Product-market fit: Why does it matter and how do you find it?

Product-market fit is, on paper at least, pretty simple. You’ve got a product that’s right for the market you’re launching into – so your ideal customers buy the product, use it as intended, and tell other people about it. Basically, it serves a purpose for them and they like it; and that means you’ve hit a sweet spot in which your product satisfies your customers and drives revenue for your business. 

When this happens, you’re also well positioned to grow your business; because your customers help to spread the word, marketing your product becomes (almost) effortless, and your customer acquisition costs take a downward trajectory. 

We recently caught up with VC investor Zach Coelius (Managing Partner at Coelius Capital) and asked him which part of the business-building journey he finds particularly exciting. He said “I love the search for product-market fit.” 

And from an investor perspective, it is indeed a search: VCs aren’t just looking for great ideas; they’re searching for great ideas that show strong evidence that they’re launching in the right place at the right time. 

Signs that an idea has product-market fit

Thorough market research can help you identify if your tech product has product-market fit (PMF) before you invest heavily in launching it. Your specific product might not exist on the market yet, but you can explore the success of competing products or related services to build an understanding of your product’s right-place-right-time-ness. 

Positive signs for PMF include: 

• There’s a strong customer demand for your product (or similar competing products), and the customers who want it are willing to pay for it. They’re actively seeking either your specific product, or a solution to the problem that your product solves.
• High customer retention. Existing customers continue to use (and pay for) your product over a long period of time, with low churn – people aren’t dropping off or cancelling subscriptions regularly.
• People talk very positively about the product. Customers are clearly happy – they keep coming back for more, and they’re spreading awareness of your product through word-of-mouth and referrals.
• Organic growth. That word-of-mouth awareness is driving demand, which means the customer base for your product is growing rapidly without major marketing spend.
• Media outlets are expressing an interest. Magazines, newspapers and online media outlets, along with social media influencers and/or public figures, are proactively seeking out your product (or competing products) to include it in their coverage or request influencer collaborations.
• Your minimal viable product (MVP) goes down well. When you test your MVP by offering it out to target users, they indicate they’d be interested in becoming paying customers when your product goes to market. 

All of these signifiers are useful for you as a product developer – and they’re also useful touchpoints for investors who are deciding whether or not to back your business. Which means these indicators of PMF are definitely worth including in your pitch deck. 

PMF doesn’t mean boring or predictable

Product-market fit assumes a certain level of market readiness for your product. But that doesn’t mean your product has to be boring or predictable – and sometimes, it’s the most innovative or surprising products that demonstrate the strongest PMF. 

We asked Coelius how he finds and selects tech startups to invest in, and if there are any particular criteria that he always looks for in a startup or founder. He said: “I look for unique entrepreneurs who are tackling huge markets with weird ideas. The weirder the better.  Everyone is very different.” 

Earlier in his career, Coelius acted as an angel investor – and shifting to venture capital has shifted his approach. “The larger your check, the more ownership you have as an investor, the harder it gets,” he said. “Board seats, legal obligations, being the responsible party is a non-trivial task. Raising a much larger fund has forced me to focus much more.” 

Part of this focus includes product-market fit. Responsibility for larger funds means that VCs are keenly attuned to PMF, and are looking for investments that offer a clear ROI. This doesn’t mean your business has to be mature, or even that you have to be turning over significant revenue already – but you need to be able to show investors why your product will sell into your target market.