Source: Valano Solutions Blog post, March 14, 2014

Note on the graphic – I found this chart which maps cost (y-axis) vs. time spent (x-axis) to achieve product-market fit in this excellent article, but the original source can be found here.

For new SaaS companies, and especially for ones with highly technical products, outsiders measure progress in terms of what is observable.

Want to assess the prospects of an early-stage startup?

Chances are that you’ll base your analysis on what you’ve heard about the company in combination with its first sales wins, team size and pace of hiring, and fundraising record.

Promising results along these dimensions are correlated with success, but they are not the cause. The magic of a SaaS startup boils down to one thing which, incidentally, is far more difficult for outsiders to observe or measure: product-market fit.

What are the elements of a Good Product-Market Fit?

First and foremost, before even considering what problems a SaaS product solves, most important is an assessment of the market itself.

Building good software is challenging enough – doing it for a market that doesn’t offer a sufficient sales opportunity simply makes no sense. Even if a solution does solve customer problems, it may not be sufficiently valuable either because a customer is unwilling to pay enough, or there aren’t enough customers in the market in the first place.

Once an attractive market has been identified, the next step is to design the product, and do it in such a way that value can be delivered incrementally. Simply put, if you’re looking to have a feature-rich, super-polished, complete offering at initial launch, you’re doing it wrong.

To borrow an analogy from HGTV home-remodeling shows, you don’t want to do “the big reveal”, where you take a list of expected features, do all of your work in seclusion, and then present the finished product to the audience in a grand, ceremonial launch.

Rather, you want to build the product – particularly those with the highest degree of complexity – in close collaboration with the customers, adding and perfecting features as you go. The benefits of this model include:

  • Validation. continual customer feedback tests design assumptions and ensures that the eventual product will provide customer value.
  • Design assistance: customers are the best source of information as to necessary features.
  • Value testing: early adopters will tell you when the product is ready for its first sales.
  • Continual improvement: having a product in the marketplace provides invaluable feedback, both from sales wins (customers) and sales losses (those who would buy, but found the value lacking in some way).

This is where the evaluation of initial product-market fit comes in. When a company can transition from its early-adopter, pilot customers to a successful, general market sales push, it’s achieved product-market fit.

Importantly, product-market fit is not binary: it is a continuum and can improve by degrees. With incremental feature delivery, products progress over time. At the same time, a product must meet some threshold of value to achieve some basic level which allows for market introduction.

What are the Benefits?

Many good things flow from initial product-market fit, such as:

  • A genuine and coherent marketing message: building the product based on primary customer feedback naturally crafts authentic product and company messaging.
  • Successful sales efforts: the best sales teams are built around real products addressing real markets.
  • Scaling of team size to support growth: with this framework – an ever-improving product with a growing customer base and successful sales will both justify and require more personnel.
  • Additional fund-raising: early success begets early growth. The bad news is that this is expensive. The good news is that the market will fund it.

So, while an evaluation of a company on these bullet points – marketing, early sales, team scaling, and fund-raising – is what drives outside analysis of a company’s prospect, they are more symptoms than causes of success.

The true value – and the real magic of SaaS startups – lies with product-market fit.

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