How to measure product/market fit and the implication for external finance

October 31, 2009

The Startup Pyramid

Earlier this week I attended one of many excellent talks organised by the Informatics Ventures and Edinburgh University Entrepreneurship Club. This week’s talk was by Sean Ellis of 12in6. Sean has worked in marketing roles at web companies LogMeIn, Xobni and Dropbox; amongst others. He is known for his metrics driven approach to customer development and in this talk he shared with us how you evaluate whether or not you’re at that critical moment in a startup’s life: product/market fit. I want to share with you the implication this moment has on raising and spending capital. I have seen that too many startups are obsessed with raising finance, but don’t appreciate the negative cost of this if taken at the wrong stage.

Although it was made famous by Marc Andreesen, I believe it was Andy Rachleff, co-founder of Benchmark Capital who coined the phrase product/market fit.

Product/market fit is being able to satisfy a good market with a good product.

But how do you determine you are there? According to Sean the key question to ask users is “how would you feel it you could no longer use our product?” If you achieve product/market fit you are looking for greater than 40% of respondents answering “very disappointed” to this question.  If less than that you need to keep working on your product until you have something people really need. Sean’s made available a free survey tool and all the necessary questions pre-populated at; if you have a product right now and you’re not sure where you are then start with this.

If you have P/M Fit you probably know it already; the sales are already piling up, the phones are ringing and there is press interest in your product. If you don’t know you are there yet then you’re probably not there yet. Assuming you’re not there and still struggling then a way to measure it will help you get there (and stop you from kidding yourself that things are going well).

Assuming you hit the jackpot and achieve over the 40% benchmark what comes next? Life after product/market fit is very different. It becomes all about the race to scale up; if you have found a successful formula speed is critical and you must go for growth and make the most of your advantage. Before product/market fit you focused on conserving cash, but now you need to change your mindset, you want to spend, spend, spend; assuming you can demonstrate the return. This is where Sean’s metrics driven approach to marketing pays off: relentlessly measure and optimise for ever greater conversion rates. Simply put, spend more on the areas that deliver the biggest ROI.

Spending money is only possible if you have it to spend, so you don’t want to get to this stage and discover you have a fantastic product, loved by the market but due to a lack of cash you cannot scale up and take advantage of your fortunate position. It is at the crucial point of P/M Fit where external capital comes in very handy, and it’s also the point VCs get interested as you have removed a lot of the risk and guesswork by proving you’ve got a valuable product. Luckily as you can demonstrate you have P/M Fit it’s also cheaper for you to fund raise at this time.

Much of success in business is about timing and external capital acts as a magnifier; it magnifies all the good and bad things in your business. I would caution that if you are not at P/M Fit you probably are not ready for that injection of steroids.

Matt Mullenweg, founder of WordPress explains it by likening VC finance to rocket fuel, put it in your car and it will do one of two things: it makes you go very fast or it makes explode. The magnification effect of VC finance acts on all aspects of your business good and bad. Once you have P/M Fit that is the right time to be going fast, before then you want to extend the time it takes till you fail, not speed it up.

The point of all this is… raising money is not what matters, focus instead on building a good product and getting early traction with sales.

First hand: the wisdom of Warren Buffett

October 27, 2009

Photo Credit: *Jimmy

The BBC aired an informative and entertaining profile tonight of Warren Buffett, “The World’s Greatest Money Maker: Evan Davis meets Warren Buffett“, hopefully spreading his name to more Brits; the average person here has no idea who he is, despite him being wealthier than the GDP of half the World’s countries and usually coming top of the World’s rich list! When I met Evan Davis he mentioned that he had just 5 minutes with Buffett, but that’s not stopped him presenting a thorough profile and insight by combining research and interviews with others close to Buffett, including with Bill Gates.

Evan describes Buffett by saying:

“He really is different to the other super-rich… uniquely clever, funny and generous”.

This is the man that’s lived in the same house for the last 50 years, (currently worth around $700,000), on a regular street in Omaha in America’s mid-west and drives a beat up old car with the licence plate “THRIFTY”. I’ve been to the Berkshire Hathaway annual shareholder meeting for the past two years, met both Warren Buffett and Bill Gates in the process and learnt a lot from the wisdom of Warren Buffett by reading his shareholder letters and attending the day-long Q&A at the gigantic stadium where the AGM is held.

Questions from the audience of around 30,000 attending what has become known as “Woodstock for capitalists” cover a wide range of topics including business, religion, the environment and tips for a successful life. Buffett is always interesting and frequently entertaining. The fellow attendees are all delighted to be there and I have met some wonderfully friendly Nebraskans who are all delighted at the influx of visitors in this weekend, the highlight of the Omaha calendar. If you are at all interested in business or investing I do recommend going at least once to this unique event. (See “how to attend” at the bottom of this article).

Buffett’s approach to investing in businesses is first and foremost about investing in things he understands, “stay within your circle of competence” and these guidelines:

  • Businesses with a durable competitive advantage through a strong brand (protective moat)
  • Management integrity, passion for the business and talent (doing business with people he likes, trusts and admires)
  • Paying a sensible price for the business

At this year’s meeting he brought up that he doesn’t have either a calculator or a computer on his desk, quite simply, “if the calculation needs so much accuracy that you need to use a computer, then don’t invest”; it should be obvious whether a company is worth investing in or not. He further explained, the key to successful investing is strong emotional stability, not skill or high IQ; in fact it’s dangerous to be too smart! An IQ of 120 is just fine; anything above that and you’re too clever for your own good.

For more lessons on life, business and investing a great free starting point is the website of Berkshire Hathaway where you can download all the annual shareholder letters.

My favourite Buffett quotes:

“Price is what you pay, value is what you get.”

“Time is the friend of the wonderful company, the enemy of the mediocre.”

“It’s better to hang out with people better than you. Pick the associates whose behaviour is better than yours and you’ll drift in that direction.”

“It takes twenty years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

“There seems to be some perverse human characteristic that likes to make easy things difficult.”

“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”

“Only when the tide goes out do you discover who’s been swimming naked.”

“If you let yourself be undisciplined on the small things, you will probably be undisciplined on the large things as well.”

“The smarter side to take in a bidding war is often the losing side.”

“No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.”

“When proper temperament joins with proper intellectual framework, then you get rational behaviour.”

“Success is having people love you that you want to have love you.”

Charlie Munger is equally as erudite, but somewhat taciturn:

“Acquire worldly wisdom and adjust your behaviour accordingly. If your new behaviour gives you a little temporary unpopularity with your peer group…. then to hell with them.”

“I sometimes tell my friends, I’m doing the best I can. But I’ve never grown old before, I’m doing it for the first time and I’m not sure I’ll do it right.”

How to attend the Berkshire Hathaway annual shareholder meeting:

Anyone can attend by one of two routes that I know of:

1. Becoming a shareholder in Berkshire Hathaway
2. If you are in business for yourself attend the Entrepreneurs’ Organization event which is held to coincide with the shareholder meeting. This year it included a behind the scenes tour at one of Berkshire’s businesses, the Nebraska Furniture Mart and a talk by Bob Prosen.

I visited the Mothership

October 22, 2009
Apple Sign 1 Infinite Loop

Apple Sign 1 Infinite Loop

Apple HQ 1 Infinite Loop

Apple HQ 1 Infinite Loop

Building 1, Infinite Loop, Apple HQ

Building 1, Infinite Loop, Apple HQ

I couldn’t resist stopping by Apple’s headquarters in Cupertino today. Not knowing what to expect I was pleasantly surprised to find an on-site gift shop, or “Company Store”.

I found myself buying a T-shirt with the motto “I visited the Mothership” on the front and a discreet Apple logo on the reverse. I thought that was quite funny and it appeals to Apple fans who already feel they are members of a special club where only the smart people are invited. It’s similar to driving a hybrid, the smug factor is pretty high. You can chuckle at those people still using Windows or driving a standard petrol engined car. Buying Apple products makes you feel part of a cool tribe.

You know when your brand is successful when people develop an emotional attachment. Selling souvenirs is taking it to the next level. Customers who want to buy those takes it to another level.

With record breaking profits and share price things are looking pretty good for Steve Jobs and the team at Apple. It shows what you can achieve when a brilliant and single minded individual exerts a laser focus on a company’s activities.

Richard Tait – pursuing passion and creating joy in the workplace

October 21, 2009

Richard TaitI should have been on a plane heading back to Europe yesterday but instead I rearranged my plans and extended my stay here in the San Francisco bay area to listen once again to the truly unique Richard Tait of boomboom. Yes, he really is that good and his story should be broadcast wide to entrepreneurs as you can learn a lot from someone who lives his life with such passion and enthusiasm.

Richard was speaking to a group of University students and started by explaining that “I want to inspire and resonate with just one person in the room, and get the message across to follow your heart”. At this point everyone realised they were not going to get the run-of-the-mill CEO talk. Having seen Richard speak before at The Entrepreneurial Exchange I knew what to expect; what he said resonated with me and showed me how you can operate a business using culture as the bedrock.

An exceptional career

After completing his undergraduate degree and fighting against the system in the UK which turns away MBA candidates without work experience, he enrolled at the Tuck school of business at Dartmouth College. That led to a transformational job with Microsoft, when the company only had around 2000 employees and at a point in time when its mission was crystal clear, putting a PC on every desk. Just four days into being there he was given the opportunity to lead a 100 strong team developing a major new project; Microsoft was a strict meritocracy and willing to take risks with the exceptional talent available to them. Ten years later, during which time he had won the employee of the year award and started numerous successful business within the company came the next major fork in his life when he realised that the culture had changed as the company had grown and he no longer enjoyed working there.

Cranium & culture

Some people are great at pictionary but struggle with scrabble, equally there are plenty of people who excel at scrabble and not at pictionary. This simple truth learnt while playing those 2 games with friends was the genesis for the board game Cranium, a game where everyone would have a chance to shine at whatever their talent is. Or to put it another way, “an entertainment company that celebrates the human spirit”. That very clear vision, coupled with a clearly defined set of core values created an amazing company culture. That in turn happened to create the third largest games company in the World, and it became such a thorn in Hasbro’s side that they eventually bought the company last year. Now Cranium exists as a single game in their enormous portfolio, and the team and the culture that went with it has died. It’s no wonder that Richard explains how it “broke his heart”. Happily though at a recent picnic for employees one year on, the culture and spirit continues and people look back fondly on their times together.

The secret sauce

There is no doubt that Richard has an exceptional business talent and his meteoric career is no doubt down to this and working very hard and making personal sacrifices along the way. However, it’s the style and authenticity in which he has done it all which is what we should learn from, it’s inspiring and exceptional.

His advice for life is to pursue your passion and be joyful; focus on what interests you. (And when you do it’s really not that difficult to communicate).

He is a poetic story-teller and speaks with tremendous conviction and a disarming level of transparency and honesty. Why? Richard is being nothing other than being himself and that makes it easier to achieve business objectives. Much of business is about trust and persuasion, whether it’s convincing a customer to buy from you or an investor to part with their cash.

Richard’s talent is the ability to tell a story and get people to believe, to buy in, and to love it (and him). I was told that after meeting Richard a VC said to his colleague that although he wasn’t sure about the business idea or whether it would work financially they had to invest because of Richard.

Richard’s talent to persuade and transform has been recognised by someone famous for both those qualities as he was recently hired by Howard Schultz, founder and CEO of Starbucks to work on a transformational project. I’m sure it’s no coincidence that the title of Howard’s autobiography happens to be…

Pour your heart into it“.

Books as recommended by Richard:

Startup Bootcamp at MIT

October 19, 2009

Photo: Dan Bricklin, founder: Visicalc

Photo credit: uploaded by rhizop

I attended an amazing event in Cambridge, Massachusetts last week designed to educate and encourage new startup ventures. It took place on Columbus Day, a national holiday but that did not discourage hundreds of keen attendees who turned up for this all day event.

The photo on the right is of arguably the most famous of the speakers, the man who invented the “first killer app“, the electronic spreadsheet Visicalc. This helped establish Apple who sold millions of their Apple II on the back of that one  software title alone.

The speakers:

1. Adam Smith, Founder, Xobni
2. Alexis Ohanian, Co-Founder, Reddit
3. Ken Zolot, Founder, MIT Innovations Teams & Heartland Robotics
4. Dan Theobald, Founder, Vecna
5. Kyle, Vogt, Founder, Justin.TV
6. Angus Davis, Founder, Tellme
7. Hemant Taneja, Founder, Sunborne Energy, Managing Director, General Catalyst Partners
8. Dharmesh Shah, Founder, HubSpot
9. Robin Chase, Founder, Zipcar
10. Dan Bricklin, Creator, VisiCalc
11. Aaron Swartz, Founder Infogami
12. Drew Houston, Founder, Dropbox

There’s a number of very good notes about this elsewhere on the web, so I will simply provide links to those:

My key take away was how impressive the enthusiasm and passion exhibited here was; nothing like I have seen at home. The US leads the way for technology ventures for a reason!

For more history and lessons about technology startups I can endorse the recommendation made by a couple of the speakers of the book “Founders at work” which details the struggles and eventual success of companies like Hotmail, Apple, Adobe, Tivo, RIM and others.

Moving on from abica

October 2, 2009

abica is a successful business that until a few days ago I was the managing director of; I have now left the company as a director and shareholder. As myself and the company received a fair bit of publicity in the last year and since I have a wide network of contacts I thought I would put in writing some of my reasons for leaving the company, for a number of reasons:

  • honesty is one of mine and abica’s core values
  • it’s helpful for me to wrap up and conclude my last few years by writing about it
  • vague announcements of someone’s departure from a business usually pose more questions than they provide answers
  • to save time answering the same questions from lots of people

Background and vision of abica

abica started in 2006 trading as “abc” and we expanded our B2B telecoms service from the core product which was mobile telecoms, to broadband internet and fixed line telecoms. Right from the start we had a very successful lifestyle business, but we recognised the long-term limitations of that and created a new business model focused on enhancing the value in the business by owning and billing the customer directly, to significantly grow recurring revenues. In October last year we launched our business mobile service and rebranded the company to abica with a clear long term vision which was quite simply to be the best telecoms operator for SMEs in the UK. If you want to know more read the “painted picture“, I hope it conveys the passion and enthusiam I had for this business until recently. (A painted picture is a vivid description of how a business looks at a specific future date and provides a clear visual description which helps guide everyone; more info here).

To achieve a challenging goal like creating a great company you need to have the best systems and the best people and putting both in ahead of the growth curve is a costly but necessary thing to do. It takes a lot of confidence and determination but it’s key to building a quality brand. I am delighted that quality has been recognised and one of my goals for 2009 looks set to be achieved as abica has been shortlisted for “excellence in customer service” at the Glasgow Business Awards. [Update: I am delighted that abica won this award, beating household name, the John Lewis Partnership to the prize!] Other success to celebrate includes winning many new clients and cross-selling new services to existing ones which has significantly grown recurring revenues.

Exit from abica

So with the business progressing and developing nicely in many areas why did I leave? For any business to succeed it needs the owners to be 100% behind a single strategy and almost one year after the re-launch was a good opportunity to review that. Even if everyone thinks the destination is the same there is more than one way to get there; as one of three co-owners of the business I found that I placed a different emphasis on factors such as the level of risk, pace of growth, long-term versus short term and re-investment versus income. I realised recently that while we had made consensus decisions in the past that was going to be less likely going forward due to a difference of opinion in the route we should take. I felt it would be the right time for me to exit while we still get along, it’s the grown up thing to do and because of that we have agreed to disagee and parted ways amicably. Rod Matthews, abica’s non-executive Chairman also stepped down this week and I would like to thank him for the support and advice he has given me over the last year of working together. We both leave the company in good shape for the future with lots of potential and I wish all those who remain at the company the best of luck for the years ahead.

Growing up fast

I really grew up as an entrepreneur during my three and a half years at abica and the catalyst for that was the Entrepreneurial Exchange and Richard Emanuel in particular. An “evening with” event with him was the first I attended and he turned me on to two really inspirational things: a book called “Good to Great” by Jim Collins and the sage of Omaha, Warren Buffett. That was around two years ago and since then I have met Warren Buffett (twice) and devoured, as Buffett does, dozens of books on business, leadership and personal development. I’ve listened in person to the stories of success and failure of many incredibly talented people including Bob Keiller, Stewart Milne, Jim McColl, Doug Richard, Richard Tait, Rod Aldridge, Seth Godin, Cameron Herold and Brad Sugars.

Company culture – the bedrock of success

The best moments of my time at abica were great times with the team, so I know what my priority will be in my next business and a great culture from the outset will form the bedrock. To get it right I want to learn from the very best and right now that is a company in the US called Zappos which I am visiting later this month. Zappos was founded 10 years ago in a bedroom in San Francisco, and it has just been bought for around $1Bn by Amazon. Jeff Bezos, founder and CEO of Amazon cited a number of reasons for the purchase, including Zappos customer-service obsession, the quality of the leadership team, future growth potential and their “totally unique culture” which he described as a “very significant asset”. I’m shortly going out to Las Vegas to spend two intensive days inside Zappos learning from their top managers and meet with their CEO, Tony Hsieh and I’m incredibly excited about it; expect to read a blog about my experience at Zappos later this month. In the meantime, if you want to know more about Zappos’ groundbreaking culture watch this video of Tony Hsieh on You Tube; I found it inspiring.

The future…

As well as my visit to Zappos I will be researching business schools as this break is an ideal opportunity to obtain an MBA; if I don’t do it now then I never will. If I do take time out for an MBA it will not be until this time next year, so in the meantime I look forward to helping other businesses, both as a volunteer with the Prince’s Scottish Youth Business Trust, which helps young people set up their own business and also on the board of The Entrepreneurial Exchange, which helps entrepreneurs create companies of scale.

Often the main challenge with running your own business is that sometimes when all the day to day stuff gets on top of you, you lose sight of the really important things, the things that actually make a difference to the long term success of your company. So for that reason an outside voice and/or support from peers is particularly useful and that’s why I’m a great advocate of organisations like The Entrepreneurial Exchange and of non-executive directors, mentors and business coaches. I am hoping that I can help other businesses in that way and I relish all the opportunities ahead of me and the time to pursue fresh challenges.

With that in mind, if you want to talk to me, please get in touch – my diary is now refreshingly clear!