Strategic Execution Part 3.1: Company Launch or Customer Development
This blog is part of a series of blog posts on the 6 stages of corporate development with the overview here. In previous blog posts, I explained what strategy is, why it is needed, and how it is developed and executed. In this post, I will outline the first of six stages of strategic corporate development for growth from inception to Exit; mastering the highly differing and even contradictory demands and focuses of each of these independent stages is the key to successfully navigating the entire journey.
In the Company / Product Launch or Customer Development Stage, the company must come into existence, find its identity, identify a worthy problem to solve with an associated market, build an MVP, and find a repeatable business model. This stage must be driven by strategy and execution entirely different from the growth stage or what most people have experienced in stable-state companies.
Company / Product Launch (Customer Development) Objectives:
The objectives the Company / Product Launch Stage are:
Form the company and initial team and gather sufficient resources to keep the team going until next raise or sufficient revenue to support some salaries (often done iteratively).
Through an highly iterative process:
o Focus the team on a problem domain and coalesce a mission, vision, and
values as a step in determining the company’s identity.
o Identify a worthy problem worth solving through investigation of the
problem space, stakeholders, and current solutions.
o Validate that problem through Customer Development interviews,
discovery meetings, and research.
o Develop a Minimum Viable Product (MVP) to address the problem and
validate that MVP through traction metrics associated with a
conceptualized target micro-niche market.
Transition into Product / Market Validation through a team acceptance / validation and/or a formal capital raise process for a Seed or Angel Round.
Notes:
1. The problem, product, or service: problem has to be improvable / solvable and there is an envisioned way to improve the problem over its current state (the product / service).
2. Business model: solving the problem has to create value for someone who cares; the amount of value that can be created improving the problem will ultimately serve as a cap on the valuation of the company that will be created (or that portion of the company with products addressing that problem).
3. Business model: There has to be a connection between the value created and a payment mechanism or pathway to fund the business model and it should be feasible to refine the business model to profitability.
4. Business model: recurring revenue models where value is created and revenue harvested continuously build higher value and more sustainable companies.
5. Purpose: The problem and the people for whom you will solve it must resonate with the core team. It is hard to build a company and impossible if you do not truly care. Customers, employees, partners, and investors will see through the façade and eventually you will too.
6. MVP: I have observed a great deal of confusion over the MVP concept. It has come to mean multiple things to multiple people. In some cases, the MVP has taken on the reputation as being an extremely shoddy product that is hacked together and has almost no fitness for purpose. The truth is that the MVP is intended to be a simple version of the product, with low investment, that enables the customer to be exposed to and make a purchase decision on the fundamental value proposition being developed for the business model. Low investment and simple are subjective terms whose definition varies wildly by industry and problem domain. I will write a deeper blog post on some of the extremely wide variations in MVPs that I have seen and have proven viable. The key here is to build the least required to validate the value of the product concept to the intended customer without poisoning the customer’s perceptions for future iterations.
7. Funding of companies is a market and sequential transaction driven business that is always evolving. There is a wide variety of models of capital investment. I have found the variation is most substantial at the earliest stage of the company; the terms Seed and Angel can be as interchangeable in this context.
Company / Product Launch (Customer Development) Key Metrics:
Two kinds of metrics matter in this stage. The first focuses on runway and the second on traction.
Runway always includes some cash but is primarily time in terms of how much time the founders are able to work without compensation to move through this stage and most of the subsequent stage of product / market fit. The cash is typically used to buy services and products to build MVPs, travel as needed, meet as needed, pay service providers as necessary, and for company infrastructure.
Traction is about addressing the principal risk of the enterprise which is product and market risk. This risk boils down to the fundamental question of whether or not the company is producing a product or service for which a market which will actually pay. The ultimate traction metric is revenue and recurring revenue is what really counts if institutional investors are the objective. Precursor traction metrics that are important would include conversion rates across the sales and delivery cycle(s) as well as cost baselines for successful conversions. Many companies find the process of getting to traction metrics is a multi-stage customer development process that requires stages of metrics to help the team stay focused. I will write a future blog post on some of these ideas.
A third class of metrics is appropriate to start tracking at this point as well. They should not be the company’s primary focus during this stage, but will be in the subsequent stage and for that reason, it is important to start benchmarking. This 3rd set of metrics has to do with the closure rate of steps of uptake as well as the costs associated with accomplishing each of these steps. The uptake step model or customer funnel is unique to each business model, but all are similar to Figure 2. Some will call this the AARRR model (Acquisition, Activation, Retention, Revenue, and Referral). This model is merely a more generalized version and should enable an understanding of the need to tailor this model to the specific customer acquisition and retention process of the company.
Figure 1: Sample Uptake Step Model or Customer Funnel
Note that this is only one of many examples and the reason to start considering this model during Customer Development is that it forms the basis for proving the retirement of product / market risk. This is key to both external party fundraising as well as your confidence in the business. For this reason, base-lining these metrics during Customer Development and remembering the need to measure them during MVP development can accelerate the overall process by providing an objective comparison of the results of different business models / MVPs as well as demonstrating a focus on the necessary metrics when discussing the business with external stakeholders.
Company / Product Launch (Customer Development) Areas of Consideration:
I will not delve too deeply into the obvious facets of this stage, namely forming a company, drafting and filing the proper legal governance documents, and other basic items. These are important, but very objective and well documented; the focus here will be on the strategic aspects, namely the focus of the business and finding a repeatable business model.
Start with a problem space with which you are passionate; it helps greatly to have experience in the space, contacts, and an understanding of current industry dynamics. Form a small core team and start the process of Customer Development. The core team is obviously very important. There’s a great research based resource on this subject in the book The Founder’s Dilemma, by Dr. Noam Wasserman from USC / Marshall School of Business; he was at Harvard Business School when he wrote this book. Worth noting at this stage is the necessity to formalize the agreement between the founders with respect to contributions, generalized roles, intended focus, decision making process, and potential for departures. The initial phases of a startup will often involve periods of no or low income, confusion, and disillusionment. Founders should agree on the relative valuation of contributions of time and cash to the initial operation as well as the equity split, rules for how near-term additional contributions will be handled, how the enterprise will decide on existential pivots, and how founders’ equity will be handled upon the departure of a founder. The company should place all founder’s equity into a vesting program and file an 83(b) section election with the IRS to peg the basis of the vesting stock. These steps protect the business as well as the founders by predetermining the most contentious possible disputes as well as ensuring that the company can survive the departure of a founder. This IRS filing can save founders tens of thousands of dollars when they can least afford it and lower the overall tax bill on Exit.
There are a wide variety of methods to identify big problems to solve to build a company, they all must start with an identification of who you are and what you want to accomplish. Mission, Vision, Values is an appropriate start to this exercise. I specifically call out this activity at this stage for two reasons. First, it is critical to the process and second, at this stage, this step is most likely to need repeating and iteration, including possibly starting over. For this reason, it should not be overdone but it must be sufficient. In every other follow-on stage, the company will need this conceptual framework completed, but this is the only time it will start with a blank slate with the only exception to this being a possible future existential crisis or turnaround.
The next step is to identify a problem / problem domain. Mission, Vision, Values serves as a foundation for this step providing the backdrop of industry and desired impact. There are a wide variety of methods by which to perform this task. Here are a few that I have seen used:
An existing process is observed as being flawed. This could be a personal / consumer process, buying, information processing, industrial process etc. and there are inefficiencies in that process that are driving higher cost, lower utilization, lower quality, or other compromises in use. There are literally millions of examples of this method. Web-based retail and wholesale of everything is an obvious class of examples.
An existing solution / methodology has strong utilization, but you see an opportunity to radically transform those methods with technology. These can be big-bang companies; examples of this might include Microsoft and Apple with a mouse-driven user visual interface, Google with neural-network driven search and big data, Elon Musk’s collection of companies overturning industrial incumbents with significant technology driven leaps in battery storage, solar generation efficiency, chip processing speed and materials enabling reusable space launch, etc.
A need is observed as unmet. In this case, a person has a need which could be personal or professional that is unmet in the current situation. A (not so recent) example of this might be in the innovation of reusing donor ligaments to rebuild orthopedic joints; the underlying problem of joint degeneration was unmet as millions of patients simply curtailed activity and dealt with the pain of the degeneration.
Iteration at this stage consists of identifying a possible problem / problem domain and performing Customer Development. The key at this stage is to identify potential customers, partners, suppliers, and other stakeholders around the problem and use widespread interviews and discovery conversations to develop a sufficiently deep understanding of the problem and problem domain to proceed. Who is who among the stakeholders should not be the focus, at least until the conversations unfold and patterns start to develop. This is iterative; the key is to identify a problem about which someone cares and an understanding of the facets of the problem.
Developing a business model is a process wherein a hypotheses of the product / service to address the problem is developed and the basics of how the product / service will be sold, delivered, and priced are conceptualized and validated (business model evaluation) against the basic criteria of this stage. Usage of a Lean Canvas is an excellent way to guide the discovery and development of this business model.
The business model is developed into the form of a Minimum Viable Product (MVP) or Minimum Viable Service (MVS) for validation. This step involves bringing something to market by which the viability of the problem / problem domain, business model, and product / service can be validated in the most objective way possible, uptake and revenue.
The core point to this process is to systematically identify a possible direction and then validate that direction in the best way available within the resource constraints of the business while also following a general to specific narrowing of scope. The intent of this approach is to recognize the substantial ratio of unknown to known, and minimize risk in the process by committing small increments of resources to each step (funds, time), while also validating each step to minimize missteps. The multiple return loops of iteration are there to acknowledge and account for the high likelihood of experiments that invalidate the entire pathway resulting in a return to start. Validation starts with the most general by focusing on deep conversations and design thinking associated with understanding an addressing the problem as well as understanding for whom solution would matter and progresses more specifically to a purchase decision.
There are a wide variety of approaches in terms of depth and pace that may be appropriate for each of these steps. These are guided by a variety of circumstances and experiences and the core risks of the business model. For example, the risks always involve customer identification and demand, but may also involve significant technical or regulatory risk as well as cost of low-volume manufacturing, and the specifics of the potential customer environment will likely dictate what is needed to validate traction. Each of these may drive hybridization of the process. I will address some of these variations as well as design thinking in future blog posts; there are also many great resources out there addressing these fundamentals.
The focus areas of this stage are rapidly hypothesizing and validating each element of the problem / domain / business model / MVP in order to arrive at a combination that is validated by a large and growing market, customer traction as demonstrated by actual revenue, and a business model whose functionality and economics have good reason to prove viable. Each step is often then followed by a change in direction and reformulation as the knowledge gained from each experiment is understood and incorporated.
If this stage will culminate in a funding round, sufficient attention must be paid to generating initial metrics around the uptake model as well as the fundamentals of Customer Acquisition Cost (CAC) and Lifetime Value (LTV). The expectation is not that these are well developed metrics but that they are benchmarked, understood, and that there is an understanding of how to move these metrics as needed in subsequent phases. As this blog is not focused on raising capital, I will focus more on fundraising at this stage in a future blog.
The key challenge of this stage are managing very scarce resources (money, time primarily) with the potentially unbounded task of identifying a viable problem / business model / MVP. The best approaches to this are to establish the core team and a pool of financial resources that team is willing to expend to reach that stage, measurable in time and cash to spend. That core team should focus on thoughtful but rapid iteration through the model explained above; working to ensure that each cycle is given enough attention to trust the lesson it teaches while remaining focused on speed. Keeping teams on track about the key decision of tune vs. abandon and rethink are more important than keeping to an experiments/week type of productivity schedule, though I have seen teams track that level of productivity simply to understand if their cycles are accelerating or slowing and the possible implications to quality.
When the team has met the following criteria then the Product / Market is defined and it is time for Product / Market Validation:
Produced a business model with a product / service value proposition and a way to monetize that value
Market proof of uptake of an MVP of that model
The team has conceptualized the evolution of the business model, delivery methods, development methods, go-to-market methods, assessed competition, and evaluated the evolution of the company and product without seeing insurmountable hurdles
This is obviously subjective and is primarily validated by the team and their advisors. If a capital raise is involved, then there is an additional validation point. CEO’s would do well to remember, however, that transitioning to Product / Market Validation and raising an Angel or Seed round are not necessarily tied to each other.
In the next blog post, Product / Market Validation.
What stage of corporate development are you currently in and what challenges are you facing?
For most companies, the usage of external parties to facilitate the strategic planning and execution process produces superior results. The process typically involves a great deal of information processing that isn’t core to running the business on a daily basis and a facilitator in planning sessions frees up the team to focus on the critical questions rather than the process and can inject highly productive objectivity into the discussion and decisions. If you would like to discuss where your company is in the evolution of strategic planning and execution or would like some assistance in setting up or performing this critical process or just have a question please contact us.