The most important job of a startup in the early stages is figuring out product/market fit. Turns out that this is much, much harder than it sounds like. You know the basic story:
- Entrepreneur has a great idea for an unsolved problem to fix
- They envision what they think needs to be done to fix it
- They built that product (BTW – when we say product, it could be either a product or a service)
- They take this product out to the market and potential customers respond with “That’s nice. Let me think about if I need it.”
This is the problem of not having product/market fit. Periodically, CB Insights evaluates startup post-mortems. Each time, they find that the biggest reason startups fail is “No Market Need” – check out their findings here: https://www.cbinsights.com/research/startup-failure-reasons-top/ That’s really just another way to say “poor product/market fit.” In case you didn’t know, this is also the #1 reason for new product failure – no market need.
So, what is product/market fit then? Venture capitalist and Stanford Lecturer Andy Rachleff[1]is credited with coining this term which he explained as: “A value hypothesis is an attempt to articulate the key assumption that underlies why a customer is likely to use your product. Identifying a compelling value hypothesis is what I call finding product/market fit. A value hypothesis identifies the features you need to build, the audience that’s likely to care, and the business model required to entice a customer to buy your product. Companies often go through many iterations before they find product/market fit, if they ever do.”
Here's where the hidden debt comes in. In order to have “fit,” a startup has to work through 3 big ideas: 1) a target market, 2) a product offering and 3) a business model. Putting together any one of these parts is hard work. Getting all three right, at the same time has proven too difficult for a lot of startups. So, let’s break this down a bit more to understand where hidden debts creep in.
First, startups typically hate to focus on a specific target market. They commonly state, “Our product is great for everyone.” Clearly, that is the exception not the rule. Instead, being focused means being able to truly understand who has the highest need for your product. Focusing on only the customers with the highest need actually helps – their needs are more easily defined plus they already know they have the problem and are searching for a solution. That means that promoting to them will be less expensive and more effective. Makes sense. So, why don’t startups focus? Well, that typically means a smaller market to start. And, startups have been told investors only want to see big market potential. So, they shoot for a bigger market and are less effective. That’s a hidden debt.
Second, a startup has to figure out what this target market really needs. That means getting out of the building to talk to them, watch them, try to understand them and figure out what they really, really need – that is, what they are really willing to pay for? Talking to customers is scary… You might find out that they don’t like your product at all. That’s exactly why it is so important to do. And, it takes hard work to do a good job of listening to customers. Sometimes, it’s a good idea to get professional researchers to help. But, that costs money and time. Another hidden debt.
Finally, a startup has to put these two pieces together into a compelling business model – how are you going to get an ongoing revenue stream for solving this problem? Examples of business models might be a memberships, annual contracts, subscriptions, pay-as-you go, freemium, franchise…There are at least 40 different business models to choose from. Startups sometimes come into product/market fit with an assumption about the business model that they never test. Maybe this target for this product wants to pay in a different way than what you thought? That too takes time and testing. Another hidden debt.
The thing is that pretty much everyone agrees – you can’t scale until you get product/market fit. So, assume everything is a hypothesis and starting testing. How will you know you’ve got it? According to Rachleff, it’s when your startup “grows exponentially without marketing.” So, here’s to exponential growth!
Now, that we’ve shared all of the challenges of product/market fit, let’s remember how many notable startups have done perfected it. In fact, CB Insights lists 285 unicorns (startups with a valuation >$1 billion) as of August 2018. You’ll find a number of their stories (think AirBnB, Instacart, Lyft, and many more) in The Titanic Effect. You can see their whole list at https://www.cbinsights.com/research-unicorn-companies. You can also find out more about navigating uncertainty in the book when it hits bookstores in 2019. In the meantime, sign up for our newsletter and get more snippets from the book.
If you want to learn more about product/market fit, check out this review by Tren Griffin of Andreessen Horowitz - https://a16z.com/2017/02/18/12-things-about-product-market-fit/
[1]Learn more about Andy Rachleff at https://www.gsb.stanford.edu/faculty-research/faculty/andrew-s-rachleff