A guest post from our friends at The Bakery
Nearly half of closed technology startups founded in the UK and US say they could not find a market for their product. In other words, no product-market fit.
Product-market fit is clearly an important topic for early-stage founders to think about. Yet founders for the most part prefer to spend their time building and marketing their product, not researching, thinking and exploring. Startup canon insists that it is a good thing to move fast, fail fast and iterate until you hit upon a winner; in the mean-time, having a bias towards action is good.
The result of this approach is that too many early-stage founders launch their product to the great curtain reveal of an empty theatre. Customers really ought to be begging to buy the product or service from the founder; not the other way around.
This point has been made many times, yet the number of startups we see falling down on this stays constant. Often founders have built a product that does not solve a real problem (or not one painful enough for its users); it solves the founders’ perception of a problem.
In the B2B space, this phenomenon happens because a large proportion of startup founders have insufficient experience in the marketplace for which they profess to have a solution. In other words, they do not have enough experience having a normal job (or being immersed the market). It can also be difficult to do any meaningful customer development with B2B companies: how does one obtain live end-users on which to test and discover?
At this stage it is useful to talk about product market fit.
What is it? At its simplest, founders build a product or service, and if they find a base of customers that wish to buy from them or use their product, they have product-market fit. Whether we say something ‘has product-market fit’ when a company has its first customer, some repeatable revenue or $100m in annual recurring revenue is a judgment call.
When founders cannot find product-market fit, what can they do?
Most attempt at least one pivot, and for a minority of companies this transforms what was a mediocre offering into something huge. Instagram began as the multimedia app Burbn with limited customer interest; it became the mammoth we know today (whose valuation exceeds the market cap of Coca-Cola) after it doubled-down on its photo filtering and social sharing features, but before this pivot these were auxiliary functions in a much bigger and confused offering.
Another fix is to keep the fundamentals of the product but change the market: Groupon began with limited success as a platform for group action, aimed primarily at activists and philanthropists; on changing its focus towards consumers looking to save, it then hit startup gold (with a peak market-cap of $30bn).
FlipKart in India likewise began as an unsuccessful e-commerce retailer in India focusing on books, before changing its focus to electronics; ten years later it has ARR of $3bn.
Every time someone pivots successfully there will be hundreds of those who fail to pull it off. In our experience most failed startups have attempted at least one pivot; this also forms part of startup canon.
In our view pivots in the B2B space makes sense to founders who are on a mission to work on their particular idea: the founder wouldn’t have it any other way, and iterating the business as many times as runway permits in this scenario makes sense.
However the reality is that coming up with a good idea (and failing that, pivoting until you find one) in the B2B space is tough; as before, having businesses and end-users to experiment and learn alongside is a luxury.
Another way to build a company – and one we favour at The Bakery – is to begin by looking at a pre-validated problem. Ones that the prospective customers are screaming to have fixed. Validated problems are ones that customers would say ‘yes, I would pay for that if it existed’ (and they actually mean it).
At The Bakery, we have extensive experience helping corporates to innovate. By this we mean we have taken many large corporations – KPMG, Unilever, AXA, Rolls Royce – through a process that helps them to discover hidden problems and opportunities that exist within them, locked away. Some of these discoveries may save them from being disrupted by an incumbent further down the line.
The insights and opportunities discovered often represent huge opportunities for founders willing to do some exploration. Even better, these insights apply across enough players and industries to form something very valuable beyond just ‘building a software solution for one company’.
We’ve recently launched our new Start Programme, which is designed to help B2B founders start new companies that respond to these pre-validated types of challenges. They go through a journey with other cohort members (mostly having a technical background) where they can discover a problem that is interesting enough for them to want to spend their time solving, and large enough to be worth their time working on; they also get mentorship from day one from a large corporate who is a prospective customer and investor.
Find out more about the Start Programme here