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

[00:00] Finding product market fit is the single most important thing that your startup does in the first three years. And it's just underexplored and it's just underexplained as a topic. You've been working on a product market fit framework. We've published dozens of articles on the first round review and we have found a very consistent set of patterns. Demand, satisfaction and efficiency. But the interesting thing is that you don't go for all three of them from the very beginning. There's essentially four levels of product market fit. Nascent, developing, strong, extreme. Roughly 60% are never going to get past L2.

[00:30] four Ps, essentially what you should try to change if you're stuck. You've got the persona, the problem, the promise, and the product. Lattice kept the first one but changed the others. Vanta changed all four. Curing level three tells me level two, it's basically your pivot from, I'm just grinding, selling, pitching. This is where it starts to get fun. [00:53] Today my guest is Todd Jackson. Todd is a partner at the legendary VC firm First Round Capital [00:58] I rarely have VCs on this podcast. [01:01] But as Todd shares at the top of this episode, Todd is a very special VC.

Prior to moving into venture, he was product lead for Gmail for four years. [01:09] He is product manager of Facebook's news feed, photos and groups. [01:12] including leading a major redesign of the newsfeed. He's also director of product management at Twitter and VP of product and design at Dropbox. He's also founder and sold this company to Twitter. This episode is a very different and special kind of episode. Todd and the team at First Round have spent the last year looking at all of their data and the journeys of the hundreds of startups that they've worked with over the years, and through that have put together a very practical and very

[01:42] Product Market Fit. They're turning this framework into a three-month program for founders. And in this conversation, Todd shares an exclusive peek into the program, in particular, the stages of Product Market Fit. We talk about how to know which stage you're in, what to do if you're stuck in that stage, and also what you can change in order to get unstuck. If you're a founder or building a new product within a company and feeling like you're not making as much progress as you'd hope, [02:12] podjackson, after a short word from our sponsors.

And if you enjoy this podcast, don't forget to subscribe and follow it in your favorite podcasting app or YouTube. It's the best way to avoid missing future episodes, and it helps the podcast tremendously. This episode is brought to you by WorkOS. If you're building a SaaS app, at some point, your customers will start asking for enterprise features like SAML authentication and SCIM provisioning. That's where WorkOS comes in, [02:42] features to your app. Their APIs are easy to understand so that you can ship quickly and get back to building other features, and hundreds of other companies are already powered by WorkOS, including ones you probably know, like Vercel, Webflow, and Loom.

WorkOS also recently launched AuthKit, a complete authentication and user management service. It's essentially a modern alternative to Auth0, but with better pricing and more flexible APIs. AuthKit's design is stunning [03:12] to fit your app's brand. It's an effortless experience from your first user all the way to your largest enterprise customer. Best of all, AuthKit is free for any developer up to 1 million users. Check it out at com slash Lenny to learn more. That's com slash Lenny. This episode is brought to you by Epo. Epo is a next generation A-B testing and feature management [03:42] Companies like Twitch, Miro, ClickUp, and DraftKings rely on Epo to power their experiments.

Experimentation is increasingly essential for driving growth and for understanding the performance of new features. And Epo helps you increase experimentation velocity while unlocking rigorous, deep analysis in a way that no other commercial tool does. When I was at Airbnb, one of the things that I loved most was our experimentation platform, where I could set up experiments easily, troubleshoot issues, and analyze performance all on my own. [04:12] EPPO does all that and more with advanced statistical methods that can help you shave weeks off experiment time, an accessible UI for diving deeper into performance, and out-of-the-box reporting that helps you avoid annoying, prolonged analytic cycles.

EPPO also makes it easy for you to share experiment insights with your team, sparking new ideas for the A-B testing flywheel. EPPO powers experimentation across every use case, including product, growth, machine learning, monetization, and email marketing. [04:42] And 10x your experiment velocity. That's com slash Lenny. [04:49] Todd, thank you so much for being here and welcome to the podcast. Lenny, I'm excited to be here. Thank you for having me. [04:58] So first of all, just to mention, you're a VC. [05:01] which is very rare for this podcast, but you're... [05:05] You're very special.

We see you have a deep background in product. [05:08] And I thought it might be helpful just to give a little bit of context on your product background, kind of your product bona fides, so people will get a real sense of just how legit you are as a product thinker. [05:17] Yeah, you got it. So I am a VC. I'm a partner at First Round Capital now. [05:21] And I've been a first round for four years, but I was not a VC before first round. [05:25] So I started a company in 2013 called Cover.

[05:28] And that was actually funded by First Round 11 years ago. That's how I got to know First Round. [05:32] Before that, I had worked on Gmail as the product lead in the early days, early 2000s. [05:37] And at Facebook? [05:39] And then I started cover. [05:40] And we ended up selling cover to Twitter in 2014. And I worked on a bunch of different products at Twitter. [05:45] And then I was the VP of product and design at Dropbox. That was 2015 to 2018. [05:50] So I have always loved product [05:53] And that's actually the reason now that I love being a seed stage VC because I love...

[05:57] investing kind of at the earliest stage, [06:00] founders who are pre-product market fit, [06:02] and then helping them get there. And I just kind of love doing that over and over again. [06:06] I feel like we could have a whole other podcast episode on... [06:09] why you decided to move into venture versus staying in product, but we're going to stay [06:13] We're going to stay focused. [06:14] So the reason we're here is that for over a year, you've been working on a product market fit framework, essentially a framework to help founders.

[06:22] and product teams find product market fit, which [06:25] We should talk about this, but just like this is the most important thing you've got to get right as a founder and a product team is finding product market fit. [06:31] I got to peek at this framework. I love it. I love the way you've structured it, the way you're thinking about it. [06:35] So what we're going to do today is walk through this framework in depth. [06:39] First, I just want to spend a few minutes on setting a little context just so people understand who this is for and how to think about this.

[06:45] So maybe your first question is just, [06:47] Why do you believe [06:49] People need a framework for finding product market fit. And just also, if you want to touch on why is product market fit, [06:54] So important. Why is that something people should even be thinking about? [06:57] You know, the thing about product market fit, [06:59] is that I find it's mysterious to a lot of people. [07:02] and people tend to think about it purely as an art [07:06] rather than a science. [07:07] And, [07:08] All the advice that you find out there on the internet is very general when it comes to product market failure.

You'll know it when you see it. You'll know it when you have it. [07:16] It's not specific. And there's so many other startup topics [07:20] where there is good content on the internet you know like [07:23] hiring your first salesperson, running board meetings, [07:26] stuff that is specific and tactical, but there isn't that much content around product market fit that is that specific. [07:33] And so I think that's actually why, you know, [07:35] Like Rahul from superhuman. [07:37] is kind of well known for his approach to finding product market fit.

[07:41] That was published on the first round review in 2018, and it was like immediately popular and interesting to people. And I think the reason is because it was specific and because it was tactical. [07:50] And it brought a little bit of the science to something that people thought was just an art. [07:54] And I think it's why your content is really popular too, Lenny. [07:57] You know, like you and I worked on this product validation article together a little while back. [08:02] And the seven-part series that you did on B2B SaaS companies, [08:06] and like the PMF benchmarking data that you had, [08:09] Like I think it was how long it took to get to a product and a customer and, [08:12] and to product market fit that was super well read.

And there just isn't that much good specific content about this. [08:18] But like you said, product market fit is the single most important thing that your startup does in the first three years. [08:25] And it's just underexplored and it's just underexplained as a topic. So [08:29] We felt this was a very important thing to do, something worth focusing on. [08:33] And I've personally talked to [08:34] hundreds of founders about this topic. [08:37] We've published dozens of articles on the first round review. We call this our Paths to Product Market Fit series, where we interview founders about the early days.

[08:45] And I'm just like always interested in like what are the patterns? [08:48] If you talk to enough successful founders, and in this case, it's going to be enterprise founders, [08:52] And you ask them, what did you do in the first six to nine months of running your company, of starting your company? [09:00] What patterns emerge from that? [09:02] And we have found a very consistent set of patterns, and that's what we decided to base our framework around. [09:07] Amazing. And I think you're such an interesting... [09:09] Venn diagram of [09:11] exposure to [09:13] develop something like this.

[09:15] One, you have a deep product background. You started a company. You see tons of startups going through the journey, many succeeding, many not. [09:22] So I get why he wanted to do this and why I think this is going to be so valuable to a lot of people. [09:28] You talked briefly about why product market fit [09:30] is so important and maybe it might be helpful just to share a little bit more just like [09:34] Why is this something people should be so obsessed with and why is there? [09:37] Why did you spend so much time?

[09:39] developing this. [09:40] I think [09:41] As a founder, there are so many things you have to do. [09:44] You know, you have to pick a market, you have to find a co-founder, you have to hire a team, you have to raise funding, you have to build a product, you have to sell a product. [09:52] And so sometimes it kind of gets lost that like, [09:54] actually the only thing that matters. [09:57] in the first couple of years is finding product market fit. [10:01] And actually what we define as extreme product market fit, and I'll go into that.

[10:05] Because if you find extreme product market fit, the momentum just carries you. [10:11] and the market pulls you along and it's easy to know what to build because you're building the thing that your customers want and it's motivating [10:18] as a team it's easy to hire people it's easy all everything becomes easier [10:22] If you find product market fit, it is the thing that propels the company. [10:26] And so we work, you know, we are a seed stage venture firm. We tend to work with very early founders. [10:31] who are pre-product market fit.

[10:33] And the truth, kind of the hard truth about it, is that most of them don't get past the first couple levels of it. Like the majority... [10:41] of startups do not get past what we call level one product market fit or level two product market fit. And I'll go through and define all that stuff. They get stuck at one of those first couple levels. [10:50] And if they can unlock kind of the right product and the right way to explain it to a customer, [10:55] and make a customer deeply satisfied, and there's enough customers out there like that, it just pulls the whole thing along.

[11:02] Who is this framework for specifically for people that are listening? How do they know if this is for them or not? [11:07] This is for early B2B founders. [11:09] and specifically founders who are doing something that is more sales-led than bottom-up. I think bottom-up is its own kind of world. It's closer to consumer product development in my mind. [11:21] And I have done, you know, consumer products, a consumer product. I think there is a little bit more. [11:26] "Alchemy involved?" [11:28] It's about, you know, having great taste and sort of finding the right thing at the right time.

And it just sort of it's like catching lightning in a bottle. [11:36] I think the good thing about enterprise and specifically kind of sales led B2B is that there is more science to it. [11:43] And so it is for sales led B2B founders who are in, let's call it the first six to nine months of starting their company and want to set the foundation for product market fit like right from the beginning. Awesome. Okay, so B2B founders... [11:55] sales led in the first six to nine months of their journey. Awesome.

That's right. Yes. [12:00] You talked about the science of this. I imagine you don't want to over promise this is going to help you find product market fit step one, two, three profit. [12:08] How do you think about just what the benefits of this are and how people should think about the chance that they will find? [12:13] product market fit at the end of this journey following the streamer. [12:16] you know we can't guarantee success here like fine i just want to contextualize that finding extreme product market fit is very very hard [12:23] And what we are trying to do is increase your odds.

[12:26] right, increase the odds, reduce the role of luck, [12:29] give you sort of a framework and way of thinking about the things that you need to do [12:33] And I think that that can increase the odds. Like I said earlier, the majority of startups are sort of getting stuck at these first couple levels. I think if you know what the path looks like, [12:42] And you know what the levers are. [12:44] at your disposal and you know sort of what you need to aim for, [12:47] I think we can get more of these companies to kind of like level three and level four product market fit, which is where you really want to be and where you have a very valuable company.

[12:54] Perfect. Okay, final question. [12:56] You launched a whole program for founders to go through and learn all of this in depth, many week kind of program. We're going to be covering a lot of it here for folks that want to go a lot deeper and actually go through this program. [13:07] Talk about how they find this and how this program works. [13:10] Yeah, so we launched a new program and we call it Product Market Fit Method. [13:15] It is designed, like I said, to help early B2B founders increase the odds of finding product market fit.

[13:20] It's totally free. [13:21] It's a very intensive program. You can see all the details at com and the application deadline is May 7th. [13:29] The program starts on May 29th. [13:31] And we actually ran a beta version, like a test version of this last year, late last year. [13:36] with 11 founders. I think probably some, you know, Lenny from Stripe and Plaid and Airbnb and Twitter. And the feedback was really, it was great. It made me feel very good. [13:46] One of the founders was like, "I feel like these 14 weeks saved me two years of time.

[13:52] in what would have been kind of wandering through the desert. [13:54] And so there's kind of there's eight sessions in the full program. And the first one is the one we're going to do today. So the first session is on. [14:01] what we call the levels of product market fit. [14:04] The second one is on customer discovery. [14:07] And we actually refer to it as dollar-driven discovery. We get very specific about not just kind of like the normal way of doing customer conversations and customer discovery, but how do you find like that a customer is willing to pay money for this thing and a lot of money.

We talk about market validation, product positioning. [14:25] We do a section on design partners because I think a lot of founders have questions about that. How do I find the right design partners? What's the right way to structure an agreement with them? How do I convert them to paying customers? Kind of all that stuff. [14:36] We talk about product iteration and pivots. And I sort of refer to this stage as like the grind. [14:41] right, the grind of kind of product iteration. [14:44] And then we spent a ton of time on founder led sales.

[14:47] And the reason that we do that is we really like working with very technical founders. [14:53] you know, builders, people that are either engineering background, product design, data science, like people who are builders. Um, so that's kind of, uh, [15:01] the program in a nutshell. [15:03] And like I said, any founder working on a new B2B SaaS company, welcome to apply. And then bonus points if you are technical, like I said. [15:11] You have a clear kind of product idea or a hypothesis, but you're less than, you know, six to 12 months into building the company.

[15:19] I love how incentives are so aligned here. You help companies find product market fit. First round does great. Everyone does great. It makes so much sense to build something like this. [15:28] One thing I can't help but mention or ask about is you said it's an intensive program. How do you find founders have time to do something like this and also be building their company? I know it's like this helps them build, but I guess how do you just think about it? [15:38] They have so much to do. They have time to do a program like this.

The way that we think about it is that the program roughly takes about 10 hours a week for each founder. [15:47] And it's 10 hours of work that you were going to be doing anyway. [15:51] It is literally you're talking to customers, you're improving your positioning, [15:55] You're sort of doing critical thinking about your market and what you should be building. [16:00] And so I just what I think the way I think about it and the way I've heard from the 11 founders that went through it is it it just added structure to what I was doing anyway.

And it actually made me more efficient. [16:10] Last question. You mentioned that it's free. How does that work? How does that work for everyone? [16:14] Yes, it's 100% free and literally it costs you $0. We give you $0. We own 0% of your company. And that's pretty different than I think a lot of other programs out there. [16:23] And this is just something we do over the years. We've run first run Angel Track, which I know you were in Lenny. [16:28] We've run the first round review for 10 years. We make these things free and our belief is that you have to create value.

[16:34] in the ecosystem. You have to put stuff out in the world that is useful, [16:38] And if you can create that value, create enough value with the audience, then you'll be able to capture that value at some point. And so we think there's a win-win here. We get an inside look at some of tomorrow's great companies and they get an inside look at first round. [16:49] Got it. So companies don't have to take money from you guys to be a part of this program. [16:53] That's right. [16:54] OK, let's get into it.

Let's talk about this framework. [16:56] Maybe just as a broad strokes overview, how does the framework work? [17:00] How do companies find product market fit? [17:02] Yeah, so the framework starts with a very simple idea. [17:05] That is product market fit, [17:07] is not a one size fits all thing and it doesn't just happen overnight [17:11] And for B2B companies specifically, it does tend to follow a repeatable pattern. [17:17] And so we start with defining the ultimate goal. The ultimate goal is to get to extreme product market fit. And we have a precise definition for this.

Let me read it to you. [17:26] So extreme product market fit is a state of widespread demand. [17:31] for a product that satisfies a critical need and crucially, [17:35] can be delivered repeatably and efficiently to each customer. [17:40] And so there's sort of like three key ideas in there. [17:42] Demand? [17:43] satisfaction, and efficiency. [17:46] And I think efficiency is worth highlighting because that's what most people would leave out of their definition. [17:51] You talk about like, oh, it's a product. People like it. That's good. That's product market fit. [17:56] But if you look, there's products out there like...

[17:58] I was a big fan of WeWork as a customer of WeWork, right? And I'm a fan of Casper and these other products. Those products managed to achieve customer satisfaction and demand, but they never got the efficiency right. And so sort of the whole business just never worked right at scale. [18:18] And my partner, Brett Burson at First Round, [18:21] He gives this example of the $100 vending machine, and I really like this example. [18:26] which is, [18:27] Imagine I built a vending machine and I stuck it like in the middle of San Francisco.

[18:32] and you walk up to this vending machine and you put a dollar in and a hundred dollar bill comes out. [18:38] And that's the product. [18:39] Like that would have insane sort of like demand. Like there would be a line at that vending machine. [18:45] I think people would be extremely satisfied, right? Like they'd be like, this is awesome. The retention would be very good. I'm sure they would come back tomorrow. [18:52] But like the whole thing is like it's ridiculous, right? Like the whole metaphor is ridiculous because it's just not viable to do something like that.

[18:59] And yet you see a lot of startups like kind of do this right there. Basically, with their products, giving away two dollars for one dollar. [19:06] And it gets them pretty far, but that's not real product market fit, right? [19:10] And so, you know, that's one of the reasons that we think efficiency and how you think about the economic model of what you're doing is very important. [19:17] And then this other aspect that I like, which is we have this concept that we call the marginal customer. [19:24] and the next incremental customer you're going to get for your company, for your product.

And, [19:29] If you have product market fit and as you are progressing along this journey, the marginal customers should be getting easier and easier and easier to get. [19:37] like easier to acquire them, easier to give them good service with a good product. [19:41] And that means your efficiency is sort of increasing along the way and your product market fit is strengthening. [19:47] So you've got to have all three of those things. [19:50] right, demand satisfaction efficiency, [19:52] But the interesting thing is that you don't go for all three of them at once from the very beginning.

[19:57] And so product market fit, it happens like in the sequence of levels. [20:00] It happens over multiple years. [20:03] And for the best enterprise companies, I would say they tend to reach extreme product market fit in roughly four to six years. There's some variance. [20:10] but roughly four to six years. [20:13] And so we label these four levels. We say level one product market fit is nascent product market fit. [20:19] Level 2 is developing. [20:21] Level three is strong and level four is extreme. And that's where you want to get.

[20:26] And along the way, you're sort of trading off these three dimensions, satisfaction, demand and efficiency, because they're intertwined. [20:32] You could spend a bunch of money on marketing, [20:35] And that's going to increase your demand, but you're decreasing your efficiency if you do that. [20:39] You can invest a bunch in efficiency and like automating a whole bunch of stuff, but that actually might harm the customer experience and you're reducing satisfaction. So. [20:46] That's an interesting thing, I think, is you're actually making trade-offs at each level. [20:50] and what you should optimize for at each level is different.

[20:53] And so we talk about all these signs, you know, like whether you're getting stuck at a given level, how do you get unstuck? [20:58] and sort of how do you progress along this path? [21:01] Amazing. And we're going to go through each of these. And the idea, as a listener, what I'm thinking is you're probably in one of these buckets. [21:07] what [21:08] we're trying to do is help you out of that bucket and help you move further up the ladder to the next level. [21:13] So just to summarize, I have my notes here.

So there's essentially four levels of product market fit, basically like the strength of product market fit that you have. [21:21] Right. Nascent, developing, strong, extreme. Yes. Okay. And then you have three dimensions within each of these levels. [21:29] satisfaction, demand, inefficiency, and we're going to talk about what all these mean and how you use these. [21:34] Let's talk about level one nascent product market fit. What does that look like? [21:38] What do you do when you're there if you're stuck and [21:40] What are some examples of companies that felt nice and product market fit?

[21:44] Yeah, so, okay, level one nascent. So at this point, you're probably like a pre-seed or seed stage company. You've got less than 10 people on your team. [21:51] And at level one, your job is to find three to five customers, [21:57] that have a particular problem that is worth solving, [22:00] and to deliver them a satisfying solution. [22:03] And you got to pick a problem that is both important and urgent to them. And the solution that you deliver needs to satisfy some kind of promise that they care deeply about.

[22:14] Okay, so of the three dimensions that you just recapped, Lenny, it's satisfaction first, [22:19] demand second, efficiency last when you're at level one. It's actually okay to be inefficient at this stage if it helps you uncover something that delivers an insanely good customer satisfaction. [22:32] And so I think that one of the best examples I can think of that is this company called Vanta. [22:37] Love Fanta. Also a happy sponsor, Animated Investor. What a great example. [22:41] What a good example. So Vanta was founded in 2016 by Christina Cassioppo.

[22:46] And she had come from Dropbox and we got to work at Dropbox together, which was awesome. She was the PM of Dropbox Paper at that time. [22:53] And so Vanta, you know, it's a company that does compliance automation, continuous monitoring. Most startups think of like Vanta is how you get a SOC 2. [23:01] But they didn't do that at first. [23:02] Right. And I remember in 2018, [23:06] Christina and I went on a walk around the South Park neighborhood in San Francisco. [23:11] And this was the first time I heard the idea of Vanta.

[23:14] And she had actually in 2016, 2017, like tried a few other ideas. [23:18] She had this smart speaker that would record meetings and it would send meeting summaries over Slack. B2B Alexa is what she called it, I remember. B2B Alexa. And she had this other idea, something about dropshipping, but she didn't know anything about dropshipping. And she has just sort of been in this mode of like, we're building stuff and then we're seeing if anybody wants it. [23:35] And then she realized that wasn't working and she changed what she was doing.

[23:39] and she started talking to potential customers, and she was very interested in the idea of security. [23:44] and why a lot of startups didn't use any security products. [23:48] And she was talking to like security engineers and, you know, CISOs and just CTOs at startups. [23:55] And she would ask them, like, what is the thing you hate most? [23:59] about your job as it relates to security. [24:02] And over and over and over, they would say, "I hate filling out the security questionnaires. [24:08] I hate doing the compliance audits.

It's like so much grungy manual work. I'm in there filling out spreadsheets and taking screenshots of my AWS account. And the whole thing just kind of doesn't make sense. [24:19] And she had actually felt this herself right when she was on Dropbox paper and the experience of getting a sock to. [24:25] was onerous, right? And the reason that she needed to get it is because we wanted to start selling Dropbox paper into Enterprise. [24:32] And, [24:33] So she said to me, [24:34] You know, there's this pain out there. I think I can solve it.

[24:37] And, you know, [24:38] I think there might be a revenue unlock. [24:40] And I was like, what do you mean by that? And she was like, well, I've got these first few customers, you know, or like sort of design partner pseudo customers. It's segment and front and Figma. And this is 2017, 18. So these companies were like smaller at the time, right? Not like the sort of the big companies they are now. And she was like, yeah, they're trying to sell into like, you know, [24:59] Fortune 500 companies. One of them is actually trying to land like a fortune 10 right now.

[25:04] And they said the thing that's holding them back is they don't have compliance certification. They don't have a SOC 2. [25:09] And I told them, hey, what if I do that for you? [25:13] And they were like, [25:14] Oh, you can just do that? [25:16] And she was like, yeah. [25:18] And she did it and they landed the deal. [25:21] And it was like one of the clearest examples to me of a product that satisfies a promise. [25:26] This product is going to unlock revenue for you. You are going to be able to land this enterprise deal.

[25:32] And so I think they just did a phenomenal job of that. And that's the kind of thing that you have to, that's what you're looking for. [25:37] when you're at level one, a problem that really matters to like three to five customers. That specific example, I think she delivered like a doc, like a spreadsheet. There was no product. She just manually filled out a spreadsheet and give it to them. [25:49] Completely manual. Like she was the one behind the email address, you know, like sort of posing as the AI, but doing it herself.

And that's I think that's revealing of like it's OK to be inefficient at level one as long as you are delivering incredible satisfaction. Yeah, I think I was just going to say that this is the ultimate example of efficiency is not important, which I love. [26:08] is what you're pointing out at the step. [26:10] I know you're going to [26:11] share another example, but just to summarize, [26:13] what this stage feels like from earlier when you talked about essentially of less than 10 people [26:18] You're trying to find three to five customers.

I think that's so important. Like you're not trying to find... [26:22] tens or hundreds. You're just like three to five people in that. [26:25] Customer element, I imagine, is you're implying they're paying you money. [26:29] Yes. [26:29] They're paying you money and you're delivering a product that solves a problem for them. And the product could be potentially a spreadsheet or like super Wizard of Oz at this point even. [26:37] Yeah, that's okay at this level. I know Ramp actually had barely a product when they started selling initially. They had someone just updating things behind the scenes on these dashboards.

[26:46] And then you talked about the problem needs to be important and urgent, which connects to [26:49] People will pay attention to a startup that they don't trust or know anything about. [26:53] because the problem is that important and urgent. [26:55] and [26:56] You also mentioned it as the satisfy promise you're giving them. We'll solve SOC 2 for you, and then you actually accomplish that. [27:02] Is there anything else maybe as a benchmark that tells you you're at this step of product market fit? [27:09] Yeah. So like I said, you're kind of precede less than 10 people.

Probably your demand source at this stage is mostly people you know. It's like friends and family. It's your network. Maybe it's VCs. [27:21] You haven't probably done a lot of cold outreach at this point, [27:25] And, [27:26] it's hard to find customers, right? Like you're trying to get to three to five, [27:29] It probably takes you 20 warm intros to get one, right? Something along those lines. So maybe to get to three to five, it's like at least 50 conversations. That's very normal at this stage because you're just trying to find the right problem and find customers who have it.

[27:41] You're probably in the like $0 to 500k ARR, like somewhere in that zone. I would say that you're at level one. [27:48] And then there are metrics to track efficiency, right? Things like burn multiple, gross margin, [27:53] NRR, all of these things, all of them are just not applicable at this stage. It's too early and you shouldn't be worrying about that stuff. [28:00] And so, [28:01] You want to be feeling this sense of progress, right? That there are customers who need what you are building and the thing you are building works.

[28:09] And so conversely, the signs that we see a lot of founders get stuck [28:14] And this is a very common level to get stuck, right? [28:17] And so if you're sort of hanging out here for six months, nine months, 12 months, [28:21] and there's yellow flags that are appearing, you're starting to feel stuck. And so the yellow flags are something like, [28:26] Let's say your product disappeared overnight. [28:28] your customers wouldn't be super disappointed. [28:31] Let's say you have a handful of happy customers. Let's say you've got four or five customers, but the most important feature is actually different for each one of them.

[28:39] That starts to look a little bit more like a consulting business than a product business. [28:43] or it just feels incredibly hard to find kind of the marginal customer, the next new customer. [28:47] Or your usage is low. The product is in their hands, but the usage is low. It's not growing that much. It lasts for six months. [28:54] And this, I think, there's a really good example. Jack Altman, who's the founder of Lattice, he founded Lattice in 2015. [29:02] We've talked to him a bunch on the first round past the product market fit and other things.

So for those who don't know, Lattice is a people management platform. [29:10] But it didn't start that way, and most people don't know about this. Lattice actually started as an OKR tool. [29:14] Right back in 2015. Didn't it? Yeah. And so... [29:18] Jack had just sort of seen this at other companies. He's like, okay, companies are doing OKRs, but they're not very good at it. [29:24] And it causes a lot of arguments among the executive team and the employees are non-compliant. They think the whole thing's kind of dumb. So I can fix that with software.

[29:34] And so the original version of Lattice was for managing OKRs. [29:38] And he was able to sell it. And so his buyer was the head of HR, right? [29:44] And they said, OK, yeah, we'll give this a shot. [29:47] And he had a couple companies using it and they would use it for like one quarter. [29:51] And then the next quarter would come around and they were like, I didn't go that well last time. I don't know. The employees don't seem to like it. I don't I don't know. [29:58] And then the quarter after that, they were like, no, we're not buying this.

We're not using this. [30:03] Right. And so [30:05] Jack pulled off the pivot, right, to people management. [30:09] And the way that he did it was... [30:12] He actually kept the persona. [30:15] And so this gets into the ideas of the four Ps, and I'll talk about this a little bit more. The four Ps is our version of the four Ps. You've got the persona, the problem, the promise, and the product. [30:27] Thank you. [30:27] And all four of these things kind of have to line up, right? Your product has to deliver a promise to, [30:33] That solves the problem of your persona.

And so Jack actually kept the persona. He was like, I've gotten to know these heads of HR really well. [30:40] Over the last six to nine months, I like text with them. I go out to coffee with them. I'm like friends with them. I know them really well. [30:46] This OKR thing just doesn't seem to be a big deal for them, but they've got other problems. [30:51] that I could look at solving. [30:53] And the interesting thing was that timing. It was kind of like mid-2010s. [30:57] performance management had started to come back in favor.

It was like this pendulum. There was a period of time where performance management was really important. [31:04] And then all these companies were like, we're not doing this anymore. [31:06] And then the pendulum kind of swung back and around 2015, 2016 was that time. [31:11] And so Jack literally showed them Figma mockups like there was no product. [31:16] Right. But he's like, what if I could solve performance management for you? [31:19] in a way that is much more modern and much more employee friendly and manager friendly and the whole thing is just going to work better.

[31:25] And the response was like off the charts. [31:28] And people wanted this thing. And I believe he sold his first five or 10 customers like with Figma mockups, right? Like before he had built anything, really. [31:36] And so that I think is an interesting example, right? Of like, he was sort of stuck in the zone of like, people didn't love what he was doing. He kept the persona, but he changed the problem that he was solving and the promise he was delivering through the product. [31:49] And you see that this is like we do a whole section on pivots and like when to pivot and how to pivot.

[31:55] And I think this is actually the best framework for this is the four Ps. [32:00] Lattice, [32:01] changed, kept the first one, but changed the others. [32:05] Banta changed all four, right? [32:07] There are other products like Plaid [32:09] that actually [32:11] sort of kept elements of the product they were doing. So this, I don't know if you know the story of Plaid, but, you know, Zach Parrott was building, [32:19] Plaid started out not as like an API for bank accounts. It started out as a consumer budgeting app. [32:25] Like it was a consumer app.

[32:27] and it just, you know, it was supposed to help you save money and budget and stuff, and it just wasn't that popular. [32:32] And the founders were kind of frustrated. [32:34] But they had built this part of the product that enabled the app to like connect to your bank accounts. Right. And had solved kind of like all the nitty gritty issues with that. [32:43] And then they found that their friends wanted to license it from them. [32:46] So like there was Zach had a friend at Venmo who wanted to license this and they got, you know, they got Robinhood at some point, they got Coinbase at some point.

So that's like an example of like, they actually kept a lot of the code that they had written, they kept the product, but they completely changed the other three P's. [32:59] Right. Like instead of solving for consumers who have a problem with budgeting, [33:03] we are going to solve for developers at fintech companies who have a problem connecting to bank accounts. [33:07] And it was like a total flip of the four Ps. But that's like why I really like this framework, because I think it really helps founders think in a structured way about this.

[33:15] Todd, this is amazing. I'm so happy we're doing this. I think this is going to help a lot of people. [33:19] I want to move on to level two, but first let me try to summarize some of these key [33:23] elements. So these four Ps, essentially, [33:25] what you should try to change if you're stuck in this level or any level. [33:30] And just to summarize, you can change who you're targeting, the persona. You can change the problem you're solving. [33:36] You could change the way you're [33:37] pitching it, which is the promise is how you describe it, basically positioning.

[33:40] And then you could also just change your product. [33:42] You mentioned Vanta change shell 4. Some companies change this one. [33:47] Any advice for how to know which of these to change? Like what points you to change this? [33:52] versus change that? Is there anything that you've seen? I think different founders approach this differently. [33:57] Thank you. [33:57] And I've, [33:59] seen a lot of founders who are build first and then sell. And I've seen a lot of founders who are sell first and then build. [34:05] And they can both work.

[34:07] Right? [34:08] I tend to gravitate towards the like, I want to sell it before I build it, because I really want the signal from customers. [34:16] And I want that to sort of be the guide and the oxygen that drives what I'm building. I find that very motivating. I also find it kind of like easier, honestly, rather than guessing like, oh, I'm going to write [34:28] 50,000 lines of code and then see if somebody wants this thing. I think it's better to sort of talk to a bunch of customers, know that, hey, if I had this thing, if I could build this thing, I know it would sell.

I know these people want this thing. [34:40] So I tend to approach it from that point of view. And therefore, I focus on the persona and the problem and the promise. [34:45] What is the promise that is really going to click for that buyer, for that persona? And then the product's job is to satisfy those first three Ps, really. [34:54] And obviously those are much easier to change and play with versus rebuilding your product. So if there's nothing else, you should probably start there. [35:00] I actually have a post with a bunch of awesome examples of changing the positioning, changing the persona.

[35:06] And so we'll link to that in the show notes if people want more examples. Okay, finally, let me try to summarize kind of the stage. So I think it's important to know at this nascent stage, you're not like, [35:14] It's not roaring product market fit. It's, as you described, very nascent. You're like, [35:18] getting customers but it's hard you're you said it's like 20 [35:21] Introductions to one sale. [35:23] But you're like getting them. I know Retool has a great quote. David has this quote. Like every customer he got early on, he felt it was the last customer he's ever going to get.

[35:31] No more people want this thing and it's always a struggle. [35:34] So I think that's very normal is what you're describing. The beginnings are [35:37] rarely [35:38] off into the right. [35:40] And it's okay if this takes a while. You said that if it's something like [35:44] If you spent like 12 months at this stage, [35:46] stage, you're probably stuck in the stage. [35:48] and signs that you're stuck in this nascent stage versus-- this is actually normal-- signs you mentioned are-- [35:54] If you asked people if this went away, they wouldn't be disappointed.

They'd be like, nah, all right, it's cool. [36:00] You have many customers, but they're using different features of the product. [36:04] So to you, the way you described it, essentially, you're like, [36:07] professional services for them. You're not actually building product. You consult a lot of people. [36:10] and then they're actually not using it often. Like they're buying, they're paying for it, like the last example. [36:15] but they're not necessarily using it, and they're going to churn pretty quickly. [36:19] That's right. [36:19] Anything else you wanted to touch on there before we get to level two?

[36:22] The last thing that I'd add at level one is there's this founder from a company called Persona. His name is Rick Song. He's like super awesome. You know, Persona is a first round company. [36:32] they do identity verification. [36:35] And Rick's analogy, I just love it for level one, is you don't want to get friend zoned. [36:41] by your customers. [36:42] Like where your customers like you, but they don't love you and they don't need you. Right. And he was super paranoid about this in the early days of Persona.

[36:52] And his technique for doing this, which I really like, super simple. [36:55] was he was very close with his first five or ten customers. [37:00] And he would go to them and sit them down one-on-one and say, [37:03] I need your help. [37:05] Like it is very important to me that this company succeeds and does not fail. So I don't want you to be nice to me. [37:12] I want you to tell me [37:14] is persona like a necessity for your company? If we went away, [37:18] you know, how painful would that be?

If a competitor came along that charged half as much as us, [37:24] Would you switch to them? And he's really trying to like get to the essence of like, is persona critical for you or am I in the friend zone? [37:32] And I just think that's like a really great way of thinking about this. I love that story. It's like it's like in a relationship. It's like the talk. Are we? [37:39] Are we a thing? [37:41] I love that. That's so good. The sooner you know the truth, the better. It's hard to hear bad news, but I love that advice of just...

[37:48] Sit them down one-on-one. Let me tell you about CommandBar. If you're like me and most users I've built product for, you'll probably find those little in-product pop-ups really annoying. Want to take a tour? Check out this new feature. And these pop-ups are becoming less and less effective since most users don't read what they say. They just want to close them as soon as possible. But every product builder knows that users need help to learn the ins and outs of your product. We use so many products every day and we can't possibly know the ins and outs of everyone.

CommandBar is an AI [38:18] power toolkit for product, growth, marketing, and customer teams to help users get the most out of your product without annoying them. They use AI to get closer to user intent so they have search and chat products that let users describe what they're trying to do in [38:32] and then see personalized results, like customer walkthroughs or actions. And they do pop-ups too, but their nudges are based on in-product behaviors, like confusion or intent classification, which makes them much less annoying and much more impactful. This works for web apps, mobile apps, and websites.

And they work with industry-leading companies like Gusto, Freshworks, HashiCorp, and LaunchDarkly. Over 15 million end users have interacted with CommandBar. [39:02] com slash Lenny, and you can unlock an extra 1,000 AI responses per month for any plan. That's com slash Lenny. [39:13] Let's talk about level two. So what does level two look like and what should founders be focusing on when they're in level two? [39:19] Yeah, so level two is developing product market fit. [39:22] And your job at level two is now you've got to go from five satisfied customers to 25.

[39:27] Satisfied customers. [39:29] And so now you've got to start thinking about demand in addition to satisfaction. [39:34] Because it is very hard to just grind your way all the way to 25 customers with sheer willpower. You can do that to like five, maybe 10. And we see some founders who just have phenomenal willpower and grit. [39:48] and grind their way to five or 10 customers to get to 25 and to get beyond 25, like the product has to be doing a lot of the heavy lifting for you. [39:56] And so that is kind of the essence of this level.

So, [39:58] If you're at this level, now you're like seed or series A style company. [40:04] Maybe you've got up to 20 people at the company. [40:06] and you're starting to work on this demand source. [40:09] where you have the early signs of a scalable channel. And it's not just warm intros like from your VCs or from your friends. [40:16] You are [40:17] You're maybe investing in cold outreach and getting that to sort of tuned and humming. [40:22] You might be investing in content. [40:24] You might be doing community events, but the whole idea is you're trying to scale sort of the demand source.

[40:29] It's still not easy. Like, you know, like a benchmark we would say is that your sales conversion without a warm intro is still probably like 10 percent, something like that. Like first call to close one is like around 10 percent. You get higher than that. That's great. [40:41] But that's sort of benchmark for this level. [40:44] You're in kind of the like anywhere from like the 500k to 5 million ARR zone. That's sort of like a hallmark of level two. [40:51] And you're actually starting to think about efficiency metrics and sales metrics.

You might start starting to be thinking about magic number. [40:57] which is a new ARR that you take in in a period divided by the CAC you spend in that period. So [41:03] Something in like the 0.5 to 0.75 range, you want to get higher eventually. But that's pretty reasonable for this level. [41:10] you're just starting to think about retention. You've been around for a year, so you've got renewals, right? And you want those renewals renewing. [41:16] Maybe something like 10%, 20% regretted churn is okay. You don't want to be higher than that.

And you want your NRR to be at least 100%. [41:24] And then things like gross margin and burn multiple, they're still kind of like not the focus. Those are like the classic efficiency metrics. They're not the focus right now. But we would say you want your gross margin to be like not worse than 50%. And you'd want your burn multiple to be not worse than 5x. Your burn multiple, by the way, is just how much you burn in a current period versus how much new ARR comes in. So if you burn $5 million and you take in one, then you've got a burn multiple of five.

And you don't want to be worse than that at this stage. [41:51] Amazing. There's a lot of these benchmarks which I love. I imagine not everyone's going to hit each of them exactly. These are just rough guidelines of you're probably in this stage if you're in this level, right? [42:03] Yeah, exactly. There's kind of some wide, you know, bars around these metrics. It's just representative of generally the stage of five to 25 customers. I love it. And it's so interesting that [42:13] People think of product market fit, as you said, as this binary, like I have it or I don't.

[42:17] And the way you're talking about this is in this level to developing product market fit. Like a company has 25 satisfied customers. They're over 5 million in ARR. A lot of cases, they have 20 employees. Between 500 and 5 million. [42:29] 500k and 5 million. 500k and 5 million. They have 20 employees. They're like, in theory, you would think this is like a roaring success. They're killing it. They have all these customers. They're growing. [42:40] but it's still just like level two of product market fit. [42:43] So I think this has a really interesting insight that like, [42:45] And it reminds me of when I did a bunch of research on product market fits.

So many founders are like, [42:50] I never felt that product market fit. It was like never... [42:53] I didn't have it. It was always like, I don't know, maybe when we get to 100 million ARR, I'll really feel like we got this. [42:59] So I think this is a really good reminder that a lot of times you're not actually going to feel so confident this will last. [43:05] and you're going to get to lasting... [43:07] durable product market fit so i think that's a really great insight here [43:11] Yeah, and the thing that's, you know, really, I think the hallmark of level two is you've got a product that like a handful of people like, right?

It's satisfying a critical need for them. [43:21] Now you've got to open the demand floodgates, right, so that we can get to 25 customers and beyond. [43:26] And different companies do this in very different ways. It's much easier said than done. [43:31] Looker is an example. Looker is a first-round company found in 2012 by Lloydtab. They do business intelligence. [43:40] And Looker actually, [43:42] Looker is interesting because they spent actually kind of a long time at level one. [43:46] but then like flew through level two. [43:48] And the reason is because [43:51] They Lloyd, the founder, the first five customers of Looker, he was basically going in and doing consulting for them.

[43:59] And the reason is because of the nature of the product. Like, Looker, people don't get Looker until they see their own data in it. [44:05] and their data is modeled and they see the dashboards, and they're like, "Oh my God, wow, I didn't realize these insights." So Lloyd kind of understood, like this is, Looker is not a product you could sell with Figma mockups. And so what happened was Lloyd would go into these customers, [44:19] He spent 20, 30, 40 hours, right? Like before they were even a customer modeling their data, [44:25] teaching them how to use it, showing more people within the organization, like the power of the data and the dashboards.

[44:32] And later they called this their forward deploy process. This is how they figured out sales. [44:39] And so it actually took them kind of a long time in level one to get this right. [44:43] but then they were able to do this repeatedly. [44:46] And so they went from five to 25, like fairly quickly. And it's like a lot of amazing, like 75% close rate because they were only selling customers who are already using it. There was like zero churn. And Lloyd explains like once he got to 20 customers, he's like, I know, I know I'm onto something.

And I think I figured out a model and the model stayed the same until they. [45:06] ended up selling to Google. [45:07] And so they did these other things too. They started focusing on demand channels. They got a couple SDRs who were prospecting. [45:13] I think they did some partner marketing with AWS Redshift. They did these like look and tell customer events in San Francisco where they got [45:20] Looker customers together to talk about what they were doing in Looker and how they built the product. [45:24] But really it was like the ground, the groundwork was set at level one.

And then they sort of like moved really quickly through level two. [45:31] you [45:32] So kind of, again, the... [45:34] Way to think about this phase, this is when you're starting to scale a way to drive demand. You're not just grinding sales cold outreach. There's a way you're starting to bring in customers that are more efficient and [45:43] In Looker's case, they kind of just started coming because I imagine there's word of mouth. [45:48] And people started to talk about it. [45:50] Yeah. Let me do another example. [45:53] Okay, a really different example is a company called Ironclad.

[45:57] Ironclad, you know, it's a legal tech company. They founded it in 2015. [46:02] Jason Bamig is the founder, AI-powered contract management software. [46:07] So this was interesting because Jason started out... [46:11] He started out calling as an AI legal assistant. [46:15] And this is like 2024 people like, oh, yeah, legal assistant. Yeah, that's awesome. But in 2014, like people were like, what? [46:22] And he found it really hard to sell. Like no one was looking for an AI legal assistant. [46:27] And so he told us this story. You know, there was an email address on the Ironclad homepage.

Hello at com is in 2015. [46:34] And like he doesn't get very much email, but like Jason's checking the email. [46:38] And one day he gets this like one line email and he almost archives it because he doesn't know who it's from. It's one line. [46:44] But he sees that it's from like a person at a publicly traded company. And so he's like, oh, maybe there's something here. [46:49] And the one-line email is just, [46:51] Are you a CLM? [46:54] And he was like, what is a CLM? And he Googles for it.

A CLM is a contract lifecycle management platform. [47:02] And he's reading up about CLMs and he's like, oh, you know, we do that and we do. Yeah. Yeah. And so he replies to the email. Yes, we are a CLM. [47:11] and the customer gets him on the phone. [47:14] And the customer says, oh, you know, I'm in the market for a CLM. I'm looking at like 10 or 12 different vendors, but you guys look pretty cool because there's, you know, some automation, some AI stuff going on. Like, you know, can I check this out?

[47:25] And Jason's like, "Of course." [47:27] He and his co-founder take the train from San Francisco down to San Jose. [47:33] And on the train, [47:34] Jason is telling his cover, Kai, hey, I need you to code this up right now to make it look like what this customer is expecting. [47:42] And they get to the meeting and they do the demo and the customer has like no idea that they just made this demo on the train and like they're a very small company. [47:50] And they win the contract against these like 10 or 12 other established bases because Ironclad, it's more modern, it's automated, it's got this AI stuff like it's just a better product, right?

[47:59] or the demo looks like it's going to be a better product. [48:02] And so Jason reflects on this and he's like, yeah, the thing for us is like we had been trying to create this new category of AI legal assistant and it was just like a slog. [48:11] Right? [48:12] And instead, when we changed our positioning to play in an existing category, [48:16] of CLM, but a much better CLM. [48:19] But customers are already looking for a CLM. They're already looking to spend money on a CLM. And just expand the definition of what that category is, things just started to click.

And that's how they got sort of through that zone of like 10, 20, 30 customers. And even if you look at the Iron Cloud website today, it says... [48:34] AI powered contract management software, right? Like that really is the key idea still. [48:38] Awesome. So this is an awesome example of... [48:40] positioning slash [48:42] Promise is the lever they pulled here. [48:44] I love the point about category design. That's one of the ongoing debates on this podcast. I know, it's a hot topic. Hot topic. Sounds like you're in the boat of probably better not to create your own category.

[48:56] I think it's hard to create a category. It certainly works in some cases, but if you actually have a really interesting spin on an existing category, there's already buyers spending money on that thing. They're already looking for something to buy. So if you can do it, I do actually think that way is easier. [49:13] Before we get to level three, what are signs that you're maybe stuck at level two and what should one do about that? [49:21] Yeah, so the whole idea of level two is this thing that the marginal customer is getting easier.

[49:26] Right, and so you've got to be focusing on demand and the repeatability of demand. [49:31] while you maintain satisfaction. So the yellow flags are like things that are the opposite of that, right? [49:36] like your current customers are like pretty happy, but you're just having trouble opening the floodgates. Because you're getting to the top end of level two, [49:43] you should start to hear some startups kind of know who you are. [49:48] you know, like, [49:49] Oh, you need a SOC 2? Your startup? Oh, Vanta. Oh, you need AI-powered contract management software?

Oh, Ironclad. You sort of start to get known for a thing. [49:59] And so if you're having trouble opening those floodgates and you're sitting there for, I don't know, 12 months, 18 months, that's kind of a problem.