Product-market fit — when a startup’s product sells well — has become even harder to find in this AI era. Despite startups achieving record-fast growth, not all customers are sticky, and products can be replicated more easily than ever. Anu Bharadwaj, a partner at Iconiq; Rajeev Dham, a partner at Sapphire Ventures; and Rahul Vohra, the founder of Superhuman Mail, discussed the new rules for product-market fit last week at TechCrunch Disrupt.
A common gimmick is counting pilot customers, who might only use the product for a couple of months, in the annualized run rate revenue number, implying that income is expected to continue for the entire year. It should be obvious, but Bharadwaj pointed out, “It’s definitely in your long-term interest that you be very honest and upfront about what quality of revenue this is.” She said companies need to separate hype from reality when looking at the quality of their revenue. It’s a red flag, for example, if only a few customers make up much of a company’s revenue or if the customers can easily go to another vendor for a better price.
That’s why Vohra advises startups to track customer engagement and dollar retention, especially for consumer products. For example, at Superhuman, he said that the company tracked ARR but also had their own internal metric called “delighted ARR,” which, he said, “was the ARR only from customers who are super engaged with the product.” He said that metric helped them see how sticky the customers were and how long they were likely to stay around. For Vohra, he said talk to customers to understand what value they find in the product and how they would feel if they could no longer use it.
Then be honest with yourself when measuring those responses. Take the codebase, take the team, build something entirely new. Actually, Dham said, it’s important for a founder not to confuse having a vision with having a good business.
At the seed level especially, Barudvaj said that it’s fine to pivot. She doesn’t even look for product-market fit at that stage, but “does the founder have a thesis that seems plausible and do they have the agility to duck and wave as the situation changes?” she said. Dham added that he values founders even more these days who have made numerous pivots because it shows they’ve had to make very hard decisions in this ever-shifting moment.
Product-market fit, therefore, is something founders will always have to redefine and re-earn.
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