How to Land a $5m Investment by Getting Product-Market Fit
5 detailed objectives for your startup to execute
One of the biggest challenges we overcame at Skylift was getting product-market fit to prove to investors we had a viable business.
At Skylift, we helped firefighters cut half the time in extinguishing wildfires. We did this by enabling them to focus all their attention on extinguishing the fires and letting us handle the short-range logistics.
As a result, we helped save millions of dollars in economic loss and firefighting costs for the nation.
You’ll notice I don’t have to tell you about our product for you to understand the impact it has on the world. I don’t have to tell you the inner workings of our technology or that it’s patented.
Instead, what you read is how to communicate product-market fit.
What is product-market fit?
Product-market fit describes how well your business’s product and your target market’s demand for your solution are aligned. Sometimes achieving product-market fit requires you to change how you talk about, or brand, your product.
Sometimes it’s about shifting to hone in on marketing to the specific segment of the total addressable market (TAM) that is your ideal target market.
We ended up receiving a $5m term sheet from investors, dozens of government customers from all across the western United States, and offers to acquire us for 10x the initial investment.
Getting there was a struggle. My investor meetings would be long and scattered because my business’s mission was. I’d hear feedback on my pitch presentation that made me want to crawl up and die:
“You need to map your product development with your market development.”
“Your slides didn’t align — unit economics were for a different solution.”
And the worst iceberg that sunk my heart like the Titanic breached from a very important decision-maker at one of the world’s largest aerospace companies:
“You had my interest at first. Then you talked about a completely irrelevant market problem.”
I’ll go through our journey sort of like a case study. My aim is to give insight on which you can take action to achieve product-market fit for your business. Your resulting story will increase your chances of getting investment.
Why does product-market fit matter?
Product-market fit is when your customers gain so much value from your solution that they’d be very disappointed if they didn’t have it anymore. It’s when you have paying customers and can show both customer growth and customer retention.
Getting that customer validation becomes especially problematic when you seek funding to help get to the next stage of your business. Investors aren’t ready to invest until they see that next stage reached — the classic “chicken and egg” situation.
“Most investment funds would rather wait until something proves itself in the market. For someone to go out there and close a $3–5 million round, they’d have to have a couple million dollars in the pipeline, either signed or coming on soon.”
Vitaly M. Golomb, Author of The Accelerated Startup
But when you do, it’s an absolutely thrilling feeling. Seeing an audience of investors glued to your presentation energizes every fiber inside you. It alleviates the struggles you’ve experienced as an entrepreneur.
It validates the progress you’ve made.
And it helps you realize you’ve finally achieved market validation.
When you have that fit (or validation), you can quantify and communicate:
- the problem you’re solving for your customer
- your solution’s impact
- the market size and growth potential
- your strategy to capture that market
- your competitive advantage
1. Defining the Problem
The first step you need to take is to profile your customer and identify the problem that customer faces. I’m making this sound easier than it is.
Skylift started as a company that produced heavy lifting drones for any industry. And we struggled for two years to find customers willing to pay us. What gave us successful traction was narrowly defining who the specific users were and why they’d use our tech.
Don’t put too much emphasis on perfecting the product before even attempting to test it in the market. Start asking people right away what they think of your idea or solution.
You want to eventually say “customers love bringing their kids to enjoy family time and amazing, healthy meals” instead of “we have the best food in town!”
According to Entrepreneur’s
Hayden Field in her article on how to make an app,
“[Products] that try to solve a slew of problems often take on too much — either they’re not solving any of the problems especially well, or none of the problems are especially important.”
We needed to say “firefighters are faster because they don’t have to carry hundreds of pounds of equipment” instead of “we have the most advanced drone technology!”
We asked firefighters what issue they faced the most, or even if they had an idea what to use a logistics drone for.
Their response was almost unanimous: “move our hose packs.”
Transporting these 20–40lb rolls of hose frees the firefighters of carrying the weight, but more importantly, frees them of having to repeatedly trek the rough terrain to the fire truck and back. It saves time and gives them more energy. It lets them do what they signed up for, which is to fight fires.
You’re selling a solution.
That statement implies so much: that you have something worth buying and that you’re solving a problem for the customer.
2. Articulating the solution
The second step is to look at the benefit of your solution from your customer’s perspective.
When we decided to pursue the firefighting market, we knew we’d use our heavy-duty drones for moving equipment. Our parameters were based on the limitations of our technology’s lift capability. That’s all. The other half of the equation was missing: a specific use case.
Find alignment between your customer’s pain point and your solution’s value proposition. A simple way to achieve this is by finding the answers to “does it save money, make money, save time, or make operations more efficient?”
Just having an application for your tech doesn’t satisfy the need for product-market fit because it leaves you to create wild ideas about its applications.
It wasn’t until we quantified what a firefighting result should look like (i.e. preventing a 10-acre fire from turning into a 10,000-acre fire) that we had a goal to build results toward.
The coolest part?
We didn’t even need the drone to show that it made sense.
We just placed the hose packs where the drone would have delivered the equipment and timed the firefighters during a hose lay training. (Firefighters conduct training to simulate the real-life laying hose from the fire truck to the fire line).
We proved that firefighters would be at least 50 percent faster if they had the hose readily available, say 500 to 2,000 feet ahead of them.
3. Quantifying the Market
The third step to creating fit is to quantify market size and growth to determine if you can scale.
In our first investor deck, we referenced a 2015 IbisWorld report on the Courier and Express Delivery market.
We made the same argument as almost every ambitious entrepreneur, “Should we attain merely 1percent of global market share…” Global market size was $246B, growing at 1.9 percent a year. Just imagine what we assumed our first year’s revenue would be.
Find how many more of your specific type of customer exist in a targeted region or industry. Many entrepreneurs struggle with this because they take a top-down approach only.
But quantifying a market requires you to take both approaches: top-down and bottom-up.
When you take a bottom-up view, your focus shifts from the superficial and sometimes fabricated “we have a multi-billion dollar market” to the reality of how many people deal with the problem you’re solving.
It’s still important to know that a market has enough space for your business to grow and become profitable. Just be cautious.
When we took a top-down approach we didn’t fully understand our obtainable market, and subsequently overlooked the difficulty of getting just one customer, let alone a percentage of a total addressable market.
With a targeted customer who validated our product-market fit, we could define our markets from the viewpoint of how the customer pays.
We defined our TAM (total addressable market) as the $75B of combined county budgets, our SAM (serviceable addressable market) as public safety budgets, and our SOM (serviceable obtainable market) as fire control budgets.
We found this approach because we had the bottom-up data:
- Wildfires gave us regions to target and quantify (300 fires/year in the western states).
- Fire departments gave us a customer profile (31 counties in California wildfire danger zones).
- County buyers gave us personas and budgets we could target ($3.2B in 31 counties)
4. Developing the Strategy
The fourth step is to develop and execute a series of sales objectives.
We couldn’t even build a sales strategy without a customer profile. We ran around asking top executives at various firms in all sorts of industries if they’d find a place for our solution. Naturally, they couldn’t help us. Most of them didn’t even think they had a problem to warrant a need for our tech.
Engage with your customers. Ask them questions about their challenges. Co-create a solution. And very quickly determine if you could help them at all within the confines of your service offering.
Don’t try to help them build hardware if all you do is software. Don’t try to force your software to fix a problem that requires a hardware solution. Meaning, don’t try to force a solution onto a customer when it doesn’t actually solve their problem.
That investor who said we had no alignment between our product and our market was spot-on. We were pitching a drone that could lift heavy things into the utility market, which required a drone that flew long distances for inspections.
The applications were different. Therefore the capabilities of our technology needed to be different.
When we found our fit with firefighting logistics we realized so much more.
The problem that gave firefighters the most grief wasn’t the same for their superiors. Because we knew who to talk to (chiefs, captains, and buyers) and what each needed to accomplish, we could deliver our product based on their needs and payment structure.
We started to personalize the entire sales experience in their context. For instance, we needed to get the buy-in from the fire captain of operations before approaching the chief or buyer who could write big checks.
So we just needed to take the captain and chief’s support to the county buyers and convince them to purchase our solution.
Commitment like that is important because it demonstrates a need, thus product-market fit.
5. Creating a Competitive Advantage
The fifth step to creating fit is to understand how you have a unique advantage.
Most entrepreneurs look at the competitive landscape as potential threats from direct competition. We did too at Skylift. We would talk about which other drone companies could take our position, and investors would wonder how well-funded those companies were.
That dynamic took the attention away from our company’s unique capabilities and put the attention onto, quite frankly, irrelevant stuff.
Focus your attention on the opportunities you create for your customers. Instead of worrying about who else is out there that could steal your customers, you should view them as validating a market on your behalf.
Go-Pro is infamous for being paranoid about competition. The company has an internal spreadsheet that lays out all of the indirect and direct competitors. It compares advantages like business model, target market, and product features.
You could take this approach, but I’d caution you to open your mind to the possibility that your competitor can also be your partner or acquirer.
When we dug deep in firefighting, we learned that none of our competitors included drones.
- People moved small equipment, but this was slow and created new risks.
- Trucks moved small equipment, but couldn’t reach most areas.
- Airplanes carried large equipment and water, but they were overkill for the small stuff.
- Helicopters also carried large equipment, but were expensive and unavailable.
We assessed how things were traditionally being moved, how slow it was, how costly it was, how operationally prohibitive it was. We did not worry about what other drone companies were doing.
The second and third-order outcomes astonished us. We realized that we were very aligned for partnerships and potential acquisitions with one category of competitors: helicopter companies that provided vehicles and services to the firefighting and other public safety agencies.
A partnership with a large helicopter company meant reduced manufacturing costs, increased sales growth, and a strong advantage over any potential drone competitor.
In order to be successful at getting product-market fit, you have to focus on one customer problem. It has to be the best thing to reach what you believe to be successful for you.
You’re never going to be informed enough to have 100% confidence that you’ve chosen the best option. And you’re probably never going to be satisfied after you had. Entrepreneurs rarely are.
Ray Dalio says,
“You can have anything you want, but you can’t have everything you want.”
I took the stage at the Gore Silicon Valley Innovation Center in Santa Clara. Before me sat an audience of investors from the likes of Boeing and GE Aviation.
But this time, my pitch was ready.
For months after that day, Skylift received calls from investors who weren’t even in attendance. They only heard about our company and its market validation.
Start by identifying your specific customer segment. Deeply understand their challenges. If you determine you can help, then provide the best service — a service so good your customers would be disappointed if they didn’t have it.