Dreams of Product-Market Fit

The financial signs of lost or weakening PMF. Nobody is safe from losing PMF in 2025.

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Losing PMF is a Death Sentence

All companies that go out of business do so for the same reason – they run out of money. —Don Valentine

So what causes a company to run out of money?

1. Never finding or failing to maintain product-market fit (PMF)

2. Don’t properly manage expenses and cash runway

3. Poor execution

#2 and #3 are critical for any business to survive. They require strong leadership. It’s REALLY hard to overcome weak management (but possible with strong PMF).

But…poor PMF is a guaranteed death sentence.

• Never finding PMF: Revenue doesn’t come and/or unit economics are bad

• Premature declaration of PMF: High cash burn and highly inefficient

• Failure to continually build PMF: Failure to maintain PMF as things change (like the AI platform shift) or as customer needs evolve. PMF never rests.

What is Product-Market Fit (PMF)?

PMF occurs when a company addresses a good market with a differentiated product that can satisfy a market segment’s needs.

Below are my favorite quotes about PMF:

• Do any users love our product so much they spontaneously tell other people to use it? —Sam Altman

• Product-market fit is when your customers become your salespeople. —Michael Porter

• When the customers want your products so badly that you can screw everything up and still succeed. — Don Valentine

PMF Never Rests

I’ve talked with many companies that had PMF in 2021 but have clearly lost some of it today. And yes, this applies to very large companies as well!

Achieving PMF is NOT a one-time thing. Especially during a major technology shift (i.e AI). Because of AI, all companies (small or large) can lose PMF quickly.

If larger companies don’t pay attention, then it might take a long time before they realize they have lost PMF. Multi-year contracts, highly complex software, lots of integrations are great for retention, but they can hide PMF problems.

Financial Signs of Weak PMF

As a finance guy, I like to look at the numbers that may indicate a company has weak or deteriorating PMF. These are usually lagging indicators, but when multiple of the below signs are present then the company is likely already in big trouble.

• Churn is high or increasing

• Expansion is hard or becoming harder

• Becoming more inefficient, particularly within sales/marketing

• Gross margins are bad and/or worsening (have to give away the product)

• Revenue growth is quickly slowing (i.e. revenue growth endurance is weak)

• Customer support and engineering teams are overstaffed to compensate for lack of PMF (i.e. giving away services)

There are three primary conclusions you can make from the above symptoms:

1. Lost or never really had PMF

2. Blame macro conditions

3. Have decent PMF, but not the best offering

Blame Macro

Unless you are a massive company with lots of revenue, I think blaming the macro environment is a really weak excuse. If your large public company competitor can close $60M of ARR in the quarter then blaming the macro for missing targets by $500K seems kind of lame…

🚩 Beware of leaders who always blame the macro.

Not The Best Offering

Alternatively, the same indicators could be the result of having PMF but you are not close to the best offering. Folks flock to the market leader (or at least the top 3) while you have to give more away to win deals.

If you aren’t truly the best at one thing, then even having PMF may not solve your problems.

Not sure which is worse: 1) a lack of PMF, or 2) a market you can only compete in with poor unit economics. Either way, something has to get fixed before you try to brute force scaling growth.

Weak PMF

The hardest to admit, but often the right answer.

Measuring PMF

There are certain metrics you can look at to quantify PMF:

• High retention: Note that if you have annual contracts or complex software, then it may take a while before lost PMF shows up.

• High organic growth rates: A lot of companies can get high growth through high spending but word-of-mouth growth means you have something special.

• Highly efficient: Related to the above point. When PMF is strong, it is easier to grow because customers are begging for your product and users are telling their friends. Some metrics to measure this include:

  • Burn Multiple: cash burn / net new ARR

  • Customer acquisition cost (CAC): prior period sales & marketing / New ARR

• The 40% rule created by Sean Ellis: if at least 40% percent of surveyed users indicate that they would be “very disappointed” if they no longer have access to your product.

Ellis concluded that if 40% or more users would be very disappointed if the product disappeared, the company will grow faster compared to others with a “disappointment rate” of less than 40%.

Final Thoughts

Product-market fit is not just a startup problem. Every single company needs to be thinking about PMF and whether it’s improving or worsening. This is especially true today in the AI technology shift where huge companies can quickly lose PMF.

Track it and monitor it.

If you don’t have PMF or you are losing it, then it will eventually show up in your financials. By the time it does show up significantly in your financials, then the sirens should be blaring and it should be all-hands on deck to fix the problem.

Two other things I want to end on:

1. An improving product doesn’t always equal stronger PMF.

2. One of my favorite quotes from Peter Lynch is what he refers to the “bladder theory” of corporate finance: “The more cash that builds up in the treasury, the greater the pressure to piss it away.”

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Footnotes:

• Check out this guide on how CFOs can save on SaaS spend (from Vertice)

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