Startups need to strike a balance between seeking new opportunities and maximizing the existing ones. Mastering this balance can make all the difference  between surviving and thriving.

In this article, I delve into the secret weapon that can either make or break your startup.

I'll take you on a journey through the concept of the Explore/Exploit loop. I'll show you how to harness its power for product discovery. I’ll hand you the tools necessary to find product-market fit and put your startup on the road to success.

Don't miss out on the opportunity to give your startup the edge it needs to succeed. Read on to unlock the full potential of the Explore/Exploit loop.

Product Discovery for Startups

Product discovery involves understanding and addressing customer needs and pain points.

The Explore/Exploit loop plays a crucial role in product discovery for startups. On the one hand, startups need to explore and  identify new growth opportunities. Yet to maximize resources and success, they must take advantage of those opportunities that yield the most return.

Product-market fit requires balancing exploration and exploitation.

Startups must make strategic decisions and meet their short-term goals in a way that drives towards their long-term vision. Practically, it means seeing signals of being on the right path right now; seeing behind corners.

Being able to pivot and iterate quickly is also essential for startups.

Startups that are too focused on simply closing the next deal and don't look into new opportunities will miss out on chances to grow. And startups that spend too much time looking for opportunities will struggle to stay competitive.

The Explore/Exploit Loop

Multi-Armed Bandit

The Multi-Armed Bandit problem illustrates the exploration-exploitation trade-off.

In this scenario, imagine you’re playing slot machines at the casino. The slot machines represent different options or opportunities, and the goal is to find the one with the highest return.

The challenge is that you don't know which machine is the best in advance, and the only way to find out is to start pulling levers and gather information.

However, gathering information comes at a cost. Every time you pull a lever, you're spending money and time. This trade-off is a real cost.

Experimentation can be a malinvestment.

If the opportunity cost outweighs the potential benefits of new information, you're overspending. The ultimate solution to the problem is to start with a period of exploration where you gather information by pulling levers at random.

Once you have enough information, you focus on pulling the lever with the highest expected return (exploitation). But how do you know when enough is enough?

The Exploration Never Stops

It is most important to note that the exploration phase never truly stops.

Even if you believe you have found the best possible option, it is essential to continue experimenting and gathering information. The market and industry are constantly changing, and new opportunities may arise.

Additionally, as you continue to gather information you may find that your current best option is not the best option available. The only way to combat the Explore/Exploit problem is to keep trying new things and stay open to new opportunities while also exploiting the best option.

Even after finding a product-market fit, startups should keep looking for new opportunities. This means they need to always have resources available to cater for both phases of the loop. And in turn, each set of resources must go through that loop as fast as possible.

Setting Goals for Discovery

Explore Goals

Product development requires setting goals, but startups may not benefit from quarterly goals. Instead, balance phases by setting goals based on the length of the experimentation cycle.

Set goals to minimize the time between testing new ideas.

The best advice on this comes from the author of “Continuous Discovery Habits”, Teresa Torres. She says that if the goal of two teams is to talk to 12 customers in a quarter, and one team talks to a customer every week and the other talks to 12 customers in the last two weeks of the quarter, the former will get exponentially better results.

Instead of keeping track of how many times an activity is done, measure how long it takes to progress from one activity to the next. How long has it been since your last interview? Find out how many days have passed since your last assumption test. And try to cut down the number of days between events.

In a casino, you don’t wait a month to play a new slot machine. Your hotel bill alone would make you go bankrupt before you even try a new opportunity.

Exploit Goals

It is also critical to decide on a threshold which gets a particular opportunity moved to the exploit phase of the loop. As observed, it is hard to predict which opportunity will maximize payoff, so recognising the early leading signals which can approximate this knowledge is best.

Use a "metacriterion" to compare opportunities and decide when to stop exploring and commit.

A startup may use market size, problem frequency or relative importance as metacriteria to evaluate opportunities.

In “What to measure pre-product & pre-revenue”, for example, the author looks at "customer currencies" such as attention, time, reputation, effort and money that can be used to assess desirability.

He suggests which signals to look out for during each stage of the journey, such as problem talks, social media attention and customer commitment. Understanding why a customer is not moving forward is just as important as understanding why they are.

Hire Experienced Operators

You should invest in learning these correlations for your business. But the next best thing is to find people who have developed a feel for such desirability markers from experience. Startups should regularly reassess and adjust their goals based on new information and insights.

Slack is a great example of a company that effectively leveraged the Explore/Exploit concept to find success. The company originally started as a gaming business, but soon realized that the messaging platform they built for the game was more popular and had more value than the game itself.

By recognizing this opportunity, they decided to pivot and focus on building a messaging platform for teams. This was a risky move, as they were shifting away from their original idea and into an uncertain market.

However, they also recognised the potential of the messaging platform and resolved to explore this new opportunity. But it took them to look at what part of the original product was gaining the most traction, which enabled them to recognise this opportunity in the first place.

All because the founders had done this before.

Before Slack, a similar thing happened to their previous startup, Flickr, which also started out as a game. Only there, it was the photo-uploading feature they ended up exploiting, resulting in an acquisition by Yahoo.

Without knowing what is good engagement or what early signs of good engagement are, you won’t be able to notice when the exploration should stop and when to pounce on an opportunity. If you don't have this developed sense, hire someone who does.

Conclusion

Congratulations, you've uncovered the secret weapon that can make or break your success: the Explore/Exploit loop.

You are now aware how this powerful concept allows startups to stay ahead of the curve and thrive in an ever-changing market. You've learned how to tackle the tradeoff, how to set goals and how to think about pivots.

By understanding and implementing these concepts, you've armed yourself with the tools to navigate the complex and challenging landscape of startup product development with confidence.

Let’s recap the lessons:

• Don’t forget that exploration never truly stops. Don’t think of it as a sequential process across the entire product cycle, where once you’ve explored, you only exploit. Exploration must never stop.
• It is important to have appropriate resources for going through both phases of the loop, and doing so as fast as possible.
• Hiring people who have seen the early signals of what might lead to success is one of the best bets for correctly determining when to exploit an opportunity.
• Develop your own unique knowledge of such correlations, think in terms of leading metrics, and use principled metacriteria to decide when to shift from “explore” to “exploit”.

Take what you've learned here and put it into action, and watch your startup soar to new heights. The possibilities are endless, and success is within your grasp.