The document discusses the most fatal mistake startups can make, which is scaling prematurely before achieving product-market fit. It defines product-market fit as having customers that love the product and a plausible monetization strategy. Startups are warned to focus on building a great product and validating their business plan, rather than growing headcount or marketing, until these metrics are met. Common reasons for premature scaling are a lack of clear product metrics and pressure from investors, which founders can avoid by appointing metric owners and regularly communicating progress.

1. The most fatal mistake to
avoid as a startup
Based on a presentation to startup founders at Sigma
Labs Accelerator. This version is for stand-alone reading.
David Jackson, founder Seeking Alpha

2. The bottom line
The most fatal mistake a startup can make is to scale
prematurely. I’ve seen this repeatedly. It’s toxic.
In this presentation, I’ll explain what I mean by
“prematurely”, what’s so bad about scaling prematurely,
why companies scale prematurely, and how you can
avoid it.
This topic is relevant for startups, and also startup products
or divisions within larger companies.

3. The end-game: what a successful startup looks like
Successful startups have three defining characteristics:
1. Customers love the product. (This includes big enough
customer base, low churn, high engagement.)
2. Customer acquisition works. (This includes the entire
marketing and sales funnel.)
3. Monetization is successful. (This includes pricing and
product segmentation.)

4. What do startups need to achieve in their early
stage?
As with constructing a building, some things need to be done first. What do you
need to achieve in the early stages of your startup? What is the startup equivalent
of the foundations of a building?
1. Build a product that core customers love.
2. Have a plausible monetization strategy.
>> This is the narrowest definition of product-market fit.
See: Product-market fit requires a market, a business model and customer engagement.

5. Build a product that customers love
Why is building a product that people love foundational, ie. must be done before
building your sales and marketing channels? Because leaky funnels don’t work:
If your product is mediocre, everything you spend on marketing and sales will
have lower ROI due to low conversion rates and high churn.
When you eventually fix your product, you’ll have to change your pricing and
your marketing and sales materials.
See Product strategy — retention trumps acquisition and Sustainable growth vs. growth hacking.

6. Have a plausible monetization strategy
From the outset, you need to know how you will generate revenue. Broadly, who
will pay, and will it be enough for you to build a good business?
Why do you need to figure this out early on?
It’s hard to raise money and motivate your team if you don’t have a clue about
how you’ll generate revenue.
Knowing who will pay -- your target customers -- will massively impact your
product development.
From the outset, you need to think about building a product valuable enough
that people are willing to pay for it. (Eg. see With freemium, it’s easier to start with the paid product)

7. What should you NOT do at an early stage?
Invest in sales or marketing. (Ask yourself: What’s the minimum number of
users or customers I need to validate product-market fit? What’s the minimum
marketing I need to test whether my product message resonates with my
target customers?)
Hire aggressively. Small teams work best for core product development
because they collaborate better. (See The optimal number of people in a meeting is… and
Minimize internal co-ordination costs.)
Instead, stay focused on building a great product, and validating your core
business plan until you have product-market fit.

8. What’s so bad about scaling prematurely?
● Low ROI, high burn rate. Sales and marketing for a product without product-
market fit will suffer from low conversions and low renewals.
● Frustration. When you don’t have product-market fit, everything seems too
hard, and everyone is frustrated. See: How you know when you’ve hit product-market fit.
● Not building permanent value. When you eventually fix your product, you’ll
have to redo your sales and marketing anyway.
● Distraction. Managing all those people will distract you from your key task --
finding product-market fit. See: The most important factor in startup success.
Bottom line: Don’t scale before you have product-market fit. You’ll burn money,
delay true success, and be miserable.

9. So why do startups scale prematurely? (1) Founders
Founders fall into the trap of scaling their startups prematurely for three reasons:
1. They don’t know how to measure and increase their product’s product-market
fit. Most founders are people who are passionate about an idea. They’re not
people with product experience.
2. They use the wrong metrics to gauge success. It’s not always their fault --
other people are impressed by how many employees you have, how much
you’ve raised, how many users you have, or how much revenue you’re
generating.
3. They cave into pressure from their investors to scale prematurely.

10. So why do startups scale prematurely? (2) VCs
1. VCs are not product people, they are momentum investors. They look at their
companies which are growing (ie. found product-market fit and are now
scaling) and incorrectly pattern match to your company. “My most successful
companies invest a lot in customer acquisition, so you should too”. But they
don’t realize that those companies found product-market fit, and you haven’t
yet. It’s like saying “You should be adding floors to this building before you’ve
built the foundation.”
2. They just invested money in your company. They want to see you use it.
“What’s your hiring plan?”
For these reasons, VCs often add bad pressure on founders to scale prematurely.

11. How can you avoid scaling prematurely?
1. State and validate product-market fit hypotheses
2. Establish clear metrics, targets and ownership for product
success
3. Don’t raise too much money too early
4. Ensure you’re aligned with your investors

12. (1)State and validate your product-market fit
hypotheses
Write down your hypotheses for narrow product-market fit, covering:
● Target market. Who is your target user; who will make the payment decision?
● What is the customer’s problem / Job to be done? See What problem are you solving? and
Focus on the job, not the customer type and Build your product to explicitly address a “Job To Be Done”.
● Your product’s value proposition from the customer’s perspective -- what
does this uniquely do for me? How much am I willing to pay? See Four simple questions
to help you get product-market fit.
● Strategic differentiation. What unique capabilities does your company have?
● Competitive superiority. What’s better about your product than other
solutions?

13. (2) Establish metrics and targets for product
success
You need people to love your product, and you can measure that using:
● Net promoter score. See: The only way to build a massive business. Here’s How to set up a NPS survey.
● “The one question that matters”. See Surveying customers to answer Sean Ellis’ “One Question That
Matters”.
Whether people love your product is also measurable by:
● User engagement relative to your product’s frequency of habit.
● Churn

14. An aside about metrics and ownership
If something is really important, it must have an owner in your company. See
Managers and metrics.
The more important the goal, the more senior the owner should be.
In this case, the CEO must include product success metrics in the scorecard
and report it to investors.
Ask yourself this question: Who owns product success in my company? What is
their key metric?

15. (3) Don’t raise too much money too early
● More money won’t help you find product-market fit.
● This is because it’s easier to find product-market fit with small teams.
● Raising too much money early on will put you under pressure from investors
to demonstrate growth before you’re ready for it.
See: Why more funding won’t help you find product-market fit.
(See also: Product-market fit and fundraising.)

16. (4) Ensure you’re aligned with your investors
● Set product metrics (NPS, avg. engagment per user etc) as your key KPIs.
● Regularly share these KPIs with investors. See How to write a monthly report
for your investors or manager and Investor updates — the minimum viable
product version for startup CEOs.
● Agree on a non-hiring plan (!) and target burn rate until you validate product-
market fit.

17. Summary
Make sure you have narrow product-market fit and a basic monetization plan
before you scale headcount or build out your sales and marketing.
Narrow product-market fit is measurable with product metrics -- net promoter
score, the “one question that matters”, measures of engagement (such as
days per monthly user) and churn.
If you scale prematurely, you’ll burn money AND make it less likely that you’ll
find product-market fit.
To avoid this error, appoint an owner and set targets for product metrics; and
communicate them regularly with stakeholders. Scale only after you’ve hit
your targets.

18. Thank you!
The material for this presentation came from my experience building Seeking
Alpha, and talking with other founders.
I also read voraciously about startup best practices, and collect them on my blog,
A Founder’s Notebook. The list of posts by topic is a helpful resource for startup
founders. You can get new posts emailed to you by subscribing to the blog. (About
3,700 other entrepreneurs do that.)
If you have any feedback or suggestions for improvements, please contact me.
If you found this presentation useful, please think about who you know who would
also benefit from it and send them the link.