A Practical Guide to Product-Market-Fit
2.5 years ago when we established the Value Creation team at Glilot Capital, we needed to make a tough choice and decide where to focus our efforts in order to optimize our support of the portfolio companies.
There are many components to a startup’s success, but we understood that one thing is certain — without achieving Product-Market-Fit, a company simply cannot scale and, ultimately, will not survive.
What is Product-Market-Fit (PMF)?
Years ago, Andreessen & Horowitz defined this term as something you feel you’ve achieved — but truthfully, feelings can be subjective. Therefore, we’ve defined it a bit differently, as inspired by Tae Hea Nahm and Bob Tinker’s great book, “Survival to Thrival”:
On your first interaction with a customer, his or her feedback should reflect that your solution answers a pressing and painful need and that its competitive edge is clear.
When deepening the relationship with a prospect, you should expect the prospect to be willing to pay for the solution, and even more so, to be willing to recommend it to her peers.
In later stages, look for more well-established and quantifiable signs, such as: Churn rate, renewals or CAC\LTV.
As we invest in early-stage companies, let’s focus on how to achieve the first two PMF goals.
How to Achieve PMF for Early-Stage Startups in 5 Steps:
1. Define the Process
Hoping to achieve Product-Market-Fit without defining the PMF process in advance is like going out for a road trip without a map — You’ll probably get lost and if you do arrive at your destination, it will take more time than necessary.
Therefore, first define the questions you want answered, the type of prospects you’d like to interview, and most importantly, what the process KPIs are.
2. Build the Pipeline:
- It’s not the quantity you’re after: Build an optimal pipeline of prospects that will include the different personas you believe are ideal for your solution. The number of prospects shouldn’t be more than 50 or you might wind up with confusing results.
- Diversify the list: Your most important KPI is PMF and closing deals, so make sure you don’t set calls with early adopters alone. You want to make sure there’s a variety of potential customers and that the problem you are solving is critical for many different types of companies out there.
One of our companies defined their ideal prospect as a “cloud-first SMB”. We’ve decided to create a more diversified pipeline for them to make sure we are not missing anything, and found out that the prospects who eventually bought the product were the Fortune 1K companies! In fact, this has exposed a use case we haven’t thought of to begin with. This was quite a leap towards an accurate PMF.
- PMF = Product-Buyer-Fit + Product-User-Fit: Make sure you talk to both the buyer as well as the actual user. Your goal is to satisfy them both and each will provide you with different types of feedback.
3. Reach Out to Set Calls — Warm Intros are a Must!
Since you’re looking for genuine feedback and not a polite, yet unhelpful response, you need to talk to a friend, or a friend of a friend, and so warm intros are a must. If you are lucky enough to have a VC that is well connected to a variety of potential customers, ask them to make the intro. This is critical to build an accurate picture of the market sentiment, and this is exactly why we at Glilot Capital have invested a vast amount of resources in developing a network of advisors who are keen to provide wise feedback.
4. Manage the Conversation:
- Be a salesperson, but ditch the salesperson’s KPI — This is one of the most important, yet complex, principles of PMF; In order to receive feedback that you can actually learn from, your prospect has to truly consider buying your product with all of its pros and cons. If your prospect perceives the meeting as a friendly “advisory chat” the feedback that she will provide should not be taken under consideration. Your KPI, however, is not to close the deal, your KPI is to achieve PMF.
- Don’t be afraid to talk about $: As mentioned, it’s not the money you are after — BUT a paying customer does prove you’ve reached PMF. A paying customer can truly vouch for what she says when claiming she needs and loves your product. Therefore, discuss the pricing early on in the conversation and see how the prospect reacts.
Prospect: “This solution is awesome! I love it and definitely see the value in using it.”
Me: “I’m so happy to hear that. So…would you pay for it?”
Prospect: “Oh..mm…No. You know what? it’s not really on the top of my organization’s priorities now. Let’s re-engage in a year or so.”
- Are you a pitcher or a listener?: Since your goal is to collect feedback (verbal or otherwise) and improve your messaging, positioning, and pitch, make sure to include someone else in the conversation whose sole purpose is to carefully listen to the prospect and document any responses to the things you say.
- Reduce the noise: Keep your eyes on the ball (aka PMF) by removing solvable barriers. You don’t want the prospect to terminate the discussion just because you currently don’t support a specific integration that you’ll be supporting in the near future. Therefore, clarify that integrations, specific features, compliance approvals, and other similar issues are solvable.
5. Summarize, Analyze, Implement, Repeat:
Make sure to stop after a certain number of calls, analyze the repetitive reactions, and adjust your product and pitch accordingly. We at Glilot Capital collect the data and then share a PMF report with our companies to make sure no insight is being neglected. Only after such a process, return to the pipeline and continue with setting additional conversations to validate your new approach.
We hope you found this guide helpful, and we would love to hear your thoughts!
Feel free to contact me at firstname.lastname@example.org.