Source:
The most common symptons of in-pending death after seed funding - why Founders believe they have product market fit when they don't.
Outline and bullet points
1. Raised from impressive people
Founders somehow believes that these people, famous VCs or investors are great at choosing companies - if these people chose them that means they must have product market fit or the problem they are trying to solve.
2. Raising a Series A before Product Market Fit
It's common nowadays for companies to raise 5-10 million dollars when they don't have something people love yet. What's interesting is instead of focusing on users and products, founders often shift their focus on company building - which is a typical no no.
3. Magical Thinking
Ignoring the facts and metrics will often trick you into thinking you have product market fit when you don't. For example, not understanding your churn; no understanding your payback period when you acquire a customer.
4. Lack of strong technical talents
A lot of times people convince themselves that they have product market fit - simply because they don't want to embrace the idea that they might need better engineering, or they might need to improve their product. Improving the product is too hard so it's easier to believe the product is good.
Issues 1. Fake Product Market Fit - Company Building before Product Building
What you think PMF means might be different from what it actually means
Common misconception: PMF means conceptually we built the product that users want.
Reality is it reflects on numbers.
What product market fit feels like:
Your product is breaking with profitable usage.
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People come and use your product by word of mouth
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Advertising channels are working
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Users are loving it so they are retaining
Result:
1. Parts of the product that you didn't build to scale is starting to not working.
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Sometimes the software components
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Sometimes it's operational, human components
One of these will start to break because you didn't build it to scale.
2. Profitable Usage
- Users are the type of users you want + provide the economics you want.
So you are not paying 1k USD to a user that are ever going to give you 1k dollars, or they don't have a three year payback period.
Make sure you have both two elements.
What are some of the signs you convinced yourself you have Product-Market Fit?
- Lots of hiring
Lots and lots of hiring. Typically Founders who think they have product-market fit - their teams goes from 4 to 12 before you know it.
- More business people than engineers
"Oh it's time to scale the sales team. The numbers are not growing so let's hire more sales."
- No one is looking at numbers
Everyone is doing things by feel or by guess.
- Too many nice things
Nice offices. Nice dinners. Nice trips - suddenly you start to spend money on nice things.
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Flat grass
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Missing your estimate and coming up with excuses to think that's ok
"I thought we can do this in Q1...do this in July...we didn't hit it...but it's still ok..."
- Changing your KPIs
"We used to measure our monthly revenue..but that number is flat lining so now we are changing ot monthly usage." Then you'd better fucking ask yourself why. Why are you changing KPIs? What's going on here? Did we get our KPI wrong in the beginning? Or does that mean we are actually not progressing the business.
How to fix this?
1. Pick an honest KPI and stick to it.
- For SaaS business - the KPI is almost always the revenue.
Revenue is of course two components:
- a. Revenue from new users
- b. Revenue from retained users
2. Track your retention carefully.
If your product is exceptionally good - it's unacceptable that your users are churning.
3. Cap-ear burn
If you are pre-product market fit, you should determine the amount of money that you are willing to spend and burn every month - and stick with it. You need to say to yourself "Until we reach PMF, we are not going to spend more than these amount of money per month."
If we want to spend more than this amount per month, we will be spending our revenue, as opposed to spending the money that we raised.
Great way to prevent yourself from fake product-market fit or fake company building.
4. Consider raising less money in your seed round (also less equity dilution)
If you have less money, you'd have less magical thinking and aggressive spending. You have to be a lot of careful about your metrics and numbers, and it can prevent "fake PMF problems".
2. Strong technical founder
The stronger your co-founder is in Engineering - the fewer engineer you will need to hire.
3. Three-months essential rule in hiring
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If the person you hire, three months from now you don't feel like they are substantial - by substantial it means if they send you an email that they are quiting, you don't even want to open your email or go to work. You'd be so distral.
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If your early employees don't give you that feeling, you probably should let them go.
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Early-stage sales should pay for themselves (unacceptable if they are not).
Issue 2: Turning your investors into your boss
The easiest way to die.
Why? Go find out how many bad investment and decisions they have made. Signs you are treating your investors as your boss:
- Self doubt
Every founder has fear and self-doubt. If you have that self-doubt and need someone from outside to tell you what to do - you are typically in the position of hurting the company.
- Business environment changes
Some of the rules are applicable but some are not - their advise might be outdated.
- Lack of talking to customers
When you start talking to customers, you start to get a sense of what's wrong and what's right about your product. The process of seeking out the insights - you might be talking to your investors who are certainly not talking to your customers.
- You are feeling pressured to spend more money than you want to
You are hiring faster than you think you are should. You are burning every month, but your key KPI isn't increasing. You are locked down talking to one investor, and you are following the plan of what your investors told you to do.
How to fix this
1. Continue to talk to customers
The more you talk to your customers, the more you onboard them, the more you talk to them, the more insights to help you understand what they want and what to build.
2. Have a KPI
3. Track retention
4. Keep a low burn
You don't want to ping you investors to give you money until next round - keep a low burn.
5. Do a startup in a space you have more insights in
You need to have strong opinions so you can trust those opinions.
6. Know that you are the one give investor power of your business
If you are doing what your investors what they tell you to do, you are literally giving them power over you. Only thing they can do is use words. If you don't want to give power to the investors - don't do what they tell you to do.
Issue 3: Co-founder conflicts - relationship debt
How much bullshit you have between you and your co-founder that you haven't cleared away?
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If you only know your co-founder a week before you started this business, it's a lot easier for it to kill you.
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No clear roles or responsibilities.
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Lack of trust - not being able to trust your co-founder on doing the thing they are supposed to do.
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Unrealistic expectations.
"This company sucks, why can they raise 10 million dollars? Why can't we raise 10 million dollars?"
Unfortunately because presses cover fundraising so often - it's very easy to start getting unrealistic expectation on where you are and what you have to fundraise, it's very hard to know why that fundraising happens.
Lots of fighting, or no conversation at all.