Why is PMF (Product Market Fit) a big deal?
Since venture funding has become more scarce than before, more and more VCs are talking about achieving PMF. We have seen startups burning tens of millions in growth without finding even a basic PMF.
Trying to grow aggressively without any signs of PMF is a recipe for disaster. But sometimes founders don’t understand the importance of PMF when they are building and scaling their product.
Let’s say you have a wonderful idea, and VCs invest in brilliant ideas. If you already have launched the product, it’s no longer an idea, right? What more does a VC need?
You are right, at least partially right. VCs do back ideas, at least they used to in the halcyon days of Venture Capital. Alas, those days are long gone. We are in the midst of what is commonly dubbed as funding winter. VCs are in a wait-and-watch mode.
A few VCs still invest in companies at the idea stage. We can call them seed-stage VCs, although they are rare in India. Their strategy is to back excellent founders in the hope that these founders will create something worthwhile. But all these founders come with an excellent pedigree and a track record of creating awesome companies.
If you want venture investment at an idea stage, angel investors are your best bet. Most premier venture capitalists have outsourced seed-stage investing to angel investors.
So if you are a first-time founder, the chances are you won’t get external capital when your business is just an idea. You will need to create a product before you can go out to raise equity. And if you are lucky to find a VC who shows interest in your product and business, he or she will like to see evidence of PMF.
So what is a PMF?
Let’s see signs that don’t denote PMF. Charlie Munger calls this approach the principle of Inversion.
1. The product launch is not an indicator of PMF.
2. Neither traction nor exponential growth denotes PMF. You can grow quickly by burning dollars. The world is littered with such startups that are struggling to survive because they are bleeding money and VCs are not interested in funding their massive burn.
3. Exponential growth in some cases is a sign of scaling before achieving PMF.
PMF doesn’t require a complete or final product. And most importantly, PMF is always evolving — it is not a fixed state that once achieved stays with you. Think of it as the opposite of inertia.
There is a popular saying in the startup universe. I think Ben Horowitz of Andreessen Horowitz first said it. “When a bad market meets a good idea or an awesome product, the market wins.”
So in today’s market when good products are struggling, make sure you find your initial PMF before you even entertain any thoughts of scaling. Otherwise, you are courting failure.
How do you build a Product Growth team from scratch?
The first thing to do is to establish the philosophy of the product growth team. There are roughly two varieties:
1. Pursue a metric or business problem, agnostic of the artifact
2. Own specific growth-related artifacts
The first variety, product growth teams who pursue changes across any area of the product, generally have to do a lot of ‘farming on other’s land.’ So, it’s important as a leader to work through how the team will pursue and prioritize initiatives.
How will you prevent the teams owning a particular artifact from just picking up your good ideas? How will you work on their surface if they want to experiment at the same time? Working out the answers to those questions early is critical.
The second variety, product growth teams who own the product-led growth part of the product (in B2B, often some freemium type features; in B2C, often the top of the funnel) need to find realistic goals. What can you actually accomplish given the artifacts you can play in?
Having realistic goals based on data, not hopes, is key.
After figuring out the philosophy of the team, the next steps are to assemble the unit, begin building the backlog, and commit to your OKRs.
· Assemble the unit: Get together a cross-functional team of leaders across engineering, analytics, and design. Work as a group to identify your product principles, operating rhythms, and ideal team below you. Then work with leadership to get the requisite folks. I think it’s especially important to have enough ICs in each discipline to do the work.
· Begin building the backlog: Start to source ideas. Use data to prioritize business and user problems. Work with research to finesse the problems. Do design sprints to think through potential solutions. Work with analytics and engineering to size them. Then begin to take your initial prioritized initiatives to product leaders and colleagues to make sure you are the right team to do them.
· Commit to your OKRs: Now that you have a backlog, size those projects against some key metrics. Find a set of OKRs that are just slightly a stretch — slightly beyond your initial sizing. And then commit to them.
Now that you have a backlog and OKRs, it’s time to get shipping. Iterate and improve on your philosophy, unit, and work products as you go. Pay especially close attention to whether you need to change something. You almost always will.
