How to determine Product Market fit while evaluating an early stage startup?
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- Is Product Market Fit an important factor to consider before investing in a startup? If yes, then how to evaluate Product Market Fit?
- This week, Khushdeep Sethi, Content Strategist, brings you the importance of Product Market Fit and how does it impact your investment decision!
Last week’s take on evaluating early-stage startups was just the tip of the iceberg, factors that should be your Ground Zero when thinking about investing (we have covered this here). Stepping to the next level of hierarchy comes the Product Market Fit (PMF).
In this age with zillion ideas hovering around, it’s not easy to find the right one or as one can say sole ideas are not enough as they were in the halcyon days of investing.
From a founder’s perspective, product market fit has a massive impact but what about investors?
Why is it critical for investors to consider product market fit? What factors come into play during analysing the product market fit? What process should you have to pick the right startup with the right fit?
Don’t worry, We got your back!
The product-market fit is one of the most critical factors in a startup’s journey. PMF means being in a good market with a product that can satisfy that market.
Here are some factors to consider when analysing PMF for a startup:
- Does the startup has the ‘right market’
Ben Horowitz of Andreessen Horowitz said it correctly, ‘When a bad market meets a good idea or an awesome product, the market wins.’
To analyze PMF you need to find out if the product/ Idea will meet the market needs. Does it fill the gap of viable product and unmet customer needs? Is the word of mouth spreading after MVP launch?
The startup can have an OK team and a buggy and incomplete product but if the market is great and their product is the best available, then success can happen both suddenly and quickly.
- Market size/ Market position
Is the market size big enough for sustainability and growth of the startup? If the product is targeting a niche audience then the market size will reduce to a significant number, making it the harder fit. Additionally, is the product filling an untaken position or just another pea in the pod?A startup which is meeting desired needs of the customer base in a relevant market will be the right pick.
- Retention Curve
Another factor to consider is the retention curve. A retention curve is a line graph depicting the average percentage of active users for each day within a specified timeframe.
- Product Usage Interval
The product usage interval is the frequency (e.g., daily, weekly or monthly) with which you expect people to use the product. Why is this important? If people keep coming back for the product that means they’re dependent on it which leads to a PMF in the long run. You can measure this factor by launching a (MVP) minimum viable product.
At Favcy, we have mechanisms for analyzing the product-market fit for startups and only startups with products/solutions targeting an untaken position in their respective markets are considered for selection.
We make all these findings, along with our thesis (why did we onboard a startup on to our portfolio) available to our investors to help them make informed decisions.
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