https://medium.com/parsa-vc/7-lessons-from-andy-rachleff-on-product-market-fit-9fc5eceb4432
I am fortunate to be enrolled in Andy Rachleff’s course, Aligning Start-ups with their Market during my final quarter at Stanford GSB. The intention of the course is to examine many of the issues associated with optimizing product-market fit. Without a tight product-market fit, a startup’s service will not be able to break through the market’s gravitational forces that strongly favor existing solutions. With tight product-market fit, however, it is more likely that a company will achieve repeatable and growing sales success.
Andy is co-founder and CEO of Wealthfront, an automated investment service firm based in Redwood City. He had previously been the executive chairman of the company after stepping down as CEO, but then returned to the CEO role in 2016. Rachleff also co-founded Benchmark Capital in 1995, a top-tier venture capital firm with early investments in Snapchat, Uber, OpenTable, and Twitter. Rachleff himself led investments in Blue Coat Systems and Juniper Networks.
Below are a few key lessons I have learned from Andy and his co-teacher William Barnett during the last quarter.
Execution Does Not Matter: If your startup addresses a market that really wants your product, you can screw almost everything up and still likely be successful. On the flip side, if you are really good at execution, but the “dogs aren’t eating the dog food”, you have no chance at winning.
“When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins. When a great team meets a great market, something special happens.”
Product 1st, Market 2nd: Most successful new markets begin with a market-sensitive technologist recognizing an inflection point that enables a new kind of product. The next question becomes: “who wants to buy my product?” Start with the product and search for the market as opposed to vice versa. Evaluating a market trying to find holes and developing solutions for those problems will lead to mundane outcomes.
Prove Out a Value Hypothesis: In order to increase the likelihood of success, a startup should start with an MVP to test a value hypothesis. A value hypothesis includes the features you need to build (what), the audience that is likely to care (who), and the business model that will compel your audience to buy your product (how). A founder’s first hypothesis will likely prove incorrect. Iteration through experiments is necessary before product-market fit is reached.
Companies often mistakenly try to test their growth hypothesis (discovering how to cost-effectively acquire customers) before proving out the value hypothesis. Don’t put the cart before the horse. Most companies that nail the value hypothesis are highly likely to figure out their growth hypothesis.
Look for Desperation: Product-market fit really means finding a group of customers who are desperate for your product. If they aren’t desperate, it means there is likely a good alternative. If customers aren’t desperate for your product, look for a new group that is desperate instead of iterating your product to find what those people want.
Two Types of Disruption: Disruption occurs when a product addresses a market that previously could not be served (new-market disruption), or it offers a simpler, cheaper, or more convenient alternative to an existing product (low-end disruption).
- New-market disruptions target non-consumers, or those who have not had access to features and functions being offered because of lack of money or skill. An example of a new-market disruption is low-cost airline Ryanair. The company created an entire new market of budget travelers, not by stealing customers from KLM, but by offering routes nobody else did at prices that competed with trains and buses.
- Low-end disruptions target customers who are overserved by an incumbent. These customers would prefer purchasing a product with less, but good enough performance if they could pay a lower price. An example of a low-end disruption was Uber’s launch of UberX, which offered a cheaper and more convenient solution to traditional taxis.
Be a Contrarian: Startup ideas can be placed on a 2x2 matrix. On one end, you can be right or wrong. On the other end, you can be consensus or non-consensus. Of course, you won’t make any money if you are wrong. But you also won’t make money if you are consensus as these opportunities encounter many obstacles: new competitors, pricing pressure, longer sales cycles, etc. In these circumstances, all of the profits are arbitraged away.
As an entrepreneur, being non-consensus and right is the only way to build a legendary company. Non-consensus entrepreneurs resist the temptation to herd into markets made popular by high-profile successes. The benefit of this approach is that they have enough time to test, iterate, and learn before competitors enter.
First Niche, then Mass: Every technology has an adoption lifecycle. The chasm lies between early adopters (those who are willing to take a chance on a new product if it solves a burning pain) and the early majority (the largest market segment). To cross the chasm, startups must first dominate a niche or create a beachhead and then expand from a position of strength. Too often, startups try to skip the early adopter stage and move to early majority. The issue is that the early majority requires references, and they won’t buy the product no matter how valuable it is without them.
At Wealthfront, Andy’s team first developed a product that appealed to a small, passionate audience: young people who work in technology. These users cared more about the quality of the user experience than assets under management. Initial focus was on engineers at Facebook, then engineers at LinkedIn, then many other successful technology companies through word of mouth. Wealthfront established strength within one segment, then built a whole product and used references to expand to adjacent markets.
“Founders often stumble into product-market fit. Serendipidy plays a role, but the process to get to serendipity is incredibly consistent. We teach you the process in this course.”