If you’re looking for experts that can advise you on when and how to scale your startup, Sean Ellis should be one of your first calls. Sean coined the term “growth hacker” in 2010, after helping companies like Dropbox, Eventbrite, LogMeIn, and Lookout achieve breakout success and billion-dollar plus valuations.
Today, he’s the Chief Evangelist at GrowthHackers, a company he founded in 2016 to “help teams work together to drive breakout growth results for ‘must have’ products and services.” During the summer of 2012, Sean spoke at Alchemist and distilled some of his most valuable insights around product-market fit and developing strategies for growth. His advice provides a significant and preliminary roadmap for early-stage founders, as they look to take the next steps with their startups. Sean shared insights across several different, critical areas.
Product-market fit is important…but what exactly does it mean?
For every startup, finding “product-market fit” is a critical early inflection point. Sean notes that Marc Andreessen, founder of a16z, and one of the first people to coin the term, emphasized that founders should be obsessive in pursuing this state. Andreessen sees it as so make-or-break that every business can be categorized in a binary manner, as either “pre” or “post” product-market fit.
Despite its importance, Sean observes that a metric-based, universal definition of product-market fit has proven elusive. Through his operating experience, Sean has developed a potential solution to this “mystery.” Put simply, companies need 40% of their users, within a large segment of their market, to be in a place where they’d be “very unhappy” without the product. That seems like a clean, elegant solution. But, what is a large segment of your market?
Sean has a few answers. First, you should look for some type of 40% cluster within your user base. Next, try to figure out whether that group is meaningful, or merely an edge case. For example, if 80% of men are really unhappy without your product, that’s meaningful. However, if 80% of men between the ages of 37–40 in Oakland are really unhappy without your product, that’s an edge case.
While definitions are a helpful starting point, there is limited utility in theory. Sean’s unique value comes from his experiences in helping companies achieve breakaway success. To reach product-market fit, he has a few key suggestions.
Have a concrete plan for growth.
- Pain Point First: Find that there’s real frustration around the problem you’re solving, before you even write a single line of code.
- Early Feedback: Release an MVP to get feedback on your product as early as possible.
- Find Your “Must-Have” User: When you find this user, or group of users, who really need your product, learn as much as you can about them. Explore some of the following questions:
- Why do they need your product?
- How are they using it?
- What’s the primary benefit they’re getting from using your product the way that they do?
Sean realizes that it’s tempting to find people who don’t like your product, so that you can try to improve and iterate. It makes sense, but he emphasizes that it won’t lead you to create consistent value. Instead, he advises that you discover everything you possibly can about your “must-have” users, and find out what makes their experience “must-have.” From there, you can start to identify must-have groups and execute on their needs, as they continue to engage with your product. Sean stresses that your product roadmap should be tailored to replicate the experience that’s been resonating so strongly with these must-have users.
Funnel optimization is critical, and it always pays off.
There are a few key skills that can help founders on their journey to product-market fit. According to Sean, funnel optimization might be the most important. He emphasizes that it’s necessary to analyze every point of the conversion funnel. This process can be frustrating, because users are typically unresponsive and unwilling to give meaningful feedback.
However, even if you’re frustrated, Sean says you can’t give up or give in. Even a 1% response rate, with months of funnel analysis, can provide significant value. Sean explains that in one case, a company he worked with tripled their conversion rate with minor tweaks to messaging on their platform. Through survey results, they were able to see that users were unsure whether they were actually downloading a free version of their product. A minor tweak that more clearly distinguished between free and paid versions led to the 3X increase in conversion.
Know when to grow.
For most companies, there’s a lot of uncertainty around when and how to scale. Sean suggests that it’s optimal to spend and scale aggressively when you’ve reached the key 40% very unhappy stage, and when you have a positive ROI.
He also notes that, for freemium products, the free version is an excellent customer development channel for premium offerings. This testing ground lets them observe actual user behavior and see where there’s real value. He implores the audience to think about products in their lives that hooked them on their free versions, before getting paid subscriptions. For Sean, Skype was one of these products that quickly came to mind.
The network effects complication.
Toward the end of his talk, Sean makes a key distinction: there’s a big difference between traditional growth companies, and companies that rely on network effects. He asserts that, with network effects, it’s not possible to simulate the value of the company at critical mass, because it continually gets more valuable over time.
These companies don’t have the luxury of finding product-market fit, followed by optimization and growth — they must do all these things at once, which makes the process much more challenging.
Key takeaways in 50 words or less.
Find people who really need your product and engage deeply with them. Optimize your sales process to increase conversion at every point of the funnel. Recognize that purely viral growth is not sustainable. There has to be a “must-have” experience underlying growth, or you won’t be able to retain users.
About the Alchemist Accelerator
Alchemist is a venture-backed initiative focused on accelerating the development of seed-stage ventures that monetize from enterprises (not consumers). The accelerator’s primary screening criteria is on teams, with primacy placed on having distinctive technical co-founders. We give companies around $36K, and run them through a structured 6-month program heavily focused on sales, customer development, and fundraising. Our backers include many of the top corporate and VC funds in the Valley — including Khosla Ventures, DFJ, Cisco, and Salesforce, among others. CB Insights has rated Alchemist the top program based on median funding rates of its grads (YC was #2), and Alchemist is perennially in the top of various Accelerator rankings. The accelerator seeds around 75 enterprise-monetizing ventures / year. Learn more about applying today.