How to prove to investors you have product-market fit?

Long gone are the times when founders would lock themselves in a garage for a year while developing a product, only to launch it and discover that, well, no one cares. 

Now you are smarter. You identify a value hypothesis, find a market that is likely to care, create an MVP, and launch a prototype to test the hypothesis on real people. Sometimes, you arrive there pretty quickly; other times, you tirelessly iterate or even pivot. Assuming you do everything right and the market is on your side, you finally land on product-market fit (PMF). Hallelujah! Time to raise your Series A.

That’s when many startups hit the wall. Why? Because the waters can get muddy when it comes to understanding PMF. You start questioning yourself. Did you actually arrive at PMF or just think you did? And, if you did, did you use the right metrics to prove it? If helping hundreds of early-stage startups raise funds has taught us anything, it’s that the answer to these questions is quite often “no.” 

Before proving to VCs that you have PMF (or making any moves toward scaling for that matter), you absolutely must first make sure that you really have one. 

Here, we will share the PMF indicators that are critical to track if you want to understand whether you’ve arrived at PMF, prove it to VCs, and raise Series A.

Why do many startups fail to prove their PMF to investors?

Working with our clients on fundraising has shown us that founders often don’t really understand what product-market fit is, why the success of their business depends on it, and what it should look like. As a result, clients frequently:

• Think they achieved PMF when they didn’t
• Use the wrong indicators to demonstrate PMF to investors

As a result, these clients may see a spike in website traffic, increased sales, or low CAC and assume that they’ve landed on their PMF. In reality, however, all those things can occur without PMF.

The confusion around PMF is caused by the lack of a clear-cut definition and contrasting takes on how achieving it should look and feel.

For example, Marc Andreessen, an American entrepreneur, investor, and software engineer, defines PMF as “being in a good market with a product that can satisfy that market,” while leaving words like “good” and “satisfy” open for interpretation. 

Some say that PMF is always discreet; others say you can’t miss it. As it happens, the truth is somewhere in the middle. 

Here is how Marc Andreessen has famously put it:

No matter how on-point this description is, it’s not a universal truth for all startups. While his example is certainly appealing, fundraising would be a cakewalk if every company had the same results when they sought to raise Series A. 

In reality, early PMF is unlikely to manifest itself in such an apparent form, especially if you take a bottom-up, product-led approach. For such cases, there are indicators that will help you determine whether you’ve arrived at product-market fit, and, if that’s the case, guide you in easily proving it to VCs.

Indicators that prove you’ve achieved product-market fit

Looking into the following metrics will remove any ambiguity and help you establish whether you actually have PMF; if you do, the metrics will also help you comfortably prove it to investors. These indicators can be quantitative or qualitative and must be studied and presented together.

Quantitative indicators

These indicators are composed of so-called “hard data” – that is, the information you can count or that has a binary answer. This data allows you to understand the state of your business. The indicators answer the question “What?” without providing any context.

• Customer retention > 90%

High customer retention is the single most important indication that you’ve arrived at PMF. It’s the foundation – and the absolute minimum – of what you need to claim that your product fits the market, and investors know that. Your sales might be through the roof, but, if the majority of the clients drop out, your product or market needs an overhaul.

The benchmark for top SaaS players is an annual customer retention rate (CRR) above 90%.

Here is how to measure your CRR:

It may seem simple, but there is nuance involved. Customer retention is a lagging indicator, meaning it could take up to a year to accumulate the amount of data needed to draw conclusions. If you don’t have this data or the time to wait for it to mature, you should determine a leading retention indicator that will indicate the early signs of PMF in real-time.

The leading retention indicator must be tailored to your company and reflect your customer journey. Here is the formula for determining yours:

As a rule of thumb, your P value should be between 60% and 80% and should continuously grow over time. The key is to identify the right E (event) representing the indicator. You can use events related to product setup, usage, or results. In his ‘Science of Scaling’ framework, Mark Roberge describes what attributes the E variable should have.

T is the time by which the leading indicator event is achieved. Keep the timeframe as short as possible, but always consider how hard it is to adopt your product and see its value.

• High net promoter score (NPS)

VCs know that, if you’ve found PMF, you will start seeing exponential organic growth driven by personal networks and word of mouth. If you really create a product people want, they will be happy to recommend it to others, and this readiness will reflect itself in a lofty NPS rate.

NPS metrics measure how satisfied your customers are with your product and how likely they are to invite others to use it. For example, Robinhood had a waitlist of one million users before raising their Series A, which they achieved with zero marketing legwork. 

Here is the NPS formula:

For example, if 50% of respondents are promoters, 10% are detractors, and 40% are passives, your NPS would be 50–10=40.

The benchmarks for NPS vary across industries. But, on average, having an NPS > 40 would mean that your product is doing quite well. 

Note: Only use the NPS rate in conjunction with other metrics like customer retention and supplementary surveys.

• Surveys: the rule of 40%

Surveys can serve both as qualitative and quantitative metrics; in this case, we use them as the latter. Ask your customers the following question:

How would you feel if this product stopped existing?

Then, provide them with the following options:

• Very disappointed
• Somewhat disappointed
• Not disappointed
• I no longer use [product]

If > 40% of people choose “very disappointed,” that’s a very strong indicator of PMF, and you should most certainly show it off to investors. 

• Growing monthly recurring revenue (MRR)

MRR is one of the key metrics for businesses operating on subscription-based business models that have recurring revenue. For SaaSs, constantly increasing MRR is a natural result of strong customer retention coupled with high NPS. While the speed of your MRR growth might vary depending on your sales and marketing efficiency, the dynamics in your MRR must show an upward trend. 

As for the benchmarks, the variation is too broad to give one-size-fits-all advice. Different VC firms expect to see different MRR numbers depending on your industry and the amount of money you raise. At Waveup, we consider all these factors first to help our clients determine the perfect MRR benchmark.

• LTV > CAC

Low customer acquisition cost (CAC) alone doesn’t indicate PMF. When it is compared to lifetime customer value (LTV), however, it will paint a clearer picture of where your business stands. If customers make you more money than you spend acquiring them, it’s a pretty good indicator that:

• You’ve chosen the market correctly, and/or
• Customer retention brings in enough money

In other words, if your business is already (or about to become) profitable, you can give yourself a huge pat on the back and expect to encounter very few problems securing the round.

Qualitative indicators

Qualitative data points can’t be counted, instead taking the form of descriptions. They are designed to answer the question “Why?”, adding much-needed context to quantitative data points and guiding you in the right direction.

• Positive customer reviews and media attention

Customer feedback of any kind is your best friend at any stage of business. It’s especially crucial in the early stages, as it navigates you in the right direction. Naturally, if you’ve achieved PMF, your feedback will be predominantly positive – and vice versa. 

The same goes for media mentions. If your product has gained traction (which it should’ve by this stage) and fits the market, you will receive numerous positive social media references and numerous inquiries from various outlets. Not only is it a significant driver for revenue growth but also a great signal of PMF for you and investors.

While these things alone don’t prove that your PMF is secured, they work as an amplifier for any quantitative indicators of PMF. For example, amazing reviews and ample media attention can compensate for lower-than-ideal MRR growth and convince investors to give you a shot.

What should you do if you don’t have PMF or your indicators aren’t good enough?

Looking into the above-listed metrics might reveal that your PMF only existed in your head. Or maybe the early signs are there, but the traction is not enough to convince investors to give you the funding you need. 

Your main focus here must be on finding the reason you have not achieved it yet. In this case, we always prescribe our clients to do the following things: 

• Interview your customers
• Conduct user surveys 
• Collect product usage data
• Conduct usability tests

If your quantitative indicators look pitiful, qualitative analysis in the form of customer interviews will help you understand why. No one can explain why your customers don’t stick around better than your customers themselves.

Sometimes, the problem lies on the surface (e.g., clunky user design, a missing feature, or a glitch that ruins the user experience). It might even be as simple as miscommunicated product value that gives your customers false hopes. Fixing such things will be a piece of cake and will likely result in quick improvement.

Other times, you might need to pick a different crowd for your product or pivot your business model or the product itself. For example, if you choose the wrong revenue streams or pricing approach, you will struggle to achieve PMF no matter how well-honed your product is. Or, in another scenario, you target small businesses with a solution that is too heavily reliant on features they don’t even need and aren’t willing to pay for or vice versa. 

One of the numerous successful examples of pivoting is Instagram. Founded as a location-based game, it received $500,000 in seed funding but soon realized they were seeing low traction and customer engagement. They began analyzing user data and realized that image-sharing was their single most popular feature. In 2010, they stripped all other features and re-emerged as a photo-sharing app. The rest is history.

Proving to investors that you have PMF is easy – you just need to have one! 

If you want to prove to investors that you can lead your category, you need to start with an honest look at your metrics to ensure that you’ve actually got what it takes. Here are some primary indicators that demonstrate you have crossed the PMF threshold:

• Customer retention > 90%
• Growing MRR (for SaaS)
• LTV > CAC
• NPS > 40

Don’t be fooled by temporary spikes in sales, website traffic, or any other signs of demand but not necessarily product-market fit. And don’t get disheartened if your numbers aren’t quite there yet. If you invest in qualitative analysis, implement the feedback, and iterate, your fundraising efforts will be bound to succeed!

If you need help preparing investor materials that will blow away VCs, just drop us a line. The Waveup team has helped our clients raise over $2 billion, and we’d be happy to help you!