2019 in Review: From Product-Market Fit to Series A to Company Scale
2019 has been a year of metamorphosis for Gravitational. We started over four years ago as a group of infrastructure engineers who were frustrated with the complexity of cloud application delivery. We wanted cloud apps to be as easy to distribute as desktop software is.
It was a big year for our team. We transformed into a fully-fledged company, our open source solutions are deployed in major companies all over the world, and we capped the year with a $25MM round from Silicon Valley’s most storied venture capital firm, Kleiner Perkins.
Where we once found ourselves propelling toward building a product people wanted and sidelining scale, we can now proudly say that we have achieved product-market fit and have raised the funding necessary to be able to shift our focus to scaling what already works.
In 2020, we’re shifting our goals to focus on scale so we can continue to be a reliable partner to our customers and build a supportive and challenging place to work for technologists, marketers, and other creative minds. Let’s take this opportunity to discuss how we got here and where we’d like to go.
The Right Time to Raise Money
In 2015, we took a $4.5 million seed round to get Gravitational off the ground. We never used it all up. Instead, we intentionally stayed lean to build a great product, and we achieved profitability last year.
In a time of eight-figure seed rounds, the funding mantra for tech startups seems to be, raise as much as possible, as fast as possible. After initial discussions about raising a series A, we were advised by several people to wait.
“Don’t do it,” Lew Moorman told me. Lew is the former President of Rackspace, my former boss, mentor, and now, a Gravitational investor. As an experienced investor, he saw the danger of raising money too early. He was right, of course. Based on our experience, raising funding requires commitment. It indicates to investors and audiences that the product in question is amazing enough to warrant millions of dollars in VC money and is ready to scale — the kind of hockey-stick growth that makes money. At this point, forcing pivots of the product requires explanations to the customers and investors who hold us accountable.
Naturally, this dramatically slows down the speed with which entrepreneurs are able to move. During the company’s earliest stages, focusing on growth rather than quality can impede improvements in the product as well as company processes. So when is the right time to raise money?
The answer: after achieving product-market fit. Nine out of 10 startups fail because they scale prematurely. Until a company has found its niche, it is important to stay small to stay nimble and move quickly. Early on at Gravitational, we strived to be ruthlessly pragmatic: we took on the pain of “boring” work and long hours to make it possible to build a great product that people wanted before moving on to scaling.
So that’s what we did - and in 2019, we finally achieved the product-market fit we needed to take the next step. We were ready and excited to raise our series A for two main reasons:
- We would be able to hire outside of our trusted circle of friends and co-workers and at higher volume.
- We would be able to confidently reach a much wider audience than our small, but nimble team could get to at our pre-funding size.
So in October 2019, I was proud to announce that we had finally raised our $25MM round from Kleiner Perkins.
The Push and Pull of Product-Market Fit
We waited to raise money until we had achieved product-market fit, but how did we know that we had managed to do just that?
Y Combinator, the leading early-stage investor of Silicon Valley, has popularized the slogan, “Make something people want.” It’s such a compelling proposition because of its simplicity: to solve real problems while making money. This idea perfectly sums up the concept we call product-market fit. It’s never easy to determine whether or not product-market fit actually exists for a particular company, however, specifically in its earlier stages. We ran into the same issue at Gravitational. With such a massive target audience, we were bound to find a few people who liked our product. But how many was enough?
A friend of mine once suggested that product-market fit will be achieved when we could feel a “pull” from our customers, as opposed to requiring us to “push” the product onto them. Poor marketing and sales techniques that employ fear, uncertainty, and doubt (FUD), for example, is how companies often “push” and dampen the “pull”. This made sense to me, but one question still stood: how would we identify and measure the “pull”?
Ultimately, we’ve decided to focus on pricing and growth. In other words, if someone is willing to part ways with a significant amount of money, and the number of such people is growing, that’s a good qualifier for achieving product-market fit.
Pricing: Our products are open source (making them free of charge), so we concluded that if an organization is willing to pay a high price for a professional version of the same products, they value them to a significant degree.
Growth: Our investors believe that an ideal growth trajectory would be to triple triple revenue in the first two years and doubling for the next few years thereafter.
In 2019, Gravitational rose to the challenge. Our customers were willing to pay five and six figure prices for Teleport and Gravity, and we tripled our revenue in the past year with several larger customers.
If total revenue increases while revenue per customer increases, product-market fit has been achieved.
Scaling for the Future
Many startups have failed because they build for the future from the very beginning instead of focusing on the present. By making sure we raised money only after achieving product-market fit, we created a strong foundation for Gravitational by focusing on the present. Now that both those boxes have been checked, we have been gearing up to scale dramatically with the shift to focusing on the future.
The year 2020 will be the year of scale. Of course, we’ve been growing all along, but scale and growth are not the same thing. Growth-at-any-cost often demands drastic product alterations and risky experiments. Scaling means taking something that already works and making it bigger and better.
Previously, we engaged in several unscalable experiments to find the right audience. Our engineers built custom features for individual customers to boost conversion. Our c-suite took meeting after meeting with promising customers to reassure them about the reliability of our new product.
This year, we have a product that is reliable, useful, and stable. And so this year, we are saying goodbye to experimenting, and hello to scale. We look forward to having more internal resources, a bigger and more supportive community of open source users, more talented employees (join us!), and happier customers.
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