Redpoint Office Hours Recap: Product-Market Fit with Andy Rachleff

By: Urvashi Barooah

Redpoint Office Hours is our monthly event series bringing together bright minds for spirited discussions on building and scaling great companies, as well as highlighting trends on the horizon. Previous topics have included developer evangelism, product-led growth, customer success game plans, and more.

We recently hosted Andy Rachleff to discuss product-market fit: what it is (and isn’t); how to measure it; and how to double down on it. Andy is the clear expert in this area, widely credited with coining the term and popularizing the concept as well as having achieved it as a founder, examining it as an investor, and even studying and teaching it as an academic. He’s the co-founder and CEO of Wealthfront, one of the pioneers in automated wealth management. Before starting Wealthfront, Andy co-founded and was general partner of Benchmark Capital, where he invested in companies like Equinix, Juniper Networks, and Opsware. Andy is also a member of the faculty at Stanford GSB where he teaches courses on entrepreneurship.

Andy’s simple heuristics on product-market fit can serve as helpful guides for companies (both new and old) looking to build the next big thing. Our key takeaways from the conversation are below:

For consumer businesses, word of mouth is the best indicator of PMF: If there’s a good enough alternative, customers are going to go with the incumbents who offer “good enough.” The only reason they’re going to buy from you is that they’re desperate. During the course Andy teaches on PMF, he focuses on one key question: What do you uniquely offer that people desperately want? You need to constantly iterate on the market until you find a common segment that’s desperate. And if they’re desperate, they’re going to tell all of their friends about it. You shouldn’t spend a penny on marketing, until you’ve proven exponential organic growth, because if you do, you’re just wasting your money. Those customers aren’t going to stick.

For enterprise businesses, sales yield>1 indicates PMF: Sales yield is defined as the contribution margin a sales team can generate in a year divided by the cost to field a sales team. In the enterprise world, the total cost to field a sales team consists of the salary + commission for the sales rep and the expenses to have them out in the field. It also includes, for example, the salary and commission of the systems engineer who does the technical part of the sale, the portion of the inside rep that they need and the management overhead. All this generally comes out to $500,000 — $600,000. To look at this another way: Until a sales team can generate gross profit in excess of $500K a year, you don’t have product-market fit.

Prove out a value hypothesis before pursuing growth: The value hypothesis is the what, the who, and the how. What are you going to build, for whom is it relevant, and how is the business model going to work? The growth hypothesis — how do you cost-effectively acquire more customers? — should only be pursued after the value hypothesis has been proven. The definition of product-market fit is that you have proven your value hypothesis.

Do less, not more: One of the best things you can do to find product-market fit is jettison a bunch of features. This is really counterintuitive, but sometimes more features get in the way of the customer really understanding what you do. For instance, when Wealthfront was building its solution for self-driving money, the team thought it would be important to include a feature that recommended a threshold that customers should retain in their savings accounts. However, tests consistently showed the product performed better when it didn’t include threshold advice. Skinnying it down to just the routing tech actually led to far more engagement.

Iterate on your audience, not your product: You can change the packaging and you can change the positioning of the product — but if you’re changing the basic technology, you might as well start a new company and therefore your original insight was irrelevant. And at that point, what advantage do you have over anyone else? Product-market fit is all about leaning in to your specific advantage and finding a group of people who are desperate for your product. If people don’t like what you’re doing, find a different audience.

Offer something delightful to a desperate audience: Delight is the greatest form of virality; you don’t get virality until delight meets desperation. The biggest reason for lack of product-market fit is companies haven’t offered something that’s delightful to a desperate audience. They offer something to an audience for which there’s a good enough alternative. But better doesn’t matter. Better doesn’t win.

Build your organization to learn vs. execute: Companies should be intellectually honest with themselves about their product-market fit. If you get that fit right, you can grow the company 10x, whereas improving sales execution might improve it by 10%. In order to hold a mirror up on your own product-market fit, you need to build your organization to learn, rather than execute.

We are always trying to promote further learnings, so we gathered a few of Andy’s recommended reads. Since everyone is geographically dispersed, we added links below. But please consider purchasing locally, too!

• The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses by Eric Ries
• The Innovator’s Solution (Creating and Sustainability Successful Growth) by Clayton Christensen & Michael E. Raynor
• Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers by Geoffrey A. Moore
• A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton Malkiel

We hope to see you at our next Redpoint Office Hours!