Why HR Technology is a Good, but Not Great Category

HR Technology is a noble software category that almost everyone can rally around its mission: To improve the efficiency and effectiveness of organizations.  Whether it is talent acquisition, performance management, learning or compensation & benefits, no one can dispute that technology to enable HR organizations can have real impact on people’s lives.   In general, as an employee of one of the HR Tech vendors you can feel good about the problems your firm is solving for your clients because you can relate to the product or service you are selling.

The HR Tech industry is booming which can easily be seen by the number of startup companies being created every month, the growth of the HR Tech industry conferences  and the record amount of funding invested in the HR Tech category.   Because just about everyone has encountered some type of HR problem that needs to be solved during their career combined with the incredibly low costs of starting a SAAS business these days, everyone and their brother have started an HR Tech company in recent years to solve some piece of the HR puzzle. Many folks have dedicated themesleves to the HR Tech industry and there are certainly many opportunities to have a long career as an employee, industry expert/analyst or vendor.

However, after spending almost four years in the space, I have peeled the onion and found that it really isn’t such a great industry when it comes to profits. If you want to get disproportionate returns on your investment of time or money as an investor, founder or employee this probably isn’t the first category you would pick.

While there are clearly various pros and cons of the industry and everyone must decide what is right for their personal situation, at a macro level here are….

The Top Three Reasons Why HR Tech Is Not a Great Category:

  1. Unusually High Sales Friction: Hard to prove ROI in order to get budget approval

By definition, the HR function is not directly tied to revenue like sales, marketing or product; it is an enabling function.  While there are some roles where there is a clear connection to revenue to filling sales-related roles (for example, professional services organizations), in the significant majority of situations it has hard to show how much more money you will make for any direct HR investment. The vast majority of HR tech investments are justified based on compliance or real cost reductions (e.g. applicant tracking systems or payroll). These types of investments are considered either ‘cost-of-doing-business’ budgets or somewhat easily quantifiable via a reduction in an existing budget.   However, tools which improve productivity or quality are much harder to get approval without significant, measurable benefit data to prove the business case for a sizeable budget. This takes time, effort and commitment from a champion within the organization. Since HR budgets don’t tend to grow disproportionately to a company’s growth, most of the time getting a large budget approval for a new system is dependent on a significant change to another part of the HR budget (e.g. no longer investing in another system).   At the end of the day, the sales friction for these types of quality or productivity solutions makes it harder for HR tech companies to grow quickly.  During my years in HR Tech, this is consistently the most common frustration my fellow founders have echoed: not being able to close new customers at a faster rate due to the challenge of getting a piece of the HR IT budget.

  1. Highly competitive unless you have a moat

If you look at the most profitable companies in the Fortune 500 they have incredible scale (e.g. banks, ExxonMobil), low marginal costs (e.g. biotech)  and/or are fortunate to be in a category with ‘winner take most of the profits’ economics (e.g. Apple and Google).  In addition, having network effects helps create a moat which inhibits others from re-creating the scale that the winners have secured.  With the odd exception (e.g. Oracle, LinkedIn), there are not many companies in the HR Tech category that have been able to build a moat and achieve disproportionate profits.  While there are certainly some excellent companies who have achieved scale (e.g. ADP, Workday), their margins are good, but not great.  Almost all companies in HR Tech have (or will have) competitors that provide buyers multiple options.  So while there may be ‘lock-in’ to a solution for a large enterprise software platform for a few years, the acquisition costs, competitive pricing and cost-to-serve limit margins and growth potential.  Network effects are pretty rare in HR tech (LinkedIn being a notable exception).  The majority of IT budgets for the HR department are spent on enterprise software solutions and they usually involve traditional sales teams with big price tags and complex implementations – not viral adoption.

  1. Profitable but not liquid: Limited exit options

In the past 10 years, I am only aware of a handful of billion dollar exits in the HR Tech space.  LinkedIn, Workday, SuccessFactors, Taleo and Kenexa-BrassRing. The limited true M&A in the space makes it challenging for traditional, big name venture capital firms to be interested in the space.  If you look at most major HR tech funding announcements they do not typically include well known VCs. While there are some exceptions here and there, what I have been told the challenge in picking early winners (since HR has so many problems companies are always willing to pilot something new) combined with the lack of exit opportunity drives venture partners to prefer investing in other categories.

At least a couple of times of month I get an unsolicited email from some boutique firm offering special services to help HR Tech founders either raise non-traditional venture capital or assist with some type of creative exit opportunity for later stage companies (e.g. at least positive EBITDA or >$10M in revenue).  From someone who is pretty knowledgeable with the traditional Silicon Valley startup path where you continually raise more VC funding until you either get acquired or if you are really lucky…IPO. However, what I have learned the last couple of years, it that there are literally hundreds of HR tech companies who have achieved a reasonable level of success and likely profitability, but they are tweeners who are not big enough or growing fast enough to IPO or be an acquisition target but at the same time, they have real businesses that generate positive cash flow.  This creates a conundrum for the investors and any founder/long-standing employee holding a good chunk of equity about how to liquidate their shares. While dividends are certainly one option, that is usually not the preferred choice.  Imagine putting in many years to build a reasonably sized going concern generating millions in revenue, but not having a clear exit path.  This lack of liquidity options is something that many folks who are vested in HR Tech need to consider when committing to the category.


There are many factors I truly love about the HR technology industry.  It starts with smart, passionate, caring folks who are committed to makes things a little better every day for the working folk.  But, depending on your role, you should know exactly what you are signing up for if you are committing to a career in HR Tech.  It may not be as financially rewarding as you might expect.  If you are looking to hit the jackpot in HR Tech as a founder, investor or early employee, you might want to explore other options or categories before this one.

Founder/CEO: Knowing what you don’t know

Recently I have seen several occasions when the Founder/CEO thought they knew more than they did and could not see the cliff that was quickly approaching them. The bigger challenge was that someone was trying to help them see what was coming, but the Founder/CEO wasn’t listening. As a result,  a small issue that could be addressed now becomes a much larger effort to correct.  Whether it is re-writing code, shifting resources from one product to another or re-organizing an entire functional group, the effort to fix it can easily be 10X what it would have been to get it right in the first place.

Company Fix trajectory lines

The reality is that most Founder/CEO’s haven’t done this before, and quite often neither has anyone else on the team. But there are people who have the relevant experience. Although it may not be exactly the same experience needed for this new opportunity, it certainly rhymes with the past.  The risk is that they have ‘big company’ experience and don’t know how to be scrappy and learn to selectively pick what is really needed for a fast growing startup. But these days there are many people who have big company pasts and enough startup experience to strike the right balance.

So, how can a Founder/CEO anticipate the challenges ahead and plan appropriately when talking to experienced talent?

  1. Be open minded – you’ll be surprise how much you don’t know

There is nothing wrong with a confident CEO, but that doesn’t mean you shouldn’t listen to folks with years of experience.  In almost every conversation you should be able to find at least one insightful nugget that will enhance the lens through which you view the world.

  1. Find a specific problem to solve

Being open minded might be a start, but really it all gets down to brass tacks.  Instead talking to experienced talent in the hypothetical try picking a real problem that you currently have (or anticipate) which is in the wheelhouse of your expert.  Working through a real-life issue can surface many benefits:  better understanding of the problem, possible solutions, and how the person would work in the organization.

  1. Don’t expect experts to be totally startup savvy

It takes about 6 months for someone who has been working at a large company to shake all the big company habits that are better left behind at a startup. This doesn’t mean that they won’t fit in or add tremendous value, it just means that they need to get used to their new environment and figure out how to find the best of both worlds.  Focus on the value they can provide to accelerate the company and ensure they don’t put their foot on the organizational brakes by accident.

There are many people out there with a tremendous amount of experience that can be purposefully leveraged at a startup, but knowing how to leverage that experience requires some thoughtful effort.  As a Founder/CEO your job is to find the best way to solve your problems in new ways leveraging the talent and organization you have AND want to build. Make sure you take the time to figure out how to assemble the right amount of talent and experience for the company you are building.

Startup challenges and how they can differ from large companies: Decision Making

Having a ‘Steve Jobs-like’ founder with more of an autocratic style of management can obviously have its pros and cons. But one of the real benefits of this personality–led organization is a simplified decision making process – since it is very clear who the decision maker is and what their decision is. This clarity makes it very easy to align the organization around a common goal and reduces the amount of thrashing that can go on debating what the decision should be. Not everyone will agree all the time with the decision and people might quietly continue questioning it, but the benefit of having a final decision made and moving forward is quite beneficial to an organization.

I’ve worked at or been involved with several startups in which the company did not have a single founder who controlled most of the major decision making. Instead there were leadership teams  with distributed power who worked together to make decisions.  The two main issues I have seen in startups of a reasonable size are either  1) dragged out decisions or worse, 2) decisions that were continually re-opened after they were made.

Over my career I have seen the ingredients that go into good decision making. They consist of three key elements:  a good process, data/information and teamwork.  Big companies use some form of RACI, which stands for Responsible, Approver, Consult, Inform and is used to clearly define team member roles.  By knowing which position to play and acting as a subject matter expert, the team can function more effectively; especially when the right data is presented to facilitate a decision.


Agreement & Commitment

Once a decision is made there are two components:  Agreement and Commitment.  Usually getting some form of agreement is possible for most well-organized teams. But the challenges I have seen is where there is passive-aggressive behavior by some team members. Someone who says they agree in a meeting, but then takes steps afterwards to either re-open or torpedo the decision because they didn’t really agree.  This situation is pretty common where there are strong personalities and divergent opinions about the direction of a company, business unit or product.  These types of behaviors are killer for a startup, they can handicap the entire organization when there isn’t true commitment to decisions that have been made. The amount of lost productivity and wasted energy used to further debate the decision has an incredibly negative primary and secondary effect on an organization. Everything from just lost time, to reducing engagement of quality employees who realize what is happening.

A specific example from a past company is when our product team had made a decision on how a specific feature was to be built. However, the engineer who ‘owned’ that module of the  product did not really agree with what should be built, so he just built it the way he wanted to without telling anyone until he was finished. Needless to say when he showed off his works the entire product team was surprised at what he done. Now, to give him credit, there were elements to what he built which had some merit and would have enhanced the original agreed-upon features. But instead we got a little bit of ‘right’ to go with a lot of ‘wrong’.  Somehow the product team needed to do a better job of both listening to the engineer to improve the final decision which incorporated his ideas. This engineer was top-notch.  However his team skills were not up to par. The engineer shared some responsibility in not committing to the decision and finding ways to share his ideas.


What to do?

So how do you handle repeated inefficient decision making in a startup? First, make sure the basics described above are in place. If the issues persist, ‘how decisions are made’ becomes a leadership and management issue.  Look at the people on the team and determine if there is a teamwork issue.  Are people playing their position?  In young companies, it is not unusual for leadership not to have a lot management experience and training. It is very possible that someone just doesn’t realize that they are overstepping their bounds in how they try to affect the direction of the company.

My experience has been that some people just fundamentally disagree with the direction that the team is taking and they use their power to subvert decisions and drive their own agenda. This is poison to a startup and people like this, no matter how talented, tenured or experienced they need to either be straightened out quickly or asked to leave. As my first manager at Procter & Gamble told me, it doesn’t matter how brilliant a musician someone is, if  the whole band is marching in one direction and they want to go in another, you gotta let them go.

Consumer insights are more important than real-time behavior data

When I started my career in manufacturing at Procter & Gamble 20 years ago, I experienced an impactful training simulation that still guides me today. We had a group of about 50 new hires going through orientation and we were split in to several teams all tasked with producing various colors and shapes of Play-Doh using the Play-Doh fun factory.

Each team was tasked to produce different colors/shapes each quarter and then sold their output to “buyers” sitting at a table (simulating retail buyers like Wal-Mart or Safeway) for different prices based on what was popular this quarter. The more you were able to produce and sell of the most in demand color/shape combination the more money you made. Most teams spent their time optimizing their operational strategy for the start of the next quarter; lining up different colors of Play-Doh waiting to learn which shape that they would start to pump when they heard what was in vogue from the buyers.  Many teams made about the same money. But the key to winning the simulation was recognizing that there was a training facilitator who represented ‘the consumer’.  If a team just went and asked ‘the consumer’, they would share what shape/color combination would be popular in the upcoming quarter or two. The more you knew about what the consumer was going to buy the more you could plan ahead of time and prepare lots of inventory to be sold right at the start of the quarter.

This simulation left a career-long lasting impression on me – consumer insights can give you the ‘keys to the kingdom’.

In today’s connected world there are many powerful measurement tools that let you know exactly how users behave when interacting with your product.  Our company uses KISSMetrics, Optimizely, Facebook Insights, Google Analytics, SendGrid, MailChimp and of course our own home-made tools to analyze server and user data. These real-time applications are either free or near-free.  It is remarkable how just about every detail we could want to know is now available in real-time.

But despite this incredible toolkit to understand user behavior, none of them provide the user insights that will be the core to the success of a product.  The data captured from them enables are necessary but not sufficient to make you a great product innovator. Let me explain. You can spend all your time building something you think users will want and then watch every detail about their behaviors. You can then optimize your product to improve performance by some impressive number. But if you are working off a small base an improvement of 100% or 200% really doesn’t mean anything. You are just getting to the top of a small hill (or in mathematical terms, you’re finding a local maxima).

Consumer/user insights are what allow you to identify where the big mountains are. This is where deep functional product management and marketing skills are necessary.  Being a quant jock is great for building applications in which most of the work is done under the hood (like search or online retail), but building a consumer application with interactive workflows requires knowledge of core product/marketing know-how. Best practices in iterative user design, focus groups, follow-me-homes, online surveys and usability testing are all part of the recipe to help find where the big mountains are.

I continue to be amazed at the power of today’s online tools and how much the world has changed in just the last five years in what they can do. However, as good as they are, they can’t replace the fundamental product/marketing skills needed to discover that incredible insight which will give you the ‘keys to the kingdom’.

Startup Challenges – Deep Experiential Training

It took me a while to write this post because I wanted to cram so many thoughts and ideas into it and could not find a good framework for it all to make sense. Finally I settled on two organizing thoughts:

  • What kinds of skills and experience should you want to get at a company?
  • How should you develop these skills?

These two questions are related to my recent posts about startup challenges.  At a large company these two questions are much easier to answer since they tend to have somewhat-defined career paths. But if you are just starting your career and joining a startup there is no handbook that you get when you start out with a track for you to follow. The following is intended for people who have a goal to reach a high-level role in their career, whether it is a VP or CXO role, or for someone who strives to achieve a high level of responsibility and manage large teams.

What kinds of skills and experience should you want to get at a company?

As I look back on my career, I think about the various sets of skills I developed and I have bundled them into three groups:

1. What’s Important Skills

This is basically a re-adaptation of the ‘What Counts Factors’ framework I learned at Procter & Gamble.  It was basically a set of 7 or 8 skills that all employees are looked upon to demonstrate and perform at a continually improving level throughout their career.  As you can see these are fundamental abilities that can be applied to just about any role and is not functional specific:

  • Leadership
  • Problem Solving
  • Creativity
  • Team Work
  • Communication
  • Priority Setting
  • Initiative
  • (Technical Skills)

Many large companies have centers of excellence with specific training courses and leaders to help you continually improve on each of these skills.


 2. Functional Skills

This refers to developing a deep, core set of technical skills required to be successful in a role. If you are a computer programmer or a marketer, there is a huge breadth and depth of knowledge and experience required to master a particular function.  When you meet someone who has mastered a function, you know it right away by their ability to go into depth about just about any topic related to that function.  Not only does becoming a functional expert include understanding the foundational and traditional attributes of a function, but it also includes being familiar with the latest methods and innovative tools that are currently being adopted and have become new standards.  Example in marketing would be social media and online marketing tools. In computer programming it would be open source toolkits and mobile app development. Becoming a functional expert is critical to achieving a high level with a large amount responsibility within an organization.

Similar to going to school, many large organizations have various training opportunities to develop a breadth of knowledge and experience in a function.

3.       Performance Management & Career Development

Having solid performance management experience means both receiving great feedback from your manager and includes having your work evaluated against a tangible process and framework.  On top of being on the receiving end of this process, you should also be given an opportunity to manage others and giving performance-related feedback relatively early in your career.  While having direct reports is more ideal sooner than later, managing the performance of others does not necessarily mean having people reporting up to you, it could also include cross-functional teammates with whom you are their ‘customer’.

Learning how to develop your own performance and skill and then developing a career plan help with self-awareness and career satisfaction.  Helping others improve their results and manager their career path are critical skills to have as both a leader and a manager. This also includes discussion about future roles and levels of responsibility employees are seeking and other developmental opportunities needed to achieve both company and individual success. It is amazing how few organizations have processes and training on such a foundational set of skills.


How should you develop these skills?

The challenge in going to work at a startup early in your career is that there is a very good probability that you will not get good exposure to the three groups of skills and experiences above.  The focus and first priority for a startup is not to develop great talent, it is to grow and scale the company.  Now this doesn’t mean employees aren’t important nor that you can’t grow and develop within a startup, I am just saying that creating these training and development programs is usually not a priority early on in a young company’s life. If you are a computer programmer and never learned some best practices in coding it is very likely you are creating engineering debt for your organization that will need to be addressed at a later date. Learning the proper way to be a functional expert early in your career will be catalyst to your success.

So here are some thoughts on how to acquire these critical skills and experiences early in your startup career.

1.       Find great managers and mentors to work with

It doesn’t matter what size organization you work for, if you have a great manager who has deep knowledge and expertise you will learn a lot and improve your own skills. The key is to find several such leaders within the same organization that you can learn from.  No single manager will have demonstrate all the attributes you will want to acquire, so you need to plan on finding other sources to help supplement both within your current role and as you plan your next career move.


2.       Read a lot… learn your discipline

Don’t just learn how to do your job. Depending on your educational background you may or may not have had formal, academic training in your area of work. If you haven’t it is becoming of you to find the top books, articles, online tools and thought leaders in your field to learn the breadth and depth of your function.


3.       Take on different roles  

If you work in online marketing don’t just do a role which is about data analytics, also take on roles related to uncovering customer insights by talking to customers, or working on new distribution channels.  These days I see many young people who have become experts in a single aspect of their function but have tremendous difficulty extending themselves to other areas within their function. This myopic skill set really limits their career potential and their role flexibility.

If you are in Brand Management at a large CPG companies, the experience is a bit of an apprenticeship. Over the course of 3-5 years an employee in brand management will typically work on several brands in different categories with different managers, functional experts and outside agencies.  For example some brands are more advertising focused versus trade/retailer focused vs. R&D focused. This upward spiral of roles exposes brand managers to a variety of experiences to round them out as they develop into a true brand manager.

Not all startups give you the opportunity to change roles after a period of one to two years based on organizational size and needs. You might be the only person who knows how to do your job and the company may not want to move you. These are important factors to consider when working at a startup and whether or not the company is a good fit for your career.

This posting was based on my experience working with many startup employees who have not demonstrated the same level of well-rounded skill sets as others who started their careers working for larger companies.  I am not saying that you cannot develop these skills working at a startup, however, the effort (and sometimes luck) required to gain those talents and be successful using them is non-trivial and requires a thoughtful career path strategy.

Startup challenges and how they can differ from large companies: Team Work

In a two-person startup, roles and responsibilities are pretty straightforward.  Figuring out ownership, decision-making and how to manage projects from start to finish is almost a no-brainer.  For five years it has been pretty clear between John and me what each of us is responsible for and how we make decisions.  What typically happens is we might not realizing we missed something until we are done and then go back and address it (wishing we had realized it sooner). Now once a startup has found product-market fit it is probably time to grow the team to cover all these bases, go faster and make sure nothing gets missed along the way.

Clearly as the company grows not everything can be done by just two people, so new resources are brought on board.  Most of the time these new people will be hired in some area of functional expertise whether it is engineering, product management, sales, operations etc.  These people will allow the team to divide and conquer the different operational elements that drive the company’s success as the company tries to scale.

The challenge is that as the organization and product team grows, the amount of information flow, decision-making and synchronization of work becomes much more complicated.  This becomes even more apparent as different layers of management start to get created thus creating updates and decision making conversations occur at multiple levels. For example a product team can develop their point-of-view about a new release amongst themselves, but then need to review it with the founder, CTO, VP of Product Management etc. for final approval.  This is the kind of multi-stage team work that doesn’t exist in a tiny startup.  If you were one of the first employees of a startup this new amount of complexity in getting a product to market could be frustrating.

In fact, in my career I have seen that most people aren’t used to thinking end-to-end when dealing with a large team trying to get a big initiative into market.

Now I am going to use the dreaded ‘Process’ word.

It really drives me crazy when someone talks about there being too much ‘process’ at a company.  Process is usually just a symptom or an outcome. And in fact most of the time having a defined process for your go-to-market initiatives is critical.

Now I will grant you that as a company grows they tend to become more risk averse which then requires Legal, Regulatory and HR folks to become involved (the lawyers will tell you it’s to protect the assets of the company).  I can’t really argue that these types of added steps in a process aren’t causes of frustration.  Each company is different in terms of how much overhead they require from these functional groups. But this post is really referring to the core functions in a Go-To-Market project, some type of inititative that affects the main business operations of a startup.

What I have seen quite a bit (and occasionally been guilty of myself) are team members who do not think ‘end-to-end’ when working on a highly cross-functional team project.  For a variety of reasons, they focus primarily on their area of responsibility and have blind spots to other areas of the functional aspects of project.  An example is when product management decides to build a feature in a certain way which reduces the ability for Marketing or Sales to drive more revenue.  Or vice-versa where marketing ‘needs’ a particular feature for a release but it will come at the expense of other important user features.

As a company and its teams grow, complexity naturally increases.  More meetings start to take place, more sub-teams go off and work on specific issues and ‘report back’ to the main team.  Clarity of decision making responsibility becomes fuzzy unless special effort is made to define everyone’s role.

Team work in a growing startup is hard. Without using too many sports analogies, not everyone knows how to play their position.  Some people care more about themselves than the team.  Some people aren’t good at compromising and negotiating to strike the proper balance for the better overall good of the team than just their area of responsibility.  Some folks just completely ignore certain stakeholders on the team. And at a very basic level, some people aren’t comfortable with the amount of communication and interpersonal relationships necessary within a team environment.


Now here’s the interesting thing.  All the elements I just described about team work manifest themselves in a process to enable the team to perform at a high level. That is the only way to coordinate an important intiative and get it to market on time. There are more meetings, presentations, multi-functional decisions and collaborative compromises that these new processes are used to address.

In a big company, this amount of team work is absolutely necessary. And in well-run organizations not only do folks learn how to effectively work in large teams, they can also understand why the different steps in the process are (occasionally frustrating, but) necessary.

In a growing startup when I hear about people complaining that they long for the ‘old days’ when there wasn’t as much ‘process’ or ‘we don’t need no stinking process’,  I basically think to myself ‘here is someone who does not like to work in large teams’.

Startup challenges and how they can differ from large companies: Focus

As someone who has spent about half my career in startups and the other half in large organizations, I constantly compare one to the other as a way to figure out how to get the best of both worlds.  There are many examples (and sterotypes) about how big companies are notoriously slow and lack innovation.  Just about anyone who has worked in both types of businesses can put together a big list of pros and cons of big versus small.

The questions that I continually ask my network of former large organization leaders who now work at startups typically relate to the common challenges startups face and what could they learn from large organizations.

This post is the first in a series stemming from recurring observations and conversations I have had across many startups in which benchmarking successful large companies practices would benefit a growing startup.

To start we will discuss ‘Focus’.

There are many smart people who have already discussed the importance of focus to any organization.  Just about every organization says they are focused, and even believe it. However as you start to peel the onion and ask specific questions, you can see how startups try to be clever in investing in too many opportunities at the same time.  To me, in a startup there are two elements to being focused. The first is having the right amount of time, people and resources to successfully achieve a project’s goals. But the second is also not investing in additional projects that could draw on resources, cash or leadership attention that your main project could have/would have needed.

The first question I like to understand about a startup is where they are at as a company. Are they before or after product-market fit?  When I worked at Emmperative we had two big customers who wanted very different enterprise marketing solutions.  Coca-Cola wanted a Sales & Marketing digital asset management distribution solution while Procter & Gamble wanted a Brand Management workflow product. Let me tell you, these are very different types of products. But we wanted to keep both name-plate companies happy. So we split our engineering efforts to solve two separate jobs.  Without going into all the details, our products were still so young they didn’t solve either customers needs completely.

At Adify, we hadn’t yet gotten to product-market fit with our first Build-Your-Own-Network solution, yet we were going after four completely different markets trying to see where we could get traction. Of course each of the markets had their own unique requirements, so until they began to focus on just one market segment which showed promise a lot of cash and resources were spent inefficiently.

One way to think about focus is to divide a startup’s offerings into the three buckets.

#1      Growing & profitable

#2      Fast growing, but not yet profitable (after Product-Market fit)

#3      Before Product-Market fit

If your startup is far enough along to have a product line in bucket #1, it really makes sense to keep investing in your success and allocating resources to buckets #2 and #3 (we can discuss the proportion at another time).

However most early stage startup’s primary/flagship offering is in bucket #2 or #3.

Let’s tackle the easy case first, bucket #3. If your startup has not yet reach product-market fit with its primary offering, investing in multiple offerings or customer segements will be a challenge as you dilute your focus. Even if it the same platform but targeting different markets, this will be a distraction to your team and scarce resources. Now, this doesn’t imply doing market research to seeing how close an offering could meet a different market segment’s need. Or going on a sales call to a potential customer in a different category. I am referring more to building market-segment specific capabilities into your offering that would ‘enable’ you to sell to two different customer types at the same time.  This is where not being focused comes into play.

Now let’s discuss the more common situation. Where a company’s main offering(s) are in bucket #2 and yet they also are investing in new offerings in bucket #3. (And to be clear, in this case I am not talking about a bucket #3 product which is a next-generation version of a product in bucket #2. In fact I would consider that investment as part of bucket #2.)   I am talking about where a company has a fast growing product that still hasn’t reached scale or profitability (bucket #2), and yet the company is investing significantly in new markets, customer segments or products (with or without the same technology platform)  (bucket #3).

There is a company I know who has a phenomenal offering in market that is growing quickly, but has not yet reached scale or profitability.  Thanks to that main product line’s success (with product-market fit) the company has been able to raise lots of cash. With this new cash influx, the company has invested 20%- 50% of its monthly cash burn into new products/markets that leverage the existing technology platform (bucket #3).

Here are some of the issues facing the company:

–          The main product line is struggling to get to scale and profitability.  The company has been able to find a market for their product and sell it, however the commercialization and operational efficiency required to get to scale has yet to occur.  Management experience and organizational focus on these two areas are seen as the primary reasons.

–          As the company struggles to get to profitability with their main product line, the investments in the early stage product development (bucket #3) has siphoned talent, resources and cash from the company.  Their balance sheet looks weak and these new products will still require a huge investment to get to product-market fit.  This has put the company in a challenging position to consider raising more cash that they really shouldn’t need if they were more focused.

–          Given the lack of ability to commercialize and scale the primary offering, there is a lack of organizational confidence that even if the new offerings find product-market fit that the company will be able to scale them too.

The challenges this company faces are pretty big. There are many challenges the leadership needs to address and they need to do it quickly before their cash position creates problems. Their situation is a wonderful example how the leadership did not did not make thoughtful decisions on how to keep the organization focused in a manner which struck the right balance of short term delivery of results and long term growth.

While I don’t know the right amount of resources to allocate to non-primary Bucket #3 opportunities for a early stage startup, I am sure the maximum number is less than 20% and probably more around 10%.

Larger companies with profitable product can (and should ) invest in high growth opportunities. Due to their size they can take a more portfolio management approach to their investments and balance short vs. long term growth in way that fits their ability to generate cash from their core businesses.

If you are in an early stage startup, you should ask yourself how much of the company time, people and resources are we dedicating to these Bucket # 3 (before product-market fit) opportunities? And how much is it ‘costing’ to pursue them in terms of cash, resources and management focus.

Audi or Honda? Striking the Design vs. Development Balance

Last year I bought my first non-Japanese car in over 20 years of car ownership. I purchased a pre-owned Audi A6 from a friend of mine.  It is a wonderfully designed car for the driver with a great interface and   powerful engine.  Quite frankly it is a little too fancy and stylish for my personality, but my wife and kids love it.

A few months after driving the Audi I had to take it in for an oil change. To my surprise, instead of it being the usual $40 plus a free car wash in about 15 minutes, it cost over $100 and took almost an hour. I asked the service person why it was so expensive, and he explained it was partly due to the higher grade synthetic oil required, but mostly because of the time required to remove several components under the hood just to get to the oil tank and drain it. He told me that it takes almost 15 minutes for this preliminary step before they even start the oil change. When done, they need to reassemble all the parts again and it takes another 15 minutes to complete. I was so surprised at how two different makes of cars could have such dramatically different maintenance costs and times for basically the same operation.  When I took in the Audi for its scheduled maintenance session a couple of months ago the same themes reappeared.  The Audi dealership told me they would charge me $300 just to tell me why a dashboard indicator light was on. It took longer and cost more for the Audi check-up compared to similar work on my other car, a Honda.

This experience got me thinking about the choice car manufacturers make when designing and developing their automobiles. Forgetting the different class of car for a moment, it seems clear to me that Audi optimizes for an awesome user experience, but there is a trade-off, the cost of maintenance is much harder for those tasked with keeping the Audi running lean and mean.  In contrast, Honda strikes a balance differently, clearly making some compromises on the user experience but makes the total cost of ownership much lower, giving them a more broad appeal.

Do you think these kinds of choices only apply to cars? Well if you have owned an iPod or iPhone for a while you may have had the not-so-wonderful experience of the battery dying. It is almost impossible to change the battery on your own. Instead it is a long and expensive process to get it repaired or replaced relative to just buying a new one at Best Buy or Amazon and popping it in yourself.

So how does this relate to a technology startup?

Product Design is all the rage these days and clearly user’s expectations of a great experience is going up. But as a small startup with limited resources there are many time when you need to make choices about what and how you build your product.  Thus the question I am asking is should you build an Audi or a Honda?

At the early stage of your company when you are just trying to get to product-market fit, it is more important to make sure you solve an unmet need of your target user with a product that can easily be improved and scaled rather than ensuring an absolutely amazing end-to-end user experience.  Here are some examples of when you are making these choices, knowingly or unknowingly.


In an ideal situation every pixel on a screen is beautifully designed with cool interaction widgets and impeccable graphics and colors. Several applications make wonderful use of animation and detailed graphics that bring a certain ‘wow’ factor to their users. However, each element takes time and money.   I have several creative ideas for Jernel that will certainly delight users in their initial and ongoing use of the product, but at this time when we are still trying to make sure we solved the right problems in the right way. Now is not the time for us to be investing time and resources into these cosmetic elements. We’re still focused on the ‘steak’, when we solve product-market fit, we can put more effort into some more ‘sizzle’.

Focused Components vs. Multi-Functional Systems:

As mentioned in the Audi oil change example, Audi is optimizing for the user experience not the mechanics that will be performing maintenance on the car. So making changes and updates takes longer and costs more.  Audi has taken individual components and combined them into multi-functional systems. So when one component requires attention the entire system must be taken apart and reassembled.  Software code can also be written in very small modular, bite sized code that has logical break which is easily tweaked as you scale and adjust your offering.  This provides meaningful division between critical components and keeps them properly separated within the different layers of the application.  All this allows for easier maintenance, scalability, reliability and performance. However, all too often I have seen engineers hack several components together in order to get them to work for a release. If something needs to be changed at a later date significant surgery needs to be performed to address many shortcuts that were taken to quickly get a release out the door and unnecessary mixing of different tasks into a single, bloated chunk of code.

Simple Maintenance – Leverage Existing Tools vs. Building Everything Yourself

With all the open source tools out there, it is really worth taking the time to investigate what is already available to re-use for you needs. Almost always they will not be a perfect fit, but good enough.  The key is that there these open source resources are constantly improving over time and leverage those benefits as your product grows up.  An example of this trade-off for us has been using our own unique buttons in our application. We have over unique 100 buttons in buttons in our application, many times requiring different colors depending on the user context. While it is not expensive to have each button wonderfully designed to look great, it can be a challenge to maintain all these assets as the product grows the way we hope and expect.  Instead, we have moved to using CSS3 HTML standards as a way to simplify our lives and have one less item to worry about maintaining as the product evolves and expands over time. The buttons may not be as pretty, but it sure simplifies the lives of several product folks charged with managing the buttons.

Not every startup can afford to have a Pixar animation engineer or an Apple designer on their team, so the reality is that you will probably have to make choices early in your product development about how sexy your product will be.  No doubt with the right people and resources you can indeed create an elegant user experience, but first solving an important user need and striking the balance amongst your limited resources is critical. With the right team and a little luck you could build an Acura in your first releases as you search for product-market fit.

The Only Number That Matters

While I was at Intuit the key ‘customer’ metric everyone focused on was Fred Reichheld’s Net Promoter Score. This measurement was seen as the Ultimate Question and was used to manage customer satisfaction for all their offerings.

When we launched Aha! Baby  we measured Net Promoter and had some very good results. However, no one was telling their friends about Aha! Baby.  We found that the dynamics of a free web service does not lend itself to using Net Promoter as the key indicator of success, although it is certainly helpful for understanding the overall satisfaction of your offering for users. The problem is that there are many assumptions in how Net Promoter works with respect to length and type of experience, depth of brand engagement, ease of becoming a repeat customer and potential for word-of-mouth marketing.

The challenge with Aha! Baby was that as a search engine, a great user experience meant getting them to another site as quickly as possible.  Their first use experience could have been a 9 or 10 NP Score and lasted less than 10 seconds.  If we didn’t interrupt their experience to ask them the Net Promoter question, they might not even have remembered the site name depending on how they came to Aha! Baby.  This starts getting into some of the issues. The success of the site was dependant on elements other than just the quality of the search experience.  Different traffic sources (e.g. SEO, SEM, other sites) provided different quality of traffic.  As a search engine, we didn’t require users to register, thus had limited ability to actively try to retain a new user. We did not have a distribution agreement with other sites, so we were not the ‘default’ pregnancy search engine that many users would see every day. Finally, we did try some viral marketing with Aha! Baby Sneak-A-Peek , but the tool was not connected to the core search site to create meaningful synergy.

So what does this all mean other than providing insight into the challenges Aha! Baby faced? Well it means that while we had a great search product, using Net Promoter was not the best metric correlated to predicting the success of the site.

If you have a free online consumer property and are trying to build an audience the only metric that really matters is your retention rate.  In particular, the week-over-week decay rate.  There are lots of very well-written articles explaining how retention rates work, churn and stickiness .  Now related to this is the virality of a property (aka k-factor). A property’s k-factor can dampen the effects of a low retention rate, but there is a balance that needs to be struck to make sure that the combined acquisition and retention tools create a sustainable long-term growth engine. While DAU/MAU (Daily Average Users / Monthly Average Users) is a great normalizing metric to compare across apps and benchmark your success, early on your focus should be on your retention rate. The fastest way to grow your audience will be by retaining users and then using your installed base of users to attract new users.  Having a great Net Promoter score should significantly improve your retention rate and is usually a necessary input, but it is not sufficient.  Acquisition (distribution) channels, retention tools, viral tools and conversion/activation capabilities all drive retention.  Each of these factors drive the success of an consumer property and thus optimizing for a great retention rate (with the help of an analytics tool like KISSmetrics) is really the only number that matters as you begin to grow your audience.

How to interpret VC feedback – standing out from the crowd

In my past I have been turned down by VCs many, many times.  And while some of the VCs may not be so great at being a VC and not ‘get it’, for what I was pitching, it kind of didn’t matter.  Overall if you speak to more than five investors and basically get the same result it ain’t them it’s you.  But how do you know what ‘it’ is and figure out what to do about it?  It is really hard for someone who is raising money to figure out how to interpret the feedback (explicit or implicit) received.

You can break down what it takes to get funding into three big buckets Team, Concept, Traction.  Just about every question or discussion you had with an investor is evaluating at least one of these areas.

To get funded, you mostly need high marks on two of the three and ideally all three.  And sometimes funding is a no-brainer. If you are already a successful entrepreneur you can probably get by with just having a team and are essentially ‘instantly fundable’.  But most folks raising money don’t have a previous success.

The other ‘instantly fundable’ attribute is having big and growing traction. Mark Zuckerberg was able to raise his Series A from Accel Partners not because of the team, but because he had a pretty good concept and most important traction. Having great traction solves almost everything (except for maybe a small market) in order to get funded. And not just good traction, accelerating traction.

So assuming you are not a previously successful, repeat entrepreneur and don’t have accelerating traction, then it is basically a mix of the team, concept and traction that the VC is looking at.

With your product still in development (and likely without deep proprietary technology behind it) and traction several months away, it is all about evaluating the concept and the team. Interpreting all the messages that were sent by an investor can tell you how close you are.  Do not be surprised if you are a lot further than you expect to be despite all the nice things the VC says to you (like ‘when you have a lead’ or ‘I’m very interested to track you guys as you see some results’).

So let’s start with the team starting with the founders.  Attributes to look at include the technical background of the team. How much engineering experience is there on the team that knows how to ship a scalable product. Also, how much business acumen on the team to address acquisition and monetization elements of the strategy.  Education and previous companies worked at play a role in experience, but at the end of the day an investor wants to know if they can trust the team to build something and get people using it.

One thing most first-time entrepreneurs don’t appreciate is that most other entrepreneurs are also really smart. Most have really top notch educations, strong technical backgrounds and some previous experience in a related field to what they are working on. The question that a VC is trying to answers is ‘Are you exceptional?’.  The best (clichéd) analogy is American Idol. However, not during open auditions, but when the number of contestants has been narrowed down to a much smaller number like 20 or 30.

At that point everyone is a great singer. But what makes you have star potential even though you have never recorded an album before and not a professional singer? What makes the VC believe you have star potential?What crazy thing(s) have you done that most people would never do that shows you got something special? Did you start a business when you were 12 years old?  Did you build a cool product on your own that solved a cool problem? The ‘exceptional’ usually involves some level of either incredible domain expertise that you were able to do something great with or demonstrating some form of salesmanship that accomplished something most people would never dream of even trying.

There are many things that could show that you are ‘exceptional’, but in reality most don’t.

Given the market the team is going after, how much domain expertise is there to understand the nuances associated with the target customer. Of course, more is better.  Most thoughtful VCs can quickly ask a few questions to the founding team to see if the understand the basics and some subtleties associated with the market they are pursuing.  In a consumer business, developing some consumer insights and understanding behaviors is critical.  I can’t tell you how many times I have spoken to a startup who is developing a new product and has yet to talk to anyone who would be a target user.

At the end of the day, a VC is trying to understand if you know your stuff and do you have the passion and dedication to figure it out quickly.

A related element to evaluating the team is their ability to eloquently address the second big attribute VCs care about…the concept.

By concept I mean everything from ‘What is the problem being solved’ to the product experience, to proprietary technology, distribution to market potential.  All that rolled into one. Like we used to say at Intuit…Is it a big unmet need, that you solve well and can you have a durable competitive advantage?

And then there are the other common questions:  How will you get users/customers? How will you get them to come back? How often will they use it? How will you make money? Basically Acquisition/Distribution, Retention, Engagement and Monetization. Related to this is the network effects and scalability of your offering or model.

Do not underestimate the need to have convincing arguments for each of these elements.  Without data around adoption of your product it is very possible that there are risks on several of these attributes. Each of these risks affects your fundability.   This is where an investor can easily drill down and see how well you understand your business by asking questions about your metrics. Even if you don’t have any tangible numbers, you should know the benchmarks you will be compared to. Whether it is eCPM, DAU/MAU, CPA etc. a good knowledge of the key target metrics will demonstrate that you know your stuff.  A red flag for an investor is if they know more about the metrics than you do.

Finally, one last attribute to consider is sex appeal. How hot a space are you pursuing? If you are working on a standalone web property versus a social, mobile, local (insert hot space name here) then you probably won’t be doing so great on the sizzle scale.

It is hard to get a term sheet from a venture capital firm. All you need to do is to look at the numbers of how many Series A investments any firm makes compared to how many startups are created annually.  A longtime venture capitalist once told me that VCs are not risk takers. In fact they are exactly the opposite, they are risk eradicators. The more you have reduced each of the risk factors related to the team, concept and traction described above, the much higher the probability of closing a venture round. Do you have what it takes to be the next American Idol?