No Business Plan Survives First Contact With a Customer – The 5.2 Billion Dollar Mistake

At $5.2-billion Iridium was one of the largest,
boldest and audacious startup bets ever made. Conceived in 1987 by
Motorola and spun out in 1990 as a separate company, Iridium planned to
build a mobile telephone system that would work anywhere on earth. It
would cover every city, town and square inch of the earth from ships in
the middle of the Arctic Ocean to the jungles of Africa to the remote
mountain peaks of the Himalayas. And Iridium would do this without
building a single cell tower.

How? With an out-of-this-world business plan. First, the company
bought a fleet of 15 rockets from Russia, the U.S. and China. Next, it
built 72 satellites on an assembly line and used the rockets to launch
them into orbit 500 miles above the earth. There the satellites acted
like 500-mile high cell phone towers capable of providing phone coverage
to any spot on the planet. Seven years after it was founded their
satellites and ground stations were in place. It was a technical tour de
force.

iridium satellite network

But nine months after the first call was made in 1998, Iridium was in
Chapter 11 bankruptcy. It crashed back down to earth as one of the
largest startup failures on record. What went wrong?

We Think We Identified a Large Problem
When Iridium was first conceived inside Motorola in 1987,
worldwide cell phone coverage was sparse, calls were unreliable and per
minute costs were expensive. Cell phone handsets were the size of a
lunch box and cost thousand of dollars.

Motorola Dynatac 8000x ~1987

When it was spun out as a separate company, Iridium's 1990 business
plan had assumptions about potential customers, their problems and the
product needed to solve that problem. All were predicated on the state
of the mobile phone industry in 1990. They made other assumptions about
the type of sales channel, partnerships and revenue model they would
need. And they rolled all of this up into a set of financial forecasts
with a "size of market" forecast from brand name management consulting
firms that said they'd have 42 million customers by 2002. Iridium looked
like it would be printing money when it got its satellites into space.

A Business Plan Frozen in Time
But in the 11 years it took Iridium to go from concept to
launch, innovation in mobile phones and cell phone networks moved at
blinding speed. By the time Iridium launched, there were far fewer
places on the planet where cell phone service was unavailable.
Traditional cell phone companies now had coverage in the most valuable
parts of the world. Prices for local and international cell service
declined dramatically. The size of a cell phone handset had shrunk so it
could fit in your pocket.

In contrast, when Iridium's service became available its satellite phone was bigger than a brick and weighed about the same.

iridium-9500 satellite phone ~1999

Worse, Iridium's cell phone couldn't make calls from cars, offices or
other buildings since phones had to be used outdoors with a
line-of-sight connection to the satellites. But the nail in the coffin
was price. Instead of the 50 cents per minute for a regular cell phone,
Iridium's calls cost $7 per minute-- plus users needed to pay $3,000 for
the handset.

In the eleven years since they had been at work, Iridium's potential
market had shrunk nearly every day. But Iridium's business model
assumptions were fixed like it was still 1990. They were dead on arrival
as a mass market cell phone service the day they went live.

No Business Plan Survives First Contact With A Customer
The result was a classic startup failure writ large. Iridium
followed its original business plan assumptions off a cliff. Their
mistakes? First, in 1990 the company thought it knew the customer
problem to solve, and therefore it knew what solution to build.

Second, since it knew the solution, it went into a 8-year
Waterfall engineering development process. Waterfall development is a
sequential way to develop a product (requirements, design,
implementation, verification--ship.) Waterfall makes lots of sense in a
market with the customer problem is known and all customer needs and
product features can be specified up front. It is death in a rapidly changing business.
Waterfall development shut off Iridium's ability to listen, learn, test
and adapt to changing customer needs and a rapidly changing market
place.

Third, its business plan had no notion of learning and discovery. The
idea of iteration or pivots was unthinkable. This business plan was a
static document. It was great for fundraising, looked great in business
schools and large companies, but completely broke down when confronted
by the realities of the changing mobile phone business. When the company
launched, it ran into diminishing customers and markets that didn't
correspond to its business plan and financial projections, but it had no
ability to pivot and change their business model. A Customer Discovery
and Validation process that was ongoing with product development could
have provided early warning that its market was not developing in
Iridium's favor. Instead management was more comfortable executing to
the plan.

It All Came Crashing Down
All this, plus the corporate hubris of having raised billions
of dollars, with no adult on either Iridum's or Motorola's board who was
asking "does this still make sense?" resulted in a disaster. Instead of
the 42 million customers called for in its business plan,
Iridium had 30,000 subscribers at its peak. The company burned its way
through more than $5.2-billion because it fell in love with technology,
succumbed to Waterfall product development and never bothered to get out
of the building, get their heads out of their spreadsheets and ask,
"What do customers want today?"

In 2000, new investors bought Iridium's satellites and network for $25-million, or one half of one percent
of the invested capital. Today, the successor company serves some
300,000 customers in a series of niche markets including American
soldiers calling home from war zones, oil rig managers, and big game
hunters.

Customer Development, Business Model Design and Agile Development could have changed the outcome.

Lessons Learned

• Business plans are the leading cause of startup death


• No Business Plan survives first contact with a customer


• Rapidly changing markets require continuous business model iteration/customer development


• Your ability to raise money has no correlation with customer adoption

Reprinted from SteveBlank.com

Steve Blank is a
prolific educator, thought leader and writer on Customer Development for
Startups, the retired serial entrepreneur teaches, refines, writes and
blogs on "Customer Development," a rigorous methodology he developed to
bring the "scientific method" to the typically chaotic, seemingly
disorganized startup process. Now teaching Entrepreneurship at three
major Universities, Blank is the author of Four Steps to the Epiphany. Follow him on Twitter @sgblank.