Make Customers Your R&D Experts These entrepreneurs went straight to the source for feedback on product development.

Steve Woodward--a retired newspaper veteran and Pulitzer Prize-winning journalist--started Nozzl Media with one goal: to save news organizations by providing software for creating real-time news streams.

In Nozzl's early days, Woodward and a small team of software engineers spent much of their time writing code. A company advisor noticed that the group seemed glued to their keyboards and ordered Woodward to get out of the office to test-drive ideas and make product modifications based on customer input. Failure to talk to prospects, the advisor warned, could prove fatal to the company's success.

Woodward heeded the advice, met with Vancouver's The Columbian newspaper and discovered that the paper's management team wanted to use Nozzl's software to create customized news streams for the paper's online sections. They wanted to send breaking news streams directly to the home page, sports news directly to the sports page and so on. Woodward had never thought of Nozzl's application being used that way. The input immediately changed the way he approached the software development and sales processes.

"Rather than create the product that we envisioned, I began to listen to customers who were intrigued by our basic platform but wanted to reshape it to [fit] their specific needs," Woodward says. "We immediately saw the advantage of selling customers what they wanted to buy, rather than trying to cram our own vision down their throats."

The change in product positioning and sales philosophy helped Nozzl build its customer base. Because each sale is unique, Woodward will eventually need to hire additional programmers to fulfill orders. How will Woodward fund staff growth? For now, Woodward plans to use sales revenue to hire programmers on a per-project basis. Eventually, though, Nozzl will likely need an influx of investment money.

Finding investors and building a customer base aren't mutually exclusive, Woodward says. Building customer revenue and seeking VC investment work hand-in-hand. VCs want proof that real customers are willing to spend real money on your product or service. Customers generate revenue and boost VC confidence in your business concept, he adds.

Identifying the right investment partner, however, could prove challenging. Not every potential investor understands Nozzl's niche in the market. Woodward has met with several potential investors, and he says that while they liked what they saw, they didn't invest because their partners didn't understand news media.

"I'm just starting to compile a list of likely investors who understand our market--VCs, angels and media companies--so I don't waste time spinning my wheels," Woodward says.

Educating potential investors (and consumers) can be especially difficult when an entrepreneur attempts to create a new product category within a stagnant industry. That's what Ron and Arnie Koss discovered when they introduced Earth's Best Organic --the first line of 100 percent organic baby food--to the market in the mid-1980s. Organic was considered a fringe movement at the time, and the big three manufacturers--Gerber, Beech-Nut and Heinz--hadn't introduced a groundbreaking new product in nearly six decades.

While the Koss brothers had big dreams, they faced three big challenges: The general public was unaware of the benefits of organic food, competing with the three corporate juggernauts that controlled the baby food market, and no cash.

Like Woodward, the Kosses sought customer input before launching the company's first line of products. They conducted focus groups with parents (and babies) to gather feedback on early product ideas

"Focus groups helped us realize that we needed to adjust our initial product concepts and simplify them," Arnie says, adding that the real challenge was interpreting what the babies were trying to say as they were gumming away on one spoonful and spitting out the next.

Ron says gathering input from potential customers early in the product development process forced the brothers to separate the fantasy of starting a company from the reality of trying to introduce a product that had never been sold commercially. "Without the focus groups, we wouldn't have hit the target, let alone approach it in terms of choosing the right initial product line," he says.

Focus group participants' reactions to the early product line offered by Earth's Best enabled the Koss brothers to secure $300,000 in angel investors, which they used to produce organic cereal and bottled food. They also inked distribution deals with national grocery and health food store chains. As cash started flowing into the company, the Kosses continued investing in research and development, capital equipment, staffing and marketing to ensure sustainable growth.

But trying to fund company growth--organically--has a flip side, too. Companies that find themselves underfunded can miss out on huge market opportunities. Brian Ascher, a venture capital partner at Venrock , says you have to ask yourself if being in boot-strap mode will limit your growth.

"Someone who manages to get outside funding is going to be able to serve the bigger customers early and could zoom right past you," Ascher says.

That gray area between early startup mode and wide distribution is where Jeff Cohen, founder of Granola Gourmet , a manufacturer of energy bars for diabetics, finds himself. Cohen was diagnosed with Type 1 diabetes in 1993. He struggled to find snack foods that would satisfy his hunger--and sweet tooth--without spiking his blood sugar. As Cohen tried various energy bars, he found that they either tasted horrible or were made from ingredients that wreaked havoc with his insulin levels. To meet his dietary and snack requirements, Cohen used the glycemic index to create energy bar recipes that were low in sugar and carbs and didn't contain wheat or dairy products.

To Cohen's surprise, the bars not only satisfied his hunger but also tasted good. On a whim, he started selling the bars at farmers' markets throughout Southern California and discovered that the face-to-face contact with customers provided valuable product and price feedback.

"There's no better experience than getting people to try [a product] and watching the looks on their faces," he says. "That tells you as much as their words, because when people like something they light up, and when they hate something, you know it."

The most important information Cohen's customers gave him was that his price point was off-target. Initially, Granola Gourmet bars were sold in a 10-pack that cost $15. Customers told Cohen that buying a box of 10 bars represented a financial and consumption commitment that was too high. Cohen took the advice, reduced the price of the 10-pack to $12 and introduced a four-pack of bars that sells for $6.

Since the change in packaging, Whole Foods, Vons and Pavilions have become the first grocery store chains in Southern California to stock Granola Gourmet, and Northern California Safeway stores will begin carrying the bars later this month. Online retailers Amazon.com and DLife.com also sell the bars. Granola Gourmet's expanding distribution network has drawn the attention of potential investors.

Cohen isn't in a hurry to take on just any investor. He says the relationship between an entrepreneur and an investor needs to involve more than just money. "Any investor will need to have a lot of food experience and a list of contacts so we can use their expertise to grow the company," Cohen says.

There are no hard and fast rules about the right way to fund a startup or its subsequent growth. Successful entrepreneurs, however, say there's one key ingredient in launching a new product: Listen to your customers before going to market. "[We] hit the bull's eye with our initial product line," says Ron Koss, "and many of those products remain top sellers for Earth's Best today."