The Laser Ventures 5-step Process
It’s no secret that finding product-market fit (“PMF”) is the most important goal of a startup. In our experience, the traditional process of getting there could be improved dramatically by applying our 5-step process.
Before we get there, let's review how building usually happens. A founder has an idea for a business. They might have conviction because they had personally experienced frustration in an area, and they see a way to solve this issue. With an idea in hand, they talk to customers and industry experts and get positive feedback on their idea. They might conduct simple experiments to prove their thesis. They are exhilarated when their thesis is validated by early participants. They raise a small round, build an MVP and iterate to try to achieve product-market fit.
This is the current process but, from our experience, companies that work this way are either at high risk of building the wrong thing or at high risk of not being able to sell the great product they build. Of course, this model is better than just building a vision but we believe thinking a little differently about supply and demand can help entrepreneurs achieve greater success with less investment and fewer iterations.
Our process starts by defining each word by itself. What is a market? What is a product? And what does it mean for these things to fit together?
1) Define a Market
Too often the market is defined by existing solutions. Take Uber circa 2008. The market for Uber was defined as the market for taxis in cities. This way of thinking describes where the supply and demand curves meet for an existing product, essentially defining a product by the supply of existing products.
If people are struggling with something, then the market exists.
We think demand exists whether or not a product is yet available to serve that market. That is, if people are struggling with something, then the market exists. You can’t create a market. From our experience, 95% of founders think they are defining demand but are still actually defining supply. This misunderstanding can cost founders significant money and time and may result in failure.
The market for Liquid Death water is a perfect example of how companies that improperly define demand can miss out on important markets. Beer and liquor companies consistently defined their market as the adult alcoholic beverage market. They kept coming up with new flavors and new container shapes, essentially adding more and more features and benefits because they defined the market by supply and followed trends. They didn’t fully uncover the demand side of the market.
For millennia there have been people at parties who didn't want to drink alcohol but also wanted to fit in at the party. Many would order a club soda with lime and a straw to make it look like they were drinking. Have you done this?
People in this context should have been included in how beer and liquor companies thought about their market, but they weren’t because demand was defined too much by supply. The struggle was hiding in plain sight.
Uncovering demand is hard, very hard. The struggling moments often hide extremely well. The insights are obvious only in retrospect. This is why founders and product managers often underestimate the difficulty and nuance involved in uncovering demand.
We think it's more efficient to define a market from a demand perspective from the beginning. That is, even if we think we have a “good idea,” as soon as we have it, we put it aside and try to fully uncover demand. We define demand using Jobs to be Done "JTBD". This is a powerful tool we like to use to accomplish this task. It’s not the only tool to do it but it’s the most powerful way that we have found.
A Job to be Done is a demand-defining framework that describes how and why people switch from one product to another. The market is defined by the variables who, when, when, where, and why.
When we start by defining markets this way, it is irrespective of the solution customers are currently using to make progress. Defining demand in this solution-agnostic way sounds easy, but it's not. Read more about JTBD here.
Once we understand the market-defining situations, we try to understand how many people are in this situation and the frequency of occurrence.
If we think about Uber again, we know that people in New York City had to get to work and many took taxis. That situation existed and was partially satisfied, albeit with a poor experience. But there were other situations that were not covered by the pre-uber existing taxi market.
What about this situation: it’s Friday night in New York, and it’s pouring. How often are people opting to stay in rather than head out to dinner? As hard as it is to get a taxi to get to the restaurant, it will be even harder to get back. This is a market that existed before Uber but was hidden in plain sight and largely unsatisfied.
This is a high-energy market. That means people are willing to pay a lot and/or accept a lot of tradeoffs to get it. This is a great place to enter a market rather than go head to head in the taxi market.
In addition, bad weather from freezing cold to pouring rain to oppressively humid conditions happens weekly in New York. A higher frequency of a situation expands the market. As we now know, the market for Uber was significantly larger than the existing taxi market.
Another part of defining markets is understanding how people might naturally move between Jobs to be Done. As part of the definition of markets, we map all JTBD related and peripheral to this situation. If we help a customer make progress in one JTBD, will they naturally find themselves in another that could be part of our market?
For example, let’s take the situation where someone is overweight and they are not able to keep up with their grandkids. If we help them lose weight and regain mobility so that they can play soccer with their grandkids, they are no longer in the situation they hired us for. But new solutions typically create new struggles. In this case, after losing the weight, the grandfather might be concerned that they might regain the weight and they are willing to pay for maintenance help. The market might be bigger than just weight loss since we also need to help this grandfather maintain his habits.
The last frame we put on the market is to understand the hiring opportunities. When are people actually in a position to see and engage with a solution to their struggle? There has to be an opening. Sometimes people might be struggling but openings are extremely hard to find. This might be the case, for example, when there are very strong network effects in an existing market.
Defining markets based on demand is much harder than definitions based on supply but we think this is an essential step toward finding PMF faster and cheaper. It also helps founders not spend years on a business that won’t work.
With demand defined, most entrepreneurs typically go straight to building.
Again, we think this is a dangerous path. Rather than jump to building product, we first define fit.
2) Define Fit
We look at fit as the customer satisfaction requirements that create progress toward an outcome.
For us, mapping fit comes before building rather than after.
We define how the customer measures their satisfaction. Since we define fit before we build, we get to build with an early product market fit indication system. In the Uber example, one indication of satisfaction might be minimizing how cold and wet a customer gets when heading to a restaurant for a date night in the rain.
On the business side, for early-stage startups, implied in the term fit is the speed at which the business needs to grow to capture a large market. Most existing definitions of product market fit focus on this speed of growth metric. We think growth is what happens after we've defined a market from the demand side, understood the satisfaction requirements of fit, and built to those requirements.
3) Defining Product
For us, the product comes last. But we also define the product before we build it. We do this by describing attributes of a product that will deliver on the market-fit satisfaction requirements. We rarely see founders engage in this essential step. This helps us understand the tradeoffs early, saving us the pain and expense of technically painting ourselves into a corner.
For Uber, a product attribute that minimizes how cold and wet the customer gets is the ability to have the car pick up exactly where the customer is located, without the customer having to wait outside or walk half a block to a car. Precise geolocation accuracy is important in this situation.
4) Iterate
We are ready to iterate on our product. We gauge iteration progress based on how we defined fit. That is, we might be able to make the numbers go up and to the right, but are we actually satisfying demand? Along what dimensions are we satisfying demand? In other words, when people order an Uber when it's raining, are people getting rained on? How often? When? Why?
Iteration speed matters. Paul Graham has found that shipping speed is the highest correlated factor to the success of a startup. Startups that take too long to ship will not learn fast enough and no matter how well demand, fit, and product attributes are framed, if businesses don't ship, they won't learn and success becomes less likely.
5) Layer on Strategy
We view strategy as the final element that brings a product and a market together to create a viable business.
But building a product that fits a market doesn’t mean it will make money or be viable. Product market fit is about satisfying the progress the customer wants to make. It confirms that we delivered a product with a set of attributes that create satisfaction. We’ve seen plenty of businesses achieve product-market fit before achieving viability. Google is a good example of this path. Many early Google investors tried to sell their stock in a secondary offering after the company achieved product-market fit but before they could find a business model. The strategy created one of the most brilliant money-printing business models ever created.
A strategy includes all of the economic parts of the equation. What do we charge? How do we charge? How often are they buying it? Etc. Sometimes strategy is brought into the process early and sometimes later, but we view it as a separate component from product-market fit, but still essential.
Summary and Further Reading
In our work with founders, we see companies too often defining a market based on existing supply and trying to build something better. They define the market based on what their product is capable of (supply thinking) vs. what progress people want to achieve (demand thinking). Founders typically start too far on the product side and try to find people who need what they built. Sometimes they do find success this way but we think this is a very expensive and risky way to build.
We think a more effective way to build is:
1) Start by understanding the situation your customer is in, the progress they want to make, the frequency of the situations, and the realistic hiring opportunities
2) Define the customer satisfaction requirements of fit in that market
3) Try to understand the attributes of a product or products that might satisfy those requirements
4) Iterate on your product, constantly butting it up against your customer’s fit satisfaction requirements
5) Layer on strategy at the right time for your product to ensure economic viability
We are not the first to talk about product market fit but we think the way we look at it is different. If you are tempted to go down the rabbit hole, here are some big names on the subject: 2007 Marc Andressen