(See Part 1 - Market Phase Model for context.)
This is the most important phase of your company. Period.
Sure – all phases of your company are important. And sure, you make your money at Market Exploitation so that is clearly important. But if you do Market Exploration right and find the customer, then you have a very good shot at succeeding at everything else. And if you do Market Exploration poorly, you’re probably going to fail (unless you have ample dumb luck).
So, what is “Market Exploration?” Market Exploration is when you find your customer. I don’t mean that generically, like “My target user is CIOs of Fortune 500 companies.” I mean VERY specifically – where you find several real people and you understand their problems in depth. And when you start finding the same problems and same situations over and over, find a product that solves their problems, and you can see that these specific customers are actually part of a larger group of customers, THEN you have found your customer. (As Marc Andreessen writes, product/market fit is the most important thing. But the precursor to product/market fit is finding the customer. It’s my belief that if you are competent and can execute, then if you have found the customer, you can create product/market fit. In Marc’s language, “In a great market -- a market with lots of real potential customers -- the market pulls product out of the startup.” )
Here’s an example. I was fortunate enough to be one of the first employees of Kana Communications back in 1997. When I joined, the company was little more than a very bright founder, a little seed money, a few consultants, a Filemaker prototype, and some Office Depot furniture. Oh yeah – one other thing: the founding entrepreneur had found the customer.
Kana went on to great things. We were lucky enough to be in the right place in the right market at the right time. We did a really good job of hiring capable people and executing. We were a hot Silicon Valley company. And we sold real product for real dollars. (Our ultimate market cap was unreal, but that’s a different story.) But the amazing thing about all that is that much of it was predetermined from the day I joined – and I joined at nearly Day 1 of real company formation. Sure, a more incompetent team could have lost it all. And had we not executed so well we likely would have lost first place in the market to a fast-follower, and there is a HUGE difference between #1 and #2. All that said, the success we ultimately created was largely determined by that first step the founder did mostly on his own – finding the customer.
Here’s a counter example. I was part of a company that was founded by some very smart people. But, quite frankly, they weren’t very good at building a software company. When I joined up we had early sales but no increasing success. In fact, we hadn’t really found the customer. (And without that, we obviously didn’t have product/market fit.) The result? Absolutely predictable – failure.
I’ve seen this time and time again. EVERY company that I’ve seen succeed had found the customer, and from that had created product/market fit. The vast majority of companies I’ve seen fail or struggle have done so because they still hadn’t really found the customer.
So how do you go about finding the customer?
I don’t know.
Seriously. If it were that easy, then entrepreneurship would be easy. There is no general purpose recipe for finding the customer and it’s highly dependent on your particular company. That said, I can give some solid advice:
Finding The Customer Is The Main Goal
It’s not about revenue. It’s not about scale. It’s not even about product/market fit (yet). It’s about finding a customer, understanding their problems, working towards product/market fit, and ensuring that there are many similar customers out there.
This really is an exercise in market exploration. While I’m sure you have many ideas of who your customer is, you don’t know until you’ve proven it. So, come up with a hypothesis, figure out a way to test it, GET OUT THERE, and then quickly figure out if your hypothesis is right, nearly right, or wrong. Then move on to the next one (aka “pivot.”)
For enterprise software companies, here’s a pretty good plan:
- Write down your target market hypothesis.
- Write down a SHORT pitch. The goal is to think through who you think the customer is, what their needs are, how you solve their problems (ie: your value proposition), and your next steps.
- Write down a few assumptions or things you’d like to learn from your conversations. I highly favor qualitative / open ended questions that get the interviewee to talk. You’re too early for a quantifiable survey.
- Build as minimal a website, PDF, and sales deck as you can. Why? When you call or email, they will check your website. Then they’ll say, “send me something via email.” But don’t invest too much time in these, since they will almost certainly change.
- Now get out there and talk to as many of those potential customers as you can. Use your network. Use LinkedIn. Cold email. Cold call. Try PPC ads. Whatever it takes to have a bunch of short conversations. Your goal isn’t to sell (yet). It’s to learn. And if as you learn you start finding customers who resonate to your value proposition, then turn them into prospects and sell to them. Conversations are a good first step, but you don’t know you have a customer until they are willing to back their enthusiasm with money.
- Aside: One really good entrepreneur I know – Tyson Roberts from Lucid Commerce – said he couldn’t even imagine starting a company until he had actually sold his product, before he had even built it. Excellent.
Build Your First References
As you start to hone in to your customer, it’s time to build your first reference customers. This may be only 5 customers if you are an enterprise software company, or 500 if you are a consumer web startup, so while they aren’t material in their scale, you need them. They validate that you have found a customer (since they are giving you money), and they are essential to getting your next customers.
Once you’ve found your customer, built some early references, and are starting to feel good that you’re onto something and have a real market on your hands, it’s time to figure out how to sell to them. It’s time for Market Investigation.
(Next: Part 3 - Market Investigation)
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