PMF (Product-Market-Fit) v0.1 vs v1.0

When tal­king with some of our port­fo­lio com­pa­nies recent­ly, I had a small epip­ha­ny. As all things with star­tups, the jour­ney to find PMF is neit­her linear nor pre­dic­table. My epip­ha­ny was that get­ting to PMF may actual­ly con­sist of (at least) 2 dis­tinct pha­ses.

  1. You start with somet­hing based on your assump­tions. If tho­se are anyw­he­re clo­se and you execu­te well, you will start win­ning some busi­ness. Poten­tial oppor­tu­ni­ties start pop­ping up – “with this tweak we could ser­ve that seg­ment, with that the other”. Your busi­ness may show healt­hy growth and cashflow posi­ti­vi­ty starts loo­king like a real pos­si­bi­li­ty. You have a PMF – a v0.1 of it. Don’t get mis­lead by it.
  2. The cus­to­mers you win in pha­se #1 are your gold­mi­ne for deve­lo­ping your unders­tan­ding of dif­fe­rent types of cus­to­mers and their problems. As you can zoom clo­se in on them, you start see­ing the dif­fe­rences: from a dis­tance the cus­to­mers and their use cases look the same but once you can see them clo­se enough, they are not. That’s when you need to have the know­led­ge and cou­ra­ge to nail the nic­he you will focus 100% on – so that you have somet­hing you can even­tual­ly sca­le. If you succeed in that, you may have a PMF v1.0 – the one that real­ly works, whe­re “cus­to­mers pull the pro­duct out of your hands”.

Get­ting from 0.1 to 1.0 is har­der than it sounds. First, you must have cla­ri­ty on what is the nic­he you want to make your beach­head – whe­re you can gain such a strong mar­ket posi­tion that it gets the snow­ball effect going. Second – the har­dest part – is to have the guts to say no to what looks like good and viable busi­ness. If you real­ly want to focus on somet­hing, the flip­si­de is you must de-focus off the other things. If you don’t do that, you didn’t focus.

The grand sin of star­tups – pre­ma­tu­re sca­ling – is often the result of trying to sca­le PMF v0.1. Which isn’t sca­lable! Yes you can gene­ra­te some busi­ness if you try real­ly hard – 6 figu­res at least, with luck may­be 7. But pret­ty soon  you hit a glass cei­ling – your growth cur­ve flat­tens, you lose cus­to­mers at the pace of gai­ning new ones in, you throw in more resources and try even har­der – to no avail. You just tread water.

PMF v1.0 is a result of an evo­lu­tio­na­ry process, only with lot­te­ry win­ner luck can you get the­re wit­hout all the hards­hips in between. The­re will be a lot of full step forward, half back – and even half forward, full back. And the­re is no get­ting the­re wit­hout v0.1 first – it is an achie­ve­ment and a cri­tical miles­to­ne. But it’s just the star­ting point, not yet what you should lock the dial on.

The big­gest visible dif­fe­rence between v1.0 and v0.1 is that the v1.0 is way shar­per, far more focused, more nar­row, more preci­se. Which frigh­tens many people “hey I want my mar­ket poten­tial to be as big as pos­sible, not as nar­row”. But the mar­ket poten­tial that mat­ters to you is the mar­ket you can mas­ter, not the theo­re­tical mar­ket that exists somew­he­re. And as you as a star­tup have very litt­le gun­power, you can tru­ly mas­ter only a very nar­row tar­get seg­ment.

But that’s not the end, that’s the begin­ning. The evo­lu­tion does not stop the­re, once you have nai­led your nic­he you see oppor­tu­ni­ties you didn’t see befo­re. The­re is no limit to how far you can go. But you first need to get your PMF v1.0. Anyt­hing that has ever beco­me big has star­ted real small and focused.

Common startup mistakes

After wor­king with hundreds of dif­fe­rent kind of star­tups in dif­fe­rent industries, I must say that star­tups tend to do com­mon mis­ta­kes.

The most com­mon mis­ta­kes in my “list” are:

  1. Not unders­tan­ding problem/solution fit (typical­ly super­ficial unders­tan­ding of this)
  2. Not knowing what to prio­ri­tize and trying to do too many dif­fe­rent things (do less, do bet­ter)
  3. Focus on buil­ding sales - no focus on buil­ding unders­tan­ding (focusing on sales will not work !)

Here is also a good video from Y Com­bi­na­tor part­ner about the big­gest mis­ta­kes First-Time Foun­ders make ( https://blog.ycombinator.com/the-biggest-mistakes-first-time-founders-make/ )

Doing only the things relevant at the stage you are at

What your to-do-list con­sists of, and what your met­rics for mea­su­ring progress should be, depend great­ly on the sta­ge (see article on sta­ges) you are at. If you spend ener­gy on a task that should not be on your prio­ri­ties, it is coun­ter­pro­duc­ti­ve. It can be even let­hal. No mat­ter how good or hard wor­king you are.

Very few acti­vi­ties done in star­tups are inhe­rent­ly wrong. They might be exact­ly right – for someo­ne in a speci­fic situa­tion. But are they right for you, right now is the ques­tion.

A com­mon example of this is pre­ma­tu­re sca­ling  - the #1 cause of star­tup death. The acti­vi­ties being per­for­med can be exact­ly the right ones – for someo­ne who is rea­dy to sca­le. But if you are not, you may com­mit a suici­de as a result.

A rela­ted topic is, what should be the key indica­tors of your progress. If you are in PMF sta­ge trying to mea­su­re Cus­to­mer Love, think what is a good proxy for that? You get what you mea­su­re, so pic­king the right indica­tors for each sta­ge is impor­tant.

  1. Iden­ti­fy the sta­ge whe­re you are at and what should be on your to do list accor­dingly
  2. Iden­ti­fy the right indica­tor to mea­su­re your progress towards your next miles­to­ne

Shor­ta­ge of time is your big­gest obs­tacle - spend it wise­ly

Time is the big­gest shor­ta­ge star­tup has. So you need to spend your time doing right things at right time - otherwi­se you hours will be was­ted on doing somet­hing that could have been done on later date.

One of the les­sons I lear­ned whi­le ent­repre­neur was: You can spend your time doing things right (cor­po­ra­tion) or right things (star­tup) !

Bad Execution or Bad Assumptions ?

You have a plan, you execu­te but the results (such as sales) are not the­re. What’s the problem? Bad sales­guy, so fire him and hire a new one ins­tead? Or could the problem be a more fun­da­men­tal one: is your plan wrong, or more preci­se­ly, the assump­tions your plan is based on are wrong?

Result = plan x execu­tion. It’s not always obvious which one is wrong. Both could be. But for star­tups struggling with sales, the big­gest issue is typical­ly not about sales execu­tion (it might be subop­ti­mal, but not the root cause). It is like­ly to be a product/market fit issue. Or even more fun­da­men­tal, problem/solution fit issue. If the­re is no real oppor­tu­ni­ty, not even the best sales­guy can get a deal.

In most cases, rat­her than rota­te through a num­ber of sales­per­sons, you should go back to your basic assump­tions about the mar­ket, cus­to­mers, their needs and expec­ted beha­viour. You pro­bably have mis­sed somet­hing. Learn from your expe­ri­ments, adjust and then try again.

Problem/solution fit canvas

Ste­ve Blank wro­te ” The dif­fe­rence between win­ning star­tups and tho­se who­le lose is that the win­ners unders­tand why cus­to­mers buy. The losers never do”.

This is the mate­rial ques­tion of problem/solution fit.

The­re are dif­fe­rent ways to address the problem/solution fit. One of the first tasks is to seg­ment the infor­ma­tion you have veri­fied on cus­to­mer seg­ments. This should con­ti­nuo­us­ly be kept up-to-date.

On good tool we have found is from Idea­hac­kers ( https://ideahackers.nl/ ) and their problem/solution fit can­vas:

More on the problem/solution fit can­vas can be found here: https://medium.com/@epicantus/problem-solution-fit-canvas-aa3dd59cb4fe

Then goal is to iden­ti­fy what is the best problem/solution fit for your com­pa­ny to pur­sue furt­her.

Experimenting vs implementing

Cor­po­ra­te way of thin­king: We care­ful­ly pre­pa­re a plan. Then we imple­ment it preci­se­ly. The results will be as sta­ted in the plan. Fai­lu­re is due to bad execu­tion.

Star­tup way of thin­king: My plan is not real­ly a plan, it’s just a sum of my hypot­he­sis. For sure it will be wrong but I don’t know whe­re and how. I need to run lots of struc­tu­red expe­ri­ments to test my hypot­he­sis. When I have vali­da­ted my assump­tions, I may have a plan that is worth somet­hing. Fai­lu­re is due to not run­ning enough dif­fe­rent “tests” with cus­to­mers.

Many star­tups beha­ve like cor­po­ra­tes in this regard, assu­ming their plan will work – just throw in money and people and voi­la. No. Be very awa­re that until you have vali­da­ted your assump­tions you do not have a plan. Then you can not be imple­men­ting a plan (read: sca­ling), all you can do is run expe­ri­ments.

The result of an expe­ri­ment is to inc­rea­se your know­led­ge – does this work, Yes/No. The job of a star­tup is to run expe­ri­ments. A good star­tup learns a lot whi­le spen­ding very litt­le effort and money. A bad star­tup spends a lot and doesn’t learn much. Cost efficiency of your lear­ning should be a key objec­ti­ve whi­le in the expe­ri­men­tal pha­se (=all pha­ses befo­re sca­ling, by which time you should have a vali­da­ted plan you can just imple­ment). Cost efficiency of run­ning your ope­ra­tion should be your key objec­ti­ve once at the sca­ling pha­se.

Stages of startup development

A star­tup is like a new­born baby. The deve­lop­ment of a baby always fol­lows a cer­tain sequence: learn to eat, get the diges­tion sys­tem going, then craw­ling, wal­king, tal­king, run­ning, rea­ding, wri­ting etc. The first clo­se to 20 years of a human life are spent on just lear­ning the skills nee­ded to be a real, adult human being. And it always hap­pens in a cer­tain sequence.

You don’t expect a 2 year old to be able to run a marat­hon, nor a 2nd gra­der to apply for a uni­ver­si­ty.

Star­tups do fol­low a simi­lar kind of a deve­lop­ment. But that is poor­ly unders­tood (or accep­ted), resul­ting in “2nd gra­ders trying to get into a Uni­ver­si­ty, with the help of a rich dad” – in star­tup par­lance known as “pre­ma­tu­re sca­ling” (usual­ly fuel­led by foie gras fun­ding).

Human babies and star­tups ali­ke should focus on deve­lo­ping skills that kids of their age are meant to. Even Wun­der­kinds who have special skills and are fas­ter lear­ners than most have to fol­low the same sequence, they may just advance fas­ter. “The Star­tup J Cur­ve” by Howard Love defi­nes a 6 sta­ge deve­lop­ment process a star­tup has to go through, in sequence, to make it to the finish line. A brief sum­ma­ry of the sta­ges can be found here

https://www.startupgrind.com/blog/the-startup-j-curve/

Eve­ry star­tup should iden­ti­fy their place on that cur­ve, and unders­tand what should and SHOULD NOT be on their prio­ri­ty agen­da whi­le at that sta­ge. And when are they rea­dy to move to the next sta­ge.

One way to look at the sta­ges is as a star­tup Foun­der to do list:

  1. Pro­vi­de evi­dence that the­re is a real busi­ness oppor­tu­ni­ty with real problem worth to sol­ve. (problem/solution fit)
  2. Pro­vi­de evi­dence that a) you can build a pro­duct that does the job (pro­duct) b) you can find a mar­ket seg­ment that loves your pro­duct (mar­ket). (product/market fit)
  3. Pro­vi­de evi­dence that you can build mea­ning­ful busi­ness. (busi­ness model)
  4. Pro­vi­de evi­dence that your busi­ness is sca­lable. (rea­dy to sca­le)

You should move to the next item on the list only when you have tic­ked the pre­vious off. And expect to do a lot of ite­ra­tions – one step forward, half a step back. Some­ti­mes all the way back to squa­re 1.

Problem/solution fit

Problem/solution fit needs to inden­ti­fied & veri­fied prior you can start loo­king for product/market fit or sca­ling. Here is a pre­sen­ta­tion that can help you on iden­ti­fing the problem/solution fit.

Typical­ly ent­repre­neurs feel pres­su­re - both “inter­nal” and exter­nal - to rush to sca­le. Many time even wit­hout unders­tan­ding their problem/solution fit and how it dif­fers between seg­ments.

This results in not fin­ding product/market fit or in inef­ficient and pre-matu­re sca­ling (read was­te of money).

The aim of problem/solution fit process is to be able to iden­ti­fy the best oppor­tu­ni­ty to pur­sue furt­her.

Startups have different stages

Star­tups have dif­fe­rent sta­ges. Howard Love has well articu­la­ted the dif­fe­rent sta­ges and we have inclu­ded the problem/solution fit, product/market fit and sca­ling “fit” for you to unders­tand how the­se sta­ges over­lap each other.

Whe­re is your star­tup ? What are the KPI’s rele­vant for the sta­ge you are in ? Have you “over­lea­ped” one of the sta­ges ? What kind of veri­fica­tion and facts do you have ?

Searching or scaling ?

Is you star­tup still in search mode or are you trying to sca­le ?

Too often star­tup ent­repre­neurs mix searc­hing and sca­ling - which in rea­li­ty are two impor­tant but total­ly dif­fe­rent things. Searc­hing is somet­hing each star­tup has to go through and make own disco­ve­ries. It is typical­ly rela­ted to 1-3 first years of the com­pa­ny, whi­le eit­her in fin­ding problem/solution fit or product/market fit.

Sca­ling only comes and should be done when tho­se both have been found. The big­gest rea­son why star­tups fail is pre­ma­tu­re sca­ling !

Check also https://www.forbes.com/sites/nathanfurr/2011/09/02/1-cause-of-startup-death-premature-scaling/#2d14cf0e1fc9 and https://gorillacapital.fi/stages-of-startup-development/

You talk a lot about “start with why”. What is your own why?

The ove­rarc­hing hig­her cause for us is about making the who­le star­tup com­mu­ni­ty awa­re of an alter­na­ti­ve to the ste­reo­ty­pical “how to rai­se as much money as pos­sible” thin­king (which results in having to tell a real­ly bold sto­ry to pump valua­tions up, and eve­ryt­hing that forces you to do). We want to help build more success­ful star­tups, which reward the foun­ders and inves­tors for the risk-taking. One cor­ners­to­ne of that is the accep­tance of basic facts such as sta­tis­tical pro­ba­bi­li­ties of success in dif­fe­rent sce­na­rios. Hence we favour a ratio­nal approach to risk and fun­ding, as on ave­ra­ge the sur­vi­val rates are much bet­ter when your plan does not depend on win­ning-the-lot­te­ry type odds.

Gorilla Capital Management Oy

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