Growth without Product-Market-Fit
How it happens
Chronologically the path to scale in a startup is supposed to go something like this:
Customer development → [Pre-seed round] →Beta customers →First paid customers → Product-market fit 🎉 → Sales repeatability → [seed round] → Non-founder sales → Build mini sales team → Lean into CS → Profitability → [series A] → Scale 🚀
This is the perfect chronology of events and the path I guide my portfolio founders through.
However, there are many startups out there that skip critical milestones and still get funded. Here’s what I see a good amount of in the market.
Customer development → [Pre-seed round] →Beta customers →First paid customers → Product-market fit 🎉 → Sales repeatability → [seed round] → Non-founder sales → Build mini sales team → Lean into CS → Profitability → [series A] → Scale 🚀
Is skipping these milestones bad?
To be clear many startups have “succeeded” by skipping these milestones, taking series A or even series B funding and just grinding it out. However, they are extremely challenging environments to work in, especially if you are in any sales or marketing function. Burnout is very common, and people come and go on a high frequency.
To me, these environments are archetypal hustle cultures. Here’s a deeper dive:
How do startups get funded if they skip these milestones?
Back in the day when VCs did due diligence [deliberate slight at many VCs in today’s market], startups wouldn’t get the valuation they were looking for or get funded at all if they couldn’t prove they had nailed product-market fit, because they were deemed too risky.
Today, the perfect storm of SaaS startups getting 100x ARR valuations and VCs with $billions to deploy has meant there is a mad scramble to get capital deployed into anything that looks vaguely like it might be on a solid growth trajectory.
So in short, there’s a ton of cash washing around in the system, and no longer does getting funded validate a startup as being of solid foundation - if there is such a thing!
So what causes revenue growth without product-market fit?
In my experience there are 3 major things that cause this:
1. Ultra hot market
Black swan events like a pandemic can turn a market ultra-hot overnight. It can create a clamour for a story that overlooks the effectiveness of a product and in sheer desperation, people just buy on a promise.
Examples in the remote work, education, and events environment spring to mind - but I’m sure you can think of many more.
In many cases, it’s evangelical selling on steroids with a prevailing wind. And to be clear in this scenario who wouldn’t sell hard in this environment? When markets are exploding overnight, often first-mover advantage is what wins the day.
However, the product team needs to both have the skills and be staffed to follow through on the promises being made and they must agree to an SLA with the GTM team for this to work. Most critically, they have to deliver - more on this below.
2. Founder hubris
The very best salespeople can get contracts signed on a vision, they have the skills to sell ahead of the product roadmap.
The anti-pattern to look out for in this scenario is founders discrediting sales, and crediting the product’s current state. This is an act of hubris that is a major red flag if you observe it.
It results in under-development in product or development that comes too late. The net effect is that the founder has created an environment of over-promising and under-delivering, and the very best salespeople will not stand for this. This is the fastest way to burn bridges with salespeople who have a reputation to maintain, and most importantly need to be respected. This is seen as an act of disrespect, and it hits hard.
It creates a revolving door of salespeople and it means the founder has to remain involved in sales and the result is they never truly evolve from founder-led sales.
Worse, the net-net is ARR and logo churn. It makes the task of standing up a customer success org close to impossible.
In an ultra-hot market churn might be delayed, you might even see upsell and renewals happen in the most desperate of markets, but eventually, it will hit you, and churn will be your death knell unless you can fix product 💀
3. Product deficiencies
As alluded to above, often the product is not a strong representation of the promise being made by your salespeople. Fixing product whilst under pressure from churn, and no doubt under pressure from investors to continue to post the growth numbers that make the startup a venture backable business is a very challenging environment.
It’s not an impossible environment but it’s rough.
And good luck hiring salespeople and CS folk into that environment. Often I’ll see founders and executive teams hide the reality of the product from new hires because they know if they told the honest truth, they’d have no chance of hiring anyone.
To wrap up
Founder advice
If you’re a founder, and you’ve skipped these milestones the best thing you can do is be honest with yourself, your investors and your team and go back and fix them.
About 50% of the founders that contact me think they are ready to scale, when in reality they have 3-6 months of rewinding to do first - which is a bitter pill to swallow.
Candidate advice
If you’re a candidate at a company that looks like this, you need to call out what you see. It’s not going to magically get better when you walk through the door. If the founder is honest about the challenge, then ensure you set your terms to reflect the challenge eg: marry qualitative goals with any revenue goals they might want to put on your plate.
Employee advice
If you’ve walked into a company that looks like this but you were sold something different, that’s tough, but you have no choice but to tackle it head-on with the founder. If that goes well, ensure you reset expectations, if that does not go well, time to take the lessons and consider your options.
You’ve got this 👊🏼
Wayne
Advising: WayneMorris.co
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Twitter: @waynegmorris
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