This is the fourth post of our 10-week “funding fit” blog series. Read the first, second, and third tips too!

Tap into any start-up community discussion and you’ll quickly discover that product/market fit is one of the hottest topics. The buzz around this concept can be distilled into a simple phrase: make things that people want. As part of our funding fit series, we want to share a few tips to help you think about and validate your product/market fit.

Creating a product that has a strong market demand is especially important when raising investor money. VCs are willing to take a chance on your company only if they think they can get high returns. If your product is not in high demand, the chance of getting good returns on their investment is slim.

Even if you’re not seeking venture capital, it’s still essential that you build a product that the market truly desires. In fact, Marc Andreessen has said that ”the best team with the best product will fail if the market is not there.” He also referenced that “product/market fit is the only thing that matters and companies should strive obsessively to achieve it until they do.”

And yet, while it seems obvious that you need to find a market for your product, the number one reason why startups fail is lack of market need, according to CBInsights.

So how do you ensure that you’re building the right product for the right market? And how do you convince potential investors you have nailed a fit? There are many different models for measuring product/market fit, yet in our experience the process can be more qualitative than quantitative. Many startups never achieve product/market fit, while others have to do multiple pivots to get there.

 

1. Test Test Test

To figure out if there’s a sufficiently strong demand for your product, you first need to build an MVP (Minimum Viable Product) that you can roll out to customers. Then it’s time to test your product. And test, and test again.

One strategy is to get your MVP out there on an inexpensive or trial basis, then survey your customers to see what attributes of your product are “must haves”—and what features your product would need to create something your target market can’t live without.

This direct market feedback will help guide the next iteration of your product, making it align more closely with what your customers actually desire.

Once you have a substantial customer base, ask them what other problems they are seeking a solution for. This could further help develop your product, or provide you with valuable feedback should you need to pivot or start over.

 

2. Control Your Burn

Given enough time and money, a strong team will eventually develop the right product/market fit. The problem is, you don’t have unlimited resources. The key to success is not simply finding the right product/market fit, but finding it before you’ve run out of capital to develop, improve, and pivot to get there. The number two reason why startups fail is because they run out of cash.

So how can you build the right product on the budget you have?

Keep your expenses low while you fine-tune your product. One rule of thumb is that you should not spend too much money scaling your business until you hit a critical mass of users that find your product impossible to do without. That means, for instance, holding off on hiring a VP of Marketing & Sales until the product is ready for prime time. Overhauling the product is work that is best done—and most cost-effectively done—by the cofounders themselves.

By keeping your burn rate to a minimum, you ensure that your company can stay in the game long enough to build a product that your market will go wild for.

 

3. Really know your customers and your metrics

To help determine how far along you are on the path to a product/market fit, you need metrics that can measure if you are developing a customer base.  Sean Ellis, CEO of Qualaroo and GrowthHackers.com, suggests the 40% rule, which says that product/market fit is achieved when at least 40% of surveyed users say they would be “very disappointed” without your product or service.

While there are countless metrics entrepreneurs can use to convince investors that they’ve achieved product/market fit, you should pick ones that are most relevant to your industry, and ones that can put you in the best light of a growth story. In our experience with SaaS B2B enterprise solutions, we found these three metrics to be the most telling on whether a product is truly meeting a market need:

  • Increase in number of users over time.
  • Increase in repeat users/subscribers as a percentage of total.
  • Number of referrals.

If you can clearly articulate your unique value, execute your great idea into a product, then match the demand of target market, you have a good shot at success at convincing investors that you have a bright future worth financing.

What is your #ProductMarketFit? Let us know @LighterCapital. Get all the 10 tips and join the conversation via #FundingFit!

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