Bold title. It’s easy to see why you’d search for that, but unfortunately there’s no universal method to ensure your Tech solution is a Market Fit. Savvy angel investors understand this, which explains why they don’t mind losing money on 20 or 30 good looking ideas if they get a 5,000% return on one “big idea” that goes platinum.
I’d just like to weigh in on this subject because designing, working on, developing, and launching tech solutions aiming for big impact is exactly what myself and my company, Virtus Ventures, does.
Listen, there are a ton of different blunders that lead to missing, skewing, and destroying Market fit.
These mistakes are made by substantial mainstream brands as often as cash-strapped, vision-filled entrepreneurs or startups. They shell out buckets of money innovating digital products, software, or designing new features for mobile devices/apps, and so on, and end up with horrid conversion/retention rates.
And if they with their gargantuan budgets, layers of checks and balances, and small armies of expert teams get it wrong, how in the world could anyone claim there’s a foolproof way to ensure you and/or your company won’t make the same mistakes?
There isn’t one. Anyways, let’s dive in and to be scientific I’ll jump off with a deceptively simple definition:
What’s Market Fit?
The formal collegiate approach to answering this question involves surveys, metrics, engagement data or analytics, along with a good helping of graphs and charts to demonstrate retention curves and…
Listen, here’s what it boils down to:
Do people like and use it?
If they do, they’re going to feel awesome during and afterwards for a good while. If they don’t, or only for a little while, well, then either you can adapt and transform a market fit product/service out of it or you can’t.
I know that’s obvious. Other good questions to improve focus would be…
- Does the pain you’re solving hurt the user enough they’re willing to sacrifice a little of their day to use your idea?
- Is the ‘pay off’ big enough, or good enough for them to download your software or to just it occupying a few megabits of memory on their device?
Of course there’s plenty of variability, levels of market fit, and ways to measure how much people like something over time. But in the simplest terms, tech solutions are a “market fit” when they’re liked/used by enough people to justify their existence over a relative span of time.
They go mainstream, or mainstream within their niche.
Note: Huge difference between test groups and reality; between controlled circumstances and surveys and actual market response. More on this in a moment.
Let’s look briefly upon the almighty 4 Product Market Fit Myths, as set in digital stone by Ben Horowitz in his 2010 article, “The Revenge of the Fat Guy”. They are as follows:
- Product market fit is always a discrete, big bang event.
- It’s patently obvious when you have a product market fit.
- Once you achieve product market fit, you can’t lose.
- Once you have a product-market fit, you don’t have to sweat the competition.
A market fit develops over time, it can be hard to spot MVPs early on, it’s not a silver bullet plateau, and reaching this point is really just the beginning of your solution’s journey to big idea status.
Now, before leaping into the next section, let me say this (and put it in quotes to be super-serious):
“From my experience, and not to be cliche, but evolving a market fit is like sculpting in that each time you go into a “sculpting session” you optimize, polish, and respond to feedback and your vision a bit more, and more, and more, until however long later you’ve chiseled down to a marvelous statue.”
A good profitable idea should be sculpted, able to scale quickly, and demand market attention within roughly 5 years (at least those are the types of ideas myself and Virtus are interested in).
Take Starbucks for instance, wouldn’t you love to be the owner? Of course!
But did you realize it was founded in 1971?
I forget the numbers off the top of my head, but it was something like 25 years before they served a billion cups of coffee. Question is,
Are you willing to spend a 3rd of your life just getting to that point of ‘market fit’?
On the flip-side, Facebook. Again I forget the exact numbers, but it took them roughly 5 years to reach a billion people. Some big ideas are “Starbucks” ideas, while some are “Facebook” ideas that reach heavy market fit, or saturation much faster. Which are you looking to design?
With that said, let’s switch gears and talk about surviving.
The Top 2 Reasons 70%’ish of Startups Fall Flat
Back in 2014 CB Insights, “Analyzed 100+ startup failure post-mortems to identify the Reasons Startups Fail.” Here are the top two:
Note: Since then CB Insights has analyzed 200+, with continuing updates HERE.
Lack of market need, and they ran out of cash… probably in-part from spending too much designing products, or features, or digital assets, etc., with no market fit.
Check out the five following gems from their most recent update, which at the time this article’s being published is the update from early June of 2017. I’ll list the name of the startup and then a quick quote from CB’s update.
Try looking at these through the prism of market fit.
“The demand for Sprig’s convenient, high-quality food was always incredibly high, but the complexity of owning meal production through delivery at scale was a challenge.”
“One investor in the startup said founders were too aggressive in pushing for higher valuations.”
“Despite initial success, the business isn’t scaling sufficiently to be sustainable and in a challenging economic environment for this type of business, the decision was taken to close.”
“Unfortunately, we weren’t able to find our place in the market.”
“Regardless of the reason, Tech Crunch points out that none of Quidsi’s mobile applications were performing well in the app store.”
Examples like these just keep coming, and coming, and coming. Why? The funding and investment capital for just those 5 startups is likely more than most hard working people make in their entire lives!
You’re probably like, “How can the startup system be so inefficient?!”
I feel your frustration and sense your consternation.
3 Lessons for Tech Solution Survivability
Whether you represent a startup, or an established brand that’s struggling, from my chair here in Ohio the trifecta is as follows:
Lack of Looking Forward – Scalability
Not quite sure the percentage of companies who invest in a tech idea without really looking forward…but I’m sure it’s substantial. Your new tech product might be amazing right now, or 6 months to a year from now when it goes live, but then what?
- How much scalability is baked into the cake?
- What kind of load can it bear?
- Are there systems and processes in place to make your product/service agile enough to survive the unpredictable nature of the market and consumer needs?
- Could you smoothly down-scale?
Chasing Initial Success
Users/customers are going bonkers and revenue jumps like ash from Mount St. Helens in 1980. Whatever you’re doing must be an ace in the hole, eh? Should keep investing in it and completely forget about things like the Bell Curve, Product/Service life cycles, or inevitable market shifts…
If only we had 5 bucks for each startup that saw initial success then threw tons of resources into scalability only to find out there isn’t enough market demand to justify it. Oops…
Then again, scalability could be a ‘hardware description’ as I’m referring to here, but oftentimes when referring to scaling a product you’re referring to “executing a plan that works over and over.”
Valuations Based on Market Fit
It’s less about trying to predict the future, and more about being prepared. Tech revenue forecasts are often insane, based on pipedream valuations. The metrics to really be looking at are talked about in this 2016 guest post written by Adam Root that appeared in the Venture Capital section of Entrepreneur, entitled “VCs Want to See Product-Market Fit,”
These are market fit characteristics that smart valuations are based on:
- Ever-Growing Monthly Recurring Revenue (MRR): Gaining traction with an upward trend showing roughly 20%’ish month-over-month MRR growth.
- High Gross Margin: You’re looking for a 40-60%’ish gross margin, meaning it costs far less to produce & sell than you’re making.
- Low Churn: People may love your product at first, but how long until they quit using it? If you’re churning, well, on the high-end 6-10%’ish inside 6 months…that’s bad.
- Strong Lifetime Value: This is about the lifetime value of your customers or users. The better the market fit, the higher this value should be.
The challenge is that all the prep, or pre-launch statistics in the world can’t accurately predict initial market fit. Things happen. Black swans will always be part & parcel in this universe. On the flip-side, you have to begin somewhere and start the iteration/evolution process based on actionable evidence.
Let’s look at this brainy-stuff in motion, shall we.
The E-Trash Example
Okay, so let’s go through this process and look at it from a real world perspective. Let’s say for the last 8 or 9 years you’ve been a responsible American e-waste disposal provider located near a medium-sized city like Boulder, Colorado.
Business was booming, but now you’re struggling and looking for a survival-solution that disrupts the current broken model and propels you to the top of your industry.
Note: E-waste is non recycled tech garbage – discarded smartphones, laptops, desktops, TVs, printers, etc., and the world’s fastest-growing source of waste (toxic trash). It’s a HUGE environmental problem that really begs for a US solution – the biggest contributor.
Business was rampant and a state contract through an e-waste disposal program has kept you afloat, but you know you need to grow because the problem is too serious.
An untapped marketplace is individual tech users and households. For an interesting look at what the typical American home is using tech-wise, check out this nifty infographic: How Many Devices Will You Use in Your Life?
Your company has always been unwilling to pick up from private residences because the numbers didn’t add up. But, what if they could?
- Your company works with a local engineer and product developer to create a stylish container prototype made out of recycled tech plastics that can hold a few small to medium-sized devices: computer screens, routers, digital cameras, smartphones, e-readers, tablets, etc. No big screens or microwaves.
- You drop a pretty penny having an app designed that people can use to notify your company that it’s full, and take a picture to show reps what’s in the box before they arrive.
- The idea is people could get this branded e-waste recycling box delivered to their home for a small fee, then make the money back through e-waste recycling over time.
- Reps could make their rounds twice a month for efficiency.
The prototype ends up looking great. It’s stylish without being too outlandish. It can hold a decent amount of electronics and the feedback you’ve gotten at local and state-sponsored events has all been positive.
We could get super-specific in our example, but let’s cut to the chase and say that based on testing, surveys, general public response, and the math, you have 500 boxes made to be sold to local residents. Here’s some ways things could play out as you work towards market fit.
Initial Results – First 6 Months
- Initial orders were decent, a couple hundred units.
- Of these, only 65% downloaded the app. The rest needed reminding/help before pickup.
- Lots of confusion about pickup times and what constitutes full. What about one device?
- The majority of users have yet to fill their boxes with devices…
Initial Results – 1 Year
- Box is now free, and the app’s been streamlined to be far easier/ more intuitive.
- One pickup day per month – the 12th – reminder texts sent to users via app.
- More money directed towards educating users on app-usage and pick up times.
- Money invested in localized marketing in conjunction with environmental-based platforms.
- Usage rates increase, but overall people aren’t discarding enough tech for positive ROI.
Results – 2 Years
- Rates increasing, reaching more mainstream usage.
- Had to increase to two drivers for pickup days.
- Amount of tech being collected increasing.
And so forth. You can see where this is going. By year 3 or 4 you’ve developed a smaller dumpster-size container that’s secure and kept behind strip malls, shopping malls, and larger retail stores to increase efficiency with that side of the business.
It’s a crude example, but you get the idea here. Market fit often starts out as the opposite, then builds into it over time in response to iteration, responding to usage, and investing money properly. Then, once reached, it must be maintained.
The way to increase the chances your tech solution is a market fit, is to not give up or make huge mistakes early on. Really. Start small, build in response to actionable data, test as much as needed and stick in there if you know there’s a widespread need – in our example it’s the need to better recycle e-waste on the individual household level.
Eventually your company would get swooped up with a more extensive state program and your new e-waste recycling boxes for households would become as common as the red, white, and blue recycle bins so many Americans are already used to seeing.
Paper, plastic, cans/bottles, and e-waste.
Or, you could’ve thrown in the towel before hitting the 1-year mark when response was dismal, app usage horrible, and there wasn’t enough e-waste being collected to justify the existence of your new container.
Hope this helps provide some perspective. If you want to get really serious, feel free to contact myself or my company and we’ll chat. Regardless, cheers, and thanks for you time!
The post How to Ensure Your Tech Solution is a Market Fit appeared first on Virtus Ventures.