House of Revenue™ Radio

Gathering CEOs to Solve Real Problems.

Episode 5: Product Market Fit and Why Companies Fail Without It

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Meet Guest, Cynthia Del'Aria 

Cynthia is a startup ninja who helps entrepreneurs turn their tech ideas into real, viable businesses. Her passion is helping people fail fast so that they can save their precious time and hard-earned money for the idea that has the best shot at making it big, as well as debunking myths and misconceptions about the process of going from idea to profitable business.

   

Don't Have Time to Listen, Read The Full Transcription.

Mary Grothe (00:00):

Welcome to the House of Revenue. I'm Mary Grothe, Founder and CEO. I love scaling companies to their first 5 million, then 10, 15, and 20. If you've reached a revenue plateau and aren't sure how to get past it, you're in the right place. Listen in as we interview CEOs and solve their most pressing revenue challenges. If you want to be on our show or want to learn more connect with us at houseofrevenue.com. When I first started a consulting firm at age 27, I gave my heart to startups and entrepreneurs three years, 36 of them went through a program that I built to help them get to a point of profitability. Get through that breakeven become profitable and really start to soar the biggest challenge that I faced. And I was so young. I didn't know how to solve all these problems and what was so clearly evident is the biggest separation between success and failure was something we refer to as product-market fit. A lot of startups and entrepreneurs have great vision. Sometimes it's tunnel vision. They have an understanding of what they've built in a way of how it specifically solves a market problem. But if it's only coming through their eyes and they haven't tested that and confirmed that, and don't have proof of concept and paying customers and going through all of the exercise, they can have a little bit of ego that shuts them out from listening to the market, and it can cause them to fail or to make growing or scaling their company way harder than it needs to be way more expensive than it needs to be. And I wanted to bring in an expert today, somebody who specializes in product market fit, testing that, establishing it. And she's brilliant. She had her first successful exit as an entrepreneur at 19 years old, a multi-million dollar exit at 19. She's a serial entrepreneur. She's a startup consultant. And by the way, I know how hard that is because I did every three years, but this woman has endless passion and love for these entrepreneurs. It's unbelievable the commitment she makes to startups, but she works as a fractional CTO. So she is certainly a unicorn because you don't find one, a lot of women in tech too. You don't find a lot of women who are successful and have experience, not only scaling companies, but to have a successful exit, especially at such a young age. And what she has done since then is truly remarkable. I felt it appropriate to bring her in to our show as an expert to talk about how serious product market fit is and what it's costing your business. When you don't put attention to it, and you let that ego or just cheer, I don't want to use the word and the word that comes to bite. This is horrible as stupidity, but I've, I've worked with entrepreneurs that just refuse to do the work, to figure out if they're going to have a viable opportunity in growing their company. And I would call that stupid because if you do the work on the front end, you're going to unlock the doors. So I'd like to welcome Cynthia Del'Aria to the show. Thank you so much for joining us today. And please, will you just share your story?

Cynthia Del'Aria (03:39):

Yeah, of course. So I actually started coding when I was eight years old. And it's not because I was some, I mean, I always loved math and sciences were always my best subjects, but I actually really loved to read. And I w this was like a dry spell period where we hadn't gotten to the library in a while. And so I had like no new books and my mom was taking some programming classes at community college. And so her books were all sitting there. And so I picked up a visual basic book and like three days later I have like 3d objects flying around the screen and, you know, stuffs animating itself. And I was like, this is so cool. Right? Like it just, it spoke to something inside of me and I was hooked. And so by the time I was 14 or 15, I had taken a couple of other classes. I had taught myself a bunch of different languages. One of which was like basic HTML. This is back in the early nineties when that meant something totally different. And so my very first company, I was building websites for small business owners in my church. And, the way that I used to sell it is really funny. You'll get this cause you're a sale. You're a salesperson, right. Is, uh, people would say, well, why do I need to be on the internet? And I'm like, well, you're in the phone book. Right. And they're like, well, of course I'm in the phone book. That's how people find me. And I'm like, yeah, this is the phone book of the future. And they were like, Oh, Oh, and any small business owner could get that. Right. So I started with the ones in my church and then they would refer me out to other business owners. They knew. And over time it grew. And, by the time I was, uh, just after my 18th birthday, I was approached by a couple different competitors because a really big contract that my company won because we didn't have all the overhead of most of the consulting firms at that time. And, so I worked through that process. It was about six months after my 19th birthday. We closed on that deal. And I had my first multi-million dollar exit at 19. And, you know, that's always kind of scary because you're like, have I peaked

Mary Grothe (05:38):

[laughing] At 19.

Cynthia Del'Aria (05:41):

And you're like, what else is there? Fortunately I did not. So a few years later I moved out to Colorado. I started my second company. We built, more, this was more of a product based company. So we had some of the, technology and, and key algorithms around downloads. Download speeds were starting to get faster. Companies were transitioning from box software to online downloads and distributions. And so we, we built some of that technology and got bought up by a company that was buying a whole bunch of companies that were doing various things related to that. So here I am, you know, just before 30, I have two exits under my belt and, I have done a lot of stupid things with money. You said the word stupid. I have done that along the way. But one thing that I have always done, that's always been natural to me is the product market fit piece. And it, you know, it didn't occur to me that it was actually a thing or that I needed to teach people about it when I started working with them, because it just, it's just what I do. Like I would never put time and energy and God forbid money into a venture without going out and finding out from potential customers, you know, is this viable? Is this something that people need? Is it something that people want? What is their problem? Just because I've seen, well, I can't say that I've seen it now. Like the number of stories that I've heard of people who come to me and they're like, okay, I'm five years in, I've spent, you know, 400, 300 5,400, $500,000. I had a guy who has spent like $850,000 and he's like, I don't know what else to do. And I was like, well, tell me about the work you did before you started building your product. And there was this like silence. And, he's like, I don't know what you mean. Like I had this idea. So I went and built it and, and, you know, and I'm like, okay, so you're a product looking for a market. And he's like, Oh, well, yeah. I mean, that's how it works. Right. I was like, no. So the number of times that I hear this story, you know, I've built several successful companies. I have an active SAS company right now. That's in the commercial airline space. We're actually building another one. That's geared towards this very thing for new entrepreneurs in the tech space. And so I'm no stranger to building something and starting something and asking the questions and doing the research. But as I started working with other people to do that, some of them were really successful and some of them weren't, and I didn't really understand why in the beginning, because people would come to me and they say, I have this idea. And they seemed so knowledgeable about the problem in their customer. Right. And so it wasn't until I started asking the questions, like how many people have you actually talked to outside of like, you know, the 20 people who are your close friends and family, like who aren't your mom. Right. And started realizing though, like, well, no one, I have to keep it a secret.

Mary Grothe (08:36):

Yeah. Let's, let's let the fear set in and exactly the work you need to, Oh, I remember starting sales, B Q in November of 2017, really like December. But the first thing I did was go to who I anticipated would be my customer. So I found that I went to three brave CEOs. Since that I have this idea, I want to build a business where there's a fractional VP of sales that would come in part-time and build up your sales org and turn them into something wildly successful. But I don't know how to price it. I don't know how to do it. I don't know how to build it. I have a lot of ideas, but I have to test it. So I found three brave CEOs. They let me in. And of course I just wanted to make a decent income. So I charged the beach three grand. I'm like, okay, I can bring home nine grand a month with no overhead. That's a decent salary. And I tested it for 60 days. I was all in and I made mistakes, but they knew this was a beta. And I had to figure out if there was a market for this, to the extent that I tested it before I ever announced on LinkedIn that I was starting a company, but I saw success so fast within the 60 days. And I was able to iterate, modify and put it together. But similar to you, I thought that's just what entrepreneurs did. I never even knew the term product market fit. And of course, we're a service company. We're specifically talking about tech here, but I think there's a lot of pieces that, that are similar. And without that testing period, I would have been, in my opinion, I know I'm using big words today, like stump it, and I'm about to save full, but I would have been a fool to do a whole launch to the market and say, this is the program, but to not have tested it, to know if anyone would ever even want it, but yet that is actually what entrepreneurs do all the time. The statement that you mean that they have a product and they're looking for a market that is one of the biggest boldest truest statements that I have heard that again, leads to that separation between success and failure. So what is an entrepreneur do then to establish the product market fit before making these half million dollar investments to try to get something off

Cynthia Del'Aria (10:59):

The ground? Yeah. It's a really great question. And you know, I think the reason that it's so easy, especially in tech, I mean, you would never see a restaurant owner be able to get a loan from a bank to build a restaurant without being able to show all of this stuff. So why is this so prevalent in tech? It's so accessible, everyone's got a phone in their pocket, everyone's walking around. Like I had this idea for an app and nobody's doing that, but you could build an app for that. And it feels so easy to just go online and find a software developer and tons of them, you know, advertise. Right. And I have nothing against software developers. I have been one for most of my career. Right. So this isn't disparaging of that. But the thing that you have to understand is software developers are really great at building what you ask them for. They're not great at asking, should you be building it? Why are you building it? Are you building the right thing? Right? Because they get it. They get just as sucked into your vision as you do. Yeah. So, so what I work with with my entrepreneurs on is we go way back to the beginning and I say, I want you to be able to tell me in a two sentences or less, what's the problem you're really saying, solving, because a problem is surely something looking for a solution, a solution without a problem is just a really great idea. Ooh. Right. So what is the problem that you're solving then next step is who are you solving it for? And the third piece of it is will they change their habits? Will they spend money or ideally both in order to solve it. And then you can figure out, okay, this idea that I had, how does that create a solution that people will change their habits and spend money to use in order to get that problem solved. And that is long before, here's that, here's the reason why this works. Okay. I have had clients come to me and they're like, you know, one of my clients is actually an aerospace and he's got this great idea. And he came to me and he's like, I got this bid like $750,000 worth of software. That's even count like the money that I need to spend in marketing and advertising and all this stuff. And I'm like, yikes, that's a lot of money. And I'm like, what kind of market testing have you done? And he's like, what does that mean? I was like, great. I love that you came to me first and you didn't just write the check. So let's walk this back. So we went through the process together and software that should have cost somewhere in the neighborhood of 500 to $750,000 and taken between 18 and 24 months. We found true MVP, a true minimum viable product. Like it's not pretty, it's not, it's not what he wanted. And I'm putting that in quotes, but it gets the job done. It gets a solution out there. We're doing it for about $50,000, including ours. Kidding. And it took about four months to implement. That's a much better entry level investment. And it doesn't matter that it's ugly again, quotes or not what he, not exactly what they were going for, because he's found a way to first validated the market. Now we're testing the market with a far lower investment, and then we can say, okay, what does it really makes sense to build? Because we don't even know if the whole $750,000 software package is actually what he needs to solve the problem for his users. So we're finding incremental steps that fit inside of a budget. He's comfortable with to get him where he wants to be. So he's out in the market as we're launching this week, he's out in the market and, and he's got traction and he's got users now here's the other brilliant part of this. Okay? Because people are like, well, I'm going to go find an investor to give me a million dollars to invest into this. When you have traction, no proof, no revenue, whatever that looks like, you're going to give away a lot of your company. I mean, I have seen people give away 70, 80, 90%. I know that makes my stomach hurt. Right. Whereas if you will do the work and bootstrap yourself to a certain user level, you know, you don't have to be making revenue users or traction in a SAS business. Yes. Because data is King, right. But if you can bootstrap yourself to a certain, you know, number of users or certain level of revenue, and then you go after money for growth, you give away a heck of a lot less, that money is so much cheaper. And just understanding that should be enough to light the fire, to get you over that hump of what is really my minimum viable product. What's the least I can put out there that starts to solve the problem and starts to prove that I have something here.

Mary Grothe (15:41):

This is the winning strategy. And, it gives you leverage as the term I'm thinking while you're talking that's right. In those negotiations. I think it does two things. One, it gets investors more excited because there's actually something to invest in. So when seeking investment in winning that investment is a challenge in itself. And we've worked with founders who have to dedicate 50 to 75% of their time fundraising and not running their company. And if you have something that is that minimum viable, you do have proof of concept. You do have paying customers. You do have something to show those investor pitches. One, they go a lot better. I mean, they're a little more engaged. They're like, okay. Yeah. And then also creates a little bit of FOMO for the investors, because if you already have all of that established, it's a little bit of, I want to be the one in on this because they've already gotten it to this point. And it feels like a safer, lower risk project. And that's what investors want to do somewhere along the way. In my professional journey, I heard that a typical portfolio for an investor one out of 10 will succeed. So they're looking at they're making 10 investments, but the one that hits is what we'll pay for, you know, tenfold of all the losses. That's exactly right. They're only looking for one to hit. And with that, if you're the one showing up who says, I already made this initial investment to get the proof of concept to ensure we had product market fit, to gain a few customers, it takes a lot of risk out of the investor feeling like one that anyone ever even wants to give you money. But number two, leverage is now on your side. And the only way an investor would want to make big investment in an unknown is typically for bigger exchange. They have the leverage. And so therefore they're going to be taking more equity. If you want to minimize what you're giving up for equity and also increase the chance that you're going to get any sort of investment at all. Yes, this is the way to do it. A third thing I just thought of is it'll also then catapult your success to being profitable and to getting, or if it's not profitability, but it is users' data, et cetera, whatever it is that you're going for, that's going to you, it, for that exit, it gets you to that closer because the amount of time spent, let, let, let's go scenario a, I don't build anything, but I have an idea. Yeah. And I give up 80% of my company to get a million dollars. Yep. Then it takes however long to build it, probably the wrong way, because we haven't done any product market fit yet. We haven't tested. We have no idea. So we're dropping half a million dollars in 24 months into building something that we're not even sure if the market wants. And then we go into a 12 month period of testing. I'm spinning all the available dollars just to prove that we did a few things, uh, out of order or didn't get it quite right. So now we have to reinvest, potentially ask for more money, potentially dilute, shares even more and go about the process again. So, I mean, you're talking about three, four or five years, and I think that was the initial example that you started with. If someone had come to you and had spent $800,000 over five years and still doesn't have it right. Versus the entrepreneur that says, I'm going to make an investment in themselves, really in the future. Because by getting the product market fit out of the gate and the MVP, the minimum viable product product, or project out of the game, you will significantly fast track your path to investment success. And you're going to own way more of the company and who doesn't want more money. That's exactly right on their exit. So this is a brilliant equation and it's so powerful. What you just shared. So specifically to how you engage with entrepreneurs, what do you look for when you're vetting on who you're going to coach mentor take on projects because both of us have worked in this space and I love you all. Let me just say this. I'm a very kind person about entrepreneurs. That's the only way you can stay in this space, but some ideas are just, so we need to go back to the drawing board. You bet that what do you do there? Well,

Cynthia Del'Aria (19:52):

So one of the things that I, one of the things that I always do is I do my own market research, right? So I want to understand exactly, you know, you're going to tell me the, the research that you've done, but I'm going to go validate what you're saying. I'm going to look at, if you tell me it's a two and a half billion dollar market cap, I want to understand what part of that market are you really able to occupy? How many, how many competitors are there really in this space? How noisy is it contrast that with I'm also looking at what kind of investor movement is there in this space. Are there a lot of companies that are getting funded that are trying to do a land grab? Are there not a lot of companies that are getting funded that are, out there looking, and there's a reason why investors aren't going after a space, right? And so we're looking at all of that, right? What's interesting as, as you were, I was remembering, Crunchbase did a study in 2018 where they postmortems something like a thousand startups that failed that year. And most people think that the reason startups fail is because they don't have enough money. They don't, they don't get the funding they need, or they run out of money, not true, 42%, almost half failed because nobody wanted what they were building. They had amazing teams. They had all the money they needed. They had great technology. Like their cultures were amazing, but they had no market for what they were building. That is a preventable statistic. Money was second. And it was less than 30%. It was only 27% of the companies actually ran out of money. That's a totally preventable statistic and it drives me crazy. So I'm the person like, this is how passionate I am on. I am about entrepreneurs, right? I'm the person who is sitting in a restaurant, having dinner with my fiance and across the room. My little radar is like always listening. I'll hear, I had this idea for an app and I'm like, I need to go talk to that person. They're my people get up and I'll walk over and I'll be like, I am so sorry to interrupt, but I could not help overhearing. And I'm like dropping a business card. And I'm like, if you really want to pursue this, please talk to me first because I can save you so much time and money. You don't even know. And, but, but that's how passionate I am because entrepreneurs are the life blood of an economy. Oh yeah. They're the innovators. They're the creators. Are they entrepreneurs move things forward. And so the more we can support them in doing it the right way and have the high, higher possibility of success. The more likely it is that you get good money from good investors. And the more likely it is that you have a big exit five, seven years out. And that's what we want because that's what creates future and growth. And by the way, the true unicorn is the company that actually is, has their valuation based on profit, not investor dollars. So just throwing that out.

Mary Grothe (22:45):

42% fail rate, that's completely avoidable for a small investment, a small amount of time, but a decision to say, I want to do this the right way. And it's not, it's not the common way. Nope. But there's somebody out here, her name is Cynthia, she's doing something about it.

Cynthia Del'Aria (23:01):

[laughing]

Mary Grothe (23:03):

Which is remarkable. So not always does it need to be a startup, right? This could be an established company. Who's looking at bringing in technology as a way to diversify their offering. Additionally, a lot of companies are looking at ways to bring in monthly recurring revenue. They're looking at ways to help their valuation. It's a lot of services based companies that say, Hey, we have an idea to add him on technology that would give us a new revenue stream. It gives us the long-term contracts, the MRR, it increases the sticky with our clients. And of course, valuation significantly increases. When you're working with a company who's established and wanting to bring in that line of tech, how does the conversation differ?

Cynthia Del'Aria (23:47):

So I work with a lot of service-based companies that are like now trying to figure out a way to bring technology and for exactly what you said, either new revenue, streams, new customer bases, or my favorite one, which is they've discovered a problem in their industry and they're going to solve it, not just for their company, but for all their competitors. And now you've totally shifted the dynamic of your business because yeah, you have your own customers in that industry, but you're also selling to every one of your, every one of your competitors. So all their customers become your customers too. Oh, that's nice. It's brilliant. And so the thing, the thing that's just different is when you know an industry well enough because you're in it already and you're, you have an active, successful company look for, look for problems that exist for your clients, for potential clients that you haven't earned, like what is their problem that we're not solving and then other companies in your industry, what are their problems and how can I solve those?

Mary Grothe (24:44):

And I'm going to even just be bold and take it one step further on this. Sometimes adding in that technology isn't for external or for dollars, it's for actual internal proprietary streamlining of processes and systems and allowing a company to decrease expenses in their growth and scale by doing things more efficiently. Yep. And thinking about, gosh, I mean, it doesn't even have to be external or making money on it. Cynthia, you've been an amazing, I guess, thank you. How do people get in contact with you? Yeah,

Cynthia Del'Aria (25:17):

The best way is just to go to the website. Ryka tech.com, R a I K a T E C h.com. And I'm on LinkedIn. We've got several websites, but that's the best way to get to all of the good stuff, blog, content, all of it.

Mary Grothe (25:31):

Amazing. Thank you for joining us. And hopefully these golden nuggets today are going to take you to the next level. Thanks for listening to today's episode. If you're interested in being on our show or want to learn more about how we can help you scale your company, connect with us at houseofrevenue.com or with me, Mary Grothe, spelled G R O T H E on LinkedIn, Twitter or Instagram.

 

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