May 4, 2016

Problem-market fit is the foundation of a great SaaS company

In SaaS we talk and write a lot about product-market fit and we at Notion are as guilty or responsible as many others. Jos White and I have both written about it many times. We understand from first-hand experience just how critical it is. As Jason Lemkin put it in what the second time SaaS founders are doing once you have achieved product market fit, it’s all playbook.

And what they all know is that, once you have product-market fit, once you hit Initial traction — it’s all playbook. For a given ACV, basically you scale everything the same way. Jason Lemkin, SaaStr.

I’ve written about the process of achieving product-market fit through the systematic eradication of risk and run numerous workshops around the topic. But the more time I’ve spent with our portfolio – new seed investments at the start of their journey and those at the later stage, some of whom have achieved that mythical status and are growing fast, others who are just starting to experience the tail wind that shows they have it nailed – has led me to think that talking about “product” in the first instance entirely misses the point.

A comment from Bryan Richter, one of our Notion Experts and a specialist in establishing ideal customer profiles (more to come on this soon) galvanised this idea for me.

Brian advises our portfolio on aligning sales and marketing on precisely defined target markets, customers and buying personas. As a specialist in account based sales and marketing he understands the importance of always selling to the pain.

Customers move away from pain three times faster than they move to gain. Too often companies are focused on the product they are selling, not the pain they are mitigating. Bryan Richter.

The route to product-market fit starts with the pain

We obsess about this.

“Many founders focus their energies on trying to prove their original hypothesis rather than solving the most important problem in the market they serve”, says Chris Tottman on this – his favourite topic.

Founders burn through huge amounts time (and money) trying to prove what they originally set out to prove, rather than focusing on the problem right in front of them. Chris Tottman

We have seen first-hand the focus on pain has on a company’s success. With Triptease, their single-minded focus on the existential problem facing hotels – how to hold on to more direct bookings – has led to staggering growth and enormous value creation.

If there is one single overarching problem to solve in this trillion-dollar industry, it’s direct bookings for hoteliers. Triptease was set up to solve this. The team has combined creative and strategic thinking with customer development to bring to market a product that helps hoteliers drive direct bookings, and fast. Chris Tottman.

So focus on the pain; understand, explore and solve the most critical challenge facing your target market.

With our early stage investments, we pursue this dialogue relentlessly. What is the problem you solve? How painful is it? What is the impact and benefit of solving it? Is this truly the most significant problem they face / you can solve? We bring in specialists from our Notion Experts, other portfolio companies with domain expertise and potential customers wherever possible to take part in workshops to act as proxies for the market and to facilitate critical thinking in this area.

We know they are starting to get it right when we see the impact their decisions are having in terms of reduced lead times, higher initial order value, increased ACV, revenue expansion. Until then? Dog with a bone.

From pain to value

The quid pro quo of mitigating the pain is the value exchange that is the essence of any successful business. Critically measure the impact your solution has. The bigger the differential between the cost of your solution and the success of your customer the better.

It’s extremely rare as an investor to look at a service and immediately go ‘wow’, but with Triptease this is the case. They’re not afraid to keep reinventing their offering and as a result they’re growing extremely fast and efficiently. To say they’re committed to the success of hoteliers is a massive understatement. Triptease is just at the start of a very big ride in transforming the ability hotels have in delivering direct bookings at scale, which is both refreshing and revolutionary for the industry as a whole. Chris Tottman.

Allow the problem to pull product-market fit

Paraphrasing Marc Andreesen’s product market fit blog of 2007 he poses the question, “What is the most important factor in success for a start-up?”

Many will say “team, team, team”, others “it’s all about the product”. Andreesen espouses market.

In a great market — a market with lots of real potential customers — the market pulls product out of the startup. Marc Andreesen.

Our experience is that it is the unique combination of a big problem in a massive market that it is the critical factor.

  • Problem inconsequential, market massive? No thanks.
  • Problem acute, market small?  Lifestyle business.
  • Acute problem, massive market? Just the ticket.

With the clear focus on the problem, the emphasis of the company is to use the demand to rapidly iterate the product to achieve market fit. From that point – returning to Lemkin – it’s all about the playbook.

Solve an industry-defining problem

As an early stage venture investor, our thesis is simple. Every business we invest in must have the potential to be a fund returner – for arguments sake $100m – so assuming we have a 10% share at exit that requires a billion dollar valued business, growing fast with annualised recurring revenues north of $100m within 6-7 years. We know the odds are stacked against this, so we look long and hard at the companies we are investing in. We ask lots of questions.

  • Does the founder have what it takes?
  • Does he or she have a great founding team?
  • Do they have domain knowledge and some form of proprietary knowledge or power?
  • Do they believe something no-one else does?

You know the drill. But, as before, what we obsess about is the problem; the pain their customer faces in the absence of their solution.

So one question overrides all others. Does the founder have the ability to isolate, focus on and execute against their industry’s defining pain and create a substantial business? That’s the game, the challenge, the excitement all wrapped up as one.

So ask yourself this question. Am I trying to prove an original hypothesis or am I looking to understand and solve my very own, trillion-dollar, industry-defining problem?

Posted by Stephen Millard.

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  • Louise

    Stellar work there evyeeonr. I’ll keep on reading.