Thursday Sep 5, 2013 by Eric Paley - Managing Partner, Founder Collective
I’m a big believer in the key tenets of Steve Blank’s The Four Steps to the Epiphany and Eric Ries’s The Lean Startup. Particularly, I like to see start-ups follow the authors’ approach to finding what both call product/market fit.
One of the key concepts of product/market fit is that you should not start to invest in building your company until there is evidence that the product fits a need in the market. Blank and Ries encourage start-ups to get their first product in front of customers quickly, get feedback, then tweak their product accordingly. That’s great advice–scaling a sales force and infrastructure to sell a product that the market does not want can be catastrophic to a start-up.
Unfortunately, the pendulum rarely swings halfway, and I’ve recently noticed a worrisome trend among many start-ups. Entrepreneurs are building good products, putting them in front of customers, getting solid feedback, and then iterating into infinity in search of something they will probably never find. In most cases, the product is viable, but it isn’t magically obvious that it is extraordinary.
Many entrepreneurs seem to be waiting for their product to go viral before they actually build out their businesses. Although it’s fantastic to see companies grow without paid marketing, many outstanding companies have been built on products that have never gone viral. Some products just require a more meaningful marketing investment to educate and acquire customers before they achieve success.
Look to other metrics besides how fast your company is acquiring users to determine whether you are ready to scale up. User engagement metrics like net promoter score are very powerful in determining whether your product has satisfied users and you are ready to invest in growth. Even those numbers will never be perfect, but they should give you confidence to take a leap and believe your product will work for a large enough group of users.
Scale tends to breed scale. Start-ups often need to get some type of critical mass of users before their products start to be fully appreciated and begin to spread more organically. Malcolm Gladwell explores this phenomenon in The Tipping Point. Without making some efforts toward scale, you typically won’t have the possibility of the market tipping in your direction.
Furthermore, when you begin to intelligently scale up, you can then start to focus on the challenges of marketing and selling the product. Those areas are also critical to long-term success and will require just as much hypothesis testing and iteration. As the company gets good at overcoming these challenges, you then have the opportunity to show some pretty impressive evidence of product success that might not have been possible with a smaller user base.
When scaling up, do it rationally and sustainably. When a seed-funded company goes to investors for the next round of funding, the first question typically is, how much traction with users does the company have? Some churn is to be expected, as are some product problems.
Investors don’t expect a perfect product, but we do relish analyzing a business’s customer growth and engagement. If your company has a product that looks solid but hasn’t demonstrated the ability to scale up, you are going to find yourself meeting with lots of VCs and falling victim to the Series A crunch.
Of course, you should continue to improve your product, but don’t wait for some magical moment to start building the rest of the business. Sometimes product is the reason a company isn’t ready to scale, but often the culprit is the insecurity of the entrepreneur.
Eric Paley is a Managing Partner at Founder Collective. This blog post was originally published in Inc.com Magazine. You can find additional content from Eric on his blog called Anything's Possible. You can also follow Eric (@epaley) on Twitter by clicking here.