a team repeatedly selling a known product to a well-understood group of customers with standard presentations, prices, terms, and conditions. Startups by definition have few if any of these known elements. In fact, they’re out searching for them!
Because target customers, product specs and product presentations may change daily, early-stage startup executives need dramatically different skills from executives who are working in an established company selling established products or line extensions. The demands of customer discovery require people who are comfortable with change, chaos, and learning from failure and are at ease working in risky, unstable situations without a roadmap. In short, startups should welcome the rare breed generally known as entrepreneurs. They’re open to learning and discovery—highly curious, inquisitive, and creative. They must be eager to search for a repeatable and scalable business model. Agile enough to deal with daily change and operating “without a map.” Readily able to wear multiple hats, often on the same day, and comfortable celebrating failure when it leads to learning and iteration.
Webvan’s CEO and VPs all came from large-company backgrounds and experience. They were surprised and uncomfortable with the chaos of a startup and tried to solve the problem by scaling the company rapidly.
…measuring progress against a product launch or revenue plan is simply false progress.
7. Sales and Marketing Execute to a Plan
Hiring VPs and execs with the right titles but the wrong skills leads to further startup trouble as high-powered sales and marketing people arrive on the payroll to execute the “plan.” Here’s how it typically unfolds:
Following the business plan and the traditional product introduction model, the board and founders agree to a launch date, a burn rate, a revenue plan and a set of milestones. The sales VP begins to hire the core sales team, design sales pitches, and make appointments and attempts to acquire early “lighthouse” customers (prominent customers who will attract others). At the same time, the sales team uses revenue goals specified in the business plan to track its progress in understanding customers. Meanwhile, the marketing VP is busy designing websites, logos, presentations, data sheets and collateral, and hiring pragencies to create buzz. These tactics become marketing objectives, even though they’re merely tactics. Marketing discovers whether its positioning, messaging, pricing and demand-creation activities will work only after first customer ship.
Executives and board members accustomed to measurable signs of progress against “the plan” will focus on these execution activities because this is what they know how to do (and what they believe they were hired to do). Of course, in established companies with known customers and markets, this focus makes sense. And even in some startups in “existing markets,” where customers and markets are known, it might work. But in a majority of startups, measuring progress against a product launch or revenue plan is simply false progress, since it transpires in a vacuum absent real customer feedback, instead of searching for an understanding of customers and their problems and replacing assumptions with facts.
Webvan set off on this kind of plan-driven “marketing death march.” In its first six months, it acquired an impressive 47,000 new customers, but 71 percent of its 2,000 daily orders were repeat orders, which meant Webvan needed to quickly secure many more new customers and reduce its high customer attrition rate. Making matters worse, Webvan had scaled its spending based on unverified and, it turned out, highly optimistic marketing guesses.
8. Presumption of Success Leads to Premature Scaling
The business plan, its revenue forecast, and the product introduction model assume that every step a startup takes proceeds flawlessly and smoothly to the next. The model leaves little room for error, learning, iteration or customer feedback. Nothing says, “Stop or slow down hiring until you understand customers,” or, “pause to process customer feedback.” Even the most experienced executives are pressured to hire and staff per the plan regardless of progress. This leads to the next startup disaster: premature scaling.
In large companies, the mistakes just have additional zeros in them.
Hiring and spending should accelerate only after sales and marketing have become predictable, repeatable, scalable processes—not when the plan says they’re scheduled to begin (or when the “lighthouse” account is signed or a few sales are made).
In large companies, the mistakes just have additional zeros in them. Microsoft and Google, powerhouses though may they be, launch product after product—Google’s Orkut and Wave, Deskbar, Dodgeball, Talk and Finance; Microsoft’s “Kin,” Vista, Zune, “Bob,” WebTV, MSNTV, PocketPC—on rigid schedules driven by “the model” and the presumption of success. Shortly thereafter, a lack of customer response delivers a fast, quiet funeral for product and management alike.
At Webvan, premature scaling permeated a company culture dominated by the prevailing venture-capital mantra of the time, “get big fast.” It spent $18 million to develop proprietary software and $40 million to set up its first automated warehouse before it had shipped a single item. Premature scaling had dire consequences, assuring that the Webvan case will be taught in business schools for decades to come. As customer demand failed to live up to Webvan’s business plan, the company slowly realized it had overbuilt and overdesigned. While Webvan had executed to its plan, it had also failed to pay attention to its customers.
…no business plan survives first contact with customers.
9. Management by Crisis Leads to a Death Spiral
At Webvan, the consequences of all the mistakes began to show by the time of first customer ship. The story usually unfolds like this:
Sales starts to miss its numbers and the board becomes concerned. The sales VP arrives at a board meeting, still optimistic, and provides a set of reasonable explanations. The board raises a collective eyebrow. The VP returns to the field to exhort the troops to work harder. Sales asks Engineering to build custom versions of the product for special customers, since this is the only way that the increasingly desperate sales force can close the sale. Board meetings become increasingly tense. Shortly thereafter, the sales VP is probably terminated as part of the “solution.”
A new sales VP hired and quickly concludes that the company just didn’t understand its customers or how to sell them. She decides that the company’s positioning and marketing strategy were incorrect and that the product was missing critical features. Since the new sales VP was hired to “fix” sales, the marketing department must now respond to a sales manager who believes that whatever was created earlier in the company was wrong. (After all, it got the old VP fired, right?) A new sales plan buys the new sales VP a few months’ honeymoon.
Sometimes all it takes is one or two iterations to find the right sales roadmap and positioning to attract exuberant customers. In tougher times, when dollars are tighter, the next round of funding may never come.
But the problem at Webvan was not an incorrect sales strategy or positioning statement. The problem is that no business plan survives first contact with customers. The assumptions in the Webvan business plan were simply a series of untested hypotheses. When real results came in, they learned that the guesses in their revenue plan were wrong. Focusing on executing their business plans, Webvan iterated their strategy and their search for a business model by firing executives.
Failure is an integral part of the search for a business model.
Webvan went public in 1999, and its sea of red ink was reported quarterly for all to see. Rather than acknowledge its unrealistic plan and scale back or retrench, the company
