Understanding the All-important ‘C-word’

“C” stands for “customer,” of course. Customers are the centrepiece of any early-stage business success and their importance is often underestimated by entrepreneurs and investors.

In fact, VCs typically look at three core elements when considering a startup: the team, the product and the potential market. Potential market (a.k.a. potential customer) is certainly very important and VCs worth their salt will have analyzed, segmented, measured and even fantasized about it before investing in a certain company.

But knowing your potential customer does not necessarily guarantee your startup’s success.

CONSIDERING THE “POTENTIAL MARKET” IS NOT ENOUGH

There also exists a fourth element VCs consider when looking at a startup: product/market fit.

Product/market fit means being in a good market with a product that can satisfy that market at that moment in time. You can always tell when the product/market fit is not there, as the sale cycle is very slow, there is no viral effect among customers and many deals on the sale pipeline do not close.

The following principle, attributed to Andy Rachleff, formerly of Benchmark Capital, is worth remembering:

 The number one company-killer is lack of market:

  • 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.

This is a golden rule as far as I am concerned. The number one company-killer is lack of market: actual markets, not potential markets. Of course, you need a great team too, but no matter how great, chances are very slim the team will win if the market is lousy.

So, how should we tackle the product/market fit (i.e. customer) beast? Here are four suggestions:

1. Ask yourself the right question.

The question to ask is not “Can this product be built?” (I can hear hoards of brilliant engineers/developers screaming “Yes, we can!”) but “Should this product be built?”

To answer “Yes” to this question, you must do some serious homework and identify a real problem, build a product to address it, map your customer base, understand the sale cycle and feel comfortable that the cost of customer acquisition is lower than the revenue generated.

Have a look at “The Lean Startup” approach which has many more insights on this point.

2. Engage your customers early.

One of my favourite phrases is a variant of one by Reid Hoffman, co-founder of LinkedIn: “If you are not a bit ashamed of your product when you launch it, you launched too late.”

Too many entrepreneurs focus solely on technology development, dedicating little or no time for interacting with the customer, until they have a “perfect” product they consider ready for sale. These companies often end up hunting for a problem to fix with the cool technology they just developed, and few actually ever find it (see “Ask yourself the right question” above).

Make your product people engage with customers early on, make them live through uncomfortable discussions about features nobody has the budget to pay for now, and then incorporate these customers’ feedback into the product roadmap.

If you are onto something, a customer-centric approach will drive sustainability and generate results; if not, it will give you time to pivot before all the capital you have painstakingly raised is gone.

3. Focus on landing an “anchor customer” or “strategic partner.”

An anchor customer passes that first substantial order which validates your product, while a strategic partnership helps you turbocharge your customer base. The recent partnership of Toronto-based Shoplocket with WordPress is a good example of the latter. While not sure-fire, striking such a deal is also a great way to verify you have product/market fit.

Unfortunately, capturing anchor customers has proven extremely difficult for startups because many do not have the market development resources to identify such customers nor the know-how or network to gain direct access to the decision makers.

In Canada, this difficulty is compounded by the fact that not many corporates are interested (and willing to take the risk) in being the anchor customer to a startup with an unproven product and track record.

Therefore, if you are a startup in the process of choosing an accelerator, investors or board members, make sure that they add value, not only bringing to the table potential co-investors for future rounds, but also, and most importantly, an entry to your key customers and/or corporate partnerships that will validate your product, give you credibility and turbocharge your customer base.

4. Value customers over investors.

A common mistake of startups is to believe that landing meetings with investors is a proxy for landing customers, and that raising money is a good indicator of success, but the reality is that the skill set needed to get in front of an investor is not the same as that for identifying early customers.

In fact, don’t ever let your investors become a distraction from chasing customers. The key to a successful company is not the reliance on outside investors; it is a strong customer base that loves your product and your company.

Your investors will love you for it in return.