Product-Market Fit (PMF) is one of the most powerful frameworks the world of entrepreneurship has come up with to determine whether a business is ready to scale. If you haven’t heard about it yet, here’s a quick summary: PMF is like finding the perfect match between what you’re selling and the people who want to buy it. It’s the point in time when your product fits so well with what people want that it starts selling almost automatically.
The Story of Product-Market Fit
Starting back in 2007, Marc Andreessen wrote a blog post, that defined Product-Market Fit. In his post, he said that for any new business, there are two main stages: before you find that perfect match (BPMF), and after you find it (PMF). He suggested that new businesses should keep a low profile until they find that perfect match, and only then should they start growing bigger.
The idea of PMF was further developed by one of Dropbox’s first marketers, Sean Ellis. He noted that if 40% of your customers are upset that they can’t use your product anymore, you’ve found the perfect match. Since then, this idea of Product-Market Fit has become a great compass to guide start-up success before metric-based scaling makes sense.
Some Additions to PMF
While finding that perfect match is really important, there are other things that founders should think about. Though Marc Andreessen rightfully argues PMF is the most important framework you should consider, there are further frameworks that can help you answer the following questions better:
- Should I start this business in the first place? Does it fit to me?
- What will my moat and strategy be?
- Should I invest in this business?
Here are my 10 extensions to PMF that I hope will help you better navigate your journey as an entrepreneur.
1. Problem-Founder Fit
This is when a founder’s own interests, know-how, and skills match up perfectly with the problem their business is trying to solve. It’s important because founders operate in a competitive environment. Having a certain skill-set or network will make it much easier for a founder to develop a business fast. For example, one person I invested in who wants to build a reverse-mortgage company has 20 years of experience in raising funds, market-making, and leadership in finance. Compared to all the other “blockchain dudes and dudettes” who wanted to solve this problem just by launching a security token, I found his non-blockchain solution much more enticing. Problem-Founder Fit is also really important because when founders really care about the problem, they work harder, think creatively, and are more likely to come up with a product or service that people really need.
2. Problem-Solution Fit
Problem-Solution Fit is when the solution you’re offering really fixes the problem you’re targeting. It’s a step before Product-Market Fit and, especially when creating your first deck, consider it before talking about PMF. Believe me or not, but 10 years of experience with startups has taught me one thing: Most new startups don’t offer a solution that really fixes the problem. They think it does, but that’s about it. PSF is important because if your solution doesn’t fix the problem well, people won’t want to use it or pay for it later on. Many startups discover this after successfully raising a pre-seed or even seed round, but by then, it is often too late.
3. Product-Market-Channel Fit
It is an extension of the Product-Market Fit concept by Brian Balfour (see his article here). It adds another layer, the “channel,” to the equation. The “channel” refers to the method or platform through which a company delivers its product or service to the customer. This could be through physical retail stores, online platforms, direct sales, or any other distribution method. Achieving Product-Market-Channel Fit means not only does your product meet the needs of the market, but it’s also being delivered to the customer in a way that aligns with their preferences and behaviours. Brain says there’s a power law of distribution channels, i.e. 80% of your sales probably come from one channel only. You should spend enough time on exploring different channels until you have found this really powerful one. Conversely, the wrong channel can make it difficult for the product to reach its target audience, which might lead to the conclusion that you haven’t yet achieved PMF even though you would by using another channel that attracts different kinds of users.
4. Founder-Team Fit
This is when the founder and their team work well together. It’s important because a good team and their speed of execution is often necessary for reaching PMF in the first place. And it’s even more important after. I’ve seen tons of founders that are unable to lead the team they recruit for various reasons, the most common being: young founders hiring more experienced teamies who do not look up to nor listen to them, people with a corporate background hiring ex-startup employees that talk a different language, and business people hiring techies without having a basic understanding of the technology that needs to be built. I’ve seen all of those three combinations of Founder-Team Misfits get funded, but usually fail shortly afterwards.
5. Product-Technology Fit
This is when the technology you use can support your product and its growth. It’s important because the right technology can help your product work better and reach more people. Think about how the internet revolutionised file storage. If you read the pre-seed deck of Dropbox, which is easily available on the internet, you’ll see that their entire pitch evolves around product-technology fit.
6. Customer-Experience Fit
This is when the experience you give your customers matches what they expect and like. It’s important because the customer experience determines to a great extent their willingness to adopt and pay. This is in my opinion why it took so long for B2B SaaS to kick off with SMBs. They were looking for more efficiency, but often expecting a completely different experience that was highly misaligned with what internet startups offered. Now, both SMBs and the people building SaaS companies have adopted, and we see a huge rise in fast-scaling B2B SaaS startups focusing on SMBs.
7. Business Model-Industry Fit
This is when the way you make money matches how businesses in your industry usually make money. It’s important because some business models don’t work in certain industries. Especially with FinTech companies, I often see ingenious business model innovations that are, sadly though, not adopted as the industry is used to transaction fees as a main business model.
8. Culture-Market Fit
This is when the way your company works matches the market you’re in. It’s important because, especially in B2B, the culture of your startup determines your sales process. I’ve personally seen tons of successful startups that sold a nerdy open-source product or B2C application and suddenly failed to build a B2B SaaS that sells to huge corporate customers. Even though these teams are building immensely valuable products, their culture and style of communication is so incompatible with the purchasing departments of big firms that they never even make it to the first sale.
9. Founder-Investor Fit
This is when the founder and their investors get along well. It’s important because bad relationships with investors can destroy entire businesses. I see this especially when founders go with investors that don’t know anything about their industry and, very often, about startup investing in the first place. When investors have a very different understanding of their role in a startup than the founders building the business, all sorts of problems arise up to them, blocking any future funding rounds. This is why I recommend doing extra-vigilant DD on your investors, too.
10. Business Model-Geography Fit
Business Model-Geography Fit is when the way you make money with your business matches the geographical restrictions you are confronted with in a certain place. It’s important because a business model that works in Asia doesn’t necessarily work in Europe. Especially business models based on cheap labour, e.g. some specific delivery services I’ve seen scale very well in Asia, have not made it to Europe. This is a structural problem, as staff is much more expensive in Europe. Building a copycat without thinking about the differences between certain geographies often leads to disastrous results.
A Final Word on Product-Market Fit and Its Extensions
Importantly, the list above is by no means a checklist for you to complete for your business. Rather, I hope it provides more useful and unique insights to both founders and investors, helping you identify more businesses that just “make sense”. As the entrepreneurial landscape continually evolves, adapting and understanding these frameworks can be your compass in navigating challenging terrains.
