Before vs After PMF
A few weeks ago, we met with two portfolio companies on the same day and had two completely different conversations.
With the first one, we talked about really small things – how has the product improved from last month, how many customers do they have, why are customers using their product, how are users finding out about them.
The second conversation revolved around topics such as what drove revenue growth, what do the margins look like, what new products they plan to launch, or which new market or channel they will open next.
As pre-seed investors, we have an extremely unique vantage point into the progress of startups. We see clearly how things change from before to after PMF. So, I want to share how we’ve seen founders operate at either side of the divide: what they get right and where they go wrong.
What PMF actually means
But first, I’ll briefly explain what I mean by PMF so that we have the same frame of reference. PMF is three things coming together:
- A product that customers genuinely want to use, not just try once
- A deep understanding of who those customers are and how to acquire them
- A clear way to monetise and visibility into the unit economics
The most important principle here is that it has to be all three. Which means the biggest pitfall is having one, or even two, and considering that as PMF.
Before PMF
At this stage, you have one clear goal: to achieve PMF. I acknowledge that there’s ambiguity around how to define PMF and it could mean different things for different startups. But still, you can work backwards from certain metrics and set a timeline to get there.
So, we’ve seen the best founders do one of three things: finding customers, talking to customers, or building what customers want. That’s it, everything else is a distraction. That’s because the path to finding PMF is essentially building the feedback loop between the product and the market, and iterating through that as fast as possible.
Most of our conversations are about reinforcing these priorities. We are constantly asking: who are your customers, what are they using you for, how are you building the product for them. Once in a while, we push back when they want to grow because these things aren’t fully clear. We also advise them to be as lean as possible and use capital as a constraint as they figure things out.
The single biggest mistake, and the most common one that founders make at this stage, is scaling before they have PMF. I’ll share a couple of instances that we’ve seen:
- A platform business tried to scale the demand side without having enough supply. While they were able to get customers, most of them went away simply because they didn’t get what they needed.
- A consumer tech product had some customer pull so they started to scale but their CACs went up and churn increased because they didn’t know deeply enough why users were using the product.
The cost of this mistake is inevitable: raising the next round becomes difficult. You either raise at unfavourable terms, or fail to raise, in which case you either have to shut down or pivot to a lifestyle business model.
After PMF
Post PMF, the goal completely flips. The objective is to become as large as possible, which by itself is a moving target. Much later, profitability comes into the picture, but for all practical purposes, the goal for many years is growth.
So you work back from revenue targets. You need to hire people, train them, and organise the startup into defined functions and teams. Your focus shifts from not only acquiring customers to also retaining them. Your product starts to become deeper – more features, newer products or services. Distribution goes from a single channel or strategy to multiple channels and multiple strategies.
Counterintuitively, the biggest challenge to growth is being able to keep up. The magical and scary part about PMF is that there’s so much demand that the startup simply doesn’t have resources to fulfil it. As a result, most founders try to grow within those constraints instead of trying to elevate them. They still grow fast but sometimes, not as fast as they potentially could.
I know that there are logical reasons to do it: growth depends primarily on being able to continuously raise external capital, which is always risky, as investor focus and macro conditions change, profitability becomes an important consideration while scaling so growth cannot come at the cost of simply burning money.
However, here’s my simple argument: firstly, it’s extremely rare for startups to work so when they do, founders should do all they can to scale; secondly, when things start to work, most startups have a limited window of time before competition, newer startups, or evolving incumbents start to catch up.
I’ll illustrate this through Zepto as an example. They came up with 10-min delivery but soon after, started to see intense competition from Blinkit, Instamart, and others, who were quick to copy the model. Would Zepto be where it is if it became conservative?
The Real Test
PMF is an important inflection point and founders need to evolve with the startup. I suspect that the most difficult part of the before-after is psychological.
On the path to PMF, you’re constantly iterating but it’s hard to tell how far you’ve come. The progress made internally isn’t visible to outsiders. However, there’s always external pressure to make it more tangible. This pushes some founders to convince themselves that they have PMF when they don’t.
But things flip completely post PMF. From having to stay small to needing to grow bigger, from working with limited capital to getting all the resources you can, from doing everything yourself to building teams and functions. The same things that helped you achieve PMF can become restrictive to growth.
The only way to navigate this is through great self-awareness about what the startup needs from the founder, and the willingness to adapt accordingly.