Custdev: Starting with First Principles

by Giff on June 7, 2015

On Friday morning, I popped over to Frank Rimalovski and Lindsay Gray’s always-impressive startup class at NYU‘s Entrepreneurial Institute to talk about vetting new ideas.

Afterwards, one team asked the classic question, “if I shouldn’t ask speculative questions, and yet my product isn’t ready to test, how can I do customer development?”

In their case, they had an interesting scientific breakthrough that would enable tattoos to no longer be permanent. (by the way, this kind of question is exactly why the first chapter of Talking to Humans focuses on a pillow).

As always, they needed to go back to first principles, and not think about how other people should do customer development.

This team was trying to solve how to do custdev on their consumers. But was that really their biggest risk? Yes, they could certainly talk to people about how and why they got tattoos, and interview some folks who tried to get tattoos removed. They would get insights there, no doubt.

However, it is no mystery that a lot of people do not get tattoos because they are permanent. It’s not really a cultural taboo anymore. That statement could certainly be custdev-ed, but I feel like there are plenty of data points on this around. If I was looking at this business, I wouldn’t view validating the consumer problem as a priority risk.

That could be wrong, and I wouldn’t ignore consumer custdev completely here, but you do not have time to test everything. You need to take some bets with your time, and focus on the priority risks.

In this case, I would think a much bigger risk is on how their product gets discovered, distributed, purchased and delivered.

Is their hypothesis to create their own chain of stores, or did they want to distribute through tattoo parlors? If the latter, they should focus their customer development not on consumers but on tattoo parlor owners.

I would *think* that tattoo parlors would find this technology exciting. After all, if tattoos were more temporary, they become a fashion accessory and people would get more tattoos, more often.

But that could be totally wrong. There is a stack of assumptions underneath even that assumption. I haven’t spoken to a single tattoo parlor owner, and have zero data points on what could be a rather critical risk for this business. I’d be burning to go find out.

When it comes to customer development, there is a reason why we start with the assumptions exercise. You need to think through *your* business. What are your risks? What are your big unknowns?

Don’t follow someone else’s playbook. Don’t test things that are not a high priority. Always start from first principles and your own context.

A few years ago, I wrote about the Truth Curve, and refined those thoughts later in Talking to Humans. Essentially it states that the believability of information you receive from market tests increases as the fidelity of your product test increases. You should not wait until you have a live, instrumented product in the market, but nor should you take early signals too literally.

I used to think about this order:

Custdev Conversations > Landing Pages > Paper Tests > Prototypes > Concierges > MVP

Fast forward to 2015. When it comes to validating an idea, now all I really want to do is:

Custdev Conversations > Concierge > MVP.

You can invalidate an idea with customer development, but you cannot validate it. But you still do customer development to gain deep insights.

You then put people through some sort of experience and watch what they do. Then you interview them to dig into the motivations behind those actions. Concierge is a good placeholder name for this because it reminds you to think about a delightful customer experience, but not one that needs to scale to many people.

Landing page tests are overused and, in my opinion, uncreative. I’ve seen quite a few in action, and I don’t think you get much useful, believable information. I would much rather see a team figure out a more creative experiment.

Would I ever put up a landing page? Yes, but not really as a test for value or market demand.

It is very useful to generate a waiting list of people to tap for better experiments or your MVP.

Testing advertising conversions is also useful. Again, not so much for testing the value of your business, but for exploring customer acquisition costs and effectiveness.

Another thing on that truth curve was paper tests. They also have their uses, but not in validation. Paper tests help inform design decisions (not unlike card sorting exercises).

So don’t be lazy about “lean.” Constantly ask yourself whether the way you are testing something is as creative as it can be, and as believable as it can be, while still allowing you to move fast and scrappy.

Upside and Downside

by Giff on May 9, 2015

Heidi Roizen has yet another great post this week: “How to Build a Unicorn from Scratch – and Walk Away With Nothing.” Every budding entrepreneur should read it.

Her post isn’t just about valuations and terms. It is also about thinking through downside. In frothy times, especially when equity starts to feel more valuable than cash (a condition not yet reached in New York, but which seems to have hit the SV/SF again), it is easy to focus solely on the upside. Growth, growth growth! Let’s make the business awesome! Let’s make the culture awesome! Let’s make the product awesome!

Awesomeness is indeed a desired, even necessary, goal, but you can’t forget downside protection.

What are some common examples where entrepreneurs lose their head and forget about downside?

Bizdev Deals
A common mistake in the dotcom era, which reared its head in Heidi’s post, is to do business development deals without downside protection. The startup agrees to a distribution deal of some kind and commits to certain levels of payment, but forgets to put performance metrics in place. Why does this happen? Because everyone is so focused on awesomeness! But if your partner’s performance doesn’t live up to expectations, you can get screwed. Believe me I know. In 2000, I sold my startup Ithority and took over business development at the the buyer – an Internet company that subsequently went public. I inherited a ton of these deals that promised cash in exchange for promotion or distribution. When the economy went south, I had to figure out how to re-negotiate these poorly performing deals, but the contract terms left me little leverage. It sucked – and could have easily been prevented with outs tied to metrics.

HR Issues
If you focus solely on awesome and forget the downside, you can get sloppy with employee and contractor practices. You gloss over creating clear terms for your contractors that makes it easy for you to terminate someon who isn’t working out. You don’t set up processes for managing poorly performing employees out of the business, which puts you at risk of spurious lawsuits when you finally crack and decide to fire someone. The truth is, no matter how rigorous your interviewing process is, some folks are not going to work out. Unlike big companies, startups can’t afford to let non-performing people linger.

A rising tide floats all boats, doesn’t it? Not in startup land. In each major category, there will be lots of competitors, but only 1 or 2 big winners (and sometimes none at all if the timing is wrong). When times are frothy, there is a clear temptation to think of things as a land-grab, and thus try to grab as much as you can as quickly as you can. That can lead founders to spawn multiple business initiatives in parallel, which dilutes the team and burns through cash quickly. The way to prevent that is to either 1. stay focused on one thing until you have a clear, very strong beachhead; 2. only allow yourself to look at things with very clear synergies; and/or 3. take a lean “experiment-driven” approach instead of diving in big.

Founder Vesting
Another common place for entrepreneurs to forget downside is at the founding of the company and how equity structures are put into place within the team, in particular, vesting. Many people think that they deserve ownership because they helped come up with an idea, but that’s bunk. The real work and real value is building a company. This is where vesting comes in. It says that if you leave the company too quickly (or deserve to be fired), you don’t get to keep your unvested shares. Usually vesting terms are 3 or 4 years, with a 1-year cliff. For example, for a 4-year schedule, you don’t get to keep any of your stock unless you stay for a full year, and then you get vest a monthly portion for the remaining 36 months. This is a very very good thing. Get a good startup lawyer to help you think through these structures.

Final Notes
In conclusion, dream big but don’t forget to protect yourself from the downside, not just in hunting for product-market fit, but in everything important. Remember that contracts exist in case the things that we DON’T want to happen actually happen. Sometimes they will.

Preparing for these kinds of problems isn’t being a debbie-downer. It’s good business.

Workbook for learning financial modeling and excel techniques

May 6, 2015

I’ve written about financial modeling for startups on here a few times, and included a few sample models. More recently, I led an after-work class internal at Neo for those interested in improving their skills. For those into lean, doing a thoughtful financial model from scratch is one of the best ways to spot hidden […]

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Slack’s Success and Silos vs Teams

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(Note: I’m going to leave the original post as-is, but I don’t think I wrote it very well, so see the addendums to prevent misunderstandings. Maybe. This is the Internet after all.) I read a blog post today that shocked me. A design agency taking credit for their client’s success. Which was surprising unto itself […]

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The challenge of a hedging model

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A couple days ago, I wrote about entrepreneurship and some level of partial hedging. Actually solving that challenge is, of course, enormously difficult. So much so, that I think it might only really be doable when companies are just starting out, and the equity is worthless. I can see it working in a startup studio […]

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The Stupidity of Entrepreneurs

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I was hanging out tonight with a bright young man who said, “A great entrepreneur always bets on themselves.” Context: we were talking about hedging. I asked the question: what if founders could hedge themselves against other startups so that if your company failed, you still had a chance for upside? He disagreed. He felt […]

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Why You Don’t Split Your Innovation Teams By Stage

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Do Market Sizing Early, Before You Jump Into “Lean”

February 11, 2015

Powerful new ideas often start with a spark insight: “Carpooling sucks! How can we fix it?” Or “Wow, these new smartphones might allow me to disrupt the entire taxi industry in a way never before possible!” Lean is great, but before you jump ahead with customer development, experiments and MVPs, it is worth taking two […]

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Custdev – Everyone Does It. Full Stop.

February 10, 2015

I see a lot of product teams try out customer development at the beginning of their product journey. But quickly the team gets so busy shipping features and they outsource customer learning to customer support, research or usability specialists, or the sales force. Those are all valuable touch points, but custdev is not a task […]

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