July 13, 2010

Getting to Product-Market Fit

I’m very excited about this guest post and confident that it will be a huge help for anyone struggling to find Product-Market fit. Enjoy! Sean

Guest Post By Patrick Vlaskovits

Sean asked me to write a guest post to help startups achieve Product-Market Fit since he primarily advises startup after they’ve already reached it (during their transition to high growth businesses). Actually getting to Product-Market Fit is an important topic since the vast majority of startups never get there, making it virtually impossible to drive sustainable growth.

I’ve just completed what amounts to a comprehensive study on the topic of getting to Product-Market Fit with Brant Cooper, culminating in our book called The Entrepreneur’s Guide to Customer Development. The most important insights were gained from successful serial entrepreneur, Steve Blank, who encouraged us to write the book as a primer to the first step of Customer Development. Customer Development is the startup framework he codified in his landmark book, The Four Steps to the Epiphany. If you haven’t read the book (you really should), Steve’s many insights are deep, but the core takeaway is that most startups fail not because they don’t manage to develop and deliver a product to the market; they fail because they develop and deliver a product that no customers want or need.  The ramifications of this deceptively simple observation are manifold and underpin much of what you will read below.   Sean has provided a free survey that should be helpful in validating if you have created a product people want or need.

The Entrepreneur’s Guide to Customer Development also folds in the work of Eric Ries.  Eric has built upon Steve’s work and expanded it with his concept of “The Lean Startup.” A Lean Startup is one that combines fast-release, iterative development methodologies (e.g., Agile) with Customer Development concepts.

Wherever you are in the process of taking your product to market, the following Lean Startup and Customer Development concepts can help you achieve Product-Market Fit.  Nothing else really matters to a startup other than getting to Product-Market Fit as fast as possible.   Below is a brief outline, based on The Entrepreneur’s Guide to Customer Development, which will hopefully help you do just that.

Identify and document your assumptions

The sooner you understand and accept that you, as a entrepreneur at somewhere pre-Product Market Fit with your startup, are operating in near-chaos, where all your assumptions/hypotheses about how you gratify your users, who they are, how you will acquire and monetize them – are simply that, untested assumptions, the better off you are.

With your assumptions documented and in-hand you will:

“Get out of the Building” to validate (or invalidate) your assumptions

You must find, meet and speak with prospective customers about your product and ascertain the validity of your assumptions. This is the crux of Customer Development.  Only by speaking to these people will you have any sort of understanding about “their reality” as Dan Martell likes to put it.  What problems do they face?  How do they solve them?  What matters to them?  What is a must-have for them?

As you speak to potential customers, you should:

Identify the risk factors in the opportunity

Are you facing significant technology risks?  Or more of market risk?  How can you test and validate these (starting with the most risky)?  What market testable milestones can you build that would result in sufficient evidence to induce you to pivot or move forward? A proof of concept? A letter of intent?  A prototype?

As your understanding of the market betters, the risks will begin to crystallize, if certain risk factors prove insurmountable, you must:

Pivot but not jump

By changing an element of your customer-problem-solution hypotheses or business model, based on actual learning from a customer. As Eric Ries writes “by testing, each failed hypothesis leads to a new pivot, where we change just one element of the business plan (customer segment, feature set, positioning) – but don’t abandon everything we’ve learned.

The way to test and learn from your market is to build an:

MVP (Minimal Viable Product)

Don’t forget that an MVP is a product with the fewest set of features needed to achieve a specific objective and that you should require a trade of some scarce resource (time, money, attention) for the use of the product, such that the transaction demonstrates the product might be “viable”.

For non-paying milestones, you must define the currency (the scarce resource) and your objective (what you are trying to learn). For example, intermediate MVPs might include: landing page click-through that prove there’s some amount of interest in a product; a time commitment for an in-person meeting to view a demo that shows the customer’s problem being resolved; or a resource commitment for a pilot program to test how the product fits into a particular environment.

Once you have users using your MVP, listen for and tune into the:

Must-have signal

that demonstrates the core product functionality that your customers absolutely must have, while testing your assumptions and learning the characteristics of your market segment that will allow you to reach out and acquire them efficiently.  Sean’s survey, mentioned earlier, can be useful in finding your must have signal.

Once you successfully developed a minimal viable product and have found the must have signal, it is time to:

Double-down and strip away the unnecessary

Now you know what your customers want, you need to focus with laser-like intensity in building a gratification engine that does not disappoint.

If you can do all of the above successfully and throw in a hearty amount of luck for good measure, there is a good chance you can get to Product-Market Fit.  It may take a significant amount of time and persistence, but potential customers always hold the answer to creating a must have product.

June 29, 2010

My Mixergy Interview

The video from yesterday’s interview with Andrew Warner is now live on Mixergy.com (see embed below).   While Andrew initially characterized me as the “secret weapon behind start-ups that have had incredible growth” I explained that a lot of their growth was based on the pre-existence of great products that met important user needs. I helped these startups build a strong growth foundation around early users’ passion, but the continued momentum is the result of product/engineering teams that keep enhancing the products and great marketers accelerating customer acquisition. Startup success is truly a team accomplishment and if the team starts to focus on who deserves the most credit, success will likely evaporate.

As a successful entrepreneur himself, Andrew did a great job of steering the conversation to the topics most interesting/useful for entrepreneurs. It took me a while to get warmed up (it was a Monday morning after a weekend in Vegas), but there is a lot of new and useful information – particularly in the second half.

Successful startups are only possible with founders who have the guts to go for it so Andrew and I spent a lot of time at the end of the interview trying to analyze the qualities of the best entrepreneurs. Each of the founders I’ve worked with deserve to be on this list, so I regret not mentioning all of them. If the video isn’t loading below, try this link.

June 29, 2010

Deconstructing Startup Growth

Elements of a startup growth curve

After product/market fit, driving sustainable growth is probably the most important/difficult part of creating value in a startup.

For most of the last 15 years of my startup experience, I’ve been the point person responsible for primarily one thing: driving growth.  Even after two IPOs, I didn’t really have a firm grasp of the essential elements of driving growth.  My view has evolved from externally focused metrics-driven marketing, to a more holistic approach built on a solid foundation of product/market fit.

Growth Foundation

Even the greatest marketers can’t sustain growth on a weak foundation.  Eventually, their growth curves crater.

So what is required for a strong foundation?

Must Have Product

The most important element is having a large percentage of users who consider your product a “must have” (over 40% is a good benchmark).  This gives you two key benefits:

  1. The first is that your churn will be relatively low (if it’s a “must have” why would users leave?), so you won’t be wasting resources filling a leaky bucket.
  2. The second is that “must have” products generally maintain strong word of mouth.

Together, these two elements give you a steady upward trajectory of your growth curve until you reach market saturation (hopefully you are in a big market!).

Must Have is Perishable

An important caveat is that your product will stop being a “must have” if a competitor offering a viable substitute enters your space. If they are really a good alternative to your product, then you’ve been downgraded to a “nice to have” and your foundation starts getting shaky.  Therefore, once you become a “must have” it is critical to get to the growth phase of your business as quickly as possible.

Check out my earlier post to determine if your product is a “must have.”

Conversion Optimization

Your ability to accelerate growth will be greatly enhanced if you optimize conversions.  There are many ways to define a “conversion” but for me, it’s a person who reaches the “must have” experience.  If 1000 new visitors come to your website and only 50 experience the “must have” benefit, it’s very difficult to efficiently grow your business.   However, with focused attention on fine-tuning the first user experience, startups often see a 2x – 10x improvement in conversions.

This immediately enhances your growth curve since word-of-mouth referrals begin “sticking.”  It also greatly enhances your ability to find viable, scalable ways to grow your user base (especially when combined with a good monetization approach).

Driving Growth

Most startups entering the growth stage obsess too much on finding a VP marketing capable of building and managing a large marketing organization.  At this stage your more immediate challenge is finding sustainable, scalable growth drivers to augment the organic growth achieved through solid product/market fit and conversion optimization.  If you are compelled to bring in a VP Marketing at this stage, make sure he/she has a track record of developing scalable growth drivers and is willing to make this their core focus until it is figured out.  Otherwise, I recommend instead bringing in a scrappy growth hacker to generate a strong flow of ideas for experiments that will scale if successful.

The faster you run high quality experiments, the more likely you’ll find scalable, effective growth tactics. Determining the success of a customer acquisition idea is dependent on an effective tracking and reporting system, so don’t start testing until your tracking/reporting system has been implemented. Once scalable growth tactics are developed, then a VP Marketing may be important for building and managing the marketing team that will execute these tactics.

One benefit that is emerging from advising multiple startups is that our rate of collective discoveries is accelerating across the non-competitive network of startups. With sharp, creative growth hackers in each startup we are able to brainstorm and test many more tactics.  The best ones are exchanged across the network for everyone’s benefit.

Growth

As the preceding paragraphs hopefully demonstrate, growth is a function of multiple factors.  Focusing on the right factors at any given time offers the best chance of ultimately becoming a high growth startup.  One exception to this rule are startups like eBay, Facebook, and Twitter, where “must have” status could only be achieved after critical mass.  In these startups, they did not have the luxury to focus on one element at a time – instead they had to work on the full growth ecosystem at one time.  But for most startups, you will approach your full growth potential by obsessively focusing on the most important goal for your particular stage.

June 8, 2010

Figuring Out Your Way to Startup Success

“Team.”  It’s the cliché response from VCs when asked about the most important factor in deciding to fund a new startup.

But what separates great teams from weak teams? I believe it’s the team’s ability to “figure stuff out.” Founders figure out potential customer problems that are worth solving.  Engineers figure out how to build a well functioning product that meets this need.  Marketers figure out how to reach people who really need the product and how to convert them into customers…

While natural talent is a big part of figuring stuff out, we can all benefit by improving our work environment.  There are two areas in particular that prevent creative problem solving.

1) Too much focus on financial rewards

It is obvious that the effort required to raise VC funds can be a major distraction from executing the business, but few realize that the repetitive discussions about financial outcomes can also shut down your ability to figure stuff out. In my 15 years in startups, I can’t think of a single breakthrough epiphany we experienced while fundraising.

Daniel Pink demonstrates the potentially negative effect of financial incentives in his new book Drive, The Surprising Truth About What Motivates Us.  He describes several experiments where people who were offered a financial reward to quickly complete a challenging task actually performed worse than those who simply did it for enjoyment.  An important part of figuring things out is getting into a state of flow (sometimes known as being in “the zone”) and a focus on financial incentives often prevents this state of mind.

The book mostly challenges the effectiveness of typical incentive structures inside more established businesses, but I believe the implications are even stronger in startups where survival is contingent on our ability to figure stuff out and the financial rewards of doing so are potentially enormous.

2) Too much pressure

I’ve also realized that I’m not good at figuring stuff out when I put too much pressure on myself.  A few months ago I had a beer with a friend and successful serial entrepreneur, Antony Brydon, and he zoomed right in on my problem.  I had put myself under so much pressure to help the startup with which I was working, that I had virtually shut down my creative abilities.  He mentioned that he’d been reading Andre Agassi’s autobiography where similar self-induced pressure had destroyed Andre’s ability to play tennis.  His career only recovered when he remembered to loosen up and have fun.   Every time I feel myself getting tense, I now remind myself to loosen up and immediately feel my creative problem solving abilities return.

While self-induced pressure is common in startups, pressure can also be applied externally by the Board (or the CEO to the rest of the team).  Most leaders don’t realize how counterproductive this can be in a startup.  It is OK to apply pressure for better execution of things that have been figured out, but it should be applied very sparingly when trying to encourage the team to figure out the remaining unknowns.

The solution: loosen up and have fun

When breakthrough thinking is needed, a fun, collaborative and supportive environment will generally yield better/faster results than the pressure of sticks and carrots.  This is especially important in the early days of a startup while the team is still figuring out a viable formula for the business.

Also, given the likely negative effects of fundraising, I recommend fewer/bigger rounds of financing (if possible).  Run leanly on your first round while you figure out the key success elements of the startup.  Then raise another round while executing the formula.  This may result in more dilution, but a more valuable company should offset this dilution.

Finally, encourage the team to obsess about solving customer problems rather than their potential financial outcome from success.  The best breakthroughs initially come from immersion in customer problems and then later from understanding the customer experience and benefits of your solution.

May 17, 2010

Key Elements of a Massively Scalable Startup

VC backed startups generally aspire to valuations in the hundreds of millions or even billions of dollars, but very few really consider all of the elements they’ll need to make it happen.  After analyzing several startups I’ve worked with that have reached or are approaching these valuations I’ve boiled it down to four interdependent commonalities that always seem to exist.  While they are easy to describe, they are of course very difficult to achieve.  Still your best chance of achieving them is to know what they are.

Element 1: Gratification engine

 

Your gratification engine is the repeatable process of turning cold prospects into highly gratified customers. Whether you are aiming big or small, an effective gratification engine is probably the hardest of the four elements for a startup to get right.   Tenacious execution works for a lot of things, but you can’t force customers to want, need or like what you have created.  Building an effective gratification engine is an iterative process driven by a lot of prospective customer feedback.  Once you get the basics right, your process of gratifying users can be optimized with tools like Performable for landing pages and KISSmetrics for full funnel tracking/improvement (I’m an advisor to both).

Element 2: Economic engine

Once you have figured out how to gratify prospects, your next challenge is creating a viable economic engine.  For your business to be sustainable in the long run your average revenue per user will need to exceed your average cost per user.  Beyond business sustainability, the right monetization approach will also be based on the value users get from your solution, the competitive environment and your ultimate growth strategy.

Element 3: Growth engine

Your growth engine is very dependent on your economic engine.  If you have relatively limited revenue per user, you’ll need to pursue tactics with a very low marginal cost such as PR, SEO or viral marketing.  With a higher revenue per user, you’ll also be able to effectively arbitrage growth through paid tactics like display advertising and SEM.  The most valuable companies generally choose an approach that allows them to capture the biggest share of the market in a sustainable way.  This often means a strategy with lower revenue per user.  They don’t invest too much time in one off gimmicks, instead they focus on growth drivers that can be repeatable and scalable.

Element 4: Huge addressable market

The best opportunities generally have the hardest markets to accurately size.  That’s because these are fast growing or whole new markets that are based on potential rather than existing customers.  Perfect accuracy on market sizing isn’t important here.  Instead creative scenarios that show how it will likely be big should generally suffice.  You also want to breakdown potential segments and people that are new to the market or coming from an existing related market.  Again, you just want to have approximations that are believable and big.

Start with a Hypothesis for Each Element

It is important to have a realistic hypothesis for each of these elements before you even get started with the business.  If you are having a hard time creating a realistic hypothesis for one or more of these elements, your vision probably isn’t viable.

I can often look at a business for less than an hour and decide if I believe it is massively scalable opportunity based on my hypothesis for each of these.  If I’m not confident on a specific element, I spend a lot of time vetting this with the CEO before committing to a project

Of course it won’t happen exactly the way you plan.  The best opportunities have multiple contingency plans in case your initial theory doesn’t work.  But if you can’t even creatively come up with a viable theory for each, you’ll likely have a very hard time raising VC funds.  Once you have a theory for each, start with the practical bottoms up execution described in the startup pyramid post.

April 27, 2010

Dropbox – The Power of a “Value Based” Startup

Drew Houston, CEO/Founder of Dropbox, gave an amazingly forthcoming presentation at the Startup Lessons Learned Conference chronicling his team’s path from idea to their current position as one of today’s hottest startups.

Because of the importance of protecting user data, they modified the “launch early, launch often” mantra to “learn early, learn often.”  And they aspired to gain the “best understanding of customers as early as possible.”

My favorite quote from Drew’s presentation highlighted the power of focusing on what is really important: “If you make a feature matrix of Dropbox versus all the other products out there, we’ll never come out in front.  We wanted to do a few things [really] well as opposed to a lot of things kind of well, presented in a way that’s confusing.”

Dropbox struggled to find effective paid marketing channels, but Drew states: “The one thing that saved us was that we put all of our effort into something that worked, that was an elegant solution.”  They then empowered extremely gratified users to spread the word about Dropbox.

The result: In 15 months, Dropbox attracted 4 million users.  In the last 30 days users have sent 2.8 million direct referral invites.  Watch the video, you’ll definitely learn something.  During my time with Dropbox, I learned how to build a sustainable startup (and business in general) the right way.


Watch live video from Startup Lessons Learned on Justin.tv

April 26, 2010

Steve Blank’s SLL Keynote – It’s a “Must Watch”


Watch live video from Startup Lessons Learned on Justin.tv

Some of my favorite quote are:

Role of the Entrepreneur

  • Your job as an entrepreneur in a startup is to search for a repeatable and scalable business model. When you find it, your job is to build a company around that business model.
  • Search for a business model rather than write a business plan. Biz model is how a company makes money.
  • Customer and agile development is how you search for a business model.
  • You fail if you stay a startup – goal is to become a large company.  Search is bringing order out of chaos, pivoting all the time.
  • Goal is not to becoming the world’s most fun startup. Goal is to become a valuable company.
  • No business plan survives first contact with the customer.

Differences Between Startups and Established Companies

  • Startups search and pivot; companies execute.
  • Very different skills needed to execute a business model compared to those needed to search for a business model.
  • Customer development = hypothesis testing, minimum feature sets and pivoting.  Product management is very different than customer development.
  • You need to brainwash and deprogram product managers if you want them to perform customer development.
  • Key startup numbers are not: balance sheet, income statements and cashflow.  They are cash, viral coefficient, customer acquisition cost, burn rate, average transaction size…

Want more Steve?  Check out his blog.

April 25, 2010

Early Detection is Key

Following the Startup Lessons Learned conference, I had the Founder/CEO of a startup tell me that she finally ran the Survey.io customer development survey. She was thrilled to discover that more than 40% of her users considered her product to be a “must have.” She had avoided running the survey earlier for fear of a disappointing number. But now that she has run it, she can confidently start planning the steps needed to scale her business (see Startup Pyramid post).

Her fear is common among many startup founders. We have so much invested in the vision (especially emotionally), that we dread an inconvenient truth standing in the way of our dream.

The fear reminds me of one of my personal life missions. Over the last five years I’ve strongly encouraged my friends to get physical exams – especially entrepreneurs consumed by their startups. I know how hard it is to make time.  At perhaps the most intense period of scaling LogMeIn I was putting off a routine physical exam. I felt healthy, so why worry? But I gave up half of a day anyway and finally got a complete checkup. It turned out that I had the very early stages of bladder cancer. A simple procedure removed the cancer and I haven’t had any signs since. But if I had waited just a few more months, my doctor explained that the prognosis would have been a lot scarier. If you haven’t had a physical exam recently, please make the time. It could save your life.

And on a much lighter note, if you haven’t run the customer development survey on Survey.io, just do it (it’s free). If too few people consider your product a “must have”, you’ll want to pivot/course correct as early as possible.

April 20, 2010

A Lean Start is Smart

Lean Vs Fat Startups
When I read Ben Horowitz’s article “The Case For The Fat Startup” http://bhorowitz.com/2010/03/17/the-case-for-the-fat-startup/ I expected to be in violent disagreement with most of it.  However, I was surprised to find myself mostly nodding in agreement.  Many of the moves he describes that led to the survival and success of Opsware/Loudcloud were similar to the ones I advocated as an executive in a post dotcom bubble public company (Uproar.com).  Cutting was important, but it was even more important to protect and build on the value that we had created.
So how can I find myself agreeing with Horowitz, when he seems to be such a vocal critic of Lean Startups?
Well first, he’s not against running leanly.   He simply suggests that lean shouldn’t be the end goal.  Instead, he claims startups should be focused on survival and market leadership – both of which benefit from more money.  However, his examples mostly center on companies that have significant traction.  Take Facebook, which he touts as a “fat startup” because they have raised over $700m.  The fact is that they didn’t start out fat; in their first year they only raised $500,000.
This mirrors my experience at multiple successful startups.   Most maintained a very low burn in the first year, investing funds carefully to create a valuable product.  Only after early users validated that it was a must-have product, did we start loosening the purse strings.  Speed of execution to fully capture the opportunity became the primary objective.  At this point, most of the companies were able to successfully attract additional financing (often very large rounds).
Perhaps the most important realization that I’ve made as a result of this debate is that: Lean Startup principles are most critical in the early stages of a startup before product/market fit.  If you have not created a “must-have product” your ability to attract future rounds of financing will be limited if not impossible.  Your best chance of survival is to create a must-have product on your first round of financing – with the overwhelming majority of funding going into R&D.  Once you have created a must-have product, it will be much easier to raise enough money to capture and lead the market.
Of course, this could be an argument for a big first round of financing.  I rarely advocate raising a small round if you can raise a big one.  But it’s important to recognize that the best VCs invest small before traction and big after traction.  They realize that overinvesting up front rarely improves a startup’s ability to create a must-have product.  If you are fortunate enough to raise a substantial round up front, you’ll need discipline not to spend in areas that aren’t essential to creating a must-have product.  If you have the right discipline, your only important risk of raising a big early round is limiting the potential for lucrative small early exits.  But more likely you won’t be able to raise a substantial round until you have created a must-have product.  Once you can prove an ability to scale cost-effective growth for this must-have product, smart VCs will be knocking down your door to invest as much as you can realistically absorb – and often more.

When I read Ben Horowitz’s article “The Case For The Fat Startup” I expected to be in violent disagreement with most of it.  So I was surprised to find myself mostly nodding in agreement.  Many of the moves he describes that led to the survival and success of Opsware/Loudcloud were similar to the ones I advocated as an executive in a post dotcom bubble public company (Uproar.com).  Cutting was important, but it was even more important to protect and build on the value that we had created.

So how can I find myself agreeing with Horowitz, when he seems to be such a vocal critic of Lean Startups?

Well first, he’s not against running leanly.   He simply suggests that lean shouldn’t be the end goal.  Instead, he recommends startups should be focused on survival and market leadership – both of which benefit from more money.  However, his examples mostly center on companies that have significant traction.  Take Facebook, which he touts as a “fat startup” because they have raised over $700m.  The fact is that they didn’t start out fat; in their first year they only raised $500,000.

This mirrors my experience at multiple successful startups.   Most maintained a very low burn in the first year, investing funds carefully to create a valuable product.  Only after early users validated that it was a must-have product, did we start loosening the purse strings.  Speed of execution to fully capture the opportunity became the primary objective.  At this point, most of the companies were able to successfully attract additional financing (often very large rounds).

Perhaps the most important realization that I’ve made as a result of this debate is that: Lean Startup principles are most critical in the early stages of a startup before product/market fit.  If you have not created a “must-have product” your ability to attract future rounds of financing will be limited if not impossible.  Your best chance of survival is to create a must-have product on your first round of financing – with the overwhelming majority of funding going into R&D.  Once you have created a must-have product, it will be much easier to raise enough money to capture and lead the market.

Of course, this could be an argument for a big first round of financing.  I rarely advocate raising a small round if you can raise a big one.  But it’s important to recognize that the best VCs invest small before traction and big after traction.  They realize that overinvesting up front rarely improves a startup’s ability to create a must-have product.  If you are fortunate enough to raise a substantial round up front, you’ll need discipline not to spend in areas that aren’t essential to creating a must-have product.  If you have the right discipline, your only important risk of raising a big early round is limiting the potential for lucrative small early exits.  But more likely you won’t be able to raise a substantial round until you have created a must-have product.  Once you can prove an ability to scale cost-effective growth for this must-have product, smart VCs will be knocking down your door to invest as much as you can realistically absorb – and often more.

Note: Eric Ries clears up some of the common mis-perceptions about lean startups in this post.