My investing partners and I, The Boardroom, have identified the next startup we’ll be investing in.
They’re a rapidly-growing adult (alcoholic) beverage brand.
But not just any beverage company…
Earlier this year, a well-known global research firm recognized them for their growth (cases/volume, dollars, and sales velocity).
They also named them in the Top 10 Brands for their entire beverage category.
They’re on to something… and it’s called Product-Market Fit (PMF).
While this deal isn’t quite ready for investors just yet, I’ll be keeping you updated as this opportunity unfolds.
It’s where I share the most vital pieces of MY Angel Investing strategy.
So how important is product-market fit?
Well, it will make or break a startup.
Let’s look at some examples of real companies that absolutely nailed it…and some that just missed the mark.
Product-market fit (PMF) is the key to any startup’s success. It’s the most important thing the startup needs to get right, and the most important thing for you, the investor, to identify before investing.
The word on the street is that Sequoia Capital founder, Don Valentine, invented the concept which was then popularized by venture capitalist Marc Andreesen.
Andreesen says, “Product/market fit means being in a good market with a product that can satisfy that market.”
Seems kind of obvious, doesn’t it?
As simple and straightforward as PMF is, you would be shocked at how many startups get it wrong. It is far more complex and elusive than you think. Knowing what it is and knowing how to achieve it are two very different things.
I’m going to show you exactly what you need to know about this essential concept from an investor’s point-of-view. I’ll even throw in some of the best and worst examples of product-market fit from real companies.
Why Investors Need to Know
Product-market fit isn’t an idea or a value, it’s a position.
Believe it or not, PMF comes after tons of other essential milestones have been met. It’s the result of loads of planning, testing, and validating.
This is why your job as an angel investor can be tricky. The startup you invest in will probably not have a product-market fit yet. Your job is to assess the startup to see if it’s on track to reach it.
You will constantly find companies that have great ideas and great teams but simply cannot connect the product to the market. Either they haven’t defined an underserved market or they don’t have a strong value proposition.
Spotting these things and separating the wheat from the chaff is your job. Your success depends on it. As an investor, you need to start seeing companies in this light.
Identifying Product-Market Fit
Finding if your startup can reach its product-market fit is easy. Put simply, customers should see the product and say, “That makes my job so much easier!”, or, “The one I have can’t do that!”
Those reactions are a sign of a product that fits an underserved market and brings value to the customer — the basics of product-market fit.
Getting a bit more in-depth, here are four questions to ask yourself when checking out a company:
- Is there a clearly defined market?
- Does this product solve a problem for that market?
- Has the product been tested on real customers?
- How do customers respond to the product?
The better the answers, the better the chances of the startup’s success. If a founder can’t answer these, they simply don’t understand product-market fit and aren’t worth investing in.
Ideally, the answers should look like this:
- Yes. We have chosen a target customer and we know everything about them.
- Of course. We are solving problem X or satisfying desire Y for our customers.
- We sure did. Our product has gone through rounds of testing, feedback, and iteration.
- When customers try our product, they instantly see the value in it.
Don’t worry if the team hasn’t taken in that far yet. If they had, you would be investing on much different terms. The goal is to see if these things have been considered. Just check the position of the company and see if it’s on track to succeed.
Want to become a startup investor? I outline the most vital pieces of my Angel Investing strategy in my latest investing guide, the Startup Investor’s Playbook. Download your FREE copy today (retails for around $49)…
Companies That Got PMF Right
OK, I think you get it now. Product-market fit is everything. Angels live and die by it.
Let’s check out some of the best examples of companies nailing the product-market fit so we can learn and grow and hopefully make big returns on our investments.
Sound good? Good. Let’s get right into it.
Product-market fit tip: Find what people are already doing and make it so much easier they have to take notice.
Before DocuSign, people were faxing or scanning and mailing signed documents. The system worked and there was a huge market for it. Then, Docusign came around and digitalized everything. Now, documents can be signed, sent, and stored easily and securely.
This was a game-changer.
Apart from getting everything else right, the company had a clear product-market fit. They already knew there were customers for their solution, the only question was whether they could get enough people to adopt it. The solution was so drastically easier than the alternative that loads of businesses happily switched over.
Docusign nailed its product-market fit and went on to be wildly successful. It raised $536.2 million in funding and went public in 2018.
Download your FREE copy of my latest investing guide, the Startup Investor’s Playbook. In it, I outline the most vital pieces of my own Angel Investing strategy.
Product-market fit tip: Take a bunch of things customers are already doing and bundle them together (bonus points for network effects).
Slack took almost every type of communication that businesses use and combined them. Emails, watercooler conversation, messaging, file-sharing, were all brought into one seamless application.
Right away it shows a value proposition to businesses — an all-in-one suite for better communication and collaboration for teams. As well as creating a ton of value for users through the network effect. The more users on the platform, the more valuable it is for each user.
There were other apps doing something similar, but Slack with its custom emojis, threading, and intuitive interface, created something much better, more fun, and more social.
The result was a work application that users enjoyed using. Overnight, individual-based communication (email) gave way to team-based communication (Slack).
Slack is fabulously successful. It raised $1.4 billion in funding and landed a hefty IPO exit.
Product-market fit tip: When you find out you have no market — pivot.
To have a product-market fit, you don’t just need to think you have a market, you need to iterate and test until you know you do.
More often than not, startups make products that there just aren’t any customers for, despite their best guesses. Or, in the case of Twitter, your market gets stolen right from under your nose.
Twitter began as a startup called Odeo. Odeo was going to be a website for creating and sharing RSS-syndicated audio and video — later to be known as “podcasts.”
Then, catastrophically, the already-huge iTunes launched its podcasting service, essentially making Odeo irrelevant. The market was gone, eaten up by a giant competitor.
Instead of laying down to die, the Odeo team pivoted hard into another idea, a social network, one where users share brief posts on what they are doing and thinking. Yup, that’s Twitter.
In this new market, Twitter was able to compete with other social networks through its unique focus and purpose. It found a new customer base, tested it with them, and found its product-market fit.
The rest is history. Twitter went on to become a unicorn — $1.5 billion in funding, an IPO, the whole nine yards.
Companies That Got PMF Wrong
One of the best ways to learn product-market fit is to see companies that missed the mark. Here are two I think you can learn a lot from.
Product-market fit tip: Innovation isn’t enough — a product should solve a problem.
I’m sure you’re all familiar with that famous, futuristic (but not in a cool way) vehicle known as the Segway. There were huge expectations behind this little self-balancing electric vehicle. The Segway was supposed to carry us into the future on two wheels.
Despite having a great product and lots of funding, the Segway was a flop.
The first problem — the team never identified the target market. It was just assumed that people would want to use the thing on novelty alone, or perhaps they thought their product was so revolutionary it would catch just like wildfire and take over.
Next, they never bothered to test it with real consumers because they wanted to keep it a secret. Their fear of potential competitors had them going to the market blind to what people actually thought of the product.
Most of all, the Segway didn’t solve any problems. It was developed and marketed as a vehicle for everyone, pedestrians, commuters, workers. They thought it could replace cars, bikes, and our own two feet. Turns out, it doesn’t add enough value to do that. People get by with the alternatives just fine.
As a side note, the Segway actually has a product-market fit with warehouse companies, police forces, and a few other niches. If the Segway team had checked their expectations, tested, and iterated, they could have focused on these markets and done quite well.
Product-market fit tip: If you pivot away from a product-market fit, you may never get one again.
This is an interesting case. Yik Yak was an anonymous social media application. Users could connect and talk in forum-style threads based on their proximity to each other.
The app became hugely popular with high schoolers and college students. Yik Yak rapidly grew, reaching a valuation of $400 million at its peak.
The trouble started when some media outlets criticized Yik Yak for facilitating cyber-bullying.
In an attempt to change its public image, the founders made several big changes to the service. They removed users anonymity and more or less turned the platform into a standard social network, stepping right into competition with Facebook and the like.
Yik Yak had lost its identity. The changes alienated users, pushing away a loyal customer base. It tanked shortly thereafter.
In 2017, Square purchased Yik Yak’s engineers for $3 million, a long fall from $400 million.
It was a tricky situation they faced. They could keep a successful product-market fit and be criticized or they could rebrand and risk losing it all. They attempted the latter and it didn’t pan out.
PMF is a hard thing to come by. Once you get it, you should try to keep it at all costs. And as an investor, it should be top-of-mind when evaluating your next potential investment.
Ready to apply what you’ve learned today to a real angel investing strategy? Download your copy of my latest investing guide, the Startup Investor’s Playbook.