Note: This post is the forth part of a five part essay about reducing the cost to sustainability when developing a new product. Please click HERE to read the first part; defining product market fit.
This is not an attempt to create a magic formula to solve all the problems with building a new business. It is simply looking at the influences behind building a product from scratch. The entire purpose is to improve the understanding for founders, and their teams, of the impact of early decisions and thereby help improve what to focus on.
In my previous three posts I have shown that product resonation, within a market, can be measured by the Customer Contribution Margin (CCM) and Cost per Acquisition (CPA) as the business scales. I have also briefly outlined how these variables can change when developing a business efficiently in the ideal startup product development journey. In this post I am looking to expand these ideas to include the core influences behind changing product resonation. To do this I am going to continue with the modelling technique that I started in ‘Defining Product/Market Fit’. As with any model, I need to list my assumption(s), namely:
- The resonation of the product, within a market, can be quantified as a value. The perfect product would achieve 100% market share so can be measured by 100% of market value and the worst at 0%.
As this assumption enables the ‘product’ to be quantifiable it allows us to formulate the changes to product resonation, in respect with time, as a quadratic equation:
‘Initial speed of change’ and ‘acceleration’ within this formula, I believe, are the resource used to develop the product and the efficiency, based upon the understanding of the market, of using said resource. Therefore: Resource is the money available to the business for product development and efficiency is a reflection of team. In particular the knowledge, decision making and size of that team. Does this answer the debate of what is more important, the initial idea, or the quality of the team? Ultimately; yes, but it also depends on the perspective. It tells us the initial idea is everything in the beginning and as time goes on the importance of that idea dwindles. Thereby proving that team is more important in the long-term for any startup or business. The insight is that the goal of the business and entrepreneur are not aligned in this. This is because the cost, to the founder(s), of achieving business sustainability/profitability is substantially higher if the initial idea is rubbish. As shown by the formula, there are two variables that ultimately influence the speed of change to the initial idea and they are expensive:
- Money is money. If the business is not making any the founder(s) either have to invest their own (if they have enough). Alternatively they need to seek external investment which is very expensive. A more in-depth analysis of this cost can be found in my favourite post HERE from the list of posts HERE. In summary, the earlier you seek funding externally the more expensive it is in the long-term.
- Team An outstanding startup team is very expensive. This is either in wages that the founder(s) can ill afford or more expensively, in the long-term, equity. If the initial idea is awesome, then as by the formula, you are less likely to need a great team to achieve profitability. You ultimately will need a high quality team but if you wait until you have achieved profitability, or after gaining cheaper investment post proving metrics etc. You can then afford to pay higher wages and save on the long term cost of large equity dilution.
In summary, even though the team is more important for the business, the initial idea is more important for the founder(s). This is an important insight as I am now going to start at the beginning… my view on the number one initial requirement for an entrepreneur looking to build a high growth business. Simplistically this should be to build, or shown empathic proof you can, a sustainable business with the least amount of investment possible in as large a market as possible. Every entrepreneur should therefore be seeking an idea with the smallest jump required, from initial idea, to achieving product/market fit in a healthy sized market. Obvious… Yes. Easy… Hell no. What the formula is doing is opening the idea that this is not the only option. Why not flip the formula and change the requirement for the final product needed to achieve product/market fit. Enter planned pivots… NEXT POST: Reducing the cost of scale – The Planned Pivot
This post is part of a larger essay about reducing the cost to sustainability when developing a new product. Total parts are:
- Defining Product Market Fit
- The Reality of Marketing
- The Ideal Startup Product Development Journey
- The Product Formula
- Reduce the Cost of Scaling – The Planned Pivot