About Me 0114: Making Fast Money

What is product/market fit?

In the beginning, the entrepreneurs should be obsessively focused on finding a product/market fit, and conserving cash to allow them as much roadway as possible. Mark Andreessen describes product/market fit as “the only thing that matters,” but what is it?

Basically, a startup has product/market fit when it has:

A set of customers excited enough about your product to pay for it. Usually, that payment is cash, but sometimes it’s time. As Facebook, Twitter and Google have proven, if you can get enough customers spending time with your product, there’s usually a way to monetize it.

A customer base large enough to create a viable business.

Andreessen says:

ou 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 ….

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.

Lower your burn rate during the search for product/market fit

If your startup hasn’t reached product/market fit, you should obsessively focus on finding it and adjust your burn rate downwards to give yourself as much time as you need to get there.

The best way to find product/market fit is to get in front of customers and validate your assertions. Start early, and validate before you build anything. Use wireframes of the product to walk customers through your vision, then keep validating throughout product development.

Develop objective listening skills, and don’t get caught up in selling too hard. Often entrepreneurs only hear what they want to hear, a trait sometimes referred to as “happy ears.” When a customer disagrees, you’ll often hear these entrepreneurs say: “They just don’t get it.” This is a good indication the entrepreneur isn’t listening.

Also, ask yourself two questions about each of your assertions:

1. Is the problem you’re tackling important to the customer? Too often, companies chase problems that just aren’t important enough to spend money or time to solve. If the problem isn’t important enough, be prepared to drop the idea you’re currently working on and pivot to something different.

2. Do your solutions really solve the problem? Present the solution to the client, and ask them tougher questions such as:

“Is this a must-have, or a nice-to-have?”

“Would you commit to purchasing at this price if we build it?”

“Where does this fall on your list of priorities on which you’d spend money?”

At my fourth startup, Watermark Software, we got a great response when we showed our software to potential customers; our launch went well; and even the New York Times was excited enough to dedicate a half page to covering us. But while it was cool, it wasn’t a must-have, and we struggled to sell it. After two more years of hard work, we found the vertical applications that were a better fit for our product and pivoted the product into a full solution for those verticals. The business took off.

We wasted a ton of money in those two years. Had we done a better job of customer validation up front, we could have avoided that waste. I made the mistake of listening with “happy ears” instead of being objective.

Reduce your burn rate; increase your time

No one can predict how long it will take to find product/market fit. To give yourself the greatest chance of success, you need your funds to last as long as possible. In other words, you need to set your burn rate as low as possible.

The ideal startup team should be the founders, the product development team, and one or two sales people to get the founders in front of customers. That’s it. The founders are the people best suited to interacting with customers to figure out if the experiments are working and to learn from the failures. This work is the key job of the entrepreneur, and cannot easily be delegated to others.

It may also be tempting to hire a large R&D team to get to market quickly.Recognize that few products are immediately ready for broad adoption, and you’ll likely need to go through a few revisions to get to product/market fit. Set your burn rate for a marathon, not a sprint.

There can be exceptions to this spending rule when you can find things that will clearly shorten your time to product/market fit: for example, a new hire that brings in a missing but much-needed skill.

Once you have evidence of product/market fit, you can then find a repeatable and scalable sales model, which I’ll address in my next post.

David Skok has been a General Partner at Matrix Partners since 2001. He founded his first company when he was 22, and since then, founded three companies, including SilverStream Software, and done one turnaround. Skok specializes in SaaS, enterprise software and cloud computing, and blogs at forEntrepreneurs.com.

Image courtesy of Flickr user tonylanciabeta.

This guest post from Jacq Jolie is part of the “reader stories” feature at Get Rich Slowly. Some stories contain general advice; others are examples of how a GRS reader achieved financial success — or failure. These stories feature folks from all levels of financial maturity and with all sorts of incomes. You can read more about Jacq’s story at Single Mom Rich Mom.

On 31 December 2009, I finished what I hope will be my last full-time, permanent job. I’ve worked a bit here and there over the past year, but it’s on my own terms, and not because I have to. I’m now semi-retired at the age of 45. But what does that mean?

About nine years ago, after reading Your Money or Your Life, I changed from an under-earning, confused woman to a woman with a mission: to never have to work again (unless I wanted to). In November of last year, I reached the Crossover Point, where the income from investments exceeded my expenses. (I think it actually happened sooner than that, but I hadn’t been paying attention.) At last, nine years after first figuring out what I wanted to work hard and save money for, I’d reached Financial Independence.

I’m fortunate that in the last few years, I’ve managed to raise my income so that I can work a few months a year and earn the same amount as I have working full-time (and overtime!) in previous jobs. I’m also fortunate that my wants remain relatively small and I never succumbed to lifestyle inflation. I’ve never wanted a big house, a fast car, or exotic travel.

In a “normal” year, I can easily live on about $36,000, including mortgage payments of about $15,000 per year (that I’m prepaying). So I knew that my Crossover Point was somewhere around $20,000/year with a paid-off house. In the next year, I intend to downsize and move to a (mortgage-free!) townhouse that will be close to public transit for those times I choose to work, and, more importantly, be low maintenance to allow for periods of long travel during the summers.

I’m trying not to plan too far in advance. I want to be flexible. My hope is that I can continue to work part-time or a few months a year for the next 5-10 years until a part of my pension is eligible for withdrawal. My net worth is somewhere around the $500-600k mark, not including pensions. Since I don’t have any intention of touching my savings for the next ten years, I’m hopeful that it will last as long as I need it. If not, I’ll go back to work full-time for a couple of years.

I think what Financial Independence has given me has been a confidence in life itself — that I can handle anything that comes up. If life is difficult, sometimes throwing a bit of cash at a problem resolves it. It’s also given me the freedom that I first dreamed of when reading Your Money or Your Life — that I could work because I enjoyed working, and that I could have my life be about more than work. I have the flexibility to leave any work situation that doesn’t contribute to my overall happiness.

Having lived very frugally for long periods in the past, I experienced frugality burnout earlier this year. I’ve consciously been spending more lately on the things that I’ve “deprived” myself of over the last almost 30 years I’ve been working. For example, my bed was over 50 years old and desperately in need of replacement. A new bed is being delivered this week, and I couldn’t be happier. I’ve also stopped thinking that I should DIY everything; I’ve had house cleaners come in this last month — something I would never have considered doing just six months ago.

Part of me still worries about the future:

What is it like to be looking for a job and networking once I get over 50?

Will it be hard — or impossible — to find work if I stay out of the job market too long?

What if the stock market falls again?

Are my investments too aggressive or not aggressive enough given that I hope not to draw down on them for quite some time?

Am I jumping too fast? Should I keep working full-time for a few years and get to that magical million and give myself even more of a buffer?

I only have a year of semi-retirement under my belt, so I’m not sure if that’s necessarily a “success”; I’m still just learning what works. I do know I’ll never go back to a regular job again though and definitely not go back to driving myself as hard as I have in the past again. My hope is that my approach is flexible enough and that I’m resourceful enough to survive and thrive through whatever lies ahead.

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Wednesday, December 8, 2010

Making Fast Money

What is product/market fit?

Lower your burn rate during the search for product/market fit

Reduce your burn rate; increase your time

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