Every startup wants to succeed. They know nine out of 10 startups fail. They want to be that one that succeeds! They spend all their time first making that great product. And, trying to make it better.
And when they think they have the next big thing that’s going to disrupt the market, they go hunting for capital, trying to get any venture capitalist and angel investor they can to fund them.
“Capital first” is the battle cry so built into the startup community that whichever startup event people attend, the conversation seems to always shift to raising money.
Yet, when a founder does get an investor meeting, typically investors want evidence to support founder claims. They want to see metrics such as monthly and annual recurring revenue, active users, renewal rates, customer acquisition cost, customer lifetime value, and the like.
Investors also want to know about the market and the customer, in addition to your product. Is the market big enough? Who is your customer? What value do they get from your product? What kind of traction do you have in the marketplace?
While startups make their primary focus about raising capital, they place their secondary focus, if at all, on the customer. Many times I hear startups tell me “I’ll focus on user and customer research after I get funding”.
Funding Helps But It Doesn’t Guarantee Success
Too many startup founders feel that getting funding is the magic pill that will solve all of their problems and put them on the fast-track to success. But there is no fast-track to success. Google, Apple, Slack, and every other unicorn had plenty of blood, sweat, and tears they went through to get to where they are.
Investors want to know about your customer strategy – i.e. how you make money – before they give you money. Raising capital is very important. But to focus on it first is the wrong approach. The first thing a startup should do is achieve product-market fit. It is everything.
It’s what sustains a startup and enables it to grow. Make something people want. It seems basic. Creating a product that doesn’t fit what the market wants is silly. Yet, many do exactly this.
And if a startup doesn’t achieve product-market fit, chances are it will fail. According to CB Insights, who has been compiling failed startup post-mortems, the number one reason startups fail is that they don’t achieve product-market fit – this reason is cited by 42% of CEOs of failed startups.
Product-market fit is hard work and it takes time. There is no doubt about that. Yet, it’s too much work for some founders. They want the glory but don’t want to do the work. This is where things become paradoxical.
These are the same startups that worry about churn. “We have to eliminate churn,” they say. But to ultimately reduce churn means you have to first retain your customers, build loyalty, and drive customer lifetime value.
What is Product-Market Fit and Why Does it Matter?
According to Marc Andreessen, the co-founder of Netscape and Wide Web Hall of Famer, product-market fit means being in a good market with a product that can satisfy that market.
He goes on to say product-market fit is the only thing that matters. When it’s not there you can tell because customers don’t get your value, no one is talking about you, usage isn’t growing, conversions are slow or not at all, etc.
But when it’s there, revenue, usage, and growth are fast. People crave your product. People are talking about you, especially your customers. When your customers advocate and sell for you, you have achieved it, something I call “customer nirvana”.
You have to keep on working towards it. You have to give your customer that experience. And it all starts with product-market fit. And making everything about the customer.
To get to product-market fit, ask yourself:
• What is the unmet need my company or product is attempting to fulfill?
• How do I meet that need?
• What value do I deliver to my customer that enables them to achieve their business outcomes? What is my customer’s a-ha moment?
That moment is what gets you to the value. But it isn’t only the value, it’s how quickly you can get to that value.
Time-To-Value is Key. You have to know your why – why do they buy from you? You have to know the what – what is resonating for them that is compelling them to buy from you? Then you must know the actions and behaviors they are taking with your product that’s enabling them to be successful.
Knowing your why, and how customers use your product is what will sustain you. This is THE WORK. And, you’ve got to do the work if you want to drive revenue, customer lifetime value, and growth. This work will get you to a minimum viable product, which you can use to gain traction, which you can use to get noticed by investors, which will help you get funded.
Having the insights from product-market fit is what drives and sustains growth.
Can product-market fit be measured?
It’s questionable. But there are certain trends you can look for in the product-market fit path. Retention is the social proof to product-market fit. Other metrics to be watching for product-market fit include Net Promoter Score (NPS), Customer Effort Score (CES), increased sales (upsells, cross-sells, and greater share of wallet). Win-Loss can also hold insights to how healthy product-market fit is.
I scratch my head when companies don’t focus on retention. They should double-down on it. Yet, for many, it’s an after-thought.
In its 2018 NPS & CX Benchmarks Report, CustomerGauge still finds retention is an issue. 44% of respondents don’t know their customer retention rates, that’s one in three companies don’t know this vital info. This aligns fairly well to my research that 2/3 of marketing budgets focus on acquisition activities and 1/3 is focused on retention.
This is another head-scratcher.
Companies place more resources on acquisition and feel it is more valuable than retention. Forget about data points from Bain – it costs 6-7 times more to acquire a customer than retain one – or Gartner – 80% of your future profits come from only 20% of your existing customers.
There are numerous reasons for the push on acquisition.
- This is the culture of the organisation and how it measures success.
- Marketing doesn’t view itself as responsible for retention (to this I find fascinating, considering many marketing departments feel they own customer experience).
- Retention gets passed around so many times that ultimately no one ends up owning it.
- Investing and analyst communities place high value on acquisition and so CEO’s follow suit to be in lockstep.
Ultimately, retention must be a mindset that is ingrained in the culture.
It also troubles me when I hear people say product-market fit is elusive. Why? How? You want to determine product-market fit?
Get out there and research. Find people. Ask people. Take the data they give you and identify insights to help you craft your business model. Do the work.
Raising capital is vital. But it should not be the first plan of attack. Startups must make product-market fit job #1. All roads to startup success begin there.