Rapid Blog: What West Michigan Can Learn from the Mistakes of Silicon Valley, by Carl Erickson

Carl Erickson is the President of Atomic Object and SoftwareGR. He's recently started blogging about building and running software product development firms at Great Not Big.

Silicon Valley has a problem. The traditional approach of funding technology startup companies (build a product, then launch and market it) is inherently wasteful and unnecessarily risky. While venture capitalists only expect a small proportion of companies they fund in this fashion to be successful, they count on those few successes to generate an overall return of 40% or more. This model appears to be broken, as the returns of VC firms have been diminishing for a decade.

Steve Blank, a serial and successful entrepreneur now teaching at the University of California, Berkeley has defined a fundamentally different approach to building companies. In his book Four Steps to the Epiphany, Blank describes the process of Customer Development. Customer Development is one of the three pillars of an approach to building companies known as Lean Startup (the others are agile software development and open source platforms).

Customer Development addresses the waste inherent in the traditional VC-funded approach to startups. Before spending a lot of money on product development, possibly only to discover that no one cares, Blank argues that many startup companies would be better off first developing their customers.

The four major steps of Customer Development are:

1. Customer Discovery
Who are your customers? What problem are you solving? Blank uses the expression that "no facts exist inside the building" to get you to find your customers and learn from them. Forming hypotheses about your customers and your product, then finding cost efficient ways to validate them, illustrates the inherently inquisitive and iterative nature of Customer Development.

2. Customer Validation
Does your solution solve the problem? Will customers pay for it? Selling (for money) your product to your earlyvangelist customers is the validation of a fit between your product and the market. Fully understanding and being able to repeat the process is critical.

3. Customer Creation
Can you create demand? Blank emphasizes that understanding the type of market (existing, re-segmented or new) you're entering is critical as each requires a distinct approach to creating demand for your product beyond your first, evangelistic customers.

4. Company Building
This is the step where most traditional, VC-funded startups begin. Having proven there's a demand for your product, you can now more confidently invest in the company with new people, systems and processes. This step is all about execution and scale.

Do the ideas of Customer Development and Lean Startup apply in West Michigan? Absolutely. Despite appearances to the contrary, Silicon Valley doesn't have a monopoly on technology startups. Some local startups Atomic Object has been involved in recently include Kidtelligent, Bloomfire, and Ascribe. And of course, we're just one of many software design and development firms in the area; the total technology startup activity in West Michigan is greater than most people know.

Duellr is a product where we're currently applying Customer Development thinking. We launched Duellr with nothing more than a web page that succinctly describes our customer problem hypothesis, and a call to action to sign-up for an alpha account. A customer willing to give us an email address in return for an alpha account is an example of Blank's exchange of value early in the Customer Discovery step. Building out the product behind Duellr will probably cost around $50,000. Starting with a web page to validate our hypothesis was more than an order-of-magnitude cheaper. Shawn Crowley is blogging about his experience with Duellr.

Customer Development can also be used by more than just technology startups. I think the core philosophy of waste reduction, efficiency and effectiveness lines up very naturally with Grand Rapids values. Atomic is using Customer Development practices with a long-established company, which is in the process of bringing their product into the mobile age. An existing customer base and regular traffic to the company's website are huge advantages for applying Customer Development practices. You don't need to be starting from scratch to benefit from these ideas.

Customer Development, with its emphasis on lower cost, rapid learning and customer-focus, provides a way for West Michigan to compete more effectively in the startup sphere. The validation and systematic mitigation of risk, which Customer Development provides is also a better match to our local funding sources, both in terms of scale and risk-tolerance.

To Learn More

Local Events

Steve Blank is speaking at Ann Arbor New Tech on Tuesday March 29, 2011.
Momentum is focusing on Lean Startup techniques this summer. The Michigan Lean Startup Conference on May 19, 2011 is the kickoff event this year.
The Great Lakes Software Excellence Conference on April 18, 2011 has a wide variety of presentations on various aspects of software development.

Customer Development

Short videos of Steve Blank explaining various aspects of CD.
Slide deck for an overview of CD.
A summary of Customer Development by Eric Ries.
Four Steps to the Epiphany, a self-published book by Steve Blank to accompany a course he teaches on the subject. Conversational style and a treasure trove of valuable insights, ideas, and experience.
Entrepreneur's Guide to Customer Development, the CliffsNotes for the Customer Discovery portion of the Four Steps. Appears hastily written, but easily digested, approachable and useful.

Lean Startup

A short summary of Lean Startup from Eric Ries, the person who coined the term.
Wikipedia entry for agile software development, one of the three pillars of Lean Startup.
A blog post I wrote last year on Lean Startup.