In this blog series, I’ve been exploring product-market fit (PMF). Not finding it – there’s plenty of material on that to be found. The focus of this series is losing it. In my first blog, I offered a brief guide to just what PMF looks like in a venture-backed business, and you can catch up on that here. Put simply, it’s the sweet spot at the meeting point of vision, customer experience and scalability.

In the next, I went into detail on some of the pressures that can lead to a business losing its PMF. These tend to arrive as a company reaches £2-£10m in revenues and include ever-more demanding customer requirements (which can have a knock-on impact on scaleability), a dwindling sales performance driving founders to dilute or confuse their solution (and damaging customer engagement) and the dilution of vision that can occur as options for new markets and sectors multiply.

In this final instalment, I’m going to offer my tips on what you can do to prevent PMF going in the first place, as well as some thoughts on safely approaching new opportunities and markets without putting PMF at risk.

How do you stop yourself losing PMF?

When you’re losing PMF, it can be hard to recognise what’s happening. After it’s gone, of course, it’s all too easy to look back and reflect on what was happening – but by then it’s too late. Best catch it early by keeping attentive to these watch outs:

1. People within the business starting to have versions of what the company’s about, the direction it’s going in, and where priorities lie. As this slips people start to pull in different directions and set different priorities – and inefficiencies start to mount.
2. Potential customers becoming much harder to find, and taking much longer to land, as they find it harder to understand your complex and multifaceted offering. Often, they’ll start brushing off propositions as they struggle to see what’s in it for them.
3. More people working to client requirements than on your original vision. There are lots of employees but no one is selling, and creating any sort of flywheel is almost impossible as you have to keep adding more developers to deal with the mounting customer requirements.

With any of these watch outs, efficiency suffers and before you know it your gross margin has been eroded. The business is now on the downwards spiral to low growth and high cash burn.

So, when answering the question ‘How do I stop my company losing PMF?’ I always draw founders’ attention to their biggest asset. What quality allows their business to win, over larger, better resourced and better financed businesses? Relentless focus.

In his book That Will Never Work, Marc Randolph, co-founder of Netflix, describes the  ‘The Canada problem’. In the early days, Netflix had the opportunity to enter Canada, a move likely to increase revenues by 10%. They decided not to. A different market, with different challenges and laws, seemed certain to draw resource and focus away from the business’s core vision: growing in the USA. Randolph cites the Canada problem whenever he explains why Netflix decided to reject opportunities (selling DVDs, one off rentals, physical stores, etc) in favour of focussing on its core vision – subscription. Ultimately, this approach led to Netflix setting the definition of what it means to be a subscription business.

The ability to turn down distraction (even if it presents as opportunity), in favour of keeping a world-leading team laser-focussed on the ultimate mission of the business, is the differentiator that sets a growing start-up apart from its more established competitors. Often, when I make this argument to founders, I hear them say they can’t afford to focus, or that as every customer is ‘Profitable,’ they’re worth chasing. What these founders don’t factor in is the cost of losing PMF and all the inefficiency that brings. As we saw in the last blog, these inefficiencies and lack of vision represent an existential threat to the business if not rectified. 

If you’ve lost PMF, how do you get it back?

Having lost PMF, it’s far harder to get it back than it is to find it in the first place. But if it does happen, remember the three S’s:

1. Stop. If you’ve lost PMF you can’t sell your way out of trouble. Selling will have become too expensive, and trying to will only make things worse. There’s no choice but to stop, rearrange the deck chairs and start again. Chances are this will mean, at best, a period of stagnation. It could even mean backtracking to find a new path forwards.
2. Simplify. Focus on what you do well, and do more of it. Remember the Canada problem: a start-up’s biggest advantage is its ability to focus and go deep into solving a specific challenge. Sit down with your leadership team and decide what you’re going to focus on – and what you’re going to drop (Thinking through your company’s mission, objectives, strategies and tactics, or MOST, is a good place to start).
3. Survive. Protect cash at all costs. This may be painful, and will almost certainly require a reduction in people. But once you’ve lost PMF, and growth and efficiency with it, it’s going to be almost impossible to raise more funding. The only time you’re out of the game is if you don’t exist – so do everything you can to survive.

Ben Horowitz offers a great example of all three Ss in his book, The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers. As he comes to the realisation that his company, LoudCloud, isn’t scalable, and recognises that if he continues it’s going to run out of money, he asks a question relevant to any founder who fears they might be losing PMF:

“If I could start again, what would I do?”

For Horowitz, as he tells it, the answer was to sell off Loudcloud’s core managed services business and start again with Opsware, a software company (Stop and Simplify). The move was painful, with a huge reduction in employees and customers. The share price cratered almost to the point of delisting and the business came very close to running out of cash (Surviving). But what Horowitz recognised was the urgent need to create something scalable, and with Opsware that’s what he did, ultimately selling the company for $1.6bn.

So if you think you’ve lost PMF, ask yourself: what would you do if you could start again? And then do it. Without PMF your business is a zombie and, chances are, it’ll eat you up. Or all your capital, at least. Work out what’s scalable and ditch the rest.

Should you always ignore new opportunities?

The purpose of this blog series is not to scare you into ignoring every opportunity that presents itself. Many of the world’s most successful companies have come out of pivots, or reading the wider macro environment and shifting direction. But if an opportunity does arise, you need to make sure you’re deliberate about seizing it.

In the last blog, I introduced an example, a software company focussed on healthcare providers, but presented with an attractive opportunity to start selling to large banks. It may well be that this move is the right one – but if it is, the business’s leadership needs to think, hard, about how that pivot will impact the company’s mission, communication and focus. Here’s a three-point framework for handling the decision:

1. Deliberate: If the opportunity is attractive enough, a conscious decision must be made to reevaluate your mission and refocus. This thinking needs to be communicated, carefully, throughout the company, to ensure everyone is still pulling in the right direction.
2. Ringfence: Take the core activities that need to happen to explore the opportunity and clearly ringfence them; nothing should pollute the longstanding mission, or the communication around it. If, for example, you decide to take on a large new customer and offer them bespoke modules away from your core offering, these may be better built by external tech consultants. Then if things don’t work out they can be shut off quickly, without diluting the effort and focus of the core team.
3. Start again: If, after deliberating, you realise the opportunity is too far beyond the core competencies of the main business, it might only be graspable through starting a new company entirely. Founders with larger companies may be able to do this whilst maintaining the existing business, but for those at smaller scale, it probably means starting again.

Each of these emphasises the need to take the shift seriously and adapt deliberately. The tactics tail must not wag the mission dog!

But what if you’ve exhausted your existing market?

In this series, I’ve been offering tips calibrated for businesses at the scaleup phase (£2-£10m), the stage in a company’s growth journey when pressures on PMF start to become real. But as a business grows, it will start to exhaust its existing market. At this point, if growth is going to continue, it’s necessary to adapt a product for new sectors and geographies. So how do you do that without falling into all the traps of losing PMF listed above?

Jeson Lemkin of SaaStr, and a recognised guru of all things SaaS investment, makes the point that early-stage companies should define their market narrowly, and not distract engineering, product and go-to-market (GTM) teams with new product ideas too early. He does, however, advocate constant long-term thinking. His fantastically simple rule states you should take your ideal customer profile (ICP) and if that equates to 100 enterprise customers, 1,000 mid-market customers or 10,000 small and medium size business (SMBs) you’re likely to be at something like a 10% share in your core market. After that, ‘Things will start to slow down’ and it’s time to consider other markets.

As a venture capital backed company, unless the ICP has been defined incorrectly from the outset, or the Total Addressable Market (TAM) was always too small, Lemkin’s rule means you won’t reach this stage until your revenues are well in excess of £10m.

When that point is reached, instead of thinking about your next move as a pivot, think of it as more of a ‘Tilt’. In my blog on TAM, I offer my definition of a tilt: companies can move into other spaces by making sure those moves are deliberate and aligned to the company’s mission and objectives. For example, Amazon’s move from online books to online CDs was a tilt that could be controlled and aligned with their mission. A move into physical stores, by contrast, would have been far harder to control (even now they’re struggling to do it!).

Conclusion

We read a lot about finding product-market fit, but maintaining it is just as important. In this series I hope to have offered some guidance on how to recognise PMF is slipping, and what to do when it goes. When it comes to retaining it, keeping faith in the mission, eyes on the prize and focus on delivering excellence to customers are a good place to start.

PMF is an exciting challenge to find in the first place, and it’s easy to lose. How to protect it is one of the most important lessons in a founder’s journey, and will make the difference between a business that shapes the future and one that never, quite, reaches its potential.

If you have a growing business with great PMF, and think, one day, you might like my support in keeping it – get in touch to tell me about it. You can reach me on [email protected], or learn more about pitching to us here.