How Imperfection Reveals True Product-Market Fit for Startups

This post suggests a new way of thinking about product-market-fit. Not as a binary state - but as something that is reached once enough indicators are present. I argue these indicators become most exposed during the phase when startups still deliver an imperfect value proposition to customers. On the way to the conclusion, I provide imaginary and real-life examples and analogies. In the end, you should be better at identifying product-market fit in your own startup or in the ones you have invested in.

In 2007, the most influential concept in entrepreneurship was coined. Marc Andreessen, the founder of Netscape and partner in the juggernaut venture capital firm A16Z wrote a seminal blog post titled: "The Only Thing That Matters", In this post, he introduced the term "product-market-fit" (PMF). As the blog's title suggests, PMF is the paramount concern for startups. Without it, any attempt to build or expand a company is futile.

Think of PMF in the context of opening a burger joint; unless you've perfected the burger recipe (discovered PMF), scaling up to churn out subpar burgers is a misguided venture.

Having supported roughly a thousand startups since 2009, I can unequivocally confirm the validity of this principle. A common pitfall occurs when startups raise too much funding before achieving PMF. Founders' ambitious promises to investors can only be fulfilled by hiring sales teams and boosting marketing budgets. However, without a finely tuned sales strategy and a clear understanding of what type of content resonates with customers, any attempt to "scale" is doomed. Essentially, these startups have turbocharged their burger-making machine to produce something nobody desires.

In his influential post, Marc Andreessen asserts that recognizing PMF is obvious. Marc writes: "You can always feel product/market fit when it's happening. The customers are buying the product just as fast as you can make it—or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You're hiring sales and customer support staff as fast as you can. Reporters are calling because they've heard about your hot new thing, and they want to talk to you about it. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house. You could eat free for a year at Buck's."

While Marc's description certainly hints at PMF, my experience suggests that PMF often takes a different form. First, the notion of "people buying the product just as fast as you can make it" is irrelevant for most software startups. In fact, it sounds more like the buzz surrounding consumer product releases, like a recent Prime drink promotion. Secondly, the idea that "reporters are calling because they've heard about your hot new thing" seems to reflect public hype rather than true PMF. In fact, it brings to mind situations reminiscent of Theranos and FTX, both of which were revealed to be fraudulent and outright criminal.

Despite the cogency of Marc Andreessen's logic, his description of PMF is not particularly useful for determining if a startup has achieved PMF. But if the attention of reporters and investment bankers doesn't signify PMF, what does?

Though Marc Andreessen's depiction of PMF lacks practical diagnostic characteristics, it encapsulates a crucial truth. PMF can't be reduced to a single metric. More than a mere factual state, Marc describes it as a sensation. He portrays the feeling of transitioning from being ignored to being noticed. In my experience, PMF is indeed a sensation, but, like most sensations, it doesn't occur in isolation. Signs of PMF can be subtle and are often entangled with other, sometimes conflicting, sensations. However, they are there, hidden in plain sight amid the imperfections that characterize most early startup offerings.

How to identify product-market-fit

There's a term in the investor community that defines a startup's value proposition maturity. Does the startup offer a feature, a product, or a solution? In the initial stages, most startups primarily offer a feature. They possess something "new" and concentrate on communicating and delivering this novelty. Let's say they've created a connected coffee maker that starts brewing morning coffee the moment the alarm goes off. The coffee maker works, but its connected aspect is merely a feature because it's only available on the startup's website, lacking expansion, spare parts, and even a functional app. In response, the startup makes a solid app, offers spare parts, and ensures it can be bought in electronic stores and on Amazon. Now they have a product.

Now, imagine that co-working spaces express interest in the machine, wanting it to be available for their tenants. The connected feature enables them to automatically control the machines. However, the facility manager soon realizes that purchasing beans and servicing the machine is a hassle, and buying machines for the entire space is cost-prohibitive. In response, the startup offers bean delivery, regular servicing, and financing options. The startup now offers a solution.

The coffee maker is just an example, but this logic applies to all startups. In the beginning, startups focus on providing a feature, often encapsulated in what's known as the MVP (minimal viable product). In this phase, the startup fails to deliver enough value to constitute a product, let alone a solution. Is this a problem? Indeed, because customers seek solutions, not just features. However, it's in this precarious phase that one must search for the initial signs of PMF. Why? Because PMF emerges within the imperfections of the offering.

When startups offer a mere feature to customers, they leave them wanting more. The additional layers of value required to constitute a solution are absent, which provides customers with ample reasons to abandon the offering. In other words, prospects fail to convert, and customers churn. Nevertheless, this doesn't always occur. Sometimes, customers stick with the startup despite the evident imperfections. In fact, the more glaring the imperfections, the stronger PMF becomes apparent. If customers are willing to endure these pronounced shortcomings, it's one of the most potent signs of PMF.

Allow me to provide a real-life example from our portfolio.?

The lack of updates revealed PMF for a skin care app?

Skin Bliss created a skincare guide app without having seasoned software developers on their team. Essentially, one of the co-founders, Maria taught herself to code to build the first version of the app. Arguably, the app started as a mere feature. It lacked essential elements such as a user-friendly onboarding process, and there was (and still is) no option to purchase the recommended products.

The approach enabled the founders to create the initial version of the app quickly, but it also generated a significant amount of technical debt. The app remained stagnant between 2021 and 2023, with a deluge of feature requests, bug reports, and user feedback pouring in. In 99% of cases, a lack of updates would spell certain death for an app. However, inexplicably, users continued to use the app and even referred their friends.

Due to the mounting technical debt, the app was impossible to update, so the founders decided to rebuild it from scratch. This project spanned two years, during which users had to contend with an increasingly outdated version. Yet, they persisted, and even more users joined. In 2022, after over a year without updates, the app surpassed one million downloads and climbed to the top of the beauty app charts. It soon crossed the 100,000 monthly active users mark as well.

While developing the second generation of the app, the founders wanted to gain more insights into their users. Consequently, they conducted an in-app survey, asking users who they were and why they used the app. Naturally, the founders (and investors) anticipated minimal user responses since the startup offered no incentives for participation. However, contrary to expectations, the surveys kept pouring in. No less than ten thousand users voluntarily sent in detailed data. Many users even took advantage of the free-form text fields to share intimate personal stories of how the app helped them overcome skin problems, describing Skin Bliss as their "savior." More remarkably, many users offered to assist the founders in their mission, with non-English speakers even volunteering to translate the app for free, enabling its use in various countries.

In 2023, investors recommended Skin Bliss to initiate monetization. Their initial plan had been to delay this step, but understandably, investors wanted tangible proof that users were willing to spend money. Crafting a monetization structure overnight was impossible. So, in a bid to kickstart monetization, they introduced the option for users to voluntarily donate money. The donation wasn't publicized or incentivized. The donation feature simply asked users to contribute if they found the app valuable. Without significant external motivation to donate, it would have been reasonable to assume that users might not choose to do so. However, that's not what happened. Thousands of users donated funds, not because the app was perfect, but because they hoped their contributions would accelerate the developers' progress.

The Skin Bliss example vividly illustrates how the app's imperfections made PMF stand out. Without PMF, it's improbable that users would exhibit such levels of engagement. Remarkably, the app still maintains a stellar 4.5-star rating on the Google Play Store—a rarity for an app that took two years to update and boasts such a large user base.

Those close to Skin Bliss are well aware that they have achieved PMF. It's unmistakable because users display a kind of "love" for the app—not because it's flawless, but in spite of its imperfections. Had the app been launched by a beauty powerhouse like Sephora, with a budget 50 times greater than what Skin Bliss had available, the buzz, promotional efforts, and extensive distribution could have easily masked a lack of PMF, as has happened countless times with splashy product launches. Instead, it's the imperfections that reveal the truth, like a receding tide that leaves everything exposed.

PMF has nothing to do with hype; it's quite the opposite. PMF is about customers and users who actively inquire about how they can assist you because they depend on your product's existence. It's inbound customers referred by your existing customers, who've heard that you offer the best solution in town. It's customers willing to pay in advance.? It's users who eagerly complete surveys, and customers privately suggesting you could charge three times the current price. None of these elements, taken in isolation, fully encapsulates PMF. However, when these signs emerge simultaneously despite glaring imperfections in the offering, the unmistakable sensation of PMF takes hold, and in such cases, trusting your gut feeling is warranted.

Below is a? list of signs of PMF. When several of these signs are present while still offering an imperfect value proposition, one can sense a high degree of certainty that PMF has arrived. My list is not exhaustive, and if you have additional signs to add, put them in the comments.?

• Users and customers offering to donate money to your startup.
• Users and customers offering to perform significant tasks and help your startup.
• Users and customers show (surprisingly) high engagement with your surveys and requests for interaction while providing (surprisingly) a high level of qualitative feedback.
• Users and customers actively spend time and resources to refer other users and customers to you.
• Users and customers actively spend time and resources to refer other users and customers to you.
• A high degree of users and customers promoting you on social media without any compensation or request to do so.
• Users and customers offering to invest in your company.
• Users and customers telling you in private to raise your prices.
• Engagement metrics are well out of the ordinary compared to peers and competitors.?
• Having terrible customer support, terrible onboarding, terrible everything, and customers still stay.?
• Users and customers risking blame and ridicule from others and still buying from you.
• Users and customers defend you when being attacked by “internet trolls”.
• Users and customers who in no time rely so heavily on your feature/product/solution that most of them sign up for any training, education or community feature you provide.

As always, you can learn much more about obtaining product-market-fit on our free platform for startups called TOOLS. Here we got an entire learning path on how to obtain PMF. Find the link in the comments.?