No Business Plan Survives First Contact With A Customer – The $5.2 Billion Mistake

Money Black HoleSucks.

At $5.2-billion Iridium was one of the largest, boldest and audacious startup bets ever made. Conceived in 1987 by Motorola and spun out in 1990 as a separate company, Iridium planned to build a mobile telephone system that would work anywhere on earth.It would cover every city, town and square inch of the earth from ships in the middle of the Arctic Ocean to the jungles of Africa to the remote mountain peaks of the Himalayas. And Iridium would do this without building a single cell tower.

How? With an out-of-this-world business plan. First, the company bought a fleet of 15 rockets from Russia, the U.S. and China.  Next, it  built 72 satellites on an assembly line and used the rockets to launch them into orbit 500 miles above the earth. There the satellites acted like 500-mile high cell phone towers capable of providing phone coverage to any spot on the planet. Seven years after it was founded their satellites and ground stations were in place.  It was a technical tour de force.

But nine months after the first call was made in 1998, Iridium was in Chapter 11 bankruptcy. It crashed back down to earth as one of the largest startup failures on record. What went wrong?

We Think We Identified a Large Problem
When Iridium was first conceived inside Motorola in 1987, worldwide cell phone coverage was sparse, calls were unreliable and per minute costs were expensive. Cell phone handsets were the size of a lunch box and cost thousand of dollars.

When it was spun out as a a separate company, Iridium’s 1990 business plan had assumptions about potential customers, their problems and the product needed to solve that problem. All were predicated on the state of the mobile phone industry in 1990. They made other assumptions about the type of sales channel, partnerships and revenue model they would need. And they rolled all of this up into a set of financial forecasts with a “size of market” forecast from brand name management consulting firms that said they’d have 42 million customers by 2002. Iridium looked like it would be printing money when it got its satellites into space.

A Business Plan Frozen in Time
But in the 11 years it took Iridium to go from concept to launch, innovation in mobile phones and cell phone networks moved at blinding speed. By the time Iridium launched, there were far fewer places on the planet where cell phone service was unavailable. Traditional cell phone companies now had coverage in the most valuable parts of the world. Prices for local and international cell service declined dramatically. The size of a cell phone handset had shrunk so it could fit in your pocket.

In contrast, when Iridium’s service became available its satellite phone was bigger than a brick and weighed about the same.

Worse, Iridium’s cell phone couldn’t make calls from cars, offices or other buildings since phones had to be used outdoors with a line-of-sight connection to the satellites. But the nail in the coffin was price. Instead of the 50 cents per minute for a regular cell phone, Iridium’s calls cost $7 per minute– plus users needed to pay $3,000 for the handset.

In the eleven years since they had been at work, Iridium’s potential market had shrunk nearly every day. But Iridium’s business model assumptions were fixed like it was still 1990. They were dead on arrival as a mass market cell phone service the day they went live.

No Business Plan Survives First Contact With A Customer
The result was a classic startup failure writ large. Iridium followed its original business plan assumptions off a cliff. Their mistakes?  First, in 1990 the company thought it knew the customer problem to solve, and therefore it  knew what solution to build.

Second, since it knew the solution, it went into a 8-year Waterfall engineering development process. Waterfall development is a sequential way to develop a product (requirements, design, implementation, verification – ship.) Waterfall makes lots of sense in a market with the customer problem is known and all customer needs and product features can be specified up front. It is death in a rapidly changing business. Waterfall development shut off Iridium’s ability to listen, learn, test and adapt to changing customer needs and a rapidly changing market place.

Third, its business plan had no notion of learning and discovery. The idea of iteration or pivots was unthinkable. This business plan was a static document.  It was great for fundraising, looked great in business schools and large companies, but completely broke down when confronted by the realities of the changing mobile phone business.  When the company launched, it ran into diminishing customers and markets that didn’t correspond to its business plan and financial projections, but it had no ability to pivot and change their business model.  A Customer Discovery and Validation process that was ongoing with product development could have provided early warning that its market was not developing in Iridium’s favour.  Instead management was more comfortable executing to the plan.

It All Came Crashing Down
All this, plus the corporate hubris of having raised billions of dollars, with no adult on either Iridum’s or Motorola’s board who was asking “does this still make sense?” resulted in a disaster. Instead of the 42 million customers called for in its business plan, Iridium had 30,000 subscribers at its peak. The company burned its way through more than $5.2-billion because it fell in love with technology, succumbed to Waterfall product development and never bothered to get out of the building, get their heads out of their spreadsheets and ask, “What do customers want today?”

In 2000, new investors bought Iridium’s satellites and network for $25-million, or one half of one per cent of the invested capital. Today, the successor company serves some 300,000 customers in a series of niche markets including American soldiers calling home from war zones, oil rig managers, and big game hunters.

Customer Development, Business Model Design and Agile Development could have changed the outcome.

Lessons Learned

  • Business plans are the leading cause of startup death
  • No Business Plan survives first contact with a customer
  • Rapidly changing markets require continuous business model iteration/customer development
  • Your ability to raise money has no correlation with customer adoption

Steve Blank teaches entrepreneurship at U.C. Berkeley, Stanford University and the Columbia University/Berkeley Joint Executive MBA program. He also wrote about building early stage companies in his book, Four Steps to the Epiphany. This post was originally published on his blog, and it is republished here with permission.

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