Y Combinator CEO: “The True Test of Product-Market Fit Is 'Drowning in Demand'”

http://blog.capitalandgrowth.org/michael-seibel

by jkuria • 8 years ago

236 98 8 years ago

blog.capitalandgrowth.org

sheetjs• 8 years ago

The original context is more nuanced. The quote was responding to "Can you have product market fit without monetization?"

It depends your product. My definition of product-market fit is: you are drowning in demand—your product is being used by so many customers that you cannot handle all the new people knocking at your door!
Absent that you do not have product market fit. Most people use the term too loosely.

It's easy to sell a dollar for 90 cents and be "drowning in demand". The answer seems to indicate that demand is a pre-requisite, but not necessarily sufficient.

edanm4• 8 years ago

This is an incredibly important point that often gets overlooked.

Not only are many businesses actually selling a dollar for 90 cents and therefore think they have product-market fit, but even if you aren't one of these, your competitors might be behaving this way.

For example, when doing freelance/consulting work, you can try to match the rates of cheap freelancers, but that's usually not smart- they might be doing the equivalent of selling a dollar for 90 cents.

Always worth remembering that 90% of new businesses die within a year (or something like that). That means there's always a significant amount of competition that is doing things that don't make business sense.

Retric• 8 years ago

That's way off base. ~1/2 of small businesses survive for 5 years. ~1/3 of small businesses survive for 10 years.

sp3322• 8 years ago

This is a very common thing to hear, but Fortune couldn't even find an original source let alone actual data to back it up. http://fortune.com/2017/06/27/startup-advice-data-failure/

HeyLaughingBoy• 8 years ago

There's a very good book about pricing called How Much Should I Charge? that warns about exactly this.

Her advice is to make sure that you base your "absolute minimum" price on what it takes to sustain your business and not just on what your competitors are charging because the competition could be going out of business and just don't know it yet.

pcarolan• 8 years ago

I’ve even seen companies struggle to sell a dollar for 90 cents. Great point.

cableshaft• 8 years ago

I've even seen companies struggle to sell a dollar for zero cents. I worked in video games. Even making your game free didn't always translate into downloads for some of these products.

bkohlmann• 8 years ago

I think the more interesting comment is related to hiring an MBA for a startup.

Having just graduated with one, and meeting Michael at a lunch where he tried to tell us MBAs why we were bad fits for YC, I actually agree.

It’s certainly not a differentiator and while it got me a great job in a very traditional firm, startups need risk takers more than credential seekers (which I’ve come to understand is something I’ve actually become to some extent).

irq11• 8 years ago

Being a bad fit for a startup doesn’t mean it’s a bad personal decision. When startups want to stop being startups and start being seen as respected companies, you can bet they start hiring MBAs.

It makes sense for YC to try to filter out credential seekers, because they’re unlikely to have the right motivation. But if your goal is to have a wildly successful career, and MBA is probably a safer bet than a startup. Most startups - even well-funded YC startups - trundle out of the gate, fall over and die.

PakG1• 8 years ago

Would you rather get on a rocket shop at ground zero or after it's achieved escape velocity? I imagine only founders want to get on it at ground zero. People who get on it after it's reached escape velocity seem to do just fine with all their stock options, especially if they get on there early enough. It would seem to me that MBAs get hired after escape velocity.

sp527• 8 years ago

In my mind, a startup is a not a 'business' by any reasonable definition of that word. Steve Blank has the best and probably final take on this: "a startup is an organization formed to search for a repeatable and scalable business model." And so an MBA can probably only deliver negative value insofar as it calibrates you to operate on well-defined problems in fairly predictable, slow-moving environments with ample resources at your disposal.

baxtr• 8 years ago

Why do you care what other people tell you’ve become? Just a nice story people try to tell you. Taking risks depends on your life situation. Young graduates going into startups don’t take a risk. A guy who’s made millions going into a new startup is not taking a risk. Best of all: most successful entrepreneurs didn’t ever take a huge risk, but rather go step by step, even if they tell the story differently in hindsight. If you don’t believe that, watch this video https://www.youtube.com/watch?v=t5HZW4NqZ-E

jcadam3• 8 years ago

I am a programmer with an MBA. I honestly forget I have it sometimes. Occasionally someone will remind me I have a master's degree (Why did you leave your master's degree off of this form?) and I have to think for a moment. "What?! Oh, yea..."

So, getting an MBA has had very little impact on my career/life. In fact, considering the time/effort involved, I'd say it has probably given me negative value.

philipodonnell3• 8 years ago

I am in the same boat, but with a bit more charitable view.

You may not realize it but an education like that will come across in the language you use and the way you present yourself to executives. It won't help in a startup, because there are no executives, only doers, but in a larger company being able to hold a conversation with executives on thier terms and using thier jargon will make you far more effective than someone who can only talk in programming paradigms.

suhail• 8 years ago

You need demand and user retention. Just the former is a false sense of success. Many startups flameout without the latter at high frequency. I've witnessed 100s.

RA_Fisher• 8 years ago

Yes indeed!

taneq2• 8 years ago

Also, uh, money. Coming in. Income. You need this. If you don't have income (or a clear road map to it before you run out of funding) then you don't have a company, you have a Ponzi scheme.

hndamien• 8 years ago

And a path to profit. If the moment you make it profitable demand evaporates, you have nothing.

emmett• 8 years ago

Sorry, but do you think Google (prior to turning on AdWords) was a ponzi scheme?

wpietri• 8 years ago

Yes! The way I explain it: a sustainable business is one whose customers keep come back because they were satisfied. Until you see that happening, even revenue could be a vanity metric.

(There are exceptions, of course. LASIK surgery, for example. In which case something like NPS can be a better key metric. But generally, repeat business is the best proof that you've got something real.)

sskates2• 8 years ago

Agreed with all the above. Retention is the best long term predictor of success of every business I’ve seen. Growth can be fast or slow- what matters is do you keep your customers around.

volument2• 8 years ago

I agree to this. In fact — product/market fit can be measured from the traffic by studying the user experience and frequency of visits. We just launched a product that can do this:

https://volument.com/product-market-fit

briandear• 8 years ago

No it can’t. It is measured by people paying you for your product at a price that is higher than the cost to deliver the good or service. Visiting your website a lot isn’t an indicator of anything. It’s a vanity metric.

hoodoof• 8 years ago

And yet we must still do "things that don't scale" to build up that demand.

The real challenge is to work out when your product isn't being snapped up by users not because it CAN'T be awesomely useful and demanded and valuable, but because your marketing has not effectively sold it to them yet.

sskates2• 8 years ago

Yeah- the truth is always more nuanced. Both product market fit and doing things that don’t scale are required to get something off of the ground. It’s almost never you see a successful startup that didn’t have both of those pieces.

rmason• 8 years ago

I've seen startups that couldn't succeed selling dollar bills for fifty cents. There are others, Dropbox for example, that post a video and demand explodes.

I've seen people grind on a startup for years, pivot multiple times, and have nothing to show for it. Then they try another totally different idea and it's an instant success from day one.

tritium• 8 years ago

Put another way, there doesn’t seem to be any apparent correlation between effort and success.

jesscxc• 8 years ago

Another way to look at it is that the effort is in the enduring of the pivots.

onion2k• 8 years ago

Effort is a multiplier. A bad idea with a ton of effort won't go anywhere. A good idea with a little effort will succeed in a small way. But a good idea with a lot of effort... that's when things are massively successful.

Applejinx• 8 years ago

There's no particular correlation between MERIT and success, never mind effort. My own work's increasingly based on the notion of, if you want merit/quality, come up with some way for it to survive outside of the success dynamic, then pursue that way.

pjc50• 8 years ago

Was there ever? No amount of pushing on a pull door is going to help.

murukesh_s• 8 years ago

It's more complicated. Sometimes a simple spin to the messaging is all that requires. Sometimes your idea can be too early and at times little late by the time you built it. It's almost like fashion - no body knows what becomes a hit, even though some popular design agencies can give some good boost to a particular trend (y-combinator).

Another analogy is viral music videos, even though some videos have all the ingredients they never take off, while others go viral. Same is sometimes with not-so talented getting popular due to various factors. Another analogy I could think would be movies or game production, no one can really know when it will go viral, but you can do some calculated risks and make sure that it will become at least a modest success. Like sequel to a hit movie or a poker/gambling games that won't go viral but can give consistent returns. That can be thought of as b2b in software markets, while b2c leans towards viral/large success stories..

joncrane• 8 years ago

I think you almost always need effort for success. But effort does not guarantee success.

philipodonnell3• 8 years ago

Worth pointing out in a tongue-in-cheek way... Effort alone is useless, execution is what is important. One of the things you learn in an MBA program is how to tell the difference. :-)

peter_retief• 8 years ago

The advantage of being oversubscribed is you can be more picky and get the best, great news

kyloon• 8 years ago

It is also important to tease out if the demand is actually because of pricing your product too low which can sometimes be perceived as achieving product-market fit. Nothing wrong with that if cost efficiency is what you are trying to solve, but in most cases this is a sign of underestimating the true value of the product.

paraschopra• 8 years ago

I like the phrase market-product fit more. I wrote about it last month: https://invertedpassion.com/to-get-good-startup-ideas-look-f...

paulsutter• 8 years ago

Well put and entirely correct

canvasduck• 8 years ago

Awesome post. Bookmarked so I can reread.

amasad• 8 years ago

Reminds me of the Segment CEO line at one of the startup school lectures: "finding product market fit is like stepping on a landmine -- you can't miss it".

lowglow• 8 years ago

1. Create demand

2. Acquire users

3. Own distribution

4. Iterate to multiply 1

Lordarminius• 8 years ago

Jeff Bezos once said the same thing in different words: "... The true test of innovation is customer adoption."

owens992• 8 years ago

My only problem with this is that it's not really a test at all, because it is not quantifiable.

It's almost like saying, "The true test of product/market fit is whether or not it's obvious you have product/market fit."

Essentially, the statement is redundant.

There are various levels of Product/Market Fit. There's unicorn-level product/market fit and there's amazing product in a small market-level product/market fit (ie. $25M-$100M exit). YC and others in the VC-world only seem to recognize the unicorn-level because that's the only level that's relevant to them.

boffinism• 8 years ago

"The true test of product/market fit is whether or not it's obvious you have product/market fit."

The thing is, this is the sort of thing people _actually say_ about p/m fit. E.g. Marc Andreessen: "you can always feel product/market fit when it’s happening"[0].

It might feel redundant, tautological and unhelpful, but there are a heck of a lot of startups who are really, really trying to convince themselves they're ready for the next step because "I think we've got product/market fit - I mean, we got that pilot with a big corporate, didn't we?".

Statements like this are a reminder to bring over-optimistic entrepreneurs back down to earth and remind them there's still work to do.

[0] https://a16z.com/2017/02/18/12-things-about-product-market-f...

ekidd• 8 years ago

The thing is, this is the sort of thing people _actually say_ about p/m fit. E.g. Marc Andreessen: "you can always feel product/market fit when it’s happening"[0].

I've consulted for quite a few startups, and the successful ones really do feel different. Are there lines of people standing outside the booth at trade shows trying to write 5-figure checks? Are the sales people bringing in big contracts so quickly that people start mixing them up in conversation? Is engineering constantly struggling to keep up with ridiculous growth?

Mind you, not all of these companies succeed. Some find themselves trapped in a market that can't sustain growth. Others are mismanaged, or ultimately suffer from too much churn. Sometimes Google moves into the market and everything gets harder.

But once you've seen very aggressive customer demand, it's pretty obvious.

owens992• 8 years ago

The thing is, this is the sort of thing people _actually say_ about p/m fit

Just because lot's of people say it, doesn't make it any less wrong or misguided. In my mind, it's kind of like the "great man theory" from the 19th century in that is fails to go deeper into the issue and take a critical analysis of what's really happening [0].

There are many amazing techniques that are 10x more rigorous than this statement, which we've only scratched the surface of for testing Product/Market Fit.

[0] https://en.wikipedia.org/wiki/Great_man_theory

realusername• 8 years ago

I don't think it's a true statement, you have plenty of small to medium-size companies serving niche interests which will be never be drowning in demand but are still profitable. But of course those companies are not exactly the right profile for Y Combinator.

icebraining2• 8 years ago

You don't need an ocean to drown. To me, that means "more demand than they can handle".

stephenson• 8 years ago

It depends on what kind of company you want to build.

Yes if your goal is to build a Dropbox, an Instagram etc then you don't have "product-market fit" before you have to stay up all night weeks in a row to keep your service alive.

But sometimes it makes more sense (and joy) enjoy building stuff where the product-market fit and growth curve is a lot slower, read Basecamp's post about linear growth companies: https://m.signalvnoise.com/the-world-needs-more-modest-linea...

Background: I have build a VC backed company that ended up on a linear growth curve and enjoyed it a lot, today the company is profitable and proud. Today I am VP Growth of a heavily VC backed company that is trying to hit product-market fit.

gajju35882• 8 years ago

Is it always the demand? How will this work for some company which provides a service which is used once in a while by other companies? So for a long time, there would be no demands. Think of something like https://dataturks.com/ . They provide UI tools to manually label data for ML algorithms until some company is doing that specific ML algorithm/task/project.

icebraining2• 8 years ago

Demand doesn't need to come from the same people continuously. Car manufacturers have plenty of demand, despite their clients only buying a product every few years.

Similarly, Dataturks can have demand from a stream of different companies, each doing their isolated projects.

gajju35882• 8 years ago

Cold-start will be a big problem, once you have customers it becomes easier. How does one read signals in the beginning ?

derrida2• 8 years ago

You mention not having a technical co-founder as a big turn-off. But we all know that unless you’re doing a ‘hard tech’ startup, customer acquisition can often be harder than building a product. Is it not possible to succeed by hiring external tech talent? After all, Kevin Rose famously built Digg with $20/hour Rent-A-Coder talent.

How is Digg?

mjlee• 8 years ago

Not so hot, but I think most people would be pretty happy to be where Kevin Rose is, financially.

acct1771• 8 years ago

Everything's about the scoreboard.

Y'know, unless you want to be happy.

jcadam3• 8 years ago

Kevin Rose famously built Digg with $20/hour Rent-A-Coder talent.

I'm so doing that next time (and on elance, et al., coding "talent" can be had for even less than $20/hr). I spent a year coding my current product (b2b) myself, and now I'm discovering user acquisition is the hardest thing in the universe.

philipodonnell3• 8 years ago

I wish there was a Rent-A-Marketer site. Everyone in freelance marketing wants to be paid up front with no guarantees about anything.

derrida2• 8 years ago

Funny... all the hackers reading this trying to figure out how they can "game" this system.

gregoriol2• 8 years ago

If you are "drowning", it's not market fit, it's actually how unfit you are for the market.

McPepper2• 8 years ago

Interesting perspective and I can agree somewhat... But isn't "drowning" correlates to the validation of your product/business model?

Depending on the business that is, but if there's an unsolved need from the market, wouldn't it be that no one is fit for the market? If so, then the person who's "drowning" is the most qualified of all (given at that moment).

gregoriol2• 8 years ago

Drowning can have bad reasons: you are not ready, your product is under-priced, your product is trendy based on an point-in-time event/PR/whatever, ...

And it can have bad consequences: your customers might get unhappy because of delivery delays, lower quality, you might try to adjust the product/price loosing early customers or making a mess, your thinking and doing will be in a hurry, ...

Overall, the trend might not last, and others might get into that market in a better shape than you.

Market-fit is more about the long run: being able to have regular steady growth, of customers, of the revenue, being able to learn and adapt to it, having positive feedback again and again and again, ...

I think this "drowning" idea is a pure bro/VC one: you demonstrate in a short time that you can attract a lot of customers, you get good press (for that short time), investors, millions (or billions) of money pours in, and it's not really about the customers or the long game of making a product.

crocal• 8 years ago

I am drowning in demand right now and it is not a pleasant feeling.

icefox• 8 years ago

Whats the demand?

lazyjones2• 8 years ago

So, for example Tesla has a better product-market fit than the competition because it can't produce the Model 3 fast enough? That seems like a rather 1-dimensional view to me...

kozak2• 8 years ago

Look at the differences in product-market fit between Model 3 and its closest equivalent/competitor, the Chevrolet Bolt. Model 3 is obviously a much better fit.

lazyjones2• 8 years ago

There isn't an isolated EV market. People who drive EV can also drive gasoline cars. So the M3 has plenty of competition in the large car market.

jnsaff2• 8 years ago

So this cryptocurrency/blockchain demand means that it has achieved the perfect product-market fit?

blueline• 8 years ago

bitcoin transaction volume is down ~50% from 400k/day in december to 150-200k/day recently

the "demand" is from people who like seeing lines that go like this / in their portfolios

the ratio of people who are actually using the "product" to those who are just speculating is pretty insanely low

icc97• 8 years ago

This seemed a more useful quote:

Foolish stubbornness comes not from working on the same problem, but from an unwillingness to iterate on the solution. Many founders fall in love with their product rather than the problem they are trying to solve.

Hydraulix989• 8 years ago

"Sometimes we see founders who are not 'all in' but are looking for YC to validate them."

Isn't that a bit irresponsible?

I, for one, had to taper my startup ambitions for a year after graduating university because I had student loans to pay and an initial bank account balance of zero.

Some people are a bit more privileged to have a bit more of a safety net when they start, so jumping off the deep end is a bit easier and less risky.

Many tech companies don't see profit for several years. I don't see how that's possible for some aspiring founders without someone like YC giving them that initial boost.

Despite this "strike," I'm fully self-sufficient now with my own business that is ramen profitable despite having a bit more of a barrier to overcome to start with (which meant biding my time at a Big Company and legally moonlighting by doing remote work with my cofounder while building my business).

Is it not equally impressive that someone started with an empty bank account and worked a full time job for a year and then worked 8+ more hours each day after work to bootstrap their own company?

Please keep this in mind, if at all possible, when deciding whether someone is "fully committed." I hope this makes sense.

mathattack2• 8 years ago

Has anyone here ever been drowned in demand on the Enterprise side? I’ve been in high growth (50+% annual) and it still felt like we were fighting for every sale.

You can have product market fit but if there are competitors, life still is hard.

beager• 8 years ago

That sounds like an attitude aspect, which may have contributed to the growth. Even if you’re drowning in demand, you’re leaving value uncaptured if you don’t aggressively sell.

mrep• 8 years ago

Slack had about 10 times YOY growth when it first started and then slowed down to about 3-4 times YOY growth which is what it currently looks like it is at.

*these are just my eyeball estimates from looking at graphs in google search for "slack growth"

mathattack2• 8 years ago

Was this driven by end user adoption, or larger scale enterprise sales?

powvans• 8 years ago

I wondered the same thing when I saw this. I've been working in enterprise SaaS startups for the last 5-ish years and my experience has been similar. Even when we had solid growth numbers, every single sale is a long fought battle.

I've experienced "drowning in demand" twice in my career. An ecommerce startup and a dating app. It is intense and you know it when it's happening. It's hard to fathom what that would look like in an enterprise software setting. Large deal size, long sales cycles, high touch everything, it just feels like it's geared differently.

lkbm• 8 years ago

"Y Combinator CEO", to me, means sama, though I guess his title isn't actually CEO. I feel like a better title would be "Y Combinator company CEO".

Not a big deal, but confused me at first.

vonnik2• 8 years ago

Sam Altman, sama, is president of Y Combinator Group, which includes more than the accelerator. Michael Seibel is CEO of Y Combinator, the accelerator.

https://www.linkedin.com/in/mwseibel/

vonnik2• 8 years ago

I think the key point here is: If you have to ask whether you have product-market fit, the answer is "no." Product-market fit, when it occurs, is an overwhelming, white-knuckle ride. Google and FB figured out monetization after they found product-market fit, but once you have users, advertising will follow.

logicallee• 8 years ago

This also explains why so many great companies are built by people solving one of their own problems: imagine how high your demand is for a particular solution, if you are willing to spend 100 hours coding it! That means it is worth at least $1000 for you, for many programmers closer to $10,000.

That is for founders who can personally code their solution. Imagine the situation for founders who can only make a proof of concept prototype and need to raise money for them to see a commercial version.

In this case the desire to see their idea in physical form is so great, they would work unpaid for 1 to 2 years for a 20% chance at seeing it. That means their personal demand is $100,000 for a 20% chance to have 1. (And this is why many engineers work for equity / often called a lottery ticket.)

That is another way to see that the world is drowning in demand for your product/vision :) People will donate hours or market salary to having one.

(I realize that the last three paragraphs are mixed with potential financial reward - however for people coding the solution for themselves, this definitely shows that they themselves are drowning in demand for it.)

throwaway84742• 8 years ago

What would you do if you worked at a startup which, after a year and a half of existing and raising a substantial Series A _hasnt even started_ to define what the product is? Basically the only reason the startup is alive is a single large customer walked in one day in search of the narrow expertise that we excel at, and gave us a contract. But other than that, there’s zero product effort, and the CEO doesn’t understand he needs to solve customer problems.

How would you estimate the chances of success on something like that. I estimate them at roughly zero in spite of the technological prowess, but maybe I’m wrong.

Y Combinator CEO: “The True Test of Product-Market Fit Is 'Drowning in Demand'”

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