Investing in Growth without Product-Market Fit (PMF): A Route to Scaling Up or Simply a Money Burn?
Investing in Growth without Product-Market Fit (PMF): A Route to Scaling Up or Simply a Money Burn?
There seems to be no consensus on this critical question within my startup network. Numerous founders and executives in startup C-suites need to pay more attention to the essential Product-Market Fit (PMF) methodology when deciding on growth investments. I am publishing this article to advise founders, startup executives, and growth hackers on proper budget allocation, especially in these challenging economic times.
Understanding Different Startup Founder Personas
From my recent observations, the three primary startup founder personas are trying different paths to achieve scaling up. They believe that the right way to scale up is:
- Persona A: raising money to finance growth and partnerships, despite not having PMF, hoping to find it along the way.
- Persona B: focusing on aggressive campaigning, assuming strong marketing will retain customers without PMF.
- Persona C: investing growth and campaigns with PMF without proper product & service quality. It is scarce, but currently, I am experiencing that situation. The founder hypothesizes that customer is loyal despite lousy experience, so the company invests in growth rather than product or services.
Defining PMF:
To frame our discussion, let’s refer to a satisfying definition of PMF from Marc Andreessen’s paper “On Product/Market Fit for Startups.”. He states that PMF can be achieved when “The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can.”
It is tangible and revealing for Starbucks, Apple, Coca-Cola, etc., right? For a more analytic approach, Christoph Jans describes PMF as “having a product that solves a problem for a significant number of independent customers.”. (1)
Achieving PMF:
Achieving PMF is characterized by a scenario where the customer demand outstrips your growth efforts. It’s an environment of high customer growth facilitated by relatively less effort, bringing you closer to PMF.
So, how can we understand the PMF? There are many opinions and approaches, but we should understand two main things: there is no proper and exact way to find it. If there was such a thing, everyone would go there. Second, the market (so customer) is constantly changing, dynamic, and fluid. So, there will only be a static situation if you discover a new precious metal in your garden.
Christopher Janz described the PMF criteria with more empirical methods above. It should be scalable for all industries and market situations, so my simple definition is “PMF is where customer appetite is higher than your effort to grow. Less effort with higher customer growth means you are getting closer to PMF.”
Where does PMF fit in a whole company lifecycle? How is the Ideation to the PMF process?
Every business founding story should be matched with a business problem; identification of the problem is the ideation phase. The founders should make the problem tangible and well-defined in that phase. Then, when it comes to searching for problem solution fit (desirability), it is generally named MVP (minimum viable product). MVPs hopefully demonstrate that the product/service is feasible to develop with new or existing technology.
When the founders are searching and testing whether their MVP fits with the market, it mainly requires too many tests, trials, and customer research. The product can be re-developed, improved, and kept the same during this phase.
In the pre-PMF phase, the company may have a few successful PoCs with large potential customers, but it is not expected to have a loyal retained customer base in that phase. Also, the team has only core–required capabilities as a self-sufficient agile team. That’s why the primary investment is for product development and customer tests. Cash is very vital and limited.
The PMF is not a treasury you can find and sit down; it is also an iterative path to collect different treasuries to design your own jewel. During the journey, the founders should follow a similar lean startup like — loop as follows:
- Define the initial PMF hypothesis.
- Measure quantitatively and decide the next steps.
- Validate your assumptions and hypothesis.
- Test and iterate, if needed, start with a new hypothesis.
The Post-PMF stage
First, there is no black-and-white transition from one stage to another. We can name the post-PMF stage: the founder has at least a few strong hypotheses (Customer Value Proposition) proven in a statistically meaningful market sample. In this stage, the founder may have a product fit with a specific market need. But there are still some questions to answer to scale the business: scalability, profitability, and sustainability.
It is tough to achieve as market conditions, prices, and costs are dynamic in such an inflation-centered economy. In that stage, lean startup methodology still helps us to scale your business:
- Achieve your operating profit in a target niche market (PMF)
- Understand the market (competition, stickiness, and switching easiness) and customer (complaints, churn causes, etc.).
- Iterate and copy–paste your model to a similar market.
- Understand the market and customer and again iterate and expand to the other markets
In the post-PMF stage, the founder has a variety of market hypotheses to create/expand the market. Series A and B investments should mainly be used in customer and growth (70-customer, 30-product). Typically, the team searches for sustainable revenue streams and retains high LTV customers. This research and tests are mainly used for growth budget to fuel customer behavior and for product/service development budget aligning with customer needs. It is an iterative and dynamic loop aiming to get more loyal, profitable customers in different markets. We can name the company as a scalable business model at that time.
The business model should be revised in later stages regarding customer and market needs. In those stages, efficiency and stable positive EBITDA are crucial to sustain the business. Mainly, investments or excess profit are invested in transformation to revisit the current business model and establish new channels.
To conclude, let’s review our three different founder personas and their problems.
The PMF is not being searched while investing in growth!
What is our advice for founder A?
- As mentioned above, before investing in growth, the company should have various hypotheses about fitting its product or services, not MVP, to a specific market or customer need. Our advice to founder A is that he should invest in its product/service & customer research in line with its market hypothesis.
Without The PMF, investing in growth is just a money burning!
What is our advice for the founder B?
- First of all, stop wasting your bullets. Invest in deep market research, structure the market hypothesis, and then decide whether you improve your product/service regarding market needs or kill the business.
When you find your indispensable PMF, eliminate bottlenecks to fuel growth!
What is our advice for the founder C?
- If you have a loyal customer (without burning money) despite your low level of product operations or services, you may have a very strong PMF and an indispensable business model. Focus on essential quality and operations problems to get a better customer journey and eliminate bottlenecks.
As a result, in the unpredictable path from Ideation to achieving a scalable business model, founders struggle with the vital decision of when to invest in growth or product with the ever-elusive PMF, which is very hard to achieve and keep. It is a must for founders to navigate the sensitive balance between pursuing growth and ensuring product-market fit, mainly based on robust market research, understanding customers, and agility to iterate and improve. To foster a business in that way is not just successful in the short term but sustainable and efficient in the long run.
(1,2) http://christophjanz.blogspot.com/2014/10/five-ways-to-build-100-million-business.html
(3) https://www.forentrepreneurs.com/most-important-startup-question/
Other resources:
https://pmarchive.com/guide_to_startups_part4.html
https://www.theventure.city/article/from-idea-to-scaleup-startup-stages
