Andy Rachleff on how he defines product-market fit

Andy Rachleff, who coined the term product-market fit, tells in a podcast interview with William Channer how he came up with it and how he defines it:

WC: Let’s talk about the basics. What is product market fit? We hear this term a lot.

AR: I coined it. I don’t know if you knew that, but I’m the one who coined the term.

WC: Amazing. I never knew that. Where did that come from? What epiphany did you have?

AR: Well, it came from an observation of what led to the success or failure of my portfolio companies. I noticed over the years that another firm called Sequoia Capital — with whom we often co-invested and often competed as well — did an amazing job of focusing on this subject.

Now, I’m not sure they use the term product-market fit to describe it, but their founding partner Don Valentine used to say: “I want to invest in companies that can still succeed if they screw everything up when it comes to execution because the pull from the market is so strong.”

And that is what I define as product-market fit: when the customers want your products so badly that you can screw everything up and still succeed.

Later, while discussing the growth channels used by Wealthfront — the company he founded after leaving Benchmark — Andy offers more valuable insights:

WC: So, word-of-mouth is how you grow. But what are your channels?

AR: We’re almost exclusively organic and therefore almost exclusively word-of-mouth. We institutionalized word-of-mouth with our the incentivized invitation system — and we also have physical word-of-mouth. Those two drive probably 75% of our new client growth.

The reason that we get word-of-mouth is that if you delight your customers they’re going to tell their friends. So I think delight is the greatest form of virality.

I’m not a big fan of paid marketing because I think that it always gets arbitraged away. I’d rather invest in building delight than in something that gets arbitraged.

WC: How do you know when you have something delightful?

AR: Well, at least for us, we see it in a couple of ways.

Number one. People add more money to their accounts. So, in our case, you make an initial deposit, probably to test out what we do, and if you have a good experience with it you’re likely to continue to add money as you save.

As I said before, we focus on people who are under 40, they are in the wealth accumulation phase of their lives versus the wealth preservation phase of their lives. And, as they make more money and save more money, we hope they’re going to keep giving us more money, but they’re only going to do that if they’re delighted.

And they’re only going to invite their friends if they are delighted. So, we track the rate at which people and on deposits and invite their friends.

Now, by the way, you asked me in the beginning of the show: How do you know if you have product-market fit? Or what is product-market fit?

A question that I’m often asked is: How do you know when you have product-market fit? And the best answer that I can give you is: when you have exponential organic growth.

You can fake growth by buying it. But, let’s say you buy a customer, but then they don’t stay with you, they churn. That’s not real growth. So I’m not a big believer in buying growth, because you can’t really tell if you’ve achieved product-market fit.