Steve Blank is a legend in the startup ecosystem. His online course on entrepreneurship has over 100,000 students, and in this interview he teaches us how to use customer development to make customer acquisition easier.
TOPIC STEVE COVERS
- He is a retired serial entrepreneur, professor, and author
- Has taught an online class on entrepreneurship with over 100k students, and recently released new editions of “Four Steps to the Epiphany” and “The Startup Owner’s Manual”
- Active blogger provides resources for entrepreneurs through free tools, slides, and videos
- Has had both successful and failed ventures in his entrepreneurial journey
- He learned how to be an entrepreneur through apprenticeship and 8 startups in 20 years
- His background includes 4 years in the Air Force and working for the CIA and NSA
- He has had successful startups, such as iPods, and massive failures
- He is retired to spend time with his family and wrote about balancing family and entrepreneurship in his blog post “Epitaph for an Entrepreneur”
- He is now known for his contributions to the Lean Startup movement
- And a whole lot more
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READ THE TRANSCRIPTION
Bronson: Welcome to another episode of Growth Hacker TV. I’m Bronson Taylor, and today I have the legendary Steve Blank with us. Steve, thanks for coming on the show.
Steve: Thanks for having me.
Bronson: Absolutely. Let me tell our audience a little bit about you, just in case they don’t know, you were previously a serial entrepreneur. You’re a professor currently at some of the most prestigious institutes of higher learning. You teach an online class on entrepreneurship that has over 100,000 students. You’re an author. The new addition of Four Steps to the Epiphany, I believe, just came out. You have a new book, The Startup Owner’s Manual, that just came out. And you’re an innovator of startup methodologies, for lack of a better way to put it. So even if startups don’t know about you, they’re probably deeply affected by the concepts that were either originated by you or popularized by you. So first of all, thank you for all the work you’ve done.
Steve: So you’re welcome. But you missed the most important thing, which is I’m retired. That’s right. And so all the things you mentioned were done as a retired serial entrepreneur.
Bronson: No, that’s right.
Steve: I got to go home. And the other thing is, I have a blog, Stable Income, where a good number of the stories I write and the things I talk about are online and a ton of material. Is Startup Tools a whole page of tools for entrepreneurs and slides and videos, which are also resources for entrepreneurs as well. And all of it’s free.
Bronson: Yeah, that’s great. Well, tell us about what you did before you retired. How about that? Talk to us about your own kind of entrepreneurial journey, because if you’ve said it, you’ve had some, you know, massive successes and some massive failures. So talk to us a little bit about that.
Steve: Yeah. So, you know, the thing I realize now is when I teach entrepreneurs is that I was definitely not as smart as my current students and not as smart as the current crop of entrepreneurs. I learned how to be an entrepreneur via apprenticeship, meaning I didn’t start a company in my twenties. I worked for in a variety of essentially marketing roles until eventually I became a co-founder and then a CEO. And I did that in a period of eight startups and 20 years. And so my entrepreneurial career, again, was one of learning. And I’ll give you a summary of what they are in a second. But before that, I had a couple of other interesting careers. During the Vietnam War, I spent four years in the Air Force and two of them in Southeast Asia learning how to fix fighter planes. And then my first career in Silicon Valley was as a contractor for a company now known as the innovator in national means of technical verification, which was a fancy way of saying in the Cold War, we worked for the CIA, NSA, a national reconnaissance office, and by accident I ended up in the middle of that. But I very quickly joined the got out of the black world and joined in the world of startups. And I did two microprocessor companies, enterprise software, a company through and a video game company in their Macintosh consumer electronics company and others I don’t even remember. And the kind of the box score at the end was for iPods, one of which or maybe two of which I had a lot to do with and a couple of creators, one so deep. It was its own iridium layer, I like to say, meaning it was them. It was one of them was a publicly massive failure. It was I was on the cover of Wired magazine, and 90 days later I realized the company’s going out of business. That’s going to cause a massive failure. And, you know, fortunately, out of that failure, no one likes to fail. And I got depressed like everybody else. But then I was old enough at the time. I don’t think I could have ever done this in my twenties and thirties, actually reflected about which parts I owned and which parts of my behavior and what I did and how I did it and such that we at least I took that out. And when we did our final startup, which was called The Epiphany, we put those lessons to work and actually made both the team in the company and the way we managed it work much better. And then I retired because I wanted to see my kids grow up when they were seven and eight years old. And, you know, for everyone watching who does entrepreneurship, it’s a 24 seven game and it’s very easy to lose family, marriage, children, etc.. In fact, I lost the one marriage when my wife once asked me, Ex-wife, what’s more important, me or your job? And when we realized I was still thinking about it for a minute, you know, we realized the marriage was over. And luckily that one had no kids. But I had a lot of regrets because I made those choices. And in fact, I’ve written a blog post about that called Epitaph for an Entrepreneur, which if you’re an entrepreneur trying to figure out how to balance a family, I suggest you to go read it. It’s not advice. It’s just what we did to stay married. And I’m still married to the same woman now with my kids now in their twenties who actually like to come home for the holidays. Their choice now. Right. And, and I guess I’m proudest of my entrepreneurship career. And then I managed to do both and got very lucky. So I was able to retire and then start thinking about what we knew about entrepreneurship and then essentially what became the Lean Startup movement. Yeah, always. Now, what was your question?
Bronson: Yeah, it doesn’t really matter. No. So as you built those companies, you’ve done a lot to rethink entrepreneurship and how to build a startup. Was it your experiences doing it firsthand that really led to that rethinking or was it other things wasn’t watching what other people were doing that caused you to kind of rethink it?
Steve: Gee, that’s a really insightful question and I think a combination of both. And I’m going to, you know, just tell you and your audience a personal story is when I retired, all I knew was I wasn’t going to do Startup Night. I mean, I had done eight startups in 20 years. I was going to go home. I didn’t know what I was going to do. But, you know, I’ve always had a philosophy that says, you know, my best days are ahead of me. So I was less so going to worry about what I was going to do. I knew I’d figure something out. I just knew it wasn’t going to be another 24, seven or whatever. And in hindsight, what I’m about to tell you was actually a catharsis. But I thought I was actually doing something productive. I thought I’d write Steve’s, you know, history of, you know, as an executive in Silicon Valley and when people find that an interesting book. So I started writing and I remember getting 80 pages into this truly writing. You know, here is something I learned that Company X and I would always punctuated with what you see now on my blog, something called the lessons learned. And I truly was doing this. So going through the history of eight companies, I must have gone halfway to company four or five or maybe even six. And I realized I still remember the moment the hair starts standing up in the back of my neck because I realized I was seeing a pattern I had never seen when I was deep down in those startups. And the pattern I was seeing was back then, every entrepreneur, believe it or not, thought they were on a singular journey that is, that there was nothing you could learn from other stories. Well, these are not that’s what we believed. And in fact, you know, what your voices told you is right, the business plan and then go execute the income statement and make the plan, the revenue plan. And when you failed to make the plan, they beat you up in a board meeting and you’d sit there thinking you were possibly the only executive who never made the plan. Because remember, this is pre net. None of us. The bandwidth was coffee, right? I mean, it was limited to the bits you could exchange. And after so much caffeine, you’re so wired you can’t have anymore. So imagine the bit rate coffee back in, you know, three net days. And so the insight of, wait a minute, this isn’t a singular journey. All my journeys had a common pattern. And wait a minute, by then, you know, I wasn’t investing like a VC, but I was doing a bunch of angel investments and I was sitting on a couple of public boards. I was sitting on a kind of private boards. So I was saying by the end of my career, a lot of stuff, I realized, wait a minute, this pattern is common to all startups. We’ve we’ve never described that. In fact, the real insight was we’ve been treating startups like they were smaller versions of large companies. Mm hmm. Oh, what’s with that? Well, what was with that is like. Well, what else would you describe them as well? That took three years to answer that dumb question, but no one had ever articulated that question is, wait a minute. Every time we try to act like a big company, we fail. Because what we’re doing is and this was took me a while to parse out the words, what we were trying to do was execute like we knew a series of facts. In fact, what we were doing was back then investor says, go write a business plan if you if I like it out fund funded and then you’ll execute to a revenue model and you’ll do waterfall engineering alpha and then alpha test, beta test first customer ship. And the only problem we’re going to have is where do we put the bags of money? And more importantly is post first customer ship if in fact the the actual revenue doesn’t match the plan, it’s obviously a failure of people. So the first thing we’re going to do is fire the VP of Sales to fix the problem. And when that doesn’t work, you know, insert time delay, we’ll fire the VP of marketing and then finally we’ll fire the CEO. And if he’s the founder, maybe we’ll make him the, you know, chairman or something. But that’s the process. Never once thinking that perhaps the problem isn’t the people. Maybe the problem is the player. Hmm. Right. But we never assume that. How could the plan be wrong? I funded it, for God’s sake. It must have been perfect. Mm hmm. And all you needed to do is obviously execute the plan. This is a long soliloquy. To say, well, we never understood is that large companies execute a series of knowns. Most startups are actually searching through a series of unknowns. It’s a big insight. Big insight. Better, simple, 32nd idea, as I describe it, is no math is involved to try to understand this. Simply says, well, wait a minute. If startups are searching, what are the tools for search? And then you kind of go, Oh my God, we’ve built a whole set of management tools for execution. Where do we build them at these things called business schools? Well, wait a minute. Where do those come from? Well, in the early 1900s, people observed, rightly so, that in the United States there was a need for a managerial class to administer and execute growing companies, and there was no professional education to do that. So first, Harvard as a graduate school, and then others decided to set up something called the Masters of Business Administration. Administration. Not business start, but administration. These were professional managers to administer. And by the way, for the next hundred years they did an awesome job of building strategies and tools and, you know, finance classes and organizational theory classes and whatever, and how to manage your 10,000 people. But none of those professors, none is probably a big word, but very few of them spent their time consulting for two person startups and garages. Mm hmm. Most of them spend their time when they’re not teaching consulting for large corporations who could write large cash checks. Right. But no one said, well, what do we do with these new things? It’s not like they didn’t think about entrepreneurship. The first class, an entrepreneurship at a business school was in Harvard in 1947. Miles Mayes offered the first class while George Darrow was teaching his famous manufacturing class and Stanford. They offered a small business entrepreneurship class in the mid-fifties. But still, entrepreneurship was thought of as a smaller version. You know, whatever we did at GM, you’re going to do just in smaller. Mm hmm. So. And I grappled. So now, to answer your question, which I think I remember this time, is that I grew up for about three years trying to puzzle through, well, what tools should we do? What what is it that make we differentiate the companies from, you know, the companies who are going public and drinking champagne versus those who are selling off their furniture. And the distinctions seem to be is that startups that succeeded managed to get outside the building. That is, they seemed to understand the core idea was there are no facts inside your building. And so they get the hell outside. And the interesting thing is, what do they do outside? And what they do outside is they listen a lot and they realize that what they just had was a series of untested hypotheses, not facts. Mm hmm. Does that.
Bronson: Make sense? Absolutely. What kinds of facts are you looking for outside the building? Because that in itself can really narrow focus and give us a lot of direction.
Steve: Right. So, you know, for a long time, I used to make a checklist and here are the things you need to worry about or customers and all the logical things. Until about three or four years ago, I ran into somebody named Alexander Oscar Walden, who wrote a book called Business Model Generation. And what that book and something called the Business Model Canvas was the missing piece in the Lean Startup. You know, for 20 years, academics have been using the word business model. And this is throw it over, throw it around. Like they actually knew what it meant, what it was. Ill define it was basically the sum of things you needed to do to deliver products and services to companies. At the same time, the things you needed to do internally to build profit and revenue and a business model this is the one that used to confuse me is different than the business model is not whether you have sales, marketing, engineering, manufacturing, you know, revenue growth hackers, whether that’s org chart stuff a business model says what are the components for getting at how we’re going to execute it? What are the pieces we need to worry about? What are the hypotheses that make up our business? And Oscar Walter did a pretty darn good job. And I say darn good job because academics will be arguing about it for another 20 years, but it’s good enough to execute. He said, Look, I can draw nine boxes on the wall and you need to worry about these nine, maybe a couple of others. But boy, if you’re not worrying about these, you’re going to get screwed because you need to worry about who your customers are. Pretty obvious, right? What are you building for them? The value proposition. So value proposition. Customer segment. Those first two things have a special name. We call it product market fit, right? So if you’re not have features and pains and gains, managing customer segments and archetypes and needs, if you don’t have this, the rest of what we’re about to talk about is kind of silly. So we spend a lot of time looking at our value proposition versus customer segment. Then you need to worry about channel now on the web. IP. You are selling off your own website, but you also might be going for affiliates and other things that’s better in physical products. You know, channels could be direct sales or value added resellers or system integrators or OEMs, etc.. Then you worry about what he calls customer relationships. But what in Morocco and I am from floodgate kind of relabeled get keep and grow customers. That is how do we do acquisition activation, you know, reduce attrition and churn, loyalty, etc.. And then how do we do cross-sell ops on that? So then how how do we worry about revenue streams, which actually is some of revenue models are your subscription or direct sales or licensing and pricing, which is a tactic. And the some of the two revenue models and and pricing make up revenue streams. Then on the left side of the canvas, we worry about do we need any partners? You know, iPod and iPhone without content would just be another piece of nice hardware and system software. Any special resources, any special activities. And while one of those costs that canvas while it seems complicated on day one, what we teach is every startup needs to get nine sticky notes and write down their hypotheses on day one. Oh, yeah, of course. These are our customers. Oh, for sure. This is what they’re going to want to buy. Great. Here’s how much they’re going to pay. Or in what’s called a multi sided market. No, no, no. We’ll have all these users, which is one customer segment, and then we’ll have payers over here and the payers, you will pay for that. But the users will have, you know, zero and great demand and blah, blah, blah. That’s all great. But what we now know is on day one, a startup is nothing more than a faith based enterprise. It’s a religious activity. I can’t convince you you’re wrong because you believe, which is what it takes to be a founder. But the reality is it’s a pretty safe bet that you’re effing wrong, right? Maybe not about everything, but you’re probably really wrong. And now so the question is how do we like reduce the pain of failure? And this is when we come up with all the words of minimum viable product and the idea of pivots and the idea of, you know, iterations and even restarts that now kind of have found its way into the lexicon. But they’re all designed to reduce the cost of failure. In fact, the other big insight I had was it was one of these startups don’t go from success to success. I mean, some corner cases do, but most of them go from failure to failure. And what world class founders are great at doing is reinventing the past. Oh, I thought that was my original idea. You know, that wasn’t the original Apple two idea was like, you know, maybe we’re going to, like, put the single board computer in a nice wooden box. All right. You know, Ben, Jobs have been the master of like reinventing the past. You know, manage to have a great ear and a great eye for customer needs and desires.
Bronson: Does that? No, that’s great. I mean, I just won’t let you keep talking because everything you say is so great. Let me ask.
Steve: This. So just just for context, by the way, the lean startup, as I define it and again, you’ll find different definitions from Eric Reese and Oscar Walter and others. But my version says, look, it’s composed of three components that every founder needs to know what is. You need to understand your business model. Go by Oscar Walter’s book you is you need to understand some out of the building customer discovery and validation process meaning okay you got these hypotheses you know, I don’t believe a single one of them proved to me I’m an idiot. Right? So go out and let’s run a series of experiments with MVP’s and pivots and the rest, and go see if. If this is, if this is real. And then third is we need some type of agile engineering process because we discovered, you know, that waterfalls are pretty dumb way to spend your money. Why don’t we build the product incrementally and iteratively? And by the way, this contribution of agile and customer development together, the steps two and three was Eric Reese’s major. Just like huge insight. I had come up with the customer development process, but Eric was the first one to ever be implemented and he’s smack bang in the side ahead. And so it’s deep. You know, we don’t use waterfall anymore, like you’re an old guy. Let me explain to you how we built Prior. Really? Oh, now this actually makes sense. And then it was Oscar Walter’s piece. And by the way, the canonical description of Lean Now is the cover of the May 2013 Harvard Business Review has a great summary article written by me. I was going to say, but you can get it for free on my website. Stable income. If you just click to the website and you’ll see it on the right. On the sidebar, just click on the icon and you can kind of read a, you know, a layman’s version if you want to explain lean to your mother and trust me, believe it or not. HPR So got all the multi syllable words, so it’s kind of easily understood. So those three. Components for me are kind of the religion. And I find it very funny when I now teach students like they go. So how else would you build a start up? Right. And I go, You wouldn’t believe what we were doing.
Bronson: Yeah, well, let’s let’s really hone in on one of those pieces. I want to hone in on customer development, because I feel like that piece of the pie that you just described is going to have a lot of overlap with growth hacking, because growth hacking is all about, you know, users retaining them, acquiring them, those kind of things. Tell me first how you define customer development. What’s the you know, I can explain to my mother definition, like you said.
Steve: So customer development simply says as a couple. But there’s maybe two or three principles. One is there are no facts inside your building. And the caller ID, that is, you’re you’re might be the smartest person in your building. Let’s just take that as a given. But there’s no way just computationally you’re smarter than the collective intelligence of your potential customer. Right. Even in a new market. And what describe market types in a second but so why don’t we you know, just do like engineers love to argue you know so let’s let’s go have that argument. Are you smarter than the collective? I guess not. Okay, well, let’s just assume you’re a genius. Since I’m giving you the money, you know, let’s run a series of cheap experiments. And so customer development is actually the process that in in which we test those hypotheses around the business model and customer development. And I’ll also content growth. Hacking doesn’t work. If you believe that your plan and idea were given to you by God or you’re a first time entrepreneur with both of them seem to be synonymous, right? It’s only after you’ve failed a couple of times that I kind of realized that maybe now we should have some process. So I find this very interesting. But teaching, that’s why I like to teach grad students because they’ve had some experience not succeeding, but screwing it up. And then they go, Really? There’s a process. I really want to work this. Does that.
Bronson: Yeah, absolutely. What does that process look like? Make it really tangible. So I’m watching this to know, like, what does it look like?
Steve: Yeah. So I’m going to just describe the canonical case, not just for web mobile, but in general, and then we could dove deeper, if you like. So the first set of assumptions for getting the business model canvas that Aaron, a great founder, has implicitly and this one like troubled thing for years is implicitly you’re building something because you believe you’re either solving a problem or fulfilling a need. Right. And a problem solving is some kind of like app for spreadsheets or accounting or it solves a problem. Needs are basic hardwired human needs. I need to communicate sex. You know, dating, gambling, entertainment often fall under the need categories. And so I tend to put startups kind of into those two buckets because problems are kind of like change over time, but needs are kind of hardwired into human beings. That’s what makes us human. And by the way, just as an aside, if you look at social media and entertainment and all the huge total available market opportunities, they’ve all been attacking, moving what we used to do face to face to something that’s now mediated by computer, just like this conversation you and I used to, like we would have to meet and you know, some molecules would actually exchange or fair gnomes or something. But now we do this via computer and that’s what Twitter is. That’s what Facebook is, that’s what online porn is. That’s what, you know, video games are. Zynga is hard wired stuff that we used to do. We’re not inventing the category. The category used to exist, by the way, total available market for those 6 billion people. Very interesting are hard wired into humans like problems are, you know, not everybody not 6 billion people have a Quicken problem, you know, in a character. Yeah. All right. So the first thing is to answer your question is. At its core, every founder believes that their insight is that they’re solving a problem or fulfilling a need. Great. Let’s start with that. How do you know that? Well, Steve, I believe and and not only do I believe me and my friends in the dorm, believe. Wonderful, great. So now, like, oh, we’re not going to write the code. And I thought, well, wait a minute, have you asked anybody else? Well, why should I believe it’s my idea? Now, by the way, this is the extreme version, because I also teach scientists and engineers who say, Steve, I’ve been working on this in the lab for the last 15 years. Of course, everybody wants it, which, by the way, is the same problem just because you’ve been working at it for ten years. In fact, it’s sometimes a worse problem is like, you know, no one else might actually care. And so the first tests of getting out of the building is, can you verify that somebody other than you actually has the problem or the need? Steve That should be easy. We’ll just go out. Great. Great. You believe it’s going to be easy? Why don’t we quantify what you see looks like? Let’s, in fact, take that problem hypothesis and design an experiment. What’s an experiment? Well, the experiment is, I believe that 300 people are going to believe that, you know, writing messages in 140 characters is a great idea or better. I believe actually 140 characters is the wrong number. I believe what they really need today is 189 characters. And so I’m going to go out and test whether I could move people off of one for three characters to 189. Great. Well, that’s a good test. How we’re going to run the test. Well, I’m going to call on whatever and I’m going to give them a wireframe or I’m going to let them type in. What are great. What kind of results should you see? Oh, what I’m going to see is, you know, 100% of the people are going to want to drop Twitter and use my app. Wonderful. Great. What’s the pass fail number? Oh, well, 90%. I think it’s great. Good. Let’s go run out and try that experiment. Does that make sense? That’s a problem.
Bronson: Yeah. Now it’s tangible.
Steve: Right. And by the way, what I really just jumped to is problem and solution, because the first the first thing you really want to understand is, do people have the problem? The next thing you want to test is, well, what? They actually like the solution. And, you know, what you’re trying to understand is, you know, can I test that solution and wireframe to test it in a PowerPoint slide. Can I tested in a mobile mock up which I tested by the way some testing is can I tested it in a Kickstarter, which is the world’s, you know, the world’s biggest pile of stupid money. I mean, but I think of Kickstarter as like a marketing demand creation thermometer rather than like anything else useful. I mean, no, you know, Pebble sold 10 million bucks, but I mean, those are outliers. But it is a great testbed for the people. Really want the solution. Mm hmm. And then I want you to march through all of the physical pieces of the business model. Help me understand the archetypes. The customer, always. What’s an archetype? You know, demographics, psychographic, geographic, whatever. And how many archetypes are there? Typically in a business, you’re not just selling to, you know, women 29 and a half years old who are living in this square block. I mean, and you might be having, you know, multiples inside and which are archetypes are more likely to buy when what’s then, you know, what’s their average purchase price, etc.. And I want to understand all that. I want to understand which features do they really care about on day one? Which are critical? Which are, you know, the sum of where necessary. Wait a minute. B And by the way, is this a multi-sided market? By the way? Multi-sided market means you might have multiple customer segments with different archetypes, but those customer segments might actually be different as well. There might be, you know, users and buyers, but these might be players. The key ideas for every customer segment, you need a value proposition. You need a revenue model. You need a acquisition activation path. Right. And you can separate companies.
Steve: And might be so so in where mobile might might be. The example I start with in my classes group. Right. I go, great. You know who the customer and everybody is upstate. Stupid questions, like who’s buried in Grant’s Tomb? We’re all customers. Great. How much do you pay? Well, we don’t pay anything. Well, Google is one of the most profitable companies on earth. Who the hell is paying at this point? Dope. I mean, what the hell? They do it for their heirs. Oh, well, the payers the same as the users. Well, they might be, but they’re actually paying for something. What were they paying for? Oh, well, their value proposition is very different than yours, the user. Okay, so now we can understand users and payers of Google to different value props. Mm hmm. Oh, well, wait a minute. Users, by the way, don’t pay anything, so their revenue model is zero. But how do payers pay? Oh, there’s a very unique revenue model. It’s pay per click. Well, how much do they pay? Oh, well, that depends on, you know, keep, move, value, the keywords, etc.. So the pricing is different than the revenue model, which is pay per click. Mm hmm. How do we acquire users? Well, on Google, it’s word of mouth. Right. And by the way, I don’t know about you, but I’ve never seen Google watch their product being a. Right? Yeah, but how did they get payers? Well, there’s an entire salesforce. Right. Well, there’s a self-service component for buying keywords. There’s an entire sales force working with large companies to go do that. So now all of a sudden, we can understand, even for a simple web model, there are users and payers. Now just I know it’s not your audience, but when I teach students who are building medical devices, this gets even more fun. Well, who are the users? So assume you’re coming up with a new artificial hip. And I said, Oh, we’re building it for my grandmother who needs a new hip. And I go, grader, she’s putting it in herself. Well, no, I guess there are doctors closet now. We have users and doctors, you know, customers and doctors. Great. Can the doctor put in a hip in his garage? Oh, no. He has to go to a hospital. Okay, so now we have users, doctors and hospitals. Who pays for the hip to take a grandma, take out her credit card. Now there’s insurance. Well, gee, you can. Will they reimburse any hip? No. We need to get something called the CPD code. Okay, so now we have, you know, customers, we have doctors, we have hospitals, we have insurance companies. Now, can can you still make any help and just kind of put it in? Oh, no. There’s the FDA right before you need. And they’re what’s called the 510 K or PM, which is approval process. Now we have five different customer segments we need to play with on day one before we even start our business, all with their own value props, all with their own pricing, all with their own business. Absolutely. But but you know what? Once you start, I’m like a head up display, like you’re using Google Glass. Any time I now hear somebody describing their business, I’m popping up a business model canvas overlay, which is the 2D version. And then I’m thinking, how are they going to run experiments on each one of those hypotheses and which ones are critical for them to figure out before they even think about anything else? Yeah, just just as an aside, my favorite is still you would think after 50 years that we’d stop doing this. You know, I find startups still arguing about their logo and their name. How about we worry about product market fit yet? And I don’t care what it’s called.
Bronson: We’ll get the t shirts made later.
Steve: Well, you know and by the way, you’re talking about the guy who used to be the king of t shirts and crap. I mean, I, I, I had a budget of $100,000 my first year. I swear to God, I would have shot me. Now, how about we worry about, like, finding the right customer segment and figuring out whether engineering, scrubbing the right problem?
Bronson: Yeah. When it comes to customer development, you know, you’ve kind of mentioned the first hurdle is getting them to want to do it, getting them to realize it needs to be done. Once they’re on board with that, they realize, yes, I think I know what I don’t actually know. And they’re outside the building. What’s the next hurdle? Is it coming to grips? Will they find is it something else? What do you see in your experience as the next hurdle for customer development? Right.
Steve: So so A, it’s hard because it’s counterintuitive to a great, passionate entrepreneur. Let me just emphasize again, it’s hard not because it’s physically hard because emotionally you’re wired for action and somehow you don’t think this is action or worse, you’re afraid of cognitive dissonance of somebody saying you’re ugly and realizing not only weren’t you holding it up, but the honor actually was right side up. You know, it’s like, how can it be ugly? It’s it’s my idea because part key part of customer development is you can’t outsource. Oh, I hired some consultants. No, because here’s what’s great about getting out of the building. If you’re if you send this to some consultants and say, well, why don’t you do a survey and they find the product sucks and you come back and tell the founding CEO hired you. Steve, we talked a bunch of people. Product sucks. The first thing they’re going to say is why? What do you think they’ll say the first time a consultant comes back or a VP of sales says it sucks.
Bronson: And something wrong with the user?
Steve: Yeah, you know, they just don’t get it or you just don’t or you’re just not explaining it right. Go back again.
Bronson: So that it’s broken.
Steve: That’s not so. So they go back again. They come back with even more data that says it sucks. What what do you think? The second thing gets.
Bronson: Said now you go into the wrong segment of the population.
Steve: Maybe, but if you’re working for me, you’re fired. Okay, there you go. All right. But now imagine I’m on your board and I go, That’s great. But customer development is done by the founders. Get the hell outside, and you need to hear that data. Mm hmm. What do you think happens the first couple of times you hear the data?
Bronson: Well, first of all times, you still think something’s wrong with them.
Steve: You hear it, they don’t get it. About the five times five through ten they’ll be. It usually took 20 or 40. Smoke starts coming out of your own ears because cognitive dissonance is setting it. Now, you could still say they don’t get it because you’re in a new market and you know it’s explained market types in a minute. But it might be that you have to deal with this, but you as a founder could do something. No proxy. Yeah. What is it that you could do?
Bronson: You can change the product.
Steve: You bet. Only founders could pivot. Mm hmm. It’s a key idea. Only founders could pivot, but you can’t pivot on second hand. Data because what the hell do you know? So the key. So the key idea getting out of the building is if you’re using the word pivot and you haven’t left your desk or your office or not made eye contact with potential customers. And by the way, customer discovery requires the ability to see someone’s pupils dilate. And that means it’s not done by SurveyMonkey. It’s done either by video, Skype or in-person interviews. Because I want to know, am I looking at my watch, my distracted overhear, my reading, my email or whatever? You can’t tell that in a in a survey monkey or whatever. Nor can you ask what to me is the world’s best customer discovery question, which is why ask one? I’ve now trained thousands of students to ask, which is as you’re leaving. You ask, What else should I have asked you?
Bronson: Mm hmm.
Steve: And that’s sometimes. That’s another half hour ago. Well, I thought we were going to talk about X because. Why? Well, X is my most important problem. All right, throw away your script and let’s talk about that. And sometimes here, I’ll give you another example. I swear this happened, and now I’m about to talk about Stanford graduate students. Right? Right. Trying to price a mobile app, you know, research library spoke to 50 people in our pricing week. Great. Well, what did you decide? 999 is the price. What is right. Okay, you know, that’s like a bunch of genius, right? And you got into Stanford. That’s great. And so why did you conclude that? Well, 47 out of 50 said 99 was the right price. Right. What are the other three say? Oh, they’re so silly. You know, and I’m looking at their data because we make them use a tool to automate this process called Launchpad Central. And I look at their data and I said, I want you to stand up in front of the entire class and tell them what the other three people you discarded said. Okay, so it was obvious these people were crazy. Well, tell the class what they said. They said, Well, we pay tens of thousands of dollars for this product and at least three new features. Why don’t you tell the class why you like discarding the data? Well, that would take us another four months. So then I said, you know, did you ask those three people if they had any more friends? Hmm. Well, no, we never did. And so this is a common customer discovery mistake is thinking that A, it’s maybe a focus group or that you’re looking for the sum of the data. Mm hmm. And this is a big insight. The big idea. Mm hmm. You’re not looking for the data. You’re looking for the insight in the data. Any fool could gather data. And on the web, it’s really easy to get tons of data. Right. So if you want to have a nice small company, you know, keep optimizing the data. And again, there are some people who are great at that and make that a nice, profitable million dollar of your business. And if you were living in your dorm, you know, all power to you. I tended not to want to build million dollar companies, so I wanted to build, you know, 100 million or billion dollar companies. So I was looking for something to like I’ve just been ignoring, you know, I think the Twitter or now, you know, going from idea to Twitter was one of those insights or going from a Facebook being a, you know, utter knock bang into something a lot more general was one of those insights about what was the what is the bigger idea here?
Bronson: Now, that’s our great insight. I love that.
Steve: So if I might just just one other thing I should mention to your audience, and it’s even true in web mobile apps and this notion of market type, which doesn’t get talked about because it hurts your head to think about it turns out we in the English language only have one word for startup, and that word is startup. It turns out really that there are four types of startups, and if you don’t know who you are, you’re screwed. And here’s one. There’s a startup entering an existing market. Steam’s definition of an existing market is you have a higher performance product, not cheaper, not me, but better in some axis, as defined by the existing customers. Mm hmm. And because we’re calling it an existing market, by definition, the market exists because there are customers. There are competitors. The customers can tell you the name of the market. And if you ask them doing customer discovery, they could tell you what what features are important. They could tell you what the basis company. We can tell you the pricing. Existing markets are fun. So if you’re in an existing market, go out and do discovery and ask the classic questions. Mm hmm. There’s another type of existing market where the incumbents are so strong that you going against them head on, regardless of how much discovery. You know, people hate Microsoft. Great. Let’s build another operating system. Probably a bad idea, but you might decide. No. But Microsoft isn’t strong on server, so let’s build Linux, you know, or something else. So you might decide that you want to go around an incumbent because you know two things. You might know that people will actually put up with 80% of the features for 20% of the price or some trade off. Because you’ve actually done a ton of discovery. And I call this a segmented market. You might decide you’re going to reach segment by price or in a physical product which build it. In China, it’s cheap, but people really don’t care about quality. All right. But there’s another type of risk segmentation which says, I know something about a specific set of user needs in this broad horizontal market. And I’m going to enter there. That’s that’s niche segmentation. And there’s a third version called Blue Ocean Strategy, but I won’t be back to. So existing risk segmentation, all you can do for additional get out of the building as customers questions plus more discover. Mm hmm. There’s a third type of market, which is the one Steve Jobs used to say, well, we don’t do any market research. And that’s when you’re creating something new. It’s a new market. What’s a new market? Well, you ask people, well, you know what features and they’re looking at you like from Mars because, you know, market, there is no competitors. There is no competition. There is no users. There is no pricing. Yeah, you are a visionary. You see something? And so people then go, well, why should I get out of the building? Then there’s nobody there. In fact, it’s like a divide by zero answer Why would I go? And the answer is, Well, yes, you could decide. You’re such a genius. You could sit in a red wine room in the Zen lotus position with the lightning bolts coming out of your head. But the odds are you really need to understand something different going on outside. You implicitly believe that the world is going to change from here to there. Mm hmm. I want you to be able to draw for me the day in the life of a customer now and when the world changes. Mm hmm. Tell me what has to happen and the odds of you being able to do that in detail, sitting in your office. Pretty low. I mean, you might, but pretty low. So therefore, the type of customer discovery and development you do is not the same as an existing or re segmented market, but actually is customer discovery. You’re just asking different questions and you’re trying to get a deeper and different understanding. By the way, the reason why understanding market type is important if you’re in an existing market, your job in year one is to take share for the from the incumbents. And you do a traditional launch and in fact, you launch with everything you got. Once you got product market fit, don’t sit around, for God’s sake, move. Spend money when it matters to get share. Now imagine you get that exact same pile of cash and you tried that in a new market. You might well for on the money in the street because there is no market and doing a great launch and big blog and press event. In fact, in a new market, what you’re doing is guerrilla activities, trying to find a tipping point and tip the market for adoption. In a new market, the revenue curve is the canonical hockey stick. In an existing market, it’s a straight line. Last type is a clone market. If any of your viewers are in India or China or Brazil or Russia in markets that where there are populations north of 100 million people, regulatory barriers, language barriers, etc., you take a U.S. business model, you clone it and you put your name on it and go, You’re in business, but you still need to do customer discovery and understanding what the right way to adapt, adopt and clone is. So understanding market type, well, a little more difficult, really, in fact, affects who you are, how you spend money, and how you do customer discovery and in fact, in fact still controlling start startup.
Bronson: Yeah, I’m so glad you went into marketing because one of the criticisms that I hear of Lean Startup and customer development is But what about Apple? And I’ve actually never heard a great answer, to be honest, but what you just said is, Yeah, what about Apple? There are one kind of market and there’s customer development to be done. It’s just different. It doesn’t take anything away from it.
Steve: Right. And so, you know, and Apple PR has probably done the worst disservice to entrepreneurs everywhere of again, promoting their jobs. You sat in the corner and great lightning bolts came out of his head. You know, Jobs probably was the best intersection of a of a CEO for art and science in the 21st century and probably the equivalent of Henry Ford. But you know that Canonical, if I would go ask customers what they wanted, I would have gotten giving them a six legged horse. You know, that’s just a bunch of B.S.. Wasn’t Henry Ford just, like, sat in the shop and came up with the automobile? He actually spent a long time trying to understand, you know, what it is customers wanted and why. And he basically executed on that hypothesis. Jobs had a great insight about the revolution and in putting computers on everybody’s desk in the from the seventies to the eighties and then again in everybody’s pockets in the 21st century. Does that. I know.
Bronson: That’s great. Now I have to ask this next question just because of who my audience is. You’re interested in acquiring new customers and retaining the ones that have in your opinion, if customer development is done well, does that make customer acquisition and retention a magnitude order easier later, or is it not related?
Steve: Of course it does. Think about it. Right. You know, the most expensive part is of of any sales pipeline, you know, of any growth factors, customer acquisition, activation, right. Once you got them, it’s a lot easier to retain them and acquire them, right? Depending on the industry. The number varies from, you know, three X to ten x and you know, but but let’s just agree it’s so the question is, who are they? What the hell do they like about you? And like, what are the things that keep them coming back? And so all the numbers you start thinking about upfront, about acquisition activation, you should also be thinking about, well, wait a minute, what if I changed the lifetime value? You know, what if in fact, you know, I changed, you know, lifetime value by cross-sell, upsell, next sell. What if I change retention, eliminated churn, etc.? So, by the way, my screwed up owner’s manual, which was the book After the Four Steps, The Epiphany, we had a huge section on basically unraveling. Dave McClure’s, you know, the arc of it, which kind of started a good bunch of the growth hacking thinking in basically a double barreled sales funnel where you have people coming in one side, you try to retain them and then you try to grow them again. On the other side, I tend to think of this visually is you want to like not just worry about acquisition activation, you want to worry about the entire lifetime of these customers. So.
Bronson: No, absolutely.
Steve: Now, and by the way, startups are, you know, so desperate to get them in. And I forget that there’s.
Bronson: Other part of the funnel.
Steve: People make a pile of money from them. And I mean, I know you have some other goal. What you could have is I want to flip the company or I want to sell them, you know, Google or Facebook, and then maybe you’ll optimize for other things. But I don’t know how to do that. I just want to give advice on how to build sustainable companies over time and that. Choirs, not only focusing on the front end activities, but focusing on the entire pipeline. And to answer your question again is unless you have a deep knowledge of let me explain who the archetypes are. And by the way, I got pictures of them, you know, in front of the engineers with their names. And, you know, as you know, here’s Sally, here’s who she is, and you’re building for her. And there, you know, and Jose is next to her. And the note is, you know, next to him all on the wall. And we all understand that’s what we’re building for. Then it’s too abstract.
Bronson: Yeah. Now, let me ask you this customer development, as you’ve described it here, does it ever cease to exist in a startup or does it become something else? Does it become, you know, the community building? Does it become marketing or should it always survive as a standalone piece that you’re working on? How do you see that going forward?
Steve: So let me tell you, the first time I did this in a larger company, I took over a marketing and a company that had gone. Chapter 11 was a company in yeah, in the past, but it made peripherals for the Mac and it’s called supermen and. One of the things I realized is no one in the marketing department, which was when I got it, was 14. I made sure we got it down to four before we kind of back up to 40. But no one in marketing was actually connected to customers. They were connected to activities. Oh, I do trade shows. Oh, I do PR, oh, I do whatever. What is the thing? I do like talking to customers. So this is back before the web. I know it’s hard to remember. Or even your grandparents could probably tell you about those days, but we used to get physical registration cards of customers and so I made it as a requirement is you had to talk to two customers a week to attend my marketing staff meeting. And by the way, attendance at the staff meeting was a requirement for your continued employment in the company. So therefore it wasn’t optional. It was kind of it took me a while to realize, oh, well, just do the math. Eventually when I have 40 people, we’re talking to 80 customers a week over a year, plus or minus. We were talking to 3 to 4000 customers personally, first of all. And yes, it was by telephone, but we had a series of questions. Then we would ask open ended questions. These were people going, Who is this company that actually cares about? And we were using that data. In fact, we do have arguments in the marketing staff meeting. I knew by week three when the first fight broke out that I had won. We were arguing about what customers wanted, not like what color was the damn logo. And so I’m trying to tell the story is to say why, of course. And in fact, when I find companies who build, you know, marketing or growth hacking or whatever, as they get larger and turn into execution organizations without this constant iteration with customers, you kind of lost the mojo because some other start ups can eat your lunch. Yeah. And the answer is, there’s no magic in. Like, somehow talking to them will sprinkle fairy dust, but you will still keep your finger on the pulse of what are they reading, what’s changing? What are they see? You know, when you ask these questions of like, well, what else are you looking at? Or Did you have a bad experience with us, man, to be able to hear that stuff real time. And then when my department would bring that into the rest of the company, we were the only people with facts. Everybody else. Well, I think well, we never thought we said let me explain to you the data we have. And then because I was pretty creative with it, you know, and here’s what I think we should do really became, oh, does that help?
Bronson: Yeah, no, it’s great. Now, despite all that you’ve done in your career to promote better startup practices, better methods, what do you see right now as the cardinal sin? Is there any one piece of the pie that is just still lagging behind in terms of the things you’re trying to teach startups?
Steve: Yeah, I think incubators and accelerators and our toxic beauty contests for entrepreneurs. All right.
Bronson: You have to unpack that for us.
Steve: If you think about what their business model is and not to diss their model, I think it makes sense is, you know, they want to select a elite group of teams and they want to get them funded. And therefore, Demo Day is in fact their graduation present. Right. And the number of companies they’re putting through the process limits, you know, how what those companies can communicate. And I believe that what they are starting to communicate actually is also is you could, you know, write the slides and give the most aggressive speech. Mm hmm. But what really, I think and I know have some data I’ll share with you in a second is I don’t think that that means that these companies have learned craft. I think what we really want to have is a lessons learned day, not a demo day. That is, tell me what you learned. And by the way, what you learned. There’s not a point in time. Tell me where you were and then how do you get from A to B to C to D and tell me that story in 3 minutes, because I know you’re going to still be learning and I want to know that got the smartest so BS or capable of quick cheap whatever iteration and you’re on a path and now you need money to kind of prove or scale or whatever. Not that I have a demo and great slides and my font looks pretty and I’ll give you a AB test. Yeah. I teach this class and this is the online class. At least the lectures are they’re called the Lean Launchpad at Stanford and Berkeley at Columbia. About two and a half years ago, the US government adopted the class as the standards of commercializing all science in the United States. Go figure. It’s like, Oh, what the hell? It turns out the government has a program called the SBIR program that says they’re mandated to give out 3% of their funds for research organizations to commercialize anybody, raise their hand. And so for 30 years, we’ve been giving away $500,010 million grants to companies without training them what to do. So it’s like giving away cars without driver’s ed. What a surprise. They would crash the cars. But. But the Congress never bothered to ask, how are they doing? They were just interested that we were spending the money. Mm hmm. And finally, the National Science Foundation, the institution that funds all science and research in the US, in universities, except for medical, which is done by the NIH, said this is working for us based on my class, asked me to put one on for them. We built a prototype. It worked so well. They’ve scaled it to now 11 universities teach 400 teams a year. All right. And it’s called the Innovation Corps. That’s interesting. But what’s really interesting is but there were a ton of teams that weren’t joining the Innovation Corps. So they essentially had an accidental AB test for the last two and a half years. Mm hmm. So all I could do is tell you the results as they reported it to date. Mm hmm. Which I didn’t believe when I heard it. The control group have been doing stuff like they’ve always been doing funding rate from both government and private capital at the end over multiple over the last two and a half years. 18%. Innovation Corp. in my class funding rate, 60%. Wow.
Bronson: That is quite a difference.
Steve: So again, the numbers are biased and gee, maybe the people who got in were the best ones and maybe or at least they were funding the ones who got it. You know, it it kind of just says that maybe we’re teaching the wrong things for if we did a longer to do study of the intersection between the output of incubators and accelerators and early stage theses. I think we’re asking the wrong thing and I think that interface is not yet optimal. No one is being stupid or bad or whatever. I just think we’re now learning a lot and I’m going to offer a class this fall in September. I now teach 100 educators a year how to teach this class. Whistling Launchpad class We’re going to offer a first class for incubators and accelerators. We want to use the same techniques the National Science Foundation is using, and we’re going to try to see if we can get some people to adopt. You know, the first generation was guru based, the next generation of incubators, accelerators. We’re mentor based. And I’m not suggesting we get rid of any of those. I’m not just suggesting that we add some curriculum and evidence based entrepreneurship. And that key phrase, evidence based entrepreneurship is I think what’s been missing from demo days is, is the fact that you could, you know, project a reality distortion field is clearly an important part of what you’re doing. But actually having market fit and revenue and customers and some some evidence that that you have anything other than good fonts would be useful.
Bronson: Yeah. Now, given the success of a class like the one you teach that you just told us the stats for you must believe that entrepreneurship can be learned to some degree. Is that accurate?
Steve: I think the key question is some degree for those who knew me as a as an entrepreneur. They laughed hysterically when I heard from I was an educator because their first reaction was Steve born entrepreneur, you can’t stick to this stuff. What do you think? And boy, that troubled me for a decade because I knew I was teaching something and it was and so and I finally realized the following. We’ve been asked the wrong question. Of course, you could teach entrepreneurship the real way to frame the question. Let me pass it back to you as Steve, what can you teach entrepreneurship to? That is you can’t teach it to anybody. It’s like asking a roomful of people, how many of you want to be sculptors, an artist? You don’t assign sculpture and art to one room and the other half get to work on the factory floor. It doesn’t work that way. People who are artists, sculptors or composers or painters, they have something inside of them that they see or hear that no one else has. And in fact, they want to learn these skills just so they could get that out of them. But you know what? It’s not the skills that are going to make them great. The skills will help them. Yeah, but. But it’s. It’s a passion. Yeah. The mistake we made about entrepreneurship education was confusing it with teaching accounting. Right? No. Accounting is a job. You don’t need partnership. Entrepreneurship is passion driven, and that’s the biggest mistake I see young founders making at a school is, in fact, my favorite stories. I get this literally because I teach in business schools at Berkeley and Columbia and engineering schools at Stanford. And sometimes Cal Tech is the the I always get a couple of students every year, professor, like I need a job choice. Great. What do you got? Well, I got I got choose between these two things. Well, what are they? Well, I got this great offer from McKinsey. McKinsey, great company. What’s your other choice? Well, let me tell you about the startup. Me and my room and I stop. I go, I don’t want to hear it. You’ve already decided. If you’re consulting.
Bronson: McKinsey, you’re not an entrepreneur.
Steve: There you go. I can’t keep both. Well, why do you want to do this? And what? You really peel the onion? It’s cool. Well, yeah, it might be cool, but, you know, like, that’s the bullshit part of entrepreneurship. The reason why artists and founders need to be passionate is it sucks 95% of the time. Yeah, you’re failing. Your co-founders are quitting or they’re, you know, or they’re too stoned most of the time to show up for work. Or, you know what? Or like you can’t attract money or your your board is beating the crap out. I mean, that’s what it’s all our customers are. Forget about culinary. We don’t have it. I mean, that’s 95% of the time. If you’re not driven through those bad times by passion and drive and the just the desire to make something happen, you’re going to just quit it the first time it gets it gets better. Yeah. And that’s and you can’t teach that, but you can teach entrepreneurship to those who volunteer. That’s the answer to your question. And it does that make sense?
Bronson: That makes perfect sense.
Steve: And I never got that right because we were confusing where we taught it in business schools or engineering schools versus how we should teach it and how we should teach those. Just go look at our curriculum. It’s okay. We teach survey classes. For Arts for everybody. We should teach survey classes for entrepreneurship. We teach theory for art, like, you know, mixing color, a 3-D perspective. We should teach theory for, you know, on and other stuff. But the rest of the art curriculum is hands on an experiential. And that’s what we’ve been missing, is how to write a business plan and do a PowerPoint deck. That experience that you get out of the building. And in my class, you have to talk to a hundred customers in ten weeks. Let me tell you, that’s experiential. Absolutely. Well, you might hate me by the time you’re done. You will know how to actually mix paint and, you know, like, figure out how to do art. Yeah. As I.
Bronson: Answer question. That’s great. Well, Steve, this has been an incredible interview. I have one last question. If the high level fortune cookie question, you can answer it any way you want. But what’s the best advice you have for anyone that’s currently in a startup and they’re trying to grow it? What would you say to them? Obviously, you don’t know the details of their situation, but.
Steve: Just never, never give up. You know, entrepreneurship is just the pursuit when everybody else thinks you’re crazy. And by the way, you have to be and you have to decide that this is the thing you want to do with your life. Any time it feels like a job, you know, no one’s forcing you to do this other than you and I. To actually be honest, try to discourage people from becoming entrepreneurs because the ones who will make it are the ones who see things up there that other people don’t. But they can convince you. Good luck. Barely. What do you mean? No, no, no. Look. Look over there. Come with me. And get rational people to quit their jobs. You know, whatever to do that. If that’s who you are, then for God’s sake, stick to it. And if it’s not this one, it’ll be the next one. This was my entire career, and I have never once thought I would have done wanted to do some other job. It’s the most exciting time in the world to be an entrepreneur. And just congratulations to all your viewers who are doing it. Thanks for the time.
Bronson: Well, it’s awesome. Steve, thank you so much for coming on Growth Hacker TV.
Steve: All right. Take care. Bye bye.