These Are The Six Things You Need to Know to Validate Your Business Model

               My pick: The Four Steps to the Epiphany by Steve Blank
               Approximate read time: 7 minutes
There are a lot of studies weighing in on what factors most contribute to the failures of companies. An internet search of “why startups fail” will produce an avalanche of “top 10” and “top 20” lists, or ballsy “number-one reasons why startups fail”. Like you would expect, the importance of factors changes over time as companies gain experience and become more efficient. So, too, do the weights of individual factors, depending on where the company is in its life cycle and stage of the adoption curve. 
But there are some things that always make the lists, including the element that by definition makes a company, a company- the customers. Not listening to the customer, not building what the customer wants, ignoring the customer… you get the idea. 
The same care and consideration given to developing the product is usually not given to developing the customer. Too often, the timing of marketing and sales initiatives are based entirely around product development, with first product launch as the primary focus. A methodology is applied to the build, marketing and sales plans are designed based on best guesses, and the product is thrown into a market of (hopefully) hungry buyers. The execution looks doomed on paper, but it’s the reality of most startups. 
The Customer Development Model developed by Steve Blank is a methodological approach to discovering who the customers will be, and learning from them to find product/market fit as early in the development process as possible. It sets milestones for non-product development activities, helping to mitigate cost and equipping marketing and sales to design effective strategies.
These six points are the meat and potatoes of the Customer Development Model:

Get outside the building.

You need a proven business plan to succeed. Throwing the product into the market without first testing your assumptions is one way to prove it- the fiery crash and burning wreckage of your company should leave little doubt of the plan’s effectiveness. The sexier option- Test the hypotheses you developed early about your customers and their problems. 
You’re not going to learn what you need to know sitting in the office. You have to have actual face-to-face contact with the people that you think will be paying your bills, and those who know more than you do about the market you’re entering. 
Learning who your customers are and gaining insight into the value of your product in their lives requires gathering intelligence in the field. Ask questions and listen. When you know how they spend their day, how they spend their money, and how they do their jobs- you have something to start building a plan around. How well do you know the market you’re planning on entering? You’ll learn more at trade shows and industry conferences in a day than from a week of research at the office.
If there are customers and a market for your vision, know them intimately and find them early. The customer discovery process arms the founders with as much information as possible about customers and the market to increase the chances of success, minimize risk, and control the burn rate. It’s a search for true product/market fit, prior to forming marketing and sales departments.    

Startup Market Types.

The market you are in influences everything you do to connect with customers. Most startups venture into an unknown market, and few know who their customers are (unless they’ve got a customer development team). Even in the best-case scenario where the market is known, each type of startup has different rates of customer adoption and acceptance, and the sales and marketing strategies and cash needs differ dramatically.
A startup doesn’t simply end up in a certain market through some kind of economic equilibrium, it’s a committed decision, based on knowing what kind of company they are relative to others. Think about every successful company you know- they’ve found their own space in the market to compete in some way, that’s not by accident. 
There are four market types for a startup, each with its own requirements for what a company needs to do to address its own challenges:
  • entering an existing market
  • creating a new market
  • resegmenting an existing market as a low-cost entrant
  • resegmenting an existing market as a niche player
Startups that don’t understand Market Type will spend themselves out of business as the company begins its marketing activities to help customers learn about the product and create desire to buy it through their positioning messages. They’ll also be clueless about the type of staffing, hiring, and spending they’ll need.  

Recursive feedback vs. linear execution.

The methodology for building a product follows a linear model- a product is designed to solve a problem, then it’s built. Finding the right customers and market doesn’t follow a clear and calculated path to success, there’s too much unpredictability. You can count on not finding the customers on the first attempt, and you haven’t got a prayer developing an effective sales roadmap and marketing strategy until the right ones are found. 
To effectively find customers requires a disciplined, systematic approach- one that recognizes you’ll most likely screw up several times before you get it right, but you’ll gain valuable information in the process. Learning what works and what doesn’t, and adjusting course accordingly, prevents the premature execution of an ineffective business plan that could lead to a very public and embarrassing end to the company. 
How it’s done? Micro-experimentation- testing each assumption until it’s proven, then implementing it and updating the business plan. The Customer Development Model outlines where the milestones are to stop and reevaluate the current trajectory of the business, when to repeat a step, and when it’s time to push through and move on. 
What happens when you know who your (paying) customers are, that they’re satisfied with the minimum feature set, and you have a tested sales roadmap? Good things. All good things. How do you feel about scaling now?

Sell the Product as Originally Spec’d.

In big companies the product spec is market driven- the customers are known, and successive models and iterations are refined for their needs. But startups don’t know their customers yet, they only have the founders’ vision for the product. Too often the startup’s search for customers produces a catalog of nifty features the not-yet customers would like to see, leading to modifications of the original product and misguiding the team from finding the true customers and market.  
The goal of customer development is to find early customers for the product as spec’d- those ready to buy in to the founders’ vision, not potential customers looking for modifications to fit their specific requirements. Sure, there might be consensus among early customers about a must-have feature, but now you know who’s buying. You know the minimum feature set acceptable for first release to paying customers. You’ve got a bitchin’ new iteration with the right market, before launch. 
The Four Steps. The Customer Development Model describes four phases of company development and growth: 
  • Customer Discovery (testing the business model and finding market/product fit) 
  • Customer Validation (developing a sales model that can be replicated)
  • Customer Creation (creating and driving end-user demand)
  • Company Building (transitioning from an organization of learning and discovery to a business ready to execute) 
Operating parallel to product development, each step has its own requirements to complete before tackling the next step. It’s designed to both optimize non-product development activities, those concerned with customers and market, and to ensure that those activities jive with product development, so the venture moves forward as a cohesive whole. 

The nimble Customer Development team.

Everything outside engineering prior to Company Building is carried out by the Customer Development team. It’s made up primarily of founders to collect information, respond, and adjust rapidly to maximize effectiveness in finding the right customers and market. Small by design, it’s agile and nimble- moving quickly and able to turn on a dime as new information is assimilated. 
Until the company has the fullest understanding possible of what’s required to successfully sell the product, there are no traditional departments or titles. The non-product development teams aren’t built until the business plan is proven with paying customers. This keeps the burn rate low. False starts are less costly, as there is yet no staffing and hiring for Marketing and Sales. Why would you develop Marketing and Sales, based on first customer ship- activities essentially developed in a vacuum?
A startup’s business plan is based on a lot of assumptions, not the least of which is everything that has to do with the customers. One way or another your business plan will be tested. The assumptions you based that plan on, the company on, will serve you well or indifferently lead you to their own inexorable consequences. 
Validating the elements of the business plan methodically through small-scale experimentation produces certainty to build on. It creates reliability and makes for something repeatable, saving time and money a startup cannot afford to waste. A startup is, after all, an organization learning how to become a business. 
I’ve seen second-hand the effect of startups not following the principles of the CDM through two friends, both programmers at two different startups. Fortunate, because the fallout serves as a warning of what happens when a company doesn’t test its assumptions or listen to its customers. Or when it doesn’t know who its customers even are. Those two friends are now caught in the maelstrom of the companies’ death spiral, going down exactly as it’s described, step by step, in The Four Steps to the Epiphany.
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Why this book is my pick: 

The Four Steps to the Epiphany is an impressively comprehensive methodology for the non-product development activities for startups, covering everything from finding the first customers to building the business. Extremely practical, it recognizes the reality that startups are not simply smaller businesses, that each startup is a different animal. It’s grounded in Lean Thinking, prescribing rapid iteration, testing of the business plan, customer feedback, and eliminating waste. Nothing in the book is abstract theory. The model has led thousands of startups to success. It’s startup gold.