BRAD FELD ON PRODUCT MARKET FIT – THIS ONE IS A BITCH

January 20, 2015

The Illusion of Product/Market Fit for SaaS Companies

“We have product/market fit.”

“We are searching for product/market fit.”

“We are raising this financing to find product/market fit.”

“Our customer traction demonstrates product/market fit.”

Product/market fit. It’s a wonderful phrase, thanks to Marc Andreessen, Sean Ellis, Steve Blank, and Eric Ries. But it also one of the most overused, and inappropriately used, phrases that I hear with SaaS companies on a daily basis.

I was in a meeting a month ago with a company I’m on the board of where product/market fit was asserted. I sat quietly for a moment and then stated as clearly as I could that the company didn’t have product/market fit, they had the illusion of product/market fit. A long conversation ensued which resulted in me pondering this illusion and trying to put some parameters around it.

But first, some history.

There’s a fun post from Ben Horowitz in 2010 titled The Revenge of the Fat Guy that weaves in comments from Fred Wilson about product/market fit where Fred argues in his post Being Fat Is Not Healthy. While ostensibly it’s a post about lean vs. fat startups, it really is about discovering product/market fit and it gives a good history lesson on the thinking circa 2010 on this issue. Ben eventually states, and then explains, four product/market fit myths.

  • Myth #1: Product market fit is always a discrete, big bang event
  • Myth #2: It’s patently obvious when you have product market fit
  • Myth #3: Once you achieve product market fit, you can’t lose it.
  • Myth #4: Once you have product-market fit, you don’t have to sweat the competition.

As I rolled this around in my head, I started to realize that part of the illusion of product/market fit is that there’s a belief that once you have it, you never lose it (myth #3). There’s also the belief that there’s a magic moment where you have it and declare it (myth #1). Worse, there’s the belief that it’s obvious when you have it (myth #2). And tragically, a lot of companies believe when they have it, they don’t have to worry about anyone else because they’ve won (myth #4).

I’ve experienced the downside of each of these myths many times. I’ve seen companies have to rediscover product/market fit after getting to a $500k MRR (monthly recurring revenue). I’ve been involved in companies that thought they owned the market at a $2m MRR only to have a new competitor come out of no where and beat the crap out of them. I watched companies at a $4m MRR enter new markets and struggle mightily to discover product/market fit for these new markets. Or worse, I’ve seen a new product release that was late completely toast product/market fit and force a company to hang on to customers any way possible while rushing to fix what was broken.

The illusion of product/market fit pops up at multiple points in time. So I started thinking about heuristics for these points in time and came up with MRR as a parameter to explore. Suddenly, the illusion problem came into focus for me based on MRR, with clear transitions happening up to a $1m MRR. While I’m going to keep exploring this, I have a hypothesis now about the dynamics around product/market fit in SaaS companies that I’m playing around with. Feel free to tear it apart.

When you have $0 of MRR, you have no product/market fit. Ok – that was easy. You are working on a product and searching for your first customer.

From $1 to $10k MRR, you have the illusion of product/market fit. You finally found someone to pay you for your shitty MVP, but you’ve got a long way to go before you truly have product/market fit. Do not pour on the gas at this point. Stay calm and keep doing what you are doing.

$10k to $100k MRR is a super exciting time. You’ve got a semblance of product/market fit. You are starting to learn what your customers will pay you for. You feel like things are actually cranking. You probably have one or two salespeople and one of your founders – maybe your CEO – is still the head of sales. If you try to raise a Series A, the process is straightforward. It’s easy to believe you’ve got it figured it out here. This is the point at which myth’s #1 and #2 usually kick you in the ass. If you aren’t growing a compounded 10% each month, you don’t have product market/fit yet. If you are growing faster than that, you have found something.

Going from $100k to $500k MRR is a product/market fit sweet spot. You are starting to build a sales organization, have visibility in the market in your segment, and might even have customers coming to you on a regular basis. This is where myth #3 bops you on the head. You think you’ve got it and it’ll keep scaling, but you hire the wrong VP Sales, you focus on the wrong metrics, or you end up struggling to renew your customers when the first annual renewal cycle hits. You get confused about negative churn and conflate upsells with growth with churn. Lots of companies stall here – some due to self-inflicted pain; others due to the illusion of product/market fit.

If you can blast through the $500k MRR mark and march to $1m MRR, you’ve found product/market fit. You are now at the magical point some people call “Initial Scale.” Cool – you’ve got a business.

Now, your value is going to be determined by your growth rate. At any point in time, if you are growing > 100% year-over-year you will be highly valued – think at least 10x revenue, but I won’t tell you whether it’s trailing or forward, as that’ll shift around based on the public markets. And, the faster you are growing, the more discontinuous (e.g. higher multiple, but not linear) your valuation will be.

If your growth rate is between 50% and 100% and holding steady, that’s good and you’ll see a nice, big, healthy valuation. But if it’s declining, watch out for that magic 50% year-over-year mark. It’s like a trip wire that will send off all kinds of weird alarm bells. Once you decline below 20%, you better make sure your existing investors are going to be ready to step up to finance you, or else start the rapid march to profitability, which likely generates even slower growth.

Myth #3 and myth #4 show up all the time at MRR’s > $1m. You disrupted someone a few years ago which is what caused you to discover product/market fit. Don’t be confused about the world – someone else is gunning for you now that you are the big player in whatever segment you are in.

Every time you work on something new, whether it’s a new feature, a new product, or a new product line, recognize that you are searching for incremental product/market fit. The search is a continuous and never ending quest. Don’t confuse illusion with reality.

hi, badrish – see this – its kinda interesting

Accel invests $50m in code testing firm BrowserStack

ET Bureau|
Jan 31, 2018, 08.50 AM IST

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From: Badrish \<badrish.aom>
Date: Wed, Jan 31, 2018 at 11:20 AM
Subject: Re: hi, badrish – see this – its kinda interesting
To: Ajay Mishra <ajayinsead03>

Example of Patience in Venture

https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/accel-invests-50m-in-code-testing-firm-browserstack/articleshow/62718792.cms

On Wed, Jan 31, 2018 at 5:06 AM, Ajay Mishra <ajayinsead03> wrote:

https://en.wikipedia.org/wiki/Typeform.com

WE MAKE THINGS THAT GO INSIDE THE THING THAT GOES INSIDE ANOTHER THING – Thats Mittelstand – and its a very GERMAN thing. Its not an AMERICAN OR ISRAELI OR INDIAN THING

A VC asked me where i see the company in years ahead

he is an american VC

so his question is do u want to be a Billion dollar worth company or do you plan to stick around and grow Myraah to be a Billion dollar sales

here is that post -> http://yoninetanyahu.com/2018/01/31/the-question-are-u-gonna-be-a-billion-dollar-valuation-company-or-do-u-want-ot-be-a-billion-dollar-in-sales-company/

70 % of german employment is through MITTELSTAND companies : these companies are :

[a] SMALL AND MEDIUM BUSINESSES WITH AROUND $50 MILLION IN ANNUAL SALES

[B] TYPICALLY FAMILY OWNED

[C] TYPICALLY IN GERMAN SUBURBS OR AT LEAST FAR FROM THE MAJOR BIG CITIES LIKE BERLIN MUNICH, FRANKFURT ETC

these Mittelstand companies are mostly high tech manufacturing and/or high – end manufacturing – most of them manufacture assembly items that go into the larger assembly items of some end product – a finished good ..

as you can see -this MITTLESTAND is a godo thing

that said – VC backed companies or our company MYRAAH isn’t like MITTLESTAND model

u can see a good blog post on the differences here -> https://nothingventured.rocks/what-startups-can-learn-from-the-mittelstand-399842086221

here u will hear a word UNICRON – motre on that later

ps: one way to think about growth and unicorns is to ask- CAN this company grow non-linearly ? – SPECIALLY when u want to compare and contrast a company in say technology – which has the potential to grow exponentially – or non linearly – versus – a manufacturing company – which is hard to grow non linearly

THE QUESTION : HEY U MYRAAH FOLKS :ARE U GONNA BE A BILLION DOLLAR VALUATION COMPANY OR DO U WANT TO BE A BILLION DOLLAR IN SALES COMPANY

WITH YOU HE MEANS

THE FOUNDERS OF MYRAAH

 

IE

SAURAV KUMAR

 

AJAY MISHRA

 

GAURAV KUMAR

Gaurav called me today. He said ” sir, whats happening at your end “

 i am mulling over last night’s question from a VC friend from Palo Alto California. I told Gaurav.. and one more question – the backup for the addressable market..size.

 

 

 

For entrepreneurs its an important question.


It has something to do with:

[a]

the VISION

[b]

the AMBITION – U can call it as some others may – the MISSION

[c]

the patience, the perseverance and there is one more word – with p – Yeah the PSYCHOLOGY


because? well because – many entrepreneurs get burned.


They are happy with an early exit .

Dreams of Seychelles, Sicily and Serenity of Goa, Eilat, Hawaii and Bali come to many an entrepreneur’s mind.

 

We just exceeded this month’s sales target. Its always good to have good news.


 

Later in the day: Dad asked me -” SO, how is your company doing?”

I told him : we want to be a BILLION DOLLAR REVENUE COMPANY

🙂


we are moving to a new office. starting February 5. Well February 5, is the Havan

what is a Havan? Well, its a Hindu event thing they do when they want to inaugurate a new beginning. Its the Hindu equivalent of a Blue Ribbon cutting ceremony

my mom will do her own Puja { Puja means worship and praying } in Lucknow house.

Gaurav – wrote this cool post.

Gaurav is a nice fella. Very Smart guy.

Gaurav was in London.

He did his Master’s of Finance in London.

And worked in London at Lloyd ‘s .

Gurav then did his MBA from IIM Ahmedabad.

Saurav is the younger brother of Guarav:

Saurav is my junior from IIT Kanpur.

Saurav is our Ramanujam – a MATHS MAJOR FROM IIT.

Go to the profile of Myraah IO
Myraah IOFollow
Oct 1, 2017

Om’s (Shiva) law of Sales

1*qSwBRuJgscWnj5hbLkaGjw.jpeg

To my entrepreneur friends,

So you have figured out a product or service. You and your co-founders worked day and night to create a product or service.

Now, the most important battle begins — To find the product market FIT.

This challenge is enormous and this is why many of start-ups fail. They fail to sell.

I am no start-up guru. But based on my experience of over 10+ years doing start-ups I discovered a common pattern.

This may help other entrepreneurs make their first sales.

OR

even better discover a PROFITABLE AND SCALABLE SALES MODEL.


I call it OM’s law of sales. It sounds like OHM’s law in physics and actually works like that. But I renamed it coz I am a SHIVA follower.

Here it goes:

The idea of sales is to flow the money from customer to your bank account. Think of it like current flowing from point C (Customer) TO your Bank Account (B). WOW- Like C-2-B

0*SGM0HLW9YlA5dL6C.png

OK, this transaction is our goal. To make the current (Money) Flow from customer to your account.

But, you will need to overcome FOUR resistances.

R1 : WHAT ARE THE CHANCES THAT THE PROSPECT IN QUESTION IS LOOKING FOR THE SOLUTION YOU ARE SELLING

Real Estate Example: If you are selling a 1 BHK home. And you come across a prospect. But, She is actually looking to buy a 2 BHK. What are the chance of sale — 0%. No matter how hard you try you won’t be able to do the transaction.

Now the next example entrepreneurs will love. Suppose you are approaching a VC for funding. Suppose you have a services business.

 

BUT the VC invests only in TECH product.

The chances of funding is ZERO coz their money cannot cross the first R.

Simple. When you realize this. move on to the next lead.

 

Lesson: Focus and invest in finding the RIGHT prospect.

R2: WHAT ARE THE CHANCES THAT THE PROSPECT IN QUESTION HAS AN IMMEDIATE NEED TO BUY

Real Estate Example: If your prospect is actually looking for 1BHK home and you are selling 1 BHK home. Great R1 crossed with fair probability. Now suppose prospect says he is looking to buy in 3–4 months of time as he has started looking for a home. Oh, this means the probability of transaction happening is low. These kind of prospects will waste your time. Move on Buddy!

Now the VC example: So the VC invests in the business type you are in. Great. But they don’t are not in a hurry may be they will like to shop around for 6 months or so as they are meeting many start-ups. What are your chances buddy!

This happens a lot in the Angel world.

Lesson: Find prospects , who are hungry and you have the right food for them.

R3: WHAT ARE THE CHANCES THAT THE PROSPECT IN QUESTION HAS AN ABILITY TO PAY

Real Estate Example : Your prospect is looking for 1BHK. He wants to close the deal in next 10 days. How about his ability to pay, that’s R3. You realize his credit rating is bad and no bank will give him loan. FINISHED. He cannot buy. So move on.

Now the VC example: You spoke to an associate at the firm and everything is looking good. They like what you are doing and they like your team. Waiting for the cheque. Actually VC himself is waiting for the Cheque from their General partners. They don’t have the money RIGHT NOW in the bank. As they themselves are raising for the FUND -2. What are your chances of getting funded buddy !

This has happened with me and friends I know. So don’t discard this.

Lesson: Always confirm if the prospect has the money to buy what you are selling.

R4: WHAT ARE THE CHANCES THAT PRICE PROSPECT IS ASKING IS A PRICE YOU WANT

Now Suppose our prospect got the loan and all R1,R2 an R3 are satisfied. Now it’s a deal buddy. NO.

Real Estate Example: The last thing is that prospect may say: I can offer 30 Lakhs for the flat you want to sell at 50 Lakhs. Will the deal happen? NO.

Now the VC Example : All done. Now the VC gives you valuation of $1 M whereas your expectation is $5 M, Will the deal happen. Remember Snapdeal.

Lesson: Always clarify the price early in the sales process.

OK

Here is the summary:

Figure out all these chances (Probability) earlier in the sales process. So that you don’t waste time on wrong leads.

MULTIPLY them and calculate what the chances of sales are. If any one of them is ZERO. Trust me my HERO it’s gonna happen. MOVE ONE.

Here is OM’s law of sales:

CHANCE OF SALES =

(PROBABILITY THAT I AM SELLING THE SAME THING AS PROSPECT IS LOOKING FOR)

X

(PROBABILITY THAT PROSPECT HAS AN IMMEDIATE NEED TO BUY)

X

(PROBABILITY THAT PROSPECT HAS MONEY OR CAPACITY TO DO THIS TRANSACTION)

X

(PROBABILITY THAT PROSPECT HAS SIMILAR EXPECATION OF PRICE THAT I HAVE IN MIND)

Comments pls.

saurav’s paper is below

Mom asked me why i work?

here is why

PS: A BILLION DOLLAR VALUATION COMPANY MEANS $100 MILLION IN SALES – MULTIPLIES BY 10 TIMES THE SALES = A NET WORTH OF ONE BILLION US DOLLAR COMPANY

AND A BILLION DOLLAR IN SALES COMPANY – MEANS  MANY A BILLION DOLLAR NET WORTH COMPANY.

PS: AFTER A FEW MILLION DOLLARS – OK – LETS SAY $100 MILLION – IT DOESN’T REALLY MATTER MUCH – HOW MUCH MATTER ONE. ONE WAY TO EXPLAIN THIS WOULD BE – HOW MY PROFESSOR AT INSEAD SAID – HE SAID – THERE IS A LAW OF DIMINISHING UTILITY –

I WANT TO DO SOMETHING MORE THAN JUST HAVE MORE MONEY. .. SO, WHAT IS IT HONEY? DO U KNOW?

 

 

Regarding PAR Finance :

Hi Saurav and Rohit

[1] Change the NAME of the header – from GALLERY to TEAM

[2] Add a TEAM BLOCK content on Home Page – – position – just right above this section

[3] 4 people team Block in here

OUR TEAM

team.jpg

PAR Financial offers a common integrated platform for all your financial needs, be it budgeting, investment planning, investing and achieving goals.
We provide tools that allow users to create monthly investment plans track their spending pattern and optimize savings.
Whether you opt for long term or short term investment plans, PAR Financial acts as a financial investment advisor and helps you select, compare and keep track of your investment goals.

PAR Financial makes users financially independent by helping them grow and track of their investments

PAR Financial offers savings optimizer to help user optimize savings, which ultimately helps them to achieve their goals.

http://myraah.co/clients/financial/

thnx

ajay

 

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HELLO MOSCOW

🙂

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To: ajayinsead03


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