Product-Market Fit
Product-Market Fit or PMF is the degree to which your product or service satisfies strong market demand. There is no science or hard number behind what is PMF but there are rule of thumbs. PMF is also a moving target- what metrics worked for you at a point in time may not necessarily work for you later. Which are the most important ones? Read below
Pre-seed
For a company approaching pre-seed, PMF can be validating the idea from potential buyers, and industry people, and to figure out an MVP (minimum viable product). This can be achieved by knowing more about the problem you are trying to solve in detail from the horse's mouth - the people whose problem you are trying to solve. But just figuring out the problem is not the only piece of the puzzle. The next step is to conceptualize how will your solution be different and better compared to competitors. And finally, your ability to build an MVP which your potential users can test and provide feedback on. Without understanding the problem and how it affects your potential users, your product building will struggle.
Seed
For a seed stage company, PMF is no longer validating the problem that exists, and building a better solution than those present in the market. By now, you should have figured out the problem and built out an early version of the product you envisioned. PMF for your stage is to show traction - companies and users who acknowledge the problem you are solving, and their ability and willingness to purchase the solution from you despite alternatives being available. There are no strict rules, but for a consumer SaaS product having 5-10k users, and for a B2B SaaS product, having 10-15 paid customers with a clear roadmap towards getting to $1mn in annual recurring revenue is the logical next step. Your roadmap should include your GTM (Go-to-market) which is your company's disproportionate chance to win customers despite competition existing. A category creator may have lax rules and no hard mandate to show a roadmap to $1mn, but that is where the differences end. Without figuring out your GTM, your company will struggle to raise funds.
Series A
By the time you approach Series A, you should be aware of whether your product is accepted in the market or not. Your traction, revenues, and users will show you in cold hard numbers. PMF for a company approaching Series A is to have a fully functional, repeatable, and scalable GTM. This also includes knowing exactly who is your ideal customer, and what is the extent to which your product solves their problems. PMF at Series A can also mean targeted and tailored pitches for different customer segments you serve. By now, you should be aware of your gross margins, overall sales efficiency, and customer/logo churn rates. You should also have a sales & marketing infrastructure set up that acts as the base for all future endeavours. If a B2B company, expanding to the US (even if remote sales-led) is a must-have. Without growth, your company will struggle to remain relevant.
Series B and beyond
I have limited experience in knowing the intricacies of a company which is beyond Series B. Hence will share what I've learned from founders and investors in the ecosystem. Most companies will either cease to exist by the time they reach Series B - either they built a product nobody wanted or ran out of cash, or couldn't sustain high growth rates and became a zombie company (a company which is self-sustainable, but has limited growth with often a low 7 digit ARR). The most important indicators for PMF in a company approaching Series B are controlled churn, high net retention, vertical/horizontal expansion, and increasing product offerings. By this stage the company is very much aware of the numbers - topline (& growth), bottom line (& trajectory), unit economics (& improvements), and there is second-tier management which can take over the reins of micro markets or products. Without a roadmap toward sustainable financial metrics, your company will struggle to grow.
PMF is more of an art backed by science - there is no right answer. But there are always leading indicators of you achieving PMF at every stage in your journey.
If you work in the tech world, you’ve heard about “product-led growth” numerous times. This is a good website to read all about product-led growth. In this post, we’ll summarize some of the key points which help founders build a product-led organization.
Better customer experience
Keep asking yourself “How can I use my product to deliver a superior customer experience?” Good companies use the product to deliver a better customer acquisition experience through self-paced free trials. Good companies use the product for better onboarding and seamless integrations. The best companies offer streamlined acquisition, onboarding, customer support, success, and growth functions within the product. This leads to better customer satisfaction, higher retention, and increased revenues over time.
Get customers to nirvana everyday
Customer nirvana is that one thing your customer wants to achieve via your product. For lead gen companies – it is creating a list of soft leads. For payroll companies – it is a quick and uncomplicated way of processing employee payroll on time. Many software products are overcomplicated and overthought. The key is to focus on getting your customers to nirvana every day. Break down every task into a nirvana moment – the customer should feel they are accomplishing their tasks every time.
Tell your story every time
Founders should use every opportunity to tell their stories. The best companies are acquisition engines because customers feel they belong and relate to the story of the founding team and the product they are building. Storytelling is also a great way to insert customer case studies, and evangelism and become thought leaders in your space which can act as a customer acquisition engine on its own.
For founders and investors interested in Product-Led Growth, OpenView's reports on PLG Benchmarks are essential reading—after all, OpenView coined the phrase!
What is PLG? Product-led Growth is an end-user-focused growth model that relies on the product itself as the primary driver of customer acquisition, retention, and expansion.
The ultimate aim of PLG companies is to use the product to drive discovery as well as help drive top-of-the-funnel traffic and signups. Broad strategies used by PLG-focused companies:
Exposure Virality: Every time a user interacts/ uses the product, the company’s brand is exposed to the broader public. E.g.: Zoom, Calendly
Collaborative Virality: Tools that encourage peer participation in a workspace or an assignment. E.g.: Slack, Dropbox
Side-Car Products: Standalone products that introduce the brand to ICPs by solving a tangential need, typically for free. E.g.: HubSpot’s website grader
Note: Almost all companies focus on creating search-friendly content (SEO) that drives discoverability, this is more pronounced in PLG-based companies
The Product Benchmarks report 2022 provides relevant benchmarks for SAAS companies across their life cycle. Some numbers which stood out for me:
Today’s most successful companies are adopting PLG, leading others to try to mimic their approach. Respondents at product-led companies, especially those with a freemium model, are over 2x more likely to be growing quickly (100%+ year-over-year revenue growth) than sales-led models.
The Open View report and interactive calculator to see how your startup’s user journey compares to businesses at a similar size and scale in the comments below
Which are some of the upcoming Indian companies in your view using PLG in a big way?
PS: True to form, OpenView’s report allows its readers to easily tweet insights from the report to encourage more virality – PLG in action indeed 😊
We recently visited the capital to meet our portfolio companies, attend a VC meet, and make new connections.
Sharing our learnings from the visit:
There is no doubting the enormous scale of the American market, which continues to be the ultimate target market for Indian businesses. It is still the most competitive, though!
Enterprises + SMBs in the USA are the ‘most catered’ consumers in the world and demand a high level of sophistication and quality from their sellers. This is particularly difficult to achieve for early Indian businesses.
We met early-stage founders at 2 different businesses and were surprised to learn that they collect more than 50% of revenues from abroad, yet only 10-15% of it comes from North America! Both sets of founders realised early that the USA market is a tough nut that requires lots of initial cash burn and focused on different geographies namely LATAM and MENA!
Several countries within these places have similar demographics to India and are looking for value-driven products. Also, Indian founders + products are looked upon as reliable partners especially in the IT space – thanks to the likes of TCS, Infosys, etc. We urge early-stage founders to think more innovatively on their course for global dominance!
While VCs have record dry powder, new investments are yet to still pick pace despite moderated valuations. A broader reset is underway in the world of venture capital and our interactions lead us to believe that several investors are rethinking some assumptions:
Several sectors which benefited from the covid-led online boom are now witnessing slowing growth. VCs are now wary of investing in the likes of Ed-tech, D2C businesses, etc. in the face of rising CACs.
However, there is no denying that the last couple of years has unearthed new potential opportunities for businesses – A significant chunk of Bharat (India SMB, housewives, farmers) have now decent exposure to digital goods and are willing consumers of payments, software, audio content, etc.
We believe that there is a clear flight of VC capital to perceived safer avenues (Read B2B SAAS) at least in the short term.
Account-based marketing (ABM) is a focused growth strategy in which Marketing and Sales collaborate to create personalized buying experiences for a mutually-identified set of high-value accounts. This involves businesses identifying the right ICP, targeting the most relevant, and developing a targeted campaign to gain direct access to potential customers and likely convert some of them.
In our view, Indian startups continue to treat ABM as a lead generation and mass emailing campaign. We spoke to a couple of experts in the space and were astounded to learn the results of some efficiently run campaigns. ABM is easily one of the most cost-effective ways for a startup to receive first-hand feedback and can potentially help startups figure out if they really enjoy PMF!
We're eager to connect with other early-stage ecosystem participants around the nation and share what we've learned with you.
Write to us at pitch@malpaniventures.com!