🌱 5-Bit Fridays: 10 Truths about product management, a TAM masterclass, developing product intuition, "compound startups", and how to become an idea machine

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👋 Welcome to this week’s edition of 5-Bit Fridays. Your weekly roundup of 5 snackable—and actionable—takeaways from the best-in-tech, bringing you concrete advice on how to build and grow a product.

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Happy Friday, friends 🍻

It’s been a week! For starters, Elon Musk is trying to kill Substack. Why?

Well, the cool news in case you missed it…Substack (the platform I use to write this newsletter) just launched a new feature called Notes: a space on Substack for writers and readers to share micro-posts. Musk sees it as competitive, and of course, since he’s so genuine about free speech and Twitter being the world’s town hall to talk about anything…he blocked Substack links.

A pretty shit move for new writers (like me) trying to build an audience.

With Notes though (while it will never steal real usage share away from Twitter), there’s now a more niche space for both writers and readers to engage with each other over the stuff they really care about. I truly believe the highest quality content on the internet is coming from Substack writers. So, if Notes works, it could be a place that cuts through all the Twitter noise and BS. The bots, trolls, clickbait, and verified racists.

If you haven’t checked out Notes yet, here’s how to join:

Head to substack.com/notes or find the “Notes” tab in the Substack app. As a subscriber to How They Grow, you’ll automatically see my notes, as well as notes from other world-class writers I follow, and in my niche.

At this point, I think I’ll be using Notes to share short-form ideas, including quotes/highlights from articles I’m reading, snacks from our long-form deep dives, observations, and recommended links. Would be great to see you over there.

On that note 👀…Small ask: If you enjoy today’s post and wouldn’t mind ❤️’ing (or Restacking/Sharing) it in the header above, I’d be incredibly grateful. Thank you!

Alrighty, with housekeeping out the way….

Here’s what we’ve got this week:

• 10 truths that need to be said about product management

• A Total Addressable Market (TAM) Masterclass

• The only way to develop product intuition

• 5 reasons to go big from the start, and why the “compound startup” wins

• How to become an idea machine

Shall we?

(#1) Ten truths that need to be said about product management

Let’s kick today off with real-talk advice from the legendary Peter Yang. While focused on PMs, it’s also applicable to founders and operators.

1/ You can learn all the PM frameworks in the world or you can figure out how to deliver value to customers and to your company.

2/ If you're spending all your time on internal and exec alignment, you're likely not spending enough time with customers. That means you risk succeeding wildly in convincing your company to go in the wrong direction.

3/ It doesn't matter how senior you are or how many people you manage - you still need to talk to customers directly and obsess about what gets shipped to them.

4/ Metrics are (at best) just a proxy for what customers want. Focusing too much on metrics is the most direct path to ship a crappy product.

5/ Every half-baked A/B test is a paper cut on the customer experience. Not everything needs to be tested just to prove impact.

6/ If you wait to make a decision until you have perfect information, you probably made the decision far too late.

7/ Internal processes that try to avoid bad outcomes 100% of the time end up adding so many hurdles that they produce no outcomes at all.

8/ The messaging, marketing, and launch of your product is just as important as the product itself.

9/ Small, empowered teams move much faster than large teams. Huge headcount + unrealistic goals for a risky bet leads to inevitable disappointment.

10/ If you want to get good at product strategy, learn how to prioritize and focus your efforts until it starts to feel deeply uncomfortable.

Here’s one more from Sanjeev…PMs, do you agree? 👇

Jokes aside though. Any others you guys can think of? If so, I’d love to hear in the comments.

For more insights like this, make sure to follow Peter’s work at Creator Economy by Peter Yang

(#2) A Total Addressable Market (TAM) Masterclass

Earlier this week, I came across Mostly Metrics—a weekly newsletter about financial metrics and business models—by tech CFO, CJ Gustafson.

And I’m super glad I did. Finance is often a black box for many folks, and CJ covers a bunch of topics many founders get lost in, like SaaS Metrics, Financial Forecasting, Equity, Dilution, and Fundraising.

As I was wading my way through a few of his posts, including a wonderfully frank post on failure (I lost $209,640 of my own money trying to start a business), one I found very practical was an interview between CJ and Sebastian Duesterhoeft (Partner at Lightspeed Venture Partners, Ex-Morgan Stanley).

So, here’s a look at market sizing from the lens of an investor. One who CJ dubs “the Michael Jordan of TAM”.

Starting off with my favorite question in the interview:

Why is TAM important to investors? For all the founders out there working on pitch decks, how “large” is a big enough market, from your perspective, in dollar terms?

1. The size of the TAM ultimately determines how much revenue a company can capture over time. A company can’t “outgrow” its TAM, but rather will end up capturing some fraction (market share) of the TAM.

2. How “large” is big enough actually depends partially on the fund you are pitching. Venture fund returns typically follow a power law (e.g. 80% of the returns are generated by 20% of the investments). As a rule of thumb, investors will often want to see a scenario where any given company could theoretically return the fund 1x. So, if you are talking to an investor managing a $500M fund, the investor would be looking for a $500M return potential. The simple math then would be in order to generate $500M returns, at 20% ownership the company needs to be valued at $2.5B at exit. Assuming we are looking at a software company we could very simplistically assume a 10x exit revenue multiple (generous!) which would imply the company needs to reach $250M in revenue at exit. However, it’s important to realize that when the investor sells, there has to be another buyer that is actually willing to pay a 10x revenue multiple. For that to happen, the next investor (potentially a public market investor at IPO) still needs to see a meaningful growth opportunity. 15-20% required return for that next buyer would imply a 2x over 5-7 years, at which point the company would have to be $500M+ in revenue. Now, to bridge from the revenue needed to actual TAM, a simple framework could be that market-leading horizontal SaaS companies will get to ~20% market share over time (Salesforce.com has ~20-30% market share in core CRM today, vertical SaaS companies often get to higher market share). This implies a $2.5B TAM opportunity is required to give an investor with a $500M fund the opportunity to have a “fund-returner”. When you are talking to a later-stage investor, where return expectations are often a bit more bounded (3-5x) the expectation may no longer be to have “fund-returners” but the manager of a $5B fund would still expect for an investment to be able to return at least 10% (i.e. $500M) to make the investment “worth the time”. It’s important to keep in mind who the audience is you are talking to. I’ve definitely struggled with having to tell founders that a $1B exit may not be big enough. By any standard, building a company to a $1B exit is an incredible accomplishment, yet for a large fund the absolute return dollars are often too small to move the needle enough.

— Sebastian Duesterhoeft, via A Total Addressable Market (TAM) Masterclass

I’ve thought a fair amount about TAM, and while we all know the value of a big market to investors and the need for nice exit multiples, I’ve never thought of the math this way. Interesting stuff.

CJ and Sebastian’s conversation covers a bunch of other topics (read the full thing here), but here are a few of my favorite takeaways.

Other insights: ⚒️

• Whatever framework you use to calculate TAM, the core needs to be Price x Quantity = TAM. In practice, it’s not that simple, but you need to know those two variables to build from the bottom up. Price is easier (you theoretically know it), but quantity is where it gets tricky. For SaaS businesses pricing against usage, “a workaround in those cases can be to try to determine what the spend potential of ‘typical’ SMB/mid-market/enterprise customers is, which then allows you to extrapolate that spend to the # of companies out there in each of these size buckets.”

• A big red flag for investors is when founders simply use TAM numbers from market research reports in their decks. Founders often don’t even know how researchers came up with those numbers, and relying on them signals to VCs that you still lack a good sense of who you’re selling to (customers and market).

• TAM is the nice big number in your pitch deck, but of course, you need to think about which parts of the market are actually serviceable for you — today, and in the future. The following are important things to consider when thinking about what your Serviceable Addressable Market (SOM) looks like. AKA, the part of the pond you’ll be able to swim in.

  • What part of the market might be economically unattainable? i.e Customers/use cases that are too expensive to acquire.

  • Which parts of the market might your product just not work in? i.e Big enterprises might just need things you’ll never be able to do, or, just shouldn’t waste time doing.

  • For an existing market with incumbent vendors, how feasible (and quickly) can customers using them “roll-over” and just switch to you? i.e For payments, companies are likely locked into Stripe, and winning them will be very tough.

• TAM maturity is like an S-Curve. “You don’t want to be too early, when the market is still in the very early, flat part of the S-Curve where it takes a long time for value to be captured. Ideally you want to “catch” a market when there is a clear catalyst that drives the transition from the flat part of the S-Curve to the steep part of the S-Curve.”

• Extensibility is the key driver behind durable revenue growth. Investors like to look for founders, at the earliest stages, who have a strategy for how the company will expand the initial market size. TAM runs out, and like we’ve seen in many cases so far with this newsletter (like Stripe and Shopify) — companies that expand the market are the ones that win.

  • And this often comes in the form of launching new products and thinking like a platform. (more related to this coming up)

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For more of CJ’s Tech X Finance wisdom, take a look at Mostly metrics . 🏦

(#3) The only way to develop product intuition

Simply put, product intuition is knowing your customers and market so well that you just “get” what works, and what doesn't for them — helping you quickly know how they’ll react to changes. Like a pro tennis player who just knows what shot to play instinctively, people with product intuition have a higher win rate with customer-facing decisions — making them decision-making powerhouses and great vessels for the customer's voice when they’re not around.

And Merci Victoria Grace is absolutely right about it.

Product people are obsessed with product intuition and we’ve ceded it to the small group of people who’ve been anointed as product visionaries. This is evident in how we speak about product intuition — as if it’s an innate trait that people either “have” or “don’t have” rather than something that anyone can develop. I rarely hear from PMs or founders about the steps they’re taking to build their product intuition in the way that people build technical or design skills. Anxiety about whether we have it is rampant.

In other words…product intuition is trainable.

In a great post of hers, she introduces this concept of the product hierarchy — a table-stakes way of thinking about developing product intuition. 👇

Source: Mercia Victoria Grace

In short, the process of building product intuition starts by focusing on building a deep base of knowledge where it’s most important. The customer.

Your customer is the foundation of the product hierarchy because this is where gravity needs to take you when you’re tired or lost. If something isn’t working, go back to the assumptions you’ve made about who your customer is first.

— Mercia Victoria Grace

So, the customer is where you want to start developing and fine-tuning your spidey senses.

And would you look at that... Julie Zhuo from The Looking Glass has some immediately actionable advice for us:

12 actionable steps to take right now that can help improve your product intuition

1. Use the product daily as a real user would [15 minutes / day]

2. Watch one or two user research or replay sessions [10 minutes / day]

3. Check your key usage metrics dashboard [5 minutes / day]

4. Interview a prospective client and ask them to describe a specific workflow related to your product [30 min / week]

5. Email or slack 1-3 existing clients with a specific feedback question [30 min / week]

6. Read notes from recent sales calls or user interviews [30 minutes / week]

7. Read customer feedback queue tickets [30 minutes / week]

8. Read the latest data analysis on user behavior on your product [30 minutes / week]

9. Read industry blogs / articles related to your product area, ideally about either customer learnings or from the perspective of customers [30 minutes / week]

10. Explore competitor products as a real user world [2 hours / month]

11. Try selling the product yourself, or tag along on a sales call [2 hours / month]

12. Read 3 books a year relevant to the psychology of your customers [5 hours / week]

If you did EVERYTHING on the list above, it would take you 10-15% of your working hours. Doing half of them would be more like 5% of your week.

This is tiny investment for 1) honing your product intuition 2) making better prioritization decisions 3) gaining greater conviction in your work and frankly 4) having way more fun in your work.

— Julie Zhuo, via The Looking Glass: Fear of What Others Think

(#4) Five reasons to go big from the start, and why the “compound startup” wins

Parker Conrad is a serial entrepreneur. Most recently, he co-founded Rippling, a platform for companies to manage all things HR, IT, and Finance. Before that, he started Zenefits, selling it for $4.5B.

Over the course of his startup life, he’s seen, been given, and shared plenty of startup advice. But, in reflection, he thinks that a lot of the conventional ideas about what startups should do and how they should operate are reaching “their expiration date”.

Since day 1 of starting Rippling in 2016, he’s applied a different set of principles that break away from traditional wisdom. They’ve worked for him, and having observed similar trends in other large market SaaS companies, he’s distilled his new perspectives into 5 ideas.

Which, he shared at the Startup Grind Global Conference 2021. After watching the 38m video, here’s what you need to know.

*Note: His advice is directed towards B2B SaaS startups. Even if that doesn’t apply directly to you, I think it’s still a good read.

Idea 1: A narrow focus leads to missed opportunities and steeper competition

Usually, the move is for startups to create a super narrow focus for their product. It’s always “How can you be more niche?”, “Get more specific!”, and “Be careful broadening your scope”.

Conrad thinks this standard advice is dated. Speaking primarily of SaaS startups, he says having a super narrow focus “has held back the industry and has held back a lot of really important companies that could have been created but have not been.”

He adds:

When you think about the problems your clients have, they often span a lot of different business systems or point solutions.

In fact, I think some of the biggest problems, and therefore the problems that potentially could give rise to the most valuable companies tend to be things that span a lot of different point solution products within a business. And therefore, only building one point solution product can't really address them.

Once upon a time, a small company could dominate a super niche space. But now there are actually a lot of different companies operating in all of these different narrow-point solution verticals. So there is actually now a lot more opportunity if you can go bigger and combine a bunch of these different point solutions into one product.

In SaaS, he talks about the idea of starting small and expanding later on. But, noting that historically, that doesn’t happen often → “Companies that focus early on tend to continue to focus.”

Idea 2: The “compound startup” can be more effective

A compound startup is a startup that instead of just doing one very narrow thing, tries to build a whole set of different point solution systems in one coherent product and tackle several different related point solutions at once to solve a much larger problem for businesses.

Why would you do this? Because there are a lot of reasons why it's hard. The first thing is this idea that these compound startup opportunities are relatively unexplored, because everyone has been focusing for so long. If you take on a series of different but closely related products and do them all at once, there are these islands of undiscovered product market fit that are just beyond the horizon line—that no one has sailed out to because of all of this advice that you should narrow your ambition and your focus to just one very specific thing, which often isn't enough to get you from point A to point B.

The companies that tend to be bigger and more ambitious are solving the whole problem as opposed to just building a tool.

In other words…think in ecosystems. It will also build you a nice moat in terms of switching costs.

Examples of ecosystem products:

• Stripe: All things payment infrastructure

• Atlassian: All things DevOps

• Alchemy: All things Web3 development

• HubSpot: All things CRM

Idea 3: Integration is the product

So, to become a “compound startup”, Conrad’s main advice is to think about integration as a top priority.

The types and the depth of integration you can have when you're building a set of related products together in-house is so much more powerful than what you can do through a set of APIs with other vendors.

There are a set of often shared components. You can identify certain bits of functionality or certain parts of the product that end up being reused across a number of different products that you're building, and you can build those once and gain some advantages on R&D efficiency. But more importantly, you can afford to go much deeper and invest much more deeply on those critical pieces that are shared across these different products.

Like we saw most recently with ByteDance and their shared middle platform, doubling down on shared services can be massively beneficial to things like your process power, speed to market, and user experience.

Conrad describes though that this isn’t just about adding integrations across your products. To really get the value of being a compound startup, you need to make sure “the product is the integration.” This will give operators more room to create whole solutions and continue growing as they work on solving new or different problems.

Idea 4: Maximize the price of bundled solutions

Conrad notes a key competitive advantage that the compound startup has: bundled pricing.

There's this incredible contracting and pricing advantage where the bundled contract or system allows you to optimize your price for the value of the bundle rather than the value of any specific point solution.

The focused startup has to maximize their revenue from one single SKU. But a compound startup can maximize revenue across a bundle and optimize for the bundled price, and therefore deliver cost savings to clients on the individual products and focus startups in aggregate. If a client has a lot of different point solutions, eventually it becomes a real headache to manage. Compound startups reduce complexity by consolidating a lot of these systems into one.

Simply, when you have multiple products that all play nicely together (vs a single tool), you can undercut competitors on the price of each product and effectively compete with vendors that only focus on one thing.

What’s more (and a method I find more interesting than just undercutting) is cross-selling, which we defined in How Atlassian Grows as “a strategy to move customers from one complimentary product to another, layering in value of product X while using Y. If done with very targeted customer journeys, it’s a powerful sideways distribution tool.”

Examples of companies nailing bundled pricing:

• Adobe: Creative Cloud (i.e Photoshop, Illustrator, and After Effects)

• HubSpot: Growth or CRM Suites

• Microsoft: Office Suite

Go deeper on bundling 🧠

• Product bundling 101: Examples + how it works for SaaS businesses

Idea 5: The structure of your startup matters—a lot

Conrad insists that compound startups require different structures than traditional startups, and that leaders must organize for parallel execution, using product owners or business units to distribute areas of responsibility.

[At Rippling] we have an engine of about half the company in engineering.

First of all, it's a much higher percentage than most other SaaS businesses. But it's not a monolithic team. There's really this loose federation of much more individually focused teams—there's a team that builds payroll, there's a team that builds device management, there's a team that builds insurance and benefits administration. Each of those teams individually have a tremendous amount of focus. It also means you need to hire people differently, so you need people who can run those teams like business units that are both engineering teams and also cross-functional. They include customer support, product management, design, and so on.

And just a reminder, this advice is geared towards B2B SaaS. Starting with a niche and being very focused is still the best way to start for most products — the beachhead works! (See How Canva Grows for why)

(#5) How to become an idea machine

Greg Isenberg is quickly becoming the G.O.A.T.

He’s the co-founder of Late Checkout, a product studio that designs, creates, and acquires internet communities. Greg is also a social media and content-creation machine, writing a popular Substack (70K+ subs), hosting a podcast, regularly going viral on Twitter/LI, and most recently kickstarting an AI community and growing it at a record pace (25K in 21 days).

He’s also an advisor to Reddit and a previous advisor to TikTok. Oh, and he was Head of Product Strategy at WeWork.

A fanboy, you say?

Yes. Yes, I am.

Clearly, Greg is doing a lot of cool things. And cool things come from cool ideas. So…what can we learn from Greg here?

Much like product intuition, building your idea muscle is trainable. And who better to give advice on how to become an idea machine than the 🐐 himself?

In a recent post, Greg walks us through his 4-step process for validating ideas — for both content and products. From how he captures and triages his thoughts, down to testing them, and turning them into, as he says, “beautifully packaged, public-facing winners.”

1. First, capture your ideas in a list — even the messy and bad ones.

I have a Notion page titled “Ideas” — which is just several running lists of thoughts that come into my brain. It’s structured into different categories:

• Tweets

• Substacks

• Names (usually domain name ideas)

• Sayings (ex. “Do you mind if we blow your mind?”)

• Logos (ex. Flying saucer with rainbow coming out of it)

Some of the ideas are dumb and silly, which is perfectly fine. Some of the ideas come from things I see — for example, I saw an umbrella at the beach and thought, “That’s a logo.” And I write it down. Others come from listening to podcasts or watching YouTube.

I also have a page in my Notes app that is ideas for startups. This one’s a bit more unstructured.

2. Then, “garden” for the best ones

For 30 minutes twice a week, I have time blocked off in my schedule to review my lists. I call it gardening — which consists of two ways of thinking deeper:

1. Prioritize: What are the most interesting ideas?

2. Synthesize: How can I say this in a more clear & concise way?

Why now?

That’s the most important question I ask myself when sorting through these ideas.

Why should I be tweeting this now?

Why does this need to come out right this second?

I think the reason I always find myself asking this is because ideas that come out at the right time have the highest likelihood of spreading.

Timing isn’t everything but it’s a lot.

3. Then, focus on the “scroll-stoppers” only

I always try to prioritize insight bombs when posting. I enjoy thinking outside the box and communicating the ideas that others might not be thinking of.

Every time you see my name, I want it to be attached to a scroll-stopping idea — something that grabs your attention. Something that you need to see.

I want people to see my ideas. I want to create conversations. If I’m choosing between two things I want to post, the one that has a better chance to stop the scroll is the one I’ll pick.

3. Finally, go and get external validation

If an idea is really sticking out to me, here’s what I’ll do:

Throw it up on Twitter and LinkedIn as a one liner.

(Remember: the median tweet gets zero likes, so if you haven’t built an audience on Twitter, I think LinkedIn is the best place to start.)

If the idea resonates, I’ll turn it into a Twitter thread or a longer LinkedIn post. I’ll type it all out in 10-15 minutes, throw it into ChatGPT (my prompt is always “Pretend you’re a copy editor"), and once it’s cleaned up I’ll post that.

If it resonates again, I’ll move it to a newsletter or blog post. And if that hits, I know I’m onto something — so it’s time to talk about it on my podcast and short-form video.

I love seeing things like this systemized. Super inspiring. Hopefully, you can steal something from that to validate your own ideas.

Go follow him on (sigh) Twitter, LinkedIn or join his newsletter > Late Checkout - a Substack by Greg Isenberg

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🌱 Other things if you have time 🧠

• How to use ChatGPT in your PM work (Lenny Rachitsky)

• Nobody knows how many jobs will "be automated" (Noah Smith)

• The Almond Butter Test (Freddie DeBoer)

• +A new video from Kurzgesagt dropped yesterday. Absolutely nothing to do with anything we talk about in this newsletter, but it’s my favorite YouTube channel, exploring different scientific concepts, theories, and ideas. So, for the curious…Why Aliens Might Already Be On Their Way To Us 👽 [11m video below]

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And that’s all we’ve got this week, folks!

As always, thanks a lot for reading and supporting my writing. I hope in return, you learned at least one new thing today. If you did, and wouldn’t mind, I’d really appreciate it if you hit the ❤️ below (or, even gave the new Restack feature a go) — it helps others discover my writing. Thank you!

Have a lovely weekend, and I’ll see you on Wednesday for our next deep dive.
— Jaryd ✌️

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