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How can we achieve Product-Market Fit? – The Customer Development Process

By Fabian Hogrebe

With contributions from Gregor Haidl (Investment Manager), Ulrike Kalapis (Investment Manager), Yann Fiebig (Senior Investment Manager) and Dr. Andreas Olmes (Principal).


“How can we achieve Product-Market Fit?” is a question that we are regularly confronted with here at High-Tech Gründerfonds. The bad news is that there is no straightforward path to success.

However, each and every start-up has the chance of getting there. The question should therefore be: “How can we enhance our chances of achieving Product-Market Fit?” Although this path may not be straightforward and does not always lead to success, inductive and iterative approaches can help to enhance your chances.

What we know so far about Product-Market Fit

In previous articles, we demonstrated how Product-Market Fit is critical for start-ups, as well as how companies can pick up on and use indicators to gauge the point where they’re at.

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

We now want to share how companies can achieve Product-Market Fit, if they haven’t yet reached that stage.

It all starts with the customer

In our first article, we defined Product-Market Fit as follows: the value proposition of a start-up must correspond to the customer’s problem. In 2010, when talking about Product-Market Fit, our colleague Andreas gave the following definition:

“Customer? ➢ Painful problem? ➢ Effective solution? ➢ Why start-up? ➢ Cash customer? ➢ Cash start-up?”

Furthermore, Andreas’ definition provided a pathway that company founders can follow. Over the past 10 years, we’ve continued to outline the nature of this pathway. We’ve also come up with a series of questions for each individual step that serve as an indicator of whether a company is ready to take the next step.

We’ve also learned the following: You need to start with a single customer (n=1!). Try to understand this customer 120%(!), because otherwise important details can be easily overseen. There is no shortcut for this intensive groundwork with your customers. Furthermore, it must be performed by the founders themselves.

Customer Development Process and Product-Market Fit

And there’s some more good news: This pathway has also been outlined by other individuals and appears to be the best way of achieving Product-Market Fit. For example, as part of his Customer Development Process, Steve Blank proposed a pathway that launched the “lean start-up” revolution. The pathway has four steps: customer discovery, customer validation, customer creation, and company building. We have combined this pathway with Andreas’ definition of Product-Market Fit, resulting in a very strong method. As you can see, this combination goes hand in hand.

Adapted from “The Four Steps to the Epiphany” by Steve Blank

Pre-Product-Market Fit: agile and capital efficient

In Steve Blank’s Customer Development Process, everything begins with the search phase. This phase is almost always a closed loop, with companies often having to go back to the “start”. The pathway ends upon reaching Product-Market Fit stage, which can take up to two years. Be honest with yourself and your company and avoid scaling too early, the #1 cause of death for start-ups. You need to be able to answer the questions completely before taking the next step. If you cannot, you’ll have to pivot.

Before reaching the Product-Market Fit stage, it is important to work in a predominantly inductive and iterative manner. Hypothesis testing and pivoting is key. In order to follow these guidelines, start-ups need to act quickly and exhibit capital efficiency. Fail fast and focus on cash!

A founder in our portfolio provided us with an excellent phrase: “capital reach is not measured in time, but in the number of hypotheses that you can test.”

This is something we have experienced and observed in our industrial tech portfolio with more than 150 companies. Nevertheless, it also comes with a drawback: the path is not always as straightforward as it may seem.

The key challenge – and opportunity – is to pivot! As demonstrated in the combined model of customer development, the real question to ask is: how can we test our hypotheses and pivot most efficiently?

Summary

There is no straightforward path to achieving Product-Market Fit. The most important message to take away is this: Trust yourself, be courageous, fail fast and focus on cash! We hope these guidelines can help you and look forward to hearing how you get on.

In the next article, we’ll focus on the following question: How can we test hypotheses and perform pivots most efficiently?

Check out our other articles:

Product-Market Fit: The Main Reason for Failure of Industrial Tech Startups within the HTGF Portfolio
Product-Market Fit in Industrial Tech – The way to customer understanding
How do Industrial Tech founders recognize Product-Market Fit? (Part 1)
How do Industrial Tech founders recognize Product-Market Fit? (Part 2)

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