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Development is useless unless the product development organization can iterate the product with speed and agility.

Customer Development is useless unless the product development organization can iterate the product with speed and agility. If Engineering builds the product using waterfall development, it will be deaf, dumb and blind to customer input except during a short period when it’s specifying the product. The rest of the time, engineers are locked into an implementation cycle, unable to change the product features without intolerable delay. By contrast, a startup engineering organization using an agile methodology is designed to continually take customer input and deliver a product that iterates readily around an MVP or its minimum feature set.

      In this book, agile engineering/development refers to the rapid deployment, iterative development and continuous discovery processes that hardware or software companies can use. We don’t advocate any particular flavor, just its necessity. The Customer Development process provides the continuous customer input to make agile work.

      Before the company even starts, the founders need to reach a deep and inexorable commitment to the customer/agile development partnership.

       Rule No. 3:

      Failure is an Integral Part of the Search

      One of the key differences between a startup and an existing company is the one that’s never explicitly stated: “startups go from failure to failure.”

      In contrast, existing companies have learned what works and doesn’t. Failures in an existing company are an exception. They happen when someone screws up. In a startup, you’re searching, not executing, and the only way to find the right path is to try lots of experiments and take a lot of wrong turns. Failure is part of the process.

      If you’re afraid to fail in a startup, you’re destined to do so.

      Failures are not truly failures, per se but an integral part of the startup learning process. You’ll be running dozens if not hundreds of pass/fail tests—on your pitch, your features, your pricing, and on and on—so get ready to accept failure and move on. When something isn’t working, successful founders orient themselves to the new facts, decide what needs fixing, and act decisively.

The Customer Development process demands frequent, agile iteration, followed, of course, by testing of the iteration that often leads to another iteration or pivot, which leads to more testing and…

      If you’re afraid to fail in a startup, you’re destined to do so.

       Rule No. 4:

      Make Continuous Iterations and Pivots

      The strategy of embracing failure in Customer Development demands frequent, agile iteration and pivots. A pivot is a substantive change in one or more of the nine boxes of the business model canvas. (For example, a pricing change from freemium to subscription model or a customer segment shift from boys 12-15 years old to women 45-60.) Or it can be more complex, such as a change of target customer or user. Iterations, meanwhile, are minor changes to business model components (e.g., changing pricing from $99 to $79).

      Groupon’s legendary $12 billion pivot is a perfect example.

      When a company is limping along, only a dramatic change to one or more business model components can get it back on the road to success. Groupon’s legendary $12 billion pivot (their IPO valuation) is a perfect example. Groupon was started from a company called the Point. It was struggling, at best, as a social media platform working to get people together to solve problems, but was about to run out of money.

The most effective campaigns on The Point were those that saved people money by grouping or bundling their purchases. The founders started blogging various deals from different businesses each day. They called this, “Get Your Groupon.com.” Groupon’s first offer hit in October of 2008: buy two pizzas for the price of one in the shop on the first floor of its Chicago headquarters. Twenty people bought the deal and the company was well on its way to its $12-billion pivot.

      Pivots are driven by the learnings and insight from a continuous stream of “pass/fail” tests you run throughout discovery and validation.

      The best startup founders don’t hesitate to make the change. They admit when hypotheses are wrong and adapt.

       Rule No. 5:

      No Business Plan Survives First Contact with Customers So Use a Business Model Canvas

      There’s only one reason for a business plan: some investor who went to business school doesn’t know any better and wants to see one. But once it has delivered financing, the business plan is fundamentally useless. Entrepreneurs often mistake their business plan as a cookbook for execution, failing to recognize that it is only a collection of unproven assumptions. At its back, a revenue plan blessed by an investor, and composed overwhelmingly of guesses, suddenly becomes an operating plan driving hiring, firing, and spending. Insanity.

      The difference between a static business plan and a dynamic model could well be the difference between flameout and success.

      The difference between a static business plan and a dynamic business model could well be the difference between a flameout and success. Startups should dump the business plan and adopt the flexible business model.

      A business model describes the flow between key components of the company:

       value proposition, which the company offers (product/service, benefits)

       customer segments, such as users, and payers, or moms or teens

       distribution channels to reach customers and offer them the value proposition

       customer relationships to create demand

       revenue streams generated by the value proposition(s)

       resources needed to make the business model possible

       activities necessary to implement the business model

       partners who participate in the business and their motivations for doing so

       cost structure resulting from the business model

The business model canvas (see Figure 2.2) presents a visual overview of the nine components of a business on one page. In this book, Alexander Osterwalder’s business model canvas serves as the scorecard for the customer discovery process described in Step One. Osterwalder’s book Business Model Generation (Wiley, 2010) provides the structure for the canvas.

Figure 2.2 Business Model Canvas

As a startup moves through the Customer Development process, it will use the business model canvas as a scorecard, by posting the hypotheses about each component of the model and then revising the hypotheses as the founders gather facts. Think of your first version of the business model canvas as the starting point showing the hypotheses that must be confirmed in face-to-face or online interaction with customers. More often than not, the customers will reject components of the business model, saying, “I’d rather buy that from a retailer,” or, “The product needs to have these features to be important to me.” As customers approve or dispute the business model hypotheses, the company either accepts the customers’ approval or pivots to change its business model to better target the opportunity.

      Using the business model canvas as a guide makes it easier to figure out where and how to pivot, since the team can visually diagram its alternatives and see what

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