These common assumptions can be toxic to the success of any new venture.
Editor’s note: This is an excerpt from the recently published book, The Startup Owner’s Manual, written by entrepreneurs-turned-educators Steve Blank and Bob Dorf. Come back each week for more how-tos from this 608-page guide.
Whether your venture is a new pizza parlor or the hottest new software product, beware: These nine flawed assumptions are toxic.
First and deadliest of all is a founder’s unwavering belief that he or she understands who the customers will be, what they need, and how to sell it to them. Any dispassionate observer would recognize that on Day One, a start-up has no customers, and unless the founder is a true domain expert, he or she can only guess about the customer, problem, and business model. On Day One, a start-up is a faith-based initiative built on guesses.
To succeed, founders need to turn these guesses into facts as soon as possible by getting out of the building, asking customers if the hypotheses are correct, and quickly changing those that are wrong.
The second flawed assumption is implicitly driven by the first. Founders, presuming they know their customers, assume they know all the features customers need.
These founders specify, design, and build a fully featured product using classic product development methods without ever leaving their building. Yet without direct and continuous customer contact, it’s unknown whether the features will hold any appeal to customers.
Traditionally, engineering, sales, and marketing have all focused on the immovable launch date. Marketing tries to pick an “event” (trade show, conference, blog, etc.) where they can “launch” the product. Executives look at that date and the calendar, working backward to ignite fireworks on the day the product is launched. Neither management nor investors tolerate “wrong turns” that result in delays.
The product launch and first customer ship dates are merely the dates when a product development team thinks the product’s first release is “finished.” It doesn’t mean the company understands its customers or how to market or sell to them, yet in almost every start-up, ready or not, departmental clocks are set irrevocably to “first customer ship.” Even worse, a start-up’s investors are managing their financial expectations by this date as well.
Established companies execute business models where customers, problems, and necessary product features are all knowns; start-ups, on the other hand, need to operate in a “search” mode as they test and prove every one of their initial hypotheses.
They learn from the results of each test, refine the hypothesis, and test again—all in search of a repeatable, scalable, and profitable business model. In practice, start-ups begin with a set of initial guesses, most of which will end up being wrong. Therefore, focusing on execution and delivering a product or service based on those initial, untested hypotheses is a going-out-of-business strategy.
Traditional business plans and product development models have one great advantage: They provide boards and founders an unambiguous path with clearly defined milestones the board presumes will be achieved. Financial progress is tracked using metrics like income statement, balance sheet, and cash flow. The problem is, none of these metrics are very useful because they don’t track progress against your start-up’s only goal: to find a repeatable and scalable business model.
Most startups simply borrow job titles from established companies. But remember, these are jobs in an organization that’s executing a known business model. The term “Sales” at an existing company refers to a team that repeatedly sells a known product to a well-understood group of customers with standard presentations, prices, terms, and conditions. Start-ups by definition have few, if any, of these. In fact, they’re out searching for them!
The demands of customer discovery require people who are comfortable with change, chaos, and learning from failure and are at ease working in risky, unstable situations without a roadmap.
Hiring VPs and execs with the right titles but the wrong skills leads to further trouble as high-powered sales and marketing people arrive on the payroll to execute the “plan.” Executives and board members accustomed to measurable signs of progress will focus on these execution activities because this is what they know how to do (and what they believe they were hired to do). Of course, in established companies with known customers and markets, this focus makes sense.
And even in some start-ups in “existing markets,” where customers and markets are known, it might work. But in a majority of startups, measuring progress against a product launch or revenue plan is simply false progress, since it transpires in a vacuum absent real customer feedback and rife with assumptions that might be wrong.
The business plan, its revenue forecast, and the product introduction model assume that every step a start-up takes proceeds flawlessly and smoothly to the next.
The model leaves little room for error, learning, iteration, or customer feedback.
Even the most experienced executives are pressured to hire and staff per the plan regardless of progress. This leads to the next startup disaster: premature scaling.
The consequences of most start-up mistakes begin to show by the time of first customer ship, when sales aren’t happening according to “the plan.” Shortly thereafter, the sales VP is probably terminated as part of the “solution.”
A new sales VP is hired and quickly concludes that the company just didn’t understand its customers or how to sell them. Since the new sales VP was hired to “fix” sales, the marketing department must now respond to a sales manager who believes that whatever was created earlier in the company was wrong. (After all, it got the old VP fired, right?)
Here’s the real problem: No business plan survives first contact with customers. The assumptions in a business plan are simply a series of untested hypotheses. When real results come in, the smart startups pivot or change their business model based on the results. It’s not a crisis, it’s part of the road to success.