Todd Jackson, a partner at First Round Capital, introduces a framework consisting of four levels of product-market fit: nascent, developing, strong, and extreme. The framework is based on the persona, problem, promise, and product of the startup. First Round Capital has developed a three-month program based on this framework to help founders find product-market fit. Product-market fit is crucial for startups as it brings momentum and makes everything easier for the company. Many startups struggle to reach this level of fit and remain stuck in the early stages. The framework aims to address this by providing a structured approach to finding product-market fit. The four P's framework, which includes persona, problem, promise, and product, is a key aspect of the framework. The framework also includes the concept of dollar-driven discovery, which involves testing the dollar potential of a hypothesis to avoid biased feedback from customers. First Round Capital offers a program called the Product-Market Fit Method Program to help B2B founders navigate the early stages of finding product-market fit.
Todd’s background
Todd Jackson, a partner at First Round Capital, has a deep background in product management and design. He has worked at Gmail, Facebook, Twitter, and Dropbox. Todd emphasizes the importance of finding product-market fit in the first three years of a startup and introduces a framework consisting of four levels of product-market fit: nascent, developing, strong, and extreme. These levels are determined by the persona, problem, promise, and product of the startup. To help founders find product-market fit, First Round has developed a three-month program based on their framework.
First Round Capital’s PMF framework
First Round Capital has developed a product-market fit (PMF) framework to help founders and product teams find PMF. The framework brings a scientific approach to finding PMF and has been well-received by the startup community.
Key points:
- PMF is often seen as mysterious and subjective, and there is a lack of specific and tactical content available on the topic.
- First Round Capital's framework aims to address this by providing a structured approach to finding PMF.
- The framework is based on extensive research and interviews with successful founders to identify consistent patterns in achieving PMF.
Why product-market fit is so important
Product-market fit is crucial for startups, as it is the key to success in the early stages. Achieving this fit brings momentum and makes everything easier for the company, from hiring to building the right product. However, most startups fail to reach this level of fit and get stuck at the initial stages. Unlocking the right product and satisfying customers deeply is essential for propelling the company forward.
- Product-market fit is the alignment between a product and its target market, where the product perfectly meets customer needs and desires.
- Startups that achieve product-market fit experience momentum and find it easier to hire and build the right product.
- Many startups struggle to reach this level of fit and remain stuck in the early stages.
- Unlocking the right product and deeply satisfying customers is crucial for the success and growth of a company.
Who can benefit from this framework
- The framework is designed for early B2B founders, particularly those who are sales-led and in the first six to nine months of starting their company.
- It aims to establish a strong foundation for product-market fit.
- The framework provides a structured approach and identifies key levers for success, increasing the odds of finding product-market fit.
- The goal is to help companies reach level three and level four product-market fit, becoming highly valuable.
- The speaker launched a program for founders to go through.
The product-market fit method
The Product-Market Fit Method is a free and intensive program designed to help early B2B founders increase their chances of finding product-market fit. It covers various topics such as customer discovery, market validation, product positioning, design partnerships, product iteration, and founder-led sales. The program aims to provide founders with valuable insights and strategies to save time and navigate the challenges of building a successful business.
Key points:
- Designed for founders of new B2B SaaS companies
- Helps founders find product-market fit
- Free of cost and requires approximately 10 hours of work per week
- Adds structure to founders' existing work
- Offered by First Round Capital to create value in the ecosystem by providing free resources
- Framework for creating value and capturing that value without financial investment.
Broad overview of the framework
The framework for finding product-market fit is based on the idea that it is not a one-size-fits-all concept and takes time to achieve. The ultimate goal is extreme product-market fit, which is characterized by widespread demand, customer satisfaction, and operational efficiency. Many companies focus on demand and satisfaction but neglect efficiency, leading to unsustainable businesses. The framework for finding product-market fit involves three key dimensions: demand, satisfaction, and efficiency. These dimensions are intertwined and require trade-offs at each level of product-market fit. The goal is to reach extreme product-market fit, which typically takes around four to six years for the best enterprise companies. The framework consists of four levels: nascent, developing, strong, and extreme product-market fit. Achieving product-market fit involves progressing through these levels while optimizing for the trade-offs between satisfaction, demand, and efficiency. The topic of the video is a framework for finding product-market fit. The framework consists of four levels of product-market fit: nascent, developing, strong, and extreme. Each level is characterized by three dimensions: satisfaction, demand, and efficiency. The goal is to progress from one level to the next by identifying signs of being stuck and finding ways to get unstuck. The framework aims to help listeners move up the ladder towards stronger product-market fit.
Level one: nascent product-market fit
At the nascent stage of a company, the focus is on finding three to five customers with a pressing problem that needs solving. The solution provided should deliver a satisfying outcome that aligns with the customers' deep concerns. Customer satisfaction takes priority over demand and efficiency at this stage.
Key points:
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Vanta is an example of a company that successfully navigated this stage by exploring different ideas before settling on compliance automation.
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The founder, Christina Cacioppo, learned from her previous attempts and realized the importance of building something that customers truly want.
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A founder identified a pain point in the market related to security questionnaires and compliance audits.
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She found initial customers, including Segment, Front, and Figma, who lacked compliance certification.
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She offered to provide this certification for them, resulting in successful deals.
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This example demonstrates a product that fulfills a promise and addresses a specific market need.
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Level one of product-market fit is characterized by finding a problem that truly matters to three to five customers.
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Efficiency is not important at this stage, and manual solutions or basic products are acceptable.
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The key is to provide incredible satisfaction to these initial customers.
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The problem being solved should be important and urgent, capturing the attention of customers despite their lack of trust or familiarity with the startup.
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The product should fulfill the promise made to customers, demonstrating its ability to deliver on its claims.
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Level one of product-market fit is characterized by being in the early stages of a startup, with less than 10 people and primarily relying on personal networks for demand.
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Cold outreach is minimal, and finding customers is challenging.
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The focus is on identifying the right problem and finding customers who have it.
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Key indicators of being stuck at this level include a lack of customer dependency on the product, having different important features for each customer, difficulty in finding new customers, and low product usage.
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Lattice, a people management platform, initially started as an OKR tool but faced challenges with user adoption and satisfaction.
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The founder, Jack Altman, made a pivot to focus on people management, aligning the product with the needs and problems of the target persona.
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Aligning the four Ps: persona, problem, promise, and product, is crucial for successful product-market fit.
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A founder named Jack initially focused on solving a problem related to OKR for HR heads but realized it wasn't a big deal for them.
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He pivoted to solve the problem of performance management, which was gaining popularity at that time.
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The response to his new idea was positive, and he sold his first customers before building the actual product.
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The four Ps framework (persona, problem, promise, and product) is mentioned as a guide for pivoting.
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The video discusses a framework for finding product-market fit.
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An example is given of a consumer budgeting app that wasn't popular but had a feature to connect to bank accounts.
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The founders pivoted and licensed this feature to fintech companies, changing their target audience.
The four P’s
The most profound aspect of the topic is the four P's framework for finding product-market fit.
Key points:
- The four P's refer to persona, problem, promise, and product.
- Persona: target audience
- Problem: specific issue being solved
- Promise: how the product is positioned and described
- Product: the actual offering
- Focus on selling the product before building it
- Customer feedback and demand should guide the development process
- Changing persona, problem, and promise is easier than rebuilding the entire product
- Signs of being stuck in the first stage of product-market fit include customers not being disappointed if the product went away, customers using different features of the product, and customers treating the company more like a professional service than a product
- Importance of customers not just liking the product, but also needing and loving it
- Technique of sitting down with early customers to determine if the product is critical for their company and if they would switch to a competitor
- Use of nudges based on in-product behaviors like confusion or intent classification for finding product-market fit
- CommandBar, an AI-powered toolkit for product growth, marketing, and customer teams, is mentioned as a helpful tool for navigating and getting the most out of a product without annoying users.
Level two: developing product-market fit
Level two of developing product-market fit involves transitioning from having five satisfied customers to 25 satisfied customers. At this stage, founders need to focus on demand in addition to satisfaction. The product itself needs to play a significant role in attracting customers. Companies at this level are typically seed or Series A stage with around 20 employees. They start working on scalable channels for demand generation, such as cold outreach, content creation, and community events. The benchmark for sales conversion without warm introductions is around 10%. Companies in this level have an annual recurring revenue (ARR) ranging from 500K to five million and begin considering efficiency and sales metrics. They may calculate the magic number, which is the new ARR divided by the customer acquisition cost (CAC), aiming for a range of 0.5 to 0.75. Retention and long-term customer satisfaction also start to become important considerations at this stage.
- Transition from 5 to 25 satisfied customers
- Focus on demand and product attraction
- Scalable channels for demand generation
- Sales conversion benchmark of 10%
- Consider efficiency and sales metrics
- Calculate the magic number (new ARR divided by CAC)
- Retention and long-term customer satisfaction become important
Signs you’re stuck at level two, and what to do
Signs you’re stuck at level two, and what to do:
- Difficulty in expanding customer base
- Lack of recognition in the market
- High regretted churn rate
- Long sales cycles
- Losing deals to competitors
- Lack of urgency from customers
- Struggling to meet desired price points
Actions to take:
- Make significant pivots to achieve product-market fit
- Recognize the need for a pivot to overcome the plateau and progress to the next level
- Be willing to make significant changes in persona, problem, promise, or product
- Find a problem that is significant and valuable to people
- Consider changes in persona, problem, promise, or product to overcome challenges
- Focus on demand and its repeatability while maintaining customer satisfaction
- Find a channel to drive demand
- Emphasize the importance of finding a problem that is significant and valuable to people
Level three: strong product-market fit
Level three of strong product-market fit is characterized by:
- Strong repeatability and ease of acquiring customers
- Rapid growth of the customer base and ease of generating leads
- Referrals and word of mouth playing a significant role in generating inbound leads
- Company size of around 30 to 100 employees, likely at the Series B stage of funding
- Focus on efficiency metrics such as gross margin, burn multiple, regretted churn, and net revenue retention
- Aim to have around 100 customers with an average annual contract value (ACV) of $75,000
- Uncertainty and the need to remain critical and strive for improvement even at this stage.
Signs you’re stuck at level three, and what to do
Signs you’re stuck at level three, and what to do:
- Decrease in customer retention
- Slower growth
- Increased competition
- Need to find new channels for scalability
- Struggle with balancing growth and spending efficiently
- Reaching level three does not mean things become easier
- Challenges to navigate and plates to keep spinning
- Maintain customer satisfaction and demand in a competitive market to progress to level four
Level four: extreme product-market fit
Level four of product-market fit is the highest level of satisfaction, demand, and efficiency that a company can reach. Legendary companies like Vanta, Verkada, and Stripe have successfully achieved this level of growth and expansion.
Key points:
- Level four requires a team of over 100 people, more than 100 customers, and generating over $25 million in annual recurring revenue (ARR).
- Other metrics such as sales conversion rate, magic number, payback period, gross margin, burn multiple, churn rate, and net revenue retention (NRR) are performing well.
- The focus is on expanding the total addressable market (TAM) through entering new markets or introducing multiple products.
- Reaching level four does not guarantee free product-market fit for new products, and it requires a mindset of constantly seeking and maintaining product-market fit.
- Customer expectations constantly increase, making it a never-ending battle to stay ahead.
- Majority of companies get stuck at level one or two, while only around 30% make it to level three or four.
- The goal is to help founders increase their product-market fit above 30% and ideally reach a 50/50 ratio.
- Currently, around 60% of companies don't make it past Level two.
- Getting more companies to higher levels of product-market fit would have significant benefits for the ecosystem and the lives of founders and users.
Rough timelines for each level
The rough timelines for each level of product-market fit are as follows:
- Level one: Choosing the right persona and problem to focus on, taking 12 to 18 months.
- Level two: Reaching the first five satisfied customers, possibly within a year.
- Level three: Scaling from five million to 25 million in revenue, around two years.
- Reaching 100 million in revenue and dealing with the complexities of a growing team and company, a couple more years.
The speaker suggests that the entire process of achieving product-market fit typically takes around four to six years. However, he emphasizes that achieving product-market fit is very difficult and not the norm. If after four years there is still no demand or significant customer base, it becomes a personal decision for founders to either continue or move on to something else. The speaker expresses support for founders who choose alternative paths.
A quick recap of the framework
A framework for finding product-market fit is presented in the video. The framework consists of four levels: nascent, developing, strong, and extreme. Each level represents a different stage of growth and customer acquisition. The focus at each level shifts from satisfaction to demand to efficiency, and finally to expansion of the total addressable market. The four Ps, mentioned as a tool for course correction, are not explained in the provided snippets.
Diving deeper on the four P’s: what to do if you’re stuck
The most profound aspect of the topic is understanding the persona and getting into their mindset to achieve product-market fit.
Key points:
- The four Ps of finding product-market fit are persona, problem, promise, and product.
- The persona refers to the market and their willingness to pay for a product or service.
- Founders need to understand the persona's challenges, goals, and how to help them succeed.
- This understanding is crucial for achieving product-market fit.
Dollar-driven discovery
Dollar-driven discovery is a framework for finding product-market fit by testing the dollar potential of a hypothesis and avoiding biased feedback from customers. The key points of this topic include:
- Identifying extreme value and understanding customers' problems and challenges in a non-leading way.
- Avoiding seeking validation for one's own ideas and instead focusing on finding the most important aspects for customers.
- The importance of wow statements or demonstrated behavior that shows interest from potential customers.
- Determining if there is a budget available for solving a particular problem and assessing the willingness to pay for a solution.
- Asking customers specific questions about pricing to gauge the value they place on a product and determine if it is priced appropriately.
- Asking potential customers how much they would pay for a product to gather insights into the size of the problem and the likelihood of customers actually purchasing the product.
- Talking to enough people to understand their patterns and predict their responses in order to accurately predict future customer responses.
Apply for the product-market-fit method program
The most profound aspect of the text is that there is a program called the product-market fit method program designed to help B2B founders navigate the early stages of finding product-market fit.
Key points:
- The program is for B2B founders who have been working on their product for six to nine months or earlier.
- The program aims to help founders find product-market fit.
- Applications can be submitted until May 7th and the program starts on May 29th.
- Interested individuals can apply at pmf.firstround.com or reach out to Todd Jackson on Twitter.