Inside Word: Why Do So Many Startups Fail?

Steve Blank

The Inside Word is a weekly feature that looks at compelling industry debates and discussions unfolding on the blogs of employees at digital-media companies.

Blogger: Steve Blank

Blog name: Steve Blank

Backstory: Blank is a serial technology entrepreneur, who wrote Four Steps To The Epiphany, which was published in 2005. He teaches entrepreneurship at the U.C. Berkeley Haas Business School, the joint Berkeley/Columbia MBA program, and at the Stanford University Graduate School of Engineering. He developed the Customer Development Model, a business model which encourages startups to focus on their customers from their inception, on the premise that startups are more likely to fail from a lack of customers than from the lack of a product.

Blog post: In a series of recent posts on his blog, Blank recaps some of the tenets of his theory. A central belief is that the traditional product development model — which involves entrepreneurs developing a business concept, building the product, testing it, and then shipping it — fails for most startups.

“The model is a good fit when launching a new product into an existing, well-defined market where the basis of competition is understood, and its customers are known,” Blank writes. “The irony is that few startups fit these criteria. (None of mine did.) We had no clue what our market was when we first started. Yet we used the product development model not only to manage product development, but as a road map for finding customers and to time our marketing launch and sales revenue plan.”

He outlines several reasons why the model does not work. The model is focused on what happens inside the company, rather than on the customers it is trying to serve; by focusing on an initial ship date, startups will often launch a product before they know how to build a profitable business; and the model is inflexible.

In forthcoming posts, Blank plans to describe alternative models.

Post-script: We asked Blank why he had decided to summarize these concerns on his blog now. He noted that the economic situation had driven more venture capital firms to forgo product development-centric models for the firms in their portfolios. “There’s a necessity of getting it right early. It’s not an option now,” he said. “You actually need to build a company. That isn’t what venture capitalists were doing. They were flipping companies.”

“When I started talking about this in the internet bubble my VC friends laughed. Now, I think every firm has at least one partner who understands the process.”

Please e-mail suggestions for future editions of the Inside Word to joe@paidcontent.org.

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