Crawl Before You Run: The Search For Problem Market Fit

The past year has been a wild joyride of new friendships, professional discovery and countless lessons learned. During these twelve rollercoaster months, I have made more than 21 investments across my fund vehicle (Behind Genius Ventures) and an angel investment portfolio. While I have learned a lot through observing and assisting in the journeys of my portfolio companies, nothing has provided me with more insight than the time I have spent at Series in search of Problem Market Fit. For context, Series is a picks and shovels company building modern financial infrastructure for institutions and corporations. With a healthy pipeline of customers and substantial resources, we are now marching towards Product Market Fit. So, what does that mean and what did we do right?

At the pre-seed and seed stage, nothing is more mission critical than identifying your customers’ biggest pain point– the “problem” in Problem Market Fit. At Series, we essentially spent the first nine months doing research in a specific market on a certain customer demographic. Yes, being funded to do research is a super privileged position to be in, but the truth is, the product you sell to your investors is almost always different from the product that customers ultimately convince you to build for them. One’s ability to recognize and deliver this story to investors is the difference between receiving pre-seed or seed funding to conduct research versus feeling pressure to go to market with an improperly validated product.

Before we dissect Problem Market Fit and how we discovered it at Series, it is important to note why this document was created: I was inspired to write this in response to my experience observing too many entrepreneurs prioritizing the wrong goals at the earliest stages. For some, such prioritization meant spending years building products that invite market indifference. If there is one key takeaway from this piece, it should be that you should always sell before you build. The most common mistake I see founders make is their undying belief that displaying technical competence is key. This trope is pushed by the naive who encourage entrepreneurs to find Product Market Fit before validating the problem that their customer demographic face.

This piece should help demystify what founders should prioritize when starting to build a company, especially as we enter a world where Web3 dominates the internet and it becomes increasingly difficult to decipher the positive signals from noise.

Before I dive deeper, I want to highlight a few early-stage startup assumptions that I hold as true, and that work as foundations for this piece:

  1. 99% of entrepreneurs can’t afford to skip Problem Market Fit and jump straight to Product Market Fit. In fact, problem market fit is a prerequisite to product market fit. The single biggest mistake entrepreneurs make is adhering to the antiquated arcane adage, “Build it and they will come.” There is one common pattern found amongst many of the iconic companies of our generation: they pivoted early on.
  2. The likelihood that your original idea is the Unicorn winning lottery ticket is very low AND that is normal! I know this becomes hard to process when you see so many companies raising at unicorn valuations in less than a two-year period, but frequently these founders have two factors in their favor: 1) Market Timing, and, 2) Unique insight from a lived experience in a large community.
  3. The goal of pre-seed and seed funding is to give you time and capital needed to de-risk the core business AND market. This is NOT the time and place to de-risk the product. There is a fine difference between validating a problem versus building a solution in search of a problem. You want to be doing the former with early-stage funding.

With this all said, let’s dive into:

  1. What is Problem Market Fit and why is it important?
  2. What are the best ways to discover Problem Market Fit?
  3. How do you know you have identified Problem Market Fit?

What is Problem Market Fit and why is it important?

The delineation between Problem Market Fit and Product Market Fit is an important one to understand. Product Market Fit is when you have evidence that your value proposition is actually solving the problem; Problem Market Fit is evidence that customers have a common pain point and that there is a clear market gap. To simplify, while Product Market Fit is defined by percentage retention, Problem Market Fit is determined by rate of adoption. These two are often conflated, which leads to confusion around the true stage of a company. While adoption of the product is the first step in the journey to creating a generation defining company, it just gets you to the crawling stage. Once Problem Market Fit is identified, it immediately becomes time to move and gradually accelerate until you are running at full speed!

What are the best ways to discover Problem Market Fit?

There is a famous saying, “First time founders over-index on product, while repeat founders over-index on distribution.” Startups that build a “minimum viable community” (shoutout to Alexis Ohanian) prior to shipping any product are much more likely to find success. These companies are in a constant feedback loop with customers and are obsessed with finding the right problem to solve, irrespective of whether they are a Web2 or Web3 company. You should have a large, healthy pipeline of customers at the earliest stages of your company, before you write a single line of code. Once you succeed in developing relationships with customers, you can stack rank your problems against one another based on customer demand. For example, even a large corporation such as Stripe is known for building product features only after at least one large customer is lined up to use it.

The following are best practices to build the foundations of obtaining distribution and discovering Problem Market Fit, even if you don’t come with a prior network of customers to sell:

A. Constrain your customer demographic. Remember, sell before you build. Be obsessed with a specific customer subset from Day 1 and don’t deviate from your target focus at any point in your journey to discovering Problem Market Fit. This is a long game and you have to be in it for the long haul. Furthermore, don’t be afraid of “niches”. Most people fall in the trap of assuming a TAM is too small, when in reality, great businesses expand TAMs.

At Series: Our customer demographic were institutional/enterprise allocators. We spent all our time talking to them about tools they needed and constantly expressing our desire to build for them. We never deviated from this customer base.

B. Spend at least 1000 hours talking to multiple customers from your target demographic before building any product. Keep your burn rate low and your team small. All hands should be on deck with each team member talking to customers every day. Don’t pour fuel and resources on the fire until you have Problem Market Fit.

At Series: We spent more than nine months talking to customers in our target demographic before we truly doubled down. During this time period, we shipped multiple smaller products to help us further our distribution to customers & validate market needs.

C. Sell picks and shovels. It’s important to test every hypothesis when building for a market with a specific customer subset. You should spend no more than a month validating or invalidating an idea.

At Series: We had a notion document that started with 50+ ideas and eventually led to 250+ ideas that we pitched to customers during a nine-month period. There were moments of doubt, but we never wavered from our mission to find the biggest market gap for our specific customer set.

D. Challenge markets, not specific ideas. If there is a (un)popular narrative in your market, learn from it and empathize with your target demographic.

At Series: Our fundamental belief is that most individuals solve problems in asset management by managing assets themselves. Our hypothesis was that widespread change could only occur by building software to solve problems in asset management. This message resonated with our customers.

E. Be emotionally detached to ideas and solutions. The original idea you pitched to your favorite VC is likely not the winning lottery ticket. Your rate of iteration (aka, “pivoting”) is equally proportional to the speed at which you find adoption. The quicker you are able to validate or invalidate a hypothesis, the quicker you will find the biggest problem your customer is facing.

At Series: We continually iterated ideas throughout our nine months of diligence. We never let a single customer validate or invalidate a product. We made sure to cycle through our entire customer base every time we validated or invalidated an idea, with an unbiased lens. We were emotionally unattached to our product, but hyper attached to our customer demographic. Our one constraint was institutional allocators. Everything else could flex, but those were our bumpers.

How do you know you have Problem Market Fit?

As stated above, Problem Market Fit is determined by adoption. The higher the rate of adoption, the less pushback you receive from customers to whom you are selling, and the more likely it is that you are on the path to finding Problem Market Fit. To simplify what Problem Market Fit looks like, consider the following:

  1. Quantitative: Organically 3X’ing the number of customers you have week over week for at least a three-month period.
  2. Qualitative: When you have limited bandwidth to engage with all incoming customers due to increased demand. This moment can be recognized as the official threshold of adoption. In other words, when your customers need a solution yesterday and they don’t let you forget it, you’re there.

Here are the three stages (in order) that you are likely to go through if you found Problem Market Fit:

  1. Unsolicited Customer Feedback and Engagement. Are customers reaching out to you of their own will with excitement towards the problem you are solving for them? Are they offering feedback, advice, and even help? How often are they reaching out to you? Have they asked about a waitlist or when you’ll provide the solution?
  2. Customer Referrals. Are customers introducing other potential customers to you? How often are they introducing a new customer to you? Are they introducing you to a new customer with no financial incentives included?
  3. Customer Cold Inbound. Are new, unfamiliar customers reaching out to you? Is the size and value of customers increasing exponentially week by week? How many cold emails and requests are you receiving from customers daily/weekly/monthly?

Conclusion

The holy grail of startup success at the pre-seed and seed stage is finding Problem Market Fit. Everything else is superfluous. While Problem Market Fit is all about discovery, Product Market Fit is all about execution. In fact, there is a large chasm between Problem Market Fit and Product Market Fit. You can compare finding Problem Market Fit to disrupt an industry to a child learning to crawl: it’s slow, sometimes tedious, and it takes some time to build up the strength. But sometimes you have to slow down in order to speed up. In fact, don’t just celebrate crawling; learn to crawl so that you can go walk, and then run! That’s when you can put your head down, pour fuel on the fire, and set off sprinting to engulf everything in your path.

Thank You

Major appreciation to Justin de Guzman (Arctype), Bruno Faviero (Magna), Leigh Marie Braswell (Founders Fund), Ethan Glass (Ocra), Paige Doherty (Behind Genius Ventures), Zeeza Cole (Bain Capital), Ariana Thacker (Conscience VC), Jai Malik (Countdown Capital), Ana Bharadwaj (Founders Circle), Jessica Peltz Zaltulove (Hannah Grey), Tasti Zakarie (Triangle), and Allison Pope (Variant) for all the feedback they provided throughout my writing process.

However, this paper would be nothing without the mentorship and guidance of Brexton Pham and Daniel Lai, my CEO and COO at Series. Major thank you for allowing me to go on this crazy ride with you. It’s been a wild journey and I’m humbled to learn from you both and my teammates at Series everyday.

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Chief of Staff at Series Financial, Solo GP at Picks and Shovels, Founding Partner at BGV

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Joshua Schlisserman

Joshua Schlisserman

Chief of Staff at Series Financial, Solo GP at Picks and Shovels, Founding Partner at BGV

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