[Playbook] How to determine if a startup has Product Market Fit
[Playbook] How to determine if a startup has Product Market Fit
a guide for early stage employees
There has been an embarrassingly small amount of literature dedicated to helping employees determine if a startup has PMF.
Do a quick Google search and you will find thousands of articles to help founders find PMF, or for investors to determine how to put in a seed check based on PMF. Not only is there some really bad advice in these articles (like growth = PMF, hint: it doesn’t), but almost none of them are directed towards early stage startup employees.
For someone like myself who is making a career out of scaling early stage startups, being able to determine PMF is an absolute critical skill. It’s literally the difference between making $1M+/year, or hardly being able to pay my SF rent.
What is Product Market Fit?
“Product/market fit means being in a good market with a product that can satisfy that market.” - Mark Andreessen
In this article I’m going to outline what it feels like when a company has PMF, how to determine it, and some common pitfalls that make people think there’s PMF, when there isn’t.
Growth isn’t a sign of Product Market Fit
In almost the same breath, brilliant VC’s will tell you that rapid growth is the #1 sign of PMF, and then tell you a story about a startup like Homejoy who rapidly scaled then died.
In my opinion the #1 thing that people get wrong about PMF, is not being able to tell the difference between hype and growth vs a product that people truly love, within a “good” market.
Hype, sales, and growth, are NOT indicators of a good product OR a good market.
I’ve written about this a few times, but one of the hardest product lessons I have learned is that just because I am able to grow a product, or that it has a positive ROI on my ad campaigns, doesn’t mean that I have PMF.
Just because you can sell ice to Eskimo’s, doesn’t mean that ice has PMF for the Eskimo market.
There is so much more to determining if the product & market are good rather than if revenue is going up and to the right, or how much money the company raised. Even if your growth is being profitably fueled (unlike Homejoy who was growing with a negative ROI), that doesn’t mean that your users actually use & enjoy the product.
The key things that you need to measure are how good is the product, and how good is the market.
Determining A Good Product
For almost every product, there are a few core metrics you should look at to determine if the product is “good”.
What is the churn rate
How much do people love the solution (NPS, Superhuman PMF survey, etc)
How much are people willing to pay for the solution
These three metrics will tell you the truth about how great a product is. Products that are truly great (regardless of market size) are going to have very low churn, they are going to have users that RAVE about them, and the users are going to be willing to pay a ton of money.
These factors often DO lead to growth, which is why there is such a misconception around growth & PMF.
When there is basically no churn, users love the product, and they pay lots of money, that makes our job as Growth Marketers or early stage startup employees extremely easy.
We’re able to go in, take this amazing product, and go conquer the market.
Red flags to look for are when you see lots of growth but high churn, a low NPS, or a product that no one is willing to pay for. This almost always means that the startup/product is super hyped and it doesn’t actually solve a problem that people care about.
Determining A Good Market
The market is often the second half of the equation that people completely overlook or misunderstand when trying to determine PMF.
Let’s say you have an AMAZING product that has a 0% churn rate, a 10/10 NPS, and people are willing to paying $100,000 for. Literally everyone you talk to signs up on the spot. 🤯
But the problem… is that the market size is 3 people.
A “good” market means a market that is big enough that the amazing product you have created is able to have enough users that it becomes a product worth $1B+. It also has to have a realistic way for you to communicate with those users.
The market needs to be big enough to create a product worth $1B+
The market needs to be profitably reachable (Google SEM, Facebook ads, cold email, etc)
Let’s give an example for this. Let’s say you are a mental health app that solves for addiction. A quick Google search tells us that over 20,000,000 people struggle with addiction in the United States.
So our market size is 20,000,000 right?
No. :(
Our real market size is determined by how many of those 20,000,000 people we are able to profitably reach through our channels of growth. Even if you had their addresses, you couldn’t realistically send a sales person to each of their doors asking them to download your app.
The market needs to be big, and it needs to have a way to profitably reach it.
So let’s say that Apple Search Ads, and Facebook ads are profitable for us. Our actual market size is the combination of the search audience on ASA, and the Facebook ads demographic.
If ASA and Facebook ads aren’t profitable even WITH a great product? Our market size is 0.
Great Product + Great Market = $$$
When you have an amazing product that exists in a great market, that is when really magical things start to happen. There’s still a number of things that can go wrong, but the raw ingredients are there to create something worth a lot of money.
This is when a startup can go from a ~$10M seed, to a $100M+ series A or B within a period of 12-18 months.
In my opinion, right after finding PMF (created a good product for a good market) is the ideal time for a Growth Lead/Head of Growth to join an early stage startup - both for the growth person, and the startup.
This is when you’re able to take this awesome product, and go off to start to dominate the market.
When you have strong PMF, almost everything you do to try and scale works. Facebook ads are profitable, Google ads are profitable, you’re able to create partnerships and viral growth and instead of struggling to sell more of a shitty product, your bottleneck becomes more operational issues like hiring engineers & PMs.
And again this is why people often think that lots of growth means PMF. It truly doesn’t. It especially doesn’t, before a strong Growth/Marketing lead has been hired.
This is why it’s so critical for early stage Growth/Marketing people to be able to determine PMF. Being an early stage hire for a well funded startup with strong PMF is probably one of the highest leverage positions you can have in your career, especially if you’re great at solving for distribution.
The real trick is when every startup says “we’re a rocketship destined to be a unicorn” determining which rocketship is real, and which one is made out of cardboard, hype, & leaking fuel on its way to explode. 🚀
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