No matter the business or the industry, there will always be changes afoot upon reaching product-market fit. Any startup must be proactive in making these changes after achieving product-market fit. It’s these changes that will hopefully take a startup from product-market fit to product-market dominance. But what are the changes that will take a startup from initial success to being a dominant player in the market
On this week’s episode of the Midstage Startup Momentum Podcast, Midstage Institute co-founder Roland Siebelink talks about all of the ways that tech startups have to change after they’ve reached product-market fit. He explains the potential pitfalls after finding product-market fit and how startups can quickly move to achieve product-market dominance.
Hello and welcome. I am Roland Siebelink, founder and CEO of the Midstage Institute. And it’s my honor to present this workshop to you about five changes that startups must make after they reach product-market fit. A little word about the Midstage Institute before we get started. We are an institute based in Silicon Valley in San Francisco, and we help tech founders maintain momentum through the difficult years of the midstage. This means after they found product-market fit and before they found the full exit or independent existence on the stock exchange. All those difficult years in finding distribution, attacking the mainstream market, disrupting its competitors, and also building up defenses so that other ones don’t take up their market. That’s what we specialize in. And we do that through thought leadership, self-help tools, CEO coaching, co-founder deep dives, team assessments, and a lot of offsite facilitation.
But that’s enough about us. Let’s talk about the content of the workshop. Five changes that startups must make after reaching product-market fit. Actually, I have seven points and these seven points are as follows. First of all, we have to check, have you really reached product-market fit? Because there’s a big tendency and a big temptation for startups to dive right into what we advised them, even if this is too early for them. Starting to apply these recipes before you’ve properly reached product market fit is starting to build walls and a roof when you don’t have a foundation yet, and that is really dangerous. A double check, have you really reached product market fit.
Assuming that you have, we will actually move to a new concept, which is product-market dominance. And how do you reach product market dominance? Well, first you have to redefine your mission around product market dominance. That means a very big focus not just on product development but on sales. How do you do that? Well, you can start focusing on capturing not just the people that come to you but actually the latent demand in the market. You design your product for automatic upgrades when possible. You also ensure that you have healthy growth margins on your product so that you don’t lose on every product that you sell. And then on the marketing side, in particular, start driving down payback time. And that is the first step in what we call mastering distribution, which is your first hurdle on the way to product-market dominance.
In other workshops, we will talk also about the other hurdles, which is to bridge through into mainstream markets, to start disrupting your competitors, and to work toward defending your newly found markets from others. And finally, the conclusion, putting it all together is how to move freely your startup from a lab based feel to a full commercial company.
Let’s start with, have you actually reached product market fit? That’s section one and that’s the most important question before you delve into anything else that I’ve been mentioning here. The Real Product Market Fit by Michael Seibel is a video I absolutely recommend everyone watches. Michael is, of course, the CEO of Y Combinator, the foremost incubator/accelerator for startups in the Bay area. What people tell you in this video is how often he talks to founders who believe they found product-market fit when they haven’t. Product-market fit is the badge of honor that people know investors are looking for. And so, they’re trying to fake it till they make it, trying to find product-market fit just in order to attract that investment and then to use that investment as further validation. But this is not something we recommend because it too often fails.
What does product-market fit really mean and how do you know if you have it? Well, the last question is probably the easiest to answer. It means that you’re completely overwhelmed with demand. It’s like sitting on a fire hose and suddenly it starts spraying all that water. And all you can do is to try and bring it under control. That’s how it finally hits you when you reach product-market fit. You feel overwhelmed with the demand. You can’t even make changes, as Michael is saying, to your product because you’re swamped just keeping it up and running.
What are the elements to get there? That’s what all early stage founders want to know. And we try to bring it together in these three key ingredients or buckets. First of all, start from a real customer pain. The people at Sequoia call that a hair-on-fire customer pain. In other words, the customer can hardly think about anything else. They need this product because it’s so painful having to deal with that problem. And we can imagine from any successful startup and scale up how big of a customer pain that was.
For example, in Salesforce’s case, it was having to wait for upgrades of enterprise-related sales software whereas that could have just been served from the cloud. That was their key solution. In Facebook’s case, it was knowing which of the cute guys or girls in your college were still available. Well, that was a big customer thing. And both companies came up with unique working solutions. That’s the bucket of number two, the technology. That technology is often where founders start, and that brings you into a problem when you have a solution but you don’t really have a problem. I’ll get to that in a second. Start with matching that customer pain to the working solution. Start matching your technology, your working solution, to a real customer pain before you start moving into a monetizable market and trying to find where you’re going to find money for it.
Coming back to problem-solution fit, many people who have not yet experienced that product-market fit - that overwhelm of people who want to try out your product - why is that? Very often, it’s because you have a solution but you don’t have a real customer pain yet. I would say 90% of the startups we’ve talked to struggle with product-market fit because they have this - what Y Combinator calls - a solution looking for a problem. Just be critical. Talk to your co-founders, talk to your advisors and say, “Do you really feel that what we have today is a real problem and the real solution matching it or is one of these two deficient? Maybe we’ve deluded ourselves in saying there’s a problem that customers are actually working with.”
If you don’t have product-market fit yet, here’s our advice, and it’s basically to use the methodology Lean Startup. It’s the gold standard in iterating toward product-market fit. Lots and lots of materials outside of the book that have been written about this. But the core is to build this iterative cycle of build, measure, and learn. And how you do that is to build hypotheses in the office but then to go and test them outside of the office.
Okay, that’s enough about product-market fit. Just one more repeat to not fake it till you make it because it will come back to haunt you. A strong startup foundation is your product-market fit. And if you fake it, your startup will collapse. It gets only more difficult as you fake it and try to pull your startup to a place where it’s not yet. That’s about product-market fit. Do not start scaling until product-market fit overwhelms you with demand.
Next section. In the five changes startups must make after reaching product-market fit, we’ve not tested, have you really reached product market fit? If you have, your next mission is to move toward product-market dominance. And in this workshop, we talk about the first phase of that, which is to master distribution. But first, let’s talk about what it actually means to find your mission around product-market dominance.
Your new mission is product-market dominance, from product-market fit to product-market dominance. Why is this? Well, the worst part about product-market fit - getting to that end of the rainbow about all your years of struggle - is others may actually have found that product-market fit too. What’s even worse, it’s because you announce it, because you raise your funding, because you have your TechCrunch article showing off that great new fit you’ve found. And guess what, all the other startups will do that are in your field and that haven’t found product market fit yet? They jump on your solution as fast as they can to try and conquer that market. In other words, as soon as you have found product market fit, what happens? It sets off an immediate race.
Alex Rampell of Andreessen Horowitz says the battle between every startup and incumbents comes down to whether the startup gets the distribution before the incumbent gets the innovation. In other words, you may have the technology and you may have a new way of serving the market, but other startups may have that too or can easily replicate it. And then, of course, the incumbents, the ones who want to steal the market share from you, may be able to figure out that innovation pretty fast and have all these distribution channels already in place. They know how to sell. They know how to market. Can you fight against it? Only if you move really fast before they can actually offer that product like you can.
And there’s even more of a reason why you want to be very fast here - I’m not trying to scare you, but I’m trying to scare you - tech markets evolve toward a very high concentration. There are a lot of reasons for that economically; it’s primarily related to the fact that technology is such an upfront investment asset that the one who can invest in it the most will get the most benefits from over time, nobody can really match that anymore. Geoffrey Moore calls this phenomenon one gorilla, two chimps, and a bunch of monkeys. That’s what all the markets ultimately end up with. Talk CRM, you say Salesforce. Talk about databases, you say Oracle. Talk about word processors, you say Microsoft. We can always see that there’s one big gorilla, two chimps, and a bunch of monkeys. Where do you want your startup to end up? I think you’d much prefer to be the will. And guess what? You’re just going to end up like a bunch of monkeys.
How do you set up to become the gorilla in your market? Well, first you find users faster than competitors do. Second, you have them try your products before competitors products are even tried. Then you lock them into your product before competitors. And only then you start earning more money from this market than competitors. That is the key to becoming a gorilla. Because if you start earning more money, you can reinvest more money, hire more engineers, build more technology, build more features, and therefore, become the go-to-market leader that nobody will question.
That means that in your early stage, it was really about innovating and about building features. And while that still remains important, customer acquisition, the whole marketing prospecting sales pipeline, becomes as important as innovation. The midstage startups that we work with typically have a sales, marketing, go-to-market organization that is as big, if not bigger, than the whole product and engineering department put together. To many people, especially those with a technical background, that sounds ludicrous because this is a product company and it’s about selling a technology. Yes, it’s about selling a technology. And the misunderstanding people often have there is that selling doesn’t come for free.
That also means that typically at this stage, we want to start seeing some specialization between founders. There’s going to be one founder who’s going to be focusing more on the product engine, product delivery, ensuring that there’s a working product that best solves the customer’s pain point on an ongoing basis. And that means staying ahead of the curve, knowing what competitors are doing, doing a better job than these competitors, and always keeping a trailblazing product in that market.
The go-to-market person - very often the CEO but not always - is the one that ensures that customers with that pain point know, try, and buy the product from you. And then there’s a third co-founder or maybe an early hire who focuses on operations, who ensures that customers have already bought the product, who are using it, get help and support when they need it. And that’s a function that becomes more important as the business grows even further. To conclude section two of this workshop, before anyone else can, you must gain product-market dominance.
Roland Siebelink talks all things tech startup and bring you interviews with tech cofounders across the world.