Live or Die by Product-Market Fit

🌈 Abstract

The article discusses the importance of product-market fit (PMF) for software companies, highlighting how weak or lost PMF can lead to a company's downfall. It examines the financial indicators of weak PMF, the dangers of false confidence in PMF, and the need for companies to continuously maintain and adapt their PMF.

🙋 Q&A

[01] Live or Die by Product-Market Fit

1. What are the main reasons software companies run out of money?

• They never really find or don't maintain product-market fit (PMF)
• They don't properly manage expenses and cash runway
• Poor execution

2. Why is weak PMF considered a "death sentence" for software companies?

• Software companies can appear okay with weak PMF for a short time due to factors like funding, well-known founders, and strong sales teams.
• However, weak PMF will eventually catch up to the company if no changes are made.

3. What is the critical point about PMF that many people forget?

• PMF is not a one-time thing - the only thing that matters is finding PMF and then fighting every day to maintain it.
• Many things can push companies from strong to weak PMF quickly, and if companies are not adapting and continually building PMF, they can lose it rapidly.

[02] Financial Signs of Weak PMF

1. What are some financial signs that indicate weak or deteriorating PMF?

• High and/or increasing churn
• Difficulty with expansion
• Highly inefficient, particularly within sales/marketing
• Poor gross margins due to heavy discounting
• Slowing revenue growth
• Overstaffing in customer support and engineering to compensate for lack of PMF

2. How should companies interpret these financial indicators?

• These indicators can be lagging, so when multiple signs are present, the company is likely already in serious trouble.
• While some indicators may be due to external factors, if a company has multiple indicators over a longer period and above its peers, PMF is likely an issue.
• A major management red flag is when they continually blame macro conditions for all their issues, rather than addressing the underlying PMF problems.

[03] Death By PMF

1. What is the danger of "false indicators/confidence" in PMF?

• Raising large amounts of money, especially in the good times, can give companies a false sense of confidence in their PMF.
• This can lead companies to focus less on ICP (ideal customer profile) and PMF, and instead prioritize scaling and selling.

2. How can the pressure to "grow into a valuation" negatively impact a company?

• When a company receives a lot of money at a high valuation relative to its size, there is immense pressure to grow into that valuation and become a big company.
• This can lead to a lack of time and focus on pivoting, building the right sales team, and maintaining PMF, as the priority shifts to scaling.

3. What should be the priority for companies when facing urgency to grow?

• The urgency should prioritize getting to and maintaining PMF first, before focusing on other aspects of the business.