Category Archives: Product

November 3, 2011

The Cult of “Great Product”

Many of the most successful founders, CEOs and VCs in Silicon Valley belong to the cult of great product.  They understand that a great product is critical to the success of a startup.  News around the life of Steve Jobs has galvanized even more people to jump on the “great product” bandwagon.  Generally this is a good thing, but there tends to be a lot of confusion about what makes a great product.

Great products aren’t anointed by product gurus.  Only customers can decide if a product is great.

Customers will decide your product is great if you can map it to their motivation for changing to your solution.  All customers change from something.  Generally they either switch from a competitive solution or from just tolerating a problem without a solution.  New products should decide on one of these markets.  Trying to serve both markets generally leads to failure.

One way to decide which market to serve is to ask yourself: “when we are generating $100m in revenue, which type of customer do we think will contribute the majority of this revenue?”  Your guess is usually the market you should serve.

Greenfield Customers

If you decide to target “greenfield” people (those without a current solution), then your product roadmap should be focused on simple, effective execution of their desired task.  Simplicity is usually much more important for greenfield users than being feature rich. Dropbox is a great example of a product that has succeeded in a greenfield market with a dead simple solution.   For some categories, features do eventually become important to users, but on a greenfield user’s first experience they should not be emphasized.

Competitive Solution Customers

If you are targeting people who will be switching from another solution, then usually features are an important part of people’s decision to try it.  In this case, you’ll want to make sure that you at least have parity on the key features.  Of course they have no reason to switch if everything you do is the same, so you’ll need to understand their switching motivation.  If you can differentiate on one of the key gripes of the competitive solution, there is a good chance you can be successful.  Common gripes include price, reliability, poor customer service, lack of key features, etc.  You’ll need to both message this differentiation and also deliver on the promise. A “false promise” will cause a high churn rate (people who stop using your product).

Reduce Conversion Hurdles

Either way, switching takes a lot of guts and effort.  Most people are afraid and/or complacent about switching.  Even for those who take the initiative to consider your solution, most will give up before actually trying it.  So it’s also critical to reduce all hurdles that may cause them to abandon the conversion process.

You’ll know you have created a great product when users tell you they can’t live without it.  Unfortunately the “cult of great product” occasionally forgets about these critical components of building an indispensible product.

March 18, 2011

Ideal Ratio of Product Vs Marketing Spend for a Consumer Startup

Below is an answer I recently put on Quora… Since I haven’t posted on my blog for so long, I figured some people not on Quora might find it useful.

Your marketing spend should be very minimal until you validate that you have created a product that people want or need (an important exception is for network effect products, which I’ll cover later). I would suggest 95/5 ratio between product and marketing. You don’t necessarily need a marketing person on the team to do this early validation.

Once you’ve validated that people want or need the product, you should spend as much as you possibly can on customer acquisition as long as the value of each user exceeds the cost of acquiring them. Often this requires raising additional funding, but if you can present proof of profitable, scalable marketing channels then it should be easy to raise the additional funding. Of course you should complement this paid customer acquisition with free sources if possible (and you can start these early in the validation process). If your product really does a good job solving an important need, you should also have strong organic growth. At this point the spend ratio generally tips toward marketing. I’ve seen it as high as 80% to marketing and 20% to product.

The exception for network effect businesses mentioned earlier is for the following reason… The user experience for a network effect product improves with each additional user. You may need to reach a critical mass of users before you can validate that the product is important for users.

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.