Does Customer Development Really Matter For Startups?

I was chatting with someone the other day about customer development and I asked a simple question. Now that customer development has become so common among venture backed tech startups, has it moved the needle at all on outcomes? I don’t have any hard data but, it seems to me that just as many startups fail now as did before. And, anecdotally, in my own angel investing (74 companies) it seems that the more obsessed a founder is with customer development, the less likely they are to build a big successful company.

I want to explore a hypothesis today, one that some of you will hate, but will make others of you nod your head and agree. I hypothesize that customer development hasn’t really worked out all that well, and has led to many small outcomes and companies that won’t die, and thus doesn’t fit the venture model. This, in turn, has led to the worship of the visionary entrepreneur and is why we sometimes get bad situations like WeWork was a few weeks ago.

When people say “customer development” they mean a few different things. I mean the more formal version of it as laid out in Steve Blank’s book Four Steps To Epiphany. I think Steve was actually on to something, but like most ideas, it was summarized and bastardized until it became generic and mostly wrong.

The problem is, talking to customers has some value, but it’s not a panacea. Customers often don’t know what they want, or they want a problem solved in a way that is stupid, wrong, not scalable, or not repeatable. Listening too much to customers often gets you stuck in a rut where you do a bunch of services work. Or more often, it gets you stuck in a local minimum with a handful of customers that have your specific problem and desire your specific solution.

Blank’s book actually gets you out of this – he has 4 major steps, and one of them is “customer creation” but, it seems like 95% of what is written about customer development is just about making sure you talk to customers before you build anything.

Here is my hypothesis.

  1. Customer development was bastardized from a really nice smart process into “interview customers before you build anything.”
  2. As entrepreneurship became “cool” circa 2011 or so, and everyone wanted to start a company, there were too many interviews with people who wanted niche solutions, but these interviews (if a few people agreed) were proof that it should be built.
  3. People without vision started using metrics and “data” to iterate their way to success via customer feedback.
  4. But it never worked and didn’t move the needle on outcomes overall. All we got was a bunch of walking dead startups that were really lifestyle businesses.
  5. Smart investors realized this tired of it and thus and started being drawn to big visions and the entrepreneurs who swung for the fences. (For the record, I personally think it’s better to swing big and miss than to swing small.)

What should have happened, and what I think Blank intended, is that companies that found product-market fit but then realized they:

a) couldn’t reach customers cost effectively

b) were in market with a small TAM

c) couldn’t find a scalable repeatable business model

These companies would re-trench and start with a new product for their market. But that didn’t happen. They adopted the YC “don’t die” philosophy and, well, now you have a bazillion 3 person companies clinging on for life support. And you have a bunch of VCs who grew up in the customer development age and think that a lean company clinging on for life support is what they should be looking for.

All I know is that, in my own experience running companies and investing in them, sometimes they just pop. It’s often hard to explain why. The timing matters, and the it’s a function of all the pieces lining up at the right time. But when they do, you know it. Until they do, you just keep trying stuff. I don’t think it’s a good idea to just stay small because it doesn’t fit the venture model, and if you want to raise venture, you have an obligation to try to go big. (Note, there are many paths other than venture, and those are all good too, but, if you take VC, it’s about going big).

I’d love to see some numbers if they exist, but, my guess is the customer development wave hasn’t improved returns for VCs or success rates of startups. It’s hard, and the factors for success are complex. But feel free to tell me in the comments why I’m wrong.

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