Know your customer

In the last few days, I have come across two articles on Medium written by startup founders that reminded me about what I see startups struggle with or not giving enough importance to: Know your customer – or in short: “KYC”

I don’t mean KYC in the sense of banks and other financial institutions verifying someone’s identity in order to protect themselves from fraud and to comply with government regulations. In a startup context, this is about deeply understanding who your (paying and non-paying) customers are:

  • What are their problems and needs?
  • Which existing solutions are they using at the moment to address these problems and needs (work-arounds, competitors, do nothing)?
  • How much budget do they have available to spend without having to get their Manager’s sign-off? And when are they typically allocating and spending that budget (important for B2B)
  • What decision-making power do they have in the buying cycle (important for B2B)?

Gaining first-hand insights about your customers and their behaviours that are based on concrete evidence from interviews and experiments is called Customer Discovery which is part of Customer Development, a process developed by Steve Blank. Customer Development will help you discover a solution that actually delivers value to your customers.

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Back to the two articles. In the first article, the founder shares her learnings from building relationships with their investors and also provides actual feedback from said investors on her pitch deck used to secure their $10M series A round. What struck me here is that the founder openly admits that “[she] did not spend enough time finding out who the typical buyer of [their product] is.

Now, you could argue that why bother with finding out who buys your product when you have $10M in the bank? However, don’t misread getting such an amount of capital (or any amount for that matter) as validation of your business model because investors can’t decide whether a business becomes a success or not – at series A stage, they give you their LPs’ money because they believe that you will figure out how to make this business profitable – it is your customers who will decide your fate. IF your solution solves their problem(s) or fulfils their need(s) better than any other solution at the time, chances are they will gladly give you money or their attention in exchange which you can then monetise, e.g. through selling advertising.

The second article is from a startup tackling transit maps for big cities (think maps for public transport like subways, busses, trams etc.). It is going head-to-head with Google’s and Apple’s current native map solutions. The article’s objective is to entice readers to try out their solution by providing examples of how their “personalised transit maps” are better than the ones from Google and Apple. And, from the screen shots shared in the article (and the praise received in the post’s comments), it looks like they are winning because the startup’s maps appear visually and technically superior to the incumbents’ solutions – all thanks to the clever algorithm that their star developer created. However, just because something looks better and allows you to personalise it in every which way, it does not mean that your are going to become a profitable business.

The biggest concern I have though is the why the founders embarked on this new venture (bold emphasis is mine):

Why we did it – Transit maps are hard. Really hard. Even for Apple and Google. Piecing a transit map together, city by city, agency by agency, stop by stop, without it turning into a hairy mess is INCREDIBLY difficult. So far, no one (not even Apple or Google) have been able to create a transit map that is both automatically generated and well designed. […] We wanted the prettiness of Apple’s slow solution, but the scalability of Google’s automatic process. In short, we wanted algorithms to draw beautiful transit maps.”

In fairness, I don’t have any insights into the customer development work the startup may have done to validate the need for a beautiful and faster mapping solution. Maybe they did but just did not bother sharing these in the same article (I am going to ask them). The risks that the startup is running is that they may be able to create the most beautiful maps faster than anyone else (today), however, just because they can, does not mean that it will make them money. The question is not “can a more beautiful and faster transit map be build?”, it is “should a more beautiful and faster transit map be build in the first place?”. Are there strong signals that anyone is actually going to pay for this solution? Do you have sufficient evidence that this market is large enough to become a profitable business?

Side note: CB Insights published their analysis from 101 startup failure post-mortems in “The Top 20 Reasons Startups Fail“. The #1 reason (42% of responses) why founders thought they failed was “Building a solution looking for a problem, i.e., not targeting a ‘market need’ ”.

In summary:

  • Do your homework, i.e. Customer Development. Figure out who your customers (paying or no-paying) are and what they need to accomplish.
  • To increase the chances of becoming a profitable business, your product must address a need or problem for a large enough group of people willing to pay for your solution with their money or attention. You also must be able to repeatedly sign up new customers to make up for churn and to grow.
  • Bonus: Don’t bank on getting money from investors to buy you time to validate your customer segments (or business model). Customer Development does require time but it is time well invested. By the way, it is never too late to learn about your customers, whether you are at idea-stage or Series A or later. Start today!

If you want to learn how to do Customer Development as part of your business model validation, I’d recommend two practical books from seasoned entrepreneurs:

  1. Running Lean” by Ash Maurya
  2. Lean B2B” by Etienne Garbugli

Or you can get in touch with me, of course, and I can show you how. :o)

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