Let's Simply Investing: Product-Market Fit, Retention, Sales & Market

When Evaluating the Potential ROI of a Startup Investment, Product-Market Fit is the Crossroad that Makes or Breaks a Startup...

In short, do people buy what you are selling?

What Product-Market Fit Is

Product-market fit is the point at which your product successfully meets the needs and demands of a specific target market, and they choose to pay for it at the price you offer—it's that simple. This concept is crucial because it signifies that your startup has developed a product that the market truly wants and values, laying the groundwork for sustainable growth and long-term success.

What Product-Market Fit Is Not

Anything other than receiving payment from customers for goods and services provided is not product-market fit. That’s the only real progress that indicates potential success.

Many things can be misrepresented as progress, which often only serves to delay the inevitable moment when a startup runs out of runway, realizing they never had a product that their market truly wanted at all.

Sales as Your Main KPI

Sales are the lifeblood of any startup. If you sell, you breathe.

However, sales can sometimes be used as a short-term boost to mask the reality that a startup doesn’t have anything that their audience is willing to pay for. If you aren’t selling or are barely selling, simply multiplying your sales team for a couple of quarters with early incentives for your audience, only to discover a dropout rate that your company can’t survive, is not the answer.

This is where the sweet spot lies for many early-to-mid-stage investors—post-MVP, with traction and early revenue, ready to expand an already successful sales strategy. In other words, this is the stage where an investment transitions a company from a startup to a scale-up—two very different animals to manage.

How do you cross that threshold? You sell and maintain your customers—nothing more, nothing less.

Why Retention Matters

Retention is the ability to keep your existing customers or users engaged and loyal over time. If your customers are leaving, you haven’t actually sold them on your product; you’ve sold them on the idea of a product that they eventually realized you aren’t delivering.

High retention rates clearly indicate that your product or service delivers ongoing value. When customers stay, it shows they are satisfied with what you offer and find it useful and worth the price. This continuous engagement is a testament to the product’s relevance and effectiveness in solving a problem.

Moreover, retaining customers is more cost-efficient than acquiring new ones. The cost of acquiring new customers can be five to seven times higher than retaining existing ones. By focusing on retention, startups can maximize their return on investment and ensure a steady stream of revenue without constantly spending heavily on marketing and outreach. This efficiency is crucial for startups operating with limited resources.

Retention also fosters community building. Loyal customers often become advocates for your brand, spreading positive word-of-mouth and increasing your reach organically. This sense of community enhances customer loyalty and creates a network of supporters who are emotionally invested in your success.

When Market Size Becomes Redundant

Analyzing the potential market size is one of the major endeavors when evaluating a startup. However, a simple review can determine whether or not a startup is worth the effort based on one key question: does the company have a solution-focused product or a problem-focused product?

When a company fails to present compelling evidence that their product addresses a significant problem for their target audience, along with proof of traction within a smaller audience to which their product is applicable, despite a history of diligent effort to develop a fitting solution, it’s most likely a poor investment. Relying on small studies with misleading questionnaires as proof should be avoided at all costs. The only valid proof is when a client is willing to invest money in the product, not just verbally confirm interest.

Achieving Product-Market Fit

An early sign, which is easy to pick up in conversations with startup founders, is whether the startup is solution-focused or problem-focused. Did the founders take their (perhaps supposed) expertise and build a product under the pretense that it would be useful? Or was the startup born out of a recurring problem within a certain market that has gone unaddressed and is ripe for a solution that customers would happily pay for to save themselves time, money, and headaches?

The difference in outcomes between these two early perspectives is astounding. The solution-focused startup will treat their idea as a piece of art, worthy of investment for its mere existence and the effort put in by the founders. In contrast, the problem-focused startup is just that—a solution relentlessly focused on solving a practical problem that can be monetized.

How to Deal with Pointless KPIs

Humans generally avoid confrontation, and investors, while sometimes a unique breed, are no different. If a startup is simply in love with its own narrative and solution instead of obsessively solving a real problem, and proving its monetizable potential by presenting it to an audience that actually pays for it (rather than just claiming interest), then you have a measurable indication of success—selling to and retaining this audience. In other words, having a product that truly fits your market.

Every startup has a realistic milestone where they are expected to show traction. If your company starts selling when it is ready to sell, you will garner interest from investors.

However, if your company is realizing too late that it needs more runway to compensate for the fact that you should have been selling all along—not just to generate income, but also to entice investors—you will likely scare away most, if not all, investors. And they won’t always tell you this directly.