Like a Glove Podcast, Episode 13: Trying to Boil the Ocean, with Chelsea Linder

CHELSEA:
Thanks. Thanks for having me.

PAT:
So, tell us, what does gBETA do, and what do you do specifically for gBETA?

CHELSEA:
Yeah, so gBETA is a pre-accelerator for early stage companies with local roots. So the gBETA programs in Indiana are all focused around companies that are based in Indiana. I’m a managing director of gBETA. So I manage gBETA programs across the country. Right now we have 19 gBETA markets across the country, and Toronto.

PAT:
gBETA’s really been expanding quite a bit, in the last one or two years. I mean, originally it started in Wisconsin, right? In Madison.

CHELSEA:
Mm-hmm.

PAT:
Right, and has slowly but surely started to spread across the US.

CHELSEA:
Yeah, so when I started working at gener8tor, which is the company that runs gBETA, two years ago, I think Indy was the fourth or fifth market for gBETA. So in two years we’ve gone from five to 19.

PAT:
Five to 19, that’s awesome. So you probably have product-market fit if you’re able to expand that quickly, right?

CHELSEA:
I think we’re getting there, yeah.

PAT:
Yeah? Okay. Great. All right, well, let’s get into some of the questions I had about product-market fit. Now that we’re talking about it, I’d like to talk a little bit about product-market fit for gBETA, and how you guys got there. So, let’s start off with, what’s your definition of product-market fit? Let’s level set us.

CHELSEA:
Yeah, so the way that I typically explain it to a startup, when I’m trying to explain product-market fit, is you have to prove whether the dog will eat the dog food, and that’s really what it comes down to. So, who are the people that are going to pay for and use what you are making and selling? And, do you have a really specific handle on who those people are and how to sell to them?

PAT:
So you want to make sure the dog eats the dog food. And so, how specific do you get, to continue the analogy? How specific of a breed do you want, right? Is it any old dog? Is it male Irish setters?

CHELSEA:
Here’s a funny thing I just realized. All of our examples at gener8tor are dog related.

PAT:
Really? So you all love animals. That’s great.

CHELSEA:
We do. We have a g-dog Slack channel. Yeah, so we frequently use this example of dog conditioner, a dog shampoo company. And especially when we’re talking about market, this is one that we use a lot. And the example is your target market, maybe it’s poodle owners who compete in the Kennel Club of America poodle competition. There’s 64 of them in the whole country, and that might be your exact target market that you’re going after. And then, as a startup, your goal is to have that vision of a longer term growth, where you can then expand to all poodle owners who want their poodles to have soft fur, and then you can expand to all dog owners from there. But the idea is to start as small and niche as you possibly can, and really who’s feeling the pain the most. So the problem that you’re solving, and then you can kind of expand out from that target market to a bigger market as you go.

PAT:
So that initial market, beachhead market, or foothold market, you want to find the folks who have the biggest pain, who feel it the most. That’s who you want to start with.

CHELSEA:
Absolutely.

PAT:
Gotcha.

CHELSEA:
Yeah.

PAT:
How small is too small for an initial beachhead market?

CHELSEA:
Yeah, I definitely think that you need to be able to make money. So you need to be able to cover that customer acquisition hurdle and balance that out with the lifetime value of the customers within your beachhead market. Or at least know, especially since we’re talking about product-market fit, that there are more than just that initial beachhead market that will eat the dog food, so to say. You need to be able to prove out that you actually have good unit economics and potential for revenue generation, et cetera, within that beachhead market.

PAT:
And so, by “unit economics,” you mean…?

CHELSEA:
You can sell it and make money.

PAT:
Awesome. Great. And so, at the very beginning of a startup, you want to find product-market fit for the folks who are having the biggest pain in the market. You want to understand what the CAC is, the cost for acquisition. You also talked about lifetime value, to make sure lifetime value is greater than the CAC. How do you know what the lifetime value is if you’re at the very beginning of that cycle?

CHELSEA:
It can be really hard to figure out. A lot of it is just kind of guessing, and using the data that you do have to make an educated and data-driven guess, not just sticking your finger out. So typically what we’ll say, is we want to see that your customer acquisition cost is less than three times the lifetime value of your customer. Did I say that right? I think I did.

PAT:
Less than three. So, one third?

CHELSEA:
Yes.

PAT:
Right, okay. Got you.

CHELSEA:
So basically if you have that as your starting point, you can try and do the math and figure out okay, well if as of right now, this is how much I’m paying to acquire a customer, and that times three equals this amount. Does that seem like a number that is relevant and could be the lifetime value of a customer, or is that way off the mark? And if it is way off the mark, then what do I have to adjust to make it seem more doable? Whether it’s on the marketing spend, et cetera, getting that customer acquisition cost down, or figuring out how to make the lifetime value of your customer higher. So there’s a lot of ways that, especially at the beginning, when you have the luxury of being able to experiment with your pricing, experiment with your revenue model, and all of those things, you can kind of try and fudge it around until it seems like it’ll make sense.

PAT:
And so at the very beginning, when you’re trying to figure out your lifetime value and you don’t have a ton of data to actually say, “Here’s the lifetime of the customer,” your CAC needs to be at least one third of whatever your lifetime value is. And you’re really just kind of drawing a line in the sand and saying, “On first blush, does this make sense?” And then you can adjust things along the way. But what I heard is, it’s important to just say, “Here’s the line in the sand, and then we’ll go from there.”

CHELSEA:
Yeah, absolutely.

PAT:
Gotcha. So you work with a lot of startups. I mean, every cohort in gBETA has five companies. You’re doing one to two cohorts, I think for every city, every year. And so, you’ve had literally hundreds of companies.

CHELSEA:
Yeah, I think in 2020 we’re going to be working with over 300 startups through the gBETA program.

PAT:
That is amazing. Congratulations. So obviously you’re working with those companies, but even to find those companies, you’ve got to screen hundreds more.

CHELSEA:
Yeah.

PAT:
What’s the most common mistake you see startups making about product-market fit?

CHELSEA:
I think just trying to boil the ocean, trying to sell their product to literally everybody. That’s obviously not the most effective way to go about it, as we’ve been talking about. And so, I really want to see a company that is clearly thinking about that beachhead market or target market, and knows who really is feeling this pain the most, that they’re solving, and how they’re going to specifically target those customers. Like we were talking about, having a lot of data or knowing a lot long term is difficult when you’re a really early stage startup. But if you know exactly who’s feeling the pain the most, that’s the best place you can start.

PAT:
So in your mind, how does a startup figure out who has the biggest pain? Is it because they have their own domain experience, and “This is the pain I felt?” Is it, “Hey, I don’t have any domain experience in this industry, but this is what customers said”? Is it a mix of both? Is it something else? Yeah, how do you know what the pain is?

CHELSEA:
It definitely has to be a mix. So, I really want to see domain experience in any founding team of any startup. I think it’s just, it’s a key to being able to build a successful startup. But you can’t just rely on your own opinion in a vacuum. You have to be asking your customers, and getting their feedback all the time, every day. So, it definitely needs to be a combination of those two things.

PAT:
For domain experience, what’s the right level of domain experience so that you know enough about the industry that you understand a problem, but you probably don’t have so much domain experience that you start to get blind to, okay, this is how the industry could work differently? Is there kind of a sweet spot for amount of time, in terms of domain experience?

CHELSEA:
I don’t think there is. I think knowing something is better than knowing nothing. Knowing a lot is probably better than that, too, but I’ve worked with founders with all different levels of domain experience. I think the key, and something we talk a lot about at gener8tor is, “Do you know something that nobody else knows? And can you use that to your advantage as you’re building your startup?”

PAT:
“What’s the insight that you have, that nobody else has?”

CHELSEA:
Yeah.

PAT:
Gotcha. Does this common mistake of trying to boil the ocean, I mean, does it change from industry to industry? Do you notice any patterns? Is it more prevalent in software or non-software? What does that look like?

CHELSEA:
I think it is a little bit more prevalent in software, because it’s easier to take that kind of a broad approach when you’re selling software, when you don’t have to think about manufacturing and having enough stock, and distribution, and all of those things. I think by way of all of that being such a big process, and something you have to think through so much, a lot of more physical product type companies just can’t try to sell to literally everybody, all at once. So I would say, in my experience, it’s been more common with software companies.

PAT:
And so the companies that have more cost, and these products are durable-good companies, you have to think through more of those steps, right? Because your gross margins aren’t 85 or 90% like they are in software, right?

CHELSEA:
Exactly, yeah.

PAT:
So you feel like, “Okay, yeah, I’ve got to figure out what my beachhead market is, and then start to move up market from there.”

CHELSEA:
Yeah, for sure.

PAT:
I mean, if you could tell software companies one thing that seem to have this recurring problem of trying to boil the ocean, I mean, what’s the one thing you might say to them to get them out of the mindset of trying to boil the ocean? I mean, how do you get them into, “Okay, start small. I know you want to start big”–but how do you get them to start small?

CHELSEA:
It can be hard. It definitely depends on the founders. Sometimes it’s as easy as just saying, “Look, you can’t boil the ocean. You have to try and figure this out.” Sometimes it takes a lot of work and convincing to do that. I think where you start to see the shift, the mindset shift, is when they start to see success in the sales. So if you can really get them having successful conversations in sales, then they realize, “Okay, it makes sense for me to really target the people that I’m going after and make sure that each one of them is going to be a valuable use of my time.”

PAT:
So they need to see, I mean just like anybody, some evidence that okay, yes, going small actually isn’t really going small. It’s helping me make more progress faster. They need to be able to see some tangible progress, and that you’re not leading them astray.

CHELSEA:
Yeah, for sure. It can be really tempting to just be like, “Here’s my thing, everybody in the world can buy it.”

PAT:
“Doesn’t everybody love my product? This is so great. Why doesn’t everybody buy this immediately?” Yeah. Who doesn’t make this mistake of boiling the ocean? I mean, you talked a little bit about product companies before, because they have bigger costs. But is there a mindset or a type of founder that usually doesn’t make this type of mistake, where they automatically start small?

CHELSEA:
Experienced founders, of course. So if you’ve already done it once, you probably learned this lesson. And then I do think that people who started out with making this startup because they’re solving a problem for themselves, tend to want to find like-minded people who are dealing with the same problem. And I think for example, Wes Winham from Woven, he’s a really good example of that, where he was really acutely feeling a problem that he wanted to solve, and he wanted to go find all his friends who were feeling the exact same issue and sell it to them. And he had such a good targeted approach from day one, about who he wanted to sell the product to.

PAT:
Wes Winham from Woven. What do they do?

CHELSEA:

Woven is a developer hiring platform that makes work samples, and then the developer applicants can do those work samples for the companies, and they just receive a lot more accurate information about the qualifications.

PAT:
They help companies find diamonds in the rough, these developers who are really good, but maybe their resumes don’t look like they’re good. Is that fair?

CHELSEA:
For sure.

PAT:
Okay. In full disclosure, I’m an investor in Woven, a two-time investor. I love Wes and his team, and everything they’re doing there. He’s really, I mean the whole team, but him in particular is just super smart about how they’re being systematic about how they grow the company, and how they’re doing sales development in particular, and how they’re doing their customer acquisition. It’s just all very, very impressive.

CHELSEA:
Yeah, it really is. They were in our first cohort of gBETA in Indy, too.

PAT:
And so, did you know they were … I mean, they’re not successful yet. I think they have some seeds of success. They just raised a million-dollar round and they’re starting to really ramp up their sales quite a bit. Could you tell that they were going to be successful in that first cohort, or do all startups look equally horrible at the very beginning?

CHELSEA:
I mean, there’s always the ones you feel really good in your gut about. And I would say that Wes and his team, because of the domain experience and technical skills that they have, I knew that they were the team that could. If anybody could do it, it would be them. So I definitely felt confident about them from day one.

PAT:
And one other thing that I really liked that they did, was they truly thought about their software company. It’s a SaaS company. They truly thought about it as a software as a service company. They were doing everything manually before they started building all the software, and for three engineers, that is not what you would expect them to do. Right? You would expect them to sit in a room for two years, and build this, and then release it to the public. But they did it completely the opposite. They did everything on Excel spreadsheets, and they figured out, okay, here’s what the decision tree looks like for finding a good developer versus bad developer. And then they implemented that by hand, right?

CHELSEA:
Yep. I was there. Yeah, I think that again, they just really knew that they needed to be getting communication and feedback from their customers from day one, and that it didn’t make sense to build something right away, until they knew exactly what they needed to build. I think they had a benefit in being developers, and knowing how much time and effort goes into building a product like that, and that they didn’t want to have to do it twice or more than twice.

PAT:
And so, their domain experience really led them to this insight of, “Okay, resumes of good developers don’t always look … Those resumes just don’t look good.” So it led them to this insight of, “Okay, how do we find good developers with bad-looking resumes?” Were you the one that coached them on, “Hey, you need to really figure out how to do this manually first”? Or did they just kind of figure that out on their own?

CHELSEA:
I think they were already doing that when I first met them. So they were already pretty much ready to start acquiring customers right when they got into gBETA, and we’re looking forward to starting to really accelerate the growth of the business, which is why I think the gBETA program was a good fit for them at that time.

PAT:
So Woven is a really good example of good product-market fit, or certainly they’re getting there. Without naming any names, can you maybe talk generally about a company who’s had bad product-market fit, and maybe some of the mistakes they made along the way, and why they didn’t pivot or why their pivots were unsuccessful?

CHELSEA:
Yeah, I’ve definitely worked with some companies that were struggling to find product-market fit. Sometimes a couple of the examples that come to mind are research-driven startups. So, maybe an invention-based, or research with any university, a person, again, with a lot of domain experience who just found out something cool or invented something cool, and wasn’t really starting with that nugget of trying to solve a specific problem. And then, even then, I think it can get built and start trying to be commercialized without ever talking really to a customer.
I’ve had a couple of those types of companies go through our program, and talk to customers, talk to other mentors and advisors, realize that maybe they weren’t taking the right approach. I’ve even had a company that did that, majorly pivoted, completely tried a totally new business model, totally new customer segment, everything, and still didn’t really hit the nail on the head. And so now they’re just trying to figure out what their next move might be.

PAT:
And so for these research companies that maybe couldn’t figure out how to find product-market fit, it sounds like if you’re doing research, you’ve come up with an insight into the product itself, but maybe you don’t have an insight into how it applies to the market. Is that fair?

CHELSEA:
Yes.

PAT:
And so, how would you, for these folks that are in research institutions like IU or just literally blocks away from campus, how do you coach them on finding product-market fit? How do you say, “Okay, you’ve got this really great insight into the product or this particular part of research, but nobody’s going to buy it unless you figure out kind of what the insight in the market is”? Or are these folks just kind of stereotypical academians, and they just only want to focus on doing research and academics for that own sake?

CHELSEA:
I think you can spin it and make it seem like it is research for its own sake, right? So you can say, “All right, we’re going to do customer research now.” I think I-Core is a really great example of how you can frame this for an academic perspective. It’s just like, all right, we’re going to programmatically go and talk to a hundred potential customers or more, in a really short period of time, and get as much feedback as we can and figure out how that’s going to drive the business forward. So, there’s definitely ways that you can kind of frame it so that it fits within an academic mindset. But, if it is a founder who is more focused on the business side and maybe isn’t as research driven, then it becomes a lot easier.

PAT:
For sure. I love that idea of kind of framing the work and finding product-market fit as more research. Because I mean, it really is more research, but certainly for that type of mindset, yeah, that makes a lot of sense. I like that.

Well, let’s shift a little bit to a subset of product-market fit and talk about market size. So for your beachhead market, I mean, you’ve talked a lot about, hey, it needs to be small, or not necessarily small, but these folks need to have the biggest pain point, right? Of anybody, your target, and that’s probably going to be a small market. And so how do you make it small enough that you can target enough of the right folks to give you feedback on that product- market fit, and they have the biggest pain point, but not so small that you turn off investors? Who, for obvious reasons, want to see larger markets because that’s going to mean larger returns.

CHELSEA:
Yeah. I definitely think it’s important, like I was saying at the beginning, to be a visionary and to know the long-term plan and be able to put that in front of an investor from day one, even if it might change. So to be able to say, “This is who I’m targeting right now, and these are the reasons why demographics, geographics … ” whatever the reasons are, “And then here is why, based on my data or my educated guesses, these are the next five markets I’m going to go after. This is what I see it turning into, long term.” That’s the way that you can tell a story to an investor, and show them that the returns are there, and that the market size is big enough, at the end of the day, for them to get the returns they’re looking for.

PAT:
And so, in an earlier episode, I talked with Jason Whitney from IU Ventures about this same thing, how we often see a market size slide, and it starts off really small, and it gets bigger over time, but we haven’t seen many founders, or in at least in my case, I can’t remember any founders talk about kind of what they’re going to learn at each market, in each market, and how they’re going to transition and what that timeline looks like. And so, is this something that you teach in gBETA, that you need to have a plan for how you’re going to progress from market to market? Is that something you teach?

CHELSEA:
Oh yeah, absolutely. You can’t just say you’re going to do something.

PAT:
Sure.

CHELSEA:
But I do think that when it comes to a pitch, it can be hard to just fit a lot of that information in, especially if you have a time limit, like five minutes. But definitely I think on the back end, there has to be a lot of thoughtful process around how you’re going to go from one to the other. When do you know? When do you know that you have gotten enough of one market to be ready to move on to the next one? That’s a really hard question to figure out the answer to, and then, like you were saying, what can you learn differently or new information that you can gather from each market as you go, that can inform the product as you move forward?

PAT:
And so that question that is hard to answer of, okay, when do you transition from one market to the next? Yeah, how do you answer that? Or do you just kind of have a best educated guess? And if it changes, it changes, but at least I’ve said something. Is that what you’re looking?

CHELSEA:
Definitely. Again, I think when you’re a really early stage startup, you have the ability to experiment and try things. And if it doesn’t work out, I think your investors want to be there to help, and they want to give you advice and be mentors. And so, if you come to the table and say, “Hey, I tried this market, and it’s not working out. I need to pivot.” Or, “I said I was going to stick in this one market, but I’m not really feeling like it’s working out. Let’s try this other market. What do you think?” They want you to get the returns at the end of the day, so they’re going to try and help you get through that.

PAT:
That’s a really good segue into my next question. If you don’t have product-market fit, how do you know that you need to change your product, you need to change your market, or you need to do a little bit of both?

CHELSEA:
Yeah, you definitely need to be talking to customers and even people who aren’t your customers yet, but maybe are in those other market segments that could become your customers. The only way you can ever figure this stuff out is by getting customer feedback, so you just have to keep talking to people.

PAT:
And so if you talk to customers, one thing I’ve always thought, is that they’re kind of a self-selected bias group, right? They already like you. So if you’re trying to change your brand or trying to get feedback on what you can do better, there’s only so much they can give you. So I’ve always thought it’s better to go after folks who aren’t your customers.

CHELSEA:
Yes.

PAT:
How do you find those folks, and how do you get them to talk to you?

CHELSEA:
It totally depends. We use a lot of different strategies. So everything from, depending on who you’re looking at, you could just need to go stand out on the street and ask the people who are walking by, right? Or it might be a little bit more scientific than that. So maybe you need to go on LinkedIn and find everybody with this kind of title, or everybody who works at this kind of company, and just cold reach out to them and be like, “Hey, I’m building this product. I’m looking for feedback. I would really love to get 15, 20 minutes of your time to get your feedback on what I’m doing.” And I think people get nervous that nobody’s going to answer them, or be willing to do that. But everybody, I think it’s human nature to want to help. And so, if you’re not trying to make a sale, if you’re not trying to ask for money, people are a lot more likely to be like, “Yeah, sure, I’ll totally jump on the call for 15 minutes and talk to you about what you’re doing.”

PAT:
And so, one tactic is literally just to go on LinkedIn and find similar titles to your existing customers, right?

CHELSEA:
Mm-hmm.

PAT:
And then search for them, and just cold email them, or cold reach out. And is there anything specifically that you say in the email, or the LinkedIn message to convince them to do this? Other than, “Hey, I just want 15 minutes of your time, and I’m not trying to sell you”?

CHELSEA:
There’s really specific things, just including three specific times that they can pick from. Make it super easy for them to opt-in. It’s really funny how often if you just give three specific times, people will be like, “Oh, yeah, I’m available at Tuesday at four,” or whatever. And if you say, “Let me know what works for you,” then they have to do all this work.

PAT:
They have to do the work, yeah.

CHELSEA:
Yeah. So it’s easier to just not make them do that work. So there’s really granular things like that, that you can do. But I really think the key is not asking for anything but feedback.

PAT:
Gotcha, gotcha.

CHELSEA:
And not even on the first call. If you want to sell to them eventually, that’s great, but really focus this part on getting the feedback and building the relationship.

PAT:
Gotcha. So make sure that whatever you ask for it’s truly, No, I want customer feedback and not just a quick bait and switch into trying to get a customer.

CHELSEA:
For sure.

PAT:
Okay, and the last question I have is, what’s the single biggest thing folks can do to get better product market fit?

CHELSEA:
I think I said this 500 times. Talk to your customers. Make sure you’re solving a real problem, and if you’re not sure what problem you’re solving, talk to people and figure out if what you’ve made, what you’ve come up with does solve a problem, that you can kind of plug it into retroactively, like we were talking about.

PAT:
So maybe that was my next-to-last question. So I’ve got a couple more out of that. So everybody always says, “Talk to customers,” but a lot of times folks don’t do that. They are afraid to talk to customers because they’ve been working on this thing for so long, right? They’re don’t want their baby to be released to the world just yet. Sometimes folks say, “Well, yeah, I know what all these customers are going to say already.” Right? “I’ve talked to five. Okay, what are the next five going to say? Probably the same thing.” For folks that are reticent about getting customer feedback, how do you convince them that this important thing is really worth doing, and that it’s not just some platitude that every startup mentor says, “Oh, of course you need to talk to more customers”? How do you really convince them that this is something you have to do?

CHELSEA:
Yeah, so I come from a user-experience background. So this has been something that’s been just hammered into my head for such a long time that I have a hard time imagining…

PAT:
A world where you don’t do it?

CHELSEA:
Absolutely. But, I think that in those scenarios, you can think about the fact that all of these relationships that you’re building, all of these potential customers that you’re talking to, are potential customers. And so, this is potentially a sales activity. If you are able to build those relationships and really show that you respect the person and their feedback, then it’s a much easier sale at the end of the day, because they already have a relationship with you. They already feel like they have a little bit of skin in the game with what you’re building. So it’s never a waste of time, because eventually they could become a customer.

PAT:
Eventually it’ll lead to something that will be a little bit more tangible to your business.

CHELSEA:
Yeah.

PAT:
Gotcha. Well, that is great, fantastic, fundamental advice. I appreciate it. That is it for this episode of Like a Glove. Chelsea, tell us how we can reach you online.

CHELSEA:
Absolutely. So you can email me. My email address is chelsea@gener8tor.com. It’s G-E-N-E-R-8-T-O-R. Everybody spells it wrong. Or you can just look me up, Chelsea Linder. You can Google me. You’ll find everything.

PAT:
Awesome, great. Chelsea, thanks for coming down today.

CHELSEA:
Thank you.

Like a Glove is a production of The Mill, a coworking and business incubator space in Bloomington, Indiana. Our mission is to launch and accelerate high-potential companies, and our vision is to become the center of coworking and entrepreneurship in Indiana. You can learn more about The Mill at dimensionmill.org. Thanks for listening, and be sure to check back every other Monday for new episodes.