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.
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.
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.
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.
Identify the stage where you are at and what should be on your to do list accordingly
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) !
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.
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.
There are
no strict rules for that as the whole PMF concept is somewhat abstract and
vague. But there are (semi)objective ways to assess it. What exactly works is
depending on the context so you need to identify the relevant criteria for your
case. However at the end it boils down
to this (by Eric Ries)
“If you have to ask if you have found it, you
haven’t.”
Some things
to monitor/measure that are indicators of PMF (more precisely, the “customer
love” or “market pull” part of PMF):
A
widely used measure is provided by Sean Ellis, who coined the term Growth
Hacking. He states you’ve reached Product/Market-Fit when at least 40% of the
respondents answer the question “How disappointed would you be if this
product no longer existed tomorrow?” with “Very Disappointed”.
Is
Word of Mouth happening? Are your customers telling about you to 3rd
parties, with no involvement from you, which results in winning new business?
Do
you get inbound leads that you can not track back to your own activity?
Are
customers trying to buy before you even tried to sell?
Are
your sales cycles getting shorter?
Do
customer requests generate so much workload that you have no time to pursue
your own development ideas?
Our own
formulation of a litmus test to determine whether there might be PMF:
Provide
evidence of 3 separate measured tests of your customer behaviour that
demonstrate your product/service is significantly (=order of magnitude) better
than the existing solution.
“Product Market Fit is when customers sell for you”.
“Glimmers of false
hope is not the same as customers wanting to rip it out of your hands. Product
Market fit feels like a landmine going off.” Peter Reinhardt
“The number one problem I’ve seen for startups,
is they don’t actually have product/market fit when they think they do.”Alex Schultz
“80% of SaaS companies never make product market
fit.” Peter Reinhardt
“Startups need 2–3 times longer to validate their market than most founders expect. This underestimation creates the pressure to scale prematurely.” (Startup Genome Study)
“You are able to articulate your different problem/solution fit(s) in detail”.
Before you can achieve product/market fit, you need to understand and be able to articulate your problem/solution fit(s) in detail - not in “generic” level or in generic terms (https://gorillacapital.fi/problem-solution-fit/).
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
Every startup should identify their place on that curve, and understand what should and SHOULDNOT 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:
Provide evidence that there is a real business opportunity with real problem worth to solve. (problem/solution fit)
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)
Provide evidence that you can build meaningful business. (business model)
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 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. 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 ?
A common mistake we see on startups is the “urgency” for growth. But you can not run before you can crawl - and each stage demand different tactics/strategies.
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 !
