Welcome to the Product / Market Fit stage! Now that you have a Prototype, a product or service AND at least one paying customer, it is time to find more customers. Doing so requires disciplined creativity in the face of existential uncertainty, also known as fun.
First off, read Marc Andreessen’s seminal description of product / market fit. This description, first published in 2007, four days before the first iPhone release, has held up incredibly well. The central concept is that a market, defined as many customers that will pay for your product, matters much more than your team, a well-run company or even the quality of your product. Your options are to find a market or attempt to create one.
Andreessen implores you to find the existing-but-early-enough-to-enter market first, then put the team and product together. Blue Ocean Strategy, which I run the risk of referencing before finishing, explains how to find and create new markets. Neither is easy, but the underlying point is that you need a market for your product before you invest too much in the wrong people, product, or structure. Build a minimum viable company while you build a minimum viable product, because you are going to have to rebuild both later on.
Rather than explore markets, your instinct may be to earnestly focus on that first customer so that you can prove yourself in the marketplace. Wrong. You have to prove yourself to that customer AND aggressively seek out additional customers to determine if you have a fluke or a market. Beyond market size, multiple customers help you separate universal first principles from situational idiosyncrasies – both of which are differently important in creating useful things.
Small markets are fine if profitable, but world-changing companies require a certain eventual size to pay for all the expensive people that you need to solve said problems.
Speaking of your people, during this stage you’ll want to carefully add generalists – people that can do different things at once. While people doing multiple jobs is less expensive, seeing the connections that lead to new opportunities creates the most value. Shrink the distance between your doers and your customers, while keeping your culture open enough for anyone to speak up, and you will be amazed at all the easy solutions to hard problems that fall in your lap. Take advantage of the fact that you are seeing patients using the software that you are actively building so that you realize that what you designed on a white board does not hold up in reality, quickly eliminating friction on the fly in the way only founders can.
As you seek out product / market fit, the need to make decisions on very limited data will tempt you to faulty generalizations or analysis paralysis based on your temperament. Disciplined iteration from management systems like Scrum, combined with a focus on first principles will allow you to evolve to meet market opportunities with product refinements while avoiding distractions that will kill your company.
Your growth is measured in revenue, ideally from multiple customers along the same line of business. Your costs will grow, but allow them to do so permissively, with the money spent thoughtfully on meeting customers and iterating your product. You want to continue to be cheap as per the Concept stage, except now you have to pay someone to actually make the donuts. Avoid playing company – buying symbols of success like offices, swag, snacks, especially while you have not yet achieved fit. If you are unsure, then you have not achieved fit, but more explicitly put from Andreessen:
You can always feel when product/market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of “blah”, the sales cycle takes too long, and lots of deals never close.
The worst version is the fatal pinch: not enough time (or will) to fix your product before you run out of money, which results from an internal violation of the Brutal Reality clause of the Stockdale Paradox. This is what you want to avoid. Lack of company humility is painfully fatal. However, if you continue building your customer base to validate your market, at some point you will (hopefully) achieve fit, which is best recognized as your revenue suddenly doubling (and doubling and doubling). Andreessen describes it thusly:
[Y]ou can always feel product/market fit when it’s happening. The customers are buying the product just as fast as you can make it—or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can.
This momentum is exhilarating, but not without tremendous pressure. All of your worries from the Concept stage become real, plus a bunch of new realities you did not contemplate. You have real deadlines from customers, management issues and yet your business is not quite big enough that just fixing what you have will get you anywhere.
But fear not! Keep your head up, looking for the market and growing your company AFTER you’ve found it. The revenue will start to double and suddenly you have no idea how you are going to keep up. Congratulations! You are in the Growth & Scale stage.