RIP Product Market Fit, long live Business Model Fit!

Remember Product Market Fit?

The ‘holy grail’ chased by all wannabe unicorns?

Guess what?

It’s dead!

Visionary founders with hyper growth plans raked up b$llions from VCs and family offices around the world thanks to their ‘proven product market fit’.

Growth was the Key Performance Indicator (KPI) for success, at all costs.

1,000% yearly growth!

Tens of m$llions in revenue!

People loving the product/service!

Wow!!! OMG!!! Unicorns everywhere!!!

Take my money!

Where do I sign!!!

There was a small problem though: for the vast (and I mean really vast) majority of these hyper-growth companies the growth was alienated / subsidised / call it what you want but basically these visionaries were buying their growth at a loss.

Investors confused Product Market Fit (PMF) — the fact that people/customers/users/etc liked a product/service and used it/paid for it — with the fact that a business need a solid business model in order to survive.

Allow me to give a silly example…

I love wines (I have a family vineyard and lost lots of money in wine retail in the UK).

Imagine if I launched an online subscription service that for just $19,99 sent directly to your home a case of the best Bordeaux, Barolos, Champagnes every month.

I can guarantee that I would have PMF in a blink!

How long could I survive?

As long as I can find investors who can ‘subsidise’ my enormous losses every month ;-)

The ‘winter of discontent’ that descended upon startups post Covid/Inflation/Wars caused investors to — finally — reconsider the key traits sought in companies looking for funding.

Growth alone is not enough.

The single most important determinant to the chances of success of any business is what I like to call Business Model Fit (BMF).

While PMF is important — your customers clearly must like your offering somehow! — without BMF you are going NOWHERE.

In my mind BMF can be defined in a pretty straightforward way with 5 key questions:

1. Have you identified a ‘real problem’ that your solution solves?

2. Is there anyone who is going to be willing to pay for it?

3. How much are they going to pay? Is the price enough to cover the sale effort and leave you with at least 50% gross margin (less than 50% is tough as it gives little space for manoeuvring)

4. Do you have a ‘moat’? Enough differentiation from competition and defensibility?

5. How will you scale your revenues?

Question 3 is the most important. The one that somehow investors forgot to ask in the past years.

Things have now changed. Sense — or some of it at least — has returned to most investors.

If you want to raise money today I suggest you work on having a really good answer to question 3 as I suspect that with it you will struggle to get interest in your brilliant and disruptive idea.

Best of luck to all my fellow entrepreneurs out there battling the odds.