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