Finding Product-Market Fit With a Digital Currency
You’ve probably heard the statistic that approximately 90% of all startups fail. The reasons for why they fail differs depending on who you ask. But, a survey of failed start-ups published in Fortune showed that 42% of failed startups offered a product or service with little to no market need.
As someone in the blockchain and digital currency space, after looking at all the possible reasons for startup failure this one resonates with me most. It’s been said by Paul Brody, Ernst & Young’s head of innovation that 83% of decentralized applications on the Ethereum network are “not in the most productive uses.”
Digital currency business models are complex, capture value differently, operate on new technologies and have unfamiliar user experiences. Because of this, it is naturally harder for them to find product-market fit. Beyond the obvious scams and the businesses trying to ride the wave of hype, other businesses simply struggle to find users despite the best intentions.
In this post I explain my framework for how entrepreneurs building a digital currency can evaluate their product-market fit which can help them beat the odds of startup failure while building the right foundations for startup success.
Getting Started
I like to call the phase of business concept evaluation that revolves around product-market fit “Discovery”. Discovery starts with clearly defining the overarching problem(s) to be solved. As mentioned above most startups fail to find product-market. I feel it’s because they aren’t solving a burning problem for people. Many entrepreneurs fall in love with a product or service that is a solution to nothing. In other words it’s a vitamin, not pain killer.
To better understand the problem you are tackling its important to understand your market, the users of your product or service, what is valuable to them and what relationships dictate the dynamics of this value. Lastly, if you’re introducing a digital currency, you will need to outline it’s utility as it relates to the problem, the market, your users and exchange of value.
Problem Structuring
It’s important to clearly organize and prioritize one problem for any project. The outcome of this stage is a well-defined problem. This will put everything your business is set out to do, into context. There are two tools that assist in this process:
Problem Statement Worksheet
This is a simple and important exercise. Here’s how it works:
- Write the initial problem you are seeking to solve. In separate line items explain who and what it affects and does not affect. Next explain when and where it is a problem and not a problem. If you have supporting statistical data write that in a separate line item.
- After finishing the above, write your problem statement in one or two sentences. Only focus on one problem. Do not include any solutions. Problems statements should be Specific, Measurable, Action-oriented, Relevant and Time-bound (SMART) while ensuring it is not so narrow that is excludes critical issues.
Once you have a core problem, disassemble it into distinct issues in the form of a logic tree.
Logic Trees
Good logic trees follow the Mutually Exclusive, Collectively Exhaustive (MECE) principal. MECE means that issues should be mutually exclusive, without overlap. Collectively exhaustive means that all issues are covered and there are no gaps. Below is a sample logic tree. Start with your core problem and break it down.
For instance (illustrative purposes only), a core problem could be “High rates of homelessness in downtown Vancouver”, Issue 1 could be “Inability to get a bank account”, and Sub-issue 1 could be “Homeless people have lower levels of numerical and financial literacy”.
Market research
It is vital to deeply understand the market you are entering prior to doing so. I use five tools to assist in uncovering insight that ultimately ties into the digital currency creation process.
Market trends
Identify qualitative and quantitative market trends related to the product or service. For qualitative trends look for signals that the market is growing. For quantitative trends look for objective indicators that your market entry timing is right and more broadly, the market is heading a direction favourable to your business.
For instance (illustrative purposes only), loans originated on open finance applications on the Ethereum network have grown 100% in the last 6 months. Based on large players like Facebook and Microsoft entering the space we imagine it to only pick up. Because of this we believe there will be a long-term need to provide data visualization tools to Open Finance market participants.
Problem sizing
Estimate how large the market opportunity is by looking at the problem you are trying to solve. This is different from the traditional “estimate the size of the market and how much we are capturing” method — also termed Total Addressable Market (TAM).
Digital currencies are an entirely new way to solve problems and eliminate frictions. They will create entirely new markets. Instead of asking “can we get 5% of this market?” Ask yourself “what is the value of solving this problem?” Credit goes to Beth Comstock, as this idea comes from her book Imagine it Forward.
Competitive analysis
Create list of competitors and complete a five forces competitive analysis. If you’re in the digital currency space, consider competitors within and outside of the digital asset space. It’s more likely than even that competitors with existing user bases add a digital currency to their businesses.
Primary research
Many entrepreneurs skip this step entirely. It’s worth discussing the problem and trends you’ve identified with industry experts and potential users to get feedback. Surveying individuals in the market you are targeting is an extremely valuable exercise and often produces valuable insights you cannot get online.
Product-market fit
After doing market research conduct a preliminary assessment of your proposed solution and how it fits within the market. You should evaluate the key benefits, business attributes and how they could be perceived by your target audience. Also consider key challenges you may face introducing your solution to this market.
User research
Another component of building the right foundations and finding product market fit is understanding the key profiles within your target audience and how value flows between them. There are two tools to assist with this process:
Stakeholder mapping
Stakeholder mapping is the process to help identify, analyze, map and prioritize stakeholders involved with your product/service. Stakeholder mapping is a four step process that works as follows:
- Identify all relevant stakeholders.
- Define and analyze the roles and multi-directional relationships in the ecosystem.
- Whiteboard the system as a pathway. Position and connect the stakeholders who influence and impact each other the most in priority lanes.
4. Once the chart is complete, fill in the following table below:
The outcome of this process is that it will help you better understand your users, the types of input they require, what matters to them and more. It also feeds into the value exchange mapping exercise described next.
Value exchange mapping
Value exchange mapping is a tool that helps capture business model interactions occurring between your key stakeholders. Below is an example of a value exchange map for Netflix. Ultimately it reveals opportunities where you can generate revenue, cost savings, and/or use other incentives by finding the most effective ways to deliver value.
I won’t go through all the steps in this post. It is best for entrepreneurs to create a similar type of map to the one above on a white board with team members.
Utility Canvas
Once a problem is defined, you understand the market dynamics, relevant stakeholders and their value exchange you can start to design the foundations of a token model.
A utility canvas is a tool to help you outline the usefulness of a digital currency as it pertains to the problem you are solving. It is broken into two separate areas. Credit to Eden from Outlier Ventures for this.
- Network-centric Factors — Comprised of Market Layer and Ledger Layer Economics. The Market Layer is where value is traded and incentives or disincentives are embedded, which is usually on the front-end / application layer. The Ledger Layer is where the key attributes of each transaction need to be verified and simple contracts get executed.
- Business-centric Factors — These are the external factors that influence the long-term sustainability and success of a tokenized network.
Once you’ve completed a utility canvas you can move on to a more granular design of your token.
Final Thoughts
The process of evaluating your product-market fit can not only save you an abundance of time and money in the early stages of your product but it also sets the stage for designing a digital currency that stands the test of time.
If you have any further questions about the post don’t hesitate to get in touch. I specialize in helping businesses create new value with digital currencies. Here is my website, email and LinkedIn.
Thanks for reading,
Drew
