Startup Design: Product-Market Fit

“A founder cannot pursue a novel opportunity in any meaningful way without resources, and she can’t attract resources until she’s actually pursued the opportunity- at least to the point where she can demonstrate to resource owners that the risks are reasonable.” Unknown

Andela, a Nigerian startup, aimed to connect African developers with global tech companies. In 2015, they raised $40 million in Series C funding from investors like Chan Zuckerberg Initiative and GV (formerly Google Ventures).

Despite the funding, Andela struggled to achieve product-market fit. They faced challenges in scaling their model, and their revenue growth was slower than expected.

As a result, in 2020, Andela laid off about 400 employees, citing a need to "restructure" and "adapt to the current market conditions." The company shifted its focus from connecting developers with jobs to providing a platform for companies to build and manage remote engineering teams. Their valuation dropped significantly, and they raised additional funding at a lower valuation, a process known as a "down round."

Founders need to understand that raising funds without achieving product-market fit can lead to unnecessary scaling, which can be detrimental to the startup. More crucial for founders to focus on validating the product-market fit before aggressively scaling or raising significant funds. Pivoting or adjusting the business model can be necessary, but it's essential to do so before burning through too much capital.

Andela's story serves as a cautionary tale for startups, emphasizing the importance of achieving product-market fit before raising significant funds and scaling rapidly.

Where Product-Market Fit (PMF)

A startup is said to have achieved PMF when the founders have validated their assumptions about an opportunity, reduced the risks associated with the opportunity, and resolved uncertainty about the opportunity. They have made it safe for investors to put their resources.

Startups at the very start are saddled with risks and uncertainty. Following the process from Market-Problem Fit to Solution-Product Fit is aimed at minimize the risk and reducing uncertainty, in some places eliminating it, so that investors can comfortably invest in.

At this stage, you have experimented and you have customers who have purchased your products, you have served them and they are satisfied with the purchase and use of your product. If your solution-product fit validation experiment fails, you need to either adjust your model or more likely adjust the input assumptions into the model.

This is because investors want to invest in a model that works. The purpose of a startup is to develop a business model that works. Work here means a business model that is scalable and sustainable.

Attaining product-market fit is a significant milestone for startups, indicating that they have successfully identified and addressed a genuine market need (build a business model), setting them up for sustained growth and success.

Product-market fit is a scenario in which a company’s target customers are buying, using, and telling others about the company’s product in numbers large enough to sustain that product’s growth and profitability.

Metrics to Measure PMF

There is no single set of metrics founders can use to tell that they have achieved product-market fit. But here are some signals that a company is heading in the right direction with its offering:

1. Product that works and meets needs: Your customers want your product because it meets their needs

2. Business Model that works: You have good pricing and ways to deliver and capture value.

3. Generating Revenue: Customers are buying from them and telling others about their products.

4. Recurrent Purchase: Customers are continually buying.

5. Sustain Operations: The revenue being generated can sustain its operation.

6. Relationship With Customers: The business is building deep meaningful relationships with customers.

7. More Certainty: The startup is more certain about its future because it has systems that work.

As you progress towards Product-Market Fit, you need to ask yourself the following questions:

- When surveying potential customers or allowing them to test your product, does some segment indicate they will switch to your product?

- Are some users who have rejected similar products on the market willing to try yours?

- When user testing, do people group your product accurately with the right competitive offerings?

- Do users demonstrate an understanding of your product’s differentiators or unique value proposition?

- How do your underlying metrics (such as retention rates of users) measure up against those of your competitors?

Need Funds To Scale

Someone gave this rule to founders: “Only raise a boatload of cash after you have figured out product-market fit.” There is a temptation to just go ahead and create a product and then raise funds. If you don’t follow this process, it will certainly catch up with you.

If it caught up with Andela, who we thought, will grow to be a unicorn (startup with billion-dollar valuation), then you have to make sure that you validate their product hypothesis and attain PMF before raising funds.

Of course, it costs money to attain PMF, but you can bootstrap it if you are building for the long haul. Most founders just want cash and the feeling that comes with raising the cash. They get invited to speak and share their story. They feel they have arrived. Meanwhile, they are sitting on a timebomb. Once they have burnt through the cash they raised, that is the end. The business model hasn’t been perfected.

Raising funds can distract you from doing the most important things. Investors will require you to focus on marketing and sales. As you push more money into marketing your product to pull customers in, you will be pouring money down the train. If you have attained PMF, it will be easy for customers who you have been working with to purchase from you and tell others.

In most startups that haven’t attained PMF, the bulk of their money goes into operations and salaries. However, when you have attained PMF, the build of the money will go towards expansion (scaling) to reach more customers. You already have your loyal customers, now you are using the extra cash to convince other customers to join your cause.

In conclusion, product-market fit is a crucial aspect of startup success. It's a degree to which a product satisfies a strong market demand, and it's a shared responsibility across the company. To achieve product-market fit, you need to define your target customer, understand their needs (Market-Problem Fit), identify your value proposition (Problem-Solution Fit), build your MVP, test it with potential customers, and iterate and improve (Solution-Product Fit).

Are you a Nigerian in the diaspora or within Nigeria with a dream to own a startup in Nigeria? We are your sure plug. Turn your dream into a successful startup. Apply to our Venture Studio and let’s make it happen together, for you!

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