Marketing spends thousands or millions of dollars on performance and growth marketing. Product management is trying to convert customers. But like water customers are leaking left and right. The founders seek new investments to increase the running out cash. Sounds familiar? I have seen many startups working this way. The reason is they do not know where they stand. One part of the company is in scaling mode, one part of the company is in cost cutting mode, founders are desperately looking for money – while the company has not found product market fit, which is the root of all the bad things happening.
If a startup is not aligned on the phase it is in, people do things that do not match or support each other. Not only do they not match, they hinder each other and cancel each other out. Product management is flooded with requests that do not contribute to product market fit. Founders hire too many developers to get something going. Founders hire too many marketeers and increase marketing spend for artificial growth.
But what to do instead? You need to know your startup phase and act accordingly.
Startups run through several phases or steps over the years. Each phase has its special challenges and tasks. The seven phases of a company are: Ideation, Prototype, MVP, Product Market Fit, Scaling, Potential Profitability and Cash Cow.
The first phase is Ideation. Here a startup needs to find the right problem to solve and the right idea for a solution. Many founders have their idea and jump over this phase and neglect it. Whether you have an idea or not, do not skip this phase. There might be a slightly different, slightly better idea. Getting the idea right prevents a lot of costly work later. This phase is often characterized by Design Thinking to help find an idea for a problem. You can use a fake landing page to early test demand. There is no need for technology, a developer or for marketing in this phase.
Next, it is time to build a prototype. The goal is to test an idea, play with the idea, test feasibility and have something to show around to friends, potential customers, potential employees and investors. Technology is characterized by cheapness. There often is no need to write code. Instead no-code or low-code solutions are enough here. If the technology of your idea is challenging and not of-the-shelf, you can use that technology in the prototype to see if you can make it work. Remember that people will judge your idea by how it looks. Either take that into account when evaluating feedback, manage expectations or invest in a designer. Again, in this phase, you do not need developers or marketing.
The fourth phase is the most difficult one, where startups make the most mistakes. It is about finding product market fit (PMF). You need to concentrate every effort in the startup on finding product market fit. Do not deviate and do not get sidetracked. In this phase the lean startup methodology really shines and helps you find PMF. Product market fit means that the market pushes into your product and you no longer need to pull everyone in from the market. Product market fit means sticking customers and tailwind from the market. The biggest mistake is to not find product market fit and buy growth with investor money. This often happens when you have significant investment before you have achieved PMF. Then VCs might push for growth. Many startups think they have PMF when they have not. They cannot endure the time it takes to find product market fit and skip this phase to premature scaling. Scaling on top of a product without PMF leads to high churn and low customer satisfaction. Every penny spent on scaling in this phase is wasted. Startups need only a few developers in this phase as finding product market fit is not parallelizable. Resist hiring too many developers to “get more done”. You urgently need product marketing in this phase. Product marketing tells customers about the product, explains the product, tells customers about new features and increases feature usage. When customers use your features, they will stick. You do not need performance marketing, growth marketing and obviously not brand marketing before product market fit.
Now it is time to spend money. The scaling phase is here. The goal is to find a profitable marketing and distribution channel and find channel market fit. Then spend money with the channel that is working to scale your startup. You have a working product, but in the scaling phase you might need to adapt technology to your growth. So, parts of your tech stack need to be specialized other parts need to be replaced. Not only do customers grow in this phase, but so does you startup. To scale you need many developers. Marketing spend is a mix of product marketing and performance marketing to support and fuel growth. The beginning of the phase is the last time to take risks. The time to take risks in a startup is as early as possible. The earlier the better. With growing customer numbers and growing revenue, the appetite for risk vanishes.
Then there is profitability, or at least potential profitability. After growth is maxed out or growth money has dried up it is time to look at the costs. The goal of this phase is to get into a position where you can decide to be profitable or not. If you cut marketing down, you are profitable. If you want to grow faster and spend more on marketing, you decide not to be profitable. But it is your decision not something forced on you by costs. You still have many developers working on the product and marketing works on product marketing, performance marketing and brand marketing. It is now time search for new product development and find a new product or new main feature that drives your next growth curve. Many companies miss this point and move into the next phase without having started new development.
The last phase for a product is cash cow. The product has achieved a high market share and future growth is limited. The goal of this phase is to get all the money that is left in the product. Optimize for costs to increase margins. After the beginning of becoming a cash cow is the last point to find the next star. It is already late to start a new product as most of your employees that can invent and scale a product probably have already moved on. The biggest mistake in this phase is not to stick to new product development. A new product is like a new startup, it takes years to succeed. You only need very few developers in this phase. Companies usually have too many developers working on their cash cow because they have not moved into new product development. Developers develop features that do not move the needle. Marketing is mostly brand marketing.
How can you make this work for you? To prevent frustration a startup needs to know in which phase it is in and act accordingly. Do the right marketing for the step, hire the right amount of developers and align the whole company. Every employee needs to clearly know where the startup stands, what is the goal of the current phase and what needs to be achieved to successfully get to the next step. Then success does not depend on luck and everyone is acting in concert.