Three Metrics-Driven Steps to Build a Successful Business
I remember cracking the bright blue, hardcover, first edition copy of The Lean Startup by Eric Reis in 2012. That was my gateway drug into so much: startup, entrepreneurship, building and selling a company, and ultimately a career in product management in San Francisco.
I’ve learned a lot in the past 8 years and while the fundamental insights and principles of that book (and many others!) are still relevant, I’ve found that as an educator when I’m trying to teach product management and startup the framing of “MVP” and “Validated Learning” inspire people but also sort of confuse them. I see a lot of maximal viable products and a lot of guessing and checking instead of careful thinking and deliberate action.
I’ve come up with my own new way of talking about how to build a startup that is
- Easy to remember
- Entirely data- and metrics-driven
- Based on best practices I’ve learned straight from startup leaders in SF
I call it “The 40/40 Startup”
A 3 Step Method
The method is insanely simple, but it brings more clarity, I believe to how to be a Y-Combinator-level successful startup. Here are the steps:
- Interview 40 people
- Meet the Rule of 40
- Get your NPS above 40
Let’s look at each one in more detail.
Interview 40 People
User interviewing is extremely important and until you’ve interviewed about 3 dozen people you still won’t have clear enough empathy for your users’ challenges and problems to create (and communicate!) a solution for them. These interviews must be conducted as classical user interviews beginning with warm up questions, open ended questions, and only pointed questions at the end once you’ve understood a person’s perspective and situation.
Meet the Rule of 40
The Rule of 40 has two meanings. One is a financial term, the other is a measurement of product market fit. For now we’ll just need the product market fit measurement.
To measure product market fit, survey the users of your version 1.0 of your product. Here’s the key question to ask:
How would you feel if this product or service were gone tomorrow?
A. Very Dissatisfied
B. Somewhat Dissatisfied
C. Neither Satisfied or Dissatisfied
You’ve achieved product market fit if 40% of your respondents choose “A. Very Dissatisfied”.
Now its time to focus on growth.
Get Your NPS Above 40
Now that you have product market fit because a hard core of your users don’t want it to go away, its time to focus on growth. To measure your potential for your product to grow, use the handy-dandy NPS metric — Net Promoter Score. You’re looking for, you guessed it, a score of 40 or above.
Once you have a NPS above 40 you are essentially in the money.
BONUS: Rule of 40 (Financial Version)
Bonus! After you have an NPS of 40, you could try to meet another Rule of 40 — a measurement of the health of a Saas business. This Rule of 40 says that a business is healthy if your growth rate plus profit is ≥ 40%.