The Importance of Product-Market Fit Heading Into This Next Financial Storm

Many here on LinkedIn have recently been remarking about how funding deals had been inflating in size over the last five+ years. At the top of the pyramid, there is indeed a record number of unicorns now. But at the bottom of the funding pyramid, the place where my company does most of its work – at the Series A and B rounds – there too we find tremendous inflation. In fact, Fundz.net notes that as of May 2022, the average U.S. Series A rounds have ballooned 66% in just the last three years alone to about $23M.

But we have seen another pattern in Series A companies as of late, besides round inflation. At The Artesian Network, we meet with dozens of early-stage B2B tech companies between Silicon Valley and Europe in any given year – many connect with us looking to juice sales with new messaging, branding, or an innovative approach to demand generation. Increasingly though, we have declined some of these early deals. The growing issue paralleling the inflating valuations? We have noticed a number of Series A companies, (sometimes Series B) that have failed to establish a repeatable, predictable revenue model before they get big rounds.

It used to be that proving a product-market fit and declaring an MVP was an essential step to securing the Series A. Unfortunately, we have seen that pattern broken as of late, at least from the sample size of companies we have been exposed to. Alas, we all know that hope is not a strategy. This is good money, chasing potentially bad businesses. As in the previous cycles, the companies that have failed to establish a product-market fit are the ones least likely to survive a market cycle test. From our vantage point, after the deals are done, it is hard to tell whether this is a trend in rushed VC due diligence or some other kind of shift in portfolio funding strategy. However, for sure, there is no magic marketing that can sustainably overcome a lack of product-market fit, good market or bad.

Now, by many indications, we are indeed headed into some financial turbulence in the tech world. VCs have already started to pull back on funding and companies large and small are starting to announce layoffs. Don’t fret, we have been here before; some of us a couple of times. Remember, storms pass in these “financial cleansing cycles” that sweep tech every 8-10 years. Depending on where you are on your product-market fit and funding cycle you might end up with a stronger, more resilient business.

First and foremost, if you are running an early-stage startup, you need to act swiftly depending upon where you are with your product-market fit. Here are the four scenarios:

1. If you have proven a Product-Market Fit and the coffers are full:

• B2B tech can actually thrive by selling efficiency to large corporations.
• Periods of more scarcity will drive a higher speed of innovation.
• Tune costs to run a marathon, not a sprint.
• Consider contracting out non-core resources like the marketing function to make them variable costs and to increase the seniority of talent you can bring to the team until the perhaps the B round+.

2. If you have proven a Product-Market Fit and the coffers are running bare:

• Radically scale back and fast. Lean into the pain. The round may take a while in the storm.
• Prudently outsource what you can. The objective is to live until the money is found.
• In the meantime, your best source of short-term funds may be sales/debt.
• Don’t fret, good deals can still get done.
• Rachet back on your valuation expectations, get humble.
• I have been in this very spot as an operating executive before. We were late with payroll and then we closed Venrock Assoc. for $12M in the nuclear winter right after 9/11. Funding can happen. Keep the faith.
• Good business development talent is crucial as corporate investment might be key. It was for us.

3. If you don’t yet have Product-Market Fit and the coffers are full:

• Scale back fast pulling resources into a core team focused on establishing fit.
• “Live to see another day” – extend the runway as long as possible.
• We have VERY specific staffing and activity recommendations for this particular scenario in our posted presentation “Launching Your B2B Technology Startup; Finding your repeatable, predictable revenue model” which can be found here: https://www.linkedin.com/feed/update/urn:li:activity:6939361198572265472
• Essentially, build a tight, lean initial GTM market team.
• One marketing generalist to cover product marketing, digital, targeting etc.
• Consider outsourcing most/all such as writing, web, content dev.
• .5 VPM/CMO (outsource) for strategy formulation, and method development.
• 2-3 entrepreneurial-minded, early-stage sales reps.
• This team serves a specific, early-stage purpose.
• Imperative that marketing and sales are very tight.
• Test, measure, methodical, and scientific in nature.
• No spending on brand, content, demand generation, AR/PR.
• Stay laser-focused on proving MVP.

4. You don’t have Product-Market Fit and the coffers are running bare:

• “If you are going to fail, fail fast.”
• Time is your most precious resource – Your time, your employees’ time.
• Conserve remaining resources to help employees. After all, they put their trust in you.
• We find that this is the scenario that founders have the most difficult time coming to terms with, within the proper timeframes. In fairness, all we are ever taught as entrepreneurs is “never give up.” But with the counsel of objectivity, if enough time has passed and the use cases have been exercised to no avail with remaining cash running low in a dovetailing financial environment, it is quite likely that it is time to work with your board to seek an asset sale and/or an as orderly shutdown as can be afforded.
• In Artesian’s history, we have only twice counseled sales/shutdowns, both due to poor product-market fit in the face of waning access to capital. On both occasions, managements’ lack of humility and objectivity stymied their ability to accept reality and put customers and employees first. In both cases the businesses appeared from the outside to “suddenly” shutter within six months or so, leaving customers and employees stranded and angry. This type of unnecessary extra business trauma soils the reputation of all management involved while hurting all constituents.

Remember, some of the best, most innovative technologies and companies are born out of these market lulls. This can be a time of honing, inventing, and adjusting as market inefficiencies work themselves out. Preparing for the cycle and embracing the lessons from the past will ensure that the tests to come will only make you stronger.

Should your company need assistance in finding its repeatable revenue model, FASTER, or you need some seasoned help on the team to navigate these turbulent times, don’t hesitate to connect with us at The Artesian Network. We would love to help.