This article was published here
Have you ever built a product without sufficient market validation? The result is usually wasted resources and more importantly — a wasted opportunity to build something actually useful. This problem can be summarized with 2 characteristics of a product team. Product team lack of skill or lack of ownership. In this article lack of ownership is addressed.
Skin in the game
The basic concept of “skin in the game” is that an actor bears the cost of failure or gets part of success.
“If you give an opinion, and someone follows it, you are morally obligated to be, yourself, exposed to its consequences,” as Nassim Taleb eloquently says in Skin in the Game.
Also ponder whose advice you rather appreciate — a random person, who is advising you for money, or someone who is vested in your interest — and better yet, has achieved what you want to achieve, before.
Natural selection like skin-in-the-game weeds out poor performers and rewards success 2-fold. Firstly surviving, and secondly getting a chance to play another round with bigger bets. Think of successful founders, who have a demonstrated track record. Wouldn’t you want to work with them? Keep in mind fooled by randomness and survivor bias, and pick out the founders whose success is serial from a large enough sample.
Consultants with twisted incentives
Often that advice giving ‘random person from the street’ turns out to be a consultant with surprisingly opposite interests to yours! The incentive for a regular consultant is to bill as much cash out of your wallet as possible — to do that they need to invoice as many working hours as possible. This creates pressure to introduce meaningless roles (project management, testing) to bill more hours, instead of working as a single cross-functional team towards the same goal. Exemplified by e.g. TransferWise, Spotify engineering culture write-ups. Customer-driven single KPI focused cross-functional teams.
The medium is the message. Try as we might, we can’t solve the built-in conflict with a regular service consultancy. Serving the interest of their “client” vs using them as cash cows. This logical contradiction we often overcome with shifting the focus from the end user to storytelling.
Builders want to build. As Daniel H. Pink put it in his book Drive, people get intrinsically (internally) motivated when 3 components are in place: autonomy, mastery and purpose. I don’t hire candidates that have only the first two qualities. They have to have a purpose to build the product they are involved with — otherwise, they’ll start building a product for the sake of building it. The result is premature scaling.
So what happens next? Premature Scaling.
As 70–74% of high growth internet startups fail because of some version of premature scaling. Building too much, hiring too many or marketing too early before an adequate product-market-fit is premature scaling. It is the most common reason why startups fail. Startups need 2–3 times longer to validate their market than most founders expect.
Stating the problem very plainly: Regular no “skin in the game” consultancy model incentivises building unnecessary products when it’s yet time to validate!
Learning.
“Skin in the game” teams, on the other hand, are geared towards learning. And might follow a routine similar to this:
- Customer discovery — Learning about the problem customers have. Getting to know the ins and outs — assessing the severity of the problem. How much is a solution worth for them? Understanding if a big enough problem is out there guides the team to a problem market fit.
- Creating a value proposition — Learning how well the market responds to a given solution — hence getting to a value proposition market fit. Using tools like
- landing page MVPs that present the value proposition and gather interested peoples emails
- creating interested communities to see if people rally behind your slogan
- social media marketing to assess conversion traction
- surveys and so on
3. Prototyping a product — Learning what is the most effective way to deliver a given value proposition to customers. Contains iteration after iteration on improving the prototypes via user testing. Eventually getting to a prototype market fit, when a customer after customer tells you “if you build this prototype into a product, I will buy it straight away”
4. Pre-commitment — Learning the price points. In a perfect world prototyping should be followed by getting fan users ready to give you their money preemptively (e.g. Kickstarter product campaigns) or when doing corporate sales, having letters of intent. This signifies that you have reached a product price market fit and ready to do economic calculations on business potential livelihood and ROI.
5. Iterating an MVP — Learning by building — finally the most expensive way.
Let’s contrast it to an industry consulting standard — analyzing clients’ ideas, specifying, building the product, and learning.
Notice how “skin in the game” teams focus on the end-user of the product. While consultants focus on the CEO, which they call the client. Product = People. Your product is only as good as the team building it.
The solution?
A baseline answer is to make sure your team has skin in the game. Pay them less guaranteed income and in return let them have a potential upside. This typically happens for startups through sharing equity with the product team.
Our mission at Producement is to build successful startups while being their shareholders. We build both teams and products. We invest in startups through sweat equity, so it’s our goal to get the startups independent of us as soon as possible. This also means that we help to build and hire in-house teams including CTOs. We work as a regular startup employee — take as little cash to pay out our salaries and invest the potential profit into a startup as sweat equity. In order to have a successful startup portfolio, we have to optimize the success of our startups.
This has allowed us to get access to a kind of deal flow that most VC funds can only dream of — we get the best founders very early.
