How To Find Product-Market Fit

More than 90% of companies that obtain seed funding fail. Of those that don’t, many experience hidden failure, where investors are lucky if they can recoup their money in a fire sale acquisition. They never found Product-Market Fit.

The process of finding Product-Market Fit (PMF) feels like driving through a dense fog at night, while trying to read the minds of people you don’t know to find your way home. The process is filled with anxiety, confusion and frustration. It takes longer than expected. There is a strong temptation to short cut the process and declare success based on a few orders (”The market has spoken and loves us!”).

This article aims to shed light on the process of finding PMF, while avoiding mistakes. It’s primarily intended to help those entering a non-existent, nascent or poorly understood market.

Choose the What, Who and How of PMF

Before investing in a company, investors ask entrepreneurs to clearly articulate the components of PMF; what they will build (the product or service), who will buy it (the market), and how to reach that market (go-to-market or GTM). This serves two purposes: to validate that the problem they are solving is important in the market, and to understand the Product-Market Fit (PMF) risk.

Product-Market Fit is when a product is effectively sold into a good market that desperately needs it.

?? Note of Caution: Venture capital is more accessible than ever before. There are over 3,000 firms, and they invest close to a trillion dollars, compared to just $50 billion a decade ago. I’ve seen some firms decline to invest unless a company has already found PMF “with angel investors”. That’s a red flag. You cannot test or find PMF unless you are actually in the market. So get the most experienced investors you can, but rely on yourself and your team to find PMF.

WHAT is the product or service you provide?

This is about core IP. The secret sauce. The evil plan surrounding the problem you solve. Product features will evolve, grow and improve forever, but the underlying tech (that your investors paid you to build) should remain fixed. That’s because if you substantially change what you do. It’s a restart. You’re changing the bet and starting over.

?? Example: In the early 2000s I joined a group of entrepreneurs who started an internet streaming company (FastForward), nailed their first customer for $10M, and sold the company for $1.25B. That same team went on to build Riverbed, found PMF and then boom - IPO. Later, they created an analytics infrastructure company. Through testing, they learned they couldn’t reach PMF but they still had over $10M in the bank. They shut down and returned the remaining cash to the investors. Now they’re at it again and crushing it at Corelight. Takeaway: when you find PMF in a good market, celebrate. If not, do what’s right (because integrity matters).

WHO is your product for?

What is your target market? Who buys? Consider two factors when selecting your market:

1. Do prospects recognize the importance of the problem you solve? Are they desperate for it?
2. Is the market large enough to support and grow your business?

Your target market should be desperate to solve the problem you address, even if they don't realize it yet.

??? Observation: In my experience, entrepreneurs struggle to clearly articulate the problem they solve. They state what they do and list benefits, but they struggle to state the underlying problem clearly. It’s important because people mentally organize their thoughts about a company based on what problem they solve. If they cannot (or do not) articulate the problem well, then they ***lose the benefit of word-of-mouth. The listener will space over it and forget it.

HOW will you reach your market?

Routes to market are complex. There are numerous options for sales, marketing, customer success, and supporting departments. Decisions in one area can affect the others, potentially leading to serious conflicts when GTM leaders come from differing experiences.

Finding GTM Fit is the process of determining the best way to sell to your target market. One venture firm refers to this as "market annealing".

?? Example: I was working with a software infrastructure company that built automation for complex systems in clouds and data centers. The product instantiated, configured, monitored and operated extremely complex systems from other suppliers.

Historically, these systems were purchased in pieces and deployed by different teams with different budgets (architecture team, security, operations) teams.

Their GTM problem was that the highly-experienced team was only willing to GTM as they had always done; by hiring a big field. The sales team sold to architects, who then asked security and ops teams to drop their established products and processes because “hey, it’s now all embedded!” Failure followed.

After swapping leadership in every department, a small team took the solution to managed service providers because they have a single responsible department. Before long, the first MSP they closed was buying more than the entire sales force combined, quarter after quarter.

Experienced, successful, highly educated entrepreneurs - and experienced investors - get stuck just like this all the time. They understand the basics of PMF, but in the fog of market entry, they run to their comfort zones and repeat whatever worked for them in some prior company. That’s risky.

Always, always, always be testing for PMF (process below).

When You Make The Wrong Choices

These choices companies make are invariably wrong. It’s expected. No company fails because they were wrong; they fail because they didn’t learn they were wrong through testing.

So don’t fear mistakes.

When you encounter PMF problems, you adjust by pivoting. The word “pivot” makes entrepreneurs anxious, but it’s not a mistake; it’s the only appropriate response to learning in the market.

You can change who you're selling to. You can also change how you reach your market, which is part of GTM fit. Lastly, you can continually enhance and improve your product to get to minimum viable product (MVP). So, just do it.

When testing for PMF, it is important to remember that it can be quickly lost after it is found. To avoid this, here are some tips:

• Don't choose a small market; instead, look for untapped monster markets that need help.
• Don't invest too much in product refinement before market testing. You don't need full MVP to find PMF; if you don't have PMF, you can't know what MVP even is.
• You don't need a massive launch only to backtrack later. Be frugal until you have PMF.
• If prospects say no, don't argue; search for find prospects who say yes.

The Process For Finding Product-Market Fit

You already know the process for finding PMF. It’s the scientific method invented by Aristotle, way before Al Gore used it to invent the Internet. Other high achievers who used the scientific method to accomplish above average results include Newton, Einstein and Alexander The Great, Aristotle’s early student.

It’s simple to apply the scientific method to market entry and Product-Market Fit:

STEP 1: Build a thoughtful PMF hypothesis (see below).

STEP 2: Test the crap out of it in the market (with prospects you don’t know).

STEP 3: If you’re wrong, adjust the hypothesis and test again. If your correct, sell stuff and scale.

What’s the PMF hypothesis you ask? It’s a testable theory written by the entrepreneurs, used to validate that your product is desired by a good market and that you know how to reach them. The Who, How and What you selected are in sync when your hypothesis has been proven.

IMPORTANT SAFETY TIP: Try To Stay Alive

During the process of finding PMF you have one rule: Do Not Die. Premature death comes from over spending after incorrectly declaring that you have PMF.

You don’t need a lot of people to find PMF. The people who construct and test the PMF hypotheses are the founders and a few “renaissance” sales people. Renaissance people are not classic coin-operated sales people. They’re problem solvers motivated by intellectually thrilling problems.

How Do You Know When You’ve Found PMF?

Andy Rachleff recommends these tests to determine if an organization has PMF:

For B2C: The company experiences organic growth from sales opportunities found through word-of-mouth. If that cannot be measured or isn’t applicable, NPS (Net Promoter Score) is a good proxy.

For B2B: If a substantial majority of competent (renaissance) sales teams sell four times more than their loaded costs, then that could indicate PMF. An alternative (that Andy credits to Doug Leone) is that a company limits all product trials to 30 days and then pulls every trial no matter what. If prospects scream bloody murder, then you have PMF.

These tests aren’t a substantial burden.

There is a lot of folklore regarding finding PMF. Variations on this phrase are quite common:

?? “… having PMF in a good market feels like the market is pulling the product out of the company like gravity.”

That describes how organic growth feels in great B2C markets. Word-of-mouth is happening and it’s so effective that certain marketing elements - like advertising, are not required.

It’s not a very good test though.

?? Example: Andy Rachleff, the legendary founder of Benchmark Capital, first described the application of the scientific method to the problem of PMF. He founded Wealthfront, a groundbreaking investment firm for “normal” people. He rigorously implemented the PMF methodology and grew the company entirely organically. Wealthfront is a remarkable success and has grown solely through word-of-mouth.

Managing Expectations When Crossing The Chasm

Crossing the Chasm by Geoffrey Moore, as far as I’m aware, still applies to nearly every venture engaged in finding Product-Market Fit. It explains why a new product that appears to have PMF can stall.

The chasm refers to a stall in growth that occurs after a product has been embraced by “early adopters” in the market, but has not yet been accepted by mainstream “pragmatists”. Moore outlines processes for crossing this chasm, and points out that the early adopters and pragmatists have very different expectations of a solution.

This is important because companies tend to declare success with PMF based on early adopter sales, while failing to recognize that pragmatists behave differently. The chasm can make a company’s market entry feel like a “flash-in-the-pan” or a “science project”.

Putting It Together (TLDR)

PMF is as important as anything else for entrepreneurs during market entry, including the tech and your people.

PMF is a hypothesis about the value of your offering. You are asserting that you have built a product that solves a compelling, “desperate” problem for a well-defined “good” market. You are also asserting that you know how to best reach that market to sell the product.

Your assertions are valid if you test them in the market in a manner that reliably indicates (proves) that your value hypothesis is correct. That is when you’ve found PMF.

It is extremely important that you follow through with the process before scaling out for GTM. It is just as important that you continue testing PMF forever onward. This is not complex or expensive, and it will save your corporate butts as soon as you lose PMF. And that will happen as surely as day follows night.

Do not be derailed by discussions of feeling about the market (e.g. the market is sucking the product out of you). That’s a good feeling that happens, but you’ll only feel it if you actually find PMF.

Insight from Luminaries

Many people have written extensively about PMF. In my opinion, these pioneers provide the most valuable insight.

Don Valentine - founder of Sequoia Capital

In this impactful video from 2011 at Stanford, Valentine talks about investing in markets as Sequoia’s core investment strategy. Note that Don’s point is that the market is the most important factor to consider when investing. This is not product-market fit (but related). I recommend watching it straight through.

Andy Rachleff - founder of Benchmark Capital and Wealthfront

Andy is an earnest, brilliant, investor and leader. He was the person who popularized the phrase Product-Market Fit, and he credits Don Valentine for giving him the idea. Andy took the idea much farther and has implemented it flawlessly in his own companies and in his investments. This is an illuminating recording of an interview Andy gave where he drilled down into PMF history, and provides his analysis of its application and value. Internalize every word.

Marc Andreesson - co-founder of Andreesson Horowitz and Legendary Entrepreneur

Marc has done more to popularize the idea of PMF than perhaps anyone. He, and many in his firm, have written prolifically on the subject. Here are two papers Marc authored. The first (deprecated) is a paper Marc wrote at Stanford which describes an exciting confluence of Valentine’s and Rachleff’s perspectives. The second is a more recent perspective using quotes from the a16h website. They’re both great and it’s fascinating to see how his thoughts progressed.