Finding product-market fit — the point at which a startup’s product achieves strong sales — has become increasingly challenging in the current AI landscape. While many startups are experiencing unprecedented growth, not all customers exhibit loyalty, and products can be replicated with greater ease than ever before. Anu Bharadwaj, a partner at Iconiq; Rajeev Dham, a partner at Sapphire Ventures; and Rahul Vohra, the founder of Superhuman Mail, addressed the evolving criteria for product-market fit during a recent discussion at TechCrunch Disrupt.
“It’s never been easier to secure a multitude of pilot projects, as numerous companies are willing to experiment with new offerings,” Bharadwaj remarked to the audience. “However, the transition from pilot to full production is the real challenge.” She noted that many founders present revenue figures to investors without clarifying the nature of those revenues. “Is it genuine ARR or merely a run rate?” she questioned. “There are various ways to obscure the truth.”
Recently, there has been considerable discussion on X regarding AI founders potentially exaggerating their ARR figures (which may refer to “annualized run rate” or the more reliable “annual recurring revenue”) to create the impression that their companies are performing better than they actually are. A prevalent tactic involves including pilot customers, who may only utilize the product for a brief period, in the annualized run rate revenue calculation, suggesting that this income will persist throughout the year. Bharadwaj emphasized, “It is undoubtedly in your long-term interest to be transparent and clear about the quality of your revenue.” She advised companies to distinguish between hype and reality when assessing their revenue quality. For instance, it raises a red flag if a small number of customers account for a significant portion of a company’s revenue or if these customers can easily switch to another vendor for a more competitive price. “Churn rate and retention are heavily influenced by that,” she added.
Consequently, Vohra recommends that startups monitor customer engagement and dollar retention, particularly for consumer products. “Determine what benchmarks are considered good, great, and excellent for your industry,” he stated. For instance, at Superhuman, he mentioned that the company tracked ARR but also developed an internal metric called “delighted ARR,” which represented the ARR derived solely from customers who were highly engaged with the product. He explained that this metric allowed them to gauge customer stickiness and predict customer longevity. “Those users are still users, those companies are still customers,” he noted. “We focused intensely on serving that specific segment of our user and customer base.”
The panelists also identified positive indicators that suggest a startup has successfully achieved product-market fit. Vohra advised engaging with customers to ascertain the value they derive from the product and their feelings about potentially losing access to it. He urged founders to be honest in evaluating those responses. “If you’re at 15%, 14%, 13%, or lower, consider a complete pivot. Retain the codebase, keep the team, and create something entirely new. But if you’re at 20%, you can definitely optimize your way from 20% to 40%,” Vohra explained. Dham added that it is crucial for founders to differentiate between having a vision and establishing a viable business. Particularly at the seed stage, Bharadwaj noted that pivoting is acceptable. She does not even seek product-market fit at that point but rather assesses whether the founder possesses a plausible thesis and the adaptability to navigate changing circumstances. Dham further remarked that he places even greater value on founders who have undergone multiple pivots, as it demonstrates their ability to make difficult decisions in this rapidly evolving environment.
Thus, product-market fit is a concept that founders must continually redefine and earn anew. “Even at a billion in revenue, these companies are still re-establishing their product-market fit,” he stated. “Continuous innovation in products is essential.”
