ep245 ยป

EP245 Lecture 1.5


What Is A Company

Let's take up this target business model and customer development but you know before we even begin one of the first questions I tend to ask is what is a company? What is it that I'm trying to actually start? Just for the sake this class, I think we ought to just use this definition. A company is a business organization with sales, a product, or service in exchange for revenue and profit. So explicitly for the purpose of this class, I'm eliminating nonprofits. Let me be clear, you could use the business model canvas and customer development to go through the process for nonprofit but actually having some goals that are fairly concrete revenue and profit allows us to measure whether we're succeeding and failing in very clear ways and then we adjust to the question. What's a startup? It tells use where the company is but how does a startup different, and for me you have know I spent 20 years doing eight startups and I never could have given you a definition on the top my head what a startup is. I always thought a startup is where we have free food. Where there is a great small team or you could bring your dog and whatever, but I never quite understood the purpose of a startup. So I'm going to give you Steve's definition of what it is your actually doing. A startup is a temporary organization design to search for a repeatable and scalable business model. Now let's go back and parse the sentence because this is pretty important. Number one is temporary. The goal of a startup is not to be a startup. A startup actually aims to bring you a company. Well that's kind of interesting because if you really think about it at least if you're a web mobile startup there is no such thing as a ten year old startup. There's a two year old startup attached to an eight year old failure. A start up is a temporary organization and what are you suppose to be doing? Well, while you think it might be built on the product or maybe if you're thinking harder it might be to get customers, actually no. A startup is actually design to search person. Well that' kind of interesting. What is it that I'm suppose to be searching for? Let see. Well number one, you want to search for something that's repeatable and repeatable means the same thing that works on Monday, works on Wednesday, and works on Friday, and works next week, and works the next month. That is I want to find sales and ,marketing, and engineering processes that are repeatable. I also want to find them scalable. What scalable means, I put a dollar in, I get two dollars out, or I put a dollar in and maybe I get ten dollars out. But I better not be losing money on a continual basis or I'm called an out-of-business startup. Okay, I know I'm searching for something repeatable and scalable but what is it that I'm searching for? What you're searching for is the business model and that business model search is the basis of the rest of the class. Let's take a look and see how we become a company.

Business Model

One of the interesting thing about thinking about a startup is how is your company going to be organized? What we now know is the most efficient way to think about all the pieces, just all the parts, is by a business model. And so the next question is okay, Steve just told me think about a business model but what is a business model? What are all the pieces? Well let's take a look. A business model is how a company creates value for itself while delivering products or services for its customers. Now if you think about it, in the old days we think about how to organize a company around functional organizations. We think no no... a company is about its sales department or its engineering department and you would draw a org chart but now we're going to draw a very different diagram.

Business Model Canvas Value Proposition

Let's take a look at the first piece called the value proposition. The value proposition answers the question what are you building and for who? The value proposition says, "Hey, it's not about your ideal product, it's about solving a problem or a need for a customer." That is what pain are you solving, what gain are you creating, and more importantly, who are your customers? Now value proposition is a fancy word for what product or service are you building. This is where you normally would list all your features and here's all the speeds and feeds and benefits and whatever but we're really going to be asking a different question than might have been used to. It's not all about your technology. Your technology is just part of the value proposition. Customers really don't care about your technology. The customers are trying to solve a problem or fulfill a need. By the way, we'll be talking about this for multiple lectures. The difference between a problem and a need is--a problem is I have an accounting problem or I want to use the word processor, and those type of products solve a problem, but they are other things that human beings do--like I want to be entertained or I want to have a date. There's just some basic hard wired social need or I want to communicate with my friends. Like Facebook or Twitter. Those are needs. Needs are different than problems. And by the way, if you could find products that solve needs, your total available market as you'll see later is huge compared to I solve specific problems.

Business Model Canvas Customer Segments

The next thing is, who are my customers? Who are they and why would they buy? And as you'll hear a number of times, your customers do not exist to buy, you exist for them. And what you're going to do by getting out of the building is figuring out all their geographic, social characteristics, demographics such that you actually could draw and put up a picture on your wall of who the archetype is or who the persona is of your customer, but it turns out that in most start ups you might have more than one or two or three types of customer archetypes than personas, but you need to understand them in detail, and there is no possible way you could have anything but a hypothesis on day one of who they are.

Business Model Canvas Channels

The next is channels. How does your product over here get to your customers over here? We use distribution channels to do that. Now what's really interesting is pre-1990s, the only channels to get to a customer was at physical channel. That is you went to a store, you have sales people, there was physical distribution, but since the mid 1990s in the last couple of decades, we now have virtual channels. The web, mobile, cloud and so at distribution channel, the first question you want to ask is, how will I be selling and how will I be distributing my products. Are they through physical channels or the web mobile or given today almost every physical channel also has web presence. What is the relationship of how your product gets from your company to the customers?

Business Model Canvas Customer Relationships

Customer relationships is kind of a fourth piece, and customer relationship has a really interesting interaction with these other three pieces. It basically says how do I get customers, how do I keep them, and how do I grow them, and just like thinking about distribution channels, these are very different for web mobile than they are for physical channels. But visually, they kind of look like this double-sided funnel. Let's just take a look at quickly a web example--in getting customers, you're going to be o worrying about how do I acquire them that is how do I get them even to my website, how do I activate them that is how do I make them do something, and then later on we'll see after I got them how do I keep them around that is how do I not lose them through attrition and churn and then what can I do once I have customers to make them spend more money or use my product even more. One of the things we'll be thinking about is how do I get, keep, and grow customers. And just like every other step, you might have hypothesis on day one, but you're only going to figure this out when you're out of the building.

Business Model Canvas Revenue Streams

The next thing is revenue streams. How do you actually make money from your product and service being sold to customer segments? You know revenue streams basically ask the question what value is the customer paying for and then actually as you think about what's the strategy of how long I'm going to capture that value. Is it I'm going to just have a direct sale or it's a complete transaction based on price? Is it a free me model where I'm going to give away the product for free and hope that some portion convert later. Is it a license or subscription model? That revenue model is different than the pricing tactics. That is what is the dollar or pound amount or euro amount that I'm going to be charged. Again the only way to figure this out is being able to interact with tens or hundreds or thousands of customers so you finally understand what the right revenue streams and revenue model is.

Business Model Canvas Key Resources

Next piece is you want to think about is what in the key resources? What do you need to make the business model work? What assets are important? And what's an example of an asset in a key resource, well finance. Do you need capital? Do you need a line of credit? Some assets are in resources or physical. Do you need physical plant like a manufacturing line? Do you need specialized machines? Do you need vans for delivery? Do you need cars? Is there's something else you need? Is there intellectual property you need? Is there patents you need to acquire or protect? Do you need to acquire customer list? Or is it just that you need to get great people, great shop or programmers in the specific area or great hardware designers or great manufacturing people. And then finally again at the interaction between intellectual and human capital is that's another key resource. What specifically do you need to do to keep this people and who are they.

Business Model Canvas Key Partners

The next piece is who are your key partners and suppliers. Partnerships are kind of interesting is we need to ask ourselves before what's the deal is what exactly are we acquiring from partners, and also what activities are they going to perform and when. And this is where a start up sometimes make a mistake of thinking while large companies do partnerships, I guess I need those two on day 1. Change all the types of partnerships you need in year 1 are certainly not the ones you're going to need in year 3 or 5 or 10, and the types of partnerships could be strategic alliances, joint ventures, just regular suppliers and buyers, and you need to be thinking through who they are and after your getting out of the building and tested them.

Business Model Canvas Key Activities

Next, our key activities. What's the most important things you need to do for the business to make the business model work. Are you in the production business, are you making something, or you're in the problem-solving business like you're doing consulting or engineering or you're managing supply chains. What are the key activities you need to become expert at.

Business Model Canvas Costs

Finally all these adds up on the left hand side over here to cost. What are the cost and expenses to operate the business model? One of the interest thing things about cost is it's not just the obvious ones like people or buildings or materials. What you are going to be asking is what are the entire cost to operate a business model. You want to think about our what are the most important cost you need to worry about? What are the most expensive resources you're going to need to pay for? And what key activities are the most expensive? And then you want to ask the typical accounting things. What are fix cost? What are variable cost? Are their economies of scale? And you want to start getting a good handle on what it is that will end up costing you money to run your business.

Hypotheses Or Guesses

We put all these together, and we have a great series of hypotheses. What's interesting is the word hypotheses. I call that a $50 word. That really sounds pretty important, and I use it when I teach this class in universities. But you know what? The word hypotheses is really a fancy word for guesses, and if you really think about it when you fill out the business model canvas all you have is a series of guesses. That's it. That's all we have is a series of guesses. What's great about the business model canvas is it allowed us to organize our thinking not around functional organization like what is sales doing or what's marketing doing or what does our spreadsheet say but just around a series of thoughtful first guesses about who do we think our customers are and what products are we making for them, and how much are we going to charge, and that's great, and you could sit around all day or all week in your conference room figuring out what those are. But the odds are you're probably wrong, but it's a great first starting point, but the question is how do we change those guesses into facts?

Customer Development Process

One of the really interesting developments about this class is this whole customer development process. It says you start with your business model canvas hypotheses, and in fact, what you really do is you blow up the canvas, and you actually post it to the wall, and you use yellow stickies, no pens or pencils allowed, because you are going to get most of them wrong. But you're going to make it visible, and you will actually begin to construct your hypotheses, and the next thing you'll do is look at them and go "Hey, there aren't any facts in this room." "Let's get out of the building and talk to customers and partners, inventors, and we'll learn how to do this with some rigor, with a process." Not just randomly getting out, but actually design experiments, run tests, get data, and more importantly, get some insight, and the customer development process is kind of interesting. The customer development process is actually a 4-step process. The first step is customer discovery. This is where you construct your hypotheses, and you get out of the building and start testing your assumption about whether other people have the same problem or need you think they have. And then you're going to do customer validation and actually see if your proposed solution actually matches what you think the customer problem was. This test between problem and solution and your features and customers is actually sometimes called product market fit. That's what you're out testing, and this is what we call the search for the business model. But now instead of randomly doing this by hiring and firing sales execs and trying to make numbers that really are just random guesses we're actually going to have you get out as early as possible and test some of these primary assumptions. One of the interesting things on the bottom of this diagram that we'll talk about is something called a pivot, and the pivot is what will save your job. Once you find this repeatable and scalable business model then you go into the execution phase of customer development, and that's about creating end user demand and scale called customer creation and then building the organizations to actually build your company for scale by transitioning from customer development into a functional organization that's oriented for constant and rapid execution.

Four Phases Of Customer Development

Order the 4 phases of using customer development when building a company.

Four Phases Of Customer Development Solution

The order is customer discovery, customer validation, customer creation and company building.

Customer Development Done By Founders

Now, one of the interesting things about customer development that makes startups very different from large companies is that customer development is done by the founders. Why the founders? It turns out that there's a couple of interesting things, and this is about human nature. There's no technology involved. In a traditional startup in the old days, you would hire a VP of sales who would go out because you were smart, this was your idea, and you'd say, "Go try to sell this. Go talk to customers. I'll just hire somebody to do this." But remember, an employee doesn't have the vision. They're just executing what you told them. And guess what happens if they go out and talk to people who say, "This is the worst idea we ever heard," or "No, we won't buy it." What happens is they'll come back and tell you in the first time they do this, and you'll say, "Well, you're just not describing it right." And you send them back out for another couple of days or weeks or months, and they'll come back again. And if you're like any passionate founder, you'll go, "I hired the wrong executive. You're fired." Now just imagine we run the exercise this time not with a proxy head of sales or marketing, but we force you to get out, you the founder to start talking to customers. And if you got that same exact feedback, it might take you 3 customers or 5 or 30, but eventually, smoke will start coming out of your ears because cognitive dissonance is now coming into effect. It's that you might realize that your story or vision isn't right. But unlike a proxy, a VP of sales or marketing, you have the power to change the company's strategy. You have the power to change the entire value proposition, to say, "What if we had these features?" And customers might say, "Nah, nah, nah, still not." But then if you said, "Well, what if we had this?" they might say, "Oh, if you could do that, you could have my check right now." If you're a smart founder you'd say, "Let me get right back to you," because what you'll do is you'll go test that new feature with 5 or 10 other customers. And all of a sudden you realize that you had the wrong feature set and just by adding this small, little change, you can now actually get a whole series of paying customers. Only founders could do that. And what we did in the past is we would wait till first customer ship, we'd wait till sales didn't match the revenue plan, and we'd actually make these changes by firing executives instead of actually having the founders engage in Day 1. So it's the founder who could change the product, make pivots, and hear customer feedback firsthand. And that's the idea of getting the founder outside the building.

Hypothesis Testing

The next piece about customer development to understand is what is it you're actually doing outside the building? And what I think about is you're really testing on the highest possible level your understanding of the customer's problem or need. You implicitly had a hypothesis. I want to extract from implicit to have you make it explicit. Here's what the pain and the gain is we're actually doing for these hypothetical customer segments that I've written down on my canvas. Great, so how are we going to go do that? Literally we're going to get out of the building, take our hypotheses, and we're not just getting out of the building and randomly talking to customers because if that was the case we could have just sent them a letter or sent an email. What we're looking for is not just data, it's insights, and how this process will work is we'll get out of the building, and then as we find those new insights we'll actually change the canvas. Big idea. We'll change the canvas by marking it up and saying, you know, we thought the customers were these kinds of people. Holy cow, they're actually these kinds of people, and we thought the features we need, well, they're kind of different. They're actually these features, so what we are doing outside the building is you start with these hypotheses. In this case let's just take an example of the customers will be male, Let's go figure out maybe a Google AdWords campaign. Or if it was a physical product, go out and meet them personally, and then run some tests and take a look and analyze the data. But it's not just the data. We're trying to understand did the results match the hypotheses? And if not, just don't give up and say, "Well, it didn't." "Let's try another segment." Understand why your initial hypotheses were wrong because it's this why not that might give you some insight. What you might find out in this case is, oops, we kept getting teen girls in suburbia, and you can either keep deciding no, no, no, I want men, or you might go "Well, wait a minute." "The teen girls are actually enthusiastic, in fact, trying to figure out how to buy our product right now."

Minimum Viable Product

The interesting thing about the customer development process ties back into agile engineering and agile development hand and glove. Basically it's this notion of the minimum viable product. Back in the old days what we used to do is specify the entire feature set of the product from beginning to end. Now, this makes sense when you're in a large company releasing version 2.0, 3.0 and 4.0 because you kind of have a feeling of who the customers are and what they need, so a product manager can be pretty accurate about I've been interacting with customers for the last year and a half, and I think I know what they need. But in a startup you're really kind of guessing, and the odds are you're going to be guessing wrong, so rather than waste a whole ton of time and money why don't we actually get outside the building before we build something and waste a lot of engineering time, and more importantly, cash, because that's what puts startups out of business is running out of money. We want to make sure that we actually listen to the people who eventually will buy this product. We want to make sure we satisfy their wants and needs. Why don't we just figure out how to build the minimum viable product? Build the minimum features in order to get feedback. Now, feedback could take the form of input verbally, or they gave you early orders, or they gave you anything that was valuable in helping you come to closure on what should we be building in what order? And by the way, an MVP could be something as simple on the Web as a wireframe or a PowerPoint slide, or for physical products it could be a physical mockup, or it could be a working part of the system. But as you get more feedback you could start adding more features. One caveat is a comment I always get is "Steve Jobs didn't build the iPhone by asking customers." And we really doubt Henry Ford asked customers do they want a car before one existed. In fact, in his case if you would have asked people about what they wanted they would have said a faster horse or one with 6 legs. And so the immediate response is "Well, therefore for new products you just don't get out of the building at all," and that's just a fallacy. There is a type of startup in what we call a new market, and we'll be describing new markets in the Customer Segments lecture. But just understand that in new markets of course you don't get out and ask people what features they need. But you do want to understand how is their day in a life different today versus the day after you give them your new product? How does their world change? And there's no possible way sitting locked in your conference room or your office you would know that without talking to customers.


One of the other interesting observations about customer development is this notion of the pivot. The pivot was a term that my best student ever Eric Reese coined when he noticed the arrow between customer validation and customer discovery, and he actually gave it a name, which I think is incredibly accurate. A pivot says what do you do when your hypotheses don't meet reality? And this is such a neat observation about startups and why what we now know is much different than before. What we now know instead of firing executives when our business model doesn't match what's going on outside in the real world we fire the model, and we simply say, "Hey, our hypotheses were wrong," so because we've been building the product iteratively and incrementally and keeping our burn rate incredibly low a pivot is a substantive change to one or more of the business model components. It just simply says, "Hey, this isn't our customer segment." "Our customer segment is really here," or "Wait a minute." "Our revenue model shouldn't be freemium." "We should be charging for it from day 1," or "Wait a minute." "We've been using the wrong distribution channel." "We need a direct sales force," or "Gee, we have the wrong partners." By the way, an iteration is a minor change to one or more of the business model components. For example, an iteration would be going from charging from $9.99 to $6.99. A pivot would be a change of "Gee, our pricing is going from freemium to subscription." That's a substantive change. The key idea here is a pivot allows you to get out and make changes. Remember, typically only the founders could do pivots, but it's actually the heart of what makes customer development radically different than what's come before. The other thing to notice about pivots is that you want to keep them up at a constant speed and a constant tempo, and you want your entire company operating with speed and tempo in decision making just like a metronome. It's constant, it's consistent, and it's relentless.

Customer Discovery

Let's take a look at the first step of customer discovery. You're going to be living this for the next couple of weeks if you're doing this for real. Phase 1 is you state your hypotheses and you draw the business model canvas. And again, you put the canvas on the wall, you and your team get around and put up yellow stickies. But the next step is you get out of the building. You're going to test the problem. You're going to test your understanding of the customer's problem or need, and you're going to figure out how to build the prototype. The next thing is you're going to test the solution, and you're going to test the solution if you're on the Web by building a low fidelity and then a high fidelity prototype, and you're going to again test your understanding of the customers' needs and whether your solution matches this. And this match, again, is called product market fit. That's the holy grail for entrepreneurs. Am I building something that people can't get enough of or are just willing to open up their wallets and empty it in front of you to get their hands on? And the fourth phase in customer discovery is you verify your pivot. Do people agree that you're solving a high value problem or need, and do you understand your business model enough to start test selling, which is the next step in customer validation. Now, what's really depressing to most entrepreneurs is the answer most often the first time you go through this is, "Heck no." And what's worse is, "Well, they kind of, sort of like..." Well, kind of, sort of is not a startup. Kind of, sort of is people have been nice to you. The only time you know that you have something that's worth investing your time and money in is if people are literally trying to force their money on you or can't use your product even in its buggy, uninitialized form enough. This is what you're looking for. And if you haven't found it yet, that's why the customer development process is an iterative circle. It assumes you will be going through this multiple times. And when you finally, finally think you do have something that matches customer needs, you get to the next step, which is customer validation.

Phases Of Customer Discovery

Earlier we looked at the 4 phases of the entire customer development process, but now let's take a look at the customer discovery process itself and order its phases.

Phases Of Customer Discovery Solution

And so the phases of customer discovery start with stating your hypotheses, testing the problem, testing the solution, or verifying or pivoting.

Customer Validation

Let's take a look at customer discovery one more time in just a different way. Again, if you're using the startup owner's manual you'll notice these 2 tracks, and remember, I said you have 1 track for physical, 1 track for web mobile, and all that is are the different tactics for one channel versus another, but the strategy is the same. State your hypothesis, test the problem, test the solution, pivot or proceed. And remember, all of this is going on outside the building in front of customers. Let's take a look at the next step in searching for a business model, and that's customer validation. By now to get to this step we assumed you believe you have product market fit. Now, you would say, "Okay, now I can hire people." "Now I could run my million dollar Google AdWords campaign," and we say, "No, not really." We don't really think you have enough evidence to do so. We kind of hear you that you believe you do, so we're going to do this again, but this time try to get orders or users or both, depending on what your business model said. Phase 1 is you're going to get ready to sell. If it's a physical product, you're going to develop sales collateral, meaning the data sheets and price lists and demos, etc. If it's a web and mobile product, you're going to try to acquire and activate customers, and you're going to build a high fidelity, minimum viable product, which is a fancy word for your website or mobile app will look like it's almost done, maybe the help files aren't there, et cetera, and maybe not all the features but the core features that people will use, and then you get out of the building, physically or virtually, and you try to get out and sell and see if you get users or payers or both. The other thing you'll be doing simultaneously with this is to develop positioning, which is a fancy word for saying "Okay, I now have a lot of customer feedback." "How could I have best described this based on what the customers are actually telling me?" Because you'll ask "So, I explained it to you like this." "How could I have said it better?" And if you actually listen to them they actually would have said, "Yeah, I ignored the first 7 things you said, but when you said number 8 that's when I really got interested and excited." And so you're going to develop both corporate or company and product positioning, and you're going to do this way before you ever spend money on external PR agencies by actually listening to your own customers. And then in Phase 4 you're going to verify or repeat, and you're going to see if you're ready to start scaling sales and marketing spending in customer creation, which is the most expensive part of a startup. This customer validation stage actually gets you out, and you pretend you have the world's largest sales force, and you're ready to go "Okay, I think it's really going to work because I've tested it in customer discovery." And most of the time you find out, "Oops, I really didn't quite understand what those customers were saying." And instead of being out of business because you spent all your money on sales force or Google AdWords campaigns or customer acquisition you now have the cash and time to simply go back from Phase 4 and go back and pivot and say, "I clearly didn't understand something about my customer segment or features or customer needs or how to do customer relationships," et cetera, and so customer validation in its detail, again, has 2 tracks, 1 for physical, 1 for web/mobile. Get ready to sell. Sell to early customers who we call early evangelists. Develop positioning, and again, either pivot or proceed.

Market Opportunity Analysis

One of the things we keep asking our startups to think about is how big is this opportunity? That's just a fancy word for saying when you're all done and you're spending the next couple years in the startup are you going to make a million, or are you going to make a billion? That is, how potentially large is the opportunity? And so what we really want to do is do what we call a market and opportunity analysis. What you've already put together is a business model canvas with your hypothesis that says, "Look, we're really passionate about this product or service, and we think there's a set of customers out there, and we've put together a revenue model, our first hypotheses and saying we're going to make a lot of money," and that's great, but there's really kind of a method to this madness, and there's not only one way to do this, but this is the way we kind of think of it. You want to identify who your customers and markets are, and you have, but you now want to size the market, look at competitors, and figure out whether this market could grow.

Total Available Market

The first word we want to think about is something called Total Available Market, and I like to think of Total Available Market as a pie. It's the entire pie. Total Available Market says, look, how many people or companies or whatever your unit of sale is would want or need this product, and how large is the market in dollars or units if they all bought? That's just a pretty nice calculation. And the question is, okay, how would I find out? In different industries, there are analysts that specialize in vertical markets and enterprise software, it's Gartner and Forrester; in video games, it's the MPD Group; in consumer research, it's Nielsen; if you want to understand how many mobile startups there are, you go to the Mobile Startup Genome Project, et cetera. So you need to ask some questions as which industry analysts kind of follow your specific domain, and then also Wall Street analysts follow competitors in this business. That is, they follow whoever's public; in fact, some of them write very nice research reports. If you have access to university library or a friendly broker, you can get a great free industry analyst report and I would be asking others, as well, and Google is your best friend here. I truly would be spending time trying to understand, is this a $1 billion market, and by the way, if you throw out those numbers, the first thing I'm going to ask you is, well, that's nice, but break it down for me. Help me understand how many users, who are the players, what are the competitors, et cetera. You need to understand this total available market pie in some detail before I'll let you get to the next step, and the next step is how big is my slice? And we tend to use a fancy word for that: What's the served available market? The served available market means okay, well instead of the theory that there are 7 billion people in the world, how many people really can use a mobile app? Oh, well a mobile app is kind of dependent on how many people have mobile Smart Phones, and if I'm making the mobile app for, let's say an Android platform, then the first question is how many theoretical people are going to be using Android platforms in this year and in the next 5? Oh, now I can start estimating what's my served available market. And so many people have the money to buy the product; that is, are you a 99-cent product or are you a $99 product? Now you're narrowing the market based on pricing or availability and you want to do some thought experiments like how large would the market be in dollars if they all bought-- if everyone in the served available market bought, how large would this be, and this is kind of your first test to say, "Oh" or "Wow." So you want to understand this before dollars and units. How do you find out? Well, this is one where you're really out of the building and talking to customers. Then I think of this again using the pie analogy the first step was try to understand the number of people in the world, but now we can narrow it down if I have the Android app to number of Android phones--capable phones, and then down to how many would buy it at my price, but now we really want to get pretty specific. Who example am I going to sell in years 1, 2, and 3? How many customers is that? How large is the market if they all bought? That is, what we now are coming up with is the total number of dollars if you had 100% market share, your revenue isn't going to exceed this number, and many units would that be? Again, how do I find out? Boy, this is really about getting out of the building and talking to customers and talking to potential channel partners, and talking to competitors, et cetera. You really, at the end of this exercise, now have the first pass hypothesis about is this business model canvas worth executing for the next couple of years?

Market Size Summary

So in summary, the questions you want to ask are how big can this be, how much of it can we get, what's the growth rate of the market, is the market itself declining or is it in flux or is it taking off? and most importantly here is talk to customers and the sales channel, and next important is you can get some pretty good market size estimates by competitive approximation if it's an existing or resegmented market, or even if we're going to clone a market outside the US. Next important is Wall Street Analytic Reports are great. Market research firms like Forrester and Gartner are great, but something to keep in mind about market research forecasts going forward. Market research data is wonderful on the size of markets in the past, but if market researchers were great at predicting the future, they'd actually be running hedge funds, so one of the things I don't accept from my students is, "and it's going to be a $40 billion business in the next 7 years." Well, what's its size now? Zero. So therefore, I just don't accept guesses from a market research firm, unless you've actually cross validated that with some really heavy customer input from outside the building.

Estimate SAM

So how would you estimate the served available market or SAM for an Android Game within an order of magnitude? Choose from the list below.

Estimate SAM

Would it be the total number of Web users? Well, for an Android game, they're not on the Web. They might hear about it on the Web, but that's not really gonna help you understand the served available market. Is is the total number of mobile phone users? Well, that might be the total available market, but you're really interested in just the Android piece and so number 3 might make sense, the total number of active Android users. But if we get a little more sophisticated, we'd understand that the real answer is number 4; it's not only the total number of active Android users, but they need the right level of the operating system to support the particular game's features, and so you really want to get the SAM as tightly defined as you can.

JerseySquare Self-Intro

[Music] [Why buy authentic professional sports jerseys] [when you can rent from JerseySquare] [Avoid the risks of] [free agency] [release] [trade demands] [retirement, unretirement] [steroids] [jail sergents] [guns] [The JerseySquare Subscription Service lets you exhange your rental jersey at any time] [so you can wear Lin-sanity when he's hot!] [but exchange for Melo when he's not!] [Don't regret buying another jersey. Sign up today with JerseySquare] [Jersey Square]

Survey (Please fill out!)

[Please take the course survey by clicking the link below]

Optional Reading

So now that we have an overview of the business model canvas in customer development, there's some optional reading for the next lecture. Take a look at business model generation, pages 86 through 111 and pages 135-145. In the Startup Owner's Manual, take a look at pages 51 to 84 about market size, and then take a look at pages 188 to 199 and pages 457 to 459. Also take a look at the links below and 4 additional readings that don't require any of the textbooks. So that's the reading, but what you should really be doing if you want to build a startup before the next lecture. Well, what we want you to do is start working on identifying your market size of total available market and what's your target market? and then we want you to think about what kind of a experiments would you want to use to test your value proposition, customer segment, channel and revenue model? How would you go on about doing this? Not just talking to people, but what would you ask them, and what would be a pass/fail signal for each test? Some examples for the next class are available on the link below. The other thing you need to be doing or the most important thing you need to be doing in between lectures is talking to customers, and if you're not talking to at least 10 potential customers between these lectures, you're really not gonna have enough mass, enough to actually get some insights. You can say, "Well, I've talked to 3," but you know, there's no magic number, but it just turns out that you want a data set large enough that you can actually get not only the mainstream thought, but some of the out lyers, or some of the interesting answers are. So the other thing is after you talk to customers, you want to every week, update your business model canvas with what you've learned. Which hypotheses were wrong and which were right? And optionally, if you're using the LaunchPad Central software, post your first discovery narratives.