4 Degrees of Product/Market Fit
Product/Market fit is one of the most talked about startup topics. That’s no surprise. It’s the most critical objective for any founder.
Yet there is a surprising lack of consistency about what it means and how it is achieved. You will hear various descriptions: ‘The product is being pulled out of our hands.’ ‘Customers enquiries are piling up.’ ‘Revenues are finally accelerating.’ But these are all hard to pin down to a specific cause.
And there is another tricky dimension to understanding Product/Market fit (PMF). One of the great misconceptions is that it represents a specific moment, a sudden inflexion point when all the stars seem to align as customer demand takes off and keeps going. It’s rarely like this.
In our earlier piece, ‘When early growth becomes a deadly illusion’, we commented: “But reaching PMF with early adopters is rarely the same as reaching PMF with the mainstream market. Startups often have to find PMF multiple times as the company grows; as they target new types of customer, fend off competition, and extend the product offering. PMF is rarely a static position.”
What we were eluding to was a ‘non-binary’ view of PMF. In fact the degree of PMF evolves as the company progresses, even before real growth starts to take hold. We take a deep dive into this during investment preparation projects.
In today’s briefing note we summarise our key insights from working closely with over 60 founders on this topic. Here, we specifically refer to sales-led B2B software startups (as they are the most common in mainstream VC) but PMF is just as nuanced in other models, such as DeepTech.
Our key takeaways are:
- There are different degrees of PMF depending on the stage of the startup on its scaleup journey.
- You can measure it but there is no one single metric that will guarantee it
- You can lose it much more quickly than you found it — if market conditions change
- The degree of PMF expected at each funding stage varies depending on the business model
Let us explain.
First, remember the Technology Adoption Curve?
In our blog article, Crossing the Chasm — from Seed to Series A, we described the classic stages of the startup to scaleup journey. These follow the Technology Adoption Curve, incorporating Geoffrey Moore’s ‘Chasm’. The chasm notoriously sits between the Early Market and the Mainstream Market.
In the Early Market there are 2 stages, first the Innovators and then the Early Adopters. As we eventually transition to the Mainstream Market, our initial push is into the Beachhead, before expanding out to sell to the Early Majority.
Our observation is that the journey to PMF perfectly overlays the Technology Adoption Curve: The different degrees of PMF align with the different stages on the curve. In the sales-led B2B scenario, these further align with the traditional venture funding stages (Pre-Seed, Seed, Series A, B..) for this business model, as we highlight below.
Aligning stages with degrees of PMF
As there are 4 stages of progression on the Technology Adoption Curve — before the market matures and ultimately declines — there are 4 associated degrees of product/market fit.
Across the investor community different terms are used to describe these different degrees of PMF. We like those used by US investment firm First Round Capital, and have adopted them. They are: Nascent, Developing, Strong and Extreme.
Stage 1: Innovators (first phase of the Early Market)
PMF degree: ‘Nascent’
Typical funding stage: Pre-Seed (in some cases Seed)
Measure: By engaging with a small but very receptive audience — often using a prototype or MVP — founders gradually discover if their underlying assumptions about the market opportunity are accurate.
Stage 2: Early Adopters (second phase of the Early Market)
PMF degree: ‘Developing’
Typical funding stage: Seed (in rare cases Series A)
Measure: Now, with the first substantive version of the product, a larger group of early adopters is providing significant feedback. Those experiencing a high degree of satisfaction are validating that the product is aligned with a clear market need.
Stage 3: Beachhead (first phase of the Mainstream Market)
PMF degree: ‘Strong’
Typical funding stage: Series A (in some cases Series B)
Measure: There is strong, continuous pull for the startup’s standard (‘off the shelf’) product from these more demanding beachhead customers. This confirms significant need with this initial but significant slice of the mainstream market.
Stage 4: Early Majority (second phase of the Mainstream Market)
PMF degree: ‘Extreme’
Typical funding stage: Series B, C+
Measure: Growing, widespread demand for the product, which can now be delivered repeatably and efficiently into the mainstream market. There will likely be multiple products and use cases exploiting adjacent segments. The startup is now creating its brand and hopefully, a new market category.
Note: Investor expectations at each funding stage will vary depending on:
- Business model. Financial metrics for Sales-led B2B startups are different, for example, to product-led B2B, B2C, and DeepTech companies (more on this below).
- Geography. Growth expectations are dramatically different in Europe compared to the US, for example. This is reflected in very different deal sizes and valuations, notably at Series A and beyond.
- Industry sector. Market timing and the degree of hype are always major factors. Just look at AI today.
In all cases, speed of adoption, customer satisfaction, and repeatability of the sales cycle will all need to trending positively and in unison to create ‘stable’ PMF.
Hard to find and easy to lose
PMF stability is most elusive in the transition from the Early Adopters to the Beachhead customers for reasons we have expanded on before. This is ‘the chasm’. The biggest reason is that you either can’t find the beachhead or you have found the wrong beachhead. The tell tale sign is that customer acquisition and successful product deployment is getting harder rather than significantly easier.
The harsh reality is that most startups never achieve strong PMF and transition into stage 3. This is classically associated with Series A in sales-led B2B markets. Research has shown that only 14% of European startup companies graduate from Seed to Series A and continue on a funded growth path.
Even after stage 3, a whole variety of events — often outside a founder’s control — can impact the degree of PMF. Market conditions can change. Competitors can enter the scene. Technology trends can shift. Pandemics can hit. The reality is that PMF is dynamic and as it moves around, demand will shift with it.
If PMF adjustments cannot easily be made, then the task is to pivot — before premature scaling kills your startup. This gets progressively harder and more expensive with each stage. A pivot during stage 2, as the startup seeks to validate the market, is optimum. This is why we sometimes see several rounds of funding during Seed stage.
But once a startup has secured a Series A round, everything changes. The optics of a pivot are more alarming. The PMF journey must begin again, although hopefully with much greater insight. This is a hard reset for investors who suddenly have to invest in a new proposition — or potentially lose everything.
Different business models
The notion that there are multiple degrees of PMF is not in itself a revolutionary idea. But the concept that the stages of the Technology Adoption Curve align with these degrees of PMF, which are then also strongly aligned with the classic financing stages, is an important insight. This provides a powerful framework to think about what must be achieved at each stage.
We have referred so far to sales-led B2B software strategies. Other B2B software strategies carry different expectations. For example product-led growth, the cousin of sales-led growth, demands faster progression through the initial stages. If the product is doing the selling then even greater commercial traction is expected at Seed.
In B2C software (apps) there is a similar expectation of rapid traction in the very early stages. But this can vary: In B2C offerings that incorporate hardware, e.g. consumer electronics, evidence of ‘developing’ or ‘strong’ PMF is often essential before venture investors will even get involved. The reason? There is perceived technology risk as well as market risk.
Conversely, DeepTech startups typically have much slower commercial validation of PMF progression, especially through stage 2. Hence, multiple Seed rounds are very common. But once stage 3 is reached, big Series A and B rounds mean they can accelerate faster. Why should this be?
For mainstream B2B software startups the risk is not so much whether the product can be built, but whether the market will be there. In DeepTech it is the other way around. The big risk is in technology and product development. But once this is overcome, there should be little doubt about the scale of the market opportunity.
In summary
For Tech startups, the PMF journey perfectly overlays the Technology Adoption Curve: The different degrees of PMF (Nascent, Developing, Strong and Extreme) align with the different stages on the curve.
In the sales-led B2B scenario, these degrees of PMF further align with the traditional venture funding stages (Pre-Seed, Seed, Series A, B..). Investor expectations at each stage will vary depending on business model, geography and industry sector.
The harsh reality is that most startups never achieve ‘strong’ PMF and transition into stage 3. But by having a clearer sense of the journey, especially as they navigate the chasm, founders will increase their chances of ultimately creating a new market category.
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