Lean Startup Customer Development And IxD Personas

On Quora Steve Blank asked "Is it possible to use Lean Startup customer development findings to inform IxD personas?" This post is my response to Steve on Quora:

Absolutely yes.

Pivoting is not just about finding the right business model that works for a start-up but it is also about nailing down the persona that you are designing your product for. I have seen many start-up fail because they don't know who the end user is. Creating a persona is an iterative process by itself. Many people focus on persona as a final artifact but I believe that the journey is more important than the destination. While discovering a persona and iterate on it to make it crisp, the team - the dev, marketing, and UX - comes together with the shared understanding of the target end user. The journey brings in the empathy that they all internalize and that influences what they do. The journey includes getting out of the office and talk to the real people who you think would use your product.

Persona requires qualitative discovery as well as validation. It's an instantiation of your customer. The customer discovery, validation, and creation are all directly related to the persona. In fact I would argue that in many cases knowing the target audience, at a given stage, is far more important than having a perfect product. Plenty of people fixate on building the right product against building it for the right people.

A Laundromat Entrepreneur

In my previous post “While Entrepreneurs Scale On The Cloud The Angels Get Supersized” I wrote about how cloud computing is disrupting the VC industry. Continuing on the thread of entrepreneurship I am seeing more and more entrepreneurs building applications who do not belong to any formal organization, start-up or otherwise. The definition of what used to be a start-up itself is changing, primarily because of two reasons - simple and easily accessible PaaS tools to design, run, and maintain applications on the cloud and access to a market place to sell the applications.

We have been witnessing this trend for the mobile applications for a while - Android as well as iPhone and now iPad. I see the same pattern for the cloud-based applications. I have seen many useful, productive, and successful applications that are designed by individual developers with no affiliation to any organization.

Google has done a great job in designing the tools for the developers to build applications that can run on their cloud and can be sold on their app store. This has democratized the application business to large extent that attempt to solve niche problems. At the same time the individual developers have started monetizing their work without going through an overhead of bootstrapping and running a company. While Google’s cloud platform is a generic one the application and stack specific PaaS providers such as Salesforce.com and Heroku are also attracting such developers. Intuit’s partner development platform is a great example of a channel platform that allows the entrepreneurs to market to an SMB segment, a very difficult segment to reach (a post on that later).

All these trends, collectively, have introduced a new category of an entrepreneur. A laundromat entrepreneur.

They are not full fledged start-ups but these individuals are also not developing just for fun. These businesses have steady revenue, positive cash flow, and require very little maintenance. The companies such as Help Me - located in Karachi, Pakistan - have created their business model to support such developers outsource customer support for their existing applications so that they can focus on building new applications. Some of these individual businesses could be worth a few million dollars.

This is a very different business model that combines the best-of-breed with long tail. I am quite excited about this new category since that puts in the developers directly in charge of the product and takes them closer to the end users. I am curious to see the life cycle of these laundromats and how they get bought and sold. Many people that I have had discussions with claim that we could expect to see plenty of individuals who will own such a laundromat portfolio worth five to six million dollars.

Attribution: I have shamelessly stolen the word “laundromat” from my friend Mike Ni after my discussion with him on cloud computing business models. I had told him that I would!

The picture credit to Michael Valli

While Entrepreneurs Scale On The Cloud The Angels Get Supersized

Cloud computing is disrupting the venture capital industry in a big way. One of the obvious changes we all have observed is the reduced up-front capital expenditure to start a new venture. Things that used to require an array of expensive servers and an army of people to maintain them have essentially been replaced by a bunch of EC2 instances and a few smart developers. The tools and the technology stack for today’s applications are designed for cheaper and faster experimentation allowing the entrepreneurs to follow the lean methodology and pivot as fast as they can. I agree that some investors underestimate the people cost and overestimate the capabilities of the cloud but regardless this has caused a major shift in how the companies are funded.

The rise of an emergent category of super angel is all about leveraging the cloud computing. Fred Wilson closed a $30 million fund and Aydin Senkut closed a $40 million fund. These funds will invest into dozens of companies that can be bootstrapped with low up-front cost. More and more entrepreneurs prefer to raise as little money as possible in the beginning. This phenomenon has a few effects:

Raise AS you scale and not raise TO scale:

Founders have been able to raise money at good valuation without giving up large equity. This has been an uneasy situation for many venture capitalists and has crated strange problems while raising money. When Foursquare raised money the founders sold part of their equity to the VCs so that the VCs can earn money on a successful exit. The founders also decided not to sell out to Yahoo. Raising money as the company scales follows the cloud motto of scale-as-you-need and pay-as-you-go.

Build a product that you want and not what a VC wants:

The super angels typically stay on the sidelines and definitely don’t serve on the board. This means a lot more freedom to entrepreneurs to define and shape their product. This also allows the companies to take up-front risk, venture into new areas, and experiment where conventional wisdom would otherwise have prevented them. Fail fast and fail cheap is now a reality from a venture as well as technology perspective.

Prominent network effects in the start-up community:

I strongly believe that the cloud is the best participatory platform to create network effects of all kinds. I have seen similar kind of network effects occur in the new angel industry, especially in an incubator such as Y Combinator. The Silicon Valley start-ups have enjoyed the network effects for long time. These effects are even more profound when some of these start-ups are in an incubator setting. Such environments have a natural advantage for the entrepreneurs to leverage cross-pollination. Cloudkick is such an example of a YC company that was started by three entrepreneurs to build a solution to manage the Amazon EC2 instances that all other YC companies used at that time.

Competition in the portfolio companies could be a good thing:

The VCs do not prefer to have competing start-ups in single portfolio to avoid conflict of interest. As rational as it sounds this is simply not feasible when an angel or a super angel funds tens and hundreds of companies. I believe that it’s a good thing. At macro level the angels can see the patterns and advise the companies and at the micro level the companies can hone in their competitive differentiation before raising more money. This might also change how the founders pick and choose the angels. If the founders pick an angel who has similar companies in their portfolio they can expect better connections and mentoring from the angels despite of having the competing companies funded by the same set of investors.

It’s not that the entire VC industry has changed. The series A and B investors are as important as angels and super angels but the way the VCs operate and the expectations that the limited partners have would certainly change. I also believe that the VCs who are not stage agnostic will revisit their seed-funding strategy. The performance of the traditional VC funds that were raised in the last ten years is far worse than what an investor would expect from an alternate class assets, which is what the VC investments are. Time will tell whether doing more deals with same money will yield better return on the portfolio but, at least for now, the VC climate change is imminent.

Software Is The New Hardware

Today Intel announced that it is buying McAfee for $7.7 billion. This acquisition made people scratch their heads. Why McAfee?

The obvious arguments are that Intel has hit the growth wall and organic growth is not good enough to satisfy the shareholders. But this argument quickly falls apart from margin perspective. Why dilute their current nice gross margin even if McAfee has steady revenue stream? [Read my update at the end of the post]

I believe there are two reasons. The first is that the companies need a balanced product and revenue mix regardless of different margins. Oracle bought Sun and HP bought EDS. Big companies do this all the time. The second, not so obvious, reason is a recognition that software is new hardware. The processors are processors – they are a commodity any which way you look at them. It is not news to anyone that the computing has become commodity which is the basis of utility style cloud computing. Software, embedded or otherwise, has significant potential to sell value-added computing. The security solutions could fit in nicely on a piece of chip. When you drive a few miles from Intel’s headquarters to meet folks at nVidia you will be amazed to see what kind of value a software tool kit can derive from the processors.

I don’t know how Intel will execute the merger considering the fact that this is their largest acquisition ever. But, I am even more convinced that software is the new hardware. Cloud computing, data center automation, virtualization, network security, and a range of other technologies can leverage software in a chip that is optimized for a set of specialized tasks. Time to move from commodity to specialized computing until specialized computing becomes commodity. Interesting times!

Update: Romit sent me a message commenting that how McAfee will dilute Intel’s margin since McAfee’s gross margin is more than Intel. I should clarify. The assumption on the street is that the cost of capital for this purchase is about 4% and Intel expects 8% return on the investment even after paying 60% premium for the purchase. The tricky part is that how long Intel can maintain the close to 75% software margin of a software company operating inside a hardware company. When I say diluting the margin I mean diluting the overall combined margin post-purchase. The analysts are skeptical about the success of the merger and so am I. Intel has no track record of integrating large software companies such as McAfee especially after paying significantly higher than average premium. Hypothetically if Intel were to buy a company with more synergies that can leverage existing channels and can fit into their culture they could have increased the gross margin and hence the return to their shareholders.

The Missing Half Of A Social Enterprise

In my previous post “Social CRM Is Only The First Half Of A Social Enterprise” I started the discussion on why social CRM is only the first half of a social enterprise and how we can go to the core and build a true social enterprise. Continuing the discussion on the missing half on a social enterprise this is the part 2.

Transform productivity silos into collaborative content curation:

The social software gets better as more people use it but we need more people to make it useful. There is no easy way out. As Andrew McAfee’s rightly put it Email is a 9x problem. There isn’t significant juice in standalone social software to gain broader adoption due to the endowment effect. There is a huge adoption barrier for standalone social software to be successful since it is not contextualized into a business process. The users simply see it as yet another tool that increases their cognitive overload.

I suggest don’t go after social software that is designed to create a parallel universe. Instead design solutions that are contextualized within existing business processes and makes it very easy for the end users to curate existing content from several structured, semi-structured, and unstructured sources e.g. Email, Wiki, PowerPoint, ERP, CRM, SharePoint etc. The nature of the content could be any artifacts such as an invoice, purchase order, strategy document, pipeline report, documentation etc. Describing what collaborative content curation can actually do for enterprise software would require a blog post by itself. I suggest you read democratised curation by JP and "The Seven Needs of Real-Time Curators” by Scoble. But in nutshell if designed correctly it offers significant potential to help people find, nurture, and syndicate the enterprise content with collaboration on steroids. The users continue using the tools that they like. However suddenly these tools start feeling more and more social with collaborative on-ramps and off-ramps. Social media, cloud computing, and collaborative content curation will be peanut, butter, and jelly for a social enterprise.

Use social tools to challenge and rethink management practices:

Efficient tools are not a proxy for an efficient management. The tools of the past did bring the automation and productivity but did very little to influence the way the organizations are being managed. Adding social fabric to existing processes may bring in some additional benefits but a true social enterprise should thrive for the tools that completely make them rethink the management practices almost to the point to cause disruption.

How about opening up the cost structure to the entire organization, democratize the decision making process, run bottom-line based prediction markets – not how much we will sell it for but what will it cost us to build it. It’s an endless list. This will be unsettling in the beginning for some but it would eventually yield great results.

The generational shift is already ready for this disruption. The baby boomers are on their way out and the current mid-level and senior gen X managers will be replaced by the millennial very soon. Millennial is a born-social generation. As one millennial told my friend when asked what does career mean to him – “I want to have awareness of what’s going on around me, have micro-conversations on social tools, and create context. This context is my career”. Such philosophy will challenge the current management practices and put organizations in a difficult situation.

But this is an opportunity as well. The organizations can completely rethink the management practices as they start their journey to be a true social enterprise. This is not just about asking a CEO to use a blog to communicate with the employees but to have a social-first attitude at every single step of the management.

Earn your user base by leaning in with a consumer start-up mindset:

One of the biggest differences between the enterprise and the consumer software is that the user is not a buyer in the enterprise software. Enterprise software vendors don’t attempt to win the end users since they don’t have to. The end users have no choice. I suggest that if you are an enterprise software company that designs social solutions lean in with a consumer start-up mindset where you really have to earn your user base.

The cafeteria menu is my personal favorite example. One of my friends’ company spent $600k to redesign their intranet and the most popular page on the new Intranet is still the cafeteria menu that gets updated every week. Why not solve that problem? Provide cafeteria information that is fresh and accessible from mobile devices. Now, you have my attention. Add social and location-based functionality to help me find other employees to network and have lunch with. This is the new HCM. Well, not exactly, but you get the point.

If you attempt to design an IT-driven top-down solution to enforce “socialness” it simply won’t work. You need to win your users to use your solutions even if, in theory, they don’t have a choice.

Having fun and being productive should not be mutually exclusive.

Podcast: The Next Cloud: Emerging Business Models

I was a guest on Novell's radio/podcast series, the Cloud Chasers. The topic was "The Next Cloud: Emerging Business Models And Their Impact On The Enterprise". It was a great conversation! You can download the podcast here or tune in below:

Social CRM Is Only The First Half Of A Social Enterprise

Social CRM has arrived. My fellow bloggers and analysts friends Jeremiah Owyang, Ray Wang, Esteban Kolsky, Paul Greenberg, Sameer Patel, Oliver Marks, Jeff Nolan, and countless others have done a great job in defining the attributes, characteristics, and value proposition of social CRM. The recent acquisitions - Lithium acquiring Scout Labs, Attensity acquiring Biz360, and Jive acquiring Filtrbox - have clearly indicated the market interest in social CRM. There are also tons of emerging start-ups in this domain solving specific problems in niche sub-categories of social CRM.

However, social CRM is only the first half of a social enterprise.

Let me be that idiot for a minute who over-simplifies enterprise software and its evolution. The traditional ERP, MRP, and SCM software were designed for automation and productivity to improve the bottom-line, scale the business, and make informed decisions. The CRM was essentially designed to sell and market better and eventually to support the customers whom you sold to. Then comes the social CRM that is designed as an extension of CRM to help understand customers better, have rich conversations with the customers, increase the impact of the brand, prevent customer churn etc.

Unfortunately social CRM is only the half part of the equation primarily designed to influence the top-line of an organization. The other missing half is the social solutions that support the bottom-line of a company. Together they form a social enterprise. I don’t like the word “social business”. In case you didn’t get the memo, the business has always been social. What is not social is an enterprise. A combination of social CRM that supports the top-line and a set of solutions that supports the bottom-line can truly transform an enterprise into a social enterprise.

Some vendors have attempted to introduce “socialness” in some of the edge applications but I believe there is a need to go to the core and build a true social enterprise. In my two part series I would like to share my thoughts on how this could be accomplished. This is part one.

Focus on the means and not the end:

I can talk about plenty of ERP processes but let’s discuss a specific process that is perceived my many people as dry and not social. It’s the “closing the books” financial process. I would encourage the folks, who think that the financial processes are not social, to spend some time in a large organization to observe and shadow the controllers and a CFO in the last few days and the first few days of a quarter. The software that “closes the books” is the very last step in the process, the end, designed to keep the CEO and CFO out of the jail. Everything that leads up to closing the books, the means, comprise tacit social interactions such as calling cost center managers for their numbers, asking for clarifications, communicate not to do certain things etc. The list goes on. This social system certainly works. However there is one problem – it is highly inefficient.

This is where I see the opportunity to provide a social toolset designed for a specific process – a social vertical – to help all the stakeholders. The social tools should not be designed to replace the face-to-face interactions and should not just be limited to encode the interactions. Instead they should allow people to scale their social interactions, leverage discovery, and experience serendipity. The social tools become the context for the core processes.

Find an internal business process that is inherently social where employees spend most of their time outside of a destination tool. Run with it.

Don't fight the system, instead cater to emergent roles:

As the nature of business changes the great organizations that are on forefront of this change are good about creating new roles that never existed before. Some the examples are Chief Sustainability Officer, Chief Privacy Officer, Chief Customer Churn Officer etc. Enterprise software vendors are often criticized as “pouring concrete into existing business processes”. It’s not a surprise that existing processes are hard to change and existing human behavior is even harder to change but providing a “social-first” experience to these new emergent roles could potentially trigger a positive change in an organization. The people in these new roles don’t typically have a rigid set of pre-defined processes and tools. That’s good news. Work with these people to identify how social software can enable some of these new business processes and functions. As a vendor you are likely to get more traction working with them against working with a CFO or a purchase manager.

Turn involunteer collaboration into social interaction:

Let’s be very clear that being collaborative does not mean being social. Unfortunately the existing collaboration tools help people collaborate once they have decided to collaborate. Well, duh. But when you think about it, if people get along well before they decide to collaborate they have a higher chance of success while they collaborate. The problem is that people neither have motivation nor time to find and get to know the folks that they might be required to work with. This is where social enterprise can do wonders.

The solution that powers the social enterprise does not have to solve a specific business problem. Imagine an enterprise social network that has algorithms to find the like minded-people based on their skills, interest, extra curricular activities, the departments they work for, the cars they drive, the neighborhoods that they live in etc. The real advantage of using such a network is to bridge silos without having an explicit goal of collaboration. This is an antithesis of collaboration.

You don’t collaborate with your neighbors before you socialize with them. You greet them, go to the block party, and have beer and BBQ. And then if you need to collaborate on chopping that tree you do so. It isn’t very different when it comes to enterprises. End of the day the enterprises have human beings that behave like, well, human beings.

Coming up in the next post:

Social enterprise enablement through collaborative content curation, democratizing the management, and earning instead of buying adoption.