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ENGINES OF GROWTH DETERMINE PRODUCT/MARKET FIT

Marc Andreessen, the legendary entrepreneur and investor and one of the fathers of the World Wide Web, coined the term product/market fit to describe the moment when a startup finally finds a widespread set of customers that resonate with its product:

When you see a startup that has found a fit with a large market, it’s exhilarating. It leaves no room for doubt. It is Ford’s Model T flying out of the factory as fast as it could be made, Facebook sweeping college campuses practically overnight, or Lotus taking the business world by storm, selling $54 million worth of Lotus 1-2-3 in its first year of operation.

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Startups occasionally ask me to help them evaluate whether they have achieved product/market fit. It’s easy to answer: if you are asking, you’re not there yet. Unfortunately, this doesn’t help companies figure out how to get closer to product/market fit. How can you tell if you are on the verge of success or hopelessly far away?

Although I don’t think Andreessen intended this as part of his definition, to many entrepreneurs it implies that a pivot is a failure event—“our startup has failed to achieve product/market fit.” It also implies the inverse—that once our product has achieved product/market fit, we won’t have to pivot anymore. Both assumptions are wrong.

I believe the concept of the engine of growth can put the idea of product/market fit on a more rigorous footing. Since each engine of growth can be defined quantitatively, each has a unique set of metrics that can be used to evaluate whether a startup is on the verge of achieving product/market fit. A startup with a viral coefficient of 0.9 or more is on the verge of success. Even better, the metrics for each engine of growth work in tandem with the innovation accounting model discussed in Chapter 7 to give direction to a startup’s product development efforts. For example, if a startup is attempting to use the viral engine of growth, it can focus its development efforts on things that might affect customer behavior—on the viral loop—and safely ignore those that do not. Such a startup does not need to specialize in marketing, advertising, or sales functions. Conversely, a company using the paid engine needs to develop those marketing and sales functions urgently.

A startup can evaluate whether it is getting closer to product/market fit as it tunes its engine by evaluating each trip through the Build-Measure-Learn feedback loop using innovation accounting. What really matters is not the raw numbers or vanity metrics but the direction and degree of progress.

For example, imagine two startups that are working diligently to tune the sticky engine of growth. One has a compounding rate of growth of 5 percent, and the other 10 percent. Which company is the better bet? On the surface, it may seem that the larger rate of growth is better, but what if each company’s innovation accounting dashboard looks like the following chart?

Even with no insight into these two companies’ gross numbers, we can tell that company A is making real progress whereas company B is stuck in the mud. This is true even though company B is growing faster than company A right now.