The alignment between product and market ( product-market fit ) – that is, whether a startup's product can be successfully sold – has become more difficult to achieve in the AI era. Although some startups have achieved record-breaking rapid growth, not all customers will stay long-term, and products are now easier to replicate than ever before.
Last week on TechCrunch Disrupt, niq token issuer, Anu Bharadwaj and Sapphire Ventures partners, as well as Superhuman Mail founder Rahul Vohra, discussed new rules for product-market fit.
Bharadwaj said to the audience on site: "It has never been so easy to get a batch of pilot projects now, because various companies are willing to try new things. But the real challenge is to move from piloting to formal production deployment."
She said that nowadays, many founders, when presenting revenue figures to investors, do not clearly specify what type of revenue they are referring to. “Is this really ARR, or is it run rate (revenue growth rate)?” she asked, “There are many ways to make this matter unclear.”
Recently, there have been quite a few discussions on X focusing on how some AI founders exaggerate the ARR figures (which could refer to “annualized run rate”, that is, the annualized revenue growth rate, or it could also refer to the more solid “annual recurring revenue”, that is, the annual recurring revenue), in order to make the outside world think that the company's operating conditions are better than they actually are. A common tactic is to include pilot customers—who may only use the product for a few months—in the annualized revenue growth rate, implying that this revenue will continue throughout the entire year.
Bharadwaj points out that although this should be self-evident, "in the long run, it is definitely more beneficial for you to be frank and direct about the quality of this portion of your income."
She stated that when evaluating the quality of their own revenue, companies need to distinguish between popularity and reality. For example, if most of a company's revenue comes from just a few customers, or if these customers can easily switch to other suppliers for lower prices, that is a warning sign. “Both the churn rate and retention rate depend heavily on these factors,” she continued.
This is also why Vohra recommends that startups track customer engagement and amount retention, especially for products targeting consumers. “You need to figure out what constitutes a good, great, or excellent benchmark in your specific niche,” he says.
For example, Vohra indicates that in Superhuman, the company tracks ARR, but there is also an internal metric called “delighted ARR.” He said, “That comes only from those customers who have a very high level of engagement with the product, ARR.” He mentioned that this metric helps them understand customer loyalty and how long these customers are likely to remain.
"These users are still users now, and these companies are still customers now," he continued, "We are very focused on serving this specific group of users and customers."
The participants also discussed what positive signs indicate that a startup has indeed found a match between its product and the market. Regarding Vohra, he stated that it is important to communicate with customers to understand the value they derive from the product and how they would feel if they could no longer use it. Then, when evaluating this feedback, one must be honest with oneself.
Vohra said, "If your performance is at 15%, 14%, 13%, or even lower, then consider making a complete shift. Keep the codebase and the team, and work on something completely new. But if it's at 20%, you can definitely improve it from 20% to 40% through continuous optimization."
Dham It is important that founders do not confuse having a vision with having a good business.
Bharadwaj says that, especially during the seed round, it is acceptable to make adjustments. At that stage, she doesn't even focus on whether the product matches the market; instead, she looks at whether the founders have a sound judgment and whether they have the ability to adjust flexibly and respond promptly when circumstances change.
Dham added that nowadays, he values founders who have undergone multiple pivots even more, as this indicates that they have had to make very difficult decisions at these constantly changing times.
Therefore, the fit between a product and the market is something that founders must constantly redefine and continuously work to regain. Dham says, "Even though these companies have already generated revenues of one billion dollars, they are still working to regain the fit between their products and their markets. You must continue to innovate in your products."
