I experienced an Aha! moment the other day with CEO Sean Chou of our portfolio company Catalytic. Sean is an experienced enterprise startup founder and exec through his time as CTO of Fieldglass (sold to SAP). Sean and his VP Product, Jeff Grisenthwaite, had prepped an investor brief with a simple expression summarizing their pursuit of product-market-fit. It looked something like this:
If[(effort + price + risk) << (pain of customer problem), win sale, lose sale]
Bingo! In words, if the effort plus price plus risk of your solution is much much lower than your customer’s status quo pain, you can sell and find product-market-fit. We could complicate this by adding an expression for competitive position, but let’s assume the field of 2.0 solutions is sparse… something that is often true for the earliest stage startups, with competition heating up above 1-3M in ARR. This expression also assumes that the benefits of your solution actually solve the subject problem!
I love this expression because it succinctly captures the key issues effecting early PMF sales:
Pain of status quo: Is there real pain and is it big?
Effort: Is your solution relatively quick and easy to implement and maintain?
Price: Is the price of your solution very reasonable relative to the pain (and competitor prices)?
Risk: How do customers perceive the risk of purchasing from an early-stage startup? How do you help your customer champion mitigate the political capital risk of pushing a new process or solution?
“<<“: Are effort + price + risk much much lower than customer pain? If not, customers won’t bother. A simple “<” doesn’t cut it. It must be “<<”. Put another way, ROI must be very high.
An example of this is HPVP’s recent consideration of buying software to manage our portfolio job postings site. We currently do this with a string-and-chewing-gum combination of Startuphire and Angellist widgets. Even with both, they don’t cover our companies exhaustively, and we would love to have resume gathering and funnel tracking capability. However, what we have is pretty good for free! We were approached by an early startup with a slick solution, but we didn’t end up buying:
Pain of status quo: You may hear in my narrative above, this isn’t a top 1 or 2 pain point for us. If there is software out there that can find me the next Uber to invest in, you have my undivided attention and wallet.
Effort: We probed a lot on what the effort would be to implement and maintain their posting solution. Great answers here.
Price: They wanted 4x the price what we were happy to pay and 2x what we might have been willing to pay. They didn’t come down at all. Wuh?
Risk: We were being asked to take a risk on a seed stage startup with limited funding and only very early revenues. We love startups, but it would have been a bummer to invest in implementation and see them disappear six months later. We are thrilled to take that risk, but not at premium pricing…
“<<“: …which all comes back to the much-much-less-than issue. The risk and price together were just not that much lower than the current pain, so we passed.
S how big does the “<<” need to be for good “ROI”? ROI may be characterized qualitatively as (Value-of-solving-pain / (effort + price + risk)) or precisely quantified as ((savings or increased revenue) / price of software). Either way, we generally find that business customers want to see 5 to 10x ROI on software investments. In the example above, we figured we would see a 2 to 3x ROI at list price. If they had halved the price, we probably would have accepted 4 to 6x. Remember, we like startups.
You might say, “Wow! 5 to 10x is an inordinate return expectation for a customer” when lots of corporate investments are made at much lower ROI levels (think advertising as low as the 1.5 to 4x range and capex in the 3 to 7x range). Fair, but remember that even with SaaS where the hard cash cost is paid over time, costs of organizational effort and change management for new software adoption are front-loaded and heavily resisted. That lump cost of effort upfront means the solution has to be really really good – and quickly – for the customer champion to look like a hero to their organization. If a champion doesn’t think this is likely, they won’t risk their political capital.
Now how about competition? Without consideration of competition, the PMF sales expression above helps define whether the customer will play ball or not. Competition defines who is on the field of play. If there are several competitors who offer solutions that bridge the “much much less than” gap, then it’s a question of positioning product, features and price to stand out in the noise to a specific customer segment.