We meet with Series A and B+ founders on a daily basis and very few say, “we don’t have product-market fit yet.”
The false positives they receive from early adopters lead companies to ramp and hire inefficiently and increase burn dramatically. We call it the broken hockey stick, but others call it just a part of the process. How can we avoid this?
What is my definition of product-market fit for tech startups?
- Products that have been sold in a repeatable way
- Sales cycles behave predictably
- Total addressable market for that product, based on your current customer data and new product/acquisition plans, is large enough to grow revenue at the appropriate, rapid pace.
So how do you know when you’ve found it? Let’s analyze the above descriptions to clearly define where you or companies you may know are in this process.
1. A product that has been sold in a repeatable way with repeatable sales cycles.
Let’s start with having a repeatable process. If you don’t have a documented process that you are constantly optimizing, you can’t have a repeatable process. If founders have their own process or five rogue sales people have been fishing in the lucrative waters of the early adopters for clients, it doesn’t mean that you have product-market fit. You don’t have fit with the mainstream and real market, you have a small business. It doesn’t mean that you don’t have a rocket ship on your hands, but that you may have growing pains when you have to move to more systemized process.
What does a repeatable process lead to? Predictable customer behavior and sales cycles. This is when life gets fun and stress starts to go down, or at least shifts to other mounting priorities. You have to track your process and opportunity age relentlessly from day one to know where the bottlenecks are in the process. If you know that you are losing or deals are stalling at a certain point, you can start to adjust behaviors.
You must have a sales process that generates repeatable outcomes in somewhat predictable time frames.
2. You know your real addressable market and it’s large enough to get you where you want to be.
The biggest fallacy that we tell ourselves is “our market is really anyone in the ‘industry X Y Z'”
The reality is it’s not. It’s a subset of those people, evolving over time and hopefully getting larger. They have specific demographics and behavioral similarities, and a higher propensity to buy than other companies or buyers in other markets. To help with this, we suggest you build out five core buyer personas that include not only company types, but people types. If the VP Marketing is the decision maker, build out a persona around him or her. This helps the whole organization to focus on the real buyer at all times. Know your buyers and sell to them the way they prefer to be sold to.
Many companies haven’t spent the week to go through this exercise to really get to know their customers, or determine how many of those people exist in the world. This seems kind of important. To approximate, pick 500 companies in your target industry and then identify which of those companies fit demographically and have buyers that fit your personas. That should give you some percent of the total 500 that fit and you can extrapolate that percentage to the rest of the industry.
Once you’ve done this, take the total number of companies in your redefined market, multiply that by your % of buyers found that fit your personas (from above), multiply that by your ASP, then multiply that by 25% (possible market penetration) to better understand your total dollar potential as it exists today. Don’t like the number? Now is the time to start thinking how to expand that market by pivoting, acquiring, or thinking about new complements that can help to make that number much larger. Be conservative and then adjust the levers to see where you can make small changes that make the total opportunity larger.
When you can dominate the above two points, you are most likely ready to scale. These numbers will change as your product and market evolve, so it’s important to re-evaluate this bi-annually or so.
Find repeatable processes to generate revenue, know who and how many people will buy, and now you know if you have product-market fit.