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 Depth of engagement & quality of revenue) 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.

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 invest in a company
• VCs helping portfolio companies prioritize and focus on the right efforts
• Early-stage startups who need help focusing on the right things
• Large companies developing new products and innovations
• Job seekers who are evaluating the likelihood of a company’s success before joining
  

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

2. People- state and experience of the team, what roles are filled and how well they are functioning

3. Process & impact on velocity- an early-stage startup’s top priority should be to maximize the speed of learning

4. Revenue- most early-stage companies have little or no revenue, which is why other leading indicators are needed at this stage.

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 this criterion or this 5-question quiz), the product maturity analysis is easy.

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 (Identifying and proving a compelling value hypothesis means you have found product/market fit), and then the growth hypothesis.

Value hypothesis

I break this journey into 4 steps:

1. Problem hypothesis- what is the market problem the company is trying to solve?
2. Market hypothesis- Who suffers from this problem? Is this market large enough?
3. Solution hypothesis- Does the target market believe the solution solves the problem?
4. Pricing hypothesis- does your target market find enough value in your solution to be willing to pay you for it?

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.

AFTER 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.

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 Minimal Viable Segments 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
• “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 PAYING early adopters, that have a shared use case

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)

Example: iPhone, Palm Pilot

Impact on Strategy: 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.

2. Existing Market (other solutions to the problem exist, going head to head with existing players)

Example: Zoom (better performance than WebEx/GoToMeeting)

Impact on Strategy: Product strategy must focus on finding significantly better features (that are at least ten times better at doing something than the current prevailing way of doing that thing), performance, or a better/different go-to-market.

3. Existing market — attack from below (re-segmenting an existing market as a low-cost player)

Example: Low-cost flights

Impact on strategy: 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.

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.

Example: LinkedIn (started as a social network targeted towards professional networking and connections)

Impact on strategy: 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.

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:

1. Hiring a sales team 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)
2. Channel partnerships- 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
3. Full-blown marketing and advertising investments
4. Setting revenue goals for the company, and using them to report on progress

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-

1. A high burn rate for almost a year with no results, and a significant lag in the ability to execute on their strategy
2. Need to “fire” 2 customers after attempts to bring all customers to a viable product direction
3. “Resetting” the entire sales funnel- delay of approximately one year
4. 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:

1. Progress towards product-market fit is the most important indicator to measure when evaluating product maturity for new products
2. 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
3. There is no “1 size fits all” market strategy for startups; understanding the market type is key to formulating the product and GTM strategy
4. Investing in growth and scale before achieving PMF is the same as burning money

Originally published on medium