Product market fit is a common concept in the start-up world and arguably the most important thing when developing a product and raising capital at any stage.
Having a good product-market fit means developing a product or service that the market needs and sometimes doesn’t even know it. Obvious product market fit is what the investors are looking for and are ready to put their money where their mouth is when they see one. But how do we recognise it? How do we prove it? Trust it?
To measure your product market fit that is recognisable and trusted by investors, you need quantitative data. This data comes in a form of metrics that are understood and analysed by investors and compared to your industry peers and competition. When you are fundraising, you will be expected to have your activation, acquisition and retention rates figured out, alongside your CLV (customer lifetime value) and CAC (customer acquisition cost) if you want to impress investors. These are called your KPIs (key performance indicators) and by developing those, you should be able to start the process of determining if you’ve achieved product market fit.
If you’re a SAAS business, a high retention rate is an excellent indicator of product market fit. If your churn rate is less than 20%, you have a solid base of customers who are willing to use and pay for your product on a recurring basis. That is a fantastic data point and a good sign you’re on the path to product-market fit, if not already there.
Now, that’s well and good if you are raising for Series A or later stages. Scale ups have all the data to learn from, adjust and improve their metrics. But what if you are trying to lift your idea off the ground, if you are preparing for pre-seed or seed rounds? How can you prove your product-market fit?
In one of my previous posts, I have written about the mistrust and miscommunication between founders and investors and how it stems from unrealistic expectations of early-stage founders having to report on certain metrics and how that takes away the focus from development of the company. Founders end up focusing on reporting on the KPIs instead of focusing on the long-term picture of product success. I believe when it comes to product market fit, we have another example of this unfortunate miscommunication.
When the product or service is in the very early stages and there is no real data to use to measure OKRs, KPIs, CAC and CLV, founders are expected to make projections… which often causes them to come up and put forward assumptions and future projections that are essentially best guesses. And those are easily manipulated — adjust your assumptions and your projections will look better or worse. That is not to say that founders tend to be unfair or that it is wrong to look for product-market fit. But there is an obvious problem with using this tool to evaluate the idea.
If there is no data to evaluate these metrics, we need a metric that can be fed by available data.
Enter Founder-Market Fit. This is not a new concept, but rather something that we are seeing a shift toward when talking about early (pilot, pre-seed, seed) stage start-ups. Founder-market fit is an innate, almost unfair advantage that sets founders apart from their competitors. Founder-market fit looks different in each founding team and each industry.
Having worked in a certain market or field certainly helps and shows a good founder-market fit. If founders are more junior in their career, they will obviously have less tangible ‘work experience’ but their subject-matter expertise may be manifested in different ways. For example, founders that are still in undergrad, may be starting a company where they have a deep understanding and unique insights of their customer base because they are building a company where they are selling to fellow students. Or they could have done extensive research in a very niche field or new direction of science and are now able to use that information to bring products to market.
Arguably even more important… passion. Investors will often look for founders that are absolutely obsessed with a problem they are trying to solve before they fully understand the founder’s solution to that problem. Sometimes investors ‘just go for it’ because they have a good feeling about the founder. But this isn’t some voodoo valuation or made-up number, this is trust that the founder is the right person to solve this problem and has the right knowledge and mindset to do it. This is trust that when they need to pivot, they will, because they care about solving the problem more than they care about their initial idea being realised or about their ego. They are creators and problem-solvers at their core, and these are the founders investors want to back.
At Kavedon, being founder centric means more than just a buzz word to us. Founder is our metric, especially but not limited to the very early-stage deals. Besides investment professionals, we have a team of people that have experience working with a wide range of founders and hence are able to spot those diamonds in the rough (and start up life does get rough!). Our behavioural scientists collaborated with the tech team to create metrics and scoring systems that are able to use available, quantifiable founder data. So, there is no need for speculations and best guesses!
Initially, as part of the founding team in a start-up in Hong Kong, Ieva was responsible for product management, fund raising and IP. During the last 4 years, Ieva has worked as an Investor Relations and Investment Operations Associate at an Asset Management firm in London and at Truesight Ventures, as an analyst focused on different pre-seed and seed stage companies, carrying out product and market analysis.