Talk to any startup founders in the Bay Area, and you will know that one of the biggest challenges for them is to determine the product-market fit for their own product. What is product-market fit? Marc Andreesen, whom the term is attributed, defines it as “being in a good market with a product that can satisfy that market.” Countless influencers in the tech industry have given advice on how a startup can hit product/market fit, from Marc Andreesen himself, to Steve Blank (who started the Lean Startup school of thought) and Paul Graham (who founded Y-Combinator, the most influential venture capital firm in Silicon Valley).
Last week, I went to talk called “Product Market Fit: The Importance of Getting It Right” at the Nasdaq Entrepreneurial Center. The 2 speakers are Sean Jacobson, a general partner at Norwest Venture Partners (a global, multi-stage venture capital growth equity investment firm with approximately $5 billion in capital), and Michelle Zatlyn, co-founder of CloudFare (a web performance and security company that provides online service to protect and accelerate websites online). In the talk, Sean interviewed Michelle on how she was able to know that CloudFare has achieved product-market fit, particularly after its series-B fundraising round. Sean outlines the 5 categories that startup founders need to look at while assessing their product:
· Diversity of customers
· Commitment Level
· Word of Mouth and Virality
For each of these categories, Sean came up with 3 options, correlating with the maturity stage of the product with respect to that specific category. He then asked the audience, which comprised of many startup founders, to evaluate their own products based on these 3 options. Option 1 gets 1 points, option 2 gets 3 points, and option 3 gets 5 points. The more points the product gets, the closer the business reaches product-market fit. In this post, I want to share Sean’s product-market fit evaluation rubric, because I think it is extremely note-worthy for founders to consider so they can make proper move while developing their business.
1 — Diversity of customers
How many customers you did not know before starting the company?
· Your customers are only fellow startups in your incubator class (1 pt)
· Your customers include other tech companies in Silicon Valley (3 pt)
· Your customers span around the country and outside of your network (5 pt)
2 — Engagement
How core is your product to the customer’s business?
· Users log in once every month or two in sporadic bursts (1 pt)
· Users log in several times a month (3 pt)
· Users leverage the product daily to get their job done (5 pt)
3 — Churn
What is the rate at which you are losing customers?
· You haven’t started measuring churn yet. You need more data to assess why you’re losing customers (1 pt)
· You experience 2–4% churn per month or 24–48% churn per year. Customers are actively giving you unsolicited feedback on how to improve the product (3 pt)
· You experience 0–1% churn per month or up to 12% churn per year (5 pt)
4 — Commitment Level
Do you have customers on pilot programs?
· Users have committed and are likely to test other products in the market too (1 pt)
· Users commit to your product on a month-to-month basis (3 pt)
· Users commit to your product to 1–3 year deals (5 pt)
5 — Word of Mouth and Virality
How are you acquiring new customers?
· All sales require outbound cold calling or networking (1 pt)
· Sales are mixed between outbound cold calling and inbound leads. People start to search for solutions in your market (3 pt)
· Most sales are generated from inbound leads and customer referrals (5 pt)
Finally, this is the product market fit point assessment:
· 0–9 points: You are in the product testing phase to define what business you are in. You should not hire any salespeople yet, but you should definitely get market feedback outside of your local tech community.
· 10–17 points: You start getting early validation that your product solves a potential pain. It might be time to hire 2 sales representative. If both of them perform well, then your product really resonates with the market.
· 18–25 points: Your product is well on the way in reaching product-market fit. You should think about expanding your sales team to catch even bigger opportunities.
There you have it, a simple rubric to determine how you are doing in the process of getting product-market fit. Let me know if you agree or disagree with this evaluation system!