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.

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3 Comments

  • Ayush Sharma

    Great case study. Though calling it a start-up may not entirely be accurate since it was conceived and executed and funded by Motorola, then integrated with their main operations. A business plan, yes. Nevertheless, it may exactly be the reason why Iridium survives to date. Mir was made to last forever but failed. Technology advancement also means that you can do more with existing resources and infrastructure than you had earlier planned as pointed out by Liz. Fortunately for Motorola, the cell phone evolution did not go beyond their capability to improvise, neither the satellites are near end-of-life.
    Actually it doesn't make sense to leave billions of dollars hanging out in outer space when you can reap from them adding few extra millions on R&D, which is why Liz has her job.

    - Ayush

  • Elizabeth J. DeCastro

    Dear Mr. Blank:

    Your recent article on No Business Plan Survives First Contact With A Customer – The $5.2 Billion Mistake was excellent. Indeed, there are a great many valuable lessons learned from what we refer to as the “first Iridium” and everyone in business should read your piece as a cautionary tale on the possible disconnect between a business plan and the market.

    As the corporate communications director of the “new Iridium” that has been in business since 2000, I am writing not to take issue with your piece, but rather to provide an update on the “latest” here at the company:

    •Since Iridium re-launched in 2000, we have completely re-purposed the use of our network. As you pointed out, there are 383,000 Iridium subscribers worldwide from vertical industries such as maritime, aviation, defense and a rapidly emerging market known as M2M where machines “talk to” machines. In addition, our current handset is now only 9.4 ounces – about the size of the first cell phones.
    •It’s understandable that “providing phone coverage to any spot on the planet” was so compelling to Motorola in 1987 because – despite the fact that urban populations are now heavily covered by cell phones – the great majority of the Earth is still not covered by cell phones or landlines today. When you consider that two-thirds of the Earth’s surface is covered by ocean and then factor in massive expanses of rural land, it estimated that cell and landline phones cover less than 10% of the globe. Iridium works everywhere. For that reason, total Iridium revenue in 2009 was $318.9 million. We expect to deliver at least $150 million in Operational EBITDA in 2010. This financial performance is allowing us to self-finance a significant portion of the $3 billion next-generation satellite constellation we are building -- Iridium NEXT, which is expected to begin launching in 2015. Our current constellation is expected to continue to perform at a commercially-acceptable level until then.
    •The “first Iridium” deserves credit for building a technological marvel – the 66 low-Earth-orbit satellite constellation that we use today. It was clearly ahead of its time in design and execution. And we are proud to say that Iridium NEXT is the most significant commercial space project today and will deliver a global satellite constellation with the same “cross-linked” architecture as the current network – a key feature that ensures a subscriber always has coverage by one of our satellites no matter where they are in the world. Plus it will deliver enhanced services and applications that weren’t even dreamed possible when the first Iridium came to fruition.

    So, as you can see, a lot has changed since the “first” Iridium. Perhaps we should have changed the name when the company re-emerged, but it has worked out well after all...

    Thanks for your attention. I thought you might be interested in “the rest of the story.”

    Sincerely,

    Liz DeCastro
    Corporate Communications Director, Iridium

  • aldo

    Excelent article! But I disagree with the first lesson: "Business plans are the leading cause of startup death". The making of a business plan is a must for a serious start up...but don't fall in confussion: instead an instrument to predict the future (nobody can do it) the biz plan talks more about who are the entrepreneurs than about how the future will be.
    ...the problem in this case was not the business plan but the inflexibility in the execution, as it was said in the article "Iridium's business model assumptions were fixed like it was still 1990"..

    Aldo Aspilcueta
    CEO - Octantis