The Key to More Sales: Focus on Your State

It's not the product. It's not the timing. It's your body language and tonality. Both have more to do with sales success than other factors because at the core, sales is result-driven communication.

I've been leading sales organizations for more than a decade. However, when I speak with entrepreneurs as an Alchemist Accelerator mentor, I’m reminded that although not everyone is employed in sales, at different times, we all sell—to potential investors, co-founders, employees, partners, and perhaps, even family members.

Your State Matters

Take a minute. Consider how you feel right now. You should care about your state of mind because it’s influencing the work that you're doing and the effectiveness of your communication (i.e., your body language and your tonality). You need to ensure your mood is making a positive impact, helping you achieve what technical professionals call flow or being in the zone. This is your peak state, and it affects the results that you want. It heightens your performance. The opposite is also true. If you are in a bad state, your performance dips, you communicate poorly, and you make mistakes.

A few months ago, I went to a demo-day event where a number of founders were pitching their products to a large audience. After noticing a disturbing trend in a few sessions, I did a little experiment. What I observed was this: at the start of every presentation, attendees sat up, ready to listen. But by the two-minute mark, most attendees lost interest and were looking at their laptops or phone screens. The presenters were dull. Some lacked energy, others lacked enthusiasm, as they pitched their products.

One presenter was different. He started with high energy. He sounded passionate and engaging. Attendees looked up from their screens and listened. He asked questions, and they paid attention. Yet within a few minutes, his energy dipped and he lost them. The attendees went back to their devices because he couldn't maintain his state.

I spoke next, determined to engage the audience’s attention through the entire session. My product wasn't any better than the others being presented, so I knew my communication needed to be different. I took a moment to get myself into a peak state. Then I made my pitch with a powerful and palpable energy. I was loud and enthusiastic. I moved around the stage, and asked a ton of questions. Above all, I maintained intensity during my entire talk, and I paid careful attention to the results.

Throughout my session, the vast majority of the audience was attentive and engaged. I had five times the number of questions about my product than any presentation before me, and at the end, a number of attendees came by to meet me in person. My pitch was successful, and it had very little to do with the product I was introducing.

The secret to a successful sales pitch is more than the initial spark—it's sustained energy and enthusiasm. If you can achieve peak state, getting into the zone, you communicate better. Your body language and tonality automatically attracts people and significantly enhances your influence over them. If you can consistently attain this state, you can consistently elevate your performance above the norm.

Two Simple Ways to Master Your State

There are two simple steps you can take to very quickly make a meaningful difference in the result of any communication:

1.     Hack your brain

2.     Hack your body

What is hacking your brain? In effect, it's an exercise to change your state. You hack your brain before a big pitch by taking five minutes and focusing your thoughts on these things: (Hint: It helps to write them down.)

  • Think of one thing you are truly excited about today. If it's a thing, imagine receiving it right now or if it's an event, imagine it taking place right now. Focus on how you feel.

  • Think of one thing you are truly thankful for in your life? Take a moment to appreciate that feeling.

  • Think of one person you are thankful to have in your life? Take a moment to consider why.

When you hack your brain, you put it in a different mood. You replace negative emotions with positive ones—excitement, thankfulness, and appreciation—and those excrete the chemicals that get you closer to your powerful peak state.

Hacking your brain isn’t enough. You need to hack your body in a similar way because emotions and your body are connected in a profound way. If you change the state of your body, you change the state of your mind and vice versa. As Tony Robbins often says, “motion creates emotion!” Doing any form of exercise (e.g., fast-paced walking, running, dancing, or even some jumping jacks) can influence your mental state and put you in the zone. With the right mental state, you'll start to notice that your communication and body language improves. You do better things and you do things better. Sales is one of those things.

After hacking your brain and your body, you feel better. Your body language automatically improves, and your tonality matches your positive, confident, and empowered emotions. At this moment, you have the best chance to influence others through your communication.

Achieve Results

Your body language and tonality are what people use to interpret what you are saying. It’s not what you say, it’s how you say it that matters. Frame of mind and tonality are the reasons two sales people using the exact same script, answering the same questions, can have very different results.

The next time you're ready to make a cold call, close a deal, pitch to investors, or present in front of an audience, pay attention to your state. If you’re not in a peak state, take a minute to hack your brain, then hack your body. You'll be glad you did.

About Kevin Ramani

Kevin is the Head of Sales at Cobalt Robotics, and was one of the founding team members of Close.io, helping to build the company from the ground up. Kevin is also a startup advisor and a mentor to several Silicon Valley startups. Connect with him online.

About the Alchemist Accelerator

Alchemist is a venture-backed initiative focused on accelerating the development of seed-stage ventures that monetize from enterprises (not consumers). The accelerator’s primary screening criteria is on teams, with primacy placed on having distinctive technical co-founders. We give companies around $36K, and run them through a structured 6-month program heavily focused on sales, customer development, and fundraising. Our backers include many of the top corporate and VC funds in the Valley—including Khosla Ventures, DFJ, Cisco, and Salesforce, among others. CB Insights has rated Alchemist the top program based on median funding rates of its grads (YC was #2), and Alchemist is perennially in the top of various Accelerator rankings. The accelerator seeds around 75 enterprise-monetizing ventures / year. Learn more about applying today.

Funding Basics: Fundraising 101

If you’re unfamiliar with how venture capital funding works, it can seem akin to playing the lottery. Anyone can try, but only a few lucky entrepreneurs actually win. Fortunately, fundraising isn’t as random as a Powerball drawing and founders can improve their odds of success by engaging with right-size partners, recognizing what investors find intriguing, and understanding the technical aspects of term sheets.

How do I know?

I was a VC.

Establish a Strategy

As an Associate at Draper Fisher Jurvetson and now as Founder of the Alchemist Accelerator, I’ve met hundreds of people with good ideas and great demos, but far fewer with a strategic plan for fundraising. Founding teams can save time (and alleviate stress) by researching fund sizes and prioritizing meetings based on the outcome they expect. Founders and the venture capitalists they choose will need to make the economics work. Investors will need to pay back their funds. A rule of thumb is that one out of every 10 investments in a VC portfolio will drive outsized returns. And a typical fund has 30 investments. So 3 companies in a given VC fund portfolio will likely be responsible for the fund’s performance. Given this, most investors want to see a path to paying back at least ⅓ of their fund size with an individual investment.

Investors are also constrained by the number of investments they can make. Because they have to limit the number of board seats they take on, they often can only make 2 or 3 new investments per year. And each investment has to deploy enough capital for them to deploy the cash in the fund. For these reasons, investors at large funds (e.g. funds that are $300m or larger in size) will care much more about whether they have enough ownership in your company to create an exit to pay back their fund than the check size of your investment. In fact, if you are asking for too little money (e.g. less than $3m) it can be more difficult for that investor to justify the investment given the size of their fund and the limited number of new investments they can make each year.

Ideally, founders approach a mix of VCs during the fundraising process, recognizing that there will be more traction with those that are a good fit. Don’t get too excited about meetings because every firm will want to meet for fear of missing the next big thing—think Google! That’s why it’s important for startup teams to have a plan.

Choose to make scarcity of supply an asset. Optimize for a short, yet intense fundraising process. Establish a list of three dozen firms, then agree to pursue 12 active discussions at a time—segmenting top-tier / second-tier VC firms, angels / high-value investors, and corporates / strategic investors into separate thirds. This will enable the rapid replacement of non-responsive firms, and help ensure the arrival of term sheets at the same time.  

Share Your Story

VCs meet (and subsequently) invest in startups for a variety of reasons. The startup meets all of the criteria of previously proven successful companies in their portfolio; the startup is somehow connected to the VCs personal network that she trusts; or the firm likes to make contrarian bets. Whatever the reason, the dance between startup and VC always begins with a presentation.

During a seed or series A round, fundraising meetings focus on the idea and its potential. In series C and later rounds, VCs spend time evaluating the idea, the market, and results. How has the company executed to date?

Early round fundraising presentations are expected to be lean, including a brief overview of the team and the market potential. A dozen or fewer core slides is ideal, coupled with a large appendix of slides that goes deeper into specifics. An overview of capabilities and a product demo will also be expected. Sequoia Capital has a good template for creating solid fundraising presentations.

But wait... Before presenting, stop, summarize how and why you are there (don’t forget to mention explicit connections). The goal of this is to try to address from the top the two fundamental questions wrestles with: “Are you any good?” and “If you are so good, why are you talking to me?”. At the beginning -- from the top -- you want to signal strength (that you are in fact a company the investor should want to chase), and that you are talking to them because of some privileged access that investor has. For example, “Before I begin, let me just set some context. As you may know, we have been heads down with customers and will be beginning our official raise next quarter. Our attorney XXX spoke very highly of you and recommended we get your guidance in advance of that”.

You then want to unearth any biases upfront the investor may have before you go into your pitch. VCs often provide the best feedback before you speak. This time is also the best chance you have of understanding any bias or concerns VCs may have about differentiation, distribution, market factors, or some other issue you’re going to cover.

You can simply ask “Did you have a chance to review the information I sent over?” They may not have, but if they have, you can invite them to share what’s important to them upfront so you can cater your talk better to them.

At the end of the day, VCs want founders to like them and VCs want to like the founding team’s energy and passion. After all, funding is a long-term commitment (typically 3—7 years). Additionally, potential investors want to be sure the market opportunity is large enough and that a startup’s entry point is specific enough to ensure a big return.

About Ravi Belani

Ravi Belani is Fenwick & West Lecturer of Entrepreneurship at Stanford University, and Managing Director of the Alchemist Accelerator. Ravi formerly spent six years as part of the investment team at Draper Fisher Jurvetson's Menlo Park global headquarters, where he led investments and served on the boards as the first institutional investor in companies such as Justin.TV & Twitch (acquired by Amazon for $970m), Pubmatic, Vizu (acq’d by Nielsen), and Yield Software (acq'd by Autonomy). Ravi formerly worked in product management at two Kleiner Perkins enterprise startups, and as a consultant in McKinsey and Company's San Francisco office. Ravi is a Phi Beta Kappa and Tau Beta Pi graduate of Stanford University, holding a BS with Distinction and MS in Industrial Engineering. Ravi also holds an MBA from Harvard Business School.

About the Alchemist Accelerator

Alchemist is a venture-backed initiative focused on accelerating the development of seed-stage ventures that monetize from enterprises (not consumers). The accelerator’s primary screening criteria is on teams, with primacy placed on having distinctive technical co-founders. We give companies around $36K, and run them through a structured 6-month program heavily focused on sales, customer development, and fundraising. Our backers include many of the top corporate and VC funds in the Valley -- including Khosla Ventures, DFJ, Cisco, and Salesforce, among others. CB Insights has rated Alchemist the top program based on median funding rates of its grads (YC was #2), and Alchemist is perennially in the top of various Accelerator rankings. The accelerator seeds around 75 enterprise-monetizing ventures / year. Learn more about applying today.

This blog is the third in a financing series with topics designed to help entrepreneurs be better prepared for venture capital conversations.

How One Hour of Customer Development Saves Five Hours of Coding

The greatest expert on your customer is: your customer.  I consider that rule number one on any customer development journey.

Over the years, I’ve discovered one of the biggest mistakes tech entrepreneurs make is overbuilding. Teams get so excited about an idea that they create feature after feature, hoping one of them will help someone, somewhere, soon save time, spend less, or be entertained.  

 

Getting to Data-Driven

The reason I wrote Lean Customer Development to stop teams from building things that people don’t want. That’s what successful customer development does for you - allows you to avoid (some) mistakes and focus on building what your customers will use, love, and buy.  You see, no matter how smart people are, no matter how well they know their industry, they’re wrong at least half of the time. That means about 50 percent of what is built is wasted effort!

In my experience, every hour spent on customer development saves an organization five hours of design and coding time. That’s my conservative estimate. It’s probably closer to 20 hours.

One of the reasons teams overbuild is because humans like to do what comes naturally. We like to build! We love coming up with solutions (that’s why we join product teams and start companies). But if you’re just starting out, you have to embrace what comes a little less naturally—and that’s listening.

Following a Proven Process

Start with a hypothesis. Ask the right questions. Make sense of the answers. Then figure out what to build based on the input. Those are steps to successful customer development, yet not everyone follows them.

Teams often lead with their own product - a solution created based on assumptions of who’ll need it and why. We don’t create a narrow, unbiased hypothesis that focuses on the person, the problem, and how we can make their life better. This is ineffective for a couple of reasons.

First, it puts you in the role of the expert when you really need to be learning from your prospective customer. Second, once you show someone a solution, that’s what they’ll talk about. Rarely does the person you’re talking with stop and say, “wait, I don’t really have that problem” or “hold on, I’m not motivated to change my behavior over this”.  When you start with a solution, you risk hearing a lot of “polite maybes” instead of uncovering the “here’s what I really need” answers that lead you to a successful business.

Getting Input

As an Alchemist Mentor, I encourage founders to start with one testable hypothesis.  For example, “I believe [type of person] has [problem they need to solve] in order to [experience this benefit]”. There are three segments to that hypothesis, and each of them can be invalidated - you might be talking to the wrong type of person; they may not have the problem you expect; they may not see that a solution will make their life better.

There may be multiple stakeholders - for example, if you are trying to develop a solution to improve patient compliance in taking their medicine, you’ll likely need to talk to the doctors who prescribe medication as well as the people swallowing the pills. By understanding the behaviors, motivations, and constraints of all your stakeholders, you’ll be better able to design a solution that they’ll actually use and benefit from.

Abstract up a level: more general, “storytelling” questions about the ways people do their jobs, what they buy, and how they use products give you more informative answers than yes/no questions. For example: What frustrates you about your job? How is work done in your organization? How do you evaluate solutions? Open-ended questions like these give customers the power to talk about what matters most to them. At the end of the discussion, don’t forget to inquire about what else you should have asked.

I prefer one-on-one conversations: in-person is great, because you can see the customer’s environment - but phone conversations are often far easier to schedule and conduct. The best customer development method is the only you’ll actually do!

I’m not a fan of focus groups. It seems far more efficient to talk to multiple people at once, but participants may not openly share in a group for fear of sounding dumb or having an idea dismissed.

Depending on your hypothesis, you may easily find people in your extended network or a community online. (When people ask, ‘but how will I find people before I have a product to show them?’, I ask ‘but how were you planning on finding people after you have a product?’)  Sometimes you’ll need to pay for access to the right people through services such as LinkedIn InMail or user research firms, but generally you’re better off investing the time to figure out where your prospective customers ‘live’, online or offline, and making yourself part of those spaces.  You’ll need to build that trust eventually, so you may as well start in the early phases of your company!

Making Decisions

No matter how you discover customers, approach each conversation as a listener, not an expert.  I often recommend telling people explicitly, “I want to hear from you - I’m going to try and talk as little as possible.”  That’s the valuable data you need to inform your decisions. Whether you’re building your first product or rolling out a new feature, test everything. Customer discovery that’s about them, not you, is how to ensure your startup builds something people actually want to use and will pay money to buy.

About Cindy Alvarez

Cindy Alvarez is the author of Lean Customer Development: Building Products Your Customers Will Buy and Director of User Experience for Yammer (a Microsoft company). She has over a dozen years’ experience leading design, product management, user research, and customer development for startups, and is currently using that background to drive intrapreneurial change within Microsoft. She tweets as @cindyalvarez.

About the Alchemist Accelerator

Alchemist is a venture-backed initiative focused on accelerating the development of seed-stage ventures that monetize from enterprises (not consumers). The accelerator’s primary screening criteria is on teams, with primacy placed on having distinctive technical co-founders. We give companies around $36K, and run them through a structured 6-month program heavily focused on sales, customer development, and fundraising. Our backers include many of the top corporate and VC funds in the Valley -- including Khosla Ventures, DFJ, Cisco, and Salesforce, among others. CB Insights has rated Alchemist the top program based on median funding rates of its grads (YC was #2), and Alchemist is perennially in the top of various Accelerator rankings. The accelerator seeds around 75 enterprise-monetizing ventures / year. Learn more about applying today.

Do Pivots Matter?

                                                              There’s a sign on the wall but she wants to be sure
                                                           Cause you know sometimes words have two meanings
                                                                           Led Zeppelin – Stairway to Heaven

In late 2013 Cowboy Ventures did an analysis of U.S.-based tech companies started in the last 10 years, now valued at $1 billion. They found 39 of these companies.  They called them the “Unicorn Club.”

The article summarized 10 key learnings from the Unicorn club. Surprisingly one of the “learnings” said that, “…the “big pivot” after starting with a different initial product is an outlier. Nearly 90 percent of companies are working on their original product vision. The four “pivots” after a different initial product were all in consumer companies (Groupon, Instagram, Pinterest and Fab).”

One of my students sent me the article and asked, “What does this mean?”  Good question.

Since the Pivot is one of the core concepts of the Lean Startup I was puzzled. Could I be wrong? Is it possible Pivots really don’t matter if you want to be a Unicorn?

Short answer – almost all the Unicorns pivoted. The authors of the article didn’t understand what a Pivot was.

What’s a pivot?
A pivot is a fundamental insight of the Lean Startup. It says on day one, all you have in your new venture is a series of untested hypothesis. Therefore you need to get outside of your building and rapidly test all your assumptions. The odds are that one or more of your hypotheses will be wrong. When you discover your error, rather than firing executives and/or creating a crisis, you simply change the hypotheses.

What was lacking in the article was a clear definition of a Pivot.  A Pivot is not just changing the product. A pivot can change any of nine different things in your business model. A pivot may mean you changed your customer segment, your channel, revenue model/pricing, resources, activities, costs, partners, customer acquisition – lots of other things than just the product.

Definition: “A pivot is a substantive change to one or more of the 9 business model canvas components.”

Business Model
Ok, but what is a business model?

Think of a business model as a drawing that shows all the flows between the different parts of your company’s strategy. Unlike an organization chart, which is a diagram of how  job positions and  functions of a company are related, a business model diagrams how a company makes money – without having to go into the complex details of all its strategy, processes, units, rules, hierarchies, workflows, and systems.

Alexander Osterwalder’s  Business Model canvas puts all the complicated strategies of your business in one simple diagram. Each of the 9 boxes in the canvas specifies details of your company’s strategy.  (The Business Model Canvas is one of the three components of the Lean Startup. See the HBR article here.)

So to answer my students question, I pointed out that the author of the article had too narrow a definition of what a pivot meant. If you went back and analyzed how many Unicorns pivoted on any of the 9 business model components you’d likely find that the majority did so.

Take a look at the Unicorn club and think about the changes in customer segments, revenue, pricing, channels, all those companies have made since they began: Facebook, LinkedIn – new customer segments, Meraki – new revenue models, new customer segments, Yelp – product pivot, etc. – then you’ll understand the power of the Pivot.

Lessons Learned

  • A Pivot is not just when you change the product
  • A pivot is a substantive change to one or more of the 9 business model canvascomponents
  • Almost all startups pivot on some part of their business model after founding
  • Startups focused on just product Pivots will limited their strategic choices – it’s like bringing a knife to a gunfight

About Steve Blank

Entrepreneur-turned-educator Steve Blank is credited with launching the Lean Startup movement. He’s changed how startups are built; how entrepreneurship is taught; how science is commercialized, and how companies and the government innovate. Steve is the author of The Four Steps to the Epiphany, The Startup Owner’s Manual -- and his May 2013 Harvard Business Review cover story defined the Lean Startup movement.  He teaches at Stanford, Columbia, Berkeley and NYU; and created the National Science Foundation Innovation Corps -- now the standard for science commercialization in the U.S. His Hacking for Defense class at Stanford is revolutionizing how the U.S. defense and intelligence community can deploy innovation with speed and urgency, and its sister class, Hacking for Diplomacy, is doing the same for foreign affairs challenges managed by the U.S. State Department. Steve blogs at www.steveblank.com.

Strategy is Not a To Do List

I had breakfast with two of my ex-students from Singapore who were building a really interesting startup. They were deep into Customer Discovery and presented a ton of customer data on the validity of their initial hypothesis – target customers, pricing, stickiness, etc. I was unprepared for what they said next. “We’re going to do a big launch of our product in three weeks.” I almost dropped my coffee. “Wait a minute, what about the rest of Customer Development? Aren’t you going to validate your hypotheses by first getting some customers?”

Without any sense of irony they said, “Oh, our investors convinced us to skip that part, because our customer feedback was all over the map and our schedule showed us launching in three weeks and they were worried that we’d run out of cash. They told us to stay on schedule.” Now I was confused, and I asked, “Well what do you guys believe – Customer Development or launch on a schedule?” Without missing a beat they said, “Oh, we believe both are right.”

I realized I was listening to them treat Customer Development as an item on their To Do list.

Suddenly, I had a massive case of déjà vu.

Can You Pull This Off
I was VP of marketing at Ardent, a supercomputer company where a year earlier I had a painful and permanent lesson about Customer Discovery. I was smart, aggressive, young and a very tactical marketer who really hadn’t a clue about what strategy actually meant.

One day the CEO called me into his office and asked, “Steve I’ve been thinking about this as our strategy going forward. What do you think?” And he proceeded to lay out a fairly complex and innovative sales and marketing strategy for our next 18 months. “Yeah, that sounds great,” I said. He nodded and then offered up, “Well what do you think of this other strategy?” I listened intently as he spun an equally complex alternative strategy. “Can you pull both of these off?” he asked looking right at me. By the angelic look on his face I should have known that I was being set up. I replied naively, “Sure, I’ll get right on it.”

Ambushed
25 years later I still remember what happened next. All of sudden the air temperature in the room dropped by about 40 degrees. Out of nowhere the CEO started screaming at me, “You stupid x?!x. These strategies are mutually exclusive. Executing both of them would put us out of business. You don’t have a clue about what the purpose of marketing is because all you are doing is executing a series of tasks like they’re like a big To Do list. Without understanding why you’re doing them, you’re dangerous as the VP of Marketing, in fact you’re just a glorified head of marketing communications.”

I left in daze angry and confused. There was no doubt my boss was a jerk, but unlike the other time I got my butt kicked, I didn’t immediately understand the point. I was a great marketer. I was getting feedback from customers, and I’d pass on every list of what customers wanted to engineering and tell them that’s the features our customers needed. I could implement any marketing plan sales handed to me regardless of how complex. In fact I was implementing three different ones. Oh…hmm… perhaps I was missing something.

I was doing a lot of marketing “things” but why was I doing them? I had approached my activities as simply as a task-list to get through. With my tail between my legs I was left to ponder; what was the function of marketing in a startup?

Strategy is Not a To Do List, It Drives a To Do List
It took me awhile, but I began to realize that the strategic part of my job was two-fold. First, (in today’s jargon) we were still searching for a scalable and repeatable business model. My job was to test our hypotheses about who were potential customers, what problems they had and what their needs were. Second, when we found these customers, marketing’s job was to put together the tactical marketing programs (ads, pr, tradeshows, white papers, data sheets) to drive end user demand into our direct sales channel and to educate our channel about how to sell our product.

Once I understood the strategy, the To Do list became clear. It allowed me to prioritize what I did, when I did it and instantly understand what would be mutually exclusive.

Good Luck and Thanks For the Fish
My students were going through the motions of Customer Development rather than understanding the purpose behind it. It was trendy, they had read my book and to them it was just another step on the list of things they had to do. They had no deep understanding of why they were doing it. So they were at a crossroads. Since their investors had asked them to launch now, what happened if their initial assumptions were wrong?

As they left I hoped they would be really lucky.

Lessons Learned

  • Entrepreneurs get lots of great advice.
  • Most of it is mutually exclusive.
  • Don’t do it if you can’t explain why you’re doing it.
  • Or else it all becomes a To Do list.

About Steve Blank

Entrepreneur-turned-educator Steve Blank is credited with launching the Lean Startup movement. He’s changed how startups are built; how entrepreneurship is taught; how science is commercialized, and how companies and the government innovate. Steve is the author of The Four Steps to the Epiphany, The Startup Owner’s Manual -- and his May 2013 Harvard Business Review cover story defined the Lean Startup movement.  He teaches at Stanford, Columbia, Berkeley and NYU; and created the National Science Foundation Innovation Corps -- now the standard for science commercialization in the U.S. His Hacking for Defense class at Stanford is revolutionizing how the U.S. defense and intelligence community can deploy innovation with speed and urgency, and its sister class, Hacking for Diplomacy, is doing the same for foreign affairs challenges managed by the U.S. State Department. Steve blogs at www.steveblank.com.

Funding Basics: Customer Development

Entrepreneurs take note. More startups fail from a lack of customers than from a failure of product development. That’s why I believe strongly that every new product company should have a methodology for developing customers.

I’m a proponent of Steve Blank’s startup stack methodology for customer development, which features the following steps:

  • Customer Discovery – Begin with a business model canvas, a summary of how you’re going to serve customers and earn money

  • Customer Validation – Make assumptions, then test them to develop a repeatable and scalable sales process

  • Execution –  Fine tune your model to get to a market fit that is tight and profitable; pivot, as needed

As an Alchemist Accelerator mentor, I recently had an opportunity to share some perspective about the customer development process and how to maximize success. The first thing I told the group in front of me—a large percentage of whom were engineers—was that they should focus everything on finding the right customer segment, rather than building or modifying a new product concept to fit initial discussions. I think I heard a collective sigh of relief before I began my presentation.

Completing Your Canvas

Research has proven effective customer discovery begins with a business model canvas, so the first part of our discussion, framed in that context was designed for them to hear one thing: You are making a best-guess at first. There will be plenty of time for refinement, when you know more.

A strategic management and lean startup template, your canvas should reflect initial assumptions. To begin, you must understand the market you’re targeting—total addressable, served available, and/or target market. You’ll also need to define the type of market you’re hoping to penetrate. Is it existing with incumbents, but a known problem; new with no competition, but steep education requirements; re-segmented where you’re offering a lower cost or niche alternative; or are you cloning a concept from somewhere else?

Your canvas should also identify key value propositions. What is the job your customers are hiring you to do? How will you do it, and most important, what one-to-three benefits will customers get from using your product or service?

In the customer relationships section of your canvas, you’ll need to outline how you plan to

  • Get customers

  • Keep customers

  • Grow customers

In addition, your canvas should highlight any other key activities, resources (e.g. required equipment), partners and costs (fixed and variable), as well as your anticipated revenue model (e.g., one-time scale, subscription, etc.).

Finding Your Fit

A completed business model canvas ensures your team has fully immersed itself in the customer problem. As such, it can serve as a foundation as you define tests for customer validation.

Testing can begin once you’ve identified subjects. Who are they—end users, influencers, recommenders, decision makers, or others? What do they do all day, and can you create an organizational or influencer map around them? Plus, don’t forget to acknowledge any saboteurs because they have no interest in your success.   

Next, only founders should conduct customer validation meetings, and they should be face-to-face for added visual cues. Don’t outsource the job. Ask open-ended questions and avoid trying to convince someone he or she needs your solution. Test your theories to determine if you’re on the right track. If you don’t get a good signal, reframe the problem. Test again.

In general, ask questions that help you learn more. Lead with

  • Tell me more about…

  • What do you mean by…

  • How so…

  • Why is that…

  • What are your thoughts on…

  • How would you quantify…

  • How did you measure…

  • How did you come up with that…

  • What was your thinking behind…

The goal of every customer validation meeting should be the same: To understand the problem space and the current solutions available.

Pivoting and Execution

During customer validation, your team may uncover some startling truths. Your product doesn’t fit the market it was intended to serve. Prospects already have a solution for x, but have you considered this other opportunity, y? Do not panic.

Instead, apply your development methodology to your customer discovery process. Be agile. Don’t build a new product. Find a new set of customers. Pivot into a new space and test again.

By following a customer development process, you have a tremendous opportunity to deliver what people will pay for, improving your product along the way. Moreover, you’ll have high-quality data to answer the question “who is your customer?” when potential investors ask.

About Alan Chiu

Alan Chiu is a Partner at XSeed Capital, with a strong background in enterprise software startups. His investment areas include mobile enterprise applications, data analytics platforms, enterprise infrastructure, and fintech startups. He serves on the Board of Directors of Breakaway and previously served on the board of StackStorm (acquired by Brocade – NASDAQ:BRCD). He has provided support to other portfolio companies including Lex Machina (acquired by LexisNexis of the RELX Group – NYSE:RELX), AtScale, Dispatcher, Teapot (acquired by Stripe), Pixlee, SIPX (acquired by ProQuest), Zooz, BrainofT, Mines.io, Inklo, and My90. Alan is currently Co-President for Stanford Angels & Entrepreneurs, an alumni association that seeks to strengthen Stanford’s startup community by fostering relationships among entrepreneurs and alumni investors.

About the Alchemist Accelerator

Alchemist is a venture-backed initiative focused on accelerating the development of seed-stage ventures that monetize from enterprises (not consumers). The accelerator’s primary screening criteria is on teams, with primacy placed on having distinctive technical co-founders. We give companies around $36K, and run them through a structured 6-month program heavily focused on sales, customer development, and fundraising. Our backers include many of the top corporate and VC funds in the Valley -- including Khosla Ventures, DFJ, Cisco, and Salesforce, among others. CB Insights has rated Alchemist the top program based on median funding rates of its grads (YC was #2), and Alchemist is perennially in the top of various Accelerator rankings. The accelerator seeds around 75 enterprise-monetizing ventures / year. Learn more about applying today.

This blog is the second in a financing series with topics designed to help entrepreneurs be better prepared for venture capital conversations.

Funding Basics: Adopting the Best Business Model

The culture of nearly every business-to-business software startup centers on products. Everyone talks about product innovation and disruptive technology, but I think today’s founders need more than great product ideas to launch successful companies.

In my role as Managing Director of Hummer Winblad and also as an Alchemist Accelerator mentor, I share this advice with new entrepreneurs: Get as comfortable with your spreadsheets as you are with your product. By that I mean that your financial models show potential investors you’ll be a metrics-driven organization and that you understand you are building a business not just a product. I also believe that only metrics-driven companies can operate high-velocity business models.

A New, Emerging Approach

If success is 10 percent idea and 90 percent execution, deep thinking is required of teams pulling together new business models. For example, are you going to sell direct or through a channel?  Will you have a subscription or a perpetual model? Do you envision a “land and expand” model where you encourage a smaller, initial buy that increases over time? Does your business model reflect the way customers want to buy?

Teams developing enterprise software traditionally have had to factor in a 9-to-12-month sales cycle on top of the year or more it takes to deliver product. Both development and expensive sales professionals operating in this model require significant runway—and thus funding.

Fortunately, times are changing.

Taking a cue from evolving consumer models, I now encourage enterprise software founders to more precisely consider cost of sales (including customer acquisition costs relative to pricing and hiring) together with product decisions.

Our team members and other venture firms ask them to think about how they can achieve operational and growth targets from two perspectives:

  • The old model – Costly, large account-focused, in-person sales teams operating on a quarterly rhythm

  • The new model – High-velocity, mid-market-focused, inside sales teams operating on a weekly rhythm

The new, high-velocity model optimizes sales and marketing processes by measuring the end-to-end effectiveness of all touchpoints. With metrics, teams can determine what is and what isn’t delivering results. I created two blog posts a few years ago explaining the high-velocity business model and the metrics for a high-velocity business model—based on the success of teams that Hummer Winblad invested in early.

High-Velocity Benefits

For a startup pricing products in the USD$150,000 and up range, leveraging the traditional, enterprise sales model may still be practical and even preferred. For everyone else, here’s why a high-velocity model makes more sense:

  • Faster time to revenue – The combination of an assertive inside sales professional (who can reach 80 to 100 prospects a day) and a web purchasing model speeds sales, which enables the company to run on monthly recurring revenue.

  • Greater accountability – When your product team’s responsibilities expand beyond building the solution to the entire lifecycle (from first customer touch to download to using), teams are more collaborative and can achieve greater success faster.

  • Complete visibility – Companies operating high-velocity models are highly automated and instrumented, so individuals and teams are always aware of their goals and progress toward reaching them—from calls and demos to trials, seats, and monthly volumes.

Does Your Business Have the DNA?

In a high-velocity business model, leadership, product, sales and marketing teams all shoulder responsibility for success. We see entrepreneurs embracing this new approach taking a similar journey, learning from others that have succeeded already about how to ramp up fast.

My tips for them include the following:

  1. Hire consumer experts to run your enterprise marketing model, so it’s firing on all cylinders

  2. Simplify the sales process by adding a free or low-cost download feature

  3. Add insides sales professionals to follow up on every lead and upsell from the download

  4. Run everyone in the company through your sales process—from start to finish—to ensure everyone understands it

  5. Test online pricing and trial models by dividing traffic

  6. Test your social media and web flows, counting the number of clicks at each step

  7. If you choose to work with channels, hire someone that has previously built them

  8. Bet on mid-market customers to start, but establish a sales value that when exceeded, makes sense to add enterprise sales

For founding teams seeking funding, business models matter. Remember your ability to explain the thinking behind your business model is as important as explaining the product you’re going to bring to market—and sometimes, more important.

About Me

As Managing Director at Hummer Winblad, I oversee investments in SaaS, virtualization, cloud and mobile technologies. Prior to joining Hummer Winblad Venture Partners in 2006, I was involved in founding and operational roles at start-up companies. I was a co-founder of AutoFarm (now Novariant), a company focused on GPS and robotics. Although I spend less time programming now, I started my technical career coding and hacking computer games. I have a Master of Science (Engineering) degree from Stanford University, an M.B.A. from the Stanford Graduate School of Business, and an Engineering Physics degree from Queen’s University.

About the Alchemist Accelerator

Alchemist is a venture-backed initiative focused on accelerating the development of seed-stage ventures that monetize from enterprises (not consumers). The accelerator’s primary screening criteria is on teams, with primacy placed on having distinctive technical co-founders. We give companies around $36K, and run them through a structured 6-month program heavily focused on sales, customer development, and fundraising. Our backers include many of the top corporate and VC funds in the Valley -- including Khosla Ventures, DFJ, Cisco, and Salesforce, among others. CB Insights has rated Alchemist the top program based on median funding rates of its grads (YC was #2), and Alchemist is perennially in the top of various Accelerator rankings. The accelerator seeds around 75 enterprise-monetizing ventures / year. Learn more about applying today.

This blog is the first in a financing series with topics designed to help entrepreneurs be better prepared for venture capital conversations.

Not BI, AI

A product business can double its revenue and quadruple its margins by moving to a service business. What is service? It's information, personal and relevant to you.  

Amazon delivers information that is personal and relevant to you, for example, with its recommendations: customers like you bought this book, or customers like you like this music. Now think about your favorite banking site and log in. I will contend that there’s very little personal and relevant information. The only reason you’re being asked to log in is for security reasons. After that you are really looking at a big shopping cart to move money from savings to checking, buy stocks, sell a bond, etc. 

Could the bank deliver information that’s personal or relevant to you? Could they say that people like you bought this stock, or people like you re-financed their mortgage? Yes, they could, so why don’t they? Well, you probably never thought about this, but the consumer Internet that Google and Bing let you see through search is believed to only be about 100 or 200 terabytes. That’s it. Now, I’ll guarantee your current IT systems have 10, 100, or 1,000 times that amount of information; so why can’t they deliver information that is personal and relevant to you? Well, I say they are held hostage by the SQL monster. So let’s just have a little fun here.

It’s the late ‘90s and I have several SQL engineers in the room. I come in with a brilliant business idea. My idea is that we are going to index the consumer Internet and we’re going to monetize it with ads. We’re going to be billionaires! Just guess what the SQL engineers would do?

The first thing they’re going to do is design a master, global-data schema to index all information on the planet. The second thing they’re going to do is write ETL and data cleansing tools to import all that information into this master, global-data schema. And the last thing they are going to do is write reports, for instance, the best place to camp in France or great places to eat in San Francisco.

Any of you who are technical are probably laughing right now thinking, “Well that’s a completely stupid thing to do.” But if you try and attack the problem using SQL and BI tools, you’re also going to fail.  

Furthermore, as you connect your machines, you have the opportunity to bring in large amounts of time-series data. Modern wind turbines have 500 sensors and the ability to transmit those sensor readings once a second. Most analytic techniques depend on the idea that the data scientist can try and visualize the data, but how is that possible if I have a 1,000 wind turbines and data for 12, 24 or 36 months?  How can we learn from that?

Artificial Intelligence (AI) has been increasingly in the news. Google’s DeepMind made headlines when the machine, AlphaGo, programmed to play Go, defeated Lee Sedol, one of the best players in the world, by 4 - 1. Amazon’s Echo and voice assistant Alexa is being widely praised for its voice recognition capabilities, and many people remember how Watson handily beat the best Jeopardy players in the world.

Things have been changing quickly and here is a great example. ImageNet is a database of millions of images. Beginning in 2010 the ImageNet Challenge was established to see how well a machine would do at object recognition. As a point of reference an average person will be able to achieve 95% accuracy. In 2010, the winning machine could correctly label an image 72% of the time. By 2012, accuracy had improved to 85%, and in 2015 the machine achieved 96% accuracy.

So why have things been changing so quickly?

First, we’re continuing to get more computing and more storage for lower and lower prices. Next generation compute and storage cloud services can provide thousands of computers for an hour or a day. AI and machine learning software require lots of computing during the learning phase. The second reason is the emergence of neural network algorithms. Third, it’s not possible to apply these advanced AI technologies without data, and lots of it. Consumer Internet companies like Facebook are able to use billions of photos to train facial recognition systems. AlphaGo learned from millions of games of Go and Alexa learned from millions of voice patterns.

While we’ll continue to see progress in replicating what humans do, we have the opportunity to apply these AI technologies to even more important challenges. Today, many of the machines that generate electricity, transport goods, farm food, or sequence genes have large amounts of data. If we were able to connect these machines and collect the sensor data from them, we would have the opportunity to use AI and machine learning technologies to operate a more precise planet. Imagine a future farm that can use fewer pesticides, which not only reduces the cost of the food, but also makes it healthier. A future power utility could be based on a vast array of solar panels, wind turbines, small hydro generators and batteries to generate more power, much more efficiently. A pediatric hospital could share the results of millions of MRI scans and diagnose patients far faster.

Next-generation machine companies could not only double their revenues and quadruple their margins, but build a better planet in the process.

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Timothy Chou, Ph.D.

Timothy Chou has lectured at Stanford University for over twenty-five years and is the Alchemist Accelerator IoT Chair.  Not only does he have academic credentials, but also he's served as President of Oracle's cloud business and today is a board member at both Blackbaud and Teradata. He began his career at one of the first Kleiner Perkins startups, Tandem Computers, and today is working with several Silicon Valley startups including as the Executive Chairman of Lecida, which is building precision assistants for the IoT using AI technologies. Timothy has published a few landmark books including, The End of Software, and Precision: Principals, Practices and Solutions for the Internet of Things, which was recently named one of the top ten books for CIOs.  He's lectured at over twenty universities and delivered keynotes on all six continents.

Service is Not Break-Fix

As a student of business, you may have come to realize that with a recurring-service-revenue business, you can not only double the revenues of the company, but also quadruple the margins. I recently spoke with an executive of a large European company who has a 50/50 business; 50% of their revenue is selling machines and 50% is service on those machines. He said, “In 2008 our revenues went down, but our margins went up.”

But what is service? Is it answering the phone nicely from Bangalore? Is it flipping burgers at McDonald’s? No. Service is the delivery of information that is personal and relevant to you. That could be the hotel concierge giving you directions to the best Szechuan Chinese restaurant in town, or your doctor telling you that, based on your genome and lifestyle, you should be on a specific medication. Service is personal and relevant information.

I’ve heard many executives of companies that make machines say, “Our customers won’t pay for service.” Well of course, if you think that service is just fixing broken things, then your customers will think you should be building a more reliable product.

Service is information. In 2004, the Oracle Support organization studied 100 million support requests and found that over 99.9% of them had been answered with already known information.

Aggregating information for thousands of different uses of the software, even in a disconnected state, represents huge value over the knowledge of a single person in a single location. Real service is not break-fix, but rather information about how to maintain or optimize the availability, performance or security of the product.

Above is my Amazon home page. Every time you log in, Amazon attempts to deliver information that is personal and relevant to you. For instance, people like you bought this book. If you look closely at the image, you might guess who uses my Amazon account. Now, let’s point something else out, namely the little shopping cart in the upper right hand corner. That’s the transactions processing system. It has to operate securely with scalability, but how important is it?  Not very.  Instead, most of the real estate of the page, and therefore of the company, is dedicated to delivering information that is personal and relevant.  

Service is information.

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Timothy Chou, Ph.D.

Timothy Chou has lectured at Stanford University for over twenty-five years and is the Alchemist Accelerator IoT Chair.  Not only does he have academic credentials, but also he's served as President of Oracle's cloud business and today is a board member at both Blackbaud and Teradata. He began his career at one of the first Kleiner Perkins startups, Tandem Computers, and today is working with several Silicon Valley startups in roles from investor to executive chairman. Timothy has published a few landmark books including, The End of Software, and Precision: Principals, Practices and Solutions for the Internet of Things, which was recently named one of the top ten books for CIOs.  He's lectured at over twenty universities and delivered keynotes on all six continents.

Not Machines, It’s the Service

If your company builds agricultural, power, construction, healthcare, oil, gas or mining machines you’ve probably heard about the Internet of Things.  All of us in the tech community are excited to tell you about our cool technology to run on your machine, connect it to the Internet, collect data from it, and then make predictions from that data using advanced machine learning technology.

But maybe the question you’re asking as the CEO of one of these companies is why should I care?  Isn’t this just stuff my geeky R&D staff cares about? How can it be meaningful to my business?  

I’ll be making the case that with IoT software; you can not only double the size of your business but also create a barrier that your competition will find difficult to cross.

Next generation machines are increasingly powered by software.  Porsche’s latest Panamera has 100 million lines of code (a measure of the amount of software) up from only 2 million lines in the previous generation.  Tesla owners have come to expect new features delivered through software updates to their vehicles.  Healthcare machines are also becoming more software defined. A drug-infusion pump may have more than 200,000 lines of code and an MRI scanner more than 7,000,000 lines. On a construction site a modern boom lift has 40 sensors and 3,000,000 lines of code and on the farm a combine-harvester has over 5,000,000 lines of code.  Of course we can debate if this is a good measure of software, but I think you get the point.  Software is beginning to define machines.

So if machines are becoming more software defined, then maybe the business models that applied to the world of software will also apply to the world of machines. Early in the software product industry we created products and sold them on a CD; if you wanted the next product, you’d have to buy the next CD. As software products became more complex, companies like Oracle moved to a business model where you bought the product (e.g. ERP or database) together with a service contract. That service contract was priced at a derivative of the product purchase price. Over time, this became the largest and most profitable component of many enterprise software product companies.  In the year before Oracle bought Sun (whilst they were still a pure software business) they had revenues of approximately $15B, only $3B of which was product revenue, the other $12B, over 80%, was high margin, recurring service revenue.

In the world of machines, you might wonder why General Electric is running ads on Saturday Night Live talking about the Industrial Internet.  Why are they doing this?  All you need to do is download the 2016 10-K (http://www.ge.com/ar2016/assets/pdf/GE_2016_Form_10K.pdf) and look on page 36.  Out of $113B in revenue they recognized $52B, or nearly 50%, as service revenue.  Imagine if GE could move to 80% service revenue, not only would the company be tens of billions of dollars larger, but also margins for the overall business could easily double. And let me remind you this is all done without connecting the product (software or machine).  Once connecte you can provide even more service and ultimately deliver your product as a service.  As we have already seen in high tech software and hardware moving to product-as-a-service is transformative.

So if you’re an executive at a power, transportation, construction, agriculture, oil & gas, life science, or healthcare machine company, how big is your service business?

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Timothy Chou, Ph.D.

Timothy Chou has lectured at Stanford University for over twenty-five years and is the Alchemist Accelerator IoT Chair.  Not only does he have academic credentials, but also he's served as President of Oracle's cloud business and today is a board member at both Blackbaud and Teradata. He began his career at one of the first Kleiner Perkins startups, Tandem Computers, and today is working with several Silicon Valley startups in roles from investor to executive chairman. Timothy has published a few landmark books including, The End of Software, and Precision: Principals, Practices and Solutions for the Internet of Things, which was recently named one of the top ten books for CIOs.  He's lectured at over twenty universities and delivered keynotes on all six continents.