PAT:
Hey, everybody. Welcome to Like a Glove, the podcast about product-market fit from The Mill. I’m Pat East, your host and the executive director of The Mill. And today’s guest is Jane Martin. She is a retired venture capitalist. She was our first board chair. She’s a member here at The Mill, and she is an all around really great fan and enthusiast of startups in our community. So welcome to Like a Glove, Jane.
JANE:
Good to be here, Pat.
PAT:
Tell us a little bit about your background. I ran through it really, really quickly, you’re a retired venture capitalist. Can you tell us a little bit, just maybe 30 or 60 seconds about your career, and kind of set the stage for today’s interview?
JANE:
Well, I started in Chicago in the 70s as a venture capitalist, a limited partner in a bunch of West Coast VC funds. And when one of them was raising a big second fund, they asked me to join them as a partner. So, I stayed at US Venture Partners for three funds and then retired, failed at retirement, and joined an East Coast firm, Massachusetts Village Venture. And I just retired from there a couple years ago, and now I’m just doing angel investing, and I’m a limited partner in five or six VC funds.
PAT:
That’s great. So you have quite literally probably seen thousands of startups at this point, or been pitched certainly hundreds of times. And so you have a really broad and wide perspective on startups and certainly product-market fit.
JANE:
We’ll see.
PAT:
We’ll see. Alright. Tell me, what is your definition of product-market fit? Everybody’s definition is slightly different, so I want to make sure we’re all working from the same page. What’s your definition of product-market fit?
JANE:
Well, most startups deal with pioneering and innovation. And finding a better way, better, faster, cheaper way to do something is an innovative way to either create a new market or create another vertical in an existing market. Some of the startups that I’ve had the most success with are those that take a sort of sleepy market and add technology into it. And this is a way to both innovate and create a new market vertical.
PAT:
And tell us what are some of the examples of kind of sleepy markets where tech has been added to them, where you really felt like they had great product-market fit because they added that tech?
JANE:
Well, one that’s kind of surprising since I’m not a golfer, but for those of you who are, I funded Callaway Golf before it went public in the early 90s. And there’s a market where Ely Callaway created the big Bertha [golf club]. He saw the larger sweet spot in tennis, in a tennis racket, and he applied that to golf with a bigger club and also for weight, made titanium clubs. So the combination of those two enhanced everybody’s golf swing, and it was patented. So, there is one. And another is a more recent investment, the Bee Corp. Beekeepers tend to be sort of hands-on, non-technical folks, and Pat and I share an investment in a startup that’s applying technology to infrared sensing to determine how strong a hive is because pollination is important for about a third of our food supply. So, those are two examples of kind of sleepy markets humming along just fine (to pun, a little). And technology just creates a trajectory, upward trajectory.
PAT:
Those are really great examples. Tell me a little bit more about Callaway. Once they added, you said it was the big Bertha, so that kind of sweet spot, they took that from tennis and then they also added the titanium. And so they found product-market fit because folks want to improve their golf game, obviously. But why was their product so much better than everybody else’s? Was it—it’s not a tech itself, it’s what the tech does. And so what were folks able to do with that product that they weren’t able to do before?
JANE:
Well, normal golf clubs have just a half-inch or three-quarter-inch edge on them. So a big Bertha had a much larger edge. So, you have a better chance of connecting with the ball. And when you do connect with the ball because of the advantages of a very lightweight club that has some spring in it and a stronger head to it, people were finding they were doing 400-yard drives when theretofore had not been able to. I’m exaggerating a bit, but that combination created some innovation. And of course it was initially licensed to the Japanese, who are wild about golf, and that gave some additional money into Callaway Golf to allow it to then penetrate a more resistant US market.
PAT:
And so for Callaway, the users, the golfers could quite literally see the product-market fit in terms of the number of yards that were added to their drive. I like that kind of visible way to tell whether or not you have product-market fit. For the Bee Corp, there’s a little bit of a kind of a visibility there, too, right? When the current method of determining whether or not a hive is healthy, you have to literally look at it—and you can’t do that for 100% of the hives you buy. But for their product, and I’ll steal a little bit of your thunder here, but they use infrared technology to figure out how healthy the hive is. And they can look at a lot more than just 10 or 15% of the hives, they can look at almost all of them. And so do you think that kind of way of seeing or showing success is a way to kind of maybe indicate you have product-market fit? Does that make sense?
JANE:
I think the Bee Corp is a great example, Pat, because their initial product didn’t experience the same kind of take-up rate. They were selling sensors on hives so beekeepers could determine the health of the hive. Beekeepers didn’t care about it. So, through a huge number of cold calls to potential customers on every side of the supply chain, whether it was professional bee food processors or growers, or commercial beekeepers all the way to backyard beekeepers, making 50, 60, 70 calls to them and asking them what was important to them. They came out with a statistical segment of the market that led them to, first of all, targeting growers because they really care about pollination. It affects their yield, and they don’t want to pay for hives that are dead.
So, in the past, the almond growers and processors were opening up about 15% of the hives that came on the pollination trucks. This technology allows them to inspect all their hives. The Bee Corp gets a payback in five minutes on the camera, and they are now demand their supply constraint. They simply cannot fill all of the orders. So I think the point finally is if you introduce a product and the take-up rate is so high that you can’t fulfill demand, then that’s the market talking back to you and saying, you nailed it, you got it right.
PAT:
That’s a really good story and I love how the story also illustrates their pivot—it wasn’t just, “Hey, we need to tweak this about our product.” It was, “Hey, we need to go after a completely different market.” The beekeepers initially, much to our surprise, they just don’t care whether or not their hives are healthy. They were going to sell them regardless, so they had to go after the growers who really care about the health of the hive and because it affects their yield and affects their profit margins. And they were the ones who we really needed to go after, and we’re going after them now and it makes a big, big difference.
JANE:
Ideally—and this idea did not originate with me, it originated with Jeff Ready at Scale Computing—he suggests that every startup go through this cold-calling process. This is the market I’m going after. How do I find who to call? Go on your competitor’s websites, look at the testimonials, get a name, start cold-calling. What are you happy about with this product? What’s missing? Is price important to you? Is throughput important, what do you care about? And it’s not fun, but as you know, Pat, better than most, it’s the hard blocking and tackling the unglamorous stuff in a startup that is really the key to the universe. It’s not all glamorous, it’s hard to do.
And I think ideally you validate your market niche early with that kind of drudgery, 50, 60, 70 calls. And people hang up on you, but you’ll get surprising information. And if you do find someone who’s willing to talk to you, ask him who else you should talk to. And so you get this ripple effect, and pretty soon you are able to validate a market before you spend money on R&D and intellectual property protection, and just trudging into the market with something that nobody seems to want.
PAT:
I love the idea of cold-calling your competitors’ customers, because one, they don’t have any particular reason they have to talk to you. So if they do, they’re probably going to give you a pretty open book. The bigger reason I like them though is if you only talk to your customers, you’re talking to a self-identified group that kind of already likes you, right? And so, yes, you can talk to customers and make tweaks and improvements, but you’re probably not going to uncover the types of things that you want in your users or your market than if you go after folks that are interested in your customers, or maybe they’re just in the market general but they haven’t heard about you. You’re talking to these folks that could be a potential customer. So I think that really opens up the market for it quite a bit.
JANE:
A huge mistake that I think entrepreneurs make, we used to say in the early days of venture capital, the biggest reason that startups fail, ego of the founder. And I think it is very easy to spend a lot of time in the echo chamber of you and your R&D group and your software designers. “This is the best thing since sliced bread.” I always like to point out, but anyway, to finish that point, to get out of that echo chamber and into the market and let the customers tell you that, let the customers validate that. Because if you don’t, you have a chance of spending 1 million bucks, 5 million bucks heading down the wrong lane.
PAT:
I love the ego is the biggest thing that kills startups because I think you’re absolutely right that sometimes it takes a customer who’s ultimately going to pay your bills to say, “No, it needs to be this way, and guess what? If I’m not paying you, I’m probably going to pay somebody else.” And so, yeah, I absolutely agree with your ego statement. That’s good.
JANE:
I also like to point out that Apple had a far better operating system in 1980. But it took them 15 years and for IBM to actually go away to get a better product into the market. They were relegated, Apple was, to the education market because IBM could outspend them, because no purchasing officer is going to get fired for choosing big blue over this crazy California Steve Job’s startup. So, most entrepreneurs I talk to think if we have a better mouse trap, it’s going to see the light of day. And that’s wrong on many reasons.
First of all, there’s always course corrections. If we want to humble ourselves in the VC business, we go back and read the original business plan where we thought the market was, where we thought the product was going to be successful. And it’s always different. So it’s the team, it’s an experienced team that’s humble enough to let the market talk back to them and to have a really healthy respect for their competition. And also is not naive enough to think that just because you have a better mouse trap that it’s going to win that day. Oftentimes it doesn’t.
PAT:
I think that’s a great story about how Apple truly did have a better product, but because IBM had such a big brand name, they had such name recognition because they were everywhere. Whereas, Apple was only in a segment of a segment of a segment of a market that they were never going to get traction until IBM had to leave. I think that’s a really illustrative example. You talked a little bit about how company building is an iterative process that you need to be kind of tweaking and iterating all along the way. Can you maybe talk a little bit about how companies should not necessarily pivot, because pivoting is not just a small change, it’s a big change. We’re going in a completely different direction. Can you talk a little bit about how companies should continuously make sure they’re getting product-market fit along the way even after they feel like they’ve gotten product-market fit? How do you make sure you stay at it or you keep product-market fit? How often should you talk to customers? How deep should you immerse yourself in that?
JANE:
Pat, I came in here saying that marketing and sales is really not my forte, but I have learned a little along the way kind of as an observer. I think it’s very easy when you introduce a new product to get some false positive signals. And the reason is your competitors, the major customers in a market, always want to have one of a new product. So you introduce a product, and pretty soon you get 10 or 15 purchases. And you say, “ow, we’ve only just begun and already. . .” Well, I think it’s important to remember that that’s the low-hanging fruit and that doesn’t make a market, because all of your competitors and all of the big customers want one of a new product. It doesn’t mean they’re going to repeat buy.
So, that’s one false signal that you have to be careful of. The best companies are the companies that don’t get fat, dumb, and lazy. They keep innovating, and they keep pressing their folks to keep innovating. I think it’s very easy to, once you get a product into the market, to just hit the bid every day and stop listening to your customers. I think the most important call you can make is the call of the big customer that you lost and get somebody to tell you exactly in brutal honesty, exactly why you lost that order. That is going to tell you more than the customer wins.
PAT:
And how do you make sure that you always keep pressing on innovation? What’s a drum beat? What’s something that a CEO, that a founder can do, regulate to make sure that innovation is baked into their company and that they’re always trying to improve? Because ultimately nobody— these larger companies and/or more successful companies, they sometimes do get fat, dumb, and happy. Nobody wants to be fat, dumb, and happy, it just kind of happens. And so you have to actively work against that. How do you make sure to keep pressing on innovation? What’s the thing you can do to bake that into your company?
JANE:
I think it’s in the end about leadership, isn’t it? So, going back to my comment about ego of the founder is the primary reason that companies fail, not having a healthy respect. I really mean respect for your competition and for your customer. If you approach both your customer and your competition with a healthy humility and a healthy respect and show that, model that to your employees, and importantly to your R&D outfit and fund R&D, so you’re creating a risk environment, a risk-embracing environment to try new things, at least in beta. So, I don’t think anything can replace that leadership style and just hanging out with your customers and getting . . . Salespeople tend to be overly optimistic, as we all know. So, I think it’s really important for top management to get out there, go to conferences, visit competitor’s booths, talking to customers, really be willing to hear the bad stuff. And the best CEOs are the ones that model that behavior.
PAT:
Those are really simple and great tips. And so you don’t need to just talk to your customers, really it’s the CEO that needs to talk to them because among other things, the salespeople are too optimistic. The CEO’s going to have the moral latitude to be able to say, “Oh no, we need to change this product. We need to go after this market.” Whereas, maybe a salesperson won’t think that. I love that you mentioned that it just comes down to leadership, that the CEO really needs to be the one that makes customers the center of the company. That’s always pressing on that.
And I especially like your example of the R&D department where you have kind of a structure in place. You’ve got maybe either people working on R&D specifically, or if you’re on a small company, at least allocating some measure of the budget or some measure of time to that—so that folks know that that’s an actual expectation that you can measure against and that it’s not just some kind of concept of, oh yeah, we should talk to our customers or we should pay attention to them.
I love that it’s a structure and it’s kind of hard. Not kind of, it would be very difficult to not implement if you have a discrete budget or discrete time for that. That’s great.
In our pre-interview you said, you talked about maybe some of the best business models you’ve seen that ties into matching a product to a market in an economic formula. Could you maybe talk about some of those business models that you think really help to drive that?
JANE:
Well, I’ll tell you what I think is the best business model I ever funded, and that was HomeClub when I was at USVP. It was the beginning of the big box stores, and we stayed away from them thinking, wow, that’s a really capital-intensive business. Even though we were running a $150 million fund, $100 million-revenue warehouse store, we thought this was going to be a very capital-intensive business. But we funded a guy who came out of Zayre, formed HomeClub and then we sold, once we had 10 stores, we sold it to Zayre, back to Zayre. This business model was absolutely brilliant, because Bob got 30- and 45-day terms from his suppliers, but his inventory turned 15 times a year. So he ended up selling the product before he had to pay his suppliers. So, with a couple of million bucks per store, we could get a store on a trajectory to generate $100 million in revenue. And our suppliers actually paid for our inventory.
PAT:
Wow, talk about a capital-efficient business.
JANE:
That was an incredible business model.
PAT:
In that particular example, were those terms that his suppliers gave him, were those kind of industry-standard terms, or did he intentionally say, “Hey, I want longer terms, and we’re going to try to turn over inventory much faster than those terms?” Was that intentional, or did it just kind of happen that way?
JANE:
This is the advantage of having someone who is known in the business. So, they know the customers, they know the suppliers, they can curate a warehouse store for inventory turn. So, it was both a case of being able to go to suppliers because you have street cred with those suppliers. And going to a curated set of products, so that you can maintain a faster inventory turn versus your payment terms. So, I think it was both a case of a product line that generated fast inventory turns and credibility with major suppliers to be able to get industry terms for a startup.
PAT:
So he had domain expertise and knew the specific types of products that were going to turn quickly, and he went to suppliers because they already had that cred and credibility with them to extend those terms. And so he kind of hit it on both ends. And that’s really what made Zayre start so quickly ,because they were able to, what you said just a couple million dollars in capital for each store, get each store up and running.
JANE:
Actually, it was HomeClub.
PAT:
HomeClub, sorry.
JANE:
He came from Zayre. Zayre is no longer around, I’m a dinosaur.
PAT:
I remember them.
JANE:
So, Bob left Zayre, we funded him to form HomeClub under this pretty compelling business model. “Okay, we’ll try a store or two.” It worked like a charm, and after 10 stores, Zayre came back and said, “We want Bob back, and we also want that model.” So they bought it.
PAT:
Gotcha. That is such a great story. I love it.
Let’s wrap the interview up with one last question. When you’re working with your startups—you mentor a lot of startups here at The Mill—what’s the single biggest thing that our startups have difficulty in getting their product-market fit, what’s that if you could wave a magic wand and just say, “Hey, this is the one thing our startups in general need to do,” what would be that one thing to help them get to product-market fit faster?
JANE:
That’s a tough question.
PAT:
Get everything all at once.
JANE:
What do you think it is?
PAT:
Oh, turning it back on the interviewer. So, working with some of our startups, I think the thing if I could wave my magic wand, I think they are very concerned about getting their product perfect to be able to talk to their customers. They feel embarrassed if it’s not more built out, or there is parts of it that they know just don’t work. And my feedback to them is always, what’s their current solution? And as long as whatever you are presenting to them is better than their current solution, then that’s going to be good enough. And just tell them it’s in beta. I wish I could just help folks get over that immediately. Because I think once they get out in the market and talk to customers, they’d be obviously much better off. But a lot of times because they’re technicians, because they started the company to solve a very specific problem, sometimes they feel embarrassed going out to the market. And so I guess I would say the one thing would be to help them get over their embarrassment.
JANE:
Or their emphasis on perfection.
PAT:
Perfection, yeah.
JANE:
Yeah. Which is why technical projects tend to be late and over budget. So, that’s why you need a mix of folks. I think that’s a brilliant perception. And I’m reminded of Microsoft that sold to do IBM. They didn’t even have a product, they had to go back to the West Coast and actually cut the VL. Yeah. So, I think that’s great. And that’s essentially why betas are very important. Customers love working with new startups because they can have an influence on where the features will be going. So, it’s a win-win for both of them. It’s just a matter of managing expectations. This is not a final product, you can’t roll it out into your supply chain, this is a beta.
PAT:
And I think you’re absolutely right. Customers love to help influence kind of the direction and product and vision, and tomorrow one of your key phrases, that helps them put their thumb on the scale a little bit in terms of what problems they want to compare to solve for them. So yeah, I think that’s a great example. Jane, thank you so much for being our guest on today’s show.
JANE:
My pleasure.
PAT:
All right. 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.