André-Paul on twitter quoting Elad Gil:
One sign of raw product-market fit is when something has grown despite itself.
I love @eladgil’s definition of PMF because it really emphasizes the need to resist perfecting your product until you know that you’re building the right thing.
In a conversation with Guy Raz (transcript), Stewart Butterfield tells the story of how Slack was born. Besides the great insights on product-market fit, it is also an amazing plot — full of spectacular ups and heartbreaking downs.
They started out around 2009 and the intent was to create a multiplayer online game. The conditions seemed perfect:
Guy Raz: So what did you do when you walked out of Yahoo? What was your plan?
Stewart Butterfield: There wasn’t an immediate short-term plan. But it didn’t take long for a lot of the same people who worked on Flickr and had worked on the previous game to decide that we wanted to work on the game again.
Guy Raz: You wanted to go back to gaming? You didn’t learn your lesson the first time around?
Stewart Butterfield: Yeah, we apparently didn’t. I mean, so the world looked pretty different at that point. So now it’s the beginning of 2009. There was at least an order of magnitude more people online, whereas, in 2002, the majority of people didn’t have Internet access at home. Now the majority did. Computers are way faster. All the hardware was way cheaper. Online games were something that was really popular. And so we figured, like, oh, this time we can’t fail.
There is — you know, all of the conditions are perfect, so we should do this.
There was me and three of the engineers, and what we decided to do it, which was called the Glitch. It was completely different than anything that anyone had ever seen before.
This game — it was a bizarre, fantastical world — really tried to encourage individual creativity. People could create stuff inside the world. You would milk butterflies in order to get butterfly milk, and eggs grew on trees. And the look was kind of Dr. Seuss meets Monty Python meets modern-day graphic novels. As you moved around the world, the look changed dramatically.
Guy Raz: So you had a track record with Flickr. Like, you already had a reputation. You’d been on the cover of Newsweek. You’d worked for Yahoo. So when it came time to raise money, was it pretty easy?
Stewart Butterfield: Yeah, absolutely. It was very easy for us to raise money. And so we started off with you know, a million and a half dollars. We were able to hire someone. We were able to afford all the technology we wanted.
As they began developing the Glitch, they faced a crucial point: there was a niche of people very interested in the product, but, despite a lot of effort, they never managed to improve their metrics with a broader audience.
Stewart Butterfield: And as we started developing the game, we had a bunch of really positive early indications. So we charged people money, and they were — they paid a lot, you know? Like, the average person who paid was paying $70 a year.
Guy Raz: And this is, like 2010, 2011, something like that. And people are already paying for it. It was that good?
Stewart Butterfield: Well, it was that good for a very small population. In fact, it was really hard for us to get people even to go through the first few minutes of the game because it was just so different and so weird. Most people who tried it were — what the hell is this? And just pass out in the first three minutes of gameplay.
Guy Raz: All right. So you guys launch this thing. There’s some early success. You raise lots of cash. And then November of 2012, you shut it down. What happens?
Stewart Butterfield: Well, being in business, and I think especially being a CEO requires a lot of unnatural optimism.
And at some point, that optimism was exhausted. We had what’s called a leaky bucket. People would come in the top of the funnel. And the funnel is kind of describing: first people hear about your thing, then they go to the website, then they sign up, then they in our case, play the game a little bit, then they end up paying you. And in each of those stages, some people fall out of the process. So, that’s why it’s called the funnel. The leaky bucket is when you get people in the top, but they just fall out. They fall out the process too early. Not enough of them make it all the way through.
Guy Raz: They didn’t stick with it.
Stewart Butterfield: Yeah, they didn’t stick with it. And it was always the next thing that was going to fix it. Like, the next game dynamic we added, the next bit of customization, the next thing, the next thing, the next thing. But as we continued to try those things, we just never found that magic formula that would make it work economically.
It would have been a fine, what people call, lifestyle business. But it was never going to become the kind of business that would justify $17.5 million of venture capital investment.
This is a very important learning: fixing leaky buckets is extremely hard. This matches with my own experience building software products for consumers. There is also the good reminder that, in the context of venture-backed business, you aim big and try to get there as fast as you can.
Back to Raz and Stewart:
Guy Raz: So at what point did you come to the decision to shut it down?
Stewart Butterfield: I was losing a lot of sleep in those days. It was like 2 or 3 in the morning. And I was in bed. And I hadn’t been sleeping for hours. And I just realized, like, I don’t believe this can work. Like, I don’t believe it anymore.
There’s a saying — if you’re thinking about firing someone a lot, you should just fire them. That intuition — if that keeps coming up, it’s almost certainly correct. And you wouldn’t be thinking that all the time if there was a real shot at making the relationship work.
I think it’s exactly the same thing with a business. Once I began not to have little doubts, but once I hit a fundamental level, I was just, like, I don’t think this is going to work. It’s not going to work. So, you know, first thing that morning, I wrote to all the co-founders and then to our board of directors and just said, it’s over. And that definitely was not a unanimous point of view. And there was a lot of contention… And argument, and… Because we had developed an enormous amount of kind of equity.
Guy Raz: Content — you had content, tons of content.
Stewart Butterfield: Yeah, millions of frames of animation, hundreds of hours of original music.
Guy Raz: So how did you break the news to the team? I mean, they must have been - it must have been excruciating.
Stewart Butterfield: Yeah, it was a horrible experience. And I say, we’re going to have an all-hands meeting. And everyone, you know, files in and gets together. People have their coffee in the morning, and they’re chitchatting. And finally I stand up. The meeting starts, and I start to tell them that we’re going to shut down the game. Before I could even get the first half of the sentence out, I was crying.
You know, almost everyone in the room I had personally convinced that they should come work in this company, that they should accept our stock options, that they should believe in the project, that they should believe in me. It’s humiliating. There’s a real sense that I had failed all these people…
That I had an obligation to them. And I was — I had locked eyes with this one software engineer who had just three months before moved. He had an infant daughter, maybe 6 months or a year old. He was moving away from his in-laws, who were helping take care of the kid, moving to a new city with his whole family, and now I was telling him he didn’t have a job anymore.
I will now fast-forward the story several months because, here and now, I am focused on product-market fit.
Once you have the time, you should listen to the whole episode. He tells how they returned to a very small team, how they decided to transform the communications tool they’ve used internally into a new company that became Slack, how difficult it was to sell other people and companies on Slack in the early days, how their distribution strategy of enterprise software was very unconventional (and hard for VCs, like a16z to get their heads around it), and so on.
Back to Stewart telling what were clear signals of Slack’s product-market fit:
Stewart Butterfield: Well, so by the time we officially launched, it was evident that this was going to be something. The leaky bucket problem that I talked about in the context of the game was completely eliminated.
We found that once people started using it — as hard as it was to get people to start, once they started, they almost never stopped. At that point, people weren’t paying us. They were just using it for free.
But we could see that they were getting utility out of it. They were logging out at the end of the day, and first thing in the morning they were right back in there.
Guy Raz: So you launch in February of 2014 officially. It goes out into the app store or whatever and into the world?
Stewart Butterfield: Yep. We also told other people who had been using it for free, like — hey, now you’re going to have to start paying. We’ll give you a nice, healthy credit to thank you for being one of our early testers.
And we found the conversion was excellent. You know, within maybe two or three weeks of launching that officially, we had sold a million bucks’ worth of Slack.
It costs $80 per person per year. So you would pay — you would only pay for the people who are actually using it. So if you have a 50-person company and there are 20 people using it, then you just pay for 20 people.
We were off to the races. Unlike almost any enterprise software ever, people would talk about it. Like, they would be in line at the coffee shop, and they would say, oh, my God, you’ve got to start using Slack. It’s amazing. It changed my life. And they would post to Twitter and say, like, I — you know, I recommend it. And that — you know, no one ever says that about the software that they have to use at work.
Guy Raz: It’s amazing. By October of 2014 — so this is just two years after you shut down Glitch and, like, have to break the news to all these people — you raise 120 million bucks. It has a $1.2 billion valuation. I mean, that’s nuts. That’s totally insane.
Stewart Butterfield: Yeah. It was completely insane. And, you know, at that same period, we’re still growing, like, somewhere between 5 and 10 percent a week.
What a ride.
Steve Jobs was interviewed by Nick Wingfield in early August 2008 about the iOS App Store. At the time the marketplace for iPhone apps was just one month old.
It is obvious in 2018 — ten years later —, how big of a winner the App Store is. It is more interesting though to realize that Steve was already very aware of the hit he had in his hands. I believe he was able to grasp it at such early stage because of a product-market fit sense he had developed.
For anyone intending to build successful consumer products, it seems wise to hone in our abilities and pay close attention to his train of thought.
He starts the interview by explaining how the App Store was built on top of iTunes:
Steve Jobs: The way we think about this is that the App Store is to iPhone like iTunes is to iPod. Just like with the iPod, where we enhanced it with an internet service to bring content to it, we’re doing the same thing with the iPhone. We’re enhancing it with an internet service to deliver content right to the phone.
It’s built on the same iTunes infrastructure, including all the storage and all the billing and getting email receipts and all of that kind of stuff. The downloads are fast and reliable because it’s the same system as iTunes. Customer reviews, buying with one tap, just like one click on music and stuff. No one’s ever duplicated iTunes in over five years. This’ll be even harder because it’s built on top of it.
He then talks about the early numbers of the App Store:
Steve Jobs: We have over 1,500 applications on the App Store today. We thought that the input would start to slow down from developers, but it’s accelerating.
My gut is that we’re seeing around 50 new apps a day coming in. As I mentioned, over 1,500 apps, 27% of them are free, leaving 73% paid. Of the paid apps, over 90% are under $10.
What you really want to know is how many apps have been downloaded. I’m going to put everything in terms of next Monday because we can project very accurately, over 60 million apps. Users have downloaded over 60 million apps from the App Store in the first 30 days.
Nick Wingfield: What’s the installed base of iPhones? The last publicly released figure was six million.
Steve Jobs: I can’t give you a number because we’re in the middle of the quarter.
I’ll tell you. The total revenue has been $30 million in the first 30 days. Developers get 70% of that. Developers get $21 million. Nine of that $21 million is going to the top 10 developers. A lot of small developers are making a lot of money. This is just in the first month.
We actually were putting the number of downloads on every app initially, if you went and look but we were asked to take that down [by the developers].
He talks next about how app downloads were growing much faster than music downloads (recall that the iTunes Store was a big success in the 2000s):
Steve Jobs: I can tell you an interesting fact in just a second. That is 30% as big as iTunes for music downloads. Let me say that again. App downloads equal 30% of all iTunes song downloads during the last 30 days.
Nick Wingfield: What does that number say to you?
Steve Jobs: It says the App Store is much larger than we ever imagined, iTunes has been out for over five years. In 30 days, users downloaded 30% as many apps as everybody in the world downloaded songs from iTunes. We didn’t expect it to be this big. The mobile industry’s never seen anything like this. To be honest, neither has the computer industry. [laughs] 60 million downloaded applications in the first 30 days. 30% as big as iTunes song downloads during the last 30 days, this is off the charts.
He then foresees the huge growth that would come from the expansion of the iPhone user base. He also mentions that small developers were already seizing the opportunity:
Nick Wingfield: Is it concentrated to a percentage of your user base, would you say, or…
Steve Jobs: It appears to be very wide, yeah. I have met a few people who had bought 30 apps. Everybody I know that has an iPhone has bought a handful and enjoys it.
Music is a $2.5 billion dollar business a year for us. I think we’re not quite in the same league as music, but I think this is really significant. Who knows, in the fullness of time? I don’t know.
Remember, we’re on a ramp. There’s going to be even a lot more iPhones out there in the future and a lot more iPod touches. We’re already at a $360 million a year run rate. This thing is going to crest to half a billion soon. Who knows? Maybe it’ll be a billion dollar marketplace at some point in time. This doesn’t happen very often. A whole new billion dollar market opens up. 360 million in the first 30 days, I’ve never seen anything like this in my career for software.
Let me characterize what I’ve seen with my own eyes that’s happened in the last 90 days. I’ve seen one- or two-person teams develop amazing applications and they’re ready to go in less than 90 days, and that are up on the App Store—we’re running an average of 48 hours after submission and they’re up in the store. 48 hours after they submit, they are in front of millions and millions of customers.
Being at the epicenter of the mobile explosion, Jobs was even able to foresee the potential of mobile games:
Steve Jobs: There’s only one other thing that’s interesting to me, the largest category of apps, by no means the majority, but the largest category of apps is games. You’ve got everything from games to medical software to business analytics software to all sorts of stuff on it, but games is the single biggest category.
I did dig up some information on the mobile gaming market for myself. I’ll share it with you. 20 million handheld gaming players are expected to be sold this holiday season, for about $3 billion in revenues.
This is the No. 1 and 2 are the Nintendo DS and the Sony PSP. We’ve got two contenders for that. We’ve got the iPhone, which costs zero if you have it as a phone, zero incremental to have it as a game player. Then we’ve got the iPod touch, which currently sells for $299, but who knows what could happen over time there.
On the Nintendo and Sony, the average game title, at the street level, costs $30. Our average game title’s less than 10, some are free. It’s delivered instantly right on your device, which of course is not the case with these other guys.
I actually think the iPhone and the iPod touch may emerge as really viable devices in this mobile gaming market this holiday season.
Nick Wingfield: Do you think we should look for advertising that stresses this message?
Steve Jobs: I don’t know. I just find it very interesting.
Nick Wingfield: Is gaming something that Apple has a lot of experience with, do you think?
Steve Jobs: No, I don’t, except that we sure delivered a lot of games in the last 30 days.
No, we thought games would be a part of it, but I’ve always been excited about Epocrates and some of the medical apps. There are people that are excited about this category, that category.
He also pointed out that mobile was a serious contender to desktop — which was the major software platform at the time:
Nick Wingfield: Facebook is doing an app for BlackBerry.
Steve Jobs: Yeah, but if you go talk to them, the best one by far is on the iPhone, so I’ll take that.
Nick Wingfield: How much of the traffic to a site like Facebook might come from iPhone? [Ask] any of these guys… because I know Google I think has talked about iPhone being the No. 1, by far, mobile search product.
Steve Jobs: By far. And bought mobile maps and everything, Facebook would tell you. I believe if you talked to Facebook they would also tell you some statistics that are similar to that on the iPhone Facebook app.
Nick Wingfield: If you looked at overall traffic…
Steve Jobs: How serious will mobile be relative to desktop is your question. I think there are a lot of people and I’m one of them who believe that mobile’s going to get quite serious because there are things you can do… Obviously, mobile’s with you all the time, but there are services you can provide with mobile that obviously are not relevant on a desktop, such as location-based services integrated into your application.
They can be mighty useful and we’re just at the tip of that. That’s going to be huge, I think.
Finally, it is kind of comforting to see that he did get some things wrong. Predicting the future is very hard, after all:
Nick Wingfield: I think you guys have said that you see the iPod that’s sort of stand-alone MP3 player evolving into a wireless-enabled device.
Steve Jobs: I think there’s going to be two kinds of devices in the music space. One is going to be just the pure evolved music device. People want it for music, maybe music videos, maybe an occasional movie, but they really want it for music.
That would be a device that just keeps evolving, getting better.
As we all know today, there is no such a thing as a “pure evolved music device”, the iPhone has eaten them all.
He is a famed angel investor, who has experienced first-party what success in tech startups looks like. In my mind, although he hasn’t framed it that way in the interview, he clearly is enumerating (in points #2, #3 e #4) ways to spot product-market fit.
Elad Gil: If I look back at data in terms of what has actually worked in the set of companies I’ve invested in —
- They have launched a product or at least had a crappy demo when they started raising money
And if the fact that they actually build something, even if it was awful, showed a mentality of going and building. So that’s one key thing. Just investing on a PowerPoint deck tends not to work well. Although I think I invested in OpenDoor and Wish before they had much built. But even then there was sort of something going on.
- Organic growth, even if it’s a very small base
Most early-stage investors really discount early tractions. They say, “well, that went from 100 to 120, to 150 over 2 or 3 months. Is that real?” But in reality, if something is growing 20-30% a month organically, just through word of mouth, usually there may actually be something there. So I think that’s a clear sign, even if it’s tiny numbers.
- On the enterprise/SaaS side, 1-2 major brands are using them that just found them randomly
That’s usually a very good sign. When I invested in PagerDuty, which is now a very successful company on the Ops/Infrastructure side, they had, I believe, Amazon and Apple as their customers. I don’t know if they still do, but, you know, they 7-8 years ago they did. They didn’t have a sales force, it was just 4 engineers. They were just getting traction because the product was so good that random people at big companies were finding it and adopting it, even if they were sort of overruling their own internal IT to do it.
- Utilization, even if the product is really broken
If something looks really janky — and, you’re like, how can anybody use this? — but people are still using it, there’s usually a very good sign. I’d say, for example, Snapchat in their early days was kind of like that. Most people even in that demographic didn’t get it and it was still just working, even though the UI was kind of rough, and tough to get into and everything else.
I mean, there are other obvious criteria, like talking to customers and seeing if there’s real traction, or looking at metrics, like negative churn. But in terms of the things that were just high-level data that I normally wouldn’t have looked at, those are the things that in hindsight really correlated.
Later in the same conversation, he adds another key point on product-market fit that may sound counter-intuitive to many people — but it does match with my own experience:
The other non-intuitive item is: in general, things that work tend to work early.
You always talk about people grinding for 5 years until it finally works. In enterprise or in highly regulated areas, where it takes time to build a product, that’s very true. But in many cases, if people need the product, the second the product is available, it kinds of starts moving.
You need to do some iteration to really get to escape velocity. But at least the very biggest things tend to work early.
William: Let’s talk about the basics. What is product market fit? We hear this term a lot.
Andy: I coined it. I don’t know if you knew that, but I’m the one who coined the term.
William: Amazing. I never knew that. Where did that come from? What epiphany did you have?
Andy: Well, it came from an observation of what led to the success or failure of my portfolio companies. I noticed over the years that another firm called Sequoia Capital — with whom we often co-invested and often competed as well — did an amazing job of focusing on this subject.
Now, I’m not sure they use the term product-market fit to describe it, but their founding partner Don Valentine used to say: “I want to invest in companies that can still succeed if they screw everything up when it comes to execution because the pull from the market is so strong”.
And that is what I define as product-market fit: when the customers want your products so badly that you can screw everything up and still succeed.
William: So, word-of-mouth is how you grow. But what are your channels?
Andy: We’re almost exclusively organic and therefore almost exclusively word-of-mouth. We institutionalized word-of-mouth with our the incentivized invitation system — and we also have physical word-of-mouth. Those two drive probably 75% of our new client growth.
The reason that we get word-of-mouth is that if you delight your customers they’re going to tell their friends. So I think delight is the greatest form of virality.
I’m not a big fan of paid marketing because I think that it always gets arbitraged away. I’d rather invest in building delight than in something that gets arbitraged.
William: How do you know when you have something delightful?
Andy: Well, at least for us, we see it in a couple of ways.
Number one. People add more money to their accounts. So, in our case, you make an initial deposit, probably to test out what we do, and if you have a good experience with it you’re likely to continue to add money as you save.
As I said before, we focus on people who are under 40, they are in the wealth accumulation phase of their lives versus the wealth preservation phase of their lives. And, as they make more money and save more money, we hope they’re going to keep giving us more money, but they’re only going to do that if they’re delighted.
And they’re only going to invite their friends if they are delighted. So, we track the rate at which people and on deposits and invite their friends.
Now, by the way, you asked me in the beginning of the show: How do you know if you have product-market fit? Or what is product-market fit?
A question that I’m often asked is: How do you know when you have product-market fit? And the best answer that I can give you is: when you have exponential organic growth.
You can fake growth by buying it. But, let’s say you buy a customer, but then they don’t stay with you, they churn. That’s not real growth. So I’m not a big believer in buying growth, because you can’t really tell if you’ve achieved product-market fit.