[ Interview ] Customer Development Expert Sean K Murphy on the 3 Capitals Driving Business Success


A few weeks back, I spoke to Sean Murphy for The Lean B2B Podcast. We talked about entrepreneurship, customer development, the importance of social capital, and the best time to start a business.

You can watch the full interview below, or access it on iTunes, Google, or Spotify.

Interview Transcript

Customer Development Expert Sean K Murphy

Etienne Garbugli: My guest today is Sean Murphy. Sean is the CEO and founder of SKMurphy, a consultancy helping clients find early customers build early revenue. Sean is a sales and customer development expert focused on B2B. Recently, Sean also published a new book, part of a series of three, called Working Capital: It takes more than money.

Sean, welcome to the podcast.

Sean K Murphy: Thanks for inviting me.

Etienne Garbugli: Maybe as a first question, I read your book over the weekend. What was your goal in writing Working Capital?

Sean K Murphy: Well, I wanted entrepreneurs to get a better understanding of how the three types of working capital operate so that they can use them to established and scale a viable business. In addition to financial capital, there is also intellectual capital and social capital.

Etienne Garbugli: Specifically, I really liked your analogy for these capitals. They’re a little bit like three legs of a stool: they’re all important in order to achieve success in business. So, if we were to zoom out a bit, thinking through this, when would you say someone is ready to be an entrepreneur? Is there even such a thing?

Sean K Murphy: I’ll give you the flip answer, which is you’re ready to be it after you’ve had your second business failure. Then you’re really ready. In my experience, entrepreneurship is very hard. I believe that people are either born that way or they’re forced into it.

If you’re starting out, I think you’re much better served to work with a firm with a successful system that you can learn from. And I would learn as much as you could before you go out on your own because learning on somebody else’s nickel is substantially cheaper than making your own mistakes.

I would also try and pick an industry or pick an area with customers that you want to work with. Now, this may take much of your twenties to figure out or even some of your thirties. I don’t think you necessarily have to go right out there and fail on your own right away.

Etienne Garbugli: So, should people who aspire to be entrepreneurs kind of decide on their career earlier on, based on their ambitions to be entrepreneurs, or should they consider that?

Sean K Murphy: That’s a good question. I think two things: one, I think it’s a mindset that can be applied to a variety of domains. So, I think we need to develop domain expertise, intellectual capital, whatever you want to call it. And I think you’ve got to develop some understanding of the customers you’re going to serve before you go do it. So, it’s both of those. I think it’s an orientation or a mindset.

I think you can be entrepreneurial inside of companies as well. You can look for ways to improve services, improve group processes that create more value for the customer. That’s another way to experiment or move down the learning curve in terms of what it takes to learn how to introduce and sell change.

Etienne Garbugli: So, say someone has failed a few times, has built some form of career, what kinds of business approaches do you feel that they should be prioritizing?

Sean K Murphy: To me, you’ve got to look for places where your know-how and your existing business relationships provide you with a significant competitive advantage. It’s not just energy and enthusiasm. You’ve got to bring distinctive competence, the ability to deliver results, and preferably some knowledge of and affinity for the people you’re going to serve.

Etienne Garbugli: Is there one of these facets that’s more important or more critical? Is there one that’s fully essential, like, you can’t start without?

Sean K Murphy: We like to see teams come together. So, I think that on a team, there has to be at least one person that’s worked with or understands what it’s like to be the customer or the people you’re trying to sell to. It doesn’t have to be everybody on the team.

And there are advantages to having some people without direct industry experience. They tend to bring new ideas from adjacent fields; they’ve got something to prove. And you’ve got to have some insights and some ability to solve a problem in a better way than what’s already out there.

Etienne Garbugli: So, in a way, one person that has a profile, at least partly a domain expert or at least has some domain expertise?

Sean K Murphy: Right. I think without that, you can achieve what’s called the negative strategic surprise. You just don’t know something about the domain that turns out to be fairly essential. There’s a category of information that’s not written down, and if you haven’t worked in the industry or worked with people and supported them or been part of that, it’s hard to get that.

I mean, I can read 10 books on the Apollo Program or what it’s like to be an astronaut, but that’s very different from the guy who’s sitting at mission control in front of the panel or the guy who’s sitting in the pilot chair of the shuttle or whatever. But I can have read a lot of books about it. It’s two different kinds of knowledge.

Etienne Garbugli: So, what you’re saying a little bit is that this might mean that you run into a challenge that you didn’t anticipate, but that actually may be deadly to your business?

Sean K Murphy: There’s this guy, Albert Hirschman who says creativity is the result of finding yourself in a very challenging situation. So I think that it’s fine to bring people from the outside. It’s good to have a diverse team that is coming from different places. But if you don’t have anybody, if you don’t have Tonto, you don’t have somebody that knows what it’s like to travel the Badlands or get through the desert, then, yeah, you may discover some things that you wish you had known before you started.

Etienne Garbugli: So, in that sense, like I have this experience, I’m an entrepreneur, I’ve had certain domain expertise. I’ve worked in different types of organizations. How would you recommend that that person starts thinking about markets, audiences? Like, what kind of entry market should that person be looking for?

Sean K Murphy: I really liked Peter Thiel’s formulation of secrets: you should have determined something that you believe is true or you confirmed is true, which is contrary to commonly accepted wisdom. So, you can be early, you can be different, but if you’re proceeding just based on common sense and the ability to execute, it’s really hard to outperform incumbents unless you’ve got some kind of geographic separation or there’s some other kind of separation from people that have been in that industry for a while.

I think you’ve got to have something which is going to give you an unfair advantage. It’s okay to study and definitely not quit your day job until you’ve got a very clear idea of what’s going to make you different.

Etienne Garbugli: How sustainable should that distinction or is that difference or that ability to differentiate on the market be? How long-lasting should it be?

Sean K Murphy: I think it’s got to be at least three to five years. I think it takes a while for you to figure that out. I remember talking to a friend of mine who was working at Arthur Andersen in like 1998 at that point.

There was thing back then called Y2K. And I asked him how it was going. And he said, “Well, we’re not really hunting for any more Y2K problems. That’s now off strategy for us.” I said, “Well, that’s amazing. It seems like there are tremendous opportunities.” He goes, “Yes, but they’re all only going to last another 18 months.” I hope that helps.

Etienne Garbugli: In that case, what types of problems should those businesses be considering within the market and how should they best frame those problems to be able to align their business?

Sean K Murphy: Most people that we work with don’t ask me these questions. So, I’m just being candid. Most people that we work with have a burning desire to solve this particular problem, or to take this technology, which they believe is going to make a difference and find a place to apply it.

I think larger firms ask the kind of questions that you’re asking, where we’ve got these resources, what’s the best way to deploy it? But for the early-stage entrepreneurs I work with, they want to go do it. We’re trying to help them make it succeed. So, it’s a little different.

The people we try and deter would be somebody who says, “I’ve never worked in cleantech, but I hear they’re huge opportunities. I’d like to go do something there.” It’s like, “Well, you better find somebody then that knows a lot about cleantech or biotech or pick your favorite domain because a strong desire in and of itself is not enough.”

Etienne Garbugli: So, let me put some meter on that then. I do feel personally, that the concept of a problem is quite subjective, both in the way it’s understood as well as in the way it’s expressed between people.

So, what do you feel is the relationship between, for example, the problem that a company that comes to you guys is addressing versus the job to be done behind it? What’s the relationship between jobs to be done and problems specifically?

Sean K Murphy: I really liked the jobs to be done formulation. I like the idea that you’re hiring a product to solve a problem. So, I think there’s a couple of things. Let me unpack a little bit of what you’re talking about. I think there’s a couple of things going on here.

The first is that it’s much better if the people you’re calling on realize they have a problem or at least acknowledged that they have symptoms, and better, that they have a problem. If you’ve got to convince them they’ve got the problem, it’s a much harder path to proceed.

So, it has to be a recognized problem.

And your solution, our rule of thumb is I have to be able to come in and within two hours, working from information that’s readily available to you, tell you something that’s relevant to your business you didn’t know. So, the best case is in one demo, I could show you something that says I can make that problem better.

The backup step is, “Okay. You’ll agree to let me take some data away or some aspect of this problem away, and I’ll come back within five working days. I’ll come back a week later and I’ll be able to demonstrate something to you. So, if you don’t have that level of kind of time to value, I think it gets much harder to sell.

I think, as a startup where you’re already in kind of a one-down position with not much credibility, you have to offer, not only a compelling before and after, but a fairly quick time to solution. Maybe not time to fully deploy throughout the enterprise, but you’ve got to show them something that says, “We can solve this problem. We can solve your problem working from your particular information data, your situation. We can make it better.”

Etienne Garbugli: So, you’re trying to sell the relationship between what things are today and what they could be tomorrow with a clear time horizon of how you actually get from A to B?

Sean K Murphy: I’m trying to demo to them the solution or an aspect of a solution that they’re going to find compelling. It has to be a business-critical issue. It has to be a problem that the customer is willing to spend money to solve — some kind of goal or objective or career is at risk.

People who are in a lot of pain will accept partial solutions. You don’t have to make the problem go away, but you’ve got to deliver some significant quantum of benefit that makes it noticeably better.

Etienne Garbugli: How do you make sure that both your understanding and the prospect’s or the customer’s understanding of the problem and maybe your team members’ understanding of the problem all sync up so you’re sure that you’re all solving the same problem?

Sean K Murphy: This is very hard and it involves a fair amount of trial and error. So, Batman’s got the Batcave where he develops all of his tools and all of his techniques, but he has to leave the Batcave to fight crime. I mean, without the Batcave, he’s not as effective as a crime fighter, but you actually have to get out of the Batcave and you have to go engage with customers.

And many times, it’s kind of like the “dogs watching television” effect. They look at you and they go, “Yeah, I don’t have that problem.” Sometimes you propose a solution and they’re like, “Well, I’ve got these constraints or these requirements that mean that your solution is completely unsatisfactory.” You have to engage and it’s somewhat of a trial and error process.

Etienne Garbugli: So, coming back to the previous question; would it make sense to first define the job to be done, then figure out what the problems are or can you do the reverse?

Sean K Murphy: We have people that have a technology that has uses in many areas. And sometimes you explore multiple areas in parallel and they get traction at a particular place. They’re typically all related in some overall industry over here, but you don’t always know where it’s going to work best.

Sometimes you’ve got a problem and it turns out that you bring together three or four existing techniques in a novel methodology or a novel way to solve it in a way that’s much better than what’s out there.

So, I’ve seen it work both ways. Sometimes you start with a technology or solution; sometimes you start with a problem. I don’t have a dog in that fight. There’s a whole bunch of jobs to be done. Guys are all… it’s a very quarrelsome church.

Etienne Garbugli: Yes. I think that’s something that most people can agree on. So, in the book, you talk about the importance of time to revenue. I’ve seen this framed as well as time to product-market fit. I think it’s a really interesting concept. So, how do you feel time to revenue should impact a business or a founder’s decision-making process?

Sean K Murphy: I say time to revenue and I have to be careful because when many people hear that, they think about how long does it take to get paid once you bill them. And that’s a consideration, but what I’m really talking about is how long does it take to get paid once you’ve had that first conversation and you believe that you can provide them with value?

You’ve essentially got a qualified prospect. So how quickly can you go from, we’ve qualified that we’ve got somebody who fits our target customer profile and has a problem we can solve. Then how quickly can we demonstrate value in their business and get paid? We normally encourage startups to align when they get paid to when the customer sees value because this significantly reduces the customer’s perception of the risk in this purchase or the risk in this deal.

And frankly, customers are not going to cut you a lot of slack until you’ve demonstrated some real value. So, I think this question of how quickly you can produce value in their business is always a strategic consideration for startups.

Etienne Garbugli: So, the question the other question I’m adding there; in that case, if you’re bootstrapping versus you’re a venture-backed startup, should your idea of the time to revenue change and should it, in that case, mean that the type of value you’re trying to provide will be different?

Sean K Murphy: Okay. There are two drivers on this. We do some work with venture-backed folks. Typically, it’s after they went through their money and have discovered the joys of bootstrapping. The reason why you want to focus on the customer paying you is because that’s unambiguous proof that you’ve delivered value.

For the most part, a business will not pay you or will not do a reorder until you’ve delivered value. And that is the crucible. The whole cluster of hypotheses you’ve been carrying around, actually get marked to market: it tells you if this works or it doesn’t.

So, to me, the time to revenue is the clock speed or the clock cycle on how quickly you can run experiments that you can iterate. Now, I know in the very beginning, people may pay you with their attention. So, you try a message and you get paid with attention. That’s necessary , but that’s not sufficient.

And then as well, they give you data or they give you some problem you can solve to demonstrate you can do something. That’s a form of payment, again, that’s necessary, but not sufficient.

So, the reason why I focus so much on time to revenue is that’s when you get unambiguous proof that you’ve actually delivered value. So, I think venture guys should do it as well as bootstrappers.

Etienne Garbugli: I think they probably somewhat tried to do it based on their pitch decks and how much money they feel they need to raise to reach certain milestones, but yeah, they probably don’t do it the same way for sure. That’s partly why I think it’s super interesting. And it’s really interesting in the book that you talk about as well, the time that it takes to get paid, which is a really critical consideration, especially for people who have maybe never managed a business because actual money matters if you want to keep the business engines going.

Sean K Murphy: Right. And I think it’s possible to work nights and weekends and do a certain amount of lunch hours and do it outside of ordinary work hours. Not chasing customers that your current employer also wants or at least solving the same problem. I don’t think you should compete with your current employer.

The other thing that the venture-backed guys sometimes get into… I did some business once with an early-stage startup and I said, “Look, I’d like to buy a seat.” And they say, “Well, we’re trying to prove our business model, and selling to you is going to be off strategy for us.” And I’m like, “Well, how many people have paid for the product?” “Well, no one.”Well, gosh, I’d like to use it and see what I can do” They were very committed to their model. I guess that was all strategy.

If I had been on the other side of the table, I would have found a way to take my money and work with me because it would say something. If I already had 10 paying customers, then I might be less willing to explore. But at the very beginning, all you’ve got is a hypothesis about how it’s going to move. You don’t actually know.

Etienne Garbugli: Yeah. And it’s interesting when people self-select, to some extent, as you were kind of doing in that case. You were thinking, “Oh wait, this could be interesting for that.” So, it’s probably very important to still be open to these unplanned outcomes a little bit because they can open up doors that are very interesting.

In the book, you talk about the importance of letting go of bad product ideas and knowing when to pivot. What are some of the signs or signals that typically indicate the need for a pivot or a change of strategy?

Sean K Murphy: Some people talk about pivots as if it’s not a big deal. And at least as I look at it, it’s typically somewhat painful. It’s always hard. So, first of all, I think you’ve got to talk to enough of your target customers who have the problem and know that you’re not providing value. So, you’ve got to have explored.

And that number, for me, is somewhere between 10 and 30 if you’re listening carefully. And it can be less if you’ve got a very strong signal, but to me, that’s kind of the range. I also make a distinction between pivoting and tinkering. I think you’re tinkering a lot.

I think you’re making a lot of small adjustments. You’re making a lot of fine adjustments. The other thing is I think when the team forms, they need to say, “Look at us, look at our capabilities. Let’s make a plan B and a plan C now.” Because one of the other things that makes pivoting hard is, should we keep doing this or do something else? I don’t know what that something else is. And that unknown actually makes people persist on a bad plan when they should have pivoted. And I have worked with and had the privilege to hear a number of serial entrepreneurs talk about this at the Bootstrappers breakfast.

If you look at how they go about it, typically, the team doesn’t change as much, but when the team forms, they write down a list of ideas and they work that list. And so, if the first thing doesn’t work, they go to the second one. I think first-time folks tend to get trapped in the, “I can do plan A I don’t know what I’m going to do”. And that always leads too far down the wrong track.

Etienne Garbugli: And in that case, when you’re talking about plan A plan B, should those plans be ideas, or should they be markets, or should they be combinations of both?

Sean K Murphy: I think they should be written down and I think they should be plans for some way that still builds on the distinctive know-how and the social capital of the team, but may involve a different technology or maybe going to a very different niche. So, we’re not going to sell to these guys. We’re going to sell these people over here.

Etienne Garbugli: So, in a way, charting these different paths that are not necessarily overlapping enough that one would negate the other one?

Sean K Murphy: Right. I think the other thing is if you can’t think of at least three things you could do with a team, then you’re probably not investigating enough alternatives. I think it’s also legitimate to explore a little bit in parallel. I think it’s sometimes useful to say, “Look, we’ve got two ideas here.” There’s a risk that if you chase two rabbits, you don’t catch either. But there’s also a benefit to being a little open to multiple possibilities.

And it could be that you discover that both are actually viable. One is small, but the time to revenue is much shorter, in which case, you use that to get in and establish a beachhead, and then from there, a base camp, and then you can scale up into B and C and D. And you should have a plan for what happens when you exhaust your primary market, but that’s a different conversation.

Etienne Garbugli: So, say, you’re exploring the several options in parallel or a little bit in parallel and you decide to go with option B, for example. Should you, at that point, stop exploring other options and focus entirely on that one, or can you still keep other paths in your target?

Sean K Murphy: I think there’s discovery and delivery, or exploration and execution. I think, to really make it work, you’re going to have to go all-in on one opportunity for a certain amount of time. When you really get into it and you’re competing with incumbents or against other people that you’re in a startup, at some point, you have to focus fully there. It doesn’t mean you can’t come back later on and reopen some of those conversations and go forward.

And you’ve got to be open to the fact that you’ve invested a lot in this effort and it’s not paying off. You’re not getting traction. You’re not getting uptake, and you’ve got to change gears.

Etienne Garbugli: Okay, great. Maybe if we take a step back a little bit more of a general question; so, you’ve been helping companies for several years. You’ve seen different models. I know you work with some hardware companies, software, different types of organizations. Has your perspective on starting businesses evolved over the years? How do you see B2B entrepreneurship evolving moving forward? Where was your understanding of it before, where is it now, and where do you think it’s trending? It’s a big question.

Sean K Murphy: I guess the first thing to say is there’s no fixed formulas for success unless you want to buy a franchise, and even then, things change. So, I think you’ve got to be careful about people that are promising you a fixed formula for success.

There’s a really good article by Arie de Geus from the late eighties about Planning as Learning. And he says, “The ability to learn faster than competitors may be the only sustainable competitive advantage.” That, to me, is the core, at least for technology entrepreneurship. That means that there’s a need for ongoing exploration and discovery efforts, not only about natural phenomena and technology innovation. I wouldn’t call it basic research. I’d use Donald Stoke’s term of use-inspired research, where you’re open to discovering basic principles.

I think there’s also gotta be this ongoing, intense curiosity and care on the part of everyone in the startup who touches the customer about how to create value or how to remove things that are limiting or restricting the value they get from their product.

I don’t know if that’s actually changed. I think that’s probably always been true. I started SKMurphy in 2003.. And that aspect of it I don’t think has changed. You have to have an intense curiosity. You have to be committed to creating value and you have to be committed to ongoing learning.

Etienne Garbugli: Well, in that case, what changed more the fact that maybe more businesses are convinced by these ideas or maybe that the way you were able to learn or the way you were able to speed up that learning or continuously improve yourself have also improved as well? Would that be a fair assessment of maybe what’s trending or what’s changing over time?

Sean K Murphy: One of the things that you have to do at certain points to learn more is you have to let go of old ways of doing things and you have to let go of previous expertise. I just don’t know anybody who doesn’t find that painful. If you’ve got a process that’s working very well, it’s hard to break that up, to find the higher plateau, or even worse, when a competitor comes in and is outperforming you. You go, “Hey, what we currently count as the best we can do is not good enough.” You have to look for new methods and look for new approaches.

I don’t know if that process is getting any easier. I guess I’ll put it that way. I think there are human elements to that or human aspects to that, and interpersonal aspects to that, but they’re just very painful. There’s an aspect of learning that when you have to reorganize your understanding of something that’s both exciting, but in some cases, it can be very painful as well.

It’s the realization that a lot of things that I thought I knew are now wrong, or obsolete, or whatever. So, I don’t know that that gets any easier.

Etienne Garbugli: Yeah. And it’s also hard to know which parts will either become obsolete or will continue to deliver value. It’s very difficult to know how you should plan for adaptation moving forward.

Sean K Murphy: You’re right. I was talking to somebody the other day about Fuji versus Kodak. So, two firms at the top of their game in photography and digital photography is coming. And for the purposes of photography, digital obsoleted probably, let’s say, 60 to 70% of their knowledge.

I think Kodak gets a bad rap. I think they ultimately didn’t do as well as they could have, but the Fuji guys said, “Okay, we’re going to hang on to what we know.” So, they chose the pain of going and talking to a ton of strangers to figure out who else could use what they did, which is just painful and being told over and over again, you’re used to coming in with high confidence and you’re saying, “No, you don’t understand. And we got to go hire people, I’m sure, that understand these other industries so that they can take our know-how and they can repurpose and remix and redeploy it.”

Fuji did that. Kodak was less able to. The Digital Tonto guy has got a thesis that we’re coming to the end of the digital revolution and that we’re going to go back and material science and atoms not bits.. I’ve argued to some level that some of the digital, the Facebook and some of the social network stuff is actually a little bit like heroin. In the same way that in 1905, you could buy heroin in the drug store, and in 2020 you couldn’t, maybe we’re going to look at Facebook that way.

But the deeper point is that we may be hitting an inflection here. All of a sudden, material science and atoms may become a much more significant source of innovation than just pure digital play. And I think the companies that adapt to that are going to have to go through this restructuring process. And I think it’s painful.

Etienne Garbugli: Yeah, but maybe that’s also the answer to some extent. You got to be willing to accept that pain, which seems to be the case with Fuji that you were mentioning. You got to set things up in a way that people are willing to take that pain.

Sean K Murphy: Right because your survival is at stake.

Etienne Garbugli: Yeah. To that point specifically, oftentimes that decision is made when the ship is already sinking, as opposed to on a continuous basis.

Sean K Murphy: Well, and things are going great. The problem is the new technology comes in slowly and, and first of all, it takes away many customers you didn’t really care to serve. So, for a while, you think this is great. Our core is protected and our critical stuff is going to be served by this crappy digital stuff.

Etienne Garbugli: Yeah. In a lot of ways, I feel like those are also based on maybe outmoded ideas from business. Like you read a lot of MBA type books from the 90s and this idea of endless growth or endlessly being able to just operationalize business and then keep spitting out cash, where I think as we’ve seen if you look at the companies at the S&P, the lifeline of a business is getting shorter and shorter. It’s way harder to be on top.

And you could argue that Kodak, for example, had a really good run for a long time, but maybe they did reach the end of the line or maybe they didn’t need to.

Sean K Murphy: No, they could have emulated Fuji.

Etienne Garbugli: Yeah, which is probably a very difficult thing to do when you’re the incumbent. Super interesting. Thanks for taking the time, Sean. Where can people go to learn more about your work, some of your thoughts on business and entrepreneurship?

Sean K Murphy: I’ve got a website with about 2,000 blog posts on it. It’s skmurphy.com. That probably is the best place to find me.

Etienne Garbugli: Perfect. Thank you.

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