Competing Definitions of Product/Market Fit

One of my favorite questions to ask seed/early stage entrepreneurs is “do you have product/market fit?” Then, naturally, it’s followed up by “how do you know and what are the metrics?” Of course, the answers, and rationale, are all over the place. While there are a variety of ways to define product/market fit, here are the three most common:

  1. By Unaffiliated Customers
    A simple, easily quantifiable definition is product/market fit is achieved when you have 10 unaffiliated customers that are passionate about the product. Unaffiliated, in this definition, is key in that the customers need to have bought the product based on its merit, not based on being a friend of the founder or an old colleague. Passionate customers are another important component in that there has to be a positive indicator beyond just paying money that there is a real need, one with authentic demand, being solved.
  2. By Positive Momentum
    A looser definition of product/market fit is when instead of feeling like everything is an up hill slog in the startup, things get easier and there’s palpable momentum. Examples include customers signing with significantly shorter sales cycles, PR opportunities popping up, and potential employees actively reaching out to join.
  3. By Distribution Scalability
    A later stage definition of product/market fit is when the cost of customer acquisition is favorable relative to the lifetime value of the customer. Here, the idea is that the solution is valuable and customers are being acquired in way that makes the startup indefinitely scalable.

While there are a number of competing definitions, it’s clear that product/market fit represents good things happening in the startup and the foundation for a successful company.

Reforecasts and Communication

Two years ago I was sitting down with an entrepreneur debating what to do next. It was early in the hyper growth stage of the startup and things were growing fast. Only, with limited operating history, growth expectations were even greater than reality, and there was no way the annual forecast was going to be achieved.

Accountability was tied to the forecast.

Goals/OKRs were tied to the forecast.

Bonuses were tied to the forecast.

What to do?

This challenge is much more common than expected. Fast growing startups are inherently unpredictable. Even with bottoms-up and top-down forecasts, reality is different from the spreadsheet. At some point, trying to hit a forecast that is no longer possible is more demoralizing than motivating — it’s time for a reforecast.

A reforecast is simply redoing the budget and expectations after the year has already started to reflect new information. The key is to get all the stakeholders together, work to make the new forecast as accurate as possible, and then communicate it with the team.

Communication is the most important part.

By over-communicating, including why the reforecast was necessary, learnings from the experience, and go-forward expectations, team members are more bought in and more accepting of the changes. People don’t expect leaders to be perfect; people expect leaders to lead and be transparent.

Reforecasts are part of normal startup life. They shouldn’t happen yearly, but they do happen in the normal course of business. When a reforecast is necessary, make the changes and over-communicate with the team.

The Double Sale

Earlier this week I was talking to a successful software rep about what it was like selling the three different products he’s represented in his career. When discussing his current role, he said something that stuck with me: now, I don’t have to make the double sale.

So, what’s the double sale? The double sale is when you have to first sell the prospect on why they even need your product, and then the second sale is your actual product.

Double sales are required when it’s early in a market and there’s a lack of market awareness. This is the good double sale, assuming it’s not too early — with time, the double sale will go away in favor of a regular, single sale.

Double sales are also required for nice-to-have products that people don’t need but might purchase if there’s a strong sales person. These are the double sales to watch out for as startups can be built selling a vitamin, but selling pain-killers is much more valuable and capital efficient.

Pay attention to the sales process and recognize the potential for a double sale, and more importantly, whether or not the double sale is for a good reason. Work towards a future where a double sale isn’t required to achieve greater success.

When the Startup Stalls

Last week I was talking to an entrepreneur with a stalled startup. After being in business for several years, getting to millions in recurring revenue, and having a great run, the business plateaued. What to do next? Of course, there are a number of areas that can be improved in the business, as is always the case regardless of growth, so I asked the bigger question: What do you want to do with the company?

After much back and forth, it became clear that the desire was to keep running the business and to get it back on a high growth trajectory. We talked about a number of different strategies and decided to focus on three areas: retention, customer acquisition, and the rule of 40.

Retention

Retention represents the core health of the business. Customers that are happy, successful, and finding value renew their contracts. The old adage that it’s more cost-effective to keep an existing customer than to find a new one still rings true. With a mature, no-growth business there’s even more time to focus on the existing customers and ensure they have a great experience and renew (see SaaS Enemy #1).

Customer Acquisition

Customer acquisition represents all aspects of acquiring new customers. Often, when a business slows, the customer acquisition channels haven’t scaled with the company and the law of large numbers kick in such that growth on an overall percentage goes down as the number of churned customers goes up (see Leaky Bucket). Now’s the time to analyze the customer acquisition channels deeper and look for opportunities to make improvements.

Rule of 40

The Rule of 40 states that the profitability, as a percentage, and the overall growth, as a percentage, when combined, should be 40 or higher. A business with 10% margins growing 30% annually meets the Rule of 40 while a business that’s breakeven and growing 10% annually is significantly below. Put another way: grow fast without making money or generate healthy cash flow with little-to-no growth. For a plateaued business, if it’s clear it can’t grow more, it’s time to meet the Rule of 40 by making it more profitable and focusing on operational efficiency.

Stalling startups is all too common and part of the normal course of business. By its very definition, a startup is a growth focused business, so if growth isn’t currently possible, it’s likely time to sell, look for new product ideas, or no longer be a startup.

Quantifying Local Startup Impact

When talking about the virtues of entrepreneurship for local communities, my two favorite benefits are transference of personal growth and high quality job creation. The faster people grow at work, the more abilities they have to help their community. The more high paying jobs, the more taxes and economic impact to help their community.

Startups have much greater opportunities for personal development, being growth focused organizations at their core. Fast growth translates into more leadership training, more pushing the limits personally, and more overall personal growth. Values and lessons developed in the startup spill over into the local non-profits, community organizations, and religious organizations. The faster people grow personally, the greater everyone around them benefits.

High quality job creation is a real challenge for most communities. Large companies, like the Fortune 500, are the business of doing more volume with fewer employees, and have seen their payrolls shrink. Alternatively, startups, while having a high failure rate, also create a tremendous number of jobs when they hit the growth and scale up stage.

Take for example a startup that’s created 100 jobs. In the non ultra expensive parts of the country, a growth stage startup might have an average salary of $125,000. At a 6% state income tax, that’s $750,000 of annual tax dollars to the state. Add in all the other regular expenditures like food, housing, transportation, local sales taxes, and it’s likely that the startup is contributing $6+ million to the local economy (e.g. half of the total salaries). Hosting a Super Bowl is estimated to bring $100 million of local impact, depending on who you ask. Only, a big event is a one-time impact. Startups persist indefinitely and contribute to the economy year after year. Put another way, adding 20 different 100 person startups to a city is the economic equivalent of having the Super Bowl every single year.

Quantifying local startup impact is difficult. Identifying areas like the benefits of greater personal development and general economic impact begins to outline the value of the startups in local communities.

Challenges Going the Local Investor Route

Over the last year I’ve had the opportunity to meet a few entrepreneurs that have raised modest amounts of money from local investors in their region and built the basis of a meaningful, valuable business. When talking to the entrepreneurs, it’s clear that they value optionality — they don’t want to raise too much money so that they maintain control and they don’t want to get on the venture-backed train of go big or go bust.

Yet, there are major challenges going the local investor route: lack of true domain expertise and recent been-there-done-that experience. Occasionally the local investors in the deal have it but the vast majority of the time they don’t. And, typically, when doing these local rounds, the money comes from non-professional investors that have a day job, usually in a different industry (e.g. successful business people, lawyers, doctors, etc.). The other major component is that many of the monied folks that do have domain expertise are many years removed from their last success. Basics like leadership and values are timeless, but many other facets of building a successful startup are different from 20 years ago.

My default position is to not raise money unless it’s clear the machine is working, defined by a 5x increase in value for every dollar invested. Too many entrepreneurs blindly chase investor money believing it is the only path forward. For entrepreneurs that have already raised some local money, the key is getting people around them that know what they don’t know.

For entrepreneurs that go this route, there are several solutions. First, get involved with an organization like EO or YPO, join a forum, and then reach out to the greater network and look for regional or national special interest groups that have current domain expertise. Second, apply to a non-profit like Endeavor which explicitly focuses on helping scalable, high impact entrepreneurship make the most impact. Third, recruit board members and advisors that truly care and will debate what’s best for the business (too many entrepreneurs surround themselves with people that won’t push back).

Raising money from local investors is fine, but it requires more time and effort to get the expertise around the table to really help the entrepreneur realize his or her potential.

Don’t settle.

Get the help needed.

Build an amazing business.

We > I for Entrepreneurs

Over the last year I’ve had the opportunity to meet with dozens of entrepreneurs through the Endeavor program. At one of the events I was seated, listening to an amazing entrepreneur tell his story and it was incredibly compelling. Only, every 10th word was “I.”

“I grew sales 30% last quarter.”

“I acquired a competitor last year.”

“I hired an amazing executive.”

“I raised an institutional round.”

Finally, I interjected and asked, “Are you open to feedback?”

Curious, thinking what he had said wasn’t necessarily feedback oriented, I shared that his use of “I” was disappointing. He didn’t achieve those things by himself. He leads a team, not just himself.

Leaders need to say “we” and not “I”, especially when referencing organizational results.

“We” accomplished the goal.

“We” made it happen.

“We” > “I”, always.