Defining Product Market Fit

Is the growth almost killing you, and is it profitable?

The term “Product Market Fit” (PMF) comes up a lot in conversations around startups.

More and more, I’m hearing the term defined by the following characteristics: initial signs of repeatable revenue growth, low churn, happy customers, and customer referrals/word of mouth.

To be clear, achieving the aforementioned is a serious accomplishment; but I define that as strong Market Validation, and not Product Market Fit.

Put simply, Market Validation is defined as the process of testing a startup idea or product in the market to determine its viability and potential for success.

In an age where inexpensive software (and a lot of early stage funding) has made it easy to build a Minimum Viable Product, most founders validate demand beyond market research. So in terms of Market Validation, the bar is set at testing a product in the market to determine its viability.

The odds of building a (technology) product that achieves any level of monetization and usage are extremely low. So when a startup enters the market, and revenue and usage start growing; it feels amazing — which is well deserved! And it’s easy to assume that the trend will continue, and drive the company to considerable scale.

In other words, it’s easy to assume Product Market Fit has been reached, when in fact what you’re seeing very interesting Market Validation.

Natural question: if that’s Market Validation, then what is Product Market Fit?

Product Market Fit

Let’s consider the definitions of Product Market Fit from Marc Andreessen, co-founder of VC firm a16z and Netscape, and Michael Seibel, YC Partner and cofounder of Justin.tv (Twitch) and Socialcam:

In his June 7, 2007 post “The only thing that matters”, Marc Andreessen describes the experience of Product Market Fit:

And 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. You could eat free for a year at Buck’s.

I first learned this definition of Product Market Fit at startup accelerator Y Combinator when my cofounder, Finbarr, and I attended in Winter 2018 for our company, Shogun.

If you haven’t yet read the post “The Real Product Market Fit” from YC, I highly recommend it. In it, YC Partner Michael Seibel, expands on Andreessen’s description:

To put this another way, you have reached Product Market Fit when you are overwhelmed with usage — usually to the point where you can’t even make major changes to your product because you are swamped just keeping it up and running.

In Michael’s post, there is a podcast style interview video where he goes into much greater detail:

Here are some key take-aways from the video:

• 2:09: The most common way it’s mistaken, and it’s weird because it sounds so close, is; “I built a thing that customers want.”
• 2:22: Product Market Fit happens after you’ve built the things customers want. It’s because you know you’ve built something customers want because they’re using it in an explosive and destructive way.
• 3:23 Once you find Product Market Fit, it’s your company to f**k up. This is going to work, unless you screw it up.
• 3:53: And moreover, you can still have customers, and you can still have growth, if you’re Pre- Product Market Fit.
• 4:15 Is the growth almost killing you, and is it profitable?

Michael states that 98% of founders get the definition of Product Market Fit wrong: so don’t feel bad if this post resonates, and your definition needs to change. He also makes it clear that most founders, including YC founders, never get to Product Market Fit: so don’t get discouraged if you’re not there (yet).

My experience with Product Market Fit

In the early days of Shogun, Finbarr and I bootstrapped (no capital raised) to $1.3M+ ARR growing at 550%+ year over year. As Shogun grew consistently into eight figure annual recurring revenue, we began raising more venture capital ($115M raised to date). Today Shogun has over 33,000 customers.

But at no point have we considered Shogun to be at Product Market Fit.

We’ve seen a lot of demand, and there were certainly times where we were profitable- even as we hit greater scale of revenue and team.

But Shogun’s growth has never been at a point of almost killing us.

We’ve always been in a place where we can readily take on twice the volume of customers, if not more.

My hope is that Shogun will one day join that incredibly small list of startups that have seen their recurring revenue growth chart become a hockey stick, but as Michael says at the end of his interview; these things can take time (a long time).

Take-aways

I hope you find this insight valuable, as opposed to disheartening, because having a correct definition of Product Market Fit can be very beneficial to strategy. Many startups who perceive Product Market Fit too early risk losing control of their burn and runway. Michael Seibel touches on this in his post as well:

I often talk to founders who believe they’ve found product/market fit when they haven’t. This is a huge problem because they start hiring people, increasing burn, and optimizing their product before they’ve actually discovered what needs to be built.

I’ll end with this summary of key take-aways:

• 98% of founders get the definition of Product Market Fit wrong.
• It’s easy to mistake Market Validation for Product Market Fit.
• You can have customers and growth, but still have not reached Product Market Fit.
• The true test of Product Market Fit is asking yourself this 2 part question of your startup: is the growth almost killing you, and is it profitable?
• Most founders, including YC founders, never get to Product Market Fit.
• Startups who perceive Product Market Fit too early risk losing control of their burn and runway.

Again, building a startup that achieves any level of monetization and usage is very rare, and something to be proud of. So don’t feel bad if you haven’t reached Product Market Fit (yet)- few do.

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