An Engine to Find Product/Market Fit

Previously I shared Brad Feld & Neeraj Agrawal’s descriptions of how hard it is for a startup to achieve product/market fit… and the ramifications of that failure. Recently Jim Stanczak kindly shared an article identifying the solution: a numbers-based, systematic, empirical process for measuring product/market fit and iterating your product towards it. This article is pure gold. Highlights:

0) Anchor on a leading indicator.

Just ask users “how would you feel if you could no longer use the product?” and measure the percent who answer “very disappointed.”

After benchmarking nearly a hundred startups with his customer development survey, Ellis found that the magic number was 40%.

1) Segment to find your supporters and paint a picture of your high-expectation customers.

As an early-stage team, you could just narrow the market with preconceived notions of who you think the product is for, but that won’t teach you anything new. If you instead use the “very disappointed” group of survey respondents as a lens to narrow the market, the data can speak for itself — and you may even uncover different markets where your product resonates very strongly.

2) Analyze feedback to convert on-the-fence users into fanatics.

This batch of not disappointed users should not impact your product strategy in any way. They’ll request distracting features, present ill-fitting use cases and probably be very vocal, all before they churn out and leave you with a mangled, muddled roadmap. As surprising or painful as it may seem, don’t act on their feedback — it will lead you astray on your quest for product/market fit.

3) Build your roadmap by doubling down on what users love and addressing what holds others back.

To increase your product/market fit score, spend half your time doubling down on what users already love and the other half on addressing what’s holding others back.

4) Repeat the process and make the product/market fit score the most important metric.

The percent of users who answered “very disappointed” quickly became our most important number. It was our most highly visible metric, and we tracked it on a weekly, monthly and quarterly basis. To make this easier to measure over time, we built some custom tooling to constantly survey new users and update our aggregate numbers for each timeframe. We also refocused the product team, creating an OKR where the only key result was the very disappointed percentage so we could ensure that we continually increased our product/market fit.

Read the whole article and consider it an instruction manual. We certainly are at Launch413. My thanks to Rahul Vohra for taking the time to document this process and share it with the world.

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Do You Have Product/Market Fit?

Ran across these great blog posts (The Illusion of Product/Market Fit for SaaS CompaniesThe SaaS Adventure) by Brad Feld & Neeraj Agrawal respectively. Product/Market Fit is now, appropriately, a central concept in startups. But when do you have it?

  1. If you think you have it, odds are darn good you don’t. Is your data really robust enough for you to know you have it?
  2. If you do have it, odds are good you don’t have it good enough to scale!
  3. If you do have it, and you are actually ready to scale… be ready for the world to change and for you to lose Product/Market fit… at scale!

Not trying to be a downer, but getting these questions wrong can kill your company. Luckily, those two posts have some great rules-of-thumb for keeping you honest and on track.

 

Congrats to a Former Student Making The World A Better Place

So much food goes to waste in our country every year.

So many people are hungry.

It is literally cheaper to throw food away than to give it away… until now.

A few years ago I had the honor of mentoring Maria Rose Belding when she and her partners at Means Database were in the Valley Venture Mentors startup Accelerator. Her social venture is organized and dreams like a high tech silicon valley startup – but all of that energy is directed to doing good, at scale. Her venture diverted more than a million pounds of food to food pantries around the country, is financially sustainable, and has only just begun.

Oh… and she did all of this while being an undergraduate.

No wonder she was just recognized as one of CNN’s Heroes of the year. Check out her CNN’s video about her here.

Maria, you make us so damn proud!

 

Launch413 Completes Seed Round

My thanks to the many people who put their faith in Rick Plaut and my new venture, Launch413. A special thanks to the many members of River Valley Investors who provided the pre-seed funding to get us started and then played a big part in finishing our seed round.

For those that don’t know Launch413, we are an alternative venture fund that takes startups from Launch to their first $10 million in revenue. We are serial entrepreneurs and veteran executives dedicated to helping startups become engines of prosperity in our region. We accelerate our entrepreneur’s progress by investing our expertise & networks to provide strategies and introductions that would have taken years to acquire on their own.

Launch413 uses a royalty-based model instead of equity, allowing our entrepreneurs to keep 100% ownership of their venture.

We are now actively seeking companies to invest in. If you know any great startups with a connection to Western Massachusetts and who want to scale to at least $10 million in revenue, let me know :).

Entrepreneurs give me hope when I need it most

When I talk about politics I am filled with sadness and a sense of near powerlessness to make the world a better place.

But when I talk to entrepreneurs, I am filled with hope. Where most of us see problems, they imagine solutions… and solutions that scale.

Here are just some of the companies blowing me away, all local/VVM companies making the world a better place!

  • Immigration
    • www.prosperitycandle.com – Providing fulfilling careers and a first rung on the economic ladder for refugees here and in war torn nations.
  • Health
    • www.newenglandbreath.com – Helping diabetics understand and adapt to their condition through superior, painless blood-glucose testing.
    • ernestpharma.com – Freaking (my words, not theirs) killing tumors with genetically engineered bacteria. No it isn’t science fiction!
    • footcarebynurses.net – These traveling nurses make help the elderly stay on their feet and independent.
    • lumme-labs.com/ – Smoking cessation
  • Education
  • Inclusion
  • Environment
    • genoverde.com – Trees that grow much faster. Good for tree farmers. Great for the environment because trees are really good at sucking carbon dioxide out of the air!

I could go on for hours.

These people give me hope. That’s why I love helping them. They are creating a brighter future.

Sermon over. 🙂

How Much Due Diligence Does An Angel Really Need To Do?

Due diligence (AKA “doing your homework” on a startup to see if investing is the right call) should clearly take time… but how much? Marianne Hudson, executive director of the Angel Capital Association (the trade association for angel investors in the US) wrote an article on this topic. Her full article (with her permission) appears further below.

One of the biggest debates in the angel industry is how much due diligence investors should do before they invest. From “rank and file” angels to rock star investors like Ron Conway or Mark Cuban, opinions differ vastly from literally doing none to conducting formal processes that take months.  So how do you decide what the right amount is for you?  And what are the factors you really need to check out?

Count me in the camp that believes that doing due diligence is a very important.  For me, it is about being comfortable as an investor that the team, market and product have a chance for success, that there are no red flags pointing toward failure, and better understanding the company’s capital needs over time.

As I’ve posted before, angel investing is risky.  Due diligence doesn’t completely “de-risk” a deal, but it helps eliminate deals in which there are clear problems that lead to failure – things like products with no real customers, CEOs with integrity issues, and no true right to sell the innovation.

2007 study found that angel investments in which at least 20 hours of due diligence was done were five times more likely to have a positive return than investments made with less due diligence time.  Put another way, while 45 percent of investments in deals with 20 hours of diligence resulted in a loss, 65 percent of the investments with less diligence took a loss. That is pretty compelling.

The point here isn’t that an individual must do at least 20 hours of due diligence for every opportunity you seriously consider.  Instead it is to understand that due diligence can help you make better decisions and increase chances for a good return. And you don’t have to do all of the work yourself – many times you can access diligence information conducted by other investors you trust.

Getting Started – Key Factors

There are some very good practice resources for angels to learn about comprehensive due diligence, including questions to askchecklists that angel groups use, best practice papers summarizing recommendations from top angel investors, and courses on investment best practices.

Although I always recommend using background resources like these, if you lean toward a faster approach, here are my top three due diligence questions to address:

Is the entrepreneur and team up to the task – and do they have the integrity you need?

A starting point is to ask the entrepreneur a lot of questions and of course check their references.  As you talk with those references, get them to suggest additional people for you to talk with.  Sometimes these are the most important interviews you will do.  In these discussions, Internet research and possibly a background check, you can also find out if the person has had issues in managing money or has been arrested – the kind of red flags that make investors walk away.

Rick Vaughn, leader of the Mid-America Angels in Kansas City, provides some good color about what you’re looking for in assessing the entrepreneur.  “It goes back to that old saying that people get funded, not business plans.  To some degree we are looking at the entrepreneur and thinking, does this person have the vision, patience, courage, creativity and integrity necessary to lead a successful venture?

“Investors are going to be thinking about how they will feel about working with the entrepreneur and the rest of the management team.  Do they feel good about forming a relationship? Investors want our level of trust to increase with each interaction we have with the CEO and the team.  If it doesn’t, that can be a deal-breaker.”

Are there customers or strong potential customers for the product or service?

A company can only grow and make money if they have customers who will pay them money.  If you prefer an early-stage company that has a product ready for sale, then it is important to ensure the company has established customer relationships.  If you like startups that are still developing their innovation, then you need strong evidence that potential customers really see that the startup can solve a pain point that they will pay for.  Generally having two established customers who will confirm that they are buying or will buy the product is a decent hurdle.   Understanding the customer situation also helps confirm or reveal important things about the market for the product and length of the sales cycle by interviewing customers.

Also, as the due diligence best practice paper notes, “Customers need not just the will but also the ability to pay (for these products).  If the venture targets customers without sufficient budget for the product, it won’t matter how badly they want it.”

How much capital does the company really need to get to an exit?

While it is important to dig into the potential exits for a company, it is also critical to get a beat on how much capital the company needs now and in future rounds of growth.  This provides a sense of the hurdles the company will face and how much your ownership stake may be diluted over time.  Many companies tend to underestimate how much money they will really need.  Ask lots of questions of the entrepreneur and financial team to get an idea of how realistic their financial plans are and mine data on companies in similar industries to see their financing and exit trajectories.

So what is the right amount of due diligence for you? Every angel will personalize the process for their own needs.  However, if you are new to angel investing, you can gain a lot by reviewing the wealth of resources available and talking with experienced angels about what is important to them and the processes they use.  Although you’re likely to adjust your approach as you make more investments, you will definitely increase your odds by incorporating due diligence into your investment decision making.