A framework for finding product-market fit | Todd Jackson (First Round Capital)

Todd’s background (0s)

• Product-market fit is essential for startups in their early stages and can be achieved through demand, satisfaction, and efficiency.
• There are four levels of product-market fit: non-existent, developing, strong, and extreme, with most startups (60%) never progressing beyond the second level.
• The 4 Ps (Persona, Problem, Promise, and Product) should be adjusted if a startup is stuck in a particular stage of product-market fit.
• Todd Jackson, a partner at First Round Capital and former product lead at Gmail, Facebook, Twitter, and Dropbox, shares his insights on product-market fit based on data from hundreds of startups.
• First Round Capital is developing a three-month program to help founders achieve product-market fit.

First Round Capital’s PMF framework (6m7s)

• The concept of product-market fit (PMF) is often seen as an art rather than a science, leading to a lack of specific and tactical content on the subject.
• Rahul's approach to finding PMF, published in the First Round Review in 2018, gained popularity due to its specificity and tactical nature.
• Lenny's work on product validation and PMF benchmarking data, such as the time it takes to reach PMF, has also been well-received.
• Despite its importance, PMF is underexplored and underexplained as a topic.
• First Round Capital has published dozens of articles and interviewed numerous founders on the subject, identifying consistent patterns in the early stages of successful enterprise companies.
• The framework is based on these patterns.
• PMF is the single most important thing a startup does in its first three years.

Why product-market fit is so important (9m7s)

• Product-market fit is crucial because it propels the company forward and makes everything easier, from hiring to building and selling the product.
• Extreme product-market fit creates momentum and pulls the market along, making it clear what to build and motivating the team.
• Most startups don't get past the first couple of levels of product-market fit, which hinders their progress.
• Finding the right product and explaining it effectively to customers, leading to deep customer satisfaction, is key to unlocking product-market fit.

Who can benefit from this framework (11m2s)

• The framework is designed for early B2B founders, particularly those focused on sales-led rather than bottom-up approaches.
• Bottom-up product development, similar to consumer product development, involves more alchemy and catching the right opportunity.
• Sales-led B2B founders in the first six to nine months of their journey who want to establish a foundation for product-market fit can benefit from this framework.
• The framework aims to increase the odds of finding extreme product-market fit, but success is not guaranteed.
• Finding extreme product-market fit is challenging, and the framework provides a structured approach to reduce the role of luck.
• By understanding the path, levers, and goals, more companies can reach higher levels of product-market fit, leading to a valuable company.

The product-market fit method (12m55s)

• Launched a new program called Product Market Fit Method to help early B2B founders increase the odds of finding product-market fit.
• The program is free, intensive, and lasts for 14 weeks.
• The first session covers the levels of product-market fit, and subsequent sessions cover topics such as customer discovery, market validation, product positioning, design partners, product iteration and pivots, and founder-led sales.
• The program is designed for technical founders who are less than 6-12 months into building their company.
• The program requires about 10 hours of work per week, which founders would be doing anyway.
• The program is 100% free, and First Round Capital does not take any ownership of the founders' companies.
• The program is designed to add structure to founders' work and make them more efficient.

Broad overview of the framework (16m54s)

• Product-market fit is a crucial concept for B2B companies, but it takes time to achieve.
• Extreme product-market fit occurs when there is widespread demand for a product that efficiently and repeatably satisfies a critical need.
• Efficiency is a key aspect of product-market fit that is often overlooked.
• As a company progresses towards product-market fit, the marginal customer should become easier to acquire and serve.
• Product-market fit happens in a sequence of levels over multiple years: nascent, developing, strong, and extreme.
• Companies need to make trade-offs between demand, satisfaction, and efficiency at each level of product-market fit.
• The optimal strategy for achieving product-market fit varies depending on the level a company is currently at.
• There are three levels of product-market fit:
  • Level 1: Strong extreme "yes" from customers.
  • Level 2: Satisfaction, demand, and efficiency.
  • Level 3: Network effects and defensibility.

Level one: nascent product-market fit (21m35s)

• At level one of finding product-market fit, the goal is to identify a few customers with a significant problem worth solving and deliver a solution that provides high customer satisfaction, even if it means being inefficient initially.
• Vanta, a compliance automation company, achieved product-market fit by identifying a specific pain point for startups and offering a solution that unlocked revenue for them.
• At level one, you have less than 10 customers who pay for a product that solves an important problem for them, and you're not concerned about efficiency metrics.
• Signs of being stuck at level one include customers who wouldn't be disappointed if the product disappeared, different most important features for each customer, difficulty finding new customers, and low and stagnant product usage.
• Lattice, which started as an OKR tool but pivoted to a people management platform, is an example of a company that got stuck at level one.
• Todd Jackson of First Round Capital presents a framework for finding product-market fit using the "Four Ps": Persona, Problem, Promise, and Product.
• Plaid initially started as a consumer budgeting app but pivoted to become an API for bank accounts, keeping the Product but changing the other three Ps.
• This framework helps founders think systematically about pivoting and making adjustments to their product-market fit.

The four P’s (33m16s)

• There are four key elements (4Ps) that can be changed to improve product-market fit: target audience, problem being solved, positioning/pitch, and product.
• Founders can approach finding product-market fit by either building first and then selling or selling first and then building.
• Selling first and then building is generally better as it provides customer signals and guides development.
• At the "n" stage, product-market fit is not yet achieved, and acquiring customers can be difficult.
• Signs of being stuck in the "n" stage include customers not being disappointed if the product went away or using different features, indicating a lack of cohesion.
• Close relationships with early customers and honest feedback are crucial to avoid being "friendzoned" by customers.
• Persona is critical in determining product-market fit and avoiding the "friend zone."
• In-product popups are becoming less effective due to user annoyance and immediate closure.
• Commandbar is an AI-powered toolkit that provides personalized results and walkthroughs based on user intent and in-product behaviors, making it less intrusive and more impactful.
• Commandbar works for web apps, mobile apps, and websites and is used by industry leaders like Gusto, Freshworks, Hashicorp, and LaunchDarkly.
• Over 15 million end users have interacted with Commandbar.
• To try Commandbar, sign up at commandbar.com for $2 per month.

Level two: developing product-market fit (39m13s)

• Level 2 of product-market fit involves scaling from five to 25 satisfied customers through scalable channels like cold outreach, content creation, and community events.
• Key metrics to monitor include sales conversion rate (around 10% without warm intros), magic number (new ARR divided by CAC) between 0.5 and 0.75, retention rate (renewals at 10-20%, regretted churn below 10%), and NRR (net revenue retention) of at least 100%.
• Gross margin should ideally be no worse than 50%, and burn multiple (current burn divided by new ARR) should not exceed 5x.
• Product-market fit is a gradual process of development and improvement, not a binary state.
• Looker, a business intelligence company, achieved product-market fit by adopting a "forward deploy process" where the founder personally demonstrated the product's power to potential customers, resulting in a high close rate and zero churn.
• Ironclad, a legal tech company, found success by repositioning itself as a superior CLM (Contract Lifecycle Management) tool within an existing category, rather than trying to create a new category of AI legal assistant.
• Category design is an ongoing debate, but it's generally easier to succeed by putting a unique spin on an existing category where there are already buyers and demand, rather than creating an entirely new category.

Signs you’re stuck at level two, and what to do (49m13s)

• Signs of being stuck at level two of product-market fit include difficulty expanding the customer base, high churn rate, prolonged sales cycles, and customers expressing budget constraints.
• To overcome these challenges, founders should consider a significant pivot, potentially changing the target persona, the problem being solved, the product positioning, or the product itself.
• Product-market fit is crucial for B2B SaaS companies, and signs of not achieving it include a slow sales cycle, low annual contract value, lack of inbound demand, and sales not becoming easier.
• To achieve product-market fit, founders should focus on solving a burning pain point with a valuable promise.

Level three: strong product-market fit (55m12s)

• Level 3, or strong product-market fit, is achieved when a company experiences repeatability and can acquire customers more easily.
• Benchmarks for level 3 include having 30 to 100 employees, reaching series B funding, cracking a scalable demand channel, and having at least 10% of inbound leads coming from referrals or word-of-mouth.
• At level 3, companies should focus on efficiency metrics such as gross margin above 60% (ideally above 70%), burn multiple below 3 (ideally close to 1), regretted turns less than 10%, and NRR greater than 110%.
• Product-market fit is not always clear, even at significant milestones like 100 customers or $100 million in revenue.

Signs you’re stuck at level three, and what to do (1h0m17s)

• Level three problems may include:
  • Leaky bucket (NRR below 90%)
  • High regretted turns (greater than 10%)
  • Slowing growth (e.g., 3x growth in previous years but struggling to reach 2x this year)
  • Increased competition
  • Saturated scalable channel
  • Growing but with low efficiency (spending too much money to grow)
• To reach level four, companies must:
  • Maintain satisfaction and demand in a more challenging market
  • Focus on efficiency
  • Continue to grow

Level four: extreme product-market fit (1h2m22s)

• Companies that reach level four have achieved high levels of satisfaction, demand, and efficiency.
• To continue growing, companies need to expand their total addressable market (TAM) by entering new markets or developing multiple products.
• Finding product-market fit is an ongoing process, and companies need to maintain a mindset of continuous improvement to stay ahead of competitors and meet rising customer expectations.
• Approximately 60-70% of companies get stuck at levels one or two, while only 30% make it to levels three or four.

Rough timelines for each level (1h6m55s)

• The process of finding product-market fit usually takes around four to six years, with the most crucial stage being the initial 12 to 18 months.
• Quickly move from choosing the right persona and problem to focus on to acquiring the first five satisfied customers.
• Reaching $5 million to $25 million in revenue can take approximately two years, while getting from $25 million to $100 million is challenging and may take a couple of years.
• If a company hasn't found product-market fit after four to five years, it's unlikely they will later.
• Founders should consider returning the money to investors or seeking a soft landing if they haven't found product-market fit after four to five years.
• It's common for startups to not get their product-market fit right away, and there's no shame in it.
• Founders should be supported in their efforts to find product-market fit.

A quick recap of the framework (1h11m18s)

• Level 1: Product-Market Fit (3-5 customers) - Focus on satisfaction.
• Level 2: Developing Product-Market Fit (5-25 customers) - Focus on demand.
• Level 3: Strong Product-Market Fit (25-100+ customers) - Focus on efficiency.
• Level 4: Extreme Product-Market Fit (100+ customers) - Focus on all three (satisfaction, demand, efficiency) and expanding the total addressable market.

Diving deeper on the four P’s: what to do if you’re stuck (1h12m15s)

• The four Ps: Persona, Problem, Promise, Product.
• Persona:
  • Think of the market as a collection of people, not just a category.
  • Understand the Persona deeply: challenges, goals, how to help them succeed.
  • Get to know your customers personally (e.g., text messaging, meeting on weekends).

Dollar-driven discovery (1h13m56s)

• Customer discovery should test the dollar potential of a hypothesis, not just talk about problems.
• Avoid the "happy ears" trap and listen for signs of interest, such as wanting to meet again or share the idea.
• Identify extreme value by looking for "Wow" statements or demonstrated interest. Ask customers to quickly identify the value of your product or service.
• Confirm the ability to pay by asking if the customer is looking for a similar product or has an existing budget for solving the problem.
• Quantify willingness to pay by asking about their budget, comparing prices with other tools, and using specific questions like "What is a fair price?"
• Ask specific questions to get honest answers and avoid speculation.
• Watch videos of other founders conducting customer discovery interviews to learn from their experiences.
• Know what to show potential customers when demonstrating your product, depending on its nature.
• Talk to enough people until you can predict 70-80% of what the next person will say, indicating sufficient customer insights.

Apply for the product-market-fit method program (1h25m11s)

• The program is for B2B founders who have been working on their product for 6 to 9 months.
• Founders should have an idea of what their product is and who it's for, but haven't started writing any code yet.
• Applications are open until May 7th, and the program starts on May 29th.
• Interested founders can apply at pmf.firstround.com or reach out to Todd Jackson on Twitter (@tjack).
• The conversation will help many founders and they will come back to it repeatedly.