The Product-Market-Strategy fit — Big-time vs Small-time ideas
Can strategy predict a big-time vs a small-time startup idea? Assume a Product-Market fit is found, can you fast forward in thoughts and see whether your business will create and sustain monopoly-level profit margins? How can you efficiently search for a big-time idea with a Product-Market-Strategy fit?
To evaluate your idea, check whether it has one or more of the following strategic levers:
- Intellectual Property
- Network Effect
- Access to Capital
- Brand
- Economy of Scale
- Economy of Scope
Levers 1–2 apply for the early stages of a startup, and Levers 3–6 can be reinforced at later stages but not at the beginning.
Applying the framework from my earlier post Starting from The End — Lean Decision Development:
When you form a hypothesis for an idea, run the following 5-minutes thought experiment: Assuming my Product-Market fit is found and validated, how can I become the dominant player in this market? How can I defend and maintain such position? What strategic levers am I basing my decision on?
Iterate as much as possible on those 5-min thoughts experiments before committing to a 5-days Design Sprint (idea-customer fit), then a ~10-weeks of business model canvas validation (business viability validation test), then ~6 months of building your minimally viable product.
Let’s take the example of Uber’s CEO: Before Uber, Travis Kalanick was approached to join Tweetbios, allowing twitter users to have extended home pages. So even though Tweetbios was having a growing user adoption, Travis quickly dismissed it as “a small-time idea”. So even if it supposedly had Product-Market fit, Tweetbios did not have Product-Market-Strategy (PMS) fit. On the other hand, it’s worth noting how Travis rationalized Uber’s PMS fit. As shown in the snippet from the What Makes Uber Run story, Travis saw Uber as a 2-sided platform with cross-sided Network Effect where the user experience gets better the more users use the service. Uber’s virtuous network effect cycle: More users → more demand for drivers → less waiting time & better experience for users → increase in demand from users. That’s a big-time idea! As Uber grew, it started to tap into its Economy of Scope by expanding to goods & food delivery with UberRush, UberEats, etc., leveraging a small marginal drivers’ acquisition cost in this expansion of scope.
Product-Market fit: Necessary but not Sufficient
The Product-Market fit as a topic and a concept has been widely discussed (Marc Andreessen blog 2007, Steve Blank The Four Steps to The Epiphany, quora, wiki). If you examine Marc Andreessen’s post, there’s an implicit assumption that the market type being discussed is a “New Market” type, versus other market types such as: Existing, Resegmented, and Clone markets.
Each market type has an implication on raising funding, scaling, revenues trend forecasting, and new hires functional skills. For instance, startups working in a New Market often face an inflation of expectation in their revenues growth forecasting by confusing traction signs from their early adopters and extending it to their mainstream adoption traction rates — when they have yet a chasm to cross. The adoption pattern is different when targeting an Existing Market (see Steve Blank’s Market Type & Revenue notes).
For a New Market type, where no one has succeeded before, influential players in VC and entrepreneurship circles focus on Product-Market fit as the Strategy part is less relevant at this stage, if you have not even found a market to fulfill! However, it’s very important to ask that once a Product-Market fit hypothesis is found, if you have what is needed to win the market? If not, can you plan to fill those gaps from the start? Are there threats in your value chain (mainly in distribution, read about the Innovation Vs Distribution and the TiVo problem)? Can you overcome them? etc. Before spraying, praying, and potentially pivoting, can the Product-Market-Strategy fit be a helpful measure for direction evaluation?
For an Existing Market, the market is there, the products are there. The discussion is more about how to enter the market, compete, win, and based on what strategic levers can this be sustained. Do you have a 10x better technology, a 10x better product? Are you thinking differently from the incumbent player?
Strategy is Thinking Different: Be Contrarian and Right
At its core, Strategy is doing something different, not outdoing the incumbent in what it does best. This is an underlying common theme in strategy courses. Attempting to outperform the incumbent by playing the same game and saying that you will outperform him and that you will be more efficient is NOT a strategy. Operational Effectiveness, e.g., better execution, is NOT a strategy, it is necessary but yet not sufficient (read this classic HBS paper on What is Strategy by Michael Porter). Try to compete with Amazon on the only premise of becoming more operationally effective, and you will not win. You need different strategies to face the e-commerce Bear.
In his Zero to One book, Peter Thiel searches for a secret (see successful businesses are based on secrets), a contrarian truth, when he invests in startups and people. Without this contrarian truth, there is nothing novel. With a secret in hand, you should strive for a monopoly when you build a venture (see Thiel’s Stanford lecture Competition is for Losers). To plan for a monopoly-level profit margins, you have to look at strategy and know your strategic levers for your Product-Market-Strategy fit. Can you know and play for a Winner Take All strategy?
The theme of being contrarian is so important and is often repeated by various influential individuals in the VC industry. The winners are the black swans who are able to win the market. Those winning ideas start as counter-intuitive, weird ideas. For instance, you can read such corroborations in Paul Graham’s Black Swan Farming, or from bhorowitz at his Columbia Commencement speech when he talked about Brian Chesky’s secret in starting AirBnB, or from Chris Dixon on his winning investment thesis of investing in the Weird Stuff.
A cautious note: there is no point in being contrarian if you’re wrong. Using the investment industry as an analogy: being greedy when you ought to be fearful when others are fearful can be costly if you’re not right. Being contrarian alone is not sufficient, you have to be both contrarian and right.
The Role of Founder-Market fit
The Founder-Market fit has been discussed on Chris Dixon’s blog, and Brad Feld’s blog. The Founder-Market fit is what allows you to develop a secret due to your unique and intimate knowledge of the space.
Once you form a hypothesis for a secret, try to iterate on it through quick thoughts experiments to refine it further towards an alignment of Product-Market-Strategy fit. If you could not identify and defend the strategic levers of your idea, then more research and brutally honest thinking are needed before you move beyond the ideation stage.
Take Uber vs taxis, AirBnB vs hotels, Tesla vs traditional automakers: all are new players in established existing markets. The new players won because they knew a secret and their game was different.
For the long-term, a Product-Market fit is not enough. A big-time winning idea should have a Product-Market-Strategy fit and the founders should be able to articulate its strategic levers. Why would you be the last mover and win the market? How would you build high barriers to entry for new entrants? How about big businesses, are you aware of your most pressing envelopment threat, and how can you plan and protect from it? These are things to think about, search for, commit to, then reinforce/adapt through discovery by doing.
You should accept and be comfortable with the uncertainty and have a structured approach to deal with it (see Optimality of Decision Time). When you’re working at the bleeding edge, you draw, project, and build the future. When the struggle of uncertainty is your new normal, strategy becomes your best friend.
Strategy should be a core component and be given its own weight during the startup ideation stage, not be an after-thought once the product is built. Applying the filter of strategy can save entrepreneurs (and investors) valuable time and resources, and allow them to iterate faster and smarter to capture and maintain the value they create.
— Mohamad Charafeddine (@mohamadtweets)
