Building a Successful Company

by Demetrios Sapounas

Part 2: Customer Discovery

In the past decade and a half, I have had the opportunity to work on several new ventures and advise and mentor numerous entrepreneurs on their journey to building a successful company from an idea.  Recently, I also began working as a business coach with the Small Business Development Center (SBDC).

A common theme with all these interactions is the emphasis on building a product. This includes: raising capital, developing detailed revenue models, recruiting a team and getting customers – not necessarily in this order.  This is the “classical” approach of going about launching a new venture where the belief of “build it and they will come” still seems to influence early- stage activities.

Customer Discovery

It is very common to hear founders say that they know exactly what their customers want and so they are developing the product they will take to the market.  That has also been the classical approach to building a product.  During the 1998-2000 period the perception was “build it and they will come”, but since then things have changed and now the expectation is that you have done market research and have product validation, or as it is referred, “product-market fit”.  This is nothing new.  The classical approach includes in-depth market research into competitors and their offerings, the target market, your target customers and estimating the market size.  All this is useful information to educate yourself on the market and the competition.  It also provides anecdotal evidence on what customers may want and value, though comes short to offering first-hand evidence of customer needs, wants and their willingness to pay for your solution.

Market Size

It is important to identify your market and its size.  This has a direct relationship to how large your company could get.  It is not an exact science, but an estimation, and it is used to determine whether all the time, effort and investment into your venture has the potential to result in reasonable rewards.  This information is valuable to you, as you determine whether the venture makes sense, given the size of the market, and is also very important to any investors who may invest in the venture.

Your market size is defined as the total addressable market (TAM), the served available market (SAM) and the target market (TM).  Depending on the type of venture and offering, the TAM may be very large (for example, the TAM for a mobile application may be global and in the billions of users) and indicates the potential growth for the company.  The SAM is commonly smaller than the TAM and represents the size of the potential market (for example if the mobile application is only available on Android, the SAM is considerably smaller than the TAM).  The TM is even smaller than the SAM, defined by those who could realistically be your customers (for example, the mobile application appeals to the 20-35 demographic and they must be on the Android app store).

The TM represents the market from where you will get your customers, though it is important to understand that not all of them are going to be your customers.  Your job will be to determine how many will realistically buy what you are offering, which is a smaller population than the TM.  This means that each market estimate further reduces the TM size.  This estimation provides some insights for existing markets.  If your idea is creating a new market, your TM does not exist, so your approach at estimating the market size should change.  For a new market, it is best to look at similar or adjacent markets and at any companies that may have similar profiles to yours, in those markets.  That should provide reasonable estimates of market size and potential growth rate.  Now you will have to craft a story to articulate and support your research and estimates, because any potential investor will ask for that.

Who is the Customer

A common question to ask is, “Who is your customer?”, which translates to (a) who you are selling to, (b) who makes the buying decision, (c) who authorizes the purchase, (d) who pays you.  Two examples of typical responses would be: (a) mid-size companies in the logistics space, (b) children in the 5-10 age range.  These may seem like good answers and demonstrate that you know exactly who your customer is, but let’s look at these two answers more closely.

Mid-Size Companies in the Logistics Space

In this case, you may be developing a solution that will add value to mid-size companies that provide logistics services.  The answer seems to indicate that the customer is the company.  However, a company is not going to make a buy decision, and a company will not send the money to your bank account.  While this group of organizations may be your target market, the actual customer includes the stakeholders within the organization.  These will be the decision makers and the ones you will have to sell to and convince that they need your solution.  Bottom line is that you sell to real people and not organizations.

A closer examination indicates that there are multiple people, from whom you will need to get buy-in, to achieve a sale.  If your solution is a system, the decision maker may be the company CIO.  But the CIO may require input from his team before making a decision.  This means that you may need to approach others, within the CIO organization, to build support for your solution.  If your solution delivers business value on the business side of the organization instead of the technology department, the business users could become your champions who will promote your solution to the technology team and help reach a decision.  Keep in mind that after the sale, the technology department will be responsible for operating and supporting your solution and the business users.

Beyond getting support for your solution, you will need to identify who controls the budget and who will authorize the purchase.  There may be a complex relationship where one department makes the decision that your solution is needed, but another department controls the budget.  For example, the people in the Compliance department may love your solution and have gotten the CIO’s and technology’s consensus for purchasing your solution, but the budget for such solutions is controlled by the Operations department. 

Children in the 5-10 Age Range

In another example, you may be offering an educational solution for children, addressing the needs of the 5-10 year-old children. This demographic represents your target market, but they are neither the decision makers nor the people who will pay you.  At best, your target demographic may be an influencer for reaching a decision to buy.  While the children are your final users, their parents would be the decision makers and also who will pay you for your solution.  This also means that you have to sell to the parents and clearly explain the value to their kids and any value to them.

There may also be additional influencers or someone who would recommend your solution, for example the school teacher, who may recommend your solution to the child and the child’s parents.  This also means that school teachers should be people you should target to create awareness and generate support.

Identify the Customer

Knowing who is your customer is critical to success.  It also helps reducing the risk of a venture, because customer discovery is supposed to happen up-front, before a lot of money has been spent and a solution has been built.  Customer discovery is a methodology that came out from Lean Start-up and further defined by Steve Blank, professor at Stanford, and others.  The process has become sufficiently important that it has been adopted by many accelerators and programs like the National Science Foundation’s Innovation Corps (I-Corps) and the Virginia SBDC Innovation and Commercialization Assistance Program (ICAP).  Both programs are focused on helping start-ups in their evolution towards success and scaling, through experiential learning.

The significance and importance of customer discovery is enormous.  Following the process, you can determine whether there is a willing market for your solution or you need to adjust or even pivot.  Since it should be done up-front and be instituted as a continuous process for market validation, it can save a lot of time and money.  What you want to avoid is spending months and large sums of money building a product for which there are no buyers or the market is so small that it does not support building the company of your dreams.

Recently I went through the ICAP program and the findings were eye-opening.  At the time we had been engaged by a large industrial client to help them with their employee wellness program.  As part of this engagement, we developed a platform for aggregation of data, analysis and reporting.  It was a combination of a cloud platform and IoT devices communicating with the cloud.  Our hypothesis was that if one company is getting value form this product, there should be others and it should be possible to build a profitable company.

We talked with numerous companies offering wellness programs to their employees and talked with others in the space offering wellness programs to corporate clients.  We also had discussions with insurance brokers, to understand the health insurance side of corporate wellness.  Our findings included:

1. Wellness programs are managed by the human resources department and usually there is no dedicated person (not necessarily the benefits administrator).
2. Companies select wellness programs from a menu offered by their health insurer.
3. The corporate wellness budget is tied to credits provided by the health insurer.
4. Corporate wellness programs are some of the first to get cut, in a bad economy.
5. Wellness programs are considered nice to have options and possibly an area of differentiation between companies, but not something they must have.
6. Some wellness program providers have a sizeable sales force and sell to corporate clients at no cost to them, because the employees pay to participate.

Our customer discovery indicated that the market is much more complex than what we thought and much more difficult to penetrate, because you have to sell to a number of stakeholders, from the health insurance company to the corporate client and to the employee.  This would require a sales team with at least some contacts in the health insurance space, to sell both to the health insurers and corporate entities.  This becomes expensive quickly and it is not easy to estimate revenues.  In our case we also had up-front fixed costs due to the need for IoT devices, which would be deployed at corporate offices.  We would have to keep some inventory of these devices, because the lead time between order and delivery would be considerable and their cost substantial.

After analyzing the customer discovery findings, we decided not to pursue the business beyond our existing customer.  In retrospect, this was the prudent choice.  Another event that further supported this decision was when our customer, following a reorganization, eliminated their wellness program, so we pulled the equipment from their facilities.

The Process

Customer discovery is a process.  It applies whether you are an early-stage start-up with just an idea or a Fortune-50 company looking to launch a new product in the market.  The process leverages the business model canvas (BMC) and focuses on the blocks of Value Propositions (VPs) and Customer Segments (CSs).  The objective is to validate strong relationships between a VP and a CS.  It all starts by defining your hypotheses of which are your VPs and which are your CSs and how they may be related.  Your VPs will cover (a) the problem(s) you are solving, (b) what customer needs you are addressing, (c) what value do you deliver, (d) what is the offering for each CS.  Your CSs will cover (a) who will realize the value, (b) which is the most important customer.  Armed with these hypotheses, you are ready to outline how you will validate them.

Validating the hypotheses requires preparation, a strategy, planning and persistence.  The information is not available in books or on the Internet.  The information is obtained through conversations with people from your CSs.  Some tips:

• Be prepared with the questions you are going to ask and have a strategy for how to steer the conversation and what information you want to obtain.  Your questions should be open-ended, so you do not get yes/no answers.  The open-ended questions include: “how”, “what”, “why”, “when”. 
• Identify the people you want to interview and how you will be able to get time with them.  You should not be relying on people you know for this information, because they would not be reliable sources and not necessarily be representative of the market.
• Determine which questions you would want to ask and in which order, because your goal is to get specific pieces of information. 
• Decide who will conduct the interviews. In most cases, it should be the founders in order to provide impartial, first-hand CS feedback.

After you have your strategy and script(s), you are ready to start meeting with people from your CS.  The process can be:

• Find the people through LinkedIn, your professional and personal networks, networking and industry events. 
• Create a list and rank it by level of importance and value toward your objectives.  You want to start by speaking with those who you feel will be of low value to you.  Starting with the lower value contacts affords you the opportunity to stumble, not being at ease, having an awkward and not well-flowing conversation.  It is all part of preparation and practice.
• Ask for introductions, making it clear that you are not selling anything and that you are conducting research.  Offer to share your research results with them. This approach presents a higher likelihood that they will be willing to allocate some time and speak with you. 

You also need to ensure you are prepared, relaxed and comfortable at conducting the interview. Preparation is key and some ways to ensure an effective interview include:

• Practice interviewing with people you know and ask them to be tough on you.
• Be able to explain the purpose and the reason, succinctly.
• Be prepared to adjust your script on the fly, based on the answers you will get.

You also need to be able to accept rejection, especially when you find out that the solution you are considering is not of interest, does not solve a problem they have or the problem is insignificant and they do not need a solution, especially one they will have to pay for. Remind yourself that rejection is not failure; it is education.  It is a positive outcome, since now you are not going to spend money and time creating something the market does not need.  This is how pivots come about, often resulting in a different idea to the original, which your CS wants now, because it solves an important problem and they are willing to do anything to get the solution. 

Three important things to keep in mind for the meetings you will have:

1. You are neither selling a solution nor you are doing a demo.  Your primary objective is to validate your hypotheses.  You want to get as much useful information from the other person, as possible.  But you should also determine how you can provide value to the other.  If the meeting becomes win-win for everybody, a lot of positive and possibly unexpected things could happen (see the next two items).  If things progress well, you could schedule follow-on discussions and you could also ask permission to do a demo.  By then they may be actively helping you to build your solution.
2. Be gracious, professional and mindful of the other person’s time.  If you asked for fifteen minutes, plan to wrap your conversation within that time frame.  If the discussion is really good and you are both engaged, ask if they have more time or it would be easier to schedule a follow-on meeting.  Often you will find that the conversation becomes very engaging and the other person is more than happy to spend more time.  I have been in such discussions, scheduled for thirty minutes, and an hour and a half later we were still in very engaging and productive conversations.
3. Establish rapport with the other person.  You would like to be able to reach out to them, at a future time.  They may be excellent candidates for your advisory board or your board of directors.  They may even be great mentors or informal advisors, who can help you through your journey or even you may decide asking them to join your team.

A few years ago, I was working with a company that was conducting customer discovery to validate the VP and the CS.  The concept was an application which parents and pediatricians would find useful and valuable.  Customer discovery validated the VP, but not the CSs the company was considering.  Instead, it was determined that physical therapists really liked the solution and wanted it now.  Furthermore, additional use cases surfaced, using the solution for education and training.  Had the company not conducted customer discovery, it would have found it hard to sell the solution to the target markets.  Following customer discovery, they knew exactly who their users were and the value they would get from the solution.  They were also able to engage some of those users to help in the development, resulting in an even better solution.

The whole idea behind customer discovery is that you must get out of your office, your house or wherever else you are working on your concept and engage with the people you plan to serve.  That is the best way to validate your idea, ensure you understand your target market and you know the specific customers who want your solution.

In the next segment we will go over the assembling a team and how building a good and empowered team can be the driver behind success.

Resources

A Conversation With Steve Blank: https://www.linkedin.com/video/live/urn:li:ugcPost:6811351794627690496/?cid=sf01001

Business Model Canvas: https://www.strategyzer.com/canvas/business-model-canvas

NSF I-Corps: https://www.nsf.gov/news/special_reports/i-corps/

Steve Blank and Bob Dorf, “The Start-up Owner’s Manual: The Step-By-Step Guide for Building a Great Company”, K&S Ranch, Inc. Publishers.

Steve Blank’s Customer Discovery Videos: https://vimeo.com/groups/204136

Virginia SBDC ICAP: https://www.virginiasbdc.org/programs/icap/

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