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Deep Dive: Paul Graham: ‘Are You Building Fake Product-Market Fit?’
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Today’s Deep Dive
Paul Graham: Are You Building Fake Product-Market Fit?
Nowadays - It's pretty common for companies to claim they've nailed product-market fit when, in reality, they're quite far from it. I'd argue this is a major cause of downfall, especially for post-seed companies.
Many founders often face a dilemma where they believe that they have achieved product-market fit based on some factor, but honestly, it’s just a "Fake Product-Market Fit." What are those factors?
Firstly, some founders believe they've hit the jackpot when they secure funding from impressive individuals or renowned funds. The thought is that if these influential people or funds chose their company, it must mean they have product-market fit. This belief is surprisingly widespread.
Secondly, there's a trend where companies manage to raise substantial amounts, even before having a product that people truly love. Interestingly, instead of focusing on users and improving the product, founders often shift their focus to building the company, which is usually not the best move.
Thirdly, there's this phenomenon we call "magical thinking". It involves ignoring obvious facts or not bothering to measure crucial metrics that would reveal whether product-market fit exists. For instance, not understanding churn or the payback period after acquiring a customer. If you're not aware of these numbers, it's easy to convince yourself that you've achieved product-market fit when you haven't.
Lastly, there's a tendency for people to delude themselves into thinking they've achieved product-market fit simply because they don't want to face the idea that they might need better engineering or product improvement. Admitting that improving the product is challenging, they find it easier to just believe their product is already good.
Most of the founders fell into this trap of ‘Fake Product Market Fit’. Not only this - One of the most common misconceptions is that
“Product-Market Fit Means Only You've To Build A Product That Your Users Want.
In reality - the product market fit is more about the numbers.”
What Does It Mean?
Product-market fit typically feels like your product is gaining traction with profitable usage.
Here is the breakdown:
”your product is attracting users, and word of mouth or advertising channels are working well. Users love your product, and they're sticking around.
However, there's a catch.Parts of your product that you didn't build to scale are starting to break. It could be software components or operational aspects, but something is faltering because it wasn't designed for this level of success.”
You might be thinking what’s this profitable usage about?
“It means these users are the ones you want, and economically, they make sense. You're not spending a lot for a user who only brings in a fraction of that cost. There's no crazy three-year payback period or anything like that.
So, for genuine product-market fit, we need both these components:
1. a product that's breaking in a good way due to increased usage
2. users who align with the economics you desire.
To achieve genuine product-market fit, founders need to determine if they have a real connection between their product and the market, instead of a fake one. Here are some signs that may indicate a fake product-market fit:
Rapid Hiring Spree:
A common signal is a sudden surge in hiring. Founders often believe they've achieved product-market fit, and the team expands rapidly from four to twelve members in no time.
Business Over Engineering Focus:
If you notice a shift towards hiring more business people than engineers, especially with the rationale of scaling the sales team, it could be a red flag that the numbers aren't moving as expected.
Absence of Metrics Dashboards:
A clear indication is the absence of metrics dashboards. When no one's actively looking at the numbers and decisions are made based on feelings and guesses, it suggests a lack of concrete data.
Excessive Spending on Luxuries:
While it might be harder during challenging times like COVID, overspending on nice offices, trips, and dinners can be a warning sign that the focus has shifted from product improvement to unnecessary luxuries.
Flatlining Graphs:
If your performance graphs are consistently flat, it's a straightforward sign that the expected growth or user engagement isn't happening as anticipated.
Missed Estimates with Excuses:
Missing estimates and justifying them with reasons like "it's still okay" can be a way of rationalizing the discrepancy between projections and reality.
Changing KPIs:
A popular but concerning move is changing Key Performance Indicators (KPIs). Shifting from one metric to another, especially when the original KPI is flatlining, raises questions about the actual progress of the business.
If you find yourself facing these signs, it's essential to question what's happening and whether the initial understanding of product-market fit was accurate or if there are underlying issues in business progression.
Once you've identified the issue of fake product-market fit, here are things that you can do to fix it and achieve product-market fit:
Choose an Honest KPI and Stick to It:
Selecting a truthful Key Performance Indicator (KPI) is crucial, especially for Software as a Service (SaaS) businesses. Revenue is often the primary KPI, comprising revenue from both new and retained users.Carefully Monitor Retention:
Vigilantly tracking user retention is essential. If your product is genuinely good, high user churn is unacceptable. Keeping a close eye on retention rates helps ensure customer satisfaction.Cap Your Burn:
Establish a monthly budget for expenditures (burn) and adhere to it, particularly if you're pre-product market fit. Until product-market fit is achieved, commit to not burning more than the predetermined amount each month. This prevents falling into the trap of fake product-market fit or excessive company spending.Consider Raising Less Money in Seed Round:
Opting for a smaller amount in your seed round can be subtle but effective. It reduces dilution and makes it harder to engage in magical thinking or aggressive spending. A smaller budget forces a more careful focus on metrics and numbers.Start with Strong Technical Co-Founders:
Having robust technical co-founders at the outset minimizes the need to hire numerous engineers later on. A strong technical foundation is instrumental in preventing the fake product-market fit dilemma.Implement a Three-Month Essential Rule for Hiring:
Enforce a rule that evaluates new hires three months after onboarding. If, at that point, they aren't deemed essential—meaning you wouldn't want to work without them—consider parting ways. Early employees should contribute significantly to the team.Make Revenue Generating Employees Self-Sustainable:
Early salespeople, for instance, should be self-sustainable. They should generate enough revenue to cover their costs, ensuring that each revenue-generating employee contributes positively to the bottom line.Learn About Investors' Track Record:
Dispel the notion that impressive investors guarantee company success. Investigate the less successful investments made by your investors. Understanding their portfolio's ups and downs provides a more realistic perspective on your own venture's potential challenges.
That’s It. So overall,
Product market fit is not just about building something that people want, it’s more about the number game.
For genuine product-market fit, you need two components:
a product that's breaking in a good way due to increased usage
users who align with the economics you desire.
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✍️Written By Sahil R | Venture Crew Team
All so true. The hiring spree as a trigger stood out to me as especially true. Thank you for sharing.
Rapid hiring spree + overspending on luxuries usually comes after a company has a funding round