This post is based on a presentation on “Product/Market Fit” that I made this week to participants in the Siftech Accelerator.
The thought leaders in the startup world who have most influenced me all highlight “Product/Market Fit” as one of the most important factors in a startup’s success. Steve Blank, Sean Ellis, Paul Graham, Marc Andreessen, and Andrew Chen all stress the significance of Product/Market Fit.
Yet, the unfortunate truth is that most startups fail, period. And most of these bound-to-fail startups are not developing something like Thongies or pickle-flavored toothpaste. They have products that do match a need or desire of participants in their target market. So what is it that goes wrong? If Product/Market Fit is so critical, why do so many startups fail, even after achieving Product/Market Fit?
I think the explanation can be found in what I’d call the Theory of (Product/Market Fit) Relativity, also known as The Black Hole of “Meh.”
The Theory of (Product/Market Fit) Relativity
We need to recognize that Product/Market Fit is not absolute. It’s not a binary “yes or no” whereby if you have Product/Market Fit, you succeed, and if you don’t have Product/Market Fit, you fail.
Product/Market Fit is relative. There are varying degrees of Product/Market Fit and you need a high degree of it to succeed. Think in terms of a “Product/Market Fit Index” where a high score, say 100, indicates a very high degree of Product/Market Fit, and a low score, say 10, indicates some Product/Market Fit, but not enough to bring ultimate success. Early-stage investors like myself, could assign a “P/M Index” score to potential investees, to help us evaluate and project our belief about the startup’s potential for market uptake and future traction.
I think the following three factors cause many startups’ Product/Market Fit to score low, and ultimately lead to a startup’s failure even though it might achieve some degree of Product/Market Fit:
1. Actual Market Size
The startup achieves Product/Market Fit in some portion of the market but is mistaken in its assumptions about the size of the addressable market. Maybe the product resonates with some market players early on — the early adopters, or another limited subset of the overall market — which leads the founders to believe that they’re on track to full Product/Market Fit. But the rest of the total market never shows up. It’s not a “sales execution” problem; it turns out that the product simply does not match the needs or desires of the vast majority of the market.
2. Willingness to Pay
Even if you “Make Something People Want” there may be a delta between peoples’ desire to use the product and your ability to monetize that use. Consumers are quite accustomed to consuming value-providing web-based products for free, and ad revenues or other monetization schemes may not work. For B2B products, perhaps your pricing model turns out to be way off. So, technically, Product matches Market, but practically, Market is unwilling an unable to financially sustain the Product.
3. Current Solutions Adequate
In my opinion this is what kills many — perhaps most? — failed early-stage startups. I’m not talking about competition. These startups launch an innovative solution to a problem or capitalize on an opportunity that the market really has. Product and Market fit. Perhaps there’s little or even no direct competition. But the company fails to understand the dynamics of the market participants and the way or ways they are already dealing with that problem (or opportunity). Startups don’t face competition only from direct competitors; they have to try to change the market’s behavior. Startups often have to pry customers loose from the various methods, tools and practices those people currently employ to meet their needs, towards the company’s new proposed way of doing things. Even if the product meets the market’s needs, it may not move the needle enough to get people to migrate, or change the status quo of user behavior. The “P/M Index” in these cases is very low because even though the product meets the need of the market, the market’s current solutions (while inefficient or sub-optimal) aren’t inadequate enough to cause people to flock to the company’s new solution.
In all three cases, the company introduces a matching product to a needy market, the market nevertheless reacts with “Meh,” and the company slides into the vortex.
An initial “Meh” by the market is not necessarily fatal. Companies can try to escape the pull of the Black Hole of “Meh.” They can canvass and target all potentially relevant segments of the market. They can tweak the pricing or business model to see if revenue can be extracted in some other way. They can change their messaging or even pivot to a different set of features or offerings that better resonates with more customers, earns more money, or more clearly drives enough value relative to current methods or practices that the market migrates to the new solution.
Not all Product/Market Fit is created equal. Try to hit a high Product/Market Fit Index score, and avoid the Black Hole of “Meh.”