The Product/Market Fit Mirage

August 29, 2013

I’m a big believer in the key tenets of Steve Blank’s The Four Steps to the Epiphany and Eric Ries’s The Lean Startup. Particularly, I like to see start-ups follow the authors’ approach to finding what both call product/market fit.

One of the key concepts of product/market fit is that you should not start to invest in building your company until there is evidence that the product fits a need in the market. Blank and Ries encourage start-ups to get their first product in front of customers quickly, get feedback, then tweak their product accordingly. That’s great advice–scaling a sales force and infrastructure to sell a product that the market does not want can be catastrophic to a start-up.

Unfortunately, the pendulum rarely swings halfway, and I’ve recently noticed a worrisome trend among many start-ups. Entrepreneurs are building good products, putting them in front of customers, getting solid feedback, and then iterating into infinity in search of something they will probably never find. In most cases, the product is viable, but it isn’t magically obvious that it is extraordinary.mirage

Many entrepreneurs seem to be waiting for their product to go viral before they actually build out their businesses. Although it’s fantastic to see companies grow without paid marketing, many outstanding companies have been built on products that have never gone viral. Some products just require a more meaningful marketing investment to educate and acquire customers before they achieve success.

Look to other metrics besides how fast your company is acquiring users to determine whether you are ready to scale up. User engagement metrics like net promoter score are very powerful in determining whether your product has satisfied users and you are ready to invest in growth. Even those numbers will never be perfect, but they should give you confidence to take a leap and believe your product will work for a large enough group of users.

Scale tends to breed scale. Start-ups often need to get some type of critical mass of users before their products start to be fully appreciated and begin to spread more organically. Malcolm Gladwell explores this phenomenon in The Tipping Point. Without making some efforts toward scale, you typically won’t have the possibility of the market tipping in your direction.

Furthermore, when you begin to intelligently scale up, you can then start to focus on the challenges of marketing and selling the product. Those areas are also critical to long-term success and will require just as much hypothesis testing and iteration. As the company gets good at overcoming these challenges, you then have the opportunity to show some pretty impressive evidence of product success that might not have been possible with a smaller user base.

When scaling up, do it rationally and sustainably. When a seed-funded company goes to investors for the next round of funding, the first question typically is, how much traction with users does the company have? Some churn is to be expected, as are some product problems.

Investors don’t expect a perfect product, but we do relish analyzing a business’s customer growth and engagement. If your company has a product that looks solid but hasn’t demonstrated the ability to scale up, you are going to find yourself meeting with lots of VCs and falling victim to the Series A crunch.

Of course, you should continue to improve your product, but don’t wait for some magical moment to start building the rest of the business. Sometimes product is the reason a company isn’t ready to scale, but often the culprit is the insecurity of the entrepreneur.

Originally published in Inc. Magazine


10 Responses to “The Product/Market Fit Mirage”

  1. Dale Larson Says:

    Spot on. Any given business may turn out to be more product, marketing or sales driven. The intuition and vision of the founders is as important as identifying and testing hypotheses in all areas of the business. After all, it’s the founders who must decide what results constitute enough proof that it is time to move forward (or time to optimize or pivot).

    • epaley Says:

      Thanks Dale. I completely agree. As investors, we prefer product driven companies. However, there is such thing as a good enough product and a founder needs to learn to start to build the rest of the business while getting to exceptional product.

  2. […] Paley has a great post about founders hesitating to invest in growth, even when he thinks they […]

  3. wmougayar Says:

    Well said, but I would argue this is true for B2B/SaaS segments, not so for consumer products, no?

    I have written about the Product/Fit Continuum here

    • epaley Says:

      From my perspective this issue came to light when advising three different consumer startups in our portfolio. It seemed to me that all three had viable products that filled customer needs, but were unlikely to have an obvious product/market fit moment. All had some traction but needed to invest in building more, which has worked well. I agree this is also very relevant for b2b companies too.

  4. >> Some products just require a more meaningful marketing investment to educate and acquire customers before they achieve success.

    Is this not a symptom of the move to fast-fail lightweight apps from serious value solutions?

    Certainly some products that have “potential virality” require an enterprise life-cycle and a direct sales force to leverage that virality.

    Further they may need the resources of a company prepared to serve and groom their evangelists. Such things cannot be iterated and pivoted away on a daily basis.

    So they are riskier, but the rewards of real disruptions are concomitantly greater.

    I wonder if much of the VC market in looking to flip “quick-wins” are commoditising the process and guaranteeing a death by 1000 cuts.

    Perhaps they could be quicker at wasting their carry if they bought a stack of lottery tickets – Same results – quicker feedback.

    • epaley Says:

      I hope we all have better results than playing the lottery ;-), but agree that the VC and startup community are slicing thinner and thinner in hot areas and ignoring some very big opportunities that are less lightweight or more “real” disruptions as you call them.

  5. Adam Berk Says:

    I think a good rule of thumb is what I call backwards cheerleader metrics… you need solid activation and then ONE of the Rs. As you stated, and I completely agree, you do not need referrals – but after activation you better have retention or revenue to prove value, even in small absolute numbers the signal should be strong.

    • epaley Says:

      Great comment. Start to scale when you get real signal in a meaningful metric. I like the three Rs as a solid set of categories for those metrics.

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