Product-Market Fit Never Rests
Those who don’t find it and continually build it will die
While finding initial product-market fit (PMF) is existential for startups, PMF is a lifelong journey for companies. The current AI platform shift will cause a reset in PMF for many companies. Companies that don’t recognize this will die.
Before I talk about all the ways PMF can kill a company, some context…
Product/market fit (or “PMF”) occurs when a company addresses a good market with a differentiated product that can satisfy a market segment’s needs.
Marc Andreessen (GP at VC firm Andreessen Horowitz) has said: “The only thing that matters is getting to product-market fit.”
Everyone recognizes that product-market fit is the only way a company can survive so startups are chasing it or declaring they have it.
Many companies appeared to have PMF when money was cheap and abundant, but now investors are asking some tougher questions to founders…
What does PMF look like?
Lots of smart folks have commented on what PMF looks like. Some of my favorite quotes are below:
Product-Market fit is when you have the right solution to a problem that’s worth solving. —Ash Maurya
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
Product/market fit isn’t a one-time, discrete point in time that announces itself with trumpet fanfares. Competitors arrive, markets segment and evolve, and stuff happens—all of which often make it hard to know you’re headed in the right direction before jamming down on the accelerator. — Ben Horowitz
You can always feel when product/market fit is not happening. The customers aren't quite getting value out of the product, word of mouth isn't spreading, usage isn't growing that fast, press reviews are kind of ‘blah,’ the sales cycle takes too long, and lots of deals never close. — Marc Andreessen
Measuring PMF
There are certain metrics you can look at to quantify PMF, but they are mostly lagging indicators.
High retention. If you have annual contracts then you have to wait a long time to really assess this.
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 defined as cash burn / net new ARR
-Customer acquisition cost (CAC) defined as 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%.
PMF Kills
All companies that go out of business do so for the same reason – they run out of money. —Don Valentine
The question then becomes what causes companies to run out of money? Software companies burn money to grow quickly and they rely on customers sticking around with a high lifetime value to make that early investment worth it. This allows them to either 1) quickly flip to cash flow breakeven or 2) raise more VC funding.
But the absence of PMF can quickly kill companies’ ability to survive:
Never finding PMF so sales don’t come and VCs don’t provide more funding
Premature declaration of PMF. This causes high cash burn and significant reduction in time to find PMF.
Failure to continually build PMF. Companies need to be in love with the problem and not their solution. Technologies change (i.e. AI platform shift), markets change, customer needs change so companies need to continue adapt and build PMF for both old and new products.
Everyone thinks about the first issue (never finding PMF), but many fail to recognize the 2nd and 3rd issue.
Premature declaration of PMF
Premature declaration of product-market fit will kill a high number of startups. A couple of thoughts on this:
Earlier stage companies that were able to get early traction inorganically through high spend when money was abundant or they had a lot of “friends & family” that they could convince to take a bet on them. They had the sales but PMF was never really there.
Lots of AI products are likely prematurely declaring PMF right now because they got some early traction. Many of these companies will face problems as the AI landscape continues to change and every company adds AI products/features.
Companies need to “nail it before they scale it”. Majority of companies scaled things well before “nailing it” and that caused high cash burn and extreme inefficiency. Scaling before nailing will cause many companies to be unable to actually find PMF because the focus turned to scaling.
Some quotes worth thinking about:
Large staffs of successful startups are probably more the effect of growth than the cause. - Paul Graham
Prematurely scaling usually doesn’t help companies grow faster but rather just a byproduct of growing fast and companies thinking they need more people.
Peter Lynch's “bladder theory” of corporate finance:
The more cash that builds up in the treasury, the greater the pressure to piss it away.
Failure to continually build PMF
PMF is a lifelong journey that never ends, not a point in time. Finding initial PMF is magical because things just start working — as all the descriptions above reference. But if markets and the technology landscape don’t rest then neither does PMF.
The current AI platform shift is one of the biggest technology innovations of our lifetime. As markets/technology changes, our products must also move along side them to keep/build PMF.
Right now is an interesting time because almost every technology company is dealing with PMF as they rush to add AI features and products. PMF is everyone’s problem. PMF may not be immediate existential threat to larger companies but it can kill them slowly if they don’t pay attention.
Concluding Thoughts
Companies that fall in love with their solution rather than trying to solve customer problems will either never obtain PMF or will lose it over time.
Many companies will die over the next 6 - 18 months due to issues with PMF, which will cause them to run out of cash and not be able to raise more money.
Basically every technology company should be thinking about PMF right now with the AI platform shift. Those that understand PMF will have the advantage.
Great post. PMF, as you mention, is not a snapshot in time. It's attained once and must be preserved in perpetuity. Markets evolve, the segments with a market that you target also change as do the user personas. PMF is a "get to it and then work to maintain it forever" endeavor.