The Truth About Product Market Fit

One of the biggest mistakes that's happening today in the entre world is that because it's so much easier to build products than it ever has been before. Whether it's a tangible product and a 3D printer can do a prototype or with vibe coding for a software product, etc. It's actually happening where we just jump straight to building the product assuming that our hypotheses are right and we get into an MVP and start building and it could be completely the wrong product, the wrong thing for the target market and it really sets us on a course where we're wasting more [music] important than money time. >> [music] >> It next rock. >> Welcome back to the Startup Ignition podcast. I am your host, Tyler Richards, with my co-host here, >> John Richards. >> He needs no introduction. Um, welcome back to this episode. We >> otherwise known as dad to you. >> Yeah, dad to me, John Richards, or Papa Rich to everybody else. I don't know who, but my name is Tyler Richards. Welcome. We are very excited about the episode today because it's just me and my dad and we're just here to talk. >> We haven't done this for a while. >> I know. We've had guest after guest after guest and we had a little bit of a lull in our schedule and so now we're just like, "Hey, let's do a couple episodes where just me." >> Actually, some of our other episodes have been really popular. >> Yeah. No, some of our most watched episodes are just us talking, which is interesting because I I don't think I would like to listen to us talking, but hey, that's what the audience wants. Okay, so we're gonna have a interesting conversation today. We uh have a really fun episode lined up. We're coming off of a very high awesome experience of our beloved Seattle Seahawks winning. >> Yes. >> And we This is the weekend after the Super Bowl and our team made it all the way there. miraculously and won and someone got to go to the game. >> Yes, I made it to the Super Bowl. Life dream. So, yep. >> My uh my uncle, my dad's brother, is a 50-year season ticket holder and he got in the lottery for Super Bowl tickets and got them and offered them to you. So, you got lucky. >> Yes, I did. That's It was an incredible experience all the way around. >> Yeah. So, what a fun weekend. But we're still coming off of that. >> Go Hawks. Go Hawks. >> Seahawks. So before we start the episode, you guys know we always do an icebreaker and we're going to play a game, just me and my dad, that is called invest, pass, or instantly dead. >> Okay. >> So, and these are to kind of call out some of the good things we like about investments and >> invest, pass, or dead. >> Yeah. And I'm going to give you three scenarios. Every single line is going to have three scenarios and you have to take I'm investing in this one. I'm passing in this one. And I'm instantly killing this one. Okay. >> Okay. And this will show you guys some of the red flags that we come across and some of the things that we like, some of the features that we like about some of the deals that we we've been investing in. So, as venture capitalists, you know, you guys know we run Startup Ignition Ventures and we're an earlystage fund writing sub $1 million checks as the very first check in the company. So, we see some interesting and crazy setups. But here we go. So, here are the three scenarios. Are you ready? >> Yep. You're going to tell me which ones you want to invest, pass, or instantly dead. A personal assistant who manages a social media account, a fractional CFO, even though there's no revenue, running a financial idea, or a contract developer that you met through a mutual friend. They all have ideas pertaining to the industry that they're in. What are you investing in? What are you passing on? And what are you instantly killing? >> Okay, I got to get those three again. Contract developer. I remember that at the end. That's a you're saying a sale software developer. Yeah. >> Okay. What was the second one? >> So, a contract developer, a fractional CFO or a personal assistant who manages a successful social media account. >> Okay. Um, probably the developer. >> Yeah. >> Okay. That'd be more invested to see what he came up with. I'm going to say, okay, is there something there? The admin probably be the delicate slight pass and the instantly dead might be the CFO one. Okay, here's the next one. Okay, so solo founder, an MBA founder, or a founder with no technical background. Which one are you investing in, passing in, and instantly deading? Okay, the third one was a founder with >> a solo founder, an MBA founder or a founder with no technical background. >> A founder with no technical background probably because just depends what it is. >> Yeah, it depends because and also um in my experience, apologies to all MBAs, MBAs have often had the risk gene beaten out of them with their training. And I'm worried about NBA founders. Um they often don't take deals all the way to the finish line, >> right? >> And then solo founders and automatic no if they just want to be the only founder. Um I we I still hold on to the belief that a scalable venture, one that is meant to scale, cannot be done by a solo founder alone. So >> I love it. Okay, here's the next one. Here's the go to market plan of three different scenarios. You ready? Mhm. >> plan is we're going to go viral on Tik Tok. Number one. Number two, we're going to just cold DM 500 people a day on LinkedIn. Number three, we only have one customer, but they absolutely love it. What What market situation are you investing in, passing in, or instantly killing? >> One customer that actually loves it is an invest. >> That's the invest. Wow. Interesting. >> Yeah. the um the other one was >> cold calling and cold DMing. >> Cold DMing is probably the delicate pass or the slight pass >> and then the viral on Tik Tok. Yeah, I just again no offense to anybody but just B to C is hard. Um it's it's a little bit lightning strike. We don't know how to really get B TOC off it. It's like unpredictable. The one where somebody's working LinkedIn DMing them probably a B2B product that has more chance of us being able to mentor them to success. Okay, here's an MVP situation. What MVP are you going to invest pass or dead? Okay, >> product is fully no code and built. Number two, it's a prototype just like a Figma design or demo and no engineering has been done yet. and three they built the whole thing in normal real code but haven't talked to a single customer. >> Um the first one is going to be is going to be the invest built-in no code a finished ready product and it sounds like you might have some pilots or early testers or something >> if he's gotten that far hopefully. >> Yeah. And so you've got that type of thing because in today's vibe coding world, a bubble app for instance could be easily put into real permanent code fast. Yeah. So I mean matter of fact, it may be to the point where here's a bubble app just do it for me and make it into uh React or whatever code you're working in. Right. So I mean that's the kind of thing that could happen. The second one on a slight pass would be the what were the other choices? Fig the so no code Figma design only or fully built but have had no conversations with customers >> fully built no conversations might be the dead one because really >> yeah it's fully built no conversations I just don't how much money they have left how much they spend on building it did they just build it for free and it's a developer there's a lot of questions around that right >> and then so that would probably be the more dead one and the slight pass would be the other one so >> okay that's me that's me >> okay final round are you ready >> Mhm. This is all about the founder. Are you investing or passing or instantly detting? A founder that wears sunglasses on a Zoom pitch. Okay. >> A founder who uses the phrase disruptive synergy multiple times. Or a founder who says I don't have any competitors. Which one are you investing passing and completely deading? These might be from real life situations. >> I might invest in the disruptive synergy. That's okay if he overuses buzz words buzzwords. The glasses on a Zoom call unless he had opthomolic uh procedure or [laughter] something. That's probably a pass. And what was the third one? That was the one. >> I don't really have any competitors. >> I'd rather have competitors is not a thing to say to venture capital. >> Yeah, that's instant dead to me. >> Yeah, >> if anybody comes up and says I don't have any competitors, I I know I don't have any competitors. I know you're wrong instantly. Yeah, the worst thing that can happen by the way when that goes on and this brings up just the whole concept of founder market fit a little bit but founder market fit is very important to us but just the concept of saying I don't have any competitors and then a venture capitalist or an angel investor or whoever you're talking to literally while you're pitching finds competitors that is when the temperature in the room will drop 20 degrees instantly and not be a fun experience. >> Yeah. Interesting. >> And it's happened before. I've done it to people as an investor. >> Yeah. >> Yeah. Yeah. You can't you you got you gotta do your due diligence yourself. >> One time I did it at a pitch competition with about a thousand people in tenants and I was one of the judges and I asked the question >> and they said they had no competitors and I then said, "What about this company?" They go, "Well, we've never heard of them." Well, it's doing exactly what you say you're going to do. Yeah. >> And well, we're going to have to look into that. And they just killed them on the thing. So, I don't do that to anybody anymore. That was kind of a little bit harsh to do that. I would say one of the probably 10 slides you need in a pitch deck is is addressing and you know your competitive analysis against the competitors in the market either a chart you know those ones with the check marks what you do or what you know how you're different from them or what they don't like but we like the pedal chart even better >> introduced by Steve Blank several years ago it's called a pedal chart and it's just a great way to project your or explain your competitive landscape. Yeah. >> Yeah. So, if you're doing a competitive analysis, do the pedal chart. We love those. So, when we see those, we're happy. Okay. Thanks for playing my little game. Uh, so that was invest pass or instantly kill or instantly unal alive, whatever you want to say there. >> All right. >> Um, so today's episode we took to our audience and we took to our community and we're going back because this was kind of a hit when we did it like almost a year ago now. uh where we take audience questions or common questions that we're running across in our mentoring or advising or within our portfolio companies and common questions that we're running up against and common questions that we're seeing within our own community online. I've put together today questions that we're going to go over and quickly answer and hopefully give you some meat and potatoes type content to understand, you know, the answers to these questions. So, um I'm going to just kick it off. Okay, >> with question number one. So I have to again >> these are kind of ranked in order of the most common. >> Yeah, I've kind of prioritized them in what we're hearing most frequently. So frequent and then obviously kind of the shark bite of a question rather than just like the the fluffy mosquito bite. So number one is >> when should I raise venture capital and how do I know if I'm venturebackable and ready? So that's a really common question. >> Yeah. So we'll take a first I'll take a first stab. So >> if I had my brothers, I would say that you should raise capital when you have found product market fit and taken in a few customers and over some sustained period of time get good net promoter scores. That would be the ideal time because you will have the most leverage to raise your first funds if you're in that situation because you will be able to say, "I found product market fit. I built an MVP. I have a handful of customers. I've had them for two or three months and they're liking it and they're giving us good scores." Then investors going to be very interested in what you're doing. If you need to compromise on that and you can't afford to get there in any way with time or money or capital to get to that stage, then you might need to try to raise earlier. But we go back then, what's the first step there? Product market fit. Product market fit takes very little money. It takes mostly time and effort to find product market fit and a viable business model. Going to raise money with a very poorly validated business model where you think or assume you're validated when you truly aren't is really an expensive >> I also think that question is kind of loaded. >> Yeah. >> Because it depends on what stage you're at, you know, what traction you're experiencing. If this is literally a napkin idea or if you're already producing revenues, like it kind of depends because if you're like, "Hey, how do I know when I'm venture ready and backable?" It's like, okay, are you producing revenue? Okay, have you had month overmonth growth or are you a napkin idea? >> Following. Yeah, we're kind >> like if you're a napkin idea, then okay. Yeah, you need product market fit. So that it's kind of a loaded question. It needs we kind of need more details to that question, but yeah. >> Yeah. Well, you said a important word there though, traction. So what investors are looking no matter what stage you're at is do you have the requisite traction for the stage that you're at? For instance, NFX, the seed fund out of Silicon Valley, has a a graphic that infographic that's really good called the ladder of proof. And each step represents a step along the way to in the um uh development of a company or a startup. And it depending where you're at on that ladder, do you have the traction that you need for that spot you're in? For instance, like if you're just going from idea and you want to raise a little money from Uncle Harry, okay, he's going to want to see what traction you have. Have you attracted co-founders? Have you uh done enough research to hypothesize a business model and started talking to your target customers? >> I think I think it could be honestly broken down into like three things. It's it's literally like you're venture backable if you are solving a significant problem in a significant market like your total addressable market and if you can show a clear path to solving that problem and getting to that market. If you have a big problem in a big market and you have a clear path that's demonstrable to an investor, you are very investable >> that's scientifically validatable. There's been validation scientifically. You can't just say you have that without proving it. >> Yeah. Well, I'm saying in those three points, there has to be high confidence of proof. >> Yeah. You can't just throw darts at a wall. >> So, and that it does boil down to the simple concept traction. Do you have true traction for the stage you're at? Then raise money, >> right? Okay. Number two. Here we go. How do I know if my business idea is good versus just something I personally like or want? Well, that comes back down to where is the validation come from? A target customer. So, you have an idea, which means you're solving a problem or providing a service or a need to a target audience. Does that target audience agree that it's needed? That's how you know. >> And the missing point to that sentence or paragraph is, are they willing to pay for it? Yes, you need to make money. >> It's got to be monetizable pain. You might have found pain, but is it monetizable? At Startup Ignition and our boot camp and when we train on this, we have a very rigorous fivestage process to go from a wisp of an idea in your brain to truly knowing it's a great idea to pursue. kind of the uh crowning moment of those five-step process is a simple test that we call the wow factor test that will tell you exactly where you're at on that spectrum. So >> yes, every entrepreneur should know about the wow factor test which is basically a pre-lean startup test. Lean startup takes a lot of time and energy. You shouldn't pursue an idea that doesn't pass the wow factor test. >> Go Google it. Um, you'll probably see a lot of our content because we have a lot of content out there and the creator's content who the originator who we're very good friends with, um, Gary Rhodess, but go Google it. We don't have time to talk about it here, but the wow factor, >> the wow factor test tell is the first time you have your target market tell you whether your idea is good or not. >> Okay. >> Yeah. >> Number three. Here we go. We're going quick, guys. How many customer interviews are enough in validation? And what should I actually be asking in those during validation? It's kind of a bad uh grammatic grammatical question. How many customer interviews are enough and what should I be asking in those interviews? That's what I'm going to summarize it. >> Okay. Well, how many are enough is an important question. So that's custom to each idea and markets. If if you're a one actor, two actor, three actor, four actor business model, each actor needs to be validated and each actor could have a different number of subjects that's needed to be scientifically validated. But almost always the minimum number is 20. Why? Because the law statistics states in order to project to a larger population if you don't have at least 20 subjects, you can't project out to a larger population. like you can't just interview five adult US consumers and project out to the 200 million adults in the United States. >> But I I even think that 20 number is probably not enough for anything consumer. >> No, that that for that of course I was just given an example. >> But I like if you go talk if you're if you're building an idea around a you know nail salon and you talk to 20 nail salons that's probably pretty good if you're doing software to run a nail salon. >> Yeah. Or something. Yeah. 20 for a B2B like that. But you're not. >> But if you have a nail product that women, all women in the United States are going to buy, 20 is not enough. >> Is your whole target market, a billion people, 200 million people, 50 million people, 10 million, 1 million, 25,000. Those determine how many you need to go interview in order to with a plus or minus of accuracy know whether the results you're getting in your validation work are justified and bonafideed by statistics. And so that's the question on the number. I think the second piece of it >> well even taking numbers out of it. How do you know when you've talked to enough people? It's it's it's literally about when you're hearing the consistently same responses to the questions that you're >> What does Steve Blank, the father of lean startup, say in his uh seinal book, The Startup Owners Manual? He says when you go back to the same target audience multiple times and are not learning anything new, >> right? >> Then you if you're not learning anything new and you still feel you're on track and validated, then you can say I'm validated. Yeah, I personally like to say when I can go to my target audience and get 80% or greater repeat results, then I feel good too, >> right? >> Yeah. >> Okay, let's just let's go to the next question. I think we've beat that one to a pulp here. >> What does product market fit really mean? >> What does product market fit really mean? Well, product market fit is simply the concept that the product that you are have devised whether it's a tangible product, a service, a software, whatever the product is that you have devised to fill a need or to solve a problem in the target customer which is the market that there's a match that the market the customer has told you yes this is meeting my need yes this is solving my problem and I will pay money for that that is product market fit when You look when you look at the business model canvas for those who are familiar with the business model canvas or the lean canvas either one in the very middle there is the value proposition. The value proposition is basically what you're building and and what the feature set and what the product is or whatever it is that you're offering. And then on the very right side of the business model canvas is the customer segment section. Product market fit is when your value prop or the product that you're building has found or has matched to a customer segment. So when the customer segment is right and the product is right and there's a fit there or a match there, that is literally the definition of product. >> Let me give you the scientific formula. So in other words, product market fit is synonymous with the term validated business model. What is a business model? Saul Kaplan coined the term, "A business model is how you create, capture, and deliver value." >> I don't know. I'd argue that a little bit because there's nine sections to a business model canvas. Yeah. >> And product market fit, it means that your the product you you've devised and the customer segment that's going to be using it has approved it or has validated it, but there's still a lot of channels and revenues and expenses that need to be worked through. You can have product market fit without a validated business. Nine segments can be broken into those three words create, capture and deliver. So we need to remember that the business model canvas has nine elements as you're saying Tyler but they can be categorized those nine elements into one of three major sections which coincide with Saul Kaplan's statement about creating capture and deliver value right so you capture value obviously when you charge people money for it and you can have a profit so you capture value that's one segment of that that's at the bottom of the business model canvas on the left side where are the things we're doing and what we need in order to create the value by creating the product or service. And then what we do is deliver value by having taking it to the customers and having channels and a relationship and giving them true value proposition to the customers. So it all coincides. So again product market fit is synonymous with validated business model and we track that through the co business model canvas and it all ties together. Right. I think that's a strong concept and it's really important for entrepreneurs to really pursue that. >> Yeah. I'm I'm my only counter-argument to that is that I think there's more in delivering a business model and executing a business model than just having product market fit. Right. Okay. That's that's all I'm saying. But I I do agree with you. The create, capture, and deliver the value across the whole model is what one way >> the real product market fit would be. >> I think what you're trying to say is this. That's all in the stage that we could count on 1% idea 99% execution. To say that we have validated product market fit and validated business model is actually just the simple early stage of a business even as complex as it is because after you've done that now the real hard part is you have to execute that business model. Yeah. >> That's the hard part. >> Yeah. Yeah. >> Yeah. That's what you're saying. >> Yeah. Next question. And this one is a very common question that we get a lot from our community and from people that we mentor and teach and help and especially within the boot camp. Number five, it says, "When should I build an MVP? How do I know?" Because I do think people are going through this validation process and they don't actually understand okay when am I done validating and when should I actually be building? So what would be your answer to that? When should an entrepreneur >> first of all I think lean startup has been around now for about 18 years or so. Yeah, >> still there's a huge misunderstanding on lean startup. A lot of people think that lean startup is just a minimum viable product or MVP. I'm going to build a product with minimum feature set and see how it goes. That's lean startup. But that is not lean startup. That is a mis uh interpretation or misunderstanding of it. MVP is actually the final last crowning step of the lean startup process. There's a lot of work we do before we even start building the MVP. So we have to do all of the precursor processes and steps of lean startup to get to the final crowning step of building an MVP. So you have to what we do is we say you have to earn the right to build your MVP by all the validation of your hypothesis. I I think another simple question and we've gone over this a lot on this podcast and through a bunch of lectures and videos and courses that we teach. I feel like you should be building an MVP when the customer is basically pulling it from you when they're saying I need this now. I I I want this. When is this available? When will this be ready? When can I buy this? When like >> from your validation interviews, >> right? Yeah. If you're like going to them and you're saying, "Okay, here's iteration number 52 and here's what I think it's going to do and here's what I'm planning it to help with and how it's going to solve this problem for you." And they're just like, "Yes, I want that." Okay, it's it's probably time to go build and actually get them the product or the service or whatever your idea is into their hands and start getting something that you can actually physically deliver to them. So, this is just such an important point and I know we've only done five of the questions we set out to do today and maybe we have to end it soon. Yeah. But >> maybe we have time for one more. >> Yeah, one more maybe. But I just want to double punch this very important point. One of the biggest mistakes that's happening today in the entire world is that because it's so much easier to build products than it ever has been before. or whether it's a tangible product and a 3D printer can do a prototype or with vibe coding for a software product etc. It's actually happening where we just jump straight to building the product assuming that our hypotheses are right and we get into an MVP and start building and it could be completely the wrong product, the wrong thing for the target market and it really sets us on a course where we're wasting more important than money time because we build a quick product, we think it's right. We put a lot of time into that even if we're vibe coding or whatever we're doing and we stick with it for weeks or months trying to force the customers to like it when in reality we should find out what the customers want us to build and then build what they want us they want us to build. That's really really important and this is the number one cause of failure for entrepreneurs to our viewers and listeners. This is one of the most important points on today's episode is that do not fall back into the classic trap of thinking that you are validated when you're not and go start your MVP because you will fall in love with that MVP and what you've built and you will not listen to the market when they tell you you built the wrong thing. That's the most expensive mistake you can make as an entrepreneur. >> Right. >> Yeah. >> Okay. I want to I want to close with one more question. So, I'm going to skip ahead a few of these. I'm reading through them and and this is one that you've kind of came out with a new stance on recently. Yeah. >> And that we've actually implemented already into our process for vetting out and finding opportunities to invest in. So here's a great one. >> Number six. This is one I'm skipping to and we this will be the last one. How big does my market the TAM the total addressable market need to be to attract investment? Okay. So, I want I want to let you go, but I want to kind of set the table for you cuz I know what you're going to say because we've you've shared a lot of this thinking and done a lot of research over this with the cost of startups coming down and the the actual resources it takes to get to a a finish line with a startup these days that TAM it used to be for probably 15 20 years in the age of technology from 2000s on there was just this unspoken rule and general rule. spoken rule actually. >> Well, just like an a known rule within the whole startup community of your TAM has to be a billion dollars. Otherwise, it's too small of a market. >> And again, for those that don't know, a TAM means, the total address mark. If you had every customer you could possibly get, would that be 1 billion of annual revenue or not? >> Oddly enough, today in our class, uh I teach a class at a university and I just came from it today. We talked about Tam Sam Psalm. >> Yeah. And I said, "Who's ever heard of Tam Sam Psal?" >> Yeah. >> And they all like I think two people raised their hand in the whole class. >> And so I'm like, "Wow, 99% of you have not heard about Tam Sams. I'm about to blow your mind." And this is this is something that you're never going to forget cuz it's so widely talked about and so important to pitching to investment to being investable. So anyways, back to the question. >> Yeah. So >> how big does my market the TAM the total addressable market have to be to attract investment? >> Okay, so this is really an interesting question. So if the investor is a venture fund that has raised $600 million and they have to deploy $600 million, they're going to want to put 30 to $60 million into each company over its lifetime. That means you have to have a massive TAM because you have to achieve a massive revenue number for them to put that money in and get a great return. So that's a true statement that a billion dollar TAM to a V VC like that is still really important. But in today's world where it's less expensive to create a company than ever before and where most companies will not exit at billion or multi-billion dollar exits, most of them will be bought for 50 million, 100 million and lower numbers. How does a billion dollar TAM figure into that? Well, this is a recent realization of my of my in my career. I studied at adn nauseium recently and I have discovered that for what you and I do Tyler, we're a preede fund. It's way more important for us to ask this question on market. Not do you have a $1 billion TAM but can you two questions can you get to 10 to $30 million of ARR annual recurring revenue. If you can get to 10 to 30 million of annual revenue, even if the TAM is far below a billion, you can get a nice exit where you're going to make a lot of money and we're going to make a lot of money, right? Okay. Number two question on that. What also is the exit opportunities if you stall out at around 5 million revenue. Okay. If you stall out at 5 million ARR, what are the options? Are you a viable company still? That's an important question for us. That's our backup plan B. So for me now, when I'm looking at investments, it's more. >> It probably still is. Can you do you have a billion dollar TAM? Okay. If you don't, >> yeah, >> can you get to 10 to $30 million in revenue, right? >> If you can't, what happens if you only achieve $5 million? That's what we look at. I'm actually way more excited now after my thorough research when I feel confident a company can get you. We're about to invest in a company right now that I don't think ever will get to a billion dollar uh uh um total address market. I don't think so. But do I believe they'll get to 10 to 30 million revenue? Yes, quite rapidly. And I think they'll be bought by an aggregator and we're going to make a lot of money. That's how I feel. That's the answer. And by the way, folks, that's a I I it's a really revelation to me. And that's what we look for. So, if you're a company that has a hard time raising money cuz you can't prove to a VC that you have a billion dollar TAM, but you can show us that you can pretty easily get to 10 to 30 million revenue, come talk to us. >> Yeah. But, but if you are looking for bigger checks and in a bigger market, there are VCs that will require that billion dollar mark for sure. Right. >> Right now, right now in today's world, there's VCs that have raised over 500 million, a billion dollars. And when you meet with them, they'll listen to you and talk to you. But unless you can literally show them that you can get to about 250 million or more in revenue, they are not going to be interested. >> Right. >> Yeah. >> Okay. All right. Well, I unfortunately we got to wrap it up because um we just have a tight schedule today. But I hopefully you guys learned a little bit of something here getting a little bit of insight into the some of the common questions that we get. And maybe it's been a little bit repetitive of things that we've talked about on the podcast, but that's just because these are very common issues and these are very common questions that we're running into all the time that I think everybody needs to hear over and over and over again. So, thank you for listening. This is the Startup Ignition podcast. If we gave you something to think about today or laugh about today, please share, like, subscribe. You know, we're trying to grow this thing and hopefully get a wider reach so that we can impact and help more entrepreneurs and startup founders everywhere across the world. Share it with your co-founder. Share it with your entrepreneur buddies. Share it with the person you're trying to bake up an idea with. And hopefully we can help you guys out. So, we'll see you next time. >> Um, keep building, keep growing, and we are out. Thank you so much. I'm going bike roll next rock.