My Last Startup Failed With 30 Employees… It Might've Worked if we'd Kept it to 5.

Every founder wants to build the next $1B+ company. So it’s normal to get inspired by what companies like Apple, Shopify and Microsoft do. But it’s also a huge mistake. 

In this episode, we look at what Shopfiy, Fullscript and Spellbook did to find product-market fit. In many ways, it’s the opposite of what they do now, as big succesful companies. 

Big companies are operating in a post-product-market fit world. Pre-product-market fit startups are in a different world entirely. 

The same rules don’t apply. 

Transcript

Speaker 1: 0:00

If somebody's hair is on fire and you give them a brick, they will use that brick to put out the fire in their head. Now the brick is a terrible tool to put out a fire, but if their head is on fire, believe me, they're gonna do everything they can to get rid of it. That is what you're on the hunt for. Welcome to the product Market Fit Show, brought to you by mistrial , a seek stage firm based in Canada. I'm Pablo, I'm a founder turned vc. My goal is to help early stage founders like you find product market fit. I'll say something like I was looking through the thread and it's really interesting 'cause I think he's like, I dunno , any founders actually that have done this, I can't remember of any. When I passed, Scott writes me an email back and says, and I'm reading it, he says, thanks for the quick turnaround. I love brutal feedback, helps me improve our pitches or any of these items, things that might have changed your mind. And he has a list of eight things, greater traction, clearer pitch, improved company website. You know, many founders will ask, not many, but maybe, you know, I think if, if I pass on a company, 80% of founders will be like, thank you . 20% of founders will be like, oh, do you know any reasons why did you pass? Or just high level , he might be the only founder at least that I can remember. They didn't just ask high level like Hey, what's your feedback? He like listed eight potential things and said Which ones of these is it? So that he could actually categorize the feedback. And I swear I remember that moment just that made me double think <laugh> and just be like, oh my, you know, that's interesting. Like, you know, should I really pass? I still pass . So that's on me. But I say all that because Scott benefited a lot from ai. You managed to take advantage of it, but he did not get lucky. He was doing things that I think more than just about any founder I've spoken with, like he's top one percentile in terms of setting his company up to find product market fit. There are some founders that launch something and it just works. But I can only think of a handful of other examples. Lummi Q , which we did a podcast with Michael comes to mind where they were just, they've set everything up explicitly to find product market fit. So I wanted to go through some of those things and you know, I was looking at the last three episodes. We did an episode with uh , CEO Fullscript. They're like almost doing a billion dollars in revenue. Uh, we did an episode about Shopify, it was a hundred billion dollar company and so looking for commonalities in all of them. But you know this one, what Scott was doing is fell book really stands out. And I think the high level theme here is when I think about startups, there really are two phases. There's pre-product market fit and post-product market fit. And there are truly two different worlds. And I think what often happens, VCs might even be more guilty of this than founders because VCs don't have a lot of depth, but they do have a lot of breath , they see a lot of things and so oftentimes they wanna like kind of find things that work elsewhere and bring them here and that's great, but it's, it's terrible if you do it wrong. It's terrible. If you look at what works for post-product market fit companies and you try to bring them in to pre-product market fit. And this is something like Scott was doing the exact opposite of this. Scott was setting everything up for pre-product market fit. So here's an example, there's a few things that are totally different pre and post. One of them is that in post-product market fit more is more. And in pre-product market fit less is more. For example, before you have product market fit, I am not joking, having fewer people on staff is better period. It doesn't matter how much money you have in the bank, fewer people will help you find product market fit faster. And I would say that Kyle from Fullscript actually put it the best. He said, most entrepreneurs are not built to manage people, especially before they're ready. Go experience every component of your business and then you're ready to see your weaknesses and start hiring up, go be that customer support agent for three months and feel the pain of the customers. If you don't, you're going to miss out on building what they actually need. And so this is like one side of the equation, which is when you have more people, you have to manage those people, you have to communicate across those people. Post product market fit, what you're trying to do becomes more and more defined because you have an actual product, you have an actual set of customers while you're still part of the business is always going to be experimenting. Part of the business is straight up execution. And for executing, if you wanna do more execution, you need more people. And so the trade off is okay, I'm gonna have more people and now all of a sudden I'm gonna need to manage those people and there's overhead as a result. But that trade off is totally worth it. It's worth it. Post-product market fit, it is a terrible trade off pre-product market fit because pre-product market fit, you do not want to be spending time on communicating. You do not want to be spending time on managing people. You wanna be spending time as close to your customers as possible because all you're doing is experimenting. This is another thing that Scott was doing right? He literally was launching experiments every two to four weeks. Over six years he had a team that ranged from five people to 10 people that's as big as it got. Not because he didn't have the money, but because he was pre-product market fit. And the only thing he wanted to do was be able to test things super quickly and change on a dime. And that's just so much easier when you have fewer people. But it's not just fewer people. The other thing is like for example, fewer features. When you have a product in market, if you look at any big company, take Shopify today, what Shopify is doing, if you look at their product roadmap, they're adding features, they're expanding their market. This is true for any company, they're always going to be doing more. That makes sense. Take Apple , you got the iPhone, then you got the iPad, then you got the Mac, then you got the AirPods, you just keep adding more and more and then you add services. That's just the game. But that only makes sense post product , market fit. And that was actually another piece of advice from Scott. He said when he was launching features, if he could go back and do one thing different, I thought this was so smart, is as you're trying to figure out product market fit, you're effectively going out and you're saying, okay, what about this thing? You're , you're putting out this new messaging or this new value prop, this new feature. And every time you're doing it, you're adding to your product. That's normally what you do. What Scott said is every time I could, I would've built a new landing page with maybe even like new branding that might take too long to do every time, but you get the point declutter because less is more. So if this new message is gonna be the thing, let it shine on its own. Don't confuse potential customers with everything else you're doing because by definition everything else you're doing hasn't gone new product market fit . So everything else you're doing has it really worked. So isolate less features is actually more likely to get you to product market fit. The last thing is less polished. I see this sometimes I see it especially from like repeat proven founders who've been there, done that and kind of feel like the second time around they just need to be more polished. You look at these decks, they're like 10 times as long as they need to be. You look at everything about what they're doing and it's just so polished. And unless you're like specifically launching like a UX product or a design product where that matters to your ideal customer profile or that matters to your ICP Polish means you've spent time figuring out the extra 20%, but pre-product market fit, what matters is the 80%. Because remember, you're trying to find this classic hair on fire problem and the story is very simply probably have heard it. If somebody's hair is on fire and you give them a brick, they will use that brick to put out the fire in their head. Now the brick is a terrible tool to put out a fire, but if their head is on fire, believe me, they're gonna do everything they can to get rid of it. That is what you're on the hunt for. So if the customer requires the additional 20%, probably what you're solving is not a need. That's that acute. The other big difference between pre-product market fit and post-product market fit, post-product market fit, market size matters, market size is very important. It's the thing you think about. Again , take the , take Apple as a company that every single person knows about and is massive. If they're going to do anything, they're going to size it out. They're going to understand the opportunity. That's the number one thing they're gonna do. They just gave up self-driving cars because they didn't think they could create a big enough company out of it. When you're pre-product market fit, market size is very much secondary. The only thing that actually matters is having clear pull. And again, this is another thing that Scott was doing so right, he had specific KPIs that he measured every single new experiment bot . So what was the cac? What was the payback period? What was retention, what was usage? And unless it met a certain kind of definition of what he thought was let's say top quartile, he just didn't keep going in that direction. So it wasn't about how big is the opportunity, what's the big story, what's the big vision? It was literally about is this new feature getting incredible market pull ? He did that for six years. He kept putting things out until he felt that pull . And if you look at Fullscript or if you look at Shopify, what you'll notice is they actually experienced the exact same thing. They were lucky in a sense because they got it effectively right away. Like if you look at Fullscript, the first version of his product that he put out in Canada got 50% market share in one year. <laugh> , their conversion rates on outbound cold email were through the roof. It was clear that he was solving a hair on fire problem . If you look at Shopify while they were building, they had 5,000 people on their wait list . And in fact Shopify only built out the platform because people came to Toby and asked him for it. That is clear market pull . Now if you get it right away, that's perfect if you don't, the point is you have to set up your entire company. If you're serious about this, you gotta set up your entire company to find it. And that's what Scott did so much better than anybody else because I think most people are so desperate to find product market fit that they will just go through the motions. If they can raise more, they'll raise more and then they'll hire more and then they'll add more features and then they'll add more polish. And yet they don't get any closer to true product market fit because they didn't optimize everything around finding incredible market pull . And I think the other thing that is quite different pre versus post-product market fit is planning versus thinking its steps. I'll never forget, like a few years ago I, I was having this debate with uh, with Rob Woodbridge, who's been on this podcast a few times and he was the CEO at my, my last company for a bit. And he just looked at me one time and I was just kind of thinking about TAM and all these sort of things, but we didn't have product market fit yet. And he kinda looked at me, he said, Pablo , you have to think in steps. And I don't know why, but that just stuck with me. And I think when you think about pre-product market fit versus post-product market fit, take any big company, what do they do? They plan. They have two year roadmaps, five year roadmaps. They have a whole strategy around every single different thing that they're doing. Makes sense. When you understand your ICP, it makes sense when you're already well beyond product market fit, but planning doesn't make nearly as much sense in the very early days in the pre-product market fit stage. Look at Scott. Was he planning? No, because he was doing new experiments, he was able to eliminate all song costs and think at the edge, will this new experiment work? I don't know, let's see, put it out. Doesn't work. Cool nest experiment. There is no master plan that needs to be redrawn every time. And that's just the reality. When you're pre-product market fit planning doesn't make much sense because you're in this lane of unknowns. You're just doing experiments, you don't know what's actually gonna work. So all you have to do is think in steps. This next thing is what makes sense. So you do it and if you get the right feedback, you keep going that way. And if you don't, then you start to move things around and explore different areas. But the problem with planning is it sets you down a path and it makes it really hard for you to abandon that plan just because of the some cause of the effort that you've put into it. How can you forecast when you have no real foundations? And so again, this is why pre prog market fit and postpartum market fit are so different. And I would say that not realizing this is one of the biggest sources of avoidable mistakes because very often you'll have founders or especially I would say VCs say, look, look at what this company, look at how this company is putting out products. Look at how this company is doing marketing. Look at what this company has. And because we're similar, we should do that too. But if that company that you're using is a post-product, market fit company and your pre-product market fit, you really have to wonder if those things translate over. The simplest way I can put it is that after product market fit, vision matters. Tam matters, forecasting matters, fundraising matters. Before product market fit, nothing matters except finding product market fit. If you listen to this episode and the show and you like it, I have a huge favor to ask for you. Well, it's actually a really small favor, but it has huge impact. But whichever app you're listening to this episode on, take It Out. Go to a product market fit show and leave a review please. It's going to help. It's not just gonna help me to be clear, it's going to help other founders discover this show because the algorithms, whether it's Spotify, whether it's Apple, whether it's any other podcast player, one of the big things they look at is frequency of reviews. It's quantity of reviews. And the reality is, if all of you listening right now, left reviews, we would have thousands of reviews. So please take literally a minute. Even if you're just writing like write podcast or I love this podcast, whatever it is, just write a few words. Obviously the longer the better, the more detailed the better. But write anything, leave five stars and you'll be helping me. But most importantly, many other founders just like you, discover the show. Thank you.