[HN Gopher] "If You Are Not Drowning in Demand, You Don't Have P...
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"If You Are Not Drowning in Demand, You Don't Have Product-Market
Fit" (2017)
Author : jkuria
Score : 84 points
Date : 2021-10-09 14:37 UTC (8 hours ago)
(HTM) web link (capitalandgrowth.org)
(TXT) w3m dump (capitalandgrowth.org)
| arbuge wrote:
| Interesting point of view on coworking spaces:
|
| "I am especially against co-working spaces but if you must join
| one, first walk in and just listen. If it is quiet maybe people
| are actually working. But if it is loud, run for dear life!"
| jawns wrote:
| He's being a bit of a stickler here about product-market fit.
|
| I wonder if there are any counterexamples, where we can say that
| there is strong product-market fit without an immediate tsunami
| of demand.
|
| What about the case where purchases tend to be large but
| infrequent or consist of long-term contracts? In that case,
| wouldn't you be able to say that you've identified product-market
| fit at some point earlier than when the actual purchases are
| made?
| bingohbangoh wrote:
| There's also the early days when you're trying to light tinder
| with flint lock. You still need to get the fire going.
| ttymck wrote:
| Does Uber giving out free rides qualify as "tsunami of demand"
| or was it artificial demand?
| AnimalMuppet wrote:
| Well, it shows that there's a lot of demand for free rides.
| But that isn't actually the business that Uber thinks it's
| in...
| dasil003 wrote:
| Keep in mind Michael Seibel is a co-founder of Twitch. Twitch
| is on extreme end of the monetization scale where it's success
| depended entirely on whether they could add free users fast
| enough to justify sufficient investment to bridge the gap until
| they could monetize via ads.
|
| The other end of the spectrum is enterprise software. In
| between you have self-service SaaS, premium consumer, and
| freemium consumer products. Each of these has very different
| requirements for what traction look like, all of it
| significantly less a pure ad-driven monetization like Twitch.
|
| The other dimension is how big you need to be to be considered
| successful. VCs need massive scale, and the bigger you grow the
| harder it is to maintain momentum, so it's gotta look really
| juicy at early stage to justify the growth. YC is not a VC, but
| as the premier incubator that feeds into the SV VC ecosystem
| they definitely have that lens.
| randomdata wrote:
| The definition of product-market fit indicates that it is about
| strong market demand, so it would seem that the tsunami of
| demand is required.
|
| That does not mean a successful business requires product-
| market fit. Weak market demand can still provide a great
| business and strong market demand is not a guarantee of
| business success.
|
| One can always play the game of semantics, of course.
| ghaff wrote:
| It sounds like semantics to me. If I start a company that
| makes a $100K machine that genuinely increases
| efficiency/saves money/etc. in some industry used to buying
| expensive machines, I might reasonably hope to create a
| successful business. I would less reasonably hope to be able
| to sit back and watch the tsunami of demand roll in.
| rileymat2 wrote:
| It would also apply to government RFP processes.
| randomdata wrote:
| And when you have products like that you don't necessarily
| need strong demand. A small handful of dedicated clients
| willing to spend incredible amounts of money due to you
| controlling the supply can create a _very_ successful
| business. In fact, the article talks about such businesses.
| Looking to achieve product-market fit is particular to
| certain businesses (the kind Y Combinator likes to invest
| in) who are looking to expand to a wide audience, not
| necessarily something all businesses should be striving
| for.
| yblu wrote:
| I don't remember where I read this: "Product-market fit is like
| porn, you know it when you see it"
| bserge wrote:
| Is there anything wrong with just "stealing" market share from
| bigger companies with some unique features?
|
| I see it all the time, these services definitely have a product
| market fit. It's just very small.
| adolph wrote:
| Q: What's the prize in a pie-eating contest?
|
| A: Another pie.
| ufmace wrote:
| One of the things that bothers me about the startup ecosystem is
| how much it's oriented around VC. There's nothing wrong with VC,
| but you also have to understand that they have a specific
| business model and are looking for only a specific type of
| startup to invest in. They want the companies that are small
| enough that they can buy a big chunk for relatively cheap, and
| ambitious enough that they might possibly have ultra 1000x
| unicorn growth. They know that most will fail; that's fine, they
| intend to make it all up on the superstar.
|
| It's perfectly fine to start a company that's only going to grow
| 10x or 20x best-case. VCs won't be interested in you, but that's
| fine, you don't necessarily need investment.
| 0x4d464d48 wrote:
| "It's perfectly fine to start a company that's only going to
| grow 10x or 20x best-case. VCs won't be interested in you, but
| that's fine, you don't necessarily need investment."
|
| I'm not saying this is your fault and I get where you're coming
| from. But saying 'only' 10x-20x growth is 'fine' as if that's
| something to be embarrassed about... Yeesh, talk about messed
| up perspective...
|
| By my reckoning, if you're generating value, have a sustainable
| business and are giving people gainful employment that in and
| of itself should be reward enough.
| tl wrote:
| Definitions help:
|
| Start a company: You + enough business not to go under in X
| months = covering living expenses for one person or family =
| $50k / year starting negative of working up to profitable
|
| 10x = $500k / year, by the previous measure = competing with
| the top end of a big tech salary.
|
| So there are people reasonably "unhappy" at 10x because of
| opportunity costs.
| 0x4d464d48 wrote:
| Yep.
|
| Being able to create an honest, profitable business pulling
| in 'only' 500k$/annum. Must suck to be that guy.
|
| It's real easy to play the 'grass is always greener' game.
| Everyone has their own aims in life. Some want money, some
| want to live a life they're proud of and pretty much
| everyone is some combination of the two. But trying to
| frame someone establishing a business with 10x-20x growth
| as a failure, assuming they're able to support themselves
| and believe in the value of their venture, is absurd.
| lazide wrote:
| 500k profit a year (which is still good!) often means 5
| mil/yr revenue. Considering the years of work, super high
| stress, lack of support network common to this, and
| generally bootstrapping from their own funds?
|
| That is decent, but considering all those factors, far
| from a huge win. If they had put similar work (with the
| same skill set) into a normal job, they would likely have
| similar returns with less risk.
|
| Especially since there is large ongoing risk of market
| shifts or the like making it fail with no warning in the
| future, and at least working in someone else's enterprise
| they wouldn't have their capital at risk.
| 0x4d464d48 wrote:
| It's subjective of course but most would call that a very
| far cry from a huge loss which was the original point.
|
| For some of us there's a lot more to life than whether or
| not the wealth we accumulate squares up with the amount
| of risk that we take on compared to others. Being able to
| contribute to something you believe in while being able
| to avoid Taleb's silent graveyard doing it is enough.
| lazide wrote:
| I happen to agree with you.
|
| There are many others who make different bargains of
| course, and for their own legitimate reasons.
| shortweb3 wrote:
| Except that you can sell the business and get a windfall.
| lazide wrote:
| Very true - if you can get that far.
|
| It's very, very high risk even getting here though, and
| not just money.
| boringg wrote:
| I'm sorry I feel like we should clarify your numbers. VC money
| hopes for 10x or 20x as a goal and is quite happy to have that
| in their portfolio. If you are a 1x-5x company that isn't
| enough return for the equity risk.
|
| 1000x is an anomaly and would make one fund round do
| exceptionally well compared to all others but most funds don't
| ever get that kind of investment return.
| jvanderbot wrote:
| The sibling comments go immediately to the evils or virtues of
| VC as though that were justification to stay small or go big,
| but this comment captures the vast majority of small business
| activity that produces thriving economies and stable lives for
| owners and workers alike. I have friends who opened automatic
| garage door repair shops. They are a two-state business and
| live comfortably and are engaged in the lives and wellbeing of
| their employees.
|
| Disruption is glamorous but small is foundational.
| satvikpendem wrote:
| One reason of many that I like Indie Hackers, it's geared
| towards bootstrapping without VC involvement [0].
|
| [0] https://indiehackers.com
| moonchrome wrote:
| >It's perfectly fine to start a company that's only going to
| grow 10x or 20x best-case. VCs won't be interested in you, but
| that's fine, you don't necessarily need investment.
|
| But is that a startup at that point or just a small business ?
| ghaff wrote:
| Well,it's just a business if you self-referentially define
| startup as a business which must have the characteristics
| that would make VCs interested in investing in it.
|
| (In fairness, I'd probably roll my eyes if someone called
| their McDonald's franchise or arts & crafts retail store a
| "startup" but plenty of today's big businesses got to where
| they are without VC funding or really looking much like what
| people think of as a startup today.)
| [deleted]
| duped wrote:
| To me (just some random person on the internet that works
| at startups) the defining characteristics of a startup are
| growth and employee equity as compensation. The second has
| to come from the first, since equity is worthless if there
| isn't some future promise of payout.
| hn_throwaway_99 wrote:
| We've been over this a lot before. I'm not saying pg's
| definition is the end-all and be-all, but for usefulness in
| discussion "high growth potential business" is the most
| reasonable definition:
| http://www.paulgraham.com/growth.html
| ghaff wrote:
| I don't really disagree. Much as the "But pg says..."
| school of argument is like fingernails on a blackboard
| for me, there is clearly a qualitative difference between
| a business that's just intended to support one or two
| people and maybe some other employee--and has no larger
| ambitions--and one that will possibly take off or, more
| likely, close down within five years (or whatever).
|
| Obviously there are still other businesses that aren't
| inherently self-limiting but that aren't really
| constructed for go big or go home either.
| blacktriangle wrote:
| The problem with "startup" is that there are two separate
| issues mixed up in the same word. PG defined it as
| hypergrowth which is certainly one class of startup, but
| there's another one as well. The other aspect of startups
| is that they are newish products doing something new in
| new markets. As such, issues like product-market fit are
| key. The problem is when you start to say things like
| you're not a startup, you're a traditional business is
| that most traditional businesses don't have the product
| market fit issue, and thus most traditional businesses
| are far far less risky. For example, I don't need to
| convince a bank that my coffee shop will achieve product-
| market fit, we know people love coffee and have lots of
| tools for evaluation the financials of a potential coffee
| shop, which is why I can get a bank loan to go start up
| my shop.
|
| Now there's the issue of starting a company that is
| trying something new and lacks product-market fit, thus
| is higher risk and we don't have good tools to evaluate
| those risks, but is also looking to grow conservatively
| thus isn't able to get the interest of those looking to
| give out high-risk funding, ie VCs.
| ghaff wrote:
| Not that I have tried to get a loan for a coffee shop but
| IMO there's very much a question of fit of your
| particular coffeeshop concept and your particular market
| (and location).
|
| The parameters are narrower than in the case of some
| totally novel software or hardware product but just
| because "people buy and drink coffee" is not remotely a
| guarantee that your particular coffeeshop will be
| sufficiently successful to stay in business.
| IgorPartola wrote:
| Police to bank robber: "why do you rob banks?"
|
| Robber: "that's where the money is. What, do you want me to rob
| libraries?"
|
| VC have money. Spending other people's money is a frequent
| pastime. If SoftBank is willing to give you $100m to expand the
| reach of your IRC replacement, why wouldn't you take it?
| Combine this with companies that are built to be sold to one of
| FAANG (ones that try to solve an actual customer's problem but
| mostly just enough to catch the eye of a giant and sell to
| them) and you have SV.
| chiefalchemist wrote:
| Softbank et al isn't _giving_ you anything. It 's an
| exchange; and with that comes responsibilities, and so on.
| arbuge wrote:
| > why wouldn't you take it?
|
| One reason is because of what you're giving up in exchange.
| Obviously equity, for one. Quite possibly also control, if
| the investors also get board seats as part of the deal. If
| they have a different vision for the company's future (not to
| mention your personal future) than you do, that could create
| problems.
| IgorPartola wrote:
| Well of course. But between working as a drone for a
| company and getting VC money to spend (with restriction) on
| how you see fit, the VC option is pretty appealing.
| lazide wrote:
| The restrictions, stress, and pressure that comes with VC
| feels a lot different when you see them on a term sheet
| you are trying to decide to sign or not after already
| busting your butt for a long time making something real,
| vs from behind that desk at a company.
|
| It is a real, and sometimes very undesirable tradeoff. Go
| big or go home, vs wealthy but not obscenely so through
| steady effort?
| codingdave wrote:
| There is a middle ground - start something yourself,
| bootstrap, get profitable, spend the revenue how you see
| fit without restriction, and own it all. And you can
| still exit down the road if you so choose.
| jetpackjoe wrote:
| Sure, but a lot of people would rather own 10% of a billion
| dollar company than 100% of a 10 million dollar one.
| blacktriangle wrote:
| But now you have to look at the expected value as well.
|
| A 10 million dollar company, lets say at a conservative
| 5x earnings multiple means 2mil annual profits. At 80%
| margin that's 2.5mil ARR. For a B2B SaaS product you
| should be able to get at least $1,000 / customer
| annually, which means you need to find 2500 customers to
| own 100% of a 10 million dollar company, which in the age
| of email and Facebook marketing is very much within
| reach.
|
| And these are conservative numbers. A strategic buyer
| might very well pay 10x if you're showing nice growth,
| margins of 90% are not unrealistic in SaaS, and you could
| possibly raise prices depending on the value you are
| providing and who you're selling to.
|
| Now ask how many stars have to align to reach a billion
| dollar valuation, assuming you haven't been screwed over
| by your investors by the time you reach that point.
| bacheson1293 wrote:
| I bootstrapped a SaaS business from my kitchen
| table...it's now worth just shy of $100M.
|
| I thank the heavens everyday that I didn't go the VC
| route. I can pretty much do whatever I want without this
| constant growth at all costs pressure. It also gives us a
| massive advantage against VC backed competitors. We can
| make decisions that reap benefits 2-5 years out.
|
| This has created a situation were every competitor
| follows the same trajectory where it eventually leads to
| an over-complicated, bloated product that users hate.
| They come to us and it's like a breath of fresh air.
| giansegato wrote:
| While many others would prefer the other way around.
|
| There's no inherently better model. Someone might prefer
| flexibility over ambition. Others ambition over
| flexibility.
| flyinglizard wrote:
| I think bootstrapping is overly romanticized. In many
| cases those entrepreneurs aren't good at taking feedback
| or telling their story or have a lousy idea to begin
| with. Not to say that it's not going to work or not
| admirable, but getting VC money is a very early kind of
| "product market fit" in the sense that you need to sell
| people your vision in return for money.
|
| I did both bootstrap and VC paths. You can get it wrong
| in each, but I know that my previous insistence on not
| taking external money was somewhat rooted in arrogance.
| flyinglizard wrote:
| The money added to the company's coffers gets added to its
| valuation, so you are not trading equity really unless you
| are personally selling (a "secondary"). It's just that the
| pie becomes larger.
|
| Now, most VCs don't want to be in the business of
| management. Each partner oversees 5-10 companies, they do
| not intend to be managing each. Most intervention comes
| when the founder is running the company into the ground. I
| can find many more cases of scandalous compliance by VCs
| than active intervention. The first thing VCs look at is
| the quality of its founding team, it's not for wanting to
| kick them out.
| codingdave wrote:
| > the founder is running the company into the ground.
|
| Except that their definition of running a company into
| the ground is more about whether or not the company is
| track to be the their 1000x return or not. They push for
| high-risk, high-return moves, which are not the same
| thing as striving for a sustainable business. I've seen
| founders building companies that are stable and growing,
| and still getting booted by the VCs because they wanted
| to push for higher returns.
| flyinglizard wrote:
| Growing for aggressive returns is the deal you sign up
| for getting VC money.
|
| That said, I haven't seen VCs pushing a founder out for
| this offense first hand, even in companies approaching
| somewhat of a zombie status. Usually VCs will just divest
| their attention.
|
| I have seen companies run into the ground with the VCs
| pushing the throttles forward though.
| ufmace wrote:
| Yes, this. I get the impression that VCs are mostly looking
| for either ultra-growth no matter the risks or a high-value
| buyout by one of the tech majors. If you want steady growth
| and modest profit, your interests will be misaligned and
| there will be trouble. I'd say, don't take investment
| unless you have both a plan for exactly what you want to do
| with the money, and a vision for the company's future
| that's well-aligned with your investor.
| el_nahual wrote:
| There is actually a very good reason why a VC-backed/VC-
| backable business shouldn't take 100M from Softbank at a 1B
| valuation:
|
| Because it removes the possibility of exiting for tens or
| hundreds of millions--the preference stack will eat up all
| the equity.
|
| _Most_ VC backed companies that exit do so for far less than
| a B; if the startup has been responsible about fundraising
| then a 50M, 100M, etc exit can be life-changing for the
| founders. Raising too much makes this impossible and turns
| the whole venture into much more of an all-or-nothing affair.
|
| Of course, the VCs don't care: they make money from the big
| winners, so they could care less about a 50M exit, but the
| founders should not.
| sdenton4 wrote:
| What if I don't feel like building an irc replacement?
| There's real problems that don't have a potential for multi
| billion users. For example, working on problems that working
| scientists face: there's a potentially huge second order
| impact, but a small potential user base and not necessarily a
| lot of cash floating around.
| andi999 wrote:
| Let's not forget that vc money is scarce outside of the US.
| If this is actually better or not is difficult to tell.
| burlesona wrote:
| This is largely good advice, but... I find that in 2021 the
| capital environment has become so much easier compared to even 5
| years ago, some of this advice feels a little out of date. Yes
| investors want a company that can scale 1000x, but these days I'm
| hearing a lot of VC interest in companies whose ceilings are
| probably in the $50-250M range, and who are offering pretty good
| terms. You don't need a unicorn exit for that, you "only" need to
| make a product that works with a degree of traction, and then get
| acquired by a bigger player. As long as you don't raise too much
| that can still make for a nice outcome for all involved.
|
| It's really astounding how much money is chasing so little return
| right now.
| code_biologist wrote:
| There's a huge unstated detail there: to access that non-
| unicorn capital you need to be recurring revenue SaaS. The
| older focus on unicorn outcomes allowed for more creative
| revenue models and higher risks. Companies that don't have
| revenue really figured out but have an ultra compelling product
| can get unicorn-targeted funding.
|
| The VC interest in these smaller companies is predicated on the
| revenue and valuation multiple predictability that comes
| alongside recurring revenue SaaS. Much lower risk for an
| investor. The margin structure of these types of companies is a
| nice bonus. If you're a founder trying to get access to this
| reduced-target capital you need to have 10%+ monthly recurring
| revenue growth, gross margins above 70%, and ideally a clear
| acquirer.
|
| Not affiliated with this group, but this article explains in
| more detail: https://leadedge.com/why-we-like-saas-businesses/
| api wrote:
| Curious tangent question: what constitutes drowning in demand? I
| mean numbers.
|
| The obviously it varies by sector and type of product but say for
| a typical SaaS.
|
| I've seen a lot, just curious about what people here think.
| tomcooks wrote:
| i would say that drowning in demand could be intended as:
|
| signups you get per day > signups you can process per day
| api wrote:
| If you have very inefficient code that makes all your systems
| crawl, a much smaller amount of demand could result in
| "drowning."
| satvikpendem wrote:
| If you have to ask, you aren't drowning in demand. Sounds
| trite, but it's true, you'll know it when you experience it,
| hard to give numbers around such an increase in demand.
| jollybean wrote:
| Any measurable consistent demand that can be seen on a monthly
| basis - assuming net lifetime value >0 is really, really good.
|
| The problem with SaaS growth is that it's a function of
| customer acquisition, marketing etc..
|
| But once you account for that, if customers are sticking around
| (low churn) and the acquisition/revenue works out, then if you
| contemplate what 'compound interest' means - and the necessity
| of a 'large market' - then it's probably a good investment, it
| just depends on the terms.
| malshe wrote:
| I have the same question. Additionally, to me the term
| "drowning in demand" is relative to the current size of the
| business. Drowning in demand for Walmart is different from
| downing in demand for a convenience store.
| agustif wrote:
| Getting more demand that you can handle with your current
| team/systems/resources?
| burlesona wrote:
| I think you know it when you experience it, but on the
| engineering side it feels like an uncomfortable level of demand
| that you know your product can't really handle yet. So for
| example, you're turning entire categories of people away - or
| ignoring their bug reports / feature requests - because you
| literally don't have time to write the 500 lines of code needed
| to support their use case yet (and you're busy doing the same
| thing for another cohort with higher willingness to pay).
|
| The "drowning" description is apt because living through that
| is stressful and uncomfortable, even though it can also be
| exciting and have fun moments. Especially great are the moments
| you discover a 1-hour hack that can unblock something you and
| your team thought was going to take 2-3 weeks to accomplish,
| and what a relief that is to "fast forward" in time.
| aazaa wrote:
| > More startups would succeed if they were bull-headed about
| keeping the customer and the problem the same but changing the
| solution. This is why passion matters. You are unlikely to pivot
| quickly through lots of different problems or customer types if
| you care deeply about the initial problem you set out to solve.
|
| What would be some examples of companies that did and did not do
| this?
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(page generated 2021-10-09 23:02 UTC)