Editor’s note: This post is part of a series featuring excerpts from the recently published book, The Startup Owner’s Manual, written by serial entrepreneurs-turned-educators Steve Blank and Bob Dorf. Come back each week for more how-tos from this 608-page guide.  

Existing companies already know what works and what doesn’t. For them, failures are an exception—if not a crisis. They happen when someone screws up.   

Startups are different. They’re searching for a business model, not executing, and the only way they find the right path is by trying lots of experiments and making lots of wrong turns. Successful startups run dozens if not hundreds of pass/fail tests—on the sales pitch, features, pricing, and much more.

So get ready to accept failure—it’s part of the learning process—and figure out how you’re going to learn from it. 

Make Continuous Iterations and Pivots 

Embracing failure demands frequent, agile iterations and pivots. A pivot is substantive change in one or more of the nine boxes of the business model canvas (like changing pricing from a freemium to a subscription model).  

When a company is limping along, only a dramatic change to one or more business model components can get it back on the road to success. Pivots are driven by the learnings and insight from a continuous stream of “pass/fail” tests you run throughout discovery and validation. The best startup founders don’t hesitate to make the change. They admit when hypotheses are wrong and adapt. 

Design Experiments and Test, Test, Test 

Initially, hypothesis is just a fancy word for “guess.” To turn hypotheses into facts, founders need to get out of the building and test them in front of customers. But how do you test? And what do you want to learn from the tests? 

The best Customer Development experiments are short, simple, objective pass/fail tests. You’re looking for a strong sign: something like, five of the first 12 customers you call on say “I need this right now, even if it’s still buggy.” Early tests aren’t necessarily precise, but should give you a “good enough” signal to proceed. 

Start by asking yourself, “What insight do I need to move forward?” Then ask, “What’s the simplest test I can run to get it?” Finally, think about, “How do I design an experiment to run this simple test?” One of the things that trips up engineering founders is thinking that these tests must involve actual code, hardware, or the real product. They don’t. Most of the time you can mock-up the webpage or create a demo or physical prototype to elicit valuable learning. 

Figure out Your Market Type—It Changes Everything 

One of the radical insights guiding this book is that not all startups are alike. One of the key ways in which they are different is in the relationship between a startup’s new product and its market. These product/market relationships generally fit one of these descriptions:

  • bringing a new product into an existing market
  • bringing a new product into a new market
  • bringing a new product into an existing market and trying to:
    • re-segment that market as low-cost entrant or
    • re-segment that market as a niche entrant
  • cloning a business model that’s successful in another country

Market type influences everything a company does. Strategy and tactics that work for one market type seldom work for another. Market type determines the startup’s customer feedback and acquisition activities and spending. It changes customer needs, adoption rates, product features and positioning as well as its launch strategies, channels and activities. In sum, different market types require dramatically different discovery, minimum viable products, and sales and marketing strategies. 

In existing markets, where customers already exist, marketing is relatively easy: Customers can describe the market and the attributes that matter the most to them.  

In a new market, a company lets customers do something they couldn’t do before by creating something that didn’t exist previously. Or it dramatically lowers costs to create a new class of customers. By definition, new markets have no customers yet, so there’s nobody to know what the product can do or why they should buy. 

The key is understanding whether a large customer base exists and whether customers can be persuaded to buy. A classic founder error in a new market is the “fast-burn” spending of sales and marketing funds, a practice that may be appropriate when selling to existing customers in a known market, but makes no sense in a new market.  The new-vs-existing axis is at the core of the market-type definition. 

Stay tuned next week for another Startup Owner’s Manual excerpt.