When do you know if you have a company
One of the persistent myths which provide comfort to both founders and investors is that you have a company once someone invests. And then if higher profile people and funds invest, you have a better company. In an ecosystem full of ‘fake it until you make it’, this may seem like the best proxy you have. But it’s not.
Here is the mental stance I recommend founders take. You do not have a company until you have product market fit (PMF). I define PMF precisely as 20% month over month organic growth, preferably of revenue, but of users is probably OK as long as there is some model for how you might monetize.
Before you have a company, you have a project. The point of your project is to see if you can make a company. The reason this gets confusing is sometimes you need investment and outside help to find product market fit. When you get the investment, that validates your project, and makes you feel like you might have a company. But companies are long-lasting, and if you don’t find product-market fit, you won’t be long-lasting. And I think it’s hazardous to think of your project as a company prematurely, because it makes you complacent or even worse, risk averse.
Instead, you should think about the key metrics I put in the report card at the top of this doc.
Initially, if you don’t convert 80% of people that see your magic to believers, don’t waste your time doing anything else. Keep experimenting there until you get close to this metric. Then move on to 7 day retention and 30 day retention to make sure you are establishing a habit. Once you have these three working, you need to start thinking a lot about acquisition. Where is the natural source for people to come from for your service. Your funnel doesn’t leak any more, so figure out how to pour people into it.
If you stay focused on these extremely product and channel focused metrics instead of which cool investor wrote you a check, or what PR you can get, you will eventually either find something that resonates with users, or you will shut down your project or pivot to something else you have learned.
I buried the lede on this one. There is one thing you just can’t fake in startups — product market fit. All of the hustling and shucking and jiving only matters if it lets you find product market fit. But often founders think that if they keep faking it long enough, PMF will happen. It doesn’t work that way.
Here’s the good news. If you run five experiments per week, with the amount of capital in the market now, you are likely to find enough money to experiment for a year, which is 250 tries to get your magic, habit and channel right. That’s a lot of experiments if you are learning each week with your success or failure. If you do that for a year and aren’t getting 20% MoM organic growth, please please do something else! It’s not that your idea sucks or you suck as a founder. It’s that our world is about amplifying emergent behaviors, like AirBnB using reputation systems to create a new way to travel. AirBnB would not have succeeded before early reputation systems like Yelp had gotten users thinking the right way. That does not mean that AirBnB 2001 would have been a bad idea, the collective behavior just wasn’t ready yet. Your job as a founder is to navigate that. You live on the edge of what people think they want and what you can nudge them to want. Experiments are nudges. If you nudge 250 times and the world doesn’t move with you, try a new idea.
