The Lean Startup - Eric Ries [89]
A Technical Caveat
Technically, more than one engine of growth can operate in a business at a time. For example, there are products that have extremely fast viral growth as well as extremely low customer churn rates. Also, there is no reason why a product cannot have both high margins and high retention. However, in my experience, successful startups usually focus on just one engine of growth, specializing in everything that is required to make it work. Companies that attempt to build a dashboard that includes all three engines tend to cause a lot of confusion because the operations expertise required to model all these effects simultaneously is quite complicated. Therefore, I strongly recommend that startups focus on one engine at a time. Most entrepreneurs already have a strong leap-of-faith hypothesis about which engine is most likely to work. If they do not, time spent out of the building with customers will quickly suggest one that seems profitable. Only after pursuing one engine thoroughly should a startup consider a pivot to one of the others.
ENGINES OF GROWTH DETERMINE PRODUCT/MARKET FIT
Marc Andreessen, the legendary entrepreneur and investor and one of the fathers of the World Wide Web, coined the term product/market fit to describe the moment when a startup finally finds a widespread set of customers that resonate with its product:
In a great market—a market with lots of real potential customers—the market pulls product out of the startup. This is the story of search keyword advertising, Internet auctions, and TCP/IP routers. Conversely, in a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn’t matter—you’re going to fail.3
When you see a startup that has found a fit with a large market, it’s exhilarating. It leaves no room for doubt. It is Ford’s Model T flying out of the factory as fast as it could be made, Facebook sweeping college campuses practically overnight, or Lotus taking the business world by storm, selling $54 million worth of Lotus 1-2-3 in its first year of operation.
Startups occasionally ask me to help them evaluate whether they have achieved product/market fit. It’s easy to answer: if you are asking, you’re not there yet. Unfortunately, this doesn’t help companies figure out how to get closer to product/market fit. How can you tell if you are on the verge of success or hopelessly far away?
Although I don’t think Andreessen intended this as part of his definition, to many entrepreneurs it implies that a pivot is a failure event—“our startup has failed to achieve product/market fit.” It also implies the inverse—that once our product has achieved product/market fit, we won’t have to pivot anymore. Both assumptions are wrong.
I believe the concept of the engine of growth can put the idea of product/market fit on a more rigorous footing. Since each engine of growth can be defined quantitatively, each has a unique set of metrics that can be used to evaluate whether a startup is on the verge of achieving product/market fit. A startup with a viral coefficient of 0.9 or more is on the verge of success. Even better, the metrics for each engine of growth work in tandem with the innovation accounting model discussed in Chapter 7 to give direction to a startup’s product development efforts. For example, if a startup is attempting to use the viral engine of growth, it can focus its development efforts on things that might affect customer behavior—on the viral loop—and safely ignore those that do not. Such a startup does not need to specialize in marketing, advertising, or sales functions. Conversely, a company using the paid engine needs to develop those marketing and sales functions urgently.
A startup can evaluate