How to measure product/market fit and the implication for external finance

October 31, 2009

The Startup Pyramid

Earlier this week I attended one of many excellent talks organised by the Informatics Ventures and Edinburgh University Entrepreneurship Club. This week’s talk was by Sean Ellis of 12in6. Sean has worked in marketing roles at web companies LogMeIn, Xobni and Dropbox; amongst others. He is known for his metrics driven approach to customer development and in this talk he shared with us how you evaluate whether or not you’re at that critical moment in a startup’s life: product/market fit. I want to share with you the implication this moment has on raising and spending capital. I have seen that too many startups are obsessed with raising finance, but don’t appreciate the negative cost of this if taken at the wrong stage.

Although it was made famous by Marc Andreesen, I believe it was Andy Rachleff, co-founder of Benchmark Capital who coined the phrase product/market fit.

Product/market fit is being able to satisfy a good market with a good product.

But how do you determine you are there? According to Sean the key question to ask users is “how would you feel it you could no longer use our product?” If you achieve product/market fit you are looking for greater than 40% of respondents answering “very disappointed” to this question.  If less than that you need to keep working on your product until you have something people really need. Sean’s made available a free survey tool and all the necessary questions pre-populated at Survey.io; if you have a product right now and you’re not sure where you are then start with this.

If you have P/M Fit you probably know it already; the sales are already piling up, the phones are ringing and there is press interest in your product. If you don’t know you are there yet then you’re probably not there yet. Assuming you’re not there and still struggling then a way to measure it will help you get there (and stop you from kidding yourself that things are going well).

Assuming you hit the jackpot and achieve over the 40% benchmark what comes next? Life after product/market fit is very different. It becomes all about the race to scale up; if you have found a successful formula speed is critical and you must go for growth and make the most of your advantage. Before product/market fit you focused on conserving cash, but now you need to change your mindset, you want to spend, spend, spend; assuming you can demonstrate the return. This is where Sean’s metrics driven approach to marketing pays off: relentlessly measure and optimise for ever greater conversion rates. Simply put, spend more on the areas that deliver the biggest ROI.

Spending money is only possible if you have it to spend, so you don’t want to get to this stage and discover you have a fantastic product, loved by the market but due to a lack of cash you cannot scale up and take advantage of your fortunate position. It is at the crucial point of P/M Fit where external capital comes in very handy, and it’s also the point VCs get interested as you have removed a lot of the risk and guesswork by proving you’ve got a valuable product. Luckily as you can demonstrate you have P/M Fit it’s also cheaper for you to fund raise at this time.

Much of success in business is about timing and external capital acts as a magnifier; it magnifies all the good and bad things in your business. I would caution that if you are not at P/M Fit you probably are not ready for that injection of steroids.

Matt Mullenweg, founder of WordPress explains it by likening VC finance to rocket fuel, put it in your car and it will do one of two things: it makes you go very fast or it makes explode. The magnification effect of VC finance acts on all aspects of your business good and bad. Once you have P/M Fit that is the right time to be going fast, before then you want to extend the time it takes till you fail, not speed it up.

The point of all this is… raising money is not what matters, focus instead on building a good product and getting early traction with sales.

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