When talking with some of our portfolio companies recently, I had a small epiphany. As all things with startups, the journey to find PMF is neither linear nor predictable. My epiphany was that getting to PMF may actually consist of (at least) 2 distinct phases.
You start with something based on your assumptions. If those are anywhere close and you execute well, you will start winning some business. Potential opportunities start popping up – “with this tweak we could serve that segment, with that the other”. Your business may show healthy growth and cashflow positivity starts looking like a real possibility. You have a PMF – a v0.1 of it. Don’t get mislead by it.
The customers you win in phase #1 are your goldmine for developing your understanding of different types of customers and their problems. As you can zoom close in on them, you start seeing the differences: from a distance the customers and their use cases look the same but once you can see them close enough, they are not. That’s when you need to have the knowledge and courage to nail the niche you will focus 100% on – so that you have something you can eventually scale. If you succeed in that, you may have a PMF v1.0 – the one that really works, where “customers pull the product out of your hands”.
Getting from 0.1 to 1.0 is harder than it sounds. First, you must have clarity on what is the niche you want to make your beachhead – where you can gain such a strong market position that it gets the snowball effect going. Second – the hardest part – is to have the guts to say no to what looks like good and viable business. If you really want to focus on something, the flipside is you must de-focus off the other things. If you don’t do that, you didn’t focus.
The grand sin of startups – premature scaling – is often the result of trying to scale PMF v0.1. Which isn’t scalable! Yes you can generate some business if you try really hard – 6 figures at least, with luck maybe 7. But pretty soon you hit a glass ceiling – your growth curve flattens, you lose customers at the pace of gaining new ones in, you throw in more resources and try even harder – to no avail. You just tread water.
PMF v1.0 is a result of an evolutionary process, only with lottery winner luck can you get there without all the hardships in between. There will be a lot of full step forward, half back – and even half forward, full back. And there is no getting there without v0.1 first – it is an achievement and a critical milestone. But it’s just the starting point, not yet what you should lock the dial on.
The biggest visible difference between v1.0 and v0.1 is that the v1.0 is way sharper, far more focused, more narrow, more precise. Which frightens many people “hey I want my market potential to be as big as possible, not as narrow”. But the market potential that matters to you is the market you can master, not the theoretical market that exists somewhere. And as you as a startup have very little gunpower, you can truly master only a very narrow target segment.
But that’s not the end, that’s the beginning. The evolution does not stop there, once you have nailed your niche you see opportunities you didn’t see before. There is no limit to how far you can go. But you first need to get your PMF v1.0. Anything that has ever become big has started real small and focused.
You don’t ask a school kid “how much money you are making”. If you did, that would guide them to skip school and get the odd job they are qualified for without education. And that would be the end of their development – they would be stuck with that for the rest of their lives.
What people normally do is ask about how kids are doing at school and what new did you learn today. If they keep learning every day, by the time they are adults they are ready to be working and then “how much you are making” will be a reasonable question to ask.
For grown up companies, revenue growth, EBITDA, quick ratio etc KPIs the traditional (and dominant) business literature (not to mention former corporate executives) is full of, are perfectly valid metrics. But what about companies who are still at school, i.e. startups?
By definition, a startup enters uncharted territories and its job is to do exploration so that it can draw a map. The success criteria for exploration is – learning. Finding the answers to the unknown.
The results of learning do not translate to revenue, profit, growth etc then and there. So what happens if success is measured as revenue growth, profit etc? You get what you measure. Startups skip learning and are trying to get the odd jobs they can, to get the instant results. Forgetting what their reason to exist is. Eventually, this may result in premature scaling – the #1 reason startups die. Pretending to be an adult when one is not.
In startup world everything is extremely context dependant. The context being your position on the learning curve – the “Startup J Curve”. Like a kid growing from child to adulthood, a startup is growing from a set of hypothesis to real business. How its success is measured should reflect their place on that journey. A conceptual illustration of that below.
As you get what you measure, knowing what is the measurement that matters at each stage on the way is crucial. You should understand what is the indicator that guides you best given where you are and where you want to go next. You first need to validate that your plan works before you start tracking your performance against it.
Note – I focus entirely on the business
implications, personal health & safety is of course #1 priority and I leave
those matters for the Healthcare professionals to advise on.
I rather
cry wolf than regret later, and as “only the Paranoid survives”, I’m OK to be
the paranoid.
No-one
knows yet what the end outcome of the Corona issue will be. But already now it
has caused a visible disturbance on businesses and economies worldwide and the
ripple effects are yet to be seen. Some businesses are affected more than
others, but very few will be completely immune. For some (like face mask
producers or remote working solutions) this can create a massive windfall.
Your business will be affected as well. In what way, when and how severely, depends. That’s what you should now form a view on, and do mitigation accordingly.
A likely
scenario for anyone selling to corporations: In the 1st wave, they
focus on their people risks: they cancel attending events, making business
trips, they ask people to work from home etc. In the 2nd wave they do
the immediate adjustments to their own business (such as airline industry), in
the 3rd wave they start calculating the cost of all that, and how to
balance the effect. They will try to assess what their customers do and how
that will affect their own business. The 1st thing they’ll do is
step on the brakes and will do only the mandatory until the dust has settled –
which means anything non-mandatory will be postponed. They will try to manage
costs, in anticipation of their revenues declining. This may mean layoffs,
freezing any new costs (such as development projects) etc. They will have to
add new issues on their agenda, changing the priorities. At this point you will
start feeling the heat.
These
“never seen before” crisis are part of the business cycles. I’m older than any
of you so I have experienced a few (and their direct consequences) myself: oil
crisis 1973, Chernobyl 1986 (this was particularly scary in Finland, due to the
typical wind directions), Iraqi war and 2nd oil crisis 1990, dot com
crash 2000, Financial crisis 2008. Not to mention the next tier – SARS, Thailand
Tsunami etc.
It’s not a
bug, it’s a feature. If you sail across the Atlantic you’re likely to get into
at least one big storm. You know that from the start so you prepare
accordingly. And when the weather map turns dark, you get ready: you take down
sails, close all holes, tie everything down, eat and rest while you still can,
make raingear readily available. When the storm hits you, you are prepared.
Then you do what you must to stay afloat, and just wait. Even the worst storms
end one day, the sun is shining again and smooth sailing can continue.
But while
sailing after is no different from sailing before, business after a crisis is
never quite the same as before. Oil crisis triggered the need to reduce
dependency on oil, Financial Crisis tightened regulation of financial markets
etc. The mankind is trying take measures that “this could never happen again” (rather
successfully, as the next major crisis is always a “never seen before” kind). Those
changes create a ton of new business opportunities.
The Corona
situation – once over and back to normal - will trigger such changes as well.
What exactly, we all can make educated guesses about. They too will create
opportunities.
Profits are
made during the high season. Strategic moves are made during the low season.
My call to
action to all of you:
The eventual consequences of Corona
will affect all of you (and us, as a result). Meaning you all need to take it
on your agenda.
You should analyse your situation
(and that of your key customers), play with some scenarios and form a view on what
you assume the implications to your business to be
What is it you can and should do to
mitigate the negative effects. Create an action plan on what to do if the storm
hits you, and what is the indicator telling you the storm is on
What new opportunities will this
create, once the storm is over. How could you best benefit of it?
I sincerely
hope none of this is ultimately needed and the world goes back to normal soon.
But it would be irresponsible to just count on being lucky. Hope for the best,
prepare for the worst!
Steve Blank wrote ” The difference between winning startups and those whole lose is that the winners understand why customers buy. The losers never do”.
This is the material question of problem/solution fit.
There are different ways to address the problem/solution fit. One of the first tasks is to segment the information you have verified on customer segments. This should continuously be kept up-to-date.
On good tool we have found is from Ideahackers ( https://ideahackers.nl/ ) and their problem/solution fit canvas:
