Revenue Traction Doesn’t Mean Product Market Fit
I recently had lunch with Mark Leslie, a successful entrepreneur and CEO, who now teaches at Stanford and works with startups, often as a board member. He told me about a paper he and a colleague published in Harvard Business Review called The Sales Learning Curve. I read the paper and it articulates something I have seen quite a few times myself.
The paper starts out with this observation:
When a company launches a new product, the temptation is to immediately ramp up sales force capacity to acquire customers as quickly as possible. Yet in our 25 years of experience with start-ups and new-product introductions, we’ve found that hiring a full sales force too fast just leads the company to burn through cash and fail to meet revenue expectations. Before it can sell the product efﬁciently, the entire organization needs to learn how customers will acquire and use it, a process we call the sales learning curve.
Not only does the organization need to learn how customers will acquire and use the product, it is also true that the product itself may not be exactly what the market wants. In other words, launching a product is not the same thing as acheiving product market fit. The organization may need another six months, a year, or even longer to get to prodcut market fit.
One of the things I have observed over the years is that a hard charging sales oriented founder/CEO can often hide the defects in a product. Because the founder is so capable of convincing the market to adopt/purchase the product, the company can get revenue traction with a product that is not really right. And that can hide all sorts of problems.
I am thinking of a company, which will remain nameless, that ended up selling itself in a fire sale. The company had strong revenue traction early on, and with that traction raised a big round of financing, which then led to a big increase in headcount, for both sales force and product/engineering, and then faced a lot of churn in its customer base. That led to a very difficult period where the company worked hard to iterate on the product while maintaining this high burn rate. In the end the burn rate killed the company and in my opinion it never really found product market fit.
Like Mark Leslie advises in The Sales Learning Curve, it is dangerous to ramp up headcount and burn until you are certain that you have the right product and the right people and processes in the organization to support the product. And early revenue traction, often driven by a passionate founder, can be a nasty head fake. Try not to fall for it.
The Return Of MBA Mondays: I am going to try a new take on MBA Mondays, suggested by one of you in the comments last monday. I am no longer going to write posts on specific topics as I was doing. I am going to take a page out of the "case method" and tell stories that have a lesson, hopefully based on real situations that I have lived through. I don't know how well this will work, but I am going to give it a try.