"Delight is seeing your customer’s pupils dilate because they’re so ecstatic about your 10x change."
IMO this kind of small-scale and shortsighted focus is holding SV-style innovation back. Twitter has no route to profit (last I heard) but it is a key factor in modern global events, for good or bad.
We need more Elon Musk-style megaprojects and fewer Facebook killers.
Twitter is currently profitable, and has been since sometime in 2018.
To your bigger point, I actually think nowadays we're finally seeing fewer "me too" type companies--fewer knockoff social companies (early 2010s), fewer "Uber/Airbnb for X" companies (mid-2010s), fewer hot air crypto companies (late 2010s), etc. Granted I'm seeing a proliferation of "AI" companies so that isn't to say that hype is dead, but I'm hoping we'll see something new and innovative over the next few years.
With companies like scooter shares or Groupon, where expansion requires physical presence and manpower, there is actually a decent chance of success, assuming there is a 800lbs gorilla or two that is funded and clamoring for growth.
Quite a few smaller, regional Groupon clones were able to sell to either Groupon or living social for very hefty sums when the gold rush was still on.
So it’s “shortsighted” for a company and it’s investors to worry about profit?
I would say just the opposite, with a very few exceptions, the entire VC startup culture optimized for three outcomes.
- create a product without any profit motive but to get acquired by a larger company. The acquiring company kills off the product and bought the company as an acqui-hire. The original company then posts a message on their blog about “Their Amazing Journey”
- the company gets acquired by a platform company, and the acquirer either kills off the product for competing platforms (see Apple/TestFlight) or tightly integrates it into another product (see Facebook) or let’s a whither and die a slow death (Google/Yahoo)
- it’s a big Ponzi scheme where the initial investors pawn off the company to the public market and the company has little chance of becoming profitable enough (or at all) to warrant its valuation.
I hope this example helps explain what I'm talking about:
In a large integrated business model you can produce expensive services which make no profit on their own, but make it possible for an entire ecosystem of profitable ones to exist. The last couple of generations of game consoles worked like this early in their lifecycle.
Of course. Apple is well known for having one profit and loss statement for their entire business. They supposedly don’t make business decisions based on an individual departments P&L.
You don't have to be profitable to have product-market fit.
Ironically, if you do things well, and you have product-market fit then you won't be profitable! Why? Because you'll want to take on financing.
Suppose you discover a cure for a major disease and don't want to sell to a major drug co. Well, you'll probably have to take on significant financing. You'll be 'losing money' possibly for quite some time. Which is fine as long as it's backed by growth and the right underlying metrics.
"When I reflect on the failures, the root cause inevitably stems from misconceptions around the nature of product-market fit. Founders are blindly searching for growth because they see that as the proof of product-market fit when in fact they should be focused on insight and customer development first as that is more likely where product market fit will be found."
[...]
Lyft’s cumulative delight overcame a customer’s investment within the customer’s first ride:
o A rider was first delighted when expecting a long lag time after ordering the car… then realizing it will arrive in only 3 minutes!
o The second delight was fist-bumping the driver — it felt like a friend coming to pick you up.
o The third delight was the interior of the car — it’s not a grungy, smelly cab, but a normal car your friend might own.
o The fourth delight was the ambiance (music, water) and chatting with the friendly driver.
o The fifth delight was the price, much less expensive than a cab ride.
A week into the Lyft launch, one of our associates ran into my office with his eyes wide, shouting, “You have NO idea what you have on your hands. I’ve taken 6 Lyfts this week alone and it’s a GAME CHANGER!”
Delight is seeing your customer’s pupils dilate because they’re so ecstatic about your 10x change."
“If you’re unsure whether you have a strong value proposition, look at your word of mouth”
It’s so difficult to track word of mouth because you can only see it as unattributed growth on your product, but I definitely agree it’s probably the single most important metric for P/M fit. One way to really know if you’re on to something is if people start mentioning your own product to you not knowing you’re the maker.
Luckily there are things like f5bot.com which are also greatly helpful!
Because either their unit metrics are positive, or they're grabbing market share and can bring down other costs later, or more cynically, they can dump shares on other investors while the hype is still going.
The underlying problem with the 'product-market fit' hyperbole is one of degree.
1) Ok, so they like your product, but how much?
2) Is it that much better than substitutes?
3) Really how big is the market?
4) Some will live it, some won't, what does that ratio look like?
5) How much customisation did each of those customers need?
This concept of 'product-market fit' is almost ridiculous frankly. In reality, investors want to see a material 'lift off' i.e. in their investments they want to see startups that have a product that is just 'taking off' and 'flying out the door' ... but this is an excessively optimistic view of 'product market fit'. By some SV definitions, most companies never had 'product-market fit'.
Another day, another bloviating "think piece" written by a consumer VC. When will we call out this content free garbage for what it is?
Minimum viable product, minimum viable company, all of these masquerade the idea casino that many large consumer VCs function inside of which occlude their mechanisms and numbers. Consumer VC is a historically poor performing asset class that funnels pension money into lightweight marketing experiments that enrich the operators much more so than the institutional asset holders via the greater fool theory. The exceptions (Facebook, Google, etc) prove the rule (WeWork).
By the way, let's take those two classes (FB/G vs WeWork) into consideration. If you want to read a better article about corporate craft, read this article [1] by a Two Sigma investor. The hypothesis is very simple: gross margins matter, and it's challenging to build a company with defensibly high valuation without them.
You'll notice that while Facebook and Google are high margin businesses with giant valuations, WeWork raised on premises that were out of line with the reality of their margins, and which were subsequently brought back down to earth.
Build a company with high margins and taking on VC capital will become a choice, not a necessity. That's the way it should be.
My dad always told me the first rule of business is "know your customer."
I don't really want to rag on someone who's clearly more successful and experienced than me but I read this article and I don't know what it's trying to say beyond, "know your customer."
Another quote from him, "you don't know a market until you're in it."
It's impossible to tell what product market fit is unless you're actually out there trying to fit something into it a real market. Like with the Lyft example (as presented) screams to me like pure luck. How did they know the market valued those things? How did they evaluate which elements had the best ROI to get right, and how to prioritize?
I just feel like this article is shockingly light on insight. But then again, we often need someone to smack us with common sense. On the other hand, most smart people know when they're pounding a square peg into a misshapen hole. The hard part is knowing what shape the hole is or if it even exists, and that's the kind of content I wish this article had more of.
Tangent: is there a market for a book full of business-isms and one liners? I've been pushing my dad to write one for years...
Help him write the book even if the market is just you and your kids. Do it before he’s too old to remember. Each of my parents went to the grave with an unwritten book still inside them.
In my opinion, a successful startup proves a market exists, it doesn’t have to fit a product to it. But it’s important to create IP relevant to exploiting the market. A very successful startup demonstrates multiple angles on one or more markets. A startup going for ipo can then go for fully exploiting these markets. A startup going for acquisition will let the acquirer do that. The acquirer is purchasing proof of market and relevant IP for exploiting it.
Basically, I’d say product market fit is mostly bs for startups. A great startup will be a string of demos uncovering a market. Product market fit is for maturing and mature companies to worry about.
29 comments
[ 4.3 ms ] story [ 75.7 ms ] threadIMO this kind of small-scale and shortsighted focus is holding SV-style innovation back. Twitter has no route to profit (last I heard) but it is a key factor in modern global events, for good or bad.
We need more Elon Musk-style megaprojects and fewer Facebook killers.
To your bigger point, I actually think nowadays we're finally seeing fewer "me too" type companies--fewer knockoff social companies (early 2010s), fewer "Uber/Airbnb for X" companies (mid-2010s), fewer hot air crypto companies (late 2010s), etc. Granted I'm seeing a proliferation of "AI" companies so that isn't to say that hype is dead, but I'm hoping we'll see something new and innovative over the next few years.
Quite a few smaller, regional Groupon clones were able to sell to either Groupon or living social for very hefty sums when the gold rush was still on.
I would say just the opposite, with a very few exceptions, the entire VC startup culture optimized for three outcomes.
- create a product without any profit motive but to get acquired by a larger company. The acquiring company kills off the product and bought the company as an acqui-hire. The original company then posts a message on their blog about “Their Amazing Journey”
- the company gets acquired by a platform company, and the acquirer either kills off the product for competing platforms (see Apple/TestFlight) or tightly integrates it into another product (see Facebook) or let’s a whither and die a slow death (Google/Yahoo)
- it’s a big Ponzi scheme where the initial investors pawn off the company to the public market and the company has little chance of becoming profitable enough (or at all) to warrant its valuation.
In a large integrated business model you can produce expensive services which make no profit on their own, but make it possible for an entire ecosystem of profitable ones to exist. The last couple of generations of game consoles worked like this early in their lifecycle.
Well, the retail stores do have a separate P&L.
Ironically, if you do things well, and you have product-market fit then you won't be profitable! Why? Because you'll want to take on financing.
Suppose you discover a cure for a major disease and don't want to sell to a major drug co. Well, you'll probably have to take on significant financing. You'll be 'losing money' possibly for quite some time. Which is fine as long as it's backed by growth and the right underlying metrics.
Also, Twitter is profitable.
"When I reflect on the failures, the root cause inevitably stems from misconceptions around the nature of product-market fit. Founders are blindly searching for growth because they see that as the proof of product-market fit when in fact they should be focused on insight and customer development first as that is more likely where product market fit will be found."
[...]
Lyft’s cumulative delight overcame a customer’s investment within the customer’s first ride:
o A rider was first delighted when expecting a long lag time after ordering the car… then realizing it will arrive in only 3 minutes!
o The second delight was fist-bumping the driver — it felt like a friend coming to pick you up.
o The third delight was the interior of the car — it’s not a grungy, smelly cab, but a normal car your friend might own.
o The fourth delight was the ambiance (music, water) and chatting with the friendly driver.
o The fifth delight was the price, much less expensive than a cab ride.
A week into the Lyft launch, one of our associates ran into my office with his eyes wide, shouting, “You have NO idea what you have on your hands. I’ve taken 6 Lyfts this week alone and it’s a GAME CHANGER!”
Delight is seeing your customer’s pupils dilate because they’re so ecstatic about your 10x change."
It’s so difficult to track word of mouth because you can only see it as unattributed growth on your product, but I definitely agree it’s probably the single most important metric for P/M fit. One way to really know if you’re on to something is if people start mentioning your own product to you not knowing you’re the maker.
Luckily there are things like f5bot.com which are also greatly helpful!
1) Ok, so they like your product, but how much? 2) Is it that much better than substitutes? 3) Really how big is the market? 4) Some will live it, some won't, what does that ratio look like? 5) How much customisation did each of those customers need?
This concept of 'product-market fit' is almost ridiculous frankly. In reality, investors want to see a material 'lift off' i.e. in their investments they want to see startups that have a product that is just 'taking off' and 'flying out the door' ... but this is an excessively optimistic view of 'product market fit'. By some SV definitions, most companies never had 'product-market fit'.
Minimum viable product, minimum viable company, all of these masquerade the idea casino that many large consumer VCs function inside of which occlude their mechanisms and numbers. Consumer VC is a historically poor performing asset class that funnels pension money into lightweight marketing experiments that enrich the operators much more so than the institutional asset holders via the greater fool theory. The exceptions (Facebook, Google, etc) prove the rule (WeWork).
By the way, let's take those two classes (FB/G vs WeWork) into consideration. If you want to read a better article about corporate craft, read this article [1] by a Two Sigma investor. The hypothesis is very simple: gross margins matter, and it's challenging to build a company with defensibly high valuation without them.
You'll notice that while Facebook and Google are high margin businesses with giant valuations, WeWork raised on premises that were out of line with the reality of their margins, and which were subsequently brought back down to earth.
Build a company with high margins and taking on VC capital will become a choice, not a necessity. That's the way it should be.
https://twosigmaventures.com/blog/article/why-gross-margins-...
I don't really want to rag on someone who's clearly more successful and experienced than me but I read this article and I don't know what it's trying to say beyond, "know your customer."
Another quote from him, "you don't know a market until you're in it."
It's impossible to tell what product market fit is unless you're actually out there trying to fit something into it a real market. Like with the Lyft example (as presented) screams to me like pure luck. How did they know the market valued those things? How did they evaluate which elements had the best ROI to get right, and how to prioritize?
I just feel like this article is shockingly light on insight. But then again, we often need someone to smack us with common sense. On the other hand, most smart people know when they're pounding a square peg into a misshapen hole. The hard part is knowing what shape the hole is or if it even exists, and that's the kind of content I wish this article had more of.
Tangent: is there a market for a book full of business-isms and one liners? I've been pushing my dad to write one for years...
Is your dad a prominent VC?
Those lines are not useful to anyone who doesn't know them because knowing what "know your customer" really means is the important thing.
I encountered the phrase when I was 14 running a managed web hosting company. It didn't help because I didn't know how to know my customer.
I wouldn't buy a book like that because I know it would be completely useless since it has no actionable advice for me.
That's how it is for me.
Basically, I’d say product market fit is mostly bs for startups. A great startup will be a string of demos uncovering a market. Product market fit is for maturing and mature companies to worry about.