Is Your Startup Focused on Discovery and Learning?

We love the concept of disruption.   Habits are altered, patterns are modified, the world is changed.  As a Wall St. analyst, we heard this claim from a company every single day.  Unfortunately, as is the case with many buzzwords, the claim that a company has developed a “disruptive” technology, or solution, is frequently……..bogus.  Moreover, everyone that reads the business plan knows it’s bogus.

Sorry, folks.  No need for a crowd of prospective investors here.  If a company truly has a new disruptive and revolutionary idea, then there won’t be any marketing data to support that market opportunity, and few people will understand the opportunity.  Yet, you’d be surprised how many of these plans contained detailed market data from well known market research organizations illustrating the size of their prospective market.  If a market doesn’t exist, how can it be analyzed to show an angel investor or a VC investor that an opportunity exists?

The short answer is that it’s very hard.  The longer answer is that you do need to have customers to prove your thesis that a market opportunity exists.

It is often said that no business plan survives the first interaction with a customer.   Therefore, if you truly developed a product or service that is unique, how to you execute on a plan without any market data?

Having existing customers helps a lot.  Of course, having a few customers doesn’t prove that a much larger market exists, and many more customers are waiting to find you.

The answer is that your startup needs to operate as an organization focused on discovery and learning, rather than focused on the execution of a business plan.  The currently fashionable method to operate a startup company is known as “lean startup” – as defined and promoted by its chief evangelist, Eric Ries.

According to this method, a startup needs to develop a minimum viable product as quickly as possible, release it, try to add paying customers, all the while changing the feature set of that product/service until that feature set intersects with the largest number of customers.  This startup will implement a lot of features over a short period of time, and execute numerous of A/B tests in order to find out how the customers respond to each individual feature.  The result is that this startup is measuring market needs by watching and responding to what customers do, not simply responding to what customers are saying.

A local well-known and well-funded startup is following the lean startup methodology.   It is running numerous daily A/B tests, introducing a many new features, and yet, its Support Board is full of comments such as “Please cancel my registration.”  In fact, some people are so angry that they want their registration purged from the startup’s database so that they don’t get its weekly reminders to try its service.

Question: Is this local startup listening to its customers and responding to what they do versus responding to what they say?  Is this startup operating as a startup focused on discovery and learning?

In the last 4 months, we have seen four major revisions of this startup’s user interface.  Significant features that users request are still in the planning stage.  Another feature is being rolled out so slowly, and is so deeply hidden inside the UI that it might as well continue to be in the planning stage.

We read a laudatory article about this startup on a blog that apparently received wide circulation.  As a result, this startup received interest from people located in cities far away from Austin.  Unfortunately, a funny thing happened on the way to the subscriber store.  Those far away users wanted the same feature as the local users.  They didn’t ask for a fancy slick UI – even though that fancy slick UI probably got them to look around the site.

Either this startup is responding to what customers are doing, or they are responding to what customers are saying.  Alternatively, they are following their own agenda for features and not focused on discovery and learning.  In other words, this startup says that they are following the lean startup methodology, but watching what they do and listening to what they say are two different things.

Several years ago, we visited a well-known but moribund software company with a 4GL product set that was dying a slow death.  After visiting with several senior members of management, we visited with the CEO.  He could see the look of dissatisfaction in our face, and knew a “Sell” recommendation was coming.  Then, as a throw away comment, he said, “You know, we have these two other products that we’ve been testing, and we’ve been gaining a few resellers here and there.  These resellers really like the products, and are gaining some traction with their business customers.  We’re allocating some resources to the products, but we have no idea about the market size, or the opportunity.  At this point, we’re just evaluating the market.”

We liked the product, and we agreed with the CEO that there appeared to be an opportunity to discover and learn.  We wrote up the Company as a “Buy.”  We didn’t have any market data, but we saw some encouraging sales.

The company was Cognos.  The products were Impromptu and Powerplay.

Check out our website: www.outramresearch.com

Advertisements

About Richard Piotrowski, CFA

Richard Piotrowski, CFA, is a formerly a #1 ranked securities analyst, who has 20 years of experience building, dissecting, and fine tuning presentations, business models and valuation models of all kinds. The experience has been gained working in the investment community on both sides of "Wall Street", on "Bay Street" (Canada), as well as on "Main St." as Chief Financial Officer, Chief Operating Officer, as well as Evangelist and Marketing Director, where he focused on building messaging for solution sales opportunities based on value positioning, high ROI and fast payback. Richard joined Canada’s investment banking community in the early 1990s as an analyst following technology companies. He was recognized within two years by the Street, and was ranked "First" for Quality of Research in the survey of institutional investors conducted by an independent advisory firm – Brendon Woods. Richard was also the founding member of the internet technology research practice at two boutique investment banks.
This entry was posted in Angel Investors, Austin, Startups. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s