“At Y Combinator, we see a lot of companies who raise money on demo day as you can imagine, but still the vast majority of them die and about 70% of them do not go on to find any form of product market fit. Here are the most common trends”
I found an online talk by Michael Seibel here (https://www.youtube.com/watch?v=Dgmmje5WHWA) that described literally every issue I have encountered since starting. It is the most relevant and useful advice I have seen in a long time. I wrote them down and organized the content into something people can skim and google easily.
What is Product Market Fit?
It’s extremely common for companies to say they have product market fit when they don’t. They have nothing close to it. I would argue this is one of the most common forms of death. One of the most common symptoms of impending death for post-seed companies.
When we talk about product market fit, unfortunately what you might think it means is different from what it actually means. I think the common misconception is that product market means conceptually we’ve built the product that our users want.
In reality, it far more reflects numbers.
Product market fit typically feels like your product is breaking with profitable usage.
Your product is breaking.
People are starting to come and use your product. Word of mouth is spreading or advertising channels are working and users are loving it. The users are retaining and as a result, parts of your product that you didn’t really build the scale are starting to not work anymore.
Sometimes those are software components. Sometimes those are operational human components. Something is like starting to break because you didn’t build it for scale.
Profitable usage means your users are actually the type of users you want and they are the type of economics that you want.
You’re not paying a thousand dollars for a user that is only going to ever give you a hundred dollars. You don’t have a three-year payback period or anything crazy like that.
You have to make sure that we have both of those components to have real product market fit.
Why do founders believe they have product market fit when they don’t?
They raise money from impressive people
They believe that impressive people: famous seed funds, famous angels, maybe a
Series A fund
They believe that these people are great at choosing companies and if these people chose their company that means that they must have product market fit. They must be on to something. They must be building the right solution for the problem they’re trying to solve.
Extremely common, extremely common.
Raising a Series A pre-product market fit
Nowadays, there are a significant number of companies that can raise five to ten million dollars when they don’t actually have something yet that people love.
What’s interesting is when that happens, instead of continuing to focus on users and product, the founder will shift into focus on company building. Which is typically a no-no.
Something we call magical thinking
Ignoring obvious facts in front of you that would give you the evidence you don’t have product market fit.
Or not even measuring them.
For example, not understanding your churn. Not understanding your payback period when you acquire a customer.
If you don’t know these numbers or you don’t look at them, it’s very easy to convince yourself you have product market fit when you don’t.
Lack of strong technical talent
A lot of times people can convince themselves that they have product market fit simply because they don’t want to embrace the idea that they might need better engineering. They might need to improve their product.
Improving their product is too hard. It’s easier to just believe your product’s good.
What are some of the signs that you have you have convinced yourself that you have fake product market fit?
Lots of hiring.
Lots and lots of hiring. Typically we see founders who think they have product market fit magically go from a team of 4 to 12 before you know it.
More business people than engineers.
You know a big sign is “oh it’s time to scale the sales team.” You know the numbers aren’t moving so let’s scale the sales team.
No metrics dashboards.
No one’s looking at numbers. Everyone’s doing things by feel and by guess.
Too many nice things.
Nice offices, nice trips, nice dinners. Suddenly you start spending money on nice things.
Missing your estimates but coming up for reasons why that’s okay.
“Hey we thought we’d do this in q1. We thought we’d do this in July. We didn’t hit it but it’s still okay.
Changing your KPIs.
“Hey we used to measure monthly revenue, but that number is flatlining so now we measure monthly usage. If you find yourself changing your KPIs, usually you have to ask yourself what’s going on here. Why? Did we get our KPI wrong in the beginning? Does that mean that we’re actually not progressing our business?
Once you have diagnosed the problem of fake product market fit, how do you fix it?
Pick an honest KPI and stick with it.
Almost always that KPI is revenue. Revenue has two components. Revenue from new users and revenue from retained users.
Track your retention carefully.
If your product is very good, it is unacceptable that your users are churning.
Cap your burn.
If you are pre-product market fit, you should predetermine the amount of money you’re willing to spend every month and stick with it. You should basically say “Until we have product market fit, we’re not going to burn more than this amount of money per month. If we want to spend more than this amount of money per month, we have to spend our revenue. As opposed to spending the money that we raised.
Consider raising less money in your seed round.
This also helps you because you get less dilution. If you have less money, it’s a lot harder to do magical thinking and aggressive spending. You have to be a lot more careful about your metrics and your numbers.
Start with strong technical co-founders.
The stronger your technical co-founders are in the beginning, the fewer engineers you’ll have to hire.
Have a three-month essential rule when hiring.
Just put that on your calendar. Make a calendar event. The person you hire should be essential three months from the day you hire them. If they told you they were quitting on that day, you wouldn’t even want to open your email or go to work. You would be so distraught. if your early employees don’t give you that feeling, you probably should let them go.
Force revenue generating employees to pay for themselves.
If you’re bringing on an early sales person, it’s unacceptable that they’re not paying for themselves.
Learn about all the bad investments your investors made.
Break this idea that these impressive people you raise money from mean that your company is good. Learn how many of their investments didn’t end up working out so you understand that maybe your fate could be similar.