In my previous article I explained the importance of finding the problem-solution fit, and showed some parts of our go-to-market (GTM) approach. A multiple-case study with 12 founders of software startups located in The Netherlands, taught us that some aspects of the GTM approach are of significant value. We explain these industry lessons in this chapter, for which we coined the term The Startup Toolkit. The toolkit explains the six most important elements a startup should take into account to achieve the problem-solution fit and product-market fit. This article, or white paper, partly overlaps with my previous one, but it also explains new insights. We hope to aid (future) entrepreneurs by presenting these results.
“Some inventions are solutions that are unrecognised by potential customers as solving a certain problem, a classic example being Facebook.”
1. First talk to potential customers
Do not focus on the technology first, assess whether the problem is, in fact, a customer problem by talking to potential customers. Numerous startups overlook this aspect, but the multiple-case study proved that this is the first thing that startups should do. Contemporary literature shows that after building the MVP, you should measure and test it with customers, for instance, via the Build-Measure-Learn (BML) Loop. However, this implies that startups should first build something while they could have learned beforehand if there exists a customer problem that demands to be solved. One pitfall, especially for innovative startups, should be noted: some inventions are solutions that are unrecognised by potential customers as solving a certain problem, a classic example being Facebook. In that case, it is better to work with an MVP to test your hypothesised solution. Other than that, the startup should talk with potential customers and attempt to understand their problems as thoroughly and early as possible. This understanding of the customer problem is paramount for the subsequently devised solution, which should be a prototype as MVP. The Design Thinking strategy has proven to be a suitable strategy for this purpose. However, the Value Proposition Design also provides practical techniques that can be applied by startups. For instance, it shows how to make a customer profile with customer jobs, which can aid in finding the right customers. This also helps in finding the ‘best’ market segment, which relates to another vital aspect of this toolkit
2. Domain expertise aids in understanding the problem
Something we have not seen in literature but does help in finding the problem-solution fit is applying your domain knowledge. The case participants we interviewed usually operated in a specific domain where they eventually found a problem that required to be solved. One founder we interviewed worked as a lawyer at a big firm where he found that time writing by lawyers was being performed inefficiently. He then confirmed at similar firms that they encountered the same problem, which was enough incentive for him to create a solution (which also relates to the previous toolkit element). This example, substantiated by other cases, show that domain knowledge and experience can help in finding or understanding the customer problem. An obvious customer problem also results in designing a fitting MVP without much effort, because you accurately know what the MVP should solve for the customer. Furthermore, it implies that if you are willing to operate in a domain that you do not know much about, it can be an advantage to work with someone in your startup that does.
“When the MVP is validated regularly with potential customers, the software startup activates validated learning and prevents the creation of ‘waste’.”
3. Create an MVP and learn its value
Every startup that was interviewed acknowledged the usefulness of an MVP. The MVP should only contain the must-haves; thus, the most essential feature set or functionalities. As early as possible, entrepreneurs should get out of the building to obtain quick feedback, and they need to prevent that a product is being created that nobody desires, i.e. for which there is no customer problem. When the MVP is validated regularly with potential customers, the software startup activates validated learning and prevents the creation of ‘waste’. This is crucial since startups generally possess limited resources, and endure intense time pressure from the market, which emphasises that time and resources should be well spent. A failed product can also put a startup out of business, if not foreseen in time because the majority of startups are engaged in a single project at a time. If the customer need pivot, which is the most common, is initiated in a relatively early stage, less time and resources have been depleted by the startup. This pivot is only foreseen when actively learning from the feedback the customer has about the MVP. The aforementioned Value Proposition Canvas provides interesting details into testing methods with prototypes. It presents prototyping possibilities and guides startups step-by-step through the testing process.
“Some startups that were interviewed did not actively think about the ‘best’ market segment. However, in hindsight, they regretted that.”
4. Discover the ‘best’ market segment
This activity was especially important in The Startup Owner’s Manual showed that this was an important activity for a startup. However, not every startup actively engages in this activity, even though it became apparent that it helps in finding profitable customers on the long-term. Interestingly, only one of the failures listed by Crowne (who presents an extensive list of startup failures), emphasises on the importance of choosing the right market segment, while we found that this is an important activity. Again, the Value Proposition Canvas provides (practical) techniques to create customer profiles through customer jobs, pains, and gains. Some startups that were interviewed did not actively think about the ‘best’ market segment. However, in hindsight, they regretted that. The main reason for regret was that they later discovered other more profitable, or suitable, market segments compared to the initial segment they were operating in. Through validated learning, some startups can apply a customer segment pivot early in the startup phase. In another study, one case was interviewed that went through validated learning and successfully applied a market segment pivot, which was crucial for survival. A positive response from an unforeseen customer segment, targeted market narrowing, or merely adverse customer reactions, are pivot triggers that most likely precede such a market segment pivot. Therefore, the startup should actively be aware of these pivot triggers and test its product in multiple customer segments, without losing too much focus. This insinuates that every market segment is easily reachable, which in practice is most often not the case. The cases that were interviewed explained that they sold to the first customers that are willing to buy, which makes sense. However, a better market segment can still be discovered in a later stage, which is why we added a reflection on the market segment in this toolkit.
5. Test customer acquisition plans
If entrepreneurs follow the aforementioned general toolkit elements, the problem-solution fit should not be hard to find. With that fit in place, new customers must be reached by getting out of the building. As Steve Blank explains: “In a startup, no facts exist inside the building, only opinions.” The next goal for the startup is to find the product-market fit, something that is easier found when an accurate problem-solution fit has been established. After all, if the potential customers are clear enough, you know exactly whom to target and to acquire as new customers. However, it is again important to remain focused and to not add waste to the MVP. Every startup that was interviewed still gathered constant feedback, even after finding the product-market fit; the BML-loop is still relevant in this stage. They also prioritised new requirements and verified with other customers to see if they would also need those requirements, where some would even handle a guaranteed minimum of customers that should use it before actually implementing. Therefore, constant feedback loops with existing and new customers are paramount for building the company. However, in this phase, it might be wise to reflect on the market segment that was initially chosen, which relates to the last toolkit element.
“One case participant had to cut off its segment where he initially operated because it was close to putting the startup out of business.”
6. Reflect on the market segment
There could be other profitable market segments to operate in than initially thought of, which must be continuously considered by the startup. Several startups that we interviewed recognised that they found a better market segment before finding product-market fit, and after finding the problem-solution fit. Thus, they initiated a customer segment pivot. We have also seen one startup establishing a new business that arose from a side project with another market segment, which essentially is a customer segment and side project pivot combined. The new startup turned out to be far more profitable than the initial startup, and the customer problem was more evident than before. Other founders also agreed on the importance of reflecting on the initially chosen market segment and some implicitly changed their segment through time. Lastly, one case participant had to cut off its segment where he initially operated because it was close to putting the startup out of business. Therefore, this is an essential startup toolkit element, which does not necessarily put you out of business if neglected, but potentially lets you find (an improved) product-market fit.
“Reinvent yourself constantly” - Osterwalder
Did this post spark your interest? Leave a comment and make sure to read my previous article as well! Software startups can always contact me for advice, a presentation, or to discuss startup matters! I am a co-founder of a software startup myself, and I am familiar with the daily struggles. Are you talented with software startups? Don’t let that talent go to waste! Enlist as, for instance, a mentor at Utrecht Inc.