July 15, 2020

How to Leverage Customer Development for User Insight – with Steve Blank

Episode 167 of The Innovation Engine podcast.

This podcast is part of the Masters of Innovation.

Learn more about this series and join the community.

Steve Blank is widely regarded as the father of modern entrepreneurship. He tapped into the importance of customer development in launching 8 startups over a 20-year period before shifting his focus to writing and teaching entrepreneurship at Stanford, Columbia, UC Berkeley, and NYU. In this interview, Steve shares insights into the relationship between customer development and innovation, a tie that was instrumental in launching the Lean Startup movement and changing the way new products, not to mention new companies, are built.

Listen to the Episode

Viewing the conversation with Steve through the lens of the Product Mindset, these are a few key takeaways you can use to ensure you’re delivering the right products and experiences to your customers:

Don’t Assume You’re Right — Go Out and Validate Your Hypotheses

  • Many are drawn to the allure of technology, so they wind up thinking about building a product first so they can share it with their customers. This is the reverse of what they should do.
  • What they should do instead is build products only after they have observed customers in their own environments, talked with customers about how a solution could potentially help solve their problems, and gained a deep understanding of the customers’ most pressing wants, needs, and problems to be solved.
  • “Everything you think on day one, even if you’re a domain expert,” Steve says, “is a series of untested hypotheses. And that’s just a fancy word for, you’re just effing guessing.”
  • The famous Henry Ford quote (which there’s no evidence he actually said) about people wanting a faster horse instead of cars represents a fundamental misunderstanding of customer discovery in existing markets vs. customer discovery in new markets. In both cases, it’s still imperative to learn as much as possible about your customers.

Understanding Customers (and Managing Change) is Everyone’s Job

  • It’s not enough for leaders to insist that their teams get outside the building and talk to customers. It has to be something that leaders themselves are also invested in doing. “If you can’t get the leaders outside to hear that data firsthand…then you’re on a sinking ship,” Steve says.
  • Founders and those workers who excel in entrepreneurial environments where a premium is placed on innovation are often hard-wired for change. Most people want certainty and routine, whereas founders and innovators are much more likely to say, “Yeah, it’s chaotic. What a nice, normal day.”

Establishing Value Early On

  • One of the fastest ways to ensure you’re building products people actually want and will use is signing “conditional POs,” or purchase orders that say someone will cut a check if you show up with a product that meets 100% of features discussed. Blank says he signed conditional POs to the tune of millions of dollars.
  • Beyond validating real need, this practice can also separate the 90% of prospective customers who will never buy your product from the 10% of future customers who will.


About The Innovation Engine

Since 2014, 3Pillar has published The Innovation Engine, a podcast that sees a wide range of innovation experts come on to discuss topics that include technology, leadership, and company culture. You can download and subscribe to The Innovation Engine on Apple Podcasts. You can also tune in via the podcast’s home on Spotify to listen online, via Android or iOS, or on any device supporting a mobile browser.


Intro: [00:00:00] We’re sitting down with the innovators, middle managers to the CEOs, who are on the frontlines of digital transformation to see how they did it and what they learned.

Intro: [00:00:08] That’s the important thing with change, is that whether you’re making change or adjusting to change, it’s really about focusing on the people.

Intro: [00:00:16] So join us as we uncover gritty perspectives on turnaround jobs, prioritization, road mapping, user behavior insights, and scaling organizations.

Jessica Hall: [00:00:29] Our guest today is Steve Blank. We’re really excited to have him. He is the father of modern entrepreneurship.

Scott Varho: [00:00:37] And we’ll be looking at customer development in existing versus new markets, how those journeys are different and the potential dangers of data and user behavior insight.

Jessica Hall: [00:00:46] And also, hearing some fun stories from Silicon Valley along the way. Let’s get into it. Our guest today is entrepreneur turned educator Steve Blank. He’s the intellectual force behind the lean startup and customer development. And we’re so happy to have you with us today.

Steve Blank: [00:01:07] Thanks for having me. This is gonna be fun.

Jessica Hall: [00:01:10] Yeah. I’ll try not to be too nerdy, but the theme that we’re really on now is about understanding customer behavior and understanding our customers and you came up with this idea of getting out of the building. I’m kind of curious of where that came from and how you’ve started to see people apply that notion of getting out of the building and learning more about their customers.

Steve Blank: [00:01:38] Yeah. So, getting out of the building came from my experience as a serial entrepreneur. I did eight startups in 20 years. And when I retired, I got to think about not only the companies I did, but the ones, by then, I’m sitting on the boards of public and private companies. And I noticed a pattern that startups that did what their investors told them to do, which was simply write a business plan, get funding, and then go execute, tended to fail more than the people who threw that rule book out, and got out and talked to customers early and often. And I found that true in my cases as well.

Steve Blank: [00:02:16] In fact, I just remember being thrown out of my building by a smart CEO who said, “You don’t know what the heck you’re talking about. You’re an embarrassment to the title of VP of Marketing. Get the heck out and get me some firsthand data.” And that stuck with me through the rest of my career. And then, when I retired, I realized it wasn’t just only a Steve problem or a companies I’ve been in problem, it was that we didn’t have a set of heuristics that were different than how we were managing project management in large corporations. And the first big idea was understanding that large companies, at their core, execute known business models.

Steve Blank: [00:02:55] That is, by the time you’re large, you’ve figured out who your customers, and competitors, and pricing, and regulatory environment and whatever are. And so, therefore, most of the processes and procedures — OKRs, KPIs — are already in place in a large company for repeatable execution. We thought we were doing that, and actually, in the early days, we’re doing something radically different. We were searching for a business model. We had a series of untested hypotheses, but we didn’t have any tools to build a framework around it. And so, to answer your question, customer development, which became a key part of lean, was the beginning of that new management stack for how do you search for a business model?

Scott Varho: [00:03:32] Yeah. And I’m curious what your observations are since introducing that concept, which is now, it’s woven into the fabric of innovation with or without the proper meaning behind it. And certainly, in the lexicon, how have you seen that develop since then? Since you introduced that concept and insight?

Steve Blank: [00:03:50] Well, I just find it, I’m both amused and bemused and a little stunned that, holy cow, I was probably more right than wrong. The first thing was when Eric Ries became the first practitioner of this, he recognized that paired with customer development was a 21st century methodology that made equal sense, called agile development. We used to build products that, in fact, still there are some people under rocks still building products with waterfall engineering, which says, you basically have a vision, or spec, or customer input, and therefore, here are all the features we’re going to build.

Steve Blank: [00:04:29] You hand it to engineering who goes into a serialized process of maybe alpha test, beta test, first customer ship, but you don’t get serious customer feedback until you actually ship something a year later, and then customers see that and say, “Nah, don’t want it, didn’t need it, too late, or I only like features three, nine, and 12.” But agile allows you to build something iteratively, and incrementally, and get feedback, whether it’s on the product or a different part of—remember, agile is not only about what’s called minimum viable products.

Steve Blank: [00:05:00] And outcomes of agile are not only about product market fit, but also, about different parts of the business model. We could easily test pricing, or we could test what the right channel is, or we could test cost or supply chain. First thing we test is what’s called product market fit, the fit between the customers and the product. And then, the third piece was finding Alexander Osterwalder’s business model canvas, which was this simple visual diagram of what are the nine things that actually make up a company.

Steve Blank: [00:05:29] It’s not just about the product, which I always used to think about being a techie. It’s actually about the customers first, and then it’s about the fit between the customers and the product, then it’s about the channel, and how do you get to keep and grow them, and what’s the revenue strategy versus pricing tactics, and then all the other pieces. And so, those three components, business model canvas, customer development, and agile engineering became that first management for startups that we call the lean startup. So, what was your question? I don’t know if I remember what you asked, Scott.

Scott Varho: [00:06:07] I did want to poke into the definition because you mentioned customer development a few times. Just for those of our audience who aren’t familiar with that term, what do you mean by customer development? Are you developing the customer?

Steve Blank: [00:06:19] Yeah, customer development is like a stupidly simple insight, but it is really, if you think about it, is that there’s no facts inside your building, so get the hell outside, that you might be—and in fact, let’s agree, you’re the smartest person in your conference room and possibly your building. But unless you’re going to be buying every one of your products you ship, you’re not the customer. So, the odds of you being smarter than the collective intelligence of your potential customers is pretty close to zero.

Steve Blank: [00:06:47] And so, what could you learn? Well, first of all, you need to understand that everything you think on day one, even if you’re a domain expert, is a series of untested hypotheses. And that’s just a fancy word for you’re just effing guessing. And let’s just assume, humor me, that says, yeah, yeah, you’re probably right, but humor me, and go out and talk to ten people. And before you run out and show them the product, implicitly, in anything you’re building, whether you’re in a large company or a startup, implicitly, you think you’re solving a problem or a need.

Steve Blank: [00:07:19] To dig out that, you just go out and talk to people about your products, kind of humor me and first validate the problem that you think people want solved or that the need they want to have fulfilled. All people desperately need widget X and Y or maybe their existing customers. And you go, oh, this new version, we’re sure they’re going to love these three UI improvements or pay for this upgrade. Great. Why don’t we just test that assumption first?

Steve Blank: [00:07:46] And, well, no, I want to show them the product. No. Let’s make sure we understand that what you had in your head about the problem you’re solving. Okay, I did that. Now, can I test and show them the product? No. Why don’t we talk about how do they solve that problem today? And do they care about solving it? Where? If you’re selling B2B. Oh, yeah, it’s a problem. Well, did you ask, is it a problem, in the top three things they pay for? Or is it a problem forty-two? That like—oh, I didn’t ask.

Steve Blank: [00:08:19] So, having conversation, first problem, then validate the class of solution. Is it something they pay for? Are they putting it together by piece parts today that’s better to solve or will this be a substitute for something else? So, therefore, it’s a displacement sale rather than a new sale or whatever. Then, you get to go out and start testing product features. But kind of extracting those implicit assumptions that never get asked about new product creation, I think, is just a big missing step.

Steve Blank: [00:08:54] And so, customer development is kind of a four-step process. One is let’s do customer discovery, problem, solution, product. And then, let’s stop talking about it and do customer validation, which is get me a damn order, or an email address, or some downloads, or something that says, yeah, yeah, yeah, wait, wait, talk, talk, talk, but I want to see some early evidence, early, that people not kind of are giving you nice words, but will simply open their wallet and pay for it.

Steve Blank: [00:09:25] And, oh, I can’t do that in B2B product unless I actually ship. I used to get conditional POs for four million bucks. Well, what’s a conditional PO? Well, a conditional PO is after multiple conversations with the decision makers. Oh, we love it. Yeah. The day you show up, we’ll buy it. I’ll tell you what, if you’re so convinced we’ve had great conversations, I want a purchase order now. Steve, I can’t give you a purchase order, all you got are slides.

Steve Blank: [00:09:52] No, no, no, why don’t we do a conditional purchase order that says I’m going to show up with 100% of the features we just described, and if I do, you owe me four million dollars? And then, of course, 90% of the time, that kind of blows down a million other objections that never get—oh, well, I forgot to tell you, the CIO needs to be in the approval chain. And then, really, at that price, the board needs to get involved, and all of a sudden, and 10% of the time, you’re going to get, okay.

Steve Blank: [00:10:19] And then, now, you’ve got to go back to engineering and say, “Hey, guys, can we really deliver this?” And hopefully, they’ve been part of this conversation. Does that make sense? So, validation could either happen on a very B2C scale, is giving your e-mail address or put $10 down or even a Kickstarter’s kind of validation, a validation trap, actually, because you can’t back out of those commitments. Almost everything else, you can. Did I answer your question?

Jessica Hall: [00:10:50] You did. I think one of the things that people don’t necessarily understand when they go to talk to customers is they say, well, I’m not supposed to ask them what they want or they tell me what they want. And I think one of the two things that you talked about that I think people kind of miss sometimes is, one, you have to understand the problem. And two is that that problem is painful enough that I’m willing to spend money or spend something, spend my time, spend my social capital. And so, I think there’s that key thing in lean startup that people forget is that exchange of currency.

Steve Blank: [00:11:26] Right. That’s a great point. And a couple other things, Jessica. One is, it depends whether in an existing market or a new market when you do customer discovery. In an existing market is you go out and try to understand problem and solution. The thing I like to get customers tell me is, well, what market are we talking about? Oh, this is the social media market or markets. Then, in fact, you’re in an existing business. That is, if your customer is going to actually tell you.

Steve Blank: [00:11:57] And why that’s important, is in an existing market, as you do more discovery, they’ll actually teach you what the basis of competition is. They’ll say, no, no, no, we don’t care about performance, but if it came in purple, we’d pay 20% more. And you go, really? It’s about color or about size? All of a sudden, they know this segment as well as you do because they’re a user and they will teach you what’s important about pricing, whatever. But there’s other markets that you’re creating.

Steve Blank: [00:12:25] There are new markets, where, in fact, it was the iPhone before the iPhone. It was, pick something that never existed before. You could say, in an existing market, well, would you pay more money for 30% more performance and you could have an interesting conversation. Imagine that in a new market, say, would you pay 30% more for performance? And they go, what are you even talking about? So, you need to understand whether you’re doing discovery in an existing business. This is that trap that people say, Henry Ford would have asked if he even-

Jessica Hall: [00:13:01] I was going to ask you if you’ve ever been Henry Forded.

Steve Blank: [00:13:05] Yeah. But that’s misunderstanding customer discovery in an existing market versus customer discovery in a new market. The discovery is important. It’s just, different questions are being asked. In an existing market, I keep going back to, you could ask customers what they want and need. Of course, you can. They’ll teach you. In a new market, your job is, actually, you’re trying to predict the future. And yes, you could think you could do that in a Zen lotus position in a dimly lit room with lightning bolts coming out of your head, but you’re better off getting informed and deeply understanding what’s the key in the life of the customer today.

Steve Blank: [00:13:44] Because you’ve been out there, you now can see how they work — f it’s B2B, what the organization is, what the other infrastructure is. And then, envisioning not only what the day in the life would look like when they start using your product, but what’s the ROI?

Steve Blank: [00:13:58] What are the returns? What other ancillary products or services need to happen about their infrastructure or any cultural changes? How do I accelerate this classic hockey stick adoption? How much capital do I need, which is very different than capital in an existing market? And so, customer development changes not the intent, but the tactics changes radically. And the first test is, do people even know what the hell you’re talking about? And if the answer is no then you might want to think that you’re either inarticulate if you thought you’re in an existing market or either you’re creating something new, and therefore, it’s a whole different ball game. Does that help?

Jessica Hall: [00:14:41] It does. So, I was actually going to ask you, because I call it getting Henry Forded.

Steve Blank: [00:14:45] That’s a great phrase.

Jessica Hall: [00:14:47] Which happens — you’re in a conversation talking about, “We need to do some customer discovery.” And they said, “Well, Henry Ford said, ‘If I asked them what they wanted, they would have said a faster horse.’” A, no evidence to suggest Henry Ford actually said this, but they might have said something like, I’m trying to get from place to place, this is unreliable, smelly, and might kill me because it’s cranky. And so, maybe there’s an opportunity for an alternative way to get around.

Steve Blank: [00:15:14] Right, or I can now live outside of the city and still come into the city, not in three hours, but in 20 minutes, right? All kinds of things change. Yeah. And that’s the difference versus, “Gee, how many legs would you like for this new horse?” Right? Because I understand the horse market, or in the military, what’s the difference between the cavalry and tank warfare? Right? That wasn’t faster horses. That was like you show up, you do a cavalry charge against tanks, you were dead. But that required different vision and different implementation. So, I hope that answered the question.

Scott Varho: [00:15:55] Yeah. That’s a fantastic insight because it is fundamentally a different exploration of the client or the potential customer when you’re working in new spaces. I’m curious, this is a little bit of a pivot, and a slightly different direction, but all the product companies that I’ve been at have amassed an amazing amount of user behavior data.

Steve Blank: [00:16:16] But no insight.

Scott Varho: [00:16:16] With no insight. Right. Like I have constantly been astounded at how much data I am collecting, every click, videos of every user session. I mean, I have had access to amazing amounts of user behavior data, but no real insights around those users. And even worse, no insights around how they’re currently using my products, but also, no insights around how they might use a different product or no way to predict behavior. I’m curious if you’ve observed anyone who’s doing that really well in terms of being able to combine that rich analytics that every company is building up these days into an insight in an actionable way. I’m curious if you’ve seen that.

Steve Blank: [00:16:59] Yeah, and I’m going to be a little heretical. I don’t think this is a failure of tools, I think it’s a failure of leadership. If you’re looking for insights, you don’t outsource it. It’s a big idea, like trying to outsource customer discovery and trying to outsource lean. Oh, yeah. Oh, I get lean. I’ll send my employees to do that. Let me go back to the lean thing, and then I’ll draw its analogy for insight.

Steve Blank: [00:17:23] If you’re in a startup or running a new project trying to do lean methodology, if you’re the leader and you’re not the one out of the building, you might as well forget what you’re—it’s not worth it because not gathering the data, it’s the ability to listen to the data on the spot and be able to have the authority to say, “Well huh, funny you said X, given what you said, what if we reconfigure the product that looked like this?” No employee could do that. It’s a big idea.

Steve Blank: [00:17:56] Customer discovery is not a giant focus group. Big idea for lean. It requires the authority to make a decision on the spot when they see the data, or else, you’ve turned this into a long design thinking process. And that is, by the way, a critical distinction between lean and design thinking. It’s not that either one is right. It’s that lean was designed by me to be able to make rapid changes when you were cash and resource-constrained and had burn rates, gun into your head.

Steve Blank: [00:18:34] Thinking is like, well, a lot of the methodology is identical, but the motivation is quite different. I need to make sure before I build a hundred-million-dollar factory that I have every I and T dotted and crossed. And so, I need infinite data, and I’ll come back to the building, and have lots of time to be thoughtful about it. Whereas, in lean, you’re operating under a different set of constraints, and therefore, the decision makers need to be involved.

Steve Blank: [00:19:01] And now, to translate that, I have data but no insight, well, what a surprise. You hired data people. And if you’re not insightful, then you’re in the wrong effing job. The job for me when I used to run marketing was all that data, the job I was having people gather it for is to help me derive some insights. If I was outsourcing it to some third party, what the F do they know about my day-to-day business? I mean, they might be able to discover some stuff, but, boy, if you were competing with a startup with a CEO or a VP of Marketing who is great at insights and was using that data funnel, I’ll run rings around you, which is what happens all the time.

Steve Blank: [00:19:48] Does that make sense? And I don’t mean to simplify it. This is not that you don’t need some great tools that every week, there’s better and better machine-learning tools and whatever, but garbage in, garbage out. Still, I don’t care whether you’re using a neural net or not, human beings still have that best neural net so far. And when combined with great machine-learning stuff, asking the right questions and going, well, wait a minute, they were just parking this thing at the wrong place. Does that make sense? I don’t mean to diminish all the other stuff that people are selling and whatever, but if the leadership isn’t by itself insightful, and they’re not engaged in the process, and they’re outsourcing it, you’re going to be missing a lot of stuff.

Scott Varho: [00:20:34] Yeah. No, that makes a lot of sense. I mean, it also makes sense, too, that it’s really important to combine the contextual inquiry, getting out of the building, seeing customers in their habitats, trying to figure out the value mental model for them, along with affording to be able to drive the product, along with perhaps the data and be able to –

Steve Blank: [00:20:55] So I built a taxonomy early on, probably still valid. At 50,000 feet, there’s economic data. At 30,000 feet, there’s market research data. Then, you have data from your existing sales force. But to me, the things that people miss are ground truth, right? That you supposedly have and you don’t need to see everybody, but you need to cross-correlate all that other stuff. And we get so data in whatever that we forgot to actually go out and actually talk to people, see stuff, or whatever.

Steve Blank: [00:21:26] And the joke I used to say, and I don’t mean this as a pejorative, but market researchers are awesome at predicting the past. If they were great at predicting the future, they’d be running massive hedge funds. In fact, the only market research data I want to buy come from hedge funds, not from market research firms, or else, they’d be running their own portfolio somewhere. And it doesn’t mean that data is not useful and I’ll stop being facetious, but it really needs to—if you don’t have that ground truth that’s driving the insight, if all you’re doing is taking this data funnel, and saying, well, here’s the deal.

Steve Blank: [00:22:06] I’ll give you a great example. I mean, I lived this and it’s one I still use. So, students get out of the building, when I teach this as a class, and they speak to over 100 to 150 customers in ten weeks in a class taking a full course load. And so, one week, they were testing a part of the business model, which was pricing. Not revenue strategy, but pricing tactics. And because I made them blog every customer interview, I knew what was coming in the class. They would present, here’s what we thought, here’s what we did, here’s what we learned, here’s what we’re going to do next week was the cadence for every week when they would present.

Steve Blank: [00:22:41] And so, they were testing pricing. And I said, “Well, tell the class what you found.”

“Oh, Professor Blank,” and they had to have a piece of software that did something interesting. “We decided that our product should be priced at $999. It’s an enterprise app.” And these were engineers, so that was great.

“Tell the class how you came up with that.”

“Over the class, we’ve spoken to over 40 people, and here’s the data,” and they showed us a spreadsheet, and everybody in the class nodded.

I said, “Well, tell the class about the outliers.”

Steve Blank: [00:23:14] “Oh, we threw out those outliers. Those numbers were off the scale.” Well, wait a minute, remind the class,” I knew what the outliers said. “Well, there were four people who said it should be enterprise software. They’d pay $25,000.”

“Well, what did you do with that data?”

“Well, Professor Blank, the 40 people were a lot more than the four, so we discarded that data.”

And so, that’s the difference between data and insight. I said, “A world-class entrepreneur would have took those four and spent a lot more time figuring out whether that was a signal in the noise.” Does that make sense?

Scott Varho: [00:23:52] Totally, yes.

Jessica Hall: [00:23:53] It totally makes sense to me.

Steve Blank: [00:23:54] It happens all the time.

Scott Varho: [00:23:56] That’s a great example. That’s wonderful.

Jessica Hall: [00:23:58] Yeah. So, I’m working, right now, with a founder-led company, rapid, rapid growth. And so, its founder, visionary product leader in the kind of classic way, and then they go from 12 engineers to 70 in like six to eight months. And now, I think they’re struggling, because early on, he was getting outside the building, he was out talking to people. But then, the organization starts to grow. And then, there’s layers of management.

Jessica Hall: [00:24:30] And then, there’s a talent team and a finance team and there’s a need to go do fundraising and kind of business operations tasks. And I sometimes find that that CEO visionary gets further and further away from the customer, but they still try to have the same impact on the decision. But because they’re not there, it’s almost as if their ideas and input to the team gets worse and worse as the organization gets bigger and bigger. I’m curious if you’ve seen some of the same dynamics.

Steve Blank: [00:25:04] Sure. And in fact, most people remember when I wrote my first book, which kicked off lean, The Four Steps to the Epiphany, the first two steps, which is discovery and vision. And actually, the last two steps were, one of them, called the company building, was exactly about this problem. As companies scale, how do you still keep founder’s intent, but without having the founder having to have 4,000 direct reports because it’s like a bad game of telephone by the time it comes down to it?

Steve Blank: [00:25:33] And listen, I’ll just tell you one story. My last company was called E.piphany. And by the time I left, it had 800 people. And I remember, like in the last six months, I was walking by a conference room and hearing them argue about pricing and should we change the pricing of a product? Now, you have to understand, E.piphany was an enterprise software company. I knew nothing about enterprise software or how to price it when I started, but I remembered a story about the first woman who started an enterprise software company called Sandra Kurtzig.

Steve Blank: [00:26:12] And Sandy started a company called Ask, which was a manufacturing automation company that was the first independent piece of software on IBM mainframes, and no one knew how to price it. And so, she used to tell the story as, I went into a buyer who the company wanted to buy their software, and they said, “How much was it?” And she said, “I picked the biggest number I could think of at the time.” And she said, “A hundred thousand dollars.”

Steve Blank: [00:26:36] And the way she told the story is, “Well, the buyer never blinked,” so I said, “Per module.” And he still didn’t blink. “So then,” she said, “Per year.” And they were paying IBM dollars, and he still didn’t blink. And then, “I ran out of things to charge them for?” And then, he said, “How much is maintenance? And I didn’t even know what that was.” So then, she said, “30%.” And he says, “We don’t do more than 20.” And she said, “You have a deal.”

Steve Blank: [00:27:06] So, I heard that story, that’s how I priced my startup software. I just did instead of 100 grand, it was 20, 30 years later, $750,000 per module. But wait a minute, I just made it up. And then, well, here it was, three-and-a-half years later, I’m walking by a conference room and they’re arguing about whether they should change this pricing model and they didn’t know I was standing by the door and I had to leave.

Steve Blank: [00:27:38] When someone piped up, “You don’t understand, those prices were calculated with theoretical efficiency of whatever.” And I’m going, “I just made them up.” And here were the founder’s intent, filtered down after 800 people. A true story. And by the way, that’s why I retired the day before the IPO went into effect. It was way beyond — they hired a world-class CEO at the time, a guy named Roger Siboni from KPMG. But to answer your question, the way I kind of think about how you solve this and not solve it is in truly air quotes here is that unless you can articulate mission and mission intent, you pretty much surely put in process and procedure and strangle a startup’s growth.

Steve Blank: [00:28:32] And by mission and mission intent, intent is not like some pure PR BS that companies say, what’s our mission? But what is it that we’re trying to do? What’s your revenue goal? What’s your profit goals? Do we have shared goals? Et cetera. And what’s your intent in doing that? Will we trade off revenue for profit or is it growth at any price and we don’t care about profit because we think we can tap the capital markets? Is it share? Is it number of users?

Steve Blank: [00:29:00] So, all of a sudden, people can understand, the intent is equally important as the mission. And then, you translate that corporate mission and intent, I want every department to come up with their own mission and intent. What’s the role of marketing? Well, at least when I used to run marketing, I had three goals. Number one goal was to create end user demand, drive it into my sales channel. Number two goal was to educate the sales force about why our products were better, cheaper, faster, et cetera. Number three was to help engineering understand customer needs and desires. If you weren’t doing those three missions, you shouldn’t be in my marketing department, right? It’s very simple. Then, what was the intent, though?

Steve Blank: [00:29:37] Well, the answer is to pull that off, number one is, well, we need to give sales 1.7 million leads, gee, the company was interested in gross margin rather than revenues. So, once you translated those down to intent, the CEO didn’t need to be managing, they were making sure that mission and intent were being executed, and therefore, CEO and staff meetings were not about reporting, but were about synchronization to make sure that everyone’s mission and intent were in sync. Does that make sense? That’s a different way to manage. But I think pretty effective, when you go from about 40 to 500 people, you can probably do this mission and intent rather than silos in organizations.

Jessica Hall: [00:30:26] Yeah. And interestingly enough, the people I’m working with are around the 200 mark. And then, that makes me think of, you do work for Hacking For Defense, and you just did a session in which there are a lot of videos up with General Mattis, and General McChrystal, and others. But the intent thing as a military kid, an Army sister, and a Navy daughter feels kind of similar to the idea of commander’s intent.

Steve Blank: [00:30:53] Yeah, that’s where it came from.

Jessica Hall: [00:30:57] Okay.

Steve Blank: [00:30:57] I had a career in the Air Force during Vietnam. And I spent a lot of time trying to help the Department of Defense. But this actually came as an entrepreneur trying to understand what were some effective ways to push decision making in chaotic situations down to the lowest level, when, in fact, waiting for orders was like the difference between life and death. So, we can either build command and control organizations, where everything had to go back through the top or you could push decision making based on intent. And by the way, Jessica, you’re the first person ever to recognize where it came from. So, you win the 30-year award, actually.

Jessica Hall: [00:31:43] Yes.

Steve Blank: [00:31:44] So, when I actually started thinking about what became lean, I read all the extent literature on innovation entrepreneurship at the time, which was almost all focused on corporate innovation, almost no startup innovation, but then, started reading a ton of stuff about leadership. And if you’re familiar with commander’s intent, the other key influence on me was reading about John Boyd and the OODA loop.

Steve Blank: [00:32:09] And so, somewhere in the OODA is all the observe, orient, decide, and act. And the two biggest influences on customer development was Boyd but also Rita McGrath, and the lead user research, which was kind of an interesting process in the ’90s about how to do innovation in large corporations. So, I did a bunch of synthesis of a lot of things, and then realized that startups, as I said, going back to the original point, needed their own tools and processes. What was your question?

Jessica Hall: [00:32:46] No. You answered the question, which is that relationship. And it’s funny because we get called in sometimes, and they’re like, “Well, there’s something wrong with our agile process.” And then, I’m willing to bet right now, I have a 95% chance it ain’t about your agile process at all. Your agile process is probably fine. It’s probably because your people don’t know what they’re supposed to be doing. And so, they don’t get things done because they don’t know what they’re doing.

Steve Blank: [00:33:11] Right. Can I tell you one more story about this?

Jessica Hall: [00:33:16] Please.

Steve Blank: [00:33:16] So, I remember when I retired, a woman who is both my board member, and then a mentor, in my whole career, had been a good friend, I can name, Kathryn Gould. She used to call me in to look at her startups. And it was almost always, “So, Steve, they have a Marketing problem.” And by then, I could get it down to a diagnostic. And a CEO would call me, “We have a Marketing problem.”

“Well, what’s the problem?”

“Well, sales isn’t making their numbers.”

Steve Blank: [00:33:44] “Well, why is that a Marketing problem?”

“Well, that’s what the VP of Sales said.”

“Okay. Heard this one before.”

Alright. So, you talk to the VP of Sales. “Well, our positioning is all wrong.”

And then, I finally dug deeper and I could almost do this as a remote diagnostic. And the diagnostic, I would say, these used to be direct sales companies with sales people across the United States. “Now, give me your corporate sales deck. Great. Now, can I have the corporate sales deck from the sales person in Boston or New York?”

Steve Blank: [00:34:19] “Steve, what are you talking about? It’s the same one.”

I said, “I’ll bet you a hundred dollars, it’s not the same.”

Of course, they get the deck from the person in New York or Boston who physically is remote from California or Silicon Valley, and you find out that a smart salesperson figured out that the corporate pitch wasn’t working, so they made up their own. And the minute you see that, then you realized it wasn’t a Marketing problem, they didn’t understand the customers, they skipped the customer discovery phase, and got into execution, and scaling a sales organization before they had found product-market fit.

Steve Blank: [00:34:57] And so, they didn’t need a language to describe that what was happening is that they were throwing salespeople at a problem before actually discovering what it is that customers wanted, and needed, and would buy, but didn’t even have the language and framework to do that. And so, my advice, which they all ignored for the first year until they realized it was right, is the only way to solve this problem is to fire everybody in the field, get it back to a small team around the factory who needed to go out, and do discovery, and figure out what problems you were actually solving that people would pay for before you could write a market. It wasn’t a marketing problem. It was a lean startup problem. We didn’t even have the language to describe that. Does that make sense at all?

Scott Varho: [00:35:42] Yeah, totally. And it’s interesting.

Jessica Hall: [00:35:44] Yeah.

Scott Varho: [00:35:45] Oftentimes, in our situation, so we wrote a book, actually, Jess, she’s a co-author of the book with our CEO on The Product Mindset, and it builds along on a lot of the concepts you’re talking about. But it’s interesting being in a services firm context, as Jess is describing, the number of times that someone comes to us with their baby, they have distilled their intent, I’ll use your language, the mission and intent into a set of features they want us to build for them. And we have to claw them back to the why. How did you come to this? What was that journey like? And how do we reintroduce the client’s voice into the conversation? Because at the end of the day, building a product is a journey, not a spec build execute process.

Steve Blank: [00:36:29] So, Scott, you mentioned this, and it’s funny, I tell what you just said is the problem I described as the ugly baby problem. If you try to outsource this to a VP of Sales or VP of Marketing, and they come back, and say, your baby’s ugly, your first response is, by the way, not you’re fired, your first response is, you’re not describing it correctly, right? Go back out, right? You’re not selling it right or the positioning-

Jessica Hall: [00:37:02] Or your methodology is wrong.

Steve Blank: [00:37:03] Right. Your methodology is wrong. And I finally found that, gee, if they come back the second or third time, it’s, well, we’ve got the wrong person for the job, you’re fired. But really, the experiment I asked them to run is no, no, no, you can’t outsource this. You take a baby outside personally. And now, all of a sudden, when people are telling them to their face that their baby is ugly, the first thing they’ll do is make sure they’re not holding it upside down and showing them the wrong end.

Steve Blank: [00:37:34] After they turn around, the second thing that happens is cognitive dissonance sets in. Like they just don’t get it or wait a minute, I’m talking to the wrong people. But most of the time, smoke will start coming out their ears. And if they’re smart, they will realize that they need to pivot, and only they could do that, that’s why it’s broken. And if you can’t get the leaders outside to hear that data firsthand, this wraps us all the way back to insight versus data, is if the leadership is unwilling to get out and hear this data themselves, then you’re on a sinking ship.

Steve Blank: [00:38:12] And it’s, to me, impossible to right it unless you have lots of capital, which, by the way, is a solution in itself. But unless you have lots of capital, the founder, or the CEO, or the department head, or whatever, if they refuse to get out of the building and run—pardon, they don’t have to hear every one of these, but they have to hear enough to derive an insight themselves. If they’re not that type of leader, this ain’t going to go well. If they’re running something inside, my first recommendation as CEO is you might have a world-class executor in place, but you don’t have somebody in your employees to…because starting a program back to me requires firsthand knowledge, not the second or third-hand knowledge.

Scott Varho: [00:38:59] I think a version of myself had learned that lesson. I’ve been in between an implacable CEO and a market that’s unwilling to buy a product as described.

Steve Blank: [00:39:09] Well, then you make sure their check cashes, and then you know you say, “Thank you,”and you go through the motions if you need to, but that’s different from actually helping somebody who wants to succeed. And that works whether it’s a CEO, or new project head, or whatever, because remember, most people are trained and comfortable to be executors of existing processes and procedures, particularly in large corporations. And that’s not a pejorative or a diss, it’s what most of our comfort levels are. Most people want to immediately converge on certainty and don’t like to operate on chaos and uncertainty. That’s, in fact, a distinction between a founder and a normal person. A founder goes, “Yeah, it’s chaotic, what a nice, normal day.”

Jessica Hall: [00:39:59] I think especially a multi-time founder. And when I did customer development for a product that I ended up killing and we ended up realizing there was nothing there, and what I found was a very distinctive—when you talked about first-time founders and people who had founded before, the first-time founder is comfortable with the ambiguity and that search for a model, was way higher.

Jessica Hall: [00:40:28] And that sense that, yes, we can find it, yes, we will. Like just they seemed more calm and more comfortable with the idea that we’re going to seek this, where I think the first-time founders were all energy and drive, drive, drive because there was something in them that they knew they had to change, but yet, emotionally, they didn’t want to be wrong. And that was one of the insights from that research was, that these multi-time founders, they have a level of comfort with the discovery, and the ambiguity, and the change, that the first-time founders, and I think if you went into corporate America, writ large, you wouldn’t find them. And they would have a lot more agita about what was going on.

Steve Blank: [00:41:15] And, Jessica, there is some correlation, or at least I’ll claim there is, between founders and dysfunctional families. Survivors of dysfunctional families are probably the cruelest training ground for operating in chaos and uncertainty. And it’s those with the brain chemistry that allow them to shut down most of that. They have a rifle shot focused on survival. It’s kind of like a Darwinian group, lest they have something to prove to the rest of the world.

Steve Blank: [00:41:46] And I know this personally because when I thought I saw this pattern in the same VC I was talking about, Kathryn Gould, who was a recruiter in her earlier life. I mentioned that to her, I said, “Kathryn, did you ever notice about founders and dysfunctional families?” And she said, “Steve, why do you think I invested in you?” I mean, look at the rest of my portfolio, what I discovered that she had invested in. And it turns out that actually, if you look at the date, I think there is some correlation. I mean, it’s not a requirement.

Steve Blank: [00:42:19] But if you think about the chaotic and uncertain environment, where else do you get that training? Not unless you’ve been in combat. And again, if you think about it, the Army and Marines, you do battle drills constantly to train for the fight. We don’t do that in business, whether it’s a startup or not. In fact, you might think that the lean startup classes I teach both the Lean LaunchPad, I-Corps, and Hacking For Defense are actually battle drills for entrepreneurship and innovation. That’s all there. It’s just kind of repeatable, like let’s get used to this chaos and uncertainty.

Jessica Hall: [00:43:02] Yeah, that makes a lot of sense because I did a weekend once. It was like a lean startup machine or something. I was a mentor. And just watching them go through, they did these on clocks, and I would have to do tests and things, just watching how much what was like they left the building for the first test, they came back from that destroyed and had to like pick themselves back up. And then, I was like, organizers were like that. And then, they had to go again. But then, when you saw them come back the second time, when they got smacked down the second time, then they were like, okay. And that was like, they had to learn that recovery.

Steve Blank: [00:43:43] So, Jessica, you just described a battle drill, right?

Jessica Hall: [00:43:45] Yeah.

Steve Blank: [00:43:45] And by the way, it also weeds out people who go, “Are you kidding me?

Scott Varho [00:43:52]: I didn’t sign up for this, right?

Steve Blank [00:43:54] And then, you kind of understand like people like me who did this for 21 years, right?

Jessica Hall: [00:44:00] Yeah.

Steve Blank: [00:44:00] I mean, like it’s just constant. There was always something different. And so then, you kind of understand the distinct makeup of people, it’s like people who love roller coasters versus people who go, “Wait a minute, I got to pay to get on that thing? Are you sure?” Or, people jump out of airplanes, where other people go, “No, no, no, that’s in case of emergency, that’s not like a sport.” Alright. What else can I answer for you guys?

Jessica Hall: [00:44:29] Actually, we have two standard questions for every guest. I want to keep going, but we are close on time, so I’m going to be good. What’s the one thing you always look for on a team that tells you if it’s either healthy or in trouble?

Steve Blank: [00:44:41] Whether they lie to each other or not. It never gets better as the company scales. And that’s from everybody from the head of engineering or in the small group who always kind of makes up what he thinks he’s going to or she’s going to ship a product. So, the CEO who can’t tell an investor the truth or doesn’t know how to deliver the truth to groups that—and I’m just telling you all the bad stuff I’ve seen. It never gets better in such a very bad culture.

Steve Blank: [00:45:11] I learned, again, in my last company from this company CEO, Siboni, who actually had a phrase that I’ve used for the last 12 years is, good news needs to travel fast, but bad news needs to travel faster. And if you don’t have that open and honest culture, you can’t do gazillions. And I’ve also seen in a public company that got into trouble when a division GM was kind of like stuffing the channel because their bonuses were based on making some numbers.

Steve Blank: [00:45:42] And while the company didn’t punish that, that got them ultimately, so they went to jail over it. And it wasn’t the guy who was cheating, it was the CFO. Unintentional. So, to answer your question, to me, the most fundamental thing is, like, are you honest with yourselves and each other? And I now kind of insist, I don’t care how great they are, get them out of your company. Give them some time to reflect, but it needs to change, or else, it’s not going to get better. So, on that happy note, what was your second question?

Jessica Hall: [00:46:15] This is more fun, hopefully. What piece of technology, analog, software, hardware, not your phone, can you not live without?

Steve Blank: [00:46:21] Not live without, but changed my life was I bought a Tesla in 2012. Now, on my second one, I went from Model S to Model 3. I think it’s important what we’re all going to be driving some version of. And I think now, every auto company understands that and et cetera. Besides other piece of technology, my laptop is just an integrated part of my life now. I write a lot. I don’t even know how to hold a pencil or pen, I don’t think, anymore. And I was writing a thing with manually. So, we take that so for granted, at least for me and I’m sure others, and I don’t even have a job.

Scott Varho: [00:47:11] I wonder if the children will ever learn cursive. I think it’s working its way out of the curriculum to even bother to learn how to write more efficiently with a pen.

Steve Blank: [00:47:19] I have to tell you, I am so uncoordinated, I could never make a circle because the ends are closed. I remember the moment I was able to draw a circle at the age of 40. When the first Mac came out. If there was a time I would have framed, I was like, “Look, it’s a circle!” and I actually drew it, which people now regret because a million diagrams later, I’ve been drawing ever since. But yeah. So, I say a laptop, but we really take for granted what a leverage that has been.

Jessica Hall: [00:47:59] On that hopeful note, thank you so much for joining us.

Scott Varho: [00:48:02] Steve, it was an honor and a pleasure to have you.

Steve Blank: [00:48:06] Yes. I appreciate being on.

Jessica Hall: [00:48:08] Thanks so much. Have a good one.

Scott Varho: [00:48:10] Thank you so much.

Steve Blank: [00:48:12] Thank you.

Outro: [00:48:14] This has been an episode of The Innovation Engine, a podcast from 3Pillar Global. If you have questions, comments, or guest suggestions, email us at info@3pillarglobal.com or visit us at 3pillarglobal.com.