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CHAPTER 2 The Path to the Epiphany: The Customer Development Model

       How narrow the gate and constricted the road that leads to life. And those who find it are few.

      —Matthew 7:14

      WHEN WILL HARVEY APPROACHED STEVE BLANK with a new business idea in June 2004, Steve uncharacteristically almost took out his checkbook before hearing Will’s pitch. Steve had invested in Will’s previous company, There.com, and sat on its board. Before that, Will had been Steve’s engineering VP at Rocket Science, a video-game company with Steve as founding CEO. Rocket Science is infamous for appearing on the cover of Wired magazine while blowing through $35 million in venture capital in less than three years, leaving a crater so deep it has its own iridium layer.

Sitting in Steve’s living room, Will explained his vision for IMVU, a “virtual world” company with 3D avatar-based instant messaging and social networking. Will had a world-class reputation. He developed Music Construction Set, a worldwide best-selling video game, at the age of 15. He earned his bachelor’s, master’s and Ph.D. in computer science at Stanford while running a video-game company that developed hits like Zany Golf, Immortal, and Marble Madness.

      Will’s co-founder, Eric Ries, had started an online recruiting company while earning his computer science degree at Yale. Eric had joined Will’s last startup as a senior software engineer. That company built a “virtual world” on the web using a multiyear waterfall development model. After three years, the product was ready to launch with a big-bang product introduction guided by a hired big gun, a CEO with large company experience. Only then did they discover that customers didn’t want or care about most of the features they had so painstakingly built.

      Steve told the IMVU founders that in exchange for his check to help fund their seed round, they were required to audit his Customer Development class at U.C. Berkeley’s Haas Business School. As the semester unfolded, Will and Eric realized that the Customer Development principles they were learning would save them from repeating the same errors they made in their previous startup. Thus IMVU’s co-founders became the first Customer Development pioneers.

      …in exchange for his check to help fund IMVU’s seed round, they were required to audit Steve’s Customer Development class.

Steve sat on IMVU’s board and watched, coached and cheered as Will and Eric paired the Customer Development process with agile software development. They built a process that used customer feedback and testing to help them determine the minimum product features customers most valued. Based on its initial set of hypotheses about its customer, IMVU set out to create a 3D chat add-on where users could create customizable avatars and talk to all their friends on the leading instant messenger of the day, America Online. After a year, IMVU could see that all its customer hypotheses were wrong. While customers liked the 3D avatars, they wanted to create their own separate buddy lists instead of using the one they already had on AOL. IMVU learned that customers didn’t want to talk to their existing friends but wanted to meet new people and make new friends. Quarter after quarter, this kind of customer feedback created a “two steps forward, one step back” learning process that supplied the Customer Development principles they learned in class.

      Most startups lack a structured process for testing their business model hypotheses.

      IMVU tested, pivoted and tested again until it had the product right. Instead of creating a crisis, this learning process was an integral part of the company. IMVU had integrated Customer Development and agile engineering and had become the first Lean Startup.

      The result was a profitable, growing company. Why was IMVU on the road to success while scores of other virtual world and avatar companies have long since folded? What was it about Customer Development that gave Will and Eric a clearer roadmap at IMVU than they had at their previous company?

An Introduction to Customer Development

      Most startups lack a structured process for testing their business models’ hypotheses—markets, customers, channels, pricing—and for turning those guesses into facts. The traditional new-product introduction model offers no customer feedback until beta, when it’s too late. What separates a successful startup like IMVU from the rest of the pack is this: from Day One, IMVU embraced the Customer Development process and used it to rapidly test assumptions and make corrections in near real time.

The Customer Development model depicted in Figure 2.1 is designed to solve the nine problems of the product development model outlined in Chapter 1. The model breaks out all the customer-related activities of an early-stage company into their own processes, designed as four easy-to-understand steps. The first two steps of the process outline the “search” for the business model. Steps three and four “execute” the business model that’s been developed, tested, and proven in steps one and two. The steps:

       Customer discovery first captures the founders’ vision and turns it into a series of business model hypotheses. Then it develops a plan to test customer reactions to those hypotheses and turn them into facts

       Customer validation tests whether the resulting business model is repeatable and scalable. If not, you return to customer discovery

       Customer creation is the start of execution. It builds end-user demand and drives it into the sales channel to scale the business

       Company-building transitions the organization from a startup to a company focused on executing a validated model

Figure 2.1 Customer Development Process

      Meshing seamlessly, these four steps support all elements of the startup’s business activities. The specific processes associated with the first two, most powerful “search” steps are described in subsequent chapters.

“The Search for a Business Model:” Steps, Iteration and Pivots

      In the Customer Development model, each step is represented as a circular track with recursive arrows in order to highlight that each step is iterative. It’s a polite way of saying, “Startups are unpredictable. We will have failures and we will screw it up several times before we get it right.”

      In contrast, a traditional product introduction plan makes no provision for moving backward. To do so would be considered a failure. No wonder most startup founders are embarrassed when they’re out in

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