Actionable advice and learnings: Product-market fit in startups — How and what to measure
PreSeed Academy zoomed in on the sacred topic of product-market fit at our StartupTalk #9. In 2018 when the academy was launched, Cathrine Andersen, co-founder of Roger.Ai and previously Canvasdropr, took new founder talents on the journey towards product/market fit and taught them about avoiding the pitfalls and choosing the right mountains to climb. At StartupTalk #9 we went into detail on how to actually measure when you’ve ‘hit the fit’. If you don’t know how and what to measure, you won’t know when the finish line is crossed. The big question is though if an absolute finish line for product-market fit exist? We have many names for the things we love and the same goes for the definition of product-market fit — how you measure it, when and how you reach it, and so on and so forth. If you’re at a total loss when it comes to the subject, check out our article with Cathrine Andersen’s key learnings and advice on reaching product-market fit.
The many different views on the term indicates the importance of the topic. Reaching product-market fit is vital to every single startup, no matter the type, yet it’s also what pretty much everyone is struggling with — meaning they’re struggling with not only solving a specific need for a specific group but also finding how out how to then run it in a repeatable and scalable business model. Obviously, you don’t hit product-market fit overnight and when you do there’s a chance it’s a ‘one-hit-wonder’ — in other words; you might have to find your product-market fit more than once. Nicolaj Højer, PreSeed Academy’s usual ‘toastmaster’, pinpointed that startups need 2–3 times longer than expected to validate their market, which is why investors tell themselves to multiply by pi, when startups think they have it all planned out.
As the definition of the term seems to differ depending on a startup’s business model, stage, market, etc., we can’t offer you exact tools and measurements to a bullet-proof product-market fit plan. What we can do, however, is to provide a few guidelines on the topic based on the insightful experiences from our speakers at the latest StartupTalk, Hans Henrik Hoffmeyer, COO and co-founder of Coinify, and Claus Møldrup, co-founder of DrugStars. Listen carefully to their learnings from searching for the notorious fit.
Product-market fit isn’t a one hit wonder
Hitting product-market fit is not like going from A to B once. It’s an iterative process and you are probably going to pivot you idea along the way meaning that you product-market fit will change. You’ll have to change the plan thus will the metrics to measure it. Claus made the metaphor of climbing a mountain, where you, as a startup standing at the bottom of a mountain wanting to end up at the summit. There’s no way you can go straight there, you’ll have to make stops and camps along the way. Therefore, your focus should be on getting from one camp to the next while having the bigger destination in mind and focusing on not passing out due to exhaustion and the thin mountain air.
From a Coinify perspective, the climb-the-mountain metaphor is pretty accurate. The company made major changes to its original business model and idea several times. Initially, Coinify pursued a consumer-centric model, but ended up operating in both B2C and B2B markets. One of the reasons for the change was a key assumption being invalided, why they had to change their approach. That naturally meant changes to market, business model, targeted segment and so on, and with that Coinify’s key metrics had to change accordingly.
The key metrics defines how you measure when you have reached the summit and the camps you need to reach along the way. Not only do these change if you adjust the key assumptions, they also may change when moving from funding round to funding round. Next stage investors will require you to prove new measurements for which camps you’ve reached towards product-market fit. Claus advised to find a North Star metric, one metric to rule them all, which you should prepare for each camp on the way to the summit.
There’s no shortcuts to the top. If anything, you’ll hit more camps along the way than initially expected and you might have to move back and forth between a few camps more than once (remember to multiply by pi).
Success and product-market fit isn’t a one to one match
Even though both Hans Henrik and Claus run successful businesses, and have done so over a few years, neither of them are under the impression that they have product-market fit. Coinify, being one of the biggest players in their market still haven’t found the fit even though payment service providers, who initially turned down their idea, came back to Coinify asking for their service — not due to their pricing, but because of their approach to the market (in other words their value proposition). Earlier on they would maybe have thought this equaled product-market fit but according to Henrik, this only show they’re on the right track. Today they know they won’t be able to plant a Coinify flag on top of the crypto mountain until they have the world’s biggest payment service providers onboard, such as Visa and MasterCard. But because they’ve had clear indications Coinify is heading in the right direction, they now have a crystal clear plan for how to reach the summit. Their North Star metric might very well have been proof of market demand for Coinfy’s specific product.
Do they ever come back?
There’s no way around it, retention is key. If you can prove customers use your product and they keep — actively — using it, you’re one step closer to product-market fit. Your product is meeting a real need and it’s doing it better, cheaper and/or smarter than the alternatives for that specific group of people. But don’t let the importance of retention make you forget traction. When DrugStars was at one of the first ‘camps’, they were advised “to fill the bar with girls, then the men would eventually come”, referring to users and potential buyers of the collected data from users. DrugStars had a long term plan in head when making the company: They knew they needed a lot of users, the data from users would get pharma companies on board and that was were they would make money. Therefore Drugstars first had to focus their efforts and the metrics they measured on users. Then later shifting focus to the pharmaceuticals.
LTV vs CAC
It’s the classic rundown of two ever important metrics in your search for product-market fit. It’s been said repeatedly but can’t be said enough. Being able to acquire a customer for less than the same customer’s total value might seem like a matter of course. If that isn’t the case forget about product-market fit. You’re not running a financially viable business and you wont be able to scale it. And then we haven’t even gotten around to the horrifying churn — acquiring customers that jump over board too fast will kill you, but we’ll have to dig deeper into that another time.
All that being said knowing your LTV and a range of other metrics in the early days of a startup is difficult as it’s bound in the future. Not to mention that measuring a ton of metrics from the get-go isn’t where your resources is well-spend. Start by worrying about attracting users that you can get feedback from, so you learn, adjust and test your assumptions.
Can you go global?
So you might have proven that you’ve been able to scale your idea in Denmark and make money through a repeatable business model. That’s good but not necessarily enough. Your next step is to prove that your model is repeatable and scalable in other markets, other segments, through other channels and so on. Local product market fit is one thing — can it be applied globally?
Now you need to reach product-market fit in new markets, consider measuring new metrics and prove that your business model is financially viable, but that’ll have to wait.
It all seems like somewhat of a mouthful, right? There’s a long way to the top and you should only take it one camp at a time. Having a plan for reaching the summit is preferable, but chances are that you’ll have to adjust that very plan. Once you’ve reached it, some will argue that you’re not a startup anymore, but a scaleup a.k.a. you’ve proven you have a scalable and repeatable business model, and you’ll be busy hiring sales and customer support people.
Still craving more knowledge on product-market fit? In our investment team at PreSeed Ventures, we highly recommend this clever and thorough article.