Until you reach $1M in revenues, everything remains an experiment
Last week, I had the honor of judging pitches from pre-seed, pre-pre-seed, pre-pre-pre-seed, and whatsapitchdeck? startups.
Like a conquistador declaring they’d discovered the golden city of El Dorado, each founder stood on the stage and asserted they’d found product-market fit. They needed money now to conquer the market and bring back untold riches.
Of course, they hadn’t actually seen the shimmering gold with their own eyes much less held it in their hands. But they’d talked with 10 potential customers, with 25 potential users, with over 100 people in the industry, and now they had a notarized map with a big X marking the gold’s location.
Sorry, cap’n, until you’re holding a big pile of gold in your hands, you haven’t found product-market fit. Your confident assertions that you’ve already crossed the valley of death into the promised land lose you credibility.
As a pre-seed startup you have an educated (hopefully) guess of the general neighborhood of where to find that elusive product-market fit, but that’s a long way from excavating the trove of buried treasure.
A useful rule of thumb is that until you’ve reach annualized revenues of $1M, you don’t have product market fit. Though you may have some traction with customer trials and early revenues, until you’re generating $1M or so, you haven’t crossed the chasm from early adopters, innovation labs, and people who like to play with whizzy toys into the mainstream where businesses and consumers would rather kill themselves than live without your product.
It’s no coincidence that $1M in revenues is also where venture funds start to get excited. At that point, the product is proven, and you just need money to scale up, hire a sales team, and begin marketing the hell out of it.
Prior to reaching that $1M milestone, pouring money into sales and marketing is money poured down the drain. At this stage, the product is still an experiment. Yes, you have some ideas about what customers need, but they’re invariably wrong.
Hopefully, just a little wrong and you’ll only need to make minor adjustments — add a few key features, rewrite the interface, or redo the business model — but it’s just as likely you may have to pivot completely, or worse, that there’s only a few flakes of gold to be found.
What is Product-Market Fit?
Product-market fit is when you have a product that users absolutely can’t live without. Not just a product that everyone says is a good idea or taps into an important need.
Product-market fit means you have a product that has all the critical features customers require, the interface they need (including integrations with other products), and the business model, distribution model, and pricing model that fits their purchasing requirements.
When you find product-market fit, it will be obvious. There will be a step change as business explodes. Customers start shoveling orders at you as fast as you can take them.
If you make consumer goods or a hardware product, you’ll suddenly have a problem manufacturing it fast enough. For software, onboarding customers and handling support will suddenly become your biggest headache.
After years of begging potential users to take a look at your product, these will be problems you’ll be thrilled to have. After years of ignoring your calls or saying, “Sorry, you’re too early,” investors will suddenly be calling you, desperate to grab a piece of your company.
But until finding product-market fit, every day can be a slog. Something isn’t quite right, but it’s hard to know what. Customers says it’s useful, but other than a few trials, nobody is buying.
Before reaching $1M in revenues, the goal is not to make sales but to find that elusive product-market fit. Yes, you need the income and investors are pushing you to show growth, but growing from $100K to $200K is irrelevant when the end goal is to get to hundreds of millions in a few short years.
Instead of focusing on how to close a deal with one customer, be thinking about what it would take to sign up 10 customers, or 100 customers, or even a thousand in the same amount of time.
Until you reach product-market fit, every customer interaction should be considered a critical learning experience. The MVP was an experiment to get customer feedback on the basic concept. Treat v1.0 of the product as an experiment to get customer feedback on everything else and find all the stumbling blocks.
That means at this stage, the CEO and CTO are still doing the sales. The product is not ready to hand off to a head of sales or CRO until you have a repeatable sales process. Before then, the founders need to be talking directly to the users and getting as much feedback as possible. A “no” can be more even valuable than a “yes” if you can find out why and adjust the product, business model, and marketing.
It’s also not yet the time to hire a product support team or sales engineers, as much as you’d like to get that off your crowded plate. But you need to be onboarding the customers personally and seeing how they use the product, watching where they’re getting stuck, and thinking about how to make the product entirely indispensable. I guarantee it’s different from what you thought.
Once you do find product-market fit, in hindsight it will have been obvious. Need a place to hang out on some stranger’s couch? No, but how about an apartment for daily rental? (AirBnb) An online bookstore? Maybe. But why not an online store for everything? (Amazon) A multiplayer online game? Join the crowd. But that internal messaging platform sure is handy. (Slack)
An Example of Finding Product-Market Fit
My first startup developed a way to transfer data 10x faster over the internet. It was brilliant. It was unique. Remember the HBO Silicon Valley series about the startup that developed compression software? It was like that, but much better.
As soon as our software was ready, we sold hundreds of thousands of dollars of copies. We thought we’d found product-market fit with a great product that had a trillion dollar need. We were wrong.
The product failed to take off. Companies like Apple paid for copies, but outside the test lab, nobody was actually using it.
Our software only worked when it was installed on both the sender and receiver machines. That created a chicken-and-egg problem that Google could overcome in a heartbeat, but not a small startup like us. We had a great product for a huge market, but no product-market fit.
So we went back to the drawing board. Since our customers couldn’t get our software on all the sender and receiver machines, we rearchitected the product to run on one separate server on each network. That took us another year.
It seemed like the right idea at the time. It wasn’t. Pilot customers loved it. We had great reviews in industry publications. Users wanted it. But the IT departments that had to install and maintain those servers weren’t excited. We sold a lot of trial copies, but had few deployments.
We knew deep in our hearts what we needed to do, but we kept trying to convince ourselves there was an easier way. There wasn’t. We needed to embed our functionality into a router that would go onto the network.
We were a software company, though, and it was a difficult leap to become a hardware vendor. We’d have to manufacture the product and deal with inventory, supply chain, returns, and warranties. Even our accounting system, and therefore our accounting staff had to change. We’d have to deal with sales tax, customs duties, and international shipping. Ugh.
But as soon as we built the boxes, our phones didn’t stop ringing. The product took off. The military, which needed to push large image files from war zones back to the Pentagon for analysis, flew a team across the country to grab as many units as they could carry home.
After a short trial with a handful of devices, big enterprises were placing orders for hundreds of units to install in all their offices around the world. I couldn’t hire and train people fast enough. I didn’t sleep for a year.
That didn’t mean the product was finished. There were adjustments to the distribution model, tweaks to the pricing, no end to feature requests and enhancement, and adjacent markets to conquer. And soon we had competition from the 800lb gorilla of networking — Cisco. But it was clear we’d found product-market fit and struck a mother lode of gold.
I hope you, too, are able to find product-market fit, but be prepared for the hard slog through the valley of death to get there.
Finding product-market fit takes time, takes experimentation, takes listening closely to customers. It almost always takes major pivots that require hard choices until suddenly, all the pieces fall into place.
Then one day you realize you have a product different from what you expected, a business different from what you anticipated, in an industry you knew nothing about when you started. But you won’t have a moment to take a sigh of relief because you’ll be overwhelmed with customers and investors banging on your door.
The Silicon Valley startup, SüprDüpr, thought they’d found product-market fit with their teleportation service. But people were scared to step inside until they were assured of its safety. So the company planned a huge demonstration teleporting elephants. What could go wrong with that?
Find out in my award-winning novel, To Kill a Unicorn.
