When it comes to startups, one of the most important things a founder can achieve is finding product market fit (PMF). This occurs when a startup has created a product that starts to meet some or many of the needs of its target market. When we work with a startup in our Norwich based incubator, or through our work as startup and scaleup consultants, the current status of the product market fit is always one of the key considerations before making the engagement.
Early in a company’s life, defining product-market fit can be difficult for a number of reasons. Understanding the messaging to engage with a customer may be hard, the product doesn’t meet some, many or all of the customers’ needs, or in the worst situations, the customer simply doesn’t want the products at all.
As a startup starts to have a more consistent PMF, it becomes a viable business and growth potential increases significantly. Generally, some processes will have been implemented to make new customer acquisitions a process and customer feedback is supporting in iterating and improving the product.
In this article we will explain to a startup founder why product market fit is so important, the value of acquiring and learning from early customers helps to shape and drive a company’s later successes.
Why a product is not enough
A startup with a great product that doesn’t sell is in trouble. Without customers, there is no revenue coming in to cover costs and the company will eventually run out of money. This reality has been the foundation to business since the beginning. Even if the startup has a lot of funding, it’s not a guarantee that the company will be successful. A lot of startups have failed even after raising a lot of money.
Having a great product isn’t enough. A company also needs to find a market for its product and connect with customers who are interested in what it has to offer. Without that connection, the company will struggle to survive.
Many would argue that the Sinclair C5 was a great product, but ultimately it was a failure.
For the uninitiated, the Sinclair C5 was a battery-powered electric vehicle launched in 1985 by Sinclair Research Ltd. It failed for a number of reasons, with many suggesting it was because it was ahead of its time and not what the market wanted or needed then. Even today many people collect the battery-powered C5 for its product innovation, but it never became a commercial success.
Using early customers as a learning opportunity
A startup needs to the opportunity to engage and learn a lot from its early customers. These “early adopters” are taking a chance on a new product and can ultimately help to shape it into something that meets their needs.
Feedback is essential in understanding what works and what doesn’t for the most important part of any business, its customer. These key insights can be taken and added to the product roadmap, refining and improving the product for the next potential sale.
Good feedback can also help uncover new marketing messages that you didn’t know your product would be able to use. If a customer feeds back that since using the product, this problem becomes ten times easier to solve, that can become a foundational feature of your product.
Early investment with limited PMF
Many startups engage with us seeking investment to catapult their business and its fortunes forward. Our first focus on where the organisation is in terms of its product market fit. Whilst there are always outliers, Theranos raised a significant sum of money and many have successfully argued they never had a product. A rough guide that we would expect to in terms of fundraising is as follows.
Idea Stage: No Product, No Market
At this stage you will be looking to create an initial proof of concept product and start to define your market. Generally, this would be the friends and family, or own investment round. We have secured grant funding from certain organisations, including from our partnership with Polygon, for excellent early-stage ideas. We have also signed companies to the startup business incubator at the idea stage.
Proof of Concept: Early Product, Early Market
In this stage you may be seeking further fundraising and we would recommend this is still within the grant and friends and family stage. Consider that when spending any budget raised at the beginning that getting to the next stage beyond this is where we would recommend and SEIS raise. The product will usually be trialled with early potential customers and feedback and insight being taken prior to release.
Early Revenue: First Release Product, Early Adopters
At this stage, your business has found a product that resonates with customers enough for your first orders to come in. The product will probably be raw, and there’s lots of feedback and opportunity to polish and add new features. Now is the time to be thinking about investment if you need it via the SEIS route.
Scaling: Product Feature List, Scaling Customer Base
At this stage the product is selling well into its customer base, the product team will have new opportunities to differentiate the product and the sales department will be selling to new customers. An EIS raise may be the way to continue accelerating the business as product market fit has been found.
In summary, product market fit is so important for startups because it allows them to learn about their customers and understand what they need. Having a product that meets the needs of the customer is essential for a successful business, and early market feedback can help to shape and improve the product. We hope that this article has supported and outlined in a typical business, what types of investment at different stages can help a startup to continue moving forward and achieve success.