Last week, Brad Feld posted on the illusion of product-market fit at early stage companies - starting first by reiterating four myths:
- Myth #1: Product market fit is always a discrete, big bang event
- Myth #2: It’s patently obvious when you have product market fit
- Myth #3: Once you achieve product market fit, you can’t lose it
- Myth #4: Once you have product-market fit, you don’t have to sweat the competition
From this, using MRR as a chief metric, he lays out great guidelines as to when startups have found product/market fit:
- When you have $0 of MRR, you have no product/market fit.
- $10k to $100k - you’ve got a semblance of product/market fit. If you aren’t growing a compounded 10% each month (CMGR), you don’t have product market/fit yet. If you are growing faster than that, you have found something.
- Going from $100k to $500k MRR is a product/market fit sweet spot.
- If you can blast through the $500k MRR mark and march to $1m MRR, you’ve found product/market fit.
- Fit - If your growth rate is between 50% and 100% [3.45% to 5.55% CMGR] - and holding steady, that’s good and you’ll see a nice, big, healthy valuation.
- Watch - If [your growth rate] is declining, watch out for that magic 50% [3.45% CMGR] year-over-year mark. It’s like a trip wire that will send off all kinds of weird alarm bells.
- No Fit - Once you decline below 20% [1.5% CMGR], you better make sure your existing investors are going to be ready to step up.
Of course, these are guidelines, but they're clear enough to have a useful discussion about. In fact, it's caused us to re-evaluate whether some of our internal startups have achieved this fit.
To help with these internal discussions, I made this graphic as a type of short-hand. Note: since the guidelines convert from CMGR to CAGR at the $500k mark, I converted everything to just use CMGR.
What do you think? Is this useful for you?
You can read the full post here: http://www.feld.com/archives/2015/01/illusion-product-market-fit-saas-companies.html.