Category: Story

By Gregor Haidl (Investment Manager)

Supported by Yann Fiebig (Senior Investment Manager), Fabian Hogrebe (Analyst), Ingo Fehr (Investment Manager), Dr. Andreas Olmes (Partner)

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Part 1: The emotional perspective

„Have I found Product-Market Fit?“ This question is particularly difficult to answer for first-time founders in early-stage start-ups. The answer has far-reaching consequences: If I don’t have Product-Market Fit (yet), everything in the start-up should revolve around the search for a scalable use case. The burn-rate must be kept low in order to maximize the runway (cash reach). Only after an initial Product-Market Fit has been found, the founding team should seriously consider scaling and growth financing for the first time.

But are there indicators that help me as a founder to answer the question of Product-Market Fit? Perhaps you will find our perspective as a VC investor on this question helpful. We try to evaluate Product-Market Fit twofold: The emotional perspective (topic of this blog post) and the quantitative-analytical perspective.

• The emotional perspective describes the feeling that founders experience with customers when Product-Market Fit has been reached. This blog post is dedicated entirely to this topic. It is based primarily on the personal experiences of the founders in our Industrial Tech portfolio.
• Our next blog post deals with the quantitative-analytical perspective, i.e. the answer to the question of whether there are objective criteria or KPIs that can prove the Product-Market Fit of a start-up.

How do famous Silicon Valley founders experience Product-Market Fit from an emotional point of view?

Peter Reinhardt, Founder of Segment

“Product-Market-Fit feels like stepping on a landmine.”

From our point of view, Peter Reinhardt hits the nail on the head with his quote on the very feeling that a genuine Product-Market Fit causes: customers have a clear intention to buy. The number of customer inquiries explodes and a significant pull effect from the customer side is created. The problem no longer lies in persuading customers to buy but in keeping up with a large amount of inquiries and orders internally in the start-up. In one of his lectures at Stanford (Link), Peter Reinhardt goes even further:

Peter Reinhardt, Founder of Segment

„You can’t mistake the two. So if you’re at all questioning whether you have product-market fit or not. You don’t!”

This leads us to the third of our favourite quotes from Silicon Valley:

Marc Andreessen, Founder of Netscape, Partner at Andreessen Horowitz

“You can always feel when product/market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of ‘blah’, the sales cycle takes too long, and lots of deals never close.

And you can always feel product/market fit when it’s happening. The customers are buying the product just as fast as you can make it —or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can. Reporters are calling because they’ve heard about your hot new thing and they want to talk to you about it. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house. You could eat free for a year at Buck’s.”

Marc Andreessen describes Product-Market Fit just like Peter Reinhardt as a binary event: As a founder you either reached Product-Market Fit or you didn’t. There is nothing in between. If you doubt it, you can be sure that your start-up doesn’t have Product-Market Fit yet. We as a Seed-VC see this difference also very often: On one hand, start-ups that have obviously discovered a vein of gold on the customer side and. On the other hand, teams that have to tediously convince customers of their product. In the end often with no success.

Many of you already know these quotes from Silicon Valley. Nevertheless, we still meet many founders, especially from the Industrial Tech sector, who are convinced to have reached Product-Market Fit already, but who actually have a wrong understanding of the term. As an engineer by education, I also found it hard to believe the quotes mentioned above: All examples are contributed by founders of software and Internet startups. I thought that startups with a hardware product and industrial customers played according to different rules. Due to this assumption I was aware of these quotes but I didn’t really believe or internalize them.

However, they also apply for Industrial Tech start-ups, regardless of whether the product is based on software, hardware or a combination of both. Our HTGF portfolio contains some extremely concise examples that we would like to share:

„How did the entrepreneurs from our portfolio companies experience Product-Market Fit?“

We asked this question to successful founders from our Industrial Tech portfolio. All companies have in common that they

• achieve significant 7- to 8-digit sales (€),
• show strong growth,
• address B2B customer.

Kristjan Maruste, Founder of COMODULE

His start-up has developed an IoT-connectivity platform comprising hard- and software that enables operators of eBikes and eScooters to connect their vehicles and manage their own fleets.

“for us we did not really have time to celebrate as the acceleration was so fast. Immediately we ran into supply chain problems. Could not deliver what was asked and even what we promised. I think the scale was like…. 5000 units a year for the whole 2018 as initial plan and then going to a 50k orders in 4 weeks.”

“I think what is the best indicator that you have really hit the sweetspot is that you do not have to negotiate pricing. I remember discussions like:

“How much is it?”

“It is €150”

“WHAAT? That is ridiculously expensive”

“We do not think so. This tech. enables your whole business”

“NO. Way too expensive. Can you make it for 100?”

“No”

“Okay, then give me 10k ASAP for the 150 price”

Fabian Reuter, Founder of FAZUA

FAZUA develops the evation drive system for eBikes, an electric drive which is integrated in the bicycle frame and excites customers due to its low weight and natural riding feeling, especially for sporty riders.

“The Eurobike 2017 was certainly a trailblazer here. The first customer (Focus) offensively presented a bicycle and at the same time we won two awards on this fair. Not one of these startup awards but an award for real products on the market. For the first time we were able to present production-ready bikes and we received only positive feedback. Another milestone that we always remember is the result of the first service training tour. We trained several 100 dealers in a short time. People, who voluntarily travelled long distances to learn about our system, in order to sell it in their shops and offer our service. Ultimately, it is the sheer number of manufacturers which have chosen us over the fierce competition from other drive systems.”

Philipp Roesch-Schlanderer, Founder of eGym

eGym revolutionizes the fitness and health industry with digitally connected training equipment, personalized training programs and interactive apps for coaches and members at gyms as well as facilities for physical therapy.

“If customers pay for the product and tell you after 4 weeks that the purchase decision was right, then you know that you have reached PMF. That’s a great feeling, because you’re a company now and not a test lab anymore.”

Based on his own sales experience my colleague Andreas regularly states: “…it feels like being able to print your own money.”

What do these extremely intense emotional experiences, when Product-Market Fit has been achieved, have in common?

Great appreciation by customers

• Customers invest a significant effort or make a serious (financial) commitment to use the product. They express their enthusiasm for the product publicly or send fan mails (really!).

Bargaining power

• Founders can meet potential customers at least at eye level and negotiate. The price, for example, only plays a subordinate role for customers because a real problem is solved.

Feeling overloaded

• A rapid and almost destructive increase in customer inquiries. Suddenly, the own supply chain and the recruiting of the startup is the bottleneck.
• Emotionally, there is often no time to enjoy success as a founder. The new challenges quickly lead to a feeling of being overloaded.

From our point of view, these quotes from our founders speak for themselves. They show that the “Landmine Feeling” mentioned by Peter Reinhardt also exists among Industrial Tech start-ups. The founders experience strong appreciation by customers and an unexpected position of power in negotiations. At the same time, they suddenly feel overloaded by the high level of customer interest and the resulting challenges in scaling. These feelings from the emotional perspective are thus a clear and unambiguous proof for Product-Market Fit.

In the next part of this blog post (part 2), we look for objective criteria and KPIs in the Industrial Tech sector that can help start-ups on their way to product-market fit.

You’re new to this blog? Then maybe our first two blog posts are interesting:

Part 1 – Product-Market Fit: The main reason for the failure of Industrial Tech start-ups in the HTGF portfolio

Part 2 – Product-Market Fit in Industrial Tech – The way to customer understanding

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By Ingo Fehr (Investment Manager), Gregor Haidl (Investment Manager), Fabian Hogrebe (Analyst), Yann Fiebig (Senior Investment Manager), Dr. Andreas Olmes (Partner)

The founders of Industrial Tech Start-Ups master difficult technological challenges: problems are identified, large problems are broken down into small elements and detailed analyses are performed. For most of the Start-Ups, this way of working solves the most difficult technological problems in product development: less than 10% of Start-Ups fail due to problems with the technological development.

Surprisingly, the same founders have a hard time dealing with customers and customer problems: 74% of the failed Industrial Tech Start-Ups in the HTGF portfolio had a lack of Product-Market Fit as the main reason for their failure. Internationally, analysts come to similar conclusions. Thus, the technological risks are not the deadliest! (see our first article on the topic)

This is a fundamental problem that we face in our daily work with Start-Ups. Therefore, we would like to develop some explorative ideas and potential reasoning in this article. We hope to stimulate your thoughts and to help founders to avoid certain stumbling blocks.

What we observe

Many of the founders come straight from academia

Industrial Tech and Deep Tech startups are based on outstanding scientific and technological achievements, mostly generated at universities. In academic thinking, understanding is more important than economic benefit.

We remember our own scientific work well: It was important that something new was described for the first time and that the academic knowledge was expanded. Whether the researched topics also brought economic benefits, was of little relevance.

The founders often start in this environment – with the discovery and description of previously unknown effects. In the next step, they consider in which field this effect could be useful and whether a business can be derived from it. The major threat is to think that one has already reached the goal.

Some of us started their own business and remember well how unusual and difficult it was to approach potential customers. However, this is essential in order to take the next and most important steps in product development: Achieve the Product-Market Fit. This requires a deep understanding of what the real customer problem is: How painful is it? Which competing solutions are available to the customer – external and internal? The tendency is to reject critical feedback from potential customers – “they just didn’t understand our solution”. The sale of a proof-of-concept is often rashly considered as a validation of the business model. Later founders must often painfully realize: Selling a small proof-of-concept does not mean having found the product market fit. It is way more difficult to get a new product into a series rollout or widespread productive use – this represents the core validation of Product-Market Fit.

Product-Market Fit is not trivial

We regularly observe that large rollouts of start-up products fail because of ostensible banal reasons – not technical reasons. The client would have to change a process or the works council sees the introduction critically. Alternatively, the customer recognizes the added value but considers it to be low. Thus, the efforts and risks of the introduction are not worthwhile and the product is not rolled out.

At second glance, these non-technical hurdles are not at all trivial, but complex, and difficult to grasp from the outside. The good thing is that, in order to overcome these hurdles, the founders can apply exactly the scientific way of working that they master so excellently: Formulate hypotheses, carry out experiments or surveys and arrive at analytical results in order to increase the ground truth about the customer. This is the best way to achieve Product-Market Fit from our perspective.

Customer interest is difficult to interpret – especially for first time founders

At the beginning, it is difficult to critically question the interest of a potential customer and to moderate the euphoria: Why does the customer need the product? Which problem exactly should be solved? Are there any cheaper/better alternatives? This is even more difficult if you are dealing with a large customer.

If these questions are not tackled early, it could become clear at a later stage that this customer (or even the entire customer group) will not use the product to a broad extent. The planned product sales are then unreachable.
The situation is aggravated if the Start-Up has set itself high sales targets, it will then take a lot of effort and conviction to cancel an order from an interested party with no clear customer benefit or no potential for scaling. Before reaching the product market fit, we as HTGF have made the experience that too high sales targets in the budget can be counterproductive.

Technology hypes obscure the view on the use case

We live in exciting times with extreme speed of technological development. A wide range of opportunities and chances open up! Unfortunately, this can lead to an overestimation of the applicability of new technologies. Current hype topics, such as blockchain, artificial intelligence, quantum computing or drones, are just a few examples. No matter which problem is discussed, we hear “technology XY is the solution”. Just because we don’t want to see any hurdles and problems in the implementation of these technologies that are perceived as omnipotent, they are not gone. If customer problems are ignored, Product-Market Fit cannot be achieved.

Another observation is the too early focus on a use case where the customer mainly wants to learn about the potential of a new technology rather than to solve a real problem. This ties up so many resources that the exploration of further, perhaps better, use cases does not happen or happens too slowly.

What are the deeper causes for a lack of focus on Product-Market Fit?

We would like to present some hypotheses for open discussion. They are based on our own experience, the experience of several founders from our portfolio and former founders with successful exits.

Types of recognition and appreciation

Only those who solve a clearly defined task completely and correctly, receive appreciation during their studies or research. With a partial solution, no matter how good it may be, the scientific reputation suffers. It is therefore not surprising that it feels bad to approach potential customers with an unfinished product or even a mock-up.

A concrete example is Ulrich Reiser, CEO of Mojin Robotics, who develops innovative service robots. At first, the team had fully implemented applications for pilot customers to validate them directly with a working product (in an alpha version). The effort for this approach was very high. Both developer and management resources were often tied up for many weeks and sometimes months, only to finally discover: The robot did not solve a real problem, the customer was mainly interested in the innovative technology. In order to be able to test potential use-cases faster, he decided to have parts of his robots manually controlled by people in the background. “In the beginning it felt like cheating, to me as a perfectionist. But it was extremely important that I bit the bullet at that point. I am convinced that the decision to change our business process was essential for Mojin in that phase.,” Ulrich Reiser stressed in an interview with us. With the new approach, he could find out much more quickly whether an application was working or whether it was not accepted by the customer – without time-consuming technical development. He learned that gaining knowledge by quickly validating hypotheses in the seed phase is a hundred times more important than quickly generating sales that don’t scale or perfecting a product.

People, which are strongly motivated by good performance (from the perspective of motivational psychology), it feels unpleasant and unprofessional to “trick” the customer. They think of fraud and they don’t want to be accused of it in any circumstances. They have a motivation to deliver only perfect, functioning products. Almost all successful founders had a moment of “biting the bullet” and since then have drawn motivation and appreciation from fast-pace learning about the customer: Only if you realize regularly that you’re on a dead-end road, you are really able to iterate quickly.

Strong identification with own startup

Many technological founders understandably see their invention and idea as “their baby” and want to steer the fortunes of their company themselves. However, a managing director has to take care of all aspects of the startup. The tasks that arise in the area of business development are often carried out half-heartedly and as a necessity. It would be better for the Start-Up if every founder had a realistic view on his capabilities and motivation so that missing competences can be added to the team if necessary.

In addition, criticism of a product or business model can easily be perceived as a personal attack, when founders strongly identify with their Start-Up. In order to achieve Product-Market Fit we should listen carefully and reflect.

Underestimating the task of finding the product market fit

There are hardly any elements in technical studies that prepare you for customer development. As a result, many Industrial Tech founders, especially first-time entrepreneurs, have little idea of how deeply they need to understand the customer, what questions they need to ask, and where they really are in the sales process. The size of the challenge is often enormously underestimated. Having an investor at your side who repeatedly brings the important questions regarding Product-Market Fit on the table is vital.

Dr. Kai Richter, who successfully sold his company Symtavision, told us: “In the initial phase, we focused on the technical product rather than on our customers. We assumed a Product-Market Fit and did not do enough to validate this.” His key experience was the realization, that it is a greater achievement to improve customer understanding with many hypotheses and little effort than to develop a technologically perfect product which needs lots of explanation and is therefore difficult to sell.

Complex B2B sales processes are hard to understand

B2B sales processes, where many parties are involved, are typical in the Industrial Tech sector. Some stakeholders in the company, such as the technology scouting department or the end user, are easy to thrill by new technology. But the controller and management must also be convinced for a large rollout. You can’t do this from a purely technological perspective, but you have to look at the big picture from the customer’s point of view. It is important to establish clear connections to all affected processes in the company. We observe that sales success is only achieved when a significant influence of the Start-Up product on the profit and loss statement is perceived by the customer. It is particularly difficult for young Start-Ups to gain the trust of their customers and to convince them to make the necessary larger investments, change existing processes and qualify the new way. To communicate the opportunities and risks associated with the product in such a way that all internal stakeholders understand them is crucial for success.

Bottom line

It is difficult to distinguish how close you are to the product market fit. Start-Ups in the industrial tech sector, which generate some revenue through proof-of-concepts, can certainly raise several rounds of financing. Without Product-Market Fit, failure is ultimately inevitable and only a matter of time.

We don’t have the single answer and we didn’t find the perfect way to Product-Market Fit.

But, we want to help founders to become aware of these challenges and to reflect them in order to build even more successful companies. Founding a company is a tremendous challenge especially for the personality.

In our experience, founders should…

… generate as much customer understanding as possible.

… not be afraid to approach customers with mock-ups or just ideas and should keep asking “Why?

… be critical to customers, investors, but also themselves and question their value proposition and business model constantly to find obstacles in the implementation.

… say “No!” if your product is not clearly the best solution for the customer.

… have a healthy respect for the size and difficulty of the task of finding Product-Market Fit.

We would be happy if this article provokes your thinking about your interaction with customers and even more to hear your opinion!

In the next part of this series (part 3) we will tackle the question how to know that you have reached Product-Market Fit in Industrial Technologies.

A post-mortem Analysis of the HTGF Industrial Technologies Portfolio

By Gregor Haidl (Investment Manager), Fabian Hogrebe (Analyst), Ingo Fehr (Investment Manager), Yann Fiebig (Senior Investment Manager), Dr. Andreas Olmes (Partner)

Every year we read through hundreds of pitch decks or business plans at High-Tech Gründerfonds (HTGF) created by technology startups in the industrial environment. In recent years, we have repeatedly experienced the reasons that determine the success or failure of industrial tech startups.

The Starting Point

Most of the founders in the Industrial Tech or Deep Tech space have a technical or scientific background. Often a new technological product or a related service is the beginning of their own startup ambitions.

A technical development plan for the company is quickly drawn up. Initial market and sales figures are compiled through research and customer interviews. All this work is summarized in a pitch deck or business plan. The wishful thinking of many startup founders can be described in a simplified form: An investment round is raised to develop the initial product idea to a market-ready product. The successful market entry is then achieved by extensive marketing and sales activities. A growth investor is then acquired in order to further scale the product or service.

Startup Planning meets Industry Reality

From our experience startups rarely develop according to a plan. For example, sales are delayed or significantly lower than expected or the first product version has to be technically revised. Many technical founders ignore or strongly underestimate one fundamental risk: the risk that there is no demand on the market. The market-ready product or service is not able to convince a sufficient number of customers and the necessary revenues for the business model are not generated.

Instead, the teams are focussing primarily on minimizing technology and product risks. The founders rely on their gut feeling and hope that customers are demanding the product as soon as it is available on the market. All too often we hear: “Without a first product, the customer cannot even know whether it works and has any value!

One of the most important reasons for the failure of  startups is being either neglected or the importance is recognized too late in the startup’s development: the Product-Market Fit and the Value Proposition from the customer’s point of view.

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Product-Market Fit

Product-Market Fit from HTGF’s point of view means that the startup solves the problems of the target customer entirely and better from the customer’s point of view than potential competitors.

Value Proposition

The central promise from the customer’s point of view that the startup’s product or service is capable solving the customers’ problems. Competitors are not only alternative technologies, but also substitutes or existing processes that can solve the target customer’s problem well enough.

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The American venture capital database CB-Insights concludes that the main reason for failure is no market need for the product or service of the startups. 101 startups were analyzed post-mortem, however, not exclusively focused on the industrial tech sector: 42% of the analyzed startups are affected by this category which can clearly be attributed to a lack of Product-Market Fit. It is likely that the number of companies that failed due to Product-Market Fit is even higher! Other reasons listed in the top 10, e.g. ignoring customers, poor marketing or product pricing problems, can be indirectly attributed to startups struggling with Product-Market Fit.

Product-Market Fit Know-how is available

We are even more surprised how often startups still struggle with these problems. Today most startup founders, including those from the industrial tech environment, are familiar with the concepts originally developed in Silicon Valley, such as Steve Blank’s Lean Startup or Product-Market Fit. The term was already coined in 2013 by Wealthfront founder Andy Rachleff. In addition, there are numerous good contributions on the Internet, above all the Lean Launch Pad lecture by Steve Blank or the blog post 12 Things about Product-Market Fit by Tren Griffin (Andreessen Horowitz), which deepen these topics with relevant practical insights.

Our Portfolio Analysis: Why do Industrial Tech Startups fail?

From the experience of over 150 Industrial Tech investments, we are well aware of how important the  Product-Market Fit is for startups in the seed phase. We have invested in many very successful Industrial Tech startups which have created great value based on an initial Product-Market Fit. At the same time, it is the most important reason for failure. However, whether Product-Market Fit played a role in our failed Industrial Tech startups has not been systematically evaluated yet. We find this question particularly interesting. Previous contributions and analyses on the subject of Product-Market Fit have so far not explicitly dealt with these companies, but addressed other companies, e.g. with SaaS-models or B2C focus.

We have made 154 investments in various fields such as mechanical engineering, energy, automation, control systems, optical technologies and industrial software. 46 of these investments were either total losses or did not generate any significant returns.

In order to identify the reasons for failure, we conducted a detailed evaluation of these investments. In addition to internal documents, we also conducted interviews with the responsible investment managers for the post-mortem analysis. Thus, personal experience was also taken into account. In total, we were able to evaluate the results of 39 failed investments. The analysis was based on the same categories used by CB Insights to allow a comparison between both analyses.

Our portfolio evaluation shows a clear picture: In our former Industrial Technologies portfolio, the Product-Market Fit is by far the main reason for the failure. Although many of the founders have worked on challenging technological projects, almost no one has failed due to the risks of technical development. Although the team, which is cited by many investors as a success factor, is also significant, it is not the main reason for the analysed failures.

From our point of view, these results prove that Product-Market Fit is vital for high-tech startups with a focus on industrials in the seed phase. As investors in the HTGF Industrial Tech Team, it is also critical for our success. As a consequence, we have been working with our portfolio companies for some time now to address the challenge of finding Product-Market Fit as quickly as possible. We are working on indicators for a successful Product-Market Fit as well as on business development processes and tools. By doing so, we try to support the founders in their search for the best fit in the industrial tech sector.

We will present our learnings and experiences from an investor’s point of view to founders and startups in our upcoming blog series.

In the next part of this series (Part 2) we will deal with the special challenges in the Industrial Technologies sector on the way to Product-Market Fit.