This week on the startup to scaleup journey:

• When a product pivot demands a whole company reset
  
  

When a product pivot demands a whole company reset

The Seed to Series A transition presents a unique set of challenges for any startup. These are often associated with navigating 'the chasm', the major discontinuity that separates the early adopters from the mainstream market.

We have previously highlighted that finding the beachhead into the mainstream market is a time-critical mission. For B2B businesses in particular, the chasm is an uncertain, high cash-burn phase as startups search for product/market fit. The biggest question is how to avoid getting stuck there: Customer feedback becomes the critical accelerant.

A vital role of the early adopters is to road test the initial product and provide this feedback. i.e. The product may not yet represent a complete solution, although it must possess the core, game-changing functionality. Here, the startup often makes up for these deficiencies by temporarily using a services 'wrapper'.

But for products that require embedding into enterprise workflows or larger systems, this presents a major potential risk. The services wrapper could end up being extensive. So much so that to build its equivalence into the final product could present a significant, even insurmountable challenge.

A critical factor to immediately weigh is the level of capability (and enthusiasm) required by mainstream market customers to adopt the product without such major enhancements. If this capability is not ubiquitously present this will could severely impact the startup's ability to scale.

In extreme cases this could force a complete rethink, not just on the product, but on the go to market strategy and even the business model. In other words, this could require a fundamental pivot, just at the point when mainstream product/market fit seems to be in reach.

What action can founders take to mitigate the risk of such disruption?

A real life example

Before Duet, Jonathan and I experienced 'the chasm' at first hand. Our company, RadioScape, was a pioneer in software defined radio (SDR). Our vision was to enable the nascent global market in DAB digital radio.

Back in 2002 the company had developed a software stack for the emerging DAB standard, running on a Texas Instruments DSP chip. We were engaging with early adopters, mostly the big Japanese consumer companies, led by Sony. They had the smarts to build a consumer radio around this device and we were lining up big licensing deals as a result.

But in the formative stages of this emerging market, much was changing around us. Chinese manufacturers were starting to enter the scene with real intent. They didn't have a background in software (let alone SDR) and we were struggling to secure wins beyond our software-savvy early adopters.

To make it easier we produced a complete reference design (with a services wrapper!) but even this wasn't enough. We eventually realised that the only way we could enter the then emerging mainstream market was to build a complete radio subsystem product.

Whole new product

Over a year later and with $M's of further investment from our VCs, we produced a breakthrough DAB radio module design. We had also established a strategic relationship with a manufacturing partner in Taiwan. They were going to manufacture our product (a small PCB module) and drop ship to our radio manufacturer customers.

After some significant efforts in the design for manufacture phase, units started to be produced and we began selling the device. But this had all come at huge cost. Firstly, the significant delay in reaching the mainstream market had opened the door for competitors. They didn't have the feature set that SDR enabled but they did have a price advantage for an entry-level product. This limited our TAM.

Secondly, we'd hired a phalanx of new people in hardware development, product management, operations, quality, business development, and customer support. And we'd opened a design office in Hong Kong, close to our new regional partners. We had built an amazing team but we also now had an amazing wage bill to match.

Whole new company

To realise our vision, we'd completely re-engineered our company. We had new products, a new go to market strategy, a new business model, and a new team. We were no longer a software licensing company but a consumer electronics business. Most significantly we were now also a hardware business.

The fundamental pivot we had embarked on was complete. We now had a product that began to sell in volume, surpassing a million units within the next 3 years. This drove solid revenue growth but on very thin margins - partly due to competitive pricing pressure. Over time this presented new challenges for the business. That chapter of the story will have to wait for another day!

Lessons learned

This experience happened when the venture market in Europe was in its infancy. It was a mere fraction (around 5%) of what it is today. Some of the courageous VCs that backed us then are no longer even around.

This was also years before the lean startup movement began. In those days conventional wisdom was that startups were just smaller versions of established companies. How much we have learnt since then.

If at that stage we had followed the lean startup theory of today, we may have taken a different path. Most critically, rather than simply following the 'Product Development' ethos of the time we might have employed a 'Customer Development' ethos.

Lean Startup

In other words, we would have employed the 4 lean startup steps espoused in the Customer Development framework to reassess and iteratively build our new plan: Customer Discovery, Customer Validation, Customer Creation, and finally, Company Building.

In practice, what would this have entailed?

• Customer Discovery
  Our early mindset was that we were dealing with a product issue. In reality the issues were far deeper than we imagined. This really demanded a complete re-examination of the entire problem/solution thesis on day 1. We could of course say, "We got there in the end", but not until we had passed the point of no return and burnt huge amounts of cash to end up in a place that ultimately presented a whole new set of economic challenges.
  
  
• Customer Validation.
  The pathway to Product/Market fit would have been very different. (This wasn't even a term at the time!). The rise of the Chinese manufacturers (in the emerging mainstream market) completely changed the profile of our target audience. We allowed the early adopters (Japan) to preoccupy our thinking for too long. These two customer cohorts had almost nothing in common. This locked us in the chasm for much longer than expected.
  
  
• Customer Creation.
  Moving up a position in the food chain as well as managing a new supply chain, necessitated a complete reorganisation. This not only impacted development but all our customer-facing roles. The 'Go To Market' strategy became as crucial as the product but this was not clear in our early thinking.
  
  
• Company Building.
  Our prevailing mindset was 'Can we win?' rather than 'Can we make money?'. We were in a gold rush for a new and exciting market. As a result, we were modelling the financial outlook with too large a dose of optimism. A senior hire with a strong CE background eventually helped to open our eyes about consumer market cycles.
  

In summary

The 3 big takeaways for any founder crossing the chasm are:

1. Beware of building a large services wrapper to facilitate the early adopters. If this can't be elegantly incorporated into the product for the mainstream market, the cost of customer engagement may become too high and the potential to scale curtailed.
   
   
2. Ensure that the early adopters you select are broadly representative of the mainstream market in terms of capability. If they are very different, you may find that product/market fit remains elusive for a very long time.
   
   
3. Beware of adopting a Product Development ethos, even if you are a hardware business. This is vital in a major pivot. A Customer Development ethos is the opposite of the “if we build it, they will come” approach. It guides the search for a repeatable and scalable business model, rather than just focusing on product superiority.

Let's talk!