Last Friday, Ann Miura-Ko, who is a partner at Floodgate, published an interesting article called 'True product-market fit is a minimum viable company'. She questions 'whether the importance of product-market fit is a myth.' The article aligns with the thoughts I shared end of last week and illustrates well the change of mind that is happening in Silicon Valley and the broader venture community.
Ann argues that the old rules of building tech companies, that led to some incredible businesses in the last decade, are giving way to a new set of rules. This part, in particular, got my attention:
'When I reflect on failures, the root cause inevitably stems from misconceptions around the nature of product-market fit. (...) To have created a minimum viable company, a company needs all three of these elements — value propositions, business model and ecosystem — working in concert.'
The 'business model' part is the important one to stress out here. The conventional wisdom so far was that, once you have a fast-growing group of people using your product over a more extended period, you have reached product-market fit. Here an excellent overview of some famous product-market fit definitions. Less than half of them mention paying customers or revenues… This is changing as investors seem to have become more cautious.
I agree with Ann that we need to figure out if users are willing to pay for a product or service before moving into growth mode. The big question, in my opinion, is timing. We have many pre-seed and seed companies in our portfolio. So, we talk and think a lot about monetization. Timing is different for every business model. While B2B enterprise products should monetize early on, it is a much harder choice for some SME or consumer-focused products pre-Series A (Series A being a EUR 5M+ round and annual marketing budgets of EUR 2M+). Think about it. It took Wix, for example, nearly thirty tests to figure out the best way to monetize their initial freemium model. It just takes time and a big enough user base to run relevant tests.
Ann's post suggests that pre-Series A 'your business model and pricing must fit your ecosystem. They must also generate enough sales volume and revenue to sustain your business'. In a European context where round sizes are (still) smaller than on the west coast, I think entrepreneurs need to be careful not to hinder growth too much for the sake of monetization. You could lose the power of a relevant enough user base, its usage data, and the ability the run enough tests at a high frequency.
I would adapt the definition as follows: To have created a minimum viable company, a company needs all three of these elements — value propositions, a strong validation of the business model and ecosystem — working in concert.'
Of course, nothing will ever be a better signal of interest and PMF than if you can get people to put down money to use your product. It does not mean, though, that you have to have your business model figured out entirely. Managing this tension between monetization and growth is, and will always be, challenging and different for each business. Therefore, I don't like to define universal execution targets by business model (besides B2B enterprise SaaS), but, rather, spend time with each founder individually to build the best case for his specific venture.
I would love to hear your thoughts on this. Please send me a DM or comment here below.
Have a great weekend!
Yannick