Earlier this month, Retool CEO and Founder David Hsu spoke with Bryan Schreier, partner Sequoia Capital and Retool investor, at Web Summit in Lisbon. David and Bryan discussed how startup founders can identify and achieve strong product/market fit (PMF) by synthesizing information from various sources while challenging assumptions.
Some highlights from the discussion:
You know you have strong product/market fit when it feels like you’re rolling a rock downhill instead of uphill. (Or does it?)
David shared this metaphor from Retool investor and CEO/Co-founder of Charm, Peter Reinhardt. However, that’s not how David perceived PMF, even when Retool hit $10mm ARR: “Maybe we have product/market fit now, and it seems like customers are buying this thing. So I suspect we do have product/market fit, but it is actually very hard. And even today I would say it's still to some extent pushing a rock uphill.” Perhaps the most pervasive myth about PMF is that it is a binary state, and a universal definition applies for every company, every product, and every market.
Leverage your sales team to help you shape your messaging so it resonates better with potential customers.
Your sales team is on the frontlines and can give you direct feedback on what messaging is resonating the most with potential customers; or will tell you the simple product specs a customer requires to turn a prospect into a conversion. This is crucial information, especially when you are new and still searching for PMF.
Companies will see more growth in revenue utilizing traditional sales and marketing than depending on the product-led growth (PLG) method.
While PLG is all the rage–especially with DevTools companies–David cautions against betting that your product will sell itself and hoping for the best.
“I think the rise of PLG has actually been really bad for a lot of early stage founders,” says Hsu. “PLG causes people to optimize for very weird things …a lot of founders will tell me, ‘Oh, we don't have much revenue yet, but it's PLG and the reason we don't have revenue is because the revenue's gonna come. We just have to build a great product and it's all gonna work eventually.’ That very rarely works.”
The risk of PLG is that it can encourage small companies to optimize for the wrong thing without being able to collect the necessary feedback from sales to improve the product experience.
Whether your startup feels PMF like rolling a boulder uphill, downhill, or sideways, one thing is certain: PMF can be just as nebulous as its effects are very real. Your sales team is your frontline, your boots on the ground for gathering intelligence on what the market wants. And if you forego a sales-driven strategy, may good fortune smile upon you: you’ll need it. See below for a lightly edited transcript of the conversation, and video of the Q&A session between David and Bryan:
Hi everyone. Thank you for hanging around. I'm Brian Schreier from Sequoia Capital, this is David Hsu from Retool. We're really excited to take a little bit of a break from the last session, it's really gonna be about product/market fit and dreaming and creating, so excited to talk about that with all of you. I actually started my technology career in Europe at Google where I worked for six years as we were opening our first European headquarters back in 2004. And then more recently, I've been at Sequoia for 14 years. We've been pretty active in Europe since I started at Sequoia, partnering with companies like Unity, UiPath, Klarna pretty early on. And we have a team that's live on the ground in London, so we're really, really excited about the ecosystem over here. David actually also did his schooling in Europe. He went to Oxford in this combo major, or I'm not sure, what do you call it? You wouldn't call it a major you or would you?
We call it a subject.
Yeah, a subject. The Oxford subject of computer science and philosophy, which makes for really interesting conversations. He founded Retool; we met in 2019 and the company has scaled 50x—five zero x—since we first met and partnered in the series A. So we've seen David do an amazing job taking Retool from just getting the product/market fit and really scaling it up into a large business that serves very large customers as well. So with that intro, I'm gonna turn it over to David to tell us all what Retool is and how you start it.
Yeah, so Retool's kind of like LEGOs for code. It's kind of this fast way of building internal tools. And the way we started it actually was we ourselves built way too many internal tools and as lazy engineers, we were like, “There's gotta be a faster way of building all this stuff instead of coding from scratch. So that's where Retool first started and when Bryan and I first met, I think we were four people at that point in time. We were three or four people doing about a million dollars an ARR. I think at that point we did not think we had product/market fit but when talking to Brian, we had to somehow convince Brian that we were a great company, had product/market fit. So that was a fun experience.
Well you did convince me that you had product/market fit, so this is gonna be an interesting conversation. So tell us how do you define what product/market fit is? And if you didn't have it back then, do you have it now?
Before starting a startup, I had been fairly interested in startups and most people had referred to product/market fit as something like, “Oh, you will know it when you have it. It's almost like hitting a geyser or something.” We went through the Y Combinator program, and in YC, one of the talks was from the founder of Segment, Peter Reinhardt, who's now an investor in Retool as well. And Peter at that point said that it's so obvious that you have product/market fit, it's gonna feel like rolling a rock downhill instead of rolling a rock uphill. And I remember when we were probably at three or four or five million ARR, I was still wondering to myself, still kind of feels like we're pushing it uphill, when's it ever gonna go downhill? And so for us the feeling of product/market fit was sort of never zero/one, never black or white in that way. It was very much sort of a process. I think at one point we looked around and we were around 10 million ARR, maybe around 20-30 people in the company, and we're like, “Maybe we have product/market fit now, it seems like customers are buying this thing.” So I suspect we do have product/market fit, but it was actually very hard. And even today I would say it's still to some extent pushing a rock uphill.
It's refreshing to hear a company that almost went from one to 10 million ARR by surprise or by accident. So I like how easy you make that sound. It's not that way for all the companies that I've met out there. You guys did a lot of hard work. One of the things that has been said is that, David, you have a formula for finding product/market fit, and I would like to write that down.
Well, I think for B2B SaaS companies, finding product/market fit is actually quite formulaic. For consumer, I think it is totally different. But for B2B SaaS, our thinking always was that sales was the best way to find product/market fit. And when we first started with Retool, we sort of had the core idea, but to be honest, we had no idea how to pitch Retool. It was sort of this interesting piece of technology, if you will, that we had built. The first time we launched Retool was on Hacker News, and I think the Hacker News title was called something like Excel but with Higher order primitives. And people were very confused about what this was. I think no one really understood. We sent outbound emails actually with that title and no one responded, sort of unsurprisingly. Then we pivoted a bit, we were like, “Okay, well maybe that sort of messaging doesn't really resonate.”
We kept the product exactly the same and said, “Hey, what if we were to focus on let's say, internal tools specifically”, because companies build a lot of internal tools. And so we pivoted the messaging and that turned out to be much more effective. And then we entirely just did sales for probably maybe 18 months or something. It was entirely outbound sales. And I think B2B SaaS product/market fit is sort of quite formulaic when you do outbound sales in that way. At that point we had a bunch of investors that invested in us and we tried getting a few investor intros. For example, like, “Hey, could you intro us to other companies that you invested in?” or that might be building internal tools–which is all of them. And a lot of people would take these intros, but actually it wasn't very effective.
It was a very low signal intro. People would always take the intro, they would always act kind of interested, but actually wouldn't actually end up buying the product. And so we're like, we gotta be more hardcore about this. What if we just did outbound sales? And so we did that, and through outbound sales we iterated a lot of the messaging. We iterated a lot on the profile that we pitched to even the market actually. So one funny thing about product/market fit is that it's both a product, but it's also the market as well.
David, one of the things that I often say about working with you is that most founders come in one of two flavors; which is either hyper product-focused or hyper go to market or sales-focused. And I feel like you've done both really well and you really get both. And what I'm hearing from your answer to the formula for product/market fit is there's a lot of sales in there, which is maybe something new, maybe something that's kind of surprising to folks who are coming at founding or building product more from a technical angle. So can you talk a little bit more about how you think about sales and how you weave that into product/market fit and building a business as a technical person?
Yeah, I think the rise of PLG has actually been really bad for a lot of early stage founders.
PLG is “product led growth,” the idea that you can build a software product or a consumer app and it kind of sells itself without having to be driven by more traditional sales and marketing. PLG is very common in the developer space, which is the market that Retool sells to. And the reason product led growth is a strategy that develops per space employees is because developers do not want to talk to sales and marketing people. I had a big sales function when I was at Google, so I don't feel bad about myself, it's just the way it is. You think about a company like GitHub, which was a wonderful outcome. They didn't have people calling engineers, they had open source and they had a very large network of folks who were using GitHub for code who just adopted the service themselves. So that's PLG, and it's interesting to hear David say, “Hmm, maybe it's not such a great thing to chase.”
Yeah, I think PLG causes people to optimize for very weird things and probably kills the company, actually. Today, when I talk to founders for example, a lot of founders will tell me, “Oh, we don't have much revenue yet, but it's PLG and the reason we don't have much revenue is cause the revenue's gonna come. We just have to build a great product and it's all gonna work eventually.” That very rarely works. You (to Bryan) are an early investor for Dropbox; Dropbox is a one-in-a-generation company that doesn't happen very often. Chances are if you think you're Dropbox, you are probably not Dropbox, actually. And so for us we were always very sales driven to say, “Hey currently we have this website, we have this product, people are signing up, but people are not paying us. Why are people not paying us?”
Let's go talk to them, actually figure out why they're not paying us. So then we talked to them, we were like, oh, actually it's totally the wrong market. So one funny anecdote was when we first started Retool one idea we had was, oh, a pretty good market for Retool might be FileMaker developers, Retool's, kinda like FileMaker; like FileMaker 2.0 in the cloud if you will. FileMaker is an Apple product from 20, 30 years ago. And so what happened is I ended up joining a sort of FileMaker user group on LinkedIn and I was like, This is gonna be huge. You're gonna sell all these FileMaker people on Retool and we're gonna find so many customers here. And what ended up happening was, I think we got a list of two or three hundred emails from the LinkedIn user group and I emailed all of them and I think we got three replies out of three hundred.
And they were all like, “No, no, no,” but one guy was like, “Hey, I'm actually happy to hop on a call with you and tell you why this is such a bad idea.” And I was like, “Well, that's a start,” so let's take the call and see what happens. We took the call and he was like, “Well, it's a terrible idea because FileMaker is good for A, B, C reasons and you're bad for X, Y, Z reasons, and therefore FileMaker is great and Retool sucks. And we're like, “Well, thank you for the feedback, see ya!” And so that's an example of something that if we had done the PLG way, in a marketing-driven way, we would've been like, “It's pretty weird, a lot of signups, but no one's using the product. No one's paying for it. Why is that?” You don't really know actually.
But then when we did that in the sort of outbound sales way, people maybe feel more okay to be mean when you're doing outbound sales. They tell you the truth more, and that helped us iterate a lot. And so in the early days, the sort of core messaging that we had was almost entirely driven by the outbound sales that we did. And we would test messaging, we would test pricing. For example, how we’re priced today is entirely because we would test, “Hey, can we charge $5 a seat? Can we charge 10? What about a hundred? When we say a hundred, what's their facial expression? Are they happy? Are they sad?” If they're happy, we're like, “Wow, now we learned we charge a hundred dollars per seat, it still works.” And so that is the kind of learning you can only have via sales. And so for that reason, I think PLG is actually sort of a very dangerous path to go down, or a trap to fall into when you believe “Oh, if I build it, the people will come,” or the customers will come. In reality, I think that's very rarely the case. You and I were talking backstage and you were sharing one sort of counterintuitive thing or surprising thing about PMF that Sequoia sees…
Oh yeah, well I think one of the things that we see is that many companies actually just never find product/market fit, which is just really tough to admit. And I think that what people tend to miss is that it's not really a science, it's definitely more of an art. It's more of a holistic effort. And as David was talking through his and Retool's approach to finding product/market fit, I think one of the things I would love for the audience to take away is how customer and sales oriented that effort was for them. And I think I know from starting to work with David very early on is that when most companies talk about sales, if it's a bigger company, they're probably talking about the sales people. When you're talking about Retool, when it was two or three folks, the engineers were the founders, the product people were the founders, and the salespeople were the founders. And so whether you're starting a small company or you're building a new product line at a much larger company, when you're putting a new product or feature into the market you're probably gonna be more on the product and edge side, but you also need to think like a salesperson because that's how you're gonna get the feedback from the market on the value proposition; how it's working and what your customers really want versus what you want to build for them. And there's always a little bit of a give and take there.
Bryan, I'm gonna ask you an unscripted question if that's okay? What percent of Sequoia seed stage companies do you think find product/market fit?
Ooh, that's a good question. Not one I'm prepared to answer in a scientific manner, but I would say that at Sequoia we start with companies at the pre-seed stage all over the world. Actually, we just launched our pre-seed stage and seed stage catalyst called Arc in London this summer. And I would say that of those pre-seed stage companies, none of them have product/market fit yet. And for a typical seed company out there, I think a quarter of them would be lucky to find productmarket fit. It’s really, really tough. Now, I think that half of those companies probably think they found product/market fit and because sometimes you can cover up the cracks with a different type of sales and marketing, which is just spending a lot of money to get people to start buying or using your product and that's another common kind of failure mode in this space that you want to be careful about. What do you think companies should do if they can't find product/market fit?
Wow <laugh>. So I think of the B2B SaaS world, actually, the way I think about it is there is always a path to a product/market fit to some extent in the sense that it's almost like a chess game. I think when you think about no matter where you are at a seed stage company, I think there's like eight moves you can play where you will find product/market fit somehow. Now the question is how do you make sure you're on those eight moves? That's the challenging thing. But I think being sales-driven, being customer-driven are probably the two main things, especially being outbound sales driven. I think especially so because again, as mentioned, when you're outbound sales-driven, people don't lie to you. When I remember the happiest days we had in early Retool was when we sent an email to this Sequoia company based in Latin America called Rappi, a delivery company at that point, I think maybe a few thousand people or something. So I had cold emailed the CTO saying, “Hey, we have this fast way of building internal tools.” And I think within 30 minutes he replied and said, “We'd love to see a demo.” And I was like, “Well great, how about tomorrow?” He was like, “How about today?” And I was like, boom, product/market fit.
In that case I was pretty certain that this guy actually wanted the product because we had no relationship, we were not a Sequoia company at that point. There was no reason for him to respond to my email.
You think of that as product/market fit or value proposition market fit, because he hadn't actually seen the product.
I would agree, yeah.
I think we're hitting a lot on the value prop here and how getting that can really inform your product development work.
That's a good point. I think probably value prop fit, whatever you want to call that is probably number one. Because for us, if I think about that sale, you're totally right because when we sold Rappi at that point in time, our product was fairly immature, actually. What we were pitching them really was, we have this solution to this problem they have. And the problem they had was they have all these internal tools they want to build because they're a very operationally heavy company, but they don't have the software engineers to go build all these tools. And so that's why he was so interested in Retool. But when he first saw the product, the product itself actually had a lot of shortcomings. Those were a lot of things we had to go fix. For example, I think we might have built on-prem over a weekend or something after said he was only interested in on-prem and he couldn't use it without on-prem. So I think you're right. I think he was broadly interested in the problem, but the fact that he was a stranger that we did not know who was so excited by the problem that we were solving, that he would hop on a call within an hour or two to us, that was gold. That is something you could only get, I think, via pure outbound sales.
And I'm guessing you didn't have much time to pitch this, was this email back and forth or was it a phone call? I can't remember.
It was email.
When you're working on the value prop, people assume you have so much space and you really only have one little sentence typically to catch someone's attention. In order to get in a meeting in 30 minutes, you really have to have it nailed.
One thing I'll say on that too is we experimented a lot with the messaging, but the core product idea is always the same. I think one mistake I see early stage founders make is that they have no core idea at all. They're kind of just like, I don't know, I don't have an idea. Let me test various Google AdWords, I have seven ideas and let's see which one is the best one. Let me go pitch all seven ideas via cold outbound emails and see what happens. That I think very rarely works. A startup philosophy, if you will, that I have is, as a founder, you have to have some strong differentiated opinions about the world, that then you go and test. But you can't just say, I have no opinions, let's see what happens.
And so in our case, our opinions were that we think that the current way of building software is stupid. We think that it could be a much better way of building software, a much higher level way kind of LEGOs for code basically. And so that was our opinion and that was kind of a controversial opinion. And the second controversial opinion we had was that we wanted to sell that to developers. I remember when we were a small startup, plenty of people would come to us and say, “What's your idea?” We’s say, “Oh, we're selling this drag and drop way of building apps to developers.” And people would respond, “That sounds like a terrible idea. I'm a developer and I would never use a drag and drop product like this. You should go shut down. You should go do something else.”
We in fact had a YC batch mate that told us, “Oh, this idea, I tried this three years ago, it doesn't work for XYZ reasons. I would go do something else.” And so I think what you have to have maybe two or three core beliefs that you have about the world that are different from what other people believe. And then you have to test that in a very rigorous and sort of outbound salesy way. But you can't be too fluid with what you're testing because if we were testing seven ideas, honestly we'd have no idea what resonated or not. So I think it was because we had a core idea and a core value prop, and we continuously tested messaging on that value prop, we found the messaging that resonated, which was “build internal tools fast,” and then worked with the customer to develop the product. That I think is the formula for finding product/market fit.
That makes a ton of sense. And Retool's been on quite a tear in terms of launching new products recently. So two over the summer. I know there's another one coming. How do you think about product/market fit when it comes to new product lines? And maybe this applies to folks who are working on bigger companies with multi-product line types of businesses, and what's next for Retool?
Yeah, it's tough. I think one curse of success, if you will, is that companies almost become less interested in taking big risks the more successful they are. I have actually long admired Chinese or Asian companies for this reason, as these Asian companies seem to do everything. If you look at, for example, Tencent or if you look at WeChat, if you look at Alibaba, you look at Grab for example, these companies do everything. I mean on WeChat for example, you can order food, you can send messages, you order a taxi, you can send money, you can order food…
Apparently this is gonna be Twitter soon, once Elon finishes deploying product...
It's hard in the western world, I think. But I think these Asian companies are so competitive, those eyes are so on the ball. They're like, Okay, we launched one product, that's great, we're not done yet. We wanna launch 5, 10, 15, 20 more products. And that to some extent has been sort the thinking at a Retool as well, which is, it's great that we have this one product that now has found product/market fit but we don't want to be complacent. We actually want to build far more products. So Retool today is a fast way to build front ends. We want to expand onto the back backend storage, backend logic, mobile front ends, and probably five or ten other product lines as well. And it's actually quite challenging because figuring out how to invest in new product lines when you have a product that's already working. When you have limited resources it’s tough because if I apply, let's say four engineers to the core product, the ROI there's actually pretty positive, we can pretty easily quantify what the ROI of that is.
Whereas we can spend four engineers for a year on a new product line and it could go nowhere actually. And so today the way we think about building new products is we keep the budget very low. So we like to think that new products can be started with basically two or three people. For us at Retool, when we were at around a million dollars in ARR when we met Bryan, we were only three, four people. And so that's kinda the philosophy that we had for starting new product lines too, which is could we get this product line to something like a million dollars in ARR with two or three people? And that means it's gonna be hard. Those two people are gonna have to do everything basically. They have to do sales, they have to do engineering, have to do marketing, have to do products, everything. So now we're applying the formula again, if you will, to these two, three new product lines that we're launching as well. But it's a lot of fun and I think part of the fun of doing a startup is being able to launch these new product lines, expand your product offering and find product/market fit again, again, and again, as well as scaling the core product to nine or eventually 10 figures in ARR. So it's a lot of fun.
Awesome. Well hopefully many of you out there are working on product/market fit, and this was some helpful information guidelines to go by. If you are, you're very lucky because as David was saying, you literally get to wear every hat in that journey to create something new and put it in the hands of your customers. So good luck to you all on that. David, thank you so much for the time and sharing your wisdom.