Product Market Fit : The Elusive Holy Grail of Tech Start-ups All over the World
Osita James Uche
Leading Startup Attorney @BlackCrest LP I TEDx Speaker I Startup Coach | Chevening Scholar '22 I Human
Product Market Fit is something every start-up founder is either aspiring towards or raising funds to reach. No matter how brilliant a product is, the uncertainty of scale potential is a turn-off for most VCs. And sadly, in order to grow, start-ups need money, and if a start-up needs money, it often has to work with a VC; one of the few tech financiers capable of navigating the high-risk circumstances of most start-ups.
Last year, my marketing professor described product-market fit using celestial mechanics (space terms). He described the point at which a start-up reaches product market fit as "escape velocity". This in Celestial mechanics is actually the point at which the gravitational pull equals zero as a result of the object's tremendous speed.
In this piece, I will not be debunking my professor's opinion but will discuss product market fit from founders' and VC perspectives to help founders and VCs alike build better and scalable start-ups.
What is product-market fit?
Product market fit has been defined by a host of experts since Marc Andreessen's definition He defined product market fit as;
"Being in a good market with a product that can satisfy that market."
The trouble with this definition however is that demand can increase at some point and still decline as a result of a change in customer behaviour, change in market expectations or outright disruption.
If this happens, does it mean that the product market fit was not accurate?
Or that it was accurate and no longer accurate?
Whatever the answer, VCs will not write another check if a start-up experiences a huge disruption unless they can calculate the risk involved in advancing more funding.
Paul Graham of the Y Combinator also defined product market fit as
"Making something that people want."
What people actually want is still out for the jury to decide. People or users are notorious for being misleading about what they actually want. Most product management experts advise product managers to follow user behaviour and not what users say they want. And even that is super hard.
Founder perspectives on Product Market Fit
In this segment, I will explore some top voices among founders who in building successful ventures themselves have voiced an opinion and developed frameworks for reaching and measuring product market fit.
Dan Olsen's Product Market Fit Pyramid
According to Dan Olsen, the author of the "Lean Product Playbook", product market fit occurs;
"When you have built a product that creates significant customer value and your product meets real customer needs."
In his book, he explained that many start-ups fail because they don't address a real customer need and then sets out a system using the product market fit pyramid that start-ups can replicate for a similar result.
The start-ups are to start at the bottom of the pyramid by identifying their target customer and understanding their needs before they can focus on the last three upper parts of the pyramid around their product and how to deliver the best experience to users.
He identified six helpful steps in using the pyramid to work towards product market fit as follows;
Sean Ellis's 40% Test
Sean Ellis, a globally renowned start-up mentor developed a test for determining product-market fit, in the course of his start-up consulting practice with start-ups from all over the world.
The test involves asking one question: “How would you feel if you could no longer use our product?” with only three potential answers: Very disappointed, somewhat disappointed, and not disappointed.
If after the test, the ratio of the answer “very disappointed” is more than 40% of all respondents, then it indicates product market fit.
A similar test was conducted for Slack in 2015 and they scored over 50% on the Ellis test. We all know the rest of the story.
Balfour Model
Brian Balfour the CEO of Reforge, did not define product market fit but described it as a continuous path for a start-up.
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He divided the product market fit path into 4;
The leading indicator survey involves the Ellis test, while the leading indicator engagement is about getting key data of what users said they would do according to the Ellis test, and then an analysis of their actions to attempt to validate their response to the test.
For the retention curve, he advises start-ups to plot their retention rate on a graph over time and when it flattens they would then know they are closer to product market fit.
To determine if the start-up has a trifecta, he outlines three indicators they can use;
Examples of companies that had this trifecta quality include; Facebook, Uber and Snapchat.?
VC perspectives on Product Market Fit
The VCs have opinions around product-market fit that don't vary greatly from the founders except in that they are centred around the reduction of risk.
According to Andy Rachleff, CEO of Wealth front Capital on product market fit,
"Founders first have to determine their value hypothesis before they pursue a growth hypothesis."
The value hypothesis and growth hypothesis were explored in the Lean Startup by Eric Ries.
Value hypothesis: Does the customer you're trying to serve have the problem you’re trying to solve? Does your product actually deliver value to the customer?
Growth hypothesis: How will your company grow once people start using the product?
A start-up has to first figure out the value it intends to offer its customers and successfully offer it over a period of time before it starts to think of how to scale its operations.
Sam Altman and Joshua Porter have shared similar views on product-market fit from the investor's perspective.
According to Sam Altman,
"Product/market fit is characterized by having enough users that love your product so much they spontaneously tell others to use it as well."
Porter expressing a similar view describes product market fit as;
"A situation where a start-up's customers begin to share their positive experience with others and the start-up can replicate the same experience with every new user who their existing users have invited."
Altman's view primarily centred around user delight (excitement). This is also an element in Kano's model of customer satisfaction. According to him, if the customers are so delighted by the product experience they turn to salesmen for your start-up, you may have achieved product market fit. There are of course many ways to measure if this has happened. They include;
Porter expressed a similar view but includes an element of stability of the product experience as a sub-criteria. The product must therefore not only delight the early adopters but continue to provide a delightful experience for all the subsequent referred users. Once this is in motion, the platform can adopt a viral quality that enables it to grow based on its reputation, fuelled by loyal users.
The situation he described is similar to the flywheel effect. The flywheel effect as a business concept means when growth almost appears to occur on its own for your start-up as a result of a series of tiny victories, akin to the momentum produced by a flywheel on a rowing machine.
Andrew Chen, a current partner at Andreessen & Horowitz describes product market fit from the product perspective and the SaaS perspective.
According to him, for consumer products, this is what Product market fit looks like;
"Usage 3 out of every 7 days, Organic growth of 100s of signups/day, 30% users are active the day after signup and a Clear path to 100,000 users."
Also According to him, for SaaS, this is what Product market fit looks like;
"5% conversion rate from free-to-paid, 3X CPA to LTV ratio, <2% monthly churn rate, Clear path to $100k MRR."
Cheng's metrics are very useful for founders in thinking about product-market fit from the perspective of a VC. If you already have up to 5% conversion rate in your marketing communications and are on a trajectory to $100k MRR, you are oftentimes already profitable and just looking to scale. By setting a high standard such as this, VCs significantly reduce their risk in the investment. But on the flip side, it also helps the founders determine their timing for funding to scale and this is where the growth hypothesis comes in.
Beyond product Market fit
Product market fit is still the holy grail for start-ups all over the world but like most billionaires who have achieved the pinnacle of wealth, they are then ushered into the era of safeguarding assets, tax management, wall street nightmares and other associated rich people problem. This is similar for start-ups as well. When you find the product market fit holy grail and raise your first $2 million dollars, then the business is no longer you and a bunch of guys and girls eating pizza and coding.
Startups have to plan for post-product market fit using the growth thesis espoused in Eric Ries' Lean startup.
They need to think about things like;
It is usually during the post-product market fit, also known as the scaling stage that building a start-up often stops being fun. But business is business. I sincerely believe that we can create our own fun. If you find the work you do meaningful, you will always have fun.
Conclusion
VCs and Founders do not disagree fundamentally on product market fit. As a founder, you need to validate your hypothesis about a customer problem by getting users willing to pay for them and then measure your growth over a period before approaching investors. VCs are not small investors and typically write big checks. If you are not sure if you have a product market fit yet, explore angel investors who are more willing to invest at the idea and early stage during your pre-seed. You can find a list of resources for your fundraising effort in my previous newsletter here .
About the Author
Osita James is a technology entrepreneur building?Surepayy , an innovative digital escrow service facilitating scam-proof payments for social media vendors and shoppers in Africa. Surepayy's Flagship product is a Trust pilot for African social media vendors called?Surereview . He is also a partner in?BlackcrestLP , a startup advisory law firm that has successfully advised startups across Africa in investment deals worth over $ 1 million. He is studying for an MSc in Innovation Management and Entrepreneurship at the Nottingham Trent Business School and writes poetry in his free time.
I support African founders with legal and start-up operations advice. You can reach me here for enquiries.