisarmsandwhoopsaloud:“Ididit!”Henryspinshischairtriumphantly.“NowIcantellSusie,”hethinkstohimself.“We’llberich!”CUT!Enoughofthisnonsense.Ifwepromisetoforgoourmythtelling,willyouforgobelievinginthem,atleastforashortwhile?AfterTheLeanEntrepreneur,youcanreturntoyourlonelyalbeitheroicgenius,fightinghiswaythroughspasmsofself-doubt,humiliation,andtormentatthehandsoftheignoranthordesofnon-believersthatsurroundhim.WewillsetasidehisEureka!moment,andskipoverhislong,righteousfighttothetop,hisbountyofdeservedwealth,andtheadoringlooksthatareshowereduponhim.WewillsheepishlyignorethetardycoronationofVisionarystatus.

Let’sgetreal.

Man,beingbiological,followsbiologicalpatterns.Sodoman-madethings.Cyclesexistinnature:water,seasons,phasesofthemoon,lifeanddeath,and

soon.Humanstuffgoesthroughcycles,too:moods,business,life,anddeath.Ifyoupullback far enoughanddon’t sweat thedetails, youcan findpatterns inlargeswathsofhumantime.Humanslovetolabelthesetimeperiods:

TheStone,Bronze,andIronAges.Reconstruction,theGildedAge,andtheProgressiveEra.TheMachineAge,theAtomicAge,andthePostmodernEra.TheAgrarianandIndustrialRevolutions(herelivesamyriadofpostindustrialterms).

Welimpforward,fallback,andthenleap.Wash,rinse,repeat.Eveninthebestof economic conditions,millions are unemployed. It’sworse elsewhere.Manyhavewrittenaboutitbeforeandwillcontinuetodoso.Theeconomyischangingstructurally,forever.White-collarjobswillfollowtheblue.Punditseverywherehave been competing for years (decades?) for what to call the postindustrialeconomy. It’s the ThirdWave, the Information Age, the Knowledge Era, theServicesEconomy;theeconomyisglobal,digital,virtual,andcreative.Meanwhile, manufacturing is not merely being sent offshore, it’s being

permanentlydisplaced.Servicejobsaredeteriorating,too.High-endservicejobsaresentoffshore.Onlinemarketplacesturnwhite-collar,college-requiredcareersintocommodities.Browsing theonlineworkplaceoDesk, for example, revealsthefollowingjobsforwhichyoucangetcompetingbidsfromcontracton-shoreandoffshoreindividualsorfirms:engineering,accounting,marketing,sales,webdevelopment, design, customer service, technical support, administrativeassistance,writing,editing,translating,HR,legal,recruiting,statisticalanalysis,andIT.Furthermore,manyother services jobs—retail,hotel, tourism,and the like—

whichoftenleadtherecoveries,areoftenlowpaying,seasonal jobs.It’sworthasking,Whatarethesepeoplegoingtodo?AsSethGodinwrites,“Thefactory—thatsystemwhereorganizedlabormeets

patient capital,productivity-improvingdevices, and leverage—has fallenapart.Ohio andMichigan have lost their ‘real’ factories, just as the factories of theserviceindustrieshavecrumbledaswell.Worsestill,thetypeoflow-risk,high-stability jobs that three-quartersofuscravehave turned intodead-end trapsofdissatisfaction and unfair risk.”1What’s going on? It’s pretty hard to get yourarmsaround.Economicgrowthindicatorsthatreportonthepasttohelpusplan

for the futurewill be revised backward soon.Don’tworry; expertswill be onhandtoexplain.Political institutionshaveneverseemedsoclueless.Themediaiscompletely

flummoxed,havinggivenupentirelytryingtoseparatefactfromfiction.Punditsareprovenwrongonadailybasis,onlytobetrottedoutbeforethemassesfortheiropinionsagain.Economistsrunmodelsbasedonassumptionsthathavenoreal-world bearing. Ceteris paribus is Latin for “on Fantasy Island.” (CueRicardoMontalban.)Yet, if you travel to tech hubs in San Francisco, parts ofManhattan, Santa

Monica,Boulder,orBoston,youcan’tbuyahip,gourmetcoffeewithoutwaitingin a queue of T-shirt- and jeans-clad entrepreneurs; the chosen fashion of therelentless.Entrepreneurship is flowering globally. Chris McCann’s StartupDigest, a

startup-event newsletter, has over 200,000 subscribers and is published in 94cities in 43 countries.2 Lean startupmeetups, which host startup speakers andoffermentoring,collaboration,andsocialization,occurregularlyin185citiesin37countries.3Morethan75,000attendeeshaveparticipatedinover750StartupWeekendeventsin325citiesinover100countries,wheretheyformteamsandbuildstartupsovertwo-dayintensiveworkshops.4

ThestartupsceneissohotinSiliconValley,entrepreneurs,investors,andthemediaaredebatingwhetherweareamidanotherinvestmentbubbleinthehigh-technologysector.Facebookwentpublicatavaluationofover$100billion.Thesame company acquired Instagram and its 13 employees for $1 billion.Valuations of hot, low-revenue (or in some cases, no-revenue) technologystartups are reaching nosebleed levels. Engineering talent is difficult to find;competitivehomebuyers areoverbiddingonhouses in theSanFranciscoBayarea. Sound familiar?Many commentators fear that Silicon Valley (and othertechclusters)isrecapitulatingthedot-comboom,bubble,andbustcycleofthelate1990s.Asinthepast,there’snoshortageofhandwringingwithregardtothetypesof

companies being created. Copycat companies, feature-not-a-product ideas,entrepreneurs thinking too small, a lackof innovation, and soon are commoncomplaints, especially among venture capitalists and page view–hungrybloggers.EvenSiliconValleycheerleadersimploreentrepreneurstostopmakingconsumer iPhone applications and instead switch to building more efficientairplane wings, as if that’s how entrepreneurship works, how innovationhappens.5

Weheardoomandgloomononesideandboomandgloomontheother!Yes, this all moves in cycles. Human beings have witnessed similar trends

before.Butthecyclescomequicker,andtheyevenoverlap.We’reatthetailofoneandintheeyeofthestormatthesametime!CyclesaremovingatthespeedoftheInternet.Althoughcyclesmeanwhatgoesupmust comedown—andviceversa—the

arrowoftimemeanstheworldisdifferenteachtime,andchange,fromthemostmacro perspective, heads in one direction. The long-term progress of humanshasbeenoverwhelminglypositive.Wearguethatwenowfindourselvesamidatremendousstormofeconomic,

technological, and cultural disruption.We are experiencing massive waves ofchange,hightidesofanxiety,andatumultuousbackwashofresistance,toputitdramatically. The disruption creates an odd mixture of extraordinary marketefficiency coupled with volatility and uncertainty at levels equaled only by,perhaps,thequantityofinformation,data,andconnectivityhelpingtocauseit.Toprosperthroughthesechanges,whetherasanindividualorabusiness,you

mustbefast,efficient,andvalue-creating.Youhavetobelean.

CaseStudy:DisruptingVentureCapital

500Startupsisaglobalventurecapital(VC)firmheadquarteredinMountainView,California.Startedinlate2010,ithasinvestedinnearly400companiesin20differentcountries.WespokewithprincipalsDaveMcClureandPaulSinghabouthow500Startupsemploysleanstartupthinkinginitsinvestmentdecisionsandhowthey,alongwithahandfulofotherinvestors,aredisruptingtheventurecapitalgame.Lean Entrepreneur: What is different about 500 Startups asopposedtootherearly-stageventurecapitalfirms?500Startups:We thinkweare agoodexampleof aventure firmthat has adapted to the new nature of early-stage technologystartups,whichisbeingdrivenbyanumberoffactors.

The first point is that it’sbecomingeasier to launchaproduct

andtogetcustomers,andthat’sdrivenbyrapidlydroppingcostsandaccesstothesehugeplatformslikeFacebook, likeTwitter,likeiOSandAndroidandothers.The second thing that is fundamental toourbusiness is as theweb gets bigger, the world is getting smaller. You can, veryliterally,beanywhereintheworld,andstartaglobalbusiness.Thirdly, access to capital for tech startups is getting easier aswell.ThiscapitaliscomingnotonlyfromVCsandangels,butgovernmental programs such as Startup Chile. We’re seeingwhat isessentiallyacommoditizationofearly-stagemoney,asgovernments—regional, local, and federal governments—realizethatsometimestheirtaxdollarsarebetterspentcreatingentrepreneursratherthantryingtolurethemfromotherregions.

LE:Howhas500Startupsadaptedtothisenvironment?500S:Theprocessofduediligenceonapotential investmenthaschanged drastically. Ten years ago, the process to get to know acompanyorastartupwaslong.Youreallywantedtogettoknowthefoundersandthebusiness,becauseyouwereprobablygoingtowrite a quarter-million-dollar check. So all the drawn-out duediligenceyouweredoingovertwoorthreemonthswascompletelyrational.

Butbecauseof those trends thatwe justmentioned,youdon’treallyhavetodothatanymore.Because,again,it’sjustsoeasytostartup,mostpeoplewhogetfundedtodayhavesomesortofprototypealreadyinplace,evenif it’s a roughprototypeofminimaluse.That’s far better thansomeoftheideasthatweregettingfundedfiveor10yearsago.Wearethereforeabletodeploysmallerchecks.Weareabletodeploythese$50,000checks,whichinthebiggerpicturearenotabigdeal,butwemakethosedecisionswithinlessthanaday,sometimeslessthananhour.Soearly-stageinvestorsareincreasinglyrealizingthatfortheseearly-stage startups, most of the meaningful due diligencehappensintherear-viewmirror,afterthefirstinvestment.

LE:Islarge-scaleventurecapitaldead?500S:Wedon’tthinkthat’sthecaseatall.Infact,wethinkwhat’s

actually happening is that though it’s cheaper to start a startup,scaling a startup ismore expensive. That’s because asmore andmore of these startups exist, they start to saturate the best onlinedistributionchannels,drivingcostsup.

Whencustomeracquisitionstartstoworkandtheywanttoplowmoremoneyintothesecompetitivechannels,theyrequirealotmoremoney.Thefactisitcostsmoretoscale.SotherecertainlyisstillaplaceforthebigVCs.

LE:Howdoescrowdfundingaffectearly-stagestartups?500S:We think that’s going to be big.When people think aboutcrowd funding they usually think about doctors and lawyerswriting checks, but what’s going to be interesting is that nowfounderscantakeacheck,evenaverysmallcheck,fromsomeonewho has functional expertise in an important area, say, pay-per-click. This means that traditional investors who simply wavecheckbooksaroundaregoingtobecomeincreasinglyirrelevantandweasanindustryaregoingtohavetoadapt.LE:WhatdoesitmeantocallyourselvesaleanVC?500S:WethinkthatbeingaleanVCisreallyaboutbeingthecardcounterat theblackjacktable.InsteadofbeingthetraditionalVCjumpingaroundanddoingbigbetsbasedongutfeeling,wethinklean VC is akin to walking up to that table and placing theminimumbetspossible,whilewecount the cards andas soonaswesee thepattern, that’swhenwedoubledown. It’s reallyaboutputtingalittlebitin,watchinghowthefoundersbehave,puttingalittlebitmorein,watchinghowthingsgo,andthenputtingalittlebitmorein.

That’smuchdifferentthanthetraditionalVCmodel,whichistotakealotoftimetogettoknowthefoundersandthenwriteabig check upfront, and then pat ourselves on the back andpretendweknowthatthisisgoingtobeawinner.

LE: Has the VC industry kept up with the meta-innovationrecently?500S:Ourassertionisthatventurecapitalisoneoftheonlypartsofprivateequitythathasnotinnovatedmuchoverthelast10,15,oreven50years.

Here is a very simplistic example: If you are a publicmarkettrader andyouboughtone shareof thisonecompany, and thenext day the price changes, if there was any pain in thattransaction,youfeelitonyourbooksimmediately.Now ifwe look at venture capital, if you’re aVC and you’rewritingaquarter-million-dollarorhalf-a-million-dollarchecktoanearly-stagecompany,youarenotgoingtofeelthepainorthesuccessforwhat,maybeayear,maybetwo?Possiblyeventhreeyears?Thepointisthatifyouareapublicmarketinvestor,youfeelthepainrightaway,positiveornegative.Ifyouareaprivatemarketinvestor, you feel the pain measured in orders-of-magnitudelongeramountsoftime.Asfledglingcompaniesareabletodomoreandworkwithless,we investors need to adapt our thinking and our processes,because as we write smaller checks, we are going to feel thepainsooneraswell.Venturecapitalhasn’tinnovated,becauseweneverfeltthepainasfastaswedotoday.Speedandfeedbackloopsareparamounttothe500Startupsstrategy.Ontheoneextreme,ifwejusttakeourtimelookingatdeals,wearegoingtomissthedealbecauseother leanventureinvestorsare going to come in andwrite smaller, faster checks to thosestartups.Ontheothersideofit,evenifwethinkthatwearegoingtobeabletodeployaquartermillionorhalfamillionintoanearly-stagestartup,it’slikelywewillneverseethereturns.ThefactisthattheamountoffailureyouseeasaleanVCisnolargerorhigherthanwhatyouwouldhavetraditionallyseen.Itjust feelsmorepainfulbecause ifyouaremakingsmallerbetsacrossmore companies, youwill perceive a higher percentageofcompaniesfailing.Therealityisthatit’sactuallythesameasa traditional VC but simply more visible and the feedback isfaster.

Thereareanumberofconvergingtrendsandtechnologiesthatbringustothis

point,summarizedby(butnotlimitedto,andinnoparticularorder):ByteseatingtheworldHypeandhyperCrowdseverywhere(feelingclaustrophobic?)

BytesEatingtheWorldIn2011,famedInternet-entrepreneur-turned-venture-capitalistMarcAndreessendescribedhowtechnologycompaniesaredisruptingentireindustries.Hecalledthisphenomenon“Softwareeatingtheworld.”Hedeclared,“Sixdecadesintothecomputerrevolution,fourdecadessincethe

invention of themicroprocessor, and two decades into the rise of themodernInternet,allofthetechnologyrequiredtotransformindustriesthroughsoftwarefinallyworks and can bewidely delivered at global scale.”6 It’s hard to arguewithhim,thoughsomewouldprefertothinkaboutitintermsofhardwareeatingtheworld, or the “cloud” eating theworld.Of course, the Internet is softwareandhardware;hardwarerequiressoftwareandsoftwarerequireshardware.Asidefromthequestionofwho’seatingwhat,thelinebetweentechnologycompaniesand traditional-products companies is blurring to the point of making thedistinctionirrelevant.Softwareisineverything:yourcar,phone,stereo,camera,andTV.Softwareis

critical to any modern business. Customer management, logistics, resourceplanning,inventorycontrol,humanresources,accounting,factoryautomation—allaremadeupofsoftware,software,software.AsAndreessenpointsout,youbuybooks,watchmovies,listentomusic,and

play games created or distributed by software companies: Amazon, Netflix,Pandora,Apple,Zynga.Innovative software coupled with new electronics results in new ways for

computersandhumanstointeract(HCI),resultinginwhatinvestorBradFeldofthe Foundry Group calls “instrumenting human beings.” We are at the veryinfancyofHCIanditsnaturalprogressiontowarda“symbiotichumancomputerfuture.”7

The open softwaremovement, which helped drive down development costsand drive innovation in the personal computerworld, is now emerging in thecomputernetworking industry led largelybyGoogle’s“G-ScaleNetwork”andtheuseoftheOpenFlowprotocol.Did we mention hardware? And materials science? Massively disruptive

technologieslike3Dprintingareenablingthefirstwaveofmasscustomizationthat will threaten manufacturing-based economies. Movements are wellunderway to open-source hardware development technologies and createhardware components that can be used across different companies, even indifferentindustries.“For the last hundred years and definitely for the last thirty years

manufacturinghasostensiblybeentreatedasasolvedproblem,”saysDavidtenHave,CEOandfounderofPonoko,aweb-basedplatformforthemanufactureofcustomproducts.“Therealityisthatitisjustaplateauthatwe’vebeensittingonand some technologies and some social forces have come into play that havecausedustopushofftheplateau.”8

digital fabrication:Digital fabrication combines 3Dmodeling and additivemanufacturing technology to produce models, prototypes, and, mostsignificantly,functionalproducts.Digitalfabricationisgivingsmallbusinessestheabilitytomanageinventories

likeFortune100companies.Suddenly,experimentationwithnewproductsanddisruptiveinnovationisnotsorisky.Thisalsomatchesupwiththetrendtowardpeopleproducingproductsthatare

solving problems for themselves, their communities, and nichemarkets.Moreand more businesses are no longer developing for masses, but rather solvingproblemscloseby.Thecultureofopen-sourcesoftware(whichallowsfreeuseofthecodeunder

specific conditions) emerging in hardware is another death knell for the big-business-protectingpatentsystem.(Notthatthiswillbeaquickdeath.)The only way to thrive is to be what Steven Spear calls a “high velocity”

organization. A high-velocity organization not only continuously produceshigher-qualityproducts,while increasingefficiency,butcontinuously improveshow toproduce the product. This, Spear argues, is the forgotten lesson of theToyotaProductionSystem:thatToyotafiguredout“howtodotheworkinsuchawaythatindividualsandgroupskeptlearninghowtodothatworkbetter.”Currentdigital-fabricationtechnologiesareatthestateoftheAppleIin1976,

estimatesDavidtenHave,which,iftrue,meanstheeffectthat3Dprintingandotherdigital-fabricationtechnologieswillhaveonoureconomiesandcultureispotentiallymassive.MarkFrauenfelder,theeditor-in-chiefofMAKEmagazine,points to themanufactureof componentswith significantlygreater complexitythanstandardsubtractivemanufacturingallowsforandtothelargelyunexplored

applicationsinfineandcustomartproduction.9

HypeandHyperInternet, mobile, mobile Internet, laptops, tablets, PDAs, GPS, 3G, 4G, IM,SMS,GPS,sixdegreesofseparation,LinkedIn,Facebook,Twitter, theMatrix,youget thepicture.We’replugged inandconnected,and,assome like tosay,hyper-lyso.InvestorMikeMaples Jr. says, “Part of what we talk about with respect to

hypernet is you’re going to have billions of nodes connected to millions ofcloudsandthatyou’renotgoingtothinkofitasoneInternetanymorebutyou’regoing to have all kinds of different clouds and data feeds and screens andinterfacesthatdon’tevenhavescreenstalkingtoeachother,sometimesovertlyandsometimesbehindthescenes.”10

Toalargeextent,thishasalreadyhappened,andwecanseetheramifications,bothgoodandbad.Hypernetmeansspeedandreach.Dataofanykind,fromadstozeitgeist,reachesfurtherandtravelsfaster.Theimplicationsaretremendous.It took AOL nine years to hit 1 million users, Facebook nine months, and

DrawSomethingaroundninedaysinearly2012!Howlongbeforeweseeapairofentrepreneursteamuptobuildabillion-dollarcompany?11

Comingisaworldofworldwide,instantaneousconnectivity.Machinestalkingtomachines,datatodata,decisionsmadebymachinesbasedonthatdata.Thesizeandspreadofdemonstrationsandprotestsacrossmultiplecountries in theArabworld,knownastheArabSpring,leveragedhypernet.“That Wednesday, what had started as a series of bizarre, unexplainableglitches inquant [financial “engineers”who tradeusingbrain-twistingmathandsuperpoweredcomputers]modelsturnedintoacatastrophicmeltdownthelikesofwhichhadneverbeenseenbeforeinthehistoryoffinancialmarkets.Nearlyeverysinglequantitativestrategy,thoughttobethemostsophisticatedinvesting ideas in the world, was shredded to pieces, leading to billions inlosses.Itwasdeleveraginggonesupernova.”12

Source:ScottPatterson,TheQuants:HowaNewBreedofMathWhizzesConqueredWallStreetandNearlyDestroyedIt.

It’snotjustus,however;it’sthem.It’sthemachines!Machines needn’t have intent to assist in catastrophes like the financial

meltdownof2007.Accordingtosomeanalysts,60percentofequitytradingis

alreadydonebymachines.Notonlyarealgorithmssometimesbuggy(inotherwords,havecodingerrorsthatcanwreakhavoc);theireffectsarenotpredictableby human intelligence. Under unusual market circumstances, such as theunravelingofthehousingmarketin2007,forexample,computertradingandthemathematically complex algorithms directing them had unforeseen andunforeseeableconsequences.Thisphenomenonwas, infact,a leadingcauseofthemarketmeltdown.13

Hypernetandhyperconnectivitydisconnectusasquicklyas theyconnectus.The 2011 power blackout in San Diego was historically severe, traversingseveral Southwest grids, leaving 7 million without electricity in 11 minutes.Tripping mechanisms, designed to protect the system, actually caused theripplingeffect.14

WhenAmazon’scomputer-networkedcloudservicegoesdown,ittakesmajorbusinesses down with it. Ditto with Facebook’s open programming interfacesthat other businesses use to connect to Facebook. Connectivity bringsredundancy,butdependencealsobreedsfragility.The same connectivity that passes useful and literally revolutionary

information around the globe, just as quickly and perhaps more thoroughlypasses mundane, brain-rotting drivel and, worse, manipulation, propaganda,rumor,misleadinginformation,andoutrightlies.Infact,thefourthestateisnowbuiltontopofthispageview–centricworld.RyanHolidayexposesthefarceinTrustMe,I’mLying:Thelinkeconomyencouragesblogstopointtheirreaderstootherbloggerswhosaycrazythings,toborrowfromeachotherwithoutverification,andtotake more or less completed stories from other sites, add a layer ofcommentary,andturnitintosomethingtheycalltheirown.15

Ryanisn’treferringtotheblogsthattheold-schoolmediaderidesaspajama-wearingamateurswritingfromtheirparents’basement,but,rather,theoldmediawebsitesthemselves.Theydependonnewsthatisfirstreportedbyblogsofallstripes,whichthenreportonwhatpeoplearesayingwithoutverifyinganyoftheconjecture.Ironically,thisisoftencalledbetajournalismanditiseerilysimilartoleanstartuppractices,thoughinawhollynegativeway.

FeelingClaustrophobic?Allthisconnectivitynotonlyaffectsindividuals,businesses,andmachines,but

also creates a revolutionary crowd dynamic. That crowds wield tremendouspower has long been known. See their impact on social upheaval, labormovements, or even John Steinbeck’s phalanx theory, wherein he observers“withadrive,anintent,anend,amethod,areactionwhichinnowayresemblesthe same thingspossessedby themenwhomake [it]up.”AlthoughSteinbecknoted the negative side of the mob mentality, it is also observed that theknowledge of the mob, as in a network, perhaps, can be greater than theknowledgeofanyofitsmembers.The organization of crowds is disrupting all sorts of disciplines. Scientific

organizations, researchers, and private life-science businesses, includingpharmaceuticals,usealoosenetworkofprivatecitizenstoadvanceresearch.Itturns out that smart people outside of corporate research and developmentdepartments can often break through scientific bottlenecks that internalresearcherscannot.Amazon’sMechanicalTurkdistributessimpletaskstoworkersworldwidewho

voluntarilyperformthemenialtasksforverysmallamountsofmoney.Althoughthe Internet is littered with amateurish, horribly mundane, and ignorant user-generated content, the opposite also is out there. Much to the chagrin ofprofessional photographers, writers, designers, and such, as well as stockpickers,politicalanalysts,andmembersofotherdisciplinesnormallydominatedby elites, there are legions of people in the great wide world who are theirequals.TheInternetandcrowdsourcingbringsthattolight.Crowd-sourcedadcontestsresult inadvertisementsatleastasentertainingas

thebestprofessionalTVspots.OnlinenewssiteslikeHuffingtonPostleverageunpaid bloggers and yet produce copy that rivals that of traditional printstalwarts. Online graphic design and stock photography websites introducedmarketefficiencythatapproximatesperfectfreemarketconditions.“Ifsomeone’sgoingtocannibalizeyourbusiness,betteritbeoneofyourother

businesses,” Getty CEO Jonathan Klein said after acquiring iStockphoto, acrowd-source marketplace for photographers.16 Crowd-source networks breakthroughman-madeknowledgesilosandbreakdownthought-limitinghubris.Crowd-funding sites like Kickstarter are currently used by entrepreneurs to

takeproductordersbeforemanufacturingtoprovedemand.RecentlegislationintheUnitedStateswillenablecrowdfunderstomakeinvestments,takingastakeinthestartupstheysupport.Inthenot-too-distantfuture,theinvestmentbankerswho arrogantly believe that their post-crash bonuses are justifiable will havetheir value tested as money flows like water downhill toward opportunity

withoutthem.InvestorBillGrosssays,“Crowdfundingisgoingtohaveanenormousimpact

onentrepreneurs,impactonVCs,impactontheangels.It’sjustgoingtoreally,hopefully democratize fund raising, but it’s going to have unintendedconsequencesofsomekindaswell.Whoknowswhatthepitfallswillbe.”17

Doweknowifcrowdfundingwilldisruptbankingandventurecapital?No,ofcoursenot.Thewaytheyaredismissingit,however,sureportendswell.

WhichIstoSay,DisruptionHurtsGlobalizationcombinedwithonlinemarketplacesresultedinoffshoringandthecommoditizationofformerhigh-marginbusinessesandoccupations.Disintermediationhasdisruptedmultipleindustries,puttingcreativepeoplein

directcontactwithconsumers.Increasingly,musiciansselldirectlytotheirfans,authors to their readers, filmmakers to their viewers, product producers toconsumers via downloadable physical products! Intermediation istransformative, too.The large studios, for instance, dominated their respectiveindustriesbycuratingcontentproducersandowningdistributionchannels.TheInternet brought democracy to these endeavors, but the democratizationincreases competition and drives down the price of the content, such as withInternet-basedcrowd-sourcemarketplaces.TheInternetgivethandtheInternettakethaway.

BlackSwans,WhiteRats,RedHerringsPredictingthefutureisafool’serrand,andsowemayaswellbefirstinline.Allthistalkaboutwherewemightbeheadedmightbemorepersuasiveifweknewwhere we were now. That being said, our brains work better when we havesomething tomeasure against. A baseline or a hypothesis allows us to createsome sort of an experiment to determine how reality compares to our guess.Withoutthebaseline,wearemorelikelytoshapewhatweexperiencetomatchwhatwebelievedbeforetheexperience.Itsomehowmatterslittlethesizeofthepegweimaginewecanfitintowhateversizehole.If it’s not bad enough that humanbeings arehardwired to suffer experiment

bias, it’sparticularlydisconcerting thatourability topredictworsens themoreexpertisewehave in a particular domain.18 It seems strange that this comes to

lightwhenourrelianceuponexpertshasneverbeengreater.Ourworldissocomplicatedthatweoutsourceournarratives.Weseemtonot

care about the accuracies of the predictions, as long as we have explanationsaboutthingsbeyondourcontrolthatwecanstorecomfortablyinthebackofourminds.It’swhatfreesupourabilitytocopewithday-to-daylife.Truthbetold,expertshavebeenwrongforalongtime,andbythis,wemean

allexperts,includingdoctors,lawyers,scientists,andsoon,tosaynothingaboutthepseudo-scientificeconomists,psychologists,sociologistsandlessstilloftheself-aggrandizing and self-appointed pundit class, subject-matter experts,consultants,andthink-tankdenizens.Wearewrongbeforeweareright.Theverynatureoflearningpresumesthisto

beso.Youmayhaveheardtheoneabouthowleadingmindsinhistoricaltimesthought theworldwas flat because thebeerwas.Okay,we justmade that up,but, truth be told, we are not smarter than they were. We only have moreknowledge.Historicalfigureswereeverybitasfullyevolvedasweare.As thenewsdeskonSaturdayNightLiveoncereported,“This just in,white

ratscausecancer.”Thesoonerwegiveup thenotions thatwecan, first,accuratelydescribe the

past;second,predictthefuture;andthird,manufactureit,thebetteroffwewillbe.It seems reasonable that we as humans have an evolutionary-based

predispositiontocreatenarrativesthatexplainthepastandpredictthefuture.19Ifournormalsensoryfilterswereremoved,ifwecouldsmelllikeadog,seelikeaneagle,hearlikeadeer,wewouldneedlargerbrainstoprocessthedata,nottomentionlookfunny.Thestorieswetell,likeourfilters,createboundariesforourthoughts. It’s easier for us tomake sense of theworld ifwe fit data into ourexistingmodel,ratherthanchangethemodeltofitthedata.Wearepattern-identifyingmachines.Ifyou’rehikinginthewoods,youmight

glimpseoutofthecornerofyoureyeadarkobjectintheshadows.“It’sabear!”Adirectlookrevealsalargerock.Intermsofevolution,earlywarningisbetterthana404error:“Thatlinknolongerexists.”Rememberthecampfiregamewhereyoubeginbywhisperingastoryintothe

earofthecampernexttoyouandshepassesitonuntilyou’vecomefullcircleandtheendstorybarelyresembleswhatyoustartedwith?Well,memoryislikethat,onlyyou’retheonlyoneatthecampfire.Howelsetoexplainthedifferencebetween your memory and that of your partner with whom you shared that

romanticexperience?“Ahyes,Irememberitwell.”It’snotactuallytruethatvictorswritehistory;survivorsdo.Deadmentellno

tales. The history told by losers, though presumably told by fewer people, isequallylikelytobeobjectivelytrueasthehistorytoldbywinners.Oneman’smythis,ofcourse,another’sreligion.Althoughscientificresearch

inexorably leads us in one direction, if we don’t read the research, let aloneconduct it,wearestill leftwith thequestionofwhichstory tobelieve:Shouldwefavorthescientistorthepreacher?“Experts” theorizewhyYouTubesucceededsoquickly.Firstmover!Orwhy

FacebookbeatoutMySpaceandFriendster.Uh,fastfollower?Themorepseudo the science, themorepersonality-based the results.Onwe

go,reshapingthetheorytofitcurrentcircumstancesorreshapingtheresults tofitthetheorybymanipulatingvariables.ThisiswhyTVpunditsputpersonalityfirst.Youneedtotellaconvincingstory.The problem is when the story is false or when inappropriate lessons are

drawn,asisoftenthecasewithvisionariesandentrepreneurs.

PrimordialInnovationSoupAll thatbeingsaid,here’souranalysisof thepastandpredictionof thefuture.Caveatemptor.Throughouthistory,technologicalinnovationleadstodisruptivechange,from

the transformationofagriculture-basedeconomies tomanufacturing,andagaintopostindustrial.Thishasbeensothoroughlyanalyzedandarguedthatwewon’trepeatthediscoursehere.Patternscanbediscernedwithinthechanges.Patternsdon’tpredictthefuture,

buthelpdescribe thechange,andhelp theunderstandingofwhy,perhaps,andprovide a baseline tomeasure current changes against. If nothing else, it’s anamusingthoughtexperiment.The transformation of the computer and resulting application breakthroughs

over the past 50 years or so has been described in terms of Moore’s Law.Moore’s Law says that the number of transistors that can be placedinexpensively on an integrated circuit doubles approximately every two years.The specifics hardly matter, since the law has been extrapolated to describenearly anything computer related that demonstrates greater performance, insmallerpackages,ataminimumcost.

Ohyeah, and the performance needs to improve exponentially, too. In otherwords, if you’re stacking pennies and double the number of pennies in eachsubsequentstack,thetwenty-firststackwillhaveover1millionpennies!Thefactthatyounowcarryacomputerinyourphoneisdirectlyattributableto

Moore’sLaw.Personalcomputers,theInternet,andmobiletechnologyrepresentwideswathsoftechnicalinnovation.Buriedinsidethoseswathsarethousandsoftechnological advances that not only provide continuous, incrementalimprovement of the technology itself, but enable new technology and newapplicationsandthensetthestageforthenextwaveoftransformation.Eachcyclelaysafoundationforthenexttransformation.20

lifecycle adoption curve: Popularized by Geoffrey Moore, the technologylifecycle adoption curve is a bell-shaped curve separated into five phases:innovators,earlyadopters,earlymajority,latemajority,andlaggards.The next transformation, however, doesn’t displace the prior one, but rather

builds on top of it. Innovation comes so quickly these days that onetransformation has not reached the mainstream in its lifecycle adoption curvebefore the next one is upon us. Developing countries, for example, arecompletely bypassing the personal computer wave to take advantage ofubiquitousmobiletechnology.Today, technology innovation is finally about the individual. This perhaps

surprises you, since we’ve all been talking about personal computers fordecades.Upuntilrecently,thecomputerrevolutionordigitalrevolutionhasbeenprimarily about productivity and efficiency gains for businesses. Consumersplayedanimportantrole,butitwasn’teverreallyaboutthemandtheirneeds.Individuals don’t want and have never wanted computers. They want to

accomplishspecificgoals,getthingsdone,beentertained,protecttheirinterests,haveajob,raiseafamily,andsoon.Theyevenwantsomeofthesethingsbadlyenough that they have been willing to put up with pretty awful solutions,includingcrappycomputers.Businessesdidn’t setout tosolve these individuals’problems,because,well,

because that’s not where the big money was. The big money was in solvingcompany problems. Individuals’ concerns were only addressed as they wereneededtosolvecompanyproblems.So,forexample,businessesboughtWindowscomputersinthe1990sandnot

thefarsuperiorApples,because theIBM-basedPCswerehalf thecostandnoonecaredthattheyhadahorribleuserexperience.Mediumandlargebusinesses

could still communicate more efficiently with partners and customers, whilebypassingtheneedforeachpartnerinthefirmhavinghisorherownsecretary.Typeyourowndamnletteronthatcomputer!Business-levelproductivitygains(just barely) justified the incredibly expensive two-to three-year replacementcycle for computer and networking technology. The 2000s saw the rise ofdepartmentalproductivity.Software-as-a-serviceemergedtodramaticallyreduceifnoteliminatethepainofinformationtechnology(IT)departmentsowningthecorporate applications. Suddenly, individual business units could acquiresoftware available over the Internet, access it using a common desktop clientcalledabrowser,andimprovedepartmentalproductivitywithoutinputfromIT.Itdidn’treallymatterthattheexperiencesucked.software-as-a-service: Software-as-a-service is software used over theInternet.Typicallythesoftwareisrunoncomputersindistributeddatacenters—inotherwords,“inthecloud”—andisaccessedviaawebbrowser.The best indication of the rise in the significance of the individual is the

concomitantriseinindustrialdesignpracticesforhigh-techcompanies.Thelastcouple of years havewitnessed a surge in user-experience design for softwarecompanieswhoare focused first and foremoston theproduct experience fromthecustomer’sperspective.You’llknowwhenhumanconcernshavebeenaddressedbycomputerswhen

you don’t recognize them as computers. People want appliances that do coolstuff.Whatthismeansisthatwe’reinavalue-basedeconomy.Thebusinessesthat

continuously create the most value for a market win. This is true for big,establishedbusinesses,aswellasstartups.Onewaytothinkaboutit:insideatech-wave,theplatformsaredominatedby

a few large players, an oligopoly. The platform enables other companies tocreatevalueforcustomers.Overtime,competitionontheplatformdrivesdownthe price of the value created for customers.This is “value surplus,”which isgreat for customers and society, increasing the standard of living across theboardasmorepeoplehaveaccesstothevalue.This pattern is true for all customers who participate in the relatively free

market, including businesses on the consumption side and consumers. (Bigbusinesses and governments don’t benefit asmuch from less expensive value,becausetheirinefficienciespreventthemfromdoingso.)So, for example, because ofmarket efficiencies, the cost of creating a new

high-tech business has dropped dramatically. Cloud computing providescomputer servers, network access, and storage as a service to businesses at afraction of the cost of businesses building out the infrastructure and humanresources todo it themselves.Theservice is likely tobefaster,moreavailableglobally, andmore fault tolerant.Furthermore, youpayonly forwhatyouuseand upgrades are a credit-card swipe away. It’s very lean, since the serviceutilizationistieddirectlytocustomerdemand.Thecostofproducingproducthasalsodecreased.Freesoftwareisavailableto

write the software that operates alongside the free web service and databaseprogramsrunningonallthatcheaphardware.Furthermore,thesoftwareiseasiertowrite,requiringless-skilleddevelopers.Internet and mobile startups are instantly global, to boot. Access to less-

expensiveresourcesandmonetizablecustomersaroundtheglobearewaitingforyourightthisinstant.It’s not surprising, then, that entrepreneurship is flourishing globally. It’s a

perfect storm. We have decades of technology foundation, an environmentconducivetolow-costexperimentation,andaneedtocreatevaluefinelytunedto customers’ needs. We have thousands of startups, thousands of low-costexperiments, an evolutionary dream enabling an extraordinary opportunity forhighmarketefficiencyinthecreationofvaluesurplusforpeople.21

It’s tough, though,especiallyonlegacybusinessesandthegovernments theyboughttoprotectthem.It’shardoneveryone—allthosewhoendeavortocreatevalue,bothyoungbusinessesandold,thoseinsideandoutsidetech,thosewhowanttogrowbig,aswellasthesoloentrepreneur.shadow force: a core competency, operational excellence, or keydifferentiator internal to the business, which allows it to outperform thecompetitionIncreased competition makes chasing value more difficult. Speed is of the

essence in the hyperconnected world. Understanding and capitalizing on thatspecialsomething,ashadowforceallowsyoutooutperformthecompetition,aslongasyoucontinuouslyimprove.Over time, new disruption happens at the platform level, threatening the

hegemony of the incumbents, forcing them to become opportunistic or toconsolidate around what remains of their core competency. Adoption of theplatform continues along the technology lifecycle adoption curve, but rapidgrowthisbehindthem.Manyareunabletorespondtodisruptioncompetitively,

that is, in value-creating ways, and so they seek other methods to maintainrevenues, such as government regulation, patent hoarding and litigation, andcrazyamountsofbrandmarketing.A new wave of value-creating businesses ride on top of the new platform,

killinglegacybusinesses,beingacquiredbythem,orestablishingnewmarkets.Thecostcurvecontinues todecline, so thesenewbusinesseshave lessmarginthantheircounterpartsonthepriorplatform.Apple’s iPhone disrupted multiple industries simultaneously. Prior to the

iPhone, Internetuseon themobilephonewasfollowingthesamepathasonapersonalcomputer.TheiPhoneflippedthatonitshead,becoming,essentially,aparallelplatform.Dozensofstartups thatwerebuildingmobileapplicationsonlegacymobileoperatingsystemswerekilledoff,virtuallyovernight.Suddenly,theirvaluewasreplicatedatafractionofthecostandmadeavailableforfree(ornearlyfree)onApple’sAppStore.Similarly,thetelecommunicationsgiants’grandplanstomonetizeapplications

ontopoftheirnetworksvanished.Telecomswentimmediatelybacktotheircorecompetency: selling consumers access to bandwidth, selling the governmentaccesstousers’privatedata,andbuyingoffCongressionallegislators.What’scrazy is that justbecauseyouhaveamobileapplicationwith tonsof

happyusersdoesn’tmeanyouhaveabusiness.Thepriceofthevaluecreationisalmostzero.Thisishypermarketefficiency,thelikesofwhichwehaven’tseensincecircathe1920s,whentheinabilityoffamilyfarmstomakemoneyledtoagriculture subsidies that have lasted to this day (though the intendedbeneficiariesarelonggone).Thevalue-creationeconomycomesontheheelsofthecollapseofthewealth-

creationeconomy. It remains tobeseenwhetherpolitical leaders,big-businessexecutives,andWallStreet regulatorshaveheard thewarningswith regards tomotivatingexecutivestomaximizeshareholdervalueratherthancreatevalueforcustomers (which, if successfully accomplished, shouldmaximize shareholdervalueover the long term.)Bothof the last twobubblemeltdowns, recessions,major financialmeltdowns—whateveryouwant tocall them—canarguablybetracedbacktoill-conceivedincentivesrewardingnon-value-creatingactivitiesinfavorofspeculative(andoftenillegal)short-termmoneymaking.Entrepreneurshiprequiring littleorno investment togetstartedand lifestyle,

bootstrapped endeavors that will succeed or fail based on real value creationseemtohaveemergedasifinresponsetothepriorhedonism.

linchpins: A term coined by Seth Godin to describe the “indispensableemployee”who“bringshumanityandconnectionandarttoherorganization.”WhatChrisGuillebeaureferstoasthe“microbusinessrevolution”22isacalling

tothe“unexpectedentrepreneurs,”whoareSethGodin’slinchpins.23Don’twaitfor corrections fromWall Street and theWashington, D.C. village, but forgeaheadandcreateyourownvalue.Similarly,forthosewhodreamofcreatingtomorrow’sbigcompanies,perhaps

of being acquired, of creating a sustaining business that employs dozens orhundredsofpeople,orevenofbeing thenextdisruptive force, the time togetstartedisnow.Finally,forthoselargebusinessesthatarecommittedtocreatingcustomer value, companies like Procter&Gamble, O2, and Intuit, aswell asthosecontemplatinghowtodisruptivelyinnovateinordertostayrelevant,anewwaytocompeteisrequired.

TheValue-CreationEconomyTherearetwosidestothevalue-creation-economycoin.Ononesideiscustomerempowermentandontheotherisemployeeempowerment.Thenatureofbeinghyperconnected,whereaccesstoyourglobalcustomersis

nearly instantaneous and 24/7, means that the more highly attuned to yourcustomeryouare,themorelikelyyouaretodeeplyunderstandthem.There’sanentiremythologythathasgrownuparoundSteveJobs’sdismissal

of customer’ concerns, such that he supposedly showed themdisdain.Successwasduewholly tohis“visionary”capabilities.Wewouldargue,however, thatthe mythmakers have the story wrong. Jobs’s genius was not in his productvision or vision of what the world would become. As we’ve described, webelievethereisnosuchthingassuchavisionary.Jobs’sgeniuswasinhisdeepunderstandingofhiscustomers.Heknewthem

sowell,heneedn’taskthemwhattheyneeded!Perhapsthiswasinnate;perhapsitwaslearned.Puttingasideforamoment thegraveyardofmistakeshemade,theAppleretailstoresarenothingifnotacustomerlab,where“geniuses”studycustomerbehavior.Itisahoneypotofsortstolurecustomerstoaplacewherethey canbe studied experiencingAppleproducts, so that other “geniuses” canmake products that provide value to customers.Apple’s first real sale, for therecord,wastoacustomerwhotoldJobsexactlywhathewantedtobuy.Inthevalue-creationeconomy,customersareempoweredby:Havingaproductexperiencethatexceedstheirneeds.

Havingarelationshipwiththecompanyinwhichthecompanytreatsthemrespectfully.Havingavoiceintheproduct.

Thevalue-creationeconomyisdefinedbyeliminatingbarriersbetweenthosewhobuildaproductandthosewhoexperienceit.Toaccomplishthis,employeesareempoweredto:

Makedecisions.Continuouslylearn.Continuouslyimprove.

Thisisobvioustosome,sacrilegetoothers.You might be surprised where it’s happening. Consider this: U.S. Army

GeneralMartinE.Dempseysaid,“We’vegonetooutcomes-basedtraining....Whatwe’velearnedinthisfightisthatsoldiersreallyneedtobeabletofigurethingsout.”Donald E. Vandergriff, Maj. U.S. Army, Ret., believed the U.S. Army was

stuckintheIndustrialAge.Theirpersonnelsystemcreatedsoldiers“whoarenotcraftsmenwhomastertheirart,butinsteadareconsideredmeretechnicianswhoperformrotetasks,”likefactoryworkers.Astheworldchanges,sodoesthestyleofconflictand,inturn,thestructureof

the armed services.Without commenting on thewisdom, theUnited States isengaged in multiple armed conflicts around the world. The methods ofdeployment,aswellasthelengthandstyleofengagement,isinconflictwiththetop-downMissionCommandsystemthatgrewoutoftheWorldWars.Vandergriff argues for amore decentralized system capable of deploying an

army that “embraces creativity, risk-taking, and flexibility while encouragingprofessionalservice.”Overthepastfivetosixyears,theArmyhasadoptedwhatitcallsOutcomes-BasedTraining&Education(OBT&E)with theobjectiveofdevelopingsoldierswhoareadaptivetoconditionsontheground.A simple example that demonstrates the difference in training is to look at

“SPORTS”(slap,pull,observe,release,tap,andshoot),atasktaughttosoldiersforclearinga jammedweapon.The traditionalapproachisaskill-trainingdrillthatadherestotask,condition,andstandards(TCS).Thisisakintomemorizingbestpractices.Inthisexample,thesoldiermustcorrectlyperformthesixstepsinfiveseconds.In theOBT&Eapproach, soldiers arepresentedwitha jammedweapon in a

specific combat scenario. When the weapon jams, the soldier only uses the

taught process to clear the jam if the circumstances call for that action, andconsiders other tactics as well, such as taking cover or communicating withfellowsoldiers.The emphasis is on teaching the soldier how to read the situation and

empoweringthesoldiertothinkandmakedecisionsthatreflecttheenvironment.Thesoldier’sabilitytoexecutebestpracticesismorereflectiveoftheabilityofthe trainer than the abilityof the soldier.The soldier’s ability to find the rightsolution to specific problems increases their accountability, and, in return, thesoldierisempowered.24

Good physicians know that understanding their patients deeply helps themdiagnose illness. Family history, nutrition, exercise, stress, and other dailyroutinesandquality-of-lifeconditionshaveanimportantimpactonhealth.Thatbeing said, specialists can lose sight of the impact medical procedures andpharmaceuticalsmighthaveonqualityoflifeandotherfactorsthatimpactlong-termhealth.Sorelyingsolelyonthescienceofdisease,medicine,andcures,it’spossibletolosefocusontheideathatanalyzingthequalityoflifeshouldn’tbeseparatefromthediscussionaboutlifeitself.Dr.StephanieCooper,25cardiologistandassistantprofessorattheUniversityof

Washingtonsays:Inthepast,adoctormaybegininteractionwithapatientwithanopen-endedquestion, but research has shown that doctors often interrupt the response.The ensuingdiscussion is directed andmanipulatedby thephysician,whooftenhaspreconceivednotionsaboutwhatthepatientneeds.Patientsleavewithout having all of their questions answered, often feeling disrespectedand not fully understanding the treatment plan. This leads to decreasedcompliance,andintheworsesituations,toincreasedlikelihoodoflitigationif things gowrong. Itmay also result inworse outcomes. In recent years,there has been an increasing emphasis on patient involvement in medicaldecisionmaking inwhich all the possible treatment options and outcomesareoutlined and thepatient anddoctor togethermake a decisionbasedonpatient preferences. This is in direct counter distinction to physicianpatriarchalautonomousdecisionmaking (telling thepatientwhat treatmentcomesnext)butalsoisnotanopen-endedchoicegiventothepatient,whocannot possibly understand all of the consequences of treatment optionswithoutguidancefromtheirmedicalprovider.Thisispatientempowerment.

NotonlyaremajoruniversitieslikeMIT,Stanford,andHarvardputtingcoursework and lectures online; education startups like New Charter University arefillingineducationgapsforunderemployedorcareer-transitioningadults.Asinother sectors undergoing disruption, New Charter operates outside standardeducationalpractices,suchasnotparticipatingingovernmentloanprograms.Sowhereas government regulations are often intended to serve social good andoftencontinuetodoso,theyalsotypicallyslowinnovationthatisnecessarytohelpstudentsadapttothechangingeconomy.DirectorofUserExperienceTimMcCoysays:Soessentiallythegovernmentsays,“Lookwe’regoingtogiveyou$15,000to pay for this student’s year of education. In exchange, you have to docertainthingssowefeelthatmoneyisgoingtogooduse.”So,forexample,students are required to spend a certain amount of time in the learningenvironment.Butit’sreallyavanitymetric.Whatoftenhappensisyouendupwith 10-week courseswhere studentsmust sit through lectures for theentire 10 weeks regardless of how much you already know. It’s timeconsidered busy work for a lot of folks. By not participating in the loanprogram,wecanrunwithacompetencybasedmodel.26

Studentsareempowered.

CaseStudy:CustomizedValueCreationFiveyearsagoBespokeInnovationsfounderScottSummitsetouttoexplorenewpossibilitiesmadepossiblebydevelopmentsinthedigital-fabricationworld.Here’shisstory.

Isetoutthinking:“Wherecanyoucreatethingsthat(1)areverycomplexand(2)willbemeaningfulinchangingthequalityofsomebody’slife?”Asithappens,Iwasalwaysinterestedinprostheticlimbs.Isawanopportunitywaitingtohappenorasolutionthatiswaitingtohappenbecauseexistingproductsrepresentanunsatisfiedneed.Regularprostheticsareanengineeringsolutiontoaproblemandnotadesignsolution.Ithought,“Okay,hereisanopportunitytofixthat.MaybeIcancombine3Dprinting,whichistheabilitytomakeauniquethingforauniquesituation,andprostheticlimbs,whicharenotverywellsuitedformassproductionsincethatmakesgenericthecomplexityandnuanceofhumanindividuality.”SothatbecamethefoundationforBespoke.Westartedwithprostheticlimbsandthat’sstillwhatwedoaskindoftheflagship,butnowwehaveanumberofotheropportunitiesthatfollowasimilarmentality.

Ultimatelywewanttoshowasmuchrespectforanindividualaswepossiblycan.Weusetechnologytoolsandthedesigntoolsasour

vehicle.Ithinkitshowspeopletremendousdisrespecttolumpthemallintothesamecategoryandsay,“Okay,you’reallamputees—youallgetthispart,thiscollectionoftitaniummachinedpartsbecauseyou’reallthatsimilar.”Sowerethinkthatandsay,“Howdowespeaktoaperson’sindividualityandtheirtasteandtheiruniqueness?”Theprocesswetakeismultifaceted.There’sthe“gettoknowus”process,whereweexplaintothemwhatwedo.Weattempttoelicittheirtastesandpreferencesindesignaestheticoutofthemandthat’sactuallyverydifficulttodo,harderthanIhadeverimagined.Outsideofpeoplewhoaredesignersatheart,it’sveryhardtothrustsomebodyintotheroleofdesigningsomethingforthemselves,somethingverypersonallikeaprostheticlimb.It’sliketheextremeversionoftellingsomebodytodesigntheirowntattoo.Weallgenerallydon’tdothatbecausewe’renotusedtodoingthatinourdailylives.Sowetypicallyshowpeopletheartwehave,thepatterns,thedesignswe’vedoneinthepastandweusethatasakickoffpoint.Wesay,“Bytheway,wecanchangethismaterial.Wecanadddetailsifyoulike.Iftherearepatternsthatyoulike....”Wetrytoteasethatoutofthembecauseultimatelywedon’twantthemtosimplyselectfromourpreexistingwork.Thatdoesn’ttakewhatweoffertoitsfullestpotential.Soweencouragepeopletocutlooseabitandlookinsidethemselvesandseewhatwouldmakeitthemostpersonalandgivethemthemostconnectiontoit.Thenthere’sthetechnologypartoftheprocess.Wedoa3Dscanoftheirbodyandturntheimagesintousabledatabyrunningthemthroughsoftwarethatusesdifferentcleaningalgorithmsandmeshingalgorithms.Fromthatdata,weactuallymirrortheperson’ssound-sidelegandsuperimposeitovertheirlostleg.Wealignitbyeye;thereisalotofcraftinvolved.Welineitupuntilitlookslikeitisinanaturallocationonthebodybasedonthescan.Thatwillbethereferencefortherestoftheprocessbecausenowthebodywillbesymmetricnomatterwhatwedoanditwillbeuniquenomatterwhatwedo.Theprocessphilosophicallygoestotheheartofwhatwedobecauseitgenerateswhatwethinkarethemostimportant

elementsweoffer:symmetryanduniqueness.Wehaveanumberoftemplatesthatwe’vedeveloped,whicharepartiallymechanicalandallowustoattachelementstothesubstructureoftheprosthesis.Thetemplatesmightcreatethedesignpattern,forexample,herringbonetweedoralaceoralattice,andwestartmixingthesetemplatesintothecomputerfiles,playingwiththemtocreatetheaestheticwe’restrivingfor.Thefinalstepisthatoncewehavethedata,wedoalotofcommunicationwiththeclient.Wesendthemimagesoftheprosthetic,whicharephotographicallyaccurateeventhoughthey’revirtual.Whenthey’rereadytopullthetriggerwesendthefilesouttoathirdpartywhothree-dimensionallyprintstheparts.Wehaveafewpost-processingstepswecanapplydependingonwhatthepersonislookingforandthenwe’rereadytosendthemtotheperson.Howtheyusethemandhowtheirlifechangesisuptothem.Weencouragethemtocommunicatebacktouswhenthey’reready,becauseit’sexcitingforusandrewarding.Wehearofstorieswherewomenallofasuddenarebuyingclothestomatchtheirfairing.Werecentlyhadacasewherethiswomanworeabeautifuldressandshoesthatreallybroughtoutthebestinthefairingwecreatedforher.Thewomansaidshehadbeencreativelyhidingherprostheticforeightyearsunderstockingswithfoampadsandsuddenlyshe’swearingskirtsthatshowitasitisanditjustlooksgreatandshedoesn’tcareaboutpeopleseeingitandknowingthatshe’sanamputee.We’vehadsoldiers,guyswhodon’texpressemotionreadily,saytheyfeelnakedwithoutitortheywouldn’twalkoutthefrontdoorwithoutit.We’vehadpeoplecometousandtheyhaveagymsockpulledupovertheirprostheticlimbandtheyhavethreeorfourothersocksstuffedintoittoapproximateacalfshape.Peoplearemostlynotcomfortablewiththefactthatapartoftheirbodyisabunchofskinnylittletitaniumpipes;it’sdisheartening.Sothisprocessgivestheprostheticadynamism,asuggestionoflife.Eventhoughintuitivelyweknowbetter,itsuddenlyimbuestheprostheticwitha

senseoflifethatitwouldn’totherwisehave.Welookatourbusinessasafundamentaldeparturefromthetraditionalthinking,whichistodoatonofresearchupfront,market-researchthehelloutofit,focus-groupit,throwinatonofinvestmenthopingthatyou’regoingtocapitalizeonthebacksidewithahugereturnoninvestment.We’resayinglet’sturnthewholethingonitshead.Haveaverynimbleprocesswherewecanprintonethingandifwethinkit’svaluableandcompelling,itcanbecomeanentireproductline,becausewedon’thaveinventory;weprinttoorder.Ifthenextpersonwalksinthedoorandsays,“Hey,I’vegotthisthing,myneckmusclesgaveout,”we’rereadytogoandcandoaquickscanandbeforetheyleavewecanhaveacustomproductcreatedoratleastintheprocessofbeingcreated.Youcan’tdothatwithtraditionalmanufacturing.Whenadisruptivetechnologycomesalongitdoesn’tjustchangethewayyoudothings,itchangestheentirecultureofthewayyoulookatdoingthatthing.Onlinetravelsites,forexample,likeTravelocityandExpedia,didn’tjustchangethewaywebookaflight;theychangedthewayweapproachtravelingasaculture.Forthepast20years,Iwasabletolookatpeoplewithamputationsandthink,“Iwouldlovetodosomethingaboutcreatingabetterprostheticleg.”IcouldthinkaboutitandthinkaboutitandIwouldn’tgetanywhere.Itwasn’tuntilthetechnologiesmaturedtothepointwheretheybecameviablethatIcouldstartputtingdifferentelementstogetherintherightway.ThenIcouldstartthinkingdifferentlyandsay,“Okay,nowwelookatprostheticsanddon’tthinkofthemjustastechnologysolutions,butthinkoftheproblemofamissinglimbandwhetherthereisawaytoincorporatedesignandtheartsandhumanemotionintothesolution.Itinvitesusoritchallengesustoseeproblemsandsolutionsinanentirelydifferentlight.

AndCuetheLeanStartup

Whetheryouareastartuporabigbusiness trying to revitalizegrowthorsaveyourbusinessorprotectagainstthefuture;whetheryouarehigh-tech,low-tech,or somewhere in between; whether you are business-to-business, business-to-consumer, or business-to-business-to-consumer, you are at the mercy of thevalue-creationeconomy.To succeed, grow, thrive, you must be focused on creating real value for

knowncustomers.Youmustbefast,agile,quickthinking,andquickacting.Youmust not only continuously improve your output; you must continuouslyimprovetheprocessofoutputting.Youmustbealeaderandafastfollower.Youmust be like a basketball point guard defending your counterpart, anticipatingmoves,andreactingfast.Youmustbethemirrorimageofabutterfly,mimicanoctopus,beyourcustomer’sshadow.Youmustbeabletoinnovatesustainablyanddisruptively.Clearly, this is no small task. The methods and processes differ greatly at

oppositeendsof thespectrum.Although leanstartupprinciplescanbeappliedacross the spectrum, they aregeared toward entrepreneurial endeavors tendingtoward the disruptive side. Most how-to business writing, academic research,andbusinessschoolinstructiontendstowardthesustainingside.TheleanstartupisamethoddevelopedbyEricRiestoincreasethesuccessof

entrepreneurialendeavorswherevertheymightbeattempted,butthatisfocusedprimarilyonthedisruptiveside.Riesdescribesfivecoreprinciples:

1.Entrepreneursareeverywhere—anyonecreatingnewproductsorservicesinthefaceofextremeuncertainty.2. Entrepreneurship is management—one can use processes to navigateuncertainty,andsotheseprocessesmustbemanaged.3. Validated learning—startups exist to learn how to build a sustainablebusiness.4.Build-measure-learn—afeedbackloopusedtovalidateinthemarketplacethat business activities (including but not limited to product, distribution,delivery,marketing,sales)aretherightones.5.Innovationaccounting—howtomeasuretheprogressoflearning.

Based on our experiences—entrepreneurial quests, advising and mentoring,interviewswithcountlessentrepreneurspastandpresent,friends,academics,andinvestors—we have developed how to think about and implement the leanstartup.Theprinciplesofleanstartuparen’tnew.Youcanfindsimilarelementsin“designthinking,”userexperience(UX)design,discovery-drivenplanning,tonameafew.Thisposesproblemsforsome.Buttorejectleanstartupistorejectprinciplesthathaveledtohuge,successfulbusinesses.TorejectleanstartupistoaccepttheMythoftheVisionary.

mythofthevisionary:Theculturalmythbasedlargelyonanarrativefallacythat suggests some can predict the future and then bring it to fruition. Inreality, thevisionary is likelysomeonewho isNOTcommitted toaspecificscenario, but rather seeks change and seizes present opportunities andrelentlesslypursuesthechange.Youmayverywellask,ifnotnew,what’sthepoint?Thepoweroftheleanstartuplanguageshouldnotbeundersold.Thelanguage

iswhatbringstogetherfirst-timeentrepreneursandthosewithexperience,thoseinsideandoutsidetech,thosewhoseektomakesignificantchangeinnonprofits,government,andbigbusiness,aswellasstartups.Whatisalsotrue,webelieve, is that themetachangeswewitnessintoday’s

world thatwediscussabove,maketheseprinciplesmore learnable,applicable,

andmeasurablethaneverbefore.Furthermore,leanstartuphappenstoarriveatatimeofgreatneed.

LeanStartup,PleaseMeettheLeanEntrepreneur

Ourgoalistohelpentrepreneursapplyleanstartup.Todoso,let’stakeaquickstepbackandmakesurewe’restartingfromacommonpoint.The lean in lean startup does not mean small startup, or a startup with no

moneyornovision.It comes from leanmanufacturing as represented by the Toyota Production

System. Basically, lean manufacturing is about optimizing efficiency in allvalue-added activities and minimizing or eliminating all non-value-addedactivities,where value addedmeans providing value to customers. Customersinclude both the final user of the product and internal customers who linkactivitiesthroughthelifecycleofproductdevelopmentanddelivery.28

Critically,optimizationthatadverselyaffectsvaluebeingprovidedisnotlean.Also inherent in the Toyota Production System is the concept of continuouslearningandcontinuousimprovement.Manydiscussionsaboutleanfailtocaptureseveralkeypoints:Youcannotdelivervaluewithoutmarketingandsellingit.Thecomplexityofvaluecreationmeansleanprocessesareoftenmoreefficientthantraditionalmethods.Aimingatperfectionisnotafluffyorspiritualplatitude.

It’sinterestingthat,whereasmostleandiscussionandimplementationfocusesonproductdevelopmentprocesses(manufacturing,forexample),ifyoulookattheproductfromthecustomer’spointofview,theycouldn’tcarelessabouttheproductdevelopmentprocess.Hopefullythecustomer’sexperienceisimprovedvialeanmethodologies,butthefactthatleanledtothatisirrelevanttothem.Marketing, sales, services, support, aspects of operations, partners, and so

forth often have a direct relationshipwith the customer and a direct effect ontheirexperience.Theexperiencemightlooklikethediagrambelow.Inlongform,ifeverythinggoesswimmingly,acustomerbecomesawareofa

product, goes through a courtship process during which he or she decides

whethertopurchasetheproduct,makesthepurchase,receivesit,andthenhasanexperiencewiththeproduct.Moreover, there are infinite activities a business might conduct that both

directlyandindirectlyaffectthecustomer’sexperienceaboveandbeyondtheirrelationship to the product. This is called the company’s brand. (Yes,when itcomes to brand, you must think beyond branding elements such as companyname,logo,andtagline.)

Inexistingsuccessfulbusinesses, thevaluebeingcreated for thecustomer isknown. It has already been validated that product x solves problem y forcustomer profile z. The business has already grown or is growing rapidly.Dilemmas facing such companies belong in Steve Blank’s third customerdevelopmentepiphany,companycreation.29Thechaosthatreignedinthestartupphaseneedstoquicklyturnintoorderlyexecution.Thebetterandmoreefficienttheexecution,thefasterthegrowth,limitedonlybythevaluesofthefoundersorinvestorsandthenumberandsizeofdistinctcustomerprofilesforwhomvalueis being created. The dilemmas that such a business faces are numerous,difficult, varied, and, to thepoint, fundamentallydifferent than those facedbystartups.

companycreation:ThethirdpartofBlank’sTheFourStepstotheEpiphany,whencompaniesseektoprovetheyhaveascalablebusinessmodel.

Those that choose to be high-growth businesses aspire to bemonopolies. Ifthey are to accomplish this objective using free market tactics, many of thebranding activities will be employed. Once you leave the comfort ofmanufacturingorotherproductdevelopmentmethodologies,whichactivitiesarevalue-addedactivitiesandwhicharenot?Traditionally,asgrowthaccelerates,multi-hattedearly-stagestartupemployees

areorganizedintosilosbasedonfunction.Whereasstartupmarketingandsaleswereoncetightly integratedorevenoneandthesame, theyarenowseparatedwith carefully controlled integration points, as are manufacturing and testing,legalandfinancial,facilitiesandoperations,andsoon.

Value to the final customer is often lostwhenmanagers attempt tooptimizeefficiency inside the silos. Integration points between the silos grow intobureaucraciesassilosseektoprotecttheirmembers.Theobjectivesofthesilosoften dwarf those of the company as awhole. Silos can turn into fiefdoms inwhichpowerandprestigearemeasuredbysizeofstaffandbudget.Managementteammeetingsdevolveintodepartmentscompetingwitheachotherovervision,strategy,budget,andego.Lean attempts to offer solutions to this siloing inefficiency. Organizing

activitiesintogroupsprovidingvaluetotheendcustomerreducesactivity-basedsilos.Youdonotmeasurewastebylookingatwhatpeoplearedoing,butratherwhat’s wrong in the process, from product demand to product delivery topassionateproductexperience.What lean uncovered was that there’s likely a lot of waste if it takes two

months todeliver a chair needingonly twodays (of actual building) tomake.The early manufacturing belief that batch-and-queue activities are the mostefficientprocessisturnedonitshead.The batch-and-queue process is where a product manufacturing process is

brokendownintostagesofproduction.Eachstagewill typicallyhaveaninputqueue,whichwasproducedbytheupstreamstage,andanoutputqueue,whichisproduced for the downstream stage. Each stage can be optimized so thattheoretically,theproductitselfcanbeproducedmoreefficiently.The idea of a division of labor has been recognized for centuries and was

fundamental to industrialization. The idea of comparative advantage, whichrefers to the ability of one country to produce a particular product at a lowermarginal cost than another, is dependent on the division of labor and is afundamentalpreceptofmoderninternationaltrade.Thethingis,althoughwhat’sgoodforthegoosemaybegoodforthegander,

what’sgoodforthegandermaynotbegoodforthegander’sdescendants.In what may be another sign of the changes coming, increasing product

complexity combined with increased demand for customization limits thebenefitsoforganizingproductionaroundthespecializationoflabor.Batch-and-queueprocessingismoreoptimalwhen:

Customerisknownandestablished.Valuebeingcreatedisknownandestablished.Valuecreatedislessvaried.Productionrequiresfewerparts,fewerstages,andlesslabor.Complexityislow.

Althoughthetrendtowardincreasingcomplexityandcustomizationhasbeengoing on for decades, advances in factory automation and workarounds havemasked some of the inefficiencies of organizing company operations aroundbatchandqueue.Paintingcarsdifferentcolorsdoesnotposemuchofaproblem.Changing equipment to produce different car models turns out to be a hugeinefficiency,whichtheToyotaProductionSystemovercomes.That nonengineering departments are organized around the same batch-and-

queue principles strikes us as insane. It’s no wonder that corporate efforts tobuild teams, align objectives, optimize, streamline, innovate, <insertmanagementconsultantbuzzwordhere>havefaileddismally.

LeanStartupandDisruptionWhatdoesallthishavetodowithdisruptiveinnovation?It’snothardtoimaginehow building product systems based on division of labor does not lead toprofound new ideas that might change the world. The process is meant toincreaseproductivityandlowercostsintheproductionofaknownproductforaknowncustomer.

Lean advances the cause, but not sufficiently. Lean talks about employeeempowerment, learning about your customers, cross-functional teams, andincreasedagility, but the system remains focusedonproducingaknownvalueforaknowncustomer.Thisiswhereleanstartupcomesin.Soalthoughleanmanufacturingpresumes

value and that the customer and product are known, this isn’t the case forstartups.Startupfoundershaveplentyofhypothesesregardingtheirstartupideaand the products necessary to solve problems for specificmarket profiles, butthese are only known to be true to the extent they’ve been validated in themarketplace,asmeasuredbypayingorengagedcustomers.Inotherwords,theyonlythinktheyknow.It bears repeating:A startup does not knowwhat value it is creating or for

whom. Put another way: if the innovation you are bringing to market has apredictableeffectonaknownmarket,youaresustaininganexistingmarketandare,therefore,notdisruptinganything.Thisbegsthequestion:Ifinaleanstartupyoudon’tknowwhatvalueyouare

creatingandforwhom,howdoyouknowwhat’swastefulandwhatisn’t?Tomeasurewasteinaleanenterprise,youcan’tlookatthingslikeunusedraw

materials, unused product features, inventory, and the labor to produce, test,release,andmarketallthat’snotpurchased,used,ordesiredbyyourcustomers.Tomeasurewaste ina lean startup,Ries introduces theconceptofvalidated

learning.Wasteinaleanstartuparethoseactivitiesthatdonotproducelearning.Sincewhat the startup is all about isunknown, one can’t organize let alone

optimize employee activities around executing the creation of customer value.Instead,onemustorganizearoundlearning.Onemustlearnwhatthecorevalueis; what solution provides that value; to whom it provides value; and how tomarket,sell,anddeliveritsothatthevalueisrealized.Weproposeand,therefore,layoutforyouinthepagesahead,apathyoucan

taketowarddiscoveringthevalueyouaretocreateandforwhom.Although the customer experiences a product in the order shown in the

diagrampreviouslythisisn’ttheorderinwhichastartupdiscoversthevalue.It’s

importanttonotethatthereisnotonewaytolearnsuchthings,noristheprocessof discovery linear. Also, before finishing the discovery and validation of thevalue and its delivery, one shouldn’t be overly concerned with processoptimization.Sowe’renotgoingtospendasmuchtimetryingtomakesureeachlearningactivityisefficientaswewilloneliminatingorreducingactivitiesthatarenonlearning.

Notes

1.SethGodin,Linchpin:AreYouIndispensable?KindleEdition(PenguinGroup,2010),8.2.http://startupdigest.com.3.http://lean-startup.meetup.com.4.http://startupweekend.org.5.http://gigaom.com/2011/12/01/its-time-for-startup-founders-to-think-bigger.6.http://online.wsj.com/article/SB10001424053111903480904576512250915629460.html7.BradFeldnotescomefrompersonalinterview.8.DavidtenHavegreatlyhelpedourunderstandingofemergingdigital-fabricationtrends.9.MarkFrauenfelderthoughtscomefrompersonalinterview.10.MikeMaplesthoughtscomefrompersonalinterview.11.http://articles.businessinsider.com/2012-03-21/tech/31218762_1_zynga-app-mobile-game#ixzz1yRwEPJ24.12.ScottPatterson,TheQuants:HowaNewBreedofMathWhizzesConqueredWallStreetandNearlyDestroyedIt(CrownBusiness,2010).13.http://online.wsj.com/article/SB10001424052748704509704575019032416477138.html14.www.nbcsandiego.com/news/local/Feds-Set-to-Release-Power-Outage-Report-149584875.html.15.RyanHoliday,TrustMe,I’mLying:ConfessionsofaMediaManipulator(PortfolioHardcover,2012),150–151.16.www.wired.com/wired/archive/14.06/crowds.html.17.BillGrossthoughtscomefrompersonalinterview.18.SeethisincredibleNewYorkerdiscussionofPhilipTetlock’sbook,ExpertPoliticalJudgment:HowGoodIsIt?HowCanWeKnow?(Princeton,2006).

www.newyorker.com/archive/2005/12/05/051205crbo_books1#ixzz2Em3VFcMC19.Foranamusingandeye-openingreadonthefrailtyofhumanrationality,pleasereadNassimNicholasTaleb’s,TheBlackSwan:TheImpactoftheHighlyImprobable,(RandomHouse,2007).20.SpiritedconversationswithVenkateshRaocontributedtoourthinkinghere.Pleasesee:www.ribbonfarm.com.21.ThankstoPaulKedroskyforhiscontributiontothisdiscussionandhelpingourunderstandingofwhat’sactuallygoingonintheworldtoday.22.ChrisGuillebeau,The$100Startup:ReinventtheWayYouMakeaLiving,DoWhatYouLove,andCreateaNewFuture(CrownBusiness,2012),7.23.Godin,op.cit.,9.24.DonaldE.Vandergriff,“Today’sTrainingandEducation(Development)Revolution:TheFutureisNow!”TheAssociateoftheUnitedStatesArmy,2010.25.Dr.StephanieCooperisauthorBrantCooper’ssister.26.CommentsbyTimMcCoyfrompersonalinterview.27.EricRies,TheLeanStartup:HowToday’sEntrepreneursUseContinuousInnovationtoCreateRadicallySuccessfulBusinesses(CrownBusiness,2011),8–9.28.JefferyLiker,TheToyotaWay:14ManagementPrinciplesfromtheWorld’sGreatestManufacturer(McGraw-Hill,2003).29.SteveBlank,TheFourStepstotheEpiphany(Cafepress.com,2005).

Chapter2

Vision,Values,andCulture

VisionandValues

Most successful endeavors startwith a bigVision, capitalV. The end successrarelymatchestheinitialvisionexactly,andsometimestheendresultishardlyrecognizableatall.Thevisionsimplybecomespartoftheexpostfactonarrativethatmakesusfeelgoodaboutthevisionary-turned-billionaire.When corporate consultants and coaches insist youwrite a vision statement,

theywantyoutoprojectwhereyouwillbeinfiveyears.Thisisthesortofthingthat leads to those horribly mundane opening lines in “about us” statements—“Industry leader in blah, blah, blah.”1 Those are the businesses with themanagementteamsfullofpre-billionairevisionaries.Thevaguerthevision,themorelikelyitwillbetrue.“Abrokenwatchisright

twiceaday”andallthat.Didyouknowthatthenumber11hasspecialpowers?Ifyouopenyourselftoitsenergy,youwillbedrawntowardlookingataclockprecisely11minutesafterthehour.Thisisonewaytobecomeavisionary.

Irwin Jacobs, founder of telecommunications giant Qualcomm and certifiedbillionaire, purportedly once told a room of skeptics (in other words, venturecapitalists)thatthebrickofacellularphonehewasholdingupwouldonedaybeusedforcredit-cardtransactions.Basedonourownexperienceswitharoomfullofbusinessexperts, investors,and rotary-phoneuserswecanwell imagine thehilaritythatensued.Thatvision,however,isnotthatextraordinary,andwedon’tevenknowif thestory is true.WeneversawStarTrek’sCaptainKirkhave tobuyanything(heck,there’snoroomforacreditcardinthosepants,letaloneawallet),whichleaveseitherhiscommunicatororphaserasameansformakingpurchases from the Enterprise’s vending machines. We’re guessingcommunicator.“‘Followyourpassion’iseasilytheworstadviceyoucouldevergiveorget.”

—MarkCuban,billionaireIn themid-1990s,wepublisheda letter to theeditor in InfoWorldmagazine,

whereinwewarnedthosecomplainingabout73cablechannelsandnogoodTVtojustwaitandseehowbaditgetswhentherewere3billionchannels.Yep,we predictedYouTube and Internet TV.We’re not sayingwewere the

onlyones,mindyou.That’sreallythepoint.Thevisionisnotasimportantasthedrivetoachieveit.Jacobs’sgeniuswas

not the vague prediction ofwhatmight become of cell phone technology, butratherhisdrive,hisrelentlesspursuittoseethechangehappen.Alas,weneverinventedYouTubeorInternetvideostreamingorInternetTVs.

Jacobs stopped at nothing, removed obstacles, ignored detractors, and likelychangedtheassumptionsunderpinninghisvisionnumeroustimesonhiswaytobuildingamultibillion-dollarcompany thatbuilt awinningplatform thathostscellphonesthatareusedtopayforproducts.It’s not the vision that makes the visionary; it’s the driving force to make

changehappen.

DrivingForceMarkCubanonce said: “ ‘Followyourpassion’ is theworst adviceyoucouldevergiveorget.”LeaveittoCubantocomeupwithpithyanti-clichésthatdon’treallysaywhathemeans.There’ssometruthinit,wesuppose.Hispointisthatthestuffyou’rewillingtoworkhardatisyourpassion.So,inotherwords,youmayreallylikehotsexandcoldicecream,butthey’re

not passions you should be following for your career.Or something like that.Don’tfollowyourpassions;followyoureffort.Itwillleadyoutoyourpassionsandtosuccess.Whereweallwanttogettoiswhatdrivesyoutodothethingsyoudo.What

motivatesyoutoworkonaparticularproject?When it comes to starting a business or perhaps seeking to reinvigorate an

existingbusiness, it’shelpful tounderstandyourdriving force.Whichelementareyoucommittedto?

Segment—youwanttobringanykindofproductforaspecificgroup(orgroups)ofpeople.Problem—youwanttosolveaparticularissueoraddressaspecificpassion.Product—youhaveasingularproductvision.Technology—youhaveaninventionyouwishtoproductize.SalesChannel—youaregreatatsellingorarecommittedtoe-commerce.

Thereareotherdrivers,too,likedistribution.AmazonandDellbothdisrupted

markets throughnewdistributionmethods.Telecommunications companies, asmuch as they have fought to extricate themselves from the fact, are a puredistributionplay.The key insight as articulated by SeanMurphy and others is that all these

elementsofabusinessmodelformasystemofsimultaneousequations,inwhichthere aremultiple right answers for any variable, but changing one variable’svaluechangestheothers.Whenyoucansimultaneouslysatisfyallvariables,youhaveabusinessmodel

figuredoutandarereadytotestscalingit.Whenentrepreneursfirstlookfortheirbigideas,it’slikelytheywillstartwith

aproblemtheyhaveorsomethingtheyhavepassionfor, likehelpingacertaingroup of people. One of these may end up being the driving force of theirbusinessandsomaybeavariablethat’sheldconstant.Nevertheless,theotherequationsstillhavetobefiguredout.Ifyoudecideto

holdoneconstant,becausethisiswhereyourcorecompetencyisorthisisyourdrivingforceoryourvision,fine,aslongasyouareawareofitandcognizantoftheeffectsonyourbusiness.Note,evenifyoudosolvealltheequations,itdoesn’tmeanyourbusinesscan

growbig.

Segment-CentricAcompanycommittedtoaspecificsegmentwillbuildordeliverpotentiallyanyproduct or service required to solve a myriad of problems faced by anidentifiable group of people or businesses. A startup starts by solving oneproblem and grows larger as it discovers and addresses additional needs.Youmight be committed to solving all information technology problems faced byhospitalsoryoumightsupplyallnewmomswithproductstokeeptheirbabiessafeandhealthy.Tofigureoutyourbusiness,youproceedfromtheinsideout.Inotherwords,

youseektounderstandyoursegmentdeeply,figureoutwhatproblemstheyface,andworkwiththemtodevisethesolution,usingatechnologythatbestsuitsthecustomer’senvironment.

Problem-CentricMany entrepreneurs start out by identifying a problem they’d like to solve.Often,thisisaproblemtheyhavefacedthemselvesorhavewitnessedclose-up.It’s a natural place to start, since the presumption is that the customer isunderstoodprettywell.This can also be a trap, however: First, just because you have the problem

doesn’tmean there truly isanaddressablemarket.Second,youmaybebiasedtowardasolutionthatthemarketmajoritydoesn’twant.Inthisscenario,youstartwiththeproblem,andthendefinethesegmentthat

has theproblemmostacutely,and thenwork todefine thesolution themarket

segmentiswillingtousetosolvetheproblem.Ifyouaretrulyaimingtosolvetheproblem,youshouldbesolutionandtechnologyagnostic.

Product-CentricIf,comehellorhighwater,youhaveaproductideaandyouwillseeitbuilt,itcansafelybesaidthatyouareproduct-driven.Thisisperhapsthemostcommondrivingforceweseeamongentrepreneursanditisperhapsthemostdangerous.Yourproductisonlyasgoodastheproblemit’ssolvinganditssuitabilitytothesegment.

Productsgatherdustonshelves,bothrealandvirtual,andbusinessesspinforyears trying to match the value the founders thought they were creating formarketsegmentsthatmayormaynotevenexist.If you startwith the product, you have essentially chosen the technology. If

youarebuildingahigh-techproductandarefollowingtheexpertadvicedujour,thenyouhavechosentobuildamobileproductratherthanaweb-basedproduct.(Goodluckfindingabusinessmodelaroundyour99-centapp.)Regardless,youhadbetterquicklyfindthatproblemyouareostensiblysolving.

Technology-CentricTechnology is a platform or an invention that needs to find an application.Platformscanbesoldseparatelyorlaunchedafteranapplicationhasestablishedsome sort of a foothold. Facebook is both an application and a platform. The

same can be said for Twitter. Apple’s iPhone is both. New chemistry, plantextractions,geneticmanipulation,newmanufacturingmeans,andnewmaterialscanallbeplatformsfornewapplications.

Entrepreneurswith technologyare insearchforproblems tosolve.Theycandevelopproductsthemselvesortheymaylicensetheirtechnologyorsellaccesstotheplatform.Yourdrivingforceisn’tnecessarilythemostimportantpartofyourbusiness,orwhatyouneedtofocusallyourenergyon.It’sawaytounderstandhowyou’reattempting toshapeyourbusiness.Nomatterwhat thebusiness,youstillmustidentifyapressingproblemtosolve,understandthesegmentmosteagertosolveit,andprovideasolutionthatworksforthatsegment.Itisaproblem,however,ifyoudon’tknowwhatyourdrivingforceisandso

your strategy changes. One day you are keen on solving all problems of aparticularcustomerandthenextyouareallaboutbuildingandsellingaspecificproduct.Youcanthinkofyourdrivingforceintermsofapivot.Ifyourproductwereto

fail,whataspectofyourbusinessmodelwouldyoubemostlikelytokeep?Wouldyoukeeptheproductandchangethemarketsegment?Wouldyoukeepthesegment,butlookforadifferentproblemtosolveusingthesameproduct?Wouldyoukeepthesamesegment,buttryadifferentproduct?

It’s paramount that you take your values into consideration. Socialentrepreneurs—inotherwords,cause-orientedbusinesses—areoftencommittedto solving a specific problemor serving a specific constituency, andwe think

that’s great. But they are, at the same time, likely limiting the size of theopportunity. Similarly, those entrepreneurs solving a problem that theythemselvesface, like,say,howtoorganizewherethey’regoingtohangoutonFridaynight,arenotlikelytotaketheircompaniestoastockmarketlisting.We hear a lot of complaining from certain sectors in technology about a

supposedlackofinnovationandaboutentrepreneursthinkingtoosmall,butthat,toourminds,issmallthinkingitself.Withchange,bothgoodandbad,comingfastandfurious,opportunitiesandfearabound.Bigvisionpairedwiththedrivetomakechangehappenisgreatandwe’reallforit.Maketheworldslightlybetterformillionsordramaticallybetterforhundreds,

orchangethecourseofhumanhistory.Venture capitalists whining about too much money being thrown at small

startup ideas are like Major League Baseball team owners complaining thatplayersalariesaretoohigh—thesebastionsofcapitalismdecryingfreemarkets.Small visions are all right, too. Make a career by providing value to others.Employ tens and not thousands. There are life-changing experiences in smallpackages,too.Atsomepointyourvisionwillbetested.Thetoughpartwillbetostickwith

theoriginalvisionorallowittobeshapedbywhatthemarketistellingyou.Yourvisionisaboutwhatdrivesyourbusinesstosuccess.Itisthechangethat

youhopetomake.Nomatterifyoustartwiththesegment,problem,product,ortechnology,thevisionislessabouthowyouchange,andmoreaboutwhatyouchange.

CaseStudy:IstheProblemReallySolvable?Admittedly,wehaveabiastowardentrepreneurswhoaretryingtosolverealproblems.What’snottolikeabouteager,passionatepeopletryingtomaketheworldabetterplace?Theseareoftenmoreinterestingprojectsthan,say,fallinginlovewithasolutionortechnologyandsearchingforaproblemtosolve.There’satrap,however,andthat’swhenonetriestosolvehumanproblems.Theseareproblemsthatthebesttechnologyintheworldcannotsolve;problemsforwhichsymptomscanbeaddressed,butnottheactualcause;problemscausedbythetendencyofimperfecthumanstodoveryhuman-likethings.Oneofus,forexample,hasane-mailinboxthatresemblesthe

mythicalHydra.Perpetuallyoverflowingwithunreade-mails,theinboxstandstoworsenwhenactedupon.Whenheanswersonee-mail,hereceivestwomoreinresponse.Inapatheticattempttostemthismultiplicationofurgentcallstoaction,heenablesanauto-responderthatwarnsrecipientsthathewillbeslowtoreply.Hehearsconstantly(viae-mail)howannoyingtheseauto-respondersare.Hisfriendshelpfullysuggestmultiplee-mailinboxmanagementsoftwareservicesthatpromisetoautomaticallyfilter,sort,defer,andmagicallyresurfaceonlyhisimportante-mailsforhim,ostensiblyharnessingsophisticatedtechnologytomanagehise-mailinboxbetterthanheevercouldhimself,buyinghimtime,freedom,andpeaceofmind.Gmail,forexample,helpfullyplacesGoogle+notificationsintothe“priority”inbox.There’ssomethingmissingfromthesolution,however.Hisproblemishimself.Hesimplyovercommitshimselftotoomanyinterestingbuttime-intensiveprojects.Hisproblemonlymanifestsitselfine-mail—hisfundamentalproblemisn’tlikelytobesolvedbyatechnologysolution.Whenhiswell-meaningfriendssuggeste-mailinboxmanagementsoftware,theyaretreatingthesymptom(overflowinge-mail)andnotthedisease(thetragicinabilitytosaynotointerestingprojects).Althoughourherointhisstoryisatleastreasonablyawareoftheproblem,asavvyentrepreneurundertakingcustomerdevelopmenttofigureoutsolvableproblemsforacertainmarketsegmentshouldneverassumehiscustomersaresoclever,andheorsheshouldtakecaretoavoidgettingpulledintothehuman-problemmiasma.Weonceprovidedcustomerdevelopmenthelptoastartupthatwasbuildinganorder-managementsoftwaresystemforrestaurants.Thestartup’scross-functionalteamgotoutofthebuilding,visitingwiththemanagerofaparticularrestaurantatlength,multipletimes.Asthestartupteamspokewiththemanager,theyalsoobservedtheactivityintherestaurantandhowthestaffcurrentlywentabouttheirbusiness.Itbecamecleartotheteamthatthemanagerhadaproblemnoteasilyhelpedbybettertechnology:Shedidn’thaveasetprotocolforhowherwaitstafftookphoneordersandhowthekitchenprocessedthemduringpeakhours.Sometimeswhoevertookthe

ordermadesureitwasfulfilled;othertimesitwashandedovertosomeoneelsetofulfill.Themanagerdidn’tseethisasaproblemassheproudlydescribedhernon-managementtechniqueas“empoweringeveryonebykeepingthemontheirtoes.”Fromthestartup’spointofview,itappearedthatThursday,Friday,andSaturdaynightsweresimplychaosandthatdinerswereaslikelytohaveabadexperienceastheyweretohaveagoodexperience.Theirorder-managementsystemwouldnotlikelyaffecttheexperience.Whiletheteamdiscussedthisinternally,therestaurantmanagerinsistedthatthevendor’ssoftwarewouldbeagoodfitandwouldtranslateintomoreorders.Withsometrepidation,theteamreluctantlyagreedtoalivebetatest.Whatcouldgowrong,right?Actually,alotcangowrong.Thesoftwarewasdeployedtothegrumblingwaitstaff,whoreluctantlyagreedtouseitwithintheircurrentnon-systemofordertaking.Withinafewdaysofincreasedmissedordersandusercomplaints,thesystemwasputtobed.Everyonepolitelyagreedthatthesoftwarehadn’tbeenhelpful,andboththemanagerandthestartupteamcouldpointtothemetricsshowingnoncomplianceofwaitstaffinusingthesoftware.Althoughtheexperiencedidn’tprovefataltothestartup,theexperiencewasatremendouswasteoftime,money,energy,creativity,andmorale.Nothingwaslearnedfromtheprocessthathadn’tbeenknowninadvance.Thisallcouldhavebeeneasilyavoidedhadthestartupstucktoitsgunsandclungtoitsinitiallearningsthatthismanagerwasnotatrueearlyadopterbecauseshehadahumanproblemthatshewasnotonlyunawareof,butalsocomplicitincreating!Tryingtosolvesuchproblemsmakesyouatherapist,notanentrepreneur.

WhatDoYouWanttoBe?Weonceworkedwithacompanythatdecidedtochangeitsfocusfrombeingasmallsoftwarecompanydedicatedtobuildingasuiteoflow-endITproductsforone specificmarket segment to an enterprise software and hardware companyserving a completely different segment. Both were built on top of the same

technology. The problems being solved in the two segments were completelydifferent.Thecompanysucceededuntiloneof theexecutivesdecided that theyhadn’t

reallyagreedtothechangeandwantedtoreturntotheoriginalbusiness,whosemargins had long since vanished in the face of open-source software. Further,during theirgrowthquest, the foundersmotivatednewandexistingemployeeswith a stock-option plan. They insisted that they were looking for a liquidityevent, having missed out on the dot-com era. (Red flag, anyone?) In reality,however, theywould never pull the trigger.Venture capitalist term sheets andacquisitionovertureswereturnedaway.Whattheyhadwerehighsalariesandanicelifestylebusiness,andperhapsa

simultaneouscaseoffoundermidlifecrisissyndrome(FMCS).There’snothingwrongwith lifestyle companies.Webelieve theyare thebackboneof theU.S.economy. However, there is a problem when founders don’t understand theirownvaluesandthey’renotsyncedupwiththecorporatevision.The big (or small) problem you commit your business to solving is your

vision;yourvaluesdescribewhatyouhopeyourbusinesstobe.Doyouhopetogenerate a personal revenue stream? Are you satisfied with earning a decentsalaryorprofittosupportyourfamily?Doyouhopetoemployacoupledozenpeople?Acouplehundred?Doyouforeseeanacquisition?IPO?When you look at financing the company, do you plan on growing through

revenues?Areyouwillingtomaxoutcreditcards?Orwillyouseekfinancingfromprofessionalinvestorslikeangelsorventurecapitalists?Valuesmight determinewhoyou buy from and sell to. Social entrepreneurs

committheirbusinessestoservingaparticularcause.Ofcourse,thesebusinessownersarewell aware that thechoices theymakeaffectgrowth, theability tosellthebusiness,andsoon.Other business ownersmay choose to not sell to specificmarket segments,

perhapsforperceivedethicalreasonsthatgoagainsttheirvision,ortheremaybeanothersegmentthatthefoundersarepassionateaboutserving.Again,that’sallwellandgood,aslongasthesevaluesareinconcertwiththevision.Perhapsthebottomlineisvaluecreation.TheToyotaProductionSystemisnot

aboutefficiencyforefficiency’ssake.Valuecreationisatitscore.Thesameistrueofleanstartup.Createanenvironment,practices,andprocessesthatincludeempowering employees to empower customers, tomove the business to be asclosetothecustomeraspossible.

Theproximityiswhatallowsthebusinesstounderstandthecustomerdeeply,tozigwhenthecustomerzigs,andtozagwhenthecustomerzags;topredictthecustomer’s needs and always be creating value so that the customer remainspassionateabouttheproductsandloyaltothebusiness.

LeanintoIt:TheLeanStartupCulture

Arguably, whether you are launching your own startup or trying to create aninternalstartupinabigbusiness,it’stheculturethatwilldictatesuccess.Culturedoesn’tmean that your offices are in an up-and-coming neighborhood, on thewrongsideofthetracksinacool100-year-oldbuildingthatwasoncethehomeofarchitects,witharetractableroof,Nerfgunsstrewnabout,freesodaandbeer,andweeklyHalonetworkgamingcompetitions.(Ofcourse,youcanhaveallthatifyouwantandifyoudo,we’dcertainlyappreciateaninvite.)Culturedoesmeanthatyoucreateanenvironmentthatreinforcesyourvalues

and aligns the company toward achieving your vision. It doesmean that youcreateproximitytoyourcustomeraspartofthefundamentalDNA.There isnodefined leanstartupculture.Weidentifyafewcorephilosophies

andthenrecommendotherfactorsyoushouldconsiderimplementing.First,bealearningorganization.Sounds easy, but it is more difficult in practice. Somehow theMyth of the

VisionaryandtheconcomitantEureka!momentareso ingrainedinourculturethat many entrepreneurs and business leaders believe their visionary abilitiesapply even to the most minor tactical decisions. All those we consider greatvisionaries, however, learned their way toward achieving change. They mademistakes, they reacted to themarket, andmore often than not they performedmultiplebusiness-modelpivots.A learning organization puts data before rhetoric, testing before executing,

customersbeforebusinessplan.Itrunsexperimentstoreducerisk,usesdatatoresolveconflicts,andinteractswithcustomerstounderstandthemdeeply.Keyquestion:With the leastamountofeffort,whatwillmove theneedleof

thebusinessrightnow?Ifcustomerslovetheproduct,engineeringnewfeaturesisnotoptimal;lookatyourconversionfunnel.Ifcustomerslovetheproductandthe funnel is optimized,maybe it’s time toblowupyour customer acquisition

channels.Ifsomecustomersliketheproductandothersdon’t,it’slikelynottimefor engineering or marketing or sales, but rather for understanding yourcustomersbetter.Doyouhaveaproduct,positioning,orsegmentproblem?Use data to resolve conflicts, measure progress, and inform decisions. An

organization drowning in data is little better off than onewithout data. Thosewhofeartheoverheadofimplementingdatasystemsaremissingthepoint.Onthe other hand, decisions by data only risk missing the big decisions byautomatingthesmallones.

Data is used to inform decisions, not make them. Data tracked must beactionable and should mirror an objective tree that drives all organizationactivityandwillvaryatdifferentphasesofthebusiness.Forexample,atthetopisahigh-levelobjective;perhapsyourgrowthisbased

on subscription revenue. Churn (customers canceling subscriptions or not

resubscribing)isanathematoyourbusiness.Ahigh-levelobjectivemightbetoreducechurn.What reduceschurn?Increasedproductpassion,whichmightbemeasured by the percentage of users who successfully refer the product toothers. Maybe that metric is fine. What next? What about satisfaction asmeasured by specific product engagement metrics? How do you increaseengagement? Try improving x, as measured by customer use of x over timeperiodt.Alearningorganizationrunsexperimentstoreducemarketandtechnicalrisk,

testnewideas,andoptimizeresults.Itinteractswithcustomerstoassesswhethercustomer-problem-solutionassumptionsarecorrect.Before building product, one learns whether the proposed product has a

market.BeforeonefollowstheadviceofInternet-social-media-marketing-ninja-gurus, one learns whether suggested tactics work with a particular marketsegment.

CaseStudy:Experience-DrivenJumpstart

WespoketoBillScott,seniordirectorofUserInterfaceEngineeringatPayPal,abouthowembeddingstartupcultureintolargeorganizationsrequirescommitmenttochangeandnewDNA.It’sachallengingendeavor,butwhenundertakenthoughtfully,itcanprovidetremendousvelocitytoinnovation.Lean Entrepreneur: How did you approach taking over the UIengineeringroleatPayPal?BillScott:OneofthefirstmissionsIhadwastofigureout:Howdoweturnthesewebdevelopersintotrueengineers?Howdoweget them to be user-experience focused and work closely with

product design and engineering?How dowemove away from asiloedenvironment?

Within PayPal itself, when I joined in late 2011, there werepockets of innovation. Groups were trying to do things in amorerapidsense,butIdidn’treallyhearanybodytalkingaboutthisinashared,universallexicon.

LE: What in your career convinced you that being especiallycustomer-centricwasakeytosuccess?Scott:PreviouslyatNetflix,wewerezealousaboutunderstandingcustomers through build-test-learn principles and I came to seehugevalueinhavingcustomerinputatalltimesinourprocesses.LE:Howdoesthataffecttheinternalteams?Scott: You got rid of politics; you got everybodymoving in thesame direction, a shared understanding and a real reason tocollaborate.

TheotherthingthatbecamepartofmyDNAatNetflixwasjusthowmuch of the user experience changeswhen you’re doinglotsof testing.Youtendtoprobably throwaway90percentofthe code for the very specific tests you’re building. Itacknowledgesthatchangeisconstant.Thatisadifferentmindsetthan:createsomesoftware,putabigteam together, and march towards the delivery. When thedelivery is done, disband the team and go do something else,whichissortofthemodePayPalhadbeenin.

LE:Whatdidthechangeinmindsetstemfrom?Scott: When I came to PayPal, the guy who became the CTO,JamesBarrese,hadjustmovedoverfromeBayandhehadlearnedalotfrombothsuccessesandfailuresateBay.Hewaspartoftheteam who recruited me and gave me a carte blanche to changewhateverIneededtoinmyarena.WhenDavidMarcus,whocameoverwhenPayPal acquiredZong, becamepresident ofPayPal inMarch, he called James and said, “Iwant to get a skunks-workstogether and I want to do this in a lean manner, and I want toreinvent thewaywedoourcorebusiness.” James reachedout tomerightawayandsaid,“Putateamtogetherandlet’sgrabawarroomandwe’llstartwiththeseskunk-works.”Itwasgreatbecause

itwas ledby thepresidentofourcompanybeing likeourprojectmanager.

HendrikKleinsmiede tookthe leadfromthedesignside,andItookitfromtheuserinterfaceengineeringside.HillFergusonbecame theheadofproduct.Bothof themwererecentlyatstartups.So,thisishowallthisnewDNAcamein.

LE:WhatwasdrivingthischangeatPayPal?Scott: From a financial perspective, you could say the ship wasrunning great. But I think we had all experienced how startupsfunctionandweknewPayPalwasn’tlikethat.

We thought,“Wow, lookatall this revenuewehaveand thesegreat products solving real problems, butwith really less thanstellar user experiences. What if we create great experiences,too?”The other major reason was that the competitive space hadheatedupincredibly.Sointhecourseofaweek,twomoremobilepaymentstartupswouldpopup.Mostof themwill fail,but itonly takesoneofthose to catch enough wind in its sails, with enough venturecapital backing and hiring the right talent, to become the nextmarketdisruptor.

LE:Thepreviousdisruptorbeingdisrupted?Scott:DavidandHillandothers in theorganizationwhocameinrecentlyhad thisverykeensenseofhowfastyoucanmoveasastartupandhowfastourcompetitioncanmoveandknowingthatifwecanmarshalour forces,wecaneasily, inour estimation,beatthecompetitionandsimultaneouslycreate thebestexperienceforourcustomers.

I shouldnote,David’s language,our language, isall thesame.Our language is not about killing the competition or defeatingthecompetition.That’snotreallyourfocus.Obviouslywekeepthem in mind, but it’s really, how do we have the bestexperience?Thatmeansre-evaluatingourriskmodels,oursecuritymodels,withoutmessing the business up.We’re not going to sacrificesecurity.

LE:Whatwerethechallengesingettingbuy-in?Scott:MyimpressionwhenIfirstgotherewasthatthere’salotofsmartpeopleatPayPal,butbecausethecompanyhadgrownsofastand therewassomuchgoingon, itwashard to functionbecausePayPalhadgottensobigandbureaucratic.Thisisobviouslyabigchallenge.

If anyonewanted to do something different, the basic posturewastosayno.So what we’ve done with the lean initiative is that we havebrought all those teams into the discussions up front. Forexample, we are working on new products that push theenvelopeinsomeareaswithsomeofourriskmodels.Soatthatverybeginning,theheadofrisk,TomKeithley,wasintheroomandsaying,“We’regoing tomake thisworkbecausewewantthebestexperience.”Obviouslywehavetobalancetheuserexperiencewithourriskandsecuritymodels.Buthavingtheheadofrisktaketheviewofthecustomerwasreallydifferent thanwhatwasdoneinthepast.

LE:Howdeepisthistransformationalmindset?Scott:Ineverypartofthecompany,fromtheexecutivestaffdown,we’relookingathowwecantransformPayPal.

Youhavetorethinkhowdoyoudoyourfinancialplanning,howdoyoudoyourtalentrecruiting,howdoyoudoyourincentives,whataretherolesoftheteamwhenyourteamsareallleanandagile?All that has been looked at, every piece of the organization,without exception.We’re going through this now and hope torollitouttothecompleteorganizationin2013.

EmpoweringtheEdgeAllemployees,founders,andmanagement-teammembersshouldbeinvolvedinimprovingprocessesandgettingclosertothecustomer.Theleanmanufacturingpractices at Toyota included empowering factory-floor workers to stop theproduction line any time they saw something out of whack. The core lean

principleofcontinuousimprovement—kaizen—teachestheimportanceofskill,problemsolving,andself-improvementforfactoryworkers.Considerthefollowingphenomena,whichatfirstglanceappeardisparatebut

havesomethingincommon:LeadingleansoftwaredevelopmentproponentslikeMaryPoppendieckurgethatengineersbeallowedtoengineersolutions—inotherwords,thattheynotbekeptseparatefromthecustomerproblemstheyareostensiblytaskedtosolve.Zapposdoesn’ttrytoshortencalltimesintheircallcenters,orup-sellcustomers,orusescripts.“Wejustcareaboutwhethertherepgoesaboveandbeyondforeverycustomer....[W]etrustouremployeestousetheirbestjudgmentwhendealingwitheachandeverycustomer.”3

TheU.S.Armyrestructurestrainingtoemphasizein-the-fielddecisionmakingbysoldiers.Salesleadersteachsalespeopleconsultativesalestechniquessuchthattheycontinuouslylearninordertobedomainexpertsandtherebybecomevaluecreators,notjustvaluecommunicators.4Doctorsincreaseemphasisonpatientinvolvementinmedicaldecisionmakingwherebyallthepossibletreatmentoptionsandoutcomesareoutlinedandthepatientanddoctortogethermakeadecisionbasedonpatientpreferences.5MIT,Harvard,Stanford,andotherinstitutionsofhigherlearningmaketheircoursesavailablefreeonline.SethGodindeclares,“Now,theonlywaytogrowistostandout,tocreatesomethingworthtalkingabout,totreatpeoplewithrespect,andtohavethemspreadtheword.”6

Sowhat do they have in common?They are all pushing power to the edge.The structural changesand thecoming transformationare shiftingpower fromhierarchical, centralized systems to decentralized, edge-based systems; tostudents,patients,andcustomers.

KilltheSilosTeamsdividedintodepartmentsbyfunctionareabyproductofmass-productionthinking.Theideawastomaximizetheeconomiesofscalebyreducingthecostpermanufacturedunit.Soonewouldbuildmachinesthatreducedcapitalcostsandtrytorunthemachinesat100percentutilization.7

Second,youmightorganizelabortobeasmachine-likeaspossible.Increasedspecialization allowed a labor pool thatwas predictable, easily scheduled, andessentiallyusedlikeswappablemachineparts.Thisthinkingworkswellwhenthedemandforaproductiswellknown,such

asinproductionofairplanesduringwartime,andwhentheprocessdoesn’thavetoo many cells. The more cells you have, the more in-process inventory youhave,aswellasagreaterchancetomakeamistakethataffectsthewholeline.In today’s information-centric economy, the same holds true. Departmental

siloswere created as themanagement response to specialization of trade. Butjustaswithmanufacturing,themorecomplextheprocessandthemorepeopleinvolved, the less efficient iswhite-collared, batch-mode processing.We haveonly served to create distance between customers and the people makingdecisions that have a direct effect on them.You don’t get great economies ofscalebyhavingmarketers sittingwithothermarketersor engineerswithotherengineers.Theremaybebenefits,forsure,buttherearecosts,too.Hierarchical structureshaveadifficult timemeasuringproductivity inaway

that aligns with corporate objectives. Staff objectives are often counts ofactivities,orhoursworkingonspecificactivities,orevenresults thatequatetotheworstofonlinevanitymetrics!Internet vanitymetrics include things likepageviews, or appdownloads, or

clicks—datathatisnotactionable.Researchanddevelopment(R&D)mightbemeasuredbynumberofpatents;engineeringandmanufacturingaremeasuredbylinesofcodeorquantityofpartsorfeaturesperproduct;marketingismeasuredbyPRhits.It’s almost amusing that organizations undertake huge strategic initiatives to

align departments and ensure that departmental metrics tie back to businessobjectives, such as revenue growth, yet don’t structure the business aroundbusinessobjectives.Thesilosaresacrosanct!Theyareassumed tobe themostefficientstructure.Someorganizationsaredoing it adifferentway, includingO2, Intuit, and leanstartups like KISSmetrics and Meetup.com. They break down objectives intoactionabletargets.In traditionally siloed businesses, corporate objectives are broken down into

departmentalsub-objectives.Resources,budgets,schedules,anddeliverablesareanalyzed,negotiated,andpromised.Silosprotecttheirborders.Seniormanagers

measuremiddlemanagers,whomanageproducers.By the timeyouget to thelowest rung on the ladder, you cannot draw a line back up from employeeobjectivestocorporateobjectives.Howwouldyouorganizeyourbusinessifitwerenotorganizedbytraditional

departments?Tryformingcross-functionalteamsdirectedatovercomingclearlyidentifiedroadblocks.Obviouslythisdoesn’tworkinallbusinessesoranybusinessinallscenarios.

It’sworthathoughtexperiment,however,touncoverareasinwhichsuchteamscansolveproblemsquickly,ratherthanwaitingfordepartmentalqueuestofreeup.

CaseStudy:KISSmetrics

Likemanycompaniestoday,KISSmetricsisadistributedteam,andlikemostdistributedteams,communicationcanbedifficult.Having25peopledistributedacrossfourtimezonesandhinderedbye-mailandconference-callinefficienciesandalackofserendipitousfacetimetypicallyresultsnotonlyinproductivityproblemsbutalsoinmoraleissues.KISSmetricsmanagement,includingCEOHitenShahandNeilPatel,recognizedthatcommunicationissueswerehavingasignificant,negativeimpactonthegrowthofthebusiness.“Thelefthanddidn’tknowwhattherighthandwasdoing,”Shahsays.“Remotepeopledidn’tfeelliketheywereconnectedwiththerestofthecompanyorevenwiththeirteam.Theyfeltliketheywereintheirownlittlesilos,yetwewereonlya25-personcompany.Wewerehavingdifficultygettingthingsdone,andasayoungcompany,thatcanbedevastating.”Managementdecidedtoimplementaprocesstheynamedthe“GoldenMotions,”whichwouldbreakthroughtheinertia.Thebasicideawastopickasinglemetricimportanttothebusinessandthenhaveaninternalcompetitiontoimproveit.Beingananalyticsfirm,KISSmetricsiswellversedinbenchmarkingandtrackingactionablemetrics—inotherwords,datathatdirectlyimpactsthesuccessandgrowthofthebusiness.Asoneexample,theyarduouslytrackthepercentageofpeoplewho

cometothesite,thenumberwhosignupforatrialandtalktothesalesteam,andthenthereareseveralstepstogothrough,culminatinginthepercentageofpeoplewhoenduppurchasing.Thisisaprettystandardfunnel,thoughonethatencompassesbothonlineandofflinesteps.ThefirststepinGoldenMotionsistofindthefunnelbottleneck.Wherewasthegreatestdrop-offinconvertingcustomersfrominitialinteresttosatisfiedcustomers?“Wenoticedthatweweren’tgettingenoughpeoplewhoactuallycompletetheimplementationoftheproduct.We’dgetatonofsign-upsbutaverylowpercentageofpeoplewouldendupintegratingtheproduct,andyouneedtocompleteintegrationtogetvaluefromit.”Thesecondstepwastoestablishteamstoachieveaspecificobjective.Theyformedthreecross-functionalteamswithatargettoimprovethatparticularmetricby25percentinthreeweeks.Nearlyeveryoneinthecompanywasdistributedacrossteams,includingsales,marketing,designers,support,andengineers.Thethirdstepwasforeachteamtocomeupwithitsownhypothesisandthenworkaggressivelytowardinvalidatingit.“Usuallytheystartbytalkingtocustomers,micro-surveys,anduserresearchlikeusabilitytestingbeforeweactuallyrunanactualexperimentlikesplit-testingfeatures.Iftheteamdisprovesthehypothesisintheprocess,theydon’truntheexperiment,butdevelopanewhypothesis.”Thecross-functionalnaturewascriticaltosuccess.Neitherdesignnorengineeringcouldhaveresolvedtheproblemonitsown.Forexample,oneteamhadahypothesisthatwhenpeoplesignuptheydon’tfullyunderstandwhattheproductcandoforthem,sotherewasnourgencyingettingitdeployed.Totesttheassumption,asalespersonstartedaskingwhythepersonhadsignedupandrecordedtheanswer.Itwasnotatypicalquestionthatsaleswouldask.Itturnedout,however,thatthehypothesiswasfalse;customersseemedtounderstandtheproduct’svalueproposition.Soafterthefirstthree-weekcycle,theymadesomemodestprogress,but,throughsurveysandinterviewswiththeteams,managementdecidedtoimprovetheprogram.Whattheyfoundwasthatthe

competitionformatdidn’tworkthatwell.Multipleteamstryingtotacklethesameproblemwasproblematic.Therewerelimitedresourcestotesthypothesesonactualcustomersbyusingsplit-testing,forexample.Plus,teamscameupwithsimilarideas.Forthesecondcycle,theydecidedtocreateproblemandsolutionteams.Oneteam’ssoleresponsibilitywastoanalyzethebusinessandidentifyproblems.Theotherteamswereresponsiblefortestingsolutionsfordifferentproblems.Forthelack-of-integrationbottleneck,thehypothesisthatturnedouttobecorrectwasonethathadtodowithadesireforfasterintegration.Theresolutionwastoprovideoptionsduringthesign-upprocess,sonewuserscouldpickthepaththeywanted,includingabasicfastintegration,anadvancedself-serviceoption,orafreeconsultationrequest.Bymakingthemchooseupfront,theirintegrationrateincreased.“Weendedupblowingawayour25percentimprovementobjective,”saysShah.“Notonlyhasbusinessgrownsignificantlysinceimplementationof‘GoldenMotions,’communications,morale,andthefeelingofconnectednesshasaswell.”Implementingprocessesbyhierarchicalrulesortoolsasameansofimprovingcommunicationsisakintotreatingsymptoms.Siloedproblemsolvingresultsincommunicationonlyattheconnectionpointsdefinedbyhigh-levelprocesses.Creatingacommongoalacrossbusinessfunctionsnaturallyimprovescommunication.

Itmightbehelpful tolookat leanstartuppracticesfromtheperspectiveofatraditionaldepartmentalorganizationalstructure.

ProductDevelopmentFlow in lean circles means that manufacturing is pulled through the productdevelopmentprocess so that each component is built onlywhendemandedbythenext step in theprocess. Inotherwords,StepC tellsStepB, “Don’tbuildyourpartuntilIneedit.”Thisresultsinnoexcessinventoryandtheeliminationofwastefulactivity.It’s important tounderstand that flowbeginswith customerdemand,not the

productmanager,vicepresidentofengineering,or theCEO. Inan ideal,web-

based product scenario, lean development would result in features beingdeveloped,tested,andreleasedonlyasthecustomerhasindicateddesireorneedforspecificfunctionality.When still learning what value is being created or how to improve value,

developmentissynonymouswithexperimentation.Continuousdeploymentisanoptimized process whereby a cross-functional team will work on a specificfeature hypothesized tomove the needle of the company. The functionality isreleasedtoasubsetofexistingcustomersanditsusemeasuredagainst the testhypothesis.AtIMVU,Ries’steamdeployed50changestoitsproducteverysingleday.8

There’sactuallyadanger incontinuing todevelopwithoutconcretedemand.It’s very difficult to random-feature yourway into product-market fit, but youcertainlycanrandom-featureyourwayoutofit.So what does product development work on if not new features? Plenty ofresources exist to help build agile development teams and implement leansoftwareprocesses—andthisbookisnotoneofthem,butwecanthinkofafewthingstodo:

Payofftechnicaldebt.Livethelifeofthecustomer.Runexperiments.Searchfornewinnovations.

technical debt: Technical debt describes problems or unaddressed productdevelopment issues that accumulate due to other priorities, such asconcentratingonnewfeatures.Whatmoves the needle of the business is not the number of lines of code,

features, or products but the amount of customerpassion.What is insideyourproduct-developmentprocessesthatdrivescustomerpassion?

MarketingTobeglib,marketingcanbethoughtofashavingtwoflavors:

1.Fluffybrandingactivities,graphics,images,andmessagingthatappearonTV and radio, in magazines, and on the web that magically create buzz,buildawareness,andhopefullyleadtoincreasedrevenue.2.Specificcampaignsandbusinessactivitiesthatgetusersintothetopofasales funnel and through the funnel resulting in sales and sustained

engagementwiththeproduct.The first is generally considered a black-box endeavor that requires creative

people andpseudo-psychologists to leverage consumer emotion to create needforaproduct.Notincidentally,theworld’snon-Internetadvertisingmodelisahouseofcards

built upon this black box, currently being disrupted by Internet advertising. Itrequiressophisticateddataanalyticsandaplethoraofhiddenassumptions,focusgroups, and consumer surveys that demonstrate justification for, among otherthings, millions of dollars spent on Super Bowl ads, and tens of millions ofdollarsspentbyaTVnetworkfortherightstobroadcastSuperBowls.ThesecondrequiresaGoogleAnalyticsaccount.A leanstartupusesneitherapproachuntil it candemonstrate that themarket

segments being pursued are already passionate about the product and that themethodofconvertingprospectstocustomershasbeenoptimized.Aleanstartupisnotreadytoscaleuntiltheproductitselfisthebestmarketing

tool.Theobjectiveofthesecondtypeofmarketingdescribedistodevelopaseries

ofknownsteps thatmerely requires their competentexecution.Yet there is aninfinitenumberofpossibilitiesforeachstep,andnewonesareinventedallthetime.Wouldn’titbeprudentif,forexample,beforeyoutooktheadviceofthatInternet-social-media-marketing-ninja-guru, you understood if it is going towork?OrbeforeyoupaidthatPRagencyacostlyretainer?Areallproductsrightforinfomercials?Ofcoursenot!The fact is that not allmarketing activities are right for all products and all

customer segments. If someone is sellingyou—whetheranagency,consultant,orpresumptivefull-timeemployee;whetherninja,guru,orrockstar—atoolkit,abagoftricks,ablackbox,oramagicformula,walkaway.The bottom line is that there is no reasonwhy you can’t apply an iterative

learning process to marketing the same way you might when developing aproduct.Foreachphaseofyourbusiness,yourmarketing team’s learningplanmightlooklikethis:

Employing thewrong salespeople or sales channel has the same deleteriouseffectashiringthewrongmarketingperson.Monthsgobyandyouhavelittletoshowfortime,effort,andmoney.

Protip:Revenueissometimesavanitymetric.Oryou couldhave theopposite problem,whereyou sellmore thanyou can

deliverbecause:Wrongproductdecisionsweremade.Salesoverpromisedproductcapability.Ashotgunsalesapproachresultedinanonscalablebusiness.

Youneed to learn how to sell your particular product before executing.Therightsalesengagementsellswhatyoualreadyhave,butalsohelpsestablishwhattheproductmusthaveinordertobesold.Besttolearnthispriortoreleasingtheproduct,but,iflatetothegame,stillbestbeforebuildingoutthesalesteam.The right sales engagement also establishes whichmarket segments are the

besttopursueandhowtopursuethem.Inotherwords,earlysalescallsshouldestablish thepatternofselling intoaparticularsegmentandwhatmarketing isrequiredtoquickenorevenautomatetheprocess.

LegalandAccountingIfyourbusinessisn’talawfirm,thenlegalmattersdonotcreatevalueforyourcustomers. Typically, they are non-value-creating activities: most likelynecessary,butnotvalue-added.(Wesuppose thereare instances inwhich legaldoesaddvaluetothecustomer,perhapsthroughagrantingofcertainrights,butgenerallythisisn’tthecase.)Legalactivitiesarenecessarytoprotectthebusiness,andwithoutthem,there’s

risk that the value-creating activities will not survive. Legal activities mustremainalignedtothevaluecreation,however,ortheyarewastefulandharmfultothebusiness’svisionandvalues.The legal task becomes more difficult when we look at larger, established

businesses seeking to imbue startup culture. In these cases, businesses shouldproactivelysetuplegalprotectionswithrespecttothestartup-likeactivity.Thesame can be said for accounting. Accounting-department activities that aremisaligned with the business’s value creation are wasteful. Businesses with aprimary focus of reducing cost have little chance of being lean. They mightachieve“skinny,”butnotlean.

Root-CauseAnalysisRoot-causeanalysisisasetofmethodologiesusedbyorganizationstoestablish

underlying causes of specific issues. The goal is to use objective thinking tofigureoutwhysomethingwentwrongorwhysomethingisnotpossible,insteadofblamingindividualsorbelievingtheit-can’t-be-donenaysayers.Truthbetold, theblamemayrestwithanindividual,buthowdidtheperson

gethired?Did thenewhiregetproper training?Maybeovercominga specificobstacleisnotcurrentlypossible,butwhatthenarethealternatives?Since put into use as part of the Toyota Production System, the 5-Whys

method has remained primarily focused on manufacturing and engineeringprocesses. Toyota figured that there was a puddle of oil on the shop floorbecause a parts purchasing agent was motivated to lower costs of partspurchases.9 At IMVU, Ries figured that a new product release made existingcustomersunhappybecausecorporatedidn’temphasizenew-employee trainingenoughtomanagers.Onekey to root-causeanalysis in the leanstartup is that the resolutioncosts

lessthanthecostoftheissuebeingresolved.Iftrainingmishapsareminorandfewandfarbetween,thenahugeinvestmentintrainingiswasteful.Duringrapidgrowth, however, the lack of training may lead to more costly mishaps andwarrantinvestment.10

We’rehappythatengineering teamsare living inastateofblissfulharmony,but meanwhile sales is blaming marketing for a failure to sell, marketing isblamingengineeringforalackoffeatures,andengineeringisblamingsalesforsellingvaporware.Can’twealljust...getalong?There’s no reason why root-cause analysis can’t be used in the rest of the

organization,withthesamerules:Identifiableissue.Noblamegame.Actionablesolutions.

CaseStudy:Root-CauseAnalysisonSalesAnewmediacompanywe’llcallNewCoisdevelopingaplatformtoenablecustomerstocreatehighlyinteractivepresentationsandtraining.Customertargetsarelargecorporationsandthemilitary.NewCoscaledquicklythroughinvestmentcapitalbasedonrevenueprojections.Becausethecompanywasdevelopingaplatform,investorsknewtheyhadtobepatientwhilethesalespipelinewasbuilt,butofcoursetheywerenotinfinitelyso.

Twoyearsintothecompanyandsixmonthsaftertheirfirstinvestmentround,themanagementteamandboardofdirectorsrecognizedanobviousissuewiththesalespipeline.Potentialcustomerswerefallingoutearly,salesconversionrateswerelow,andthesalescyclewastakingtoolong.Theissuewasbroughttoaheadwhenaprospectthatwaslabeleda90percentpositive,$1million-plusdealcollapsedjustbeforeaboardmeeting.Theanalysisofwhathadhappenedwastypicalofmostbusiness-to-businessstartups.Themanagementteamwaslockedinaroomforacoupleofdayswithnorealdirectionapartfromplayingtheblamegame.Theconclusionsfromthemeetingincludedthefollowing:

Salesneededtobemorehonestreportingpipelinestatus.Salesneededtobemoreconservativeonthedealsize,thelikelihoodofclosing,andtheclosingdate.Theexecutiveteamneededbetterpolicingofthepipeline.Salesneededmorestringentprospectqualification.

TheCEO,puttinghisleadershiphaton,urgedforacommitmenttoworkharder,faster,andsoon.PuttingonhisI-report-to-the-boardhat,headdedsubtlethreatsthat“Ifthesalesexecutiveandstaffcan’tdotheirjob,thenmaybesomerestructuringisinorder.”Norealcauseswereidentified;hencetherewerenoactionablesolutions.Theresultswerepredictable:Thepipelinebecamesmallerandwasmanagedbetter,resultinginbetterpredictability,butnotbetterresults.Sixmonthswentbyanditwastimeforanotherroastingbytheboardofdirectorsfollowedbyanotherteammeeting.Acoupleofkeythingschanged,however:First,thebrainstormingprocesswasformalizedbasedonroot-causeanalysisaspracticedbyStephenDavies,theVPofbusinessdevelopment.Second,anewCEOwasinplacewhofullybackedthenewapproach.Daviesbeganwithaclearproblem-definitionstatement:“Inappropriatesalesopportunitiesarecreatedaspartofthesalesfunnelprocess.”Therewasnothinginherentlywrongwiththetrackingprocessoncetherewasapotentialinthepipeline,but

theprocessforqualifyingtheinitialpotentialwasproblematic.Thenextstepwastobrainstormcausesandcategorizethem.Forthis,NewCousedanIshikawa,orfishbonediagram.

ThekeyistostartatthesamepointastheIshikawa,butthenfollowthecausalpathuntilonegetstothepointwhereoneisnolongerincontrol;thatistypicallywheretherootcauseis.Invirtuallyallcases,thereismorethanonerootcause,sooneneedstorepeattheexerciseafewtimes,oneforeachpath.TheIshikawaisusedtokeeptheteamfocusedoneachpotentialcause.Version1Q1:Whyarewefailingtoadequatelyqualifyleads?A1:Becausewedidn’tknowwhattheimpactofthisfailuremightbe.Q2:Whydidn’tweknowtheimpactofnotvalidatingleadswhentheyenteredthepipeline?A2:Becausewehaveaninexperiencedboardofdirectorsandsalesstaff.Q3:Whydowehaveaninexperiencedboardofdirectorsandsalesstaff?A3:Becausewefocusedonhiringtechnicalstaff,notsalesstaff.

Q4:Whydidwesolelyfocusonhiringtechnicalstaff?A4: Because the assumption was that large sets of platformfeatureswouldattractinboundsalesfrompromotions.Q5: Why did we assume that platform features would attractinboundsales?A5:Founders’assumption/inexperiencedfounders.

Thefirsttimethroughwasveryhigh-level.Theresultsmakesense,butareverybackwardlookingandnotveryactionable.Lookingatthepreceding,whichanswerrepresentstherootcause?Onecouldblametheinexperienceofthefounders,butthatisnotveryhelpful.Thekickeristheassumptionthatlargefeaturesetswillautomaticallydriveinboundsales.Thereisalessoneveryonecanlearnfrom.Manyorganizationswouldstopthere,butNewCoreturnedtotheIshikawa,followingthenextcausalpath.Version2Q2: Why didn’t we know the importance of not validatingpotentialswhentheyenteredthepipeline?A2:BecausewehadnobaselinebestpracticeforB2Bsales.Q3:WhydidwehavenobaselinebestpracticeforB2Bsales?A3:Becausewedidn’tdevelopasalesexecutionstrategy.Q4:Whydidn’twedevelopasalesexecutionstrategy?A4:Becauseitwasnotseenasapriority.Q5:Whywasitnotseenasapriority?A5: Because the salespeople were out in the field with no timeallocatedtodeveloptheexecutionstrategy.

Andsoon.BacktotheIshikawaforpaththree.Version3Q1:Whyarewefailingtoadequatelyqualifyleads?A1:Because they arenot being tracked in themost efficient andeffectivemanner.Q2: Why are they not being tracked in the most efficient andeffectivemanner?A2: Because we didn’t invest in a real customer relationshipmanagement(CRM)system.

Q3:Whydidn’tweinvestinarealCRMsystem?A3:BecausetheexecutiveteamdidnotunderstandtheimpactthatarealCRMsystemhasonthesalesorganization.Q4:Why didn’t the executive team understand the impact that arealCRMsystemhasonthesalesorganization?A4:Becausewehaveaninexperiencedboardofdirectorsandsalesstaff.Q5:Whydowehaveaninexperiencedboardofdirectorsandsalesstaff?

Thisissoundingfamiliar.TherootcauseforthislegmightbeatAnswer3becauserecognizingthelackofunderstandingmightpushtheorganizationtowardgettingsometrainingtogetituptospeedonsalesbestpractices.StoppingtooearlymightresultinagreatCRMsystem,butiftheexecutiveteamstilldoesn’tunderstandtheneedforit,thenthere’snotmuchchanceforrealimprovement.Sothesolutionsfromthefullanalysisinclude:

Thedevelopmentofasales-executionstrategywithemphasisplacedonlearningandvalidation.Mentoringforallexecutives,especiallyinbusinessdevelopmentandsales.InvestmentinanappropriateCRMsystem.Performingafull-featurereviewontheproduct,distillingthe10percentoffeaturesthatactuallyhavebenefits,andintegratingthemintothesales-executionstrategy.Pushingharderonmilitarysales.It’salongercycle,butonceaneedisestablished,thenvalidationisstraightforward.

Big,Old,and...Lean?It’s pretty easy for us to sit back and declare that large, successful—evendominant—businesses should act like startups in order tomaintain, regain, orprotecttheirsuccess.Butthereistruthintheidea.Thepointisn’ttobecriticaloflargebusinesses;heck,they’veachievedmore

than most. There’s also truth, however, in the observation that the tactics,strategy,andbrandingthatmadethembigaren’tthesameasthosethatlaunched

theminthefirstplace.Theideaistoputastartupcultureinplaceinordertofindthatcompletelynew

valuepropositionthatleadsthemtohugegrowthagain.Itsoundseasy, right?Buildastartup insideyourexistingbusiness.Charge it

with the clarion call “Be innovative.”Holdmeetingswhere employees ideate.Giveeveryoneabit of autonomy.Bigbusinessesknow theyneed to innovate.Withoutsomeamountofinnovation,it’sunlikelytheywillcompetesuccessfullyinthemarketatall.Theproblemisthattheterminnovationhasceasedtohaverealmeaning.It’sa

buzzword.Tomany,disruptiveinnovationandsustaininginnovationhavecometomeanthesamething.Youcan’tgoadaywithouthearinghowcompanyxisinnovating,istheinnovationleader,orisdiscoveringnewwaystoinnovate.It’sinnovationbybranding.Inventionhasbecomethemeasure,ratherthanfindingamarketforanapplicationoftheinvention.Thenumberofpatentsheldreceivesmoreattentionthanthenumberofloyalcustomers.

Universitieshaveasimilarissue:lotsofresearchandfewapplications.Lab-to-marketprogramsteachthe4Ps(product,place,price,promotion)ofmarketingandhowtowritebusinessplans,butnothowtodiscoveramarket.Whenthatfails,technologyislicensedtobigbusinessestobolstertheirpatent

portfolios.Moreoftenthannot,thenewtechnologyneverseesthelightofday.Governments that get involved often exacerbate the problem, doling out

moneytostartupscomprisedonlyofuniversityresearchersoccupyingspace inanincubator.Theresearchersresearch;theydon’tcreatemarketableproducts.Partoftheissueistheoldideathatscientists,researchers,andengineerswho

invent must partner or turn over their inventions to the business side of thehouse.Ifthisiswhattheyprefer,thensobeit.Webelieve,however,thatthingswouldbebetteriftheinventorsweretaught

to be entrepreneurs. In order to build things thatmatter, inventors need to becloser to themarket, closer to problems their technologymight solve. Secondbestistofinddomainexperts,perhapsotherscientists,whoareentrepreneurial.Thelastresortistouselocalbusinessexperts.Thiswillallbutkillthedisruptiveportionoftheinnovation.Thebusinesssideofthehouseisusedtoaskingtwofundamentallydisruption-

killingquestions:1.Whatisthereturnoninvestmenttotheorganization?2.Whenwilltheorganizationrealizethereturn?It’snotthatbusinessexecutivesarewronginaskingthesequestions.Theyare

very rational todo so. In large, successfulorganizationsparticularly,money isinvested in projects that have the highest likelihood of generating significantrevenue.Additionally,executivesareoftencompensatedforshort-termthinking.Bonuses for protecting the business a decade from now are of limited use. Inshort time horizons, the projectsmost likely to produce returns are those thataddresstheneedsofexistingcustomers.Existingcustomers’needsarewellunderstood,marketingandsaleschannels

areproven, andbusinessprocesses exist that close the circlebetween learningwhat customers need and delivering that value. This describes sustaininginnovation to aT.All innovative endeavorswill be sucked into the sustainingvortex, because theywill bemeasured against the performance of existing (orrecent)products.Startupsandstartup-likeventurescannotbeheldtothesamemeasures,which

isnottosaytheyaren’t.It’s a good way to send a startup into a death spiral, however, wherein

execution of best practices is favored over learning and onemoveswith greatefficiencytowardfailure.WhenSteveBlank suggests that accountantsnot run startups11 andEricRies

talks about “innovation accounting,” they are demonstrating how to track astartup’sprogresstowardfindingascalablebusinessmodel.Astartupmustlearnitsway, and a large organization that seeks to find new revenue opportunitiesmustlearnitsway,too.It’ssimplynotgoingtocutitwhenateamofmanagersisallowed to nix ideas becauseof their paygrade.Management hierarchy is notstructured based on ability to predict the future.Yet, that’swhatwe’re doing,onlyweuseanalysisasaeuphemismfor“readingtealeaves.”A large, hugely successful communications company in southern California

madetwoimpressivemovestowardimprovinginternalinnovation:First,theyformed(andfunded)anorganizationtocreateinternalstartupteams

tocreateproductsthatwould,ifsuccessful,generatedemandforcoreproducts.Second,theyadoptedleanstartupprincipleswiththeaimoffindingworking

businessmodelsversusformulatingapresentationwithimpressivespreadsheetsandpiechartsrepresentingcrystalballplanning.Early in the process, we led the teams through a workshop to posit market

segment assumptions and problem-solution hypotheses, and to identify corebusiness risks.Weestablishedhowthe teamsshouldgetoutof thebuilding tolearnthroughcustomerdevelopment,whatviabilityexperimentstheymightrun,andwhatdatatheyshouldtrackastheymovedthroughthelearningprocess.In the end, the teams presented to an internal venture funding group. The

problem is that likemanyof their venture capital firmcounterparts, thegroupevaluated the startups based on their ownmythological ability to envision thefuture,ratherthanthereal-worldlearningpresentedbythestartupteams.Infact,thewholeprogramwasscrapped.Itwasarepeatofanoft-toldstory:

When the core business needs resources, both capital and human, the internalstartupsarethefirstsourcestobetapped.Creating a startup culture is, in our view, the right way to create truly

innovative products inside large organizations. There also needs to be afundamental shift toward long-term thinking. Many U.S. businesses seem tohave a cyclical, love-hate relationship with long-term thinking. When theeconomyisgoinggreat—orat least isbubbly—short-termshareholdervalueisrevered,coincidingwithstock-option-basedexecutivecompensationplans.Tosucceed in today’seconomy,businessesmustbe focusedoncreating real

valueforcustomers,notpapervalueforexecutivesorinvestmentbankers.Theissueremains:Howtodothat?

OvertheHorizon:AFrameworkIn 2000, McKinsey & Company management consultants Mehrdad Baghai,StephenColey, andDavidWhite introduced a “3Horizon” framework tohelpbreakthispattern.12

1.Horizon1isthecorebusiness,accountingformostrevenue.Thebusinessmodeliswellunderstoodandisexecuting(fornow)withallcylindersfiring.Theprimaryfocusisonnear-termperformance.

2.Horizon2 represents internal businesseson the rise: products that havecustomers,haveperhapsachievedproduct-marketfit,andarereadytoscale.These businesses have the potential of becoming core to the business—inotherwords,aHorizon1unit.3. Horizon 3 contains early-stage startups. They might include researchprojects, prototypes, inventions, products in pilot phase, and strategicinvestments in external young companies. Most of these startups, for avarietyofreasons,willfail.This, itseemstous, isareasonablewayof lookingat things.Buthowthese

groupsarefundedandhowtheyinteractwitheachother(ifatall)arecriticaltotheir success. The three horizons should be seen as a pyramid,with a greaternumber of smaller investments on the bottom andwinners bubbling up to thetop,thesamewaytheinnovationeconomyworks.GeoffreyMoore, authorof themarketer’sbible,Crossing theChasm, sees a

problem in the application of horizon planning whereby Horizon 2 teams areoften tossed Horizon 3 projects that are little more than “prototype-stageproducts” developed by “lab-centric inventors.” Additionally, Horizon 1marketingandsalesorganizationsareoftenassignedtopushHorizon2productsthatareunproven.Horizon 1 business units have no real incentive to prove the viability of

Horizon2productsratherthanmakingmoneyonprovenHorizon1products.13

Here,onceagain,weseeproductsthatmayverywellbethecompany’sfuturesalvationbeingheldtoaccountbyexistingbusinessmetrics.“Thus,”Mooreconcludes,“innovationsarebetteroffinbootstrappedstartups,

becauseatleasttheretheycangetaccesstothemarketandsuppliers,andtheirinvestorswillusefairerstandardsofmeasurement.”Althoughwe’renotsurethelatter is (yet) true, the prescription seems pretty close. The key is to combineleanstartupmethodologieswithhorizonplanningtoproperlydefinethehorizonboundaries.Businessesshouldusestartupstoproveproductideasandbusinessmodels, before integrating core resources such as sales and marketing.Furthermore,labsandresearchcentersshouldbeconsideredpre-startup.Inotherwords,experimentationinthedevelopmentoftechnologyisseparateanddistinctfrom the experimentation done in Horizon 3. Horizon 3 startups are forexperimenting around developing the right application of the technology for aspecificmarketsegment.ResearchcentersliveinHorizon4!

CaseStudy:LeanStartupHorizons

Intuitisagreatexampleofacompanyadaptingthehorizonplanningmodelthroughtheapplicationofleanstartupprinciples.Ofcourse,Intuitisnoordinarycompany.Fromitsinception,Intuithasbeenfocusedoncreatingnewvalueforitscustomers.ThatIntuitcanbeseenasaposterchildofMoore’sCrossingtheChasmintheearly1990stoaleadingpractitionerofdesignthinkinginthelate2000sandnowashiningexampleofRies’sleanstartupisatributetotheearlyvisionandleadershipofco-founderScottCook.Thirtyyearsofsuccessmeansovercomingseveralperiodsofcomputer-baseddisruptionfromtheeraofshrink-wrappedsoftwaretomodernmobileapps.Today,withtheportfolioapproachofhorizonplanning,Intuitcontinuestodeliveroncurrent-termcommitmentswhilepurposefullysettingafoundationforfuturegrowththroughexperimentationandcontinuouslearning.Here’showIntuitdefinesits“3Horizons”:1. Horizon 1 extends and defends the core. In other words, itcontinues the growth of current proven products and improvesprofitability.2. Horizon 2 builds emerging offerings. Product teams validatetheirbusinessmodelsoremergingproductsandprovetheabilitytoscale.3.Horizon3createsviableoptions.Itprovesthestartup’sconceptbyvalidating thatusers love theproduct, and ithasacompellingbusiness-model hypothesis. As part of an ongoing refinement,Intuithasevolvedawayfromusingrevenuenumberstodeterminehorizon-level status and instead looks to validated learningmetrics.

WheremanycompaniesgetofftrackisthatHorizon3productsareseenaslabtoys,non-market-testableprototypes—inotherwords,somethingthat’snotyetbeentestedinthemarket.Intuit’sHughMolotsisays:“PartoftestingauserconceptinHorizon3isputtingitinthemarketandseeingwhatactualuserbehavioris.

Therefore,itdidn’tfeelrighttocallsomethingthat’slaunchedinascrappywayaHorizon2product.It’sstillHorizon3becausewe’restillexperimentingwithit.”Revenuenumberssimplyharkbacktothetraditionalstyleofmeasuringallnewendeavorsbyreturnoninvestment.Instead,Intuitturnedtothefollowingthreelovemetrics:1. Net Promoter Score, which measures the willingness of acustomertoreferaproducttoothers.2. Active usage, which measures customer engagement with aproduct.3.Customerbenefits,whichmeasureswhetheraproduct’spromiseisachieved.AsMolotsifurtherstates:

Foreachproductyoudefinethebenefitprovidedtocustomers,suchassavingtimeorsavingmoney.Sooneofthethingswemeasureis:Areyouactuallydeliveringthat?SowhenyouareaHorizon3you’retryingtorunexperimentstoprovethosethings.

Horizon2isexperimentingwiththebusinessmodel.You’vefoundasetofuserswholovetheproduct,areusingit,andarebenefitingfromit,butisthereactuallyascalableandsustainablebusinessthere?

Youhavesomehypothesis—you’regoingtochargesubscribersamonthlyfeeoryouhaveanadvertisingrevenuemodel,whateverthecaseis—youhavesomebusinessmodelhypothesisthatyou’regoingtotrytoprove.

ProtectingtheCoreBusinessInlargeorganizations,fearisoftenthecauseoffailuretodisruptivelyinnovate.Someofthefeariswellfounded.Asdiscussedearlier,it’scriticalthatinternalstartupsareprotectedfromstandard,core-businessoperatingprocedures,butprotectioncutsbothways.Corebusinessunitshavelegitimateconcernsregardingtheiryoungstartupsiblings:Sales: For value-based organizations, salespeople’s compensationis dependent on the ability to sell products that provide value.

Forcedtosellunprovenormediocreproducts,salespeoplewillfindworkaroundsorleave.Marketing:Newproductsthatareperhapsincompleteordon’tjibewith existing core products might confuse existing customers,adverselyaffectingbrandimage.Furthermoremarketingactivitiesthatsupportanunprovenormediocreproductorservicewillprovewasteful.Legal: Privacy, compliance, and intellectual property are a fewlegalissuesthatbigbusinessesmustconcernthemselveswith.Humanresources:Somepeoplearedrawntochaotic,wear-many-hats situations, whereas others prefer orderly, well-defined roles.Thisneedstobemanaged.Jobsecurity:Anyoneworkinginabusinessbeingdisruptedbyaninternal startup will understandably feel vulnerable. Ultimately,youhope thatyourstartupcannibalizesyourcorebusiness. If theinternal startup doesn’t do it, an external organization will. Thispointstoanumberofpotentialculturalissuesthatwillneedtobeaddressedaswell.

Intuithelpsbusinessunitsdealwiththeseissues.Usingcross-functionalteamsanddefiningtheHorizonmetricsaslearningratherthanrevenuemeanseachbusinessunit’scorebusiness(H1)salesandmarketingteamsarenottaskedwithexecutingwithunprovenproductsdevelopedbytheH2sandH3s.Employeesareempoweredtoparticipateininnovation,andtheycanmovebetweenhorizons.“WeoftenhaveprogramswherewerotateengineersthatareH1engineersthroughtheH3sandH2s,justbecausetheyhaveeitherpersonalinterestortheyjustkindofwanttoseewhatit’slikeorjusttobringinfreshbloodallthetime,”saysIntuit’sBennettBlank.Additionally,Intuithasanunstructured-timeprogram,duringwhichemployeescanspendupto10percentoftheirtimeworkingonprojectsthey’repassionateabout.“That’sactuallybeenreallypowerfulaswellbecausealotofournewideasarecomingoutofthat,”saysBlank.Toprotectthebrand,Intuitdeployedasub-brandcalledIntuitLabstoletcustomersknowthatproductsreleasedwithinitarestillinthe

experimentalstage.Toaddressthelegalcomponent,Intuitdevelopedacoresetoflegaldocumentsandprocesses,which,iffollowedbyH3s,donotrequireinvolvementbycorporatecounsel.ThisapproachcansimplifyandspeeduptheH3’sprogress.Intuithasanumberofin-marketwins,includingH3graduatesSnapTaxandGoPayment.

LeanstartupsarenotjustforHorizon3sand2s.H3sdoleanstartuptofindaproductthatresultsinpassionateusers.H2sdoleanstartuptofindascalablebusinessmodel.H1s can do lean startup, too. The lean startup processes help existing, core

businessesbecomemoreeffectivebymovingclosertothecustomer,becomingacontinuous-learningorganization, beingmore agile, and relentlessly improvinginternalprocesses.Startups can apply Horizon ideas to their planning, as well. After nailing

productfit foronesegment, itcouldbebeneficial tostartexploringalternativeproducts to sell to theexistingsegment, inaddition to searching foradditionalsegments.

WorktoDoAlongtimeago,wepromisedourselveswewouldneversuggesttosomeonethattheywriteavisionstatement.Wewillkeepthatpromise.So,instead,youknowthosefunpersonalityquizzesinairlinemagazines?Weaskyoutogetinyourfavoriteyogaposition—c’mon,admitit,youdoyoga—andanswerthefollowingquestionsashonestlyasyoucan.Youdon’thavetoshowittoalifecoachoranything.Therearenocorrectanswers.1.Wheredoesyourproductorideafallontheinnovationspectrum?Idea:

a.Addsfunctionalitytoexistingproductcategory.b.Dramaticallylowerscostofnewproductforanexistingproductcategory.c.Highlytailorsfunctionalityforanunderservedmarket.d.Isanexistingproductcategoryfornewlargemarketplace.e.Isanewproductcategory,newmarket.f.Isflippinganexistingmarketcompletelyonitshead.

2.What’syourphilosophyontakingmoneytofundthebusiness?a.Bootstrapping,baby!b.Friends,family,andfools.c.Cash,creditcards,coupons.d.Accelerators,angels,a**holes.e.Venturevampires(We’rekidding!).

3.Whatismostimportanttoyou?a.There’saspecific(largeorsmall)marketsegmentI’mcommittedtoandpassionate

aboutserving.b.It’simportantthateveryonegetaholdofmyproduct.c.Mytechnologyisgamechanging.Ijustneedtofindtherightapplicationforit.d.MyvisionisradicalandIwillseethatitismadereal.e.Myvisionisn’tasimportantasthefactthatIwilldowhateverittakestochangetheworld.

Notes

1.WestronglysuggestreadingtheHarvardBusinessReviewcasestudy“TheVisionTrap”(March1992)byGerardH.Langeler.2.http://blogmaverick.com/2012/03/18/dont-follow-your-passion-follow-your-effort.3.TonyHsieh,DeliveringHappiness:APathtoProfits,Passion,andPurpose(BusinessPlus,2010).4.DonalDalyandPaulO’Dea,SelectSelling(OakTreePress,October1,2004),19.5.InterviewwithStephanieCooper.6.SethGodin,Linchpin:AreYouIndispensable?KindleEdition(PenguinGroup,2010),26.7.Liker,ToyotaWay.8.Ries,189.9.Liker,253.10.Ries,232.11.http://steveblank.com/2010/04/15/why-accountants-dont-runstartups.12.VastuShastriKhushdeepBansal,AlchemyofGrowth(SouthWesternCollege,2000).13.http://hbr.org/2007/07/to-succeed-in-the-long-term-focus-on-the-middle-term/ar/1.

Chapter3

AlltheFishintheSea

Askfirst-timeentrepreneurswho theyplanonselling theirproduct to,and themostlikelyansweryou’llhearisanenthusiastic“Everyone!”Thoseabitmoresavvybackofffromglobalhegemonybyproposingavertical

slice, such as “financial services companies,” or horizontally, “the Fortune1000,” or by product, as in “peoplewho buymilkshakes,” or even a specificdemographic, suchas “womenbetween the agesof18and73.”Unfortunatelyfornewbusinesses,theseill-definedsegmentsareneitherrealisticnorhelpful.segment:Adefinedgroupofpeoplewhosharethesameproblemorpassionandspeakthesamelanguage.Productslikelydoexistthatarepurchasedbyboththose18andolderand73

andyounger,butnotbyallwomenbetween18and73.Whydothosewhobuy,buy?Imagine you were a commercial fisherman. Your livelihood depends on

catching and selling fish. If you are asked, “What sort of fish do you plan tocatch?”andyouanswer,“All the fish in the sea,”youare surelydoomedasacommercialfisherman.

It turns out there are not onlymany fish in the sea, but they have differentforms and different ethologies. Methods of fishing that work well for somespeciesdon’tworksowellforothers.Battle-testedentrepreneursknowhow to fish, andwhenaskedwhowill buy

theirproduct, they respondnotby recitingdemographiccharacteristics,butbyspeakingaboutspecificbuyersandtheirparticularpains,passions,andneeds.Who will buy your product is as important as the gloriousness that is your

product. Although the customer chooses the product, when building a newbusiness it’s up to you to choose your customer. In fact, depending on yourvaluesandvision,thechoiceyoumakemaybeevenmoreimportantthanyourproductidea.If themost important element of your business idea is the particularmarket

segment you want to serve, and you think you can serve them in a way thatmatchesthevisionyouhaveforyourbusiness,thenyoumaydecidetotreatyourmarket segment as the fulcrumonwhich topivot. Inotherwords,youchangeyour product idea, your distribution channels, and your marketing and salesplanstofittheneedsofthatsegment.pivot: To keep one foot firmly planted in one fundamental aspect of yourbusinessmodel,whilechangingotheraspects.Ifyouarecommittedtosolvingasegment’sproblem(oraddressingapassion),

youshouldbesolutionagnostic.FamedmarketerSethGodinsays:Great customers . . .will engage and invent and spread theword. It takesvisionandgutstoturnsomeonedownandfocusonadifferentsegment,onpeoplewhomightbemoredifficult tosellatfirst,butwill leadyouwhereyouwanttogoovertime.1

If thesegmentyouchooseisnotonethatresonateswithyoupersonally,willthisadverselyaffectthepassionyouhaveforyourbusiness?Willthetimeandexpenseofalongsalescyclebedifficulttoovercomewithyourrevenuemodel?Doestheprospect,whohasabudget,alsohaveanadequateworkaroundtotheproblemyou’resolving?Whendiscussinghowaprospectissolvingtheproblemnow,has theprospect described the specific shortfalls of the existingmethod?What is the cost of those shortfalls to the segment in terms of time, money,marketshare,risk,orcustomersatisfaction?Your solutionmust address one ormore of these shortfalls.How does your

solution do that? Be specific. What functionality or feature of your solution

resolveswhichshortfall?Doesthepassionatecustomerrepresentanimpossiblysmallmarkettosupport

abusiness?Market segments drive your business model. Alex Osterwalder’s seminal

business-modelbook,BusinessModelGeneration,breaksbusinessmodelsdownintoninecomponents:

1.Customersegments—whoyouaimtoreachandserve.2. Value propositions—products and services that create value for yoursegments.3.Channels—howyoucommunicatewithandreachyoursegments.4. Customer relationships—types of relationships with customers; forexample,directandpersonal,indirect,automated,andsoforth.5.Revenuestreams—howyouwillbepaid.6. Key resources—physical, financial, intellectual, and human resourcesrequired.7.Keyactivities—themostimportantthingsacompanymustdotomakethemodelwork.8.Keypartnerships—suppliersandpartnersthatcompletethemodel.9.Coststructure—howmuchitcostsyoutorunyourbusiness.2

If you look at the nine building blocks, you can see how your values andcustomer segments drive the business model: The segment determines thepreferredmethodofpaymentandhowcustomerswouldliketointeractwiththebusiness—inotherwords,the“relationship.”Conversely,abusinessthatchoosesaspecifictypeofrelationshipispurposefullyblockingsegmentsfrombecomingcustomers. (There’s nothing particularly wrong with this.) Specific segmentsdeterminesaleschannel,howmuchcustomersarewilling topay,what typeofsolutions they require and, therefore, cost structure of the business, aswell askey partnerships and activities, and resources required to serve the chosensegment(s).Alternatively,abusinesscanchoosetocommittospecificchannels,revenue streams, or key activities thatwill, once again, purposefully eliminatesomemarketsegmentsfromconsideration.Not to beat a dead fish, but this is a critical point in understanding your

businessmodel:Areyoucommittedtocertainbusiness-modelassumptionsand,therefore,seektofindcustomersegmentsthatmayfit?Or are you committed to addressing a specific problem or passion and,

therefore,seektofindthecustomersegmentsthatfitandwilllettheremainingbusiness-modelbuildingblocksfallwheretheymay?Orareyoucommitted toservingaparticularsegmentand, therefore,seek to

find theirmost pressing issues andwork toward assembling a businessmodelcapableofaddressingthose?Whicheverwayyouchoose,theprocessofsegmentingyourmarketisoneof

themostpoorlyunderstoodconceptsintoday’sbusinessstartupworld,yetaswecansee,itisoneofthemostpowerful.

CaseStudy:TheEthologyoftheFishInthekelpbedsoffthecoastofSouthernCalifornia,onecanfindthousandsofspeciesoffish,buttwoofthemostsoughtafterbycommercialfishermenaretheCaliforniahalibutandthewhiteseabass.Bothfishareclassifiedasdemersal,meaningtheylivenearoronthebottomoftheoceanfloor,andcatchingfishofbothspeciesinthe20-to30-poundrangeisnotuncommon.Halibutareflatfish.Theymakethemselveseffectivelyinvisiblebynestlingintothesandybottomsbetweenpatchesofeelgrass,andwhensardinesswimby,theyexplodeoutofthesandtonabthem.Theyhavetwoeyesononesideoftheirbody,whichmakethemveryadeptatambushingpredators.Fishermenknowthatoneofbestbaitsforcatchinghalibutisafellowdenizenofsandybottoms,thelizardfish.Whiteseabassarelongandcylindrical,andhaveamuchmoretypicalfishform.Theycruisethekelpbedslookingforsquidormackereltoeat.Whiteseabassareverydifficulttohuntwithspeargunsbecausetheyareverysensitivetonoise,andtheslightestinorganicsoundwillsetthemoff.Anyamateurfishermancanthrowalineofftheendofthelocalpierbaitedwithfrozensquidandpullinafewmackerel,ormaybeevenarockfish.

Butcommercialfishermenhaveto—dayin,dayout,ingoodweatherorinbad—acquiretheirtargetfishandthensellitformorethanthecostofcatchingit.Todothatrepeatedlyandscalably,theymustdevelopadeepunderstandingoftheethologyofthefish.Theymustlearnwhatsortofbaittousewithwhattackle,thebesttimeofday,andwhatenvironmentwillmaximizethepotentialtocatchtheparticularfishtheyarelookingfor.Fishcanonlybecaughtwhentheyareaccessible—itdoesn’thelpyoutoknowthattherearefish1,000feetbelowyourboat,ifyourlinecannotgetdowntothatdepth.

Themarketsegmentyoupursue is inextricably linked to theotheraspectsofyourbusinessmodel.Segmentsdeterminehowfuturecustomersexpecttointeractwiththeproduct,

how theywill bemarketed to, and theirmethod of purchasing.Differences inhowpeoplearereached,theirexpectationsofthebuyingprocess,howtheirtrustis earned, the price point they’ll accept, what distribution methods are mostefficient, the messaging that attracts them—all these factors (and more) mayrepresentdifferentsubsegments.Whatarethevaluepropositions,thebenefitsandmessaging(bait),thepricing

structureandchannels(tackle),andthelengthofsalescycle(howlikelyafishwill snapyour line)?Will youneed abignet (full-page ads in theWallStreetJournal)tocatchlotsofsmallsardines?Orwillyouneedtostaffandfinanceawhalingshiptobeoutatseaformonthsatatimetocatchtwoorthreewhales(enterprise sales model)? Or perhaps you need to chum the waters a bit(freemium)?Maybeyou’llbehuntingona reefwitha speargun for20-poundgroupers(B2Bsalesataconference)?freemium:Atermused todescribeaproductoffered ina“free”version,aswellasinoneormorepremiumaccountversions,requiringpayment.Youcanbuildamobileappforseniorcitizens, launchaFacebookcampaign

targetingFortune100CEOs,orcharge$25fora food-carthamburger ifyou’dlike, but the mismatch between product, tactics, pricing, and segment mightdelaythatHawaiianperma-vacationyou’vebeenplanning.As with many aspects of entrepreneurship, the practice of segmenting your

marketseemscommonsensical,butismorecomplicatedthanmeetstheeye.Theproblemisthatfewtakethetimetotrulymasterit.Entrepreneurs carry market segments around in the back of their minds,

relyingongut feel todeterminewhether thecustomers theyare seeingare theright customers. The problem is, when you’re chasing revenue, any and allcustomerswillseemliketherightcustomer.Commonmistakesinsegmenting:Dividinggroupsofpeoplebyfirmographicsordemographics.Dividinggroupsbyarbitrarycharacteristics,likeearlyadoptersorFacebookusers.Dividingbyproductcategory,likefine-diningrestaurants,orelectronics.Dividingbyverticalmarkets:healthcare,financialservices,andsoon.

KnowYourAudience:WhySegmentationMatters

Leanthinking—forexample,leanmanufacturing—hasaconceptcalledpull.pull:Anarrangementinwhichnothingisdonesimplymeansthatnothingisdone in product creation or delivery until the customer (including internalcustomers in the design and manufacturing process) expresses a need or a

demand for the product or for the intermediate “deliverable” from thedownstreamprocess.Product-marketfitcanbethoughtofasmassivepull.Pullhastwoprimarycharacteristics:1.Demanddemonstration.We’renotbuilding theproduct, part, or featurebecausewethinktheproductiswanted;ithasbeenordered.2.Nooverproduction.We’rebuildingjustintime(JIT)—inotherwords,noinventory.Theproduct,part,or feature iscreatedonlywhenpulledby thenextdownstreamprocess.Combinedwith lean’s concept of flow, pullmeans that not only is the final

product not overproduced, but neither are all intermediate parts, so that fromdesign to delivery, a product flows from rawmaterials to the customer’s handwithoutwaste:nowastedactivity,time,ormaterials.Product-market fit can be thought of as pull on a large scale. So many

customers are demanding your product (and product features), that a clearmarket signal has been sent saying your product is needed.MarcAndreessen,when firstdescribing theconcept,used the termpullwithout referencing lean:“themarketpullsproductoutofthestartup.”3

This is different from normal market pull. Remember, in a nonstartupenvironment, the customer is known, as is the value being provided to thecustomer.Thecompanyisinexecutionmode,havingalreadyfiguredouthowtobuild,market, sell, and distribute the product.Leanhelps the business do thatbetter.product-market fit: A match between product and market segment thatresults in high growth or high demand.This isn’t an assumption, but ratherdescribes a significant change in the number of customers based on havingachievedthefit.In a startup endeavor, however, we seek to discover the customer and the

value.Pullinthiscontextmeanstwothings:1.Demandsdemonstration:Valuehasbeendiscovered.2.Nooverproduction:Onlyfeaturescontributingtovaluearebuilt.Product-marketfitrepresentsthisdiscoveryforoneormultiplesubsegments.Defining and understanding subsegment pull is the only way to measure

progress toward product-market fit. Product requests from engaged customersmaybeagoodindicationthatyou’venailed—orareclosetonailing—thecorevalueproposition, but if these requests are scattered acrossmultiple segments,

it’seasytomisunderstandthesignal.Ontheotherhand,ifyouunderstandyoursubsegmentswell,youcanmeasure

pull coming from a specific group of users with a common need. The sameappliestoothermeasuresofmarketsignal—inotherwords,whatthemarketistelling you about the demand for your product. Looking atmonth-over-monthgrowth rates across all users is not as effective as month-over-month growthratespersegment.Better to understandwhich segments are growing fast versus those that are,

perhaps,notgrowingatall.Ifyoumeasureusersatisfaction,itmakesalotmoresensetoknowalotabout

who is satisfied and why, rather than monolithically knowing that mostcustomersarehappy(ornot).Withoutpropersegmentation,youareleftinthedarkaboutwhoistestingyour

value proposition. As businesses achieve some measure of positive marketsignal, customerswill provide feedback:what they like,what they don’t like,whatworks,andwhatdoesn’t.Theywilldothissolicitedorunsolicited.Someofitisvaluable,someofitisn’t.Allofitindicatesmarketsignal,buthowdoyouknowwhattolistentoandwhattoignore?

In their quest to achieve the oft-stated ambition of “thinking big,”entrepreneurs express the desire to have access to huge markets, and if they

convert a conservative percentage of them, the revenue is so huge thatinvestment is a foregone conclusion. When discovering the value you’recreating,however,it’svirtuallyimpossible—fromtheoutset—todiscoveracorevalue proposition that suits this whole market en masse. Instead, successfulsolutionsevolveovertimetoattractmoreandmoresubsegmentswithoutlosingthe early adopters, or the early adopters are used to attract the mainstreamcustomers,afterwhichtheearlyadoptersareabandoned!ThisisarguablythecasewithApple’siPhoneandiPad.Havingwatchedand

learned from (and participated in, to some degree) the early entries in thetablet/microcomputingdeviceindustryforoveradecade,Appleleapfroggedtheearly adoptermarket with the first iPhone release.Early adopter is the namecoined by Everett Rogers and popularized by GeoffreyMoore to describe anearlycustomerofaparticularproductortechnology.Thesecustomersareoftenwillingtoputupwithunfinishedorimperfectproductsforavarietyofreasons:

Thesolutionsolvesaproblemorpainjustenough.Thebuyerlikestobeseenasaleader.Thebuyerisatinkererinparticularareas.

Note that one common misconception is that an early adopter is strictly apersonality type—that is,aparticularpersonwho isanearlyadoptergenerallywillbethefirstbuyerofanything.Thisiscertainlynottrue,evenbyindustry.Thosewhomusthavethelatestelectronicsgadgetdon’tbuytheearlyversions

of all new electronics product categories. Additionally, someone who buysproducts to play with and quickly discards them is a tinkerer, not an earlyadopter. It’s important that an early adopter understands and needs your valueproposition.We often see thismisconception lead to problems in the high-tech industry.

StartupsseekcoveragefortheirproductononlinemediasiteslikeTechCrunch,assuming that readers tend to be early adopters. Unfortunately, the bump intraffictheyreceive—eventhatwhichresultsinconversionstoproductsign-ups—is misunderstood as product-market fit and can wreak havoc on youngcompanies.TheTechCrunchbump,asitiscalled,literallycankillacompanybysending

them off on a wild goose chase once the first wave of (non) early adopterssubsides.The would-be early-adopter crowd for Apple’s first iPhone (who were not

fierceApplebrandloyalistsbuttechjunkies)decriedthelimitedfeaturesetand

lackofcustomizationavailable—functionalitythattheydesiredasearlyadoptersbutthatwouldhavehinderedtheusabilitybythemainstreamadopter.Ironically,thewaytogobigistofocussmall.Youaremorelikelytodiscover

whatwillgobigbyfocusingonindividualusecases.One of the biggest entrepreneur traps is to be all things to all people. Big

companiesgetbigbybeingafewthingstoalargenumberofgroupsofpeople.Althoughaplethoraoffeaturerequestsmightindicateapositivemarketsignal,theyarepotentiallyfatalwithoutknowingwhotheycomefromorwhytheyarebeingrequested.ASouthernCaliforniastartupwespoketowasrecentlyshutteredbyitsCEO

after he had an epiphany during a meeting with a large, influential partnerprospect:Iwas sitting inhisofficeand thepotentialpartner asked the rather simplequestion:“Whatisyourcorevalueproposition?”Isatthere,mullingoverthefeatures upon features we had added to the product over the prior fewmonthsbasedon in-depthcustomer interviews,automatedfeature requests,and conversations with prospects, and I realized I couldn’t answer thequestion.Iwenthomethatdayandsentane-mailtomylistof1,500customerstellingthemthatregretfully,theproductwouldnolongerbeavailable.If you haven’t done the proper market segmentation, categorized feature

requestsbysegment,andmadetheefforttounderstandwhythecustomeraskedforaparticularfeature,thenyouarenoclosertoproduct-marketfitthanifyouwerereceivingnorequestsatall.This isn’t to say that you will not pursue additional market segments. The

point is that it’s very difficult to pursue many at once, especially if they’reparticularly divergent. GroupMe, the group messaging service acquired bySkype in2011,hadexplicitly rejecteda corporate segment thatwaswilling topay for its service. For several reasons, it chose to pursue the free-user routeinstead.Sometimessayingnotoasegmentmeanssayingnotoimmediatesales,butyestobuildingoutalong-termbusinessmodelor,inthiscase,anattractiveacquisitiontarget.Whenyoucatchafishyoudidn’tmeantocatch, it iscalledaby-catch.This

can be serendipitous—for example, if youwere fishing formackerel (a smallfish)butyouaccidentallyhookedandlandedawhiteseabass(alargeandverydeliciousfish).Generallyspeaking,however,youdonotwanttohookaleopard

sharkwhenfishingforhalibut.Asyouhavenointentionofeatingtheshark,youneedtogetthehookoutof

itsmouthsoyoucanletitswimfree,butinthemeantime,thehookedsharkisaggressively thrashing about in your boat, destroying your equipment andtanglingyourline.Youalsoaren’tterriblythrilledaboutgettingyourhandnearitsteethtoremovethehook.Youdidn’twanttocatchthisfish.Youaren’tsetuptocatchoreveneatsharks.

Yet,yougotoneonthelineandyouandyourfishingbuddieshavetodealwiththeconsequences.Accidentallyhookingaleopardsharkisatotalbuzzkill.Ontheotherhand,if,uponlearninghowtocatchhalibut,youfoundthatthe

methods also led you to catching lingcod, you might have found the nextsegment you could pursue. Lingcod and halibut have overlapping ethologies.Halibut like sandy bottoms near what fisherman like to call structure, forexample, rocks with eelgrass, or reefs, or maybe even piers, whereas lingcodactuallyliveintherocks.They’rebothambushpredatorsthatfeedonbaitfish.As you start to dominate the halibut segment, youmight send an additional

boat and cast into deeper water to find the sweet spot for lingcod with littlechangetogear,bait,andexistingprocesses.

MarketSegmentAn ITmanager andCIOmay face the same problem—network security—butthey don’t speak the same language. Although the IT manager is activelyfighting a breach, a CIO might be estimating the potential risks of exposedassets. The CIO doesn’t look to IT managers in other organizations to findsolutions tonetwork security issues.Neitherdo ITmanagers look toCIOs forthebestproductstosolvetheirimmediateissues.Theydonotlooktoeachotherasareferenceforresolvingtheproblem,sotheyaresaidtonotspeakthesamelanguage.Thebenefitstheyhopetoreceivefromasolutionaredifferent.Therefore,the

product requirementswillbedifferent.Theyalso tend toget information fromdifferentsourcesandtheirmethodsforapprovingsolutionswilldiffer,andwillrequiredifferentmarketingandsalesmethods.Cluesthatpeopleareindifferentsegments:Theirdepthofpainorpassionismarkedlydifferent.Theyhangoutindifferentplaces—forexample,FacebookversusLinkedIn.

Theyexpectdifferentsolutions—forexample,fastfoodversusasit-downmeal.Theyexpectdifferentdistributions—forexample,onlineversusbrickandmortar.Theyexpectdifferentsalesmethods—forexample,fieldsalesversuse-commerce.

ClaytonChristensenasks,“Whatjobisyourproducthiredtodo?”Thesameproductishiredtodoadifferentjobbydifferentcustomers.Inhisnowfamous(amongmarketers)example,aresearcherforafast-foodrestaurantfoundthatalargeportionofmilkshakepurchasesinthemorningcamefromcommuters:Theyfacedalong,boringcommuteandneededsomethingtomakethedrivemoreinteresting.Theyweren’tyethungrybutknewthat theywouldbeby10 A.M.; they wanted to consume something now that would stave offhunger until noon.And they faced constraints:Theywere in a hurry, theywerewearingworkclothes,andtheyhad(atmost)onefreehand.4

Proposed changes to the product to increase market penetration of thiscompany’s milkshake focused on maximizing its utility to this particular usecaseforaspecificsegment—thecommuter.Althoughthisexercise—answeringthequestionofwhatjobyourproductperforms—isacleverone,youdon’twanttoignorethecustomerwhenansweringthequestion.Perhapsifyouhavethemarketingbudgetofafast-foodrestaurantit’snotan

issue,buttostartups,thefactthatyourcustomerswhoarehiringtheproductareidentified as commuters tells you a lot about how to reach them and convertthemintocustomers.Market segmentation isn’tonlyabouthow todesignaproduct for them,but

also,justasimportantly,howtomarketandselltothem.As an aside, we should note that it has been known for many years that

segmenting alongdemographic traits doesnot prove to be terriblyuseful,5 nordoesitamarketsegmentmake—yetforsomereasonmarketsegmentationisstillthoughtandtaughttobesynonymouswithalistingofintersectingdemographictraits.Backtothemilkshakeexample:Othersubsegmentswerehiring,too.Athinner

milkshakewasdevelopedforparentswhowerelookingtohireaproductforthejobofrewardingachild,butwhodidn’twantthedrinktolastalongtime.Youcaneasilyimaginethemyriadreasonswhydifferentvisitorstothatfast-

foodrestauranthireamilkshake.

In fact, there were likely other subsegments who bought milkshakes in themorning alongside the commuters. Additionally, some commuters didn’t buymilkshakes.Whatdidtheybuyandwhy?Mostcommutersdidn’tevengototherestaurant.Why?Themore you know about your customers, themore you know about your

segments and even your subsegments. The more you know about yoursubsegments,themoreyouknowaboutattractingmoreofthatparticulargroupor alternative, and the more you know about which segments to ignore. Keyaspectstothestoryinclude:

Problemstatement:boredomoncommute.Existingworkaround:bagels,donuts,milkshakes.Solution:thickermilkshakes;addfruit.

Personas:CreateaFakeCustomerA description of the customer with the job he or she wants done is called apersona. Popularized by Alan Cooper in 2004, personas are a description ofpretendusersandwhattheywishtoaccomplish.Wishtoaccomplishisanotherwayofsaying“jobhiredfor.”Originallyconceivedofasatoolfordesignerstoensureproductswerebeingdeveloped inways thatwould resonatewithusers,webelieve the concept is useful tohelpyouunderstandyour customerdeeplyanddriveallcustomerengagements,includingmarketingandselling.Soinsteadofjustlookingathowpeoplewillusetheproductandthentreating

salesandmarketingasproblemsofdistributionandexploringwhatmagazinesthey read, you treat them all as a desirability problem of creating somethingwonderfulthatpeoplewanttobuy,andyoudothatbyidentifyingwhoisgoingtouseit,whatdrivesthem,andwhatgoalsanddesirestheyhave.Coopersays that theseneednotberealusers,butratherarchetypesofactual

users.Inouropinion,there’snothinginherentlywrongwithusingarealuseraslong as the sketch is representative of others. The advantage of usingstereotypicalcharacteristicsisthatthesketchisreadilyaccessibletoothers,butyour primary goal is to be as accurate as possible. You want to be able torecognizethemwhenyouseethem.Vaguedescriptionstendtosolicitbroaderfeaturelistsandlessunderstanding

of yourmust-have use case.You are not going for an assemblage of differentuserstocomeupwithacomposite.

Rather,you’rewritingacharacterwhohasaspecificgoalandactsinpreciseways. InB2B environments, you create a persona for all user types and eventhose who influence the purchasing decision. Every market has multiplepersonas, andeachpersonamighthavemultipleuse cases. Ideally,youdesignyourproductaroundonepersonawith themostcompellingusecase.Thinkofcompelling along a continuum. A product is considered a painkiller if it is amust-haveproduct, incontrast toavitaminproduct,which isnice tohave.Wethinkofashotofadrenalinaslikethepainkiller,onlyaddressingapassionratherthanrelievingapain.Alan Cooper talks about a higher level of compelling—that which evokes

desire. “People’s desires always have away of emerging after their needs aresatisfied.Whenapersonneedssomething,shewilldowhatisneededtogetit,butwhenshedesiressomething,sheisloyaltoit.”6

If you find a use case that evokes desire, you are ahead of the game.Yourbusiness, however, depends on evoking desire somehow. In the end, youmaydiscoverthatittakesacombinationofbusinessqualitiesthatgobeyondsolvinga problem: product plus support, customer service beyond the call of duty,addictivegamification,off-the-chartseaseofuse,massivereturnoninvestment,andsoon.Aswiththeotherphasesofbuildingyourstartup,thewayyoudetermineyour

ideal market segment is by interacting with your customer (customerdevelopment),testing(viabilitytesting),andmeasuring(data).

CaseStudy:Salim’sFishInventoryOurclient,Salim,CEOofacompanywe’llcallNewCo,isdevelopingamobileapplicationforrestaurantstoautomaticallytrackingredient-sourcinginformationinrealtimeinordertomaximizemenuefficienciesintermsofdishavailability,foodprices,andrecipecosting.If,forexample,arestaurantoffersfreshhalibutontheirmenu,butthesupplyislowonedayandpricesdouble,thechefneedstochangethemenuoroffersmallerportionsinordertomaintaindishmargins.SalimisasuccessfulSouthernCaliforniarestaurateurwhocameupwiththesolutionbasedonhisownexperiences.He’spassionate,hehustles,heispersonableandwellconnectedintherestaurantindustry,butdoesheunderstandthemarketfromtheright

perspectivetodesignamust-havesolutiontotheingredient-sourcingproblem?RatherthanfocusingfirstonallthefeaturesSalimwantedtobuild,wefocusedonthesixdailyproblemsofrestaurateursthatSalimtoldushefaced:1.Foodandplatecosts—Gettinganaccuratefoodandplatecostistoo complicated, so I just follow my gut and hope I don’t losemoney.2.Masterproductlist—Itrytokeepingamasterlist,butupdatingitistootimeconsuming.3.Recipes—MyprofitabilityisaguessinggamebecauseIamnotabletoreadilyupdateplatecostsand,therefore,menuprices.4. Inventory—Because inventory takes so long, I only do itmonthlywhenitwouldbeidealtodoitweekly.5.Reporting—Thedata Iget frommybookkeeper/accountantarenotdetailedenoughformetodeterminethereasonsformyfood-costvariances.6.Labor—Idon’thaveenoughlaborhours toallocate inorder toproperlymanagemyfoodcost.

Thisisagoodsetofproblemstoworkfrom,andwecanbegintoimaginewhatjobsaproductneedstodoinordertosolvethem,butwhicharethemostpressing?Whataretheeasiesttofix?Whodecideswhethertobuyasolutiontofixthem?WhenweaskedSalim,thissuccessfulownerofmultiplerestaurants,amanwithatremendousamountofmarketknowledge,“Whoisgoingtowantthis?”heansweredlikeatypicalentrepreneur:“Everyonewillwantitandwillpay$99/month.”Theimplicationisthateveryonewouldwantitbecauseallrestaurateurslook,feel,andsmelllikeSalim,right?Wrong.Togetentrepreneurstothinkaboutgoodsegments,it’ssometimeshelpfultothinkaboutpeopleororganizationsthat,atfirstblush—thatis,superficially—look,feel,andsmelllikeagoodsegment,butwouldneverbuytheproduct.Sowestartedtalkingthisthrough,andSalimcameupwiththefamily-collectivepersona.Thefamilycollectiveisafamilyrestaurantasrepresentedbyaone-locationrestaurant,perhapsafamily-ownedChineseorIndian

restaurant.It’safamilyaffair:Theywanttomakeaprofit,butit’sjustasimportantthatthefamilyisworkingtogetherandthateveryonehasarole,andthemainthingiskeepingtherestaurantgoingandthebillspaid.ThewaytheysourcetheiringredientsisnotthesamewaySalimdoes.Theirnetworksaredifferent.Theygotothesamesourcesfromwithintheircommunity.Theytendtodothingsbyroutine,thewaythey’vealwaysdoneit.Quickly,Salimlaunchedintoanotherpersona,theold-schoolindependent.Thisisachef/owner,maybeasmallItalianrestaurant.Joe,theowner,isabitolder,hasafewemployeesworkingforhim,alreadysenthiskidstocollege,andownshishouse.He’snotreallyinitforthemoneyatthispoint;hewantstopaythebills,stayinbusiness,buthealsoenjoyshangingoutwiththeregulars.Hewantstobeproductiveandhappyinlife.Helikestalkingtopeople—thisishislife.Thefoodisnotbad,notcomplicated;themenudoesn’tchangemuch.Therestaurantisanextensionofhispersonality.You’renotgoingtosellhimaniPadapplication.Thinkingaboutthesetwoantisegments—thepeoplewholookthepartsuperficially,butwon’tbuytheproduct—broketheiceonhowtothinkaboutsegmentation.Fromthere,weestablishedseveralpositivesegments,likeJack,thesoloindependentchef:JackissingleandischefandownerofaNewportBeachseafoodrestaurant.Hecurrentlyhasonelocation,buthopestohavemore.Hisrestaurantishislifebloodandhespendsvirtuallyallhiswakinghoursthere.Heisacollegegraduate,istechnologyadept,andkeepsuptodatewithemergingrestauranttrends.Heconsidershimselftobeafine-diningchef,andservingfreshfishisakeytohisrestaurant’sdifferentiation.Itisimportanttohimtobeuptodateoncurrentinventory,andheiswillingtoupdatehismenudailytoreflectcurrentofferings.Hisbiggestchallengeisfindingthetimetocallsourcestokeepuptodateonavailableproduct.Thesegmentationexerciseincludesnotonlythepersona,butanyotherdatathathelpstodescribetheproblemorrelevantdifferencesfromothersegments.Forexample,thestructureoftherestaurantisimportant.Jack,the

soloindependentchef,doesn’thaveasouschefemployed,meaningheissolelyresponsiblefortheingredient-sourcingdecision.AsolutionmustsaveJacktimeorit’sworthless.Anydetailsthataffecthowthebusinesswillbemarketedandsoldtoarerelevant,suchaswhoinfluencesthedecisionmakerandwhatisthedecisionmaker’ssourceofindustryinformation.Salimwasabletoestablishseveraladditionalsegments,includingthoselabeled“TeamIndependent,”“SmallCorporate,”and“Corporate.”

ChoosingaMarketSegmentAs we’ve discussed, the market segments you decide to pursue drive yourbusinessmodel.Youcanwriteadetailedplanonyourproductplatform,howitwillbedistributed,whatmarketingchannelswillbethemostefficient,andhowtheproductwillbesold,butallthatdependsonyourmarketsegment.(Unless, of course, you choose yourmarket segment based on one of those

criteria.Inotherwords,ifyouchoosetodisruptthedistributionmodelandonlyservecustomerswillingtobuycomputersofftheInternet,thenyourdistributionhaschosenthesegmentthatwillbehavethatway.)Notice,however,thatwedidsay“choose.”Yes,yougettochooseyourmarket

segments.Notonlywillthisaffectthepotentialsizeofyourbusiness,itmayalsoaffecthowyoufeelaboutit.It’simportantthatyourvisionforthebusinessalignwithyourvaluesandthatthemarketsegmentsalignwithyourvision.

CaseStudy:Carla’sDreamJobsWewerehelpingasocialentrepreneur(we’llcallherCarla)whosevisionistohelpout-of-workwomenfindtheirdreamjobs.Carlaispassionateaboutchangingthelivesofthesewomeninfundamentalandmeaningfulways.Shewantedtocreateamarketplacethatwouldmatchtheirdreamjobswithreal-lifebusinessopportunities.Onebusinessmodelhypothesisthatsheandherteamwereexploringhadthejobopportunitysideoftheproductprovidedbylargebusinessesthatwouldrequireanenterprise,B2Bsalesmodel.Shelamentedthepossibilityofneedingtobuildtheproducttosatisfythatsegment,therebythreateninghervisionaswellasher

relationshipwiththesegmentshewantedtoserve.Shequestionedwhethershewouldhavethesamepassionforherbusinessifshehadtoworktoolonginthatvertical(niche)market.Weremindedherofseveralthings:First,sheownshervision.Ultimately,shegetstodowhatshewants.Thesizeofherbusinesswillbeaffectedbythechoicesshemade.Second,ifsheistoseethebusinessthrough,she’llbeatitforalongtime.Manyentrepreneurshaveatendencytodramaticallysquashtimelines.Ifshechosetopursuethisparticularstrategyanditwassuccessful,shewouldbeatitforyears,notmonths.Movingontoadjacentsegments,perhapsthosemorecloselyalignedwithhervalues,wouldbealongwayoutinthefuture.Decidingearlywhethershewishestocommittothatpathisimportantnotonlytoherself,buttocustomers,employees,andinvestors.Third,youarenotreadytobeinastartupifyoucan’tdothethingsyoudon’twanttodo.Again,it’snotaboutlosingthevision,butaboutflexibility,listening,anddoingthingsyoudon’twanttodointherealizationofthevision.OurdiscussionultimatelyledCarlaandherteamtochooseadifferentsegmentfortheopportunitysideofthemarket,onethatwasmoreinlinewithhervision.Onewaytohelpyounarrowdownwhichsegmentsyoushouldpursueistocreateanopportunitymatrix.Listsegments(orpersonas)asrowtitlesandcriteriausedtoevaluatesegmentsascolumnheads.Fortherestaurantexample,welistthedifferentrestaurantsegmentsdowntheleft-handcolumnandthecriteriaweusetoevaluatethesegmentsacrosstheremainingcolumns.Wechosethefollowingcriteria:

Depthofpain—howbadistheproblemwe’retryingtosolveforthisparticularsegment?Budget—canthesegmentpayforasolution?Easeofreach—aretheymarketablethroughrelativelyeasychannels?EaseofMVP(minimumviableproduct)—dowethinkthesolutionisrelativelyeasyorcomplex?

Values—howdowefeelaboutservingthisconstituency?

OpportunityMatrix

The criteria you use are up to you and your business. Be sure to choosecharacteristics thatdifferentiate thesegments. Ifallevaluations foraparticularcriterionarehigh, then thatcriterion isnotservingapurpose for thisexercise.Othercriteriamightbe:

Lengthofsalescycle—howlongdoesittaketoacquireanewcustomer?Costofsales—doessalesrequirepeopleonthestreetorisitonlineconversion?Techsavvy—doesthesegmentlookfortechnologysolutionstoproblems?

To be sophisticated about the approach, you can weigh each criterion. Forexample,depthofpainismostimportant,sotheweightis4outof1–4,but“easeofMVP”onlyweighsa2.Then,youcanscorethecriteriaforeachsegment1–4,4 being positive, 1 negative. Finally, you can use a mathematical formula todeterminewhichsegmentscoresthehighest.Thescoreforeachrowwouldbe:(scoreA×weightA/(Sumofweight))+(scoreB×weightB/(Sumofweight))+(continueforallcolumns)Inourexample,wetookmoreofaback-of-the-napkinapproach,wherebywe

simply ranked each criterion H for high, M for medium, or L for low, andeyeballedwhich segment(s) appeared tobe theonemostworthpursuing.Thisexercisehelpsyouidentifythesegmentcharacteristicsyouneedtovalidate—inotherwords,thevaluesyou’veputintothematrix.Aretheyright?Gooutintothemarketandspeaktocustomerstofindout.Doesthesolochefreallyhavethehighestpain?Is thesolutiontheeasiest to

provide?As you prepare to validate the assumptions captured in your personas and

market-segmentcharacteristics,preparealistoffivepeopleororganizationsyoucanapproachforeachsegment.Inourfirstbook,TheEntrepreneur’sGuidetoCustomerDevelopment,wego

intodetail onhow to find, approach, andhold conversationswithmembersofyour potential market, but we won’t repeat that here. In a world where thenumberofconnectionsrequiredtoreachanyoneonEarthhasdecreasedfromsixdegreestojustfiveinthelastdecade,avenuestoyourcustomersareallaroundyou.

AccessyournetworkthroughTwitter,Facebook,andLinkedIn.Usealumniorganizations.Coldcall.Usethefriendsandfamilyofyourfriendsandfamily.Visitonlinecommunities.Visitofflinemeetups.UseCraigslist.Sendoutsurveys.

Althoughweeschewairportbusinessbooksandmotivationalspeaking, thereiscredencetotheclarioncall“Justdoit.”Tobeanentrepreneuryouhavetobewillingtodothethingsyoudon’twanttodo,todothethingsthatyoudon’tfeelyou’re good at, and to take personal risks thatmake you feel vulnerable.Youmust.Thewaytogetstartedisbycreatingtasksthatareofadoablesize.Lookingat

thesuccessofbigbusinessesmaybe inspirational,but the tacticswesee themundertaking right now don’t represent how they got big. All big businessesstartedout small—bydefinition.Youmust start small, too!Youcan findyourthousandth customer only after your hundredth, which came after your tenth,whichcameafteryourfirst.Youdon’tneedtodrawupbigstrategicplanstofindthefirst10customersthat

careaboutyourproduct;youjusthavetogooutinthebig,badworldandfindthem.So,whatdotheylooklike?Ifyoudon’tknow,takeastabatdescribingone.

Closeyoureyesandimaginethem.Thisistheprocessofcreatingassumptions—guesses, really—that give you something tomeasure againstwhenyougooutinto the realworld. Then, go out in the realworld and find them, and talk tothem.

IfYouGetNothingElsefromThisChapterLikemostthingsinlife,there’snoonerightwaytodosegmentation.Youcannotunderstandthesolutiontotheproblemofaparticularsegment,however,without

diving deep. So some prefer to choose one segment at a time, dive deep, andthenmoveontothenextifthefirstonefails.Othersprefertogolessdeepacrossmultiplesegmentsuntilonebecomestheleadingcandidate.Stillothersalignresourcesacrossmultiplesegments,forexample,a70–20–10

splitwhere70percentofyourresourcesarecommittedtolearningdeeplyaboutonesegment,20onasecond,and10percentasopportunistic.Yourchoicemaydependonresources,ifnothingelse.Thepointisn’ttofillouttonsoftemplateslikethoseincludedunder“Workto

Do”at theendof thischapter.Thepoint is todocumentyourassumptionsandbeginvalidating(orinvalidating)them.Thepath towardsuccessbeginsbynailing thedeliveryofvalue toanarrow,

well-definedgroupofpeoplewhoshareapainorpassionandwhowouldlooktoeachothertorecommendproductsorservicesthataddressthatpainorpassion.Thisgroupofcustomerscanbedefinedbyadescriptionofanarchetype.The

archetype may have multiple use cases, but one is more compelling than theothers. The use case represents a goal the customer has, or a desire, or putanotherway,itrepresentsajobforwhichtheuserneedstohireaproduct.Youhopefullywill encountermultiple segments, andyouwill likelyneed to

focus your energy on one segment in order to nail your value proposition. Intime,ifsuccessful,youwilltackleyourothersegmentstoo.Documentingyoursegmentassumptions,even ifbackedbymarket research,

does not prove your assumptions; rather, it helps you think them through andestablish what needs to be tested. Only themarket determines the validity ofyour assumptions. Documenting your assumptions gives you a baseline tomeasureagainstwhenyougetoutofthebuilding.

CaseStudy:It’sintheName

Traditionally,theclothingindustryisseasonal.Twotofourtimesayear,largeclothingcompaniesreleaseproductstotheworldandmaybe,eventually,theymaketheirwayonline.It’sanold-fashionedindustrythatmovesatold-fashionedspeedcomparedtothewayspeopleinteractwithcompaniesontheInternet.That’snotwhatfounderChrisLindlandhadinmindforBetabrand,

however,anonlineclothingcompany.Notanonlineclothingcatalog,mindyou,butaclothingcompany.Chrisexplains:“WhatIfiguredisthatanonlineclothingcompanyhastoabidebytherulesofblogsorTwitter,whichpeopleexpectwheninteractingwithcompaniesonline.TheideawithBetabrandiswe’regoingtotrytoputupproductsasrapidlyaswecan.”LikeEricRies’scontinuousdeployment,wherebyIMVUdeployedchangestotheirwebapplication50+timesperday,Betabrand’saimistoputoutanewproducteveryday.Theyproduceonlyasmallbatchofaparticularproduct,butenoughtocometoadecisionpoint:“Ifthere’sanythingthatwe’velearnedfromourcustomers,”Chrissays,“it’sthatwiththefirsthundredtotwohundredpairsold,wecanmakeminorchangesonittoimproveitandretest,wecanturnitintoanentireline,orwecankillit.”Whileadmittingthattheydon’tsitdownandprofiletheiridealcustomers,intheend,theytargetverydistinctsegmentsbyfindingexistingonlinecommunities.“Whatwedoiswelookmoreatproductsthatwouldappealtoveryvocalcommunitiesonlineandthenallowthosepeopletochatteraboutourproductsanddrivetraffictoit.“Forexample,wemakepantsforbikingtoworkin.Thesepantshavereflectivecuffsandareflectivepackinbackthatyoucanpulloutthatreflectswhilethepersonisridingalong.Therereallywasnomarketfor‘bikerfashion.’“Therewasonlypracticalbikingattirethatyoucouldfindatbikestores.Therewasnooneouttherethatwassellingclothingthatfitthebikerlifestyle.SoImadethesepantstoappealtothebikersubculture.Asitturnsout,there’sanenormousnumberofbikingblogsandanenormousamountofpeoplewhotweetaboutanythingnewinthebikeworld.Wecreatedaproductthathadashamefullyloyalaudienceoutthere.Ithinkwhathappensistherearetheseself-appointedbikebloggersofeverycommunityandtheyneedcontentsotheyallwroteaboutmy‘bike-to-workpants.’”Sometimesitworks,andsometimesitdoesn’t.“Oneproductthatwefailedwithwasacollectionwecreatedcalled

Harvester.Wehadbeenverysuccessfulwithtwoproductspromotingthemtothefoodiedemographic—successfulbecausetheywerelikethebikers.Yougivethemafunnyfashionstoryandeverysinglefoodbloggerwillwriteaboutit,likeourCornucopiaBagorthesepantscalledGluttonPants.Iwasconvincedthatthiswastooeasy—youjustneedtomakealineofclothingforfoodiesandthey’llpromoteitforyou.Sowewentoutandtriedtomakethemostcrazilyhyperorganiclocallysourcedanddyedproductspossible.Wedecidedweweregoingtoputthemoutaccordingtotheharvestcalendarandgetfoodiestoreallycareaboutthis.Thethingistheyjustdidn’tcareatall.Theproductswereoverlyexpensive;theydidn’treallyhavethatmuchofahook.Ithoughtthattheideathatyoucouldputonagarlicshirtthatliterallycametomarketthedaythatgarliccametomarketwouldactuallybeacoolthingandnobodyreallycared.Sowesoldthrougheverythingbutitjustdidn’tgoanyfurtherthantheinitialbatch.”Sothequestionis,howdoyoucreateaculturethatembracessuchexperimentation?Chrishastheanswertothat,too:“Iusedtoworkforadot-comandithappenedtobelocatednearafriend’snewspaperandIwouldgomeethertogetlunchandIwasamazedbyhowboringmyworkplacewascomparedtoagoodold-fashionednewsroom.Everyonewassayingthatthedot-comsarethesehot,exciting,sexythingsbutitwasjustabunchofcubesandpeoplehadquietmeetingsanditwasreallyjustaquietenvironment.

“Thenyou’dgoovertoanewsroomandpeoplewouldbeswearing

ateachotheranditwasjustkindofchaosalldaylongbecausetherewasadeadlineandinmostdot-comstherearen’tdeadlines.SoIsaid,’Allright,wellwhatwe’regoingtodoiswearegoingtohavedeadlines.We’regoingtohavetworeleasesaweekandit’sgoingtobethesegrand,creativeperformanceswhenevertheygoout.’Theresultofthathasbeenit’saveryexcitingworkplacebecauseeveryonefromourengineerstoourproductionpeoplegetsinvolvedintheseeventseachweek.Theyareincrediblyexcitingbecauseyouhaveahunchthataproductwillbepopularandyougettofindoutwithin24hourswhetheryou’rerightornot.That’swhatmakesthatenvironmentwork.Wehavepitchsessionseveryweek.It’slikeawriter’sroomforaTVshowwhereyou’rejustpitchingideasandnowandthenyouhavehits.Soeveryone’salwayssubmittingideas.Itreallyisanideafactory.”

OneFinalAnalogyAswe’vediscussed,attractingthewrongcustomeratbestcausesconfusionandatworstwreakshavoc.Earlyoninyourstartup,youhavetochoosewhomtoletin.Pretendyouareabouncer.You’reworkingatanightclubinManhattanthatis

havinganexclusiveparty.Youunderstandwellthestyleofpersonyouwanttoattend.Youcanrecognizepotentialpartyguestsbasedonhowthey talk,walk,groom,dress,andspend.Youknowwhat theirexplicit(and,moreimportantly,implicit!) expectations are of what makes a great party: what sort of musicshouldbeplaying(ThieveryCorporation),whoisplayingit(localDJ),andhowloudthemusicshouldbe(very).Youknowthattheylikecertaintypesofhigh-end cocktails (lavender jalapeno elderflower fizzes) and how they don’t drinkdomesticbeers(youcouldn’tgiveawayBudweiserifyoutried).You know that they intuitively dress to look good in your dark nightclub

environs, which include furniture and lighting all in line with your patrons’unspokenexpectations.Asabouncer,youhaveagreatresponsibility.Notonlydoyouneedtoadmit

thepartyguestswhowillhaveagreat timeinyourclub,butyouneedtokeeppeopleout—thesortofpeoplewhohavedifferentexpectationsofwhatmakesfor a good party: people whose musical, sartorial, and culinary tastes lie

elsewhere.Inherently, this ispatronizing.You,as thebouncer,willbemakingdecisions

on behalf of potential patronswhomaywant to get into your club, but don’trealize they aren’t a good fit, hence will probably not enjoy themselves andprobably won’t spend money. These people like cheap domestic beers (PabstBlue Ribbon), and complain loudly and bitingly at drinking $14 lavenderjalapeno elderflower fizzes, ruining the vibe for everyone else. With theirvociferous complaints, they occupy a disproportionate amount of your staff’stime as they make suggestions for features (playing the hit song “1901” byPhoenix)thatyou,yourstaff,andyourpassionatecustomerswillneveragreeto.Toaddinsulttoinjury,theydon’tspendanymoney.Theproblem isn’t thesepeople.Theproblem is thatyou let them in.The fit

betweenthemandyourclubiswrong.Hence,youneedtobevigilant.Theyliketogotowell-lithipsterclubsthatplayFrenchalt-rockmusicsotheycanenjoytheir retro-Americanabeers likePabstBlueRibbonorYuengling.Theyhaveacertainsenseofironichumorthatisn’tsharedwithyourcustomers.Itwouldbeawasteoftheirtimeandmoneyifyouletthemintoyourclub.Inaclub, theproblemlikelyfixesitselfquickly.Thehipstersleave.Oftenin

the startupworld, however, entrepreneurswill be quick to be all things to allpeople,andindoingso,theyarewithoutasolididentityorvalueproposition.

WorktoDo1. Create a market segment. When thinking about your customers, don’t start with“Everyonewho”or“Anyonewho.”Answerthesefourquestions:

a.Whatisthepainorpassion?Askyourself,“Whydotheyhavethisproblem?”togetdeep.Thisshouldnotbeashallowresponse.b.Whatimpactwillsolvingtheproblemorexcitingthepassionhaveonthecustomer?Iftheimpactissmall,youdon’thaveamarket;youmustfindadeeperpain.Howdoesyourproductchangethecustomer’slife?c.Wheredothecustomershangout?Ifyouwantedtofindthemonline,wherewouldyoubrowse?Whichforum?Whichblogs?WhatTwitterhashtag?Wherewouldyoufindthemoffline?Whatstores?Whatmeetings?Whatevents?d. Who influences them? Which blogger? What personality? A specific author orcelebrity?Aspouseorpartner?Parents?

2.Createapersonafortheidealcustomer.Whowouldbethemostpassionate about yourproduct?Provideasmuchdetail aspossible. Ifyouwere togowhere theyhangout,youshouldbe able to recognize themwhenyou see them. It’s all right if the description is astereotypeorevenacaricatureatthisstage.Itdoesn’tmatterifyou’reunsure.Takeastab.3.Createseveralmoresegmentsandpersonasfordifferentusecases.4.Createanantisegment.Onewhoappearsatfirstglancetobeanidealcustomerbutwillneverbuy.Whywon’ttheybuy?Howdoesthathelprefineyouridealcustomer?

5. Create a segment matrix. Choose the most important characteristics with which toevaluatethesegments.

Notes

1.http://sethgodin.typepad.com/seths_blog/2009/11/choose-your-customers-choose-your-future.html.2.AlexanderOsterwalder,BusinessModelGeneration:AHandbookforVisionaries,GameChangers,andChallengers.(Hoboken,NJ:JohnWiley&Sons,2010).3.MarcAndreessenblog,blog.pmarca.com.4.http://hbswk.hbs.edu/item/5170.html.5.In“NewCriteriaforMarketSegmentation,”HarvardBusinessReview(March1964),DanielYankelovichasserted,“Traditionaldemographictraitssuchasage,sex,educationlevels,andincomenolongersaidenoughtoserveasabasisformarketingstrategy.Nondemographictraitssuchasvalues,tastes,andpreferencesweremorelikelytoinfluenceconsumers’purchasesthantheirdemographictraitswere.”http://hbr.org/2006/02/rediscovering-market-segmentation/ar/1.6.AlanCooper,TheInmatesAreRunningtheAsylum:WhyHighTechProductsDriveUsCrazyandHowtoRestoretheSanity,2nded.,KindleLocations2250–2251(PearsonEducation,2004).

Chapter4

WadingintheValueStream

ArticulatingtheValueStreamIn lean manufacturing, an organization’s value stream is comprised of allactivities undertaken to provide value to the customer. Activities includeeverythingfromdevelopingtheconceptofaproducttoitsdesign,engineering,manufacturing,anddelivery.Aswe’vediscussed,thevaluestreaminaleanenterpriseincludesbothvalue-

added activities (for example, assembling part of a car) and non-value-addedactivities(forexample,forkliftingpartsacrossawarehousefloor).Theobjectiveof lean is to eliminate as many of the non-value-added processes as possible(somearenecessary)andtooptimizetheefficiencyofthevalue-addedactivities,whilemaintainingtheestablishedvaluetothecustomer.The value being produced should never be adversely affected by process

optimization, the elimination of activities, or other improvements. Destroyingreal value is more wasteful than eliminating inefficient time, money, or rawresources utilization.An organizationmay ormay not be better off becomingmore efficient through elimination ofwaste independent of its effect on valuecreation.Thelattermaybethegoalinsomeorganizations,butitisn’tlean.

Inthecontextofaleanstartup,inwhichtheproductionanddeliveryofvaluehasn’tbeenproven,youdon’t trulyknow either thevaluebeing createdor forwhom it’s being created. You may think you know. You may believe what’sbetweenyourears;youmayhavefaithinyourideaandyourabilities,butuntilyou’vesuccessfullyconductedtransactionswherebycustomershavepaidsomecurrencyforthevalueyou’veproduced,youdon’tactuallyknow.

Thisiswhywesaythat,nomatterwhatyourstartupendeavoris,yourjobistodiscover the value, for whom it’s being created, and whether there’s a largeenoughmarkettosupportthebusinessyouenvision.This is true in largeorganizationsaswell as startups. Ifyouareworkingon

known problems with known solutions, you are likely making incrementalimprovementstoyourproducts,somebasedontrueinnovation.Thisisfineandgood and is necessary to compete against your known competition. It won’tprotect you against disruption, however. For that, you must foray into theunknown,intodisruptiveinnovation.If history teaches us anything, it’s that for your startup to succeed, or your

existing business to flourish, you must be willing to experiment and fail insearchof therightcombinationofproblem,product,andmarket that results inbigsuccess.Fundamental changes will occur in your thinking between concept and

delivery.Yourearlyassumptionswilllikelybeprovenwrong.Thisistrueofalltypes of businesses that face uncertainty. There’s nothing wrong with that—embraceit.Goahead;we’llwait.

CaseStudy:SeeingfromCustomer’sView

WhenSightMachinefounderNathanOostendorpsetouttodisruptthe$2billionmachine-visionindustry,heassumedhissolutionwouldrequireamassiveamountofhardware:cameras,mounts,brackets,andblack-boxappliances.Machinevisionisaquality-controlprocesswherebycamerasensorequipmentisdeployedacrossafactoryfloorandimageanalysisisusedtoensurethatautomatedmanufacturinglinesareproducinghigh-qualitypartsorproduct.Theexistingpracticetypicallyrequiredcustomsolutionsforeachcustomerandrequiredmassiveamountsofprofessionalservices.Nathan’svisionwastocreateaplatformthatcustomerscould“orderliketheywerepurchasingaDellcomputer.Weprovideyouallthepiecesandthenweputthemtogethertodoveryspecificthings.”Thevaluepropositionwastodramaticallylowerthetotalcostofownershipofdeployingandmaintainingamachine-visionsystem,throughloweringthecostsofhardware,integration,andcustomization.Thesystemcouldbeinstalled“byanyonewithanAllenwrench.”

Thetrade-offwouldbeflexibility.Onceinstalled,thesetupisdifficulttomodify.SightMachine’schoicetopursuethismodelwasdrivenbythepainofthecurrenthigh-pricemodelandtheassumptionthatcustomersdidn’treallywanttohaveanythingtodowiththesystemitself.InNathan’swords,“Wethoughtpeopledidn’twanttohavetodealwiththetechnologyandsoweweredevelopingappliancesthatwouldprocessimagesintodata,comparethedatatogivenparameters,andthendosomethingwiththedata,liketriggeralightorsendanalert.”Astheyweredevelopingtheplatform,SightMachineconductedpilotprogramswithearlycustomers.Butbecausetheproductwasnotreadyforprimetime,itrequiredalotofmanualinstallation.Itwasthiscustomerinteractionthatchangedtheirperspectiveonwhatcustomersreallyneeded.“Sowhenweactuallystartedinteractingcustomerswiththetechnologywefoundthattheywereactuallycuriousaboutthetechnology.Wehadtobringtheoperationofitevenclosertothem.”Inotherwords,flexibilitywasasmuchthedrivingfactorasloweringthetotalcostofownership.Customerswantedtobeabletomovethecamerasandmounttheminchallengingenvironments,aswellascreatetheirowntestsinthesoftware.Inotherwords,theywantedtheflexibilityofthehigh-cost,services-basedmodel—buttheywantedtobeabletoimplement,manage,andcustomizethesystemthemselves.

“Today,ourgoalistoshowupinavan—liketheGeekSquad—withabunchofhardwareinthebackandmountacameraandhavevisionsystemssetuponthefirstvisit.Unlikethewayitworksrightnowwhereyoumaybehaveafour-tosix-weekleadtimeforallofyourequipment;wereallymakeitsothatanyonecangetsomethingupandrunningveryfast.”ValueAssumedBeforeDeepCustomerInteractionLowtotalcostofownerships(TCO)TurnkeyCustomerdoesn’tneedtotouchsystem

ValueValidatedAfterDeepCustomerInteractionZerocapex(hardwarerolledintosubscription)Software-as-a-service(SaaS)(noblackboxtomaintain)Customizationbycustomerrequired

Werecognizethisisnotatraditionalwaytoconductbusiness.Althoughmanysuccessful entrepreneurs implicitly understand that many of their ideas abouttheir businesses are guesses and go about their ownway of testing these, theMythoftheVisionaryisthepredominantstartupmeme.When businesses cost a lot of money to get started, investors from bank

officers to venture capitalists want to know as precisely as possible what thereturnontheirinvestmentwillbeandwhentheywillseeit.Theopportunitycostof the investment was high. The business plan was an assurance document,despiteitsfictionalquality.Big businesses look for the same assurance.Despite their best intentions of

encouragingdisruptive innovation, theverynatureofasking,“What’s theROIand when will I see it?” lures disruptive ideas toward sustained, modestinnovation.Topredictthemarket,youhavetobeinaknownmarket.Todisrupt,youmustcreatenewmarkets.Reducingthecostofstartupendeavorsmeansaloweropportunitycostandthe

abilitytofundexperiments.It’sactuallyratherironicthatwearewillingtofundscientiststoconductresearchinnewtechnology,whetherinrobotics,chemicals,materials,andsoon,butthemomentwewishtocommercializesaidtechnology,weabandonthescientificmethod.In other words, it’s perfectly okay to test, fail, iterate when developing a

technology, but to test, fail, iterate to find a marketable application of the

technologyseemsridiculoustomany.Ofcoursethetechnologyismarketable;it’sgroundbreaking!The result of scientific research is tangible, or at least factual. You put in

money,youeventuallygetoutaresult.Thisworksoritdoesn’t.Theentrepreneurwhosays,“Eh,thismayworkormaybenot,”isnotgivinga

very compellingpitch. It’s not very comforting, but there’s truth therein.As amatteroffact,basedonthenumbers,theentrepreneurwouldbethemosttruthfulifhesaid,“We’llgiveitago,butitmostlikelywon’twork.”If youwere to look at the value stream of a leanmanufacturer, youwould,

from a high level, understand the steps involved in producing and deliveringvalue.Ifsomeoneweretooutlinetheplanfromdeliveryofrawmaterialstoitsflow through themanufacturing process and on to the delivery of goods to acustomer,youwould likelybe able to identifyvalue-addedactivities andnon-value-addedactivitieswithoutalotofknowledgeoftheparticularproduct.Butwhataboutanalyzing thevalue streamwhenvalue isnotknown? Ifour

goalinaleanstartupistoeliminatewasteinthediscoveryofvalue,howdoweknowwhat’s wasteful? The fact is you can’t eliminate all waste if you don’tunderstandthevalueyou’recreating.Theprocessofdiscoveryitselfwillincludewaste. If you build a prototype that flops, you arguably wasted your timebuildingthatparticularprototype,butit’satleastlesswastefulthanbuildingtheentireproductbeforeitflops!ThisiswhyEricRiesincorporatesadifferentmeasureforleanstartup.Inlean

manufacturing,you’rewastingtime,money,materials,andlaborwhencreatingunusedexcessorwhenperformingnon-value-addedactivities.Inaleanstartup,you’rewastingifyou’renotlearning.“Theeffortthatisnotabsolutelynecessaryfor learning what customers want can be eliminated.” Validated learning isdemonstratedbypositiveimprovementsinthestartup’scoremetrics.1

Notethatcoremetricsdonotautomaticallymeanrevenueand,asamatteroffact,earlyon,theymostassuredlydon’t.Coremetricsinitiallyrelatebacktothephrasewhatcustomerswant,which,bytheway,doesn’tmeancustomersknowwhattheywant.Wecanhearyousaythatyoucanraise$10millionandbuildaproductnoonewantsandlearnaton,too!That’s true. Which is why lean takes no stance on how much money you

should raise. Arguably, one could learn a lot quicker with more money. Inpractice,however,weoftenseethat(1)moremoneyleadstomorewastesimplyfromalackofdiscipline;and(2)moremoneyoftenmotivatesinvestorstowant

more sooner (What’smyROIandwhendo I see it?) just as itdoes ina largeorganization. You’ve perhaps heard that nine moms can’t make a baby in amonth.Yourobjectiveistolearn,butnotalllearningiscreatedequal;qualitytrumps

quantity.Yourobjectiveistolearnwhatisfundamentaltoyourbusinesssuccesswith the minimal amount of effort. Learn as if you believe you will fail. Aprototype that fails helps point you in a better direction. A $10 millioninvestmentinproductdevelopmentandlaunchisonebigfailedexperimentthatleavesnoroomtopivotorlearningtopivotaround.It’seasytounderstandbigwaste:Spendingayearbuildingaproductnoonewants.Spendingsixmonthslookingforinvestorstofundayear’sworthofdevelopmentonaproductnoonewants.Writingabusinessplanforfourmonthstoconvinceaninvestortofundayear’sworthofdevelopmentonaproductnoonewants.

Small waste is much more insidious, flailing through business-model ideaswithoutdirection:

Opportunisticandshotgunsales.Productfeaturemongering.Greatmarketingforacrappyproduct.

Sothequestionremains:Howcanyoudevelopyourleanstartupvaluestream,whichismeasurablebyvalidatedlearning?Inanysuccessfulbusiness,acertainnumberofcustomersgothroughaseries

ofstepstobecomeawareofyourproduct,experienceit,becomesatisfiedwithit,and then finally feel a high level of loyalty to the experience. Through theprocess of customer acquisition and conversion, and then delivering on theproduct’s fundamentalpromise, the successfulbusiness learnswhatproblem itshouldbesolvingandwhatproductsandservicesitmustprovide,plusparticularactivities inmarketing, selling, product development, support services, and soon,itneedstoemploy,inordertolettheusermostefficientlyflowthroughtheexperiencefrombeginningtoend.Theprocesscanalwaysbeimproved.Thesalesprocessmightbemademore

efficient so that it maps closer to customer expectations. Marketing can beexpandedtoautomatepartofsalesandbemoreinclusivetoadjacentsegments.Engineeringmightreducenon-value-addedstepsinthecreationoffeaturesandreduce“feature inventory.”Manufacturersmightadopt leanmanufacturing!As

long as value is maintained, these are lean practices, and continuousimprovementisacoreleanethos.Becausewedon’tknowwhat thevalue stream is ina lean startup,however,

we’re not so concerned with improvement but rather with learning andvalidatingwhatthe internalbusinessprocessesare in thecreationanddeliveryofvalue,suchthatthebusinessissuccessfulandgrowing.Traditionally, the50,000-footviewofa startupvalue streammight look like

this:BusinessPlanning⇒ Investment⇒ProductDevelopment⇒Marketing⇒Sales⇒FeedbackAswe’veseen,however,thishasalsoresultedinalotoffailedstartupsanda

lotofwaste.Asthecostsofbuildingproductshasplummetedsuchthatmostentrepreneurs

requirelittletonocapitaltogetstarted,thevaluestreamhasnotbeenrethought,butratherbeenshortened.ProductDevelopment⇒Marketing⇒Sales⇒Feedback⇒ Investment toGrowIntermsofsheervolume,it’snotsurprisingthatthenumberofstartupsfailing

hasincreased.Itwouldn’tsurpriseusifwithalackofrealplanning,therateoffailurehadalsoincreased.Whether the product should be built is not seen as a question even worth

asking. If it is asked, it is answered through persuasion born of charm andpersonalityratherthanthroughanyfactualelement.Canleanhelpus?Through its evolution, leanhas remainedprimarily anengineeringendeavor.

Designissometimesincludedandinternalrepresentativesofthecustomer,suchas product managers, are often added to the process, but in practice, directcustomerinteractionispoorlyrepresentedintheleanprocess.Datacollectedbythebusiness isoften tiedback toefficienciesofbusinessunits,qualityofcodedelivered by IT, customer satisfaction as measured by marketing, but there’slittle to connect product and product developers to customer satisfaction andproductloyalty.The Toyota Production System includes stories about engineers and design

leads interactingwith customers firsthand, in order to learnwhat to build.WeknowthatToyotasalespeoplesoldcarsdoor-to-doorandconsideredthispartofbeing lean. One hears of efforts to develop lean sales and lean marketing

processes, but few lean organizations are truly completing the lifecycle of acustomer’srelationshipwithabusinessinoneleanflow.As long as everyone is being lean inside vertical silos, rather than as a

horizontalteamcreatingvalue,startupswillfailandbigcompanieswillonlybecapableofsustaininginnovation.Unlikemanyengineering-ordesign-led leanprocesses,we includemarketing

andsalesinthevaluestream.Manyfeelthatmarketingandsalesareinherentlyevilandarenon-value-addedactivities.Inaperfectworld,onewouldnotneedthem.Suchpeopletendtobelievethatifyoubuildthebestproduct,themarketwill

eventually find you. It’s often referred to as the build-it-and-they-will-comephilosophy.Weempathize.Yourproductisyourbestmarketing.Allmarketingdependson

word-of-mouth,soifpeoplehavegoodthingstosayaboutyourproduct,youareastepahead.An inverted corollary is “Nothing kills a bad product quicker than good

marketing.”The bottom line is that if people have nopath to your product orservice,thenyouwillnotbeabletoprovidevaluetothesepeople.Theywon’tbecome your customer. Assuming that you truly wish to provide value, theimportanceof lettingpotentialcustomersbecomeawareof thevalueshouldn’tbediminished.Theprocessofconvertingcustomersshouldbebuiltaroundwhatthebuyerwantstheprocesstobe.Thisiscriticaltodeliveringvalueandcreatingpassionintheproduct.The fundamental difference between marketing and selling products that

deliver value andmarketing and selling products to make a dollar is that theformerispartofcreatingalastingbusinessbasedonrepeatcustomers,long-termretention, and referrals. The latter (generally) is about maximizing revenuethrough as many one-off transactions as possible. The ambition isn’t tomaximize customer satisfaction that generates word-of-mouth marketing, butrather to simplymaximizemoney coming in, while minimizingmoney goingout. When the product has run its course, those businesses launch anotherproductunderadifferentbrand.“Nowtheonlywaytogrowistostandout,tocreatesomethingworthtalkingabout,totreatpeoplewithrespectandtohavethemspreadtheword.”2

—SethGodinWhat we are talking about is building businesses based on providing such

extraordinary value that customers are willing to pay something valuable tothem:money,time,asignificantamountofattention.AsSethGodinpointsout,this isn’taccomplishedbyarace to thebottom,butratherarace to the top.Inotherwords,doingwhatothersaredoingata lowercost isn’twhere thevalueplayis.Youmustprovidesomethingmeaningful,somethingmore.

This isn’t always true, however. A “value surplus” can be created whereincreased competition lowers cost without destroying value. Customers thatcouldn’taffordthevaluebefore,nowcan.Thisisclearlygoodfortheconsumer.Itmustn’tmean lowerqualityor lowervalue,but rathergettingmore for less.Thisisthenaturalresultoftruefreemarketcapitalism(theAdamSmithversion,notthelibertarianversion).New product ⇒ Company strives for monopoly ⇒ Competition entersmarket⇒CustomergetsmoreforlessBusinessesnaturallystrivetoachieveormaintainamonopoly.Infreemarkets,

this is accomplished by relentlessly adding value.More value comes inmanydifferent flavors—higher quality, more features, support for social causes,environmentalinitiatives,betterpackaging,andsoon.WhatStevenSpearcallsthe“highvelocity”companyisonethatmaintainsitsmarketleadbyrelentlesslyleveragingsomecorecompetency.Wecallthisthe“shadowforce,”becausethiscapabilityisn’tnecessarilyvisibletooutsiders.Eventually, you want to discover your value stream that encompasses

everythingfromwhensomeonefirstdiscoversyourproductthroughtheendofthecustomerlifecycle.Sowhatmarkstheendofthelifecycle?Manymightsay,“Duh,when the customer pays you.”Not so fast! The customer lifecycle is aloop.Itisn’tcompleteuntiltheycontributetothetopofyouracquisitionfunnel.

Theydothisintwowaysandbothareimportant.First,theycontinueasloyalcustomers:Resubscribe.Becomeregulars.Signlong-termcontracts.Buyotherproductsandupgradesfromyou.

“People’s desires always have a way of emerging after their needs aresatisfied.Whenapersonneedssomething,shewilldowhatisneededtogetit,but when she desires something, she is loyal to it. She knows that it is adiscretionarypurchase,andshewillbuywhatmakesherhappyandwillnotnecessarily judge rationally.Whenaconsumerdesiresaproductor abrand,hisloyaltyisoneofthestrongestforcesinbusiness.”3

—AlanCooperSecond,theybecomeproductchampions:Invitefriends.Agreetoapressreleaseorcasestudy.Provideatestimonial.Agreetoactasapersonalreference.Showoffproducttoothers.

There’s a pointwewant to capture that goes beyondwhen a customer feelssatisfiedsimplybecauseyourproductdeliveredonitspromise.So what might a value stream look like that maps activities to learning,

includesmarketingandsales,aswellasanswersthequestion,“Shouldwebuildtheproductatall?”

Value-StreamDiscoveryFromthe50,000-footview,yourvaluestreammightlooksomethinglike:Validateidea⇒Validateproduct⇒Validatemarketingandsales⇒ValidategrowthenginePlanningandcustomerfeedbackareworkedintoeachstep.(Investmentcanbe

aswell.)Drilling down into a generic product, validating the idea typically involves

testing three components: the problem you’re trying to solve, the customersegmentthathastheproblem,andtheproposedsolution.

Validating the product means figuring out the specific product functionalityrequiredtominimallysolvetheproblem.Validatingmarketingandsalesindicatesthatyouknowwhatchannelstoreach

outtoinordertofindthetargetcustomersandwhat’srequiredtoconvertthemintosatisfiedcustomers.Validating the growth engine is determining how you convert satisfied

customers into passionate customers, at a cost that will allow the business toscale.Let’s lookatanormaluseracquisitionandconversion funnel.Wemightuse

DaveMcClure’sPirateMetrics4asanexampleforweb-basedbusinesses:Acquisition—Howusers get to yourwebsite, such asGoogleAdWordsorFacebookads.Activation—Customerssignupandtrytheproduct.Retention—Customersaresatisfiedwiththeproduct,sotheycomebackandusetheproductregularly.Revenue—You’re paid by advertisers based on the quantity of users orcustomerswhopayfortheproduct.Referral—Customers are passionate about your product such that theyputnew people in the top of the funnel through word-of-mouth or even by“showing-off.”

All businesses have such a funnel. A B2B funnel typically uses differentlabels,butitamountstothesamething.

Apackagedgoodsoldinaretailstoremighthaveafunnelthatlookslike:

Thismightbeavaluableway tounderstandhowyourcustomermovesfrom“aware”to“repeatbuyer.”Youcanvisualizethatthenumberofpeoplewhogothrough the funnel decreases from stage to stage. It’s easy to imagine theactivitiesyoumightperformtogetthemtomovetothenextstage.Sothefunnelisavaluablepartofthestream,butit’snotenough.First, though the funnel purports to describe the state of the customer, it’s

reallyseenfromtheseller’spointofview.Afunnelfromthecustomer’spointofview isbetterdescribedusingemotional states.So,McClure’sAAARRfunnelmightlooklikethis:

We’vedrilledintothefunneltoexposeboththecustomerconversionprocessandthecustomer’sproductexperience.Eachstepisindicatedbytheemotionalstateofthecustomer.Youcanrightfullyquibblewiththewords,butthismethodcanbeapowerfulwaytoempathizewiththecustomerandtoavoidthetrapofthinking about the process you would like to implement versus the one thecustomerwantstoexperience.Tosummarize:Whencustomersfirstbecomeawareofyourproductviaadvertising,socialmedia,orfromafriend,theywillseektolearnmoreiftheyareintrigued(acquisition).Ifuponlearningmore,theylikewhattheyhear,theybecometrusting.Theyhavestartedthepathdownthefunneltowardactivation.Oncetheyhavebeenconvincedthattheproductandcompanyareright,perhapsthroughreferences,theybuytheproduct(revenue).Afterbuying,theyarehopefulthattheyhavepurchasedtherightproduct.Theynexttrytorealizethevaluepropositionpromisedtothem(activation).Onlyafterusingtheproductforsomeperiodoftimedotheybecomesatisfied.Thevaluepropositionhasbeenrealizedandtheyarelikelytocontinuetousetheproduct(retention).Customerswhoaremerelysatisfieddon’treferproducts.Passionateusersdo.

Notethatforbusinessmodelsinwhichscalemustbeachievedbeforerevenueis realized, revenue is not realized until after user retention, whereas in mostotherbusinesses,revenueisachievedpriortoretentionand,manytimes,priortoactivation.Toillustrate,Facebookdoesn’tchargecustomerstousetheproduct.Assomeliketosay,thecustomer(theuser)istheproduct.Facebookhadtonailtheproduct tosuchadegree thatpeoplewerewilling to inviteall their friendsanda largeenoughpercentageof those friendshad toconvertandbeengagedenough to invite their friends. This is known as the viral coefficient. Viralcoefficients greater than 1.0 result in exponential growth. Revenue is realizedonlyafterscalehasbeenachieved.In business models where there is a free component (often known as

freemium)andrevenueisachievedbyup-sellingtopremiumaccounts,wetreatthe free component as a component of acquisition. Revenue happens whencustomersareconvincedthatthepaidcomponentisworthpayingfor.It’sworthreiteratingherethatfreedoesnotequalfreemium.Freemeansthere

isnopaidcomponentfortheproduct’suse.Revenueisnotmadedirectlyfromusers, but via other means, such as selling user data to third parties, sellingadvertising, or, in Facebook’s example, taking a cut of revenue from for-payapplicationsthatrunontopofFacebook.It’s also worth noting that freemium is not really a business model. The

businessmodelisbasedonsellingpremiumfeaturesbeyondthefreelevel.Freeisahooktogetuserstotrytheproduct,perhapsbecomedependentonitandpayforadditionalusage,orit’ssimplyamarketingactivity.Entrepreneursshouldbecarefulaboutover-complicating theirvalueproposition.Aswehave toldmorethanoneentrepreneur,ifyousellhatsandhaveidentifiedamarketthatwishestopay for hats, there’s no sense in giving them a visor first and then upgradingthemtoahatlater.Sellthema$&*@&!hat!Ontheotherhand,youmaybeabletodisruptanexistingmarketbyofferinga

free product in an otherwise for-pay business. Your revenue comes fromconsistentlyidentifyinganddeliveringvalueontopofthefreeversion.Keepinmindthatyoucan’tdisruptafor-paymodelwithfreeiffreealreadyexists!Back toour funnel.Foreachstep,youwish thecustomer tomoveon to the

nextstep.Youwantthemtotakeaspecificaction.Asabusiness,youmustdosomethingorhavesomethingthatleadsthecustomertotakethataction.Thatitiseasytoimagineawholelaundrylistofactivitiesabusinessmightdeployforeach stage, or product features it might build to deliver some value, makesdiscoverydifficult.What’soptimal?Wewant tobeable topositonebest-casescenarioandworktovalidatethatscenario,hopingitwillinstructusonhowtocapturethemarket.

CustomerStateTo develop one scenario for an entire value stream,we’ve found it helpful tobegin at the end and work backward. In other words, we flip the funnel. It’sactually a flipped value stream. We start with, “Why is your customerpassionate?”andworkbackward:

Passionate—yourcustomerlovesyourbusiness;yourcustomerisloyal.Passioncomesfromsomethingmorethanthattheproductmetexpectations.Satisfied—yourcustomer’sexpectationshavebeenminimallymet.Minimallyisnotimbuedwithnegativity.Thisisapositivething;yourproductdoeswhatyou’vepromised.

Hopeful—yourcustomerfirstexperiencestheproductinordertorealizethepromiseyou’vemade.Theyarehopefulthattheirneedswillbemet,thattheyhiredtheproperproducttocompletethejob.Convinced—yourcustomerhasbecomeconvincedyourproductistherightfitfortheproblemthey’retryingtoresolve.Thereasoningcanbebothrationalandirrationalandincludereasonsbeyondtheproductitself.Trusting—yourcustomerbelievesnotonlyinthelikelihoodthattheproduct

willdothejob,butalsothatthecompanyisworthyofarelationship.Intrigued—yourcustomerisintriguedwhenearlyinvestigationindicatestheproductwillsolveaproblemimportanttothem.Aware—yourcustomerfirstrealizesyourproductexistsandpurportstoaddressaconcernoftheirs.

For some products the lines between convinced, hopeful, and satisfied areblurry, if not arbitrary. The goal is tomeasure the changes between customerstates. Ifyouhavefewerstates, thenyouhave less tomeasure.Otherproductswillhavemorestates.Ifyou’resellingB2B,youcouldcreateawholedecision-making tree that includes all the champions, opponents, and deciders and theinternalprocessestheygothroughtopurchaseaproduct.Asamatteroffact,ifyou’resellingtobusinessesyoushouldcreatesuchatree.

CustomerActionNext, we want to ask ourselves, what specifically is the customer doing thatindicatesthestatetheyarein?Wefollowthisworking-backwardprocessallthewaybacktothepointwhentheyfirstheardofyou.EmotionalStateofCustomer CustomerAction(example)Customersloveyourproductandyourcompany(passionate).

Theycontinuetheirsubscriptionsandtelltheirfriendsaboutyou.

Onlyafterusingtheproductforsometimedocustomersbecomesatisfied.Thevaluepropositionhasbeenrealizedandtheyarelikelytocontinuetousetheproduct.

Logindaily,runreport,viewdashboard,createsomething.(Whatisthespecificinteractionwithyourproduct,andwhatisthefrequencywithwhichthathappensthatindicatessatisfiedengagement?)

Customersarehopefulthattheyhavepurchasedtherightproduct.Theynexttrytorealizethevaluepropositionpromisedtothem.

Login,createsomething,uploadsomething,configuresomething,viewsomething.(Whatisthespecificminimalinteractionwithyourproductthatcustomersmustdototryandrealizethevaluepropositionforthefirsttime?)

Oncecustomershavebeenconvincedthattheproductisagoodfitandcompanyiscapable,theybuytheproduct,resultinginrevenue.

Theybuy.

Customerstrustthattheproductisagoodfitandthecompanyprovidingtheproductisworthyoftheirbusiness.

Theysignupfortheproducttrial.

Ifuponlearningmore,customerslikewhattheyhear,theybecomeintrigued.Theyhavestartedthepathdowntheactivationpartofthefunnel.

Theyreadmoreaboutproductbenefitsonyourwebsiteandintestimonials.

Customersfirstbecomeawareofyourproductviaadvertising,viasocialmedia,orfromfriends.

Tolearnmore,theyvisityourwebsitelandingpageandwatchavideo.

Obviously, these are examples from a hypothetical software-as-a-serviceapplication.Youmustcreateyourownsetofhypothesesforyourproduct.

BusinessActionThisvalue-streamdiscoverytechniquecanbeusedwithanybusiness,withsometweaking for different products and services.As you flesh out the scenario, itbecomesapparentthatthebusinessneedstodosomethingorprovidesomethingforthescenariotowork.CustomerState

CustomerAction(example) Companymustdosomethinglike...

Passionate Subscribes.Refers.

Somethingbeyondbasicproductthatdeliverspromise.

Userexperience?Customerservice?Supportcause?Elegantproduct?

Satisfied Usesproductinspecificwayoverspecifictimeperiod.

Buildminimumspecificfunctionalitythatdeliversonvalueproposition.

FeaturexFeatureyFeaturez

Hopeful Triesproductinspecificway. Overcomeblankslate?Dripcampaign?Follow-upphonecall?

Convinced Buys. Abilitytopurchase.Calltoaction.

Trusting Demosproduct. Providetrial.Gettestimonials.Providetutorial.

Intrigued Readslandingpage,watchesvideo. Providewebsitemessagingandpositioning;createvideo.

Aware Readsthird-partyblogpost;visitscompanywebsite.

Reachouttothird-partybloggerwhoisacustomerinfluencer.

What would your customers say about you? Let’s look at the differentpossibilities companiesmight employ to affect the customer at each state, byimaginingwhatthecustomermightthinkorsaywhenfeelingacertainway.They’rePassionate

“Theproductissoeasy,sobeautiful;itmakesmewanttouseit.”“TheproductdoeswhatIwantitto,andthensomuchmore.”“Thisgameisaddictive!”“Ihavetogettothetopofthejackpot!”“WhenIcalledcustomersupport,theCEOanswered!”

“Theytooktheshoesback,noquestionsasked.Evenpaidforreturnshipping.”“MyreplacementarrivedbeforeIshippedthedefectiveoneback.”“ForeverypairofglassesIbuy,theyprovideafreepairtosomeoneinneed.”“Thepackageissocool!”“Theirnewpackagingmakespouringsomucheasier.”“I’veimprovedmybottomline,monthaftermonth.”“Idon’tknow,theproductjustmakesmefeelgood.”“ItfoundproblemsIdidn’tknowIhad.NowI’maheroatwork.”“Notonlydothejeansfitme,butthelooksIget...”“Thewaitstaffwentaboveandbeyondthecallofduty.”

They’reSatisfied“Thefoodwasdelicious.”“Iwasactuallyabletofindjeansthatfitme.”“Iamabletocreateandsharenewsurveysinunder10minutes.”“Theintrusion-detectionsystemimmediatelyandconsistentlyreportsaccurateanomaliesonmynetwork.”“Theshoesfitandlookgood,too.”“AfterIconfiguredthesystem,Iamfinallyabletotrackmymarketingcampaigns.”“Thisgameisfun!”“Usingthisproducthashelpedmegeneratemoreleads.”

They’reHopeful“IhopeIchosetherightproducttosolvemyissue.Let’sgiveitatry.”“Ihopethisthingworksasadvertised.”“It’sratedasatthetopofitsclass,let’ssee.”“I’veheardtheprimeribistop-notch,Ican’twaittotasteit.”“Ihopeimplementationgoessmoothly;thiswizardlookshelpful.”“I’mnervousIwon’tknowhowtoworkit.”“IwonderwhatIshoulddofirst.”“Itsaysnoassemblyrequired.”“Wonderifitcomeswithbatteries.”

They’reConvinced“Wow,Oprahrecommendsit.”“DemoseemedtodowhatIneededdone.”

“Worthashot.”“After30days,trialseemstobepayingoff.”“Sampletastedgood!”“Well,nottooexpensive.”

They’reTrusting“Feelslikethey’retalkingtome.”“Irespectthetestimonialstheyhaveontheirwebsite.”“Dataanalystgavethemathumbsup.”“Onlinecustomerreviewsarepositive.”“Huh!Fouroutoffivedoctorsrecommendit.”“Trademagreviewwasenthusiastic.”“Notmuchtolose,satisfactionisguaranteed.”“AtleastIcanreturnit,plusfreereturnshipping.”“Lookslikeit’sapprovedbytheBetterBusinessBureau.”“Casestudyexamplematchesusperfectly!”“Friendsaiditwascool.”“4outof5stars!”

They’reIntrigued“Cashbacksoundsgood.”“Soundscool.”“Whoa,thisdemorocks.”“Nicedatasheet.”“That’saclevervideo.”“SoundsexactlylikewhatIneed.”“Yep,that’smyproblem.”“Whowouldathought,better,faster,ANDcheaper.”

They’reAware“Wow,thosetradeshowbootbabeswerehot.”“Salesguywaskindofpushy,buttheproductsoundedprettygood.”“Didyouhearaboutthatproductthingy?”“Wonderifit’sforreal.”“Yeah,weshouldcheckthatout.”“Huh,what’sthis?”“Coolpackaging.”

MeasureWhat is particularly helpful in the softwareworld is that one canmeasure thecustomer’sprogress through thevarious stages. In today’s software-eating-the-world environment,most businesses can figure outways tomeasuremuch oftheirvalue-streamactivity,too.Gettingcustomerstointeractwithyouonlineiskey.Youareonlylimitedbyyourcreativity.Ofcourse,youareencouraged toobserveyourcustomersandevenspeak to

them,whichareacoupleoftacticsavailabletoeveryone.Yourcustomerwilldosomethingthatindicatesthey’vemovedastepthrough

thefunnel.Inotherwords,youwanttomeasurethecustomer’sstate.Sometimesthis can be done with simple analytics tools. In other instances, youmust bemuchmoreclever.

Going through this process documents the business model assumptions youneedtotestfirst.Thevalue-streamstagescanbedividedintothesecategories:GrowthengineMinimumviableproductConversionFunnel

AcquisitionchannelFor each, you have assumptions concerning specific customer behavior and

businessactivitiesrequiredtoinducethebehavior.Youhavealsothoughtaboutwaystomeasureprogress.

GrowthEngineWhatyourcustomerdoeswhenpassionateorloyalistheprimerforyourgrowthengine. For network effects businesses, passionate customers invite all theirfriends,colleagues,orwhoeverneedstoparticipatetomaketheexperiencemorevaluable. A transaction business (both online and offline) relies primarily onsomecombinationofcasestudies,testimonials,orreferralsfromexistinghappycustomers;ongoingperiodictransactions;and,sometimes,regularmaintenance,support, or other services fees. Subscription models need referrals plusmaintenanceofsubscription,inotherwords,lowchurn.

MinimumViableProductTheMVP is your proposal for theminimum specific functionality required toprovidethevalueproposition.Thevaluepropositionisthevalueyouarehopingtodelivertoaspecificcustomersegment.Thecustomerusesyourproductina

specificwayinordertoaddressaspecificpainorpassion.Youwanttonailthespecific, not the general. At this stage, you aren’t concerned with howmanypeopledownloadyourproductorlikeyouonFacebook.Rather,youmustfigureoutwhatspecificallyyourcustomersdowithyourproduct tocomplete the jobyour customer hired your product for. There may be more (or less) to thesolution,buttherearetwothingsyoushouldkeepinmind:

1.Overbuildingmakesitmoredifficulttounderstandwhatisthemust-havepartofyourproduct.You’renotdonebuildingaftertheMVP.Thisissimplythefirstiteration.2.Imaginetheproductfromtheoutsidein:Workingbackwardfromsolvingtheproblemmakesyousolutionagnosticandarchitectureindependent.

ConversionHowwill you cross the penny gap?Getting customers to take out their creditcardsismoredifficultthanitseems,nomatterwhattheprice.Theactofpayingmoneyforanythingisrarelyapurelyrationalexercise.Thestepsofconversionhappen between “I want to buy” and “I bought.” What needs to happen inbetween?Properpricing?Trust?Easeofprocess?Approvals?

FunnelAll sales have a funnel comprised of several actions taken by the customercorrelated to several activities undertaken by the business. We use the wordactivitiesinaverybroadsense,frompackagingandobtainingretailshelfspaceto providing elements of trust, such as testimonials or secure shopping cartbadgesonawebsite.

AcquisitionChannelTheacquisitionchannelishowyoufirstreachyourcustomers.Themethodsyouuse are dependent on the behavior of the market segment. This is what the“Where do they hang out?” question addresses. Eventually, this is how youscale.Onceyou’venailedthevaluepropositionsuchthatyoubecomeyourownacquisition channel, you’re ready to discover and validate and grow otherchannels,aslongasthelifetimevalueofacustomerisgreaterthanthecostofacquiringthem.

Atthispointit’snotnecessarytodocumentallpossiblestepsforaparticularsegment;wewant to startbyarticulatingone funnelandoneacquisition tacticyouthinkispromising.

CaseStudy:AppFog’sHighHurdle

LucasCarlsonistheCEOandfounderofAppFog,basedinPortland,Oregon.AppFogisaplatformasaservicethatallowswebandmobileapplicationdeveloperstodeploy,scale,andruntheirapplicationsinthecloudaseasilyasinstallinganiPhoneapp.ThenumberofdeployedapplicationsonAppFoggrewfrom600atthebeginningof2011to25,000attheendof2011.Theyrecentlyraised$10million.LeanEntrepreneur:Whatcaughtmyattentionaboutyou,Lucas,iswhenIheardthatyoustartedAppFogwithjustalandingpageanditblewupprettyquickly.I’dloveyoutoshareyourexperiences.LucasCarlson:Yes,absolutely.Asaquickbackground,I’vebeendevelopingsoftwaresince1996.

I’vebeenin thestartupworldfora longtime,andI’vealwayslovedstartupsandI’vealwayswantedtodomyownstartup.Ialways had plenty of ideas. I’ve often tried to do these littleideas, and my experience led me to realize two things thathelpedmewhenIstartedPHPFog.First,oneofthebiggestfaultswithmysideprojectswasIdidn’tknowhowtogetinfrontofthepeoplethatwouldusethemorendupusingthem.SoIdabbledinWordPressplugins,butIhadnoideahowtotalktopeoplethatusedWordPresspluginsorgetinfrontofthem.Second, Iviewed themas revenuestreams thatcouldaugmentmyincome,butnotasbusinesses,soIwouldloseinterestatapointbecause,tome,theyweremeanstoanend.

LE: So the passion really wasn’t there about the products. Wecouldcallthisfounder-marketmisfit.

Carlson:Right,soIhadbeenwatchingHerokuforalongtimeandI thought it was really cool. I started to move all of my sideprojectsintoHeroku.TheproblemwasonenightIrealizedIhadawhole bunch of PHP projects that I couldn’t move to Herokubecause theydon’t supportPHP. [PHP isa softwaredevelopmentlanguage developers use to create products.] I wasn’t the firstperson to come upwith this idea. I had heard people talk aboutPHPHeroku,andPHP’samuchbiggermarketthanRubyhaseverbeen.[Outofthetopmillionwebsites,athirdofthemarePHPandonly 5,000 of them are Ruby, a rival software developmentlanguage.]

Itwasprobablyaround10o’clockonenight,andthat’susuallyprimetime for me to have an idea and start building it. I’vealways been a night owl and nighttime is when I domy sideprojects.ThatnightIfeltlazy.Iwastootiredtogooutandstartprototypingthisplatformasaserviceandstartbuildingit,soIdecidedtothrowupalandingpage[aone-pagewebsitewithaspecificcalltoaction],andIwasstilltootiredtoevenprogramabackend, so I usedoneof themailing services to collect e-mails for me. And I came up with the name PHP Fog. Iregistered the domain name. I put up the landing page, itwasone page, and put one paragraph of text and put a link onHackerNewsandfellasleep.ThenextmorningIwokeupandtherewere800peoplesignedupfortheservice.

LE:Whatwasthatlikewhenyouwokeupandyousaw800peoplehadsignedup?Carlson:Itwasathrill;itwasarush.Itwasamazingbecausethiswaskindofthemissingpiececomparedtomypastprojects.IhadspentadecadetryingtodostartupsandthiswasthemissingpiecethatIneverhadseenbefore,howdoyoufindpeoplethatwanttouseyourthing?Thiswasanideathatthepeoplewereripeforthepicking and they were right there and I knew how to get thembecausetheywereme.Theywerepeopleexactlylikeme,tryingtodothingsexactlylikeme.LE:You know how they think. You knowwhere they hang out,right?ClearlyHackerNewsiswheredevelopers,especiallystartupdevelopers,hangout,right?

Carlson:Iwashopingthat I’dgetafewcomments in theHackerNewsthreadthatwouldhelpguideme,andIgotwaymorethanafew comments. There was a huge discussion. This was clearlysomethingthatalotofpeoplewereinterestedinandwanted.LE:Whatwasyournextstepafterthat?Carlson: That night I said to myself, “Okay, I’ve got to build itnow.Ihave800people.”...Icalleditaprivatebeta,soIhadn’twrittenanycode,but800peoplewereexpectingtobeletintothebeta, so that put a fire underme.That night I started building. Istartedbuilding it theway that I traditionallybuilt ideasandsideprojects.IthoughtaboutthecoolesttechnologyIcouldandstartedprototyping that technology andbuilding an ivory tower.Aweeklater,Ihadbeenworkingonithourseverynight,pouringintothemorning,andbytheendoftheweekIwasnotevenclosetohavingsomethingthatwasready.LE:Yougotexcitedandyouthought,“Ihave800peoplewaitingforme.Ifeelaresponsibilitytothecommunity.”Carlson:Yes. Iwasworking on it and by the end of theweek Ithought,“I’mnotgoingtogetanywherethisway.”SoItrashedallthework that I had built for the entireweek and I started againfrom scratch. This time I said tomyself, “I need something thatpeoplecanatleaststartlookingat.”SoIbuiltthefrontendfirst.LE: What happened there? What happened between you goingfrom“Okay,I’mgoingtobuildthe‘bullet-proofivorytower’”to“Okay,Ijustneedtogetsomethingouttomypeople”?Carlson:Well,Iknewthat itwouldbemonthsbeforeitwouldbeready if I kept it at that pace. Then Iwould definitely be lettingthesepeopledown.Idecidedtobuildthefrontendfirstandletthatguidealldecisions.ThefirstthingIbuiltwastheuserexperienceIwouldwant to seeasacustomer, theminimum interaction togetstartedwiththeproduct.IstartedwiththemostplainstaticHTMLyou could have. I am terrible at design, so I didn’t even bothertrying.Ijustputthebasicsinplace.

Step1:Pickyour framework,Step2:Giveusadomainname,Step 3: There is no step 3—you should have a runningapplication now! Then I started making those things actually

work.Ihavealwaysbelievedinthepowerofgreatdesignandsimpleexperiences. I feel like if you don’t capture someone’simagination in the first 60 seconds, you have lost the game.Design projects confidence, and especially with young ideas,those early users need to have as much confidence in it aspossible in order to turn into your advocates. So, I hired adesignerforafewthousanddollars tomakeit lookasgoodaspossible.BythetimeIhadthisready,aboutfourweekshadpassedandIwas ready to start letting people in. I now had around 4,000people signed up on the waiting list. I knew I couldn’t bring4,000peopleintotheplatform,butIknewthatIneededtokeepengagedwiththesepeople,thatIhadacontractwiththem.I’mnotsureifthiswasthemotivation,butoneofthethingsisthat ever since that first day,with the 800 sign-ups overnight,I’vejustbeentotallyaddictedtotraction.Tractionis thebloodflowofastartup,andyouwant tocollectasmuchyoucan,asquicklyasyoucan.We had 4,000 people; there was no way I was ever going toinvite4,000people inat thisstage. Itwasasideproject Iwasworkingonatnight and itwasn’t fullybaked,but Ineeded tokeepthemengagedandIneededtraction.Oneof the thingsI thoughtofwasaVIP thing.Noneof theseideasIcameupwith; Istoleeverything. Istoleall the ideas; Ijust watched what other people did and thought about how Icouldapply[theirideas]towhatIwasdoing,buttheideawastocreateaVIPwaitinglist.SowhatIdidwassendane-mailtothe4,000 peoplewith a link to a survey and I said, “You can getintoourprivatebetaalotfasterifyoufilloutthissurvey.”WhatIintendedtodowiththesurveywasmakeasurveythatIthoughtwould takea significant chunkof time to fill out, onethat would not be easy, one that had many open-endedquestions, like:Why did you sign up for PHPFog?What didyouexpectfromus?What’syourmajorpainpoint?

LE: So you purposefully created a burdensome survey to try to

weedoutthepassersbyfromtheearlyadopters.Carlson:Yes.SoIexpectedafewdozenpeopletospendthetimeto tellmewhat theywerewanting. I thought, I canhandlea fewdozen people. So I sent the e-mail to 4,000 people and whathappenedwasIendedupwithabout2,000responses.LE:Wow,50percent!Carlson:Thatwas likestrikinggold.Thefirstbitof tractionwiththe800sign-upsovernightwasagreatindication,butthiswastherealgoldthatthewholecompanywasbuilton.Thiswasthestuffthathasdirectedtheproducteversince.LE:Thesewerenotearlyadopters in thesense that theyare techgeekswho like tohangout atApple for the latest iPhone.Thesepeople were early adopters in what I think is a verymeaningfuldistinction:Theywereearlyadoptersforyourspecificproduct.Carlson: Yes, and I did not expect that half of the people whosigned upwere those early adopters and [that they]would be sowilling to open their time and their energy to tellme about theirproblemand their pain,which just totally reinforcedhowpainfulthiswasandhowbigofaproblemIwasabouttotacklebecause,literally, thesepeoplewouldput paragraphsof text.Theyhad allbeenthinkingaboutthisforsolongandnothingonthemarketwastheretoaddressthatpain.LE: Was it just you digesting all this information, with 2,000responses and open-ended text responses? Seems like this is anamazingamountofdata.Howdidyougetthroughthat?Carlson:Ireadeverysingleoneofthemmyself.Oneofmyearlyteammembersanalyzedallthewordsandfoundwhichonescameup most often. That surprised me a lot because we had someexpectationsaboutwhatwasgoingtobethemostinteresting;Wasit going to be scaling, or ease of use, or reliability?We had ourideasaboutwhatpeoplewanted,andoutofthese2,000responsesofparagraphs, lookingat the frequencyofwords, itbecameveryclearwhattheirexpectationswereandthepriorityofthembecameveryclear,too.Itwasastounding,whattheywantedmostwasnotwhat I expected at all. Just by analyzing the text we found thatwhatIpersonallythoughtwasgoingtobemostimportantendedup

tobetheleastimportant.LE:Andtheresult?Carlson: At the beginning of 2011, I think we had around 600applicationsdeployedonoursystem.Bytheendof2011,Ibelieveit was up to around 25,000 deployed applications. So we grewfrom 600 apps at the beginning of 2011 to 25,000 at the end of2011. The end of this quarterwe’reway past that; our sustainedgrowthhasjustbeenhugethroughthiswholeprocess.LE:Would itbe safe to say thatyouguysare seeingexponentialgrowthrightnow?Carlson:Oh,we’veseenexponentialgrowth foroverayear,yes.All of our curves look exponential right now. So revenue, apps,users,engagement,everythingisexponential.

Andyouknow,yes,partofthatwaslisteningtoourcustomersand making sure that we were building something thataddressed their pain but I don’t think that’s full credit. I thinkthatpartofit isthemarketitself.IfeellikethisisanideathatwasabullandIhappenedtograbthebullandI’mjusttryingtokeepholdingontothebullbecauseit’sreally. . . themarket’sdriving us; we’re not driving the market. The demand is agroundswell.

WorktoDo1.Usethetemplatesthatfollowtocreateyourproposedvaluestream.2.Usingyouridealcustomerprofilecreatedfromthelastchapter,constructthe“ideal”pathcustomerstakefromfirstbecomingawaretobecomingpassionateaboutyourproduct.3.Werecommendyouworkbackwardfrom“passionate.”4.Document:

a.Specificfunctionalitybusinessprovidesoractivitybusinessconductsforeachstep.b.Whycustomersfeelthewaytheydo.c.Expectedcustomerbehaviorbasedonhowtheyfeel.d.Metrictomeasurecustomerbehavior.

5. Try to document only one or two business activities, or one customer action. Less ismore.

Notes

1.Ries,49.2.Godin,26.3.Cooper,Inmates.4.Seehttp://vimeo.com/26277733(video).

Chapter5

DivingIn

King Sisyphus angered the Greek god Zeus with his hubris and avarice. Hispunishment? To roll a boulder up a steep hill, only to see it roll back downbeforehereachedtheapexandtobeforcedtobeginagain.Foreternity!Thisiswhat they do with those more concerned with creating wealth than value inGreekmythology!AlbertCamus, leaving aside the nature ofKing Sisyphus andwhat got him

intohispredicament,believedthestruggleofrollingtheboulderuphilltobelifeaffirming and believed the King, in the end, found contentment. Perhaps theKinghad learnedhis lessonandwas forced to find comfort in the act ofhardwork,ratherthanmerelytheaccumulationofmaterialisticrewardsthatonecan’ttaketotheafterlife.“I leaveSisyphusat the footof themountain! . . .Eachatomof that stone,eachmineralflakeofthatnight-filledmountain, initselfformsaworld.Thestruggle itself toward the heights is enough to fill aman’s heart.OnemustimagineSisyphushappy.”

—AlbertCamus,TheMythofSisyphusThereis,perhaps,anentrepreneurstorywecanpullfromtheGreektale.Like

theKing,thejobofanentrepreneuristorolltheboulderupasteephill.Thosewhosesolecommitmentistotherichesthatawaitaredoomedtoseetheboulderrollbackdown.Thosewhoarecommittedtocreatingvalue,mayseethebouldercrestandrolldowntheothersideofthehill.Victory!ThemythofSisyphusoccursfromtheobserver’sside,bythosewhowitness

the success of the boulder tumbling down the side of startup success. Theobserver believes the entrepreneur is successful overnight and momentum iseasy.Theyseetheentrepreneurasvisionaryandsuccessasarewardforfaithfulexecution.The observer never sees the entrepreneur struggling, failing, and learning

whilerollingtheboulderuphill!

ListentoYourCustomers—orNotIn theentrepreneurialworld, is thereanymoredivisivea topic thantheproperrole of the customer in innovative endeavors?Other than the (near) universalacceptance that customers should either pay for product or amass in suchnumbersthattheycanbeotherwisemonetized,adviceonhowcustomersshouldinfluence your business decisions is all over themap.Countless books, blogs,and bloviating business gurus repeat common customer cliches: customer isking,becustomerdriven,thecustomerisalwaysright,andsoforth.Yet,it’snottoodifficulttofindlink-baitheadlinesclaimingtheexactopposite:Ignoreyourcustomer;“MarkCubanonWhyYouShouldNeverListentoYourCustomers”;1andSteveJobs,whosupposedlysaid,“Wedonomarketresearch,”yada,yada,yada.Thethingis,bothsidesareright.2

Thisbringsus toan innovationaxiom:Themoredisruptive thesolution, theless you can believe what customers say they need or what they will do.Innovation is an overused, tired word, but let’s say that innovation refers tomeaningful change, forgetting for a moment its use as buzzwordy, marketinghype.Clayton Christensen coined the term sustaining technology to refer to

meaningful technology change that improves existing products for an existingmarket. In other words, both the problem and solution are known. The valuestream is understood and has been translated into specific processes that arebeing executed and, ideally, continuously improved upon. Part of the value

streamincludesmethodsofworkingwithcustomerstounderstandwhatproductimprovementswouldmostbenefitthem.

Some of these improvements are so obvious one needn’t even ask thecustomer. If you can boost performance, boost capacity, lower total costs ofownership,youreallydon’tneedtoseekyourcustomer’sreactionfirst.Youcanbelievethem,however,whenyouaskthemiftheyliketheidea.Youmightevenbe able to ask the simple question, “What would you like from us?” andexecuting on the answer will generate revenue. Although Christensen talksprimarily about technical innovation, meaningful change doesn’t have to betechnology driven or at least not directly so. Innovation can come from newdistribution, for example, or different packaging, new features using existingtechnology,exceptionaluserdesign,andsoon.Thephrasesustaininginnovationcapturesallthewaysexistingmarketscanbemarginallyimproved.On the other end of the spectrum is what Christensen calls disruptive

technology. As with sustaining innovation, disruption needn’t only betechnological, so we talk about disruptive innovation. Disruptive innovationcausesmassivechange.Itcreateswholenewmarketsor turnsexistingmarketscompletelyupsidedown,sothatsuddenly(seemingly),newcompaniesareatthetop of the food chain or large chunks of a market suddenly belong to a newcompetitor.3

TheiPhonekilleddozensofstartupcompaniesplanningonofferingmobileservicesacrossavarietyofhandsetsinpartnershipwithmajortelecoms.EntirecompanieswerereplacedbytheiPhone(andthenAndroid,too)with

freeor99-centapps.TheiPhonealsothrewseveralmajorhandsetmanufacturersintolong,painfuldeclinesintoirrelevance.iTunesisdisruptingthemusicindustry.Salesforce.comnotonlyturnedtheCRMindustryonitsheadbutalsowasthefirsthugelysuccessfulsoftware-as-a-service(SaaS)businessmodel.ThePriusdisruptedtheautomobileindustry.Amazoncontinuestodisruptthepublishingindustry.

Disruptiveinnovationisoftenstumbledupon.Thenatureandscaleofchangeis a black swan,whichNassimN. Taleb defines as having three fundamentalcharacteristics:

1.“Itliesoutsidetherealmofregularexpectations”[it’srare].2.“Itcarriesanextremeimpact.”3.“Humannaturemakesusconcoctexplanationsforitsoccurrenceafterthefact,makingitexplainableandpredictable”[retrospectively].4

Notonlyisthemarketfordisruptiveinnovationunknown(priortogettingtomarket), it’s unknowable. You think you know, because you have a strong“vision”ofthefuture—butsodoastrologistsandfortune-tellers.Youdon’tknowthe market until the market weighs in. If you don’t know, your customerscertainlydon’t.Withdisruptive innovation,youcan’t askcustomerswhat theywant, because they don’t know what’s possible outside their existing domainknowledge.Steve Blank’s newmarket correlates to Christensen’s disruptive innovation.

Stevealsocoinedtwonewterms,resegmentednicheandresegmentedlowcost,demonstratingthatinnovationexistsasacontinuum.Therearemanyexamplesof applying existingdisruptive innovations tonewmarkets, somethingwecallripplinginnovation.

Resegmentedlowcosttargetsthemostprice-sensitivesubsegmentsofanexistingmarket.Resegmentednichetargetsasubsegmentthatcanbebetterservedwithaproducttailoredtotheirspecificneeds.Ripplinginnovationtargetsanexistingmarketthathasnotyetbenefitedfromadisruptiveinnovation.

Theface-valuebelievabilityofyourcustomerdependsonwhereyousitontheinnovationspectrum.Asmentionedearlier,ifyouaskyourexistingcustomersifthey want increased performance, it’s highly likely you can believe theirresponse.Circa1990,ifyouaskedyourcustomersiftheywouldlikeincreased

diskcapacityintheir5¼-inchdrives,you’dbesurprisediftheysaidno.Ifyouasked the same customers if they could use a 3½-inch drive, theymight ask,“Whatfor,asapaperweight?”Instead,youmustfindanewmarketforthe3½-inchdrive.Youmustdiscover

the early adopter. The power of early adopters comes from their ability torecognizewhat it is you’re up to. In otherwords, if you ask someone if theycouldusea3½-inchdriveandtheysay,“Whatareyoudoing,buildingaportablecomputer?”thentheygetit!

BelievingtheCustomerHerearesomeguidelinesforwhenyoushouldandwhenyoushouldnotbelievewhatyourcustomerssay.Protip:Believingthemdoesn’tmeanyoudowhattheysay.Ifyou’retalkingtocustomersaboutimprovingaproducttheyknowandlove,youcanbelievethem.Ifyou’retalkingaboutintroducingnewproductandthroughinteractionwiththemgetthefeelingtheygetit,youcanbelievesomeofwhattheysay.Ifyouaskexistingcustomersiftheywantsomethingradicallynew,theirresponseshouldbetreatedwithskepticism.Ifyouaskprospectivecustomersifthey’rewillingtopayforyourgreatidea,youshouldn’tbankontheirresponse—eitherway(yesorno).Ifyourgreat-unclelovesyouridea,that’swonderful,butnotactionableadvice(unless,perhaps,he’sinyourtargetsegment).

Customers in your target market move from right to left on the innovationspectrum as you engage them. When you introduce a new product, earlyadoptersarealreadytotheleftofthedisruptive-innovationendpoint.Thisiswhytheyaresovaluable,becausetheyprovideyourelevantfeedback.The moment any customer becomes somewhat satisfied with your product,

thatcustomerhasmovedfurtherleftoftheendpoint.Themoreengagedtheyare,themorepassionatetheyare,thefurthertotheleftthey’vemoved.Listenup.Ifyouhavecustomerswhoarehighlyengagedwithyourproduct,

listen to them. Listen when they complain, listen when they ask for features,listenwhentheypraiseyouandthankyou.Thisismarketpull.Thisiswhatgetsyou toproduct-market fit.Listening,however,doesn’tnecessarilymeandoing.It’suptoyoutofigurewhythecustomerisaskingandwhatthebestresponseis.

Thequestion,then,isdoyouexecuteonwhattheysay,andifso,whatdoyouexecuteon?Theanswerdependsonwhetheryouunderstandyourmarketsegments.Rememberthatchapter?Youshouldexecuteonthethingscustomerssaywhentheyaremembersofthe

market segment you’ve decided to crush. If you have segmented yourmarketproperly and are tracking engagement with your product by segment andtracking feedback by segment, you will know how to prioritize features. (Byfeatureswemeananycharacteristicofyourbusinessoranyactivitypertinenttodelivering value to your customer. This could be distribution, packaging,messaging,productfeatures,andsoon.)Listeningtowhatyourcustomershavetosayisonlyonewaytovalidateyour

assumptionsandgrowyourbusiness.There’salsotheethnographyofwatchingandmeasuringwhatyourcustomersdo.Lean startups use three primary methods of testing the validity of their

assumptions:1.Customerinteraction.2.Runningexperiments.3.Analyzingdata.

CustomerInteractionCustomer interaction is a catchphrase for the myriad ways successfulentrepreneursengagewiththeircustomersinordertolearnfromthem.Someofthesemethodsinclude:

SteveBlank’scustomerdevelopment.Observation.Varioususer-centricdesignmethodologies.Consultativesales.Livingthelifeofyourcustomer.

We are perhaps biased toward customer development as a result of havingworked in high-tech startups through the frustration caused by executingunknownprocesses.SteveBlankoffersaremedytosuchunknownprocessesinTheFourSteps to theEpiphany.At the riskof restating theobvious, therearetwoprimaryobjectivestoallthesetechniques:

1.Learn.Your job isnot tobe faithful toyourproduct,value,andmarketassumptions,butrathertovalidateorinvalidatethem,inorderforyoutobeabletoiteratetowardreality.2. Don’t waste. The point isn’t to fill out worksheets, create newdeliverables, fill out your assumptions in triplicate, or increase interviewefficacybyconductingthestand-on-your-headinterviewtechnique™.Whatdoyouneedtolearntomovetheneedleinyourbusiness?In a story told in perhaps every lean book written, a Toyota chief drove

through the 50 United States and the 10 provinces and three territories ofCanada, mostly in a minivan, in order to experience what American andCanadian auto consumers experienced in their daily lives.5 This is customerdevelopmentdoneby theworld’s largestautomobilemanufacturer, so surely itcanbedoneinyourbusiness!

CustomerDevelopmentHerearetheeightbasicstepsweoutlineforpracticingcustomerdevelopment:

1.Documentyourprimaryassumptions:Whoisyourcustomer?(marketsegment)What problem are you trying to solve? (pain, passion, customer goal,jobtobedone)What’s your (pie in the sky) solution idea? (not features, but valueproposition)

2.Brainstormotherbusiness-modelhypotheses:Partners,distribution,andsoon.Productplatform,design,functionality.Salesandmarketingfunnel.

3.Findprospectstotalkto:Useyoursocialnetwork(e.g.,Facebook,LinkedIn,Twitter,andsoon).Craigslist,surveys,meetups,forums,andsoon.Ifyouareunsureofwhototalkto,startbroadandworktonarrowthefieldtothosewhounderstandtheproblemyou’retryingtosolve(earlyadopters).

4.Reachouttoprospects:E-mailandphone-calltechniques.Sellingbeforebuildingandinformationalinterviews.

Don’toverplan;justgetstarted!5.Engageprospects:

Customer-problem-solutionpresentation.Useopen-endedconversationtechniques.Berespectfulofpeople’stimeandexpertise.

6.Compile-measure-test:Iterateoncustomer,orproblem,orsolutionassumptions.Moveontominimumviableproduct(MVP)testing.Pivot because something in your business model is fundamentallywrong.

7.Problem-solutionfit/MVP:Iterateonproducttowardmarketviability.Quantifythevalueyouprovidethecustomer.Investigatethesalesandmarketingroadmap.

8.MVPachieved:Market viability validated, move on to validate other business-modelassumptions.Returntoearlierassumptionsbecausesomethingiswrong.Pivot because something in your solutionhypothesis is fundamentallywrong.

Soundssimple, right?Youcanbedone inacoupleofmonthsat theoutside.Wrong. Startups iterate and pivot and persevere on all that, trying to findproduct-market fit with their no longer minimal MVP, easily spending yearstryingtofigureitout.Thesestepsrepresentonepossibleapproachorganizationsmightfindhelpful

when implementing customer development. The reality is that since allorganizationsaredifferent,it’suptoyoutofigureoutwhatworksbestbasedontheuncertaintyyouface,whereyouareinyourproductdevelopment,andwhatresourcesyouhaveavailabletoyou.Yourgoal isn’t togo through thesteps.Yourgoal is to learn.Theprocess is

rarelyaslinearasitmightseem.Youcanlearnatonaboutconversionfunnelsatthesametimeyouarevalidatingyourmarketsegmentassumptions.Really!Youdon’t have to wait until step 15 in the Cooper-Vlaskovits Paint-by-Numbers,Startup-to-IPOBlueprintbeforeyoulearnhowtosellB2B.

CaseStudy:Don’tJustGetOutoftheBuilding,GetOutoftheCountry

In2008,agroupoftalentedindividualsledbyJaneChincametogethertomakeanimpactontheworld.TheywereMBAs,lawyers,andengineersfromthetopuniversitiesaroundtheworld:theIndianInstituteofTechnology,Harvard,Stanford,andMIT.Thisgrouphadverylittlereal-worldexperienceintermsofbuildingabusinessandcommercializingproducts.Theydidn’tknowwhattheydidn’tknow,theyhadlittlefear,andtheyapproachedtheworldwithopen-mindedness.RatherthanpursuingcareersinSiliconValleyorWallStreet,withthehelpofAndyButleratD2M,adesignconsultancy,theEmbraceteamenteredtheworldofsocialentrepreneurship.Theproblemtheyhopedtosolve?Savebabiesbeingbornprematurelyinthird-worldcountries.Thesolution?Makeavailableanextremelyaffordableincubatoratapricelevelappropriateforthethirdworld.AndyButler: “To start out, theywere thinking, ‘Let’s just take aconventionalincubatorparadigmandtryeverywaytocostreduceit,’andthereareawholebunchofwaysyoucanlowercostsusingoff-the-shelf components rather than specializedcomponents, andso theywentdown thatpathandmadeprogressexploring severecostreductionforastationaryincubator.”

Intheleanspiritofgenchigenbutsu,“goingtothesourcetoseeforyourself”(TheToyotaWay,p.40),theteamnotonlygotoutofthebuilding,butgotoutofthecountry.TheywenttoIndiaandspenttimeworkinginthehospitalsandinterviewingdoctors.Theyfoundquitequicklythattheprimaryneedwasnottofindsolutionsforpreemies,perse,butratherforlow-birth-weightchildren,regardlessifbroughttofulltermornot.Thebiggerimpactideawasamobilesolutionforundernourished,underweightinfants.Outinthemarkettheysawthatthoughchildrenweretragically

dyingduetoprematurebirth,thebiggerproblem,intermsofthesheernumbers,aswellaslong-termsociologicalimpact,isundernourishedmothersgivingbirthtoundernourishedchildren.Becausetheinfantsdon’thaveenoughbodyfatonthem,theysufferhypothermiawhilethemotherswork.Sothemothercankeepthebabywarmaslongassheholdsitnexttoherbody,butbecausethemothershavetowork,theycan’tholdthebaby.Thereareperiodsofthedaywheretheyhavetoletthechildessentiallygenerateitsownheatand,duringthoseperiodsoftime,theysufferhypothermiaanditdoesn’tresultindeathbut,rather,itresultsinphysiologicalissues.Eitherdelayeddevelopment,neurologicaldamage,orevenphysiologicaldamage,whichputsalong-termburdenonthesocietybecausethesechildrengrowuphavingseveremedicalissues.Havingamuchdeeperunderstandingoftheproblem,theteamswitchedgears.Insteadofdoingsomesortofsustaininginnovation—makingsomethingexistingperformbetter,faster,orcheaper—theylookedtowarddevelopingasolutionthatdidn’texist;asolutionthatwouldsomehowallowthemothertokeepthechildclosebesideherandsomehowkeepthebabywarm,whilestillabletoperformworkinthefieldorinthefactoryorherownhome.Butler:“Throughtheirengagementwithrealityandawayfromthetheoreticalthinking,andinlargepartduetotheiropen-mindedness—inthattheyweren’tanincubatorcompany;theyweren’ttiedtoaparticularsolution—theywereopentochangetheparadigm.”

Theteamwentintoaperiodofheavytesting,“failearly,failoften”prototypesforallsortsofproposedsolutions.Theylearnedfastandevolvedtheirideas.TheyremainedoutinthefieldinruralvillagesinIndia.Theywenttothesource.Theytalkedtomidwives,workedwithmotherswhohadlow-birth-weightchildren,workedwiththelocaldoctorswhowerestrugglinginruralhospitalswhereelectricitywasintermittent.Itwasthroughthatexperiencethattheycameupwiththeircurrentsolution.Asisthenormwhenworkingonthedisruptivesideoftheinnovationspectrum,onecan’tsimplyaskthecustomerwhattheyneed.Awomanwithanundernourishedbabywouldhardlysaytoinquisitors,“Youknowwhat?IneedthisreallysophisticatedincubatorslingthatIcanbringwithmetothefields!”Engagementandcreativityontheinnovators’sideisrequiredtorevealthesolutionifoneistobefoundatall.Butler: “You can ask themwhat their pain is.You can ask themwhattheystrugglewith.Whattheyworryabout.Whattheydesire.But ask them to articulate how they’d satisfy those issues, that’sbeyondtheircapability.Soit’sthedesignerandtheinnovator’sjobof taking that information and being creative in fashioningpotential solutions and learning as much from the rejection ofproposed solutions as the acceptance. The rejections themselvesrevealawholerangeofvaluesthatyoumayormaynothavebeenawareof.Youalwaysfindatreasuretroveinrejection.”

The “Aha!”moment for the Embrace team, aroundwhich thewholearchitectureeventuallyrevolved,wasgettingtoasystemthat was essentially passive. They had to come up with anenergy storagemechanism thatwouldwork in the fields or inlocationswithoutelectricity.

Butler:“It turnsoutyoucanengineerparaffintomeltatdifferenttemperatures and sowhen it goes froma solid to a liquid, it canabsorbwaymoreenergyandwhenitconvertsbackfromaliquidtoasolid,theenergyisreleasedgraduallysoyoucanstorehoursofheat energy in what looks like two or three Ziploc bags ofparaffin.”

Sosayyouareamother.Youareundernourished,buthavealso

recentlygivenbirthtoanundernourisheddaughter.Youworkinthefieldseveryday.Itisnecessarytobringyourbabytothefields.Beforeyougo,youmelttheparaffinpouchoverfireorevenonablacksheetmetalandputitintoonesleeveoftheEmbrace“sleepingbag.”Whenyougettothefields,maybeyoucanholdherforalittlewhile,butreluctantlymustgettowork.Youhavetopickthegrains.Sowhenyougotoputthebabydown,youputherintoonepouchoftheEmbrace“sleepingbag.”Inasidecompartment,paraffinissolidifyingandasitdoes,itreleasesenergythatkeepsyourbabywarm,soshedoesn’tbecomehypothermic.

Howyouinteractwithyourcustomersevolvesovertimeanddependsheavilyonwhatyouaretryingtolearn.Atthebeginning,themostimportantobjectiveisto simply establish what will hopefully be a long-term relationship based onempathy.The most typical problem entrepreneurs have when first speaking to a

customeristhattheyareunabletoresisttalkingabouttheirsolution.Nomatterhow they originally frame the conversation in order to get the meeting, theentrepreneur inevitably starts out with “I have this great idea!” This is prettylame.Thefeedbackyouget is lame.It’swaylesspainful foryourcustomer tonodandsay,“Yep,that’saswellidea!”andsendyouonyourwaythanitisforthemtogetintoaninvolveddiscussionaboutwhyyourideaislame,onlytohearyousaythingslike,“Eh,youjustdon’tgetit.”Ifyoudon’thaveadeepunderstandingof thepainorpassionofyour target

customer,youhavenobusinesstalkingaboutyoursolution.Noonecaresaboutyour product. Seriously, no one cares about the features, the platform, thearchitecture.Theycareaboutsolving theirproblem,and ifyouare truly in thebusinessofsolvingtheproblem,youshouldwanttoknowasmuchasyoucanaboutitfromthecustomer’sperspective.Over time, after you understand their problem deeply, then you can start

workingonqualitativevalidationofsolutionspecifics,andyoucanstartworkingonlearninghowpeoplelikethemwanttobemarketedandsoldto.Also,youcanstart showing themearlyversionsof theproduct andwatchas theyattempt touse it. You can learn what is required for the product to work within thecustomer’senvironment,whetheritbehome,vacation,socialsetting,work,andsoon.What typeofproductwillworkwithin their existing lifeorwork flow.Withanyhope, furtherdowntheroad,youcanvalidatewhatfunctionality isa

must-have. You can establish what will turn them into passionate advocates,ratherthanjustsatisfiedcustomers.

BeaZoologistObserving your customers in their natural habitat is a powerful way tounderstand a day in their lives; in other words, you can begin to empathize.When TechStars entrepreneur Reece Pacheco co-founded HomeField to helpcollege coachesmanage and share game video, the effort involved supportingnontechnicalpeoplewithatechnologicalsolutionwassurprising.Pachecosays,“ItwasnotuntilIspenttimeinthecoach’sofficethatIbeganto

understandtheproblemweweresolving.Itwasdifferentwhenwewereonhisturf, than, say,bringinghim in to lookatwhatwewerebuilding;notonly thepicturesonthewallandtheDVDsstackedonhisdesk,butthewayheinteractedwithus.”Turnsoutsupportingcoaches(theirtargetsegment)wasabigtechnicalhurdle.

The coaches used specific IT-mandatedbrowsers, anddidn’t really understandthe difference between e-mail in a desktop application versus browsing web-basede-mail.Pachecoreports,“Wehadoneguywhocouldn’taccessavideobecausehise-

mail client was Lotus Notes. Uploading videos would time out, because thecomputerwouldgotosleepbeforethevideofilewasuploaded.Butthesethingswere our fault, really, not our customers’. We needed to understand theirenvironment,providetheright,easy-to-followinstructionsandmaketheproductincrediblyeasytouse,ifwewantedtobesuccessful.”ScottAnthonydocumentsacoupleofgreatexamplesfromProcter&Gamble.

CEOA.G.LafleyobservedawomanusingascrewdriverorscissorstoopenaTide box. This from awomanwho said she liked the packaging!Watching awoman trying to clean up coffee grounds spilled on her floor inspired P&G’sSwifferquick-cleaningline.AccordingtoAnthony,themakersofWranglerandLee jeans,VFCorporation, revamped their jeans labeling and creatednew in-storedisplaysafterobservingawomanshopperbringinganarmfulofjeansintothe dressing room. The current labels were useless regarding fit for differentbodyshapes.6

SteveJobsvisitedhisretailstoresnottoaskcustomerswhattheywantedbuttoobservecustomers,supposedlyevenhidinginthebushes!7

Observing customers is a matter of intuition. You are attempting to glean

insights intowhat theneedsanddesiresofcustomersare,but it’sup toyou toenvision the solution to thoseproblems.Thecustomerowns thepain,whereasthefounderownsthevision.

BeaDoctorDoctorspoke,probe,andprodinordertounderstandnotonlywhatpatientsarefeeling(bothemotionallyandphysically),butwhy.Patientsoftenarereluctanttotell the truth about such things out of fear, denial, and perhaps a lack of self-awareness.Empathyisanimportantcomponentofdoctor-patientrelationshipsinordertoenablebettercommunication,butalsosothatthedoctorcanunderstandunderlyingissuesthatmaybeaffectingthepatient’shealth.Notthatalldoctorshaveagoodbedsidemanner!Nonetheless, entrepreneurs must aspire to the same thing. Empathy is a

cornerstoneofsuccessfulentrepreneurship.Yousimplycannotsolveaproblemif you do not deeply understand the problem you’re solving, and you cannotdesignasolutionifyoudonotdeeplyunderstandthosethatwilluseit.Further,youcannothavethisunderstandingforhuge,undifferentiatedgroupsofpeople,butbyunderstandingtheneedsanddesiresofyoursubsegments,youmightbeabletodesignanexperiencetheywillpayfor.Additionally,perhaps,you’lllearnwhatneedstobeaddedortakenaway,orthedifferentwaysrequiredtomarket

andselltodifferentsegments.Empathy,likemostotherskills,appearsinnatelyinsome,butcanbelearned

byothers.Empathyforothersmeans to“walk in theirshoes,”and thatdoesn’tmean buying the same shoes. It doesn’t mean “what you would do in theirsituation,” but rather trying to understand from their perspectivewhy they dowhattheydo.Wefindthatthemostdifficultpartofhavingthesetypesofconversationswith

prospective customers comes from the inability to succinctly describe theproblemsyouhope tosolve. It’s ratherbeyondus,however,howonehopes tosolveaproblemonecan’tarticulate.Here are example problem statements that don’t get to the root of the real

issue.“We save enterprisesmoney”: It’s true, businesses love a positive return on

investment (ROI) when they purchase a product. But they don’t purchase aproductinordertosolvetheproblemofalackofROI.Theypurchaseaproducttosolveaproblem(performajob).PositiveROIcomesfromaproductdoingthejobwellenoughtomakeorsavemoremoneythanthecostoftheproduct,plusanynumberofotherhardandsoftcostfactors,includingswitchovercosts,brandrisk,security,andsoon.“Betterwaytohangoutwithfriends”:It’strue,friendsliketohangoutwith

each other. You might even say they are passionate about it, but they’re notlooking for a cool, new wiz-bang mobile app to help them hang out more.They’rereallynot.Theproblemamobilesocialappdeveloperissolvingisnotthelackofamobileapp!“Small businesses need to have a web presence”: It’s true, many small

businesses don’t have an online presence. For many, it’s too hard or at leastthere’s a fear that it’s toohard.For some, itmaybe tooexpensive,or at leastthere’s a fear it’s too expensive. Only those fooled by hype desire a webpresence for the sakeofhavingawebpresence. Ifyouaremerely solving theproblemofneedingtohaveawebpresence,you’renotsolvingarealbusinessneed.Whydotheyneedawebpresence?Isawebpresenceactuallythebestwaytosolvetheneed?To truly understand a problem, you should not initially propose a solution.

Otherwise, the reaction you get will be to the solution and not whether theproblemexists.

GettingCustomerstoTalkAssumingforamomentthatyouareabletoarticulateyourcustomers’problemassumptions,aconversationmightbeginlikethis:Hello, I am [your name], and I’m researching the [your industry]market.When speaking with [target customers], I often hear they face difficultieswith[problem1/problem2/problem3].Doanyofthesesoundfamiliartoyou?

Example:Hello, I amBrant Cooper, and I’m researching business startups.When Ispeaktostartupfounders,Ioftenhearthattheyfinditdifficulttoknowwhoexactly their customers are, how to validate product ideas, and how tocommunicatewithcustomers.Dothesesoundfamiliartoyou?Let’sunpackthisabit.Theconversationisnotaboutyou,thoughpeoplewill

want to know who you are. Get that out of the way quickly by introducingyourselfandgivingaverygeneraldescriptionofwhyyou’retalkingtothem.Asquickly as you can, flip the conversation to be about the person with whomyou’re speaking. To do this, briefly describe one to three problems you thinkresonatewiththem.Then,askthemiftheyhaveexperiencedthoseproblems.Whataretheworstpossibleoutcomes?Theytellyoutogoaway:Sogoaway;theyareeithernotapotentialcustomerornotfriendly.Oneormoreofyourproblemstatementsareincorrect:Whatagreatopportunitytolearn!Theyunderstandyourstatementsasaccurate,butpersonallydon’tbelievetheyapplytothem:Great!Stillanopportunitytolearn.Howdidtheyovercometheseobstacles?Whatproblemsaretheyfacing?

Eitheryou’retalkingtothewrongpersonoryoustandtolearnalot.Ifyou’retalkingtothewrongperson,youstillhaveanopportunitytolearn.Askif theyknowanyonewhohasfacedtheproblems.Trytodiscernwhyyouthoughttheywouldbe the rightperson to talk to,but theyactually turnedout tobewrong.Thereissomethingabout themthatwillhelpyoutightenyourmarketsegmentdefinitionandhelpformalistofquestionsyoucanusetoqualifyfutureleads.Youcan’tlearnthisstufffromthinkingharderor“justdoingit.”Youhaveto

gomeetthem.What’stheworstthatcanhappentoyou?Someoneslamsadoorinyourface?Hangsuponyou?Ofcourse,theycouldlaughatyou.Thatwouldbeprettybad.

CaseStudy:What’stheWorstThatCanHappen?

SimpleEnergyisaTechStarscompanyseekingtohelphomeownersreduceenergyconsumptionandsavemoneywiththehelpofawirelessthermostat.Muchtotheircredit,SimpleEnergydidn’tspendalotoftimeandmoneybuildingoutalineofwirelessthermostatsfromtheget-go,butrathercreatedseveralmockups.FounderYoavLurie:

Itwasasimplethermostat;allithadwasanupandadownbuttonandalittlescreen.ButthebeautyofitwasitwasconnectedthroughWi-FitoyourrouterandthenyouwouldbeabletocontrolitthroughyouriPhoneoryouriPadandwe’dprovidetheabilityforanyotherdevelopertobuildanentireecosystemaroundourproducts.

Theybuiltseveralmockups,playingwiththedesign,howitwouldlookinvarioushouses,variousinteriordesigns,andsoon.Theideawastohaveenergyutilitycompaniesdistributethethermostattotheircustomers.Afterhustlingtolandmeetingswithseveralprominentutilityexecutives,theygotanawkwardreception:

Wetookthisthermostattothemandtheyliterallylaughedatus.Wecouldnotunderstandwhytheylaughedatus,becausewereallythoughtthiswasbrilliant.Thentheypulledoutofadrawerthisbeautiful$500thermostat.Theysaid,“Wehavetopayadoor-to-doorsalesman$60perleadforeveryhouseholdtheyconvincetotakeoneforfree.”

Aftertwosimilarexperiences,onewithanindustryregulator,theyknewtheyhadaproblem.“Theregulatorhelpedusgetthattheproblemisnotwiththetoolstohelpconsumers,butthatpeopledon’tcare.”Evenintheworstpossiblescenario,there’slearningtobehad.Theepisodedidn’tspelldoomforthecompany;rathertheyhadtolookattheproblemfromadifferentangle.Thefoundersstuckwiththeir

visionofhelpingconsumersreduceenergyuse,buthow?IfSimpleEnergyweretoaskconsumersstraightup,“Wouldyouliketosavemoneyonyourelectricbill?”Thelikelyresponsewouldbeanearunanimous“Yes!”Whodoesn’twanttosavemoney?Iftheyhadasked,“Wouldyouliketoreduceenergyconsumption?”Again,mostconsumerswouldviewthatasapositive.Wewouldhazardaguessthatevenifaskedinasurvey,“Wouldyoulikeanewthermostatforfree?”mostpeoplewouldsayyes.Unfortunately,thisexchangewouldhaveatenuousrelationshipwithreality.Therealquestionisthis:“Wouldyousignificantlychangeyourbehaviorinordertoincrementallysavemoneyandreduceenergyconsumption?”Whenconfrontedbyasalesrepresentativeatthedoorwithanofferforafreethermostat,thatrealitycomesbarrelinghome.“Whatfor?”thehomeownerasks.“Well,itconnectstoyourWi-FiandyoucanmonitoryourenergyusewithyouriPhone.”“Oh,please!”[Slam!]Thepointisthathowyouinteractwithpotentialcustomersiscriticaltolearning.Inthisinstance,onecanvalidatetheneed:Consumerswouldliketolowerenergybills,andsomeconsumerswouldliketoreduceenergyconsumption.It’sdifficult,however,tovalidatethesolutionproposalwithanydegreeofconfidence.Consumersarenotgreatatpredictingwhethertheywouldbewillingtochangebehavior,nor,iftheywereaskedtocomeupwiththeirownsolutions,wouldtheylikelycomeupwithinnovativeideas.Theinnovationisuptotheentrepreneurs.Theutilitieshadallthetoolsnecessarytoallowconsumerstotracktheirenergyconsumption,butstill,theconsumersdidn’tcareenoughtousethem.“Wewentoutlookingforsomeonewhowouldhelpusfigureouthowtogetpeopletocare,”saidLurie.“SowetrackeddownDanAriely,7whohaswrittentwoNewYorkTimesbest-sellersonwhypeopleactirrationallyandhowyougetthemtodowhatyouwant.Wepivotedfrombeingathermostat-buildingcompanytoasocial

gamingcompany.WecreditDanforhelpingusdesigntheunderlyinggamemechanicsthatdrivemuchofourapplication.”

Validateyourideaintwostages:Thingsyoushouldlearnaboutyourcustomers’problemthroughinteractingwiththem:

Top—onetothreepainsorpassionswithinthecontextofyourproduct/solutionproposal.Howpeopledealwithpainstodayandwhytheexistingworkarounds/solutionsfallshort.Whatisthecostoftheproblem?Howdeeplyheldisthepainorpassion?Whatistheprimaryobstacletoconverting?Whywouldusersdecidenottobuy?Whatisthecustomers’practicewhenbuyingotherrelated(orsemirelated,notnecessarilycompetitive)products?Inotherwords,howdocustomersexpecttobemarketedandsoldto?

Thingsyoushouldlearnaboutyourproposedsolutionaftervalidatingtheproblemthroughinteractingwithcustomers:

Doyourcustomersviewyoursolutionideasasbelongingtoanewmarket?Inotherwords,cantheyinstantlycompareittoothersolutionsoutthere?(Ifso,notanewmarket.)Doyourcustomerscurrentlyhavethenecessaryenvironmenttosuccessfullyincludeyourproductintotheirexistingworkflowortheirdailylife?Cantheyenvisionyourproductexistingintheirlifeand,ifso,underwhatconditions?Wouldtheypay$1forit?$1million?

CaseStudy:ANonprofitLeanStartup

Wefeelstronglythatthechallengesofinnovationinuncertaintyarefeltnotonlybybusinessstartups,butbyinnovatorsinthenonprofitworld,too.RobEmrich,founderofmultiplestartups,sharedwithushisstoryabouthowhesuccessfullyiteratedhisnonprofitandhowhisvisionevolvedashe“gotoutofthebuilding.”LeanEntrepreneur:What’sthenameofyournonprofit?

RobEmrich: Roadoflife.org is our website; it’s the name of ourprogram. The actual nonprofit is called the Keren EmrichFoundation.Weprovidehealth-educationcurricula toschoolsandteachers.LE:Howdidyougetstarted?Emrich:WhenIwasalotyoungerIhadasisterwhopassedawayfrom cancer. She had a nonpreventable type of cancer calledneuroblastoma.Iwasarealyoungkidwhenshediedbutitaffectedmeprofoundly.AsIwasolder,inmylastyearofcollege,Ihadacousinwhodiedofabraintumorandmymomhadabreastcancerscareandmyauntshadbreastcancer.

So when I was a senior in college I decided I wanted to dosomethingtomakearealdifference in thefightagainstcancerandraisealotmoneyforthatcause.

LE:Whatdidyoudofirst?Emrich:Thefirstthingwedidwaswhatwouldbecalled“gettingout of the building,” the equivalent of customer development instartups.Wespecificallymadeappointmentswith theheadof thecancer division at the Ohio Department of Health, who wasextremelyhelpfultousalongtheway.

Whatwefoundoutreallyquickly—anditwouldhavebeeneasytojustbestubbornandgooutandraisemoney—butwefoundoutthere’snotreallyaproblem.

LE:Classic.Inwhatway?Emrich: Imean, there could always bemoremoney that goes tocancer researchbuteven ifwewere tremendouslysuccessfulandwe raised $50 million for cancer research, that is a drop in thebucket on a year-to-year basis compared to what the federalgovernment puts into cancer research, let alone all the othercharitablefoundationscombined.Wehadnowaythatwouldhavemadeusanybetteratgivingawaythemoneyweraised.LE: So you got out of the building and the feedbackwas, “Heyguys,weappreciateyourenthusiasm,”but,then,“Here’sthebiggerpicture.Here’showtheecosystemworks.Moneyisnotreallythebigproblemforus.”Emrich: The people at the Ohio Department of Health made it

reallycleartheproblemisn’tresearchandyou’realsonotinaverygood position to make any significant difference in research,whether throughmoney or ideas or better allocation of funds orwhatever.

A lot of times you actually can get in the way; people whodonatemoneygetinthewaybecausetheydonatetothewrongthingsthatreallydon’thavethatmuchpromise.Theytoldusthereally big issue out there is prevention and specifically,preventionforchildren.Alargepercentageofallcancerdeathsarepreventable, throughreallysimple things likeeatingbetter,not smoking, and exercising more. There’s also a massiveepidemic of childhood obesity, diabetes, and other diseases ofexcess.Weendeduplatchingontothatalotmore.What we found out is that there’s a really big challenge inpreventionandspecificallywhenitcametochildrenbecausebythetimeyou’reanadultit’shardertochangeyourbehavior.Ournextstepwastostart to investigate thatasmuchpossible.Wefoundoutthatthereareactuallyquiteafewcurriculumsthatwereoutthere—somefromtheAmericanCancerSociety,somefrom other tobacco-prevention programs—but just look at theoutcomes.Therearestillalotofobesekidsandthat’sanear-termindicatorforalong-termproblem.Whyisn’tthisworking?

LE:Youactively lookedatoutcomesandthought,“Look,currentmethodsdon’tseemtobeworking.”Soyouactuallytookasortofskepticalapproachratherthanjustexecuteagoodidea?Emrich:Right,andassoonaswerealizedweneededtoworkwithkids,wewantedtofindoutwhatwashappeningintheclassrooms,so we actually started talking to teachers. That was like anotherexampleofus“gettingoutofthebuilding.”LE:Howmanyteachersdidyoutalkto?Emrich:Wewenttodozensofteacherconferences.Iwouldsayweprobably talked to 50 teachers during the course of the initialdevelopment.Whatwefoundoutissomeofthemhadbeengiventhese curriculums, but this is a critical point: They were neveractuallyusingthem.

We couldn’t figure outwhy theyweren’t using them, becauseweknew theyhad them.Wewouldgo into the classroomandwe’d see a curriculum from the American Heart Associationsittingontheshelf.

LE:HowdidtheAmericanHeartAssociationgetthecurriculumtotheteachers?Emrich:Usually they got a grant that put them into the schools.Therearealotofpeoplethatcansayyesorno,sousuallyadistrictwill make a decision, and this is an important point about howcomplicatedgetting aproduct into thenonprofit sector canbe.Adistrictcansaynotoacurriculum,aschoolprincipalcansayno,orateachercansayno.

Whatwedecidedtodo,basedonknowinghowmanylevelsofno’swecouldget,wastojustavoidgoingtothetwolevelsthatcould’vegivenusano,andwewentright to the teacherswhocouldgiveusayesornoanswer.

LE:Andthisisbasedonyourtimespentwithtalkingtoteachers.Emrich:Yes,abouthowcurriculumgetsintoclassrooms,howtheyeven are allowed to teach certain things. How they choosewhattheyteach.

Whatwefoundoutisthatitisveryindividualized.Althoughthedistrictbelievestheyhaveareallyspecificsetofstandards,forthe most part teachers did what they wanted and they wereevaluatedbasedontheteststhatstudentstakeattheendoftheyear.Werealized,after talkingwithsomany teachers, that thereason theyweren’tactually teaching theothercurriculumthatwereouttherewasbecausetheydidn’thavetimeduringthedayandbecausetheyhadanenormousamountofpressuretoteachtheseacademicconceptstandards.This is a really critical thing; other nonprofits had probablytalked to teachers, but they’d come in with a preconceivednotion that they had to have a peer-reviewed program that’sbeen used in small cohort studies and demonstrated to besuccessfulandthengoinandgivethattoteachers.It’shardforteachers to do a 50-lesson approach, however, so all the othercurriculums that hadbeenbuilt, itwas eitheryoudo all 50of

theselessonsoryoudon’tdoany.Weknew that thatwas completelyunrealistic.So immediatelywemade adecision to sacrificewhat’s calledprogram fidelityversusadoption.

LE:Whatdoesthatmeanexactly?Emrich: Like how often a teacher actually completes a lesson orhowwelltheprogramisactuallyfollowedtotheletter.LE:Soyoufindoutabout the teachers’pains.Howtheydo theirjobs every day. Then you say, “Okay,wewant to do something.Somethingisbetterthannothingsowe’llsacrificesomefidelityinordertogetadoption.”Isthatsortofthethoughtprocesswiththat?Emrich: Thatwas one of the thought processes and the other is:We’regoingtogodirectlytoteacherstogetanupordownanswerfromthemrightaway.Sowestarted toputstuff in frontof themandsay,“Isthisenough?”Whatwefoundoutwasitwasdifficulttoteachwhatwewereputtingouttherebecauseitwasn’talignedto the academic content standards. So, at the time—and this isdifferent now—but at the time every single state had their ownacademic content standards. It was part of the No Child LeftBehind act passed by Congress to begin the process ofstandardizingwhat’staughtinschools.

Sonoteacheractuallyhadtimetoteachanylessonsduringtheday,because theyonlyhad to teachwhatwas in theacademiccontentstandardsandwhatwasgoingtobeinthetestattheendoftheyear.Soourbiginsightwasthatwetookourlessonsandtransformedthem to align to the academic content standards for bothnationalhealtheducationstandardsandmath.Thiswaslikeourbig innovation that actually helped make our program muchmoresuccessful.This was a pivot that I think was critical. So instead of justteaching akid about healthwewould talk to themabout theirbody mass index (BMI), based on teaching them a lesson onlongdivision.For all the thingswewanted to teachwe foundoutwhereitcouldcorrespondtosomethingthatstudentsalreadyhad to learn, and then we taught health in the context of the

academiccontentstandards.LE:Whydoyouthinkthathadn’thappenedbefore?Emrich:Ithinknooneactuallygotoutofthebuildingandtalkedto teachers and observed teaching in the classroom. I think theprograms were designed by doctors who were much moreinterested in building small cohort studies that could be peerreviewed,woulddemonstratethattheprogramsworkinavacuum.When a teacher is forced to actually teach all those lessons, itworksverywell.

Oncewehadbuilt theprogram, itwasonline and any teachercould use it, it still wasn’t being used much and we didn’tunderstandwhy. Sowe got back out of the building and theykept tellingus,“Well, I like tohaveabookinmyclassroom.”We’re always reading about these new smartwhiteboards thatareinalltheclassrooms.Itturnsoutteachersdidn’treallyknowhowtousethemyet.

LE:Sothere’sthissupposedtechnologicalinnovation,thesesmartblackboards...Emrich:Andcomputers...LE:Andyettheadoptionwasn’tveryhigh;peopleactuallyweren’tusing them. They were actually telling you, “Look, we want aphysicalpaperbook.”Emrich:Right.Sotheyactuallywantedtobeabletotearthepagesoutofaworkbook,photocopythemsotheycouldgivethemtothekids,becausethat’swhatthey’reusedtodoing.Theygothroughalesson plan that they probably developed at home after hours oroverthesummer.Theymakephotocopiesonthecopymachineattheschoolandforsomeofthemitwas,“Wedon’thaveaprinter,butwedohavethiscopymachine.”LE: So this was after you had already created all the onlinecontent?Emrich:Right.Wedidthatinconjunctionwithteachers.Thenwealignedit toall thestateacademiccontentstandardsandchangedthenatureofallthelessons.Thenwefoundoutthatwestillweremissing part of the story: Younger teachers were teaching ourcurriculumbecausetheywereusingthistechnology;theyhadbeen

taughthowtouseitandwereusingit.LE: So you guys had aligned the contents to the academicstandards,youguysbuiltanonlineplatform,andyoungerteachersthought,“That’sprettycool.”Theywereusingit.Emrich:Right,butthemoreexperiencedteachers,whichmakeupthevastmajorityofteachers,weren’t.LE:Atthatpointwasitactualconscioustesting?Emrich:Therewere two types of experiments thatwere running.One, about the actual changes that our curriculumproduced, likewhat knowledge, attitudes, and behaviors had changed with thekids,andwedidthatwithpre-andpost-tests.Sothatwasonelevelof testing, that to be relevant on a long-term basis, we had todemonstratethatwhatweweredoingmattered.

The other thing was just in terms of: How do we get moreteacherstodothis?Thatwastheusabilitytestingwedid.That’showwefoundoutthatolderteacherswereuncomfortableusinga laptop in the classroom or a computer. It just didn’t makesense for them. So through surveys and talking to teachersdirectlyatconferences,theywouldsay,“Iwantitprintedout,”andwewouldsaytothem,“It’ssoeasytoprintout.Thisformatautomatically creates a PDF from theWiki.We spent a lot ofmoneyusingthistechnology;justprintityourself.”

LE:Theirresponse?Emrich:Theydidn’tdoit.Wethoughttheyweregoingtodoitbutthey didn’t.We didn’t see our adoption rates go up. They didn’thaveprinters,or theydidn’tknowhowtousethem,or theywerejust not comfortable doing it thatway.We eventually listened tothemandprintedourownversionthroughLulu.LE:YouguysprintedyourownbookthroughLulu,theonlineself-publishingservice.Emrich: Right, and we had school districts buy it. So stategovernments and school districts bought our curriculum.We hadteachersdownloadthecurriculumandthenweaskedthem,“Wouldyou be more likely to teach this if you had a physical copy?”Almostallof them,99percentof themhadsaidyes.Sowhatwewoulddoismatchthemuptoafunderwhowaswillingtopayfor

thepapercurriculumandinthatway,webecamecompletelyself-sustainable. So, this is significant; our program wasn’t paid bydonationsanymore.Itwaspaideitherfromtheschooldistrictorateacher or anyonewhowanted our curriculum, and they actuallypaidusforit.Westoppedaskingfordonations.Imeanwestillgotsignificant donations fromMicrosoft, fromAetna, fromDannon,frombigcompanies, and the federalgovernment,butwestoppedasking.LE:Beingabletohavethefreedomtonotaskfordonations,howdidthataffectyouguys?Emrich: It allowed us to completely focus on delivering a bettercurriculum that would be used by more teachers, rather thancreating this narrative about “all thegreat thingsour nonprofit isdoing”inordertogetmorefunding.That’snormallytheparadigm.Every nonprofit tells a story and they come up with things thatsoundlikefactsaboutwhatthey’redoing,like,“Thisishowmanypeoplesleptinourhomelessshelterduringthecourseoftheyear.Thisishowmanymealsweactuallyfedtopeople.”LE: Because they have different problems and it’s not just asmallerversionofabigcompany.Emrich:That’sprobablyoneofthebiggestproblems.Whenyou’retryingtomakeachange,there’sawholebunchofpeoplewhoarejusttellingyouwhatbignonprofitshavetodowiththesealready.They’renottellingyoudon’tworryaboutthisnow,whenyougetbiggeryoucanworryaboutit.Allthey’resayingisthatyouneedtohavethefollowingchecksandbalancesandyouspendallyourtimeworkingonadministration.LE:Whydon’tyougivemesomevanitymetricsforfun,actually?How many downloads? How much curriculum has beendistributed?Whatarethebignumbers?Emrich: For us we looked at the amount of curriculum wedistributedandtheUniversityofMarylandBusinessSchooldidastudy for us.This is specifically so thatwe could create a socialROI analysis of how much each curriculum was worth to eachchild. So we took all of our kids and multiplied them by thisnumber that theycameupwith forus and that’showwegetour

$70millionofcurriculumdistributed,andover250,000kidshaveusedourprogram.

WorktoDo1.FromChapter3,youhopefullyhaveafewmarketsegmentsdefined,withcorrespondingproblemstatements.FromChapter4,youhavedocumentedassumptionsfromthefivepartsofyourvaluestream:

GrowthengineMinimumviableproductConversionFunnelAcquisitionchannel

Now’sthetimetofigureouthowtovalidateyourassumptions.Youcanuseonetemplateforeachinterviewee:

Segment:Interviewee:Assumption Hypothesis ResultPersonaexists/detailscorrect:Customerhasproblem/pain/passion:Customerwillrespondtosolution(highlevel):Customerwillbesatisfiedwithspecificfunctionalityx,y,z:Customerwillbecomepassionatewhen:Customerwillmakefinaldecisiontobuywhen:Customerwilltrustthecompanywhen:Customerwilltrusttheproductwhen:Customerwillwanttolearnmorewhen:Customerwillbecomeawareoftheproductby:

2.Allthisdatadoesnotcomefromoneinterview,but,rather,itiscollectedovertimeasyouformadeeprelationshipwithyourcustomer.

Notes

1.www.entrepreneur.com/article/222501.2.Bytheway,incaseyoujustthoughtofHenryFordandhisobservationthat“IfIhadaskedpeoplewhattheywanted,theywouldhavesaidfasterhorses,”that’snotexactlywhathesaid.Buthedidthinkalongthoselines.Readthewholethinghere:http://blogs.hbr.org/cs/2011/08/henry_ford_never_said_the_fast.html.3.WeoweagreatdebtofgratitiudetoClaytonChrisensenandhismust-readtome,TheInnovator’sDilemma(HarvardBusinessReviewPress,1997).4.Taleb,xviii.5.Liker,229.6.www.fastcodesign.com/1669070/3-ways-to-predict-what-consumers-want-before-they-know-it.7.www.zurb.com/article/588/hiding-in-the-bushes-with-steve-jobsandwww.nytimes.com/2011/01/19/technology/companies/19innovate.html?_r=1.8.Ariely’sPredictablyIrrational(HarperPerennial,2010)isafantasticbook.Ifyouhaven’treadit,wesuggestyoudososoon.

Chapter6

ViabilityExperiments

Winnersexperiment.Theworldischangingfast—strikethat,therateofchangeis increasing.Youarebeingdisrupted.Thepundits screamingat you from theTV,whataretheyonabout?They’rebeingdisrupted.It’swhatyoudowhenyoubecomeobsolete.Innovateordie.Youcandoubledownon“ignoranceisbliss”oryoucanstartrunningexperiments.The idea of viability experiments is to test critical aspects of your business

model,beforeyoubuildthemout.Justasascientistrunsexperimentstoproveatheory,soshouldanentrepreneur.Justasresearchersandengineersuseiterativeprocesses to discover new things, so should founders use such processes todiscoverwhatwillworkinthemarket.“The real measure of success is the number of experiments that can becrowdedinto24hours.”

—ThomasAlvaEdisonAsquicklyasyouareabletoposityourmarketsegments,youwanttothinkof

waystovalidatethatthesegmentsexistasyoudescribethem.Gettingoutofthebuilding to interview prospective customers gives you your first insights intowhether you’ve described them and their problems correctly, and now byrunning experiments you work to confirm customer behavior. Experimentsrepresentthefirstopportunityforyourpotentialcustomerstoexperienceatsome

levelyourvalueproposition.Augmentwhat customers say they’re going to dowith tests that showwhat

theyactuallywilldo!The basic premise of viability experiments is that the quicker you can

determineafailedapproach,thebetter.Ifyourequireanexpensivecustommoldtobebuiltforyourproduct,wouldn’titbebettertounderstandtheviabilityofthe product prior to building the mold? If you wish to open a restaurant,shouldn’tyoucheckwhetherpeoplelikethetypeoffoodyouplanonserving?Ifyoumustdevelopsoftwareforayeartofinishaproduct,isn’tthereawaytotestwhetheryou’rebuildingaproductpeoplewant?Viability experiments do not only apply to product. You should test any

element of your business model that has significant uncertainty. Will a retailstorecarryaproductlikeyours?Ifso,whatdoyouhavetodotogetshelfspace?How many page views do you need before advertisers will pay you enoughmoney to sustain your business?Will people buy high-end art onlinewithoutexperiencingthepieceinperson?EricRiesadoptedthetermminimumviableproduct (MVP) todescribe these

experiments,as longas theyresult invalidated learning.1Originally thephrasedescribed theminimum functionality necessary to be viable in the product, asevidenced by the willingness of customers to pay, because it sufficientlyaddressestheirproblemorpassion.Ries’sdefinitionincludesallsortsofcreativeviabilityexperiments that result

inlearningandreducedbusiness-modelrisk.Webelieveit’svaluabletoseparateout the first attempt at putting product in front of customers and call that anMVP, versus running purpose-built experiments to educate your productdevelopmentassumptionsandotherriskyaspectsofyourbusinessmodel.Soforthisbook,viabilityexperimentreferstotestsyouruntovalidateaspects

ofyourbusinessmodel.ThisepitomizesRies’sbuild-measure-learnframework.We are holding out the termMVP for the first stab at releasing product thatcreates value for a specified customer segment. What follows are the mostfamiliarmethodsofrunningviabilityexperiments.

TheInfamousLandingPageThelandingpage2testisprobablythemostfamiliartopeople.Thebasicpremiseisthatyouputupabasicone-pagewebsitecomprisedofyourmessaginganda

calltoaction,drivetraffictothepage,andmeasureclicksonthecalltoaction.Landing Page smoke tests are at the same time the most abused and

underutilized of tests.Most abused because the interpretation of the results ishighly subject to experimental bias: Entrepreneurs seewhat theywant to see.TheLandingPagetesthasthreevariablesinplay:

1.Howgoodisyouracquisitionmethod?IfyoudrivetrafficusingGoogleAdWords,butnobodyissearchingforyoursolution,thenyouhaven’treallytested your value proposition but, rather, your ability to drive traffic viasearchmarketing.Furthermore, ifyoudon’tdrawtheright traffic, inotherwords, your target segment, then you can endupwith hundreds of e-mailaddressesfromcasualpassersbywhohavenodeepinterestinyourproduct.2.Howgoodareyourmessaging,positioning,anddesign?Peoplewhoclickon the call to action arepersuaded (amongother things) by their belief inwhethertheproductistargetingthem(positioning),ifitmightbenefitthem(messaging),andifthedesignreinforcestheproductappealtothenecessarydegree. Ifyou’re sellingbridalproducts,but the landingpage looks like aGeoCitieswebsitecirca1999,you’regoingtohaveahardtimeconvertingvisitorseveniftheywouldvalueyourproduct.3

3.Howgoodisyourvalueproposition?Ifyou’vedriventherightpeopletothe page, have articulated yourmessaging and positioningwell, and yourdesign doesn’t subtract or distract, then youmight, in fact, be able to testyourvalueproposition.Ifpeopledon’tclickonthecalltoaction,youhavealongroadinfrontofyou.Ifpeopledoclickonthecall toaction,youstillhavealongroadinfrontofyou,butperhapsenoughreasontocontinuethejourney.At thispoint,youmight reasonablyask,why runaLandingPage test?Here

aresomegoodreasons:Asmentionedearlier,ifyourunahigh-qualitytest,youcanlearnwhetheryouhaveafightingchance.Collectinge-mailaddressesprovidesyoualistofpeopletofollowupwithasyoupursuetheidea(including,onewouldhope,earlyadopters).Thereisthepossibility,again,oftrulyvalidatinganidea.

Recall that Lucas Carlson at AppFog started with a landing page test thatgenerated 800 e-mail addresses overnight. Unlike other entrepreneurs whoinstantly believe that whatever number of addresses collected proves ideavalidity,Carlsondoubleddownontestingwithwhatwecalla“highhurdle”test.

He wanted to only let into his beta program early adopters willing to jumpthroughahoop.Thewillingnessofcustomers to fillouthispainfully in-depthsurveywasgreatvalidationoftheideathroughindicationofadeeplevelofpain.How,then,isthelandingpageunderutilized?Becauseit’sstillprimarilyatool

forhigh-techstartups,wheninfactitcouldquiteeasilybedeployedbystartupsoutsideoftech,aswellasbybigcompanies.Weoncecounseledabiotechentrepreneurwhohadinventedatechnologyfor

folding proteins.He related to us that hewas stymied because his technologyappeared applicable to many, if not all, protein families with some futureinvestmentandfine-tuning.However,at thetime,itonlyworkedforaspecificsetofproteinfamilies.Assuch,hewasunsurewhether theproteinfamilieshecould fold at the time were commercially interesting, and whether he shouldinvesttimeandmoneyintoconfiguringhistechnologyforanotherspecificset.Wereframedthisquestionthroughthelensofmarketriskandtechnicalrisk:

Was thecurrentsetofproteinscommerciallyviable?Yesorno?Whatwas thetechnicalriskofsupportingotherproteinfamilies?Either way, what sets of protein families, irrespective of his ability to fold

them,showedmarketpull?Inotherwords,couldhede-risk themarket furtherbeforeaccumulatingadditionaltechnicalrisk?We suggested he consider a landing page viability test that allowed those

workingwith specific proteins toopt inbasedon informationprovided.Then,wealsoaskedhimtoconsiderrunningadsinamedicaljournalpertinenttohistargetmarket segment,whichwould actively test demand for various, specificproteinfamilies.

ConciergeTestTheConciergetestistestingbydoing.Neveraweekgoesbythatwedon’thearof a new onlinemultisidedmarketplace idea. These entrepreneurs have grandplans tobuildanonlineplatform thatbrings together twoormorepartieswhoaren’treadilyaccessibletoeachother.Intheinstanceofcreatinganewmarket,inotherwordsbringingnewbuyers

andsellerstogether,theConciergetestisconductedbymanuallybringingbuyersandsellerstogetherandrepeatingthatprocessuntilyoulearn(1)whethertakinga cut of the transaction would support a business, and (2) what part of thetransactioncanbeautomated.

Thistestmightbeusefulinnon-marketplaceexamples,too.Inmanyinstances,if you can’tmake a transaction happen in the realworld in real time, it’s notlikelytoworkonline,either.Ifnothingelse,youwill learnwhat itwill taketogetthepartiestothemarket.Services-basedbusinesses aregoodexamplesofConcierge tests. If someone

pays you for a service, you pretty much know a pain exists and someone iswillingtopayforit.(Thisisbeyondthepointthatmanyproductstartupsgetto!)This,ofcourse,doesn’tmeanyouhaveascalablebusiness.Whetheraproduct-basedstartupcanbebuiltfromasuccessfullysoldserviceisnosmallmatter.Convertingaservicesbusinessintoa(scalable)productsbusinessisalwaysa

toughproposition.(We once worked with a successful consulting business to help establish a

products division.Despite the fact that executives could never get their headsaround non-billable hours,wewere able to build anMVP, execute onemajorpivot,andlandasix-figureannuallicensedealwithineightmonths.Becauseofnotmeetingbusiness-planexpectationsandotherinternalissues,however,eventhiswinwasnotenoughtosavetheproject.)Presumingoneisabletoproveviabilitywiththeservicesversion,whatisthe

nextbiggestrisktoofferingaproduct-basedsolutioninstead?Twothingscometomind:

1. Is the problem even solvable with a product? Believe it or not, someproblems are not. Some problems are human based. Problems caused bypersonality,habit,emotions,orbehaviormaybebigproblems,butproductsmightnotdothetrick.(Productsrelyingoninfomercialsandsmarmydirect-marketingtechniquesoftenrelyonthisfact inordertosellproductstotheunaware.)2. Are customers willing to substitute human service with a product? Inlong-termservicesbusinesses,thetrustengenderedbypersonalrelationshipsisoftennecessarytocreatepassioninthebusiness.Thismaybethreatenedbyproduct.Whichisn’ttosaythatyoushouldn’tpursuetheopportunity,butyoumightneedtolookforadifferentmarketsegment.Tomovetowardaproduct-basedsolution,oneneedstofindwhatwithintheir

existing process can be automated, using existing passionate, service-basedcustomers as early adopters. They will be your bellwether to see if you canprovidebenefitsofautomationbeyondthevalueyourservice-productoffers.

CaseStudy:CuratingUserExperience

StevenCox’svisionwastoletmusiciansteach.Throughhisownexperiencesaswellasthoseoffriends,heknewthatthetoughestpartaboutbeingamusicianismakingaliving.Somanymusiciansturntoteachingmusic.Thetoughestpartaboutteachingisfindingandretainingstudents.SobeinganInternetentrepreneuraswellasamusician,hedecidedtocombinethosepassionsandcreatealead-generationsiteformusicteachers,calledClickforLessons.WespokewithStevenandhisco-founder,ChrisWaldron.CoxexperimentedwithseveralMVPsthatalternativelyofferedunlimitedleadstoteachersat$30/month,triedtocreateafreemodelwithadvertisements,andsoldleadsonaper-leadbasis.Itwasanidea—bringingmusicteachersandstudentstogether—insearchofabusinessmodel.Theygrewtheleadprogramtoover4,000instructorsin15majorU.S.citieswithrevenueexceedingsixfigures,butgrowthwasslowandhard-fought,andeventuallystagnant.Throughfailedexperimentsandspeakingwithteachers,theClickforLessonsteamlearnedacoupleofkeypoints:

Themusicianstheytargetedwerelivingpaychecktopaycheck,andmanydidn’thavecreditcards.Iftheypaid$6/lead,theyfell$6inthehole.

Tofindstudents,ClickforLessonssimplyusedonlinemarketingtechniquestosnarestudentslookingforteachers,andsoldtheirinformationtothehandfulofteacherstheyhadrecruited.Steve Cox: “The epiphany came after talking to a bunch of ourinstructors.I’mtellingthemtheycanearnthousandsofdollarsperlead—they just have to get them to buy-in. I’m frustrated,complainingtoabuddy,whosays:‘Theproblemisyou’retryingtogetthemusicianstobelikeyou.’AndIthought,‘He’sright.’I’mabusiness guy; I like the interaction with my customer. Thesemusicians don’t reallywant to run a business.At the same time,

we’regettingangrycallsfromthestudents,saying,‘Youguysareworthless—noneoftheteacherscalledmeback.’”

Coxwentbacktotheofficeandpulledtheplug.Severaldayslater,theyhadanewMVP.ChrisWaldron:“ItwasJanuary2008,andbasedonwhatwehadlearnedwewentoutandrecruited30instructorsbyhand.Wegotthemtosignagreementsandcommittocertainrevenueorpayratethatwewerewillingtopaythem,andthenwehandmatchedthemto actual students. For the students, we rigged together a phonesystem,literallylikerippedopenthewiresandrewiredit.Wehadsomeopensourcefromaphonesystem,andwehackedtogetheracall center andpublished an800number andbasically for half aday took calls on the student side and the other half recruitedteachers.”

AclassicconciergeMVP!Uptothatpoint,ClickforLessonswasjustanInternetmarketingplay,whichwasn’tthetypeofbusinesstheywantedtobuild.Itmatchedneithertheirvaluesnortheirvision.Cox: “If all we could be is a company that was really good atsearch engine optimization, that wasn’t exciting to us. Music isemotional,andbysittinginthemiddleofthetransactionwehaveall the data related to the actual student experience. That wasexciting for us to be able to leverage in building an actual brandthatcouldbeconsideredtheplacetogotobuyservices.Thevisionthat we started to create in 2008 is to become the Amazon ofservices.”

Sotheyhadfinallyidentifiedaviableonlinemarketplace,buttheInternetisawashinfailedmarketplaces.DoaGooglesearchforanylocalsmallbusinessandyouwillgetadozenonlinebusinessdirectories,eachimploringownersto“claimtheirbusiness,”eachwithpedestrianfive-starconsumerreviewscapability.Togrow,ClickforLessonsneededtoestablishits“shadowforce”:itscorecompetencynotreadilyvisibletotheoutsideworld,butthatdrivesmarketdifferentiation.TheyrebrandedasTakeLessonsandlearnedtobringnewvaluetotheequation.

Cox:“Wecontinuetoevolvetheplatformaswefigureitout.We

didn’tknowwhatwasrequired,butweknewthatwehadtocontroltheexperiencemorethanbefore.”

TakeLessonslearnedthatiftheycandeliverenoughstudentstotheteachersthey’reokaywithtakingalowerpriceaslongasthey’remakingconsistentmoneyonaweeklybasis.Atypicalmarketplacebringsbuyerandsellertogetherandthenleavesituptothemtoconductthetransaction,butthat’snotthewaysmallbusinessworks.Waldron:“Oneofthebiggestinsightswhenmovingtothismodel,whichstillblowsmymindto thisday, is therearemanyteacherswho would rather not address the fact that their customer owesthem money. They’re concerned they’ll lose the customer. TheyfeltawkwardinfrontoflittleJohnnysaying,‘Hey,tellyourmomto pay me $150 this month,’ and they would teach for anothermonth without getting paid. So we saw that if we collected themoney,theteachersfeelmorecomfortable.”Cox: “It’s like we were getting back to the vision the long wayabout.Teachersjustwanttoteach.Theydon’twanttomarket,sell,schedule,orcollectpayment.Asaplatform,weneededtoprovidevaluesotheteacherswanttobeontheplatform.”

Unlikeotherservice-basedmarketplaceplatforms,whichmustbendoverbackwardstokeepteachersfromviolatingtermsofservicebygoingoutsidethesystem,TakeLessonswascreatingdemandtobeontheplatform.Thebigwinfortheteachers,ofcourse,issteadierworkandpeaceofmind.SohiringthenextinstructorinNewYorkCityonthesameblockwasnotasvaluableashiringsomeoneinthenextmarketover.TakeLessonslooksatthedemandinaparticulararea:alltheleads,allthesearches,andallthevisits,sothey’reabletoidentifyhotspotsinthesystem.Waldron: “What we’re able to do is to understand that if thisteacherapplicationcomesthroughandshesaysthatshetravelsfivemilesandalsohasastudio,whatwe’reabletodoistocreatewhatwecallacoveragescore.Sothisis100percentcoverage,andthenbased on the subjects that she teaches and based onwhether shetravels,we’reabletoseehowmuchofourdemandshecovers.”

Theyknowwhentheyaddateachertothesystemtheyaregettinga

returnonmarketingdollars.Theycanalsoseefromanationalperspectivewheredemandisshort.Tomakethiswork,ofcourse,theyneededstudents,too,butratherthanjustleads,theyneededrelationships.BuildingoutthecallcenterratherthandrivingbookingsonlineallowsTakeLessonstonotonlyincreasetheconversionrate,butlearn.Manycompaniesaresofocusedonautomatingandreducingcosts,theydon’thavetheopportunitytotalktoandgleaninsightsfromcustomers.Waldron:“Ourrevenueswouldbeliterallyatenthofwhattheyareifwedidnothavethathigh-touchmethod.Icantellyouthatinourstudent support call center we average 175 calls a day,Mondaythrough Friday. One thing we found interesting, for example, isthatonereasonwhyastudentlikesgoingwithusis theyactuallydon’tfeelguiltywhentheycancel.TheycancallupTakeLessons,cancel with that teacher, get another teacher and a 30-secondconversationandthere’snoguiltassociatedwithquitting.”Cox:“Thekeyinsightwehadwastheneedtoprotectthestudent’sexperience.”

Inordertoprotectit,TakeLessonsdisengageswithunderperformingteachersonaregularbasis.Iftheyfindtheinstructorroutinelygivesaless-than-stellarstudentexperience,TakeLessonschoosestoplacethestudentwithanotherteacher.Thestudent’sexperienceislargelydependentonthequalityanddedicationoftheinstructor.Theexperienceismadebetterbycuratinginstructors.Waldron: “When we talk about our teachers, it’s not that wescraped30,000profilesandcalledtheseourteachers.Ourteachershavesignedcontracts,they’veattendedorientations,andtheyhaveagreedtoupholdthewaywetreatcustomers.”

Studentcomplaintsobviouslyaffectteacherevaluations,butdataalsohelpsinformdecisions.TakeLessonsmonitorsstudentengagementbysubject,billingplan,geographicarea,andbyinstructor.Theymeasurelessonstakenpermonthtoindicatethattheyarelearningandprogressing.Theymeasuremonthonmonthretentionbycalendarandusercohorts.Teacherengagementismeasuredbymanyfactors,includinghow

oftentheyupdatetheircalendar.Waldron:“Wecouldsignupahundredinstructorsthismonthbutifnone of them log in 30 days later to review and update theircalendar,theteacher’snevergoingtorespondtobookings.”

Theymeasurethetimetocontactnewstudents.Waldron:“Sowhenwesendthemanalerteitherby textmessageorbye-mailsaying,‘Wehaveanewstudentforyou,’wemeasurethe next time they view their dashboard.We can see how quicktheyaretoreplyandrespond.Oncetheyactuallytalktothestudentthey have to click a link and we measure that.We can align ormeasurehowclosely related that is to the teacher’s retention andhowgoodtheyareandthequalityofthestudents’experience.”

TakeLessonsdoeswebinarssoteacherscanlearnfromotherteachers,andtheymeasureattendance.Waldron:“WehaveateacherinAtlantawhoseaverageretentionis40lessons,whichisamazing;sohowdoesshedothat?She’llputtogethercontentandwefacilitateawebinarandshe’ll run it,andteachersfromaroundthecountryfollowupafterwithquestions.”

Havinggrownupwitharelativelyhighcustomeracquisitioncost(whichenabledtheirlearning),muchofTakeLessonsanalyticsfocusesonreducingthatcostandmaximizinglifetimevalue.Sotheyrunexperiments.Waldron:“Weoftentestpricing.We’lltakeateacher,forexample,say Jessica, she’s in Houston and her average retention is 22lessons, and we have 60 students to book. So we’ll adjust herpricing maybe up $5 and down $5 and run a cohort analysis ofstudentswhoarestartingat thesame time,with thesame teacherunder different pricing, and then see how that relates to theirretention. The goal is to maximize the lifetime value. So if wecharge $5 less but the student stays 14 lessons longer, we’remaking more profit on a per-student basis, and the teacher ishappieraswell.”

It’sanintricateloopwherebyTakeLessonsworkstohelpteachersbebetterteachers,inordertoprotectthestudent’sexperience,inordertoretainstudentssothatteachersaremoresuccessful.ThisloopisTakeLessons’“shadowforce.”

Byconstantlyworkingtoimprovetheloop,theyincreasecustomerpassiononbothsidesofthemarketplace,grow,anddifferentiatethemselvesfromthecompetition.Cox:“Ournextbiginflectioniswherewefigureouthowwecanget students to share their experiences, and the music teachercommunity isveryconnected.Sohowdowecontinue toprovidemorevaluetothem?Weneedtocontinuetohelpinstructorslearnfromeachotherhowtobegreatmusicteachers.”Waldron: “So that’s the point, dowe have productmarket fit fordelivering on the one thing that both teachers and studentswant,which is each other? I would say yes, and we do that jobexcellently,butinordertobuildthevisionweneedtocreatemorepassion.We talk about it, and Steven just reinforces that all thetime.”Cox:“It’slikethereisnoproduct-marketfit.Wehavetogetmoreteacherswherethey’reneededandmakethembettereveryday.Weneed to improve the user experience every day. We need tocontinuouslyaddmorevalue.”Waldron:“That’swhyit’sreallyhardifyouwanttobuildabrandthat people trust.We could just create a local dot-comor aYelpwhere it’s just fine, but our vision is to be able to take this andexpanditintootherservicesthatpeoplebuyfortheirhome.Ifwewanttobeabletodothatandthenleveragethat,wehavetobuildabrandpeopletrust.”Cox:“Ourinvestor,MaynardWebb(formerCOOofeBay),toldusthe next generation of marketplaces like TakeLessons werebuildingamarketplacefortheequivalentoftheeBayPowersellers—proven merchants with good track records—something thecompanycanstandbehind.”

WizardofOzTestSimilar to theConcierge test, theWizardofOz test requires littleornoactualproductdevelopment.ItcouldalsobecalledtheHamsterPowerGeneratortest,similar to the cartoons inwhichyoudiscoverhamstersonexercisewheels are

powering the car engine. Basically, you provide a front end for your productwheresomeonecanbuy,yetyoufulfilltheproduct’spurposemanually.This is aboutas lean as it gets. In leanmanufacturing, aproduction stage is

startedonlywhendemandedby thedownstreamprocess. In theWizardofOztest,theproductitselfisinactiononlywhenrequestedbythecustomerthroughplacinganorder.ZapposstartedoutasaWizardofOztest.CEOTonyHsiehtellsofmeetingNickSwinmurn,founderatZappos,in1998:Nick summarized his entire pitch in three sentences: “Footwear is a $40billion industry in the United States, of which catalog sales make up $2billion.It’slikelythate-commercewillcontinuetogrow.Anditislikelythatpeoplewillcontinuetowearshoesintheforeseeablefuture.”Hereserved thedomainnameShoesite4 andwithoutbuildingoutanysortof

inventorysystem,heliterallywalkeddownthestreettothelocalshoestore,tookphotographsoftheirshoes,andpostedthemonthewebsite.Severalmonthsintothe project, Nickwas getting $2,000worth of orders perweek. Theyweren’tmakinganymoney,becauseafteranorderwasplaced,“Nickwouldrunto thelocalshoestore,buytheitem,andthenshipitouttothecustomer.”5

In1998,NickSwinmurnusedaclassicexampleofaWizardofOztesttotestmarketrisk.Sodidanothercompanyfromthesametimeperiod,CarsDirect.

CaseStudy:IdeatoWizardofOzinunder90Days

Day1Backin1998,IdealabfounderBillGrosswantedtobuyanewcar.SooffhewenttohislocalSouthernCaliforniadealership,whereheimmediatelyexperiencedthetypicalnew-car-lotrunaround:“Oh,thatcar’snotinstock.Whatyou’reaskingforisveryrare.Wedon’thavethatcolorontheWestCoast.You’rebetteroffbuyingwhatwehaveonthelot,”andsoon.Liketheentrepreneurheis,Grosssaid,“There’sgottobeabetterway.”

Hedecidedtobuildawebsitewhereyoucouldgoonline,configurethecaryouwant,seethepricerightthenandthere,putadepositdownwithyourcreditcardandyou’resetfordelivery.Bigdeal,youmightsay,butremember,thisis1998.Amazon.comwasthreeyearsold.TheideascratchedGross’sitch,butlotsofpeoplepushedbackontheidea:

“Peoplewon’tusetheircreditcardsonline.”“Noonewillputmoneydownonacar,sightunseen.”“Maybeyou’ddothat,butthere’snowayanyoneelsewill.”

Ratherthansitaroundanddebate,Grossbuiltatest.“Let’sputupawebsiteandlet’sbuildthepropositionoutofwhatwewanttooffer,andthenlet’sseeifanybodywantstodoit;ifsowe’llbuildthecompany,andifnot,wewon’tbuildthecompany,butlet’sjustfindout.”Idealabhiredafoundingexecutive,“Bob,”tohelpprototypetheideawithin90days.

Day45BillasksBobhowit’scomingalongandhesays:“I’vebeencallingallthecardealerships,FordandHonda,andI’mhavingadifficulttimesourcingthecars.”Billresponds,“What?Whatareyoucallingthemfor?We’rejustgoingtoputthisupandseeifanybodywantstobuyacar.Ifsomeonebuys,we’regoingtogodowntotheHondaAutoMallandbuythecaratretailanddeliverittothepersononaflatbedtruckandlosemoneyonit.”

Day70Bobhasaproblembuildingthe“configurator.”“Thewhat?”Billasks.“Youknow,thewaytoallowthecustomertochooseallthedifferentoptions.It’sreallyhard,toomanypackages,toomanydifferentvariablestomakethisworkcleanly.”“No,no,no.Justletthemtypeinablankfield.We’llhaveahumanreadthething.Don’tworryaboutit.”

Day80Bobhasrunintoanotherissue.“Launchthesite,”Billsays.“Youhaven’tevenheard...”“Turniton!”SoonaThursdaynight,Boblaunchesthesite.Fridaymorning,BillmeetswithBob.“Well,whathappenedlastnight?”Billasks.“Wesoldfourcars.”“Hurryupandturnthesiteoff!”Theyquicklytookthesitedownbecausetheyhadjustlostmoneyonfourcars,notjusttwo,butatleasttheyhadananswer.PeoplewillordercarssightunseenontheInternetviaadirect-salesmodel.CarsDirectbecameInternetBrandsin2005andwentpublicin2007.

Crowd-FundingTestAlthoughsomeentrepreneursspendthreemonthswritingbusinessplansfortheirgadgets, others make a product video and seek funding on Kickstarter.Kickstarterandothercrowd-fundingsitesareahighlydisruptiveforcethatallowentrepreneurstotestandvalidateproductideasveryquickly,withlittleproductdevelopment.Asofthiswriting,Kickstarterhasledtothesuccessfulfundingofover24,000

projects,backedby2millionpeoplewhocontributed$250millon.

The Olloclip is one such example. The brainchild of Patrick O’Neill, the

Olloclipisapocket-sized,three-in-onelensyoucanquick-mounttoyouriPhonetodramaticallyimprovephotoquality.Fromtheoutset,O’Neill’sambitionwastogetthelensintoApple’sretailstores,butthat’snosmallambition.“There’s so much you have to do: you’ve got to get the company set up,

streamlineproductionofyourproduct,andbeabletoproduceinmassquantities.Yourpackagingneedstoberight.Youhavetogetthatdevelopedanddesignedandmanufacturedandeverythingtakesalongtime.Everythingtakeslongerthanyouwouldthinkandcostsmore,butyou’vegottodoitright.”Soyoucanbetthefarmonyourideaorcreateprototypesona3Dprinterand

launchaprojectonKickstarter.Thirteenhundredbackersand1,500units later, theywere inbusiness. “That

gave us 1,300 really enthusiastic,motivated early adopterswhowould go outandtakeourproductanduseitandspreadtheword.Sothatjustbranchedouttomoreandmorepeople.ApplefoundoutaboutusbecauseofKickstarter.”

CaseStudy:Two-SidedMarketLeanStartupTaskRabbit’soriginallogo,sourcedthrough99designs.

LeanEntrepreneur:SocorrectmeifI’mwrong,butyousortofgot

started on a community forum, is that right? There werediscussions happening on a particular forum where thismarketplacesortofemergedbyitself?99designs:Absolutely.SoSitePointisthishugecommunityofwebanddesigntechnologypeople.Intheirdiscussiongroupstherewasa really popular design forum and we noticed this emergingbehaviorwherepeopleweresaying,“Hey,I’mlookingforalogo.DoanyofyouhaveanyideasofwhatsortofthingsIshoulddo?”andthensevenoreightdesignerswouldchimeinwithconceptsorideasandattheendofthethreadthey’dbelike,“Oh,hey,Ireallylove that one.What’s your PayPal address?Can I pay you somemoneyforit?”

Sincethatstartedhappeningwithsomeregularitywecreatedanewforumforittogrow,andthenwedecidedtoattachafeetokeepthingsundercontrol.Thatdidn’tseemtodampenpeople’senthusiasmatall.Soonafterwehadpeoplesayingtous,“Giveus tools tomake thiseasier todo,”andso itwasoneof thosereally easy decisions onwhat to build.We built theminimumviable product for what was, at the time, called SitePointContests, and it was simply an extension of the discussionforum with some extra tools that helped people collect andorganize designs and pick a winner and announce what theirprizewasgoingtobe.In2008wespunitoutonitsownto99designs,andeversincethen we’ve incrementally added—and sometimes removed—featuresandthingsthatpeopleneedtorunacontestwell.

LE:The forum you created for these transactionswas sort of anMVP itself, proving the viability before writing a line of code.Plus,sincethiswasinanestablisheddesigncommunity,youdidn’thave to guesswhat yourmarket segmentwas; theywere alreadyrightthere.99designs: I think that one of the wonderful things about a bigtechnicalcommunityisthattherearelittlepocketsofmarkets,andI think part of the trick is being able to find those markets andlistentowhatthey’reaskingforandperhapsseealittlebitbeyondexactlywhatthey’reaskingforandbuildthemwhattheyneed.

LE:Whatwereyourthoughtsaroundthepricingstrategy?Didyouwant toweed out those people that you feltwere never going topay?99designs:Puttingasmallpriceonitwasamechanismtoensurethat people have some skin in the game; it keeps out spammers,and itprotectsbothsidesof themarket, right?Wewere trying toprotect customers fromdesignerswhomight be submitting stockand we’re trying to protect designers from customers who don’treally have any intention of paying.Also, let’s not underestimatethat creating cash flow for this was an important thing becauseSitePointhadalwaysbeenself-funded.LE: It’s funny that some entrepreneurs want to overcomplicatetheirbusinessmodelsandworryaboutmoney later.SoI love thefactthatyou’rejust,fromtheget-gogoingtosay,“Wellwe’vegottotesttoseeifthereisarevenuemodelhere.”99designs:Absolutely.It’snotabusinessifnoone’sgoingtopayforit.LE:Whataboutdeterminingwhatfeaturestobuild?99designs:OneofthethingsMark[co-founderMarkHarbottle]isa genius at is listening to what people are asking for and thenfiguring out what’s the simplest thing that will satisfy the mostpeople.

We’ve always been extremely close to our customers and ourdesigners,watchingingreatdetailwhattheydo,howtheydoit,howthey’rerespondingtous,andwhattheirneedsare.Oneoftheveryfirstthingswebuiltwasarichdashboardthatgaveusinsight into the marketplace dynamics, and it’s always abalancing act between the two sides. We’ve always trackedmetrics on both sides and used them tomake decisions aboutwhatfeaturesmakesensetobuild.

LE:Howdoyouknowwhennottolistentosomerequests?99designs: There are definitely some kinds of mechanisms forsanity checking the feedback that you’re getting from customers.You always need to be thinking about why they’re asking forsomething, notwhat they’re asking for. So are they asking for afeaturethat’sactuallyasymptomofagreaterproblemandifthat’s

the case what’s the simplest way that you can fix the greaterproblemsothattheydon’thavethatrequirementanymore?

Alotofourfeedbackcomesthroughourdesigner-supportteamand our customer-support team, and we’re constantly sanitycheckingvolumeaswellbecause,youknow,typicallyit’sverymuchanoisyminority.Whenaproblemarises,it’sproblematicandit’sdifficultforyouasacustomer-supportreptodealwith,sothat’swhyitsticksinyourmindandyouthinkthatweneedtoaddressit.Butwhenwelookatitinthegreaterstatscontext,wecaneitherlivewiththisproblemoccurringorwecanaddressit at some point or look at the bigger problem and address itovertime.LE: I’m curious whether you see the product being pulled indifferent directions, and how you monitor whether you’remaintaining the value prop for your existing customers asyou’re adding new stuff or changing stuff. How do you dealwiththat?

99designs:We follow themetrics closely.We look at things likeNetPromoterScoreonaregularbasisandwehaveanotherscoreinternallywecallaDesignQualityIndexandsowe’relookingtoseethenumberofreferralvisitswe’regettingamonth.Weactuallyencourage people to leave testimonials for us, and also from ourdesigners, we are able to measure how many of those we aregetting.

Wehaveaverycloselybuilt-infeedbackmechanismthatallowsus to see if we are delivering a quality product and if peoplewhoaregetting thatqualityproduct arehappier.So ifwe sawanythingwhereweweremovingawayfromourcoreandpeopleweren’tgettingwhattheywerewanting,thenwewouldstarttosee changes in those. But it is difficult—it’s hard to pleaseeveryone, and then certainly, some of your early adopters canalso be your noisiest detractors, because they’re the oneswhodon’tactuallylikechangeandlikedthewaysthingswerewhenyouwere small and kind of exclusive almost to them and so,youknow,youkindofalmosthavetotakeit.

LE:Anyadvice forentrepreneurswhobelieve they’re facing thischicken-and-egg,two-sidedmarketplacedilemma?

99designs:Yep.ImeanIthinkit’sprettyclearwhichoneyouneedto focus on; it’s a supply/demand problem. So if you createdemand, then supplywill follow.Our strategy in the firstyearortwowastojusttrytobethemarketplacethathadthemostprojectsonoffer.Sowefocusedalotonthecustomersideofthebusiness,and I think in the early stages of the marketplace business thatthat’s kind of the right thing to do. If you’re providing the rightopportunities for your suppliers then it basically stabilizes itselfearlyon.LE:Didyoueverfacethedilemmawherethereisanincentiveforpeople to leave themarketplace?Like say they found a designerthat they really liked and so then they don’t really need themarketplaceanymore,orhasthatreallybeensortofanonissue?99designs:Absolutely.Ourvisionhasalwaysbeentoprovidewaysfor freelancedesigners tomonetize theirwork.Contestswere thefirstpieceofthatpuzzle.Wethinkofcontestsassimilartoadatingservice.It’sagreatwayforcustomersthatdon’tknowwhat theirdesignrequirementsaretomeetagreatdesigner.I’msureyou’vebeen through the design process and no matter how great adesigneristhatyoumeet,oftenthey’renottherightperson.Sothecontest format really helps people match up with someone whogetsthemandisgoingtomeettheirneedsandthenthey’regoingtoreconnectwiththatpersonforongoingwork.It’saninterestingchallengeforusinthatwe’vecapturedthefirstpieceofthepuzzleand now we’ve just got to iterate and provide a compellingexperiencefortheongoingdesignwork.

We also understood pretty early on that this was part of thevalue proposition for designers. Designers are, in our contestmodel, by its very nature, speculating their time. They’resubmittingconceptswithachancetowintheproject,butwhenthey win, they have a high chance of getting follow-on workfromthecustomer.Soweactuallygooutofourwaytopromotethat,evenifitgoesoff-platform,asironicasthatsounds.That’sactually true to our vision and true to the value proposition,which is creating opportunities for designers. So we’reobviouslyconstantlylookingathowwecanbuildnewtoolsandcreateagreatwayfor thatongoing relationship tobe fostered,

butweget a lot of benefit from thedesigners’ participation inthefirstplaceinmakingthatcontestexperiencesuperrichandsupervaluableforthecustomer.

LE:Soit’sstayingcoretoyouroriginalvision,youroriginalvalue,butthen,also,overtime,figuringoutnewwaystoaddvaluethatjustcontinuesthatrelationshipwiththedesigners.99designs:Yes,absolutely.

PrototypingPrototypes have long been used in manufacturing, design, computerprogramming, and electronics to de-risk product development. A prototypemightbeasimulationoftheendproductoranearlyversionthatisprogressingdowntheactualdevelopmentprocess.Aprototypeallowsbothbuildersandpotentialcustomerstoevaluatewhether

theproduct isbeingdevelopedcorrectly, such that itwill solve theproblem itintends to solve. Depending on the purpose of the product and stage of theprototype,itcanhelpanswerquestionslike:

Willitfit;arethedimensionscorrect?Willitfitaesthetically;doesitlookgood?Isthedesignusable?Doesthecoretechnologywork?Howclosetosolvingtheproblemisit?

Hardwareentrepreneurs,especially,relyonprototypes.Justaswithbatch-and-queueprocessing, the furtherdown thepathmistakesarediscovered, themoreexpensive the resolution. If you are queuing product components betweenproductionstagesandfindacomponentproblemfardowntheline,youhaveastackofunusableparts,oftenalreadyintegratedwithotherparts.Similarly,ifyouwaittoolongtotestyourproductinarealenvironment,the

harder itwillbe touncover theproblem,anddevelopmentdonedown the linefromtheproblemwillhavetoberedone,perhapscompletelyre-engineered.Today,engineersusecomputermodelingtopredictproblemsandemploy3D

printers to produce prototypes very rapidly, within days or hours, that can betested in the field with small sets of customers to validate fit, features, anddesign.

Intheend,thereareaninfinitenumberofviabilitytests.It’suptoyourcreativitytodesignanexperiment that removesa riskfromyourbusinessmodel.Peoplehave used mockups, wireframes, mini-apps designed to test specific userbehavioror eliminate technical risk.Pop-up stores, food carts, and3Dmodelscost less than building out product and may inform you of the marketopportunity.To determine what you should test, draw your business-model ecosystem,

identifyalltheparticipantsyoubelieveyouneedtobesuccessful,andpositthevalue proposition necessary to involve each of them. Determine whichcomponentsaremissioncriticalandwhichyoucaneliminatewhile in thenearterm.Prioritizetheentities,andyoucangetapictureofwhereyourbiggestrisksare.Designexperimentstoovercometherisks.

With virtually all products these days, the number-one risk is:Does anyonecare?Yourbestexperimentisonethatinformsyouwithasolidyesorno.

CaseStudy:MVP:MotorVehiclePrototype

Kickstarterisagreatwaytosellbeforebuildingvisualorlessexpensiveproducts—productsforwhichthecustomercaneasilygraspthevaluepropositionorthoseforwhichthedownsidetofailureisrelativelyinexpensive.Whatifyourvisionistobuilda

radicallynewvehicle,however?Suchanundertakingtakesanincrediblylargeinvestment,typicallyseveralmilliondollars.LitMotorsfacedthatdilemma.TwoyearsagoLitMotorswasinapositiontoraise$1.5millionfortheirfirstinvestmentround,fromventurecapitalistswhowereimpressedwiththeiridea.LitMotorsisatransportationstartup,focusingonelectrictwo-wheeledvehiclesforpersonaltransportation.TheirC-1bringstogetherthesafetyandconvenienceofacarwiththeefficiencyandagilityofamotorcycle.ThemaindifferencebetweentheC-1andeveryothertwo-wheeledvehicleontheroadistheirgyrostabilizationsystem,whichgivesitthestabilityandsafetyofafour-wheeledcar.Thisrepresentsthefirstrealsafetyinnovationintwo-wheeledvehiclesin80years.“Sothat’stheengineeringsideofthebusiness,”saysfounderDanielKim.“We’vegotgreattechnology,it’sreallycoolanditworks.Butontheothersideweheard,‘Itseemstomakealotofsense,butdoyouhaveanyonewhowillbuyit?’Thatwassomethingnoneoftheengineerscouldanswer.”Thecompanymanagementhadaconversationwiththeentireteamaboutwhethertotakethemoneywiththelowervaluationandbuildoutthetechnology,ortakelessmoney,attempttode-riskthemarket,andraiseanotherroundlateratahighervaluation.Theychosetogothelatterroute.“Basicallywedecidedtocreateourownqualitativemarketingresearchclinic.Weknewwhatthetechnologyriskisandwe’regoingtobeabletode-riskthat.It’sjustabunchofonesandzerosandalotofelectrons,andthat’sestablished.Buttryingtofigureoutthemarketbitishard,especiallywithtechnologylikeoursandinamarketthathashadaprettyrockyroad.”LitMotorsdecidedtoprovideasmuchaspossibleofthecustomerexperienceofbuyingaradicalnewvehicle.“Wewantedtocreatethemostrealisticscenarioofanactualshowroomexperiencethatwecould.”Sotheyhand-builtashowroomandafull-scaleprototypeofthevehicleinsidethelaboratory.“Webuiltabikeyoucouldsitin,thathadtherealexperienceofsittinginsidetheenclosedmotorcycle.Thesameexperiencethat

you’dhaveifyouwalkedintoashowroomataplacelikeToyotaandyougottositinthecar.Thedoorfeltreal,theexperiencewasbasicallyreal,theonlydifferencewasyoucouldn’tdriveitoffthelot.”Theyputtogetherashort1.5-minuteday-in-the-lifevideodepictingwhatamorningcommutemightlooklike.Itwasacost-effectivewaytogiveashowroomexperienceforavehiclethatdidn’treallyexistyet.LitMotorsopenedtheshowroomuptothepublicandtookpreordersonthespot.Theyalsolookedforwhypeopledidn’tbuy,andwhatwouldgetthemoverthetoptopurchase.

Theyendedupgettingnearly100peoplewhoputmoneydownonthespot—arealtransactionforapreorder.Thepeoplewhoboughtonthespotwerethosewhobasicallyhadthissortofideaforawhile.Theywantedsomekindofsmall,fuel-efficientvehicle.Maybetheyhadthetwo-wheeledconceptinmind,maybetheydidn’t,butassoonastheysawtheC-1theysaid,“Sold,allin,let’sdothis.”

Theylearnedthatakeypointwasspousalapprovalandsodesignedthebiketoappealtobothmasculineandfeminineaesthetics.

LitMotorshand-builttheprototypeinasimilarmannertoactual

productiontechniques,tolearnaboutwhatscalingtheprocessmightrequire.Thesheetmetalstampingtoolingthattypicalcarcompaniesusewouldhavecostmillionsofdollarsandwouldn’thaveallowedforchangesonthefly.Instead,theyhand-shapedthesheetmetalthemselves.“Thisgaveusasimilarresult,allowedforquickdesignchanges,andtaughtusquiteabitabouthowtheactualproductionprocesswillgo.Thisde-riskedthetechnicalaspectsofproduction.”PerhapswhatismostnotableabouthowLitMotorsapproachedtheinherentuncertaintyinthemarketiswhattheydidn’tdo.Mostsimply,theydidn’tscaleuporoptimizeforproductionorsellingtheC-1.Theyoptimizedtheirprocessesforlearning.Acommonmistakeofstartupsofalltypesistoscaleproductiontooearlyinavainattempttocompetewithandimitatelarge,establishedbusinesses.Large,establishedbusinessesaren’tfataltodisruptivestartups,butlackoftractionormarketindifferenceusuallyis.LitMotors’learn-and-validate-firstapproachtode-riskingthemarkethelpsthemnavigatethetreacherous,far-rightsideoftheinnovationspectrum,rockyandstormywatersinwhichmanyadisruptivestartuphasfoundered.

WorktoDoUsethetemplatebelowtotrackexperimentsyouruntovalidatespecificassumptions.Segment:AssumptionViabilityTest Hypothesis ResultPersonaexists/detailscorrect:Customerhasproblem/pain/passion:Customerwillrespondtosolution(highlevel):Customerwillbesatisfiedwithspecificfunctionalityx,y,z:Customerwillbecomepassionatewhen:Customerwillmakefinaldecisiontobuywhen:Customerwilltrustthecompanywhen:Customerwilltrusttheproductwhen:Customerwillwanttolearnmorewhen:

Notes

1.Ries,113.2.In2004,TimFerrisspopularizedtheLandingPagetestinhisbest-sellerThe4-HourWorkweek(CrownPublishers,2009).3.Seehttp://wonder-tonic.com/geocitiesizer/content.php?theme=2&music=12&url=leanentrepreneur.co.4.Seriously,gotrywww.shoesite.com(domainname,notURL)rightnow.5.Hsieh,59.

Chapter7

Data’sDouble-EdgedSword

Datais theweaponofmodernbusinesses.Likeasword, it isonlyasusefulasthepersonwhowieldsit.Althoughdatacan’tmakedecisionsforyou,ifyou’retrackingtherightdata,it

provides you with information that must inform your decisions. To anentrepreneur,findingpatternsinthedataisnirvana.Marketsignalisembeddedinthedata:thatwhichinformswhereyoushoulddirectyourefforts,wherenotto,whentodoubledown,andwhentopivot.Butlikeadouble-edgedsword,datashouldnotbebrandishedthoughtlessly,as

carelessuseispotentiallyasriskytotheentrepreneurasitisuseful.Most modern businesses, including startups, are inundated with data. This

causesacoupleoffundamentalproblems.First,manyarereluctant toproperlyinstrument their value stream—in other words, measure the effectiveness ofbusinessactivities—for(averylegitimate)fearofmerelyincreasingthespeedatwhich they drown in data. This concern is not without foundation, since thesecond most prominent problem is successfully extracting useful knowledgefromthedata.Baseball scoutGrady: “Now there are intangibles that only baseball peopleunderstand.You’rediscountingwhatscoutshavedonefor150years.”BillyBeane:“Adaptordie.[...]Youdon’thaveacrystalball.Youcan’tlook

atakidandpredicthisfutureanymorethanIcan.I’vesatatthosetableswithyouandlistenedtoyoutellthoseparents‘Iknow,Iknow.Whenitcomestoyourson,Iknow.’Andyoudon’t.Youdon’t.”

—StevenZaillian&AaronSorkin,Moneyball(ColumbiaPictures,2011)The trick is in figuring out whichmetrics to track. Tracking the right stuff

actuallysolvesbothproblems.Asastartup,youarealreadyjugglingresourcesinordertogetdonewhatyouneedtogetdone,buthowareyoufiguringoutwhatneedstogetdone?Severalthingstokeepinmind:Focusonwhatmovestheneedleofyourbusiness.Actionableknowledgepulledfromdatamakesyourresourcesmoreefficient.Notallmetricsneedtobetechnicallyproducedandanalyzed.

Actionabledatameansjustwhatitsays:Datafromwhichyouwilltakeaction.Tracking the cumulative number of mobile application downloads is a ratherworthless metric if no one’s using your mobile application. Once you knowpeople are using your application (based on data), the same measure ofdownloadsmaybecomeimportantasyoutrackmarketingactivityefficacy.Thenumberofpeoplelikingyourrestaurant’sFacebookpageismeaninglessif

nooneisactuallygoingtoyourrestaurant.Thenumberofpageviewsonyourweb page tells you little if no one’s buying your product.EricRies call these“vanitymetrics.”vanitymetric:Avanitymetricisonethatisinaccessible,notactionable,andnotauditable.It’snotactionablebecauseitdoesn’tmaptoaclear,meaningfuleffectonyourbusiness.Vanitymetricsaregreatforbraggingrightsandperhapsusefultoraisemoney

fromimpressionableventurecapitalists,buttheycanbepotentiallydestructiveifused tomanage the business, as they allow uninformed entrepreneurs to slicetheirownfeetoff,insteadofslicingthroughthecompetition.

Weonceworkedwithacompanythat raisedmoneyon thenumberofactiveusersandaviralcoefficientthatwasn’tcalculatedcorrectly.Ineffect,theywerevanity metrics. Leaving aside the fact that media and venture capitalists lovevanity metrics, there’s real danger in trying to scale your company based onbelievingyourvanitymetrics.Actionablemetrics are always contextual, hencewill vary by company type

andstage.Ifyouhavealreadynailedproductengagement(inotherwordspeopleloveyourproduct)thenyourengagementmetricsarenolongertheonesthatwillmove the needle of your business. Although they should still be tracked toensure you don’t lose engagement, your focus might shift to acquiring moreusers to engage. Similarly, tracking data that tells you what color your “buynow”buttonshouldbeisn’tverycompellingasyoufocusonbuildingoutafieldsalesteam.Fromyourvaluestream,youcandeterminehowtomeasurewhatmovesthe

needle.The key to determining which metrics to measure and when is to optimize

fromtheinsideout:Entrepreneurswanttofocusonbuzz.Theyfiguretheirlackoftractioncomes

from a lack of eyeballs. What they’re really saying is, of course, the rightsegment hasn’t yet discovered the solution they built. In other words, thecompany is having trouble finding anyone who cares. Building positive buzzisn’tmarketing’sjob;it’stheproduct’s.Marketingcanincreaseawarenessoftheproduct,butiftheproductsucks,that’swhatthebuzzwillbe.Marketingisforleveragingbuzzthatalreadyexists.Engagementandpassionarecritical.Youdon’thaveabusiness ifyoudon’t

nailengagementandpassion.

Youwastereachwithoutengagementandpassion.Sowhatyoumustnailfirstisengagementwithyourproduct.1

Engagementmeansthatacustomerusestheproductinsuchawayastosatisfytheneed for theproduct. In otherwords, theproduct has performed the job itwas hired for. Customers have reached their goal. Their problem has beensolved.Sohowdoyoumeasureit?Goingbacktothevaluestream,whatisthespecificfunctionalityorinteraction

withyourproductthatdrivesthevaluepropositionpromised?Howoftenshoulda user interactwith that functionality to realize the promise.Measure that forengagement. If you don’t reach the expected level of usage, you must eitheriterateonthefunctionalityoryoumustchangeyourusageexpectation.Althoughpresentedhereasthreeseparatecomponentsofleanstartup—customerinteraction, viability testing, and actionable data—in fact, thesemust work intandem. For instance, data tells you what part of the business model needsimprovement; customer interaction and iterative testing help determine whatworks. It’s critical that these components arenotnestled inbig company silosthatonlyservetodelayfiguringthingsout.Youdon’twantbusiness-intelligencespecialists spending weeks generating custom reports that show engagementdipping, while productmanagers create 10-page feature lists, the design teamschedules their six months of deliverables, and software engineers work onissuespulledfromthebugdatabase.

Whether in a big company or small, high-tech or low-tech, cross-functionalteamsshouldbeorganizedaroundsolvingaproblemthatmovestheneedleofthebusiness.

CaseStudy:DisruptingtheUndisruptableBynowyouhavelikelyrealizedthatthefast-movinganditerativeleanstartupprocessesdon’tapplyjusttoInternetcompanies,butjusttohammerithome,wespokewithTomFishburne,founderandCEOofMarketoonStudios.TomranmarketingatMethodProducts,acompanythatdesignsandmanufacturesnontoxic,biodegradablecleaningsupplies.

LeanEntrepreneur:Asamarketer,howdidyoubecomeinterestediniterativeformsofproductdevelopment?TomFishburne:Itoccurredtomethatwherewewereinconsumerpackaged goods [CPG] seemed very similar to the early days ofweb development. We had these lengthy waterfall-style productdevelopment cycles that severely restricted how we could go tomarket.Onceyougetdown thepathof thedevelopmentprocess,there comes a point where you can’t change requirements, evenwhenyouhavenewinformation.

Andbecauseit’ssuchamassiveefforttolaunchnewconsumerproducts,youendupwithaphilosophywhereyoudoa lotofproduct testing, and then you have a big launch. But all toooften,thetestingdoesn’tmaptoreal-worldconditionsandyouendupwithabiglaunchfollowedbyabigfailure.Theresponseto thefailureissimplytoincreasetheamountoftesting,whichmakesitevenhardertogetideastomarket.Thismindsetalsocreatesasenseofriskaversion.Thecrazierideasneverseethelightofday,becausetheycan’tsurvive the testingmethodology toget tomarket.Even thoughthey may be great ideas, you never get the product into theconsumers’hands.Theonlyideasthatlauncharethosethataresimilar to what was already out there. This is problematicbecause,bydefinition,launchingthingsthataresimilartowhatisonthemarketmeansthere’snotmuchinnovation.

LE:Sohowdoyouapplyleanstartup–likethinkingtoaconsumerpackagedgood?Fishburne:The traditional schoolofCPGsays that itwon’tworkbecauseyouhavetoscaleuptomassiveproductionlines.WhatIlearned in my experience atMethod Products, a scrappy startupCPGcompany,wasthat,infact,youcouldplacesmallbetsanddothings on a small scale and then learn in themarket rather thanartificialpseudo-learningfromfocusgroupsandhugelaunches.

Weweretryingtocreateinnovationsinaverystodgycategoryofhouseholdcleaning.Sowehadtotakearadicalapproachtohavepointsofdifferentiation.To de-risk the market, we did a lot of rapid prototyping in-house, including a 3D printer that let us print new bottledesigns.IhadworkedinanenvironmentatGeneralMillswherewhenwe launched a newproduct, therewould be a structuraldesign stage when you do some exploratory work coming upwith a new bottle design, but then it was pretty much done.Therewasmaybe time for one revision, but because itwouldtakesuchalongtimetogetaphysicalsample,itwouldeatupalotofyourdevelopmenttime.At Method, we tried to flip that around and by having a 3D

printer in the building.We could have a discussion, turn thatintoasketch, then intoaCADdrawing,and thenwe’dhaveaphysicalbottleinourhands.Inlaunchingonenewbottledesignfor a concentrated laundry detergent, we had upwards of 45different design iterations from beginning to end, over a shortperiodoftime.Itwasfundamentallyagilesoftwaredevelopmentprogramming,andeveryweekwe’dhaveanewbottleandthenwe’dcontinuetorefineit.

LE:Whyisitimportanttogetfeedbackfromthemarketfast?Fishburne: The danger of any kind of innovation is that youbreatheyourownexhaustandjustlistentowhat’sintheroom.Wetried to listen to our insights and instincts but we also had toremain open to information coming from the outside. We hadvaryingdegreesof successat that.When I startedatMethodandwewereverysmall,wehadnocustomerinput;itwasjustlisteningto ourselves. A couple of in-market failures were reminders thatsometimes we miss the mark and it was important to have thecustomervoiceintheroom.LE:Wheredidyourfundamentalinsightsabouthowtoinnovateincleaningsuppliesstemfrom?Fishburne:Alotofmarketers in thesecategorieshadcometothepoint where they assumed this was “a low interest category.”People don’t care about design in cleaning because they alwayshave their bottles under their sink, forgetting the fact that peoplehavethosebottleshiddenundertheirsinkbecausethey’redesignedinsuchanuglyway.

Ithinksometimesthishappensinalotofcategorieswherethecategory knowledge hasn’t been questioned for a while, andpeoplecreateproducts that fit into the setof established rules,forgettingthattherecouldbeadifferentwayoflookingatit.Methodopenedupsomepeople’seyestothefactthatthereweredifferentwaysoflookingateventheseoldcategories.Itresultedin a re-evaluation of the overall category, and we sawcompetitors looking at what Method was doing and trying tocopyit.ThatraisedtheanteforMethodtocontinuetoinnovateandstayahead,becausethebiggercompaniesandbiggerbrands

were seeingMethodona shelf atTarget andquickly trying tocomeupwiththeirownversions.

LE:WhatdoyoufindinhibitsinnovationinproductdevelopmentforCPG?Fishburne:Ioftenthinkabouthowlargealaunchneedstobe.Bigcompaniesmaystartwithacrazyideaandthink,“We’regoingtodo a small-scale trial,” but very quickly they have to answer thequestion,“That’sgreat,buthowdowescaleitsothatitgoesinto3,000stores?”It’stough,becausebusinessesaretrainedtolookatthe big launch. They have two launchwindows a year, and theygunforthose.

ManybigCPGcompaniesarestrugglingwiththatbecausetheywanttobemoreinnovativeandentrepreneurial,yettheyhavetomeetthat3,000-storehurdle.

LE:Howdoyouusethemarkettoinformyourvision?Fishburne:I’minspiredbybusinessesthatcanlookatsmaller-scalein-markettrials.Methodtriedtodothis.WerealizedforthepriceofabillboardadinUnionSquarewecouldbuildaworkingpop-upstore instead. Sometimeswe sold products thatweren’t availableanywhere else in order to get realmarket learning.Effectively, itwas a free trial becauseweweremakingmoney in the store andmaking simple bench samples to see what people thought aboutthem.SoIthinktherearealotofopportunitiesforbusinessestodothat.

A lotofbrandsdopop-upstores formarketingpurposesbut itactuallycanbeapowerfulwaytogetin-marketlearningonnewideas too. Other markets can take the pop-up store approach,too, because it forces you to think about your brand in anentirelydifferentwaywhenyouhavetooutfitawholestoreasopposedtojustoutfittingashelf.Ifyou’rejustlookingatacompetitiveshelfinaSafeway,you’relookingtotheleftandyou’relookingtotherightandyouthinktoyourself,“HowdoIbreakoutoftheclutterwiththeseotherproductstotheleftandtheright?”That inherentlyputs theblindersonbecauseyou’re shapedbywhat the category looks like today. Whereas if you have to

create your own store you have to have your own vision forwhatyouwanttobeasabrandandthat’sprettypowerful.

NewProductsProblem-SolutionFitWhether you’re a startup or an existing business, when you’re building newproducts,whatmovestheneedleislearningwhethertheproductisalignedwiththe right customers and is solving a real problem.Much of the early data isqualitative.Setagoalforinterviews:“Wewilltalkto10customersandvalidatethatthey

haveproblemx.”Identifykeylearningobjectives,forexample:Customerbelongstothepreviouslydefinedmarketsegmentx.Customerfeelsdeeplyabouttheproblemhypothesis.Theyexperiencetheproblemyouthinktheydo.Customerisactivelyseekingasolutionorcurrentlyusesanunsatisfactoryworkaround.

You are looking for a pattern: If two people feel deeply about the problemhypothesis, five respond, “Meh,” and three have no idea what you’re talkingabout,youneedtoiterate.Askyourself:HowdoIfindmorepeoplelikethefirsttwo?Whatdifferentiatesthetwofromtheothereight?CanIrefinemyproblemstatement?

Gooutandobserveyoursegmentandinterviewthemagain.Iterateuntilyoufindapattern.Hopefullyyoucanseewhythere’snotmuchusefordevelopingaproductpriortofindingsuchapattern.As you uncover the segment that is defined around a shared problem or

passion,followupwithsolutioninterviews.Usethesamesteps.“We will interview the customers we have identified as early adopters to

validate that our solution idea interests them and will work in theirenvironment.”By looking for feedback,youare inviting themtoparticipate in

itsdesignversussimplytryingtovalidateyourexistingthoughts.Frankly,iftheyhavenoinputoftheirown,youhaven’tfoundearlyadopters.Pro tip: If your product leans toward the disruptive side of the innovationspectrum,askingcustomersstraightoutiftheywillusetheproductorpayforitisnexttoworthless.That noted,many first-time entrepreneurs still waffle about asking potential

customers topayforaproductstill indevelopment.NoahKaganofAppSumosuggests that entrepreneurs try his “velocity to dollar” hack: Ask for moneysoonerratherthanlater,whilestillindevelopment.Thesooneryougetanactualdollarfromacustomer,themorelikelyitisyouaresolvingarealproblem.Flip thevalueequation such thatyouaredoing thema favorbymaking the

productavailable.Thisisasimpleformoftest-selling,whichmostcertainlyhasitsplaceinany

entrepreneur’s toolkit, but don’t forget that test-selling can close off otherinteresting customer development possibilities. Could you have learned aboutothercustomerproblems?If responses are once again all over the map, you need to tighten your

segmentationorsolutionstatement.Youwant todiscern,forexample,betweenthosewhomightpreferamobileapplicationversusawebapp,afamilypizzeriaversus a hole-in-the-wall for hipsters, a product sold via the Internet versus abrickandmortar.Remember,whatproductyouendupofferingistotallyuptoyou.Youarenot

doingwhatyourcustomerssaytheywant,butrathergatheringdatathatinstructyou regarding how deeply the problem is felt, the likelihood of adoption ofdifferent solutionsbasedon currentbehavior, andwhether customers are earlyadopters for your type of product. If none of your early adopters use smartphones,amobileappmightnotbethebestplacetostart.

ViabilityOnceyou’vevalidatedthatacustomersegmentexiststhatfeelsdeeplyaboutthepainorpassionyou’re addressing,youmight start runningexperiments to test(1)customerbelievability;(2)productfit;(3)business-modelviability.The data you collect depends on the test you run. Using ideas from the

previous chapter or those that you dream up, run multiple experiments thatexpose problems with your segmentation, product ideas, or business-model

assumptions.Continuetointeractpersonallywithcustomersinordertocalibratethequantitativedatayou’recollectingfromtheexperiments.Eachtimeyourpatternbreaks,you’velikelyidentifiedadifferentsubsegment.

Youwanttotrackyourdatabysubsegment,bybucket.Thisishowyoulearntoscale. Assuming that your customers are fungible and homogenous, results inproblemsdowntheroad.Recalloursegmentmatrix:

Asyoubuildproductorcreateaviability test—forexample,aWizardofOztestinwhichyoupretendtheproductisdone,butyouactuallyfulfillitmanually—youmightfindthatsomecustomersyouthoughtwereinSegment1,actuallydon’t feel thepaindeeplyenough tosignup foryourproduct.Shouldyouputtheminadifferentbucket?DotheyfitinSegment2?Customer interactionandexperimentsareconducted touncoverandmitigate

business-model risks, including most fundamentally, is the problem you areaddressingworthsolvingfrombothyourandyourcustomer’spointofview,andisitsolvable?Surveys can help corroborate segment assumptions on a larger scale, but

shouldnotbereliedonsolely.Whenthedataindicatesthatyes,theproblemisworthsolving,you’vereached

thepointofbuildingproduct.Now’snotthetime,however,togobackinsidethebuildinguntil theproduct isdone.All through theproductdevelopmentcycle,youshouldcontinuetointeractwithcustomers.

Product-MarketFitImagine you have a group of customers you have been interacting with on aregular basis, and you have a deep understanding of them. You continue tointeractwiththemontwolevels:

1.Youvalidatehowyoucanacquiremoreofthesame.2.Youvalidatethattheproductyouarebuildingaddressestheirneeds.

Forthefirst,youbegintoruntestsonacquisitionchannelsandsalesfunnels2toensure thatyouunderstandwhere thisparticularmarket segmenthangsout,whoinfluencestheirdecisionmaking,andwhatyouneedtoprovidesothattheymovethroughtheemotionalstatesofthebuyingprocess.Tomeasure,againstartwithahypothesis:“PostingmybetainvitationtoHackerNewswillresultin1,000visitsand100

sign-ups.” If you don’t receive 1,000 visits, was there something wrong withyour post? Was it down-voted because it was deemed inappropriate? If youdidn’t receive 100 sign-ups,was yourmessagingwrong on the landing page?WasHackerNewsthewrongsite?Theresultslikelygiveyoudatayoucanacton.

For the second, you might perform usability testing and measure customerinteraction with your product. You don’t want to (and likely can’t) measureeverything. Initially measure that which you define as engagement andactivation.Activation is important to measure, since it exposes the gap between when

customers first sign up or buy and when they first try to realize the promisemadetothem.Manyproblemscaninhibitactivationduringacriticaltimeinthecustomer-vendor relationship, including password problems, activation e-mailsgoing to spam, shipping problems, poorly understood instructions, misfit,“blank-slate”effect,andsoon.

blank-slate effect: The blank-slate effect is the problem of a customer notunderstandingwhattodowithaproduct.Inwebdesign,for instance,auserlogsintoanapplicationforthefirsttimeanditisunclearwhattodonexttostarteffectivelyusingtheapplication.There are many ways to counter these issues, but you don’t want to work

around all of them if they all don’t affect you. On the other hand, you can’tafford tomiss them if they are occurring!Minimizing the time it takes to getcustomersgoingiscriticaltomovingyourbusinessforward.Tomeasureengagementinanearlyproduct,youwanttomeasurethespecific

functionality(features)thecustomermustuseregularlyovertimetoachievethevalue proposition. Is there ametric thatmight establishwhen the customer isdone; inotherwords, atwhatpoint should shehaveexperienced theproduct’sbenefits?Inotherwords,whatindicatesproductsatisfaction?You iterate on product development,messaging and positioning, andmarket

segmentsuntilyouseeorganicgrowthwithinadefinedmarketsegment.Thisiswhatthepassionmetricisfor.Thepassionmetricisyourownalgorithmbasedon somecombinationofproduct engagementdata,proclivity to shareproduct,andcustomerdemandformorefunctionality.It’s not always possible to directlymeasure these, but you should substitute

non-automated measures where instrumentation is not possible and offlinemeasureswhereonlinemeasuresarenotavailable.

OnlineEngagementWe’vediscussedengagementforonlineproductsquiteabit;that’smeasuringthespecific functionality people actually use consistently over time. Satisfactionwithotheraspectsofyourbusinessmodelincludeinterviews,managingchannelprograms,customersupport,andsoon.

OfflineEngagementDon’t let the offline nature of your business dissuade you from using onlinetools.You are limitedonlybyyour creativity inusing the Internet tomeasureofflinesatisfaction,engagement,andpassion.There are a variety of ways people track engagement of offline products,

including loyalty programs, satisfaction surveys, website tools (e.g., support),toll-free product-support numbers, retail-store interactions and observations,

third-partyreviews,traditionalmarketresearch,andsocialmedia.

SharingProductAswe’ve statedbefore, allmarketing isbasedonword-of-mouth.Back in the1970s,Breckshampooactivelyencouragedviralword-of-mouthactivityby itscustomers.2 The commercial says: “. . . and then you’ll tell two friends, andthey’lltelltwofriends,andsoon,andsoon,”asthescreendoublesthenumberofcustomerportraitsrepeatingthesamewords,anddoublesagain,andagain.FunnyhowInternetmarketers“discovered”viralmarketing!It’sfareasiertomeasureword-of-mouthmarketing(includingvirality)online.

Network-effectsproductsare those inwhich thevalueof theproduct increasesthe more the network of users grown. Theoretically, the value of you usingFacebook increases the more your family and friends are on Facebook. (It’sactually not as straightforward as it sounds, since themore people, the higherpotential for noise, the less valued the connections, and hence a decreasedproductvalue.Thequesttoimprovetheexperienceneverends.)To measure network-effected word-of-mouth, you measure the number of

invites a customer sendsout and thenumberof those invitations that result innewactivecustomers.Thisistheviralcoefficientandmustbegreaterthan1.0fornetwork-effectsbusinessesthatdependonscaletosucceed.Inotherwords,foreveryonepersonwhosignsupandusestheproduct,morethanoneoftheirnetworkwillalsousetheproduct.Ifyourbusinessmodeldoesnotdependonscalingtomillionsofactiveusers

(inorder tomonetizethatscale, typicallyviaadvertising),yourword-of-mouthcoefficientdoesnothavetobeviral;itdoesnothavetobegreaterthanone!Thatdoesn’t mean, however, you can’t try to achieve that. The higher the viralcoefficient,themoreorganicgrowthyouwin.To induce and measure word-of-mouth marketing for products that are not

network-effectsbusinesses,youcandoafewofthings:1.Runacampaignthatencouragesuserstoinviteotherusers.Thiscanbeatemporary friends-get-in-free or a long-term agreement like getting onemonthfreeforeverynewpayingcustomeryoubringonboard.2. Use social media tools like Facebook, plus coupon codes to trackconversions.3.Buildamethodintotheproductforuserstoinvitefriends,andtrackthat

asyouwouldtheviralcoefficient.Proclivity to share can also be measured through survey-based

approximations.NetPromoterScoreandMustHaveScorearetwoexamples.It’simportanttounderstandthatproductusabilityisthekeytogettingusersto

inviteotherswhetherornotyouhaveanetwork-effectsbusiness.Peopledon’tsharebadproducts,theyignorethem.

CustomerPullUrgencyforyourproductcanbemeasuredinseveralways.Demandforproductimprovementssuchasfeaturerequestsandevenproblemreportsoftenindicateastrong need. There’s a possibility for false positives from people trying to behelpful, but for the most part, people who don’t need your product won’tcomplainaboutit.Peoplereportingspecificintegrationrequirements,forexample,areindicating

they are traveling down the purchasing path. Others may voice a desire fordifferent channels,more stores carrying your product, for instance, or specificresellers.Theseneedtobemeasurednotasundifferentiatedrequests,butratherbymarketsegment.Youmustbeabletodiscernthedifferencebetweendemandsgenerating from valuable market segments and those from opportunisticsegments, some of whom may take your product or business in the wrongdirection.Therearecluesinfeedbackindicatingwhatyour“wholeproduct”lookslike.

Thefeatures,channels,environment,andpartnersyouridealcustomersegmentsrequire tofullyrealize thevalueyouaredeliveringishowyouexpandbeyondtheminimumviableproduct.It bears repeating that building features just because you can is a recipe for

missing out on what might make you wildly successful. Also, you don’tnecessarily build what is asked for, but rather you first must understand whythey’reasking.

ExistingProductsAlloftheprecedingappliestoexistingproducts,too,buttheprocessesaremorecomplex. You likely already have customers, though it is also likely that youhaven’tdone thework todivide them intousefulbuckets.Surveys are agood

waytohelpsegmentexistingcustomers.Keyitemstolearn:Whatisthecoreproblemtheyaretryingtosolve?Whatdotheyloveabouttheproduct?Whatwouldtheyliketoseeimproved?Whatbenefitshavetheyseenfromusingtheproduct?Howlikelyaretheytosharetheproductwithfriendsandcolleagues?(NetPromoter)Howdotheydescribetheproducttofriendsandcolleagues?Howdisappointedwouldtheybeifproductwerenolongeravailable?(MustHaveScore)Wheredothey“hangout”?Whoinfluencestheirdecisionmaking?

Useinterviewsandengagementdatatocorroboratesurveyresults.Iftherearediscrepancies,youlikelyhaveaproblemwithsurvey-questionwording.For complexproducts and those thathavebeenout in themarketplace for a

while, measuring product engagement is more difficult. More functionalitymeansmorethingstotrack.To get beyond this, you must be able to visualize customer product usage

similartothepre-purchasemarketingfunnelorpipeline:Thereareanumberofactions that a customer typically goes through before purchasing the product,and then there is thismagicmomentwhen prospects convert to customers bypullingouttheircreditcards.Similarly,thereareanumberofactionsacustomermustgothroughinorderto

realizeyourvalueproposition.Createanengagementmapthatmapsoutthecoreactions a customermust performwhen experiencing your product in order torealizevalue.Toeachaction,theremaybeanumberofsub-steps,anumberoffeatures that thecustomermight interactwith inorder toaccomplish that step.Continuetobreakdowntheproducttothelevelatwhichyoucanestablishthespecific product functionality where, if you increase its use, you increaseengagement.This is an example of how one figures out what moves the needle of the

business,assumingthatincreasedengagementmeansincreasedusersatisfactionthatmightleadtoproductpassion.Foramarketinganalyticsexample,engagementforthechiefmarketingofficer

(CMO)mightbeviewingreportsacertainnumberoftimes/week.Theremaybeother features, such as communication tools between the CMO and her

marketingmanagertorequestnewcampaignsorreports.Activationforthemarketingmanageriscreatingreportsandsettingupthetool

to track social media, conversion funnels, and marketing campaigns.Engagementmightincludeviewingthedashboardsonadailybasis.Theold-schoolwaytoimprovetheproductisforinternalsilostodebateover

whatfeaturestoadd:Saleswantsnewfeaturesthatovercomecurrentobjections.Marketingwantsnewfeaturestobetterpositionthecompanyagainstcompetition.Productmanagementwantsnewfeaturesbasedoncustomerfeedback.Engineeringwantsnewfeaturesbasedonnewcapabilities.Supportwantsspecificbugsfixed.

Debate and compromise lead to requirements documents, engineeringspecification,andasix-monthplanforthenextversion.Thismethodistooslowin today’sworld and doesn’t help in determiningwhat the customers actuallyneed.The high-performing, agile lean startup method means forming a cross-

functionalteamtoinvestigatewhyonemoduleisn’tperformingasexpectedandthen experimentingwithways to improve that specific functionality. The newfunctionalityistestedonasubsetofusersbeforebeingreleasedtoall.

CaseStudy:InstrumentingGrowth

Meetup’sstorytakesplacenotlongaftertheriseandfalloftheInternet,version1.Onlyafewyearsprior,businessvaluations,WallStreet,homeprices,andnaïveoptimismweresoaring.Whilesomewerechampioningtheendofbusinessdowncycles,otherswerebemoaningtheendofphysicalbooksandin-personsocialization.Thedot-comcrashand9/11changedallthat.Meetupstartedinearly2002inNewYorkinresponseto9/11,asawaytobringthecommunitytogetherintherealworld,offline.Itwasanexperiment:Wouldstrangersmeetofflineaftermeetingonline?“Remember,therewasn’tsocialmediaatthetime,”saysAndresGlusman,vicepresidentofcustomerdevelopment.“Eventheideaofonlinedatingwasextremelyweird.Wouldstrangersmeetonline?”Afewmonthsandfiftythousanduserslater,theexperimentlookedlikeasuccessandtheexperimentalculturethatfoundedthecompanybecameapersistentfeature.Meetupstartedasafree,crowd-sourced,voting-drivenmechanismforbringingpeopletogether.OnlyiftherewereenoughRSVPswouldthemeetupactuallyhappen.Throughthatsystemtheygrewfromzerotoaboutamillionusers.Afterhavingdiscoveredamarketneed,theysearchedforarevenuemodel.Theyweregettingpullfromdifferentcustomersegments.Andresexplains:“TheHowardDeancampaignwasusingit,allofthepoliticalcampaignsandotherlargeorganizationswereusingit,andtheywerethrowingmoneyatustobuildenterprise-driventools.Butthatwasn’treallyourvision.Wewerewatchinghowpeopleusedtheserviceandsawthatindividualswerecreatingtheirowngroups,ratherthanvotingonothers.”Sowiththemillionusersandmoneybeingthrownatthem,theymadeabigbettowardlocallydrivengroups.Theyre-architectedandre-launchedtheentireservice,drivenbywatchinghowpeoplewere

usingit.Thenextyear,theyriskedalienatingtensofthousandsofcustomersbyshiftingfromanentirelyfreeplatformtooneinwhichorganizerspaidgroupdues.“Itwasanextremelyharddecision,”saysAndres.“Itwasaverydifficultthingtogothrough,butitwasanotherbigexperimentwemadeinsearchoftherightbusinessmodel.”Meetuplostagreatdealofgroups,buttheactivitydidn’tgodownmuch.Whattheywereleftwithwasasmallerbutmuchmoreengagedaudience.Astheygrewandbecamemoresophisticated,theydidn’tmoveawayfromexperiments,butratherbecamemoreefficientattheirexperimentation.Soinsteadoflookingatthedataandmakingbigbets,theyusedthedatato“senduptrialballoons.”“Itsoundsobviousinretrospect,”Andresadmits.“Therearewaysoftestinginsmallways,priortoredesigninganentireexperience,toensurewe’reontherightpath.Soinsteadofinvestingallthetimeandresourcesintoabigchangeandthenhavingtosupportourusers,whynotinvestthetimeandresourcesintohelpingouruserslearnandevolveaswedo.”Allchangehasacostassociatedwithit.Notonlytheengineeringtimeandmoney,buttheimplementationandthecostsassociatedwithsupportinguserswhomustnavigatethechange.Meetuphasevolvedtheirapproachtowardlaunchingabunchofsmallexperimentsthatinformabigexperiment.Oncetheyhaveinsightintosomethingnewthatisactuallyworking,thentheydoubledownandmoveasdeepandasbroadastheycan,knowingtheyhaveahighlikelihoodofsuccess.“We’veputtogetherausabilitylabthatwillrun400–500usabilitysessionsthisyear,”saysAndres.“Ourobjectiveistoshortenthetimeinbetweensomeoneinthecompanythinking,‘Howwouldauserrespondtothis?’andactuallywatchingtheuserrespondtoit.Rightnow,thatmeansneverhavingtowaitmorethantwodaystoseehowauserwillrespondtosomething.”Havingachievedimpressiveusernumbers,figuredoutarevenuemodel,andimplementedfast,agileproductexperimentation,thekey

questionbecomes,whattotest?Whatmovestheneedleofthebusiness?Meetupknowsthedata.They’veexperimentedwithmarketingoutreach,corporateusers,andadvertising,butintheend,it’sallaboutthemeetups.Meetupattendeeseventuallyformtheirownmeetupsandthenstartpayingmonthlydues.“ThenumberofpeoplewhoareinterestedinattendingmeetupsisprovidedbyRSVPdata.YouhavetojoinMeetuptoRSVP.Fiftypercentofallmeetuporganizersstartedasmeetupattendees.Theirproductexperienceiscentraltothemcreatingnewgroupsinsidetheplatform.”Theproductexperiencerequiresadelicatebalance.Growthcanadverselyaffectvaluerealizedbyexistingcustomers.Thisiswhyfeature-mongeringispotentiallydangeroustoaproduct’slong-termsuccess.Meetupisactuallyanetworkofgroups.It’snotjustaboutbeingabletoparticipateinonemeetup,butabouttheabilitytoservemultipleinterestsbybeingapartoflotsofdifferentmeetups.“Oneofthethingsthatweexperimentedwithistosharemoreaboutwhoelseisgoingtothemeetups,howyouareconnectedtothem,andwhatothergroupstheybelongto.Thisverysimpletesthadahugeimpactonindividualsjoiningothergroups.Itprovedtheconceptthatweshouldbeoptimizingtheexperiencetohelppeopleunderstandmoreaboutwhoelseisgoingtobethere.”Totacklethisscopeofexperimenting,Meetuporganizesintofivetosixcross-functionalteamsthatarefocusedonwhattheycallan“I-statement.”Theteamsaddressapartoftheuserexperiencefromauser’spointofview.Theyaretryingtosolveaproblemorenablesomethingreallyinterestingfortheusertoexperience.Oneoftheteams,forexample,isananalytics-driventeamthatfocusesoncreatingsmartmeetuprecommendations.Sinceenagedusersjoinmultiplemeetupsandengagedusersbecomeorganizers,it’simportantthatusersgetrelevantrecommendations.Ateamistypicallycomprisedofaproductmanager,auser-interfacedeveloper,aback-enddeveloper,acommunityspecialist,andananalystdoingqualitativeanalysis.Theirchargeistodesignaseriesofexperimentsthataremeanttomakeprogresstowardsolvingfor

theircoreI-statement.Theymanageaportfolioofdifferent-sizedexperiments.Theyarenotjustsatisfiedwithsmallexperimentsthatmightekeoutmildpercentageincreasesinengagement,butinsistongoingafterbigchanges,too.Notthattheprocessisperfect.“Whenwewererunningexperimentsaroundimprovingmeetuprecommendationstousers,weendedupchangingbothhowwelabeledwhatwewererecommendingandthealgorithmforproducingrecommendations,”saysAndres.“Problemis,welaunchedthembothatthesametime.Wesawmassiveimprovement,40percentimprovementfromthechangeinthealgorithmandthechangeintheheader.Soatthepointwewerelike,‘Thereissomethingreallyfascinatingthatjusthappenedhere,’butwecouldn’tpointtowhatexactlyandwewentbackandthensystematicallyundidtheexperimentwedid.“Sowesaid,‘Okay,let’srollbackhalfthat.Let’srunaversionwithjustthetitlechanges.Let’srunaversionwithjustthealgorithm.’Weraneverypermutationwecouldsothatweteasedoutexactlywhatcausedthejump.Wewereabletogleanthisinsightintotheessenceofthealgorithmandhowpeoplerespondtoit.Wesaid,‘Okay,westruckgoldhere,howelsecanweusethatnuggetofinsightnowinotherpartsoftheexperienceandpropagateitthroughoutthesite?”WhathastheimpactbeenonMeetup?ImprovingrecommendationshaveledtohighermeetupRSVPs,moreconversionstopayingorganizers,andadramaticincreaseingrowth.Butthebigimpactcomeswithlearninghowtoasktherightquestions.“Oneofthereasonswe’reexperiencingsuccessrightnowisthatwe’veshiftedourfocusawayfromthinkingaboutourselvesasgroupsandshiftedtobemoreaboutwhat’stheindividualmember’sexperienceinsidethecontextofbeingpartofagroupormanygroups.“It’sasubtledifference,butwhenyoucometounderstandthatMeetupcreatesvalueasaresultofhelpingyoufindandengagewiththepeopleyouwanttomeetandwhoaredoingthethingsyouwanttodo,itsuddenlyisaskingthequestioninaslightlydifferentway.

Howdowehelppeoplefindtherightpeoplewhoaredoingthethingstheywanttodo?Askingthatquestionopenedoureyestoallofthesedifferentexperimentswecouldrun.Inrunningthoseexperimentswesawthattherewasanimpact,thatwecouldmakesignificantimpact.“Sowhatwe’vedoneoverthepastyearishaveanevolutionofunderstandinghowwecreatevalueforpeople.Wefundamentallybelievethatgreatcompaniesdothreethingsreallywell:(1)asktherightquestions,(2)executemanyrapidexperimentsinpursuitofthetruth,(3)doubledownonwhattheylearnfromexperiments.”

WorktoDo1.Buildyouractionabledataplan.

2.Buildanengagementmap.

Notes

1.Thematterofbuildingdata-informedsalesandmarketingfunnelsisimportantenoughtomeritastandalonechapter.ToskipaheadpleaseseeChapter9:RealVisionariesHaveFunnelVision.2.Seewww.youtube.com/watch?v=TgDxWNV4wWY.

Chapter8

TheValleyofDeath

TheValleyofDeathiswherestartupsgotodie.Youhaveaminimumviableproduct(MVP)andalittlecustomerinterest.Or

youhaveanMVPyou’vebeeniteratingformonthsandhavecustomers,butnoserious traction. Or you have a solid product some customers are passionateabout but little organic growth. Or you have a pretty impressive number ofpayingcustomers,butcan’tfigureouthowtofindmore.Oryou’regrowingandfeelpoisedforabreakout,butyourmarginsarevirtuallynonexistentandyouareskatingontheedgeofinsolvency.Yourviralcoefficient is0.42.YouareofficiallyaMinimumViableBusiness

(MVB).Ifyou’reonthedisruptivesideoftheinnovationspectrum,yourdeathwillbe

lonely, one of indifference as you wander aimlessly, unknown to yourcompetitionandcustomers.On theotherhand, ifyour ideahewscloser to thesustaining side of the innovation spectrum, your deathwill be instigated (andcelebrated!) by your competition andperhaps evenunknowingly facilitated byyouranti-segments.Nearly all startups can build product. This isn’t a problem. Founders fail to

create enough value for customers; or they create value, but not for enoughpeople; or they fail to truly understand the core value they provide and whomightmostbenefitfromit.

Theydon’tunderstandtheirmust-haveusecase.Ortheydon’tunderstandhowto translate thewinning use case for one group of customers to use cases forothersegments.Theyhavecustomers,butlittlepassion.Theyhavecustomerswithpassion,but

theydon’tknowanythingaboutthosecustomers,sotheydon’tunderstandhowtogetmore.The typical entrepreneur’s response to all this? Build features or hire a PR

agency.Neitherislikelytowork.Gettingoutofthestartup“ValleyofDeath,”asEricRiesdescribesit,requires

using the same principles we’ve already outlined—customer interaction,experimentation,anddata—buthowyouusethesemustevolve.You’relikelynolonger validating initial assumptions. You need new assumptions, newexperiments.ToescapetheValleyofDeathyouneedtomovebeyondyourminimumviable

product, and you need an optimized conversion funnel and a customeracquisitionstrategythat’sreadytoscale.TheendoftheMVBphaseisproduct-marketfit.Way back in the day, we worked with an enterprise software company

deploying their product for a leading U.S. financial-services company in aconsumer-facing application. It took 50 seconds for customers to log in. Thelifebloodofthesoftwarecompanywasitsprofessionalservicesteam,whichhadtocustomizeand integratecomplicated,buggyproduct into thehuge,complexsystemsofearlyFortune500customers, the revenue fromwhichcouldnotberecognizeduntilcustomersign-off.Theprofessionalservicesteamjumpedintosolvethelog-inproblem,through

a straightforward, analytical, and iterative process of eliminating bottlenecks.Theydidn’tsearchforthebiggestbottleneckbutratherforthefirstonebetweenthe user and the desired result. They didn’t perform workarounds; they fixedproblems.WhenthecoreengineeringteamwasrequiredtofixAPIs,theywereforced todespite theircomplaining.Accumulatedworkaroundswere likely thecauseoftheprobleminthefirstplace.

The team knocked off a five-second issue here, a three-second issue there,until discovering a full table scan that took25 secondson a large table! Issueresolved.This is how to think of your startup endeavor, as well. What’s the next

bottleneck?Howdoweremoveit?

MinimumViableProductAtarecentAgileConferenceinScandinavia,presenterDr.VenkatSubramaniamsaid,“programmersshouldhavethecouragenottowritecode.”Thisappliestoallstartupproductdevelopersnomatterwhattheproduct.Please.Stop.You should be building out product featuresonly if the following applies to

you:Youknow.If you are still learning, you should not be building features; you should be

buildingexperiments(whichmaycontainfeatures).It’sanimportantdistinction.Thinkofyourproductashavinganintrinsicfeaturethreshold.Thisthreshold

mapstothepainorpassionofyourmarketsegment;oncethatthresholdismetandthepainisresolved,addingmorefeatureswillnotresolvemorepain.Thisbearsrepeating:Economistscallthisdecliningmarginalutility—wegoasfarastosuggestthat

if you build features into your product, release them to theworld, and do notmeasure whether they are used or desired, you are inflicting harm to your

existing value proposition; that is to say, the marginal utility of too manyfeaturesisnegative.Increasingstuffthatdoesn’taddvaluedilutesexistingvalue.Period.It’salsoextremelywasteful.Yourtestingteamiswastingtimetestingit.Your

sales team is wasting time and money selling new unwanted features. Yourmarketingteamiswastingtimemarketingit.Yoursupportteamiswastingtimesupportingit.

Toknowmeansthecustomerdemandispullingthefeaturesoutofyou.Howdo you know? By understanding the customers within your target segmentdeeply.Youhaveknowledgeandsignal:

Yourcustomershavebeensegmentedintobucketsgroupedbypainorpassion.Youcanprioritizewhichsegmentsare“highvalue;”keytogrowth.Youunderstandwhichcustomersarepassionateaboutyourproduct.Featurerequests,supportneeds,feedback,andengagementfromthesespecificcustomersorchannelpartnersisincreasingandurgent.

Thedirectioninwhichyou’rebeingpulled(whatandwho)iscongruentwithyourvision.1

Whatshouldengineersbedoingifnotbuildingfeatures?Plenty:Fixingbugsandrefactoringexistingproduct.“Goingtothesource”—inotherwords,goingtothecustomerandlearningaboutcustomerneeds.Servingoncross-functionalteamschargedwithimprovingcompanyoperationalprocesses.Automatingquality-assurancetests.Designingandimplementingnewexperimentsrelatedtoexistingproducts.Experimentingwithnew,disruptiveideas.Improvingyourshadowforce.

These are not rhetorical suggestions. Leading organizationsmust adapt. Theelimination of old-school silos—not through touchy-feely, new age, kumbaya,can’t-we-all-just-get-alongidealism,butthroughbuildingcross-functionalteamschargedwithfindingandeliminatingbusinessmodelbottlenecks—isthekeytosuccessinthevalue-creationeconomy.

YourFirstMVPTheminimumviableproduct(MVP)isyourfirstattempttodelivervaluetoyourcustomer. If youhavemade the effort to interactwithpotential customers andhaverunexperimentstestingyourcustomer,problem,andsolutionassumptions,your first MVP will be the first effort to deliver validated value to a known

customer.Inthiscontext,anMVPisnotalandingpageoramockupofyourapplication.

It’snotamodelornonfunctioningprototype.Yourminimumviableproduct iscomprised of the least amount of functionality necessary to solve a problemsufficientlysuchthatyourcustomerwillengagewithyourproductandevenpayyouforit,ifthat’syourrevenuemodel.Itwilltakemorethanonetry.You’renotgoingtonailitthefirsttimeout.In

fact,you’reneverdone.Intoday’svalue-creationeconomy,there’snosuchthingasdone,whichiswhyyoumightaswellgetyourproductinthehandsofafewcustomersassoonaspossible.Youwon’t learnwhatyou’remissingorgettingwronguntilyouletsomeonetryanduseit.HencetheminimuminMVP.Yourproductmayormaynot requireanartfuldesign,42 features,beautiful

packaging, a kickstand, and blue buttons to be viable to your chosen marketprofile. A viable product, at the very least, delivers just enough of its valuepropositionthatcustomerswilluseit.Thetrickisadmittingyoudon’tknowallthat’srequiredtobeviable.Releasing early to early adopters is the most efficient way to learn what’s

required. Too much product hides the specific functionality that providesviability. The core functionality that provides value such that customers aresatisfied because the product fulfills its promise forms the foundation of yourfuturebusiness.Itdoesn’tguaranteehighgrowthorevensuccess,butyoucan’tachievethose

withoutit.Most failed startups fail in the MVP phase. Iteration through features can

quicklybecomeflailing,tothepointwherefoundersarenolongerabletorecallthevisionortheoriginalvalueproposition.Orperhapsthevaluepropositionwasvaguefromtheoutset!Reid Hoffman, founder of LinkedIn, famously said “If you are not

embarrassedbythefirstversionofyourproduct,you’velaunchedtoolate.”Theideacausesmassivecognitivedissonanceinthestartupworld.Entrepreneursarescaredthat:

Abuggyproductwillkillthebrand.Customerswillleavebehindanunfinishedproductandneverreturn.Theirideawillbestolen.

BuggyProduct

Althoughperhaps reasonableat firstglance, these fears are largelyunfounded.The suggestion to release a product earlier rather than later doesn’tmean youshouldreleaseanunusableproduct.

UnfinishedProductInvestorPaulGraham says: “[launch]when there is at least some set of userswhowouldbeexcitedtohearaboutit,becausetheycannowdosomethingtheycouldn’tdobefore.”2Youdon’ttrulyknowwhenyouruserswillbeexciteduntilyou try to excite them.Launchdoesn’tmean release it to theworldandmakehay about it. Itmeansget it in front of earlyusers tounderstandwhether youhaveuncovered thequantumofutilityorwhetheryouareat leaston the rightpath.Entrepreneurs often swing from one extreme to another. If they focus on

minimaltheyforgetviableandiftheyfocusonviable,theydon’tknowwhentostopbuilding.3

Ifyouhaveacontrolled,earlyreleasethatturnsouttonotbeviable,it’seasiertoretoolcomparedtobuildinguntilyouthinkit’sdone,whateverthatmeans.Thisisthepointofiteration.Youmakeareasonablestab,otherwiseknownas

a hypothesis, also known as an educated guess. It’s not exactly right. Somecustomersseemtobekicking the tiresbut inarather lackluster fashion.Makechangesandtryagain.If,ontheotherhand,youkeepbuildingfeatures,delayingyour release—and then the product isn’t exactly right—not only did you losetimefinding thatout,but it’sharder toknowwhatyougot rightandwhatyoudidn’t!Youwant tounderstandwhatproduct functionalityproducesyourmust-have

usecase,as thisprovides thefoundationofyourproductmovingforward.Themust-haveusecaseistheoneyoumustnotdestroyasyoucontinuetobuildouttheproductandbringonadditionalmarketsegments.Onceyouareabletoprovidetheutilitythatexcitestheuser,youwillfindthat

the early adopters are willing to put up with glitches. This is the classicdefinition of the early adopter. As thought leaders in their space, or as socialleadersthatotherslooktofornewproducts,theytendtoforgiveproductissuesaslongasthecorebenefitaddressestheirpainorpassion.Thegreatironytotheideathatcustomerswillneverreturntoafaultyproduct

isthattheentrepreneurswhoespousethisphilosophystaketheirentirebusinessontheirpersonalbeliefthattheirfullyfleshedoutproductisn’tsomehowfaulty.

But there’salwaysonemorebug to fix,onemoredesignelement tocleanup,onemore feature toadd.Youknow thisbecauseyoudon’t fireyourengineersand designers after release. You need them to fix bugs, clean up faults, addfeatures.ButIthoughtyousaidtheproductisdone!Entrepreneursoftensayyoucan’tlaunchearly,becausetheproductisn’tdone,

butonceithasbeendeclareddone,theythenthinktheonlythinglefttodoistotelltheworldasquicklyaspossible.Doneonlyreallymeansthedatetheychosemonthsagohasarrived.Becausethedayarrives,itmustmeanit’stimetolaunchtofullfanfare,praytothemediagodsthatTechCrunchhighlightstheproductonits front page; that theWall Street Journal declares you a visionary.Wemustreleasebecauseitwasintheplan!

Afterall,thesefoundersbelieve,theonlythingmissingisproductbuzz.What about beta programs, you ask? Most beta programs are part of a

prescheduledlaunchprocess,primarilyusedtofixmajorbugs.Betausedtorepresentafeature-completeproduct.Thetermhasevolvedover

time to thepoint that in someorganizations, thebeta release is in essence thefinal release, because the developers recognize that it will continue to evolveovertime.Thisreallyistheessenceofmostsoftwarethesedays,sobetaceasestohave realmeaning.Google’sGmailwas inbeta for fiveyears,waybeyondproduct-marketfit.Ifyouarenotgoing to releaseearly,howdoyouknowwhen theproduct is

done?What if you’re wrong? Building a big product does not make successmore likely.Remember thefeature threshold; thewinner isn’t theonewith themostfeatures.

StolenProductTheideathatpeopletrolltheInternettostealideasisamusing.It’scharacteristicofeitherover-believinginyourideaornothavingenoughofanidea.Considerthis:

Afterreleasingaproduct,thehardestthingtodoistogetpeopletocare.Contrastthattothefearthattrollswillnotonlyfindyourproduct,butlaunchacompanytocompetewithit!Haveyouheardofanystoriesinwhichanideawasstolenbecauseitwasreleasedtooearly?Faceit,thereareveryfewtrulynewideas.It’shighlylikelysomeoneisalreadyconsidering,ifnotbuilding(orhasbuilt),youridea.You’regoingtolaunchsomedayanyway,right?Allthetimeyou’renotreleasing,you’renotgettingearlycustomers.Customersarewhatcreatethebusiness!

It’sactuallyhardtobuildsomeoneelse’sidea.

CaseStudy:TheMinimumViableAudience

Whetheryoucallthemyourcustomers,yourmarketsegments,oryouraudience,theyprovidethenecessarycontextparamountineffectiveproductdevelopmentofanysort.WespokewithBrianClarkofCopyblogger,consideredoneofthefoundingfathersofcontentmarketing,abouthisconceptoftheMinimumViableAudience.LeanEntrepreneur:HowwasCopyblogger born and howdoes itrelatetotheMinimumViableAudience?BrianClark: Initially, the ideawas that ifyoucreatehigh-qualitycontent,peoplewillshareitifyoucandrawenoughattentiontoitinthefirstplace.Asaone-personblog,Iwroteacoupleofarticlesaweek.Ididn’tpublisheverydaybecauseIwantedeverythingthatcameouttobegood.Butmyfundamentalideawas:Ifyoubuildan

audience,youcanbuildabusiness.I had no idea what I was going to sell. No idea. I had noproducts, no services. I really didn’t want to be in a servicebusiness. I looked at companies like 37signals and I thought,“Oh,I’msoenvious.IwishIcouldstartasoftwarecompany.”It’sfunnybecausesevenyearslater,we’reasoftwarecompanywithahundredthousandcustomers.ButitwasallbecauseIhadbuilttheaudienceandalloftheopportunitiesthatsubsequentlycame to me, again, because I had built the audience. And assuch,we’re intimatelyfamiliarwithwhat themarket thatwe’dcreated wanted. That’s invaluable to the lean concept forstartups—really,foranybusiness.

LE:Thisrelatesbacktothebeginningofblogging.Clark:Theideastartswiththebloggingsubculturegettingstartedin late 1999, early 2000. By 2005, it was starting to get to thatpoint where people were thinking, “Okay, there’s got to be acommercial angle to blogging.”At that point,many peoplewerestillarguingwhetheritwasokaytoputadsonblogs.

Istartedtalkingabout it,andsaid,“Youknowwhatyoureallyought to do? You ought to build an audience and sell themthings.” And everyone just freaked out, but because that wasradicalcomparedtotheconversationthatwashappeningatthattime.AndIcantellyouforthefirstthreemonthsofCopyblogger,itwas awfully lonely. I hadno contacts, I hadno friends.EverydayIhadtocreategreatstuffandsomehowdrawattentiontoit.The initial three months, I tried things, a lot of them failed.Someworked.I learnedfromthat.Youcan’tbuild itandhopethey come. That doesn’t work. But if you put something upthereandyouworktogetattentiontoitinsomefashion,you’reeithergoingtogetindifferenceoryou’regoingtogetapositiveresponse.During thatperiodof time, Iwasgoing through thisprocessofdoingmoreofwhatworkedanddoing lessofwhatdidn’twork.In the process I got to the point where I had enough of anaudiencewhere they started tellingme, they startedpromoting

thecontent themselvesand thatgrew theaudienceorganically.Butmostimportantly,Ithinkfromthisdiscussionstandpoint,Istartedtogetaninsightintowhatwaslackinginthemarket.Youraudienceisnevergoingtotellyou“IneedXYZ.”They’regoingtotellyou,“Ihavethisproblem.Ihavethisdesire.Anditisunfulfilled.”That,tome,isentrepreneurialgold.Ialwayshadfaith in that process and that’s how the whole company wasbuilt.

LE: How did you know that build-it-and-they-will-come won’twork?Clark:IthinkIhadavisionbutvisionhasgottobeflexible.Youhaveageneralviewpointofwhatyouwanttosharewithpeople.

You’ve got to stick with what you know but, when it comesdown to the brass tacks, the audience is going to say, “Yes, Iwanttoknowmoreaboutthat,”and“No,Idon’twantthat.”Ifyou just relentlesslypush forwardwhatyou think thatotherpeopleneed toknow,wecall this“feedingpeoplebroccoli icecream.”Yes,it’sgoodforthem,butthey’renotinterestedinit.You’rebasicallylostoutinthecold.You’renothavinganykindofresonance.What are you going to do about it? I think from the social orideological standpoint, maybe you carry forward. As anentrepreneur, I think you go with what the audience or theprospectivemarketactuallywants.

LE:Howdoaudiencesdrivepivots?Clark:IwasthrilledandIevenwroteaForbes4articleaboutthiswhen I saw that you two were mentioned in a Fast Company 6

articleusinganexampleoftheBeastieBoys,whostartedoutasapunk band in New York back in the 1980s, when hip-hop wasemerging.

These were very progressive guys from Brooklyn andManhattan in a punk band, then they eventually startedincluding rap songs in their act, and they saw the audiencereaction.Itwasamuchstrongerreactioncomparedtoanythingthattheyhavebeenuntilthen.Thisisabrilliantexamplebecausehowdo

you pivot without feedback? And how do you get feedbackwithoutanaudience?ThatwasthestoryofBeastieBoys.ThatishowtheybecameaRock and Roll Hall of Fame rap group that started as threeJewishguysasapunkband.That’sanamazingstorybutit’sthesamestoryIthinkyou’reseeingplayoutwithstartupswhostartout with an audience online because like you two have saidbefore,it’ssimple,butit’snoteasy.But it’s so well worth it because in addition to starting asuccessful company, which is hard enough, you’re building amedia asset, right, with the website that builds the audience.That’s worth the money in itself, and I don’t think you candiscountthat.I’vebeenofferedacouplemillionbucksforCopyblogger.com,not the businesses that generate the revenue. That’s prettyamazingwhenyouthinkaboutit.

LE:Howdoyoucounselentrepreneursafraidtotakethefirststep?Clark: I tell you what, I admit to small-business people andentrepreneurs all the time that I’m a freak. I was a writer whostarted a software company. That doesn’t happen often. I wasgearedtomakecontent,tocreatestuff,toputitoutthere.

Iwasdriventodothatevenattheexpenseofmyformercareer.In that sense, I’m strange. But the whole concept behindEntreproducer is you don’t have to be the content creator.You’re the entrepreneur. And that is an aspect to modernbusiness thatwe’re seeingemerge thathas todowithcontent,how one company markets better than the other. How onecompanyprovidesasalesexperiencethatissuperiortoanothercompany’s.Whydoesthispersonchoosethatcompanyinoftenundifferentiatedmarketing?Butyouhavetothinklikeaproducer.Youdon’thavetobethewriter.Youhavetobetheguywhomakesitallcometogether.Isn’tthatwhatanentrepreneuris,theperson,themanorwomanthatbringsitalltogether?Andattheendoftheday,I’mjustsaying,whynotalsoaddtheaudiencein?

Thereareinstancesinwhichtheleanstartupmantra“releaseearly,releaseoften”needstobemorecarefullymanaged.

IntheB2Bworld,somecustomersdon’twantearly-releaseproducts.Theirowninternalprocessesdemandthatproductsmustbefullyvettedbeforetheyarereleasedintotheirparticularenvironments.Inotherwords,thesecustomersarenotearlyadopters.Large,well-knownbusinessesneedtoprotecttheirbrands.Releasingproductsthatareminimallyviabletosome,butbuggyandpoorlydesignedtoothers,couldpotentiallyhaveanegativeeffectontheirreputation.Evenwithreleasestoacontrolledaudience,there’sachanceofhavingnegativeresultsbleedovertounintendedaudiences.Startupsdon’ttypicallyhavethisrisk.

Even in these cases, it’s worth considering that not releasing doesn’t reallyresolvetheprimaryissue.Ifyouwaittorelease,youarestillassumingyouknowwhatthefinalversionlookslike.Waitingtoreleaseafinishedproductisgoingtogainyoualotmorenegativeattentioniftheproductisn’trightversuslettingoutacontrolledrelease.Thereareoptions:Becarefulwhichcustomersyouchoosetoreleaseearlyproductto.Youcould,ofcourse,releaseunderadifferentbrand.Inotherwords:Createanewentitysolelyforthepurposeoftestingyourideas.Youcouldmanagethepress.Themediawantsexclusives.Sogiveaninterview,talkaboutproblemsintheindustry,yourvision,andwhenyouhopetogettheproductouttothemasses,whiletestinganearlyreleasewithanexclusivesetofcustomers.It’sreallymorelikelytobehardertolandtheinterviewthanhavingtofaceamobofangrycustomerswhowillneverforgiveyouforreleasingsuchahorribleproduct.Buildandreleaseseparate“mini”productsthattestriskyaspectsofyourmainproduct.

BeginningoftheEndorEndoftheBeginning?

Onceyou’velearnedwhat it takestodeliveryourvalueproposition, there’snolongeraneedbeminimal.Onceyou’vevalidatedthevalueyouarecreatingandforwhom,it’stimetoexpandyourproductsomehow.

We’veheardstartupsdramaticallydeclare,“We’renotdoingleanstartup.WehavelotsofmomentumandouruserswillleaveusifwedoanMVP.”Exactly!Orrather,exactly,youshouldnotbeminimallyviableafterachievingproduct-

marketfit.Buildouttheproduct,butcontinuetotestandreleasequickly:Buildwithinthedemandsofyourtargetmarketsegment.Buildtoexperimentwithadjacentsegments.Buildtoblockcompetition,ifnecessary.Buildtocreatepassion.Don’tinhibitthecorevalueproposition!

The idea of the whole product is that there may be more to your valuepropositionthanyoufirstthoughtorfirstbuiltintoyourMVP.Youmighthavetoprovideadditionalproducts,features,orservices;supportdifferentplatforms;ormaketheproductavailablethroughotherchannels.Thegapbetweentheinitialproductandthepotentialproductismadeupover

time or might be fixed in the near term with partnerships. In the end, thecustomer’s experience with the whole product may represent the differencebetween a satisfied customer and a passionate one, or what moves you fromearly adopter customers to early mainstream. There are many aspects of thewholeproductthatyoucannotknowuntil(1)youhavevalidatedyourcustomerand (2) you have validatedwhat solutionwillwork. It’s ludicrous to plan, letalone implement, a whole product if you have not validated your core valueproposition,yourmust-haveusecase.Therearetoomanyunknowns:

Howdoesthecustomerexpecttousetheproduct?Howdoesthecustomerexpecttobuy?Willotherecosystementitiesbenecessarytomybusinessmodel?Isthereanythingbeyondtheearlyadopter?

CaseStudy:SocialImpactLeanStartup

Rooztisamarketplacethatconnectscause-orientedretailbrandswithonlineshopperswhowanttobuyfashion-forwardproductsthat“giveback.”Ratherthanbuildouttheplatformin2009whenhefirstenvisionedit,founderandCEOBrentFreemansoughttoprovethat

suchamarketexistedfirst.Likemostconsumer-facingbusinesses,theirprimaryriskwas,“Dopeoplecare?”Brent Freeman: Almost everyone says they want to supportsocially conscious, causes-related, responsible brands, but wewantedtoprovethatpeopleactuallywouldshopthatway.

TheirfirstMVPwasjustane-commercewebsitereleasedunderadifferentbrand.“Weknewthenamesuckedbutwejustlauncheditanyways,”Brentsays.Theybarelyknewwheretostart,buildingasimplewebsitethatleveragedAmazoninawaysuchthattheycouldpickoutthecause-orientedproductstheywantedtosell,embedthemintothesite,andcreatetheshoppingexperiencetheyenvisioned.WhenpeoplewenttopurchaseaproductitsimplylinkedouttoAmazon.“Wewereaglorifiedaffiliateportal,butforproductswewantedtosupport.”Theystartedtheirmarketingeffortsinlearningmodeaswell,reachingouttofamilyandfriends,runningsmall-scaleGoogleAdWordsandFacebookadcampaigns;enoughtomeasuremarketresponseandseeiftheirhypothesiswouldactuallybesupportedbycustomerdollars.Freeman: We knew the product wasn’t perfect. We knew ourconceptwasn’tperfect.Butwealsoknewthatifwethrewenoughstuffagainstthewallandtalkedwithourcustomers,we’dseewhatreally sticks.Most importantly,weknew thatprogresswasbetterthan perfection, and that ifwe tried to come upwith the perfectideabeforewelaunched,thatwewouldsitthereforalongtime.

Iteratingconstantlybasedonlearning,theyeventuallybuiltoutaproductthatactedasavirtualmarketingmachineforcause-relatedbrands,whichtodayboastsover100,000users,200brands,and5,000SKUs.Thekeytosuccesshasbeenprovidingeasy-to-usetoolsthatteachandenablebrandstoengagewiththecustomersRooztbringstothemarketplace,primarilythroughhighlyengaginge-mailnewsletters.Theirlearningisnowconcentratedontestingothercustomer-engagementvehicles,likeapps,andseeinghowtheycanreducetheconversionfunneltoaone-clickexperience.

AnMVPTakesGutsWhat’sthebiggestrisktoyourbusiness?Countlesstimeswe’veaskedentrepreneursthisseeminglysimplequestionand

countlesstimeswehearthesameresponse:Generatingbuzz.Customeradoption.Ineedusers.Growth.Scale.

Ifyouhaveanythingatallofinterest,gettingcoverageintoday’scrazed,pageviews–ruledmediacultureisn’tthatdifficult.What’shardisfindinganyonewhocares.Okay, so many of you read the first sentence and ignored the second.

“Really?”you’resayingtoyourself.“Icangetmediacoverage?”Sure.Haveyouactually triedsendingane-mail toaneditoratyour favorite

onlinerag?Theyarebeggingforstories.Yes,youstillneedanangle,butit’salink-bait lifeandyour storydoesn’tevenhave tobe real.5But ifyouhavenotproventheviabilityofyourproduct,please,pleasedon’t.Astartupwespokewith inNewYorkCity servesurbanpetowners. It’s the

sort of idea themedia loves. It’s cute. They received tons of attention, all ofwhich they felt wasworth bragging about. Here’swhat their adoption lookedlikeafteralltheTVcoverage:Pageviews Sign-ups Engagement10,000/day 2,500/month 5/week

Whatdoesscalingacquisitiondoforthiscompany?Regardlessofwhatyoumightthink,thebiggestobstacletoyourideaisthatno

one cares. The hardest thing for you to admit is that though your friends andfamily tell you thatyouhaveagreat idea, it’s actuallyworthless.Yourbaby’sugly.You have toomany features.You have toomany ideas packed into oneproduct.Whenyoupull a product off the shelf of a retail store, howmanyproblems

doesitsolve?Guesswhat?Thatyousolveaproblemthatyouyourselfendure isgreatand

all,butitdoesn’tmakeabusiness.Whenyougotoutofthebuildingandwent

aroundandsaidtoyourpotentialcustomers,“Wouldn’titbecoolif...,”or“Igotthisgreatidea...,”or“Whatdoyouthinkof...,”or“Wouldyoupayfor...,”youdidn’treallygetanymarketvalidation.We once worked with a team at a Lean Startup Machine workshop whose

leaderinsistedthatpeoplearemotivatedtoovercomepersonalobstaclesthroughpublicurgingbytheirclosestfriends.There’snodoubtthatforsomethisisso,butfeedbackamongmentorsandotherworkshopparticipantswasresoundinglynegative. Feedback outside the building conducted by team members wasoverwhelmingly negative. Yet the feedback the leader himself found wasunanimouslypositive.What’swrongwiththispicture?It’sveryeasytofindevidencetobolstertheviewsyoualreadyhave,especially

those that you are emotionally attached to. Very few minds are changed inpoliticalorreligiousargumentsoringreat-ideadiscussions.It’sdifficulttoletgoofideas,tofacethefacts,asitwere.It’sdifficulttogo

throughaprocessthatseekstoinvalidateyouridea.BythetimeyouarebuildingyourMVP—again, as opposed to a viability experiment—you should bewellbeyondemotionalevidencebeingtheropeyou’rehangingyourhopeson,tomixametaphor.Whereas your viability tests were your best attempts at “all right, if this

doesn’twork,myideasandassumptionsareseriouslywrong,”theMVPisyourfirstattemptat“allright,ifthisdoesn’twork,myimplementationiswrong.”

ThinkingThroughViabilityFundamentally, yourMVP should be the validated core functionality of yourvalue stream. It’s the discrete functionality that fulfills the promise you’remakingtothecustomer.Nothingmore,nothingless.AppFogbuilt theirproductfromtheoutsidein.Whatis theminimum—from

the customer point of view—required to achieve the value promised; theminimumtosatisfytheneed?Toshootlongistowaste;toshootshortistolearnwhat’sdeficient.Minimum doesn’t mean sucky, but sucky might be sufficient; viable is the

crux;minimallyvalue-creating.Perhapsforyourparticularsegment,viabilitymeans:Thelookhadbetterrock;itmustbeaestheticallypleasing.Itmustfitseamlesslywithinthecustomer’sexistingworkflow.

Itmustrequirenomorethanthreeclicks.It’ssoeasyanyonecandoit.Customermustbeabletoeasilyopenpackage,butitalsomustbetamperproof.It’sdisposable.It’sgreen.Itmustintegratewithsystemx.Itmustcompletetasksxandy,andreportbackz.

Orlookingatwhatitmightnotneedattheoutset:Aterminalcommandlineissufficient.Packagingissuperfluous.Usablemorethanahandfuloftimes.It’shardtouse,butworks.Lookskludgy,butdoeswhatit’ssupposedto.Doesx,butnotyety.Reportingnotautomated.Requiresmanualintervention.

CaseStudy:ButMyMarinaraIstoDieFor!

Upuntilthe2008financialcrisis,DanPalacioswasareal-estatedeveloper.Ouch!Duringthemeltdown,Danlostmostofwhathehadspentyearsbuilding.Alistofremainingassetsincludednotmuchotherthanakillermarinarasauce,accordingtoDan’ssupportivebutrathernonmonetizablefiancéeandfriends.Normally,duringarecessiononedoesn’tlooktoopenarestaurant,letaloneaChicago-style,gourmetpizzarestaurantusingfresh,organicingredientsandsellingthemat$25perpie,indowntownSanDiego.Thingsdon’tlookupwhensportingacreditreportfeaturing

recentforeclosures.Theold-schoolmethodofopeningarestaurantseemedunlikely.Thechanceoffindingtheinvestmentnecessarytoleaserestaurantspace,buildoutakitchen,hirestaff,andsoforthwas,astheysay,lessthanzero.Howmightonegoaboutlearningwhetheronecouldcreateaviablerestaurantbusinessinaleanstartupfashion?Onepossiblescenariowouldbe:

Figureoutwhoyouridealmarketprofileisandwheretheylive.IterateonanMVP,untiltheproductisvalidated.Measurecustomerpassion.

Dansetouttodoexactlythat.Heknewwhohiscustomerswere,ormoreaccurately,heknewwhotheyweren’t.Theyweren’tpeoplewhoboughtfromthenationalpizzafranchises.Theyweren’tpeoplewhocouldn’tcarelessaboutfreshingredients.Theyweren’tpeoplewholivedoutsidehisdeliveryradius.Theyweren’tcollegekids,becausetheyhadtobeabletoaffordgourmetpizza.Mostimportantly,wheredocustomersintherightmarketprofilehangoutorliveinorneardowntownSanDiego?Palaciosfiguredhisidealcustomerswerevisitorsofthelocalfarmers’market:Althoughnotnecessarilywealthy,patronstendtobewillingtopaymoreforhigh-qualitygoods.Theywerepassionateaboutfoodandfresh,high-quality,organicingredients.Theywerepartofacommunity:young,technologyadept,vocal,andsocial.Aftervisitingthefarmers’market,helearnedthatinordertoservefoodtherehehadtohaveacateringlicense.Togetalicense,youmusthaveacommercialkitchen.Buttohaveacommercialkitchen,youneedarestaurant,right?Danwasclevererthanthat.TocreatehisfirstMVP,herentedspaceinacommercialcateringkitchen.Evenings,Dantriedtobuildadowntowndeliverypizzaservice,andeverySaturday,hebroughtpizzapiestothefarmers’marketandhandedoutsamples,guerilla-marketingstyle.Althoughrevenueistheultimatemeasureofsuccess,DanknewhewasontosomethingwhenhesuddenlyappearedinYelp,withfive-starreviewsalmostacrosstheboard.BerkeleyPizzaconsistentlyscoredinthetopfiveonYelp’sbestSan

Diegorestaurantslist.Thereviewscamefromthefarmers’-marketcrowd.“Suddenly,”Dansays,“customerswantedtoinvestinmyrestaurant.”Hequicklygotinterestfromlocalrestaurantgroups,aswell.Withinayear,Danwasoutofthecateringkitchenandintohisownrestaurantspace.“Theplanwasalwaystoopenarestaurant,butIwasn’tgoingtogetinvestmentfor$25pizzas,notwithmycreditscore.Ihadtoprovemymarket.TheYelpreviewsnotonlydrovebusiness,butdemonstratedIhadamarketthatlovedmyproduct.”

MVPTestingTestingevolvesasyoureleaseyourMVPandstartthetrekacrossthevalleyofdeath.As you first posited and then validated you should havemetrics that define

customer satisfaction and passion. If you have customers in multiplesubsegments, you must determine whether these metrics differ between thegroups.Youstateasanobjective thevalue for thosemetricsyoumustachieve tobe

readytoscaleyourstartupendeavor.Yourunexperimentsontheproduct,messaging,andpositioning,andacquire

(relatively)smalltranchesofcustomerstotestagainstandmeasuretheresults.You interactwith customers to learnwhere you are still off on the product,

messaging,andacquisition.Forproduct,measuresatisfactionandpassionbysegment:

WebAppExample

PizzaRestaurantExample

Youput yourMVP into themarketplace and reachout to the early adoptersyou’ve identified. You measure your satisfaction and passion metrics. Ifnecessary, you run specific campaigns in order to measure these metrics, forexample,couponsonFacebook,tomeasuresharingforthepizzarestaurant.Rememberthattheobjectiveof“satisfied”istomeasurewhetheryouhavethe

right functionality for the right customerprofile.Theobjectiveof “passion” isthatnewcustomerswillbeputintothetopofyourfunnelwithminimaleffortonyourpart,orthey’llpayahighmargin,orresubscribe.Passionate users must be satisfied first and they must take some action to

spreadthewordaboutyourproduct.Ifthisisnothappening,you’renotreadytoblowupyourcustomeracquisition.Youmustfirstclosetheword-of-mouthloop.Thisisamajorbottleneckofgrowth.Atthispointyouhavethreeprimaryvariablesyouareplayingwith:1.DoIhavetherightcustomer?2.DoIhavetherightfunctionalitytosatisfythecustomer?3.DoIhavetherightstufftoevokepassion?Ifpossible,youwant tomeasure incohorts.What thismeans is thatyouare

grouping customers based on a shared characteristic—for example,when theyfirst became a customer—and comparing the groups’ metrics relative to thatdate.Forexample,thedatalookslikethis:

SegmentA:PassionData

Asacohort,thedatalookslike:

SegmentA:PassionCohort

Assumingyoumadechanges toyourMVPmonthly,you’reable to track theimpactofyourchanges.Notethatyoualsowanttocomparesegments:

Segment-PassionCohort

It’s important thatyou’renotmeasuringeverythingunder thesun.Toomuchdataisnotanexcusefornotanalyzingtheappropriatedata!To test, you need customers, though you’re not ready to blow up your

acquisition channels. It’s a good time to start testing your acquisitionassumptions,though.In addition to product, you alsowant to experiment on yourmessaging and

positioning.You’renotinoptimizationmodehere,butratherstilllearning.Thereasonthisiscriticalisthatmessagingandpositioningformthepromiseyouaremaking to the customer. Satisfaction is the measure of fulfilling the promise.Passion ismeasuringsatisfactionplussomeother factor thatpropelsusers intoacquiringmoreusersforyou.

InChapter3youhypothesizedwhereyourcustomershangout,andinviabilitytesting,youworked to invalidate, iterate,and thenvalidatewhere, in fact,youcould locate them. During this process, you actually accumulated people youcouldgobacktoandtestyourMVPwith.Althoughyoushouldcontinuetoworkwith thosepeople, it’salsoagood idea to testwithnewpeoplebasedonwhatyou’velearned.

Using standard methods of low-energy acquisition—reaching out toinfluencers, running a small AdWords or Facebook ad campaign, using yournetwork,postingonspecificforums, tweeting,directmail—younotonlybringinmorecustomerstotest,butaretestingvariousacquisitionchannels.Onceyouhavecustomerstotest,therearevariousmethodsforlearningmore

about your customers. Simple surveys, split-testing (running two or morelandingpagesandsplittingusersbetweenthem),andonlinemarketingservicesare all effectivedependingonwhat stageof learningyou’re in.Suchmethodsreally shouldbe augmented through in-person interviews andusability testing,however. Interviews tell you why. Looking at the data tells you what yourcustomer did, but you don’t knowwhy they did what they did until you askthem. Usability testing allows you to watch the customer interact with yourproduct without your influence or the influence of other customers like intraditionalfocusgroups.As you do when looking for patterns in data, you look for patterns in the

customersthatyouspeakto.Canyoudrawbetterbucketstogroupthemin?Dotheyhavesimilarproblemsusingyourproduct?Dotheygivesimilarresponsestoyouremotion-evoking,open-endedquestions?

CaseStudy:O2,TelecomattheSpeedoftheInternetLotsoforganizationssaytheyarecustomer-centricbutwhatdoesthatmean?Companieshavedisruptedindustriesaroundtheideaofcustomerserviceitself,sohowthosecompaniesunderstandcustomer-centricmustbedifferentfromhowGoogleorAppleorFacebookdescribeit.Zappos,forexample,sellsshoesonline.“Well,sowhat,”youmightsay,“alotofcompaniessellshoesonline.”Zappo’sshadowforceiscustomerservice.FromTonyHsieh’sDeliveringHappiness:

“Wehadacustomere-mailustheotherday,”Isaid.“Hehadorderedapairofshoesthatwehadinourwarehouseandwe

surprisedhimwithashippingupgradesothathegothisorderintwodaysinsteadofouroriginalpromiseofaweek.Hesaidhelovedourcustomerserviceandwouldtellhisfriendsandfamilyaboutus.HeevensaidweshouldonedaystartaZapposAirlines.”

Apple,however,offerslittletonocustomerservice,yetisarguablymorecommittedtothecustomerexperiencethananyotherhigh-techcompanyintheworld.StephenDevereuxwasonateamcalledFuturesInnovationatO2,theUnitedKingdomtelecommunicationsprovider.“Wewerechallengingthebusiness,atthattime,toreallythinkdifferentlyabouthowwedeliveredproductsandservicestoourcustomers.Wedeliberatelybrandedourselvesdifferentlyfromthetraditionalsortofstrategynametobemoreforwardthinking,anddeliberatelyusetheword‘innovation’.”Asatelecomcompanyinanindustrynotknownforbeingeithercustomer-centricorinnovative,O2hadperformedwell,notonlymovingitswaytothenumber-onetelecomproviderintheU.K.,butalsobuildingabrandrecognizedandadmiredaroundtheworld.Atthesametime,theycouldseethesignpostahead:beingtheplumbersoftheInternethadrunitscourse.Ofcourse,manytelecomsaroundtheworldhaverealizedthisatsomepointoranother.U.S.companiesseekgovernmentlegislationtothwartinnovationandprotecttheirexistingoligopolies,whilesqueezingeverylastpennyoutofintermediatetechnologieslikeISDNandDSL.Theyspendhundredsofmillionsonhigh-pricedconsultantstryingtofigureoutwaystocarveoutnewrevenueopportunities,suchasapplicationsorGPSservices.Yetdisruptedtheyare.O2hadakeyinsight,however.Devereuxsays:“Wewereinaverymaturemarket,andwesawthatournewsetofcompetitorswerenotthetelecommunicationscompaniesoftheworld,buttheInternetplayersoftheworld:Apple,Google,Facebook.WehadtomoveatInternet-speed,Twitter-speed.”Thesecompaniesareconstantlyreleasingnewproduct.Theyareinbetaforyears.Updatescomeweekly,ifnotdaily.Theyare

constantlyrunningexperiments,optimizingproductdelivery.“Wewereluckytodeliversomethingquarterly.Wewerechallengingthebusinesstostartworkinginacompletelydifferentwaytotrytotaketheseguysonandcompetewiththem.”Thethingis,beingcustomer-centricinthiswayiscompletelydifferentthanthecustomer-centricitythatelevatedO2tonumberoneintheirmarket.“Wehavetothinkofthecustomer”becomesaproxyforbrandprotection,ratherthaninnovation.Theorganization’ssizeandcomplexity—peopleresponsibleforcustomerservice,retail,PR,brand,allvariousvoicesofthecustomer—createdobstaclestonewproducts.“Tostartoffanynewproductinourbusiness,youhaveacastofhundredsofpeople,becauseeverybodyhastheirbitofsay.Wewereactuallycreatingacatch-22situationforourselvesinwhichwebecamefullofinertia,unabletoservecustomerswithnewproducts,becauseweweresoworriedaboutthecustomers’experience,”Devereuxsays.Thekeytochangewastomoveourmoreinnovativeendeavorstoasub-brand,whereateamhaddirectaccesstoexperimentingwithcustomers.InthecaseofO2,thesub-brandwasaphilanthropicinitiativecalledThinkBig,startedbyCEORonanDunne,whobelievesthatbeingpartofalargeorganizationmeanshavingthecorporateresponsibilitytohaveapositiveimpactonsociety,toprotecttheenvironment,andtohelptheyouthoftoday.Releasingproductsunderthissub-brand,farawayfromthetraditionaltelecomservices,hadanumberofpositiveimplications:

Initiativeswouldnotbesubjecttothesamefinancialmeasurementsasregularproducts.Customerexpectationswouldbedifferent.Itallowedthecompanytoexperimentwithinternalchanges.

ThefirstproductreleasedwasO2Learn.ThevisionforO2Learnwastoprovideaplaceonlineforstudentstofindavideoaboutaschoollesson—liketogetabitofhistoryonLordNelson,forexample.Asmallcross-functionalteamconsistingofaproductmanager,adesigner,andafewengineersworkedtoreleaseaversionquickly.Devereuxexplains:“Theuserexperienceandtheinterfacewereprominentlydesignedaroundstudentsneeds.Secondarytothat

waswhatteachersneeded.Wethoughtquitehardabouthowteacherscouldeasilyuploadvideos,buttherestwasaroundthestudents.“Whatwefoundveryearlyonwasthatteacherswereusingthesiteasmuchasstudents.Whatwefoundwasthatteacherswantedtofindoutwhatgoodlessonslooklikesoweimmediatelyworkedtoimprovethesiteforteachers.Ifthathadhappenedinatraditionalwaythenprojectmanagersanddesignerswouldsay,‘Ohgosh,that’sachangeintherequirements.Youhavetogobacktothebeginning.’Youknowtheprocess.”ThepoweroftheO2brandmeantthatafterreleasingtoasmallgroupofusersandironingoutthekinks,itwasquicklyinfrontofthousands.“Wehadaquicktimeslotinordertolearn,butthentherewasthischap,afamouscelebritychefintheU.K.namedJamieOliverwhowasteachingschooldinnerladieshowtocookbetterfoodsforkidswithintheirbudgetconstraintsandwerananadforO2Learnontheshow.Soitwasareallynicealignmentthere.Asaresultwesawmassivespikesanditjuststartedtogrowfromthere.Westartedactivelypromotinglastyearandstarteddoingthesechallengeseveryquarterwherewe’dgivemoneytothebestlessons.”Althoughnotparticularlydisruptivetechnologically,O2LearnmadeadifferencetotensofthousandsofkidsandwasclearlydisruptiveinsideO2.“ItgotmassiveairtimewithinO2.Thisoneandacoupleofotherprojectswereinstrumentalinprovingthecasethatactuallythereisadifferentwayofdoingthings.Wewereablecreatealabandwegotheadcountofnearly30people.”It’sabigwinforO2,aswell.O2,alreadyknownasaleadingtelecom,andaworld-renownedbrand,isrecognizedforassistingteachersandstudents.Thesearethesortofinitiativesthat,forlargecompanies,movecustomersfromsatisfiedtopassionate.

WorktoDoIntheMVPphase,thekeymetricsareusersatisfactionanduserpassion.That’sit.Ifyouknowyourcustomerswell,youshouldbeabletoreportthesetwometricsbyproductfunctionality,bycustomerprofile.

Notes

1.Ifnotcongruent,youareripeforapivot.2.Seehttp://news.ycombinator.com/item?id=542768.3.OurfriendSeanAmmiratisuggests,somewhattongue-in-cheek,thatsomeentrepreneurscanbehelpedbytellingthemtobuildMAPs(MinimallyAwesomeProducts)insteadofMVPs.Thisisthedifferencebetweencallingacar“used”or“certifiedpre-owned.”4.www.forbes.com/sites/brianclark/2012/05/23/audience-lean-startup.5.www.fastcompany.com/1837168/pop-goes-pivot.6.Foranamazingreadonthesubject,takealookatRyanHoliday’sTrustMe,I’mLying:ConfessionsofaMediaManipulator(Portfolio,2012).

Chapter9

RealVisionariesHaveFunnelVision

All you need to know about business today is that the Internet changedeverything, right?When it comes todistribution, sales,marketing, the Internetchangedeverything!Didn’tit?Ifyousayyes,you’relikelyviewingtheworldfromaseller’sperspective.The

activitiesandtacticsyouemploytomakepeopleawareofthevalueyouhopetoprovidethem,convincethemyou’recapableofprovidingit,andmakethemtrustyouwith the ability to get it done change over time.But that you have to gothroughthosespecificstepsdoesn’t.What motivates individuals to proceed along the path from awareness to

trusting to passionate varies by many factors, including market segment,product,andemotionalpull.Thisistruewhetheryou’resellingmultifunctionalprinterstobusinessesorsocialappstoconsumers.Inasimilarveinto“ifyou’recommittedtosolvingaspecificproblem,youshouldbesolutionagnostic,”onceyouhavetargetedaspecificmarketsegment,youshouldbeagnostictowardthesales,marketing,anddistributiontacticsrequiredtoservethatsegment.Beware the business “canvass” you’re filling out. Themore disruptive your

startup endeavor, the less you know about your marketing and sales funnels,despitewhat you think. Just aswithproduct development, a lean startupmustlearnhowtomarketandsell.

Entrepreneurs without funnel vision conflate the two sides of a transaction:howthebuyerdesirestobuyandhowthesellerdesirestosell.Whatresultsislikely a horriblemismatch. The business executes a process they are familiarwith, rather than the one that their buyer implicitly demands for a particularproduct.Thebuyerwillnotengagewithasalesprocessthatdoesn’tfitwithwhatfeelsrighttothem.Youcanhaveanincredibleproductcapableofdeliveringrealvaluethatneverseesthelightofdaybecauseofthewrongsalesandmarketingpractices.1

Foundersoftenviewsalespeopleasexpertsinconvincingpotentialcustomerstobuy.Theyviewmarketersaspeoplewhoruncampaignsandbuildbrand,andgenerate buzz, in order to fill the top of the sales funnel; to find potentialcustomerstosellto.Thisviewisfraughtwithproblems,nottheleastofwhichisthatsalesandmarketingareviewedmerelyasactivitiesthatneedtobeexecuted.Iftheexecutionfails,youneedtoexecutetheexecutors.Ifnothingelse,thisisarecipe for high staff turnover, departmental goals that diverge from companyobjectives,andsalestoanti-segments.Noonetrulywishestobeconvincedtobuyortobesoldto.Ifanindividualis

atallinclinedtopurchaseaproduct,theywishtobereassuredthattheproductwillprovidethemthevaluetheyexpect.Thebuyer’sprocessistolearnasmuchastheycanabouttheproduct,testthevaluepropositionifpossible,evaluatethecompany,weighthepotentialvalueversuscostplusotherfactors,andthenmakeadecision.TheInternethaschangednoneofthat.Thesellingprocessshould,therefore,becomprisedoftheactivitiesnecessary

to provide the buyers what they desire in order to move them through theirbuyingprocess.Activitiesmight includebuildingaweb landingpage,craftingmessaging,creatingabrochure,attendingatradeshow,makingaphonecall,andsoforth,dependingonyourproductandsegment.Thereareaninfinitenumberof activities, which is why it’s absurd to think that you know what the bestactivities are for your particular product and your particular customer profile.Yep,theInternetchangedeverything.

Weonce asked thewinner of a SouthernCalifornia university business-plancompetitionwhatheplannedondoingwithhis$25,000award,andhesaid,“Idon’tknow—buildawebsite,getsomebusinesscards....”Really?Forsomereason,anincubatorweknowwasworkingwithagraphicsdesign

company and a few marketing professionals to create a super-high-levelmarketing plan template for startups. Unsurprisingly, when it came time todevelop the plan’s list of first things to do, the list included design a logo,developawebsite,printletterheadandbusinesscards,buypenswiththelogoonit,andsoon.Really?Comeon.You’re not truly in business until you’ve got a business card that

saysso.Andawebsite.TheInternetdidchangeeverything!Entrepreneursarequicktoeither:Adoptthehippestmarketingtrendsoftheday.(Howmanyarticlesentitled“WhyYouMustHaveaSocialMediaStrategyorFail!”mustweendure?)Immediatelyhireanagencybecausethefoundersknownothingaboutmarketing.(What’sthequickestwaytoburnyourcash?HireaPRagencytomanageyourmust-havesocialmediastrategy.)

Takeadeepbreath.StepbackfromtheTwitter.Strikethat.StepallthewaybackfromtheInternet.Ifyouoperateinahighlyuncertainenvironment—inotherwords,aretoward

the disruption end of the innovation spectrum—reject best practices. Bestpracticesareforstandardizingandoptimizingtheexecutionofprocessesknowntowork.Bestpracticesareantitheticaltodisruptivestartups.Expertsapplybestpracticesbasedonaccumulatedknowledge thatmayormaynotapply toyourproductandyour targetmarket.Theseexpertsareunlikely tobeexperts in thedomainthatmattersmosttoyourbusiness.

InnovatetheFunnelA startup’s job is to learn, not execute. As you learn your market, new bestpracticesrevealthemselves,andtheymayormaynotjibewithwhattheexpertssay.Onewaytothinkthisthroughatthebeginningofyourstartupendeavoristo

forgetmarketingcompletely.Thinkonlyoflearninghowtosell.

Recall the Concierge method of viability testing. Practitioners deliver theirvaluepropositionbyhand,beforebuildinganyproduct,inordertoseeifanyonecares. They then automate the parts of delivering that value that can beautomated,continuouslytestingthattheproductdeliversnecessaryvalue.UsetheConciergemethodtolearnhowtosell,too.Again,forgetabouttheInternetforthemoment.Sellyourproductinperson.

WhenEricRiesandtheIMVUteambroughtusersintotestanearlyversionoftheir product, they learnedmuchmore than that their product was all wrong.WhenateenagegirlrefusedtoshareIMVUwithfriends,becauseinherwords“What if this isn’t cool?” they learnedapowerfulmarketingmessage.Growththroughreferralswasgoingtobeimpossibleiftheproductwasn’tcool.Cool,asambiguousasthatmayseem,wascriticaltoclosingthedeal.2

Selling in person instructs you about what is needed to close a deal, whatobjections must be overcome. What you do and say evokes a response thatprovides you indications about whether you’re on the right track and whatemotionalstateyouneedtoevokenext.Thepartsofthesellingprocessyoucanautomatebecomemarketing.

As we discussed previously, customers go through a series of stages whenacquiringanyproduct.Theymustbecome:

Aware—Almostalways,peopleareawareoftheproducttheyarepurchasing.(It’softensaidthatinthecaseoffreeproducts,thepurchaserisactuallytheproductandisblissfullyunawareofthefact.Forthisdiscussion,however,Facebook[afreeInternetapplication]istheproductandnottheuserwhoseactivityissoldtoadvertisers.)Intrigued—Thepersonwhobecomesacustomermustbecomeintriguedwiththeproductbeforemovingdownthefunnel.Again,we’resureyoucanfindexceptions,butthevastmajorityofproductsmustappealtothecustomerinsomeway.Customersareintriguedwhentheythink—beyondbeingsuperficiallyaware—theproductmightbetherightthingforthem.Trusting—Fulfillinganeedisofteninsufficient,however,unlessthecustomerfeelstheycantrusttheproductandthecompanydeliveringtheproduct.Convinced—Thefinalstepthatconvincesthecustomertobuy;thepromisedvalueexceedstheprice+risk,whereriskmightberiskofchange,riskofbeingwrong,riskofbeinguncool,andsoon.

Afterthecustomerprospectisconvincedtheproductisrightvis-à-vistheprice

and the company is trustworthy, the customer buys, right? Well, not exactly.There’sasecretsubstepwecanzoominonwherethe“MagicHappens.”MagicHappensisthemomentwhenrationalityexitstheequationandemotion

takesover.Orviceversa.It’sthisineffablesomethingthatgetsthecustomertopullthecreditcardfromthewalletorputthesignatureonthepurchaseorder.Wecontemplatedcallingthatstep“Euphoria,”whichisaconditioninwhicha

person experiences intense feelings of well-being, elation, happiness, ecstasy,excitement,andjoy,butthatisn’texactlyright.We were thinking more accurately, perhaps, the moment should be called

“Delusional,”butthatisn’texactlyrighteither.Customersmightfeelarangeofemotions fromexcitement to resignation, the latterarising froma leapof faiththattheymadetherightpurchaseortherealizationthattheyareexposingtheirprivatelivestotheInternet.(CreatinganaccountonanInternetsiteisasmuchaleapoffaithasapurchase

orderistoothers.)Thisisn’tatrivialmatter,becausethenextthingthecustomerwilldoistryout

the product. How they feel about the product before using it will affect theirfeelingabouttheproductafterusingit.Thispost-purchasestagemightbecalledPPTS, post-purchase trauma syndrome, but we’ll handle this outside theconversionfunnel.(Seethesectiontitled“Hopeful,”laterinthischapter.)Thetitlesanddescriptionsofthesephasesarenotsetinstone.Comeupwith

your own, if you’d like, but they serve well as a stab at describing whatmotivatespeopletobecomecustomers.Therearemanyinstances,forexample,whereonemightuseaproductregularlyandfeelloyalty,butarenotnecessarilypassionate. Passion is just a label. What’s important perhaps is “loyalty.”Exceptions like these abound, and, frankly, youmight have a leg up on yourcompetitionifyoucanfigureouttheexceptiontotheruleandactonit.Thepointoftheexerciseisthatasabusiness,youmustdostufftohelppeople

become customers. The stuff you do varies by product, market segment, andbusinessmodel.Whatyoudois limitedonlybyyourcreativityand,ofcourse,yourvalues.Perhapsanactivityyouperforminducesthecustomertoskipastate,aswith

impulse buys near the cash register. Activities sometimes manipulate peoplethroughthevariousstagesinwaysthatareethicallydubious.Thelineisthinlydrawn.Abusiness that thrivesonone transactionpercustomermight resort toanymeansnecessary to convince a person to buy, uncaringwhether they ever

buyagain.Thatnegative experiencesmoveat the speedof the Internetmakessuch tacticsmore dangerous, but appealing to fears and emotions is a provensalesmethod.Theyareage-oldtactics.Ourpurposehereistonotstandinjudgment,butforthesakeofourdiscussion

and with the hope that providing value is not a cyclical trend but, rather, amovementforward,wewritewith thebelief that thepurposeofmarketingandsalesisindeliveringaknownvaluetoaknowncustomer.Allactivities,then,arefor thepurposeofmakingcustomersawareof,demonstrating theexistenceof,and building operations in support of this value. There is a laundry list ofactivities thatmightworkateachemotionalstage.Fornewbusinesseswithnocustomers,yourjobistolearnwhichactivitiesworkbestforyourproductandtargetmarket segment. For businesseswith existing customers, your job is toalign the best activities with specific market segments. For big businessesseekingtodisruptivelyinnovate,yourjobistocreateagrouptoactlikeanewbusinesswithnocustomers.Justasdevelopingaproductrequiresacross-functionalteamtoensureyouare

building featurespeopleneed,experimentingandexecutingonyourmarketingfunnel might benefit from a cross-functional team to eliminate conversionbottlenecks.Asmoresalesandmarketingfunctionshappenonline,a teamthatincludes design, product marketing, engineering, sales, and perhaps otherresources inorder tocreate experiments, interactwithcustomers, andmeasuretheresultsisafast,efficientwayofdiscoveringwhatworks.How can you learn what the best activities are? Dive into your proposed

funnel,createhypotheses,andtestthem.Staring into thewidemouth that is the topofyourfunnel is likestaring into

the abyss. There are an infinite number of activities tomake people aware ofyour product, for instance. But you can’t test infinity. Having numerousactivitiestocontemplatemakesitdifficulttolearn thebestandmostprofitableactivities.By flipping the funnel, you are forced to think through one buying cycle

completely for one market segment. Related activities for each step becomeratherself-evidentandacttofleshoutyourmarketingandsalesplanandprovideadditionalaspectstotest.Aswedidwiththevalue-streammappingexerciseinChapter4,weimaginethepaththatonepersona—onemarketsegment—usestotraversethroughthestages.

E-CommerceExample

On an e-commerce shopping site, you can easily measure what state thecustomer is in using off-the-shelf analytical tools.At each customer state, thecustomer needs something, in order to move to the next state. You, the siteowner,haveamyriadofthingsyoucandotoprovidetheneed.It’sprettyeasytoimagine,forinstance,thedifferenttacticsonemightusetoinvoketrustortoup-sell.Asamatteroffact,formoste-commercesites,whereboththecustomerandthe product are known, e-commerce best practices can probably be used tooptimize sales. (Best practices, of course, includes usability testing and split-testing.)If you’re doing anything radically different, the amount and depth of

experimentationrequiredincreases.It’simportanttonotallowbestpracticestointerferewithcreativity.Consider the stateof social shopping.Although still in itsnascent stage, the

extent to which social media can be used to enhance online shopping andincreaseconversionsisagiantlabrightnow.Youcan’tpredictexactlyhownewthingsmightresultinbigconversionimprovements.Consideralsosocialentrepreneurship.Howyouacquireandmeasuretrustisa

differentbeastcomparedtosellingstandardproducts.Thecustomermustbelievenot only that a green productwill bring value to their lives, but also that theproductistrulygreen.

B2BSoftware-as-a-Service(SaaS)Example

EnterpriseSoftware(orHardware)Example

SellingtoBusinessesIn 2003,MarkLeslie, founding chairman andCEOofFortune1000 companyVeritas Software, coined the term renaissance sales rep to describe theindividual “able to develop [her] own sales model and collateral materials asneeded.”Inotherwords,withoutmarketing’shelp,thisrepisabletolearnhowtosellanewproduct.Incontrast,thecoin-operatedsalesrepistobehiredonlyonce the sales process is known; “when the formula for success has beendeveloped (a repeatable sales model) and all of the support requirements forsalesrepsareinplace.”3

Steve Blank describes what happens to startups that do it wrong—scalingmarketingandcoin-operatedsalesrepsbeforethesalesprocessisknown,beforethe market is known—as the startup death spiral: Sales starts missing itsnumbers.Theboardgetsconcerned.TheVPofsalescomestoaboardmeeting,stilloptimistic,andprovidesasetofreasonableexplanations.Theboardraisesacollectiveeyebrow.TheVPgoesbacktothefieldandexhortsthetroopstoworkharder.4

What follows is increasedopportunistic sales, repsgoingoff the reservation.You see sales staff turnover, lots of finger-pointing at marketing and productdevelopers.Aquarterortwolater, thevicepresidentofsalesisgone,followedbytheVPofmarketing,and,finally,theCEO.OftentheboardbringsinamoreexperiencedCEO,buttheirexperienceiswithrunningalargeorganization.Stillnolearningisaccomplished,onlymorefailedexecution.Renaissancesalesrepsoperate differently. They can sell product without brochures, even withoutdemos. They do consultative sales, meaning that, from the customer’sperspective,theyprovidevalue.Theyaretrusted.Theyunderstandtheneedsofthecustomerandworktoaddresstheneed,ratherthansimplysellproduct.Paul O’Dea calls this rep a “sales specialist.” A sales specialist has the

followingtraits:Deepdomainexpertiseincustomer’sindustry.Integrity;abilitytogaintrustedadvisorstatus.Acompletecommunicator,abletolisten,question,andlistenagain.Engagedincontinuousself-improvementandeducation.5

In many early-stage startups, the CEO is the sales specialist or renaissancesales rep. The founder should be developing these relationships, building anempathicunderstandingofthecustomer,nottheleastofwhichisunderstandingwhattheirneedsare.Like their SaaS and even consumer-oriented business counterparts, founders

often concentrate too quickly on demand creation and filling the pipeline,withoutfirstunderstandingthetwofundamentalprinciplesnecessarytoscalethebusiness:

1.Areyouaddressingarealanddeeplyfeltneed?2.Doyouknowhowtosellthisproducttothisbuyer?Theonlyway to findout is to engage themarket.Yes, lean startup is about

developing product iteratively, releasing quickly and often in order to gaugemarketacceptance,butit isalsoaboutlearninghowtoselland therebyhowto

market.Thelargeroroldertheenterprise,themorecomplexandsophisticatedwillbe

theirpurchasingprocess.Therewilllikelybenumerousplayers:TheenduseroftheproductTheheadofthedepartmentwheretheenduserworksTheITdepartmentComplianceSecurityFinancePurchasing

Eveninsmallercompanies,youwillhavetofindaninternalproductchampiontohelpyounavigate theprocess, includingovercomingpoliticsandexecutivesopposed to the project. Some companies will only purchase from preferredvendors.Others requireworkingwith specific resellers or systems integrators.You might face requests for proposals (RFPs) heavily influenced by yourcompetition!Yes,youmayevenhavetowineanddineyourpotentialcustomers.Asasalesperson,wheninteractingwithcustomers,yourobjectiveistwofold:1.Whatisthebuyingprocessaccordingtothebuyer?2.Whatactivitieswillmovethebuyerintoandthroughthefunnel?Youareseekingoutobjections.Somearepredictable;somearenot.Thebest

waytolearnistodoit.AsChrisGuillebeausays:“Youwon’talwaysgetitrightatfirst—sometimes

you’lldiscoveradditionalobjectionsasyougothroughtheinitialsalesprocesswithreal-timecustomers.”6

You step through your educated-guess process—a process that should besomewhatvetted throughearlycustomerdevelopment—untilyouencounteranobjectionand learnwhatmustbedone toovercometheobjection.Youdo thisthrough each stage of the funnel. The next time through, you hope to find asimilarpattern,onlythistimeyouarepreparedfortheobjection.After several iterations, you might include a Frequently Asked Questions

(FAQ) section on your website or in the sales representative’s toolkit, whichproactivelyaddressestheobjectionsupfront.Pro tip:Marketing activities are designed to overcome implicit and explicitsalesobjections.Theobjectionsmightbesimpletounderstandbuthardtoovercome:Areyou

FIPS140-2compliant?Areyouonourpreferredvendorslist?This process is valid whether selling online or offline. It’s hard to discover

online objectives. Go through the process offline first in order to learn whatobjectionsyoumustovercome.In the B2B world, regardless of whether an online product or offline,

regardlessofwhetherusingtheInternettomarketorsell,customerscareaboutincreasing their revenue,market share, and customer loyalty,while decreasingcostsandbusinessrisk.Butrememberthatdecisionsaremadebyhumanbeings,soallthelessobviousandsubconsciousdecisioninfluencesmustbeconsidered,aswell:thedesireforcareeradvancement,jobsecurity,peerassessment,budgetprotection,andpersonalrisk.Whileinteractingwithmultiplepeopleinsideanorganization,youwillwantto

consider:Whoisthebuyerversusthedecisionmakerversusthefinancialapprover?Wheredoesthebudgetforpurchasecomefrom?Whoelseinfluencesthedecision?Whatcomplianceregulationscomeintoplay?Whatisthepurchasingprocess?Isapilotorproof-of-conceptrequired?Whatisthelengthofthepurchaseprocess?Aretherespecificchannelrequirements?Whoistheinternalchampion?Whomightbemotivatedtoobstructthedeal?

In the business-to-consumer (B2C) world, regardless of whether an onlineproduct or offline, regardless of whether using the Internet to market or sell,customerscareaboutmoney,time,health,theeliminationofspecificproblems,thefulfillmentorexerciseofparticularpassions,andpersonalvalues.Thesearepredominately conscious needs that, given the right circumstances, people arewillingtotalkabout.Therearealsothingspeoplecareaboutthataremoredifficulttoarticulateand

are even subconscious. These include the full range of human emotion, fear,socialstatus,sunkencosts,self-perception,andinstinct.Whileinteractingwithcustomersyouwanttolearn7:Whohasthepainorpassion?Whodecidesonthepurchase?Whoaretheytryingtoimpress?

Whoinfluencesthedecisionmaker?Whatareadjacentpainsorpassions?Dotheyhireproductscurrentlythataddresstheneedtosomedegree?Whatmakesthemfeelsecure?Whatmakesthemfeelsexy?Whatdotheythinkiscool?Whatdotheydreamabout?Whatkeepsthemupatnight?Whatcharacteristicsdotheysharewithothersthathaveneed?Wheredotheyhangoutofflineandonline?Howdotheybecometrustfulwhenpurchasing?Howdotheydecideaproductisagoodfit?

MarketingTherearethreemarketingstages:

1.Activitiestoevolvesatisfiedcustomersintopassionateones.2.Activitiestoautomatemovingcustomersthroughtheconversionfunnel.3.Activitiesgearedtogetpeopleintothetopofyourfunnel.You want to learn, optimize, and relentlessly execute the tactics in the

precedingorder.When Steve Blank took over marketing at a floundering SuperMac, he

discovered “10,000 unprocessed, unlooked at, and untouched [product]registrationcards.”8

His staff ofmarketing professionals had no cluewho their customerswere.Theycametotheofficeeveryday,workedonstuff40+hoursperweek.Likelythey had periodic job-performance reviews, which measured productivity insomeway, but theyhadno cluehow to align their activitieswithwhatwouldpushthecompanyforward.Blank:“Itdawnedonme thatwehadadepartment fullofpeoplewhowere

confusingtheirtitleswithwhatcontributiontheyweresupposedtobemakingtothecompany.”Titlesarenot thesamethingasyour job.Marketingpeoplemustrelentlessly

pursue tactics to create passion and value, move customers through theconversion funnel, and then, when the company is ready, fill the top of thefunnel.

PassionateAswe’vediscussed,achievingcustomersatisfaction isnotenough.Businessescannot achieve significant growth rates on product satisfaction alone. In trulydisruptiveendeavors,thefacttheproductexistsis,initself,soradicallynew,soradicallypleasure-inducingorproblem-solving,soradicallyvaluable thatusersarepassionatejustbecauseoftheMVP.Thisisrare.Inmostendeavors,whetherinanexistingcompanyseekingtoregainpassion

orastartupneedingtoinducepassionforthefirsttime,somethingextraordinary,aboveandbeyond—oftenoutsidetheproduct—needstooccur.Tomeasure this,youneed tocreateyourowncustompassionmetric,which

mightbesomecombinationofthefollowing:NetPromoterScoremeasurespassionbyaskingcustomerstheirlikelihoodofreferringtheproductstoothers.Generally,customerswillonlyshareproductswithothersifthey’repassionateaboutthem.Otherwise,theyrisktheirownreputation.TheMustHaveScoreprovocativelyasksyourcustomers,“Iftheproductwerenolongeravailable,howdisappointedwillyoube?”Informalevidencesuggeststhatif40to50percentofyourcustomerswouldbeverydisappointed,youhaveapassionatecustomerbase.

Highscoresonthird-partyreviewsiteslikeYelpmightindicateuserpassion.Sometimesreviewersjustwanttoshowoff,butthere’scurrencyinvolvedwhenausertakesthetimetotelltheworldtheyloveyourproduct.Again,theirreputationisatstake.

Otherindicationsyourusersarepassionateinclude:Apatternthatemergesaroundadamantfeaturerequestsorurgentbug-fixrequestsemanatingfromaparticularsegmentaroundspecificfunctionality.Customersdon’tcomplainaboutaproducttheydon’tcareabout.Theyignoreit.Theycomplainwhentheyfeelrippedoff—inotherwordsthere’sarealproblemtosolve,butyoudidn’tevengetclosetoresolvingit.Ortheycomplainifyou’reohsoclosetomakingsomethingtrulyvaluable.“Ifonlyyouwould...!”Whenyoucalltospeakwiththem,theyareexcitedtotalktoyou.AsDaveMcCluresays,youwantthemtoloveyouorhateyou.Eitherway,they’reprobablywillingtosayso.Loveandhatecomefromthesameplace:expectations.IfyoupromiseAanddeliverAaboveandbeyondthecallofduty,customersexpectingAloveyou.IfyoupromiseAanddeliverBabove

andbeyondthecallofduty,customersexpectingAhateyou.Whencustomersarewillingtogopublicwithtestimonials,pressreleases,orcasestudies.Thisistypicallyasignificantcurrencyandmayrequireextraconcessions.Whencustomersinvitetheirfriends.Ifusersforwardyoure-mailnewsletterstocolleaguesoruseproductfunctionalitytouploadalltheircontactstoyoursite,orsharecoupons,andsoforth,theseareprettygoodindicationsthatyou’vegonebeyondmerelysatisfyingcustomers.Benefitsarerealized.Thisisdifficulttomeasureandoftendifficulttoachieveviaanyspecificactivity.Brandloyalty,suchasrepeattransactionsorcross-sellingathighmargin.Effusivepraiseandsharingonsocialmedia.

It’s the marketer’s job to not only understand these, but to come up withactivities that motivate customers to act on their passion. E-mail campaigns,product features, personal outreach, and developing deep relationships helpcustomersunderstandandappreciate thebenefitsandallowyou to tell successstories.Youhavetoaskforreferencesandcasestudies.Yougiverewardstothosewho

referothers.Youcreatephilanthropyprojectsbecauseyourcustomerscare.Youcreatecommunity,oratribe,oracult.Thekeyistomakeyourcustomersyourbestmarketers.Creatingpassioniswhereyourbrandcomesintoplay.Everythingaboutyour

customer’sexperiencewithbusinessanditsproductsaffectscustomerperceptionof the brand. People can be merely satisfied with the product yet passionateaboutthebrand.Customerswilloftennotself-identifyaspassionate,yetbehaveasiftheyare.

SatisfiedSatisfactioncomesfromproductexperiencematchingcustomerexpectations.Itdoesn’t reallymatter to the business if the needs havebeenoverlymet unlessthatwillinvokepassionorexpandthemarketsegmentsattractedtotheproduct.Becareful!More featuresdonotnecessarilymeanmore satisfaction, let alonepassion.We’ve discussed at length the functionality required to minimally provide

satisfaction. What specific mouse clicks, reports, results? What shape, color,visual layout?Does satisfactiondependon someoneelse’suseof theproduct?

What customer experience represents a successful encounter or use of theproduct? In software and mobile products, you can actually instrument yourproduct to know exactly how your customer interactswith the product. Theirusageshouldmatchyourexpectationsforhowtheproducthelpsthemsolvetheirproblemoraddressestheirpassion.A satisfied experience at a restaurant might mean a rating of four stars or

above on Yelp. It might result in a large tip. It might mean that a specificcustomerreturnsonceamonthoronceaweek.It’s often the marketer’s role to measure the satisfaction. Where possible,

nontech businesses should think of ways to automate their measure ofsatisfaction.Registrationcardsareanattemptatmeasuring satisfaction. Ifyouwantthewarrantythatcomeswithaproduct,itlikelymeansyou’resatisfied.Ifyousellaproductoncethatrequiresongoingaccessories,measurethepurchaseoftheaccessoriesovertime.Themostobvioustacticistomeasuresatisfactionthroughsurveys.Providing

anincentivetofilloutasurveywillgetyouahigherresponserate,butyouwillget higher reviewswhen the customer is somotivated. Better yet, incentivizepeopletosharetheproductinawayyoucanmeasure.Attachfreeconsumablestotheproductthatonlyhavevalueiftheproductitselfisused.Talk tocustomers.Call themupon thephone.Bring theminto thebusiness.

Conductusability testingwherebyyouwatchcustomersuseyourproductwithinfluencebyyou.Protip:Conductusabilitytestingusingyourcompetitor’sproducts.This is still the bestway to learn howyour customers truly feel.Beware of

focusgroupsinwhichindividualpersonalitiesaffecthowothersthink.Satisfactionwill also be affected by business partners, channels, packaging,

customersupport,shipping—anythingelsethatispartofthevaluestream.Youmustcontroltheentireexperience.Howyoumessageandpositiontheproductaffectssatisfaction.Thestoryyou

tellabouttheproductformsthepromiseyouaremakingtoyourcustomer.Youmusttellthemtheproductisforthem,itaddressestheirspecificdesire.Ifyourproduct strays from the promise, your customer will not be satisfied. Sellbenefits,notjustfeatures.Tellastory.What’stheirlifelikeafterexperiencingyourproduct?Howhasit

changed for the better? Experiment with different stories. Different segmentsrequire different stories. Learn from your customers how they describe your

producttofriendsandcolleagues.

HopefulCustomersarehopefulyourproductwillfulfillitspledge.Theyfindoutbyusingthe product, in other words, “activating.” Again, in the mobile and Internetworlds, it’s not difficult tomeasure when a product is first used. The lure ofvanitymetricsmight trickyou intocaringabout thenumberofdownloadsandhow many Facebook likes you have, but those aren’t nearly as important asknowingifyourproducthasbeenusedproperlyorevenusedatall.Thetimedifferencebetweenwhenthecustomerbuys,downloads,orsignsup

for a trial andwhen it is used is critical. The longer the delay, the less likelythey’lleverusetheproduct—evenifitispurchased!Youforgettobuybatteriesforthetoyyoupurchasedyourkidandtheyplaywiththebox.(Ergo,“batteriesincluded.”)It’snothardtoimagineadaywhenacompanywillknowwhenyou’veopened

a package. Your car purchase is activated when you drive off the lot. Yourrestaurant experience is activated when you take the first bite. Your retailelectronicsexperienceisactivatedwhenyouplugtheproductinandturniton.Ifyou can’t automate the measurement, go out and observe your product beingactivated.Orbringusersin-houseandwatchthemusetheproductwithoutyousayingathing.Activities different businessesmight employ tomove customers through the

hopefulstageinclude:Hopeful: “GettingStarted”documentore-mail,e-mailmarketingdripcampaign,“batteriesincluded,”free

supportcall,follow-upsalescall,freeaccessory

ConvincedHow do you know your customers are convinced that your product is worthbuying?We don’tmean convinced that the productwas the right one to havechosen, but how are they convinced to consider it the first time? For freeproducts, theymay be convinced when they’ve decided to create an account.Customers become convinced when a relationship is established, eitherimplicitlyorexplicitly.Goodmarketersmarketasifit’salwaysexplicit.Possible activities to move customers through convinced (including where

“MagicHappens”):Convinced:Whitepaper,verticalmessaging,segmentcasestudy,demonstration,download,proof-of-

concept,pilotprogram,prototype

MagicHappens

Freeshipping,coupon,specialdeal,discount,forsale,limited-timeoffer,downloadnow,limitednumber,first10purchasers,packaging,salesmeeting,salescall

TrustingWhatmakesacustomertrustyouiscomplicated,yetbusinesseshavefigureditout as long as selling has existed. First impressionsmean the world. It’s likewhenyoumeetastranger:Through theirwordsandactions theysendasignalindicatingwhetherthey’retrustworthy.Samewithabusiness.Isthetransactionsecure? Is it guaranteed?Will you be there if something goeswrong?Again,thinkaboutitfromthebuyer’sperspective.Trustactivities:

Trust Influencerendorsement,reference,guarantee,certification,governmentbacking,nohaggle,testimonial,badges,magazinereview,analystendorsement

IntriguedYouknowacustomerisintriguedwhentheyrequestmoreinformation,whetheronline or offline. Theymight sign up for a newsletter, request a sales call, oractivateanonlinechatwindow.Youmakethemintriguedthroughmessagingandpositioning.Theprimaryrole

ofmessagingistosharethebenefitsyourproductwillhaveonyourcustomers’lives.Positioningdescribeswhereyoufitinthecustomers’viewofthemarket.In other words, how do you compare with other products? What’s thecompellingreasontobuyyou,yourprimarydifferentiation?Intriguedactivities:

Intrigued:Webcopy,brochures,video,webinars,insidesalescalls,presentation,in-personsalescalls,model,TechCrunch,interview.(Manyawarenesstacticsworkhere,too.)

AwareAwareness is indicated by first visits to your website, new Twitter followers,Facebooklikes,andinbounde-mailsorphonecalls.There’sliterallynolimitationtothemethodsusedtoattractattention.Thekey

is to match tactics to market segment and where you are on the adoptionlifecycle.Althoughcreatingawareness is the first thinganentrepreneurwants,it’s the last thing they should attract.Awareness activities can break the bank.Theywillattractpeopleyoudonotwantascustomers,whoyou’renotreadyfor.Insteadofbuzz,yougetnoise.AdvertisingandPRwork,butifyoupayaPRagency$15,000permonth,they

willlikelyattracttensofthousandsofvisitorstoyoursite.Howmanywillyousignup?Amongthosewhosignup,howmanywillbuy?Ofthosewhobuy,howmany will use the product? Of those who use, how many will becomepassionate?Of thosewho loveyourproduct,howmanywillhelppopulate thetopofyourfunnel?Ifyoudon’tknowtheanswertothelastquestion,thenyoudon’tknowwhat

the lifetime value of your customer is and, therefore, you cannot know if the$15,000permonthforthatPRagencyistherightchoice!Aware: PR,socialmedia,bloggeroutreach,SEO,advertising,podcasts,video,blogging,magazine

articles,newsstories,billboards,signtwirlers,promoteams,tradeshows,directmail,coldcalls,surveys,megaphones,TVcommercials,radiocommercials,etc.

GrowthWavesGrowth isn’t magic. Growth is determined by customer passion + cash-flow-positive customer acquisition. Yes, you can buy customers, but that’s onlysustainableinveryhigh-marginbusinesses.Thinkdot-comfiascoofthe1990s.Thatwasalotofbuyingcustomersandlittleofcustomersbuying.

FirstWaveCustomer passion indicates that you’ve nailed the value proposition percustomersubsegment.Yourfirstwaveofgrowthcomesfromlearningandthenexecutingonmarketingandsellingtothatsubsegment.Dangerlurksinacquiringcustomersfrommultiplesegmentsatthispoint.We onceworkedwith a companywhoseCEO came to us all excited about

theirgrowth.“We’vehiredthisgreatvicepresidentofsales,he’stotallykickingbutt.We’ve closed half a dozen deals in the last month and things are reallytakingoff!”Severalmonths later,weheardfromhimagain:“Wehadto let thesalesguy

go. Turns out he sold 10 deals to 10 different segments. They all wanteddifferentthings.Wecouldn’tfindanycommonality.Itwasanightmare!”Thingis,thatsalesguywasdoingwhathewassupposedtodo,buthewasthe

wrongsalespersonforthecompanystage.Foronlineproducts,it’sdifficulttonotacquiremultiplesegments.Thisisokay

as long as you rigorously create buckets to store them in and monitor sales,marketing, and support costs. Here are some potential differences between

subsegments:Varyingdepthsofpainfeltwillresultindifferentengagement,differentrequirementstoachievepassion.Hangingoutindifferentplacesrequiresdifferentmarketingtactics.Differentfunnelconversionstepsrequiredifferentmarketingandsalesactivities.Relatedbutslightlydifferentvaluepropositionsresultindifferentproductrequirements,differentmessagingandpositioning,anddifferentpathstopassionate.

When acquiring early adopters or early mainstream customersopportunistically, thesedifferencesmaynotmaterialize; theywill only rearupwhenyouattempttoscale.Havewementionedtostartsmallyet?Aswe’vediscussed,lookatyourtarget

marketsegment.GobacktoyourpersonasyoucreatedinChapter3.Wheredoesheorshehangout?Presumingyouaddvaluefortheperson,howareyougoingtogettheirdollar?Experimentandthenoptimizereachingouttothem.Keeping in mind that your goal is to achieve cash-flow-positive customer

acquisition,thelowest-costoptionistolookonline.In the United States, it’s very likely your customer is online.9 That doesn’t

mean,however,thatInternetusersarecreatedequal,especiallywhenitcomestodifferent products. People act differently online depending on what they’retryingtoaccomplish.

Dotheysearchforsolutionstoproblems?Dotheyclickonsponsoredresults?Ads?Whatdotheyusefortheirhomepage?

So is search engine optimization an important tactic? Is search enginemarketing?Howmuchcontentshouldyoubecreating?LiketheInternet,e-mailisnowclearlyinthelatemajorityinthetechnology

lifecycleadoptioncurve,whichmeansmost customersare reachable thatway,buttherearerulestoabideby.Whatofferscanyoumake?Howcanyouinduceyourreaderstosharethecontentandincreasesubscribers?

Doyouruserssubscribetoe-maillists?Doyourusersclickone-maillinks?Doyouruserssharee-mailwithothers?

WhatotherwaysdoyourusersinteractwiththeInternet?Dotheyreadtheirinfluencers’blogs?

Dotheyblogthemselves?Dotheycommentonblogs?Dotheyclickonads?Dotheyfollowlinksrecommendedbybloggers?

Shouldyoubereachingouttoyourcustomers’influencersonline?Whatkindof offers can youmake for the blogger and her readers?What’s in it for theinfluencers?Areyouruserspartofonlinecommunities?Dotheyparticipateinonlineforumsbasedonhobbies,interests,orshopping?DotheyposttoFacebook?Tweet?Whathashtagsdotheyfollow?Whichinfluencers?Dotheyinteractandcommentonmusic,movies,restaurants,products,services,stores?

Whatofferscanyoumaketocommunitiesandcommunityinfluencers?Reachingtheseinfluencersiskeytoearlymarketingefforts.Thinkaboutit.If

you’ve created value with a group of people—a segment—and someone elsewishestocapitalizeonyourrelationshipwiththatsegmentasaninfluencer,youwillweightherequestcarefully.As an influencer, you balance the value being provided to your segment, thevaluebringcreatedforyoupersonally,thefuturepotentialvalue,andanycoststoyourrelationshipwithpeopleinyoursegment.Imagineyourunameetupgroupforleanstartupbelievers.Someonereaches

outtoyouandsays,“Hey,you’vegotagreatgroup.Iteachpeoplehowtowritebusiness plans. I’d appreciate it if you could tell your members about myupcomingworkshop.”What’s in it foryou?Yourmembersdon’tbelieve inwritingbusinessplans.

Youdon’tknowtheguyreachingouttoyou,soit’shardtoimagineanyfuturebenefittoyou.Soyourequationlookslike:

Doesn’t look toogood.Nowsay theguyisaprettywell-knownauthor,whohasahugefollowing.Nowyourequationmightlooklike:

Potentialaccess to theauthor’snetworkmighthaveahugeupsideforyouatsome point, but how does that weigh against the blow to your credibility forhavingrecommendedtheworkshopthatgoesagainstthegroup’svalues?Afterdecliningagain,thisself-helpauthor,lifecoach,andbusiness-planguru

offersyou$10,000.Hmm.

Thistimewhenyoudeclinetheoffer,thebusiness-savvyauthorsays,“Look,I’lltailorthediscussionsoit’snotaboutwritingabusinessplanbut,rather,howto think through the standard aspects of a traditional plan. Even if you don’twriteaplan,tryingtounderstandyourbusinessisagoodthing.TheworkshopisfreeandI’llbuybeer.”

Thepointisthatwhenyoureachouttoinfluencers,youneedtounderstandthevalue they create for their constituency and how you can add value to theinfluencer.Watchwhatothermarketersaredoingandwhatisworking.Marketingtactics

comeandgocyclically.What’shotworksuntilitdoesn’t.Thinkabouthowyouarebeingmarketedto.IfyouwatchTV,listentotheradio,readwebads,orclickon Facebook ads orGoogleAdWords, think aboutwhatworked. Think abouthowtheyfoundyou.Asyousucceed in reachingmoreusers, it’smorecritical thanever todefine

bucketsforyourusersandkeeptrackoftheirsharedanduniquecharacteristics.Morethanthis,youmustcorrelateyourvaluepropositionforeachbucket.Youmusttrackengagement,passion,featurerequestsforeachbucket.

SecondWaveYour second wave of growth comes from nailing the rigorous process ofadoptingmultiplesubsegments.Thedifficulty in trackingandmanagingmultiplesegmentsvariesbyproduct

andcustomer.IntheB2Bworld,notsurprisingly,thelargerthebusinessyou’resellingtoandthemorecomplextheproduct,themorefocusedyoumustbeon

one segment. In the classic crossing-the-chasm sense, the bigger the fish youcapture, the more you want to concentrate on dominating that one segmentbeforemovingontothenext.As businesses transition toward Internet-based products, marketing, and

selling,youcanadoptmultiplesegmentsfaster.Youstillfacethesamemultiple-segmentissuesdiscussedearlier,butonasmallerscale.Thesecondwavelooksanawfullotlikethefirstwave,onlyyouneedmoreresourcestodoit.Youusebuild-measure-learn (BML) to interactwith customers to learnhow

youcangetthemfrom“meh”tosatisfiedandfromsatisfiedtopassionate.YouuseBMLtorunexperimentstovalidatewhatyou’velearned.YouuseBMLtotestmarketingandsales tactics.YourunBMLagainst individualsubsegments.Yousayno tocustomers thatendupbeingoutsideyourvisionandcorevalueproposition (unless you decide to pivot to that segment and leave the othersbehind).This is a painstaking, rigorous process. It does not come quickly. If you

alreadyhave1,000customersandyoudon’tknowhowtogettothenextlevel,pickupthephone.Literally.Pickupthephoneandstartcallingeachcustomeruntil you pick up a pattern. Who are these people? What are they trying toaccomplish?Theyarenot,bytheway,tryingtoaccomplishinstallingyoursoftware.Their

problemisnottryingtomakemoremoney.Theyarenothiringyourproductinordertoviewyourdashboard.Useroot-causeanalysistofigureoutwhytheyareinstallingthesoftware,how

they’re trying tomakemoney andwhat their business-model bottlenecks are,whatthey’retryingtousethedashboardfor.Askwhy—fivetimes,ifnecessary—togettotheurgentneedyourcustomerhas.

ThirdWaveThe third wave of growth comes from that same need to generate buzzentrepreneurs clamor for since first conceivingof theirproduct idea.Whendoyouknowyou’rereadytohelpgeneratebuzz?Whenbuzzisbeingcreatedbyyourexecution,notPR.Buzz happens when you dominate a market segment or are doing well in

several subsegments. You can’t keep a lid on it, because your customers arealready passionate, remember? This is truly product-market fit. Buzz at thispointiseasy.Mediaareclamoringforsuchstories.

Product-marketfitisn’twhatonehasdiscoveredthroughcustomerinterviewsor viability tests. Product-market fit comes from the market validating yourproduct. It occurs after iterating through market segment definitions, productfunctionality,andevenmessagingandpositioning.Whenallthreevalueslineupaswithaslotmachine,andyouclosetheword-of-mouthloop,youcandeclareyouhavefoundproduct-marketfit.Theonlyreasonwhyyoufindithardtocreatebuzznowisbecauseyou’renot

ready.Yougettherebyaddingsubsegmentsuntilithappensbyitself.PRisusedtoscaleexistingbuzz.As you reach for the mainstream, your marketing must appeal to multiple

subsegments. This allows you to drive larger, more expensive marketingcampaignsthatbringmorepeopleintoyourfold.This iswhere traditionalmarketing comes to the fore.Radio, TV, print ads,

and PR bring thousands of new visitors to your doorstep. Themessaging andpositioningisbroadenoughtoalludetothecorevaluepropositionforbroader,more traditionally drawn market segments. This only occurs after you’vedeveloped the affinity from the ground up. It only comes from understandingyourcustomersdeeply.PRischangingandrequireslessagencyworkthaninthepast.Youcancreate

your own relationship with online media editors. They are looking for yourcontributions.Startsmallhere, too.RyanHolidaysays,“Startingsmall isyourbeachheadintothenewscycle.Blogshaveenormousinfluenceoverotherblogs—makingitpossibletoturnapostonasmallsiteintopostsonlarge-trafficsites,asthebiggeroften‘scout’thesmallersites.Blogscompetetogettostoriesfirst,newspaperscompeteto‘popularize’it,andtheneveryoneelsecompetestotalkaboutit.”10IntheB2Bworld,influencingdataanalystslikeGartnerwork.Itmaynot be fair, but that’s the game. You also may have to wine and dine yourcustomers.There’snomagicbulletforcustomeracquisition.Startingsmallallowsyouto

moreeasilytrackyourcostofacquisitionrelativetopurchase,lifetimevalueofthecustomer (howmuch thecustomerwill spendover thedurationofbeingacustomer),andvelocity(timetocoverthecost).Your customer’s perceived relationship with you will depend on how they

viewyourattemptedacquisition.Subscribersdon’twanttocontinuetobemarketedto;theywantarespectfulrelationship.Howcanyouimproveuponthevalueyouarecreatingfor

them?Howcanyoucreatenewvalue?Howdoyourewardtheirloyalty?Repeat-transactioncustomersoftenappreciatereminders,likeupgrades,accessories,deals,andsuch.Theywantspecialtreatmenttobringthemaroundagain.High-costsingle-transactioncustomersexpectservicefollow-up,andtheyalsomayappreciaterelevantup-selling,maintenancecontracts,andpremiersupportoptions.Network-effectsrelationshipsrespondtowaystoincreasetheirnetwork,statuseffects,andgamification.

Marketing will continue to evolve. White papers and case studies aretransparenteffortstoinfluencedecisionmakers,butpresumablytheystillwork.Often they’re used to demonstrate due diligence to higher-ups, even if neverread.Remember, even if B2B sales requires Kabuki theater, people are paid to

performtheirjobs,andsotheywillgothroughthemachinationsandyoumustallowthemtoifyouwanttoclosethedeal.Youmust determinewhat scalingmeans to your particular business andwhatleversyouhaveavailabletomanagethegrowth.Scaledependsonmanyfactors,includingvalues,capitalonhand,customersegment,andrevenuemodel.“Values”simplyreferstothepointthatifyoudon’twanttogobig,youdon’t

haveto.Scalingmightmeanmodestyear-over-yeargrowth,orevennogrowthatall. For most businesses, scaling requires money beyond revenue. Limitinggrowth funds to cash on hand is fine, but one needs to be aware. Customersegmentdeterminesabilitytopay.Ifyou’retacklingdifferentsegments,youwilllikelyseeadifferentgrowthtrajectoryforeach.Therevenuemodel—howyouarepaid—determineswhatmetricstotrack.Fundamentally,growthtakesmoney.Youalwayspayoutinordertogetpaid.

Typically,youmustpayforsalesandmarketing,plusotherbusinessoperations,in order to realize revenues. Sales andmarketing are usuallymeasured versusrevenuesbecause they increaserelative tosales. Inotherwords,over timeandgenerallyspeaking,operationalcostsareconstantandsodeclinepercustomer.Salesandmarketing,however,increaseovertime,buthopefullyataslowerratethanrevenuegrowth.Sinceyoupayoutsalesandmarketingbeforerevenue,youmusthavecashon

hand.Cashcancomefromlastmonth’sprofits,bankloans,creditcards,venturecapital,andsoon.Measuringthelifetimevalueofacustomer(LTV)versusthecost to acquire a customer (COA) tells you if you can acquire customers

profitably. For every dollar you put into a customer acquisition channel, youknowyouarereturning1x,wherexistheLTV.ButwhiletheLTVmaybegreaterthantheCOA,eachpurchasedoesnotcover

your sales and marketing. You can’t wait to realize the lifetime value of acustomerbeforeacquiringthenextone!Theclosertheaveragedealsizeortheaveragerevenuepercustomer(ARPU)istotheCOA,thefurthereachdollaryouhavetodaygoes.BydrivingupARPUordrivingdownCOA,youincreasethenumberofcustomersyoucanacquireperdollaroveragiventimeperiod.Tracking thecostofacquiring(COA)onecustomerand theaveragerevenue

youmake per customer (ARPU), allows you tomanage how quickly you cangrow.AssumingARPU>COA,ifyoureducethecosttoacquireacustomerbyhalf,

you can double the numbers of customers per dollar spent. The length of thesales cycle is important too, since you are essentially financing the cost ofacquiringauserpriortothesale.HowmanysalesdoesittaketopayforlengthysalescycleintheB2Bworld?Word-of-mouthis therealmoneymaker,whichiswhywe’vespentsomuch

timediscussingproductpassion.Word-of-mouthonlyhappenswhenacustomerispassionateorloyalaboutaproductandwhenyouleveragethepassionthroughspecificbusinessactivities.Experimentingwithmoreexpensivecustomeracquisitionchannelsonlymakes

sensewhenyouunderstandyourgrowthlevers.Startupstendtostartwithlabor-intensive, but low-cost, acquisitions in order to work toward expensiveacquisition channels only when the core value proposition is well understoodacrossmultiplemainstreammarketsegments,organicgrowthisoccurringduetoproductpassion,andthebusinessismovingtowardlargercustomerswithhighermargins.Thetrajectorymightlooklike:Searchengineoptimization,includingcontentcreationviablog,socialmedia,video,e-books,etc.Searchenginemarketing,includingGoogleAdWords,Facebook,andthelike.Affiliatemarketing,bloggeroutreach,bundling,andinfluencerandsegmenthangouttargeting.OnlineadvertisingtargetingInternetpropertiesspecifictomarketsegments“hangouts.”

Traditionalmedia,includingtrademagazines,radio,marketanalysts,PR,andtelevision.

Foralloutreach,whetheronlineoroffline,youshouldconsider includinganonline,measurablecalltoaction.

CaseStudy:TenLeanStartupBuzzwordQuestionswithRobFan

LeanEntrepreneur:Let’sgettheformalitiesoutoftheway.What’sSharethrough?RobFan:Sharethroughisanativevideoadvertisingplatform.Bynative, we mean we integrate advertising content naturally andopenly into websites. We work with brands and agencies todistributehigh-qualityvideocontent they’vecreatedthroughtheirnetwork of publishers. We report back what was successful andwhat wasn’t. The primary pain point that we solve is getting anaudience to the content they’ve spent hundreds of thousandsproducing,thattheyhavenowaytodriveanaudienceto.LE: Okay, on to our real questions. Question 1:What was yourMVP?

Fan:Whenwestartedout,mypartner,DanGreenberg,andIhadacouple of different products going. In 2008, we had a Facebookapplication company.Webuilt a hugenetworkofFacebook appsandatonepointwerethethirdbiggestFacebookappcompanybydaily active users. At the same time, Danwas doing viral videoconsulting,helpingbrandsmakeviralvideos.Wesawthatwehadtonsof content inventory, tonsofpublishers, sowe thought, let’strytotakesomeofthesevideosandlet’sputthemintothesesocialapplications and seewhat happens and see if it’s valuable to thecustomer.LE:Likechocolateandpeanutbutter.Youguyswere theReese’sPeanutButterCupofFacebook!Fan:Haha,yeah,sortof.LE:Sorry.SoQuestion2:Whatwasyourfirstpivot?Fan:Yeah.Sowhat’sfunnyisweactuallyneverdidapivot...LE:Howrefreshing.Fan:Yeah,butwedidgothroughakindofrefocusofthecompany.Alongtheway,wehitapointwherewehadtomakeachoice.Westarted building out this ad business within the company, andbuilding out brand relationships and building out technology thatwe needed, while also maintaining our Facebook applicationsnetwork.Along theway,we realized that trying to focusonbothwas just not something we could do as a nimble startup. So weendedup spinningoff theFacebookapps and focusingon the adbusiness.LE: Question 3: What’s a warning for entrepreneurs about leanstartupthinking?Fan:Becauseweweresoearly,Ithinkwefellintoabitofatrapwhen the second MVP we built, which wasn’t much moresophisticated than the first, tookoff andwas enough to scale thebusinessforquiteawhilewithonlyminoriterations.

I think because we were so far ahead in terms of where webelieved themarketwas going, ourMVPwas solving enoughpain thatwedidn’tneed toworryaboutproduct, and sowhenyoufastforward,threeyearslater,wepaidthepriceforthat.It’syour classic startup story. We know that there is competition

around us.Themarketplace is changing. People are becomingmore aware of themarket.We can’t just keep on doingwhatwe’redoingandexpectittobeenough.Sowerealizedweneedtorefocusonproduct.What’sinterestingisthatfortwoorthreeyears, there was only myself and three other engineers. Weneverexpandedtheengineeringteambecausethingsweregoingfine and we had revenue, but it also meant that when you’reoperating a full-on business with very demanding customers,you’re also not innovating product, because the entireengineeringteamisfocusedonkeepingtheenginerunning.

LE:Question4:What’sthemostdangerousvanitymetric?Fan: Cash.We’re fortunate to be in a cash-rich business; there’slotsofmoneygoinginandout.But,onethingI’velearnedthroughthe years is that cash can be misleading: If it’s a big number itsounds great, but it doesn’t mean you’re setting yourself up tosucceed.Thebestlearningisnotcash.LE:Weshouldbeinyourlineofwork.Fan:Cash is essentially like theusermetric forusbecauseeverytime we close a deal it’s just like users signing up. But moreimportant is if the brand comes back to us and uses us again.What’smoreimportantisthatwecontinuetogrowoutthenumberofpublishersweworkwith and expand thenetwork so it’smoreattractivefortheadvertisers.Thosemetrics,whicharen’tnearlyassexy,areactuallytheonesthatdeterminewhetherweareviableasalong-termbusiness.Source:WorldGoneSour(TheLostKids)—viewthevideoathttp://youtube/tw7uhVtpI5I.

I’ll be the first to say cash is what kept us afloat. It’s whatallowsyou tomakemistakes, right? Ifweweren’t the typeofbusinesswhichbrings ina lotofcash,wecouldn’thavemadethe mistakes we made along the way. But still, it definitelydoesn’tguaranteeyouafasttracktosuccess.

LE:Question5:Whatisproduct-marketfit?Fan: I think of product-market fit in terms of the technology-adoption lifecycle.Earlyonyouhaveyourevangelists,and thosearetheguyswho,nomatterwhat,youshowthemanyshinynewobject,they’lljumponitandstartusingitandthey’llbepassionateabout it and they’ll speak to it and report bugs. They’ll tell youwhattodo,whatnottodo,butthat’snotproduct-marketfit.

Product-marketfit iswhenyoureachthemainstreamcustomerandofcourseitvariesbybusinessandyouhavetodefinewhoyour mainstream customer is. But when you have themainstream acting the sameway as an early evangelist, that’sproduct-market fit.Are they get excitedwhen you come in totalk about your product? Do they have opinions about it? Dotheyhavefeaturerequestsforit?It really comes down to identifying who is that person withthose requests. If it’s someone who you have seen to bemainstream in that industry, then I think you’ve definitely gotproduct-marketfitatthatpoint.Thenit’slike,“Oh,weneedtokeeponbuildingontopofthat.”

LE:Question6:Bestcustomerdevelopmentlearning?Fan:What’sfunnyisthatbothmyselfandmyco-founderhaveno

experience in the ad industry and the media world and it isprobably one of the most convoluted, confusing industries tounderstand.So,Ithink,takingaverydeliberatepaththatcustomerdevelopmenttalksaboutandmappingoutcustomerarchetypesandputtingthemupontheboard:Whoarethearchetypes?Whomakesthe final decision? Who is the actual executor of the contract?Whataretheymotivatedby?Doingalotofthatstuffhelpssolidify,whoare thepeople thatwe’re talking to andwhatdo theywant?What do they care about? How can they help us build the rightproductforthem?Ifeellikeweknewthattherewasabigbudgetinthemediaworldbutwehadnoideahowtotapintoit.

The biggest thing, however—this is probably the biggestlearning:MadisonAvenuedoesnotthinkinaveryrationalwayorinaverylogicalway.Ifeellikealotofstartupcompaniesgo,“Wow look, I built an amazingproduct andnow I just need abrandtobuyintoitandobviouslythey’regoingtobuyintoit.”Whattheydon’tunderstandisthat thereisanentiremethodtobuyingintoitandthatconceptisabsolutelyforeigntothem.Sothebiggest learning thatwehad, I think,was recognizing thatone,theprimarycustomerinthemediaspaceisactually21-,22-year-old new college grads who controlmillions of dollars inadvertisingbudget.They’retheoneswho,intheend,sayyeaornaytoworkingwithyourcompany.Oddly,ornotsurprisingly,they aren’t exactly motivated by what’s best for their brands,what’s best for their agency. They’re sometimesmotivated bywhogives thebestdrinks,who throws thebestparties,who isthemostfuntotalktoandhangoutwith.It’soneofthosethingsthat, for me, especially being an engineer and from SiliconValley, Iwascompletely thrownbackand I soonrealizedhowrelationshipdriventhisworldis.

LE:Question7:HowdoyouleanstartupB2Bsales?Fan:SteveBlankwrotehisbookprimarilyfromaB2Bperspectivebecause it was out of his Epiphany success, but I think the leanstartup movement moved toward consumer-based startups andweb-based startups. So you get a lot of different information outtherefocusedonconsumerstartupsversusenterprisestartups.Butthe business-to-business model is actually the angle where

customerdevelopmentworksthebest.Ithinktheconfusingpart,whenyou’redoingB2Bwithafieldsales team, is filtering the noise from the signal, because youhave people whosemain job is to be out of the building, buttheir incentivesmight not be alignedwithwhat’s right for thecompany.Youthenhavetoreallyunderstandwhatyouneedtobuildthatwillhelpyoulearnversuswhatyouneedtobuildjusttocloseadeal.Our first salesperson was my co-founder; he’s an amazingsalesperson. So hewas doing everything on his own.Hewasabletobuildalotofreallygreatinitialrelationships,butitwasnot a scalable way to grow and we were very cautious—everyone has horrible stories about hiring the wrong vicepresident of sales and thenhaving to start salesover andoverandover.Sowewereveryawareofthatandwethoughtmaybewe’rejustout winning in the market because my co-founder is just anamazing salesperson, right? If you have amazing salespeopleandyour founders are just so charismatic and able to sell thattheycouldsellanything,salesismaybenotagoodindicatorthatyourproductisreadyforthemarket.So what we did was bring in an outside rep firm to sell ourproduct.Theideawasthatiftheseprofessionalguyscannotsell,ourproductisnotreadytogo.Sowesaid,“Let’sgiveitashot,”andalmostimmediately,liketwoorthreemonthslater,wewerehittingchannelconflict.Weputtogetherthecollateral.Wehadtopresentthedecks.Wehad to give them one sheet.We had to print all this stuff forthem.Sotherewasalotofstuffthatwehadtoputtogetherforthis but, again, part of, in the lean way, you essentially areiterating through . . . havinga rep firm therehelpsyou iteratethrough it and just having a professional salesperson alreadysay,“Thatdoesnotlooklikeonesheet.Doitagain,”isvaluableinputbeforeyouwouldgototheclient.It was catching on very quickly and we said, “Okay, this isobvious,weneedtohireavicepresidentofsalesrightnow.”

We’re constantly iterating our decks and iterating our pitchesandwhatwe’vehadtodonowis,nowthatwe’reamuchbiggersalesteam,isfigureouthowtodoitina,Iguess,temperedwaythatdoesn’tmakethesalesteamgocrazybutwe’veconstantlybeen iterating the way or honing down the way wecommunicate, the way we position stuff, the way we presentstuff. That’s something that we’re constantly doing. So I likegoingout on sales calls everynowand then, even though I’mtheCTO,andmyco-founderisoutallthetimeandthat’soneofthe things that we’re doing when we’re out there. We’re justtesting different concepts, different ways that people arethinking of stuff and bringing it back and incorporating intokindofhowwe’retalkingaboutit.Thewaywe’vebeenabletodoitrightisbystayingontopofallthe things that are coming in, and so I think part of the greatadvantagewehave is thatmyco-founder isstillgoingoutandregularly being on these sales calls and we have some prettysavvy salespeople who are able to cut through the crap andreally understand what they’re talking about; what they aresaying,sotheycanbringbackactualgoodfeedbackandwecanfigureoutawaytopositionourselvesarounditorputourselvesinfrontofthepotentialcompetitorortheissuethat’shappeningsothatwe’reneverinareactiveway.It’shardformetorecallthemomentwhenwe’vehadtobesuper-reactivetosomethingoutinthefield.

LE:Question8:Doyoupracticecontinuousdeployment?Fan:No.WecouldbeandIthinkwe’vethoughtabouttryingtogettherebutwejustnevergot tothatpoint,andI thinkthereasonisthat,inourbusiness,weautomaticallyhavetonsofscale.So,fromthestart, thereneverwas thisopportunity tostartslowlybuildingthetoolingaroundittoallowustogettothepointwherewecouldusecontinuousdeployment.

Iactuallythinkofeverythingasinventoryandunusedinventory.There are moments when it’s like, “Ah,” because if we wereonlydoingleancontinuousdeploymentitwouldhelpbutIthinkofoneofthelearningsIhad,actuallyreallyearlyon,aboutjusttheentireagilething.Ihadnoideawhatagiledevelopmentwas

and I had to learn my way into it and I remember beingextremelydauntedbyhearingRiesdescribehowhisengineeringteamoperatesandhowtheywouldbuildsoftwareandIkeptonthinkinghowmyengineering teamisso inferior. Idon’tknowhow the hell I’m ever going to get to that point, and I wasthinking,“Youcan’ttakeateamfromzerotoahundred.”You can read about the hundred and you can try and get to ahundred,youcoulddreamaboutit,butit’snotgoingtohappenovernightand,forthemostpart,ifyougetuptoeven20,from0to20isawin.The entire thing behind agile is that there are many differentflavors of agile and you can pick and choose what pieces ofagile youwanted to do, as long as there are some core thingsthat you continue to do. I think that’swhat peoplemiss aboutagile, which kind of gets left out of the entire lean startupconversation, is a real conversation about what to pick andchoose out of agile and what are the right parts of agile thatreallyhelp?Ithinkgettingtothepointwhereyoustartthinkingof things essentially as backed up inventory or unusedinventory. They’re good mental models to help you kind ofunderstandhowtooperateinthatworld.

LE:Question9:Anythoughtsontechnicaldebt?Fan:Thepathwetookisastoryofnotkeepinganeyeontechnicaldebt and letting the business totally run and control the productitself.ThisiskindofgoingbacktoourMVPbeingtoosuccessful,whenwe justkeptonbuildingon topof theMVPwithout reallythinkingaboutthelong-termneedsofthebusiness,butessentiallyoperationalizingtheproductwithoutbuildingoutthefoundationoftheproductsowecouldcontinuetobuildonandinnovateontopofit.Sowedefinitelyhitapointwhenwewereforcedto...andthiswasactually,forme,itwaslikeonThanksgivingandIhadtostayupallnightandfigureouthowtoscaleupmachinesandhowto keep the cachemachines up for the next few days as best aspossible,knowingfullwellthatitwasgoingtostartcrashingagainveryquickly.Iwaslike,“Allright,you’vetakenonsomuchthatthere’snowaytoevenscaleitintherightwaythatwe’dprobablyhaveto...havetostartfromscratch”andthatwas,Ithink,oneof

thethingsthatwasabigsetbackforthecompanyatthetime.TheotherrealizationthatIhadalongthewaywasthebusinessis aroundcoreproduct.Therearemanypiecesofourproduct.Theones at the coreof thebusiness is an ad server and that’sessentiallywhat is the lifeblood of the company.The decisionwemadeatfirstwasbecauseit’score,we’vegottoownit,wehave to build it. So we spent a good two years building thiscustomadserverforourbusinessneeds.Theproblemwasthatitcouldn’tscaleanditcreatedjustahugeoperationalburdenontheengineeringteamatthetime.Atthesametime,Iwouldjustlogintoalltheseotheradserversoutthere,whichwerealreadybuilt and done.And it’s like, “Great, it does exactlywhatweneedandit’sdone.”SowhenI realizedweneeded toscale, I thought,“Right,whydo I evenhave toworry about this stuff because, one, it’s nothelpingme learn. It’s not accelerating the business at all and,aside from just being a cool engineering challenge, it’s notbenefiting at all.”So thatwaswhen Imade thedecision, “Allright, let’susea third-partyadserver.” Itmaybecorebut it’s,youknow,notthemostefficientuseofourtime.Havinganadserverthatdoesn’twork,doesn’thelpthebusinesslearnormoveforwardatall,evenifitiscore.IthinkthefearthatIhadwasthatthisissuchacorepieceofourtechnology.We shouldbebuilding it.We shouldbeowning itandIthinkthereistherighttimetodothatbutwhenyou’reintothelearningphase,useasmanythird-partytechnologiesasyoucan,evenifthatthird-partytechnologyisgoingtobeacorepartof what you’re doing because what you’re trying to prove iswhethertheoverallproductofferingyou’vebuiltisattractivetothecustomerbaseandwhethercustomersarewillingtopay.

LE:Sohowdoyouknow?Bonusquestion,Iguess.Fan: I think the main thing is really being disciplined about themetrics that you’re watching and then having specific scalingmetrics inplacetobelike,“Allright,soweachievedx,y,andz,withourMVP, sonowweneed to spend the timebuilding thesespecific chunks of a product out becausewe’vehit some typeof

product-marketfithereandthisfeelslikethisisprobablygoingtostay,versussomeotherstuff.”

Whenyou’resoearly,whoknowsifanything’sgoingtostay?Once you can start seeing the permanent blocks start to form,that’s when you should probably go back in and putreinforcementinthere.Youneedto,fromthestart,beverydeliberateabouthowyou’recommunicatingdebtandalsowhatistheendofanMVPcycle,right?Ithinkputtingthosemetricsinearlyandthat’soneofthethingsIgotfromalotoftheleanUXstuffthat’shappeningnowis putting a lot of this information up and center, in front ofeveryone,reallyhelpseveryoneunderstandwherethecompanyis,and,therefore,ifyouputyourscalingmetricupontopof,ontheboardor it’sannouncedonaregularbasisandyoukindoftalk about howwe’re about to hit the capacity of it andwhenyouneed tonowspend timeworkingon it,noone is shockedaboutthat.

LE:Question10:Sowhataboutthecompanyculture?Fan: From early on you have to start instilling this concept offailingfast,andIthinkwetrytobeverydeliberatewithourcultureand to find ways to essentially scale it. So we have a weeklymeeting with the entire company as a way to kind of bringeveryone back together and talk about things. We’ve had someconversationwithpeoplewherewekindofhave to saywedon’treallyknowwherewe’regoingorwhereweneed togowith thisproduct or we don’t have that strong of a foothold in thismarketplace.Tosomeemployees, thisshocks them,I think, toanextent,butIthinktheygetusedtoit.

We also do a quarterly meeting where we bring everyone in,which is also really importantbecausewehave remoteofficesnow.Thatbrings themall inandget everyone syncedupontothe same page and reinvigorate the company. I think all thoseactivities,althoughtheymayjustfeelliketheyjustcreatelittlebonding things, thoseare the typesof things that formculture,and if you do the right activities and you talk about the rightthings in those meetings and in those instances, that’s howcultureisformedandthat’showpeoplestartthinkingintheway

thatthefoundersthink.We’vedoneallthepaperworkonvalues,andsuch,butnothingcomes out of it until you actually start essentially living thevaluesandpeoplestartlearningfromwhatyouaredoingandIthink that’s the biggest thing. You’re struggling to create anenvironment in which people are not afraid of failing. Asleaders,youshouldprobablylet themallknowhowyoufailedandthenhowyou’re learningfromitandthat’sagreatwaytogeteveryonetothenunderstand,“Oh,it’sokaytofail,”andsokindof talkabout things:“Oh I tried thisout. Itdidn’twork,”and to constantly talk about that type of philosophy andthinking, that is what will get everyone in a culture whereeveryonewantstofailfast.

LE:Towrapup,whereareyounowasacompany?Fan: So we are about 60 people now. We’ve got three offices.We’ve got a sales office inNewYork, a sales office inChicago,we’re headquartered up in San Francisco.We’re at a point nowwhere we’ve got an existing product that we’ve operationalizedandthatwe’rekindofgrowingandscalingout.Atthesametime,now, we’re also at a point where we need to be innovating andbuildingnewproducts,whether it’s on topof the existingoneorthingsthatarekindofparalleltowhatourexistingproductis,andsowe’reatthatpointnowwhereweneedtodothatifwewanttokeeponmovingandmovingupessentially.

Yeah.SowetookaseedroundfromMikeMaplesatFloodgate,andthenweraisedanAroundfromNorthBridge.

LE:Great!

WorktoDoRecallthatinChapter3youpositedthefunctionalityrequiredtoinducecustomersatisfaction.Wehopeyouhavetestedwhetherwhatyoupositedbearsanysemblancetoreality.

Notes

1.Whateveryoudo,donotfallforthe“builditandtheywillcome”typeofthinking;eventhebestproductsneedtobemarketedandsold.Infact,thebestproductsareoftenassociatedwithverysophisticatedmarketingandsalesprocesses.2.Ries,45.3.MarkLeslieandCharlesA.Holloway,“TheEnterpriseSalesLearningCurve:AFrameworkforBuildingStartupsandLaunchingNewProducts.”www.khoslaventures.com/wp-content/uploads/2012/02/Sales_Learning_Cycle.pdf.4.Blank,11.5.DalyandO’Dea,SelectSelling.6.ChrisGuillebeau,TheArtofNon-Conformity(London:Turnaround,2011).chrisguillebeau.com.7.Toriskbelaboringthepoint,insomemarkets,yourcustomersmaynotbecapableofverbalizingorevenrecognizingtheanswerstothesequestions.Ergo,savvyentrepreneurswillneedtoframethesequestionssuchthattheanswerrevealsitselfincustomerbehavior.8.SteveBlank.com,http://steveblank.com/2009/04/02/supermac-war-story-5-strategy-versus-relentless-tactical-execution-%E2%80%94-the-potrero-benchmarks.

9.Internetusagebycountryavailablehere:www.internetworldstats.com/top20.htm.10.www.fourhourworkweek.com/blog/2012/07/18/ryan-holiday.

Chapter10

TheFinalWord

Talk to entrepreneurs tackling a consumer problem and they’ll tell you howmucheasierlean is inbusiness-to-business.Talk tobusiness-to-business(B2B)andyou’llheartheopposite.Talktobusiness-to-business-to-consumer(B2B2C)andyouwitnessvirtualself-immolation.Lean startup doesn’t work with consumers, because you can’t believe what

peoplesay.Leanstartupdoesn’tworkforbusinesses,becausetoomanypeopleareinvolvedinthedecision-makingprocess.The most pervasive reasons we hear for not acting as a lean startup are

mutuallyexclusive:“It’sunproven;showmealeanstartupbigwin.”“Whatever,there’snothingnewhere;entrepreneurshavebeendoingthisforages.”

Therearelotsofexcusesfornotdoingleanstartup,buttheremedyboilsdowntothesameidea:“Launchproductbasedonwhat’sbetweenourears.”The real reason entrepreneurs don’twant to do lean startup is that it’s hard.

Don’t talktocustomers; it’shard.Don’t involvecustomersindesign;it’shard.Don’tanalyzedataforactionablemetrics;I’llhavetohireabusinessintelligence

team.Don’trunexperiments;itwilltakeawayengineeringresources.ThereasontheMythoftheVisionarypersistsisthatifwecan’thopetoendup

asvisionaries,we’llfeellostandcluelessabouthowtobuildascalablestartup.Therealvisionaries,however,arenotthosewhopredictedthefutureorforesawproductsthatploppedfromtheirskullsinfullyrealizedform.The real visionaries are internally driven to make big change. They are

committedtodisruption.Theyhaveanidea,butitissecondarytochange.Theymakemistakes, arewrong—fail—but relentlessly pursue their ambition. Theyactuallytakethevisionoutoftheequation.Thevisionisaddedlater,aftertheywin.Leanstartupisamethodforbeingbothdisruptiveandnavigatingchange.There isnoblueprint for true,black-swan, radical,bigdisruption.Toomany

variables are involved. Previous economic, technological, and societaltransformations create platform layers like Earth ecosystems that drive newinnovationandmakepossiblebigwins. Inouropinion, thebestonecando isposition oneself for such an occurrence through unrelenting persistence andnonstopexperimentation.Despite what youmight think, a graveyard of equally visionary individuals

surroundsthewell-knownentrepreneurialiconsofourday.The time is ripe. Transformation layers are once again aligning for an

increasing number of black-swan events. Despite the cries of a lack ofinnovation,majorindustriesarebeingdisruptedatanincreasingrate.Regardlessofwhetheryouareseekingtobeexpostfactoanointedavisionary,leanstartupisamethodologythathelpsyou—asanentrepreneur,intrapreneur,oralinchpin—to not only find a place in this newworld, but to thrive. Lean startup is aprocessforidentifyingandeliminatingbusiness-modelbottlenecks.Likeanengineerwhomustlocateandeliminatebugsandotherinefficiencies

onthepathtowarddeliveringahigh-performingproduct,entrepreneurscanviewtheirstartupendeavorasaseriesofbottlenecksinhibitinggrowth.Thequestionis,howdoyoualignyourorganizationandestablishtheculture

and processes necessary to actively, relentlessly seek out and eliminate yourbottlenecks?Thelureofactingforacting’ssakeisstrong.“Justdoit”isaclarioncalltobebusy.Itiswherethemoneyis.Broadlyspeaking, themajorchokepointsareat the ideastage, releasing the

minimum viable product (MVP), finding product-market fit, establishingrevenue-positive customer acquisition, and finally making the transition fromlearningtoexecuting.Inotherwords,afteryoufigureitout,youneedagroup

executingandcontinuingtolearnoryouwillbeleftbehind.Attheideastage,throughinteractingwithcustomersandrunningexperiments,

you validate that you have the right customer profiles and understand theproblemstheyface.AttheMVPstage,youiterateontheproduct,runexperimentsonfunctionality,

performusabilitytesting,andtrytonailthecorevaluepropositionforthemarketsegment.Youcontinuetointeractwithcustomerstotestthatyouarebuildingtheright product, learning more about their problems and learning how you willmarket,sell,anddeliveryourvaluetothem.Product-marketfitisacontinuationofexperimentingandgrowingtheproduct

to find early mainstream passion and to establish the correct positioning andmessaging.In the customer acquisition stage, you’re validating the conversion funnel,

testing acquisition channels, and measuring return to ensure you have afunctioningbusinessmodel.The final stage to scale is learning how to get out of the way. To scale,

organizations must adapt. They must learn how to execute efficiently, whilecontinuouslylearningandcontinuouslyimproving.But,ofcourse,thedevilisinthedetails.The details are organized by build-measure-learn. Build an experiment,

measure the action, analyze the results, and determine learning.Rinse, repeat.Rinse,repeat.The value-creation economy is the result of technological and cultural

transformations. Technology has finally been pushed to the edge for thisparticularwave.Whenpastwavesreachedtheedge,wesawcars,refrigerators,microwaves, washers and dryers, stereos, phones, and so on, for consumers.Thosethatwonprovidedexceptionaluserexperienceorprovidedthemostvalueforalowcost.Nowweseealltheseitemscomputerized—sustaininginnovation—andtonsof

new computerized products thatminiature computers enabled. It’s time to endthe distinction between software companies and product companies. They areoneandthesame.Your ability to know what your customer needs and your relationship with

your customer are your competitive advantages. We will see many smallercompanies nailing core value proposition for nichemarkets versus companiesproducingfewerproductsthatservemany.

Startupsspendyears iteratingonproductandmarketsegments trying to findthefitthatpropelsthemintoproduct-marketfitnirvana—anirvanathatisoftenshort lived.Even after finding product-market fit, youmust continue to learn,iterate,anddiscovernewwaystodisruptagain.Thenew reality considers that todominate likeoligopoliesofold,youmust

continuously improve known processes and continuously learn new ones;continuouslyreiteratenewproductsorexistingproductfunctionality;ordiscovernewmarketsegmentswhereyoucanprovidevalue.Much to theconsternationofventurecapitalists,we’rewitnessing theendof

thedominanceofbig-wininvesting.Tracing lean startup to its origins, one understands that it emerged from the

realization that startups execute before learning. Why do we accept iterativelearning processes when running scientific experiments, when conductingresearch, or evenwhen building complex products, but notwhen determiningwhetherwe’rebuildingtherightproduct,norwhenwe’reattemptingtomarketandselltheproduct?

Tobuildasuccessfulbusiness,youmustlearnseveralthings:Whatproblemorpassiontoaddress.Whatsolutiontoprovide.Forwhomtoprovideit,segmentbysegment.Howtomarkettothesegment.Howtoselltothesegment.Howtoturnacustomerintoanadvocate.Howtoscaleasegment.

Howtoinnovateagain.The idea is toevolvefromleanstartup to leanenterpriseasyouvalidate the

answertoeachquestion.Inotherwords,youmovefromlearningtoexecution.Thepointistoembrace“Idon’tknow”inyourunrelentingpursuitofchange.

Whetheryouseektochangeyourownlife,changeyourcommunity,orchangetheworld;whetheryou’reseeking tosupportyourfamily,or10employees,orthousands,youhave to start small tobebig.The lean startup is a language todescribehowtocreatevalueasquicklyaspossible,toleveragedeepknowledgeof your customers, to discover your driving force, and to scale quickly onceyou’vefigureditout.

CaseStudy:DrinkingKool-AidandEatingDogFood

Marketingisbroken.HubSpotwasfoundedin2006byBrian

HalliganandDharmeshShahtofundamentallychange—todisrupt—howbusinessesmarkettocustomers.Inourworldofinformationoverload—data;images;nonstopadvertising;high-volumepitches;andtheblurringofpaidmessaging,newsandentertainment—wemustadapt.Theconsumercreatesnewfiltersandincorporatesnewrequirements,andbusinessesmustsomehowriseabovethedin.“IfyoucallmeonmycellphoneandIdon’trecognizethenumber,Idon’tanswerit,”saysMikeVolpe,vicepresidentofmarketingatHubSpot.“Soifyou’reasalespersontryingtogetaholdofmeandhopingtoarmwrestlemeintobuyingyourproduct,itisreallydifficulttoday.Itdoesn’tmeanIdon’tbuythingsthough.I’mbuyingallkindsofstuffformybusinessandformepersonally.”Thewaythatbuyersbuythingstodayisnotthewaypeopleusedtobuythings.Peoplehatetoreceivecoldcalls.Theyblockoutadvertising.Theylooktofriendsonsocialmediaforproductinformation.Theysearch,theyreadblogs.Theydoalotmoreresearchthemselves.Itusedtobethatcompaniesandtheirsalesrepresentativescouldcontrolinformation.Thatworkedinapre-Internetenvironment:beforesearchengines,beforesocialmedia.Youhadtotalktosalespeopletogetinformationandfromtheget-go,youwereinthesalesfunnel,youwerebeingsoldto.That’ssimplyhowitworked:Thesalesrepshadallthepower.“Asmarketers,”Volpeexplains,“wehavenotyetfullyembracedtheshiftinpowertowardthecustomer.Itrequiresafundamentalchangeinmarketing,afundamentalchangeinsales.”ThisistheproblemHubSpotfocuseson.Whileapparenttosome,mostbusinessesdon’tevenrecognizetheproblem,andamongthosethatdo,nooneknowsthesolution.It’sanewworld.Whilethephrase“leanstartup”wasn’taroundyetin2006,agiledevelopmentanddevelopingacustomerfeedbackloopwereattributesforward-thinkingstartupsembraced.“Wewereverymuchfocusedongettingproductoutthedooranditerating.Notonlyiteratingonproduct,buteverything,marketingandsales.Wewerelike:Trysomething,learnfromit,iterate,improveit,andkeepmovingonfromthere.”

Marketsegmentationhasevolved,too.Traditionally,aB2Bcompanywouldimmediatelydivideitsmarketbyverticalindustries,suchaslawfirms,financialservices,manufacturing,etc.Marketing,sales,andproductdevelopmentareorientedaroundtheseverticalsandthenfurtherbyfirmographics,suchasnumberofemployees,revenues,andsoon.HubSpotinitiallytookafairlytraditionalapproach.TheylookedattheFortune1000market,butfeltthatwasapathwithmultipleobstacles:longsalescycles,lotsofcompetingtechnology,difficultyinreachingdecisionmakers,highdemandsintermsofproductfunctionality,andthelikelihoodtheywouldn’tevenrecognizetheyhadtheproblem.Ifweweretoapplyasegmentmatrix,itmightlooklikethis:

Notagoodpicture!SoHubSpotlookedatsmallerbusinessesandwithinthat,theythoughtaboutverticals,likelawfirms,cardealerships,doctors’offices,andaccountingfirms.Whattheyfound,however,wasthatsegmentingbasedonsuchverticalsdidn’tmatter.Thevariablesthatdifferentiatedmarketsegmentsturnedouttobebasedonabusiness’sknowledgeofpainandtheirrevenuemodel.Organizationsthatwerealreadydoingsomeamountofmarketing,butfeltiswasineffectiveandwantedtoleveragetheInternet,weregoodearlyadopters.Further,businessesthatcurrentlyhadasalesprocessandneededtogenerateleadsweremorefavorablethantransactionbusinesseslikee-commercesitesorthosegeneratingrevenuefromadvertising.Verticalcharacteristicsdidcomeintoplaywhenmarketingandsalestacticsdiffered,astheydid,forexample,fornonprofits.Anupdatedsegmenttablemightlooklikethis:

Beingastartupwhoseproductshelpinnovatemarketingfunnels,HubSpotwasforcedtoeatitsowndogfood.Build-measure-learnwasthebasisforlearninghowtomarkettotheirsegments.“Itwasexecutealittlebit,learn,execute,learn,execute,learn.Itwasdefinitelythistypeoffeedbackloop,”Volpesays.Theyaskedforbetasign-upsontheirlandingpage,theystartedblogging.ThenDharmeshbuilt“WebsiteGrader,”whichisafreewebsiteevaluator.“Wethought,‘Maybepeoplewillbeinterestedinusingthisandmaybeaftertheygradetheirwebsitethentheywillbemoreinterestedintryingtosolvetheirmarketingproblemsthatthetoolidentifies.’”SoHubSpotstartedofferingeducation:webinars,buildinguptheblog,talkingabouthowtoimproveinboundmarketing.Thefundamentalinsightistwofold:First,mostorganizations(yours,HubSpot’s,HubSpot’scustomers)mustinnovateinareasotherthantheproduct.Second,funnelactivitiesshouldbevalue-creating,wherepossible.HubSpot’sWebsiteGrader(andotherfreetools)createsvalueitself,regardlessofhowitfurtherscustomers’pathsdownHubSpot’ssalesfunnel.ThesamecanbesaidforHubSpot’swebinars,blogs,andothercontent-creatingactivities.E-mailnewsletters,forexample,thatmerelysellorpointtootherresources,thatdon’tprovidevalue,areunlikelytomovetheneedleofthebusiness.“Itcreatesvalueonbothsidesoftheequation,whichhasreallybeenhelpful.WhenIdoawebinarorwriteablogpostorcreateane-bookorsomethingthatispurelyeducational,itabsolutelyishelpfultotheotherperson,”Volpeexplains.“Butitisalsohelpfultome,becausenowIhavemorepeopleintheworldthatthinkaboutmarketinginthisnewway.Eveniftheydon’tbuy,they’retalkingtotheirfriendsandcolleaguesaboutthat.Theyaretryingtoimplementthat.Maybetheymovetoanewcompanywheretheyhavealargerbudgetandit’sabetterfitandtheyenduppurchasing.”Creatingvalueinthisway—throughoutthevaluestream—createspassionatecustomers.HubSpotobsessivelyminesitsdata,segmentscustomers,looksforpatternsthatenforcethenotionofcreatingpassionate,loyalcustomerswhoactasevangelists.

Likemanyforward-thinkingorganizations,HubSpottracksitsNetPromoterScore,whichmeasureshowlikelycustomersaretoreferitsproductstoothers.Buttheydon’tjusttrackthesescores;theydoubledownonthem.HubSpotdoesn’tjustdocasestudieswiththem,orwritethemupforthewebsite;theytreatthemspecial.Theypromotetheircontent,sendthemswag.“WegavethemVIPticketstoourconferenceandtheygottomeetCindyLauperwhohadcometoperformattheevent.”InadditiontoNPS,theytracknon-productuserswhocontinuouslyinteractwithHubSpotthroughdownloadingcontentlikee-booksandattendingwebinars.They’vedemonstratedloyalty,thoughtheircurrencyistime.“Weputthosepeopleinasegmentbucket.Iftheyhavegonethroughthedownloadprocessandhavebeentouchedbythesalesteammorethantwoseparatetimes—youknowwhat?Theyloveus,theyloveourcontent,butforwhateverreasontheyarejustnotgoingtopurchase,butwewantthem.Weactuallycommunicatewiththemmore.We’vefoundthatthosefolkstendtobetheonesmostlikelytoshareourcontent.”HubSpottakesdataseriously.Theyhirequants,shortforquantitativeanalysts,whousesophisticatedmathematicsandcomputeralgorithmstoanalyzedata.They’redeepintothedatalookingforinterestingpatternstheycanleveragetoaccelerategrowth.Theylookatdataintermsof:

Pre-salesactivity:websiteinteractiondata;howpeopleinteractwiththefunnelbasedonwheretheycamefrom.Conversionactivity:howthefunnelstepsdiffered;closingrates.Post-salesactivity:howdifferentsegmentsusetheapplication,whatparts,andhowoftenandtowhatbenefit(e.g.,leadgenerated).High-valuecustomers:retentionratesbysegment,sizeofbusiness,andpartsofproductused.

Thedataisusedtodeterminehowtoprioritizemarketinggoalsandtactics.“Iknowthatsomebodyinafive-personcompanywhosignsupfora

webinarshouldaverageafewdollarsofmonthlyrevenueversussomeonewhoisata100-personcompanyandsignedupforademo,whichaverages$150/monthorsomethinglikethat.SoIcantelloneofmymarketers:‘Heyyouneedtocontribute$50,000ofpipelineandyoucangettherebyabillionwebinarregistrationsoryoucangettherewith1,000demorequests.’”Andhowdotheyreachthequota?Experiments,ofcourse.HubSpothascreatedastructurearound“howtoexperiment.”Becausetheproductisfairlymature,cross-functionalteamsdonotnormallyhaveengineeringmembersbutcangetthemifneeded,oncetheyproveviability.Theteamstypicallyincludemarketing,support,sales,andsometimeswebdevelopers(asopposedtoproductdevelopers).Theyhave“experimentmeetings”whereteamspitchtheirideas,getadvice,andthenreportbackregularlyonprogress.Experimentshaveincludednewchannels,newsegments,andlotsofsplit-testingonlandingpages,e-mailssalestraining,andsoon.“Onegreatexampleisouragencyresellerchannel,whichisnow30percentofourrevenue.ThatstartedoutasanexperimentwhenPeteCaputothoughtitwouldwork.Someofus,inourinfinitewisdom,toldhimhewaswastinghistime.Icamefromacompanythatsold100percentthroughchannelandresellers.Weweresaying,‘Thisiscrazy,resellersareterrible.’“Peterjustkeptdoingitandwe’relike,‘Fine,justletusknowwhathappenseachmonth.Wethinkit’sabadideabutyoucandowhateveryouwant.’Nowhehasateamoflike30peopleandhe’s30percentofourrevenue.Heisdirectorofthiswholechannel.”Sellingintononprofitsstartedasanexperiment.Thee-commercesegmentthatoriginallydidn’tlookpromisingisnowgettingtraction,andthatstartedasanexperiment.“We’redoingoneexperimentrightnowwherewe’retakingaspecifictypeofleadthatgoestoourmid-sizebusinessteamandinsteadgivingthemtothreededicatedsalesreps.Wearetryingtoseeifwecanactuallyincreasetheconversionrateofthoseleadsifthoserepsfocusandwegivethemspecifictrainingonhowtoaddressthem.”HubSpotistheultimateleanstartup.Theyfocusondatathatis

relevanttomovingthebusinessforward:productsatisfaction,passion,andthesalesfunnel.Theirmarketingactivitiesnotonlyfurtherthecauseofthebusinessbutprovidevaluesuchthatcustomersaremorelikelytobesatisfiedandpassionate.Theyrunpurpose-builtexperimentstoaccelerategrowthandprovidethedatatoinformandprioritizetacticsandproduct.“Ithinkalotofwhatitreallyboilsdowntoisintheolddaysmarketingfocusedonhelpingyoursalesteam,”Volpesays.“Todaywhatyoureallywanttodoiscreatemarketingthathelpsyourpotentialcustomers:creatingmarketingthattheylove,whichthenbuildsthatloveforyourcompany.”

WorktoDoForallthosewhowantastep-by-step,bullet-proofblueprintplanforsuccess,hereitis.Treasureit.Holditclose.ThisishowtobecomeaVisionary.Job1:IsThereaSolvableProblem?

Leavethecomfortofyourhomeandgofindonepersonwhoisemotionalaboutthepainorpassionyouareaddressing.IfyouareaB2Cplay,findninemoretocompleteyourLETeamof10.IfyouareaB2Bplay,findtwomoretoformyourLEAdvisoryBoard.Ifyouarecreatingamulti-sidedmarketplace,servebothsides.Lookforpatternsinthepeopleyoucompile.

Job2:IstheSolutionTenable?Additionally,qualifyyourLETeamof10orLEAdvisoryBoard.Find10(3)peoplewhoareexcitedaboutyourhigh-levelsolutionidea.Ifnecessary,filloutyour“teamof10”(AdvisoryBoard)withnewblood(startingfromthebeginning).Whatisthepattern?

Job3:SolutionDiscussionsEngageyourLETeamof10orLEAdvisoryBoardduringproductdevelopment.Areyouontherighttrack?Isthecustomeronrightplatform?Performusabilitytestingwithcompetitiveproducts.Conducta“highhurdle”experiment.Ifresponsesarelukewarmoruninterested:

Changethesolution.Changethesegment(startover).

Job4:ViabilityTestingWhatismostuncertainaboutyourbusinessmodel?Runpurpose-builtteststoresolveuncertainty:

Landingpage

ConciergeWizardofOzPrototypesWireframes,mockups,similarproductsTestapps

IfyoulosemembersoftheTeamof10orAdvisoryBoard,refill.

Job5:MinimumViableProductValidatecustomerwilldoinproductwhatthey’vesaidthey’ddo.Iterate.Developdiscretefunctionalitythataddressesthepain/passion.Iterate.Validatethroughcustomeruse.Iterate.Performusabilitytesting.Iterate.IfyoulosemembersoftheTeamof10orAdvisoryBoard,refill.

Job6:Post-MVPAsyoulearn,splitoffexecution:

Learn“activated”;buildtoward“satisfied.”Learn“satisfied”;buildtoward“passionate.”Buildtoward“wholeproduct.”

Developersshouldhavethegutsnottodevelop.IfTeamof10orAdvisoryBoardmembersarenotpassionate,refill.Whatisthepattern?TurnyourTeamof10(3)intoateamof20(6).Learn“passionate”;increasespeedofcustomeracquisition.Createcross-functionalteamschargedwithachievingspecificobjectivesbasedondatathatmovestheneedleofthebusiness.

Job7:FunnelVisionUseinsightsfromyourteamof20(6)to:

Validatewherecustomersegment“hangsout.”Validatethatyoucanreachthem.Validatewhatmessagingandpositioningresonates.Validatewhatmakescustomertrustyou.Validatewhatconvincescustomertobuy.

Re-segmentexistingcustomersbasedoncombinationof:painoriginvalue(revenue)funnelproductusagepatterns

Job8:MinimumViableBusinessLifetimevalue>costofacquisitionVelocity:averagerevenueperuserversuscostofacquisitionWord-of-mouth:viralcoefficient

AcquisitionchannelviabilityDiscoveryof“shadowforce”

Job9:Long-TermGrowthExecution+continuousimprovement+continuouslearningContinuousimprovementof“shadowforce”Resell,cross-sell,up-sellNewproductsforexistingcustomersegmentsExistingproductsfornewcustomersegmentsDisruption:newproducts,newcustomersegments

AcknowledgmentsHow does onewrite an acknowledgments sectionwithout it sounding like anAcademy Awards acceptance speech? One probably can’t. Yet this section isimportanttous,becausewithouttheseindividualsthebookwouldnothavebeenpossible.UnlikewiththeAcademyAwards,whenyoumightturnthechannelonceyou

knowwho’swonanaward,youshouldreadthissection.Why?Becausetheyarepeoplewhomyoushouldknoworwanttoknow.Theyarepeoplewhoaredoingthings,peoplewhoarechangingtheworld.First off, we’d like to thank our editors at Wiley, Laura Walsh and Judy

Howarth.Oneoftenhearshorrorstoriesabouteditors,andthoughthey’realwaysthanked in the end, the acknowledgment is often buried. This book is aboutdisruption, and there’s no better case study of an industry being turned on itsheadthanbookpublishing.Lauragetsthis.Sheisforwardthinking,opentonewideas,andinfinitelypatient.NotetoWiley:PromoteLaura.Themostcommonquestionwegetfromfrustratedintrapreneurswhoseetheir

effortsatrealinnovationinsidetheirlargeorganizationscontinuouslythwartedis“Howdoweconvinceseniormanagementtoadoptleanstartupprinciples?”Wealwayshaveoneanswer:“BuyEricRies’sbookTheLeanStartup.Ries’sbookis,handsdown, thebestway forbigbusiness tounderstandwhy theyneed toturn their continuously thwarting organization into a continuous learning one.Thankyou,Eric,forleadingthechangeandforsupportingourefforts.Similarly,whenweencounterMBAstudentsorprofessorsseekingtoactually

teachentrepreneurshipandnotjustmarkettheteachingofentrepreneurship,wepointthemtoSteveBlank.It’strulygreatthatforward-thinkinguniversitiesareusingtechnologytomaketheircoursesavailableonline,buttherealdisruptionto education is coming from the few entrepreneurswho are changingwhat isbeing taught and how it’s being taught. Blank’s class at Stanford is the bestexampleofthatwe’veseen.Insteadofalab-to-marketprogramthatresultsinabusiness plan (ugh!), Blank’s course results in real, live, functioning startupswith validated business models and paying customers. Thank you, Steve, forleadingthechangeandcontinuingtosupportourefforts.Wewouldliketosingleoutoneindividualinparticular.HitenShahembodies

today’svalue-creation startupculture.He is a lean startup thought leader,kindhearted,magnanimous,andagreatfriendwhohassupportedoureffortsfromthemomentwefirstmet.Thankyou,Hiten.We are grateful to FakeGrimlock for providing the artwork thatmakes this

bookspecial.Wearefortunateandprivilegedtobeabletotravelaroundtheworldandspeak

to entrepreneurs, investors, and other big thinkers. They’ve all influenced thewaywe view theworld,what’s happening globally, and, of course, this book.For taking timeoutof theirbusyschedules tospeakwithus,wewould like tothankPaulKedrosky,BillGross,MikeMaples Jr.,AlanCooper,BillBurnett,Scott Summitt,NickPinkston, PatrickO’Neil,BrianClark,MikeVolpe,BradFeld,AndyButler,andDavidtenHave.Similarly, thanks to Rob Fan, Bennett Blank, Hugh Molotsi, Marti

Frederickson, Mark Frauenfelder, Nate Oostendorp, Tom Fishburne, AlexDouzet, Stephen Devereux, Tim McCoy, Yoav Lurie, Lucas Carlson, ChrisLindland,NickFellers,ChiragPatel,RichardCaro,RobEmrich,DrakePruitt,Steven Cox, Chris Waldron, Brent Freeman, Jeff Gothelf, Andres Glusman,David T. Lang, Dan Palacios, Danny Kim, Ryan James, Noah Kagan, JeffTitterton, Patrick Llewellyn, Jason Sew Hoy, Lachlan Donald, VenkatSubramaniam, Bill Scott, Dave McClure, and Paul Singh for sharing theirstories.Special shout-outs to friends Jonas Koffler, Giff Constable, Trevor Owens,

EricOtterson, EricGalen, SeanMurphy, Sean Ellis, TristanKromer, JeremeyLavoi,AbbeyLavoi,JulianBergquist,KateRutter,JaniceFraser,JasonFraser,Venkatesh Rao, Al Bsharah, Bryan Hall, Aaron Eden, Parker Thompson, NikSouris,RyanHoliday,MichaelEllsberg,StephenSammut,VenkatChandrasekar,Jin Lee, Salim Virani, Dan Martell, Ben Yoskovitz, Alistair Croll, GaryWhitehill, Sisha Ortuzar, Jeffrey Zurofsky, Johnny Chan, Rodney Rumford,LindsayDaytonLaShell,AbbyFichtner,AllineOliveria,CindyAlvarez,NateBerkopec,CaseyArmstrong, TaylorMiles, Shervin andVafaTalieh, FarsheedAtef, Keyvan Raoufi, Anthony Singhavong, Faiza Tajammul, Avesta andCameronRasouli,JoeZulli,PeteMauro,MollyMatthieson,RyanTanaka,AmirBanifatemi, Andres Buritica, OlinHyde,WillyHuang,Maggie Finch, LaurenGard, Tarek Pertew, Maciej Skierowski, Neil Patel, Philip Rosedale, DannyBeckett Jr., John Fries, Josh Payne, Chris Johnson, Alexander Osterwalder,Julien Smith, Steve Cheney, Derek Holt, Scott Case, Peter Hargittay, DebbieLanda,ClareRyan,BrianHall,GregIsenberg,andStephenDaviesforproviding

somecombinationofcontent,review,bigthinking,stories,inspiration,support,andfriendship.We would also like to acknowledge others whose thinking and writing are

important influences: Seth Godin, Mark Suster, Marc Andresseen, BenHorowitz,DavidCohen,BradFeld,DavidSkok,TonyHsieh,NassimNicholasTaleb,ClaytonChristensen,andFredWilson.Thanksagaintoourearlyadopterswhocontributedto thebookbydivingin

early, reviewing content, providing feedback, and otherwise supporting usthroughpre-orders.Ofcourse,thebookissimplynotpossiblewithoutthesupportandpatienceof

ourfamilyandfriends.Brant: I send loveand thanks todaughtersRivaandElizaCooper forbeing

inspirational, smart and not least of which great human beings and excellentwritersintheirownregard!Thanksalsotomyparents,RossandCynthia,foralltheirsupportthroughoutthetwistsandturnsoflife.MybrothersCraigandToddandsisterStephanie,whoalsocontributedtothebook,areallbig,independent,andinspirationalthinkers.I’mnotsureatallhowmyfolkspulledthatoff,butIshouldprobablythankthemagainforputtingupwithall thatentailed.I’dalsolike to thankDaniellaandJackieZucker forhelpwith thefamily,EveZucker,andKarlMalonefortheirsupport.Patrick: First and foremost, I could not have tackled this book without the

loving support of my wife, Katalin Vlaskovits and our son, Shane. Kati andShane truly know the burden of having a husband and a father not alwayspresent in the moment as The Lean Entrepreneur (unfairly) occupied mythoughtsalltoofrequently.Thankyoubothforbearingwithme,Iloveyou.It should go without saying, and perhaps too often does, but my parents

LudmillaandJoseph,mybrotherJetandsisterViviennehavealwaysbeenthereforme.Thankyou.Iamincrediblyluckytohaveanamazingextendedfamily.Myin-lawsarea

blessing:IstvanCsucsy,GergoCsucsy,andofcourse,theindefatigableKrisztinaAlbert.AlanJones forhis saint-likepatience,unendinggenerosity,goodhumor,and

firmfriendshipsincehighschoolinSaratoga,thankyoubuddy.It’simportanttoknowwhothetrueentrepreneursareinthisworld.Letustell

you:Theyarenotthestewardsofwealthcreation.Theyarenotthosewhoclaimthat taxeskillentrepreneurship.Theyarenot thosewhosemotivation ispurely

money. They are not the gamblers posing as innovators, nor the smarmymarketingtypestryingtotrick,guilt,orscareyouintobuying.Theyarenottheself-promoters, real estate tycoons, thebankers,or the slash-and-burnbusinessvultures.The true entrepreneurs are those seeking to create value.Whether trying to

support themselves or change the world, we thank you for facing downuncertainty,puttingyourselfout thereon the line, risking itall todowhatyoubelievehastobedone.Aboveitall,youareoptimistic,passionatedoers,andwearefortunatetoworkforyou.

AbouttheAuthors

BrantCooperBrantCooperhelpsorganizationsbigandsmallmovetheneedle.His startup career includes Tumbleweed, Timestamp, WildPackets, inCode,

and many others. He has experienced IPO, acquisition, rapid growth, andmiserable failure. Brant previously authored The Entrepreneur’s Guide toCustomerDevelopment, the first purpose-written book to discuss lean startupand customer development concepts, earning a distribution of over 50,000copies.Branthasworkedwithhundredsofentrepreneursacrosstheglobeandisa sought-after speaker, having presented at leading companies such asQualcomm,Intuit,CapitalOne,andHewlett-Packard.Brantisreachable@brantcooper.Heliveswith(andcontinuouslylearnsfrom)

histwodaughters,RivaandEliza,nearSwami’sinEncinitas,California.

PatrickVlaskovitsPatrick Vlaskovits is an entrepreneur, author, and consultant, and more thananythingwisheshewereapolymath.

HiswritinghasbeenfeaturedontheHarvardBusinessReviewblog,theWallStreetJournalblog,andTheBrowser.Patrick routinely speaks at technology conferences nationally and

internationally, including SXSW,GROWConference, theTuring Festival, andthe Lean Startup Conference. He co-founded two startups, currently advisesmultiple technology startups, and serves as amentor for 500 Startups, a seedfund and startup accelerator. As a principal at Moves the Needle, he countsFortune100companiesinhisclientlist.The Lean Entrepreneur is his second book. The first, The Entrepreneur’s

Guide to Customer Development, is a required course text for MBA andundergrad at universities such as theUniversity ofChicagoBoothSchool andBerkeley.Hehasalsoguest-lecturedatStanfordandUCLA.For some unknown reason, Patrick holds amaster’s in economics fromUC

Santa Barbara.When he has spare time, he can be found on Orange Countybeacheswithhisfamily.Tweetathim@Pvandreadhisblogatvlaskovits.com.

IndexAccounting,businesscultureandAcquisitions:

inconversionfunnelmethods,andLandingPagetestActionablemetricsActivation,inconversionfunnelAmazon:cloudserviceofmarketdisruptionandMechanicalTurkof

Andreessen,MarcAnthony,ScottAOLAppFogcasestudyAriely,DanAveragerevenuepercustomer(ARPU)AwarecustomerstateBabycare,casestudyoncreatingaffordableBaghai,MehrdadBarrese,JamesBatchandqueuemanufacturingprocessBerkeleyPizzacasestudyBeSpokecasestudyBetabrandcasestudyBetajournalismBetaprogramsBlank,BennettBlank,SteveBlank-slateeffectBrandBuild-measure-learn(BML)Business,conversionfunnelandBusinessModelGeneration (Osterwalder) Business-to-business (B2B) selling Business toconsumer(B2C)salescontextButler,AndyBuzz,generatinginconversionfunnelCamus,AlbertCaputo,PeteCarlson,LucasCarsDirectcasestudyCasestudies:AppFog

BerkeleyPizzaBeSpokeBetabrandCarsDirectCopybloggercustomersanddreamjobsEmbraceetiologyoffishanalogyfishinventoryanalogy

500Startups

HubspotIntuitIsproblemreallysolvable?KISSmetricsLitMotorsMeetup.comMethodProducts99designsO2PayPalRoadoflife.orgRooztSharethroughSightMachineSimpleEnergyTakeLessons

Channels,ofbusinessmodelChin,JaneChristensen,ClaytonClark,BrianCloudcomputingColey,StephenCompanycreationConciergetestContinuousdeploymentConversionfunnelB2Bsoftwareasserviceexamplecustomerstatesandbuyingprocesscustomerstatesandmarketingcustomerstatesandsalesfunnele-commerce

exampleenterprisesoftwareexamplegrowthwavesinnovationandscalingandsellingbusinessSharethroughcasestudyvaluestreamandWorktoDo

ConvincedcustomerstateconversionfunnelandinexamplesCook,ScottCooper,AlanCooper,Dr.StephanieCopybloggercasestudyCoremetricsCorevaluepropositionmarket segmentsandCost structure,ofbusinessmodelCosttoacquireacustomer(COA)Cox,StevenCrossingtheChasm(Moore)CrowdfundingCuban,MarkCulture,ofstartup:aligningwithvisionembeddinginlargeorganization,PayPalcasestudyCustomerpull,dataandCustomerrelationships,ofbusinessmodelCustomersbelievingBetabrandcasestudybusinessmodelandcreatingpersonascustomerdevelopment,basicstepsdocumentingassumptionsdreamjobscasestudyetiologyoffishanalogycasestudyfishinventoryanalogycasestudygettingoutofthecountryandaffordablebabycarecasestudygettingtotalkhavingempathyforinteractingwith,generallylisteningtomarketsegmentsmarketsegments,casestudynonprofitstartupandhealthcurriculumcasestudyobservingofopportunitymatrixandpullandproduct-marketfitsegmentingmistakesinvalue-creationeconomyWorktoDo

Customersegments,ofbusinessmodelCustomerstatesconversionfunnelandCustomization,bycustomerDataactionablemetricsandexistingproductsmarketpatternsandMeetUp.comcasestudyMethodProductscasestudy

newproductsandusingtoinformdecisionsvalueanddrawbacksofWorktoDo

DecliningmarginalutilityDellDemand demonstration, pull and Demographics, segmentation andDempsey,MartinE.Design,LandingPagetestandDevereaux,SteveDigitalfabricationDisintermediation,disruptionandDisruptions,incyclesleanstartupsand

Disruptive innovationDistributed teams, atKISSmetricsDistribution,visionanddrivingforceDrawSomethingDreamjobs,casestudyDrivingforceEarlyadoptersE-commerce example, in conversion funnel Economic and social cyclesEdison,ThomasAlvaEmbrace“sleepingbag”Empathy,forcustomerEmployees,invalue-creationeconomyEmpowerment,startupcultureandEmrich,RobEnterprise software example, in conversion funnelEntrepreneur’s Guide toCustomerDevelopment,The(CooperandVlaskovits)Existingproducts,dataandFacebookFan,RobFeaturesofproduct,prioritizingofFerguson,HillField,BradFishanalogy:etiologyoffishanalogycasestudyfishinventoryanalogycasestudyFishburne,Tom

500Startupscasestudy

5-WhysmethodFlow, product development andFour Steps to theEpiphany, The (Blank)Frauenfelder,MarkFreeman,BrentFreemarketcapitalismFreemiumGlusman,Andres

Godin,SethGoldenMotionsprocessGoogle’sG-ScaleNetworkGoPaymentGraham,PaulGreenberg,DanGross,BillGroupMeGrowth waves, conversion funnel and first wave and one subsegmentsecond wave and multiple subsegments third wave and buzz G-ScaleNetwork,ofGoogleGuillebeau,ChrisHalligan,BrianHarbottle,MarkHCI(human-computerinteraction)HighhurdletestHighvelocitycompanyHoffman,ReidHoliday,RyanHomeFieldHopefulcustomerstateconversionfunnelandHsieh,TonyHubspotcasestudyHumanresources,corebusinessesandstartupconcernsHypernetIMVUInfoWorldmagazineInnovationconversionfunnelandinnovationspectrumInstagram“Instrumentinghumanbeings”Interactions,withcustomers:believingdevelopmentofcustomersgettingtotalkhavingempathyforlisteningtoobservingof

InternalinnovationInternet,conversionfunnelandInternetBrandsIntriguedcustomerstateconversionfunnelandinexamples

Intuitcasestudy

InventioniPadiPhone

Ishikawa(fishdiagram)iStockphotoiTunesJacobs,IrwinJobs,SteveJob security, core businesses and startup concerns Just-in-time productsKagan,NoahKaizenKeithley,TomKerenEmrichFoundationKeyactivities,ofbusinessmodelKeypartnerships,ofbusinessmodelKeyresources,ofbusinessmodelKickstarterKim,DanielKISSmetricscasestudy

Klein,JonathanKleinsmiede,HendrikLafley,A.G.LandingPagetestAppFogandreasonstorunvariablesand

LeanentrepreneursLeanmanufacturingLeanstartupschokepointsofdifficultiesofdisruptionandfivecoreprinciplesofHubspotcasestudyleanentrepreneursandnewrealityandWorktoDo

LearningorganizationsLearningplansLegalissues:businesscultureandcorebusinessesandstartupconcernsLeslie,MarkLifecycleadoptioncurveLifetimevalueofacustomer(LTV)LinchpinsLindland,ChrisLitMotorscasestudyLong-termthinking,importanceofLurie,Yoav

Machine-vision industry, case study Magic Happens step, in conversionfunnelinexamples

Maples,Mike,Jr.Marcus,DavidMarketing:businesscultureandcorebusinessesandstartupconcernscustomerstatesandstagesofvaluestreamand

Markets,asunknowableMarketsegments.SeeCustomersMcCann,ChrisMcClure,DaveMcCoy,TimMeetup.comcasestudy

Messaging, Landing Page test and Method Products case study Metrics(actionable)MicrobusinessrevolutionMinimumviableproduct(MVP).SeealsoViabilityexperiments Berkeley pizza case study Copyblogger case study decliningmarginalutilityandfirstmediacoverageof

02casestudy

releasemanagementRooztcasestudystartup“valleyofdeath”andtestingandunfinishedproductandviabilityandWorktoDo

Molotsi,HughMoore,GeoffreyMoore’sLawMurphy,SeanMustHaveScoreMythoftheVisionaryNetPromoterscoreNewCharterUniversityNewproducts,dataand:customerpulland

offlineengagementonlineengagementproblem-solutionfitproduct-marketfitsharingproductsviability

99Designscasestudy

NonprofitstartupcasestudyNon-valueaddedactivities,eliminatingof“Nooverproduction,”pullandO’Dea,PauloDeskOfflineengagement,dataandO2casestudy

OlloclipO’Neill,PatrickOnlineengagement,dataandOostendorp,NathanOpen-sourcesoftwareOpportunitymatrixOsterwalder,AlexOutcomes-BasedTraining&Education,ofU.S.ArmyPacheco,ReecePalacios,DonPassionatecustomerstateconversionfunnelandminimumviableproducttestingandPatel,NeilPatientempowermentPayPalcasestudyPersonas,creatingofPhalanxtheoryPhysicians,patientempowermentandPirateMetricsPivotPonokoPoppendieck,MaryPositioning,LandingPagetestandPosttraumasyndrome(PPTS)PriusProblem-centricvisionIsproblemreallysolvable?casestudyProcter&GambleProduct-centric vision Product development, business culture and Product-

marketfitconversionfunnelanddataandmarketsegmentationandProstheticlimbs,BeSpokecasestudyPrototypingPublic relations (PR), in conversion funnel Pull, market segmentation andcharacteristicsof

QualcommReferral,inconversionfunnelRenaissanceSalesRepResegmentedlowcostResegmentednicheRetention,inconversionfunnelRevenue,inconversionfunnelRies,EricRipplinginnovationRoadoflife.orgcasestudyRogers,EverettRoot-causeanalysis:businesscultureandcasestudyonsalesRooztcasestudySales.SeealsoConversion funnel corebusinesses and startupconcerns rootcauseanalysisonSaleschannel,visionanddrivingforceSalesForce.com“Salesspecialist,”traitsofSanDiegoblackoutSatisfiedcustomerstateconversionfunnelandScott,BillSegment-centricvisionSegments,defined.SeealsoCustomersService-basedbusiness,ConciergetestandShadowforceShah,DharmeshShah,HitenSharethroughcasestudySharingproducts,dataandSightMachinecasestudySiloedbusinesses,changingcultureofSimpleEnergySingh,PaulSisyphusmythSkypeSnapTax“Softwareandbyteseatingtheworld”Software-as-a-service(SaaS)Spear,StevenSPORTS,taughttosoldiersStartupDigest(McCann)Startuprevolution:BeSpokecasestudycompanycreationcrowdfundingdigitalfabricationdisruptionsandpredictionseconomicandsocialcycles

500Startupscasestudy

hypernetleanentrepreneursleanstartupsleanstartupsanddisruptionlifecycleadoptioncurvelinchpinsMythoftheVisionaryandshadowforce“softwareandbyteseatingtheworld”software-as-a-servicevalue-creationeconomyandSteinbeck,JohnSubramaniam,Dr.VenkatSummit,ScottSuperMacSustaininginnovationSustainingtechnologySwinmurn,NickTakeLessonscasestudyTaleb,NassimN.TechCrunchbumpTechnicaldebtTechnology-centricvisionTenHave,DavidThirdcustomerdevelopment3Dprinting

3Horizonframework

IntuitcasestudyToyotaProductionSystemTrustingcustomerstateconversionfunnelandinexamples

TrustMe,I’mLying(Holiday)TwitterU.S.Army,Outcomes-BasedTraining&EducationValidatedlearning“Valleyofdeath.”SeeMinimumviableproduct(MVP)Valueadded,definedValuecreationValue-creation economy customers and employees inValue propositions, ofbusinessmodelLandingPagetestandValuestreamacquisitionchannelarticulatingofconversionfunnelcustomerstateanddiscoveringofgrowthengineandminimumviableproductPHPFogcasestudy

traditionalversusshortenedstartupvaluestreamvalueassumedbeforedeepcustomerinteractionvaluevalidatedafterdeepcustomerinteractionWorktoDo

Vandergriff,Maj.DonaldE.VanitymetricsVenturecapital,valuestreamandVFCorporationViabilityexperimentsCarsDirectcasestudyConciergetestCrowdFundingtestLandingPagetestLitMotorscasestudy

99Designscasestudy

premiseofprototypingTakeLessonscasestudyWizardofOztestWorktoDo

ViralcoefficientsVision,values,andcultureaccountingaligningculturewithvisionsdrivingforceandempowermentandfocusandIntuitcasestudyIsproblemreallysolvable?casestudyKISSMetricscasestudyleanstartupcultureleanstartupculture,inolderbusinesslegalissueslong-termthinking’simportancemarketingPayPalcasestudyproductdevelopmentroot-causeanalysisrootcauseanalysis,casestudy

3Horizonframework

valuesvisionWorktoDo

Volpe,MikeWaldron,ChrisWhite,DavidWizardofOztestWorktoDo:conversionfunnelandcustomerinteractioncustomersandmarketsegmentationdataminimumviableproductplanforsuccessvaluestreamviabilityexperimentsvisions,values,andcultureZapposZerocapexZong