The Startup Owner's Manual. Steve Blank

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Figure 1.2 The Product Development “Waterfall” Model

      In Webvan’s case, Engineering moved along two fronts: building the automated warehouses and designing the website. The automated warehouses were a technological marvel, with automated conveyors and carousels transporting food items off the shelves to workers who packed them for delivery. Webvan also designed its own inventory, warehouse, and route management systems and software to manage the entire customer order and delivery process. This software communicated with the Webvan website and issued order-fulfillment instructions to the distribution center. Once a delivery was scheduled, the system’s custom route-planning feature determined the most efficient route for delivering the goods to customers’ homes.

At the same time, planning began for a marketing and promotion program designed to strengthen the Webvan brand name, get customers to try the service in the first target market, build strong customer loyalty, and maximize repeat usage and purchases. The plan was to build Webvan’s brand name (down to stickering every cup holder in San Francisco’s AT&T Park) and customer loyalty through public relations programs, advertising campaigns and promotional activities. Spending for all these activities was part of the business plan.

      Alpha/Beta Test

      In stage three, the alpha/beta test, Engineering continues building along the classic waterfall development model, working toward the first customer ship date. And, by beta test time, working with a small group of outside users to test the product and ensure that it works as specified. Marketing develops a complete marketing communications plan, sets up the corporate website, provides Sales with a full complement of support materials, and starts the public relations bandwagon rolling. The pragency polishes the positioning and starts contacting the long-lead-time press and blogs, while Marketing starts the branding activities.

      Sales signs up the first beta customers (who may volunteer to pay for the privilege of testing a new product), begins to build the selected distribution channel, and staffs and scales the sales organization outside headquarters. The sales VP works toward achieving the revenue plan as specified in the business plan. Investors and board members start measuring progress by the number of orders in place by first customer ship. The CEO hits the streets and the phone or the parent-company headquarters, searching for additional capital.

      Webvan began to beta-test its grocery delivery service in May 1999 with about 1,100 customers. At the same time, the marketing buzz started with a prblitz with hundreds of articles touting the newest entrant in the online grocery business. Private investors poured hundreds of millions of dollars into the company.

      Product Launch and First Customer Ship

With the product working (sort of), the company goes into “big-bang” spending mode. The product and the company are launched. The company has a large press event, and Marketing launches a series of programs to create end-user demand. In anticipation of sales, the company hires a national sales organization; the sales channel has quotas and sales goals. The board begins measuring company performance based on sales execution against its business plan, albeit one typically written at least a year earlier, when the company first sought investment.

      Building a sales channel and supporting marketing burn a lot of cash. Assuming no early liquidity event for the company, more fund-raising is often required. The CEO looks at the product-launch activities and the scale-up of the sales and marketing team and goes out yet again, palm up, to the investor community. (In the dot-com bubble economy, investors used an IPO at product launch to take the money and run, before there was a track record of success or failure.) This operational model no doubt sounds familiar to many: a product- and processcentric model used by countless startups to take their first products to market.

      Webvan launched its first regional web store in June 1999 (just a month after starting beta test) and filed for its public offering 60 days later. The company raised $400 million and had a market capitalization of $8.5 billion the day of its IPO—larger than the market cap of the top three grocery chains combined. The elation was short-lived.