STARTUP BOOK SUMMARY 158 The Four Steps to the Epiphany

STARTUP BOOK SUMMARY 158 The Four Steps to the Epiphany

·        Summary written by: Fern Chang

"In the early stages of a startup, focusing on ‘execution’ will put you out of business. Instead, you need a ‘learning and discovery’ process so you can get the company to the point where you know what to execute."

- The Four Steps to the Epiphany, page 20

The traditional Product Development Model where a concept is developed, tested and launched in sequence does not work for most startups because it fails to address two fundamental questions:

·        “What type of market are we launching the product into?” and

·        “Where are the customers?”

In The Four Steps to the Epiphany, Steve Blank explains that the Product Development Model works best in an established, well defined market where the basis of competition is understood and the customers are known.

Most startups do not fit into these criteria. They start with the founder’s vision which needs to be validated against customer demand and production capabilities. Aggressive branding and aiming for “first mover advantage” without an understanding of market acceptance is like climbing up a ladder that was leaning against the wrong building; and could only accelerate the cash burn rate and undermine investor confidence.

The Customer Development Model aims to avoid these pitfalls and improve the success rate of a startup.

There are four steps to the Customer Development Model: Customer Discovery, Customer Validation, Customer Creation and Company Building.

The Golden Egg

Customer Development and Product Development are parallel processes

"For a startup to succeed, Product and Customer Development must remain synchronized and operate in concert"- The Four Steps to the Epiphany, page 36

In the initial step of Customer Discovery, Product Development builds according to the founder’s vision to test whether the business model is correct, and whether the product solves customer problems and needs.

During Customer Validation, a sales roadmap that can be replicated is developed. The product development team builds the product incrementally and iteratively – getting it out of the door and quickly revising it in response to the feedback of early adopters.

The steps of Customer Creation and Business Building serve to create and drive end user demand and to transition an organization designed for learning and discovery into formal, functional departments geared for efficient execution. Product development needs to keep up with increased demands, and also be involved with installation and customer support.

In 1994, when Steve Powell of FastOffice created an all in one office device, he focused on selling to home offices only to find that people were not willing to pay $1400 for a ‘nice to have’ device. Eventually FastOffice discovered that their core asset was in the data communications technology so it discarded its products for the home and became a major supplier of equipment to telecommunications carriers. The Customer Discovery process would have revealed the need to switch to a different market much earlier.

Gem #1

What type of startup are you?

"Thinking and acting as if all startups are the same is a strategic error… Market type changes everything a company does."- The Four Steps to the Epiphany, page 31

There are four different types of startups, defined by market type:

·        Startups entering an existing market. For example, a new brand of pizza

·        Startups creating an entirely new market. For example, a pizza flavoured meal replacement.

·        Startups that want to re-segment an existing market as a low-cost entrant. For example, discounts for bulk buys.

·        Startups that want to re-segment an existing market as a niche player. For example, organic pizzas.

Launching a product into an existing market has the advantage of existing customers but faces greater competition. A product in a new market has no competitors, but there are no well-defined and known customers either. Growth in an existing market could be a linear upward path, while in new markets it will take a few years before steady growth kicks in, when the product becomes mainstream.

Therefore, customer education is the focus in new markets, while branding and positioning will be important in existing markets.

When PhotosToYou pioneered the idea of quality prints for digital cameras in the late 1990s, it focused on a large and expensive branding program without much impact. PhotosToYou was entering a new market which typically takes 3 to 5 years to develop. Consumer choice was not permanent and spending money early to grab market share was not an effective strategy. Instead, it should have focused on market adoption, for example, by educating the early adopters so that they can spread the word about the new online photofinishing market.

Gem #2

Would you deploy the product if it was free?

"The goal is to take pricing away as an issue and see if the product itself gets customers excited"- The Four Steps to the Epiphany, page 69

Asking this question reveals the extent to which customers find the product valuable.

If the customer is willing to use the product if it were free, continue by asking, “Actually I cannot give it away for free. I will need to charge $1 million for it. Would you buy it?” The customer might reply, “There is no way I will pay more than $250 000 for it.” You have just discovered how much they think the product is worth to them.

In the case of Chip Stevens in 2002, his product ‘Snapshot’ was a software that helped financial officers of major corporations manage profitability. Products were given free to beta customers and it turned out that they were not willing to deploy the product even if the price were zero, because it did not solve a problem that was mission critical enough to justify the disruption.

This leads to the observation that products should be sold, and not given free, to beta customers so that a realistic, replicable sales roadmap can be developed.

The Four Steps to the Epiphany was written over ten years ago. By now, Steve Blank’s idea that startups are not smaller versions of large organisations, and they need to search for and establish their own scalable business models, have become mainstream concepts. The core ideas are being taught in universities, entrepreneurship programs and large corporations and have become the standard for commercialising scientific research in the US.

The challenge to startups is not the lack of a proven methodology, but the determination and discipline to follow through the rigorous procedure of Customer Discovery and Validation. The executive teams, the board and the investors all need to understand that the processes, tedious as they may be, cannot be skipped.

Once the company has transitioned itself from Customer Discovery and Validation to Customer Creation and Company Building, the company structure will shift to be mission-centric and process driven, and may  require a different set of leaders.