As part of our commitment to bringing you information and opinions about entrepreneurship, this guest post features John Seiffer, of BetterCEO.  John is a consultant and an angel investor from Milford, CT.  He has been an entrepreneur and is a past president of the International Coach Federation.  In this post, John provides insight on customer development and fund-raising.  For more, check out John’s blog.

An Unending Source of Money

I got your attention with that title didn’t I?

Conventional wisdom says that companies fail because they run out of money.  Would you like to know the never ending source of money for your business? And I say THE source, not A source because there is only one: Customers.

As Peter Drucker famously said, “There is only one valid definition of a business purpose:  to create a customer.  The customer is the foundation of a business and keeps it in existence.” In other words, the only valid purpose of your business is to create a customer. And it’s convenient that, if you do that well, customers become your source of funds. But if you aren’t good at creating customers, then they don’t allow your company to live.

From this perspective it seems almost backwards that when an entrepreneur is telling you about their start-up you never hear them say “I’ve got this great idea for a customer I want to create.” Instead they usually talk about their product (or God forbid, their funding). And perhaps that’s why so many start-ups fail. (You know the stats.) They’ve focused too much on the product before they start thinking about how to create a customer.

So how do you create a customer?

Fortunately, there is a solid methodology for creating customers, called Customer Development. It was developed by Eric Reis and Steve Blank, and was written about in this book.  [Highly recommended]. Here are some tips:

1. When to start. Ideally, you start before you develop your product. Yes before. And then you develop your product in parallel with your customer development activities.  That way you’re more likely to make something people want to pay for, or at least will find out sooner (and cheaper) if no one wants to buy what you plan to make. If you’re already into product development, then start now with a parallel effort in customer development.

2. What to do first. List your hypothesis (aka beliefs) about your customers, who they are, what problem your product solves for them, how bad the pain is from that problem, what features they want, how much they’re willing to pay, what their purchasing process is and several other questions detailed in the methodology from sources above. YOU MUST WRITE THESE DOWN. ON PAPER.

The paper bit is my addition. And sure you can make a working copy on some electrons somewhere. But you want a copy of what you think that won’t change. Why? Because you’re going to be proven wrong. And that’s hard. No one said building a company is easy. Facing the fact that you’re wrong is the hardest part. You may be wrong by a lot, or by a little. But the paper helps you realize where you are wrong and where you’re not.

3. Get out of the building and talk to real people. There are no facts in your building. Only opinions which you’ve now got down on paper. And you know what they say about opinions? Opinions are like rear-ends. Everyone has one and they all stink. So get out and talk to real people.

Who should do this? The CEO and the product development team. It has to be the CEO. You don’t want any of the learning to be filtered. And the product team who isn’t used to sales or marketing will be better able to develop product if they’ve seen in real life (meat space as it’s been called) what actual customers think.

Who do you talk to? Customers if you have them. Also anyone who could possibly fit your definition (written down on paper) of who you think your customer are.

What do you mean TALK? I mean have vocalization sounds emanate from your mouth. This is important. Don’t use email and for God’s sake don’t use a survey of any type. You must have a conversation. Face-to-face is best, phone calls are a distant second but acceptable. Keep reading; you’ll see why.

What do you talk about? Your goal is to test the hypotheses that you wrote down against the real world (customers actual thoughts and feelings). You go in with the attitude that you are very smart, but only guessing about what these other people think and feel. Ask open-ended questions about what you think their problem is and your other hypotheses. Make it easy for them to disagree with you and to bring up tangents that are important to them. Check out people’s facial reaction when you talk about price. Notice their body language – when do they seem interested and when do they seem politely bored?

A useful technique is to give a couple of options and ask them to rank them (or suggest another). So rather than to say “This is what we think, what is your opinion?” You’d say “We considered the following options: A, B and C. Which is most important to you – or is there another option we missed?”

4. Now pivot. Pivot means to change what you’re doing based on what you learned. When you pivot physically, you keep one foot in place and swivel the other. [In rare cases you'll learn you're totally in the wrong place and you'll turn and run away - but those cases are rare.] Usually you’ll take part of your original vision and adapt it. Sometimes the adaptation will be a tweak (small). Sometimes it will be a 180 (major). Don’t worry. You’re in good company. Here are some famous company pivots:

Google started out as a search engine and planned to make money licensing their technology to other internet businesses, but they pivoted and sold ads instead. They kept the search engine part, and I’ve heard it’s going rather well for them.

Amazon started out selling books and other items on the web, to consumers. But they didn’t stop burning cash until they started selling their platform to other retailers. These new customers include the folks (from Mom & Pops to Fortune 500s) that sell on Amazon’s site as well as companies like Toys R Us and Target who outsource their branded online selling to Amazon for fulfillment and delivery. They’re no google, but I think they’re doing alright.

PayPal started out developing security software for PDAs. It took 5 pivots till they ended up with a system to transfer cash securely. Then they got bought by eBay and now one of the founders makes electric cars and rocket ships. Really. http://www.inc.com/magazine/20101001/elon-musks-guide-to-the-galaxy.html  I’m still waiting for my jet pack.

5. Repeat the process. Don’t stop until you’ve come to a really solid market/product fit.

Takeaways:

Many companies do fail because they run out of money. But I’d say that’s only the symptom. The cause is that they didn’t learn soon enough how to create customers.

A formal Customer Development Process is designed to help you learn quickly (and more cheaply) how to tap into the only never- ending source of funds: creating customers.

If you would like a free consultation about using the Customer Development Process in your company, email or call John Seiffer (john@BetterCEO.com, 203-775-6676, www.BetterCEO.com)

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