Back to basics: value proposition before growth
This article is part of a series of thought pieces essentially about product-market fit. I read through what I believe to be seminal articles and blogs on the topic. At its core, this series is an attack on Vanity Metrics and attempts to be a love letter to searching for value for your customer.
Any investor that may read this, should make these arguments as the core of their due diligence review and any founder should consider these points, as Marc Andersseen put it, as “the only thing that matters”.
Here are the topics that will be covered in this essay:
- Findings from Startup Genome report
- Scientific process of learning
- Identify the key pain/solution you are aiming for
- Growth has no substance without value
- Track the “love” metric and demonstrate customer success
- Going deep and not broad
Findings from Startup Genome report
The Startup Genome report is a somewhat ancient report in startup years, yet it unearthed fundamental truths about building value for startups. It’s widely believed amongst startup thought leaders, that successful startups succeed because they are good searchers and failed startups achieve failure by efficiently executing the irrelevant. We normally refer to this as a lack of market need, in the Startup Genome report it is referred to as “Premature Scaling”:
Jim Pitkow, serial entrepreneur “Premature scaling: growing in anticipation of demand instead of demand driven growth.”
What the report on about 3,200 high growth startups unearthed was that consistent startups spend more time discovering who their customers are, whereas inconsistent startups are focused on validating that customers want their product (lean startup refers to this as “Vanity Metrics”).
Scientific process of learning
The process of achieving consistency passes through deliberate learning. Steve Blank developed a customer development process based on the idea that startups should apply the scientific method just like scientists do: start with a hypothesis, test it, prove it, move on and further iterate on the hypothesis. The reason the process is depicted as a circle is that it is both iterative and continuous. One mistake many people make is to believe that the process described in feedback loop diagrams does not apply to them.
The Startup Genome report concluded: “Startups need 2-3 times longer to validate their market than most founders expect. This underestimation creates the pressure to scale prematurely… In our dataset we found that 70% of startups scaled prematurely along some dimension. While this number seemed high, this may go a long way towards explaining the 90% failure rate of startups.”
Identify the key pain/solution you are aiming for
Identifying a compelling value hypothesis is one of the key pillars at arriving at product/market fit. A value hypothesis identifies the features you need to build, the audience that’s likely to care, and the business model required to entice a customer to buy your product.
Sometimes value just happens to be conceived, like a founder scratching a personal itch – AirBnB founders, without employment, were having trouble paying their rent and were looking for a way to earn some extra cash. Other valuable startups are pivoted into – like Twitch was an offshoot of another startup. In both cases, fundamentally they are an idea that addresses an amazing point of pain around which consumers were desperate for a solution.
As we know from Minimal Viable Product (MVP) the best practice is that the product doesn’t need to be great; it just has to basically work. And, the market doesn’t care how good the team is, as long as the team can produce that viable product. An amazing point of pain causes for nearly everyone at the business to focus on trying to fulfill product demand rather than create demand.
Growth has no substance without value
Anderseen goes on to explain, “when you first start out the only thing that matters is finding a cohort of customers who truly value what you offer. Growth alone means next to nothing. Growth without value to the customer is likely to lead nowhere.
Many an investor has lost from a portfolio startup who spent a lot of money on attracting traffic to their site or app only to see low conversion rates. Hope springs eternal, and many in this situation believe they have found product/market fit because they have traffic. But traffic without conversion doesn’t mean much. In fact, growth may seduce the entrepreneurs into believing they have achieved their value proposition when they actually haven’t.
Once you do find your value proposition, driving growth is a heck of a lot easier … and more profitable. Those with the discipline to find their value proposition first build the best companies.
Before it can sell the product efficiently the entire organization needs to learn how customers will acquire and use it, a process we call the sales learning curve.
In other words, launching a product is not the same thing as achieving product market fit. The organization may need another six months, a year, or even longer to get to product market fit.
Mark Leslie – Stanford Professor
Track the “love” metric and demonstrate customer success
Hotjar, a company I follow regularly, argue that product/market fit is less about hypothetical numbers and percentages, and more about an in-depth and tangible understanding of who your customers are, and how they feel about you and your product.
The road to product/market fit is often driven by finding customers via word-of-mouth, before you build a marketing engine to scale user acquisition. If/when you receive feature requests and complaints about product functionality or website usability, use them as a signal that there’s something for you to learn about demand, and begin a conversation.
(Note: In a later post in this series I will delve deep into power users and how startups should double down on them.)
A key component, as described by Sean Ellis is to know your company’s North Star Metric. This is your measure of the value you deliver to your customers. Here are a few examples:
- AirBnB: number of nights booked.
- Medium: total time spent reading.
- Quora: number of questions answered
- Facebook: monthly active users.
You North Star should be linked to your company’s Magic Moment, that is, the moment your customer achieves the goal it set out to achieve by using your product. Your goal is to get your customers to that moment as quickly as possible. This is why eBay lets you find the objects you search for before signing up, and why Facebook showed you who of your friends was on the platform before you signed up.
Rick Nucci, in his excellent article about measuring product/market fit explains that “the ability to demonstrate value to customers can determine whether a startup generates a wave of sustainable success — or fades into irrelevance with the next tide. When the customer describes their problem, they should be able to explain why they think that your technology could play a role in the solution,”
And critically – Customer Success shouldn’t be generic. Success is the ability to prove to the customer that x metric gets improved by y percentage, because of your product.
Going deep and not broad
Dedicating a team to customer success lets you optimize for customer outcomes proactively. You need to give yourself permission to try things that don’t seem remotely scalable.
Narrow your target market to a size where you can meaningfully address customers’ pain points, and methodically expand your reach from there.
My next article will discuss “What makes for a great market for a startup”. A question that emerges regularly is about the scope and depth with which a startup should explore a market pain point.
“You can either build something a large number of people want a small amount, or something a small number of people want a large amount. Choose the latter. Dig a hole that’s narrow and deep, like a well. Some of the best startups have tackled markets that looked small initially but that went on to become huge either on their own or by merging with nearby adjacent markets.