The product-market fit obsession

By Mike Rothenberg

Marc Andreessen famously writes that "the only thing that matters is product-market fit" (1).  I'd tweak it slightly to say "the only thing that matters is finding product-market fit before you run out of cash."

If we learned anything from RC Fin, it's that for-profit businesses are as valuable as the NPV of their expected cash-flows.  Start-ups are a tricky beast not because we don't want to value them based on their cash-flows, but rather because we have no idea how to project their cash-flows.  Hence the "expected" part of "expected cash-flows" becomes the focus.  Until there is product-market fit, the start-up is just a start-up with no basis for expecting cash flows, and not a real business with a foundation on which to pin the expectation of future cash flows.

The "product-market fit" concept is essential for entrepreneurs and managers to help them focus their team on creating useful products and services.  The greatest uncertainty in a start-up’s life cycle is before product-market fit.  Entrepreneurs in consumer markets are tempted in this phase to claim product-market fit when they have something like $10,000 of sales, or 20,000 customers, or 50,000 page views.  And although usually metrics like these indicate that consumers outside of their network are using the product or service, the adoption implied at this point does not yet typically justify the opportunity cost of the individual or team building the startup.

So how do you know when you’ve reached product-market fit?  It’s when your challenges change from “how do we keep the train from stalling” to “how do we keep the train on the tracks”, i.e. how do we scale this awesome thing we’ve built? 

Image credit: Michael Karnjanaprakorn (2)

Once again, Andreessen says it best (with a shout-out to HBS):

"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."

A wise professor (3) once listed the tools and techniques that entrepreneurs now have at their disposal when searching for product-market fit.  Some of the tools he lists are as follows: 
  • Lifetime value vs. Customer acquisition costs
  • Net Promoter Score
  • A/B test
  • SEM/SEO optimization
  • Product feature prioritization
  • Customer support analysis
  • Focus groups and Customer survey
  • Wireframing and Prototype development
  • Conversion funnel analysis
  • Landing page optimization
  • Business model and structured idea generation
  • Customer discovery process
  • Persona development
  • Competitor benchmarking
  • Usability testing
  • Charter user program
  • Inbound marketing design
  • Sales pitch and Lead qualification
  • Bus dev screening

Due in part to these tools and techniques, and to the plummeting cost of hardware, software, and storage, it is less expensive than ever before to iterate within a start-up to determine product-market fit.  Thus in the race against time (as cash burns), a resourceful entrepreneur can pivot quickly, test and learn lessons rapidly, and search maniacally for product-market fit until that magical moment when “money from customers is piling up” and HBS heaps on the awards.  Until then, the only thing that matters is product-market fit.


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