August 25, 2015 | 6-minute read (1010 words)
This guest post was contributed by BJ Lackland, CEO of Lighter Capital.
One of the hottest topics in the SaaS startup world is product/market fit. What is all this buzz around? In a nutshell, it is about one simple thing: making something people want.
Making a product with robust market demand is critical when wooing VCs. After all, VCs are willing to bet on your company only if they foresee the potential for extraordinarily large returns—the kind you simply can’t generate for them unless you’re making a product your customers can’t live without.
But what if you’re not seeking VC money? The reality: you still can’t succeed unless you build something that people feel they can’t live without. Marc Andreessen, cofounder of Netscape and well-known Silicon Valley VC, says that “the best team with the best product will fail if the market is not there.” According to Andreessen, companies need to make product/market fit their top priority, because it’s what will make or break them.
Although seeking product/market fit seems obvious, CB Insights says it’s still the number one reason startups fail.
So as a new entrepreneur, how do you know if you’re on target to reach that critical product/market fit? And once you’re reasonably sure you’re on the right path, how do you convince potential VCs of the same? There are numerous ways to measure product/market fit, though it’s fine if your process is more qualitative than quantitative. And while you may land it on your first shot, more often it requires many pivots—if you get there at all.
Here are three tips to help your company reach product/market fit—and to survive until you do!
1. See what the market actually thinks
Is there significant demand for your product? The best way to test it is to create a Minimum Viable Product (MVP) that customers can actually try.
Get an MVP into your target market on an inexpensive or trial basis, then survey your customers. What aspects of your products are so crucial, they make your customers want to continue using it? How could your product be improved to make it something they couldn’t live without? This immediate customer feedback should guide your next iteration, helping you to build something that is more closely aligned with your customers’ wants and needs.
Once you have a sizable number of customers, see what other problems they need solution for. These insights can help you further expand your product—or can help you if you find you need to pivot yet again.
2. Reign in your spending
It may not seem immediately relevant to reaching product/market fit, but controlling your burn is one of the key things you can do to help you get there. Why? If you’ve got a good team and unlimited resources, you’ll eventually reach product/fit. But no matter how strong your team is, your resources are still limited. That means you need to reach the right product/market fit before you go broke. That can be a challenge, but it takes money to build, refine, and pivot along the way.
This brings us to the number two reason why startups fail—they run out of capital. So the real trick isn’t simply to reach product/market fit, but to reach it within your current budgetary constraints.
The best way to do this is to minimize your spending while you fine-tune your product. Before you spend money scaling your business, make sure you have a critical number of customers who love your product and can’t do without it. So hold off on hiring a VP of Marketing & Sales until you’ve nailed your product/market fit—or have at least come close. In the meantime, what about that product revamp work that needs to be done? The most cost-effective way to do it, the way that will best control your burn, is for you and your cofounders to do it yourself.
By reigning in your spending as much as possible, you maximize your chances that your company can stay afloat long enough, you ensure that your company can stay afloat long enough to reach product/market fit—and go to market with something your customers will go wild for.
3. Use the right metrics to see if you’re on track
Are you getting close to product/market fit? The data can tell you so, but you need to know which data to look at. Sean Ellis, CEO of Qualaroo and GrowthHackers.com, recommends the 40% rule: product/market fit is reached if at least 40% of surveyed users report that they would be “very disappointed” if you discontinued your product or service.
While entrepreneurs can choose from countless metrics to guide their decision-making and to convince investors that they're on the right track, our experience with many SaaS enterprise solution startups has shown that three simple metrics do an excellent job of determining whether a product is meeting a true market need:
- Increase in number of users over time
- Increase in repeat users/subscribers as a percentage of total
- Number of referrals
When it comes time to show investors that you’re a startup worth taking a chance on, you’ll have a good shot at success if you can clearly articulate your unique value, have turned your great idea into a product, and show that your product is truly serving a market need.
BJ Lackland is the CEO of Lighter Capital, an alternative-financing provider for growing technology companies. BJ has spent his career working with emerging technology companies as both an operating executive and an investor. He has been a venture capitalist, the CFO of a public technology company, an angel investor, and a senior finance and marketing leader at tech startups. Follow BJ @bjlackland.