What is Product-Market Fit?

Product-market fit is a relatively new, yet essential, concept that startup founders at any stage need to understand. This section synthesizes the best resources out there on what it is and how it works, from business professors, venture capitalists, growth experts, and entrepreneurs. Product-market fit can mean different things to different founders; here’s our definition of the concept:

Product-market fit (product-market fit or PMF) refers to the notion that there is a point at which a given market responds so positively to a company’s product that the product fits the market’s needs. A precise point at which fit has been achieved does not exist. Instead, product-market fit represents a continuum of traction that ranges from absolute clarity that a company does not have product-market fit to maybe they have product-market fit to experts disagreeing whether they have product-market fit all the way to it’s beyond all doubt they have product-market fit.

This may feel dull or even juvenile, but grab a piece of paper or open a Google Doc, and write down the following two questions:

• What is a product?
• What is a market?

Without reading ahead or Googling around, write out a definition.

Each of these terms is something we all have an intuitive sense of, but when it comes to defining the two, people can have a wide range of different ideas about what each means. Understanding product-market fit is dependent on a shared understanding of both products and markets.

Products are straightforward. They are anything produced or anything that people trade with or for. Markets, on the other hand, are more challenging to define and more widely misunderstood.

Our favorite explanation of what makes a market comes from Bill Aulet, author and managing director at the Martin Trust Center for MIT Entrepreneurship and Professor of the Practice at MIT’s Sloan School of Management. In his book Disciplined Entrepreneurship, Aulet lists three conditions that define a market:

1. “The customers within the market all buy similar products.
2. The customers within the market have a similar sales cycle and expect products to provide value in similar ways. Your salespeople can shift from selling to one customer to selling to a different customer and still be very effective with little or no loss of productivity.
3. There is ‘word of mouth’ between customers in the market, meaning they can serve as compelling and high-value references for each other in making purchases. For example, they may belong to the same professional organizations or operate in the same region. If you find a potential market opportunity where the customers do not talk to each other, you will find it difficult for your startup to gain traction.”*

Product-market fit is widely misattributed to Marc Andreessen by bloggers and writers, but Andy Rachleff coined the term. As of Spring 2019, Rachleff is the President and CEO of Wealthfront, a lecturer at Stanford Business School, and the co-founder of Benchmark Capital.

In a 2007 article, “The only thing that matters,” Andreessen credits Rachleff for the term and synthesizes much of Rachleff’s thinking. Andreessen highlights three important frameworks:

• Rachleff’s Law of Startup Success: Rachleff says, “The #1 company-killer is lack of market. When a great team meets a lousy market, the market wins. When a lousy team meets a great market, the market wins. When a great team meets a great market, something special happens.” This idea is critical for entrepreneurs to understand, especially when considering raising venture capital. If the market for your product is not big enough, you will struggle to raise venture capital. Many companies lie in the startup graveyard because good entrepreneurs unintentionally chose to build products for small, crowded, or shrinking markets.
• Rachleff’s Corollary of Startup Success: “The only thing that matters is getting to product-market fit.”
• BPMF and APMF: The lives of startups are divided into two categories, “before product-market fit” (BPMF) and “after product-market fit” (APMF).

Important: So much of the venture capital ecosystem is built up around these three concepts. Early-stage funding is designed to help founders get their companies to product-market fit; investors at this stage are looking for a company to demonstrate progress toward product-market fit. After a certain point—usually but not always by the series A—a company that cannot demonstrate some progress toward product-market fit will seriously struggle to raise venture capital.

We continue to evolve the product from this Product Market Fit state all the way to achieving the Product Vision (typically 2-5 years).