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In this episode, we’re joined by Chris Tottman from Notion Capital. Before becoming a VC, Chris co-founded MessageLabs and helped grow it into a $700 million exit, so he’s seen the startup journey from both sides of the table.
We talk about what really happens when your product-market fit starts to slip—and why it quietly wrecks your entire go-to-market strategy. Sales start missing targets. Marketing can’t get traction. Churn creeps up. But most teams keep pushing forward without realizing the core problem is the product just doesn’t fit anymore.
Creators and Guests
What is The Revenue Formula?
This podcast is about scaling tech startups.
Hosted by Toni Hohlbein & Raul Porojan, together they look at the full funnel.
With a combined 20 years of experience in B2B SaaS and 3 exits, they discuss growing pains, challenges and opportunities they’ve faced. Whether you're working in RevOps, sales, operations, finance or marketing - if you care about revenue, you'll care about this podcast.
If there’s one thing they hate, it’s talk. We know, it’s a bit of an oxymoron. But execution and focus is the key - that’s why each episode is designed to give 1-2 very concrete takeaways.
Why weak Product-Market Fit is quietly destroying your Go-To-Market strategy (with Chris Tottman of Notion Capital)
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Introduction
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[00:00:00]
Toni: Today I'm talking with Chris Tottman. Chris is general partner at Notion VC, and previously he's been a co-founder and CCO of Messagelabs, which sold to Symantec for $700 million a little bit more than a decade ago. So it's safe to say that he's a pretty remarkable guy. What I'm gonna talk with him today is how weak or weakening product market fit is affecting your whole go-to market organization through any stage and what the downsides are of taking on venture capital for CROs, VP sales, VP marketing, et cetera. Please enjoy.
Chris: There's this kind of what we call this kind of delusional force field that we have, that we believe what we believe and it's important that we need to believe what we believe in order to like lean forward and go in.
You know, as the founder is taking extraordinary risk. But the reality is, you know, from a vc, so staying on the venture track, so being, which is growth driven, let's say it's 1% of all of the VC deals [00:01:00] that get done. So let's say there's a hundred percent of companies, not all a hundred percent are pitching for, for VC type money or, or, or, or trading their equity for working capital, but let's say 10%, uh, of those that are pitching, uh, get VC money, there's only gonna be.
A 10th of those 1% that actually stay broadly speaking on the educator.
Toni: Chris, nice to have you on the podcast.
Chris: I'm excited to be here. It's like home tur, you know, I'm, I, I'm talking to you and go to market leaders, which is like my, my beginning.
Toni: I mean, I, I think I told you this, that, um, you are the first actual venture capitalist on this podcast.
We are like over 200 episodes in Wow. We've always avoided you guys. Wow. Wow. And you girls and only focused on the go-to market folks and, and people that are listening. It's like, what is Chris possibly gonna be able to tell me today? Wait. The difference is Chris has not only been, um, in our GP at Notion vc, which is like a.
A very much leading European firm. Right. I'm not sure kind of how big you guys are actually in, in the US too, but in Europe, like you were a really big name, but also you, uh, [00:02:00] sold a pretty big business, what, like 10, 15 years ago? 20 years ago.
Chris: Two thou right in the middle of the global financial crisis. So end of 2008.
Yeah. Yeah. It was an interesting time. You, you sell a business and you finally. Make a truckload of money and then you dunno which bank to put the money in.
Toni: You know what those problems like every listener is sharing those problems. So we can all totally relate Chris. I think that's great. But I think what's important here, your role there was very commercial, right?
Yeah. Kind of was a very commercial role. So basically, you know, this is, this is your, your school and from there then, you know, did a bunch of other things. And one of the other things that you did, um, you've wrote a book. Kind of, you wrote the Go to market handbook for B2B SaaS leaders. I mean, how more on the nose could it be for, uh, for the audience here right now?
So, kind of all of these things basically triggered the, I, I gotta, I gotta talk to Chris. I gotta have him on the show and, and here we are today.
Chris: Well, I, I, I'm so pleased [00:03:00] that you invited me and, uh. You know, I think the, I think the podcast is just exceptional. My home turf is salespeople. I mean, I have just like, I, I just love salespeople.
You know, you, you meet those people that, you know, they're, they're, they're trying to orient around a product and you know, they've got this target and they've got. You know, uh, either follow the process that's given to them or define a new process that works for them, and they've gotta define, deliver a defined outcome within a specific period of time.
And it's highly meritocratic. All your numbers are published, you know. Yeah. It's, uh, it's, it's just, uh, you're just at a remarkable group of people. So I feel like so much kinship, uh, for the sales folks.
Toni: There you go. And that almost leads me to my first thing, right? So when you, when you look at people running VC businesses, they're always writing all of these, um, you know, industry benchmarks.
They're writing kind of the, you know, blitzscaling and the founder playbook and kind of all of those [00:04:00] things that. An audience of founders would be really interesting. But you wrote the GTM handbook for B2B, uh, uh, sales, uh, SaaS leaders. Right. Kind of what brought you to write that instead of saying, you know, founders, founders, founders on the, on the, on the front.
Chris: You know, it took a while. The, the two co-authors were my original co-founders, um mm-hmm. Went from when I was 25 years old, we'd acquired one of their businesses and so they were in the message labs and star business that we then subsequently sold. We spent. Of a 30 year career, I've probably spent, uh, 20 years working with them directly or indirectly.
And, um, they wanted to get the band back together. And in that time, I'm seeing thousands of decks per year. And there's a big difference between a normal company and a venture, you know, speed company. And what you're doing is you're seeing the same mistakes over and over again. There are some universal problems.
That exists that, um, founders are having to kind of address, like hiring, like an engineer, hiring the first sales leader. Yeah. You know, it's something that they do [00:05:00] statistically very poorly. It takes two or three goes before they, oh, he was really good in the interview. But ends up being a terrible, uh, sales leader for that particular opportunity.
Or, you know, understanding who the ICP or the beachhead customers are and being really disciplined about who you don't go to market to. You know, or as we say, you know, why are you acquiring tomorrow's churn? So there are all of these. Mm-hmm. Normal things, and let's be frank, most decks at the beginning and almost at the end, 99% are terrible.
So we decided to build, um, create a book, which is really around cha. Each chapter is a workbook that enables a founder or, or, or an exec to sort of think, this is the problem that I think I've got. For my business. And then they can go through that workbook themselves. And that could be about pricing. It could be about ICPs the segmentation.
It could be about messaging. It could be about hiring a fir first seller. So that's what we did. Richard is an incredible writer, so I'm dyslexic. He's like, you know, he definitely. Um, he definitely is putting in most of the, [00:06:00] uh, the writing work. And then we got other experts to kind of contribute in certain ways.
So it was just a really great thing that you're gonna do with like two of your closest friends and you're gonna put this out because it's the lowest form of value add. Right. It's so consumable. Yeah. You know, I often say I read books with other people. So if I want to go through a transformation process with one of my founders, I'll go get us all a book and we'll all read it together in, in, you know, wherever we are in the world.
And we'll have a WhatsApp channel, which is just about that book, and it's, it is a way of accelerating learning and a way of making businesses. So we are inspired by those kind of processes. And, um, yeah, and we, we, we, we launched it 18, nearly two years ago. And it's been a hell of a lot of fun.
Toni: I wanna, I wanna tap on something that kind of set there was really interesting the um.
Do you know when you, when you have what? A, what? A change crisis. What did you call it? Um, well,
Chris: there's, there's lots of different cri we like success crisis, you know, oh, we've got so many leads, we haven't got enough salespeople. Right. I love those. Yeah. Uh, and then [00:07:00] you got survival event, right, which is like, oh my God, the infrastructure's not working.
And no one's like in message lines, we couldn't deliver email and we are an email security business. Right. So that was like, that was super tough. So, but I'm not sure which crisis you're referring to.
Toni: No. My point is actually your way of resolving it. So this, I've never heard this, this. You know, reading a group together, I've, you know, obviously, you know, I read books with, with colleagues like, good To Great and a couple, a couple of those books was like, oh, let's have a book club around it almost.
But for you it sounded way more intentional, like, Hey, uh, we have this problem, read this book, and now let's reflect together. Can just kind of shortly talk a little bit more about that.
Chris: I'll give you a specific example that I do with almost every single company that I invest in, which is one of my favorite books.
I'll give it a plug. I love it. It's called Play Bigger. Which is about category creation. Many people on the call, um, will, will, will know this book. And, um, this is all around the way that you can completely reimagine the category that you are in and the infrastructure that you would need to build in order to, [00:08:00] um, um, uh, create more power, both in terms of marketing and positioning, but also the infrastructure power that enables you to start to kind of control mm-hmm.
Or have, uh, be be the price giver rather than the price taker. So there's a moment in time. Where you are with a founder and you kind of realize this is the time. 'cause this can actually sort of blow their head off a little bit, right? Because you are gonna Yeah, it does. The book will in infer to them that their business needs to be bigger than it actually is in imagination.
So you have to be kind of careful. So I will say, listen, I want you, I'm gonna get you this book. There can't be many people on this, uh, WhatsApp channel. We're gonna read it together and we're gonna start firing inputs and outputs, and we're gonna say, Hey, but maybe we should be this, or maybe we should be positioned like that, but maybe if we do that, then we need to do this adjacent product that we don't do today and stuff like that.
And so. Not only are you learning from reading the book, the other people are learning, um, and upgrading, if you like from the book. But because a bit like, [00:09:00] um, elite education in elite education, everybody is intellectually um, um. Uh, ambitious. So they fire off each other, and so the learning gets amplified.
So I'm just using something that really comes from, you know, elite education to, to, to, to the working environment and it, and it's, it's what? It's, it's 60 bucks for three books. It is a WhatsApp channel, which is like free, pretty much. And, and, um, and the inspiration that comes through and the way that you can work on a business is, you know, you just go through like, you know, a, a, a highly accelerated process of both learning and also how you're gonna adjust the business.
So
Toni: I think this is something for people to take away. Maybe it's a little bit disconnected from the core here, but I think there's a really cool way of, of doing it. Speaking about books, I mean, I had the chance to, um, use a custom chat g bt to basically query into the GTM handbook. And I'm not sure if this is a thing that you give out to anyone.
Common mistakes in Go-To-Market strategies
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Toni: I'm not sure, but, you know, I asked it a bunch of questions, but since I have you here, I mean, what, [00:10:00] what would be, from your perspective, kind of what are the three recurring biggest mistakes that, you know, founders and sales executives kind of run into all the time on the go-to market side that. That you're kind of trying to address with, with this book,
Chris: if we think about the thing that I mentioned earlier about signing tomorrow's churn, you look at like what's going on behind the mind of an investor when you're pitching to them, right?
Who, yes, they dunno your business, they might not know your sector. They have all this pattern recognition, which can be good or bad, right? And the pitch will say, yeah, we are, we are X for Y, let's say that's SME. You go, okay, great, that's, you are X for, you know, YSME and then, you know, from experience that what, well, what do you mean by SME?
You know, so what's the, what's the segmentation? Who specifically am SME? We know, of course, that all SMEs and companies of different size are, you know, uh, have different buyers. They have different conditions to buy. We know that they wanna buy technology through different channels. We know that there's vertical nuance.
There's [00:11:00] a whole bunch of stuff. So what happens is you get this kind of generalized positioning, um, and there's very little granularity that exists around very, very specifically. You, you really haven't done the customer research, or maybe you have Yeah. But you are not articulating it. So we think that, you know, the obsession, um, around, uh, that is pretty low level in most, most of the decks that we receive.
And then they'll say, yeah, but we're also great for the enterprise. And you're immediately thinking. These guys don't get it. We could be wrong and we we're wrong most of the time, by the way. So I think really, um, having this, um, inside, inside edge, into the customer and the problem that you are solving.
Sets founders apart, that, that thing, what is the edge? What is the insight edge that they have? And then how are they then able to articulate that if we're talking about pitching or how does that inform them in terms of the way that they run the company, that they, [00:12:00] you know, acquire resources, that they focus their roadmap.
So there's that ambi that, that obsession around the problem. And there's being very, very granular. So don't, don't think. And then the next one is like, ah, they'll talk about the tam. Which obviously investors need to understand that there's a big vision and a large market to go after. But when you, when you are deploying your resources, you have limited resources.
You are, you know, you are the new, you know, small, um, vicious animal that's entered the jungle, right? And you, you know, you've gotta, you've gotta go after something quite specific. So you've got your Tam and Sam and Som, but inside the som you've got your beachhead. Like, who are the first 10, 15, 20 customers that are gonna buy this thing?
And what are the similarities? How are they the same? You know, is that then a packaged up, you know, small cohort of prospects and customers, and then you're gonna expand from there. So these kind of things are related and, uh, you know, 99% of the pitches that we get, um, or, you know, uh, founders that are struggling to find product market fit, these are the [00:13:00] problems that they have.
Also, by the way, when they get product market fit, we know all the sales leaders on the on the call will know this. Once you get product market fit, every prospect is a now and you have a hammer, right? Yeah, and what happens is all of a sudden you forget the fact that actually customers tend to prospects and markets tend to sort of like, um, uh, aggregate together.
So you know how US companies in your sector in the UK buy. He's very different from the way that your uk, uh, prospects buy. And so you have to constantly be curious at the front end, like who in the company is spending most of their time with customers and prospects, not selling, not pitching, not evangelizing.
What they're doing is they're in discovery mode. They're asking questions, you know, they're listening to customers. They're thinking about pain. They're worried about what, what's this person when they're at sleep at night thinking, if I don't solve this, I'm gonna get fired. Those are the problems that you need.
Two, if you like, mine out of your customer base, out of your promo [00:14:00] base. And it's almost like I, I, I kind of want like a VP of product market fit, right? Mm-hmm. Which lasts forever. So I think there's, there's a number, I, I mentioned one earlier, you know, one of the workbooks that like is worth the most, val, the most value is if every engineer hired the right sales leader the first time, that's gonna be great for the sales leader and great for the company.
And trust me, great for the investor. The amount of times they're on their third sales leader and you are, you know, you are like, oh my god, you know? Why did you hire this one rather than the one that the board recommending? Well, I kind of like this one. You know, he was really good in the interview. Of course he's good in the interview.
He's a sales guy.
Toni: The thing is, right, and so to a degree it's a little bit difficult to argue with you because you've been on both sides, right? You've been on, you know, you've been the commercial guy and you're now the vc, right? I do think, yes. Basically other people would say, what you just said is kind of an ICP focus.
We need to know, you know, who is our ideal customer profile, and then we are going to go after those and only those. [00:15:00] And that helps us with marketing messaging, helps us with, you know, sales processes, helps us with the right product, you know, et cetera, et cetera. All of this is wonderful. Suddenly acquisition costs are gonna go down.
Uh, churn is gonna go down. A CV is gonna go up. Wonderful. But I feel kind of the reason why people are so undisciplined about this is simply because they're lead starve to, to a large degree, right? Kind of. You get what you get and then you try and squeeze whatever juice you get out of, you know you can out of what you get, and that then leads to this messy thing that is happening there.
Which I see more often than not is the practical reality. W wouldn't you, I mean you, between your, you know, your, your, um, you know, commercial leadership days and your VC days, wouldn't you agree that that practicality thing here is driving this?
Chris: People will say in love, right? There's someone that your perfect partner is out there somewhere.
You need to go looking. Yeah. You know, you'll find 'em in the end, right? If you're looking in the right way and you get a, you get a hundred leads and your, your, your audience will [00:16:00] appreciate the point that I'm about to make. But you, you know, you get a hundred leads and you gotta figure out, well, in there, is there a rich theme of gold, right?
And is that rich theme of gold is the customers that are gonna buy really quickly, that are gonna get value from the purchase really quickly. Right that are gonna rave about you. So your cost of actual acquisition goes down. Right? And your earned, earned media. Yeah. And earned marketing kind of goes up, right?
And the customers that stay around for a long period of time. Now, if at the same time you're selling to customers that basically are poor fit, then they're gonna moan about you. Mm-hmm. Online, they're gonna not last very long. So your cer LT v's gonna be wrong. So your investor's gonna think there's something wrong with you.
So this stuff is super, super important. Um, but what the, the, the, the way that you, the, the way that you described it is the leads come in. So that, to me, that's, that's kind of after the event of what's actually going on in the brain of the buyer. Uh, you need to really, really be [00:17:00] obsessed about customer pain and what's going on with the buyer.
And then you need people that are good at analyzing all of the data and the leads to say, okay, yeah, we've got a hundred leads, but actually there's only 10 that are relevant. And this is the challenge between marketing and sales quite, um, often, so sales have hit 50% of their number and everyone's getting on.
Pips and whatever you want to call them, and like people are going, there's only one guy that goes off and buys a new car and everyone's in trouble with his wife or her husband. Meanwhile, marketing in the other room, they're like high fiving, woo woo, we've done 200 leads or whatever, but, but they're 150 of the wrong leads.
That sales are forced to follow up, right? Yeah. They're forced to follow up, which is a waste, an economic waste. So this thing is happening all the time. So you're either driving efficiency into your business with long-term value. Or you are driving inefficiency into your organization, which has very short term value.
And so I think you have to think about it in economic terms. Um, [00:18:00] and it's really about being curious, asking the right questions and listening and so on and so forth. And you're trying to pick off, that's why I say you needed like a, a VP of product market fit.
Toni: We shouldn't linger too long on this point, but to kind of, you know, show the other side a little bit, I think pressure to grow.
With scarcity leads sometimes to, I need to do whatever with whatever I get. Right? It's the hardest thing. And then you, you, you know, and, and so I've been in those situations myself a few times. Also understand whoever else is in that situation. If I was an investor. It's super easy for me to be like, Hey, in theory guys, you are all stupid.
You should just sign the customers that love you and they're gonna stay forever. And like, you should only do those. That's the asset I want you to acquire. Right. I also want to move us along a little bit. So I think, um, you know, one of the things you and I discussed kind of, you know, before this to prep this a little bit, is, um, there's an ongoing, you know, I think evolving thing now that the. Uh, let's just say going the VC path for new [00:19:00] folks, building businesses is not the immediate first step for them to go, right? They maybe want to, you know, go at it themselves or maybe small angel round or whatever it might be. And, um, I think one really important crucial piece here to understand for everyone is that, um, not every business necessarily is a VC business, right?
Uh, like not every business is a. Business that should be backed by a loan, by a bank, for example, right? Kind of, they're, they're kind of different, uh, features to a business that then lent themselves to being a VC case basically. So really the question to you is what, what is a VC case? Like, you know, how, how can people, uh, you know, put this together and maybe overlay this to their own organizations right now to realize, like.
Are we a VC case to begin with? Are we not a VC case anymore? Should we be a VC case instead? I mean, kind of give, give people a little bit of, um, uh, of a way to classify that maybe
Identifying a VC case
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Chris: it's such an important question because again, in our, in our sort of, um, all of us, the investor, the [00:20:00] founder, um, you, there's this kind of, what we call this kind of delusional force field that we have, that we believe what we believe, and it's important that we need to believe what we believe in order to like, you know, be lean forward and go in, you know, as the founder is taking extraordinary risk.
Um, with their, with their time. And then they come to us and, and we take um, a fractional amount of risk 'cause we build a portfolio on them and we all want it to work. Right. But the reality is, you know, from a vc, so staying on the venture track, so being, which is growth driven, you know, is, um, you know, let's say it's 1% of all of the VC deals that get done, parking, all the other companies, right?
So let's say there's a hundred percent of companies, you know, let, uh, not all a hundred percent are pitching for, for VC type money or, or, or, or trading their equity for working capital, but let's say 10%, uh, of those that are pitching, uh, get VC money, but there's only gonna be a 10th of those 1% that actually, um, stay broadly speaking on the, on [00:21:00] the, on the veg case.
So venture is about growth, but if you then look at it as an ecosystem, if you are now not growing so fast, then we can say what is fast growing? Yeah. Then the next place where you are gonna build with your time, you're gonna build a company and, uh, for an audience, and then you're gonna exit that business either by IPO or you're gonna have a trade sale.
Right. And, um, so the next case that's not the VC case is the PE case, right? Mm-hmm. And so that's EBITDA driven, right? And then the only other two cases that you have left is the founder's case, which is, I'm gonna run a business. Doesn't take outside equity finance, and I'm a master of my own destiny.
Nothing wrong with that case. I actually love that case for many, many founders, right? And remember, I'm advising most founders to not take VC money, right? And then the far fourth case is death, right? Is that you get that relationship between that quadrant wrong. So you think you're a high growing company when you are not a high [00:22:00] growing company.
So you therefore burn too much money and you lose your credibility. So the investors dry up and you don't have enough time to move to the PE case where you would reduce your costs significantly and you would move to the PE case, right? The alternative is your pre-revenue and you ha you know, maybe you've got something that's technically so incredible.
Then what you want. I call those a cheetah, right? So you get a guy who's a, who's a product manager, he knows there's a gap that they can't afford on the roadmap. He goes and builds that product, and then he does it with very low levels of capital, and then he sells it into that industry for like $15 million, right?
So pre-revenue businesses that are acquihire or tech hires, you know, you can, you can make a lot of money as a founder doing that, but that's, you're being bought for technical reasons, right? Mm-hmm. There's a part of the. Um, machine that they don't have, that if they do have, they will become more competitive in their bigger scale.
So the, but the two main ones are VCs are a, a, a, their catnip is growth. So for example, if you are a three x to four x to [00:23:00] five x to six x business, at the beginning when the VC writes the check, that's a VC case. As you start to get below a hundred, a hundred percent growth, you become less of a VC case.
Right? And then you, there's this critical moment in time, depending on how much capital you've got. Available on the balance sheet is then you need to decide if I'm not a VC case and I have this burn rate at some point, I am a PE case. So I need to reduce my cost. Now what happens when you are a PE company, you are EBITDA driven.
What you do is you milk your customers. So in other words, the cost of acquisition for growth doesn't make any sense. You've got 24 month payback, 36 month payback, your CAC doesn't work. So this better to basically, you know, can all of the CAC and build on your customer base if you can get profitable or cashflow break even doing that.
Then you as a founder will retain your equity and you can build a really great business and maybe you can then flip that into PE P's gonna be far more interested in you if they're not buying burn. So [00:24:00] there's a number of factors that you can do. So you think of it like a quadrant, think of it like a model.
Death is the one that you wanna avoid, but for too long it's that dilu delusional force field, um, where there's no evidence to suggest that you can be a high growth business. But you keep persisting to be a high growth business when you could pretty, pretty reasonably pivot to a, to a, you know, a a no burn business and become more PE like, right?
Or just run it as a founder.
Toni: To translate this to some folks that are listening and maybe kind of got lost here, so to a large degree, right, kind of VC is about. If you want to achieve growth, you need to invest in it, right? Whether or not you have a great CAC of 12 months or have a terrible CAC of more, you know, I don't know, 36 month or something like this.
To a degree, it matters, but it matters less because you get the growth for it, right? And then you can have the burn. But then there's the point of time where that, you know, either. Slips because you, you miss up or it slips because you reach [00:25:00] the end of the scur and there's just not that much more market to take.
Right. At that point, you as a business need to think about like, okay, I can't afford all of that. You know, you need to, can, the cac, as you said, you need to reduce the amount of sales and marketing spend basically, and uh, and kind of pivot towards a more profitable approach, which can only come from living predominantly off your customer base and then ideally trying to grow this.
In some shape or form, right? So if you're listening to you sales, a marketing leader, make sure that you keep growing like crazy because otherwise, otherwise you gotta get canned, right? That's, you know, kind of translating a little bit like this. But, uh, let's go one step further, kind of, this is, we are on the track kind of, we seeing kind of something is not working out, but heres a vc.
Right kind of view series A, uh, meaning there's usually some re relevance of a pro market fit already that you're seeing in the cases that you're working with. Um, but what is it that, you know, convinces you that something is on the growth track, uh, versus in the other [00:26:00] quadrants? Right, because. As operators of businesses need to figure out on which quadrant they are, you kind of need to do the same thing.
You need to figure out on which quadrant are they actually in, in order then to even be viable to get a check from you guys.
Chris: Yeah, I think, uh, there's obviously some, there's obviously hot sectors and some of that hot sectors can create distortions in the market. Um, uh, for example, you know, at the moment in the sort of AI window you're gonna get like, um, just extraordinary levels of growth that will exist in, and we are predominantly the application layer for AI rep, uh, that are extraordinary.
High growth and um, but actually when you kind of peel under the numbers, there's very little engagement underneath. So you have a lot of people, you know, this problem with, uh, you see this with SMEs the whole time, right? They will pay to try your application they have done for many years, and then when it doesn't work, they just stop paying you. And then if you try and even if you've got a contract to try and get the 12 months money, they'll, they'll bitch about you on, uh, online and then you sort of give up, right? You sort felt because all of a [00:27:00] sudden, um. You know, the market thinks you're a terrible app, which is not true, right? So, so what you're doing at seeing at the moment is you're seeing a lot of AI companies growing really, really fast.
But when you actually look under the numbers, the engagement, the usage is very, very low. And so there's a huge churn rate. So there's like a 15%, 20%, 25%, 30% month or month churn rate. Crazy. So, but inside that, can that founder find that seam of gold? Where that's the II business that they're gonna build for this type of, uh, customer.
Mm-hmm. So, um, so you've gotta believe that the space, uh, is, uh, is gonna be, you're gonna be able to build into and create an entirely new economic reality for an entire industry on this business, on the Rous that this business is building. Are you going to become that category king? Are you gonna, is it kind of become mo monopolist mono, you know the word I'm trying to say?
A monopoly? Yeah. Yes. Um, you know, is it a market that you think that there's gonna [00:28:00] be one alpha dog? In that space? Or do you think it's gonna be a market of many? If it's a market of many, then obviously the TAM gets broken up into fragments, right? Whereas if you can build into something where they can really, um, control much of that market, then economically that's gonna create a much bigger business.
So these are the things that you're thinking about the market. You're obviously thinking about the founder. Um, uh, that, that's probably, that's sometimes one of the hardest things, uh, to do. Most of the, um, mistakes that we all make as investors, um, you know, is, um, you're either backing the right founder that's in the wrong market, or you are building, you are backing the wrong founder in the.
It may be the right market and somebody else, you know, competitively kind of takes that away. But it's obvious from a, from, um, a founder's perspective is if if they, if they're not a, if they're not a, if they can't drive an extremely high growth business, then they're not really a VC case. If they can build a high growth business that has high usage.
[00:29:00] Retention and then they can, uh, do land and expand. So that's, if you think about that economically, land and expand rather than land and churn, right? Mm-hmm. Land and expand, you can build a much bigger business on less capital. And um, and then ultimately can they control much of that market? Because, you know, we know statistically that the number one, uh, vendor in a market is controlling.
A significant percentage of that market and there's no premium for being number three, right? Yeah. There's some examples of where there is a premium for number two and they'll duke it out For a number of years, we had three players in our market that duked it out over, you know, eight years. Um. So those are the sort of things that we're thinking out and, but growth is the catnip for an investor.
Toni: I wanna go a little bit back to, um, so we have a very much like a, you know, CEO founder conversation actually, and, you know, it's, it's also kind of important for sales and marketing obviously I see on the call to kind of try and, you know, learn about this area. That's why I you [00:30:00] on this, on this thing, but also.
Uh, try and kind of, you know, translate some of those things actually back. Right.
Importance of Product Market Fit
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Toni: So we have talked a little bit about product market fit, right? Which usually is kind of connected to the first one, to zero to 1, 2, 3, 4, 5 million of, of revenue, right? However, like. Product market fit is not a you, you said like you wanna have the VP product market fit indefinitely, basically forever in the business.
Why is that? Right? Why, why, why can't you fire that person after the first 5 million achieved and everything is like a nail hammer operation?
Chris: Because markets are incredibly dynamic, right? They're extremely, extremely dynamic. And it's just, it's just not a static mark. More today for, you know, in the AI window, what's gonna happen is the spikes are gonna be higher mm-hmm.
And they're gonna end sooner, and then they're gonna come down again. So, so we're just in this extraordinary place, which I think is so exciting, um, in many, many ways for all of the [00:31:00] people on the call. You know, I, I mean, I'm, you can see I'm an optimist, right? Um, and, um, so, but. Like what? What? What is product market fit?
Product market fit in simple terms is that you have something that has hit a resonating pain, which means cheaply. You have got an unbelievable amount of demand that you cannot supply. Right. So that you can't support those leads. It's just too much. Right. And even in there, we've talked about the efficiency of figuring that out.
Mm-hmm. Right? Mm-hmm. And then that's your first, that's when you get product market fit at the beginning. That's when, from an investor perspective, forget series, pre-seed seed, there's before product market fit and there's after product market fit.
Raul: Yeah.
Chris: Then after product market fit is highly repeatable scale.
So there's lots of companies that get to product market fit that don't get to highly repeatable scale. Your audience knows it's a hundred percent. They will have all worked for a company that's got product market fit. They've got to highly repeatable scale. They're either part of that [00:32:00] journey or they joined at some different stage and then they business.
Evolved, you know, uh, post, uh, highly repeatable scale into sort of multiple products, multiple markets, right? Each of those multiple products, multiple markets is a product market fit, right? Mm-hmm. And so all of a sudden you are either adding something that's just a little bit additive and there's nothing wrong with that.
I think that's a, an awesome strategy. Or you are, VP of product market fit finds some extraordinary, um, adjacent pain that is driving. Um, you know, a type of buyer that's within their audience or within their customer base, that is the thing that will move the business into an incredible new trajectory, right?
That just doesn't add a little bit of growth, doesn't add 10% to your growth. It doesn't add 10% to your win rate, right? You could build an entirely new company on that feature. I'll give you an example. We launched a product. This is what Creative message Earth. We launched a product and the feature was a [00:33:00] free feature.
In a bundle. Um, but when we switched the alpha on was we going live? We had the alpha, we were doing the beta, we were getting ready for general availability. We switched the alpha on and uh, and we were basically seeing how much malicious bad stuff was in email. This is back in 98 and it was, we had a bell on this thing.
So the techie switched it on in the data center. We moved some customers email traffic. We put it through this tech stack. And, um, they decided for some reason that every time it caught something that was bad, a bell would go off. And this screech emitted out of the TV as we're all involved in this demo.
We didn't know what was going on. We're like, well, what the hell is happening? And they were like, oh my God, it's the bell. So what it did is it told us there's a lot of bad stuff in email, and so we realized immediately we'd hit internet gold, right? We just thought, holy crap, we need to really start to think about this free feature that we've designed into this product, into the marketing services description.[00:34:00]
Is a killer. So that then mean meant that we created, uh, uh, a new, an entirely new company, which is Message Labs, and it became 150 million subscription business in that in eight years. Right? So your VP of product markets fits job is to find gold, right? Wherever it is within your market definition, within your buyer, your different categories, whether it's in Europe or the us or whether it's this adjacent, uh, buyer in the organization that's got a.
Uh, a similar problem that you can launch within your product that addresses their pay and product market fit for that new, new launch is extraordinary. Levels of demand that doesn't cost that much. Right? Yeah. So I think about it like that. It's this sort of like, there's this minor hat with a, with a, with a torch on it who spends all their time in the dark looking.
For gold.
Toni: So that role usually doesn't exist. Right. And that role usually is being taken on by one or more of the co-founders, I would say. Yeah. [00:35:00] I think reaching product market fit is, you know, someone ex de described it as like, uh, finally being able to sleep again as a founder, right. Kind of, there's, there's a lot of emotional strain.
Connected to this PMF thing right now, what you just described is that product market fit might slip away. Like you know, you might be at 20 million and suddenly you don't actually have that anymore. Maybe you had a really strong poll in the beginning. Uh, but maybe it's not there anymore for whatever reason.
And the people that will notice this the most are the people in the front lines, right? Might be people on, on the, on the show. We are listening right now, kind of. Yeah. I'm, I'm experiencing this. This is like, this is not as it used to be. Or like there's more competition. The product is buggy. We, we went into this, we went into enterprise and it's not working.
We went to the US and it's not working. Um, how should they, how should they address this with the f, with the, with the, the, the founding team or the CEO? Because it's like. It's a little bit like going to your boss and saying, [00:36:00] Hey, your baby is ugly. Like, how, how do you, how do you best address that and kind of bring this up and, and move this in a, you know, constructive direction.
Send them this podcast. Seriously. Right. Seriously. There you go. There you go. Just,
Chris: we we're all so invested in wanting our, our, our future self this quarter, let's say as a sales leader this quarter, the founder. Board meeting to board meeting this year. We're so invested in wanting, like you said, the belief we're so invested in wanting to see the, you know, all the lights go green, you know, all the arrows that go in the right direction.
We're so invested in that. We look, we lose. Track of, uh, of ourselves. Um, I, I, I, I, I think you can get incredibly bright, relatively cheap people, uh, you know, whose job is to just to go out mining information, looking for seams of gold. That's the job description is so simple and, um, and it needs to be semi, [00:37:00] semi-permanent.
I mean, I, I'll be on a board meeting. I will have been on a board meeting. I'll be on a board meeting again where there is 50, 60, 70 million invested in the company. And you hear the thing that you never want to hear, but you do hear, which is like, I don't, the founder says, I don't think we've got product market fit at that point.
Your investment case, you know, gone. Right. Because yeah, we, we all know that, you know, yes. We're in, therefore, like that turnaround mode. Right. Intellectually we have to turn the business around. Yeah. Even when you've intellectually turned it around, so you feel like you've now found the thesis for product market fit and all this burn is going out.
You then still gotta like, you know, hire the team and, you know, re reconfigure the product and you then still gotta build the company. So, you know, and, and in those cases when quite often they end badly, you know, there's, you know, 50, a hundred million written off, you know, effectively the senior members of the team and the board and the investors, you know, they've spent 50 to a hundred million on an MBA, that's what they've spent.
They [00:38:00] spent it on. The only way you can justify is like we've learned a lot and we, you know, we're gonna, from those learnings we learn, but there's no other way to justify what just happened. Right. Um, and uh, and obviously in the window that we're in at the moment, there's gonna be a lot of those Right.
Toni: Tagging onto this line of thought, actually some VC cases. Stopped to Bvc case, for example, here, right? Kind of you were in this board meeting, they say, we don't have Promark fit, actually. Oops. Um, that suddenly is gonna be really difficult for anyone to try and operate this business as it as it was a VC business, right?
And, you know, a very, um, Machiavellian way to sometimes think about the VC and business relationship. It's like, oh, okay, I'm now, I'm actually not you, you can't be a fund returner to me. You can't be unicorn. You can't, you know, go a thousand x my investment. I'm kind of less interested in you guys now, right.
Kind of. That's a very achillion way to kind of think about it. I don't think that's how the, the reality actually works out. But the, the, the question is like, uh, you as a, and maybe you've been a [00:39:00] chairman of a board, maybe you've kind of been the go-to guy as, as a vc, uh, for the founder. Like, um, how do you have that conversation?
Or, or, or maybe you don't, or maybe it's kind of an implicit thing of like, Hey, maybe this is just not. Maybe this, this VC path has kind of ended here and you need to change gears. Write the fuck down.
Chris: Look, no one around the table wants to lose all their money. The founders don't. The investors don't, the senior leadership don't want the zero valued, um, EPAs, right?
Toni: Yeah.
Chris: So you are all, you've all got the same information. You are all simulating it in a certain kind of way. And I just go back to that model, which is, look.
Transitioning from VC to PE
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Chris: You know, if we don't have a high growth case, then there will be, there will, there won't be pools of capital that will invest in this business, which then moves it to the PE case.
The great thing about the PE case is, you know, that they, they're EBITDA driven, so it's like, um, you get the situation where the founder is an innovator and wants to keep investing money in innovating and [00:40:00] culture. And I'm not saying don't invest in culture, right? But, and all of these extra, all of this extra stuff.
And in a PE case, that wouldn't happen. Right.
Toni: Yeah.
Chris: In a PE case, it's EBITDA driven. So what they will do is they will say like, they will get really granular about their customers and they will say, okay, we've got a hundred customers, and if in five years time we've only got 110 customers, right? We need to work out, how do we get three times more money out of those a hundred customers?
Right? Now, let me give you an example of a, a business that, um, that is like this, um, that makes an a fortune, right? The biggest law firms. Right? Yep. They're not doubling their customer size, right. They have incredibly client intimate relationships where they're picking off increasingly bigger needs that those customers have, that they solve.
You know, if you have a hundred customers and. You are burning money and you don't have a growth case, then you need to get really deep in with those a [00:41:00] hundred customers. Now, let's just play this forward. We'll just play a little game. So you now really, really understand your customers. You're spending virtually no money on cost of acquisition.
You're now unpicking all of the, um, adjacent needs that sit around your technology, your proposition for these customers, and you start to build around those customers. Do you think those customers are gonna love you more? Or love you less. I think they love you more and I think they'll tell their friends about you loving you more.
Now you might only grow at 30%, but that is the perfect PE case. So you think about, um, cash flow, you think about rule of 40, you think of revenue employee, you think of the average order value per customer. You think about the modules that you can wrap around your existing. We're not talking about CAC and.
Sales and marketing in the traditional growth sense. Mm-hmm. We're talking about the focus of the business is different. It's just an extraordinary, this is, most businesses, what I'm talking about is most businesses. So [00:42:00] there is, um, I've seen some of the, some of the, my favorite founders just make that pivot, like, and just do extraordinary.
Well,
Toni: yes. I think it's difficult to execute. I think going from growth. In, not at all cost, but being a growth business to being a profit driven business, very hurtful. Culture changes, all of that stuff. Really difficult to execute. I also think there is some, you know, math problem, the cap table that you'll need to navigate.
You know, people have invested for big multiples that were based on growth targets that are not kind of being achieved, et cetera. But I wanted to get your take on one last bonus question that I have here, um, which is. A little bit away from that stuff. Um, and you know, I recently did a piece on, um, uh, one out of four executives in pavilion are sitting on the bench, uh, not actually being able to find a job.
Um, and that has to do obviously with the boom and bust that happened in the early 2020s. Um, and it wasn't only [00:43:00] VCs and founders that lost a mon a lot of money was also those careers that got shredded to a degree. You and I had a fun conversation about this. I just wanted to kind of get your, your take on, on, on the record here on, um, you know, what is it you think that, you know, with all this vibe, coding, vibe, marketing and kind of all those execs kind of sitting around, what do you think might actually happen with that?
Chris: Yeah, I mean, first of all, I thought it was a brilliant piece of content. So, you know, well done pavilion, you know. Fantastic. I thought your take on it was fantastic. So if you take the more recent past. You know, there might be 6,000 startups that VCs are processing, right? So depending on the region, it might be two, 3000 per, per region.
Mm-hmm. And we are looking for those needles in a haystack. And if you are, um, uh, involved in those businesses, you're gonna have, let's say the way I, at a macro level, you'll have like maybe 500,000 product managers. I make the number up, right? Yeah. Let's say you've got four and a half million engineers.[00:44:00]
Right, and you've got a VP sales saying, look, if we don't have this feature, you know, our win rate's going down, we're struggling to penetrate this. And they come to the VC and it's like, oh, we need more money in order to buy more engineers and get more products and stuff like that. So that's the world that we've, we've been in.
That's the world that we know. And, but now, um, you can spin up an app. This a two hours, like I've got a 60-year-old guy who's just literally come out of retirement who just loves, he's a, he's a product, CEO. He just loves the fact that he has all this technology to hand because he doesn't have to worry about what I just said, right?
He's been stifled by the slow nature of innovation. And so what are we gonna have now? We're gonna have what, like 60,000 apps a month. Come on to the market. Yeah. So we go from 6,000, you know, are they viable? Are they not viable? Applications to, you know, six, 6,000 a month, 6,000 a week, 6,000 a day. So this is extraordinary.
I [00:45:00] mean, and of course there's a certain, um, type of person at the moment that's like, you know, if I five coding, it's amazing 'cause there is, um, you know, I come from this like, you know, really, um, underprivileged poor background. And so I see for tho that audience, this is liberation, right? This is financial liberation.
In order to create a product very, very cheaply and put it into market and then, you know, generate revenue from that, that's super exciting. But if you fast forward and you've got. All of this choice. What's it like for buyers? Right. Well, for buyers there's an overwhelming amount of choice, and so the big problem will become monetization and the big problem will become go to market.
And so actually it'll swing back to sort of like, you know, the really bright, smartest people in go to market, whether they are that founder. So they build that app, you know, they take that to market, they figure out the market side, the distribution side of an app is still super hard. Um, or whether they, they, um, pair up with, um, you know, product guy or, or [00:46:00] an engineer and, you know, they do this together, I think is interesting.
But, but products in the next two years will become like content. Yeah. Just an overwhelming amount of content coming. At buyers who then like are like overwhelmed and confused and you know, and so the sort of um, the go to market smarts and the pricing packaging value proposition. Um, you know, all of those things will, will, you know, spike back up as being important.
Toni: So I think this is a fantastic take. And just to kind of bring it back to full reality, and, you know, we're kind of, uh, short on time here, but you and I chatted about this. Uh, I actually kind of, you know, wrote some of the piece also with one of my friends in mind that is kind of experiencing this really strong go-to market leader, having issues, actually finding a job, like, you know, been struggling with that actually.
And then you and I had the conversation and I chatted with him again. And you know what? Turns out, he actually has now a [00:47:00] lovable account. He's, uh, he built a product. He's going out telling people that he's kind of building this thing. He's checking this out. He kind of, I advised him, you know, should this be a VC case?
Should it not? So, um, this is not just theoretical stuff we're discussing here. This is actually what's happening in the market right now. People are using those skills. Those tools in order to replace the skills that they didn't have and marrying this up with their go-to market smarts. I think this is absolutely fantastic.
I'm looking forward to this time. Chris, thank you so much for spending the time here and educating our, our folks here listening.
Chris: Just on that, it's just so funny. Um, one of my guys just, uh, uh, uh, launched a diagnostic tool. For me, so it's like Chris to, it's not called Chris GPT, but it's my entire investing career is 20,000 decks.
It's all of my content into a very specific GPT that you can just down, jump your deck in it and it will give you extremely pithy [00:48:00] peak feedback that do you know how extraordinary that is compared to the past? It, this thing is better than me because once you get the report. It's, it's organized for me. I have a, I have a, you know, a, a disruptive mind.
It's, you know, it's, uh, chaotic. So, um, so that GPT plus me plus the foundry is just so much better, um, and far more efficient, right? I, I could do a hundred deck hacks an hour, whereas it took me a hundred deck hacks. Took me over two years to do that. Um, like giving feedback to founders around their deck, right?
So we we're just an extraordinary way. And just, just one last point on the professional services side, right? The software is, uh, professional services and industry is over a hundred times bigger than software. A hundred times bigger. And that is gonna get digitalized. It's like a new mega trend that is gonna get digitalized.
So for like, you know, for people listening to this. You [00:49:00] know, there's just an extraordinary opportunity for you in technology and, you know, um, and yeah, you know, you can build huge amounts of financial independence if you sort of get on the ride.
Toni: How can people find this GPT you just mentioned? Is that something you fan of publicized or is that a, is that a, a secret one?
Chris: It's still in stealth, but yeah, it, it, it is around and it, it, it, it, it, it is live. If they, if they, uh, if they DM me on LinkedIn, I'll, I'll, I'll send them, I'll send them a link and, uh, dmm Chris. Just, just, just, um, just, just do that and, uh, or comment on something that I put on LinkedIn. You know, I get this ridiculous amount of impressions on LinkedIn, like 60 million impressions a year or something.
And, uh, it's the easiest way, uh, to find me or on my Substack, the Founder's Corner.
Toni: It's also recommended on my Substack, so, you know, you can find it through that. Chris, thank you so much for spending the time. This was really fun and I think it was. Not only entertaining, but also educating kind of the, the, the sweet spot we're trying to kind of hit here.
Um, and yeah, I hope everyone took something [00:50:00] away. Uh, something tangible, at least kind of for their day to day. And otherwise, Chris. Thanks a bunch.
Chris: Thanks for inviting me, Tony. I really enjoyed it and yeah, good luck out there
Next week: pricing changes
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Toni: everyone. Next week, Raul and I are talking about pricing. Everyone is scared of touching it.
Every consultant is telling you to change it and tweak it all the time, but what is our experience from pricing changes? That drove literally millions of dollars of revenue. And most importantly, what is it we would've liked to know before we did that? If you don't wanna miss it, hit subscribe and see you next week.
If you can change pricing in the right way, it can be one of the most cost effective things you can do all quarter long. But if you invest time and make the right, uh, pricing changes, you could make so much money just with that.
Raul: People are quite afraid to make a step there, which is why a lot of.
Successful pricing projects I've seen had to come from the CEO because the CEO was the one who was like, okay, nobody's gonna fire me either. The board is gonna ask me to step down, [00:51:00] but at least I know that, uh, if it's not me, nobody else is gonna touch this. We
Toni: basically took every one subscription and increased it by 5% or something like that.
We were 20 million and then, you know, that 5% jump ate a lot of money. While this was a dumb change that got a lot of money, if we had invested a lot more time instead of just. Increasing prices, but actually repackaging, putting way more thought on this and, and maybe even in some areas, pushing the price even further up.
I think there would've been a 10 50% hike in there.