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How do Industrial Tech founders recognize Product-Market Fit?

By Gregor Haidl (Investment Manager)

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


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