Startups that emulate the product development model of established companies will fail

Established companies possess some distinct advantages over startups when developing new products. Two of the biggest are market insight and scale.

Market insight comes from being in the game already, having accumulated extensive knowledge about customer needs and behaviour. Scale means the ability to deploy large amounts of capital and people onto the task and be wasteful in execution.

But it’s in the method where the biggest differences sit. In established companies, the starting point is usually a market requirements document (MRD). This contains the sum of all possible customer feature requests captured from various departments – sales, marketing, product development, customer support etc.

The roadmap from idea to product launch is clear. The market is known, the customers are known, and their needs are known. A product specification is then developed, and engineering builds the product. Under the fanfare of a marketing blitz the product is released into the mainstream market.

Startups can’t compete with this resource intensive process. Nor should they.

Instead, startups must use their unique advantages over large companies. For example, they are far nimbler, more focussed, and operate with a greater sense of urgency.

So, how do successful startups use these advantages to compete in the product development race?

The answer is by adopting a highly customer centric mindset rather than the product centric mindset of the established company. The tool that enables this fundamentally different approach is the minimum viable product, or MVP.

We call this startup methodology the Customer Development Process and I previewed this in my earlier article on funding milestones, shown diagrammatically below:       

The first phase of the process is Customer Discovery. This starts with the vision of the founders: a vision of a new product or service that solves a customer’s problems or needs. This vision, however, is just a hypothesis to begin with - a set of assumptions about the business opportunity that must quickly be converted into facts.

The MVP is the critical enabler in this process. However, the approach to creating the MVP and then engaging with customers is often counterintuitive to founders, especially those with a corporate background.

In the words of Steve Blank, the creator of the Customer Development Process;

“All the rules about new-product management in large companies are turned upside down. It’s instructive to enumerate all things you are not going to do:

• understand the needs and wants of all customers
• make a list of all the features customers want before they buy your product
• hand Product Development a features list of the sum of all customer requests
• hand Product Development a detailed marketing-requirements document (MRD)
• run focus groups and test customers’ reactions to your product to see if they will buy

What you are going to do is develop your product for the few, not the many. Moreover, you’re going to start building your product even before you know whether you have any customers for it.”

The MVP is the first version of the product to embody the core features. It is not designed to satisfy the mainstream customer. Instead it’s aimed at selected early adopter customers who’ve already bought into the startup’s vision.

The objective is to obtain feedback from these customers who want to be ‘first’. They are desperate to alleviate their pain, or gain a significant competitive edge (the Problem). They will be happy to take a leap of faith and even pay for what is essentially an unfinished product.

Ideal early adopters are ready to admit that they have a problem. They will be preoccupied by it and will have almost certainly been trying, unsuccessfully, to find a solution. They will be willing to spend money to solve the problem and will see the MVP as the potential saviour.

In the Customer Discovery Process the ultimate objective is to verify that you have a clear Problem/Solution fit. If you can’t get early adopter engagement on your MVP then you must quickly figure how wide of the mark you are. If you’re close, then iterate to a fit. If you’re way out, then it’s time to pivot and rework the solution.

A word of caution here. Some startups struggle to cement early engagement not because they have the wrong MVP but because they are talking to the wrong people at the customer. This is particularly the case in large enterprise sales. Here, the job of the startup CEO or founder is to identify the right point of contact and establish an active dialogue. This critical role cannot be delegated to others.

The reasons are simple.

First, the primary relationship must be with the person who is trying to resolve the business pain. The person who ultimately ‘owns’ the problem. This will likely be a senior executive who will also control a budget to fix problems. As CEO your position will give you the best chance of getting their attention.

Second, the future of your business rests on getting this relationship right. Remember, this is a highly targeted effort reaching out to a select group of prospective early adopters. They are highly representative of your target market and you need to hear their feedback first-hand. No Chinese whispers.

Third, you will want to know quickly if you have found common ground (potential Problem/Solution fit) and if it’s worth both companies investing the time to fully validate this position. Only the startup CEO can make that call and this nearly always involves some degree of negotiation. Here you need to be bold.

There can be huge payoffs if the relationship is set up correctly from the beginning at senior level. I’ve worked with several companies over the past 10 years that have managed to quickly prove strong Problem/Solution fit then secure very favourable commercial terms right at this early stage.

In one case a founder of a deep tech business convinced an early adopter to pay a multi $M up-front fee that funded the businesses to profitability. A few years later the company was acquired for over $300M on $20M revenues - without ever raising equity finance.

The euphoria of closing in on Problem/Solution fit can sometimes cloud the vision. Don't fall into the trap of allowing early adopters to push feature requests for enhancements back at you without some form of commitment. This can become a huge time and cash sink, so it has to be leading somewhere meaningful.

Worse, if you are using your MVP to generally tout for business across your target market, you can quickly get into trouble.

Again, referring to large enterprise sales, this is the strategy employed by the established company. They can afford to fan out early versions to a broad user base under cover of a fully staffed support organisation. Don’t try and emulate this approach!

Instead you must use the MVP in a highly targeted fashion to a select few early adopters. As a result of their feedback, the goal is to ensure you fully understand their specific Problem.

In particular, study the primary use cases and maintain a very active dialogue with these users. If possible, do this face to face. Gradually bring more early adopters into the funnel as your confidence in the wider applicability grows.

You approach will obviously vary depending on your customer engagement model. If you have a Physical product being sold through a Physical channel this will be very different to a Virtual product (e.g. an online service) being sold through a Virtual channel (the internet). In the virtual model you won’t be relying on individual relationships so much but will make up for this with lots of early user data to make necessary adjustments.

Only after you have a reasonable cohort of paying early adopters that love the core features should you begin to enhance.

Will you then be ready to press the button to scale up? Not yet! You must first ensure you have completed the critical Customer Validation step.

Here you will accumulate the evidence that you have a business that can truly scale. You will be testing your go to market strategy and validating the entire business model. I will dig into the Customer Validation step more fully in a subsequent article.

With this clear evidence in hand you will have graduated from Problem/Solution fit to Product/Market fit and be ready for scale up funding. The MVP will have been your key enabler through this entire process.

Whatever you do don't be tempted to short circuit this validation step. A company came to me recently very concerned that on the back of £1M+ revenues they could not get any Series A investor interest. Looking at their proposition it became clear that even though they had growing revenues from a pretty cool initial product, they were still some way from business model validation. Not all revenues are equal.

In summary, startups must employ a Customer Development model rather than a traditional Product Development model. The MVP is the key tool in facilitating the transition from Vision through Problem/Solution fit to Product/Market fit by leveraging targeted early adopter engagement. This is how startups win the product development race.

About the author: John Hall is CEO and co-founder of Duet Partners. His 30-year tech career began with major US semiconductor and software companies, and was based in Silicon Valley during the '90's. Before Duet he was CEO of a VC-backed consumer electronics company, sold in 2009 following several rounds of capital raising. In the past 10 years since starting Duet he has advised dozens of founders on the startup to scaleup journey and is a retained Board advisor to a number of UK technology companies.