A systematic walk through of the journey to achieve product market fit by Jeff Bussgang, general partner at Flybridge Capital Partners and senior lecturer at Harvard Business School

1. The Search for
Product-Market Fit
Jeff Bussgang
General Partner and Co-Founder, Flybridge Capital
Senior Lecturer, Harvard Business School
@bussgang

2. Startup
Life
Your old safe job
Your Startup
2

3. Venture
Capitalist
Professor
Author
Entrepreneur
Quick Background

4. Confidential Presentation
Concepts
Deconstruct “Product Market Fit”
(PMF), plus:
- Lean Start-Up Theory
- Customer Development Process
Methodology to achieve PMF
(and avoid wasting $)
The metrics that matter most
Startups as experimentation machines
Business model deconstruction
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Confidential Presentation

5. Confidential Presentation
Four core components of
a startup business model:
- Customer Value Proposition
- Go-to-Market
- Cash Flow Formula
- Technology Operations
These components are
executed in the context of:
- Founders
- Team (Joiners)
- Investors
- Partners
Business Model
Deconstruction
FOUNDERS INVESTORS
TEAM PARTNERS
Technology
Operations
Go-to-Market
Customer Value
Proposition
Cash Flow
formula
5
Confidential Presentation
Source: HBS The Entrepreneurial Manager Course

6. Taking a Page From
Experimental Design
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Confidential Presentation

7. Confidential Presentation
Startup = Experimentation Machine
7
Customer
Value Proposition
Experiments
Go-to-Market
Experiments
Business Model/
Cash Flow
Experiments
Which Experiments Should I Run (and in what sequence)?
Source: HBS Launching Tech Ventures Course

8. Confidential Presentation
Startup = Experimentation Machine
8
How Do I Build an “Experiment-Driven Organization” Across Each Function?
Growth
Product Sales Biz Dev
Source: HBS Launching Tech Ventures Course
Customer
Value Proposition
Experiments
Go-to-Market
Experiments
Business Model/
Cash Flow
Experiments

9. Confidential Presentation
Following the Scientific Method
9
Source: HBS Launching Tech Ventures Course
Ask a question or
address a problem
Research Hypothesis
Experiment
Analysis
Conclusion
(and win the
science fair)

10. Confidential Presentation
Experimentation Constraints and Flow
10
Time
Money
Team
Strategy
Experimental
Design
Experimental
Execution
Results and Insight

11. Test Selection Is Strategy:
Your Choices Matter
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12. Confidential Presentation
Three Essential Questions for Test Selection
12
Which business
model component is
most controversial
and what is the
essential hypothesis
for that component?
1
What is the key
milestone I need to
achieve to lead to a
valuation inflection
point, helping unlock
more capital from
investors?
2
Where does the
greatest risk exist in
my business model
and what does the
flow of dependencies
look like?
3

13. Confidential Presentation
Framework for Test Evaluation
(Keep an eye on causation, not correlation)
13
EXPERIMENTATION
SEQUENCING
- Is this experiment the
right one to focus on at
this exact moment?
- Are there dependencies
I need to think through?
EXPERIMENTATION
DESIGN
- Have I narrowed the
experiment to focus only on
the Most Important Thing at
this exact moment?
- Is the experiment tightly
defined and straightforward?
- Will the experiment properly
test a falsifiable hypothesis?
EXPERIMENTATION
EXECUTION
- Am I set up to execute the
experiment effectively?
- Do I have the right resources
and team?
- Are we instrumented to
collect the necessary data to
evaluate the results?

14. Confidential Presentation
Experiments: Drill Down
14
CVP = Customer Value Proposition
GTM = Go-to-Market
BM/CF = Business Model/Cash Flow Formula
Source: HBS Launching Tech Ventures Course
CVP Experiments
“Who” Hypotheses
“What” Hypotheses
“How” Hypotheses
GTM Experiments
Sales Model Hypotheses
Channel Choice Hypos
Partner Hypotheses
Growth Hypotheses
BM/CF Experiments
Monetization Hypotheses
Pricing Hypotheses

15. Confidential Presentation
CVP Experiments:
WHO
- Persona development
- Start narrow, then narrow further
- User stories
- Deep customer discovery
- Live with the customer: “Follow Them Home”
- Early evangelists — avoid the chasm
CVP Experiments
“Who” Hypotheses
“What” Hypotheses
“How” Hypotheses
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16. Confidential Presentation
“It's better to have 100 people love you than
a million people that sort of like you, so if you
can find 100 people that love your product —
as long as there are more people like them in
the world — then you have an idea that I
believe will spread around the world. But if
you can't get 100 people who absolutely love
your product, then
you do have a problem.”
Brian Chesky
Airbnb Founder/CEO
The Chasm
Innovators Early
Adopters
Early
Majority
Late
Majority
Laggards
Early Market Late Market
Tornado Main
Street
Bowling
Alley
The
Chasm
Source: Geoffrey Moore, Crossing the Chasm
The danger of the chasm is
the false positive manifested
by success with early
adopters
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17. Confidential Presentation
- “I ask existing users of a
product how they would
feel if they could no longer
use the product.”
- “If > 40% say they’d be very
disappointed, you have
found product-market fit.
If < 40%, you haven’t.”
Sean Ellis’
40% Test
17
How would you feel if you could
no longer use Google Analytics?
Answered: 1,075 Skipped: 0
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Not
disappointed
Somewhat
disappointed
Very
disappointed
Source: Hacking Growth by Sean Ellis

18. Confidential Presentation
Lean Startup
Principles
18
- No idea survives first customer contact, so get “out of the
building” and in front of prospects ASAP to test ideas
- Goal: validation of business model hypotheses, based on
rigorous experiments and clear metrics
- Minimum viable product (MVP): smallest set of
features/marketing initiatives that delivers the most
validated learning
- Rapidly pivot your MVP/business model until you have
validation and product-market fit (PMF)
- Don’t scale until you have achieved PMF
Source: Lean Startup by Eric Ries

19. Confidential Presentation
“Lessons Learned” Drives Funding
19
Source: Steve Bank
Do this first instead of fund raising
And perhaps even before writing code
(or raise seed round to test hypotheses…rigorously)
Concept
Business
Plan/Canvas
Lessons
Learned
Series A
Test
Hypotheses

20. Confidential Presentation
CVP Experiments:
WHAT
- Strict MVP
- No code! Prototypes and wireframes
- A/B tests on messaging/landing pages
- Requirements not specs
- What problem are you solving?
CVP Experiments
“Who” Hypotheses
“What” Hypotheses
“How” Hypotheses
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21. Confidential Presentation
To Explore the
“What” Employ
Design Thinking
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Source: IDEO
An interactive cyclic process
Empathize
Define
Test
Prototype Ideate

22. Confidential Presentation
CVP Experiments:
HOW
- Two architectural choices:
• Build something with a good user interface
that doesn’t scale and pay down “tech
debt” later
• Plan for scale but don’t build out the user
interface and all the bells and whistles
- Contrarian advice
• Don’t outsource R&D
• Don’t start with a remote team
• Founder as Product Manager
• Keep engineers in direct customer contact
CVP Experiments
“Who” Hypotheses
“What” Hypotheses
“How” Hypotheses
22

23. Confidential Presentation
Experiments: Drill Down
23
CVP = Customer Value Proposition
GTM = Go-to-Market
BM/CF = Business Model/Cash Flow Formula
Source: HBS Launching Tech Ventures Course
CVP Experiments
“Who” Hypotheses
“What” Hypotheses
“How” Hypotheses
GTM Experiments
Sales Model Hypotheses
Channel Choice Hypos
Partner Hypotheses
Growth Hypotheses
BM/CF Experiments
Monetization Hypotheses
Pricing Hypotheses

24. Confidential Presentation 24
GTM Is Strategy

25. Confidential Presentation
GTM Hypotheses to Test
25
Initial market
hypothesis
Growth
hypothesis
Partner
hypothesis
Channel choice
hypothesis
Sales model
hypothesis

26. Confidential Presentation
Initial Market Selection
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Source: Geoffrey Moore, Inside the Tornado
Bowling Alley Market Development
Jump Across Segments
Sell same app to multiple
customer segments,
expanding TAM
“Second Acts”
Sell more apps to the
same customer segment,
expanding LTV
“Head Pin”
Segment 3
Application 1
Segment 2
Application 2
Segment 1
Application 3
Segment 2
Application 1
Segment 1
Application 2
Segment 1
Application 1

27. Confidential Presentation
How to Select That
First “Head Pin”?
- Consistent with your
mission/passion
• That is, don’t pick an initial
market that you’re not excited
to live in day in, day out for 3-5
years
- Large enough to sustain iterations,
raise $
- Ideally high value for rich customers
– i.e., leading to high willingness-to-pay
- Consistent feature requirements that
can be generalized across other
segments
- Easy to access directly (i.e., no
gatekeepers)
27

28. ARPU/ACV vs. Sales Model
Source: Christopher Janz

29. Source: Christopher Janz
Product-Led
Growth
Inside
Sales
Enterprise
Sales
ARPU/ACV vs. Sales Model

31. Confidential Presentation 31
Product-Led
Growth (PLG)
Source: The Mobile Spoon

32. Confidential Presentation 32
Sales
Learning
Curve:
Founder-Led
Sales
Founder-Led Selling Expeditionary Selling Machine-Based Selling
Source: HBR Sales Learning Curve, Bocar Dia

33. Confidential Presentation
Some
Go-to-Market
Truisms
- Founders must lead the journey down the
sales learning curve
- Avoid Gatekeepers
- Bias towards junior, generalist resources early
- Do the unit economics math: LTV/CAC
- Do the sales quota/efficiency math
- Raise money from aligned investors — and
make sure they have your back when GTM
takes longer and costs more than anticipated
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34. Confidential Presentation
Pacing
Scaling - Blitzscaling School (i.e., Startup = Growth): use
capital and execution capacity to drive scale as
rapidly as possible
• Best applied for network effects businesses with
massive TAM, attractive economies of scale,
aligned investors, and winner-take-all
characteristics
- Avoid Premature Scaling School: don’t scale
until you’ve achieved product market fit and
then pace your scaling appropriately
• Best applied for SaaS businesses or services with
high cost of scale, high cost of capital,
“tough tech”
34

35. Confidential Presentation
Experiments: Drill Down
35
CVP = Customer Value Proposition
GTM = Go-to-Market
BM/CF = Business Model/Cash Flow Formula
Source: HBS Launching Tech Ventures Course
CVP Experiments
“Who” Hypotheses
“What” Hypotheses
“How” Hypotheses
GTM Experiments
Sales Model Hypotheses
Channel Choice Hypos
Partner Hypotheses
Growth Hypotheses
BM/CF Experiments
Monetization Hypotheses
Pricing Hypotheses

36. Confidential Presentation 36
Your Unit Economics: LTV and CAC Math
Discounted present value of the gross
profits earned over the life of a typical
customer’s relationship
Be conservative by:
- Capping lifetime value at no more than 3 years
- Apply a 30% cost of capital discount rate
- Use your current gross margin, not future one
Your full cost of sales and marketing
divided by the number of new customers
acquired.
Be conservative by:
- Include staff salaries, not just program dollars
- Keep an eye on “marginal CAC”, not historical CAC
- Recognize that CAC can get worse with scale
Customer Lifetime Value
LTV Customer Acquisition Cost
CAC

37. Confidential Presentation
Elements of a Magical Business Model
37
Tight viral
loop
Recurring
(esp. negative
chum)
Strong
network
effects
High gross
margins
Metrics improve
with scale
Organic demand
(zero marketing
costs)
High
switching
costs
Deliver high value
to rich customers —
high willingness to pay
Source: HBS Launching Tech Ventures Course

38. Confidential Presentation
- LTV : CAC > 3
- MRR growing > 10% MoM
- Churn < 20% / year (ideally
lower!)
- NPS > 50 (ideally higher!)
- Sales team hitting quota
- Sales cycles short
- 40% test — if product
disappeared…
- Product usage high, growing
Criteria for Product Market Fit
38
As users engage, they
create virtuous loops in
the product.
Product should get better the
more it’s used. Users have more
to lose by leaving the product.
Focus on growing users
completing the core action.
Self-
perpetuating
Retaining
users
Growing engaged
users
Tavel’s Hierarchy of Engagement
Source: Sarah Tavel, Benchmark

39. Confidential Presentation
Retention Metrics: Best In Class By
Business Model
39
Confidential Presentation
35%
40%
55%
70%
82.5%
User Retention (%) Net Revenue Retention (%)
67.5%
110%
90%
110%
120%
Source: Lenny Rachitsky, survey of top growth managers

40. Confidential Presentation
Monetization
Timing
- Adoption School: ship a product that people love,
drive adoption first, and worry about business model
and how to make money later
• Often applied when incremental cost of service delivery
is zero
• Often applied when willingness to pay is obviously
massive and doesn’t require proving out
• Often applied for B2C business models
- Unit Economics School: understand the cost of
delivering your offering, a customer’s willingness to
pay, and price accordingly from the beginning
• Often applied for higher cost of service and tough tech
products
• Often applied for B2B business models
40

41. Confidential Presentation
Where Are You in the Journey?
41
Confidential Presentation
- Lean startup approach
- Hunch-driven hypotheses
- Minimum viable product (MVP)
- Product-centric culture; informal roles
- Customer development process
- Pivoting
- Bootstrapping/pre-seed
- Small, founding team
- Founder selling — early adopters
- Early in sales learning curve
- Make 100 customers LOVE you
- Driving growth
- Metrics, analytics, funnels
- Building a robust, feature-rich product
- Designing for virality & scalability
- Scaling the team; more formal roles
- Challenges with corporate partnerships
- Building a brand
- Scaling a sales force
Before Product-Market Fit:
Search & Validation
1
After Product-Market Fit:
Scaling & Optimization
2

42. Confidential Presentation 42
#3 Biz Model Fit
#1 Value Prop Fit #2 GTM Fit
Goal of Phase
Target Market
GTM Process
Demand Gen.
Pricing
Sales Leader
Innovators
Risks
Personal Network +
Referrals
Customer Love
(40% Test)
Founder Selling
New: Price Low, Prove Demand
Existing: Price Hi, Prove WTP
Founder
PMF False Positives
“Tech Crunch” False Positive
Early Adopters
Paid Mktg Experiments
Partner/Channel Experiments
Repeatable Acquisition
Playbook Discovery
Solve for Breakeven
Expeditionary Sales
Vanity Metrics/False Positives
Runway to Pivot
Unit Economics,
Growth & Strategic Moat
Early Majority
Multi-Channel
Partner with Sales
Partners/Sales Team
Solve for Profitable
Unit Economics
Process/Team Builder
Premature Scaling
Putting It All Together

43. Confidential Presentation
Additional
Books/Blogs
“The Startup
Canon”
Geoffrey Moore:
Crossing the Chasm
Steve Blank:
Four Steps to the Epiphany
Eric Ries:
The Lean Startup
Marty Cagan:
Inspired
Sean Ellis:
Hacking Growth
43

44. THANK YOU!
Jeff Bussgang
General Partner and Co-Founder, Flybridge Capital
Senior Lecturer, Harvard Business School
@bussgang