Careers in Tech

How to Find Out if an Employer Has Product/Market Fit

Employers will try to sell you on their product/market fit. Employees need a way to spot it.

In my previous article, I explained that you want to join companies that have found product/market fit. But I didn’t define what that meant. This article defines product/market fit for employees, and gives four simple rules to assess it.

Does this ring a bell?

“I have an amazing new opportunity — a once-in-a-lifetime chance to change the world!” — 10th recruiter on LinkedIn this week.

But when you go to the company page, you can’t tell whether it’s a good company or not. How do you know which recruiters you should listen to and which are full of hot air?

This one is full of hot air. Source: author, inspired by emails actually received through LinkedIn

Deciding which company to pick is one of the biggest choices you’ll make in your life.

But it’s awfully hard.

Some startups look like they’re growing phenomenally, but they aren’t. Others found hypergrowth in the past, but then hit a wall. Consider, for example, MySpace and Evernote: One virtually disappeared, and the other plateaued right at the peak of success.

Regardless of reality, startups will say all the right things to lure you in. How can you know which ones to trust?

If you can’t do it, you might get stuck in a company for years on end, trying to leave because you’re fully vested, the company isn’t as exciting anymore, or you just need a change, but hesitant because you would leave valuable stock on the table, or spend way too much cash exercising your options.

As an employee, you want to make sure your company grows all the way to a liquidity event. How can you tell which companies will? Fortunately, there are certain objective criteria that you, as a savvy applicant, can look for to get the real story.

The current definitions of product/market fit

In a moment, I’m going to explain why I think you just need to ask four simple questions to your prospective employer to assess product/market fit:

What’s your revenue?

How fast is it growing?

What’s your TAM?

What’s your LTV vs. CAC?

But before I explain why, we need to understand how people usually define product/market fit, and why that doesn’t fit your needs as an employee.

First, here are thoughts from some of the greatest minds in Silicon Valley about the meaning of this elusive concept.

Eric Ries, author of The Lean Startup and The Startup Way, says:

The term product/market fit describes ‘the moment when a startup finally finds a widespread set of customers that resonate with its product.’

OK, not very specific.

Marc Andreessen, cofounder of venture capitalist firm Andreessen Horowitz, has a longer (and more entertaining) explanation:

You can always feel when product/market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of ‘blah,’ the sales cycle takes too long, and lots of deals never close. And you can always feel product/market fit when it’s happening. The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can. Reporters are calling because they’ve heard about your hot new thing and they want to talk to you about it. You start getting Entrepreneur of the Year awards from Harvard Business School. Investment bankers are staking out your house. You could eat free for a year at Buck’s.

He paints an entertaining picture, but it’s a blurry description that can’t be assessed at all from the outside. Both definitions essentially amount to “You’ll know it when you see it.”

What you really need is specific data points that your prospective employers can reveal, to decide for yourself if the company has product/market fit. They should have these numbers readily accessible. If they don’t, you have to wonder how seriously they are taking the idea of finding the right fit for their product.

The two famous product/market fit numbers that don’t work

The NPS (Net Promoter Score)

Andy Rachleff, cofounder and CEO of Wealthfront, suggests the Net Promoter Score (NPS) as a great tool to predict the magnitude of customer love for one’s product or service — ideally a score of 40 or higher “to know you’re on the right track.” That’s more specific.

A low NPS makes it much harder for a product to grow fast. A high one reflects positive word of mouth. But does it really prove hypergrowth?

Many companies with a negative NPS have grown tremendously. For example, Comcast is the biggest broadband and cable company in the world, but it has an NPS of -9. Most banks are in the same spot.

Conversely, many companies with a great NPS never get close to a liquidity event: You can imagine products that are amazing but don’t have a good business behind them, or the founders didn’t figure out how to make money.

So the NPS is not always an accurate predictor of product/market fit. Its shortcoming is encapsulated in the famous adage: “Build it and they will come.” We all know that’s not true.

You might have a product people love but won’t talk about.

Or one that people find hard to talk about.

Maybe it lacks any sort of conversational triggers in their day-to-day life. (Who is out there talking about the software they use if it’s not mind-blowingly cool?) So now you’ve got no distribution.

Or an amazing product that nobody can afford or wants to pay for.

The NPS measures how much users like a product, but that’s it.

That said, it doesn’t hurt. The more a product is loved, the more likely it is to be successful. It’s not everything, but it helps. There’s not a lot of agreement about the right numbers for an NPS, but from what I’ve seen, 40 or above is amazing. In the 20 to 40 range is OK. Below 20, people don’t care so much about your prospective employer’s product.

How devoted are product users?

Sean Ellis, CEO of GrowthHackers, developed a survey. He titled it “How disappointed would you be if you could no longer use this product?” He also proposes that if 40% of your audience would be very disappointed, you have product/market fit.

This number suffers from the same downside as the NPS: It’s just a measure of product quality, not business success. Yet 40% of your users might be very disappointed if the product disappeared, but not disappointed enough that they’d spend what it would cost to keep it alive.

Another downside is that most companies don’t know the answer to this question yet, so the data may be unavailable for a company you’re looking into.

The other reason why the current definitions don’t work for you

You might have noticed that all these definitions come from investors or entrepreneurs. None come from tech workers. Here’s a small secret nobody talks about: most definitions of product/market fit are worthless for employees.

Investors and entrepreneurs have a very different incentive regarding product/market fit than employees.

No, you can’t take entrepreneurs’ or investors’ definition of product/market fit. You need your own as a startup worker.

Investors want to catch companies that just started their hypergrowth, so they can ride all their growth — and valuation increases — with them. It’s ok if these companies take a decade to reach a liquidity event: their fund is expected to live for a decade anyways. If not, they can always sell their preferred stock in the secondary market to other VCs. When push comes to shove, it’s not the end of the world if they lose their investment. They’re diversified across many startups. As long as a few make it, they’re good.

But you aren’t. You work in one company, unlike investors. You’re not diversified. You have all your eggs in one basket. And your common stock is not liquid.

Entrepreneurs are in it for the long haul, but if they make it they never need to work again. What they want is their company to start growing fast, so that they can raise more money and continue the race. Also, a small secret in Silicon Valley is that founders frequently cash out some of their stock before a liquidity event available to most workers.

But you don’t own as much stock as a founder, and you definitely won’t have early access to cash out a life-changing amount.

What’s a more likely scenario for you? You have a lot of stock options in a company that is nowhere near a liquidity event. If you leave, you have to exercise your stock, which might mean handing out a lot of cash without knowing if you’re going to see any of it back. And you might even need to pay a ridiculous amount in taxes.

If it takes 10 years for you to know whether your startup will have a liquidity event, and it turns out it doesn’t, you just wasted a big chunk of your career’s earning potential.

If you leave earlier and exercise, you might have burned the little amount of money you were able to save, for nothing.

No, you can’t take investors’ or entrepreneurs’ definition of product/market fit. You need your own as a startup worker.

Your goal is different from that of a VC or an entrepreneur. Because your stock is not liquid, you need to be closer to a liquidity event. Put another way: since you can’t easily sell your shares at any time, you need to be very confident that a time will come soon, and when it does, your shares will be worth a lot.

Considering extra factors: Product/market/model/channel fit

Brian Balfour of Reforge has a more exhaustive approach to evaluating companies: the product/market/model/channel fit. What a mouthful. But it makes sense.

It takes the standard product/market fit as a baseline: a product that a market (an audience) loves. Then it adds “channel” for the distribution and “model” for the business model.

Product/Market fit with distribution

If you have found a way to distribute your great product at scale, then you have “channel fit.” It means you’re not just stuck with a great product. You’re able to get it in the hands of people.

All channels are not the same, however. Channel fit depends on both the product and the market. For example, you can’t distribute enterprise software through viral channels; those only work for lightweight entertainment or consumer apps. Have you ever seen Salesforce apps on Facebook?

Conversely, you can’t use a sales team for consumer content. Would you imagine a salesman knocking on your door to sell you the next hit song?

Finding the channels that work for you depends heavily on the product and market.

Let’s use my former company, Zynga, as a case study here. Zynga, which develops online social games, had massive growth built on the back of Facebook. Tens of millions of middle-aged women loved tending to their farms and playing crosswords on that platform. Zynga had the right product for the right market on the right channel.

But then smartphones came along. Videogames started to be discovered through the app stores just as virality on Facebook disappeared. Zynga had to adapt to a new channel, but it was not prepared. Their expertise was viral spread.

It made perfect sense to focus on virality for games like FarmVille, with strong friend mechanics. But on mobile, people didn’t discover a game because they were befriended by their aunt. People downloaded them based on the ratings, the summary page on the app store, and how high up on the charts they were — a process that rewards games that are really good and already big.

As a result, games lost most of their prospective players on the app store page. Something like 95% of people landing on a game’s app store page dropped off and didn’t install, compared to only around 30% or so on Facebook.

The product and the market didn’t change for Zynga; the channel changed. But with the new channel, they lost product/market/channel fit. And we all know how hard it is to get it.

Product/market fit with the right business model

Balfour’s approach also adds “model,” as in “business model.” You can have a product that people love with a distribution channel that is extremely scalable, but if you can’t get somebody to pay for it, you won’t go anywhere. I mentioned Evernote earlier, and they have this problem: The product is amazing, everybody loves it and wants to use it, but few want to pay for it.

Conversely, the right business model that fits well with the product, market, and channel will grow extremely well. Take, for example, Robinhood, the investing app. Their product is very similar to standard trading platforms that have been around for a while, and it caters to the same audience (market): self-directed investors. The distribution channels are nothing new, really. There are plenty of mobile app-based trading apps. But their innovation involves the business model: trading that appears to be free.

In reality it’s not fully free, because of complex machinations behind the scenes, in which they sell your trade orders to companies that use that information to make money off of you, increasing ever so slightly the price that you pay in every transaction. They also make money through other means, like interest on your uninvested cash and a monthly subscription you can pay. But you don’t notice that. After all, they told you the trade itself was free. (And, all that said, it is substantially cheaper per trade than on other platforms, which is why I use their product.)

So, overall, Robinhood has the same product as other trading platforms, in the same market, with little channel innovation. Only the business model is different: With the attractive “free” pricing, it feels new and fits extremely well with the other components. And that’s how the company grew to be worth $7 billion in 2018.

Adding channel and business model to product/market fit makes this framework much more robust because it’s not just about having a great product that people love. It’s also a great business and distribution guaranteed.

But how can you use that to find out whether your prospective company has found product/market/channel/model fit? How can you guess whether you will live through a liquidity event?

4 metrics to define product/market fit

My proposal is that your next employer should meet the following criteria:

Make around $100M in revenue annually Grow revenue at 40% growth year over year (YoY) Aspire to a multi-billion dollar TAM (“Total Addressable Market”) Benefit from positive unit economics: customers’ lifetime value is greater than their acquisition cost (LTV > CAC)

Why did I choose those metrics? Let’s tackle them one by one.

~$100M in revenue

If you have $100M in revenue, you already have numbers that are worth an initial public offering (or IPO), so the risk of not reaching a liquidity event is much lower.