Tag Archives: product

Why Focus Is Critical to Growing Your Startup, Until It Isn’t

When I was a teenager, I told my dad about a friend and his dad and how they had seven businesses. He immediately replied, “And none of them make money.” I thought it was an extremely arrogant thing to say at the time, but later, I realized it might be the smartest piece of advice he ever gave me.

When I joined Grubhub, I quickly noticed the founders were incredibly good at staying focused. They said we were building a product for online ordering for food delivery — and only delivery — not pickup, not delivery of other items, not catering, and that’s all we would do for a long time. I remember thinking, “but there’s so much we could do in [XYZ]!” I was wrong. By staying focused on one thing, we were able to execute technically and operationally extremely well and grow the business both very successfully and efficiently. When we added pickup functionality four years later, it proved not to be a very valuable addition, and hurt our conversion rate on delivery.

If you have product/market fit in a large market, you should be disincentivized to work on anything outside of securing that market for a very long time. There is so much value in securing the market that any work on building new value propositions and new markets is destructive to securing the market you have already validated.

There is an interesting switch in the mindset of a startup that needs to occur when a startup hits product/market fit. This group of people that found product/market fit by creating something new now have to realize they should not work on any new value propositions for years. They now need to work on honing the current product value or getting more people to experience that value. Founders can easily hide from the issues of a startup by working on what they’re good at, and by definition, they’re usually good at creating new products. So that tends to be a founder’s solution to all problems. But it’s frequently destructive.

If a product team can work on innovation, iteration, or growth, they need to quickly shift on which of those they prioritize based on key milestones and value to the business. In this scenario, it’s important to define what innovation, iteration, and growth mean. In this context:

  • Innovation is defined as creating new value for customers or opening up value to new customers. This is Google creating Gmail.
  • Iteration is improving on the value proposition you already provide. This can range from small things like better filters for search results at Grubhub to large initiatives like UberPool. In both cases, they improve on the value proposition the company is already working on (making it easier to find food in the case of Grubhub, and being the most reliable and cheapest way to get from A to B in the case of Uber).
  • Growth is defined as anything that attempts to connect more people to the existing value of the service, like increasing a product’s virality or reducing its friction points.

I have graphed the rollercoaster of what that looks like below around the key milestone of product/market fit.

Market Saturation
The time to think about expanding into creating new value propositions or new markets is when you feel the pressure of market saturation. Depending on the size of the market, this may happen quickly or slowly over time. For Grubhub, expansion into new markets made sense after the company went public and had signed up most of the restaurants that performed delivery in the U.S. The only way the company could continue to grow was to expand more into cities that did not have a lot of delivery restaurants by doing the delivery themselves.

All markets are eventually saturated, and that means all growth will slow unless you create new products or open up new markets. But most entrepreneurs move to doing this too early because it’s how they created the initial value in the company. Timing when to work on iteration and growth and when to work on innovation are very important decisions for founders, and getting it right is the key difference to maximizing value and massively under-performing.

Product-Market Fit Requires Arbitrage

One of the most discussed topics for startup is product-market fit. Popularized by Marc Andreessen, product-market fit is defined as:

Product/market fit means being in a good market with a product that can satisfy that market.

Various growth people have attempted to quantify if you have reached product-market fit. Sean Ellis uses a survey model. Brian Balfour uses a cohort model. I prefer Brian’s approach here, but it’s missing an element that’s crucial to growing a business that I want to talk about.

First, let’s talk about what’s key about Brian’s model, a flattened retention curve. This is crucial as it shows a segment of people finding long term value in a product. So, let’s look at what the retention curve shows us. It shows us the usage rates of the aggregation of users during a period of time, say, one month. If you need help building a retention curve, read this. A retention curve that is a candidate for product-market fit looks like this:

The y axis is the percent of users doing the core action of a product. The x axis in this case is months, but it can be any time unit that makes sense for the business. What makes this usage pattern a candidate for product-market fit is that the curve flattens, and does fairly quickly i.e. less than one year. What else do you need to know if you are at product-market fit? Well, how much revenue that curve represents per user, and can I acquire more people at a price less than that revenue.

If you are a revenue generating business, a cohort analysis can determine a lifetime value. If the core action is revenue generating, you can do one cohort for number of people who did at least one action, and another cohort for actions per user during the period, and another cohort for average transaction size for those who did the core action. All of this together signifies a lifetime value (active users x times active x revenue per transaction).

Now, an important decision for every startup is how do you define lifetime. I prefer to simplify this question instead to what is your intended payback period. What that means is how long you are willing to wait for an amount spent on a new user to get paid back to the business via that user’s transactions. Obviously, every founder would like that to be on first purchase if possible, but that rarely is possible. The best way to answer this question is to look with your data how far out you can reasonably predict what users who come in today will do with some accuracy. For startups, this typically is not very far into the future, maybe three months. I typically advise startups to start at three months and increase it to six months over time. Later stage startups typically move to one year. I rarely would advise a company to have a payback period longer than one year as you need to start factoring in the time value of money, and predicting that far into the future is very hard for all but the most stable businesses.

So, if you have your retention curve and your payback period, to truly know if you are at product-market fit, you have to ask: can I acquire more customers at a price where I hit my payback period? If you can, you are at product-market fit, which means it’s time to focus on growth and scaling. If you can’t, you are not, and need to focus on improving your product. You either need to make more money per transaction or increase the amount of times users transact.

Some of you might be asking: what if you don’t have a business model yet? The answer is simple then. Have a retention curve that flattens, and be able to grow customers organically at that same curve. If you can’t do that and need to spend money on advertising to grow, you are not at product-market fit.

Other might also ask: what if you are a marketplace where acquisition can take place on both sides? If you acquire users on both sides at the wrong payback period, you’ll spend more than you’ll ever make. Well, most marketplaces use one side that they pay for to attract another side organically. Another strategy is to treat the supply side as a sunk cost because there are a finite amount of them. The last strategy here is to set very conservative payback periods on both supply and demand sides so that in addition they nowhere near add up to something more than the aggregate lifetime value for the company.

Currently listening to From Joy by Kyle Hall.