Product > Strategy > Business Model
One of the mistakes I see entrepreneurs make is they move to business model before locking down strategy. The way I like to think about this is get the product right first, then lock down the strategy of the business, then figure out the business model.
Getting product right means finding product market fit. It does not mean launching the product. It means getting to the point where the market accepts your product and wants more of it. That means different things in consumer, saas, infrastructure, hardware, etc, but in every case you must get to product market fit before thinking about anything else. And, I believe, moving to business model before finding product market fit can be the worst thing for your business.
Once you find product market fit and start thinking about business model, I suggest you take a step back and work with your team (and investors) to develop a crisp and well formed strategy for your business. Investors, at least good investors, are very helpful with this stage. If you watched the John Doerr interview I posted yesterday, you hear him talk about strategy a lot (Intel, Amazon, Google, etc). The best VCs are very strategic, have seen strategies that work and ones that don't, and can be a great partner to develop a straetgy with. This is one of my favorite things to do with entrepreneurs.
I remember back to the 2009 time period at Twitter. The service had most certainly found product market fit. And the team turned its attention to business model. There were all sorts of discussions of paid accounts, subscriptions, a data business, and many more ideas. At the same time, Ev Williams was articulating a strategy that had Twitter becoming the "an information network that people use to discover what they care about." And so the strategy required getting as many sources of information on to Twitter and as many users accessing it. It was all about network size. That strategy required a business model that kept the service free for everyone and open to all comers. That led to the promoted suite business model. Twitter executed product > strategy > business model very well.
We have also had many portfolio companies build revenue models that did not line up well with the strategic direction. And in some cases, the companies really did not have a well articulated strategic direction at all. That led to a lot of wasted energy building a team and a customer base that ultimately was not of value to the business. We have seen teams walk away from parts of their business because of such mistakes.
These kinds of mistakes are usually not fatal. Not finding product market fit is fatal. But going down the wrong path in terms of strategy and business model can be fixed. But it is painful, costly, dilutive, and sometimes can lead to a change in management.
So my advice is not to rush into business model without first finding product market fit and then taking the time to lock down on a crisp, clear, and smart strategy for your business. From there business model will flow quite naturally and you will be on your way to success.
Been thinking about this a lot.For networks like Twitter, even Wattpad I couldn’t agree more.For marketplaces, like Etsy, even Kickstarter, where the content is the products of the merchants, the value of the marketplace the traffic to their wares, the story is different.Can you share a bit more about this, Network and Marketplace as you have deep experience with both?Thanks.
Yes and No. I think for Etsy and Kickstarter, the strategy and business model were clearer earlier on (or it took less time to figure them out), whereas Twitter had to figure it all out, and Wattpad is still figuring it out.
That’s my point–Networks don’t have a model till the market defines them in some ways.Marketplaces are a funnel for sales of their merchants. They are from day one even though value increases as market dynamics grow.
In marketplaces the basic transaction fee is in some ways part of product market fitBut Etsy has added a number of additional revenue sources and they are all in keeping with their strategy of being the global marketplace for independent creative business
Thnx–with anything B2B (like a marketplace) the financial relationship with the content provider (the artisan) is touchy to evolve.It’s hard to go from free to paid in my experience and sometime better up front to have this clear.
yes. that has to be part of finding product market fit not strategy or business model
pre-requisite: investors who are willing to take that path with you.
Great point! If they don’t, they aren’t being good VCs. A startup is about figuring these things out (market fit, strategy, model, etc.), and it takes some time to do that.
Yeah, I was thinking thatDoes this model apply to first-time entrepreneurial teams? In my experience about the only way first-time teams get investment is if the business model is a lock from the first pitch.Obviously that makes a lot of sense from the investor’s perspective. Since there is more uncertainty with the team you want a more defined and achievable business model. Just add water.
we’re dealing with this now. first time team with product market fit. just not a solid revenue model yet. having trouble finding investors willing to take the path with us. help? taylor at firstcutpro.com
From your public-facing materials it seems like you have a pretty clear business model, do you say it isn’t “solid” simply because sales are low? If so I’d say thats a different problem than lack of definition of a viable business model. Maybe the market fit/size isn’t as predicted?As someone that does occasional video production, I definitely see the value in you product, I’ll give the free plan a try when I do my next project.
thanks for the responses guys! had no clue a comment thread could be so useful.mm. I came from SaaS and want to apply SaaS to this product, however there are things such as the industry has never dealt/purchased a SaaS product before (they bought fixed licenses or hardware and spread it over say 3 years).pricing is an issue for us. (we’re pricing based on comparable project management tools in other industries. ie: pivotal tracker for software) we’re starting to test different prices.really appreciate the test. would like it even more if you could give your honest feedback in regards to what would make you buy vs stick with regular old emails/status quo.
Nobody else may agree with this, but I personally find pricing-tiers that include too many feature restrictions confusing, overwhelming, and certainly a friction to conversion. My advice would be to B-Test a version of your pricing tier with fewer restrictions. Instead find the 1 or 2 (ideally just one) that really differentiate the different product tiers. I know you only have 3, but here’s my thinking:When I first looked at it, I just got a bit overwhelmed and put off. I moved on, but circled back and critiqued it. What specifically put me off? Well, I do count 6 pieces of data on each tier x 4 tiers. That’s a lot of data to absorb. (The six pieces are: Price, Annual Price, Projects, Viewing Room Credits, Credits can Rollover, and Collaborators). On top of that, there’s a lot of qualitative text that honest I didn’t even think about reading because I’m too overwhelmed by the 24 data points in the table that you’ve emphasized.I have no idea if this truly affects conversions. Or maybe it does but possibly the consumer surplus you’d have if you simplified has more downside than the occasional lost conversion. But it could be worth designing a test or 3 to see.
we pushed pricing out literally last month so we’re still learning here on this part.pricing and the tier structure definitely is an issue. some of our first questions when it comes to pricing is clarifying what are projects, what are viewing room credits, etc… – we’re definitely going to be simplifying this section.thanks for the feedback. this is the honest slap in the face criticism we need and seek!
I just saw the “viewing room credit” bit. I’m a strong opponent of use frequency limitations. It adds anxiety and hesitation to the user experience which can easily overwhelm the additional sense of value you created by the artificial scarcity. imo. That feature is a big value prop, you want people to use it and love it. Get them to pay more for unlocking something within the “viewing rooms”, or somewhere else.
From your public-facing materials it seems like you have a pretty clear business model, do you say it isn’t “solid” simply because sales are low? If so I’d say thats a different problem than lack of definition of a viable business model. Maybe the market fit/size isn’t as predicted?As someone that does occasional video production, I definitely see the value in you product, I’ll give the free plan a try when I do my next project.
You’re in Austin? You should def connect with JLM. He likes video stuff too.
Taylor- From your public-facing materials it seems like you have a pretty clear business model, do you say it isn’t “solid” simply because sales are low? If so I’d say thats a different problem than lack of definition of a viable business model. Maybe the market fit/size isn’t as predicted?As someone that does occasional video production, I definitely see the value in you product, I’ll give the free plan a try when I do my next project.
So true.The difference between wanna-bes and great vcs is that they don’t let discussion of the revenue model preclude discussion of market need and product in the early meetings.Not saying you don’t discuss it and think hard about it before you do or do not invest, but it is very easy to miss signs of a potential hit that the entrepreneur may be trying to communicate as you make obvious points about the business model to make yourself feel smarter.
I was about to say the same thing.
shouldn’t that be a prerequisite for in?vesting in the first place
Also, pre-requisite: investors.
If your product is good, everything else will fall in place. Good product creates good value (and money), not the other way.
Not really. That was the point of the post.If the product is good (and market fit is there), it facilitates how you proceed. The business strategy becomes clearer, your value to your users/customers becomes well defined, and you can start to execute to scale your company with revenues.
Bingo. Forget the Product!I’m seeing some mature startup CEOs still too focused on the product, and not able to articulate the business strategy to execute on the model at scale.”It is the customer who determines what a business is. What the business thinks it produces is not of first importance; especially not to the future of the business and to its success. What the customer buys (or uses) and considers value is decisive, and it is NEVER a product. It is always utility, that is WHAT THE PRODUCT DOES FOR THEM.” — Peter Drucker in 1973So, figuring out what the product does for them (value, benefits) allows you to reverse engineer how you go to market to sell the heck of a repeatable business model.
In my experience it’s often a hard transition for a founder CEO to make as the company matures: founder CEOs usually start off owning the product. Once they bring in executive leadership on the product side their main role shifts from being the ideator to being the business executor. I’m assuming that’s the challenge and type of CEO you’re describing — are you? Is it a different issue?
Yes. Not all CEOs are able to make that key transition from product or engineering visionary to business leader who can go BEYOND developing and rolling out a great product. If they can’t, that’s fine as long as they are self-aware of it, and they hire someone else who can scale the company according to the business model.
So if the market is pulling for your product, it’s ok to not have a strategy just yet?
i think so
‘Definition of strategy: A method or plan chosen to bring about a desired future, such as achievement of a goal or solution to a problem.”Doesn’t strategy come before everything? When building a product isn’t there a strategy to the build? Did Twitter just say “Hey let’s build this and we’ll figure it out later?” I find it hard to believe that anyone would build any product without a strategy in place first.Would love feedback on this. Thx.
twitter did not have a strategy other than “let’s build this and see what happens”
Jack Dorsey stated in the beginning that twitter was built on “the idea of an individual using an SMS service to communicate with a small group”. Is that not a strategy?
that is most definitely not a strategy
We’ll have to disagree on this Fred. Jack’s original statement is a clear example of the definition of strategy.
maybe product strategy but certainly not business strategy
I like this distinction but would add that product strategy is perhaps easier to craft than business strategy in early stages. You usually have a few iterations of your product in mind when you start off. You might have a concept of what your business strategy will look like and how you’ll execute, but I tend to see it as a separate stage of development too.
it isn’t always – at some point your product and business strategy have to be baked into each other
Yes – post minimum viable product. That’s really when a viable business strategy can begin to take shape.
At what point must the two intertwine? Or must they?
You and @ShanaC:disqus are on the same track I think 🙂 Following MVP stage product and business strategy influence each other and develop in parallel.
Well @ShanaC:disqus is crazy smart so I am in good company. Thanks,Ana. When you put it in perspective — of following the MVP — this makes all the sense in the world. Guess I needed something to latch onto.
*blush* I really don’t think of myself as that smart
It is not a question of ease.Product strategy requires understanding of the product ecosystem. Business strategy requires understanding of the business ecosystem.In the HW side of tech, all BD teams were 2 handed: product guy / business guy (I would say person, but I am talking early ’90s HW)!
No, it is not. It is a first stab at a product strategy. Twitter did not attain product / market fit with that product definition, FWIW.Business strategy can be thought of as business / market fit, with tactics (including products) being business market connections.Strategy is defining what space you are going to fill in the market & how you are going to fill it (but not what or why).Many dominant tech companies are unable to execute a second strategy, regardless of the number of products or features they launch (MS – tools for PCs, GOOG – search, FB – friends).Apple has only executed 2 strategies in 30 years: be the preferred PC provider to education & design sectors through a safe (closed),’friendly’ (easy to use) product; be the consumer platform (Jobs even outlined the ‘hub’ strategy early on) for digital media (iMac, iTunes, iPod, iPhone, iPad, Apple TV are all products that fulfill that strategy).I would argue with @fredwilson:disqus re: the clarity of Twitter’s strategy. Dick C says they are not a media company, yet they sell online placements to marketers. That sounds like Eric Schmidt during his first year at Google.To be honest, Twitter fits the market in a singular way (they will never have a competitor IMO) – its the real time social network. Their splash page should say “what’s going on?”
Wouldn’t you like to be able to follow him?Man.When your version of the National Anthem is one of the top 10 grooviest songs of all time, you know you got it going on!This is a good read – http://www.grantland.com/st…
i just love his songs
Sounds like more of a concept
That’s the definition of a (very) minimal viable product. Let’s call it a prototype. Once you have a prototype, you proceed to test market fit (early adopters, growing the network) and craft the business execution strategy.
The “small group” part certainly changed over time.The fact that the most of the mainstream publicity (and the growth that resulted from that publicity) that has surrounded twitter has been as a result of individuals (or organizations) communicating with large groups. That has been an overwhelming catalyst for their success. Facebook has a bit of this as well but it’s not the primary driver of usage I believe.
I have a hard time building things that way. I usually have five or six versions in my mind of how the network could work before I’m thinking product.
To be fair though, this often leads to people accussing you of a lack of focus 🙂
It depends on whether or not you are focused on human behavior or there’s a specific problem you want to solve.
Bingo Eric!Wonder whether we can generalize this as networks are invariably about behaviors (as our communities) and marketplaces are invariably about problems and products.It will break but it may hold for the majority of cases.
I think that solving any specific problem involves human behavior.
Selling a product (like wine or shoes) involves human behavior and the way way you sell it will be the determinant of your success as an example.But selling something and brokering connections (Twitter or Facebook for example) is where I break this.
What if you’re selling wine on Twitter or Facebook? 😉
Thanks for asking 😉 A favorite topic of mine.No one has been able to figure out to sell wine online or on any of the social nets.The short story in facts:Approx $1B of the $40+B in last years wine sales were transacted on line.The vast majority were DTC opt clubs from wineries, then remote customer fulfillment from shops then $300+K from opt in branded clubs like WSJ. These were sold to existent customers not in catalogues.Amazon has failed twice and is trying a third time to have an online wine catalogue. They will not succeed is my bet. There are scores of startups trying (and many closing shop) and hundred of apps that just don’t get used.The issue is behaviorally connected to wine itself. It needs to be sold not bought. It’s that simple.Longer version of the answer:Wine needs to be sold, not bought http://awe.sm/s1G9o
Saw a startup recently — can’t remember the name — was on a VCs portfolio list, but the tagline was — wine is a grocery not a luxury… clever.
True kinda…Tons of wine start ups out there. I’m somewhat amazed where people are putting their dollars.I haven’t seen a model I like but then again I haven’t seen them all of course.
Thanks for the great reply. I read your post on your blog too. Fascinating and really hits to finding a model where the online and offline world work together. That’s one of the items I got from it. Thx.
That’s what we are trying to do with thelocalsip.What we’ve discovered is that there are thousands of geeks like myself who approach the world through tastings.There are not tens of thousands though. Relaunch in a few weeks will take this much broader, moving from a deeply focused wine geek perspective to a community of connections perspective around a fermentation infused point of view.We shall see 😉
Sounds like you’ve got a Blue Ocean Strategy going there Mr. Waldstein. ;-)Just signed up at thelocalsip. Looking forward to seeing what you’ve got coming.
On one hand we have the observation people like a given behavior A, what problem can we solve with this observation?On the other hand we have a serious problem and we are searching for or trying to create behaviors that can solve the problem.
Thanks Erik for clarifying where you’re coming from.
reminds me about how little about human behavior we know.
and/or how much we discount it
Your strategy can evolve accordingly from building the product first, to finding the market fit, to developing the business strategy, to clarifying the go-to-market approach, to executing for scale.
So strategy does come before anything else?
I think we’re getting buried in semantics. Product strategy, business strategy, market strategy, company strategy, etc… It evolves. Sometimes it’s just a plan that’s needed. Strategy is a big word.
“Sometimes it’s just a plan that’s needed.”Good distinction, William. The word strategy is overused and misused. I’m guilty of this. Sometimes it is just a plan. Not a strategy. Plans are good.
Thanks! Plans are the actionable parts.
I agree William. After reading the comments I realized I was getting hung up on the semantics. I also realized that Fred’s post is primarily focused on what he & the USV team invest in: consumer facing start-ups.
I’m a bit unclear on what you mean by strategy? Do you mean the vision and the larger picture of the role it’ll play in society? Or is it strategy to position oneself so that the business model comes out of the strategy? I guess I’m unclear on what the goal of the strategy that you’re talking about in this post.
strategy is figuring out what part of the market the company wants to play in, how it goes to market, and how it differentiates itself in the market it is about what you are going to do and importantly what you are not going to do
I’ve recently read two book on strategy: “Understanding Porter” and “Good Strategy, Bad Strategy”. Having made good strategy decisions and humbling (bad) ones over the years, I found both of these books to be helpful additions to defining what strategy means, and offering useful construct for how to think about it. I recommend both to any entrepreneur or executive. Both are books that through the lens of hindsight fit into the “I wish I had read these books a couple of years ago” category.
Thanks for those book recommendations. I’ve added to my “to read next” list.
Aren’t there times when the business model affects product-market fit? You could have a great widget but the widget costs $1,000 to build and no one is going to purchase at that price, even if it solves their needs.This advice seems relevant for VC-backed businesses with enough runway to experiment. For most businesses, if you don’t validate your business model alongside your product you are likely dead on arrival, because your business model is your runway.
“This advice seems relevant for VC-backed businesses with enough runway to experiment.”One of the things that I always think of when I read Fred’s posts is how many people who have no business experience at all (either because of age or because they have worked for someone else most of their career) might confuse what is good for a VC backed startup  vs. the entire rest of the small entrepreneurial business world that works on an entirely different set of principles. It’s like the difference between reading about running from someone who is training for a triathlon when you are only a ordinary person trying to get in shape. Different rules and truisms apply. The overwhelming number of businesses started are not done with VC money and can’t go along losing money for years before anything is validated. Not only that but if you either lose your own money or Uncle Joe’s money he won’t be sitting at the thanksgiving table saying “no problem let’s try it again what’s your next idea”. Not to mention the fact that most traditional businesses that are started don’t have the advantage of a constant increasing stream of fresh kill to replace the early adopters that you pissed off. (Thinking of restaurants that fail after messing up in the first month of business that never recover as only one example.) With or without “runway to experiment” or even a startup by someone with nothing to lose such as a student living at home with their parents.
Damn that Uncle Joe, he’s so shortsighted! 🙂
maybe we need more discussions here about bootstrapped businesses
I think if you built a widget that solves a problem and costs $1000 dollars to build and no one buys it, then one of two things is probably going on:1. The end customer did not really have a huge problem to begin with, maybe just an annoyance.2. You did not actually solve their problem, perhaps only make it slightly better.It is often times hard to admit that one of those two things is true, especially if a lot of effort and passion went in to the creating of the product, but generally that is what I have seen to cause the “we won’t buy your solution at that cost” response.
great post.i’m very skeptical of product/market fit without revenue though. i think it’s very possible to find product/market fit, then try to insert revenue, and the result is a loss of product/market fit because of how revenue impacts the situation.
that’s why you need strategy in between
ahh that makes sense
product-market fit is the toughest thing to get right. determines the difference between failure, or lifestyle vs blow out startup.
Great piece Fred. Do you think this line of approach will work equally well with ecommerce bplans as well? Or do you agree that many a ecommerce players have bled to death by not having a sound business model even though their product & strategy was in right place?
ecommerce is a super hard business to be in. i think strategy is even more critical in ecommerce
Andy Dunn, founder of Bonobos, recently wrote an excellent
This is likely obvious but I think there is a good caveat to be made that product market fit is not black and white. There is fit and there is FIT. Recent experience has taught me an important – and probably very obvious – nuance: there are degrees of product-market fit and it has a very large impact on what is needed from strategy. If you’re twitter and the product is a 10X game changer, the non-product elements of strategy become relatively speaking, much less important. I fully agree with the idea that product fit is gating. But the degree to which that product ends up being an impactful part of your strategy seems to have wide variance.In contrast to Twitter, if you look at the online travel category of the past 5 to 7 years, the real strategic levers have not been product – they’ve been choice of geography, efficacy in use of marketing channels to reach consumers, and pricing model. Though Oyster and others have introduced innovation on the product side, none of the product innovations have been 10X game changers and by derivative, the major strategic levers around economic value creation have actually been outside of the product domain. If you look at Priceline Inc., $35B+ of market cap has been created in 8 years leveraging things that most people would not think of as part of “product” but yet are definitely core parts of how strategy is typically defined.In my previous business, we had product-market fit but the consumer facing side of product was almost a non-factor in our strategy. Though we did innovate on things that would typically be considered “product”, we primarily innovated on other parts of the strategy/value chain and those innovations are what drove rapid growth for us. Said another way, our product was by no means dramatically better but other aspects of our strategy were.
Do you work in the travel tech industry?[nm – question answered]
Nice take…Some strategies are change sensitive to the core product, some are not.
interesting perspective – it also implies there are very few real game changers
Whilst the quest for product/market fit is universal, business model timing can be sectoral. If you are selling SaaS, or to the Enterprise, there is an expectation of monetization, and deep suspicion in its absence. Especially if the service is doing or touching something important such as user data. Our very first customers (remarkably) were banks. No charging = no deal. The trick is to make sure price is not an impediment, and get the product in users hands.
Agree. This discussion seems to be more applicable to consumer and especially something with a network effect. Anyone have examples of b2b Saas businesses that found the business model later? Product/market fit, sure–many start off with the wrong target, but how many have no business model? Also, one of the first questions if a lot of businesses are using something is “are they paying for it?” If not, then you don’t actually have product/market fit.
Not really. In B2B with a SaaS model, the product/market fit is still difficult to figure out. Once you do, you still need to find out the right approach to scaling it. Your original assumptions may need to be refined accordingly or changed entirely. What you thought was the value may end-up being something else. Why you thought customers would buy may be different than reality.The one difference between B2B and B2C in this context is the # of customers/users you need to have in order to figure this out. You need a lot less of them for B2B than with a consumer product. Another variation is if your front-end is B2C but your revenue back-end is B2B. Regardless, you shouldn’t need millions of free B2B users to figure out the strategy and model.
Changing your assumptions isn’t the same as not having a business model. I guess I haven’t seen any examples of a b2b company saying “we’ve got something amazing, we’ll figure out how to make money later” which happens sometimes in consumer.
Yammer might be an example of that.
I only heard of them after they had the “hey IT, we’ve got all your employees having conversations outside the firewall” monetization strategy. Do you know when they got to that point?
IMHO, Yammer is an exception. They rolled the dice and they won (acquisition by Microsoft), but I think they were able to do that because they had a star CEO – David Sacks – very connected and very well-known in the Valley (from his PayPal years, I guess). That gave them the ability to raise a significant amount of money very early on and scale thanks to more funding rounds.But note they never disclosed how many paid users they had (they reportedly had 4M users when they got acquired), nor if they were profitable at all (which I doubt was the case).I’m not saying they were lucky or didn’t execute well, but they had key assets when they first started, that most entrepreneurs don’t.
Interesting comments Anne.Actually you can figure out the model even with a b2b as it evolves. Going from free to paid is tough but it happens.Meetup is a good example. b2b certainly as the organizers pay a subscription, the users pay nothing. They were around for awhile free before they just did it and have over (I believe) 100k paying organizers today.One (the traditional} way is to just sell something like CRM to businesses. The model is clear. Another to create an entirely new model like Meetup. And something else when the pricing the business partner pays is dependent on the market you bring to them (marketplace).
I wonder if Meetup thought they were a consumer-only play at the beginning.
Don’t know but @fredwilson:disqus I’m sure does
william, anne, this is awesome, because my question was going to be how do y’all see this varying across b2b vs b2c type businesses, and you’ve already answered. thank you.
usually those sorts of business models are baked into the product so that the product is positioned better. It is extremely hard to sell the product otherwise
If you are not paying for the product, you are the product (aka a facebook user).
Very true. That being said, there are often opportunities to deploy strategy in designing B2B strategy. You can make things free in B2B to drive adoption as long as there is a clearly defined reason why A is subsidizing B. (Example: we deliver free alerts to enterprise customers whose networks have bought X seats.)
Yea. The default is typically free to a threshold.
Second that. I see a high correlation between Fred’s comments and venture-backed, consumer-facing startups.It may be fine for Twitter – with its multiple 9-figure rounds – to spend a couple of years refining the PMF and crafting the ideal Strategy, before they have to worry too much about generating revenue.But it’s a lot more painful for bootstrapped or angel-backed startups, particularly in B2B or SaaS models, with investors that frequently want to see some meaningful traction in terms of revenue before committing to invest. (albeit just because some VCs want to see revenue, it doesn’t mean they are right. There are VCs and VCs).Particularly for SaaS and B2B startups, very frequently the Strategy is an extension of the product itself, so the exercise is a lot easier/faster. Successful recent examples: Dropbox, Splunk, Tableau, Atlassian. Also the same for hardware companies – e.g., SmartThing.Obviously it is also important for them to get the Strategy right, but my point is that B2B, SaaS and hardware companies can/should transition a lot faster to finding a viable Business Model that can validate the PMF, or pivot accordingly to extend the product into new areas. I feel the fuzziness is a lot higher with consumer facing startups, where you’re creating something unique, never seen [email protected], Would love to see a follow-up post, considering your thoughts about different industries and categories.
Great points Gui
Completely agree with Barry and Gui. Fred’s post made a lot of sense, but it seemed to really apply to B2C companies where there is an expectation that the product is free and consumers don’t really care (when they sign up) whether you’re going to charge for that product at some point or not. Of course, they do care once you start charging, but that potential “Damocles’ sword” usually doesn’t prevent them from taking a leap of faith and sign up for your service in the first place.As Barry points out, it’s all the opposite with B2B, where free products are suspicious, unless you’re able to clearly show you have a freemium business model and there’s a known path from free to paid product.I vividly remember trying to pitch a potential customer for a new product we are developing and right after I got interest from him, the question was “what does it cost?”. I had a rough idea at how I wanted to charge for the product, but my response wasn’t as clear-cut as a business purchaser usually expects. And when there’s any level of uncertainty while dealing with business prospects, it’s more often than not a turn-off.
I feel like Market > Strategy > Business Model is a stronger way of explaining the concept, as I understand it. I feel like product-market fit is closer to market than it is product.Plus, if your startup has a particular under-served market deep in it’s DNA, it’s easier to pivot to entirely new products/-market fit. Maybe that’s reserved for teams with the strongest track records that can earn greater runways. Seems like the safer starting bet though, even if it might take longer.
I think this approach is better for the exception and not the rule.Most can not (and should not) try to start a business without a business model. Meaning, don’t quit your day job and focus 100% on finding product/market fit for the next year (it’s too much like playing the lottery).It worked for Twitter because: 1. They had the background/history investors would buy into and be patient with (most do not), 2. They had something else paying the bills at first as they got initial product/market fit (the other failed startup), and 3. Even with those things, they were *very* lucky to find product/market fit so quickly (and that gained enough investor interest to buy them time to figure out a business model)Most of the rest of us have to make money *much* earlier to keep doing and growing towards our vision (because contrary to popular belief *very* few investors are going to put money on the line to help you find product market/fit; especially if you haven’t already had a successful exit [and then are less likely to need it to get started anyway]).
Here’s a pictorial of this evolution. I was working on some similar thoughts for a post. http://wmougayar.com/blog/2…
also this pacers heat series is intense. go pacers! #bluecollargoldswagger
what did you of Lebron’s hissyfit.
i found it humorous…..want to make an animated gif out of it
my photo of the dayhttp://fredwilson.vc/post/5…
“And the team turned its attention to business model. There were all sorts of discussions of paid accounts, subscriptions, a data business, and many more ideas.”Important when considering this not to kill the goose that is in the process of laying the golden egg.An example for me is what linkedin has been doing. To me it’s become increasingly worthless and the whole idea of having connections that mattered in the beginning has totally gone down the drain. It should be interesting to see how this plays out in the coming years. The only good news (for them) is that there will always be a constant stream of “fresh kill” (young people) who will see value in linkedin for their resume as well as anyone who needs a venue to brag about their accomplishments or what school they went to. Not to mention how annoying it is to be receiving constant updated information from older business people who have newly discovered linkedin and think it’s a great way to keep you informed on every little fucking thing going on in their business.  The opposite of the twitter things at the start where the joke was something like “here is what I had for lunch” or something like that.
Interestingly I find linkedin’s move in content to be great – they know what content I need to read from a business perspective far better than the WSJ and have the potential to totally take business away as a result
By business model, do you mean specifically the revenue model?
Switching your process also works, so business/revenue model comes first, and product last. It looks like this:”Enterprise businesses spend lots of money on project management. Let’s make a product that could easily fit into that budget. Let’s completely scrap our product before we even consider walking away from enterprise project management dollar”
It’s important to note that this process needs to be repeated as the Product (and organization) grows. Tom Preston-Warner gave some great examples of how the Product (now Products*) at Github evolved from when they were a tiny two-person team and grew to a large, profitable organization: http://www.youtube.com/watch?featu…First, they started with “Git hosting that doesn’t suck”Then, they moved to “Make developers’ lives better every day”Now, they describe the problem as “Making it easier to work together”If you think of your product’s mission as growing in scope as it matures, then you have some clear stages to apply the Product > Strategy > Business Model line of thinking.(Note: by increasing the scope of your mission, I don’t mean adding features)
I’m a huge fan of building a business in stages. Working on one piece at a time really helps the team and the board focus on a solid foundation for the next layer.It’s amazing how scrambled things get when you’re building too much into the business at once.
I remember visiting a very old VC one day. This guy is now passed away but was the premiere VC in Texas dating from the 1970s. I asked how he was doing and he laughed and said his whole reason for being was just explained away by chance. He showed me a study that showed how VC funds profited were due more to timing (luck) than skill. This post shows how luck can be mistaken for skill. Twitter was an “also ran” until the Ukrainian conflict. It then showed its power. Did the VC orchestrate the Russian invasion? If so – take the credit. If not – stop blustering about your skill.
Damn. You figured it out.
That’s super helpful and clears some fog for me. I now realize I/we’ve been flipping back and forth between strategy and business model and sometimes letting the latter drive the former.
Instead of jump the gun to make a profit, entrepreneurs need self control and patience to find where their great idea fits into the bigger picture. Thanx for this short and succinct lesson! Louise 🙂
And as part of this approach, you need to validate your strategy before moving it to a business model.Your product/market fit process should culminate with this validation. Otherwise, your assumptions gap is too risky.
I think Fred has it sequenced perfect, Product>Strategy>Business Model, that’s the framework. The right strategies hopefully move your product successfully through all stages in the product adoption lifecycle. A helpful read on this is “Crossing the Chasm.” You may have a great innovative product but you have to be concerned with how you position through stages in the market, and understanding your window of opportunity(s).
Great stuff, thank you. (Little typo: find & replace “straetgy “)
Thanks. Will fix.
I have to disagree. There is no way that any business should start without a credible business model. Money in. Money out. The product is in itself a working strategy to bring that model to life.Investors look for traction. To get this you need to have a basic business strategy. How are we charging for this? How do we acquire users? Most startups don’t have a clue about this because they have been misguided by “advisors” into thinking that they should just focus on a great product.Investors are less likely to take that route. Especially nowadays.
The vast majority of our most successful investments have started without a strategy or a business model
that’s unusual though
You may have vague assumptions but they almost always end up changing. So in retrospect, it looks like you didn’t really have a strategy.
What did they start with? Growth?
Pretty broad and incorrect assumption about advisers here.You may have run into poor ones but to assume that the start-up world is run by a hierarchy of clueless, product-dogma spewing advisers is just incorrect.
It’s actually pretty spot-on. It simply comes down to giving broad and usually bad advice.Most startups don’t have seasoned business experience in the beginning to navigate thru the stiff competition. Sometimes, during the course of coming to that realization, they are advised to simply just make a great product, ignoring strategy, business model, capital management.That’s the point. It may be the startup world, but it is still business.
Each to their own opinion.Your experience with advisors is not representative. That I know.
Not an indictment against everyone by any means. Just the advisors who give “one size fits all” advice.
So the market is never a laboratory?
Maybe this is just a difference in language, but I don’t like divorcing product from strategy. The product itself should be strategic. (On the same note, as folks are pointing out, the revenue model is a fundamental part of the product, too.)Products are about solving problems and meeting needs; problems at scale are markets. Too many people build products that don’t solve real problems, for sure, but too many of us also build things without understanding the markets we’re playing in and ultimately serving.Yes, we can use early products to explore markets and develop domain understanding, if not expertise, just like we use tactical product experiments to explore user behavior. But how you scale the product from there *is* the strategy.
There is product strategy and business strategy
I’m pimping my related post to this,- Forget the Product, Start Focusing on the Modelhttp://wmougayar.com/blog/2…
Well, I’ve bootstrapped so far to product market fit. It’s only just reached the most bare MVP, and that is only for half of the segment of the market I am trying to have flow into the ecosystem I’m fostering – though that’ll be enough for what needs to happen next.During this process of evolving understanding I’ve figured out many revenue streams that I feel are viable, and I want to at least try them all out, eventually. I’m not sure what priority those will happen in, and I don’t think I need to know at this point. You need to be careful when implementing them though.You just can’t know the value of your product / ecosystem or what negative pressures it can withstand until you reach scale and therefore some stability.So how do you get to scale and stability? Freemium models is one good way. It allows you to let a larger amount of use occur, and then you can determine how you can monetize / ask for money (or other) in return for added / uninterrupted benefit – and you can see how people use your product, or how they function within your ecosystem.An example would be if Twitter charged people for every public tweet they posted. People already pay for private texts, so why not public ones?But what does that cost long-term, in exchange for that short-term gain of the cost per tweet? I imagine that would prevent Twitter from scaling because most people don’t get enough value from sending out a short message to a bunch of people in order to be willing to pay for it – some will though, and they’ve found revenue streams around that to accomodate the base demands / requirements that lead to and allows their ecosystem to exist.The conclusion is that if you jump to business model before product market fit (understanding your market and its values and needs) then you have a high probability of squashing something that could have worked; This kills the business – well, not usually totally fatal as Fred points out, though costly otherwise.
I’ve self funded for the past year (found my co-founder and started actual coding in september) and we’re still trying to find that exact right product market fit. We’re uncovering all sorts of interesting use cases and angles, but haven’t gotten over the hump in terms of getting the first wave of users on boarded. Our long term value prop is social (connecting you with like minded individuals nearby), which as you know, doesn’t work without a mass of users using a site. We have all sorts of business models we can explore in depth once we figure out the exact right single user dynamic.Regardless, definitely smart advice to not explore strategy & business models in too much depth prior to nailing the product.
Yeah, it’s overall a tough thing to do, and requires a lot of thinking – and I mean a ton. Part of that thinking I believe that needs to hapen is brainstorming through business models, which will lead to brainstorming through strategy – to see if it could work considering all other factors – and hopefully looking at long-term defensibility, etc..
Thanks for this post Fred — seems important, whether in starting/running a company, or anything else in life for that matter, not to put the cart before the horse!
Thanks for sharing this framework. I just wrote my blog post building on this, primarily that you do not need to be first to take over a market. The launch of the August Smart Lock a few days ago has to be an indicator of that: http://bit.ly/13e72Td
As someone just launching a new startup, this was timely. If you are looking for new ideas for your 365/day a year blogging addiction 🙂 how about a post that explains the difference between product-market-fit, strategy, and business model in the context given in this post. Then you could write three follow up posts to give lots of examples of each?
Another thing. Sounds like PMF > Strategy > BM by definition requires seed funding vs. initial bootstrapping. Maybe you can talk about that too, and discuss how people who have to take the latter route should go about it? Not all startups will have the opportunity to receive the levels of funding procured by Twitter.
agreed, would love to see these
I would encourage entrepreneurs to try what makes most sense. Do more of what works. Do less, or none, of what doesn’t work. This is what Marc Benioff refers to as “tactics dictate strategy” and not the other way around.
Fred, love the post. Thank you. I wonder if the straight line path – product/market fit, then strategy, then business model – makes most sense for B2C because you can always monetize a large enough crowd somehow in the end. But in B2B or B2SMB (especially early on) it may be more of a circular iterative loop than a straight line because some product/market fit and strategy scenarios don’t lead to profitable business models, so it’s good to know that early.
That may well be true
It also seems to me like a lot of entrepreneurs struggle with Strategy – if one hasn’t been trained in it or hasn’t had sufficient experience, its very easy to confuse strategy with tactical execution…In fact, I would argue that a lot of entrepreneurs (specially first timers) miss basic business strategy skills (segmentation, marketing, pricing)!
Which one (product market fit, strategy and partnerships or business model) gets prioritised mostly depends on the composition of the founding team. If they’re engineers they focus on building and shipping products. If they’re MBAs they care about strategy. If their skills set is in sales and advertising, they prioritise the business model.Then it depends on the investor(s) sitting on the other side. If the investor has a background in engineering, they care about product. If they’re MBAs they like to see slides of competitive intelligence involving the Porter-BCG-Peters type matrices and strategic value chains. If they investor is from a sales background, everything is about conversion into a purchase by the user.I started in Product development as a teenager, was transitioned by some MBAs into their strategic modus operandi and business model thinking as a 20-something and now I’ve returned to my Product roots.
I like the theory and it probably works in reality. But it doesn’t gel with my experience. Almost always the first question asked by VCs to wannabe entrepreneurs and start-up founders is “what’s your business model”.
Seems like a good strategy for the 1 in a million facebook/twitters/googles of the world targeting consumers. For anyone trying to make a business which makes 1-10 million without employing 100 employees, I don’t see how this could be a good advice.I much prefer the B2B businesses which make money from day 1.
This triggered a thought on what some colleagues at Google have put together. The Pretotyping Manifesto – essentially, when you are in the super early ideation phase, how you can speed up and test your idea for product-market fit. There is a one-hour video from a Stanford biz class here which is excellent – http://www.pretotyping.org/…
good advice – but it will be misconstrued. as you know better than most, there needs to be awareness of an end-game – i see way too many seed stage founders with an “idea” (= recombination of buzzwords) and no clue where to take it even were they to be successful. doesn’t mean to make investments into a revenue model before achieving market fit; not at all. but blindly building product without any mind to how it could later be monetized is not good either. also ur advice is only applicable to venture-hungry businesses; many folks these days would rather grow from cashflow. nothing wrong with that, in fact there is oh-so-much that’s right with it 🙂
Lyrics from “Use Bitcoin” on YouTube:Don’t feel guilty if you don’t know how your product will monetize.The most interesting CEOs I know didn’t know at their series A how they would make money.Some of the most interesting $10 billion companies still don’t.bit.ly/UseBitcoin
Fred Wilson with a halo! 🙂
“That means different things in consumer, saas, infrastructure, hardware, etc, but in every case you must get to product market fit before thinking about anything else.”So I think the next stage here then is to more properly define product market fit for each of these. Could have a follow up post on each vertical maybe?
I’d *love* to have MBA Monday series on getting to product-market fit.It’s such a huge thing especially if you never experienced it – so many other issues to worry about and if you don’t have prior experience it’s too easy to focus on wrong things.There was Andreessen original post and there was another great one by Sean Ellis and really not much else.http://www.startup-marketin…pmarca-archive seems to be gone altogether.
Fred I think this is a great perspective to have. In my experience though this is an idealistic model to a certain extent – without raising a round, one often pushes through to business model quickly to get cashflow numbers up. It would be great to spend an extra 6 months on refining market fit but this model could have some pretty destructive byproducts for founding teams.
excuse the tangent – you should ping Jay Weintraub I just sent him your SmashSummit keynote from last year, it’s pretty entertaining
Does having a product-market fit guarantee a sustainable business model? If not, how do you make sure that as you are making your product – market fit choices that you don’t corner yourself into a place where you can’t build a sustainable business..My most favorite business school professor used to say this “You won’t have any issue finding a market that will take $1 from in exchange of giving you $0.99. But your wife will not be happy about it.”.What is your thoughts on avoiding situations like this?
1) Finding a Product-Markit Fit OFTEN (even if not ALWAYS) requires launching a product.2) Business Model. Agree with some of the earlier comments: A lot of times without a business model, there is no business. Twitter’s example is misleading in a lot of ways, for one, they had lots of cash in the bank. Second, while Business Model and Strategy both will evolve with time, you have to have both done upfront. That is, you gotta have a hypothesis on the business model early on. Lastly, Fred, does your argument go against what the book/movement Business Model Generation has been talking about?
Hardest thing to universally agree upon is a defined and quantified product-market fit. PMF itself is a function of the market, type of customers, revenue, timing etc. The variables by nature overlap with strategy and business model discussions and I feel there will always be a cloud of overlap between each of the three stages.
Agreed, but it might be more relevant to the US or some other developed country dynamics, not that applicable to a non-US start-up may be. I for instance am trying to do a product (Olaround.me) in Pakistan, which is partially funded by Google, but now that the seed funding has gone, there is no other funding option but to either boot-strap or make it generate some revenue on its own. If you talk to investors in the US or even regional investors in Singapore or Arabia, they want to know there is money at the end of the tunnel, forcing you to find a business model fit first. To Fred’s comment, it really does disturb the strategic direction, but then it seems to be the only solution to our issue. So we’re struggling with the business model and pricing issues. So any solution or suggestion for a non-US start-up ?
Your strategy is largely dependent on the type of business.Business model and monetization depends on the amplitude of the value prop.Urgency Level + Need Level = Value Prop Amplitude = Time to MonetizationMany businesses can deliver value to customers by monetizing ASAP. (i.e. restaurants, cabs, rental companies, etc.) Other businesses, like Twitter, which have lower and less direct value prop amplitudes, need more time to gather data points.This strategy is well suited for VC backed companies, but would be hard to implement in a LEAN start-up environment that is pre-money.
I believe most successful businesses start from a hobby turned obsession turned business. And those entrepreneurs who focus on make the best product, having the best customer service, being the best “whatever” in the market will be successful.
Founder / Problem Fit -> Problem / Solution Fit -> Product / Market Fit -> Business Model Fit
There would be ways to pivot from bad product market fits, correct? Would probably have to raise more money and try again, but then having capital is a given for creating worthwhile products nowhttp://startupbook.co/2013/…
Great article! I’m in the spirit of the Creative Commons, translating to Brazilian Portuguese: http://www.ibrahimcesar.com… . Our ecossystem of startups is not as mature as the american and this is a very important thing to keep in mind! Thanks a lot!
If you don’t have a market you have bubkas!