This document discusses the concept of "product-market fit" and how startups can achieve it through experimentation and testing business model hypotheses. It frames startups as "experimentation machines" that should run experiments to test hypotheses about their customer value proposition, go-to-market strategy, and business model/cash flow. Key metrics for determining product-market fit include customer retention rates, lifetime value vs. customer acquisition costs, and results from the "40% test". The document provides examples of hypotheses a startup may want to test and discusses how to select which experiments to prioritize.

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

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Startup
Quick Background
Professor @HBS:
- Launching Tech Ventures
- Rock Venture Partners
Venture
Capitalist
@Flybridge
2x Author:
- Mastering the VC Game
- Entering StartUpLand
2x Entrepreneur:
- NASDAQ: OMKT
- Upromise (acq: SLM)
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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 assessment
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4. Taking a Page From Experimental Design

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Startup = Experimentation Machine
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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

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Startup = Experimentation Machine
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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

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

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Experimentation Constraints and Flow
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Time
Money
Team
Strategy
Experimental
Design
Experimental
Execution
Results and Insight

9. Test Selection Is Strategy:
Your Choices Matter
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Three Essential Questions for Test Selection
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Which business model
component is most
controversial and what is
the essential hypothesis for
that component?
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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?
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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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Sample User Persona:

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“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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Lean Startup
Principles
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- 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

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- “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
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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

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“Lessons Learned” Drives Funding
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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

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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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To Explore the
“What” Employ
Design Thinking
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Source: IDEO
An interactive cyclic process
Empathize
Define
Test
Prototype Ideate

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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
- Building an intellectual property portfolio
CVP Experiments
“Who” Hypotheses
“What” Hypotheses
“How” Hypotheses
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Experiments: Drill Down
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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

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GTM Hypotheses to Test
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Initial market
hypothesis
Growth
hypothesis
Partner
hypothesis
Channel choice
hypothesis
Sales model
hypothesis

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Initial Market Selection
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Source: Geoffrey Moore, Inside the Tornado
Bowling Alley Market Development
Whole product extending
applicability to address nearby
segments
Customer references to
other customers in the
same segment
“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

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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)
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ARPA/ACV vs. Sales Model
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1,000,000
100,000
10,000
1,000
100
$100 $1,000 $10,000 $100,000 $1,000,000
Source: Christopher Janz
To succeed in this segment your product
needs to be inherently viral, freemium, self-
service.
Product-led growth and channel sales helps
companies selling to rabbits reduce cost of
sale.
Most $100M+ ARR SaaS companies target
deer or elephant customers with a mix of
BDRs and direct sales.
Whale customers have long sales cycles and
require direct sales efforts but can be very
profitable over time.
#
of
Customers
ARPA
(Average Revenue per Account per Year)

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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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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”
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Experiments: Drill Down
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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

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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

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Elements of a Magical Business Model
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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

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- LTV : CAC > 3
- MRR growing > 10% MoM
- Churn < 20% / year (ideally lower!)
- NPS > 30 (ideally higher!)
- Sales team hitting quota
- Sales cycles short
- 40% test — if product disappeared…
- Product usage high, growing
Criteria for Product Market Fit
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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: HBS Launching Tech Ventures Course; Sarah Tavel, Benchmark

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Retention Metrics: Best In Class By Business Model
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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

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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
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Where Are You in the Journey?
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- 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

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Putting It All Together
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#3 Biz Model Fit
#1 Value Prop Fit
Target Market Early Majority
Innovators Early Adopters
Demand Gen.
Many Channels.
Tightly Aligned with Sales
Personal Network +
WOM Referrals
Marketing Experiments
Partner Experiments
#2 GTM Fit
Goal of Phase Growth & Moat
Learning
Customer Love (40% Test)
Unit Economics
Pricing Profitable Unit Economics
Adoption First Customer W-T-P
Sales Hiring Senior, Process Builder
None Junior, Expeditionary
GTM Process Partners/Sales Team
Founder Selling
Product-Led Growth
Go Direct/First Rep

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

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Additional Writings:
Dig Deeper
Steve Blank:
Four Steps to the Epiphany
Eric Ries:
The Lean Startup
Melissa Perri:
Escaping the Build Trap
Elliot Robinson:
10 Laws of Cloud Computing
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Sean Ellis:
Hacking Growth
Tom Eisenmann:
Why Startups Fail
Sarah Tavel:
The Hierarchy of Engagement