Reaching product/market fit is mission critical for startup success. When this remains elusive the strategy needs to be changed, often quickly and dramatically. Some form of pivot is required. In this defining moment, many founders struggle to come to terms with this new reality and act decisively. When is a pivot necessary and why do founders sometimes fail the test?
What is a pivot?
In our recent article on premature scaling we discussed the Customer Development Process and the stages of the startup lifecycle.
In the first stage, Discovery, the job is to identify the customer problem and who, specifically, is experiencing this pain. We create a minimum viable product (MVP) as the first step in building a solution to this problem.
In the next stage, Validation, we use the MVP to test our key assumptions about market size and demand. In other words, we test for product/market fit: Is my customer interested in the solution, can I monetise it, and can we build a scalable business out of this?
During the Validation stage, it sometimes becomes clear that results from early adopters - the MVP users - are not meeting expectations. Customer engagement is low, core features are not being used, deals are taking too long to close, and the adjustments that we are making along the way aren’t having any real impact. Despite all efforts the expected demand is not emerging, and we can’t achieve product/market fit. Meanwhile cash is draining away to an uncomfortable level. The overall mission may not be under question, but the strategy is and must change. Time is of the essence and a pivot is required.
Following the pivot, we then repeat the Discovery/Validation cycle under the new business strategy. Only when we are able to validate all our key business assumptions do we then start to invest in scaling and really begin to ramp up costs. For most sectors, this is the classic Series A funding point.
According to the Startup Genome Report extra on premature scaling, startups that pivot once or twice raise 2.5x more money, have 3.6x better user growth, and are 52% less likely to scale prematurely than startups that pivot more than 2 times or not at all. Pivoting is not failure, it's normal.
Why is Product/Market fit such a defining moment?
At the point where we reach product/market fit, our ability to finalise the go to market strategy and fully validate the business model suddenly becomes easier. Early adopters are pulling the product out of our hands and we are receiving almost continuous customer feedback. The path to monetisation is now clear and real revenue growth is just around the corner.
But a word of caution here. If we prematurely progress to the scaling stage and are lucky enough to secure the significant funding required, we will almost certainly hit huge problems down the road. In particular, if product/market fit has not been secured before scaling starts, the cost to correct later can be prohibitive.
The change in direction at this later stage can then cause huge disruption leading to loss of momentum and turnover of key staff. It may then severely impact investor confidence. For some new businesses this can be terminal. Avoiding premature scaling is as critical as ensuring true product/market fit.
For those of you who have not read Marc Andreessen’s blog on the subject: “The only thing that matters” please do so. This timeless work, first published in 2007, in my view is required reading for any startup founder. Andreessen, co-founder of Netscape back in 1994 (sold to AOL for $4.2 billion), went on to found Andreessen Horowitz LLC, a Silicon Valley-based venture capital firm with $2.7 billion under management, investing from seed to growth.
This seminal article assesses the calibre and quality for the three core elements of any startup -- team, product, and market, asking “what's the most dangerous: a bad team, a weak product, or a poor market?”
He says: “Whenever you see a successful startup, you see one that has reached product/market fit -- and usually along the way screwed up all kinds of other things…and the startup is still successful.
Conversely, you see a surprising number of really well-run startups that have all aspects of operations completely buttoned down, HR policies in place, great sales model, thoroughly thought-through marketing plan… heading straight off a cliff due to not ever finding product/market fit.”
How do we know if Product/Market fit has been achieved?
One of the most common questions I get asked is how to determine if product/market fit has been reached. Other than runaway revenue growth, the two most common assessment methods depend on either customer feedback (survey) data or measuring relevant KPIs (such as retention).
The well-known Sean Ellis Product/Market fit survey uses just one simple question:
How would you feel if you could no longer use this product?
According to Ellis, if more than 40% of respondents select “very disappointed” then you have product/market fit. More is Sean Ellis’s blog.
Customer engagement data can also be used as a key indicator of product/market fit. For example, Brian Balfour, formerly VP Growth at Hubspot, suggests the Retention Curve.
Plot the % active over time (for various cohorts) to create your retention curve. It it flattens off at some point, you have probably found product market fit:
Effective startups use a combination of all these reference points, combining multiple forms of engagement data and customer survey feedback.
What stops founders deciding to pivot?
In my experience there are 3 reasons why founders are unable to pull the trigger on a pivot:
1. Ignorance – this is the best reason of all, because it can easily be fixed.
This boils down to not even knowing that a pivot may be needed - heading towards the famous cliff, blissfully unaware. This can happen to first time founders that simply lack experience or serial founders that are so convinced that they are on another home run they aren’t even looking.
The give-away symptoms are endless adjustments to the product, the team, and the go to market strategy to try and find traction. To try and find ‘the market’. Nothing seems to work yet the answer always seems just around the corner. Perhaps one more push will see us through.
The causes of this are not monitoring the key metrics (e.g. MAU, MRR, churn/retention, pipeline growth and conversion) and not listening actively to customer feedback (or lack of). What data is being collected and who is examining it? How often are we talking to customers and how are we analysing this feedback? How far adrift of our cash forecast are we moving?
These are easy things to fix. If you are not doing them, start now.
2. Lack of courage – a worrying reason, but again one that can be fixed (possibly).
Here the founders know they need to change but the prospect is overwhelming. Maybe the business needs a hard pivot where big chunks of the product, market and team need to be changed. This could be a flip from being a hardware business to a software business, or from a product business to a services business. Such changes can be gut-wrenching.
The founders may be slowly coming to terms with the reality but just not fast enough. How to confront the team, the board, the investors? How to admit that Plan A didn't work? In the end time becomes the killer. A great case study on finally grabbing the bull by the horns is RelayRides, the peer to peer version of Zipcar.
Marc Andreessen also underlined the importance of courage and taking early action: “Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don’t want to, telling customers yes when you don’t want to, raising that fourth round of highly dilutive venture capital — whatever is required. When you get right down to it, you can ignore almost everything else. “
The fix here is more challenging, but this is where an experienced board, advisor or mentor can play a key role in holding the mirror up to the founders and provide wise counsel and support.
3. Ego – almost impossible to fix
Here founders get stuck on their original idea and refuse to pivot. Self-belief becomes delusion. We’re going to stick with the plan no matter what. Just another few months and all will be well…
The founders can’t admit they were wrong, and they hide the reality from all stakeholders (and often themselves) until it's too late.
The signs are that these founders don't openly report progress on the key measures of early success to the team, the board, or the investors. No performance metrics, no early customer feedback, no credible revenue or cash flow forecast. No accountability.
The result is nearly always premature scaling, cash burn continues without a clear demonstration of product/market fit leading to almost certain business failure. Unless the board or investors step in and make radical changes, all will be lost.
Product/Market fit is mission critical to startup success.
A pivot during the Discovery/Validation cycle before scaling is not a failure, it's normal.
Startups that pivot once or twice end up raising more money than their peers and are less likely to scale prematurely.
Every startup should formally monitor key metrics and customer feedback as early indicators of product/market fit.
Boards, investors and advisors have a key role to play in supporting founders that either lack experience or courage to pull the pivot trigger.
Stay away from startups run by big egos.
About the author: John Hall is CEO and co-founder of Duet Partners. His 30-year tech career began with major US semiconductor and software companies, and was based in Silicon Valley during the '90's. Before Duet he was CEO of a VC-backed consumer electronics company, sold in 2009 following several rounds of capital raising. In the past 10 years since starting Duet he has advised dozens of founders on the startup to scaleup journey and is a retained Board advisor to a number of UK technology companies.