The lone tech genius is dead, long live product market fit. That’s the advice you could take from the concept developed by Andy Rachleff, now executive chairman of the Palo Alto-based investment services firm Wealthfront.
In other words, teams and talent are important, but not as important as conceiving or pivoting to “an idea that addresses an amazing point of pain around which consumers were desperate for a solution”.
So what does product market fit mean for tech startups going into 2020? It starts with connecting to the real world.
Find your potential customers
According to Cyril Ebersweiler, general partner at SOSV, and founder and managing director of HAX, a two-stage venture capital programme for hardware in San Francisco and Shenzhen, startups can determine whether their product or service is actually meeting a need through conversations with potential customers.
“In the business-to-consumer (B2C) space, the customers are for the most part early adopters, and it’s easy to confuse being successful with that group and having a business for the masses,” he says. “In the business-to-business (B2B) space, said needs are generally well understood by entrepreneurs since they most likely are coming from said industry, but they have yet to make sense out of the product and the company’s business model.”
These conversations can take a number of forms. At Gallium Ventures, a London-based strategic consultancy that works with early-stage startups, venture capitalists and large listed companies, the team encourages founders to allow cross-pollination between, for instance, sales, public relations, social and marketing teams.
“Google Analytics is also a surprisingly underutilised resource for brands and can help various internal teams in sussing out what works,” says Heather Delaney, founder and managing director of Gallium Ventures.
Mr Ebersweiler, meanwhile, stresses that HAX has used “every possible channel to validate product market fit over the years”. This includes more than 120 kickstarter campaigns for B2C startups and hundreds of pilots on the B2B side.
David Haynes, director of the Vive X programme in Europe, works in virtual reality (VR) and augmented reality (AR) innovation, where there is a lot of exciting technology that may not scale. He encourages startups to focus on tracking whether their customers are actually using their products.
“For a consumer VR startup this means looking at user engagement and retention, such as daily or monthly active users, and not just the number of downloads or press attention,” says Mr Haynes. “For an enterprise VR startup, it means being able to show they’ve moved past proof-of-concept stage, or initial conversations with the team, and the product is being deployed and used throughout an organisation.”
Back to the business model
One metric that is often quoted by tech startups in relation to product market fit is the importance of an LTV:CAC ratio. This is simply the lifetime value (LTV) of a customer as it compares to the customer acquisition cost and an ideal LTV:CAC is thought to be 3:1. It affects everything from product pricing and the channels through which the startup will be acquiring customers.
“The LTV:CAC ratio really comes down to the margin you make and the model you are working with,” says Melissa Snover, founder and chief executive of startup Nourished, which is based in Birmingham and 3D prints personalised vitamin “stacks”. “Our fully integrated business model is more complex to set up, but allows for us to have a higher net margin to spread awareness and the dynamic flexibility to pivot and develop more products as the demand dictates.”
It’s even more important for startups building B2B hardware to measure, says Mr Ebersweiler, and difficult to put in place. “Take Amper, a company which monitors the manufacturing activity of a factory,” he says. “They had to work on very cost-efficient hardware to justify their CAC or make it close to what a typical SaaS [software-as-a-service] model would be.”
The LTV in this case comes with the “stickiness of the solution” as once this type of technology is physically embedded with a client, such as a manufacturing facility, it becomes very difficult to replace the system with something else.
Product market fit means solving problems
It’s not just accelerators, but startup founders themselves who are navigating this concept with a view to 2020. As Ms Snover explains, some of the best consumer products and services are “born from a sincere need or pain point, often felt by the founder in the first instance”.
Then comes the research to see how many people there really are in this cohort. “With direct-to-consumer models like ours you can assess market fit with customer reviews, traction and pick-up rate of the product, as well as referrals from existing customers,” she says.
These ideas of traction and referrals point to an important aspect of the concept. “In general, product market fit is when your customers spread out your product,” explains Mr Ebersweiler. “In consumer hardware, this definitely means a number of customers that’s out of the ordinary and high growth. The remaining component is ease of acquisition and this is where most could fail as distribution is a complex and costly system to put in place.”
Within this framework, the friction to test hardware, such as consumer gadgets, which have been recommended to you by early adopters, will be higher than instantly downloading an app. “Not everyone is going to love the product,” says Ms Delaney. “But once you understand the similarities between the customers who do love the product, you can leverage that to make a product or service a greater success.”
Achieving product market fit with something genuinely new and innovative can be daunting for people such as Tayga Baltacioglu, founder and chief executive of the cleaning app Cleanzy, which launched in the UK earlier this month. He also points to “the power of personal experiences” in identifying problems to solve, which could include issues faced by workers in the gig economy.
“Increasingly, the businesses which succeed and find the right fit are those that address social or environmental issues,” he says. “Without these elements at the core, I believe businesses are unlikely to find a place in the market of 2020.”