What is product/market fit?
In the beginning, the entrepreneurs should be obsessively focused on finding a product/market fit, and conserving cash to allow them as much roadway as possible. Mark Andreessen describes product/market fit as “the only thing that matters,” but what is it?
Basically, a startup has product/market fit when it has:
- A set of customers excited enough about your product to pay for it. Usually, that payment is cash, but sometimes it’s time. As Facebook, Twitter and Google have proven, if you can get enough customers spending time with your product, there’s usually a way to monetize it.
- A customer base large enough to create a viable business.
Andreessen says:
ou can always feel product/market fit when it’s happening. The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers ….
You can always feel when product/market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of ‘blah,’ the sales cycle takes too long, and lots of deals never close.
Lower your burn rate during the search for product/market fit
If your startup hasn’t reached product/market fit, you should obsessively focus on finding it and adjust your burn rate downwards to give yourself as much time as you need to get there.
The best way to find product/market fit is to get in front of customers and validate your assertions. Start early, and validate before you build anything. Use wireframes of the product to walk customers through your vision, then keep validating throughout product development.
Develop objective listening skills, and don’t get caught up in selling too hard. Often entrepreneurs only hear what they want to hear, a trait sometimes referred to as “happy ears.” When a customer disagrees, you’ll often hear these entrepreneurs say: “They just don’t get it.” This is a good indication the entrepreneur isn’t listening.
Also, ask yourself two questions about each of your assertions:
1. Is the problem you’re tackling important to the customer? Too often, companies chase problems that just aren’t important enough to spend money or time to solve. If the problem isn’t important enough, be prepared to drop the idea you’re currently working on and pivot to something different.
2. Do your solutions really solve the problem? Present the solution to the client, and ask them tougher questions such as:
- “Is this a must-have, or a nice-to-have?”
- “Would you commit to purchasing at this price if we build it?”
- “Where does this fall on your list of priorities on which you’d spend money?”
At my fourth startup, Watermark Software, we got a great response when we showed our software to potential customers; our launch went well; and even the New York Times was excited enough to dedicate a half page to covering us. But while it was cool, it wasn’t a must-have, and we struggled to sell it. After two more years of hard work, we found the vertical applications that were a better fit for our product and pivoted the product into a full solution for those verticals. The business took off.
We wasted a ton of money in those two years. Had we done a better job of customer validation up front, we could have avoided that waste. I made the mistake of listening with “happy ears” instead of being objective.
Reduce your burn rate; increase your time
No one can predict how long it will take to find product/market fit. To give yourself the greatest chance of success, you need your funds to last as long as possible. In other words, you need to set your burn rate as low as possible.
The ideal startup team should be the founders, the product development team, and one or two sales people to get the founders in front of customers. That’s it. The founders are the people best suited to interacting with customers to figure out if the experiments are working and to learn from the failures. This work is the key job of the entrepreneur, and cannot easily be delegated to others.
It may also be tempting to hire a large R&D team to get to market quickly.Recognize that few products are immediately ready for broad adoption, and you’ll likely need to go through a few revisions to get to product/market fit. Set your burn rate for a marathon, not a sprint.
There can be exceptions to this spending rule when you can find things that will clearly shorten your time to product/market fit: for example, a new hire that brings in a missing but much-needed skill.
Once you have evidence of product/market fit, you can then find a repeatable and scalable sales model, which I’ll address in my next post.
David Skok has been a General Partner at Matrix Partners since 2001. He founded his first company when he was 22, and since then, founded three companies, including SilverStream Software, and done one turnaround. Skok specializes in SaaS, enterprise software and cloud computing, and blogs at forEntrepreneurs.com.
Image courtesy of Flickr user tonylanciabeta.
Submitted by Bo Peng
Making The Last Use Of Reserve Currency Status
I suspect many in the mainstream academia haven't realized what QE2 is.
It is the last use of the dollar's reserve currency status, intended or
otherwise.
In a fiat currency system, inflation should be the
only risk, because fighting deflation should be trivial -- just print
money. This is a fundamental advantage of a fiat system over the old
gold standard. Unfortunately for the US, the dollar's reserve status
means the geopolitical border is not the dam holding the water as in
other countries. As Fed pours in more water, it leaks right out to
lowlands (good investment destinations) all over the world. Given the
current economic prospects in the world, the result is that QE2 cannot
stoke inflation in the US, but causes very unwelcome interference in
exactly the other places in the world where inflation is a big concern.
It's small wonder all the growth EM economies are engaging in the low-grade currency war of capital control.
To them, this is a defensive war for survival against the invading army
of dollars. If the low-grade war proves insufficient, they would
escalate the defensive posture. They have to.
Another
consequence, intended or not, of QE2 + reserve status is that all growth
economies are under tremendous pressure of currency appreciation. Some
may be able to resist it and muddle through until an easier day; others
will have to cave in, therefore caught in the catch 22 of either raging
inflation or shrinking economy, or both. And, of all the growth
economies, China arguably has the most capacity and strongest political
will to resist appreciation. In such a scenario, if the intended target
of Fed's fury is China, as hinted not so subtly by Bernanke, "collateral damage" would once again be the main theme, as has been in all recent offensives launched by the US.
In
summary, Fed's dogged efforts in stoking inflation have caused and will
continue increasing the risk of bringing all growth EM economies to a
halt, significantly increasing policy risks in the rest of the world as
each country tries desperately to deal with the capital tsunami, and all
the while with huge doubt in whether it could reach its domestic goal
of stimulating employment and housing. In other words, Fed is screwing
the world for a slim chance of helping the US economy.
This is
emphatically NOT a moral criticism. But it does represent a significant
abandonment of the responsibilities on Fed's part as the issuer of world
reserve currency.
Let's go back a little in history. Right on
the heels of WWII victory, in 1944 US dictated Bretton Woods that
established the dollar as a proxy for gold in the free world. The
"proxy" part was only convenience, of course, as to be expected and
proven by Nixon in 1971. The arrangement made sense: the US would
provide security blanket, and the rest of free world would pay for it by
accepting and holding the green paper printed by the US. It's the same
idea as gangs collecting protection fee in NY, no cynicism intended.
Fast
forward to Berlin Wall collapse. Now the fundamental premises of the
dollar's reserve status were gone. Europeans quickly realized this
change and created the Euro; why should they continue paying for
protection when there's nothing to protect against? The US has made
numerous fantastic efforts in creating threats (by "creating" I don't
necessarily mean create; often times you just have to doze off for a
second and the enemy will help you out): perpetual terrorism, WMD in
Iraq, perpetual war in Iraq and Afghanistan/Pakistan, Iran, North Korea,
China, even Somali pirates (now it gets really pathetic). But none of
them could ever live up to the high expectations set by USSR.
After
10+ years of trying, it's become clear that this is futile. Nothing
works; none of those idiots could do it. But with the reserve currency
status comes its responsibilities. Win-win is BS-BS; there's no free lunch after all. The time has come to end Bretton Woods II.
Now Zoelick's surprise proposal of a new gold standard makes perfect sense.
With
QE2 the Fed is saying: Ah fuck it, you don't like USD as the reserve
currency? Well guess what? We don't like it, either. So let's drop it
and from now on it's every man on his own. Good luck.
Good luck everybody. We all need it.
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