Two discussions, one with a founder, and another with an experienced operator, both around the definition of product-market fit (PMF) encouraged me to write this post.
Product-market fit (hereafter PMF) is seen variously as the ‘holy grail’ for startups (Elizabeth Yin, Hustle Fund) to the ‘only thing that matters (Marc Andreessen) to ““arguably the most critical milestone for a startup” (Jill Soley & Todd Wilms, authors of book ‘Beyond Product’)
Yet, for such a critical concept, one so vital to the startup’s journey, there is no firm established definition that is now agreed by all. If I were to reach out to say 10 founders and ask them for their definition of PMF, I would get 2-3 different responses (maybe more). For a concept that is now, nearly fifteen years old (going by the date of publication of Marc Andreessen’s famous article that brought the concept into our consciousness; though the term itself was in use well before that) and that is so central to the success of startups, this is a pity. In fact, I think it is downright dangerous.
In this post, I will discuss
- the two types of PMF definitions that I see
- suggest the ‘correct’ definition, and discuss why it is ‘correct’
PMF definitions – typologies
There are two broad buckets that PMF definitions fall into. These are
- PMF = product that satisfies customer needs. Examples of this are Steve Blank – ‘match of product features and customers’ (needs) – or Dan Olsen, author of The Lean Product Playbook – “…you have built a product that creates significant customer value; product meets real customer needs“. Both the founder and experienced operator’s definitions referred to in the first paragraph fell into this bucket.
- PMF = crazy good growth. Examples include Marc Andreessen – “Product/market fit means being in a good market with a product that can satisfy that market….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.” or Eric Ries, author of the Lean Startup – “…when a startup finally finds a widespread set of customers that resonate with its product”.
The first point above asks whether the product that you have created is broadly satisfying customers. Effectively, does the product solve the customer problems that motivated you to create the product in the first place? The second is a broader definition, which is asking if the startup is seeing huge demand for the product. Thus it encompasses the first definition, that is, if it is seeing crazy demand / growth it is certainly meeting customer needs. All good so far. So which is correct?
Startups compete for venture funds too, not just customers
Now a little bit of additional context which will help us better answer the above question. Startups don’t only operate in the ‘customer market’ or only compete for customers. They are also competing in the venture market, or competing for venture funds, which helps them keep the business running. Now, in the venture market, there are four different types of investors
- Angels: typically come in the idea stage
- Seed funds: come in when there is a working product and some customer validation feedback, and help you nail the product proposition, offering ton consumers, determine the optimal go-to-market etc.
- Series A/B: help startups address the challenges of early scaling e.g., help formalise systems / processes in co, deal with growth pangs and get them ready for global forays, expansion etc.
- Growth capital: provide money for unbridled growth & expansion, and often get the startup ready to go IPO / exit.
Historically, Series A investors have come at the point at which they know that additional funds will with certainty grow the business. The product is clear, the market the product is catering to is clear, and the go-to-market is also clear and working. Every $ invested in the growth machine hereonwards will return $1+. From this point funds are for scaling; the nailing is now done.
Of course, in this present buoyant market we are seeing Series A players play earlier than usual too. But the above logic broadly holds still. Now given that Series A investors demand PMF from the startups before investing, and because they will not invest ideally without seeing a predictable, repeatable customer acquisition playbook, it effectively means that PMF = predictable, repeatable, customer acquisition playbook for VCs. Ideally VCs would also want the sale to be profitable or at least have positive unit economics (should cover all variable costs or is CM2 positive, so that as it grows / scales, it can cover fixed costs).
It is important to factor this above perspective of venture funds, and specifically Series A investors into our definition of PMF, for after all as venture fundable startups you need the successful interplay of raising capital and deploying it. The jugalbandhi (hard to translate into English, but broadly a musical term for successful intertwining of two musical styles) of fundraising and business has to be near-perfect. This marriage of VC perspectives with what founders are seeing from founder interactions gives us the most optimal definition of product-market fit.
Product-Market Fit = Predictable, Repeatable, Positive Growth
My colleague Arpit Agarwal has an interesting sonewhat quirky definition for product-market fit. He says that is the point at which a startup can run on an excel model. What he means is that if you increase the input in the excel model you can see a proportionate output, and this number or working doesnt seem unrealistic. A founder can ask for more capital, as that will drive higher growth and output. Effectively Arpit is only stating what the Series A VCs are saying, that product-market fit is when the startup has a growth or customer acquisition model that is predictable.
The second important critieria is repeatability. It is allied in a way to predictability but is different. Predictability is to do with the measure of output we can expect from the input, and repeatability to do with whether we can continue to tap the market or customers. A highly predictable but low repeatable market = very small market. To use an analogy, repeatability means the well is full, and predictability means that the mechanism for lowering the bucket to bring out the water will with most certainty yield a bucket of water.
Lastly, positive unit economics. To use the well analogy, the cost of lowering the bucket to the well (cost of equipment and the labour) should be less than the money you will make from selling the water. Else you cannot go to the Series A VC and say I want to buy 5 more buckets and employ 5 more people to draw water!
Putting all of the above together, we get the definition of product-market fit that is most useful for founders to adopt and implement. PMF is when you have a predictable, repeatable, positive customer acquisition or growth playbook. You can confidently go to a VC and say, every $ I get and invest into my business will see my business grow profitably.
We are beginning to see this above definition come up on the startup / tech interwebs. See here
PMF means you have a working growth playbook
To wrap, let us revisit the two definitions. PMF is not just when your product meets customer needs effectively. This is the stage of Product to Problem Fit. This is the stage when you arrive at the Minimum Viable Product (MVP), or as I term it, Minimum Marketable Product (MMP). Beyond this is the stage of Product-Market Fit where the MVP or MMP has to be taken to market so that you can determine, whether there is a market for the MMP. During this phase, you will have to iterate on the market and the go-to-market / business model, and maybe even the product, to achieve product-market fit. This is the point at which you have clarity on the product, market and go-to-market. You are seeing repeatable, predictable, positive growth and every $ invested into the growth machine yields something incremental on the $. It is now time to throw in more gas!
I wrap this with an illustration I came across recently, which resonated with my thoughts above. This is from the book ‘Corporate Venturing’ by Dado Van Peteghem & Omar Mohout.
Founders, I would love to hear from you. I am happy to clarify any questions on the above, as well as get your perspectives and feedack. Please write to me at email@example.com.