How do you know when your business idea is working? Today, things like strong revenue and high profit margins aren’t necessarily signals of success. There’s something called product-market fit, which is a way of thinking about how products actually satisfy a strong market demand. For some influential people in the startup space, product-market fit is “the only thing that matters”. So what is it and how do we get it? In this guide, we’ll go over: What product-market fit is, and isn’t How to identify the signs of good product-market fit So what exactly is product-market fit?The term product-market fit was first coined by Sequoia Capital founder Don Valentine, the concept further developed by Benchmark Capital co-founder Andy Rachleff, and then later popularized by Marc Andreessen of Andreessen Horowitz, who expanded on the concept in his 2007 blog post, The only thing that matters. Product-market fit is the startup world way of saying “build something people want"—that you’re onto something, that your idea is taking off. But tell that to any founder and it’s hard to discern what exactly that advice means. You might be thinking: Well, of course I’m trying to build something people want. I already know that. Why would I be building something people don’t want? Product-market fit is the result of focusing on understanding the market and the customer over the team and even the product/solution.But before we get into how to know if you have product-market fit, here are some false signals of success that people often mistake as signals of product-market fit: It’s not the growth of the team It’s not a big funding round It’s not major press It’s not the rite of “scale” Companies often use these to inflate their sense of product-market fit. But employee growth, funding, and press can be attributed to other things that have nothing to do with that. And actually, scaling prematurely in order to get to product-market fit faster is how many companies fail, when they throw more and more resources at a product that hasn’t yet found its footing.What are the signs of product-market fit?Eric Ries, creator of the lean startup methodology, once said “If you have to ask whether you have product-market fit, the answer is simple: you don’t.” Another oft-cited quote, from Marc Andreessen’s 2007 blog post:“You can always feel when product/market fit is not 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. Still, if you’re in the midst of building or in the early stages of developing a product, consider this an education to help you know if you’re on the right track and when to know you’re close. If you’ve been reading the rest of the series, we’ve already hinted at product-market fit because focusing on the problem (aka the market) over the solution (aka your idea of a product) is that important. Now it’s time to think of how to spot that in practical terms, and here’s the tricky part: it doesn’t always look the same.Lenny Rachitsky of Lenny’s Newsletter broke it down using the concept of “pull," and that there are three different ways pull can manifest: sudden and significant pull (note that this doesn’t necessarily mean at launch—it took Tinder about four months after its initial release for its founders to realize they had product-market fit); gradual but compounding pull (most often applies to companies in niche markets where there are fewer customers overall, such as Substack and Datadog); and hitting a milestone that signals something meaningful (like when Canva saw influential people like Guy Kawasaki use their product on social media). We dive deeper into quantitative ways to measure product-fit data in this article, but there are really only two components that signal product-market fit:Desire/DemandThere are signs of interest from the market, and that market is big enough to have enough meaningful demand to support your business model.Examples: people are telling you about a problem, they ask you to pay for your solution, they use your product before it’s even ready/complete, there is a sense of urgency.MomentumOnce there’s desire and demand, there should also then be signs that these things are growing organically.Examples: sudden or gradual increase in organic growth, people are sharing the product with others, there is a sense of movement/action. Together, desire/demand and momentum create a feedback loop that signals product-market fit, even with an imperfect product, an incomplete team, and various unknowns. A lot of challenges can arise at this stage in your business, like not having the infrastructure or inventory to support demand, but when you’ve got the “only thing that matters” covered, your business at least now stands a chance.Retention It's undoubtably great to see users flocking to your product, but if they churn right out, you're still not quite at product-market fit. Try this trick: create a graph that plots a percentage of active users over time. Depending on how many users you have, you can divide these into different cohorts to get an even better understanding of what types of users are sticking around versus not.That graph will show you a retention curve. You want to see that curve flatten at some point, indicating that users are sticking around. That's another good sign you've found some measure of product-market fit.A few other measures: 40% of users say they would be very disappointed without your product, and exponential organic growth/word of mouth sales learning curves/sales efficiency > 1 -- both are from Andy Rachleff, the individual who coined the term 'product-market fit.'But that doesn’t tell us how we get product-market fit. Let’s cover that next.
What is product-market fit for startups?
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