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,, 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.

3 Reasons to Scrap Your Startup

Contrary to common belief it’s not poor market timing, aggressive competition or a lack of ability to raise capital that kills the bulk of startups. Rather, according to CEOs of failed startups, it’s a lack of market for their products. That’s right—all too often startups burn through their funding, iterating on their big idea, without validating that it solves a problem at a price customers are willing to actually pay. In the enterprise, this is even more critical as early adoption needs to be closely matched with the proper pricing structures.

But even if you’ve hit on a true need in your market, there are still a number of other pitfalls that can be hard for first-time entrepreneurs to avoid. Three of the most common reasons I see enterprise products and start-ups fail include:

  1. Low customer adoption/use. If it takes too much time to onboard, doesn’t resonate with CIOs or your target buyer (which could be the head of marketing, sales, finance, HR) or is too cumbersome for employees to use, it won’t gain traction.
  2. Product is not working as intended. Customers may have initial patience for a few minor bugs, but ongoing problems requiring significant rework can sink your company. This is especially true in the enterprise market, as your product outage could cost your customers thousands or even millions of dollars.
  3. Doesn’t address a top problem of your target customer. No matter how amazing your product is or how well it solves your customers’ problems, most companies only have enough budget to address their top two or three pain points. Creating robust buyer customer personas ensures you’ve done more than just scratch the surface of their true organizational needs, allowing you to prioritize your product roadmap accordingly.

The Road Map for Ensuring Startup Success

Communication is key. At Norwest Venture Partners, we’ve found that it’s important for enterprise companies to start by creating a customer advisory board and involving them in the development of each new product or product iteration. Test and obtain feedback from them in real time, as they use the product and test out your demos, and do a weekly gut check to evaluate how sentiment is trending. Start small and work out the kinks before scaling up to your overall customer base.

By involving your customers in your product iteration, they become more invested in your success. In turn, that means they’re more likely to give you the level of rich feedback you need to take your product to its next level and win over your market.

Some founders worry that they can only keep their clients happy by delivering every product iteration they request, but that’s not the case. If you involve your customers in your product development process, they will see the issues you encounter along the way, and won’t be surprised if it doesn’t ultimately work out. Focus on how you can get them excited about helping to define the roadmap–which may include scrapping some products that won’t keep your product on the path to success and longevity. Your customers aren’t just buying that initial product you have on offer. They’re buying your long-term vision too.  

If you’re concerned that scrapping a feature too soon is going to sink your company, consider the alternative. What if you hold out hope for six, nine or even twelve months and the end result is still the same? By failing to take decisive action, you’ve now wasted resources, money and customer time on feedback for your doomed product. This misstep can put you at a disadvantage to your competitors and even cause you to lose some great people who wonder why you let them sink so much of their time and creative energy into a project that had little hope of seeing the light of day.  

Identifying the Right Market to Disrupt

To be successful, a startup must build products that solve real problems the right way.

“You have to look for new enabling technologies, or major trends, like fundamental trends, that create a wide gap between how things are done and how they can be done,” said Aaron Levie, CEO and co-founder of Box, in his Building for the Enterprise lecture. “Looking back in time to our business, the gap was basically storage was getting cheaper, internet was getting faster, browsers where getting better yet we are still sharing files with this very complicated, very cumbersome means. Anytime, between the delta of what is possible, and how things work today is at its widest. That is an opportunity to build new technology to go solve a problem.”

But even great ideas can fail. So how can you recognize when you’re actually on to a billion-dollar valuation-creating product? In my experience, immersing yourself in your customer’s world is the best way to gain the awareness to spot the real opportunities for market disruption.  For instance, it’s unlikely that Marc Benioff would have had the inspiration, confidence and vision to have moved CRMs into the cloud with the founding of Salesforce without his years of success at Oracle. As Benioff counsels in his book Behind the Cloud,  “Don’t be afraid to ignore rules of your industry that have become obsolete or that defy common sense.”

Although some outsiders have a knack for coming in without prior industry experience and hitting the ball out of the park, most successful startups are founded by someone who is obsessed with creating a better customer experience, who understands the industry’s pain points and daily challenges inside and out. If you can tap into the issues that are driving your customer crazy and causing them to lose sleep while efficiently solving them, the market is ripe for your taking.

- Written by Sean Jacobsohn, Cloud VC | Partner at Norwest Venture Partners