One of the confusing things to entrepreneurs, investors and educators is the relationship between customer development and business model design and business planning and execution.
When does a new venture focus oncustomer developmentandbusiness models? And when do business planning and execution come into play?
Heres an attempt to put this all in context.
Dont throw the tomatoes
I was in Washington D.C. last weekpresenting at the ARPA-Econference. I spent the next day working with the National Science Foundation on theInnovation Corps, and talking to congressional staffs about how entrepreneurial educational programs can reshape our economy. (And I even found time to go to theSpy Museum.)
One of the issues that came up is whether the new lexicon of entrepreneurial ideas Customer Development,Business Model Design,Lean,Lean LaunchPadclass, etc. replace all the tools and classes that are currently being taught in entrepreneurship curriculums and business schools. I was a bit surprised since most of what Ive been advocating is complementary to existing courses. However, I realize Ive primarily written about business model design and customer development. Given that Im speaking this month in front of entrepreneurship educators atthe NCIIA conference, I thought I should put it in context before they throw tomatoes at me.
Search versus Execution
One of the things startups have lacked is a definition of who they were. For years weve treated startups like they are just smaller versions of a large company. However, we now know that a startup is atemporary organization designed to search for a repeatable and scalable business model.Within this definition, a startup can be a new venture or it can be anew division or business unit in an existing company.
If yourbusiness modelisunknown that is just a set of untested hypotheses- you are a startupsearchingfor a repeatable business model. Once your business model (market, customers, features, channels, pricing,Get/Keep/Growstrategy, etc.) isknown, you will beexecutingit.Searchversusexecutionis what differentiates a new venture from anexistingbusiness unit.
Strategy
Process
Theprocessesused to organize and implement the search for the business model areCustomer DevelopmentandAgile Development. A search for a business model can be in any new business in a brand new startup new or in a new division of an existing company.
In search, you want a process designed to be dynamic, so you work with a rough business model description knowing it will change. The model changes becausestartupsuse customer development to run experiments to test the hypotheses that make up the model. And most of the time these experiments fail.Search embraces failure as a natural part of the startup process.Unlike existing companies that fire executives when they fail to match a plan,we keep the founders and changethe model.
Once a company has found a business model (it knows its market, customers, product/service, channel, pricing, etc.), the organization moves from search to execution.
The product execution process managing the lifecycle of existing products and the launch of follow-on products is the job of theproduct managementand engineering organizations. It results inalinear processwhere you make a plan and refine it into detail. The more granularity you add to a plan, the better people can execute it: aBusiness Requirement document(BRD) leads to a Market Requirements Document (MRD) and then gets handed off to engineering as aFunctional Specifications Document(FSD) implemented via Agile or Waterfall development.
Organization
Searching for a business modelrequires a different organizationthan the one used to execute a plan.Searchingrequires the company to be organized around acustomer development teamled by the founders.In contrast, execution, (which follows search) requires the company to be organized by function (product management, sales, marketing, business development, etc.)
Companies in execution suffer from a fear of failure culture, (quite understandable since they were hired to execute a known job spec.)Startups with Customer Development Teams have a learning and discovery culture for search. The fear of making a move before the last detail is nailed down is one of the biggest problems existing companies have when they need to learn how to search.
The idea ofnothaving a functional organization until the organization has found a proven business model is one of the hardest things for new startups to grasp.There are no sales, marketing or business development departments when you are searching for a business model. If youve organized your startup with those departments, you are not really doing customer development. (Its like trying to implement a startup using Waterfall engineering.)
Educatio
Edication
Entrepreneurship curriculums are only a few decades old. First taught as electives and now part of core business school curriculums, the field is still struggling to escape from the bounds of the business plan-centric view that startups are smaller versions of a large company. VCs whove watched asno startup business plan survived first contact with customerscontinue to insist that startups write business plans as the price of entry to venture funding. Even as many of the best VCs understand that thebusiness planningandnot the planitself, are what is important.
The trouble is that over time this key message has gotten lost. As business school professors, many of whom lack venture experience, studied how VCs made decisions, they observed the apparently central role of the business plan and proceeded to make the plan [not the planning], the central framework for teaching entrepreneurship. As new generations of VCs with MBAs came into the business, they compounded the problem(thats how we always done it or thats what I learned (or the senior partners learned) in business school.)
Entrepreneurshipeducators have realized that plan-centric curriculum may get by for teachingincremental innovation but theyre not turning out students prepared for the realities of building new ventures. Educators are now beginning to build their ownE-Schoolcurriculum with anew class ofmanagement tools built around searchand discovery. Business Model Design,Product/Service Development,Customer Development, Startup Team-Building,Entrepreneurial Finance, Marketing, Founder Transition, etc. all provide the startup equivalent of the management tools MBAs learn for execution.
Instructional strategy
Entrepreneurial education is also changing the focus of the class experience fromcase methodto hands-on experience. Invented at Harvard, the case method approach assumes that knowledge is gained when students actively participate in a discussion of a situation that may be faced by decision makers.
The search for a repeatable business model for a new product or service is not a predictable pattern. An entrepreneur must start with the belief that all her assumptions are simply hypotheses that will undoubtedly be challenged by what she learns from customers. Analyzing a case in the classroom removed from the realities of chaos and conflicting customer responses adds little to an entrepreneurs knowledge. Cases cant be replicated because the world of a startup too chaotic and complicated.The case method is the antithesis of how entrepreneurs build startups it teaches pattern recognition tools for the wrong patterns and therefore has limited value as an entrepreneurship teaching tool.
The replacement for cases are not better cases written for startups. Instead, it would be business model design using thebusiness model canvasas a way to 1) capture andvisualize the evolutionofbusiness learning in a company, and 2) see whatpatternsmatch real world iterations and pivots. It is a tool that better matches the real-world search for the business model.
An entrepreneurial curriculum obviously will have some core classes based on theory, lecture and mentorship.Theres embarrassing little research on entrepreneurship education and outcomes, but we do know that students learn best when they can connect with the material in a hands-on way personally making the mistakes and learning from them directly.
As much as possible the emphasis ought to be on experiential, learner-centric and inquiry-based classes that help to develop the mindset, reflexes, agility and resilience an entrepreneur needs to search for certainty in a chaotic world.
Lessons learned
The search for the business model is the front end of the startup process
This is true in the smallest startup or largest company
The goal is to find a repeatable/scalable model, and then execute
Execution requires operating plans and financial forecasts
Customer and Agile Development are the processes to search and build the model
Product management is the process for executing the model
The case-method is the antitheses of an entrepreneurial teaching method