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Proving Your Product Market to Investors

Image by Gino Crescoli from Pixabay

One of the key elements to winning over investors to actually invest in your startup is demonstrating that you have a viable market for your product. Not only do you have to have a target market, but you also should be able to provide evidence that your targeted market needs your product and will purchase it at your price point. Let’s tackle a few strategies for proving your product’s market to potential investors.

Articulate the problem or pain point

The first step to proving your product market is to clearly articulate an existing problem or gap that potential customers are looking to solve. Depending on where you are in your startup’s growth, you may have already done a lot of market research. If you haven’t, now is a good time.

Take your problem statement and interview people within your target market. Ask them about the problem and how they currently deal with it. If they’re using a competitor’s product, ask them what about that solution is and isn’t working for them—find the pain point that the competitor isn’t fixing. As you talk to people in your anticipated target market, you may need to adjust your problem statement to more accurately reflect people’s experiences.

A clearly, accurately stated problem that your product solves demonstrates to potential investors that your product has reasonable potential to fill a need.

Determine whether the problem has a budget

Once you’ve clearly expressed the problem that your product aims to solve, also ask during your market research interviews whether this problem is a high enough priority for them to purchase a product or service to address it. Sometimes a problem exists, but the cost of a solution for it isn’t in the potential customer’s budget.

Other times, a budget exists, but your price point doesn’t match. One question you might ask is “How would you feel if you no longer had X product?” If at least roughly 40% or more would be highly disappointed to lose a product that solves the problem, you have likely found a high-priority problem that has good potential for market fit.

As you research, you may have to consider adjusting your product and pricing to match the market’s needs. If you haven’t started sales yet, and if your market research supports it, consider starting a waiting list or pre-order list to signal that you have significant interest in your product at a given price point.

Share competitor research and define your UVP

Another way to show that a market exists for your product is to compile competitor research. If multiple solutions exist for a problem, the market obviously exists. The key then is to demonstrate how your product solves the problem better.

Your unique value proposition (UVP) should express the benefits of your product and how those benefits distinguish you from your competitors. If your UVP is not significantly different than your competitors, you may have more difficulty gaining traction with customers. Use competitor research and customer feedback and/or market research to better articulate your UVP or to improve your product to have a better UVP.

Clearly state your UVP and how your product is superior to your competitors when you’re pitching to investors to show that your product has good market potential.

Compile qualitative data

Whether your startup is in the research phase or already selling your product, you can collect qualitative data to help prove your product’s market. Qualitative data is the “why,” or the soft data you collect through research and feedback from customers or members of your target market. A few ways to collect this information might include the following methods:

  • First-person interviews – Talk with potential customers or with actual customers.
  • Surveys – Send surveys to members of your target market to learn about their needs or gather feedback from actual customers about how your product fits their needs.
  • Customer testimonials – Ask customers for “success stories” from using your product.
  • Word of mouth ­– Collect evidence of customers sharing your product with their friends and colleagues, such as watching for sharing of your information on social media or by using referral codes to track peer-to-peer recommendations of your product in your sales pipeline.

After you’ve gathered this information, you can sort it into a summary and customer profiles or quotes that you can then use to show investors that your product has significant interest and/or traction in the market.

Show your metrics

If you’re already in production and selling your product, then your hard data will be very important. A few key metrics investors may be interested in that help prove your product-market fit include the following:

  • Monthly recurring revenue (MRR) – If your MRR is growing, it shows that you’re gaining traction.
  • Gross margin – A wide gap between what you spend to keep the business going and what revenue you’re bringing in shows a trend toward sustainability and profit.
  • Churn – A low churn rate means you’re keeping your customers, which means that the product is meeting the needs of the customers and that the price point is in their budget.

Highlight any metrics that reveal traction and growth to show investors that your product has a market fit.

Win over investors

There’s no magic formula to impressing investors and winning them over to invest in your startup. However, proving your market is a good first step to helping them see the value of your product and the market (and growth) potential.

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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.