When You Fall Out of Product-Market Fit

I’ve been investing just long enough now to see start-ups fall out of product-market fit.  When I started blogging on SaaStr.com back in 2012 (!), I didn’t really think this happened.  I thought folks got out-sold, lost to the competition, and even failed to evolve.  But I didn’t get that apps with happy customers, and some real traction, could fall out of product-market fit.

But they do.

Start-ups growing at fast rates at $1m slow down at $5m or $10m.  One reason is low NPS and a poor product.  That’s the #1 cause I’ve seen.  More on that here.

But sometimes, your customers are happy.  They keep buying more from you, and the net retention is positive.  The NPS is higher.  You just … start winning fewer deals.  Far fewer deals.  You fall out of product-market fit.

What’s usually happened here?

  • You didn’t build up a true management team.  This is the root cause 90% of the time, in my experience.  Without a VP of Product, it’s hard to keep up with customer demands past a few million in ARR.  Without a VP of Sales, it’s hard to create urgency and sell ahead, and compete in new segments.  Without a VP of Demand Gen, those hacks that got you to $1m-$4m ARR just doing enough.  You didn’t think you needed all those VPs.  You do, and you did.  More on that here.
  • You hired the wrong management team.  A variant of the prior point.  Sometimes, a startup gets funded and hires a management team that is just bad.  Often, folks with strong logos on their LinkedIn but that aren’t the right fit.  The wrong folks can burn through precious time and inadvertently lead you out of product-market fit.
  • You didn’t add new marketing channels.  Sometimes, one marketing channel works well for a while, and then it fades (as they do) … and you don’t add enough new ones.  The root cause here really is not hiring a great VP of Demand Gen (see prior points).  But I see this again and again.  One partner, one channel, one acquisition strategy works.  It just then doesn’t.
  • You didn’t add enough features.  This is the other most common cause, although again, it’s often tied to not hiring a great VP of Product and/or Engineering.  Oftentimes, there are enough customers in the early days you can sort of convince to buy your product, and love it — but with a very incomplete feature set.  You have to dramatically add to that incomplete feature set in many cases.  If you don’t, you slowly start losing deals as you get more “ordinary” leads that expect a more feature-complete solution.
  • You let the competition catch up.  This happens with teams that aren’t agile enough.
  • Founder drama.  You can lose years here.

So, yes, it turns out you can fall out of product-market fit.  It’s a terrible feeling, feeling like you had something, and you can’t ever get back.

And yet … and yet I’ve now seen several do just that.  Get it back.  Two of them have gone on to be unicorns, in fact.

How did they get it back?

  • They found a great VP or two.  It really, truly will make a difference.  Watch your close rates go up.  Your leads get better qualified.  Your product roadmap gets more refined.  A junior hire just doesn’t cut it here.  You need an owner.
  • They talked to every single customer until they passed out.  Most CEOs don’t do enough of this.  Go listen.  Go on a listening tour.  Listen.  Stop shooting from the hip.  They will tell you what to do.  Go do that.
  • They got more agile (somehow).  They upgraded the team so they could build a lot more software.  Over time, this compounds into an awesome force of nature.  As long as you are still in new deals, if you can ship more high quality software than before, you can increase your close rates.
  • They focused just on what was working, sometimes.  This sounds obvious, but it often isn’t.  As startups grow, they often expand into multiple markets and segments.  And sometimes, they enter segments the execs aren’t as excited about personally.  But when things slow down, sometimes just focusing on where you have a 2x advantage can pull you out.  Even if it’s a tougher segment than you want to be in.  Win even more here, in other words.
  • They went upmarket — sometimes.  This can work because if you drive your deal size up, you can bridge the gap to revenue per lead slowing down.  But this takes a huge change in culture and commitment.

Look, it’s really hard to get product-market fit back if you’ve lost it.  But be honest about it.  Have you lost it, at least some of it?  Well if so, do you still have happy customers?  Then talk to all of them.  Go build what they will pay more for.  And do you still have leads coming in?  If so, listen more carefully.  Build more of what they need.  Same thing happens.

Really, if you had it once, there’s a decent chance you can get it back.  Not that it will be easy.  But if you had it once, you are probably talented and experienced enough to find it again.  If you still have a happy customer base to build on top of.  And if you really want it.  And if … if you will do what it takes.

What worked before isn’t enough.

Growth and Burn Rates at $1m ARR for 20+ Fast Growing SaaS Companies

Published on June 24, 2020

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