Are you looking to build a successful startup? If so, then you need to understand the three key stages of your journey:
- The first stage is Product Market Fit, where you will focus on maximizing how well your product fits the market's needs. In this stage, the founder handles all the sales.
- The second stage is Go-to-Market Fit, where you will focus on building a sales playbook that can repeatedly drive customer growth and improve conversions. This is where you will hire your first salespeople.
- Finally, there is the Scaling stage, which is all about growth.
The biggest mistake you can make is trying to shortcut the first stage to scale too early. Today we will focus on the critical Product Market Fit stage, where the founder handles all the sales. So, why is this stage so important, and how should founders approach sales during this stage? Let's dive in and find out.
Product market fit is the stage where you, the founder, need to validate that your product actually meets the market's needs. Now, you have to understand that PMF (i.e. Product Market Fit) is not binary, but rather a spectrum. There are degrees to which you either have or don't have product-market fit. The higher you are on the PMF spectrum, the easier it is to sell, and vice versa. But that is not all. When your product has a higher PMF, it means that your customers are more likely to stick around and grow their usage over time, resulting in expansion revenue, and less likely to churn. This might not matter much when you only have a handful of customers, but it is really going to make a difference when you have more than $2-3M in revenue. But at that stage, it is much harder to improve where you stand on the PMF spectrum. Though you never really stop improving on PMF, the biggest gains on PMF happen in this first stage. That is why you don't want to rush it.
No doubt, you have heard about startups that raised large Series A or B rounds and then fizzled out and died. If you study their cases, you'll realize that while they grew reasonably well early, they hit some sort of plateau later on where customer churn began to outweigh any growth they were seeing. This led to an eventual decline in their business. That's the kiss of death for any company.
What is the first step to achieving a great product-market fit?
To ensure that you are positioned higher up on the PMF spectrum, the first step here is that you, the founder, need to be your first salesperson. Now, if you are a technical founder, or just have zero prior sales experience, you will likely struggle with the rigor of sales. You might feel that bringing on a professional salesperson will significantly improve the sales process by helping you stay on top of your deals, overcome objections, and reduce the likelihood of deals going cold or ghosting.
These are very real challenges that most founders face when they start selling, so it is understandable that you might have the instinct to bring on a salesperson early. As counterintuitive as it might be, you need to fight this instinct.
Know this: Even if you have terrible sales skills, if you have truly nailed PMF, you will be able to sell easily. And if you have terrible PMF, no amount of sales ability will save you, especially not in the long term. While great sales ability plus great Product Market Fit is the perfect marriage, great sales ability is really a multiplier on the foundation of great PMF. Sales ability can be learned or acquired easily, while achieving great PMF is much harder.
A good salesperson will be methodical in their sales approach, but every time they encounter a roadblock, they would look at that challenge from a sales perspective, and all of their solutions are likely to be sales-based solutions.
But you, on the other hand, have the ability to look at every roadblock from a founder's perspective. You can ask difficult questions such as: Is this the right customer profile for us to target? Is our product really meeting an important need, or is it just nice to have? Do we have a product advantage in the market that separates us from our competitors? You have the ability to dig deeper into these questions and tease out insights that can massively impact product direction, something a salesperson just cannot do.
There is a right time to bring on a salesperson, but it isn't right now. Right now, you need to focus on bringing on your first 5-20 customers and calibrate your PMF until you feel you know how to repeatably bring on customers.
When it comes to enterprise sales, meaning deals with a value over $50K per year, you can typically reach this point by winning around 5-7 deals with large companies. And for startups targeting SMB customers, meaning deals with a value of less than $5K per year, this point can be reached with around 20-25 customers.
How do you nail PMF?
To nail PMF, it's not enough to focus solely on customer acquisition. You also need to consider usage and adoption. If customers are regularly using your product, increasing their usage over time, and requesting more features, then you have a strong PMF signal. However, if usage is sporadic, there is significant churn, and customers seem indifferent, then you need to do more work on PMF.
Spend more time with your customers, learn from them, and understand the problems that matter most to them. It's possible that your product hypothesis is incorrect, so avoid becoming overly attached to your own ideas. Instead, let your customers help you determine the direction your product needs to take in order to really nail PMF.
So what happens when you don't do this? To understand that, let's look at an example of a failed startup called Mattermark. Mattermark was a YCombinator-backed startup founded by high-profile ex-Twilio executive Danielle Morrill. Founded in 2012, the business raised over $17 million from high-profile investors like Andreessen Horowitz, NEA, 500 Startups, Foundry Group and Sherpa Capital. In 2017, the year after it raised $7.2M in Series B, it was sold to FullContact for less than $1M.
Mattermark had all the ingredients needed for success. The founder's high-profile past meant she had many connections, access to great talent, and the ability to raise significant capital, all of which she did. However, Mattermark failed to execute the fundamentals.
Initially, Danielle and her co-founder focused on sales to validate the hypothesis, but after they brought in the first couple of customers, they thought they had nailed PMF. They immediately began building a sales and marketing organization, delegated all sales work to them, and focused on fundraising and hiring to scale the company.
At first, this worked, and revenue increased steadily. Despite the high cost of acquisition, Danielle had access to capital and believed they could spend money to grow quickly. However, over time, the pace of growth slowed and customers began to leave. Even after Mattermark had raised $10M in funding, its annual revenue only reached $1M. To address this, Danielle raised another $7.2M in Series B funding in 2016, promising to increase sales to $10M by the following year. They invested heavily in sales, but the returns were diminishing. Churn accelerated, and ultimately, growth came to a complete standstill. By 2017, it was clear that the company's foundation was weak and could no longer support it. In December of that year, Mattermark was sold to FullContact for less than $1M.
Although we don't have access to all of Mattermark's metrics and numbers, Danielle publicly stated that the primary reason for Mattermark's failure was the lack of PMF. In a post-mortem blog post, she outlined the reasons for this. She and her co-founder exited sales too early and focused too much on scaling the business quickly. Instead, they should have spent more time with customers to better understand their needs, taking a slower approach to hone in on product-market fit.
So, how can you make sure your startup doesn't end up like Mattermark? In the next topic, we'll look at the key metrics that tell you how well you've nailed PMF.
Kevin Ramani is the Chief Revenue Officer of Fleet Space Technologies and author of Startup Sales.