New tech must deliver real-world solutions

The lone tech genius is dead, long live prod­uct mar­ket fit. That’s the advice you could take from the con­cept devel­oped by Andy Rach­leff, now exec­u­tive chair­man of the Palo Alto-based invest­ment ser­vices firm Wealth­front.

In oth­er words, teams and tal­ent are impor­tant, but not as impor­tant as con­ceiv­ing or piv­ot­ing to “an idea that address­es an amaz­ing point of pain around which con­sumers were des­per­ate for a solu­tion”.

So what does prod­uct mar­ket fit mean for tech star­tups going into 2020? It starts with con­nect­ing to the real world.

Find your potential customers

Accord­ing to Cyril Eber­sweil­er, gen­er­al part­ner at SOSV, and founder and man­ag­ing direc­tor of HAX, a two-stage ven­ture cap­i­tal pro­gramme for hard­ware in San Fran­cis­co and Shen­zhen, star­tups can deter­mine whether their prod­uct or ser­vice is actu­al­ly meet­ing a need through con­ver­sa­tions with poten­tial cus­tomers.

“In the busi­ness-to-con­sumer (B2C) space, the cus­tomers are for the most part ear­ly adopters, and it’s easy to con­fuse being suc­cess­ful with that group and hav­ing a busi­ness for the mass­es,” he says. “In the busi­ness-to-busi­ness (B2B) space, said needs are gen­er­al­ly well under­stood by entre­pre­neurs since they most like­ly are com­ing from said indus­try, but they have yet to make sense out of the prod­uct and the com­pa­ny’s busi­ness mod­el.”

These con­ver­sa­tions can take a num­ber of forms. At Gal­li­um Ven­tures, a Lon­don-based strate­gic con­sul­tan­cy that works with ear­ly-stage star­tups, ven­ture cap­i­tal­ists and large list­ed com­pa­nies, the team encour­ages founders to allow cross-pol­li­na­tion between, for instance, sales, pub­lic rela­tions, social and mar­ket­ing teams.

“Google Ana­lyt­ics is also a sur­pris­ing­ly under­utilised resource for brands and can help var­i­ous inter­nal teams in suss­ing out what works,” says Heather Delaney, founder and man­ag­ing direc­tor of Gal­li­um Ven­tures.

Mr Eber­sweil­er, mean­while, stress­es that HAX has used “every pos­si­ble chan­nel to val­i­date prod­uct mar­ket fit over the years”. This includes more than 120 kick­starter cam­paigns for B2C star­tups and hun­dreds of pilots on the B2B side.

David Haynes, direc­tor of the Vive X pro­gramme in Europe, works in vir­tu­al real­i­ty (VR) and aug­ment­ed real­i­ty (AR) inno­va­tion, where there is a lot of excit­ing tech­nol­o­gy that may not scale. He encour­ages star­tups to focus on track­ing whether their cus­tomers are actu­al­ly using their prod­ucts.

“For a con­sumer VR start­up this means look­ing at user engage­ment and reten­tion, such as dai­ly or month­ly active users, and not just the num­ber of down­loads or press atten­tion,” says Mr Haynes. “For an enter­prise VR start­up, it means being able to show they’ve moved past proof-of-con­cept stage, or ini­tial con­ver­sa­tions with the team, and the prod­uct is being deployed and used through­out an organ­i­sa­tion.”

Back to the business model

One met­ric that is often quot­ed by tech star­tups in rela­tion to prod­uct mar­ket fit is the impor­tance of an LTV:CAC ratio. This is sim­ply the life­time val­ue (LTV) of a cus­tomer as it com­pares to the cus­tomer acqui­si­tion cost and an ide­al LTV:CAC is thought to be 3:1. It affects every­thing from prod­uct pric­ing and the chan­nels through which the start­up will be acquir­ing cus­tomers.

“The LTV:CAC ratio real­ly comes down to the mar­gin you make and the mod­el you are work­ing with,” says Melis­sa Snover, founder and chief exec­u­tive of start­up Nour­ished, which is based in Birm­ing­ham and 3D prints per­son­alised vit­a­min “stacks”. “Our ful­ly inte­grat­ed busi­ness mod­el is more com­plex to set up, but allows for us to have a high­er net mar­gin to spread aware­ness and the dynam­ic flex­i­bil­i­ty to piv­ot and devel­op more prod­ucts as the demand dic­tates.”

It’s even more impor­tant for star­tups build­ing B2B hard­ware to mea­sure, says Mr Eber­sweil­er, and dif­fi­cult to put in place. “Take Amper, a com­pa­ny which mon­i­tors the man­u­fac­tur­ing activ­i­ty of a fac­to­ry,” he says. “They had to work on very cost-effi­cient hard­ware to jus­ti­fy their CAC or make it close to what a typ­i­cal SaaS [soft­ware-as-a-ser­vice] mod­el would be.”

The LTV in this case comes with the “stick­i­ness of the solu­tion” as once this type of tech­nol­o­gy is phys­i­cal­ly embed­ded with a client, such as a man­u­fac­tur­ing facil­i­ty, it becomes very dif­fi­cult to replace the sys­tem with some­thing else.

Product market fit means solving problems

It’s not just accel­er­a­tors, but start­up founders them­selves who are nav­i­gat­ing this con­cept with a view to 2020. As Ms Snover explains, some of the best con­sumer prod­ucts and ser­vices are “born from a sin­cere need or pain point, often felt by the founder in the first instance”.

Then comes the research to see how many peo­ple there real­ly are in this cohort. “With direct-to-con­sumer mod­els like ours you can assess mar­ket fit with cus­tomer reviews, trac­tion and pick-up rate of the prod­uct, as well as refer­rals from exist­ing cus­tomers,” she says.

These ideas of trac­tion and refer­rals point to an impor­tant aspect of the con­cept. “In gen­er­al, prod­uct mar­ket fit is when your cus­tomers spread out your prod­uct,” explains Mr Eber­sweil­er. “In con­sumer hard­ware, this def­i­nite­ly means a num­ber of cus­tomers that’s out of the ordi­nary and high growth. The remain­ing com­po­nent is ease of acqui­si­tion and this is where most could fail as dis­tri­b­u­tion is a com­plex and cost­ly sys­tem to put in place.”

With­in this frame­work, the fric­tion to test hard­ware, such as con­sumer gad­gets, which have been rec­om­mend­ed to you by ear­ly adopters, will be high­er than instant­ly down­load­ing an app. “Not every­one is going to love the prod­uct,” says Ms Delaney. “But once you under­stand the sim­i­lar­i­ties between the cus­tomers who do love the prod­uct, you can lever­age that to make a prod­uct or ser­vice a greater suc­cess.”

Achiev­ing prod­uct mar­ket fit with some­thing gen­uine­ly new and inno­v­a­tive can be daunt­ing for peo­ple such as Tay­ga Balta­cioglu, founder and chief exec­u­tive of the clean­ing app Cleanzy, which launched in the UK ear­li­er this month. He also points to “the pow­er of per­son­al expe­ri­ences” in iden­ti­fy­ing prob­lems to solve, which could include issues faced by work­ers in the gig econ­o­my.

“Increas­ing­ly, the busi­ness­es which suc­ceed and find the right fit are those that address social or envi­ron­men­tal issues,” he says. “With­out these ele­ments at the core, I believe busi­ness­es are unlike­ly to find a place in the mar­ket of 2020.”