Measuring Product Maturity: Frameworks for Early Stage VCs, Founders

In most new products today, the technological risk is minuscule in comparison with the risk of not achieving product-market fit. Entrepreneurs (and therefore their investors) have X amount of time and Y amount of money to create a successful product. Any investment that doesn’t align with reducing the most critical risks (the first of them being attaining product-market fit) leads to waste. Many methods were created to help VCs evaluate an investment in a startup. Most of them are based on numeric indicators (such as ) but early-stage startups, often, do not have these indicators, or these indicators could actually be misleading. In these cases, VCs need to understand how these companies are moving forward on their product trajectories by relying only on a combination of qualitative and quantitative proxies. Depth of engagement & quality of revenue While working with VCs and startups, I created a framework to gauge the maturity of a new product, which is outlined here, and can help: VCs evaluating whether to in a company invest VCs prioritize and focus on the right efforts helping portfolio companies who need help focusing on the right things Early-stage startups developing new products and innovations Large companies who are evaluating the likelihood of a company’s success before joining Job seekers The Framework Several factors are worth considering as leading indicators of whether the product is advancing in the right direction. They are listed here by order of importance- 1. Progress towards PMF State of validation of the value & growth hypotheses Strategy & market awareness Pitfalls & activities to avoid state and experience of the team, what roles are filled and how well they are functioning 2. People- an early-stage startup’s top priority should be to maximize the speed of learning 3. Process & impact on velocity- most early-stage companies have little or no revenue, which is why other leading indicators are needed at this stage. 4. Revenue- Outcomes matter most. Many of the items in this process are somewhat intangible (like talent discussions often tend to be). Measuring where the company is, in the progress towards PMF is the most tangible outcome. Progress towards product-market fit When product-market fit (PMF) is achieved, and can be measured (for example through or this ), the product maturity analysis is easy. this criterion 5-question quiz The problem begins in companies that are before or borderline to that stage. The numbers are not there, or they are misleading, and the founders might not even be aware they aren’t there yet. My first step in the analysis is to look at the path that led them to where they are and understand how truthful they were with themselves while walking through it. State of validation of the value & growth hypotheses This journey towards PMF is broken into two main stages: validating the value hypothesis ( ), and then the growth hypothesis. Identifying and proving a compelling value hypothesis means you have found product/market fit Value hypothesis I break this : journey into 4 steps what is the market problem the company is trying to solve? Problem hypothesis- Who suffers from this problem? Is this market large enough? Market hypothesis- Does the target market the solution solves the problem? Solution hypothesis- believe does your target market find enough value in your solution to be willing to pay you for it? Pricing hypothesis- Growth hypothesis The growth hypothesis tests how new customers can discover the product- this includes a variety of topics such as lead generation, positioning against competitors, virality, and spread. It is followed by hiring a dedicated sales team, establishing channel partnerships, and more. validation of the value hypothesis, the next step is the growth hypothesis. Working in that order, and getting to PMF before growth prevents companies from wasting time, money, and resources on growing a business in a way that is doomed to fail. AFTER Quality of validation for each hypothesis To evaluate the quality of hypothesis validation, I created this : worksheet In addition to understanding the maturity of the company and product, founders/product teams can prioritize what to focus on, based on the state of each hypothesis. The following are some of the positive and negative “signs” I utilize: 1. Problem Hypothesis Signs of maturity: 5+ engaged early adopters who are at the top of the early evangelist pyramid The team can detail how the problem is being solved today by each of these customers, and what is the cost & impact of not having a product that solves it. Signs more work is needed: Less than 5 engaged early adopters The engagement is with prospects that are at the bottom 3 layers of the early evangelist pyramid 2. Market Hypothesis Signs of maturity: Initial focus on 1–2 at most, with clearly defined parameters such as industry, size, geography, buyer/user personas. A simple and intuitive explanation for this definition. Without this focus, product and GTM activities will be pulled in many different directions, actually slowing down the progress towards product-market fit Minimal Viable Segments “Guided imagery”- the buyer and user descriptions should feel real- you can imagine seeing these people, and empathize with their pains. Signs more work is needed: A broad definition of the target market TAM/SAM/SOM calculations take more than a napkin to explain 3. Solution Hypothesis Signs of maturity: 5–10 early adopters that have AT LEAST one shared use case Real engagement metrics (such as a northern star) that show early adopters are using and getting value from the solution Signs more work is needed: Customers are using the product for different reasons Customers are requesting completely different features Customers aren’t using the product or getting value from it Only vanity metrics are used for progress 4. Pricing Hypothesis Signs of maturity: 5–10 early adopters, that have a shared use case PAYING Signs more work is needed: Multiple different pricing schemes, multiple discounts Only free pilots Strategy & Market awareness One clear result of having the value hypothesis validated is the ability to lock down on a product strategy and move forward. The goal here is to assess whether the founders are following a path that shows their awareness of market types and how this affects the product & GTM strategy. : There are four common groups of such strategies 1. New Market (no other solutions to the problem exist) iPhone, Palm Pilot Example: The GTM strategy should focus on market education, building demand, very rapid testing of the first four value hypotheses with high quality of evidence on each. Impact on Strategy: 2. Existing Market (other solutions to the problem exist, going head to head with existing players) Zoom (better performance than WebEx/GoToMeeting) Example: Product strategy must focus on finding significantly better features ( ), performance, or a better/different go-to-market. Impact on Strategy: that are at least ten times better at doing something than the current prevailing way of doing that thing 3. Existing market — attack from below (re-segmenting an existing market as a low-cost player) Low-cost flights Example: Focus on offering a low-cost solution (that has a limited, but interesting enough feature set), while becoming profitable and striving for volume to benefit from economies of scale. Impact on strategy: 4. Existing market- attack from the top (re-segmenting an existing market by employing a niche strategy). This is a common market type for startups, but also the trickiest. LinkedIn (started as a social network targeted towards professional networking and connections) Example: Focus on delivering a more focused solution to a small but highly painful problem. The solution should provide enough value that customers will be willing to purchase and use an additional tool to solve that problem. The positioning and product strategy will require balancing the need to invest a lot to capture a niche and to be able to expand later on to a broader market. Impact on strategy: Pitfalls and activities to avoid Companies often engage in the following activities too early (i.e. before finding product-market fit). It is important to understand, that investing time or money in these activities before achieving PMF, will actually slow them down and cause them to burn more money: and aggressive goal setting (before there is PMF, founders should be the ones selling, and if there are sales-people, they should focus on finding early adopters to accelerate learning) Hiring a sales team - if the company hasn’t developed the knowledge and expertise in selling the product themselves, they can’t expect people external to the company to be able to. At most, partners can be collaborated with for their relationships in order to connect to potential early adopters Channel partnerships Full-blown investments marketing and advertising Setting for the company, and using them to report on progress revenue goals An example that shows how this can go wrong happened in an early-stage startup I worked with. When I started the engagement, they had three paying customers and five salespeople. Very quickly it was apparent that the product was filling a different need for each customer. This caused the company to go down many different directions resulting in a very ineffective sales process. The sales team blamed the slow enterprise sales cycles in that. The company started scaling before there was product-market fit or even a path towards one and there were very painful consequences- A high burn rate for almost a year with no results, and a significant lag in the ability to execute on their strategy Need to “fire” 2 customers after attempts to bring all customers to a viable product direction “Resetting” the entire sales funnel- delay of approximately one year Firing the majority of sales staff My next post will detail how to measure the impact of the other criteria- people, process and revenue on product maturity. Lessons learned: Progress towards product-market fit is the most important indicator to measure when evaluating product maturity for new products Breaking the measurement to four steps allows a systematic approach to evaluate the product journey the company is going through, and prioritize the right activities to focus on There is no “1 size fits all” market strategy for startups; understanding the market type is key to formulating the product and GTM strategy Investing in growth and scale before achieving PMF is the same as burning money Originally published on medium