The Path to Good Growth Is With Bad Growth
+ How to Find the Right Co-Founder, How Investors Are Defining Product Market Fit, Why Not All Validation Methods Aren't Created Equal
The Path to Good Growth Is With Bad Growth
Hsu Ken: It’s common to hear founders brag about how they haven’t spent any money on growth. My response is — why not?
Typically, they'll say something like if you spend money to grow, it’s bad growth and if you don’t spend money to grow, it’s good growth. Therefore, don’t spend money to grow.
If you’re going to take this position, you better be growing, and growing fast. More often than not, a startup will take this position but will be growing slowly. In general, good growth is better than bad growth but both are better than no growth.
I admit, and it’s obvious, that some types of growth are more valuable than others, but my definition of good and bad growth is slightly different. I define good growth as any growth that’s cost-effective. Where cost is defined in terms of both time and money - the former sometimes being more valuable than the latter. Bad growth is then any growth that is not cost-effective. By this definition, paid marketing can be good growth. If you consider the case where your CAC (cost per acquisition) is higher than your LTV (lifetime value), this is obviously true.
That’s great but what’s even more interesting is, in my experience, the path to good growth is through bad growth. If you think of Paul Graham’s Do Things That Don’t Scale, almost by definition, things that don’t scale are not cost-effective (remember, time is a cost). But those are the things that teach you the most about your users and good growth comes from understanding your users.
Here’s an example, I was working on an on-demand blue-collar staffing platform called SingleShift. Think of a part-timer marketplace where restaurants could list shifts they needed to fill and people could sign up to fill those shifts.
My hypothesis was people would use the platform because they wanted to (1) make extra money, (2) have flexibility over their schedule and/or (3) try working in new environments. My guess was (1) was the primary value proposition but I didn’t have any data to back that up.
To get data, I created three ads on Facebook and Instagram. For each ad, I used the same image and website but changed the copy to emphasise a different value proposition.
When I ran the ads, (2) was far and away the best performing. I can’t remember the exact numbers now but the campaign that emphasised flexibility had something like 10x better conversion and as a result, its cost per acquisition was 10% of the other campaigns. I changed the primary website to emphasise this as a value proposition and saw an increase in growth across all my channels (referrals, organic search, etc.). I even saw an increase in retention for each subsequent cohort of users.
Figuring out my primary value proposition was incredibly important for everything else I did after that. I might have learned it in some other way without spending $ but it probably would have cost me a lot of time and I would have learned more slowly. Both are much most costly than the $250 it cost me to run the ads.
Good growth is cost-effective - the way to get good growth is by learning about your users. Often, the best way to learn about your users is through bad growth - only if you are engaged in bad growth and not learning, then stop.
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The next batch is scheduled to start in July this year, and we're already doing final interviews - the next round happens in three weeks. Be one of the early founders that we speak to.
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We're always looking for companies to invest in, so if you know anyone who's working on a cool idea, send them our way.
Not All Validation Methods Are Created Equal
We often see founders say they've successfully validated the idea or achieved significant traction, but not all validation is created equal. Customer interviews or surveys are a helpful gauge, but they aren't indicators that there's actual demand for what you're building.
So how can you tell?
In this video, Hsu Ken Ooi breaks down five of the most common validation methods, and what are their ascribed cost and value. Here are three of the five examples:
User Survey - Very Low Cost, Low Value
While surveys are generally quick to set up, the caveat is that what people say and what people do are separate things. Someone saying they'll use your product or service is not a strong indication that people will actually do so when it's launched.
Show Mockups - Medium Cost, Very Low Value
Showing mockups is more of a research tool than it is a validation one. If you show somebody a mockup, they'd tell you things like ‘I would click this button’ or ‘the flow doesn't make sense’, but you won't get to the heart of validation, which is: would you use this product consistently? Hypothetical questions give you hypothetical answers.
During the validation phase, you want to find out if your product should exist or not, and showing mockups won't give you a good answer.
Fake Doors - Medium Cost, High Value
The cost of Fake Doors is higher as it involves creating a website, but they bring you higher value. Unlike user surveys or user interviews, where you're asking someone to imagine a situation, fake doors get the user to actually do something about it because they think the product exists.
Watch the video here.
How Do Investors in SEA Define PMF?
We asked five investors: How do you define product market fit?
We asked Iterative's Managing Partner Hsu Ken Ooi and Brian Ma, as well as Susli Lie (Monk's Hill Ventures), Piruze Sabuncu (Square Peg), and Shiyan Koh (Hustle Fund) - here's what they had to say.
Shiyan Koh, Hustle Fund
Product market fit is when you can’t keep up with demand.
You have finally understood your problem and solution in a high enough resolution that you know who is a good customer, how to show them your product cost effectively, and they buy without needing you to do unnatural contortions.
Brian Ma, Iterative
For any founder that's seen product market fit, it's obvious. Your key metrics are growing ~2-3x a month with very little input from you. The best analogy I've found for this is pre-product market fit, you're rolling a boulder up the hill, then all of sudden, the boulder is rolling down hill and you're chasing it. I remember this point for my company - I was looking around to our senior team seeing our metrics jump month after month. When I asked "what happened", the answer even after digging into data for weeks was: "we don't know."
The real answer is 20+ things happened. Your sales team figured out how to close customers in 1 conversation rather than 3, your account managers (or equivalent) figured out how to onboard or underwrite in 3 days instead of 6, your product is breaking and confusing only 30% of the time instead of 60%, and now... your customers are talking about you to their friends faster than you can pay money to acquire them. They're also closing and convincing their friends for you.
That said, the reason product market fit is so elusive is because you're never really sure if (1) you're solving a very big pain point and just haven't fully optimized your delivery or (2) you're actually solving a medium/small pain and should do something else.
That's where perseverance, founder gut instincts, a founder advisory networks, and a lot of luck come into play. I wish there was an easier answer, but in reality, have found it to be much messier than that. There's no silver bullet. The best advice I have is to try a lot of things (Iterate!) and surround yourself with other smart founders you respect. Good luck!
Susli Lie, Monk's Hill Ventures
When it comes to product market fit, you often hear this response: "If you're wondering whether you've reached product market fit, you probably haven't."
There's a lot of truth in this statement.
Product market fit is hardly formulaic but when you achieve it, you won't miss the visceral effect of having hit an inflection point, and the data will show it. The typical traction graph will suddenly show accelerated growth and you'll start seeing increased demand for or engagement with your product.
In the Loop
Over the past two weeks, we held two online events - if you've attended, thank you for coming! If you've missed it, here are the recordings.
Tell Me Your Idea, and I'll Tell You How to Validate It In 2 Weeks Without Code
We ran a similar online event last year, and it really resonated with founders - we had founders join us from across the globe, from Malaysia to South Africa - so we decided to bring it back this time around. In this online event, participants told Hsu Ken their startup ideas, and he told them how they can validate the ideas. He also shared…
What's the difference between validation and product market fit
Why the product is not the app - it's the solution to the problem people have
Why founders shouldn't be thinking about scaling during the validation phase
Watch the video here.
What to Look For in a Co-Founder
Choosing the right co-founder is one of the biggest decisions founders will have to make, as co-founder issues can make or break a company. To help, we got Hsu Ken Ooi, Victoria Riingen from BeautyBuddy and Luc Loja from Coverio to help answer…
What to look for in a co-founder?
What should you consider when choosing a co-founder?
How to evaluate a potential co-founder
Watch the video here.