The Four Steps to the Epiphany

Test “Problem” Hypothesis 

Demand  

Creation 

Hypothesis

 

Market Type

Hypothesis

 

Product  

Hypothesis

 

Customer & 

Problem 

Hypothesis

 

Distribution & 

Pricing 

Hypothesis 

Competitive 

Hypothesis

 

State Your Hypotheses 

Market 

Knowledge

Friendly 

First Contacts

 

 

Presentation'>“Problem” 

Presentation

 

Customer 

Understanding

 

Second

Reality Check

 

First Reality

 

Check

 

 “

Product”

Presentation

Yet More 

Customer 

Visits

 

Test “Product” Hypothesis 

Iterate or 

Exit

 

Verify the  

Problem

 

 

Verify the 

Product

 

Verify the

Business 

Model

 

Verify 

Customer Discovery Step-by-Step

1

st

 Advisory 

Board 

---

 

 

 

 

Chapter 3: Customer Discovery  | 27

 

 

 

 

 

Chapter 3 

Customer Discovery 

A journey of a thousand miles begins with a single step. 

— Lao-tzu 

In 1994, Steve Powell had an idea for a new type of home office device. Capitalizing on the new high-

speed phone connection called ISDN, Steve envisioned creating the Swiss Army knife of home office 

devices. His box would offer fax, voicemail, intelligent call forwarding, email, video and phone all 

rolled into one. Initially Steve envisioned that the market for his device would be the 11 million 

people with small offices or home offices (the SOHO market). 

Steve’s technical vision was compelling, and he raised $3 million in his first round of funding for 

his company, FastOffice. Like most technology startups, FastOffice was first headed by its creator, 

even though Steve was an engineer by training. A year after he got his first round of funding, he 

raised another $5 million at a higher valuation. In good Silicon Valley tradition, his team followed 

the canonical product development diagram, and in eighteen months he had first customer ship of 

his product called Front Desk. There was just one small problem. Front Desk cost $1395, and at that 

price, customers were not exactly lining up at FastOffice’s door. Steve’s board had assumed that like 

all technology startups, first customer ship meant FastOffice was going to ramp up sales revenues 

the day the product was available. Six months after first customer ship, the company had missed its 

revenue plan and the investors were unhappy. 

It was at about this time that I met Steve and his management team. His venture firm asked me 

to come by and help Steve with his “positioning.” (Today when I hear that request I realize it’s code 

for “The product is shipping, but we’re not selling any. Got any ideas?”) When I got a demo of Front 

Desk, my reaction was, “Wow, that’s really an innovative device. I’d love to have one at home. How 

much is it?” When Steve told me it was $1400, my response was, “Gosh, I wouldn’t buy one, but can I 

be a beta site?” I still remember Steve’s heated reply: “That’s the reaction everyone has. What’s 

wrong? Why wouldn’t you buy one?” The stark reality was that FastOffice had built a Rolls Royce for 

people with Volkswagen budgets. Few—unfortunately, very few—small home businesses could afford 

it.  

Steve and his team made one of the standard startup mistakes. They had developed a great 

product, but they had neglected to spend an equivalent amount of time developing the market. The