Lesson: Customer Understanding with Steve Blank

Step #9 New Market: Customers do not exist today in a new market

There is a new market and here the customers are really unknown. All you have is a vision and a set of hypotheses and what you're hoping is you're going to provide for customers is something transformational, not just incremental improvement but transformational improvement. And the good news and bad news is that there is no competitors in day one. It's pretty lonely. So for this market to exist you're going to have to create it through a force of will and a lot of money, and that's going to require evangelism and education. An example, Groupon. Groupon single-handedly created the Daily Deals market.

Now, the next market type is a new market. Customers don't exist today. The real questions are, if they don't exist, how will they find out about you? And how will they even become aware that they need to be in this new market? And, by the way, how do you know the market size of something that doesn't even exist today? The market size is zero. And what factors should you create that the industry has never offered? Now a way to look at this is to look at the chasm. Man, this is scary. That is, you can sell to the crazy people all you want, the earlyvangelists, the early adopters and that's nice but you'll have a small business until you figure out how we get the masses to adopt.

Here's what that hockey stick sales curve looks like. Here are the early people you're selling to and one of the mistakes that startups and entrepreneurs and founders make is look at that slope of those early sales. And when you get them you go great time to like kick up spending and look at this, our board is happy and when we start doing advertising and staffing up the company, but then it kind of declines and people are scratching their heads going, "What's going on?" What's going on is the mainstream market just hasn't adopted. And this might go on for years and never kick in. But if you're lucky you'll hit a tipping point and market adoption happens, and when it happens, it happens faster than you could imagine. But at times it takes longer to get there than you could imagine.

So in a new market, one of the things you need to be thinking about is that is there any possible way to move this curve in. There's a couple of really interesting things to notice about a new market. One is, this valley of death of almost no sales can continue for years. Now why is this important to know? Well, just imagine you're a startup and you've put together a nice financial forecast for your board and your investors, and they all believe that you are an existing market. So they're expecting you to have revenue that increases every year. Why? Because you've never asked the question, what type of market am I in? Now if you're in a new market you now know that it's quite possible that you might have a curve that doesn't look like this but actually is flat for a long period of time.

So the consequences of understanding a new market are essential for a startup. This was a startup killer for decades. In a new market, there are no customers, so revenues might extend out for years. In fact, if you think about what happened during the dot-com bubble in the beginning of the 21st century, is every startup executed like they were an existing market. They hired sales people, they spend marketing dollars in scales of tens of millions of dollars trying to create end user demand for a market that didn't exist. Just imagine what would have happened if those startups would have parked their capital in a bank getting interest and doing gorilla activities to help start the market because the market wasn't there. There is no way any individual startup can accelerate technology diffusion.

So for a new market to take off, lots of things external to your startup need to happen. Regulation needs to change, platforms need to become cheaper, customer tastes needs to change, etcetera. The dot-com bubble was actually predicated on all these things happening all at once and they didn't. And therefore all that money that got raised got spent trying to acquire customers when there were none. The test for whether you're in a new market is not whether 30 people in your regional cluster or in Silicon Valley or in New York have heard about your technology. The real test is whether your grandmother in Omaha or Berlin or in Uganda actually have heard about the technology or the product or the market. If the market doesn't exist there, you might be spending a lot of money trying to create a market where there is none. Premature spending is the killer for startups.