Luke Skywalker didn’t just roll out of bed one morning and defeat the Emperor.
First he faced the deaths of his aunt and uncle. Then he encountered Obi-Wan Kenobi. He trained with Yoda. He battled Darth Vader. Finally he confronted the Emperor.
Enough trials to fill three movies!
Well, entrepreneurship works the same way.
A startup’s journey toward becoming a public company is also punctuated by trials.*
Each trial closes one chapter and begins the next.
The chapters are neatly described by Steve Blank’s Customer Development model. For another take, check out Brant Cooper.
The Four Stages of Customer Development, and What They Cost
The stages are:
- Customer Discovery: $0
- Customer Validation: $25,000
- Customer Creation: $500,000
- Company Building: $2,000,000
Customer Discovery: $0
The first stage is Customer Discovery. Think of this as the training level. A startup can do this with no inventory: it’s learning to walk, run, jump, and interact with creatures in the environment. As an entrepreneur, you’re learning to talk to customers and, more importantly, to listen to them.
The goal of this stage is to prove fit between startup and customer (subgoal 1.1), between customer and problem (subgoal 1.2), and betweenproblem and your proposed solution (subgoal 1.3). You don’t need to write any code in this stage. Think research, rather than development. A crude wireframe or paper prototype is enough to illustrate your first, non-functional MVP.
You pass this stage if customers start jumping up and down saying, “yes, when can I have it? Can I pay you now?”
Customer Validation: $25,000
The second stage is Customer Validation. The first subgoal (2.1) is confirming problem/solution fit, which you can prove by building a working, albeitlow-fidelity MVP. Your ability to design a useful MVP demonstrates team/solution fit (2.2).
Use your MVP to get initial customer traction (2.3). You still don’t have to write actual software, at least at first – the first iteration of your MVP could be a single-page website leading to a concierge MVP. Only after it proves demand should you bother converting it to code. But you will need a complete prototype with all moving parts in place, before you talk to seed investors. They want to know you have the ability to build a complete working prototype.
JFDI Accelerate gives you 100 days to achieve traction. What does that mean?
By Demo Day, the startup should be able to show (subgoal 2.4) a few test cases that prove it can make a profit – that the revenues and expenses line up so the business model works, at least in theory. The startup should show the beginnings of growth: users should be signing up (subgoal 2.5), or at least sending one another invite codes. Ideally, if you’re building a platform, the essential sides of your platform should be able to sign up, and transact with one another, without your intervention.
You should be able to talk intelligently with investors about conversion rates, LTV, and CAC.
Customer Creation: $500,000
The third stage is Customer Creation. Seed funding pays for this. With $500,000 in the bank and 18 months of runway your job is growth maximization – to increase your customer numbers as fast as possible. The goal here is the hockey stick. You achieve it by finding solution/channelfit (3.1), which could describe everything from SEO/SEM to reseller partnerships. Growth hacking happens here. You know you’ve achievedserious product/market fit (3.2) when you find yourself asking, “they seem to keep buying, no matter what price we set! How do we know what price is best?”
To solve this stage often requires a rewrite of your prototype into real, scalable, reliable product, which is why you need the 18 months of runway. This is where that metaphor comes from – entrepreneurship is like jumping off a cliff and assembling an airplane on the way down.
$500,000 is just an estimate. Some can do it on $250,000. Others will need $1,250,000. It depends on the market you’re in. Some businesses cost more than others.
Company Building: $2,000,000 and up
The fourth stage is Company Building. The goal here is revenue maximization through building an organization that executes your business model in a scalable and sustainable way. Series A funding opens the door to this stage. Your job now is to ride the wave, inside the tornado, toward becoming a mainstream vendor – in other words, company/market fit. That kind of recapitulates startup/customer fit, but fully elaborated, in a whole product, whole-industry kind of way – the way Google fits web advertising, the way Microsoft fits enterprise office suite software, the way Apple fits smartphones and tablets. You may still be losing money, but you’ll make it up in volume! Sometimes $2,000,000 is not enough. Series B, C, and D funding help you to win mind- and market-share.
You Win: $200,000,000
Outside the Customer Development model, but for the sake of completeness, is the fifth stage. If you can build a company which, once it becomes profitable, will be immensely so; if the founding team can step away from day-to-day operations; if the company is now a significant player in a market that is large and growing; then that company is ready for the last fundraising it will ever need: a public offering.
The funds received from that IPO should enable a company to switch from revenue maximization to profit maximization.
(To be fair, your job isn’t actually over then – you’re now the CEO of a public company, which has its own headaches. But you’re not running a startup anymore, so we’ll stop here.)
The Trials
So that’s the very abbreviated plot synopsis of a startup journey. What’s missing?
The level bosses.
In Star Wars, each trial that Luke Skywalker faced, helped him to level up. What appeared to be an opponent eventually became an ally. Even Darth, in the end!
With startups, the same is true.
Many entrepreneurs come to JFDI, expecting us to help them find a VC who likes their idea enough to give them one or two million in Series A funding. That’s true, in a sense – but first you have to get past a bunch of level bosses!
The Customer Development stages map exactly to early-stage funding:
- Customer Discovery — Pre-Accelerator Program
- Customer Validation — Accelerator
- Customer Creation — Seed Funding
- Company Building — Series A and beyond
How to Get Series A Funding
Series A investors want** to see a complete team running the company, significant revenue – say, $100,000 a month – and significant growth – say, 10% a month – with full mastery of distribution channels. (That’s the core of the decision; the formalities of due diligence can still kill the deal.)
This corresponds to Investment Readiness Level 9.
But software doesn’t write itself and products don’t sell themselves. So, to reach those milestones, you probably need to raise seed funding, to hire the team and scale DevOps.
How to Get Seed Funding
Seed and angel investors want to see that you have built a complete working prototype (subgoal 2.2) which solves a problem that customers care about (subgoal 2.1); that those customers are signing up of their own volition, in convincing numbers (subgoal 2.3); and that each customer will make you more money than they cost (subgoal 2.4). Revenues should be at least $200,000 per year. (subgoal 2.5)
This corresponds to Investment Readiness Level 6.
Most startups need about three months of intensive customer validation and product development to pass those tests. Accelerators exist to help them do this. If you’re building a platform business your product has to work for each face of the platform, at a level beyond a concierge MVP.
How to Get Into an Accelerator
To get into our accelerator, you have to show evidence of three things to our panel of judges:
(subgoal 1.1) that the startup knows who their customers are, and that they understand those customers better than they understand themselves;
(subgoal 1.2) that the customers agree that the problem is worth solving, and hasn’t already been solved to their satisfaction; and
(subgoal 1.3) that the customers want to buy your proposed solution.
This corresponds to Investment Readiness Level 3.
If you can defeat the level bosses on these three counts, your startup will be formally admitted to JFDI Accelerate, we will begin the process of incorporation, and we will start to disburse funds.
If JFDI Discover went well, you should be able to complete this process within the second week, and full steam ahead to customer validation.
Most teams close their first arms-length customer either before admission to JFDI Accelerate, or during the first half of the program.
To get out of our accelerator – to go onstage at Demo Day – you have to show traction.
Traction means customers, willing to pay. More than one. More each week. If your business relies on unpaid users signing up in droves, then traction means 10,000 weekly active users by the end of the program, growing 7% per week.
This corresponds to Investment Readiness Level 6.
If you don’t show traction, that’s fine; you can defer your pitch to our next Demo Day. B2B businesses take longer and there’s no shame in that.
How do you meet the requirements to get into the accelerator? Through JFDI Discover.
How To Pass JFDI Discover
During JFDI Discover, we give startups three weeks to prove that they understand a problem worth solving. Who decides the problem is worth solving? Customers do – not the startup. Paul Graham says: Build something people want. If you want to build something that only you want, then it’s not a startup, it’s a science project. An art project. A hobby. You should have fun doing it, but don’t quit your day job.
Customer Discovery is no secret:
- Define a customer persona, or archetype.
- Find a statistically significant sample of those customers.
- Contact them for an interview.
- In conversation with those customers, elicit a list of pain points – annoyances or significant problems – that they face in their persona role. Ask the customers to order that list.
- (If your startup is more about gains than pains, then frame the pains in terms of the difficulty of achieving those gains.)
- Find out what solutions to the pain point the customers have already surveyed and rejected.
- Find out what the customers have been doing to solve their problem, in the absence of a suitable solution.
- Only after you have done the above, introduce your proposed solution.
- Do they care?
- Enough to pay?
Anyone can do this. Detailed guidance instruction is available to those who sign up for JFDI Discover; you can also sign up for Udacity EP245.
JFDI’s coaches will help you set Objectives and Key Results. Each week you will face a mini-trials. Do you have the discipline to follow the process and gather the evidence the judges want to see?
Frequently Discovered Findings
You may find that what you thought was a problem was only a problem to you – once you start asking intelligent questions of the right people, you may quickly find that the product that you wanted to build was already on the market and being used by your “customers” – you just didn’t know about it, because you weren’t scratching your own itch! If this happens, you’re done; JFDI Discover has completed successfully, albeit not in the way you had hoped, and you have at least learned something.
The most common scenario is what we call “reinventing the unwanted wheel.” A group of founders with only layman-level familiarity with an industry domain imagines that customers must be dying for some technology solution. However, that solution first became feasible five years ago, if not more. There are already incumbent businesses who have executed the innovation, and offer products and services to the market. However, not knowing the market well, the founders are unaware of this fact; and they assume that the solution does not exist. They talk to customers, and have three kinds of conversations.
The first kind of conversation goes like this: the customer agrees that they have the problem. However, they have never looked for a solution to that problem; they simply cope. This customer doesn’t really have that problem. They are just being polite. They’re not actually a customer.
A startup’s journey toward becoming a public company is punctuated by trials.
The second kind of customer is aware of existing solutions. The founders’ first rude shock comes when customers tell them about competitors they didn’t know about. The second rude shock comes when the customers say they have not already availed themselves of those solutions. Why? “Because they’re too expensive,” say the customers. What they really mean is, “we have bigger problems to worry about – those solutions are a nice-to-have, not a must-have.” That is what happens when you reinvent a wheel that doesn’t quite fit anybody else’s axle. If you encounter this kind of customer, it is essential that you get to the bottom of their willingness to pay. You may learn that “too expensive” applies to any price level above $0. In fact, even at $0 they may not adopt your solution, because it takes time and effort to do things a different way. They aren’t actually a customer either.
Now, you may find a way to involve them in the value network somehow anyway – maybe you give it away to this customer category, but monetize on some other face of the platform. Just remember: they’re not the customer – they’re the product. You still need to find a customer somewhere else.
JFDI Discover: Special Cases
If you’re scratching your own itch, you do not get a pass. You are not excused from doing Customer Discovery. Rather, you should be able to do the customer discovery even more easily, because you should naturally be in contact with people like you – other potential customers.
Exceptions. That this model of Customer Development works for almost all startups, except those whose business model depends on advertising. If you’re building a medium, you will spend years acquiring users but not customers. Don’t worry. If you can break 100 million users, and know a lot about them, the customers will come.
