TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

Finding product-market fit is the single most important thing that your startup does in the first three years, yet it's often underexplored and underexplained.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

The framework for product-market fit includes four levels: nascent, developing, strong, and extreme product-market fit.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

Most startups never get past level two of product-market fit, which is a common challenge for early-stage companies.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

If you're stuck at a level of product-market fit, focus on changing the persona, problem, promise, and product to move forward.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

Extreme product-market fit leads to momentum where the market pulls you along, making it easier to know what to build and hire.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

The ultimate goal is to achieve extreme product-market fit, characterized by widespread demand for a product that satisfies a critical need and can be delivered efficiently.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

At level one product-market fit, your goal is to find three to five customers with a significant problem and deliver a satisfying solution, even if it means being inefficient initially.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

It's acceptable to be inefficient at level one as long as you deliver exceptional customer satisfaction, which can sometimes mean manual processes.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

Vanta is a great example of a company that found product-market fit by addressing a critical pain point in compliance automation for startups.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

The demand source at level one often comes from personal networks, and it may take many conversations to find the right customers.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

At level one, metrics like burn rate and gross margin are often not applicable, and the focus should be on customer satisfaction and progress.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

Signs of being stuck at level one include having customers who wouldn't be disappointed if your product disappeared or if the most important feature varies for each customer.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

If you have a handful of happy customers but struggle to find new ones, it may indicate you're stuck at level one of product-market fit.

LP

Lenny's Podcast Cast

04/11/24

@ Lenny's Podcast

Lattis started as an OKR tool in 2015, but pivoted to a people management platform after realizing that companies struggled with OKRs, leading to dissatisfaction among employees.

LP

Lenny's Podcast Cast

04/11/24

@ Lenny's Podcast

Jack, the founder of Lattis, maintained the same target persona of HR heads while pivoting to address their other pressing problems, which ultimately led to the success of the new product.

LP

Lenny's Podcast Cast

04/11/24

@ Lenny's Podcast

The four Ps framework includes Persona, Problem, Promise, and Product, which must align for a product to succeed. The product should deliver a promise that effectively solves the problem for the target persona.

LP

Lenny's Podcast Cast

04/11/24

@ Lenny's Podcast

Jack kept the same persona but changed the problem he was solving and the promise he was delivering, which is a crucial aspect of pivoting successfully.

LP

Lenny's Podcast Cast

04/11/24

@ Lenny's Podcast

Founders often get stuck at various levels of product-market fit, and it's essential to evaluate which of the four Ps—persona, problem, promise, or product—needs to change to move forward.

LP

Lenny's Podcast Cast

04/11/24

@ Lenny's Podcast

It's often more effective to sell a product before building it, as this approach provides valuable customer feedback and ensures that the product meets actual market needs.

LP

Lenny's Podcast Cast

04/11/24

@ Lenny's Podcast

Many founders feel they never truly achieve product-market fit, often waiting until they reach significant revenue milestones to feel confident about their product's success.

LP

Lenny's Podcast Cast

04/11/24

@ Lenny's Podcast

Founders should be aware of the signs indicating they might be stuck at level two, such as slow sales cycles, high churn rates, and difficulty in generating demand.

LP

Lenny's Podcast Cast

04/11/24

@ Lenny's Podcast

If you're stuck at a certain level of product-market fit, you should consider making significant changes rather than minor adjustments to your approach.

LP

Lenny's Podcast Cast

04/11/24

@ Lenny's Podcast

At level three of product-market fit, the focus shifts to repeatability and scaling, where the marginal customer becomes easier to acquire, and leads start coming in more organically.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

Our gross margin needs to be above 60%, ideally above 70%.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

A burn multiple below three is ideal; we want to be close to one.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

At level three, regretted turns should be less than 10% and net revenue retention (NRR) greater than 110%.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

Level two is where you need to pivot from just grinding for customers to having them come to you.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

At level three, you should have found a demand channel where customers are coming to you, often through referrals.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

Even at 100 customers, some founders still feel like every new customer is the last one they'll get.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

It's common for founders to feel paranoid about product-market fit, even when they reach significant revenue milestones.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

At level three, signs of struggle include a net revenue retention below 90% or regretted turns greater than 10%.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

If growth slows down significantly after rapid growth, it may indicate challenges at level three.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

As competition increases, navigating the market becomes tougher, especially after five years.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

At level four, you should have a team larger than 100 people and be generating over 25 million in annual recurring revenue (ARR).

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

To expand your total addressable market (TAM), consider bringing your product into new markets or developing multiple products.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

Even at level four, finding product-market fit for new products is challenging and requires continuous effort.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

Expectations of customers continue to rise, making it a constant challenge to maintain product-market fit.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

About 60-70% of companies get stuck at level one or two, leaving only about 30% that reach level three or four.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

If a founder has been working for four to five years without finding product-market fit, it may be time to reconsider their approach.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

It's acceptable for founders to return money to investors if they haven't found success after several years.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

The four Ps to focus on are Persona, Problem, Promise, and Product.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

Understanding your Persona means knowing the specific people in your market and their challenges.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

Identifying extreme value involves understanding the most important problems your customers face.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

You need to confirm customers' ability and willingness to pay for your solution.

TJ

Todd Jackson

04/11/24

@ Lenny's Podcast

Asking customers about their budget and what they currently pay for similar solutions helps gauge their willingness to pay.

A framework for finding product-market fit | Todd Jackson (First Round Capital)

Takeaways