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Product-market fit: what, why, and how

Francisco Homem de Mello

This essay‘s objective is to be the best single-read resource on product-market fit out there.


This is a sample of Unlocking Potential: my newsletter about how to unlock your potential – and that of your team. Views are my own and do not represent Qulture.Rocks’ views in any shape or form. The newsletter goes out weekly(ish) and you can subscribe to it here.


Many people talk about product-market fit, and how important it is in the early days of a startup. Actually, most people agree that product-market fit is fundamental to a startup’s trajectory.

But it’s amazing how little agreement there is around what “product-market fit” actually means. Most people can more or less agree on how it feels to have product-market fit, but not on what product-market fit really is. There’s also little agreement on how to know if you have product-market fit, since the most well-known attempts at tackling the issue are contradictory and sometimes even internally inconsistent.

This is terribly important: there are many an early stage investor out there that talks about product-market fit in very certain terms, and actually states that some degree of product-market fit is essential for their investment (some think it’s necessary for seed rounds, some for A rounds). Anyway, if you don’t get clarity around what it actually means, how can you know if you have it, and have a productive conversation?

Of course, you shouldn’t only concern yourself with investor conversations. Product-market fit is also a very interesting mental model with which to think of where you are in terms of your startups (or any product’s) lifecycle and success.

Anyway, in this essay, we’re going to navigate the subject of product-market fit: what it means, why it’s important, how to spot it, and what’s the right path to take in order to attain it.

The origins of product-market fit

The expression “product-market fit” was, supposedly [1], coined by Andy Rachleff, founder of Walthfront. In a recent interview with Mike Maples Jr., Rachleff attributes the origin of term to the influence of Doug Leone, of Sequoia fame, who used to talk a lot about how demand for a startup’s product trumped everything else in predicting its success as a venture capital investment. According to Rachleff, when asked by Maples on the origin story of the term:

“I can tell you the origin story of the concept. I learned it from Sequoia Capital. Don Valentine really invented it. Don used to say, “I’m looking to invest in companies that can screw everything up and still succeed because the customer pulls the product out of their hands.” I’m paraphrasing. I’m not sure I got that exactly right. He felt that way because the startup will screw everything up. I want a company that has such demand from the market that they can literally screw everything up and still succeed.”

Apparently, Rachleff wanted to coin a term that would describe the situation a startup is in when it has robust demand for its products; “pull,” in Leone’s words. But Rachleff didn’t stop there:

“I actually defined it in terms used by Steve Blank and Eric Ries. They were the first [sic] to apply the scientific method to business and I think that Steve’s great contribution to the entrepreneurship business was the idea that first you have to prove a value hypothesis and only once you’ve proven the value hypothesis should you test a growth hypothesis. To me, product-market fit is when you have proven the value hypothesis. So the value hypothesis is the what, the who and the how. What are you going to build? For whom is it relevant? How’s the business model?”

(I would have to disagree that Steve Blank and Eric Ries where the first to apply the scientific method to business. Anecdotally (as in, not to mention my four years studying business), let me just cite Frederic Taylor and even Henry Ford as giants whose shoulders where stepped on by Ries and Blank.) 

As you can see from this last citation, Rachleff drew a parallel between what Leone was talking about (demand, pull, that was so high it compensated for everything else) and Steve Blank’s work (for example, The Four Steps to the Epiphany). When we try to look for “value hypothesis” (I did some simple Google searches like ‘Steve Blank value hypothesis’) we get, for example, an article about how to define value propositions, which are a part of the Business Model Canvas, a tool Blank uses a lot (and that was created based on his work):

Interestingly enough, when we dig deeper into this page, we find reference to product-market fit:

“If you’re familiar with the Lean Startup you know that the Business Model Canvas is the tool to frame all the hypotheses of your startup. Of all the 9 boxes of the canvas, the two most important parts of the business model are the relationship between the Value Proposition (what you’re building) and the Customer Segment. These two components of the business model are so important we give them their own name, ‘Product/Market Fit.’

According to Blank and those who work alongside him, product-market fit (PMF, for short) means how well two key hypothesis of the business fit together: its value proposition, and its target customer segment. So it seems to be about more than getting a ‘proven value hypothesis’, in Rachleff’s words.

The value proposition hypothesis

It might help us to dive just a bit deeper into what a value proposition is and how it works, so we know what we’re talking about (customer segments seem straightforward).

As per the Stratregyzer folks, who only seem to talk in terms of canvases, a value proposition (hypothesis) is the function of customers’ 

  1. jobs-to-be-done (basically progress they want to make in their stuff they are trying to get done, work or personal, but also emotions, status, etc.), 
  2. pains they want to avoid (it might get a bit tricky to separate a pain from a job, but you’ll get the picture),
  3. gains they want to have – essentially, what’s in it for them – in the one hand, and 
  4. products and services the startup intends to offer, and how they attack pains and gains

Sounds good. So back to our understanding of product-market fit, it seems to me that Steve Blank understands it means when a startup has matched a value proposition to a customer segment in a successful way.

Going back to Rachleff’s interview with Maples Jr., we see that there’s a lot to unpack and reconstruct that was left out by them. Rachleff first cites that his intention was to capture the spirit of what Leone meant – lots of demand, pull – to some Lean Startup stuff (value prop hypothesis). 

What we get from that is a bit contradictory, and it seems that we have to solve this contradiction before settling on what Rachleff talked about when he talked about product-market fit (Carver fans out there?). 

On the one hand, and according to my research, nowhere in Blank’s – or Ries’, or Strategyzer’s – work around value hypothesis or product-market fit do we get any mention to strong demand or pull from customers. 

On the other hand, Doug Leone only mentions demand/pull when he talks about demand trumping everything else. And according to Rachleff’s own words, PMF is a concept based on Doug Leone’s vision that demand/pull trumps everything else. To recap Rachleff’s own words in his interview with Maples Jr.:

“I can tell you the origin story of the concept. I learned it from Sequoia Capital. Don Valentine really invented it. Don used to say, “I’m looking to invest in companies that can screw everything up and still succeed because the customer pulls the product out of their hands.” I’m paraphrasing. I’m not sure I got that exactly right. He felt that way because the startup will screw everything up. I want a company that has such demand from the market that they can literally screw everything up and still succeed.”

Therefore, for now, we’re going to presume Rachleff was kinda mistaken in equating “pull” to having a “proven value hypothesis” and just stick with “pull,” true to Doug Leone’s wishes. So for now, 

PMF = pull/strong demand from customers

Enter Marc Andreessen’s The Only Thing That Matters post about product-market fit

To me, it seems clear that Andy Rachleff is the father of the term product-market fit. It’s also clear that he wanted to find a term that described what a startup has (or maybe the stage a startup is in) when it finds strong demand/pull from customers.

But even though Rachleff coined the term, it was actually made famous by Marc Andreessen, founder of Netscape, Opsware, and Andreessen Horowitz, in his The Only Thing that Matters post, where Andreessen discusses why he thinks the quality of the market [2] a startup is attacking is the most important variable in its success equation (the other two legs of the tripod are team and product), which seems like a tangential point to Doug Leone’s.


Aside: what success means?

It’s important to mention that when Doug Leone, Andy Rachleff, and Marc Andreessen discuss what’s key for a startup’s success – the usual candidates hovering around the discussion table are idea, team, and market – they are most definitely defining success in terms of the eyes investors. Leone, of course, was a key person in Sequoia Capital’s history; Andreessen founded Andreessen Horowitz, which is always trying to unseat Sequoia; Rachleff founded Benchmark Capital and lead it for 25 years.

In order to define what success means in the eyes of a typical venture capital investor, we have to discuss, of course, the whole power-law-unicorn-mumbo-jumbo-circular-reference. 

That’s when an investor explains to you that in order to function well and survive (especially because of how startups as investments have fared in the past) a fund has to have at least one company that brings them a crazy return, like 100x, or 1000x. In order to have such a crazy ‘winner,’ the fund has to fund only high-upside bets, which are, of course (let’s not dig this hole), much riskier. But behold: because the whole portfolio is much riskier, a bunch of the investments in it fail mightily, as in becoming worthless. And this reinforces the need for one of these bets to become an even crazier ‘win,’ which puts pressure on the investor to find even higher-octane companies to invest in. See where I’m going?

Anyway, we need to understand that PMF was coined by investors, at least at heart, and so they were probably coined to help these same investors find great investments, which are the ones that can bring a totally crazy return to their funds. Just keep that in mind.


Snap back to reality. Or, back to Marc Andreessen’s article.

Andreessen says that Product/market fit means being in a good market with a product that can satisfy that market. His definition is kind of recursive because he goes on to define a good market as a market with lots of real potential customers — the market pulls product out of the startup

Andreessen goes on to talk more about what he means by “pull” when he explains what product-market fit and its absence feel like to a company:

“You can always feel when product/market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of “blah”, the sales cycle takes too long, and lots of deals never close.

And you can always feel product/market fit when it’s happening. 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. Reporters are calling because they’ve heard about your hot new thing and they want to talk to you about it. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house. You could eat free for a year at Buck’s.”

Andreessen says that when a startup is tackling a great market and manages to make a product that solves its need, the market will almost effortlessly pull the product from the startup; the product will almost sell itself, and growth will be so intense that it breaks the organization over and over while it grows to capture the opportunity. It’s almost as if “great” is the product of “big” and “where the product is pulled.”

On the Rachleff/Andreessen definition of product-market fit

Two interesting things about Andreessen’s view of the whole “product-market fit” thing.

First, it’s interesting that he says it’s not enough to have a good solution for a big, rich market: it’s also crucial for the product to be pulled. That means, among other things, that users are prone to getting the problem solved now, but also that they actually do it. There’s a big problem with that, which we’ll discuss later: since pull is a lagging indicator, it’s very hard to optimize for it. The company may identify a big market, build something that solves its need, but end up not feeling the pull.

Second, it’s interesting that Andreessen doesn’t mention what happens after users have purchased the product: he doesn’t talk about churn, retention, expansion, or engagement, for that matter. So by Marc Andreessen’s definition, product-market fit is when a startup has built a product that sells a lot and that has the potential to sell a lot more. It’s almost a go-to-market thing.

A better definition, that would better convey what Andreessen and  Rachleff were thinking, is product/great market fit, where a great market is, as we’ve seen, defined by its size, by the amount of pain it has, and by the willingness of the market to buy a solution now for that pain. 

Anyway, putting two and two together, we get a more complete Rachleff/Andreessen definition:

Product/market fit is when a startup has built a product that can satisfy a market that’s big (has many potential customers) and that easily and intensely buys/uses that product.

What we can conclude from the Rachleff/Andreessen is that the term “product-market fit” is not a very good choice to describe what they meant in the first place. A better term must convey the idea of market “goodness,” since it’s not enough to have a product that fits any market. The market has to be good. A better definition, that would better convey what Andreessen and  Rachleff were thinking, is product/great market fit, where a great market is, as we’ve seen, defined by its size, by the amount of pain it has, and by the willingness of the market to buy a solution now for that pain. 

Nowadays (the article was originally written in 2007), the term product-market fit has been used in the startup world with many similar but not quite equal meanings.

Making something people want == product-market fit?

One common use of the product-market fit concept “disregards” the greatness of the market inherent to Andreessen’s original use. By the way, in our experience, this is the most common way people use the term “product-market fit” nowadays, and frankly, this meaning does derive more naturally from the term. Anyway, under this definition, product-market fit, or PMF, for short, is when you’ve built something that some set of users (a market), regardless of how small it is, love.

Paul Graham, of Y Combinator fame, calls this “making something people want.” In his “How to Get Startup Ideas” essay, which is amazing, he explains why startups should find small niches within big markets and find love from users in these niches before venturing out to a broader market:

When a startup launches, there have to be at least some users who really need what they’re making — not just people who could see themselves using it one day, but who want it urgently. Usually this initial group of users is small, for the simple reason that if there were something that large numbers of people urgently needed and that could be built with the amount of effort a startup usually puts into a version one, it would probably already exist. Which means you have to compromise on one dimension: you can either build something a large number of people want a small amount, or something a small number of people want a large amount. Choose the latter. Not all ideas of that type are good startup ideas, but nearly all good startup ideas are of that type.

Imagine a graph whose x axis represents all the people who might want what you’re making and whose y axis represents how much they want it. If you invert the scale on the y axis, you can envision companies as holes. Google is an immense crater: hundreds of millions of people use it, and they need it a lot. A startup just starting out can’t expect to excavate that much volume. So you have two choices about the shape of hole you start with. You can either dig a hole that’s broad but shallow, or one that’s narrow and deep, like a well.

Graham goes on to explain why he thinks the “market” is not as big of a factor to optimize for [3]. First, because markets evolve and usually have many adjacencies, and some of the best startups have tackled markets that looked small initially but that went on to become huge, either on their own or by merging with nearby adjacent markets. Second, because entrepreneurs most probably won’t be able to find a clearly amazing market that’s still untapped – chances are somebody will have taken it on already. Third, that the true bottleneck is getting users to love something. That if you can do that, you can figure the market problem later.

Nearly all good startup ideas are of the second type [4]. Microsoft was a well when they made Altair Basic. There were only a couple thousand Altair owners, but without this software they were programming in machine language. Thirty years later Facebook had the same shape. Their first site was exclusively for Harvard students, of which there are only a few thousand, but those few thousand users wanted it a lot [5].

When you have an idea for a startup, ask yourself: who wants this right now? Who wants this so much that they’ll use it even when it’s a crappy version one made by a two-person startup they’ve never heard of? If you can’t answer that, the idea is probably bad.

You don’t need the narrowness of the well per se. It’s depth you need; you get narrowness as a byproduct of optimizing for depth (and speed). But you almost always do get it. In practice the link between depth and narrowness is so strong that it’s a good sign when you know that an idea will appeal strongly to a specific group or type of user.

It seems that PG and Rachleff/Andreessen are saying different things. And they might, because they might have different motives.

By this definition, PMF means having a product that fulfills the need of a market, regardless of the quality of that market. We think this is a good term to use if you keep in mind that it doesn’t actually convey what Rachleff and Andreessen meant in the first place.

PG clearly writes to help entrepreneurs like the ones who go through Y Combinator. He’s giving out advice that compensates for some common founder biases or mistakes, like not spending enough time listening to users/customers, and/or spending too much time thinking about grand strategies [6]. Andreessen and Rachleff, on the other hand, sound like they are just musing on what makes, in hindsight, a great valuable company (a unicorn, in today’s parlance).

If we agree to use “product-market fit” meaning “product/great-market fit,” it’s easy to see why it’s an important thing to achieve: it is the recipe for building a large venture-backed company.

Notes

[1] According to Google Trends, the first searches for “product-market fit” happened in 2005, as you can see below:

From that, we can derive that Andreessen’s post wasn’t the first time the expression was used. We did find one other hit from 2005 that seems promising:

[2] We love the jobs-to-be-done definition of a market, that says that a market is the sum of all customers (people or organizations) that have a need and that are open to using a solution to fulfill that need. And a great market is a) huge (size), b) has people/organizations with intense needs (pain), that are c) very open to using something to solve that need.

[3] To be clear, he doesn’t say markets are not important. He just says that if you’re starting a startup, the most important bottleneck to solve is getting even a small set of users to love what you’re making. If you can do that, you will most probably be fine.

[4] Second type = build products that are deeply loved by a small set of users.

[5] I don’t really agree with PG on the use of Facebook as an example. I think it’s quite a stretch to single out “Harvard students” from “college students” as separate markets. I think college students are pretty much like each other, and a pretty large market that could have made for a big company. I think Facebook’s example is a great example on the right tactics of building network-effect products, like social networks and marketplaces. By almost artificially fencing your audience, like Zuckerberg did with Harvard, it’s easier to build critical mass for that audience.

[6] You can learn more about these common mistakes here and here.

[7] In some cases, especially around B2C, services are free for users, and monetized alternatively (think Facebook and ads). So you won’t be able to find out if you can make money from the business until later on. For those businesses, retention metrics are enough.

References on product-market fit

https://gsb.m.miraheze.org/wiki/Aligning_Startups_with_their_Market

https://medium.com/parsa-vc/7-lessons-from-andy-rachleff-on-product-market-fit-9fc5eceb4432

https://pmarchive.com/guide_to_startups_part4.html

https://trends.google.com/trends/explore?date=all&geo=US&q=product%20market%20fit

https://theproductmanagementcourse.com/blog/79991/evaluating-product-market-fit-1