You Reached Product/Market Fit – Now What?
Say you have finally reached product/market fit with your first product. You’ve poured your energy into getting traction from the early adopters — but what to do next?
This was precisely how we were feeling. Three years ago, we were an early startup valued at $50M with about 50 employees. Now we are valued at over $500M with 320 employees.
I have felt that there is an information gap regarding scaling your company from 1 → 1,000. On the other hand, there are many books about building the minimum viable product. Zero to One by Peter Thiel and The Lean Startup by Eric Ries are representative of this strong focus on 0 to 1.
And this is extremely inconvenient because once you start scaling, you realize that there are so many things to do but don’t know what is important.
One of the hardest things to understand is that you don’t have enough time to do everything well, and you have to be willing to let some things fall apart.
- Sam Altman (YCombinator, President)
An interview between Elad Gill and Marc Andreesen lays out the three most important things companies should focus on after reaching product/market fit. The profiles of the interviewers are below:
Elad Gil: Early member of Google and watched it grow from 1,500 to 15,000 employees. VP at Twitter when it was 90 people and watched it grow to 1,500 people. Early investor in Airbnb, Coinbase, Instacart, Square, Stripe, etc.
Andreessen Horowitz: Cofounder of VC firm Andreessen Horowitz and Netscape. Net Worth of $1.7bn.
1. Taking the Dominant Market Share
After reaching product/market fit, you need to realize that you have only reached the early adopters, which is only 5% of the market and is very different from users in the mass market.
The common adage in the tech industry is that you need to build a product so good that it sells itself. But let's face it, we are not Peter Thiel or Elon Musk, who run companies (Palantir and Tesla) that pride themselves on not spending much on sales and marketing budgets.
Instead, most successful companies can dominate market shares even if they are laggards due to their distribution channel. For example, take a look at Microsoft Teams. Slack is a better choice, but most enterprises chose Microsoft Teams. The same thing is happening with tech giants such as Oracle, IBM, and Cisco.
That is why it is crucial to build your distribution channel and dominate market share. To dominate market share, Marc Andressen distills three main points:
A) Product iteration for the mass market:
Early adopters are not the mass market, so you have to build for the mass market. You have to keep iterating your product to reach the 95%.
B) Building up a distribution channel:
Invest heavily in sales & marketing when you get product/market fit. 50% of Salesforce employees were dedicated to sales, marketing, and delivering products.
In fact, the general model for successful tech companies, contrary to myth and legend, is that they become distribution-centric rather than product-centric. They become a distribution channel, so they can get to the world. And then they put many new products through that distribution channel. — Marc Andreessen
C) M&A to defend your product share:
The third method for gaining market share is M&A. Ideally, you can combine a) product innovation and b) distribution building, but M&A is an underutilized method.
Although our company is still pre-IPO, we recently acquired an IT-Dev company for system integration and app development.
Likewise, the tech giants that we know today have been built with M&A. Google acquired and scaled most of its main products that we know and enjoy today.
Where2 (2004): Google’s second-ever acquisition became Google Maps
Android (2005): Mobile operating system.
Youtube (2006): Video sharing platform.
Writely (2006): Initial form of Google Docs and then G Suite.
Doubleclick (2008): Became the backbone of AdWord’s network.
The above three methods can help to dominate market share, but that’s not enough. You can also double-check your moat by charging a premium price.
Marc Andreessen argues that you shouldn’t slash prices to gain market share. Instead, charging more is a key lever to better fund your distribution efforts and ongoing R&D efforts.
2. Building the next product
Although your first product may be successful, that isn’t enough to scale. All the great tech companies have released innovative products continuously. Look at Square: Reader → SMB Suite → Cash App → Tidal acquisition.
Every product in tech becomes obsolete, and they become obsolete pretty quickly. If all you do is take your current product to market and win the market, and you don’t do anything else — your product will go stale.
To encourage innovation, you can allocate a certain % of resources to R&D., But Marc says it is essentially not the amount of money, time, or human resources. It depends on the person behind the R&D operations. Find a great product picker and an architect, you’ll get a great product.
3. Everything Else
The final category is “everything else” or all the functions that are thought to be secondary: finance, HR, legal, marketing, and PR/IR. These corporate functions are necessary to mitigate the risks that could blow up when things scale too rapidly.
In our startup, we revamped corporate functions at around the 40~50 employee mark. We had a couple of lawyers in our legal team, a patent registration specialist, a strong HR (recruiting and operations), and a finance team. They definitely helped, especially working in a nascent space, AI, where the regulations are not clearly defined.
According to Marc, HR should be taken seriously at around 50~150 people. And there is a science behind this, called the Dunbar number. It is an idea proposed by anthropologist Robin Dunbar who found a correlation between primate brain size and average social group size and suggested that 150 is the cognitive limit to the number of people with whom one can maintain stable social relationships.
Here are some bullet points when recruiting, hiring, and managing new employees:
Clarify the job description so relatively new employees can understand the difference between each job role when interviewing.
One of the most significant determinants of candidate conversion is how quickly you interview them and how quickly you can make an offer.
Reference check is vital. You should reference check everyone.
Employ a buddy system: Pair a new hire with a “buddy” — someone who is not in the reporting chain of command for about one to three months
Compensation structures are really important and something the CEO should spend time on.
Marc Andreessen and Elad Gil distill the three most important categories during the early stages when things can be chaotic. It is worthwhile to go through when you are scaling.
If you found value in the above topics, I suggest reading the book by Elad Gil as it is a book with a lot of gems: “High Growth Handbook: Scaling Startups From 10 to 10,000 People.”