The Importance of Product-Market Fit for Startups

Written By Vignes Rajagopal

A common pitfall for many startups is failing to ensure they have an appropriate product-market fit. Dragon Argent look at the importance of product-market fit in the startup world and how establishing this will often be the key to securing investment and scale.

Context

Product-market fit is the degree to which a product satisfies a strong market demand.  According to Marc Andreessen, the co-founder of Netscape, product-market fit means being in a good market with a product that can satisfy that market.  Demonstrating a strong product-market fit is often described as the first step toward building a successful venture in which the company meets early adopters, gathers feedback, and gauges interest in its products.

Developing a minimum viable product, or MVP, that addresses and solves a problem is an effective way for lean startups to quickly test a product-market fit with potential customers.  This is often achieved through mechanisms like design sprints, accelerator programmes or co-creation with prospective clients where feedback can result in agile iterations of an MVP.    

Product-Market Fit Criteria

There are several criteria to demonstrating a product-market fit including:

  • Value Proposition: what is the promise of value to be delivered, communicated and acknowledged by clients for your proposition and how will this be delivered, experienced or acquired?

  • Market Segmentation: what is the segment of a broad consumer or business market that contains high yield potential clients based on shared characteristics such as needs, interests, demographics or purpose?

  • Relationship: what is the relationship of your business with your clients and how do you recognize, create or act upon business opportunities, share information and seek potential partners?

  • Channel: how do you identify the most effective channels through which the distribution of your product or service takes place to get to the end user

When a business fails to establish product-market fit, customers don’t get your value, no one is talking about you, usage isn’t growing, conversions are slow or not at all and so on.  It's the foundation stone for any startup with growth ambitions. 

How Product-Market Fit Leads to Investment & Scale

Establishing the product-market fit is often a precondition for securing investment.  VC’s and angel investors want to see metrics such as monthly and annual recurring revenue, active users, renewal rates, customer acquisition cost, customer lifetime value etc. and will test founders on these criteria before making an investment decision.  If a product-market fit hasn’t been established, demonstrating these other metrics in a meaningful way is going to be challenging because the size of the true market opportunity won’t be known. 

Establishing the product-market fit is also a precondition for effectively scaling a company as it informs how you communicate what it is you do, the channels and mechanisms through which you communicate that and to what target audience, prioritizing the most significant opportunities. 

According to CB Insights, who have been compiling failed startup post-mortems, the number one reason startups fail is that they don’t achieve product-market fit – this reason is cited by 42% of CEOs of failed startups.

Summary

Establishing product-market fit is hard and takes time.  Time founders often feel they don’t have.  It is however essential if other objectives such as securing investment and achieving scale are to be achieved. 

If you’d like to discuss how to establish the product-market fit for your business, please get in touch.

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