What Startups Get Wrong About Product-Market Fit

Desiree: Hey everybody, Desiree Echevarria here, joined once again by Steli Efti. Steli, Marc Andreessen famously said the only thing that matters is getting product market fit.

Desiree: He says the number one killer of a company is not lack of a great product, but lack of a great market. Ideally, the market should pull the product out of the startup, not the other way around. People have been saying some version of this for like two decades now, right? And yet 34% of startups fail due to lack of product market fit.

Desiree: So if one out of every three startups is failing to achieve it, what exactly are they getting wrong? That's what I want to discuss in this episode. So first things first, what are some signs that you have achieved product market fit as a B2B SaaS startup?

Steli: Well, the signs of product market fit should be more success than you can handle, right? Like when customers can't stop talking about your solution, when more and more companies and customers gravitate towards it, when they use it more and in ways more expensive than you originally anticipated. When things start falling apart because of the growth you see, the engagement, the usage, the enthusiasm—usually you're doing pretty well, right?

Steli: And if that is sort of a pull rather than a push—you're not achieving that because you're spending hundreds of millions and shoving it down the throat of the market, but because the market found you and you hit the nerve so well, so perfectly, and the pain is so strong—then people flock to you. Usually, it's not hard to detect that you hit product market fit.

Steli: The issues that we're probably going to discuss a lot more are when people hallucinate it, when people want it to be so, but it isn’t really the case.

Desiree: Let's talk about that because a startup can chug along for a long time without even realizing that they haven't achieved product market fit yet.

Desiree: Can you tell me some signs that founders mistake for product market fit? Like you said, hallucinate a little bit.

Steli: Yeah. And I actually wanted to comment a bit on the 34% mark—that may or may not be true. I would assume it's even higher than that because the stronger the product market fit, the more forgiving the market and the world will be for all the mistakes you make. You could do terribly in many areas, but if your product market fit is super strong, you will still grow. You will still succeed. It's almost hard to kill what you've built then.

Steli: It's very rare that a company has that level of product market fit where it can stop success from happening no matter how hard it tries. But it has happened in the past—there are many examples of that.

Steli: Now, for any company that's a little bit below that bombastic product market fit, it has to substitute for a lot of work. I think the signs that you might not have it—or not have it enough—are correlated to how difficult or uphill many battles feel.

Steli: How difficult is it to convince someone to pay for your solution? If it takes a tremendous amount of effort and fight, it usually means something isn't right yet. There's something missing, and you have to substitute for it with tremendous energy.

Steli: Maybe buying is easy, but adopting and using it is very difficult. You’re like, "Everybody wants to buy this, but nobody's using it," or they're not using it enough, or they're not seeing value once they use it. They were enthusiastic about the idea of what it could do, but the reality of what it does doesn't deliver at the same level of enthusiasm. That usually points to not having product market fit to the degree you want.

Steli: When it's incredibly hard to retain customers or expand with them, that’s another sign. They buy and are enthusiastic, they adopt it, and they see some value early on, but it's not enough for them to keep using it, keep it as a priority, or even want to use it more and give you more money.

Steli: Those would be the three things I think would indicate you're not as close to product market fit as you wish to be.

Desiree: That makes sense. Like in the beginning, it's about how much or how little friction there is to convince people to try your solution.

Desiree: And as time goes on, naturally, it shifts to measuring retention or usage—how much are people using it? I remember you once said that early startup founders often mistake early growth for product market fit, getting a little too enthusiastic. Could you talk about that and the ways founders fool themselves into this false sense of security?

Steli: Yeah. The challenge is that, as a founder, you're hopefully, by design, very optimistic, right? You're enthusiastic, high-energy, and you want to believe. That optimism is part of what helps you create something that didn’t exist and convince people to try it.

Steli: But that same optimism can blind you to warning signs or shortcomings early on. A lot of times, in the early days, the first indicator founders look for is growth. If you can grow, that’s the quickest and easiest way to convince employees, investors, and the market that you're onto something special—that you have product market fit and have built something people want.

Steli: So founders optimize for growth—how can we grow traffic, signups, and customers? How can we grow these top-line numbers and KPIs as quickly as possible to prove to the world that this is going to be an exciting company? And sometimes you can do that. There was a time when this was all about "growth hacks." You’d come up with cool little ideas to stimulate growth in non-organic ways, which mimic product market fit because you get adoption, traffic, or attention.

Steli: People want to be early on a startup that might become a unicorn or an exceptional success story. They see that hockey-stick growth curve and want to be part of it. Many founders optimize for that and feel like, "Mission accomplished." They think, "We’re winning, we’re succeeding," and keep telling investors and others, "Look, we’ve got it! People want it!"

Steli: But instead of asking, "Did we find a trick to get signups, traffic, or growth?" they assume it's product market fit. Maybe the marketing team came up with a partnership that boosted numbers. Or an engineer built a tool that attracted signups. These things can be good, but they don’t equal product market fit. They might just be methods of distribution or virality.

Steli: You can get a lot of people to check something out—it’s only a couple of clicks away—but then they don’t engage, they don’t pay for it, and they don’t grow with it.

Steli: Founders often hyper-focus on growth, which is valid in the early days, but then they call "mission accomplished" too soon. They achieve step one and don’t want to acknowledge that there are many more steps to go. It’s more comfortable to say, "We’ve got this," rather than admit there’s still a long road ahead.

Desiree: You want to get out of the anxiety period as soon as possible—it’s totally natural. And there’s a bit of confirmation bias, too, to prove you’re right.

Desiree: They don’t hand out certificates for product market fit. There’s no black belt ceremony for achieving it. What metrics should founders measure to identify solid signs of product market fit? Is it a certain number of customers, churn rate, or something else? What are the tactical signals founders should look for to ease that anxiety and feel like, "Okay, we’re getting there"?

Steli: I think there are metrics to look at, but there’s also an intangible energy or sense you’re looking for from customers and the market.

Steli: If I had to focus on two things, they would be strong drivers of both growth—people adopting, buying, or seeking out your solution—and retention.

Steli: If I could only focus on one, I’d prioritize retention. If the people who buy your product stay with you forever and want to spend more money with you, you’re going to be fine.

Steli: One of the issues is that you might have exceptional product market fit within a very small niche. In rare cases, that niche might not be big enough. You might not be able to grow enough with these customers, even if they’re retaining and expanding, because there aren’t enough of them out there, or they’re not paying you enough.

Steli: So maybe you’ve accomplished something really great, but for a niche that’s just too small—but that’s very rarely the case. If I could only optimize for one thing, it’d be retention, usage, and expansion. These are the metrics you’d want to optimize for and make exceptional.

Steli: If you can pair that with great growth demand, then you’re on the money. Then you’re really rocking and rolling.

Steli: But it’s not just about the numbers. You want to look at the numbers, of course, but also pay attention to how your customers talk about your solution. How enthusiastic are they? How essential is your product to what they’re trying to do? How impactful is it on their lives or businesses?

Steli: You also want to note how they speak about your solution compared to the rest of the market or how the market typically speaks about similar products.

Steli: So you need to pay attention to both the quantitative and qualitative feedback and signals you’re getting from your customers and the market.

Steli: And, we might touch on this later, but product market fit isn’t a destination—it’s a journey. You can have something exceptional today, but tomorrow everyone else has copied the feature that got all the excitement. Suddenly, your customer base deflates, and people stop seeing what makes you special.

Steli: Just because you have product market fit doesn’t mean you get to keep it forever. It’s not a certificate you receive for life. You have to reestablish it every single day.

Steli: If I could only pick one metric, it would definitely be retention, engagement, and expansion—what customers do with your product is more important than how many new people you can get to check it out.

Desiree: Let’s talk about that. Have you ever seen startups achieve product market fit—or strong signals of it—and then lose it? How do you fall out of product market fit, and what does that look like? What causes it?

Steli: Typically, what causes that is the world changing—which is inevitable and guaranteed.

Steli: It could be one factor in the world changing, or a combination. For instance, your customers’ lives are constantly changing—their priorities, pain points, how they live, and who they sell to.

Steli: As these things change, your product has to evolve with them. Otherwise, a gap starts to form between your product and your customer—who they are today versus who they’ll be five years from now.

Steli: Take AOL Messenger, for example. It had amazing product market fit, introducing the first group of internet users to how to communicate online. But as the internet evolved, users evolved, and products evolved, AOL Messenger didn’t. It didn’t stay ahead of the curve and fell out of product market fit.

Steli: The same happened with Yahoo. It was the first search engine, with amazing product market fit—you could search the web, and it was great. But then another company came along and did it way better than Yahoo. Boom—suddenly Yahoo didn’t have product market fit anymore.

Steli: There are many cases where your competition might not be changing, but your customers' needs are evolving. Usually, it’s a combination—your customers are changing, your competition is changing, and there are broader market forces at play. New technologies emerge, the economy shifts—whatever it is, these changes trickle down to your customer base and your product.

Steli: Channels also change. Sometimes, companies excel at acquiring a specific type of customer in a specific way better than anyone else. Their product is good, but they have more of a "marketing product fit" than true product market fit—they’re exceptional at acquisition.

Desiree: Ah, that’s a good point.

Steli: Right. They’re exceptionally good at acquiring people in a certain way that nobody else can replicate. But then, if that channel disappears—boom, they’re in trouble.

Steli: Look at Blockbuster, for example. They had a strong competitive advantage with their retail empire and video store locations across the U.S. But then, there was a shift in technology. People realized they could get their movies quicker, easier, and cheaper through a different medium. Suddenly, acquiring customers wasn’t about physical locations—it was about the internet. And there was a new competitor better at that than they were.

Steli: This constant evolution is what makes business both fun and challenging. No matter how great your product market fit is—if you’re lucky enough to even achieve it—it will change at some point.

Steli: Think of MySpace—it was dominating the world until Facebook came along. Then Facebook dominated until Instagram and TikTok changed the game. Nothing stays the same.

Steli: End-consumer trends and markets evolve faster than B2B solutions, but even in B2B, the biggest companies and the best products change. Customers’ needs and problems are constantly evolving.

Desiree: Well, I still use AOL Instant Messenger, by the way. That’s my primary. Find me: Emo Desiree.

Desiree: What if Yahoo was still my search engine and I was your marketing person? Can you imagine?

Desiree: Anyway, we’ve talked about how you can spot product market fit and the gray areas. Are there any red flags? What are some signs of very poor product market fit, or are there just too many to list?

Steli: I mean, there are a ton.

Steli: In many cases, founders say, "Look at how amazing we are at acquiring customers, and look—we get to keep them." But when you examine how customers use the product, you find there’s no engagement.

Steli: Oftentimes, founders hack their way into making the numbers look good—not just for external stakeholders, but for themselves as well. For example, you might have a product where every customer signs a three-year contract. Congratulations—they’re not churning! But that doesn’t mean you have great retention. We have to wait three years to know what your retention looks like.

Steli: This is part of what makes enterprise sales both complicated and lucrative. You sell large deals that lock customers in, but a significant percentage—probably 80%—of enterprise or government-level software that gets bought is never used, adopted, or delivers value.

Steli: But too bad—you bought it for three or five years for millions of dollars. The company selling the product can still succeed, even if their product doesn’t get adopted well.

Steli: If a company has to resort to trickery to make metrics look better, lock people in, or take away customers’ ability to leave, that’s a bad sign.

Steli: Another red flag is a lack of enthusiasm from customers. If, when you talk to them, they just shrug their shoulders or seem indifferent, that’s a big warning sign.

Steli: Yeah. They’re paying for this. But when you ask them why they pay for it—what delivers value—if the customer doesn’t have good answers, or if their response is along the lines of, “I don’t know, somebody bought this,” and no one sees the value clearly or is enthusiastic and locked in, that’s typically a bad sign.

Steli: Even if the metrics early on look good—they’re not churning, and they keep paying—you have to wonder: if they’re not committed or excited, how easy would it be for a competitor or a market innovation to change their minds?

Steli: It seems like you don’t have a real advantage by delivering so much value or having such a great fit that you’re an essential product for them.

Desiree: Yeah. I bought a home security system for my new house. They said, “Oh, it’s a smart home, you just have to sign up for the security system.” It was a three-year contract. I said, “I don’t even know what I’m going to want in three years,” but I signed up because it was easy and right there.

Desiree: And I wanted out of it immediately. It’s almost been three years, and I’m literally counting the days on the calendar until I can stop paying this company. On their balance book, they’re getting $50 a month from me, but I’m going to churn so fast. And I’ll badmouth this company to anyone who’s considering them. I won’t name names, but I could rant about this all day.

Desiree: It’s a misleading metric, like, “Oh, look at our revenue!” But it’s probably a red flag if you have an insanely long contract. It doesn’t happen by accident.

Desiree: All right, this next part is going to be fun. I’ve put together a list of not-so-obvious signs that you haven’t achieved product market fit yet. These are things I’ve heard over the years that stuck with me, and I want you to tell me if you agree or disagree.

Desiree: Number one: if your business relies on a few key accounts to survive. Say you have a thousand customers or a hundred customers, and one customer is 40% of your revenue. That’s a load-bearing account, and if they churn, it’s catastrophic. Can you say you’ve achieved product market fit if a few key accounts make up the majority of your revenue?

Steli: It always depends, but probably no.

Desiree: Fair enough. Easy peasy.

Steli: Let me say this so I don’t have to repeat it for every point you bring up: everything always depends. If I could give three universal answers that apply to every situation, that’d be amazing, but that’s not how the world works.

Steli: If one or two customers make up 90% of your revenue, even if you have thousands of others, that’s probably an issue. You don’t really have product market fit.

Desiree: Fair enough.

Desiree: Second one: if your prospects leave your demo surprised by how your product works. It feels like a misleading indicator. Are we “wowing” people with the demo, or is it something else? Should we re-evaluate the high-level value props of the product? What’s your take?

Steli: I’d rephrase it. If people are disappointed, confused, depressed, or overwhelmed after your demo, those are bad signs.

Steli: If they come in with more energy than they leave with—if they feel overwhelmed, stressed, worried, or disappointed—that’s a problem.

Steli: Now, if they’re amazed, wowed, or pleasantly surprised because the product is even better than they expected, that’s a good thing. But if they’re disappointed, it’s definitely not good news.

Desiree: I like that reframing—if their energy level drops, that’s a bad sign.

Desiree: Number three: if your business relies on another business to function. For example, maybe you rely on an integration with another website or an algorithm you don’t control. Maybe you’re scraping data from another site or relying on a feed from another company. If they turn off that data feed, you’re in trouble.

Desiree: I’ve heard people argue that you can’t claim product market fit if you rely heavily on another company’s technology or roadmap. Do you agree?

Steli: I think you can. That sounds like nonsense to me.

Steli: There’s a strategic risk if you rely too much on someone else’s technology, but that’s separate from product market fit. You can still do incredible things and wow people, even if you rely on another platform.

Steli: Most businesses rely on some other technology or platform—nobody builds everything from scratch. You’re ChatGPT, but you rely on NVIDIA chips to deliver your product. NVIDIA relies on silicon suppliers. Everyone relies on something.

Steli: Relying on another company doesn’t negate your ability to deliver amazing value and achieve product market fit. Less reliance means less risk, but reliance doesn’t mean you lack product market fit.

Desiree: I agree. It’s more of a strategic threat. If you’re doing a SWOT analysis, you’d put it at the top of the “Threats” column: “This other company could change their algorithm tomorrow, and we’d have to scramble.” But it doesn’t mean you lack product market fit.

Desiree: Last one: if very few customers want to write a review for your product. Say you have $15–20 million in ARR, but you can’t even incentivize customers to leave reviews. Doesn’t that indicate indifference? Is that a leading indicator that something’s wrong?

Steli: Could be, yeah.

Steli: If customers don’t want to talk to you or about you, that’s a red flag. Why is that?

Steli: Could there be a scenario where customers are over-the-moon happy but don’t want to advertise it? Maybe they don’t want their competitors to know, or they’re in a discreet industry, like security, where they don’t write public reviews.

Steli: It’s possible, but it’s a stretch. Typically, if customers don’t want to be identified with your product or say good things about it, that’s an issue. You need to find out why.

Steli: Usually, it’s because they don’t really love your product, have issues with it, or are thinking about leaving. That points to not having as strong of a product market fit as you’d like.

Desiree: Yeah, they’re not in love with you—they’ve friend-zoned you. You don’t want to be in your customers’ friend zone.

Desiree: All right, that’s all the questions I have about product market fit. Steli, thank you once again for taking the time to talk to me. Until next time, everyone, bye-bye.