How does one determine product-market fit? As an investor, determining if there is product-market fit for a product or service of a company may be important part of evaluating an opportunity. This can sound challenging, especially if there is not even a sellable product or service on the market yet for an investor to see tangible results. However, there are still many ways to determine if a product may have the potential for product-market fit. Today, this blog will discuss product-market fit, some ways to measure it, and other metrics.

Evaluating Product-Market Fit

What is Product-Market Fit?

Product-market fit can be defined as how well you market your product or service to the target audience that has the most demand for your product or service. It can be important to build the right product to solve customer needs, and the product should be able to fit in the market well enough that customers will want to choose it over alternatives. It can be important to think about if your product fits so well for customers that they want to share that product with others who may share similar interests/needs.

Marc Andreessen, co-founder of Andreessen Horowitz (a16z), is an investor who popularized this term in 2007 when he talked about this idea of product-market fit and how “you can always feel product-market fit when it’s happening.”[1] He discussed how in achieving this, the customers will buy products as fast as they’re being made, with money from customers piling up. He mentioned that the company may need to scale quickly when product-market fit is being achieved. It can also be important to remember that lots of startups fail before product-market fit even happens, so doing an evaluation early on can help a company in its endeavor to achieve the right level of product-market fit.

Measuring Product-Market Fit

How Does an Investor Determine Product-Market Fit?

Investors can measure product market fit by using a combination of quantitative and qualitative metrics, which can come in many forms like surveys or customer lifetime value ratios. These metrics include, but are not limited to sales and signups, customer retention, net promoter score, demand, activation, referrals, press, influencer reviews, and more.

Without A Sellable Product/Service

If an investor is interested in investing in an early-stage company that does not have a physical product or sellable service quite yet, there are still some things that can be looked at to determine whether product-market fit might materialize. Investors may want to look at indicators that could suggest demand, problem relevance, and even future market alignment. Investors can determine these indicators by looking at market research, feedback from a minimum viable product, customer pain and desire, and engagement metrics. If there is high engagement and demand before a product has even been launched, there may be a higher chance of eventual product-market fit.

Product-Market Fit Survey

A tangible way to assess product-market fit is through reviewing any surveys conducted by the company. A survey can be a great way for investors to see if customers are interested in the product. Asking both quantitative and qualitative questions within the survey can help to give a well-rounded perspective. Learning about customer loyalty through this survey could also help determine whether there could be a product-market fit.

What to Look for in the Results

When reviewing the survey results, investors may want to be mindful of a few things. First, review the percentage of “must have” responses. Investors should look for a high percentage of customers who would be “very disappointed” if they could no longer use the product. It is reportedly accepted that this percentage should be around 40% or more when reviewing the responses in order to indicate product-market fit.[2]

Additionally, investors may want to review the net promoter score, a score that measures how likely the customer is to recommend the product to someone else, and the higher the score, the higher the customer loyalty. Finally, reviewing the market opportunity validation can also be a good way for the investors to see how the customers are seeing the product – whether it is essential, addresses an unfulfilled market need, and whether the customer would pay for it or recommend it to others.

Final Thoughts

Evaluating product-market fit can be important for investors because it could show if a product meets the needs of its target market. Product-market fit is not just about a physical product or service but can help determine if the product or service can solve a real problem, resonate with customers, and drive demand. Investors may want to assess various qualitative and quantitative metrics in order to gauge whether a product has the potential to grow.

Even without a sellable product, early indicators discussed above can offer valuable insights into potential alignment in the future. Understanding product-market fit early on can help investors research possible opportunities.

Want to learn more about product-market fit? Check out the following MicroVentures blogs to learn more:

• Finding Your Product/Market Fit
• Interpreting Business Models in the Private Market: What You Need to Know
• Proving Your Product Market to Investors
• Starting Small: Understanding MVPs
• What Investors Look for Beyond Financials: Product/Market Fit

Are you looking to invest in startups?  Sign up for a MicroVentures account to start investing!

 

[1] https://builtin.com/articles/product-market-fit

[2] https://blog.hubspot.com/sales/product-market-fit

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.