design innovation startups

Find Product Market Fit Fast

Product Market Fit is one of the hardest things for an early-stage startup to achieve and it’s a critical step for companies looking to scale and be successful.

Product/market fit means being in a good market with a product that can satisfy that market

Marc Andreesen – Andreessen Horowitz

So the first thing you need to do is to understand your target market. Are you building a product for the automotive market, the food & beverage market, the software or technology market or something else? To find product-market fit, you really need to narrow your market and niche down. Don’t try to make your product solve the problems of multiple markets early on. Identify a core initial target market.

Once you know your target market, make sure you really understand and research it. You can’t possibly expect to satisfy your customers let alone a target market unless you really understand their problems.

In researching a market and the problems within that market many entrepreneurs will start to identify problems. Once you have a couple conversations you’ll see patterns emerge in terms of problems that people are experiencing.

In the early stages of a startup it’s typical to build early solutions to those problems. And when these solutions solve those specific problems you have product-problem fit. You’ve identified a problem and you’ve provided a solution… many entrepreneurs think that they are set and they stop there but finding product-market fit is more complex. You need to ensure that your product doesn’t just solve a specific problem, but rather it solves a problem that is repeatable and consistent across a large market segment.

To do this you need two core things:

  • First: You need a good cross-section of customers across your market. Not just your friends’ circle, but knowing that a good portion of any customers in your target market have a similar problem you can address.
  • Secondly: Your product has to be sticky enough that people are upset if you were to take the product away.

Finding and solving a problem is a great start but to really find product market fit you need to make sure that the problem you’re solving is widespread and impacts a large enough market in a scalable way and that the solution doesn’t feel like a NICE-to-Have but rather a NEED- To-Have.

It’s better to make a few users love you than have a lot that are ambivalent.

Paul Graham – YCombinator

You need people to care and the best way to find out if they do is to ask them. Ask your users how they’d feel if they could no longer use your product. The group that answers ‘very disappointed’ will unlock the product/market fit.

Sean Ellis, who ran early early growth in the early days of Dropbox, LogMeIn, and Eventbrite and adviced that if 40% of your customers would be “Very Disappointed” then you’ve found product market fit.

When thinking about product market fit, it’s worth also considering founder-market fit. Some founders have deep experience with a particular market. Maybe they spent a decade at a large company within the target market so they know the right people and they know the problems that are un-solved. Sometimes having a good founder-market fit can be a huge advantage and investors will consider how well a founder is aligned to a market. On the flip-side sometimes founder-market fit can be road-block. Consider how sometimes only an outsider to a market can realize just how broken a market is. If Uber had deep market experience in the Taxi market they may never have build as disruptive a company.

Finding product-market fit is both one of the most misunderstood and difficult steps for any growing startup. Keeping yourself focused on the customer and how that relates to the larger market will keep your company on track.

innovation startups

Ideas Are Worthless

You may thinkyou have the best, most amazing idea but I’m sorry to tell you that your idea is worthless…. But it’s Ok, most ideas are worthless.

Now before I get too deep, I’ve seen hundreds of pitches with a wide range of ideas and I’ve signed stacks and stacks of NDA’s to keep someone’s ideas secrets. Want to know the best secret idea I’ve ever heard?

There are none. We’re you listening at the beginning? Ideas are worthless and I’ve never been blown away by an amazing idea. Never! I’ve heard interesting ideas and clever ideas but most of the time amazing ideas are not the exciting part.

If you just think about the ideas behind the world’s most successful companies, the ideas aren’t that exciting.

  • A phone that doesn’t have any buttons
  • A car that uses electricity instead of a motor
  • A new search engine

These ideas by themselves have no value and even if you were able to rewind the clock 20 years, the ideas themselves weren’t worth anything without the entrepenours to drive them.

Nokia had phones without buttons before Apple. There were plenty of electric golf-carts before Tesla, and Google was late to the game as far as search engines go.

It’s the execution that creates value and these companies executed exceptionaly well.

While ideas are worthless, working on your idea is the thing that starts to create value. Some examples of value creation:

  • A list of potential customers willing to try or buy a finished product
  • Sales or purchase orders for a product or service
  • A prototype of the future product
  • Testimonials from people who have tried the prototype/product
  • Partners willing to stock or sell the product/service
  • Patents on the product/technology. (more on patents here)

You don’t have to be an engineer or designer to make progress on an idea, but you need to take action.

The other reason that ideas are worthless is that the idea instantly changes as soon as you start working on it. Once you put a pencil to paper your idea starts to spawn new ideas. Once you have a customer using the product you start to get feedback on the idea and what needs to change about it. Once you try to sell a product you learn all the reasons people don’t want it. It’s this learning/feedback cycle that creates real value because it’s based on real applications, not just theoretical ones.

The execution of the idea is the essence of the idea. Want to make something amazing, take action to make it real.

Why are ideas worthless
innovation startups

Angel investors vs Venture Capitalists

Angel vs. Venture Capitalists.

Startups looking to raise money may not be too picky in terms of where they get it, but finding the right fit for your company is often more than just financing and may reflect some of the differences between angel investors and venture capitalists.

First let’s start off with where Angel Investors and Venture Capital Investors get their money.

  • Angel Investors are typically individuals – They typically don’t have other decision makers in their investments and they are usually investing their own money. This gives them flexibility in terms of deal terms and it also means that they often don’t have external requirements on how they get their money back.
  • Venture Capital investors are typically not individuals, but rather companies or firms. They are most typically investing other people’s money in a Fund. VC’s will raise this money from people referred to as Limited Partners or LPs. LP’s are typically writing million-dollar checks and expecting VC’s to invest that money and get a return.

Both Angels and Venture Capitalists look for companies that can grow and be successful but each may look at companies at different stages and be interested in making different types of investments. Because VC’s are investing other people’s money they have general expectations on how long it may take to get their money back and will structure most returns and investments to have liquidity.

Angel investments are typically investing in early stage companies and are most often writing checks between 5-50 thousand with some angel investors going even higher. It’s most typical for angels to invest in the early stages of growth.

Angels and VC’s may take different amounts of interest in the operations of the company too. While Angels will often be available and interested in helping companies VC’s are likely to insist on a board seat. As companies continue to raise funding founders should be aware of balance in the board of directors.

Generally the board and the founder are aligned however if the founder and board disagree it’s possible for the board to fire the CEO so just make sure you consider the long-term direction of your business as you take on investors and board members.

Ultimately both VC’s and Angels want companies to succeed and depending on the stage of your business angels or VC’s may be a better fit for growing your business. Lastly remember that you don’t have to take investment and there are plenty of successful companies that have never raised funding and did it all on their own. There’s no right or wrong so consider the pros and cons of the different paths as you go on your startup journey.


Startup Metrics

When you’re starting a company you may get lost in the alphabet soup of metrics of things you can be measuring CAC, LTV, ARR, Churn, and many others. Company metrics matter but focusing on the wrong metrics at the wrong stage of growth can lead you down the wrong path.

I’m going to go over three things:

  • Common startup metrics and basics
  • Pirate Metrics and the AARRR framework
  • Early metrics vs. Later stage startup metrics

There are a lot of startup metrics that are used and they often use TLA’s or Three Letter Acronyms. These can be confusing for first time entrepreneurs but they are all trying to measure how you’re engaging with customers. Investors like these metrics because they create a common framework for discussing companies across company size and across different industries and even comparing yourself to public companies.

The most common metrics allow you to track customers through sales funnel. Visitors come into your sales funnel on one end and if you’ve done your job right, they become customers on the other end. Obviously not everyone who comes to your website becomes a customer and this is called your conversion rate.

Now there are a lot of ways to get people to even visit your company or website in the first place. A common way is to spend money on advertising or promotions. If you run ads or promotions you can figure out your Customer Acquisition Cost or CAC. The CAC is how much you have to spend to get someone all the way through your sales funnel.

Once a customer is through your sales funnel they are likely to pay for your product or service. Some purchases are one-time purchases but for many businesses, especially in software you’re likely to get paid either monthly or annually. If you add up your recurring revenue on a monthly basis you’ll get your Monthly Recurring Revenue or MRR. As your startup grows and matures you’ll also be looking at your Annual Recurring Revenue or ARR… and if you project that forward to the duration of a typical customer you can calculate the LTV or “Lifetime Value” of a customer.

So great… You’ve gotten someone to sign-up for your product or service. Now the key is how you’re going to keep them engaged. This is what’s often called Churn. The Churn of a startup is what percentage of their customers quit the service over the last 12 months. As an example, Netflix is estimated to have a 9% churn rate. That means that 91% of customers from last year are still customers today. Every startup can start to calculate the churn rate and this is a good indicator of how much people like your startup or service. If you have a really low Churn rate people are likely to stick around… and spending more money on Customer Acquisition is likely to make you more money in return. However if your Churn rate is really High and people sign-up but then abandon, this is what’s called a Leaky Bucket. You’re getting customers through your funnel but you’re not keeping them around.

A good way to think about this is using Pirate Startup Metrics.

AARRR Framework – pirate metrics for startups

Dave McClure came up with the idea of Pirate Metrics and it’s just a framework to think about that sales funnel in a little bit depth.

It’s called Pirate Metrics because it spells the word AARRR. Let’s go through the letters…

Acquisition – getting people into your startup funnel. You want to explore many channels and figure out what works.

Activation – Ok you got someone to sign-up but are they using the service? Did you onboard them and get them to do something that will create value?

Retention – Do they come back? Are people coming back to your service? Do they sign-up and then forget about it or are they using the product or service on a regular basis?

Referral – Do they like the service enough to tell others? If each person who uses your service refers others this gives you a viral coefficient. And if you know your CAC (customer acquisition cost) you can even incentivize these referrals.

Revenue – Revenue, can you make money from your fanbase?

Using the AARRR framework makes it easy to remember the sales funnel and it can help you prioritize some of the metrics that you should be tracking. Each of these metrics is important but each has a time and a place in the life of your startup.

Early metrics vs. Later stage startup metrics

In the early stages of a startup it’s important to find “Product Market Fit” this tends to put a higher focus on Retention and Revenue. Your startup may not be super-efficient at either finding customers or activating them and you may find that you need to hand-hold initial customers through onboarding and setup.

But once you have customers are sticking around and using the service repeatedly then it’s important to start automating more of the funnel.

As your business gets more sophisticated you can track more complex metrics but don’t overcomplicate things too early. It doesn’t make sense to optimize some of the more complex metrics if you can’t figure out the basics.

When it comes to metrics, it’s important that your team knows what’s important. Pick ONE core metric that you want to track as your North Star and make sure that everyone on the team knows what that metric is. Creating team visibility on that metric helps everyone focus and make progress. Your one metric can change over time, just make sure your team knows what matters.

Startup metrics help you grow and focus on the right elements to ensure your startup isn’t just surviving but thriving. A full spectrum view of your own metrics gives you a birds eye view, and a narrow focus for your team allows for alignment and team progress.