Startup general interest

Identifying product market fit

By February 4, 2014 2 Comments

Most early stage companies these days think of themselves as searching for product market fit. The challenge they all have, and that we share as investors, is recognising it when it’s arrived. Many companies make the mistake of thinking they have got there before they have, dialing up expenses and marketing spend before running into trouble. This is called premature scaling, which is now widely understood to be one of the most common reasons for startup failure (in my book it’s second after building something that people don’t want).

Andrew Chen just published the slideshow below which talks about how to know when you’ve reached product market fit, and how to maximise your changes of getting there. For a consumer business he says you should be looking for:

  • Usage three out of seven days
  • Organic growth of 100s of sign-ups daily
  • 30% of users active the day after registration
  • Clear path to 100,000 users

For SaaS he says:

  • 5% conversion from free to paid
  • 3x CPA:LTV ratio
  • <2% monthly churn
  • Clear path to $100k MRR

These are broadbrush generalisations and there are definitely businesses that have found product market fit that miss on one or more of these criteria, but they are a good place to start from.