When it comes to building a startup for the long haul, how important is the design of your product, the look and feel of your website? Every investor will tell you they care about scrappy founders who experiment a lot until they find something that scales, and that getting to product-market-fit is the most important thing, while spending as little money as possible.
However, our experience has been that 9 out of 10 investors are carried away by design and user experience. If the user experience seems to be great, often investors will conclude the founders have found product-market fit and the basic unit economics become less relevant. The path to profitability in most cases becomes: You’ll get profitable if you’re big enough.
It can be a frustrating experience for startups like us who postpone perfecting the flash and feel of a user-friendly website to concentrate on the product itself and build out features that people will actually use.
While traction is the actual measure of success (i.e. do people like what I have to offer?), investors often don’t have a benchmark for how much traction is good for a very specific market. They’ll use their own experience as a proxy: Would I use this?
We’ve learned through months of meetings that these types of investors aren’t the best fit for us. Judging a book by its cover really doesn’t work well for most startups who are strapped for money and need to spend it on engineering and product development, not expensive designers and PR firms.
In 2014, we went through Y Combinator, whose mantra famously is “Build Something People Want” not “Build Nice Things, People May Want Them.” This is certainly something we take to heart.
Here are some things we’ve observed, demonstrating that design and user experience do not always signal if your product has a real market and can actually scale.
1. People say one thing but do something else
I was invited to a wedding in South America and I had the following conversation with my close friend: “When you book a flight, how important is service, food and legroom for you?” My friend told me that “… all of those are very important…” and on top of that, he cares “… a lot about the number of movies he can choose from …”, especially since we’re planning an intercontinental trip.
When we got to my friend’s place, he got his computer and went straight to www.kayak.com to search for flights. A bunch of different flights popped up, and within seconds, he pointed at the second one from the top and said: “Let’s get this one; it’s just $50 more than the cheapest one, but it’s got only one layover instead of two.”
Isn’t it funny that he said he cared about service, food, legroom, and the number of movies he can watch on the flight, but the only criteria he based his decision on was price and number of layovers?
2. You can’t be a little better than the existing products; you need to be an order of magnitude better
Airlines have a big problem: Transportation is a commodity, and the price is the only dimension on which airlines compete. In a commodity market, your goal is to reduce customer acquisition costs, and an amazingly designed user experience is indeed a way to achieve lower acquisitions costs.
That said, as a startup you don’t want to be in a commodity market altogether! As a startup, you want to have a value proposition that no other company can deliver at the same price.
Uber did not disrupt the cab industry through introducing a fancy app for ordering a black car conveniently from your phone. Uber managed to disrupt the cab industry through introducing ride-sharing and thereby increasing the availability of drivers while lowering the cost of transportation: more drivers lead to more geographical coverage, which leads to faster pickups, which leads to more demand, which leads to more drivers.
It’s a virtuous cycle! Uber’s value proposition is an order of magnitude better than the value proposition of a regular cab company.
3. You need to find a path to becoming a monopoly; otherwise, you don’t have a business
While two years ago, Lyft and Sidecar were able to compete with Uber, investors now clearly refer to Uber as the winner who will take it all. Uber has successfully grown a monopoly: No one can compete with Uber in an existing market because driver density — or I should say lack thereof — prevents a competitor from providing a similar service level.
Some startups, however, fail to find ways to become a monopoly despite millions of dollars of funding and endless praise in the media. Despite its amazing design, Square is an undistinguished player in a commodity market.
Merchants don’t care whether they accept payments through a Square, Paypal, or Intuit dongle, since all of them charge 2.75 percent per transaction. Square has the best-designed product and user experience but transacts billions of dollars at zero margins.
While the Square dongle, when introduced in 2009, did have product-market fit, the business itself lacked defensibility. CEO Jack Dorsey is aware of the unattractiveness of the business of moving money and is iterating on a number of fronts: Square Reader, Square Stand, Square wallet, Square cash, Square Inventory, Square Online Store, Square Invoices, Square Analytics, Square Pickup, Square Capital, Square Appointments plus its appetite for acquisitions, e.g. Caviar, Fastbite, Kili Technologies, BookFresh etc.
Square’s numerous attempts to distinguish itself from its competitors have failed so far. Square has not found product-market fit in a space outside of credit card processing — yet. The business of moving money, despite an amazing user experience, will not yield the desired return the $590 millions of venture money were betting on.
I’m not trying to say that user experience is irrelevant. Quite the contrary; next to innovating, measuring and improving customer experience is the most important thing a company can invest in. The good news is, you can buy a good product design and hire customer support people with money — when you have found product-marketfit.
A resource-constrained early stage startup, however, needs to first figure out a value proposition that no other company can deliver at the same price. Founders know they’re onto something if their customers use the product despite its design and not because of it.
Nicholas Hinrichsen is cofounder of Carlypso.