When it comes to understanding how to turn an idea into a scalable business model, Steve Blank is the premiere practitioner and educator.
Steve worked in eight young technology companies and used that experience to write out The Four Steps to the Epiphany, a book that fundamentally changed the way people went about innovating and bringing ideas to market. Steve now shares his insights as a teacher at Stanford University and U.C. Berkley and on his blog SteveBlank.com, a great resource for entrepreneurs and investors alike. Today you can see the imprint of his ideas in many publicly traded companies and a bevy of startups changing the way we use the Internet.
Last week I was lucky enough to catch up with Steve during his visit to the East Coast for New York Entrepreneur Week to discuss the role that customer development and lean startups play in Silicon Valley and the innovative world today…
Elliot Turner: “Customer development” and “lean startup” are the buzz words today. Why do you think they’re so popular?
Steve Blank: I think they’re popular for two reasons. One is that they provide a framework for entrepreneurs in startups and intrapreneurs in large companies, and by framework, I mean a sort of heuristics or rules where there were never any for startups. There are plenty of rules on how to operate a large company that’s existed for some time, but almost no rules for entrepreneurs about what to do after you have an idea or get seed money. And the rules are radically different for a startup that’s searching for a business model than a large company that’s executing one. Customer Development is the beginning of entrepreneurship as a management science.
The second reason that customer development and lean startups are catching on is that the Internet has actually changed the speed of iteration by maybe a one or two orders of magnitude. If you are building a steel plant, the ability to iterate is measured over years or decades. But, if you’re building a website, you could iterate on an hourly or daily basis by both getting customer channel and product feedback in a way that was never possible before.
Though I just want to point out that customer development and lean are not only about Internet commerce, it’s simply that the speed of testing ideas is far more rapid on the Web. It’s inevitable that this type of new product development will spread to traditional industries.
Elliot: And along those lines, what do you think about the use of the concepts of customer development and lean startup beyond the scope of just technology and the Internet?
Steve: Most people don’t remember that agile development, lean manufacturing and customer development was actually invented by Toyota in the 1960s. Toyota used it to completely reinvent how cars were manufactured Toyota reduced the time from a paper design to a car off the assembly line from 5 to 3 years. The radically cut waste in the design, manufacturing process and inventory. The irony is when the US manufacturers visited Japan, the American car manufacturers stood there and watched as robots built cars, and they said, “Oh, now, we understand how the Japanese are kicking our butts. It’s robots.”
So, they went home and ordered $35 billion of robots from Japanese robot manufacturers, never understanding that the solution the Japanese had come to was something much deeper and more profound. The Japanese manufacturers actually figured out how to understand customers and used customer input to drive the time from conception to production of a new car from five years to three. And used lean manufacturing to eliminate waste and inventory with “just in time” delivery. The combination of all this new stuff made what we thought of as the least agile technology (the car) to become incredibly agile.
I use that as an example when people say, “Well, Customer and Agile Development only works for an e-commerce company.” Customer and Agile Development can work in anything from the fashion business to the financial business to building steel plants and automobiles. It’s about understanding what the core principles are, and not confusing the fashion of all that is Web commerce.
Elliot: So right now you’re working on updating The Four Steps to the Epiphany, want to talk about that a little?
Steve: My blog, SteveBlank.com, shares my thinking as it’s evolved since I first wrote the book. When I wrote the book, it was almost a catharsis even as it was heretical. It was what I saw as a pattern that no one else was talking about. Then, it was a heresy and now, it’s kind of common.
But since then, I’ve had a couple of new insights. First, is using business model generation in the front end, as the score keeping system for customer development and the pivots that result. It allow us to formalise where we put the hypothesis that we developed at customer discovery and how to test it through discovery and validation. So now there’s a graphical way of having a front end and that will be one of the changes in the book.
The other is we now understand that you need an agile engineering or development model to match the customer development that’s going on “outside of the building.” We know this courtesy of Eric Ries, my student, who had the insight to say, “Steve, you know, customer development is awesome, but if engineering is still building a product using waterfall development, that’s an impedance mismatch” which is a technical term for they don’t match each other.
Elliot: Do you have any empirical observations or actual case studies that you think exemplify these changes since you first wrote The Four Steps?
Steve: Well, the joke I have with Eric [Ries] when we get together is, “what if we’re wrong?” Our ideas are now being adopted by most internet startups, so the empirical evidence is in the form that customer development is now the canonical model for startups.
There should probably be a legal notice for the next person who reads the book that says, “There’s no guarantee of success here” [laughing out loud], but I’m gratified about the adoption because it simply confirms to me that this seems to be logical to a lot more people that just myself. So that’s one.
Second is that it’s [CustDev] been adopted by large corporations as well as startups and it’s starting to be taught in various business schools.
The funniest thing for me personally is to hear terminology like, “minimum feature set” or “I’m in the discovery step” when I meet startups using the principles. Hearing it out of other people’s mouths, I can’t keep a straight face. When I was in marketing, my goal was to sell you something and I’d tell you that “whatever I’m about to sell you, it’s the only solution for you.” But with customer development and the lean startup movement, and I’m not selling anything. I’m presenting it as a possible model.
Usually when I say that, there’s someone who raises their hand to say, “Professor Blank, what are the other models?” And I go, “Well, I don’t know of any, but if you come up with one, for God’s sake, treat it seriously because Customer Development is not the model, it’s a model.” I think it’s is a model that seems to fit a lot better for early stage ventures than we have ever had before, but it might be the wrong model.
Elliot: Well, all that being said, why do you think it’s become the “go to” model for Silicon Valley and Web 2.0 startups?
Steve: Because it allows you to take more swings at the bat then ever before. I think its because it recognises that startups are all about crises, chaos and failure and builds all of that into the process. And it allows startups to fail fast, and to burn a lot less cash upfront.
Today, internet startups don’t need to raise millions of dollars from day one. That’s an outcome not only of the customer development process, but the fact that commodity software that startups needed to pay millions for, is now available in the “cloud”. That has made $500 grand the new $5 million. But, more importantly, you no longer need of a ton of cash, because now you have a process to iterate on a hypothesis. These factors have allowed startups to develop a hypothesis and test that hypothesis rapidly.
That being said, it doesn’t mean that once you find a business model that scaling the company will cost you any less. It might even cost you more! But, it does allow you to get to scale for the first time by taking maybe five or 10 shots at the goal rather than one. The customer development methodology appears to decrease the infant mortality rate of startups. I’m not sure it will increase the likelihood of success, but over a portfolio of startups, I truly believe that having more swings at the bat or shots on goal, or whatever the metaphor is, truly would reduce infant mortality. Now instead of running out of cash, you might say “Oh, failure? Well, that was part of the game,” because the goal isn’t to fail fast, but to succeed fast. We can do that by iterating rapidly.
Elliot: This is very interesting considering that at this point in time in the financial world, people are talking about floods of cheap capital and how VCs are throwing around money to anyone with a pulse that the go-to model is all about being lean…
Steve: Correct. If I were a financial investor, the place I’d want to be throwing capital is to a company that has run customer development, and can now tell me about the lessons learned. A company that can now say “let me show you what we’ve learned” is far more valuable than one that just shows me “here’s my idea”. More importantly – and this is something that still hasn’t been clearly understood – when I see a pitch from a startup, what I really want to see is what you’ve learned. I call this a “Lessons Learned” investor deck.
Startups that present a lessons learned investment deck, is the place where an investor should want to throw money at. A startup that shows “Here’s what we thought, here’s what we did, and here’s what we found.” Boom, new slide. Then you see that at the same time, the startup has some graph of either users or revenue or some metric going up and an investor responds with, “Whoa, you did all this with $20,000? How much you raising?” The company says “five million.” The VC asks “Why do you want the money?” The right startup investment says “scale.”
With customer development, first of all, the entrepreneurs have shown the ability to listen, iterate, and listen again. They’ve also shown some traction and a user-revenue business model metric that they were tracking. Now they need money mostly for scale. To me, that’s interesting. That is totally different from something like “here’s five million bucks because you have an idea.” Five million bucks for the idea is the bubble model. Five million bucks for scale is the customer development lean model.
If you find Steve’s ideas interesting be sure to head over to his blog SteveBlank.com to learn more…
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