Inc42 Daily Brief
Stay Ahead With Daily News & Analysis on India’s Tech & Startup Economy
On discovering the ultimate (must know) business model for startups…
One year ago I “came across” one book that made me completely review some core assumptions and understanding that I had about how to build a startup-business.
It wasn’t just a book it was much more than a book. It was an entire different philosophy how to think and act as aspiring startup founder. It was the definition of a game-changer in the startup field and the beginning of a new era for startups.
I am super excited to share the underlying business model of that book with you and I am sure it will make you at least pause and reflect about how you intend to build your own startup.
It’s the foundation that any startup should have from the very begging. It will dramatically increase the possibilities of having a successful startup.
Reality Check
You might wonder, why the heck I have to use that model?
I already have a clear plan in my mind how I will structure my startup and I can’t think any good reason why I need to alter my model for something else.
I can relate with you, our enthusiasm about building our own startup is something amazing. This enthusiasm and passion arguably will be the fuel and the driving force for achieving our non-negotiable goal; To become our own boss and not look back again (and by the way never again send a CV….never 🙂
Personally, building my own startup, make my wake up from the very morning and work relentlessly all day long so as to make things happen and finally accomplish to live life on my own terms.
Nonetheless this enthusiasm brings with a drawback, that if not avoided might cause serious problems to the odds of having a scalable, and successful startup.
What’s that disadvantage?
The hunger of achieving and our unprecedented passion make us ignore some facts and difficulties that startups have to live by but could be avoid with that brilliant business model.
Hard facts about Startups
– 8 out of 10 startups believe that will offer superior experience to their customers but sadly only 2 out of 10 finally achieve to create real value for them and keep up with their expectations (only 20% of customers agree with the startups expectations).
– 4 out of 10 startups approximately fail (40% failure rates).
I don’t outline that facts to discourage you the contrary. As the old proverb says
“A prudent person foresees danger and takes precautions. The simpleton goes blindly on and suffers the consequences.”
Embrace that reality and take your precautions
In other words we have to acknowledge that startups due to their nature are full of uncertainties and unknowns, but instead of either ignoring them or to getting afraid we have to embrace that reality and take our precautions.
What has to do with our today’s post?
The business model that I will outline today, is one of the very few that repeatedly proved to facilitate startups founders in the startup development phase and enable them to start from a far better starting point.
Now I think is the right time to introduce you the business model that literally changed startups life forever.
The Business Model that changed startups life forever;
Which one is that model?
That model is the Customer Development model. Is a model coined and founded by the noted entrepreneur and academic Steve Blank.
As Mr. Blank stressed in one of his books (The Startup Owner’s Manual) the main reason for the high startup failure rates is because startups were using the wrong tools, namely tools appropriate only for established firms and not for startups that they have to be in a search mode.
His famous business model is divided in 4 stages. In our today post would dive into the first two. Those 2 have to do with the main startup development phase (search for a business model) which we are interested about.
The 1st stage is the Customer Discovery
In this phase the startup founders have to follow these steps:
a) In this step the founder based on his current understanding about the market and his/her future product has to create a series of assumptions for each element of the business model canvas. Namely, what believes has to be the Value Proposition, the target group, the distribution channel, the Demand Creation Strategy, Resources needed, Partners, Cost Structure, the Action Plan and the Revenue Model.
But the fundamental difference of that assumptions with any other conventional plan is that they will not be for the final end product (what the company will launch in the future) but for a MVP.
In other words these hypotheses need to be developed for a MVP (Minimum Viable Product) purpose and not for anything else. The reason is because you don’t know yet enough so as to create a realistic business model canvas for the final end product; actually you are far along this stage you are just experimenting
b) A low-fidelity MVP should be created
(a product with the least possible features that nevertheless can create customer satisfaction) and this product will be based on the assumptions that were created through the business model canvas
(P.S. the creation of this MVP shall be resumed only if the founder has a deep understanding about his/her target segment problem. This process can be accelerated by following the advices that were given in the following Guide; how to build a passion-based startup. If you didn’t read it please have a look
c) After the creation of these hypotheses for each of the elements and the creation of a low-fidelity MVP he/she has to develop a series of tests which will allow the founder to try convert those hypotheses into facts. These tests are in simple words methods to test all of the previously created assumptions and will be tested via exposing the actual MVP in front of prospects and test each one of them.
d) In this phase the startup founders have to validate or not there hypotheses through the tests that were created in the previous step in the following manner:
-The MVP should be tested directly with qualified prospects (as were defined in the target group element of the canvas), and by using these pre-defined tests (those mentioned before) they will obtain a good feeling about the solution which they created even with just an MVP.
I want to reiterate that, the purpose of that MVP is not to generate any sale, it’s solely purpose will be to test if can generate customer satisfaction and test the assumptions of your business model elements.
e) After the MVP is exposed in front of the prospects 3 scenarios can happen;
–the initial assumptions were right and thus no need to change anything (very rare scenario)
–An iteration needs to take place (small incremental improvements, modifications, changes need to occur so as to create a better product/market fit; namely a compelling solution to a pressing problem or need of the market)
–Pivot has to occur (a radical or considerable shift need to happen to one or more business model elements), which will have as a result the whole business model canvas to get revised significantly)
f) The founder will either need to pivot and go back in the drawing board, to iterate (make the necessary micro-changes and modify the MVP) and re-test it or to go right away in the next step (because he/she managed to convert the assumptions into facts). More often than not founders found themselves either iterate or pivot before to go to the Customer Validation phase
The 2nd stage is the Customer Validation
Is composed by 4 main steps:
a) Create a new business model canvas with the learning insights that you obtained in the Customer Discovery process. Nevertheless these business model elements shall not be either for the final business product or for a low-fidelity MVP. It shall be for a high-fidelity MVP. The difference between a high and low fidelity MVP is that the 1st has to be very close to the actual final product, which will have the ability not just to create customer satisfaction but to generate an actual sale.
b) This high-fidelity MVP should be tested with a much higher number of customers in comparison with the Customer Discovery. The founder’s objective will be to make sure that he/she is in the way of finding a scalable, repeatable and successful business model.
c) After the creation of this MVP it has to get in front of real customers and try to get sold for a real price.
d) Finally based on the sales of that MVP the founder will follow the same methodology as before, either pivot, iterate or proceed.
Only and if only the MVP validate all or the most of the business model assumptions should proceed will the next 2 stages of the Customer Development model of Mr. Steve Blank. Basically the next 2 stages will shift for searching for a business model to execute the business model that was created in the previous 2 phases aiming to have a successful launch of their product/service.
As you can understand in a single post it wasn’t possible to include everything that described the Customer Development model. Nonetheless, I am confident that the most important aspects of it were covered.
The most important point that I’d like to remember for this post is; No matter how much you believe on your future product/service you have to seek “Customer proof” as Mr. Blank often say’s before developing and launching your final product/service.
As always I hope to enjoy the post and I really wish to convince you about the usefulness of that model for a successful startup business.
“Facts do not cease to exist because they are ignored”. – Aldous Huxley
Please drop a comment what you do you believe about that particular model. Does it make sense to you?
Note: We at Inc42 take our ethics very seriously. More information about it can be found here.