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Lean Startup Operating Manual (Customer Development at Work)
1. The Lean Startup Operating Manual
Steve Blank
Stanford School of Engineering /
UC Berkeley, Haas Business School
www.steveblank.com
2. The Economy
Before
• Cash was readily available
• Follow on financing was readily available
Now
• Debt markets are tight
• IPO & M&A window closed
• most VC!s haven!t made money for a decade
3. State of Startups
• High burn rate
• Swing for the fences
• Full management teams
• Assume customer is known
• Assume features are known
• Assumes growth is by execution
Traditional startups are fighting yesterday’s war
4. The Lean Startup
• Continuous customer interaction
• Revenue goals from day one
• No scaling until revenue
• Assumes customer and features are
unknowns
• Low Burn by Design - Not Crisis
8. Do Capital Needs Match Return?
• Large VC = your deal = 3x their fund
• Angels = ?
• What’s the potential return?
• Size the market…
9. sizing up the market
$123 billion tourism
industry inside the U.S.
$1 billion English travel
guides sold annually
$210 million 20-35 year
old travelers
SF (Initial test market)
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Panel display market.
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Target products: Camcorders, DVD
-93?48&/:80"@AA&'())(*+B players and recorder, digital cameras,
Apex: ! 3.5M
computer monitors, LCD and Plasma TV
OLED TV market will grow to $15.29
billion by 2015
YEAR 1 PROJECTIONS
Units sold : 1,000,000
Price per unit : $700 - $1,000
Revenue from Royalties (assuming .5-1.0% of shelf price):
Worst case = $3,500,000 Best Case = $10,000,000
14. Market/Technology Risks
• There are no average startups
• Startups do differ (sometimes dramatically)
by vertical market
• Average advice is non-optimal
15. What Kind of Risk?
• Market Risk?
• Technology Risk?
• Customer + Technology Risk?
• What are the quot;fundamental drivers of
growth?”
22. Bird’s Eye View of our Business Model
Hardware
($155)
Online Distribution
• Own website ($208+.3x)
Customer • Amazon.com ($40+32x)
• eBay ($300+25x)
Acquisition
Target Market
Cost:
($41)
Demand Creation Viral
MyNote • SEO/SEM
($156.00) Marketing
• Blogs
• Forums
• Bookstore
promotion
• Sales force
• Viral marketing Offline Distribution
• Website $399.99
• College bookstores
($0.02)
Software (in-house)
($1.00)
23. Licensed Partners:
• Sony Consumer electronics
• Samsung • Flat Screen TVs through
(Other possibilities - LG, Toshiba, Panasonic,
DuPont)
Fry’s, Best Buy, Magnolia,
etc
IP
.
C Patents 3(%-4(5,-)quot;%6 'quot;7,)quot;8-9$% :2,(quot;#
1
D
2 patents owned by Apex! Partners’ distribution channels
• Technology patent - SOLED • Sony
• Long-Brite and inkjet printing process • Samsung
(Other possibilities - LG, Toshiba, Panasonic,
DuPont)
Dollar flows:
Wages: founders &
Consultants
C.
IP Costs: Lawyer .
C License fees E-
F1
& Patent costs. E;
1 Royalties
Premises: Dev’t labs. D
24. BUSINESS MODEL
iPhone Application Subscription Based Service
$ 2.99 (x.7) $ 5/month
Year 1: $ 40K END-USERS END-USERS Year 1: $ 50K
Year 2: $1M Year 2: $1.2 M
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CITYBEATS.COM
Two Revenue Streams
March | 2011
Total Revenue (year 1) = $ 90 K
Critical Mass: 500,000 users
Total Revenue (year 2) = $ 2.2 M
26. Are You a Domain Expert?
• You’ve been an observer
• You’ve been a user
• You’ve built this before
27. +
Pain Points in Inter-District
Development of Curricula
28. What does the customer need?
65% of 315 respondents
said they would buy our product
29. TEAM ROLES AND CORE
COMPETENCIES
Building the Team Incentives
• Current Team • Equity
• Title and Responsibilities
Vision Execution • Culture
Shruti – Young, trendy atmosphere
Business Gwen – Connected
Stephan
– Creative
Amara
Technology
Horrace
• Skills Needed
– Technical Execution
» Ruby on Rails, Perl, AJAX,
Html, CSS, Clean designer
• Future Team Members
– Programmers
– Sales Force
– Interns
Slide 29
31. Market Type?
• Existing Market
• Resegment a Niche
• Resegment on Low Cost
• New Market
32. Definitions: Types of Markets
Existing Market Resegmented New Market
Market
• Existing Market
– Faster/Better = High end
• Resegmented Market
– Niche = marketing/branding driven
– Cheaper = low end
• New Market
– Cheaper/good enough can create a new class of
product/customer
– Innovative/never existed before
33. Type of Market Changes Everything
Existing Market Resegmented New Market
Market
• Market • Sales • Customers
– Market Size – Sales Model • Needs
– Cost of Entry – Margins • Adoption
– Sales Cycle
– Launch Type
– Chasm Width
– Competitive • Finance
Barriers • Ongoing Capital
– Positioning • Time to Profitability
34. END USER WILLINGNESS TO PAY
Number of Respondents Willing to Pay Per Service
100 95
80 75 60% of respondents willing
71
Nightlife Promotions
to pay for these services
Friend Locator
60 58
40
30
20 15 12
6
0
$0 $1-$5 $5-$10 $10+
Slide 34
36. Customer Development and
Product Development
Product Development
Concept/ Product Alpha/Beta Launch/1st
Bus. Plan Dev. Test Ship
Customer Development
Customer Customer Customer Company
Discovery Validation Creation Building
37. Customer Development: Key Ideas
• Parallel process to Product Development (agile)
• Measurable Checkpoints
• Not tied to FCS, but to customer milestones
• Notion of Market Types to represent reality
• Emphasis is on learning & discovery before execution
38. Customer Discovery: Step 1
Customer Customer Customer Company
Discovery Validation Creation Building
• Stop selling, start listening
– There are no facts inside your building, so get outside
• Test your hypotheses
– Two are fundamental: problem and product concept
39. Customer Discovery: Exit Criteria
• What are your customers top problems?
– How much will they pay to solve them
• Does your product concept solve them?
– Do customers agree?
– How much will they pay?
• Draw a day-in-the-life of a customer (archetypes)
– before & after your product
• Draw the org chart of users & buyers
40. Customer Validation: Step 2
Customer Customer Customer Company
Discovery Validation Creation Building
• Develop a repeatable and scalable sales process
• Only earlyvangelists are crazy enough to buy
41. Customer Validation: Exit Criteria
• Do you have a proven sales roadmap?
– Org chart? Influence map?
• Do you understand the sales cycle?
– ASP, LTV, ROI, etc.
• Do you have a set of orders ($’s) validating the
roadmap?
• Does the financial model make sense?
42. distribution and demand creation
! Unique Idea: website and iPhone app form
symbiotic relationship
Travel
AdWords App
traffic
Listing
TravelSpy.co iPhone App
m
traffic Blogs (ex.
Magazines
Travelblog.org)
43. +
Sales Ecosystem
Discussion channel
Mandate channel
Sale
Superintendant
Another
District district
IT Director
Engagement
(Early Stages) School
Dept. Head Another
school
in the
district
Teacher Teacher
44. +
Demand Creation
quot; State-by-state rollout: educational standards
quot; Continuous iteration of feedback
CA Pilot Broad Grow
Adoption Adoption
quot; Hypotheses: Will quot; Hypotheses: Will quot; Hypothesis: How
they adopt, use, they buy hands- well does it sell
and pay? off? Can it scale? itself?
quot; 10 schools f2f: quot; CA telemarket quot; All telemarket
quot; Sales: $1,066 quot; F2f elsewhere quot; $533/dist
quot; Travel: $1,000
45.
46.
47. Distribution Channels
• Online Distribution (DIRECT SALES)
! Own website
quot; Set-up and server cost = $1500
quot; Server maintenance = $200/mo
quot; Internet Merchant Fee = $8/unit
! eBay # Anchor subscription
quot; Monthly Subscription Fee = $300
quot; Variable Fee = $25/unit
! Amazon.com # Pro Merchant seller
quot; Monthly Subscription Fee =$39.99
quot; Variable Fee = $32/unit
48. Distribution Channels
• Offline Distribution (CHANNEL SALES)
! College Bookstores, e.g. Stanford Bookstore
quot; Booth/Stall outside – Free
quot; In-store vendor – $50 co-op dollars/mo
! Shelley Hughes, Manager of Computer Sales
“I hope this project is actually realized…it sounds like a
device that would do well!”
• Future Channels/Partners
! Retailers such as Best Buy, Office Depot, Fry’s
49. Manufacturing Partners
• Contacted original design manufacturers
(ODMs) in Asia to determine our supplier:
• Lucky Light Electronics Co. Ltd.
(Shenzhen, China)
• Hon Hai Precision Industry, ie. Foxconn
Electronics (Taiwan)
• Compal Electronics (Taiwan)
• Hipsley Ltd. (Hong Kong)
Slide 49
50. Cost of Goods Sold
Specification Cost/piece
Single light LCD panel $25
Motherboard (w/ WiFi and Bluetooth function) $60
RAM 512 MB $3
Wacom A5 (tablet sheet) $20
SDHC slot (expandable storage) $6
USB socket $0.50
Plastic casing (for panel and motherboard) $20
Rechargeable battery + ACDC power supply $15
Assembly cost $5
Software embedding $1
Shipping cost ($2000 for 5000 pieces in 20ft $0.40
container)
Total Hardware Cost $155.5o
Slide 50
56. K49+&;89387J&P&Q(368&;84J6
• Decide on business model
– What are the quot;fundamental drivers of growth”
• Create a decision loop (build-measure-learn)
• Write your hypotheses down (3 diagrams)
– Business model, distribution channel, demand creation
• Prove it in micro-scale
• Fact-based culture, built to learn