Updated: Jun 9, 2021
I've been fortunate enough to work on and advise over 100 startups in the past 10 years. Some hit $10m/yr + in rev, most of them failed, and a fair amount of them are cruising around $3-5 mil/year. This is a guide created by interacting and observing what was done by the ones who did the right things.
42% of businesses failing due to lack of market need
82% of businesses fail due to cash flow
The highest and best use of a Founder’s time in the early stage (pre-10mil/year in rev) is to focus on eliminating both outcomes.
In this environment of overfunded capital, new businesses’ hopes soar on unfounded assumptions, inaccurate valuations, and worst of all a dwindling cash pile.
There lie two main types of founders:
1. Those who peddle their innovations and struggle to get the market to adopt their product
2. Those who ride the market like a wave, disseminating products at the rate of St. Nick on Christmas Eve.
Luckily there is a path for the strugglers to shift their approach from peddling to dissemination while eliminating lack of market need and cash flow issues. It has to do with aligning 3 things that I call Business Fit.
An Intersection of Market, Message, and Product
It is EXTREMELY PAINFUL to build a business without market fit. If your market is not growing rapidly and in pain, you will be fighting every day of your life to build your business. This should not be the hard part. If it is… your chances of losing to someone else who has a better product increases exponentially.
Solutions looking for a problem always fail until they have someone who’s actually built a company (vs being at a company being built) come in and restart the product development process from scratch and take the entire company back to the market research phase. A great example of this was how Jobs turned around Apple when he returned.
To avoid losing to someone with a superior product and massive pain and inconsistency on the sales and marketing end of things I recommend you align 2 things: Market Growth Rates & Market Pain.
1. Growth rates follow market activity.
Mass rates of adoption, growth, or behavior in a market has led to the largest product growth rates in history. Prime examples: Apple w/ mobile growth rates, Tesla w/ eco-friendly/sustainable transport adoption rates, and Google w/ growing public information storage and retrieval rates. Were they the first to create the products? No. But they were able to capitalize on new customers to define their category. The premise is simple: new customers try new products.
Don’t believe me? Look at your laptop, phone, ketchup, car, detergent. What are the circumstances that would make you shift from the brand you buy?
2. Pain brings change.
An easy test for fit is this: If your market is not screaming… you’ve picked too large a segment and you're not likely to survive. People buy from startups when they have no other option. They see the market changing, know they have to fix it now, and see you as their savior. The challenge here is… most people procrastinate. You’re going to build your business on the few that take action now. Everyone else will string you along until it’s time (or too late) and despite their best intentions you’ll be on calls or staring at site traffic for months to years.
The bridge between market need and cash flow is your message fit.
Most approach this as explaining to the market what your product does and how it’ll make their lives better. The ones that win explain the market’s pain by using the market’s own language. They then explain their product using the market’s own language. The removal of ego here is key.
This is if they will pay enough. If they won’t… they were either lying to you in the market fit section or the pain just isn’t large enough. Dig deeper.
When market fit is coupled with message fit, a business can rapidly scale its reach, impact, and even revenues. But there lies a large hole in most companies that fail to capitalize on the two. Their profitable business model aka product approach to the market.
Most struggle to attract enough customers and rather than charge high prices and go towards lower revenue/year pricing. This leads to the startup trap:
Low prices * low # of customers * low margins = low revenues & low profits.
Founders begin to expand the market that they’re going after in hopes of increasing revenue. In reality, profit margins are going down, overheads are increasing, their brand value is reducing, their marketing message is becoming generic, and their cash stores are dwindling.
The truth is it's much easier to attract a small group of people for almost all founders. And that smaller group of people will pay anything to alleviate their Pain. Ultimately, their Pain will fund a startup more efficiently than a VC (or for some of you, credit lines).
0 ownership dilution
100% market feedback
increase in brand equity
Path to future products and recurring revenue
Reduction in product development risk & overhead
For your initial offer, I suggest the $10k or $100k price point. If your solution doesn’t address a pain that deep, you’re not doing something important enough. I’ve seen people do this successfully to the tune of $12m/year with high-end products, setup fees, custom builds, or consulting (hint: your original market might not be the ones that will pay for the solution, get creative… ) When Market Fit, Message Fit, and Product Fit are aligned, you have Business Fit. Part II coming soon...