Learning from Failure (Part 1) – ‘Growing without Product-Market Fit’

“Failure is life’s best teacher” – while a lot has been shared about the reasons for startup success, but to my surprise, not a lot has been shared about the reasons for failure. I believe the ‘mistakes’ of the past can be a treasure for a budding entrepreneur. Also, I, as an investor, have been most valuable (or so I believe!) to entrepreneurs while sharing failed initiatives/strategies or thoughts on ‘What NOT to do?’ rather than ‘What to do’? – While no two startup paths are alike, I have found that smart entrepreneurs extract relevant learning and course correct.

In the spirit of making some of the ‘mistakes’ well-known, I expect to capture through the ‘Learning from Failure’ series some of the obvious ‘mistakes’ – ‘Growing without Product-Market fit’ (part 1), ‘The Inconsistent Value Chain’ (part 2 coming soon), ‘Capital allocation – invest behind growing the Moat’ etc – while far from comprehensive, the aim here is to create a valuable repository of startup mistakes.

The following is a story of a B2C marketplace business that was in ‘hyper growth’ mode till it flew off a cliff. The company was founded by a stellar team that came from some of the leading global internet companies and was backed by marquee venture capital funds. 

Growing at Breakneck Speed…..

My first meeting with the entrepreneur had me salivating! – the market opportunity was large and under-penetrated, the founding team had developed a solid product, developed a strong fund raising pitch and most impressively GMV growth was off the charts – to the extent that, I had not witnessed such growth before! The company had grown 25x over the last 12 months to a multi-million dollar GMV run rate. The projections were equally aggressive and if historical performance was any judge of future performance, the company was well on its path to beat projections. 

Double clicking on the quality Product-Market-Fit

While the growth looked exciting, I ended up double clicking on strength of the product-market fit using the ‘CURW’ framework (More about the framework here – https://thenetwortheffect.com/2018/02/19/measuring-product-market-fit-is-your-startup-curwing-in-the-right-direction/)

  1. Conversion (%) and Conversion (%) trend – poor conversion (%) and more importantly, reducing conversion(%) trend was worrying – it implied that the company was heavily dependent on growing traffic to keep the growth engine firing and also, the ‘funnel leakage’ meant lack of consumer trust on the platform. In order to keep Consumer Acquisition Co (CAC)st low the company needed to significantly grow organic traffic to the platform.
  2. Usage – the usage on the platform was low at 1.8x transactions per customer per year.  For a low AoV product and frequent use case in the offline world, this number was a concern.
  3. Retention – customers were not sticky and the platform was heavily dependent on new customers to keep growth humming.  
  4. Word of Mouth – share of paid customer acquisition was high. Any change in competitive spending would have spiked consumer acquisition cost – at low conversion (%) a small increase in cost of traffic can cause a huge spike in consumer acquisition cost.

Poor ‘Product-Market-Fit’ So what?

Following are some of the answers I hear in response to a poor PMF –

  • How does it matter? – Product Market Fit is a reflection of two important things (a) Measures customer love – how badly does customers want the product and advocate your product to others? (b) Capital Efficiency – early reflection of how the Unit Economics of the business are going to shape up. In the above case, low conversion rate(%), heavy dependence on paid marketing, low retention (high churn) and poor usage metrics point towards a long CAC payback period and low Customer Life Time Value (CLTV). A long CAC payback period implies high cash burn while low CLTV/CAC ratio means poor profitability!
  • We are market leaders – being the market leader for the sake of it has little meaning! (apart from bragging rights) Key question is the impact of category leadership on customer switching & acquisition cost and the company cost structure? – With no switching costs coupled with little economies of scale, category leadership had no real benefit for the platform.
  • We can alter ‘PMF at scale’chasing PMF at scale is excruciatingly difficult and painful. The number of battles an entrepreneur can fight at any point of time is limited but with pushing out proving ‘PMF at scale’ approach results in a multi-enemy war – high cash burn, reduce growth targets to cut burn, harder to raise capital, potential down rounds, finding it difficult to hire/retain high quality talent, customer churn at scale making growth even harder, competition with better PMF raises capital! In my limited experience, this has been extremely hard to solve for and a big reason for the same is the following point. High valuation adds ‘fuel to the fire’ – ‘a large capital raise at a steep valuation’ is just what the doctor ordered at this point or maybe not! The large fund raise can hide all challenges with regards to the poor PMF and can help the entrepreneur continue to chase lofty growth targets – this is further pushed by the incoming investor who just invested with continued expectations of high growth. At this point, the entrepreneur finds it extremely tough to change course – the focus has now changed from solving the customer problem to chasing the next fund raise!


To complete the story, the company soon found it very difficult to sustain high growth given the high cash burn and fleeing customers. New and existing investors found it very difficult to support the company beyond a point. The entrepreneur cut growth to increase life and eventually sold the company for less than cash invested.

To Summarize –

  1. Rapid Growth Does Not Equal To Product Market Fit
  2. Focus on defining, tracking and improving key metrics that prove strong product-market fit
  3. Solving for PMF at scale is 100x more difficult
  4. Market Leadership for the sake of it has little or no meaning – does leadership impact customer switching cost or reduce operating cost?
  5. If your ‘CURW’ metrics are strong, please do give me a shout!
  6. Everything starts from nothing!

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