The long lost formula for start-up success. No, really

This is a guest post by Nigel Eccles, co-founder and CEO of Hubdub Ltd, the company behind Hubdub, the news prediction game, and Fanduel, the daily draft fantasy sports game. Over his last three start-ups he admits he has made every mistake outlined below. Throughout the summer TechCrunch Europe is running guest posts written by people on the tech scene in Europe. If you’d like to contribute get in touch.

You know the story. A group of friends come up with an amazing product idea, lock themselves away, code like demons, eat pizza, drink coffee and several months later come out with a prototype. The prototype is good enough to convince some investors, they raise money, build the full product, launch it, users love it, product gets traction, acquirers circle and then founders exit to a large pay-off. They then give media interviews which gets summarised into something that sounds like the above story.

What is wrong with this picture? Well, for a start it is not an accurate summary of any of the start-ups I’ve either been part of or observed over the past 10 years. The main problem is that it puts success down to the quality of the original idea and completely glosses over the most important factor: achieving a product that customers want enough to pay for. And even though most entrepreneurs know from bitter experience that the above story happens only very rarely (if at all), it retains a grip on how we think about growing our businesses.

Six months ago we decided to launch a premium prediction game. Our market analysis showed that the biggest opportunity was US fantasy sports. The only problem was our fantasy sports knowledge was limited and we were 3,000 miles from our target customers. So, instead of trusting ourselves to build something we thought users wanted, we looked for a way to build something we could be sure they wanted.

In doing so we discovered Customer Development, a product development methodology formulated by veteran entrepreneur Steve Blank.

Based on the premise that start-ups tend to fail through lack of customers rather than lack of technology or product features, customer development is a systematic way of identifying who the customer is, what it is they need and whether that need is sufficient to build a business on. One of my co-founders describes it as ‘an algorithm for building products users want and are willing to pay for’.

The first phase of the process is customer discovery, which is identifying who the people are with the problem. This is harder than it sounds as they must not only have the problem, they must realize they have a problem and be willing to invest time and money in a solution to that problem. These are your early adopters. They are willing to overlook shortcomings in your product and believe that you will make it better with time.

In the consumer space we used surveys and customer interviews to see if our target users identify with our hypotheses. If your initial interviewees don’t identify with the problem then you either have identified an issue people don’t care about enough or you are speaking to the wrong group of people. You need to continue to iterate problem hypotheses and customer groups to get to a problem that a particular set of potential customers identify strongly with. In our interviews we found that fantasy sports players were passionate about fantasy sports but many felt the season long commitment was too demanding and also early season injuries could end the game far too early.

In testing hypotheses we found the best method was to drive interviewees to an online questionnaire using Facebook and Google ads. The pay-off for the user was to help us make a product they would love and be entered into a prize draw. We then telephone interviewed a sample of the respondents. In building your survey it is key to making sure each question proves or disproves a hypothesis about the problem or the potential customer. Be very careful of leading questions (like one I received from a fellow entrepreneur which asked “If all my friends were on [niche social network] would I want to be on it as well?”). Finally, friends don’t count as respondents. By some quirk in the human psyche we would rather see our friends waste their time and money, rather than to tell them the truth!

Lastly, you need to identify with the interviewees what is the minimum feature set that they would require to use the product. To identify this, show a very basic mock-up to the interviewees and go through each feature to find out which ones they feel the product must have. For example, with Fanduel, we thought player images would be important but most potential users didn’t care. Live scoring however was vital.

At the end of the customer discovery process you should have a set of externally verified hypotheses, a target customer group and the minimum feature set. This is a checkpoint and you only pass on to the next stage if you have a defined customer group that said they would use the product with the defined feature set and it is within your capability to develop that feature set. Note that customer interviews and surveys don’t prove there is demand (interviewees are generally over-optimistic particularly on their willingness to pay) but they can disprove it, saving you from building something that no one wants.

The second phase is customer validation. Here you push out the first version of the product and attempt to gain paying customers. It is fine to offer free trials or discounts but it is vital in this stage you get to payment otherwise the customer has never had to decide whether product is valuable to them. For apps that are supported by advertising, your customer is the person who hands over the cash. That is the advertiser, so the criteria still holds.

Once you have got a statistically significant user base (which will vary by product) the next step is to survey them to see what they think. Sean Ellis and KISS Metrics put together a fantastic survey for start-ups which is free to use. The crucial question in the survey is “How would you feel if you could no longer use [product]?” Sean has benchmarked the results of that survey and found that if less than 40% of respondents say “Very disappointed” then your product doesn’t yet have sufficient traction to scale. Until you hit 40% you need to focus on the product proposition, targeting and quality.

Once you have achieved sufficient traction with your customers then you need to focus on optimizing your customer acquisition funnels and build out your business plan. Only once you have completed that should you consider spending serious money on marketing and customer acquisition.

The above process may sound quite linear but in fact it is highly iterative. Your vision, target customers, perceived benefits and product are all likely to change a number of times as you go through it. One of the biggest challenges of the process is trying to sell a vision to investors, customers and employees at the same time as constantly challenging and adjusting it in response to customer feedback.

Customer Development certainly lacks the drama of the overnight pizza to Porsche success story, and doing it properly takes time. However, in return you maximise your chance of finding customers who will give you their money before you run out of yours.

Further reading

Steve Blank has written up Customer Development in a book called The Four Steps to the Epiphany. I would recommend it to all entrepreneurs. It is exceptionally insightful however it is a tough read (even the author described it as ‘turgid’) and it tends to focus more on enterprise software. Jon Bischke has put together a comprehensive list of customer development resources. Also, Sean Ellis writes an excellent blog on customer development which is well worth reading.