For investors, one factor will almost always stand head and shoulders above the rest: Your TAM (total addressable market) needs to break at least $1 billion.
But alongside a massive addressable market, investors are also looking to see that you have existing customers, even they’re few in number, who truly love your product.
However, communicating the steps between your existing users (wedge) and your long-term potential as a company (TAM) can be incredibly tricky.
At TechCrunch 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 crucial to be “10x better” than the incumbents.
Startups must be able to demonstrate that they have users that love their product. But what does “love” really mean?
Faga and Pezeshki believe that startups need a framework to measure their initial push into a niche audience. They suggest running a survey with your first cohort of users that asks how they would feel should the product no longer exist. Anything below the 50% threshold — in other words, one of every two users should be upset were this product to stop existing — 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 on.
Faga described a founder she’s currently working with who is building in the beauty space, and they’re interested in applying what they’re building to the CPG market.
“We had to take a step back and say, ‘Let’s own beauty,’” she explained. “Let’s do that really well. Let’s repeat it. Let’s scale it. And then, that affords you the right to move into the CPG space, because what will happen is that the CPG space might take you in a totally different direction. You can eventually get there, but own beauty first. Do it really well. That gives you that graph that’s up and to the right and gets a lot of investors really excited.”
While maintaining focus on your niche and working to hit that 50% threshold of users who couldn’t continue on without your product, start paying close attention to your Net Promoter Score (NPS). Using that, find the group of users that are rating your product a nine out of 10 and charge them for it. If your NPS drops down to two, you don’t have product-market fit.