You’ve been focused on your product for what seems like years. You’ve perfected your business model canvas. You’ve even found an amazing technical co-founder and have launched your beta. You’ve read everything you can on fundraising and have worked diligently on your pitch deck. Investors are beginning to show signs of interest, and you’re getting your head around the pros and cons of giving away equity.
Congratulations on all your hard work. Next step… start writing your company’s eulogy because nobody actually wants your product.
Traction trumps Team and Team trumps Product
I feel fortunate, as a venture capitalist and angel investor, to see hundreds of pitch decks and presentations every year. I love this time of year in particular as we accept nearly two hundred applications for our accelerator. There will be a handful of interesting candidates (and a handful of crazy ones), and when you interview the team and hear the founder’s stories, patterns begin to emerge. Many saw an opportunity spawned by an isolated pain point they experienced in their last role. Some backed into their product by following trends and trying to improve on current offerings. Virtually none, however, started with addressing a massive pain point, testing a potential solution, iterating, and optimizing for adoption before trying to build a company. Spoiler alert: That is the formula for startup success. Traction is everything. If you’re a startup CEO, write this down so you can see it every day: Traction trumps Team and Team trumps Product. The #1 killer of any company is a lack of market and more often than not, start-ups are formed based on an idea that was never tested. There was little (your friends and family don’t count) validation that anyone will pay for what you’re building.
Let’s look at a few data points. 90% of all start-ups fail. A recent survey by CB Insights, who analyzed the failures of hundreds of funded companies, grouped the reasons into 20 categories. Mind you, “funded” assumes diligence was performed and there was product interest by generally smart people. The data showed that the #1 reason, at a whopping rate of 42%, failed because of a lack of product/market fit. That is, nobody actually wanted their product. They focused on tackling problems that are interesting to solve rather than those that serve a market need. It’s staggering to think about the resources wasted because of a reason so easily avoided.
The #1 reason funded start-ups fail is they lack product/market fit
Today, more than ever, you can validate your offering and show traction before you even build the product. Before you write a line of code, spend one dime on inventory or build your team, you can get proof there will be demand. Kickstarter is a great example of this happening every day. At the time of this writing, the platform is approaching 100K successfully funded projects with over 10 million backers pledging over $72 billion. I’m not suggesting you have to use a crowdfunding platform. I am saying you can always validate your market before spending large amounts of capital.
For example, if you’re building software (platform, app, etc.), you can develop a fully functional, high fidelity, prototype in a variety of tools (Axure RP, etc.). Use the prototype to generate interest and even pre-sales before you write the first line of code. Other products or services may just require a well-made video to test demand. Do you want to pique an investor’s interest? Show them traction in the form of pre-sales before your product is released. I know this works because I’ve done it more than once. We raised a venture round for Roost using a prototype and evidence of pre-sales. When Market Leader purchased RealEstate.com and rebuilt the platform, we created a fully functional prototype in a week, gave it to the sales team to demo, and had almost a $3 million dollar run rate before we launched a few months later.
There are added benefits to building high -fidelity (looks so real you can’t tell) prototypes. They aren’t internet dependent… never worry about bad connections when doing a demo. After getting feedback from potential customers, you can iterate and test new ideas in a few hours. Additionally, most of these tools generate amazing documentation, and the prototype becomes the specification for your development team. There is less of a chance of the team deviating from the original idea because of a misunderstanding with a working prototype.
“But Alex, how will I know I have product/market fit?” First, let’s separate product/market validation from fit. Product/market validation shows that there is sufficient interest in your product to build a scalable company. The most valid data is pre-sales. If you target audience is willing to take out their wallets in mass before receiving anything, you are on to something special. “Fit” will take iterations on the product and interaction with your customers especially if you use the 40% test. The test suggests that achieving product/market fit requires at least 40% of users saying they would be “very disappointed” without your product. To achieve 40%, I contend you’ve listened to your customers, adapted the product/service as necessary and given an incredible level of service.
If there is a startup pyramid, achieving product/market fit is certainly the base… before positioning, economics, optimization or scaling. If you want your startup to survive, do whatever is required to get to product/market fit. Changing out people, make wholesale changes to features, move into a different market, tell customers no when you don’t want to, tell customers yes when you don’t want to — whatever is required and do it first.