The Theoretical Startup: Steve Blank's Stages of Pre-History for a 21st Century Business

Preface

Drawing from Steve Blank’s writings, I decided I’d write this roadmap to crystallize the tasks startups face in simple yet efficient terms. Many articles on Steve Blank’s works have been written and published online. However, I find that they seldom preserve the robust reasoning and practical goal-setting that make Blank a brilliant writer and make his writings both engaging and intelligible. Hopefully, this article manages to do so.

Introduction

Startups are not smaller versions of larger companies.

Companies execute business plans where customers, their problems, and necessary product features are all “knowns.” In contrast, startups are seeking a repeatable and profitable business model that does not yet exist and therefore cannot be known in advance. 

The primary objective of a startup is to validate its business model hypotheses, iterating and pivoting until it succeeds. Then it moves into execution mode. It’s at this point that the startup becomes a company and needs an operating plan, financial forecasts, and other well-understood management tools.

Pivoting is a term that describes the process of changing direction when the current strategy is not delivering the desired results. For instance, a pivot might be a substantive change in one or more of the nine categories of the business model canvas.

At every stage in the development of a startup it is searching for a business model, testing and adjusting their vision, their product and business model, to the customers’ needs and actions that they discover.

These tests are instrumental to affecting frequent, agile iteration and pivots, bringing startups closer to a scalable business model and verifying what elements of their business model are untenable.

The faster the better, since the faster these “learn, build, pivot” or “iterate, build” cycles happen, the greater the odds of finding a scalable business model with the cash on hand. If cycles happen too slowly, the startup runs out of cash and dies. The biggest impediment to cycle time is psychological: it requires the admission of being wrong or even of suffering a short-term tactical defeat.

A startup’s runway, the amount of time remaining in which a startup must either achieve lift-off or fail, is really the number of pivots it can still make. Hence, they should save all cash until needed and then spend, growing headcount (hiring sales and business staff) early on is bad. 

Blank suggests replacing traditional execution-oriented sales, marketing and business development titles with a single title: the Customer Development team. At first, this “team” will consist of the company’s founder(s), who talks with customers to gain enough insights to develop the minimum viable product. Later, as the startup moves into customer validation, the team may grow to include a dedicated “sales closer” responsible for the logistics of getting early orders signed.

Formulate Business Model / Hypotheses

Startups should break down their business model into testable hypotheses with clear pass/fail criteria.

Until these business model hypotheses are tested they are just “guesses”.

You test them through Customer Development experiments: short, simple, objective pass/fail tests. You’re looking for a strong signal in the noise. The pass/fail tests give you a “good enough” signal to proceed.

For example, a Customer Relationships hypothesis for a physical product may have assumed that for every 10 sales calls three people would move into active consideration of buying. The experiment might be as simple as making the same presentation to 30 prospects and having the experiment “pass” by coming away with nine or more orders or letters of intent.

Start by gathering a list of 50 potential customers you can test your ideas on. Fifty names sounds like a lot, but as you’ll soon see, you’ll go through them quickly. A solid discovery effort will usually involve 10 to 15 customer visits a week, and getting face-to-face with 50 people will probably require contacting 200 customers or more.

Beware false positives: effective conversations are not ones where the customer merely expresses interest but one’s where you learn more about your customers’ problems and how much (if at all) they’d be willing to pay to fix them.

Rob Fitzpatrick’s book, THE MOM TEST, provides a great practical field guide for driving conversations with prospective customers into the most fruitful avenues.

THE MOM TEST:

1. Talk about their life instead of your idea 

2. Ask about specifics in the past instead of generics or opinions about the future. 

3. Talk less and listen more.

[Full book available for purchase here]

I summarise Fitzpatrick’s key insight as being that people’s ideas are not the same as their actions. Their actions outstrip their ideas, telling us much more about their behavior and beliefs than their self-understanding of either. One can uncover these in the course of a conversation by disinterestedly asking and digging into the practical details of their lives, avoiding pre-maturely leading them to engage with your idea. The accumulated experiences and insights of these experiences is the core asset of an early-stage startup and will be the focal point for business development until a viable business model is reached.

Conversations with potential customers allow you to test your business hypotheses and ascertain the following:

• Do we really understand the customer’s problem? 

• Do enough people really care enough about the problem for this to become a huge business? 

• And will they care enough to tell their friends?

PIVOT OR PROCEED:

If conversations lead to signs of commitment: letters of interest, follow ups,... then create a minimum viable product. 

Otherwise, return to “Formulate Business Model / Hypotheses”

MVP Tests and Business Development

No matter the enthusiasm or level of customer understanding that’s been developed you still don’t have enough information on:

1. What features matter

2. If people will pay for it

The way you ascertain it is by developing a minimum viable product. Testing on potential customers while iterating the MVP based on their feedback.

In this phase you test your “solution”: your value proposition (product, pricing, features, and other business model components) through deploying a minimum viable product to customers and comparing their responses to the “pass/fail” goals you developed earlier. 

Capital Intensive MVP: Product Solution Presentation

In the case of capital intensive tech you provide a product solution presentation.

This presentation is emphatically not the presentation used for fundraising or recruiting. It’s a solution presentation confirming that the product fits a serious customer problem or need. 

Customers confirm their interest by expressing interest in buying or using the product. The presentation should cover the five (no more!) key product features and the problems they solve. Include a story about “life before the product” and “life after the product” where appropriate. 

The goal is not to sell the product, but to validate how well you understood the problem through your conversations with prospective customers when you heard them say, “Even these minimum features solve our problems,” or, “I need this product.” Ideally, customers ask, “When can I get it?” 

PIVOT OR PROCEED:

• Stop and assess the results of the experiments you’ve conducted and verify that you have: a full understanding of customers’ problems, passions, or needs confirmed the value proposition solves problems, passions or needs determined that a sizable volume of customers exists for the product learned what customers will pay for the product made certain the resulting revenue should deliver a profitable business. 

• With your product features and business model validated, decide whether you have learned enough to go out and try to sell a select your product to a few visionary customers, or whether you need to go back to customers to learn some more. If, and only if, you are successful in this step do you proceed to customer validation.

  • Have we identified a problem lots of customers will eagerly pay to have solved?

  • Does our product solve these needs distinctively, cost-effectively and profitably?

  • If so, do we have a sizable market and a viable, scalable and profitable business model?

  • Can we draw a day in the life of our customer before and after purchase of our product?

  • Can we create an organizational chart of users, buyers and channels?

Sales Tests (Pre-Sales)

You are not going to hire and staff a sales team. You are not going to execute a sales plan or “sales strategy.” The reality is that you don’t know enough yet to do any of these things. At the end of customer discovery, you have firm hypotheses about who will buy, why they will buy, and at what price they will buy. But until those hypotheses are validated—with customer orders—they’re all little more than educated guesses, even with the work invested to develop them.

Run a continuing series of quantitative pass/fail tests to determine whether there’s strong enough product/market fit to justify scaling sales and marketing spending. 

Most of your testing effort will be asking people to give you an order or engage with your app or website. At this point, you’re testing the entire business model, not its individual components, even as you learn more details about some, like price or channel. 

At this stage you will target Earlyvangelists as your first paying customers. (If you can’t sell to them, it doesn’t get better over time.)

Founders must lead this process

First, founders and only founders call the shots on pivoting. To do so, they must hear about flaws in the product or business model directly from the customers. Nothing else has the same impact. Anyone other than a founder who learns of a serious product or business-plan flaw faces two challenges: he or she doesn’t have the authority to pivot, and he or she seldom has the courage to report bad customer feedback to the founder.

Advisors

Formally engage advisors who can facilitate high-level introductions and are top-notch “out of the box” thinkers: Where possible, particularly in enterprise sales situations, put key potential customers on the customer advisory board. 

These are people met in customer discovery who can advise about the product from the customer’s perspective. They’ll serve as a customer conscience for the product, and later some will be great references for, or introducers to, other customers. Use them for insight and one-on-one meetings with the company’s business and Customer Development staff—and don’t be afraid to ask them for specific introductions. 

The testing process is a series of elegantly simple pass/fail tests where the answer is binary, and never “it feels good” or “they like it.” Some examples: If your physical channel business model says... you will close two sales for every 10 sales calls, do you? an average customer will buy six widgets in three months, do they? $5,000 at spent at a tradeshow (or in direct mail) will generate 25 leads, does it? 2/3 of the prospects you pitch will refer you to three friends each, do they?

Customer Types

Distinguish your earlyvangelist targets from other major customer types, including early evaluators, scalable customers, and mainstream customers. Scalable customers may be earlyvangelists as well, but they tend to buy later. Instead of buying on a vision, they buy for practical reasons. These will become target customers in six months but are still more aggressive buyers of new products than mainstream customers. Finally, mainstream customers are waiting for the finished product and generally need an off-the-shelf, no-risk solution. They might say, “We look forward to testing your product when it rolls off your production line. We don’t test prototypes.” Remember their names, since they’ll become customers in one to two years.

As optimistic as a startup may be, the most likely outcome of the first sales push is either no orders at all, or far fewer than you expected. Typically there are two root causes: The company hasn’t found earlyvangelists and needs to keep searching in the current customer segment or abandon it and explore others Other parts of the business model just aren’t compelling, whether it’s product, features, benefits, price, issues, partners or several Either way, you need to stop and think about why what you thought would happen didn’t happen. 

This test-selling effort is still a learning exercise. This is when you go back to your business model canvas and review the hypotheses you assembled in discovery. If you can’t get early orders now, clearly some were wrong. Did you pick the wrong customer segment? Did the value proposition not match this segment? Did the revenue model not fit their budget? The business model canvas provides a visual way to diagnose what went wrong and what you can change and test.

Now, with 50 or 250 face-to-face customer interviews and thousands of online customer interactions under your belt, the company has real facts about why customers buy and real customers to help further test and refine your positioning. 

Thus far, even through the validation stage, spending on customer acquisition has been modest and the risks relatively low. But now, as the company prepares to scale from dozens or hundreds of customers to thousands or even millions, it needs to be able to communicate what the product is and does, and why the customer should buy or use it.

How Many Orders Do I Need to Prove Validation? 

One of the first questions founders ask is, “So how many orders do I need to validate my business model?” While we’d like to tell you the number is 7, it’s more complicated than that. You and your board of directors do need to agree on a number. If you’re selling million-dollar enterprise software packages, three to five repeatable sales from the same customer segment may give you a good indication that it’s time to scale a professional sales organization. However, if you’re selling new kitchenware or appliances through a consumer retail channel, you won’t know if you have it right until the channel puts in a reorder. There’s no one magic number. But you and your board of directors do need to agree on a number. You and your investors always need to be in sync about what the criteria are for scaling and the cash burn rate resulting from that decision.

PIVOT OR PROCEED:

Proceed if answered:

1. Can the business scale? Will a dollar spent on customer acquisition yield more than a dollar’s worth of incremental revenue, page views, downloads or clicks? 

2. Is there a repeatable and scalable sales roadmap? Does the company know the right prospects to call on or acquire, and what to say to them to consistently deliver sales? 

3. Is the sales funnel predictable? Do the same sales programs and tactics consistently deliver an adequate, profitable flow of customers through the funnel?

Assemble and review all key discovery and validation findings Review the business model hypotheses and their interactions with one another Focus on the “metrics that matter” in the financial model

Sales (Investing in Growth)

Having found your scalable business model, now comes the time to expand. The startup shifts full-throttle into “execute” mode, with revenue targets and timetables to hit, product and plans to deliver, and more granular and precise accountability to investors and board members. The company is about to spend a great deal of money far faster, and irrevocably, as it works ambitiously to deliver its chosen business model.

This is premised on the notion that it’s become unequivocally clear that when more money is spent to acquire customers, they’ll arrive at a steady, predictable, profitable pace

With this transition comes the typical “career risk” for founders, which always prompts investors to ask if the seemingly manic “founder type” should be replaced by a “seasoned” leader with proven execution skills. Massive amounts of money are about to be spent on a single, focused bet that the business model, as developed, has a high likelihood of scaling to profit and success. Boards and investors are suddenly less forgiving and typically far less welcoming of reports like “That idea was wrong” and “That didn’t work as we hoped”, bringing us squarely into the domain of traditional management theoretically and organisationally.