Elad Gil on how he spots product-market fit
Elad is a famed angel investor, who has experienced first-party what success in tech startups looks like. In my mind, although he hasn’t framed it that way in the interview, he clearly is enumerating (in points #2, #3 e #4) ways to spot product-market fit:
EG: If I look back at data in terms of what has actually worked in the set of companies I’ve invested in —
1. They have launched a product or at least had a crappy demo when they started raising money
And if the fact that they actually build something, even if it was awful, showed a mentality of going and building. So that’s one key thing. Just investing on a PowerPoint deck tends not to work well. Although I think I invested in OpenDoor and Wish before they had much built. But even then there was sort of something going on.
2. Organic growth, even if it’s a very small base
Most early-stage investors really discount early tractions. They say, “well, that went from 100 to 120, to 150 over 2 or 3 months. Is that real?” But in reality, if something is growing 20-30% a month organically, just through word of mouth, usually there may actually be something there. So I think that’s a clear sign, even if it’s tiny numbers.
3. On the enterprise/SaaS side, 1-2 major brands are using them that just found them randomly
That’s usually a very good sign. When I invested in PagerDuty, which is now a very successful company on the Ops/Infrastructure side, they had, I believe, Amazon and Apple as their customers. I don’t know if they still do, but, you know, they 7-8 years ago they did. They didn’t have a sales force, it was just 4 engineers. They were just getting traction because the product was so good that random people at big companies were finding it and adopting it, even if they were sort of overruling their own internal IT to do it.
4. Utilization, even if the product is really broken
If something looks really janky — and, you’re like, how can anybody use this? — but people are still using it, there’s usually a very good sign. I’d say, for example, Snapchat in their early days was kind of like that. Most people even in that demographic didn’t get it and it was still just working, even though the UI was kind of rough, and tough to get into and everything else.
I mean, there are other obvious criteria, like talking to customers and seeing if there’s real traction, or looking at metrics, like negative churn. But in terms of the things that were just high-level data that I normally wouldn’t have looked at, those are the things that in hindsight really correlated.
Later in the same conversation, he adds another key point on product-market fit that may sound counter-intuitive to many people — but it does match with my own experience:
EG: The other non-intuitive item is: in general, things that work tend to work early.
You always talk about people grinding for 5 years until it finally works. In enterprise or in highly regulated areas, where it takes time to build a product, that’s very true. But in many cases, if people need the product, the second the product is available, it kinds of starts moving.
You need to do some iteration to really get to escape velocity. But at least the very biggest things tend to work early.