The concept of a minimum viable product (MVP) is now pervasive. But it is not the only way to think about market development for new products. What’s the right way to be entrepreneurial, especially if you work in a highly regulated industry like finance?
MVP reflects a widely acceptable view that innovation is often experimental, and perhaps nowhere more experimental than in the startup community where entrepreneurs are, in effect, building a hypothesis about a product and its suitability for the market.
Product-Market Fit is an on older idea. It has much more fluidity about it – rather than proposing a series of iteration cycles it better reflects the reality of much entrepreneurship. Whatever the merits of product, and however aligned with customers, there is nonetheless an x factor that allows some products fly while others stay grounded.
The challenge to startup growth can be the presence of oligopolies or market entry barriers that come from deeply entrenched incumbents. This is very much the case in financial services. To date very few startups have managed to breakthrough as alternative providers. The banking community, by and large, already has a tier of suppliers in its core system portfolio. Why would they need another? The answer is process model innovation. Banks, and financial service companies, need processes that radically reduce costs and, potentially, provide new services.
Source: London Financial District
But in a game where oligopolies still rule what do terms like MVP and Product Market Fit mean for startups?
Why startups succeed and fail
Most data on startups is really focused on why they fail. The “why they succeed” part of the landscape is highly speculative. So let’s go with what we have.
A 2014 Fortune article CB Insights data that showed far and away the biggest reason for firm failure is a lack of need. That can mean great products that not enough people want.
A sizeable 42% of entrepreneurs listed this as the biggest reason for their failure with only 17% acknowledging that the reason was “poor product” and 14% poor marketing.
However, changing market conditions are also responsible for a large part of the cull. While the 2014 report quantified historical data CB Insights now keeps a running record of failure post-mortems. Recent additions include:
- Simple changes to market conditions such as a drop in advertising spend
- Not having the right industry expertise
- The pressure of one big deal falling through
- Legal problems such as IP contravention
- Inability to scale
- And so on…
In many of these cases it doesn’t appear as though the entrepreneur forgot to do the MVP iteration cycle. But MVP can only get you so far.
MVP, PMF and more
MVP, or rather the larger lean innovation/lean startup paradigm, is supposed to validate demand for a product and help shape the product to fit that demand. It also emphasises the need to create a learning model – the cycle is actually build-measure-learn.
While lean startup may take some uncertainty out of product development there are still significant uncertainties that bring companies down.
Product-Market Fit (PMF) is a more elusive idea. Marc Andreesen describes it as a good product in a good market. But in a recent article on PMF, Andreesen Horowitz stated that market matters over everything else.
That statement contains a lot of obvious sense. If the market for a product is not vibrant then no amount of pivoting is going to help create scale for a product. Only the market creates scale.
Startups that chase down reluctant markets are in for a hard time. They may make a reasonable living but will they ever escape the drudgery of earning enough to pay the bills? Will they achieve escape velocity?
Escape velocity is an even more elusive term but it means the point at which a company’s fortunes are finally starting to leave normal gravitational pull behind. The company will find itself pulling in inquiries and some of its product features will be seen as a standard.
A final term to take on board in this area is the value proposition. There seems to be some ambiguity around what a value proposition really is. Or rather in the early phases a startup will be trying to create a solution to a problem but may not have yet hit on the right value proposition. The latter involves attributes like appearance, ease-of-use, price and so on. Moving anyone of these facets changes the value proposition and may require adaptation in the underlying solution.
The Andreesen Horowitz article quotes Andy Rechcleff:“
A value hypothesis is an attempt to articulate the key assumption that underlies why a customer is likely to use your product. Identifying a compelling value hypothesis is what I call finding product/market fit. A value hypothesis identifies the features you need to build, the audience that’s likely to care, and the business model required to entice a customer to buy your product. Companies often go through many iterations before they find product/market fit, if they ever do.
So companies are engaged in a number of activities with varying degrees of formality:
- Hypothesising value (trying to match a solution to a problem and build value from there)
- Build-measure-learn to validate and continue validating
- Building the broader value proposition to enhance appeal and to gather more data on desirability
- Trying to grasp how and when the product will be sucked into an enthusiastic market.
Thinking about Fintech
Few Fintech companies are designed to chase down consumer markets, or even corporate markets, in competition with banks. There are more of the latter of course. But the ethos of the Financial community seems to be one of accommodation. Can banks find the keys to unlock change through partnering with Fintech? Will banks provide Fintech companies with the means to grow?
This relationship between large and small is on the cusp of becoming a new model for sectoral change.
The banking community is being eased along that path by legislation. PSD2 (the second payment services directive) forces banks to give third party providers access to individual account information, if consumers give their permission.
And there are people who have advocated a more platform-like approach for a long time now – force banks to open legacy data via APIs in order to increase entrepreneurial vibrancy in the sector.
The problem is none of this creates a market, Andreesen’s prerequisite for startup success. There are thousands of Fintech startups but their potential markets are broadly well served by banks (if at too high a cost).
In these circumstances what should we make of tools like MVP, value propositions and hypotheses, lean startup and Product Market Fit?
- The FinTech MVP. Fintechs are hard pressed to engage financial customers with an MVP. They have to aim to proofs of concept, which implies a good degree of prior investment in a product.
- The Fintech value proposition. In terms of a value proposition, there are many Fintechs out there who have a perfect proposition. They can help banks to mitigate the cost of regulation (MIFID II for example); they can help to digitise bank processes. They can improve bank product usability. Or accelerate time to adoption of new technologies like blockchain or AI. The problem is none of these is beyond the bank’s own capability.
- The Product Market Fit. Something similar applies to PMF. We don’t yet see the financial market sucking in new product enthusiastically (like it did with Bloomberg screens for example). In fact, new product is a process of long negotiation.
In its current state, a regulated market like finance can hold off radical innovation until it feels the time is right, rendering the startup movement ineffective, yet expensive (billions of dollars are spent on it).
The problem is not just the regulated nature of the market. Financial institutions engage in incredibly complex systems that their own people do well to keep on top of.
However, we know from other instances of structural disruption that the real trigger for change is convergence with another sector. Nokia after all was killed off by a computer company (Apple) and a search company (Google).
Financial services will be pushed along more quickly in “working capital” because that area is converging with business platforms like Amazon and Alibaba. In Africa banks have lost out substantially to telcos who dominate payments.
An alternative answer though is to begin exposing the potential for ecosystem development in finance. If the ethos of coworking between banks and Fintechs is to succeed it can’t be all left to the bank side to dictate when it will move to action.
On the other hand many Fintechs are small and underdeveloped. However good their products they might not be robust enough to grow.
What are the answers?
Moves like PSD2 could create a more vibrant API ecosystem in finance. But it is likely that the advantage will fall to existing large companies who want to integrate more account information into their services.
The real problem that banks face is a reluctant to take on process model innovation. There are good reasons for that. It is hard!
Source: Cloud computing diagram
The solution to creating more opportunity to create viable new products with a good product-market fit is to expand the universe of information on banking issues, opportunities and solutions.
What is lacking in this situation is information. In Shift: A Leaders’ Guide to the Platform Economy, I pointed out that a key moment of change occurs when the information about transformation becomes abundant.
In finance, banks are not behaving like business platforms in the sense that they are not enabling rapid business expansion in the sector. That could be an information problem, as could the current lack of product-market fit among startups.
Right now we have very little in the way of new sources of information in financial services. Most of the “news” about startups passes through the usual channels. There isn’t a huge blogging community and new information sites are sparse on the ground. We know very little about the startups or their products, we are not celebrating them, or creating an information layer about product-market pitfalls, or pumping out hypotheses about the future in any variegated way.
In an information poor environment, the tools that normally support the startup community have very little traction. Very little pressure is felt by banks from this community, a situation that would be vastly different if there was more information flow.
Information creates need.