The murky middle of Product/Market fit: zero to one vs one to ten
PM fit, or zero to one, is an important but murky concept. I think that ‘one’ is supposed to refer to 'repeatability of sales' in the case where there is a clear product that meets a market need and scales well enough to create a venture-backable startup.
‘One’ can also refer to the first anchor customer, but it's hard to argue for a single customer defining product-market fit. Let’s call it ‘early traction.’
‘One’ can also refer to your first 10 customers. This is where you can really define that your product fits a clear need, is sold to many people with a repeat sales motion, and looks like it's clearly going to scale. Let’s call this ‘breakout traction.’
So this is what I call the murky middle of PM fit -- somewhere between your first anchor customer and clear repeatability that will scale, you find your repeatability. At this point, you typically want to be moving from founder-led sales to a real Go-to-Market Engine. If you want to drive to repeatability, the founders should be involved in defining the repeatable process, not trying to continue to drive every deal themselves. So this is a phase where driving breakout commercial traction ends up intersecting with the management team buildout. Repeating for emphasis; the whole point here is to create a scalable GTM engine, not just 10 founder-driven deals.
The Management Butterfly Effect: reflecting on your management build hit rate
Over the years, I have personally made some really bad mistakes in this messy middle after delivering solid early traction. I recently reviewed my historical data. I noticed that I was outperforming in the 0-1 stage to drive early traction, in some cases getting $5M deals done 6 months from a standing start. I was nailing the part I’d lived through trying to get right for so many years -- the idea selection, navigating to the initial anchor customer, and building out the initial product and IP that satisfied the market need. Then I was underperforming compared to my top peers at turning that early traction into breakout commercial traction and building robust management teams.
I did a retrospective, and found a Benchmark from HBR and other Studies pegging the failure rate of executives coming into new companies at anywhere from 30% to 40% after 18 months. My miss rate within the first 18 months is 53% - 63% as compared to the benchmark 30% - 40%. Early stage startup management hiring is probably harder, but I take this HBS number as a baseline because it was the sanest thing I could find without wasting too much time on research. If someone has better numbers for early stage startups, please share. This swing in hit rate over 19 leadership hires means 7-9 leaders were wins instead of 11-13 during this period. Imagine 4 of the best VP+ leaders you’ve ever seen replaced by 4 ineffective ones, that is the swing -- 4 of 19 leaders could have been outstanding fits for the roles if I were a better exec team builder.
This Butterfly Effect is so pronounced because not only do you need to transition leaders out, you will almost certainly need to make changes in the underlying organization they built, and hire a new leader. By the time you stabilize things and find a new leader who may be the right person, you have to compare the current state against where you'd be if you had hired an outstanding leader. This is where you can see the remarkable Butterfly Effect: senior leaders have a highly leveraged impact on the organization through their own work and their hiring. The momentum, both good and bad, can play out exponentially in time.
Allocate time and be precise about skills, sourcing, and screening
After reviewing my results, I conducted more research, completely redesigned all of my management hiring practices -- sourcing, interviewing --and started working with search firms. I also found that I was not allocating enough time to recruiting, and was delaying critical executive hires that I didn’t feel confident enough to go after.
Block Time: In the startup game, the CEO just has to plow forward as planned and can’t allow ‘getting punched in the face,’ per Mike Tyson analogy. A place where this happens most often is scenarios where CEOs will get pulled down into driving elements of execution directly themselves, rather than keeping a steady 50% of their time invested on building the management team, onboarding them to success, and driving accountability. So I became emboldened to block my calendar, and never be afraid to parallel track several hard executive hires at the same time if the company needed them.
Analyze your real world data: When I conducted a detailed analysis of my real data (all management hires, complete with their interview notes and 360 reviews), I saw a clear correlation between weak performance, and the team members I hired without thoughtful calibration and effort to interview for the right skills.
Clarify skills: Engineers are very precise about the skills we look for and the tests we do for those skills, sometimes overly precise. With management hires, many times the process is very nebulous and may not even really dig into the management skills that we are trying to hire for. Start by clearly defining what you want in the role. Invest in meeting many great people that are exceptional in that role but not on the market, ensure you are up on the latest and greatest in the field and have a community to help you calibrate on skills. Make a list of these skills, review with your community. For example, be very clear about what you want from managers in their hiring manager roles -- how do you want them to think about sourcing, interviewing, and onboarding? Make an interview script and review that with your community. Don’t skip on calibration and screening for skills, and make sure you get *outside* community help as I suggest, don’t get stuck inside the company -- if you are hiring this new member of the management team, it's probably because you need them and want them to be better at these things than the existing team. So don’t ask the existing team to define the skills; go work people who are better than everyone internally (including you) at this job.
Screening and Calibrating: After spending a lot of time calibrating on the exact skills and attributes, then sourcing, it’s time to interview and assess. Design your interviews very carefully, mapping the skills tests to the right stage and modality -- up front phone screen vs in person later. If you want to set people up for success, it’s important to meet with many candidates and get calibrated. The more senior the hire, the more important to have a proper ‘interview committee’ that meets regularly to review progress on the role, and again during onboarding to review the status of success. This sets expectations for all involved, and avoids following an emotional energy rather than an analytical view of the results.
Onboarding and Accountability: Managers should come in with clear goals, and check in against them regularly. Again, don’t do this alone, but with an onboard committee in order to focus on results and avoid bias. The more senior the hire, the more they should drive the onboarding plan. If you are replacing yourself as a CEO, for example, then the new CEO should present the entire plan forward to you, and need only a small round of iteration before it’s presentable to the board. For a setup-up first time sales leader as your first commercial hire, I’d maybe share the current methodology and ideas of where I’d like it to go, then ask them to come up with a plan outline to review together, then have them flesh it out more after a jam session to determine the outline. Then I’d feel calibrated and go into a similar mode of regular check-in. Driving accountability is critical. The keys are to set goals, and religiously maintain a regularly scheduled check-in meeting. Make sure you have leading indicators, not goals you can only see at the end of the quarter, and review these leading indicators to drive tactical change and make tough calls early. For example, work backwards from revenue targets to activity levels for each stage in your sales pipeline, you can see very early if you’re not going to hit revenue targets based on reviewing these early stage pipeline activity levels.
Management teams are the secret to breakout commercial traction
While the CEO should drive zero to one themselves, they should build the management team while driving one to ten. This is why you often hear people refer to startups as ‘building the plane while flying.’ You are driving sales yourself, helping to discover repeatability, hiring management, working with them to figure out repeatability, and then gracefully transitioning to them to drive established repeatability. During this process you should never take your hand off the wheel in driving through repeatability. You are bringing other management hands to the wheel, and gracefully transitioning, but as the CEO who owns breakout traction, only you know that you must smoothly transition during the one to ten phase, not just take your hands off the wheel and walk away. This can be a challenge for executives with big company experience, because they expect more of a ‘delegate and have my space’ approach, which creates creative space when repeatability is already established, but creates toxic space when repeatability is still pending -- since it blocks vital collaboration and shared ownership of ‘figuring the business out.’
The two things that good VCs are always looking for are 1) your commercial traction and, 2) your management team.
You can be as awesome as an early traction zero to one founder CEO, but then struggle as a breakout traction founder CEO from one to ten if you struggle to build the management teams. Ultimately this is right around the time when the VCs will look at the broader management team and not just the commercial traction you're driving directly. People are going to want to see that you can replace yourself as a commercial leader of the business. People are also going to want to see if there's a strong set of leaders running multiple different key functions that make sense for the kind of business you are building.
Don’t be afraid to make mistakes though! It's also really good to see that the management team has been tested. No matter how well you do, 100% of your management hires aren't going to work. It's a good sign for experienced investors to see that you navigate through the wrong hire -- especially good if you can catch the misstep early during onboarding, and have a mutually amicable transition after realizing where you were miscalibrated. This shows there's a high degree of maturity among the management team for onboarding new leaders, getting calibrated, and shepherding transitions.