Finding Product Market Fit 2/6 — Magic

Welcome to installment two of this series on product market fit. Here is the previous piece. I’m John Danner, Managing Director of Dunce Capital. In the last four years, I have made over two dozen pre-seed investments in the space including Lambda School, where I am on the board, Outschool, Prenda, and Contra. Before Dunce, I founded three companies, NetGravity (IPO), Rocketship Public Schools (12k students) and Zeal (sold 2018).This is what I work on fulltime with founders in my portfolio, so I hope it adds some value for you! If you like this, you will probably like my substack as well.

The Goal to Exit This Phase — 80% of users who see the magic (the aha moment) once are willing to take the next step, preferably to pay for the product or at least to get into a trial.

Get Ready — Experimentation

Now that you have some initial traction, you need to become systematic about your experimentation. You don’t have enough users to do this quantitatively, but you can create the cadence to try five things every week. Use your favorite tool, a spreadsheet works fine. Here is an example:

While you are in the magic phase, don’t do any experiments which aren’t related to getting your magic conversion rate to 80%. Don’t worry about your business model. Don’t worry that there’s no way you can do this at scale. Don’t worry that people going into trials are failing. Nothing matters unless you can blow people’s minds in that first few seconds of interaction with your service.

One note to juxtapose this approach to what I usually see. Most founders try to avoid the hard experimentation work by doing a bunch of paid acquisition instead. This is especially true with accelerator companies, which are given three months to show great growth. Don’t do this. Focus on magic, get it right. If you can’t, do something else.

Back to Joe

Joe was able to get a bunch of students to do live sessions with him and they loved it. They have told friends and Joe is starting to get some buzz. For a founder, it’s easy to believe you have found product market fit at this point. Typically, I will see founders at this stage become totally convinced that this is now an execution play. But really, what’s the likelihood that in a few experiments, you have found the absolute maximum user demand in this area? Pretty small. So even when you have 80% magic conversion, it’s only enough to go on to the next stage, but when you have ideas about things that might be even more exciting, do them! Beware that your initial hypothesis doesn’t turn in to a sacred cow. For example, one of my companies, getsetup.io, had the initial hypothesis that a great cure for loneliness in the senior community was to have live classes that people could take to learn something new. With this idea, they had organic growth way above normal PMF maximums. But to the founder’s credit, he noticed that people were sticking around to chat after class, so he introduced “Happy Hours” where people could just come and chat about a topic. And that went truly bananas. It’s that kind of 10x on already strong PMF that makes for epic companies. And if you are going to work for ten years+ on something, start with something with insane demand.

Funding

After mastering the Magic:

Funding round: Pre-seed

Typical monthly recurring revenue: $25k

Valuation range: $2m-$5m

Investment amount: $250k-500k

Click here for my third piece in the series on Habit!