8 ms·

“If You Are Not Drowning in Demand, You Don’t Have Product-Market Fit” (2017)

95 points by jkuria 5y ago

jawns 5y ago
He's being a bit of a stickler here about product-market fit. I wonder if there are any counterexamples, where we can say that there is strong product-market fit without an immediate tsunami of demand. What about the case where purchases tend to be large but infrequent or consist of long-term contracts? In that case, wouldn't you be able to say that you've identified product-market fit at some point earlier than when the actual purchases are made?
- bingohbangoh 5y ago
  There’s also the early days when you’re trying to light tinder with flint lock. You still need to get the fire going.
- randomdata 5y ago
  The definition of product-market fit indicates that it is about strong market demand, so it would seem that the tsunami of demand is required. That does not mean a successful business requires product-market fit. Weak market demand can still provide a great business and strong market demand is not a guarantee of business success. One can always play the game of semantics, of course.
  - ghaff 5y ago
    It sounds like semantics to me. If I start a company that makes a $100K machine that genuinely increases efficiency/saves money/etc. in some industry used to buying expensive machines, I might reasonably hope to create a successful business. I would less reasonably hope to be able to sit back and watch the tsunami of demand roll in.
    - rileymat2 5y ago
      It would also apply to government RFP processes.
    - randomdata 5y ago
      And when you have products like that you don't necessarily need strong demand. A small handful of dedicated clients willing to spend incredible amounts of money due to you controlling the supply can create a very successful business. In fact, the article talks about such businesses. Looking to achieve product-market fit is particular to certain businesses (the kind Y Combinator likes to invest in) who are looking to expand to a wide audience, not necessarily something all businesses should be striving for.
      - danielmarkbruce 5y ago
        What you are describing with "small handful of clients willing to spend incredible amounts of money" is very strong product market fit. The market is just small.
        randomdata 5y ago
        I am not sure I agree. Demand is weak. There are few customers and they buy rarely. It just so happens that there is also very little supply, so the price can be high and in those high prices a very successful business can be built. On the flip side, as a farmer, I have found what is essentially perfect market fit. Nearly every person on earth wants what I produce. The problem for my business is that the supply is also huge, so I can't charge much. Often I lose money. It's a living for me, but not the greatest business or something investors are going to be throwing money at.
        danielmarkbruce 5y ago
        People buy cars rarely. Ferrari doesn't sell many cars. Ferrari has product market fit. The size of the market and the frequency of purchase are independent of product market fit. Farmers have great product market fit. They sell a commodity and have little/no pricing power and thus earn pretty low returns on capital. Product market fit is one thing. Market size is another. Frequency of purchase is another. Competitive advantage is another. Building a big successful business requires getting many things right, not just getting product market fit. The reason folks at YC (and others) harp on about product market fit is that they seem to see a lot of companies trying to grow before they have it - which is crazy. It doesn't mean product market fit is the only thing.
- dasil003 5y ago
  Keep in mind Michael Seibel is a co-founder of Twitch. Twitch is on extreme end of the monetization scale where it's success depended entirely on whether they could add free users fast enough to justify sufficient investment to bridge the gap until they could monetize via ads. The other end of the spectrum is enterprise software. In between you have self-service SaaS, premium consumer, and freemium consumer products. Each of these has very different requirements for what traction look like, all of it significantly less a pure ad-driven monetization like Twitch. The other dimension is how big you need to be to be considered successful. VCs need massive scale, and the bigger you grow the harder it is to maintain momentum, so it's gotta look really juicy at early stage to justify the growth. YC is not a VC, but as the premier incubator that feeds into the SV VC ecosystem they definitely have that lens.
- yblu 5y ago
  I don't remember where I read this: "Product-market fit is like porn, you know it when you see it"
- ttymck 5y ago
  Does Uber giving out free rides qualify as "tsunami of demand" or was it artificial demand?
  - AnimalMuppet 5y ago
    Well, it shows that there's a lot of demand for free rides. But that isn't actually the business that Uber thinks it's in...
api 5y ago
Curious tangent question: what constitutes drowning in demand? I mean numbers. The obviously it varies by sector and type of product but say for a typical SaaS. I’ve seen a lot, just curious about what people here think.
- malshe 5y ago
  I have the same question. Additionally, to me the term "drowning in demand" is relative to the current size of the business. Drowning in demand for Walmart is different from downing in demand for a convenience store.
- tomcooks 5y ago
  i would say that drowning in demand could be intended as: signups you get per day > signups you can process per day
  - api 5y ago
    If you have very inefficient code that makes all your systems crawl, a much smaller amount of demand could result in “drowning.”
- agustif 5y ago
  Getting more demand that you can handle with your current team/systems/resources?
- burlesona 5y ago
  I think you know it when you experience it, but on the engineering side it feels like an uncomfortable level of demand that you know your product can’t really handle yet. So for example, you’re turning entire categories of people away - or ignoring their bug reports / feature requests - because you literally don’t have time to write the 500 lines of code needed to support their use case yet (and you’re busy doing the same thing for another cohort with higher willingness to pay). The “drowning” description is apt because living through that is stressful and uncomfortable, even though it can also be exciting and have fun moments. Especially great are the moments you discover a 1-hour hack that can unblock something you and your team thought was going to take 2-3 weeks to accomplish, and what a relief that is to “fast forward” in time.
aazaa 5y ago
> More startups would succeed if they were bull-headed about keeping the customer and the problem the same but changing the solution. This is why passion matters. You are unlikely to pivot quickly through lots of different problems or customer types if you care deeply about the initial problem you set out to solve. What would be some examples of companies that did and did not do this?
adolph 5y ago
Q: What’s the prize in a pie-eating contest? A: Another pie.
ufmace 5y ago
One of the things that bothers me about the startup ecosystem is how much it's oriented around VC. There's nothing wrong with VC, but you also have to understand that they have a specific business model and are looking for only a specific type of startup to invest in. They want the companies that are small enough that they can buy a big chunk for relatively cheap, and ambitious enough that they might possibly have ultra 1000x unicorn growth. They know that most will fail; that's fine, they intend to make it all up on the superstar. It's perfectly fine to start a company that's only going to grow 10x or 20x best-case. VCs won't be interested in you, but that's fine, you don't necessarily need investment.
- moonchrome 5y ago
  >It's perfectly fine to start a company that's only going to grow 10x or 20x best-case. VCs won't be interested in you, but that's fine, you don't necessarily need investment. But is that a startup at that point or just a small business ?
  - ghaff 5y ago
    Well,it's just a business if you self-referentially define startup as a business which must have the characteristics that would make VCs interested in investing in it. (In fairness, I'd probably roll my eyes if someone called their McDonald's franchise or arts & crafts retail store a "startup" but plenty of today's big businesses got to where they are without VC funding or really looking much like what people think of as a startup today.)
    - deleted 5y ago
      [deleted]
    - duped 5y ago
      To me (just some random person on the internet that works at startups) the defining characteristics of a startup are growth and employee equity as compensation. The second has to come from the first, since equity is worthless if there isn't some future promise of payout.
arbuge 5y ago
Interesting point of view on coworking spaces: "I am especially against co-working spaces but if you must join one, first walk in and just listen. If it is quiet maybe people are actually working. But if it is loud, run for dear life!"
burlesona 5y ago
This is largely good advice, but… I find that in 2021 the capital environment has become so much easier compared to even 5 years ago, some of this advice feels a little out of date. Yes investors want a company that can scale 1000x, but these days I’m hearing a lot of VC interest in companies whose ceilings are probably in the $50-250M range, and who are offering pretty good terms. You don’t need a unicorn exit for that, you “only” need to make a product that works with a degree of traction, and then get acquired by a bigger player. As long as you don’t raise too much that can still make for a nice outcome for all involved. It’s really astounding how much money is chasing so little return right now.
- code_biologist 5y ago
  There's a huge unstated detail there: to access that non-unicorn capital you need to be recurring revenue SaaS. The older focus on unicorn outcomes allowed for more creative revenue models and higher risks. Companies that don't have revenue really figured out but have an ultra compelling product can get unicorn-targeted funding. The VC interest in these smaller companies is predicated on the revenue and valuation multiple predictability that comes alongside recurring revenue SaaS. Much lower risk for an investor. The margin structure of these types of companies is a nice bonus. If you're a founder trying to get access to this reduced-target capital you need to have 10%+ monthly recurring revenue growth, gross margins above 70%, and ideally a clear acquirer. Not affiliated with this group, but this article explains in more detail: https://leadedge.com/why-we-like-saas-businesses/ https://leadedge.com/why-we-like-saas-businesses/
  - bsder 5y ago
    > There's a huge unstated detail there: to access that non-unicorn capital you need to be recurring revenue SaaS. Agreed. I know almost a dozen actually cashflow-positive companies that want to take some investment in order to expand and can't get anyone to call them back. The reason why there seems to be a "shortage of good companies" is because the VCs are all chasing the exact same very narrow niche formula.
    - 5y ago
bserge 5y ago
Is there anything wrong with just "stealing" market share from bigger companies with some unique features? I see it all the time, these services definitely have a product market fit. It's just very small.
achenatx 5y ago
we are drowning in demand as we have manual processes. Multiple times our CEO (cofounder) has threatened to quit because the demand is too much and she has had a hard time finding people that can do the job. We had to put a minimum order size in to reduce the number of orders and we are still hitting records. We also temporarily stopped taking orders for items that require the most "order processing" time. We are currently building the features that will automate more of the manual processing to free up time. But everyday I feel bad as I see the order count going up knowing the CEO is miserable. The CEO wants to do fundraising but is helping to process orders (the orders are complex) so doesnt have time.
- Kinrany 5y ago
  Sounds like the beginning of a Theory of Constraints-style novel.

95 points by jkuria 5y ago

He's being a bit of a stickler here about product-market fit. I wonder if there are any counterexamples, where we can say that there is strong product-market fit without an immediate tsunami of demand. What about the case where purchases tend to be large but infrequent or consist of long-term contracts? In that case, wouldn't you be able to say that you've identified product-market fit at some point earlier than when the actual purchases are made?

bingohbangoh 5y ago
There’s also the early days when you’re trying to light tinder with flint lock. You still need to get the fire going.
randomdata 5y ago
The definition of product-market fit indicates that it is about strong market demand, so it would seem that the tsunami of demand is required. That does not mean a successful business requires product-market fit. Weak market demand can still provide a great business and strong market demand is not a guarantee of business success. One can always play the game of semantics, of course.
- ghaff 5y ago
  It sounds like semantics to me. If I start a company that makes a $100K machine that genuinely increases efficiency/saves money/etc. in some industry used to buying expensive machines, I might reasonably hope to create a successful business. I would less reasonably hope to be able to sit back and watch the tsunami of demand roll in.
  - rileymat2 5y ago
    It would also apply to government RFP processes.
  - randomdata 5y ago
    And when you have products like that you don't necessarily need strong demand. A small handful of dedicated clients willing to spend incredible amounts of money due to you controlling the supply can create a very successful business. In fact, the article talks about such businesses. Looking to achieve product-market fit is particular to certain businesses (the kind Y Combinator likes to invest in) who are looking to expand to a wide audience, not necessarily something all businesses should be striving for.
    - danielmarkbruce 5y ago
      What you are describing with "small handful of clients willing to spend incredible amounts of money" is very strong product market fit. The market is just small.
      - randomdata 5y ago
        I am not sure I agree. Demand is weak. There are few customers and they buy rarely. It just so happens that there is also very little supply, so the price can be high and in those high prices a very successful business can be built. On the flip side, as a farmer, I have found what is essentially perfect market fit. Nearly every person on earth wants what I produce. The problem for my business is that the supply is also huge, so I can't charge much. Often I lose money. It's a living for me, but not the greatest business or something investors are going to be throwing money at.
        danielmarkbruce 5y ago
        People buy cars rarely. Ferrari doesn't sell many cars. Ferrari has product market fit. The size of the market and the frequency of purchase are independent of product market fit. Farmers have great product market fit. They sell a commodity and have little/no pricing power and thus earn pretty low returns on capital. Product market fit is one thing. Market size is another. Frequency of purchase is another. Competitive advantage is another. Building a big successful business requires getting many things right, not just getting product market fit. The reason folks at YC (and others) harp on about product market fit is that they seem to see a lot of companies trying to grow before they have it - which is crazy. It doesn't mean product market fit is the only thing.
dasil003 5y ago
Keep in mind Michael Seibel is a co-founder of Twitch. Twitch is on extreme end of the monetization scale where it's success depended entirely on whether they could add free users fast enough to justify sufficient investment to bridge the gap until they could monetize via ads. The other end of the spectrum is enterprise software. In between you have self-service SaaS, premium consumer, and freemium consumer products. Each of these has very different requirements for what traction look like, all of it significantly less a pure ad-driven monetization like Twitch. The other dimension is how big you need to be to be considered successful. VCs need massive scale, and the bigger you grow the harder it is to maintain momentum, so it's gotta look really juicy at early stage to justify the growth. YC is not a VC, but as the premier incubator that feeds into the SV VC ecosystem they definitely have that lens.
yblu 5y ago
I don't remember where I read this: "Product-market fit is like porn, you know it when you see it"
ttymck 5y ago
Does Uber giving out free rides qualify as "tsunami of demand" or was it artificial demand?
- AnimalMuppet 5y ago
  Well, it shows that there's a lot of demand for free rides. But that isn't actually the business that Uber thinks it's in...

api 5y ago

Curious tangent question: what constitutes drowning in demand? I mean numbers. The obviously it varies by sector and type of product but say for a typical SaaS. I’ve seen a lot, just curious about what people here think.

malshe 5y ago
I have the same question. Additionally, to me the term "drowning in demand" is relative to the current size of the business. Drowning in demand for Walmart is different from downing in demand for a convenience store.
tomcooks 5y ago
i would say that drowning in demand could be intended as: signups you get per day > signups you can process per day
- api 5y ago
  If you have very inefficient code that makes all your systems crawl, a much smaller amount of demand could result in “drowning.”
agustif 5y ago
Getting more demand that you can handle with your current team/systems/resources?
burlesona 5y ago
I think you know it when you experience it, but on the engineering side it feels like an uncomfortable level of demand that you know your product can’t really handle yet. So for example, you’re turning entire categories of people away - or ignoring their bug reports / feature requests - because you literally don’t have time to write the 500 lines of code needed to support their use case yet (and you’re busy doing the same thing for another cohort with higher willingness to pay). The “drowning” description is apt because living through that is stressful and uncomfortable, even though it can also be exciting and have fun moments. Especially great are the moments you discover a 1-hour hack that can unblock something you and your team thought was going to take 2-3 weeks to accomplish, and what a relief that is to “fast forward” in time.

aazaa 5y ago

> More startups would succeed if they were bull-headed about keeping the customer and the problem the same but changing the solution. This is why passion matters. You are unlikely to pivot quickly through lots of different problems or customer types if you care deeply about the initial problem you set out to solve. What would be some examples of companies that did and did not do this?

adolph 5y ago

Q: What’s the prize in a pie-eating contest? A: Another pie.

ufmace 5y ago

One of the things that bothers me about the startup ecosystem is how much it's oriented around VC. There's nothing wrong with VC, but you also have to understand that they have a specific business model and are looking for only a specific type of startup to invest in. They want the companies that are small enough that they can buy a big chunk for relatively cheap, and ambitious enough that they might possibly have ultra 1000x unicorn growth. They know that most will fail; that's fine, they intend to make it all up on the superstar. It's perfectly fine to start a company that's only going to grow 10x or 20x best-case. VCs won't be interested in you, but that's fine, you don't necessarily need investment.

moonchrome 5y ago
>It's perfectly fine to start a company that's only going to grow 10x or 20x best-case. VCs won't be interested in you, but that's fine, you don't necessarily need investment. But is that a startup at that point or just a small business ?
- ghaff 5y ago
  Well,it's just a business if you self-referentially define startup as a business which must have the characteristics that would make VCs interested in investing in it. (In fairness, I'd probably roll my eyes if someone called their McDonald's franchise or arts & crafts retail store a "startup" but plenty of today's big businesses got to where they are without VC funding or really looking much like what people think of as a startup today.)
  - deleted 5y ago
    [deleted]
  - duped 5y ago
    To me (just some random person on the internet that works at startups) the defining characteristics of a startup are growth and employee equity as compensation. The second has to come from the first, since equity is worthless if there isn't some future promise of payout.

arbuge 5y ago

Interesting point of view on coworking spaces: "I am especially against co-working spaces but if you must join one, first walk in and just listen. If it is quiet maybe people are actually working. But if it is loud, run for dear life!"

burlesona 5y ago

This is largely good advice, but… I find that in 2021 the capital environment has become so much easier compared to even 5 years ago, some of this advice feels a little out of date. Yes investors want a company that can scale 1000x, but these days I’m hearing a lot of VC interest in companies whose ceilings are probably in the $50-250M range, and who are offering pretty good terms. You don’t need a unicorn exit for that, you “only” need to make a product that works with a degree of traction, and then get acquired by a bigger player. As long as you don’t raise too much that can still make for a nice outcome for all involved. It’s really astounding how much money is chasing so little return right now.

code_biologist 5y ago
There's a huge unstated detail there: to access that non-unicorn capital you need to be recurring revenue SaaS. The older focus on unicorn outcomes allowed for more creative revenue models and higher risks. Companies that don't have revenue really figured out but have an ultra compelling product can get unicorn-targeted funding. The VC interest in these smaller companies is predicated on the revenue and valuation multiple predictability that comes alongside recurring revenue SaaS. Much lower risk for an investor. The margin structure of these types of companies is a nice bonus. If you're a founder trying to get access to this reduced-target capital you need to have 10%+ monthly recurring revenue growth, gross margins above 70%, and ideally a clear acquirer. Not affiliated with this group, but this article explains in more detail: https://leadedge.com/why-we-like-saas-businesses/ https://leadedge.com/why-we-like-saas-businesses/
- bsder 5y ago
  > There's a huge unstated detail there: to access that non-unicorn capital you need to be recurring revenue SaaS. Agreed. I know almost a dozen actually cashflow-positive companies that want to take some investment in order to expand and can't get anyone to call them back. The reason why there seems to be a "shortage of good companies" is because the VCs are all chasing the exact same very narrow niche formula.
  - 5y ago

bserge 5y ago

Is there anything wrong with just "stealing" market share from bigger companies with some unique features? I see it all the time, these services definitely have a product market fit. It's just very small.

achenatx 5y ago

we are drowning in demand as we have manual processes. Multiple times our CEO (cofounder) has threatened to quit because the demand is too much and she has had a hard time finding people that can do the job. We had to put a minimum order size in to reduce the number of orders and we are still hitting records. We also temporarily stopped taking orders for items that require the most "order processing" time. We are currently building the features that will automate more of the manual processing to free up time. But everyday I feel bad as I see the order count going up knowing the CEO is miserable. The CEO wants to do fundraising but is helping to process orders (the orders are complex) so doesnt have time.

Kinrany 5y ago
Sounds like the beginning of a Theory of Constraints-style novel.