HOW TO LAUNCH A TECH STARTUP IN 2016
Part 6: Knowing When to Scale
In last week’s article, we discussed Product/Market Fit (PMF), why it’s important, and how to get there. For a new startup, PMF is the single most important metric when it comes to knowing when to scale.
PMF is especially important when it comes time to grow your company into the billion-dollar-beast it was always meant to be. Before Product/Market Fit, trying to scale through marketing and advertising may actually do more harm than good for your company. You’ll be throwing money away, and alienating potential customers before you’ve even created a product that they’re truly interested in. After Product/Market Fit, on the other hand, growth comes naturally, and every dollar you put into scaling your startup produces a real ROI. Therefore, it is vital to wait until you’ve reached Product/Market Fit before you start to scale your startup.
“But wait,” you may rightfully ask, “if I need to wait for PMF before I start to scale my company…
HOW WILL I KNOW WHEN I’VE REACHED PRODUCT/MARKET FIT?”
Since Andreessen first coined the phrase, Product/Market Fit has been widely misunderstood, misinterpreted, and poorly defined. It has been called “nebulous” and “hard to quantify.”
That’s because people often think of PMF as a concrete thing that you either have or don’t have. The truth is, though, Product/Market Fit is more like a continuous spectrum than it is like a boolean variable. It’s not a question of “yes” or “no” as much as a question of degree. Rather than asking “does my product fit the market?” ask “how well does my product fit the market?”
Wikipedia’s definition of PMF is worded quite well in this regard: “Product/Market Fit is the degree to which a product satisfies a strong market demand.”
Thus, there is really no such thing as “reaching” Product/Market Fit; rather, the goal is to increase your degree of PMF. Instead of thinking about “getting to” product/market fit, think about continuously developing your product to fit the evolving market as well as it possibly can. In a world that is constantly changing and evolving over time, you will need to be continually optimizing your product to keep up with the market. From this we might derive the principle of ABD: Always Be Developing. Just because you seem to have “reached” Product/Market Fit doesn’t mean you can rest on your laurels and stop developing. PMF is something that you must always be striving toward.
These concepts are summed up quite well in Ben Horowitz’s 4 Myths of Product/Market Fit:
Therefore, when we use words like “don’t try to scale your business until you reach PMF” we really mean something more like “don’t try to scale your business until you reach a high enough degree of PMF.”
This raises another question, of course: what degree of PMF do I need to have in order to know that it’s time to move past the product-development phase and into the rapid-growth/scaling phase?
QUANTIFYING PRODUCT/MARKET FIT
In response to this question, Sean Ellis proposed The 40% Rule. In his own words:
“I’ve tried to make the concept less abstract by offering a specific metric for determining product/market fit. I ask existing users of a product how they would feel if they could no longer use the product. In my experience, achieving product/market fit requires at least 40% of users saying they would be “very disappointed” without your product. Admittedly this threshold is a bit arbitrary, but I defined it after comparing results across nearly 100 startups. Those that struggle for traction are always under 40%, while most that gain strong traction exceed 40%. Of course progressing beyond “early traction” requires that these users represent a large enough target market to build an interesting business.”
Another question you can ask your customers is: “How likely are you to recommend this product to a friend?”
Josh Pigford, founder of baremetrics.com, has built out a more comprehensive survey based around this concept, that you can use as a guide to building something more specific to your own startup.
Here’s a resource you can use to actually create and send out your survey to your customers: survey.io.
INTUITIVELY KNOWING WHEN TO SCALE
Quantification aside, though, once you’ve reached a high degree of PMF, you’ll feel it. As Andreessen writes:
“You can always feel when product/market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of “blah”, the sales cycle takes too long, and lots of deals never close.
And you can always feel product/market fit when it’s happening. The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can. Reporters are calling because they’ve heard about your hot new thing and they want to talk to you about it. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house. You could eat free for a year at Buck’s.”
When you reach a high enough degree of Product/Market Fit, growth is a natural process that begins to snowball organically. If you’re not at that point yet, that’s fine; just keep iterating the Build-Measure-Learn-Repeat cycle of continuous development until you get there.