For investors, a factor will almost always be head and shoulders above the rest: your TAM (total addressable market) should break at least $1 billion.
But in addition to a huge addressable market, investors also want to see that you have existing customers, even if they are few, who really love your product.
However, communicating the steps between your existing users (wedge) and your long-term business potential (TAM) can be incredibly tricky.
At MovieUpdates Early Stage this month, we sat down with Felicis Ventures partners Viviana Faga and Niki Pezeshki to talk about scaling, product-market fit, and why it’s critical to be “10x better” than the incumbents.
Startups must be able to demonstrate that they have users who love their product. But what does ‘love’ actually mean?
Faga and Pezeshki believe that startups need a framework to measure their initial push into a niche audience. They suggest conducting a survey with your first cohort of users, asking how they would feel if the product no longer existed. Anything below the 50% threshold – in other words, one in two users would have to be upset if this product were to cease to exist – isn’t good enough to move on to the next step.
Even then, they warn, it’s important to stay focused on the niche you’re building for before moving forward.
Faga described a founder she currently works with who is building in the beauty space, and they are interested in applying what they are building to the CPG market.
“We had to step back and say, ‘Let’s see our own beauty,'” she explained. “Let’s do that really well. Let’s repeat it. Let’s scale it. And that gives you the right to go into the CPG space because what will happen is that the CPG space can take you in a totally different direction. You can get there eventually, but possess beauty first. Do it really well. That gives you that chart that’s up and to the right and really gets a lot of investors excited. †
As you continue to focus on your niche and work to hit the 50% threshold of users who couldn’t move on without your product, keep a close eye on your Net Promoter Score (NPS). Using it, find the group of users who give your product a 9 out of 10 and make them pay for it. If your NPS drops to two, you have no product-market fit.