PMF is often nonobvious and guesswork in foresight, but incredibly obvious in hindsight. But the ability to foresee and measure an inflection point in the business is a common thread among the best founders in the world. For Rahul Vohra, that was when 40% or more of his customers responded with “very disappointed” to the survey question “How would you feel if you could no longer use Superhuman?” After all, the famous Peter Drucker did say, “You can’t manage what you can’t measure.”
Founders often find themselves pushing their product onto customers pre-PMF. But once they find PMF, they feel the pull of the market. In the words of David Sacks, when you find PMF, “the market is pulling product out of the startup.”
Much like PMF, for founders, there exhibits a similar level of pull. But its measurability is often not by quantitative metrics like PMF, but qualitative. At a virtual lunch last week, Founders Fund’s and Varda’s Delian Asparouhov shared his brutally candid remarks on living a fulfilling life.
One of the questions he answered was when did he know he just had to start Varda. Why didn’t he just stay a full-time VC? Delian called it the “mind virus.” When the problem hits you like a truck and you just can’t get rid of it. Once you get it, it infects your whole brain, and you can’t not think about it.
When you have more questions than answers. And each layer of questions gets more and more specific, and no longer generalist. In fact, the majority of questions that take up your mental real estate do not have membership in the:
First 500 questions about the topic in a generalist’s mind
First 100 questions in a specialist or expert’s mind space. In fact, one of the greatest litmus tests (not the only) you can administer is getting the “Oh f**k, how come I haven’t thought of that?” response.
Naivete matters
Paul Graham wrote an equally great piece on the topic. “Naive optimism can compensate for the bit rot that rapid change causes in established beliefs. You plunge into some problem saying ‘How hard can it be?’, and then after solving it you learn that it was till recently insoluble. Naivete is an obstacle for anyone who wants to seem sophisticated, and this is one reason would-be intellectuals find it so difficult to understand Silicon Valley.”
In the analogous words of Delian, “Just ask the technical experts, is this impossible? There’s a big difference between very, very difficult and impossible. Is it just a very technical religion where people say no or is it impossible?” There’s a superpower in knowing just enough to dream and reach for the “impossible”, but not enough to get trapped in the technical dogma of what is “possible.”
Great founders are armed with the ability to balance childlike wonder with optimistic pragmatism. Great founders dare to dream. It is neither thefirst, nor the last you’ll hear of James Stockdale on this blog. But nevertheless, I find his words to ring equally as true for the best founders who have graced this planet. “You must never confuse faith that you will prevail in the end – which you can never afford to lose – with the discipline to confront the most brutal facts of your current reality, whatever they may be.”
In closing
In sum, what is founder-market fit? It is when passion turns into obsession. When founders are married to the problem, as opposed to the solution. When curiously passionate founders cannot stop themselves from doing everything in their power to engineer the solution to a problem deeply personal to them.
Here’s a simple way to think about it, using an equation most scientists are familiar with.
F = ma
Or otherwise, known as Newton’s second law. Force is the product of mass and acceleration. Think of force as the gravitational pulling force a founder has. Mass as the first impression a founder makes in meeting number one. Some permutation of their insights, their background and experience, and their domain expertise. And acceleration as the multiplicative velocity in which the founder learns. Subsequently, we have an equation that looks more or less like this:
Founder-market fit = (initial impression) x (founder’s compounding rate of learning)
For investors, a good sign of that is when that passion is contagious in the first meeting. And founders learn incredibly quickly (as a function of action) in every consecutive one after. The gravitational pull a founder brings where you just want to put down everything to listen to them. As investors, we love paying for that world-class education.
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In the past decade or two, there have been a surplus of talent coming into Silicon Valley. In large part, due to the opportunities that the Bay had to offer. If you wanted to work in tech, the SF Bay Area was the number one destination. If you wanted to raise venture money, being next door neighbors to your investors on Sand Hill Road yielded astounding benefits. Barring the past few months where there have been massive exoduses leaving the Bay to Miami or NYC, there’ve been this common thread that if you want to be in:
Entertainment, go to LA
Finance and fashion, go to NYC
Tech/startup ecosystem, go to the Valley.
While great, your early audience – the innovators on your product adoption curve – should not be overly concentrated there. All these markets carry anomalous traits and aren’t often representative of the wider population. Instead, your beachhead markets should be representative of the distribution of demographics and customer habits in your TAM (total addressable market).
Strategically boring markets aren’t limited to just physical geographies. They’re equally applicable to underestimated virtual real estate. You don’t have to build a mansion on a new plot of land. Rent an Airbnb and see if you like the weather and people there first.
As Rupa Health‘s Tara Viswanathan said in a First Round interview, “Stripping the product down to the bare bones and getting it out in front of people for their reactions is critical. It’s rare for a product not to work because it was too minimal of an MVP — it’s because the idea wasn’t strong to begin with.”
As she goes on, “If you have to ask if you’re in love, you’re probably not in love. The same goes with product/market fit — if you have to ask if you have it, you probably don’t.”
Test your market first with the minimum lovable product, as Jiaona Zhang says. You don’t have to build the sexiest app out there. It could be a blog or a spreadsheet. For example, here are a few incredible companies that started as nothing more than a…
The greatest incumbents to most businesses out there really happen to be some of the simplest things. Spreadsheets. Blogs. Facebook groups. And now probably, Discord and Slack groups. There are a wealth of no-code tools out there today – Notion, Airtable, Webflow, Zapier, just to name a few. So building something quick without coding experience just to test the market has been easier than ever. Use that to your advantage.
Patrick Campbell once wrote, quoting Brian Balfour, CEO of Reforge, “It’s much easier to evolve with the market if your product is shaped to fit the market. That’s why you’ll achieve much better fit between these two components if you think market first, product second.”
Think like a designer, not like an artist
The biggest alphas are generated in non-obvious markets. Markets that are overlooked and underestimated. At the end of the day, in a market teeming with information and capital and starved of attention, think like a designer, not like an artist. Start from your audience, rather than from yourself. Start from what your audience needs, rather than what you want.
As ed-tech investor John Danner of Dunce Capital and board member at Lambda School, once wrote, “[the founders’] job is to find the absolute maximum demand in the space they are exploring. The best cadence is to run a new uncorrelated experiment every day. While demanding, the likelihood that you miss the point of highest demand with this approach is quite small. It is incredibly easy to abandon this kind of rigor and delayed gratification, eat the marshmallow and take a good idea and execute on it. Great founders resist that, and great investors do too.”
Spend more time researching and talking to your potential market, rather than focusing on where, how, and what you want your platform to look like. Obsess over split testing. Be scrappy.
Don’t fail the marshmallow test
We’re in a hype cycle now. Speed is the name of the game. And it’s become harder to differentiate signal from noise. Many founders instantly jump to geographically sexy markets. Anomalous markets like Silicon Valley and LA. But I believe what’ll set the winners from the losers in the long run is founder discipline. Discipline to spend time discovering signs of early virality, rather than scale.
For instance, if you’re operating a marketplace, your startup is more likely than not supply-constrained. To cite Brian Rothenberg, former VP of Growth at Eventbrite, focus on early growth loops where demand converts to supply. Ask your supply, “How did you hear about our product?” And watch for references of them being on the demand side before.
Don’t spend money to increase the rate of conversion until you see early signs of this growth dynamic. It doesn’t matter if it’s 5% or even 0.5%. Have the discipline to wait for organic conversion. It’s far easier to spend money to grow than to discover. Which is why startup life cycles are often broken down into two phases:
Zero to one, and
One to infinity
Nail the zero to one.
In an increasingly competitive world of ideas, many founders have failed the marshmallow test to rush to scale. As Patrick Campbell shared in the same afore-mentioned essay, “Product first, market second mentality meant that they had a solution, and then they were searching for the problem. This made it much, much more difficult to identify the market that really needed a solution and was willing to pay for the product.”
The more time you spend finding maximum demand for a big problem, the greater your TAM will be. The greater your market, the greater the value your company can provide. So, while building in anomalous markets with sexy apps will help you achieve quick early growth, it’s, unfortunately, unsustainable as you reach the early majority and the late majority of the adoption curve.
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As I am co-leading a VC fellowship with DECODE (and here’s another shameless plug), a few fellows asked me if I had a repository of questions to ask founders. Unfortunately, I didn’t. But it got me thinking.
There’s a certain element of “Gotcha!” when an investor asks a founder a question they don’t expect. A question out of left field that tests how well the founders know their product, team or market. In a way, that’s the sadist inside of me. But it’s not my job, nor the job of any investor, to force founders to stumble. It’s my job to help founders change the world for the better. By reducing friction and barriers to entry where I can, but still preparing them as best as I can for the challenges to come.
I’m going to spare you the usual questions you can find via a quick Google search, like:
What is your product? And who is your target audience?
How big is your market? What is your CAGR?
What is your traction so far?
How are you making money? What is your revenue model?
And many more where those come from.
Below are the nine questions I find the most insightful answers to. As well as my rationale behind each. Some are tried and true. Others reframe the perspective, but better help me reach a conclusion. I do want to note that the below questions are described in compartmentalized incidents, so your mileage may vary.
Here’s to forcing myself into obsolescence, but hopefully, empowering the founders reading this humble blog of mine to go further and faster.
The questions
I categorize each of the below questions into three categories:
The market (Why Now)
The product (Why This)
And, the team (Why You)
Together, they form my NTY thesis. The three letters ordered in such a way that it helps me recall my own thesis, in an unfortunate case of Alzheimer’s.
Why Now
What are your competitors doing right?
This is the lesser-known cousin of “What are your product’s differentiators?” and “Why and how do you offer a better solution than your competitors?”. Founders are usually prepared to answer both of the above questions. I love this question because it tests for market awareness. Too often are founders trapped in the narratives they create from their reality distortion fields. If you really understand your market, you’ll know where your weaknesses are, as well as where your competitors’ strengths are.
There have been a few times I’ve asked this question to founders, and they’d have an “A-ha!” moment when replying. “My competitors are killing it in X and Y-… Oh wait, Y is our value proposition. Maybe I should be prioritizing our company’s resources for Z.”
Why is now the perfect time for your product to enter the market?
As great as some ideas are, if the market isn’t ripe for disruption, there’s really no business to be made here… at least, not yet. What are the underlying political, technological, socio-economical trends that can catapult this idea into mass adoption?
For Uber, it was the smartphone and GPS. For WordPress and Squarespace, it was the dotcom boom. And, for Shopify, it was the gig economy. For many others, it could be user habits coming out of this pandemic that may have started during this black swan event, but will only proliferate in the future. As Winston Churchill once said, “Never let a good crisis go to waste.”
A great way to show this is with numbers. Especially your own product’s adoption and retention metrics. Numbers don’t lie.
What did your customers do/use before your product?
What are the incumbent solutions? Have those solutions become habitual practices already? How much time did/do they spend on such problems? What are your incumbents’ NPS scores? In answering the above questions, you’re measuring indirectly how willing they are to pay for such a product. If at all. Is it a need or a nice-to-have? A 10x better solution on a hypothetical problem won’t motivate anyone to pay for it. A 10x on an existing solution means there’s money to be made.
Before we can paint the picture of a Hawaiian paradise, there must have been several formative volcanic eruptions. It’s rare for companies to create new habits where there weren’t any before, or at least a breadcrumb trail that might lead to “new” habits. As Mark Twain says, “History doesn’t repeat itself, but it often rhymes.”
Why This
What does product-market fit look like to you?
Most founders I talk to are pre-product-market fit (PMF). The funny thing about PMF is that when you don’t have it, you know. People aren’t sticking around, and retention falls. Deals fall through. You feel you’re constantly trying to force the product into your users’ hands. It feels as if you’re the only person/team in the world who believes in your vision.
On the flip side, when you do have PMF, you also know it. Users are downloading your product left and right. People can’t stop using and talking about you. Reporters are calling in. Bigger players want to acquire you. The market pulls you. As Marc Andreessen, the namesake for a16z, wrote, “the market pulls product out of the startup.”
The problem is it’s often hard to define that cliff when pre- becomes post-PMF. While PMF is an art, it is also a science. Through this question, I try to figure out what metrics they are using to track their growth, and inevitably what could be the pull that draws customers in. What metric(s) are you optimizing for? I wouldn’t go for anything more than 2-3 metrics. If you’re focusing on everything, you’re focusing on nothing. And of these 1-3 metrics, what benchmark are you looking at that will illustrate PMF to you?
For example, Rahul Vohra of Superhuman defines PMF with a fresh take on the NPS score, which he borrows from Sean Ellis. In feedback forms, his team asks: “How would you feel if you could no longer use the product?” Users would have three choices: “very disappointed”, “somewhat disappointed”, and “not disappointed”. If 40% or more of the users said “very disappointed”, then you’ve got your PMF.
Founders don’t have to be 100% accurate in their forecasts. But you have to be able to explain why and how you are measuring these metrics. As well as how fluctuations in these metrics describe user habits. If founders are starting from first principles and measuring their value metric(s), they’ll have their priorities down for execution. Can you connect quantitative and qualitative data to tell a compelling narrative? How does your ability to recognize patterns rank against the best founders I’ve met?
If in 18 months, this product fails. What is the most likely reason why?
This isn’t exactly an original one. I don’t remember exactly where I stumbled across this question, but I remember it clicking right away. There are a million and one risks in starting a business. But as a founder, your greatest weakness is your distraction – a line in which the attribution goes to Tim Ferriss. Knowing how to prioritize your time and your resources is one of the greatest superpowers you can have. Not all risks are made equal.
As Alex Soktold me a while back, “You can’t win in the first quarter, but you can lose in the first quarter.” The inability to prioritize has been and will continue to be one of the key reasons a startup folds. Sometimes, I also walk down the second and third most likely reason as well, just to build some context and see if there are direct parallels as to what the potential investment will be used for.
On the flip side, one of my favorite follow-ups is: If in 18 months, this product wildly succeeds. What were its greatest contributing factors?
Similar to the former assessing the biggest threats to the business, the latter assesses the greatest strengths and opportunities of this business. Is there something here that I missed from just reading the pitch deck?
What has been some of the customer feedback? And when did you last iterate on them?
I’m zeroing in on two world-class traits:
Open-mindedness and a willingness to iterate based on your market’s feedback. As I mentioned earlier with Marc Andreessen’s line, “the market pulls product out of the startup.” Your product is rarely ever perfect from the get-go, but is an evolving beast that becomes more robust the better you can address your customer’s needs.
Product velocity. How fast are your iteration cycles? The shorter and faster the feedback loop the better. One of the greatest strengths to any startup is its speed. Your incumbents are juggernauts. They’ll need a massive push for them to even get the ball rolling. And almost all will be quite risk-averse. They won’t jump until they see where they can land. Use that to your advantage. Can you reach critical mass and product love before your incumbents double down with their seemingly endless supply of resources?
Why You
What do you know that everyone else doesn’t know, is underestimating, or is overlooking?
Are you a critical thinker? Do you have contrarian viewpoints that make sense? Here, I’m betting on the non-consensus – the non-obvious. While it’s usually too early to tell if it’s right or not, I love founders who break down how they arrived at that conclusion. But if it’s already commonly accepted wisdom, while they may be right, it may be too late to make a meaningful financial return from that insight.
But if you do have something contrarian, how did you learn that? I’m not looking for X years of experience, while that would be nice, but not necessary. What I’m looking for is how deep founders have gone into the idea maze and what goodies they’ve emerged with.
Why did you start this business?
Here, unsurprisingly, I’m looking for two traits:
Your motivation. I’m measuring not just for passion, but for obsession and the likelihood of long-term grit. In other words, if there is founder-market fit. Do you have a chip on your shoulder? What are you trying to prove? And to whom? Do you have any regrets that you’re looking to undo?
Most people underestimate how bad it’s going to get, while overestimating the upside. The latter is fine since you are manifesting the upside that the wider population does not see yet. But when the going gets tough, you need something to that’ll still give you a line of sight to the light at the end of the tunnel. Selfless motivations keep you going on your best days. Selfish motivations keep you going on your worst days.
Your ability to tell stories. Before I even attempt to be sold by your product or your market, I want to be sold on you. I want to be your biggest champion, but I need a reason to believe in the product of you. You are the product I’m investing in. You’re constantly going to be selling – to customers, to potential hires, and to investors. As the leader of a business, you’re going to be the first and most important salesperson of the business.
What do you and your co-founders fundamentally disagree on?
No matter how similar you and your co-founders are, you all aren’t the same person. While many of your priorities will align, not all will. My greatest fear is when founders say they’ve never disagreed (because they agree on everything). To me, that sounds like a fragile relationship. Or a ticking time bomb. You might not have disagreed yet, but having a mental calculus of how you’ll reach a conclusion is important for your sanity, as well as the that of your team members. Do you default on the pecking order? Does the largest stakeholder in the project get the final say after listening to everyone’s thoughts?
Co-founder and CEO of Twilio, Jeff Lawson, once said: “If your exec team isn’t arguing, you’re not prioritizing.”
I find First Round’s recent interview with Dennis Yu, Chime’s VP of Program Management, useful. While his advice centers around high-impact managers, it’s equally as prescient for founding teams. Provide an onboarding guide to your co-founders as to what kind of person are you, as well as what kind of manager/leader you are. What does your work style look like? What motivates you? As well as, what are your values and expectations for the company? What feedback are you working through right now?
In closing
Whether you’re a founder or investor, I hope these questions and their respective rationale serve as insightful for you as they did for me. Godspeed!
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In the first decade of my life, my parents used to buy me different kinds of puzzles – from the Rubik’s cube to beautifully intricate LEGO sets to Luban locks. One of my favorites has always been these thousand-piece puzzles. Every time I poured those pieces out of the box, they scattered across our carpet like tiny ants scrambling to find meaning. I loved putting the puzzle together having only seen the completed image once – when I opened the box. That probably, at most, left a three-second impression in my mind. How awesome would photographic memory be. But alas, it wasn’t something I’d been blessed with. I only found out years later from friends that it wasn’t normal. That said, I imagine I took much longer than most people to piece together the whole puzzle.
Fresh out of the box, I start off knolling the various incongruous shapes. Like most others, I’m looking for similar designs, colors, lines, images – anything. Trying to make sense of disparate pieces. Frankly, I was drawing parallels wherever and whenever I found them. A more mature me would call it – pattern recognition.
As I progress, I spy colonies of color form in different areas on the living room floor. And therefore, try to see if any colonies, together, would tell a more robust, vibrant story. Sometimes I was right. Sometimes I was wrong.
As I near the end of the puzzle, I see everything come together. I’m not gonna lie. It’s extremely gratifying to see the rough picture in my head come to life. Often times, the final image has minor deviations from the loosely-defined vision I had when I started.
You probably caught on
You’re smart, and you probably guessed what I was trying to get at before you even finished reading my anecdote. And you’re right. In many ways, this puzzle journey is very similar to building a company. You start off with an idea, constructed upon anecdotal patterns you’ve seen in the world you know. And as you build the idea and talk to customers – other nearby pattern aggregations – you start to piece together a larger and more concrete goal. By the time you reach scale, you’re filling in the little details – the extra puzzle pieces – you missed when focusing on the more holistic vision. The little details of debugging, solving edge cases, and improving the user experience.
Listen to the silence
The initial idea comes from recognizing the patterns around you. Both what is being said, and what isn’t. Both what is there and what could be there.
One of my favorite stories on pattern recognition is about Abraham Wald, a Hungarian-Jewish mathematician and statistician, who’s credited with saving the lives of numerous pilots and airmen during WWII. Tasked with aircraft armor repair, Wald, then a faculty at Columbia University, was given a number of data points on bullet holes in the fighter planes that returned to base. Most were around the fuselage and a few around the motors.
As one would expect, the military anticipated to double down armor around areas with the most damage – the fuselage. But Wald took a different angle. Reinforce the plate metal around the motors, rather than the fuselage. Because the planes that didn’t make it back most likely had bullet holes where the planes that did make it back didn’t.
Listen to the sound
Sometimes you’re right. Sometimes you’re wrong. And if you’re wrong, follow the breadcrumbs of your market. Notice what their use cases are and how they’re spending their time. Even better if they’re developing hacks to circumvent the early inefficiencies of your product. What features or problems are getting a lot of attention?
For instance, Stewart Butterfield didn’t start off with the idea for Slack. After selling Flickr to Yahoo! and working at Yahoo! for three years after, he started with Tiny Speck, a gaming startup that raised $17M in venture funding to build Glitch. Unfortunately, it didn’t take off, outside of its cult following. But what did stick was the tool Stewart and his team had been using to chat in real-time with each other. Less than a year after it officially launched, it hit a $1B in valuation. Six years later, it became Salesforce’s biggest acquisitions at over $27B. And history is still being written.
Similarly, Kevin Systrom didn’t start off with Instagram. But rather Burbn – a location-based check-in app. Users would check-in, plan future meetups with friends, share pictures of their meetups, and earn points in the process. Unfortunately, the app was too complicated for the average user to use. After bringing on Mike Kreiger and analyzing how their users were using the app, they realized most of their traffic happened around posting and sharing photos. Scrapping everything else, they focused on their biggest use case – photo-sharing. And well, they were right on the pivot. In 2012, right before Facebook’s IPO, Facebook acquired Instagram for $1B. It was big then, but as we all know now, it’s even bigger now.
Back in 2012, Kevin once said, “It’s about going through false starts… Brbn was a false start. The best companies in the world have all had predecessors. YouTube was a dating site. You always have to evolve into something else.”
In closing
I love people who binge. It’s a sign that they capable of going all in and more on something they’re passionate about. I, myself, have binged time and time again on puzzles, shows, books, passion projects, and more. For Stewart, it was games. For Kevin, it was whiskey and bourbon. On the other hand, for Abraham, I can’t quite say. I have no idea if he was into plate armor or planes, but whether he liked it or not, he probably spent sleepless nights on it.
And in the process of binging, if you keep my mind and my senses open to inspiration, you may uncover some patterns in the mix. ‘Cause if you’re going to notice what’s being said and not said between the lines, you’re going to have to be in deep. Deep enough to take your breath away, but not deep enough to take your sight away.
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I was introduced to a founder of an e-commerce marketplace recently trying to figure out what product-market fit looks like. Specifically what might be some early tells of PMF. And I told him, “If your users are sticking around long enough to try to game your system, you have something they want. While it might not be in the most efficient format, you’re close to PMF. Subsequently, solving that frictional point that users are trying to ‘hack’ will delight them.”
Last year, I wrote that one of the tells of a great unicorn idea is frustration with the status quo. And the lagging indicators of frustration are complaints, but even better, “hacks”. Life hacks. Career hacks. Cold email hacks. Any time a forum or community comes together to share best practices is a potential market opportunity. As Jeff Bezos once said, “Your margin is my opportunity.”
Similarly, if some of your users converge around circumventing your platform, they’re hacking their way to find a better solution. But the fact they’re sticking around on your platform means you have something they want. And while it could be more elegant, you’ve solved the rocks of the “rocks, sand, and water” framework. What’s left are the “sand” and the “water”. And they come disguised as a user hack.
Sarah Tavel of Benchmark once wrote: “You must create an offering that is so compelling, it stands by itself in the consumer’s mind.” Solving all the frictional points in the user journey will get you to that compelling offering – a lovable product.
A reader reached out to me last year and said, “Thank you… [But] you have no idea how long I spend reading your blogposts with a dictionary next to me.” While it wasn’t necessarily a hack, to know there was a reader out there willing to weather through my idiosyncratic vocabulary in my earlier essays meant a million to me. But at the same time, it was a sign I was too caught up in my own wordsmithing. So, I dialed it back. While there will still be some esoteric jargon from time to time, I try to make my writing more relatable when editing. And to that reader… if you’re still reading this essay, thank you.
Back in 2007, Marc Andreessenwrote: “The market pulls product out of the startup.” In this case, that pull becomes a race between you and your users’ frustration. Can you release an update that addresses your users’ pain point before they become so frustrated they pack up and go? Either to build their own version or try a competitor’s.
I love Max Nussenbaum of On Deck’s analogy here. “If the market is indeed pulling the product out of you, you sometimes feel less like a creator and more like a mere conduit.” You, as the team behind the product, are a conduit to satisfying your users’ needs. As Mike Maples Jr.says, “Getting storytelling right means the founder is the mentor of the story (ie Yoda), rather than the hero (ie Luke.).” Your customers are the heroes of the story. Of their story. And your story. How they spend their time should offer you brilliant product insights.
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As part of my work, I talk to many seed-stage SaaS founders. At the seed, most of these founders are thinking about how to get to product-market fit. The one in zero to one. They’re launching their product with a select few companies to really nail their pain points. And often times, pricing and the business model take a backseat when they offer their customers the product for free or at an extreme discount. While investors don’t expect founders to nail pricing at the seed, it’s useful to start thinking about your revenue model early on. After all, pricing is both an art and a science. And with the right pricing structure, it can also be your proxy for assessing product-market fit. Here’s how.
Every product manager out there knows that customers don’t always know what they want, so asking them for a solution rarely nets valuable feedback. Rather, start with the problem. What are their frustrations? What sucks? What’s the last product they bought to attempt to alleviate their problem? Subsequently, what’d they like about that product? What didn’t they like?
There are two perspectives you can use to approach pricing: cost-plus and value-based. Cost-plus pricing is pricing based on selling the product at a given markup from its unit cost. The biggest mistake founders often make here is underestimating how much it costs to produce a product.
On the other hand, there’s value-based pricing. An approach where you determine the economic value of the service you are providing and give it to your customers for a bargain. Superhuman, for instance, prices the fastest email experience at $30/month. Or in a different light, a dollar a day. If you are saving more than a dollar of economic value a day by responding to emails faster than ever, then the product is worth it. The biggest pitfall here is that founders often don’t fully understand the value they’re bringing to their customers, which is a result of:
They don’t understand your value,
Or you can’t convince them of the value you think you offer.
To visualize both of these approaches better, let’s use the pricing thermometer, as YC calls it.
The greater the gap between two nodes (i.e. value and price, or price and cost), the greater the incentive. If you’re selling at a price far greater than its unit cost, you are far more motivated to sell your product. On the flip side, if your product is priced far below the value and benefits you provide, a customer is more motivated to purchase your product.
Buyers vs Customers
To take it a step further, if you’re planning to scale your startup, what you’re looking for our customers, not buyers. Buyers are people who purchase your product once, and never again. They learned from their mistake. Your product either didn’t deliver the value you promised or the value they thought you would deliver. Customers are repeat purchasers. Why? Because they love your product. It addresses your customers’ needs (and ideally more) again and again. Your customers’ satisfaction is evergreen, rather than ephemeral.
When you only have buyers, you have to push your product to others. It’s the epitome of a door-to-door salesperson. Think Yellow Pages.
When you have customers, you feel the pull. Customers are drawn to you. They come back willingly on their own two feet. As Calvin French-Owen, co-founder of Segment, once said: “The biggest difference between our ideas pre-PMF vs. when we found it was this feeling of pull. Before we had any sort of fit, it always felt like we had to push our ideas on other people. We had to nag people to use the product.”
Value-based pricing is playing to win. Cost-plus pricing is playing to not lose. While the latter is convenient strategy when you’re a local business not looking to scale (i.e. coffee shop, local diner, local auto parts store, etc.), it’s incredibly difficult to scale with, especially as customer needs evolve. As you scale, your customers might include anyone from Microsoft who wants you to bring a sales engineer to integrate your product to a 5-person startup team who’s just testing your product out. With cost-plus pricing, you’ll be forced to determine price points on a case-by-case scenario. With value-based pricing, you can systemize dynamic pricing based on evolving customer needs. As their value received goes up, the price does too.
As the name suggests, to generate pull, we have to start from value. In this case, your value metric.
Over the weekend, my friend and I had this fascinating conversation about how we found our other friends. I know, metaphysical, nerdy even. But nevertheless, I thoroughly enjoyed it. She posed the question: “Is it just based on how long you’ve known each other? And how often you see each other?” For most of my life, I would have said yes. Classmates that became friends were people I met and could chat with over lunch or after school. The same is true for colleagues. And strangers. Some happened exceedingly fast – within 24 hours. Others have taken over half a year before we “warmed up” to each other.
Unsurprisingly, it gave birth to the question: At what point does an acquaintance become a friend?
The PMF parallel
To be honest, I didn’t have a good answer then, nor do I have one now. Part of the reason I’m sharing this is to open up dialogue and draw inspiration from you, my readers.
Pushing up my glasses, which I’ve got to get a new pair (open to any recommendations), I couldn’t but analogize it to startups finding product-market fit.
How do founders know when they hit product-market fit? The TL;DR version: when you’re too busy to even ponder if you have product-market fit. Or simply, you’ll know it when you have it. For the longer, less nebulous answer, I recommend checking out Lenny Rachitsky’s piece on it, and some of other essays I’ve written on the topic:
Or as Casey Winters, Chief Product Officer at Eventbrite, says:
“Product-market fit isn’t when your customers stop complaining, it’s when they stop leaving.”
Some more examples include, when:
You’re focused on upgrading your servers rather than acquiring customers.
There’s so much demand, you’re writing “I’m sorry” and “Not yet” emails to your customers who are asking when can they get off the waitlist.
Laggards on the adoption curve start using your product and saying wow. In Airbnb’s case, that was Joe Gebbia‘s mom using the product.
There are handwritten love letters in your office mailbox.
Customers are asking how they can pay (more) for your product.
You’re feeling the pull of the market rather than pushing your product in front of people.
Friends
On a similar note, when the entropy of a relationship and the subsequent conversations break into an impetuous nature that eclipses the inciting reason for the relationship, you might have something going. Or in simpler words, you can’t stop the momentum of the relationship. “What about this?” “Let’s do that!” “Ahhh, not enough time!” Of course, as all relationships go, it takes two to tango. Just like product-market fit, when you don’t have it, it’s not obvious what you need to do make it click. But when you do have person-person fit, everything makes sense. And quite obvious, in retrospect.
While the above was my answer on Sunday, I’m not completely sold it’s the end all, be all. And as I continue to find new sparks and rekindle old flames, I’m sure I will learn more about myself and others. A provocative question that may require a more provocative answer.
#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The tech world, particularly Silicon Valley, in the past 2 decades, has accelerated its growth ’cause of one mantra: “Move fast and break things.” Some of the most valuable products we know today were built because of that. Facebook, whose founder coined the phrase. Google. Amazon. LinkedIn. Uber. The list goes on. In sum, be “agile”. Simultaneously, I see founders, on the regular, take this mental model too far. They move fast, but they rarely give enough time to test their hypotheses.
Equally so, some companies cannot afford to “break things”. Take Dropbox, for example. Ruchi Sanghvi, founder of the South Park Commons Fund, former VP of Operations at Dropbox, and Facebook’s earliest female engineer, told VentureBeat in 2015, “Quality is really, really important to Dropbox, and as a result we needed to move slower — not slowly, but slower than Facebook.” Ruth Reader, who wrote for VentureBeat at the time, further extrapolated, “What was right for Facebook — fast-paced iteration and fixing bugs in real time — didn’t work for DropBox, an application people entrusted with personal documents like wedding photos or the first draft of a novel. What was valuable to DropBox was the details.”
On the other extreme, there are founders who spend day after day, week after week, and sometimes year after year, pursuing the “perfect” product before launching. If they were right on the money before, by the time they launch 6 months later, they might be 6 months off the money. Take the situation we’re all in today for example – the pandemic. No one could have predicted it. In fact, I had many a few predictions before the pandemic, which all proved to be unfortunately wrong.
The Marketplace of Startups, written on February 24, 2020 – I alluded to an opinion I held that consumer social was almost dead. The consumer app market had become so saturated that it was hard for new players to play in.
Myths around Startups and Business Ideas, written on October 12, 2020 – Pre-COVID, I was more bullish on Slack than Zoom as a public stock investment. History proved otherwise.
… and more to come. Mistakes are inevitable. And “the rear view mirror is always clearer than the windshield”, as Warren Buffett would describe. Seth Godin said in his recent interview on The Tim Ferriss Show: “Reassurance is futile because you never have enough of it.”
At the end of the day, as a startup founder, your raison d’être is creating value in the world where there wasn’t before. As Bill Gates puts it: “A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it.” Analogized, your startup is that platform.
So, in this post, using the lessons from other subject-matter experts (SMEs), I’ll share how startup teams can balance speed with intentionality in their go-to-market (GTM) strategy.
In a number of recent conversations with friends outside of venture and “aspiring entrepreneurs”, a couple myths, which I’m going to loosely define here as popular beliefs held by many people, were brought to my attention. 4 in particular.
If I have a great idea and build it, it’ll sell itself.
That idea/startup is over-hyped.
The startup/venture capital landscape is over-saturated.
If it doesn’t make sense to me, it’s not a good idea.
Quite fortuitously, a question on Quora also inspired this post and discussion.
If I have a great idea and build it, it’ll sell itself.
Unfortunately, most times, it won’t. As Reid Hoffman puts it: “A good product with great distribution will almost always beat a great product with poor distribution.” As a founder, you have to think like a salesperson (for enterprise/B2B businesses) or a marketer (for consumer/B2C businesses). People have to know about what you’re building. ’Cause frankly you could build the world’s best time machine in your basement, but if no one knows, it’s just a time machine in your basement. Probably a great story to tell for Hollywood one day (even then you still need people to find out), but not for a business.
That idea/startup is over-hyped.
I’ll be honest. This really isn’t a myth, more of a common saying.
Maybe so, at the cross-section in time in which you’re looking at it. But if you rewind a couple months or a year or 2 years ago, they were under-hyped. In fact, there’s a good chance no one cared. While everyone has a different technical definition of over- and under-hyped, by the numbers, time will tell if it’ll be a sustainable business or not. If it’s keeping north of 40% retention even 6 months after the hype, we’re in for a breadwinner.
Take Zoom, for example. Pre-COVID, if you asked any rational tech investor, “would you invest in Slack or Zoom?” Most would say Slack. Zoom existed, but many weren’t extremely bullish on it. Today, well, that may be a different story. As of this morning (Oct. 12, 2020), while I’m editing this post before the market opens, the stock price of Zoom is $492 (and same change). Approximately 343% higher than it was on March 17th, the first day of the Bay Area shelter-in-place. And, right now, the price of Slack is $31. Approximately 56% up from the beginning of quarantine.
Neither are startups anymore, but the analogy holds. Also, a lesson that predictions, even by experts, can be wrong.
The startup/venture capital landscape is over-saturated.
“There’s too much money being invested (wasted) on startups.”
From the outside, it may very well look that way. Every day, every week we see this startup gets funded for $X million or that startup gets funded for $YY million. According to the National Venture Capital Association (NVCA), $133 billion were invested into startups last year. Yet, it pales in comparison to the capital that’s traded in the public markets.
VC funds see thousands of startup pitches a year. Per partner (most funds 2–3 partners), they each invest in 3–5 per year (aka about once per quarter). Meaning >99% of startups that a single VC sees are not getting funded by them. That doesn’t mean 99% never get funded, but it’s just to illustrate that proportionally, capital isn’t being spent willy-nilly.
If we look at it from a macro-economic perspective, if we are reaching saturation in the startup market, we should be getting closer to perfect competition. And in a perfectly competitive market, profit margins are zero. The thing is profits aren’t nearing zero in the startup/venture capital market. In fact, though the median fund isn’t returning much on invested capital. A good fund is returning 3–5x. A great one >5x. And well, if you were in Chris Sacca’s first fund, which included Uber, Twitter, and more, 250x MOIC. That’s $250 returned on every $1 invested.
If it doesn’t make sense to me, it’s not a good idea.
Revolutionary ideas aren’t meant to conform. If an idea is truly ground-breaking, people have yet to be conditioned to think that a startup idea is great or not. As Andy Rachleff, co-founder of Wealthfront and Benchmark Capital, puts it: “you want to be right on the non-consensus.” Think Uber and Airbnb in 2008. If you asked me to jump in a stranger’s car to go somewhere then, I would have thought you were crazy. Same with living in a stranger’s home. I write more about being right on the non-consensus here and in this blog post.
Frankly, you may not be the target market. You’re not the customer that startup is serving. The constant reminder we, on the venture capital side of the table, have is to stop thinking that we are the core user for a product. Most products are not made for us. Equally, when a founder comes to us pre-traction and asks us “Is this a good idea?”, most of the time I don’t know. The numbers (will) prove if it’s a good idea or not. Unless I am their target audience, I don’t have a lot to weigh in on. I can only check, from least important to most important:
How big is the market + growth rate
Does the founder(s) have a unique insight into the industry that all the other players are overlooking or underestimating or don’t know at all? And will this insight keep incumbents at bay at least until this startup reaches product-market fit?
How obsessed about the problem space is the founder/team, which is a proxy for grit and resilience in the longer run? And obsession is an early sign of (1) their current level of domain expertise/navigating the “idea maze”, and (2) and their potential to gain more expertise. If we take the equation for a line, y = mx + b. As early-stage investors, we invest in “m’s” not “b’s”.
In closing
While I know not everyone echoes these thoughts, hopefully, this post can provide more context to some of the entrepreneurial motions we’re seeing today. Of course, take it all with a grain of salt. I’m an optimist by nature and by function of my job. Just as a VC I respect told me when I first started 4 years back,
“If you’re going to pursue a career in venture, by nature of the job, you have to be an optimist.”
Happened to also be one of the VCs who shared his thoughts for my little research project on inspiration and frustration last week.
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People seem to love origin stories – both in theatre and in life.
“How did it all start?”
“How did you get into this career?”
Or…
“How did you meet your wife/husband?”
And well, I can’t say I’m one to push back on that.
There’s something truly magical about “Once upon a time…”. And I’m no stranger to fairy tales. Growing up, I was largely influenced by older female cousins and family friends. As soon as our parents left to their wine-sipping adult gossip around a table of blackjack, my cousins and older female friends would drag us to watch their favorite Disney movies on the VCR, namely princess movies. I’m not exaggerating when I say I’ve seen Beauty and the Beast more than 100 times or Cinderella more than 50 times. In fact, my friends in elementary school would talk about their favorite movies – Transformers, LEGO Bionicles, Peter Pan, and Tarzan. Yet, mine was Disney’s 1998 Mulan.
And they all started with “Once upon a time…”
So, it was no surprise when friends, colleagues, and then strangers started asking me:
“How/when/why did you start hosting social experiments?”
