I had the privilege of hosting a fireside chat recently with my friend, and earliest advisor, Hiten Shah – who, in many people’s opinion, is one of Silicon Valley’s most underrated and successful founders and investors. Also just a great human being. 

With 1,000+ angel investments under his belt and multiple successful exits (Dropbox, Uber, Atlassian etc), Hiten brings a hard-won perspective on building and scaling companies. What started as a structured conversation quickly evolved into a two-hour masterclass on how to build an early-stage startup in 2024.

Here are some of the key takeaways that every founder should hear:

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Product-market fit is a dial, not a switch

The concept of “product market fit” is helpful because it focuses the early-stage founder on only one thing – achieving this monumental milestone. Nothing else should matter at this early stage. 

But I have founders ask me all the time – what is product-market-fit and how do I know when I get there? So, I asked Hiten this very question. 

This is what conventional wisdom says about reaching PMF. 

Mark Andreessen gave this rather unhelpful definition:
“You’ll know it when you see it” 

Sean Ellis upgraded to this:
“At least 40% of your users would be very disappointed without your product”

But here’s how Hiten described it… 

“Product market fit is not binary. PMF is really about informing your intuition through data and behavior of your users or customers and saying, ‘Hey, intuitively, do I feel like this product meets the need and serves that need that we’re promising people?’

The ultimate indication of that is simple — people buy and they don’t stop.”

Scot’s take: I’ve long since described product-market-fit (PMF) as more of a dial than a switch, and Hiten doubled down on this perspective. You start at lower levels of product-market-fit (PMF) and keep calibrating till you reach stronger levels. This can take years. Your job is to act like a detective and find the signal from the noise. 

How do you know if you’ve found product-market-fit? I agree with Hiten here. Customers don’t just buy, they come back repeatedly. Retention is the single most important metric to assess the strength of your product-market-fit. 

Where founders go wrong is doing a “hard pivot” too early – before they’ve done sufficient calibration on their existing concept. Yes, occasionally a hard pivot is needed. But it’s a lot more common to find product-market-fit through calibration, not a cold reset. You just need to give it enough time and effort. Convincing someone on the front-end is one thing. But truly understanding why people leave (or don’t buy again) is the holy grail. 

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#2: Build formulas over funnels

Hiten says tracking vanity metrics is a waste of time. Instead he uses a framework he calls “Formulas over funnels.” Here’s how it works:

Instead of looking at your business as a traditional funnel, break it down into component pieces with clear numerators and denominators, and owners.

Take a typical e-commerce funnel:

• Visitors → Product Page Views
• Product Page Views → Add to Cart
• Add to Cart → Checkout

Now turn each process step into a rate formula: 

• Product Page Views / Total Visitors = Browse Rate
• Add to Cart / Product Views = Interest Rate
• Checkout / Add to Cart = Purchase Rate

And therefore: 

Browse Rate + Interest Rate + Purchase Rate = E-Commerce Conversion 

Then assign a clear owner for each part of the formula and have them optimize it. 

“When you map it this way, you can assign clear ownership and actually operationalize improvements. Every metric needs an owner, and every owner needs a clear ratio they’re responsible for.”

He went on to explain how Uber used this approach in their early days:

“Travis [Kalanick] would have monitors everywhere showing these formula components in real-time. Every metric had an owner, every owner had a clear numerator and denominator they were responsible for. This hyper-rationalization of their business was what enabled them to grow so fast.”

Scot’s take: Love this line of thinking. Viewing any funnel like a formula and optimizing each component is a great way to tackle process optimization. In Highland, we call these formula components “health metrics” and identify them across the various subsystems of the business: Customer Acquisition, Experience, Retention. 

We also stress the importance of leading indicators vs. lagging indicators when tracking health metrics. Leading indicators predict future performance. Whereas lagging indicators explain how you performed in the past. For example, qualified sales opportunities is a leading indicator, and revenue is a lagging indicator. 

What’s cool about Hiten’s methodology is that it helps you pick better leading indicators. Here’s what I mean… 

In his example, you could say that “visits” is a leading indicator, and it is, but not a very good one. Why? Because even if you drive visits up, you’re not necessarily moving people from visitor to product page view, and therefore driving up the overall e-commerce conversion rate. 

A much better leading indicator would be the Browse Rate that Hiten described, since it includes the percent of users moving from one step to the next. So, if you drive the Browse Rate up, with all else being equal, you know you are increasing the overall e-commerce conversion rate. 

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#3: Don’t raise capital if you like control

Here’s where Hiten got brutally honest about the mental shift required when taking investor money of any kind, especially venture capital:

“With self-funding, you’re basically not able to do what you can with funding. When you get funding, you’re able to invest ahead of your revenue. But here’s what most founders don’t realize – it is no longer your company.”

He outlined three critical questions every founder should ask before they raise:

1. Are you ready to give up control?

“You gave somebody equity in your company and took their money now. You cannot take whatever salary you want.”

2. Can you handle constant growth expectations?

“The simple expectation is this business will always grow. And if it’s not always growing, you’re always wanting to show the investors a path to how it’s gonna always grow.”

3. Are you prepared for the accountability?

“When you raise money, get ready to send an investor update every month. Make it something that helps you codify what happened that month and share it with your stakeholders.”

He then went on to talk about one of the simplest, but most important things you can do to ensure great investor relationships – keep them in the loop with regular updates. 

“Do you know what most founders get wrong with investor updates? They make it all about themselves. They: 

• Send inconsistent updates
• Write emotional narratives
• Wait until there’s a problem to communicate”

Scot’s take: Most founders enter the fundraising process rather naive (I certainly did!). They think about all the things the money could do, not all the strings that are attached to that very same money. 

My default advice to our Highland founders is to bootstrap your early-stage startup for as long as you can. Then, when you reach product-market-fit and have a better sense for distribution, you can evaluate if it makes sense to raise. 

This approach will force the right level of focus and discipline in the early days, and maximize your ownership and control. Then if you do decide to raise, you’re entering that next phase with a much stronger foundation. 

But regardless of the approach, you should always take the fundraising decision seriously; and, Hiten’s three questions are a great litmus test to see if you’re mentally ready. When a founder does raise money for the first time, they all of a sudden need to communicate decisions and create buy-in with investors (especially the lead investors and/or Board Members). This is very different from answering only to yourself. And it takes practice to get this right and strike the right balance. 

Some founders find investor relations incredibly annoying and don’t see them as real partners. This usually ends poorly. But if you can embrace the changing dynamic, and treat your investor-base as true partners in the business, you can leverage their unique insights and networks to your advantage. This is the only way to go in my view. Otherwise, don’t raise investor money. 

Hiten’s last point about consistent investor updates is also spot on. I would write monthly updates when we were an early stage startup, and then I dropped to quarterly as we matured. I would share these updates with our entire team too, as it helped them learn about the business and how we were thinking about strategically. This way, it feels like you’re doing the extra work for your full team too, not just the investor-base. Providing this extra context is a win-win for everyone and helps performance moving forward.