Speaking before a crowd of more than 600 businessmen and women at the Lincoln Chamber of Commerce’s Economic Development Breakfast Wednesday morning, Diana Kander, senior fellow at the Kauffman Foundation, urged entrepreneurs to ditch the traditional business plan and adopt a more customer-based approach.
“The entrepreneurs would like to tell you they failed because they didn’t raise money or they had management team issues or maybe they had a bad location,” she said. “But the reality is they failed because they couldn’t get customers.”
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Kander is not unfamilar to Nebraska, speaking at Big Omaha in 2013.
Incorporating examples from her own entrepreneurial history, Kander, whose talk was entitled “Why capital is no longer the most important barrier to startup growth,” said customers 15 years ago held very little power over their transactions with companies. They were “taken advantage of most of the time,” she said, and they settled for “good enough.”
“You would go to the car dealership just expecting to get hosed,” she said. “You just knew they were making money on a whole bunch of different levels.”
Today, customers have more control. They expect perfection.
“If there’s a product that you want, there are thousands of stores online where you can choose what you want,” she said. “So for the first time in a long time, the supply of stuff significantly outnumbers demand. That means anything you want, you can find the perfect product. You no longer have to settle.”
But despite a changing consumer landscape, the vast majority of companies still use the same model, largely steered by a speculative business plan that buries customer priority.
“We’ve seen in studies that those companies that raise venture capital—companies that raise $500K or more—75 percent of those companies fail,” she said. “So it’s not how much money you throw at the problem, it’s the fact that you’re trying to guess at perfection, at what customers want without actually knowing.”
Instead, Kander stressed the importance of iteration, explaining that startups must be willing to flex their initial idea to meet the customer upfront. To illustrate, she described the genesis of Hudl, the Lincoln-based sports-software company. Originally, Hudl thought of its product as a “varsity tool,” she said, but later expanded its market to include JV and freshman teams after reaching out to potential customers.
“The product they thought they were building was close, but it wasn’t perfect,” she said. “And they found out upfront, before they finished building the product, the perfect solution that people would be ready to hand money out for, and that accounts for a lot of their success today.”
Kander listed a handful of reasons more entrepreneurs aren’t adopting a customer-based approach. First, she said, too many entrepreneurs think they’re smarter than the customers. It’s also a harder model to follow; it feels less natural than the plan-based approach, in which the entrepreneur moves from the idea to development to branding and finally on to the customer. Lastly, she said, many entrepreneurs ask leading questions during the test phase and rely on unreliable vanity metrics, convincing themselves of a primed customer base.
“Making sure you have customers up front in your venture before you start implementing is the most important thing you can do to a venture or new idea,” she said, “more important than raising hundreds of thousands or even millions of dollars.”
Near the end of her presentation, Kander took several minutes to describe the “marshmallow challenge,” one of her favorite experiments. The challenge provides the participants 18 minutes to build the tallest freestanding structure from the following supplies: 20 sticks of pasta, one yard of tape, one yard of rope and one large marshmallow, which must stand on the top. All different groups have taken the challenge, she said, but in a match between MBA students and kindergartners, the kindergartners averaged a height 2.5 times taller (25 inches compared to 10).
The MBAs spent 30 percent of their time planning the structure and 60 percent building it, she said, only to watch the structure topple after placing the marshmallow on top. With what little time they had left, they cobbled together a short and poorly built structure ten inches tall.
“This is the traditional plan-based approach,” she said. “You come up with an idea and spend all your time building something and then you hope at the end that it will work, only to find that it doesn’t.”
The kindergartners, on the other hand, started with the marshmallow already on top. It’s a small structure, but it’s stable. They’ve spent very little time building it, so with extra time to kill, they start experimenting with it, adding pieces, playing.
“If you spend time upfront testing an idea before you dedicate resources to it, I guarantee you’re going to find huge opportunities. “
