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Product Market Fit - Harvard Business School

A presentation on the search for product-market fit at the Harvard Business School Black Tech Masters Series by venture capitalist and entrepreneurship faculty professor Jeff Bussgang

Product Market Fit - Harvard Business School

  1. 1. The Search for Product- Market Fit Jeff Bussgang General Partner and Co-Founder, Flybridge Capital Senior Lecturer, Harvard Business School @bussgang
  2. 2. Confidential Presentation Startup Quick Background Professor @HBS: - Launching Tech Ventures - Rock Venture Partners Venture Capitalist @Flybridge 2x Author: - Mastering the VC Game - Entering StartUpLand 2x Entrepreneur: - NASDAQ: OMKT - Upromise (acq: SLM) 2
  3. 3. Confidential Presentation Concepts Deconstruct “Product Market Fit” (PMF), plus: - Lean Start-Up Theory - Customer Development Process Methodology to achieve PMF (and avoid wasting $) The metrics that matter most Startups as experimentation machines Business model assessment 3 Confidential Presentation
  4. 4. Taking a Page From Experimental Design
  5. 5. Confidential Presentation Startup = Experimentation Machine 5 Customer Value Proposition Experiments Go-to-Market Experiments Business Model/ Cash Flow Experiments Which Experiments Should I Run (and in what sequence)? Source: HBS Launching Tech Ventures Course
  6. 6. Confidential Presentation Startup = Experimentation Machine 6 How Do I Build an “Experiment-Driven Organization” Across Each Function? Growth Product Sales Biz Dev Source: HBS Launching Tech Ventures Course Customer Value Proposition Experiments Go-to-Market Experiments Business Model/ Cash Flow Experiments
  7. 7. Confidential Presentation Following the Scientific Method 7 Source: HBS Launching Tech Ventures Course Ask a question or address a problem Research Hypothesis Experiment Analysis Conclusion (and win the science fair)
  8. 8. Confidential Presentation Experimentation Constraints and Flow 8 Time Money Team Strategy Experimental Design Experimental Execution Results and Insight
  9. 9. Test Selection Is Strategy: Your Choices Matter 9
  10. 10. Confidential Presentation Three Essential Questions for Test Selection 10 Which business model component is most controversial and what is the essential hypothesis for that component? 1 What is the key milestone I need to achieve to lead to a valuation inflection point, helping unlock more capital from investors? 2 Where does the greatest risk exist in my business model and what does the flow of dependencies look like? 3
  11. 11. Confidential Presentation CVP Experiments: WHO - Persona development - Start narrow, then narrow further - User stories - Deep customer discovery - Live with the customer: “Follow Them Home” - Early evangelists — avoid the chasm CVP Experiments “Who” Hypotheses “What” Hypotheses “How” Hypotheses 11
  12. 12. Confidential Presentation 12 Sample User Persona:
  13. 13. Confidential Presentation “It's better to have 100 people love you than a million people that sort of like you, so if you can find 100 people that love your product — as long as there are more people like them in the world — then you have an idea that I believe will spread around the world. But if you can't get 100 people who absolutely love your product, then you do have a problem.” Brian Chesky Airbnb Founder/CEO The Chasm Innovators Early Adopters Early Majority Late Majority Laggards Early Market Late Market Tornado Main Street Bowling Alley The Chasm Source: Geoffrey Moore, Crossing the Chasm The danger of the chasm is the false positive manifested by success with early adopters 13
  14. 14. Confidential Presentation Lean Startup Principles 14 - No idea survives first customer contact, so get “out of the building” and in front of prospects ASAP to test ideas - Goal: validation of business model hypotheses, based on rigorous experiments and clear metrics - Minimum viable product (MVP): smallest set of features/marketing initiatives that delivers the most validated learning - Rapidly pivot your MVP/business model until you have validation and product-market fit (PMF) - Don’t scale until you have achieved PMF Source: Lean Startup by Eric Ries
  15. 15. Confidential Presentation - “I ask existing users of a product how they would feel if they could no longer use the product.” - “If > 40% say they’d be very disappointed, you have found product-market fit. If < 40%, you haven’t.” Sean Ellis’ 40% Test 15 How would you feel if you could no longer use Google Analytics? Answered: 1,075 Skipped: 0 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Not disappointed Somewhat disappointed Very disappointed Source: Hacking Growth by Sean Ellis
  16. 16. Confidential Presentation “Lessons Learned” Drives Funding 16 Source: Steve Bank Do this first instead of fund raising And perhaps even before writing code (or raise seed round to test hypotheses…rigorously) Concept Business Plan/Canvas Lessons Learned Series A Test Hypotheses
  17. 17. Confidential Presentation CVP Experiments: WHAT - Strict MVP - No code! Prototypes and wireframes - A/B tests on messaging/landing pages - Requirements not specs - What problem are you solving? CVP Experiments “Who” Hypotheses “What” Hypotheses “How” Hypotheses 17
  18. 18. Confidential Presentation To Explore the “What” Employ Design Thinking 18 Source: IDEO An interactive cyclic process Empathize Define Test Prototype Ideate
  19. 19. Confidential Presentation CVP Experiments: HOW - Two architectural choices: • Build something with a good user interface that doesn’t scale and pay down “tech debt” later • Plan for scale but don’t build out the user interface and all the bells and whistles - Building an intellectual property portfolio CVP Experiments “Who” Hypotheses “What” Hypotheses “How” Hypotheses 19
  20. 20. Confidential Presentation Experiments: Drill Down 20 CVP = Customer Value Proposition GTM = Go-to-Market BM/CF = Business Model/Cash Flow Formula Source: HBS Launching Tech Ventures Course CVP Experiments “Who” Hypotheses “What” Hypotheses “How” Hypotheses GTM Experiments Sales Model Hypotheses Channel Choice Hypos Partner Hypotheses Growth Hypotheses BM/CF Experiments Monetization Hypotheses Pricing Hypotheses
  21. 21. Confidential Presentation GTM Hypotheses to Test 21 Initial market hypothesis Growth hypothesis Partner hypothesis Channel choice hypothesis Sales model hypothesis
  22. 22. Confidential Presentation Initial Market Selection 22 Source: Geoffrey Moore, Inside the Tornado Bowling Alley Market Development Whole product extending applicability to address nearby segments Customer references to other customers in the same segment “Head Pin” Segment 3 Application 1 Segment 2 Application 2 Segment 1 Application 3 Segment 2 Application 1 Segment 1 Application 2 Segment 1 Application 1
  23. 23. Confidential Presentation How to Select That First “Head Pin”? - Consistent with your mission/passion • That is, don’t pick an initial market that you’re not excited to live in day in, day out for 3-5 years - Large enough to sustain iterations, raise $ - Ideally high value for rich customers – i.e., leading to high willingness-to-pay - Consistent feature requirements that can be generalized across other segments - Easy to access directly (i.e., no gatekeepers) 23
  24. 24. Confidential Presentation ARPA/ACV vs. Sales Model 24 1,000,000 100,000 10,000 1,000 100 $100 $1,000 $10,000 $100,000 $1,000,000 Source: Christopher Janz To succeed in this segment your product needs to be inherently viral, freemium, self- service. Product-led growth and channel sales helps companies selling to rabbits reduce cost of sale. Most $100M+ ARR SaaS companies target deer or elephant customers with a mix of BDRs and direct sales. Whale customers have long sales cycles and require direct sales efforts but can be very profitable over time. # of Customers ARPA (Average Revenue per Account per Year)
  25. 25. Confidential Presentation Some Go-to-Market Truisms - Founders must lead the journey down the sales learning curve - Avoid Gatekeepers - Bias towards junior, generalist resources early - Do the unit economics math: LTV/CAC - Do the sales quota/efficiency math - Raise money from aligned investors — and make sure they have your back when GTM takes longer and costs more than anticipated 25
  26. 26. Confidential Presentation Pacing Scaling - Blitzscaling School (i.e., Startup = Growth): use capital and execution capacity to drive scale as rapidly as possible • Best applied for network effects businesses with massive TAM, attractive economies of scale, aligned investors, and winner-take-all characteristics - Avoid Premature Scaling School: don’t scale until you’ve achieved product market fit and then pace your scaling appropriately • Best applied for SaaS businesses or services with high cost of scale, high cost of capital, “tough tech” 26
  27. 27. Confidential Presentation Experiments: Drill Down 27 CVP = Customer Value Proposition GTM = Go-to-Market BM/CF = Business Model/Cash Flow Formula Source: HBS Launching Tech Ventures Course CVP Experiments “Who” Hypotheses “What” Hypotheses “How” Hypotheses GTM Experiments Sales Model Hypotheses Channel Choice Hypos Partner Hypotheses Growth Hypotheses BM/CF Experiments Monetization Hypotheses Pricing Hypotheses
  28. 28. Confidential Presentation 28 Your Unit Economics: LTV and CAC Math Discounted present value of the gross profits earned over the life of a typical customer’s relationship Be conservative by: - Capping lifetime value at no more than 3 years - Apply a 30% cost of capital discount rate - Use your current gross margin, not future one Your full cost of sales and marketing divided by the number of new customers acquired. Be conservative by: - Include staff salaries, not just program dollars - Keep an eye on “marginal CAC”, not historical CAC - Recognize that CAC can get worse with scale Customer Lifetime Value LTV Customer Acquisition Cost CAC
  29. 29. Confidential Presentation Elements of a Magical Business Model 29 Tight viral loop Recurring (esp. negative chum) Strong network effects High gross margins Metrics improve with scale Organic demand (zero marketing costs) High switching costs Deliver high value to rich customers — high willingness to pay Source: HBS Launching Tech Ventures Course
  30. 30. Confidential Presentation - LTV : CAC > 3 - MRR growing > 10% MoM - Churn < 20% / year (ideally lower!) - NPS > 30 (ideally higher!) - Sales team hitting quota - Sales cycles short - 40% test — if product disappeared… - Product usage high, growing Criteria for Product Market Fit 30 As users engage, they create virtuous loops in the product. Product should get better the more it’s used. Users have more to lose by leaving the product. Focus on growing users completing the core action. Self- perpetuating Retaining users Growing engaged users Tavel’s Hierarchy of Engagement Source: HBS Launching Tech Ventures Course; Sarah Tavel, Benchmark
  31. 31. Confidential Presentation Retention Metrics: Best In Class By Business Model 31 Confidential Presentation 35% 40% 55% 70% 82.5% User Retention (%) Net Revenue Retention (%) 67.5% 110% 90% 110% 120% Source: Lenny Rachitsky, survey of top growth managers
  32. 32. Confidential Presentation Monetization Timing - Adoption School: ship a product that people love, drive adoption first, and worry about business model and how to make money later • Often applied when incremental cost of service delivery is zero • Often applied when willingness to pay is obviously massive and doesn’t require proving out • Often applied for B2C business models - Unit Economics School: understand the cost of delivering your offering, a customer’s willingness to pay, and price accordingly from the beginning • Often applied for higher cost of service and tough tech products • Often applied for B2B business models 32
  33. 33. Confidential Presentation Where Are You in the Journey? 33 Confidential Presentation - Lean startup approach - Hunch-driven hypotheses - Minimum viable product (MVP) - Product-centric culture; informal roles - Customer development process - Pivoting - Bootstrapping/pre-seed - Small, founding team - Founder selling — early adopters - Early in sales learning curve - Make 100 customers LOVE you - Driving growth - Metrics, analytics, funnels - Building a robust, feature-rich product - Designing for virality & scalability - Scaling the team; more formal roles - Challenges with corporate partnerships - Building a brand - Scaling a sales force Before Product-Market Fit: Search & Validation 1 After Product-Market Fit: Scaling & Optimization 2
  34. 34. Confidential Presentation Putting It All Together 34 #3 Biz Model Fit #1 Value Prop Fit Target Market Early Majority Innovators Early Adopters Demand Gen. Many Channels. Tightly Aligned with Sales Personal Network + WOM Referrals Marketing Experiments Partner Experiments #2 GTM Fit Goal of Phase Growth & Moat Learning Customer Love (40% Test) Unit Economics Pricing Profitable Unit Economics Adoption First Customer W-T-P Sales Hiring Senior, Process Builder None Junior, Expeditionary GTM Process Partners/Sales Team Founder Selling Product-Led Growth Go Direct/First Rep
  35. 35. THANK YOU! Jeff Bussgang General Partner and Co-Founder, Flybridge Capital Senior Lecturer, Harvard Business School @bussgang
  36. 36. Confidential Presentation Additional Writings: Dig Deeper Steve Blank: Four Steps to the Epiphany Eric Ries: The Lean Startup Melissa Perri: Escaping the Build Trap Elliot Robinson: 10 Laws of Cloud Computing 36 Sean Ellis: Hacking Growth Tom Eisenmann: Why Startups Fail Sarah Tavel: The Hierarchy of Engagement

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