Measuring product-market fit
David Peterson

Last week, my partner Gil wrote a useful piece in the newsletter advising founders to set realistic targets in advance of a fundraise. As Gil wrote, listing out every possible milestone can “lead founders down a self-defeating path of trying to do too much and, thereby, failing to do the one or two key things they really need to do to derisk the company and unlock the next level.”

The challenge, of course, is identifying the “one or two key things” that will derisk the company. So I thought I’d grab the baton from Gil and riff on that a bit.

One of the benefits of a fundraising process is it forces founders to think about how an external party will view their company. That can be a sobering corrective. Sure, you’re bought in on the vision, but what will somebody new think? What doubts will they have? Which of your assumptions will they question?

Thankfully, early on the questions aren’t that complicated. For the first few years, you’re mainly trying to figure out two things:

• First, are we building something that people want? (This is what seed/series A investors care about most.)

• And if so, do we have a system in place to sell it profitably at scale? (This is what series B/C investors care about most.)

In other words, do we have “product-market fit” and do we have “go-to-market fit”?

Today, I’ll talk about the former.

There’s no surefire method for finding product-market fit (talk to your customers, ship product, pray etc.). But measuring product-market fit need not be such a mystery. Rather than trust surveys (which can be gamed) or revenue (which just means somebody bought your demo and sales pitch), I encourage founders to maniacally track retention. If greater than 90% of your customers stick with you for more than a year, investors will take notice. (Net revenue retention is something different, and also very important, but here we’re just talking about logo retention.)

Of course, you can’t wait around for a year to see what that retention number is after each change you make to the product. So you need to find some leading indicator of stickiness and measure that. At Slack, they realized that 70% of their customers sent 2,000+ messages in the first 30 days. At Hubspot, they realized that 80% of their customers used 5 core features in the first 60 days. This is the type of indicator you’re looking for…some sort of product usage threshold that your best, most active customers easily cross early in their journey.

Identifying this indicator isn’t always easy. What I advise founders is to come up with a few potential leading indicators and compare retention rates across them until you find one that is somewhat predictive. (It may not be statistically significant, but you’re looking for an indicator that’s directionally correct and intuitively makes sense.) Then create a cohort graph tracking the percent of customers that achieve this leading indicator and plaster it everywhere.

This should be the first slide in your board deck and the opener to each all-hands. Improving this metric should be the problem that everybody at the company is thinking about, whether they’re in product, engineering, marketing or sales. Can you improve that number by launching new features, targeting a new ICP, onboarding customers differently? Try it all. In the laundry list of potential things you could be doing to derisk your company, improving this number should be at the top.

There may be no surefire method for finding product-market fit. But by measuring it effectively, you can drastically improve your chances of getting there.

Next time, we’ll go deep on go-to-market fit!

David

EVENTS

Apr 11 / How to Employ Category Design as a VC
David Peterson, Partner at Angular & Al Ramadan, CEO of PlayBigger

Jun 1 / The Importance of Culture and Values As You Scale a Business
Oren Kaniel, Co-Founder & CEO, AppsFlyer

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Enterprise & Deep Tech VC in Europe & Israel 2021
A data-driven look at a record-setting year.

Shifting Left, Shifting Right
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EUROPE & ISRAEL FUNDING NEWS

UK/SW Development. Builder.ai raised $100M for its AI-based low code development platform.
Israel/Agtech. Beewise raised $80M for its robotic beehives.
Israel/Security. Ermetic closed $70M for its identity-first cloud infrastructure security platform that provides multi-cloud protection in an easy-to-deploy SaaS solution.
UK/Real Estate. Goodlord closed $35M for its lettings platform that works alongside your CRM to manage the entire tenancy process in one place.
Israel/Data Tooling. Pinecone raised $28M for its vector search database to enable the next generation of AI applications in the cloud.
Israel/Security. Cyberpion raised $27M for its Cyber Attack Surface Management platform that provides unmatched Discovery, Visibility, and Active Protection.
UK/Marine Robotics. Vaarst raised $19.6M to harness the power of data and robotics in ocean applications.
Israel/Industrial. BeamUP raised $15M for its AI-powered building design platform.
UK/Climate. Emitwise raised $11.8M for its carbon footprint management and monitoring automation solution.

WORTH READING

ENTERPRISE/TECH NEWS

Intel buys Granulate for $650M. The semiconductor giant bought Granulate, an Israeli startup, for $650M. Granulate dramatically improves cloud compute performance by optimizing workflows across machines and processors. The company, which only raised about $45M, has 120 employees which will join Intel in Israel. “The acquisition is part of a bigger-picture effort at Intel on a couple of levels. First, it underscores how Intel is continuing to build out more tools and services to help its customers manage Intel-powered networks better, in part to compete more squarely against the likes of Nvidia, which has also been snapping up smaller companies to build out high-performance computing capabilities and the management of them. . . Second, the deal appears to be part of a bigger effort at Intel to continue expanding its presence in Europe, and Israel in particular. Earlier this month, the company announced a whopping €33 billion investment into R&D and manufacturing in Europe, the first tranche of what it expects to be an €80 billion investment over several years across a number of EU countries including Germany, France, Ireland, Italy, Poland and Spain. Its efforts in Israel have been very much complementary to that and arguably have been at the vanguard of what Intel is doing on this side of the world.”

Crypto’s holy war. The Information on the epic intellectual battle between Marc Andreesen and Jack Dorsey. It’s not about “pro-crypto” vs. “anti-crypto.” It’s about a one-chain world vs. a multichain world.

Let 1000 reactors bloom. The UK plans to deploy “hundreds” of small nuclear reactors, in addition to increasing wind energy farms, in an effort to achieve greener energy independence.

Crypto-theft. An exploit resulted in the theft of over $600M from Sky Mavis, the company that operates the NFT-powered game, Axie Infinity. “Sky Mavis said its Ronin chain includes nine validator nodes, which are used to verify deposits and withdrawals. Five node signatures are needed to verify a transaction, and the actor obtained said signatures by gaining control over four of Sky Mavis’ validator nodes and a third-party one operated by Axie Infinity’s decentralized autonomous organization (DAO). The Axie Infinity sidechain hack occurred when an attacker “found a backdoor through our gas-free RPC [remote procedure call] node” and used it to access the Axie DAO validator. This, as the post explained, was not supposed to be possible.”

Israel’s first quantum computer. Israeli scientists at the Weizmann Institute announced the first fully functional quantum computer in the country. “The computer built by Weizmann researchers is a five-qubit machine, roughly the level achieved by IBM’s version when the company first started offering quantum computing as a cloud service. According to Ozeri, the team at Weizmann will use the current quantum computer to run advanced algorithms. In the meantime, an even larger computer is already in the works in Ozeri’s lab. The larger computer, called WeizQC is scheduled to work with 64 qubits. The computer, which will likely take at least another year, is expected to demonstrate the quantum advantage, which until now has only been achieved by computers built in labs at Google and at the University of Science and Technology of China.”

HOW TO STARTUP

Layoffs? TechCrunch asks if a wave of tech layoffs is on the horizon. The story offers one-click checkout company Fast as an example of what might become a trend: “Fast is offering up sharp cuts to its bloated staff in hopes offering a reduced cost structure will entice investors to keep funding its product and GTM work. The company’s 2021 revenue appears to be measurable in the six-figure range, which is a fascinating data point for a startup that has raised nine figures of capital. By those two metrics, Fast ranks among the least cash-efficient software startups we’ve ever seen. Its proposed cuts matter as the company will likely die without more capital, so how far it has to go to get said funding will help us understand how deep in the penalty box high-priced startups with famous backers will find themselves when they miss growth targets. We’ll return to Fast when it either dissolves or raises more capital after hacking away at its org chart.”

Lower valuations = happier employees? Protocol covers Instacart’s decision to issue RSUs at a reduced valuation, pointing out that this is far less damaging to employees than a down-round. “New employees like a lower price. It’s a big recruiting tool in a wieldy competitive job market. It also helps explain why Instacart went public with the price change. One reason companies started giving out RSUs in the first place was the perception that their shares were too high to see big gains on options, whose strike prices are set by the 409A valuation. Instacart has been issuing RSUs for some time now, but the lower valuation could help early employees who hold stock options — especially since it now looks like they might have to wait longer for an IPO.”

HOW TO VENTURE

UK university spinouts. VCs in Britain struggle with a university system still not optimized to support commercial innovation.

Sad SaaS. Alex Wilhelm of TechCrunch on the impact of market movements on SaaS valuations, particularly in the late stage. “TechCrunch is currently trying to square the circle between exuberant early-stage valuations, especially at the seed stage — this week’s Y Combinator startup pricing is a good data point — and increasingly conservative late-stage valuations. For startups looking to raise later-stage capital, it could be a harder lift to raise more at an attractive price this year. But for late-stage startups stuck between a frozen IPO market and the above dynamics in late-stage SaaS pricing, we may see more appetite for venture debt and similar instruments as unicorns look for ways to snag more capital without taking a valuation cut. Some will just bite the bullet and get the pain over with. Let’s see what happens in Q2, but the storm clouds do appear to be gathering.”

PORTFOLIO NEWS

CruxOCM’s CEO, Vicki Knott, was listed as one of the Top Female Founders to Watch for in 2022.

Levity’s Co-Founder & CTO, Thilo Huellmann, was a guest on the Get Busy Building podcast. He spoke about how he found the idea for Levity, how he managed to raise from top-tier investors as a first-time founder, how he prioritizes features, and more. Listen here.

Firebolt’s CMO (and Angular Advisory Partner), Asaph Schulman, was featured on The B Sides podcast to discuss the crowded cloud data warehousing space and how they’ve been able to stand out in a well-established category. Listen here.

Planable’s CEO, Xenia Muntean, talked about content marketing and building Planable in the latest Techtalk podcast. Listen here.

Forter’s President, Liron Damri, shared what inspires him in fintech.