Achieving Product/Market Fit

Product/market fit has always been a fairly abstract concept making it difficult to know when you have actually achieved it. Yet many entrepreneurs have highlighted the importance of creating a product that resonates with the target market:

• Paul Graham: The mantra at Paul’s successful startup incubator YCombinator is “make things people want.”
• Steve Blank: In Steve’s book Four Steps to the Epiphany he writes: “Customer Validation proves that you have found a set of customers and a market who react positively to the product: By relieving those customers of some of their money.”
• Marc Andreesen: A couple years ago Marc wrote the following on his blog: “…the life of any startup can be divided into two parts – before product/market fit and after product/market fit.”  He goes on to write: “When you are BPMF, focus obsessively on getting to product/market fit.  Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don’t want to, telling customers yes when you don’t want to, raising that fourth round of highly dilutive venture capital — whatever is required.” 

I’ve tried to make the concept less abstract by offering a specific metric for determining product/market fit. I ask existing users of a product how they would feel if they could no longer use the product. In my experience, achieving product/market fit requires at least 40% of users saying they would be “very disappointed” without your product. Admittedly this threshold is a bit arbitrary, but I defined it after comparing results across nearly 100 startups. Those that struggle for traction are always under 40%, while most that gain strong traction exceed 40%. Of course progressing beyond “early traction” requires that these users represent a large enough target market to build an interesting business.

You should measure your product/market fit as soon as possible because it will significantly impact how you operate your startup. If you haven’t reached product/market fit yet it is critical to keep your burn low and focus all resources on improving the percentage of users that say they would be very disappointed without your product. Avoid bringing in VPs of Marketing and Sales to try to solve the problem. They will only add to your burn and likely won’t be any better than you at solving the problem. Instead, you (the founders) should engage existing and target users to learn how to make your product a “must have.” Sometimes it is as simple as highlighting a more compelling attribute of your product – but often it requires significant product revisions or possibly even hitting the restart button on your vision.  For more on getting to product/market fit, I recommend reading Marc Andreesen’s full post via archive.org (it has been removed from his blog).

Race up the Pyramid

Once you have achieved product/market fit, it’s time to accelerate through the next steps of the pyramid and then begin scaling your business. Here’s a brief description of what to do at each of the steps before scaling:

• Promise: Highlight the benefits described by your “must have” users (those that say they would be very disappointed without your product).
• Economics: Implement the business model that allows you to profitably acquire the most users.
• Optimize: Streamline a repeatable, scalable customer acquisition process by testing multiple approaches and tracking to improve the right metrics.

Effectively executing these pre-scale steps often improves the conversion rate to transactions by 5X or more. This directly boosts the effectiveness of every future marketing initiative by the same proportion. Just don’t rush into this fine-tuning phase until you have first achieved product/market fit.

I recommend reading this post on Milestones to Startup Success for additional details.

In my experience with both Xobni and Dropbox, I stand by my earlier claim that “Y Combinator hatches brilliant entrepreneurs.”  Both have been funded by very reputable VCs and continue to thrive.  But both started before the major economic meltdown.

Today all startups are having difficulties raising Series A funding – including Y Combinator startups.  Jamie offers an interesting alternative model in his post that suggests incubators should provide more/longer help for their startups.  Venrock’s Quarry is similar to the model that Jamie is proposing.  The additional benefit offered by Venrock is that they often provide the Series A round of funding to the startups that they incubate. 

Hindsight will tell us which model is best in the current economy – but for now I have no clue.

The second major hurdle is execution.  Y Combinator entrepreneurs are “hackers,” which is another name for scrappy software engineers.  Engineers typically thrive on the challenge of “can it be done?”  Before Y Combinator, this challenge spawned many useless companies.  Y Combinator refocuses “hackers” on a new target which is closer to “should it be done?”  Their mantra “make something people want” helps entrepreneurs create useful stuff that solves real problems. 

Unlike overly exclusive VCs, the Y Combinator model is heavy on general guidance and light on cash.  This makes it much more scalable – they can afford to make decisions after a 10 minute interview.  Sure there will be more failures, but many more brilliant minds will be willing to take a chance on starting a company.  In fact Y Combinator founders are among the smartest entrepreneurs I’ve met in 15 years of startup life.

Y Combinator gives these aspiring entrepreneurs the tools and subsistence funding to actually get a product to fruition.  This significantly increases the likelihood that they can eventually get the funding necessary to build a company.  Some will have the skills to lead this company while others will pass the leadership baton to a more capable CEO.  But regardless, they will have executed the most important part of creating shareholder value – and if the company thrives, they will receive enormous financial benefit. 

If you missed the Startup2Startup interview with Y Combinator founding partners Paul Graham and Jessica Livingston, I recommend you read my guest post recap on the Startup2Startup blog.  There are also plans to post the full video of the interview.

Many people are asking me “what now?”  Through fall I’ll be working with a few other startups using a more leveraged approach.  I’ll help them set the overall marketing priorities and then provide ongoing assistance refining their go-to-market strategy and executing more challenging marketing projects.   Each startup recently received their series A VC funding and has a smart and scrappy (but less proven) fulltime marketer.

This is a different approach than I took with Xobni, where I was exclusively focused for six months on laying the groundwork for the public launch (May 5th) and building on the post launch momentum.  By focusing on only one startup during this period I’ve been able to re-tune my startup marketing skills.  I now feel more prepared to effectively help multiple startups. 

In classic flip/flop fashion of a politician, I’ve change my perspective on whether a part-time consulting approach will work.   Back in March I wrote (http://startup-marketing.com/2008/03/01/the-startup-marketing-launch-process-is-broken.aspx) that a total immersion approach is better than a consulting approach.  While this is probably still the case for the eureka moments of creating innovative customer acquisition programs, it’s less important for laying a foundation to maximize the impact of these programs and developing the overall go-to-market strategy.  If a startup has the right marketing director in place, they should come up with the innovative marketing programs needed to drive growth.  By limiting my time involvement, companies will be able to pay less overall compensation.  And it works out better financially for me as well, especially since I’ll be able to diversify my equity.  

I’ve already committed verbally to terms with three companies, but put off figuring out the contracts until I completed my fulltime role with Xobni.  I also postponed meeting with other companies because it would cut into my time at Xobni.  As a result, I have several meetings teed up over the next few weeks with other startups.  I plan to cap my advising/consulting roles to four companies through the fall (in addition to Xobni).  Once I understand my capacity I may add more.  

I’m definitely in need of a vacation and excited to be heading to Thailand at the end of next week. 

An Outlook add-on getting big buzz (Xobni Story)

I joined Xobni after 4.5 years of running marketing at LogMeIn.  I love to see both companies featured on Download.com together!

On similar note, this appeared in the Xobni forum today:

it would be great to be able to turn off animation of the app – so that when you click it just “pops” to the next screen instead of pushing (wiping) across – I access my email using logmein remotely and the animation makes it painfully slow to use.