A framework for finding product-market fit | Todd Jackson (First Round Capital)

Todd Jackson

Finding product market fit is the single most important thing that your startup does in the first three years, and it's just underexplored and it's just under explained as a topic. You've been working on a product market fit framework. We've published dozens of articles on the first round review and we have found a very consistent set of patterns, demand, satisfaction and efficiency. But the interesting thing is that you don't go for all three of them. From the very beginning, there's essentially four.

Lenny Rachitsky

Levels of product market fit. Nascent, developing, strong, extreme. Roughly 60% are never going to get past l two. These four P's essentially what you should try to change. If you're stuck, you've got the Persona, the problem, the promise, and the product.

Todd Jackson

Lattice kept the first one but changed the others. Vanta changed all four. Curing level three tells me level two is basically your pivot from I'm just grinding selling pitching. This is where it starts to get fun.

Lenny Rachitsky

Today, my guest is Todd Jackson. Todd is a partner at the legendary VC firm First Round Capital. I rarely have VC's on this podcast, but as Todd shares at the top of this episode, Todd is a very special VC. Prior to moving into venture, he was product lead for Gmail for four years. He was product manager of Facebook's newsfeed, photos and groups, including leading a major redesign of the newsfeed.

He's also director of product management at Twitter and vp of product and design at Dropbox. He's also a founder and sold this company to Twitter. This episode is a very different and special kind of episode. Todd and the team at first round have spent the last year looking at all of their data and the journeys of the hundreds of startups that they've worked with over the years and through that have put together a very practical and very actionable framework to help founders find product market fit. They're turning this framework into a three month program for founders, and in this conversation, Todd shares an exclusive peek into the program, in particular, the stages of product market fit.

We talk about how to know which stage you're in, what to do if you're stuck in that stage, and also what you can change in order to get unstuck if you're a founder or building a new product within a company and feeling like you're not making as much progress as you'd hope, you will find tremendous value in this conversation. With that, I bring you Todd Jackson after a short word from our sponsors. And if you enjoy this podcast, don't forget to subscribe and follow it in your favorite podcasting app or YouTube. It's the best way to avoid missing future episodes, and it helps the podcast tremendously. This episode is brought to you by work OS.

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That's getepo.com Lenny Todd thank you so much for being here and welcome to the podcast Lenny. I'm excited to be here. Thank you for having me. So, first of all, just to mention, you're a vc, which is very rare for this podcast, but you're very special. We see you have a deep background in product, and I thought it might be helpful just to give a little bit of context on your product background, kind of your product bonafides, so people get a real sense of just how legit you are as a product thinker.

Todd Jackson

Yeah, you got it. So I am a VC. I'm a partner at First Round Capital now, and I've been a first round for four years, but I was not a vc before first round. So I started a company in 2013 called Cover, and that was actually funded by first round eleven years ago. That's how I got to know first round.

Yeah. And before that I had worked on Gmail as the product lead kind of in the early days, you know, early two thousands and at Facebook. And then I started covering and we ended up selling cover to Twitter in 2014. And I worked on a bunch of different products at Twitter and then I was the vp of product and design at Dropbox. That was 2015 to 2018.

So I have always loved product. And that's actually the reason now that I love being a seed stage vc, because I love investing kind of at the earliest stage, founders who are pre product market fit and then helping them get there. And I just kind of love doing that over and over again. I feel like we could have a whole other podcast episode on why you decided to move into venture versus staying product, but we're going to stay focused. So the reason we're here is that for over a year, you've been working on a product market fit framework.

Lenny Rachitsky

Essentially a framework to help founders and product teams find product market fit, which we should talk about this. But just like this is the most important thing you got to get right as a founder in a product team, is finding product market fit. I got a peek at this framework. I love it. I love the way you've structured it, the way you're thinking about it.

So what we're going to do today is walk through this framework in depth. First, I just want to spend a few minutes on setting a little context just so people understand who this is for and how to think about this. So maybe a first question is just why do you believe people need a framework for finding product market fit? And just also, if you want to touch on why is product market fit so important? Why is that something people should even be thinking about?

Todd Jackson

You know, the thing about product market fit is that I find it's mysterious to a lot of people, and people tend to think about it purely as an art rather than a science. And all the advice that you find out there on the Internet is very general when it comes to product market fail. You'll know it when you see it, you'll know it when you have it. It's not specific. And there's so many other startup topics where there is good content on the Internet, like hiring your first salesperson, running board meetings, stuff that is specific and tactical, but there isn't that much content around product market fit that is that specific.

And so I think that's actually why, you know, like Rahul from superhuman is kind of well known for his approach to finding product market fit. That was published on the first round review in 2018, and it was like immediately popular and interesting to people. And I think the reason is because it was specific and because it was tactical and it brought a little bit of the science to something that people thought was just an art. And I think it's why your content is really popular too. Lenny, you and I worked on this product validation article together a little while back, and the seven part series that you did on B, two B SaaS companies and the PMF benchmarking data that you had.

I think it was how long it took to get to a product and a customer and to product market fit. That was super well read and there just isn't that much good specific content about this. But like you said, product market fit is the single most important thing that your startup does in the first three years. And it's just underexplored and it's just under explained as a topic. So we felt this was a very important thing to do, something worth focusing on.

And I've personally talked to hundreds of founders about this topic. We've published dozens of articles on the first round review. We call this our paths to product market fit series, where we interview founders about the early days. And I'm just always interested in what are the patterns. If you talk to enough successful founders, and in this case it's going to be enterprise founders, and you ask them, what did you do in the first six to nine months of running your company, of starting your company?

What patterns emerge from that? And we have found a very consistent set of patterns and that's what we decided to base our framework around. Amazing. And I think you're such an interesting Venn diagram of exposure to develop something like this one. You have a deep product background, you started a company, you see tons of startups going through the journey, many succeeding, many not.

Lenny Rachitsky

So I get why, one, he wanted to do this and why I think this is going to be so valuable to a lot of people. You talked briefly about why product market fit is so important and maybe might be helpful just to share a little bit more. Just like why is this something people should be so obsessed with? And why did you spend so much time developing this? I think as a founder, there are so many things you have to do.

Todd Jackson

You have to pick a market, you have to find a co founder, you have to hire a team, you have to raise funding, you have to build a product, you have to sell a product. Sometimes it gets lost that actually the only thing that matters in the first couple of years is finding product market fit and actually what we define as extreme product market fit. And ill go into that, because if you find extreme product market fit, the momentum just carries you and the market pulls you along. And its easy to know what to build because youre building the thing that your customers want and its motivating as a team, it's easy to hire people. Everything becomes easier if you find product market fit.

It is the thing that propels the company. And so we work, you know, we are a seed stage venture firm. We tend to work with very early founders who are pre product market fit. And the truth, kind of the hard truth about it is that most of them don't get past the first couple levels of it. Like the majority of startups do not get past what we call level one product market fit, or level two product market fit.

And I'll go through and define all that stuff. They get stuck at one of those first couple levels. And if they can unlock kind of the right product and the right way to explain it to a customer and make a customer deeply satisfied, and there's enough customers out there like that, it just pulls the whole thing along. Who's this framework for? Specifically for people that are listening, how do they know if this is for them or not?

This is for early b, two B founders and specifically founders who are doing something that is more sales led than bottom up. I think bottom up is its own kind of world. It's closer to consumer product development in my mind, and I have done consumer products, consumer product, I think there is a little bit more alchemy involved. It's about having great taste and finding the right thing at the right time. And it's like catching lightning in a bottle.

I think the good thing about enterprise and specifically sales led b two B, is that there is more science to it. And so it is for sales led b two B founders who are in, let's call it the first six to nine months of starting their company and want to set the foundation for product market fit. Like right from the beginning. Awesome. Okay, so b two B founders, sales led in the first six to nine months of their journey.

Lenny Rachitsky

Awesome. That's right. Yes. You talked about the science of this. I imagine you don't want to over promise this is going to help you find product market fit.

Step one, two, three, profit. How do you think about just what the benefits of this are and how people should think about the chance that they will find product market fit at the end of this journey? Following this framework? We cant guarantee success here. I just want to contextualize that finding extreme product market fit is very, very hard.

Todd Jackson

And what we are trying to do is increase your odds. Increase the odds, reduce the role of luck, give you a framework and way of thinking about the things that you need to do. I think that that can increase the odds. Like I said earlier, the majority of startups are sort of getting stuck at these first couple levels. I think if you know what the path looks like and you know what the levers are at your disposal and you know, sort of what you need to aim for, I think we can get more of these companies to kind of like level three and level four product market fit, which is where you really want to be and where you have a very valuable company.

Lenny Rachitsky

Perfect. Okay, final question. You launched a whole program for founders to go through and learn all of this in depth, many weekly kind of program. We're going to be covering a lot of it here for folks that want to go a lot deeper and actually go through this program, talk about how they find this and how this program works. Yeah, so we launched a new program and we call it product market fit method.

Todd Jackson

It is designed, like I said, to help early b two B founders increase the odds of finding product market fit. It's totally free. It's a very intensive program. You can see all the details at pMF dot firstround.com and the application deadline is May 7. The program starts on May 29.

And we actually ran a beta version, like a test version of this last year, late last year with eleven founders. I think probably some of you know, Lenny from Stripe and Plaid and Airbnb and Twitter. And the feedback was really, it was great. It made me feel very good. Like one of the founders was like, I feel like these 14 weeks saved me two years of time in what would have been kind of wandering through the desert.

Theres eight sessions in the full program and the first one is the one were going to do today. The first session is on what we call the levels of product market fit. The second one is on customer discovery. We actually refer to it as dollar driven discovery. We get very specific about not just the normal way of doing customer conversations and customer discovery, but how do you find that a customer is willing to pay money for this thing and a lot of money?

We talk about market validation, product positioning. We do a section on design partners because I think a lot of founders have questions about that. How do I find the right design partners? What's the right way to structure an agreement with them? How do I convert them to paying customers?

All that stuff. We talk about product iteration and pivots. I refer to this stage as the grind, the grind of product iteration. Then we spend a ton of time on founder led sales. And the reason that we do that is we really like working with very technical founders, builders, people that are either engineering background, product design, data science, people who are builders.

So that's the program in a nutshell. And like I said, any founder working on a new B two B SaaS company, welcome to apply. And then bonus points if you are technical. Like I said, you have a clear product idea or a hypothesis, but you're less than six to twelve months into building the company. I love how incentives are so line here.

Lenny Rachitsky

You help companies find product market fit. First round does great, everyone does great. It makes so much sense to build something like this. One thing I can't help but mention or ask about is you said it's an intensive program. How do you find founders have time to do something like this and also be building their company?

I know it's like this helps them build, but I guess how do you just think about they have so much to do, they have time to do a program like this. The way that we think about it is that the program roughly takes about 10 hours a week for each founder. And it's 10 hours of work that you were going to be doing anyway, right? It is literally, you're talking to customers, you're improving your positioning, you're sort of doing critical thinking about your market and what you should be building. And so I just, what I think, the way I think about it and the way I've heard from the eleven founders that went through it is it, it just added structure to the, what I was doing anyway and it actually made me more efficient.

Last question, you mentioned that it's free. Uh, how does that work? How does that work for everyone? Yeah. So it's 100% free, and it literally costs you $0.

Todd Jackson

We give you $0. We own 0% of your company. And that's pretty different than, I think, a lot of other programs out there. And this is just something we do over the years, we've run first run angel track, which I know you were in, Lenny. We've run the first round review for ten years.

We make these things free. And our belief is that you have to create value in the ecosystem. You have to put stuff out in the world that is useful. And if you can create that value, create enough value with the audience, then you'll be able to capture that value at some point. And so we think there's a win win here.

We get an inside look at some of tomorrow's great companies, and they get an inside look at first round. Got it. So companies don't have to take money from you guys to be a part of this program. That's right. Okay, let's get into it.

Lenny Rachitsky

Let's talk about this framework, maybe just as a broad strokes overview. How does this framework work? How do companies find product market fit? Yeah, so the framework starts with a very simple idea. That is, product market fit is not a one size fits all thing, and it doesn't just happen overnight.

Todd Jackson

And for b two, b company specifically, it does tend to follow a repeatable pattern. And so we start with defining the ultimate goal. The ultimate goal is to get to extreme product market fit. And we have, like, a precise definition for this. Let me.

Let me read it to you. So, extreme product market fit is a state of widespread demand for a product that satisfies a critical need and, crucially, can be delivered repeatably and efficiently to each customer. And so there's sort of, like, three key ideas in there. Demand, satisfaction, and efficiency. And I think efficiency is worth highlighting because that's what most people would leave out of their definition.

Right? You talk about like, oh, it's a product. People like it. You know, that's good. That's product market fit.

But if you look, there's products out there like, I was a big fan of wework. As a customer of WeWork. I'm a fan of Casper and these other products. Those products managed to achieve customer satisfaction and demand, but they never got the efficiency right. The whole business just never worked at scale.

My partner, Brett Burson, at first round, he gives this example of the $100 vending machine. And I really like this example, which is, imagine I built a vending machine and I stuck it in the middle of San Francisco. And you walk up to this vending machine and you put a dollar in and $100 bill comes out. And that's the product that would have insane demand. There would be a line at that vending machine, I think people would be extremely satisfied.

They'd be like, this is awesome. The retention would be very good. I'm sure they would come back tomorrow. But the whole thing is ridiculous. The whole metaphor is ridiculous because it's just not viable to do something like that.

And yet you see a lot of startups kind of do this. They're basically with their products giving away $2 for $1, and it gets them pretty far. But that's not real product market fit. That's one of the reasons that we think efficiency and how you think about the economic model of what you're doing is very important. And then this other aspect that I like, which is we have this concept that we call the marginal customer and the next incremental customer you're going to get for your company, for your product.

And if you have product market fit, and as you are progressing along this journey, the marginal customer should be getting easier and easier and easier to get easier to acquire them, easier to give them good service with a good product. And that means your efficiency is sort of increasing along the way and your product market fit is strengthening. So you've got to have all three of those things, demand satisfaction, efficiency. But the interesting thing is that you don't go for all three of them at once from the very beginning. And so product market fit, it happens in the sequence of levels.

It happens over multiple years. And for the best enterprise companies, I would say they tend to reach extreme product market fit in roughly four to six years. There's some variants, but roughly four to six years. And so we label these four levels. We say level one, product market fit is nascent product market fit.

Level two is developing, level three is strong, and level four is extreme. And that's where you want to get. And along the way, you're sort of trading off these three dimensions, satisfaction, demand and efficiency, because they're intertwined, right? Like you could do a bunch of, you could spend a bunch of money on marketing and that's going to increase your demand, but you're decreasing your efficiency if you do that. You can invest a bunch in efficiency and automating a whole bunch of stuff, but that actually might harm the customer experience and you're reducing satisfaction.

So that's an interesting thing I think, is you're actually making trade offs at each level. And what you should optimize for at each level is different. And so we talk about all these signs, like whether you're getting stuck at a given level. How do you get unstuck, and sort of how do you progress along this path? Amazing.

Lenny Rachitsky

And we're going to go through each of these. And the idea, as a listener, what I'm thinking is you're probably in one of these buckets. What we're trying to do is help you out of that bucket and help you move further up the ladder to the next level. So just to summarize my notes here, so there's essentially four levels of product market fit. Basically like this.

The strength of product market fit that you have. Right? Nascent. Developing strong, extreme. Yes.

Okay. And then you have three dimensions within each of these levels. Satisfaction, demand, inefficiency. And we're going to talk about what all these mean and how you use these. Let's talk about level one, nascent product market fit.

What does that look like? What do you do when you're there if you're stuck? And what are some examples of companies that felt nascent? Product market fit. Yeah.

Todd Jackson

So, okay, level one, nascent. So at this point, you're probably like a pre seed or seed stage company. You've got less than ten people on your team. And at level one, your job is to find three to five customers that have a particular problem that is worth solving and to deliver them a satisfying solution. And you got to pick a problem that is both important and urgent to them.

And the solution that you deliver needs to satisfy some kind of promise that they care deeply about. Okay, so of the three dimensions that you just recapped, Lenny, it's satisfaction first, demand second, efficiency last. When you're at level one, it's actually okay to be inefficient at this stage if it helps you uncover something that delivers an insanely good customer satisfaction. And so I think that one of the best examples I can think of that is this company called Vanta. Love.

Lenny Rachitsky

Vanta, also a happy sponsor, and I'm an investor. What a great example. What a great example. So Vanta was founded in 2016 by Christina Cacioppo, and she had come from Dropbox, and we got to work at Dropbox together, which was awesome. She was the PM of Dropbox paper at that time.

Todd Jackson

And so Vanta, it's a company that does compliance, automation, continuous monitoring. Most startups think of Vanta as how you get a soc two, but they didn't do that at first. And I remember in 2018, Christina and I went on a walk around the South park neighborhood in San Francisco, and this was the first time I heard the idea of Vanta. And she had actually, in 2016, 2017, tried a few other ideas. She had this smart speaker that would record meetings and it would send meeting summaries over slack.

Lenny Rachitsky

B two b Alexa is what she called it. I remember B two b Alexa. And she had this other idea, something about drop shipping, but she didn't know anything about drop shipping. And she has just sort of been in this mode of like we're building stuff and then we're seeing if anybody wants it. And then she realized that wasn't working and she changed what she was doing and she started talking to potential customers and she was very interested in the idea of security and why a lot of startups didn't, like, use any security products.

Todd Jackson

And she was talking to security engineers and cisos and just CTos at startups and she would ask them, what is the thing you hate most about your job as it relates to security? And over and over and over they would say, I hate filling out the security questionnaires. I hate doing the compliance audits. It's like so much grungy manual work. I'm in there filling out spreadsheets and taking screenshots of my AWS account and the whole thing just kind of doesn't make sense.

And she had actually felt this herself right when she was on Dropbox paper. And the experience of getting a sock two was onerous, right. And the reason that she needed to get it is because we wanted to start selling Dropbox paper into enterprise. And so she said to me, there's this pain out there. I think I can solve it.

And I think there might be a revenue unlock. And I was like, what do you mean by that? And she was like well ive got these first few customers or design partners, pseudo customers, its segment and front and figma and this is 20 1718. So these companies were smaller at the time, right? Not sort of the big companies they are now.

And she was like yeah, theyre trying to sell into Fortune 500 companies. One of them is actually trying to land a fortune ten right now. And they said the thing thats holding them back is they dont have compliance certification, they dont have a soc two. And I told them, hey, what if I do that for you? And they were like, oh, you can just do that.

And she was like, yeah, and she did it and they landed the deal. And it was one of the clearest examples to me of a product that satisfies a promise. This product is going to unlock revenue for you. You are going to be able to land this enterprise deal. And so I think they just did a phenomenal job of that.

And that's the kind of thing that you have to. That's what you're looking for when you're at level one, a problem that really matters to like three to five customers. That specific example, I think she delivered like a doc, like a spreadsheet. There was no product. She just manually filled out a spreadsheet.

And give it to them completely manual. Like she was the one behind the email address, you know, like sort of posing as the AI but doing it herself. And that's, I think that's revealing of, like, it's okay to be inefficient at level one as long as you're delivering incredible satisfaction. Yeah, I think I was just going to say that this is the ultimate example of efficiency is not important, which I love is what you're pointing out at the step. I know you're going to share another example, but just to summarize what this stage feels like from earlier, when you talked about essentially if less than ten people, you're trying to find three to five customers.

Lenny Rachitsky

I think that's so important. Like, you're not trying to find tens or hundreds, you're just like three to five people. And that customer element, I imagine, is you're implying they're paying you money. Yes, they're paying you money and you're delivering a product that solves a problem for them. And the product could be potentially a spreadsheet or like super wizard of Oz at this point even.

Todd Jackson

Yeah, that's okay. At this level. Like, I know ramp actually had barely a product when they started selling. Initially, they had like someone just updating things behind the scenes on these dashboards. And then you talked about the problem needs to be important and urgent, which connects to people pay attention to a startup that they don't trust or know anything about, because the problem is that important and urgent.

Lenny Rachitsky

And you also mentioned as to satisfy a promise you're giving them, we'll solve soc two for you. And then you actually accomplish that. That's right. Is there anything else, maybe as a benchmark that tells you you're at this step of product market fit? Yeah.

Todd Jackson

So like I said, you kind of pre see less than ten people. Probably your demand source at this stage is mostly people. You know, it's like friends and family, it's your network. Maybe it's VC's, you haven't probably done a lot of like, you know, cold outreach at this point. And it's hard to find customers.

Right? Like you're trying to get to three to five. It probably takes you 20 warm intros to get one. Right, something along those lines. So maybe to get to three to five, it's like at least 50 conversations.

That's very normal at this stage. Cause you're just trying to find the right problem and find customers who have it. You're probably in the like $0 to 500k ARR, like somewhere in that zone. I would say that you're at level one. And then there are metrics to track efficiency, things like burn multiple gross margin, Nrr.

All of these things, all of them are just not applicable at this stage. It's too early and you shouldn't be worrying about that stuff. And so you want to be feeling this sense of progress that there are customers who need what you are building and the thing you are building works. And so conversely, the signs that we see, a lot of founders get stuck, and this is a very common level to get stuck, right? And so if you're sort of hanging out here for six months, nine months, twelve months, and there's yellow flags that are appearing, you're starting to feel stuck.

And so the yellow flags are something like, let's say your product disappeared overnight. Your customers wouldn't be super disappointed. Let's say you have a handful of happy customers. Let's say you've got four, four or five customers. But the most important feature is actually different for each one of them.

Right. That starts to look a little bit more like a consulting business than a product business, or it just feels incredibly hard to find the marginal customer, the next new customer, or your usage is low, the product is in their hands, but the usage is low, it's not growing that much. It lasts for six months. And this, I think there's a really good example. Jack Altman, who's the founder of Lattice, he founded Lattice in 2015.

We've talked to him a bunch on the first round, pass the product market fit and other things. For those who don't know, Lattice is a people management platform, but it didn't start that way. And most people don't know about this. Lattice actually started as an okr tool right back in 2015. Yeah.

And so Jack had just sort of seen this at other companies. He's like, okay, companies are doing okrs, but they're not very good at it. And it causes a lot of arguments among the executive team and the employees are non compliant. They think the whole thing's kind of dumb. So I can fix that with software.

The original version of Lattice was for managing okRs, and he was able to sell it. And so his buyer was the head of HR, right. And they said, okay, yeah, we'll give this a shot. And he had a couple companies using it, and they would use it for like one quarter, and then the next quarter would come around and they were like, it didn't go that well last time. I don't know.

Employees don't seem to like it. I don't know. And then the quarter after that, they were like, no, it was like, we're not buying this. We're not using this. Right?

And so Jack pulled off the pivot. Right. To people management. And the way that he did it was he actually kept the Persona. Right.

And so this gets into the ideas of the four piece, and I'll talk about this a little bit more. The four P's is our version of the four P's. You've got the Persona, the problem, the promise, and the product. And all four of these things kind of have to line up, right. Your product has to deliver a promise that solves the problem of your Persona.

And so Jack actually kept the Persona. He was like, ive gotten to know these heads of HR really well over the last six to nine months. I text with them, I go out to coffee with them. Im like friends with them, and I know them really well. This OKR thing just doesnt seem to be a big deal for them, but theyve got other problems that I could look at solving.

And the interesting thing was that timing, it was kind of like mid 2010s, performance management had started to come back in favor. It was of like this pendulum. Like there was a period of time where performance management was, like, really important. And then all these companies were like, we're not doing this anymore. And then the pendulum kind of swung back.

And around 2015, 2016 was that time. And so Jack literally showed them Figma mock ups like there was no product, right? But he's like, what if I could solve performance management for you in a way that is much more modern and much more employee friendly and manager friendly, and the whole thing's just going to work better. And the response was, like, off the charts and people wanted this thing. And I believe he sold his first five or ten customers with Figma mockups before he had built anything, really.

And so that, I think, is an interesting example of he was sort of stuck in the zone of people didn't love what he was doing. He kept the Persona, but he changed the problem that he was solving and the promise he was delivering through the product. And you see that this is like we do a whole section on pivots and when to pivot and how to pivot. And I think this is actually the best framework for this is the four p's. Like, you know, lattice changed, uh, kept the first one but changed the others.

Banta changed all four. Right. There are other products like plaid, that actually sort of kept elements of the product they were doing. So this, I don't know if you know the story of Plaid, but um, you know, Zach Parrot was building. Uh, Plaid started out not as, as like a API for bank accounts.

It started out as a consumer budgeting app. Like it was a consumer app and it just supposed to help you save money and budget and stuff. And it just wasn't that popular. And founders kind of frustrated, but they had built this part of the product that enabled the app to connect to your bank accounts and had solved all the nitty gritty issues with that. And then they found that their friends wanted to license it from them.

So Zach had a friend at Venmo who wanted to license this and they got Robinhood at some point, Coinbase at some point. So thats another example of they actually kept a lot of the code that they had written. They kept the product, but they completely changed the other three piece. Instead of solving for consumers who have a problem with budgeting, we are going to solve for developers at fintech companies who have a problem connecting to bank accounts. It was a total flip of the four ps.

But thats why I really like this framework because I think it really helps founders think in a structured way about this. Todd this is amazing. Im so happy were doing this. I think this is going to help a lot of people. I want to move on to level two.

Lenny Rachitsky

But first, let me try to summarize some of these key elements. So these four p's essentially what you should try to change if you're stuck in this level or any level. And just to summarize, there's, you can change who you're targeting, the Persona, you can change the problem you're solving, you could change the way you're pitching it, which is the promise, is how you describe it, basically positioning. And then you could also just change your product. You mentioned Vantha changed all four.

Some companies change this one. Any advice for how to know which of these to change? Like what points you to change this versus change that is there anything that you've seen? I think different founders approach this differently. And I've seen a lot of founders who are build first and then sell.

Todd Jackson

And I've seen a lot of founders who are sell first and then build and they can both work. Right. I tend to gravitate towards the, like, I want to sell it before I build it because I really want the signal from customers and I want that to sort of be the guide and the oxygen that drives what I'm building. I find that very motivating. I also find it kind of easier.

Honestly, rather than guessing, like, oh, I'm going to write 50,000 lines of code and then see if somebody wants this thing. I think it's better to talk to a bunch of customers, know that, hey, if I had this thing, if I could build this thing, I know it would sell. I know these people want this thing. So I tend to approach it from that point of view. And therefore I focus on the Persona and the problem and the promise.

What is the promise that is really going to click for that buyer, for that Persona? And then the product's job is to satisfy those first three P's, really. And obviously those are much easier to change and play with versus rebuilding your product. So if nothing else, you should probably start there. I actually have a post with a bunch of awesome examples of changing the positioning, changing the Persona.

Lenny Rachitsky

And so we'll link to that in the show notes if people want more examples. Okay, finally, let me try to summarize kind of the stage. So I think it's important to know at this nascent stage, you're not like, there's not roaring product market fit. It's as you described, very nascent. You're like getting customers, but it's hard.

You said it's like 20 introductions to one sale, but you're like getting them. I know retool has a great quote. David has this quote about like every customer he got early on, he felt it was the last customer he's ever gonna get. No more people want this thing and it's always a struggle. So I think that's very normal is what you're describing.

The beginnings are rarely off into the right, and it's okay if this takes a while. You said that if it's something like, if you spent like twelve months at this stage, you're probably stuck in the stage. And signs that you're stuck in this nascent stage versus this is actually normal. Signs you mentioned are if you ask people if this went away and they wouldn't be disappointed. They'd be like, meh.

Alright, it's cool. You have many customers, but they're using different features of the product. So to you, the way you describe it, essentially they're just, you're like professional services for them. You're not actually building a product you can sell to a lot of people and then they're actually not using it often. Like they're buying, they're paying for it, like the lattice example, but they're not necessarily using it and they're going to churn pretty quickly.

Todd Jackson

That's right. Anything else you wanted to touch on there? Before we get to level two? The last thing that I'd add at level one is, um, there's this founder, uh, from a company called Persona. His name is Rick Song.

He's like super awesome. You know, Persona is a first round company. Uh, they do identity identity verification. And Rick's analogy, I just love it for level one is you don't want to get friend zoned by your customers like you, like where your customers like you, but they don't love you and they don't need you. Right.

And he was super paranoid about this in the early days of Persona. And his technique for doing this, which I really like is super simple, was he would just, he was very close with like his first five or ten customers, and he would go to them and sit them down one on one and say, I need your help. Like, it is very important to me that this company succeeds and does not fail. So I don't want you to be nice to me. I want you to tell me, is Persona like a necessity for your company?

If we went away, how painful would that be? If a competitor came along that charged half as much as us, would you switch to them? And he's really trying to get to the essence of, is Persona critical for you, or am I in the friend zone? And I just think that's a really great way of thinking about this. I love that story.

Lenny Rachitsky

It's like in a relationship, it's like the talk. Are we a thing? I love that. That's so good. The sooner you know the truth, the better.

And it's hard to hear bad news, but I love that. Just advice of just sit them down one on one. Let me tell you about Command bar. If you're like me, and most users I've built product for, you probably find those little in product pop ups really annoying. Want to take a tour?

Check out this new feature. And these pop ups are becoming less and less effective. Since most users don't read what they say. They just want to close them as soon as possible. But every product builder knows that users need help to learn the ins and outs of your product.

We use so many products every day and we can't possibly know the ins and outs of everyone. Command Bar is an AI powered toolkit for product growth, marketing and customer teams to help users get the most out of your product without annoying them. They use AI to get closer to user intent, so they have search and chat products that let users describe what they're trying to do in their own words and then see personalized results like customer walkthroughs or actions. And they do pop ups too, but their nudges are based on in product behaviors like confusion or intent classification, which makes them much less annoying and much more impactful. This works for web apps, mobile apps and websites.

And they work with industry leading companies like Gusto, Freshworks, Hashicorp and Launchdarkly. Over 15 million end users have interacted with command bar to try out command bar, you can sign up@commandbar.com lenny and you can unlock an extra 1000 AI responses per month for any plan. That's commandbar.com lenny. Let's talk about level two. So what does level two look like and what should founders be focusing on when they're in level two?

Todd Jackson

Yeah, so level two is developing product market fit. And your job at level two is now you've got to go from five satisfied customers to 25 satisfied customers. And so now you've got to start thinking about demand in addition to satisfaction because it is very hard to just grind your way all the way to 25 customers with sheer willpower. You can do that to like five, maybe ten. And we see some founders who just have phenomenal willpower and grit and grind their way to five or ten customers to get to 25 and to get beyond 25, like the product has to be doing a lot of the heavy lifting for you.

And so that is kind of the essence of this level. So, you know, if you're at this level, you probably, okay, now you're like seed or series a style company, maybe you've got up to 20 people at the company and you're starting to work on this demand source where you have the early signs of a scalable channel. And it's not just warm intros like from your vc's or from your friends. You're maybe investing in cold outreach and getting that to sort of tuned and humming. You might be investing in content, you might be doing community events, but the whole idea is you're trying to scale sort of the demand source.

It's still not easy. Like, you know, like a benchmark, we would say is that your sales conversion without a warm intro is still probably like 10%, something like that. Like first call to close one is like around 10%. If you get higher than that, that's great. But that's sort of benchmark for this level.

You're in kind of the like anywhere from like the ARR zone. That's sort of like a hallmark of level two. And you're actually starting to think about like efficiency metrics and sales metrics. Like you might start starting to be thinking about magic number, which is new ARR that you take in a period divided by the CAC you spend in that period. So something in the 0.5 to 0.75 range.

You want to get higher eventually, but thats pretty reasonable for this level. Youre just starting to think about retention. Youve been around for a year, so youve got renewals and you want those renewals renewing, maybe something like 10%, 20% regretted churn is okay. You dont want to be higher than that and you want your NRR to be at least 100%. And then things like gross margin and burn multiple, theyre still not the focus.

Those are the classic efficiency metrics. Theyre not the focus right now. But we would say you want your gross margin to be not worse than 50% and youd want your burn multiple to be not worse than five x. Your burn multiple, by the way, is just how much you burn in a current period versus how much new ARR comes in. If you burn $5 million and you take in one, youve got to burn multiple of five.

You dont want to be worse than that at this stage. Amazing. There's a lot of these benchmarks which I love. I imagine not everyone's going to hit each of them. Exactly.

Lenny Rachitsky

I guess how these are just rough guidelines of you're probably in the stage if you're in this level, right? Yeah, exactly. There's some wide bars around these metrics. It's just representative of generally the stage of five to 25 customers. I love it.

And it's so interesting that people think of product market fit, as you said, as this binary. I have it or I don't. And the way you're talking about this is in this level to developing product market fit like a company is 25 satisfied customers. They're over 5 million in ARR. A lot of cases they have 25.

Todd Jackson

Between five hundred and five million. Five hundred k and five million? Yep. Five hundred k and five million? Yeah.

Lenny Rachitsky

They have 20 employees. They're like, like, in theory, you would think this is like a roaring success. They're killing it. They have, all these customers are growing, but it's still just like level two of product market fit. So I think this has a really interesting insight that, like, and it reminds me of when I did a bunch of research on product market fit.

So many founders are like, I never felt at product market fit, it was like, never. I didn't have it. It was always like, I don't know, maybe when we get to 100 million ARR, I'll really feel like we got this. So I think this is a really good reminder that a lot of times you're not actually going to feel so confident this will last and you're going to get to, like, lasting, durable product market fit. So I think that's a really great insight here.

Todd Jackson

Yeah. And the thing that's really, I think the hallmark of level two is you've got a product that, like, a handful of people, like, right. It's, it's, it's satisfying a critical need for them. Now you've got to open the demand floodgates, right, so that we can get to 25 customers and beyond. And different companies do this in very different ways.

Right. It's much easier said than done. Looker is an example. So Looker is a, is a first round company, um, founded in 2012 by Lloyd Tabb. You know, they do business intelligence.

And Looker actually, Looker is interesting because they spent actually kind of a long time at level one, but then, like, flew through level two. And the reason is because they, Lloyd, the founder, the first five customers of Looker, he was basically going in and doing consulting for them. And the reason is because of the nature of the product. Like Looker. People don't get looker until they see their own data in it and their data is modeled, and they see the dashboards and they're like, oh, my God.

Wow, I didn't realize these insights. So Lloyd understood Looker is not a product you could sell with figma mockups. What happened was Lloyd would go into these customers, spend 2030, 40 hours before they were even a customer, modeling their data, teaching them how to use it, showing more people within the organization the power of the data and the dashboards. And later they called this their forward deploy process. This is how they figured out sales.

And so it actually took them kind of a long time in level one to get this right. But then they were able to do this repeatably. And so they went from five to 25 fairly quickly. And it a lot of amazing, like 75% close rate because they were only selling customers who were already using it. There was like zero churn.

And Lloyd explains, once he got to 20 customers, he's like, I know I'm onto something and I think I've figured out a model. And the model stayed the same until they ended up selling to Google. And so they did these other things too. They started focusing on demand channels. They got a couple sdrs who are prospecting.

I think they did some partner marketing with AWS, Redshift. They did these look and tell customer events in San Francisco where they got Looker customers together to talk about what they were doing in looker and how they built the product. But really it was like the groundwork was set at level one and then they sort of moved really quickly through level two. So kind of, again, the way to think about this phase, this is when you're starting to scale a way to drive demand. You're not just grinding sales, cold outreach.

Lenny Rachitsky

There's a way you're starting to bring in customers that are more efficient. And in Looker's case, they kind of just started coming because I imagine there's word of mouth and people started to talk about it. Yeah, let me do another example. Okay. A really different example is a company called Ironclad.

Todd Jackson

Ironclad, it's legal. It's a legal tech company they founded in 2015. Jason Baymig is the founder AI powered contract management software. So this was interesting because Jason started out, he started out calling this an AI legal assistant. And this is like 2024.

People are like, oh, AI legal assistant? Yeah, that's awesome. But in 2014, people were like, what? And he found it really hard to sell. No one was looking for an AI legal assistant.

And so he told us this story. There was an email address on the ironclad homepage, helloroncloud.com dot. This is in 2015, and he doesnt get very much email. But Jason is checking the email and one day he gets this one line email and he almost archives it because he doesnt know who its from. Its one line, but he sees that its from a person at a publicly traded company.

Hes like, oh, maybe theres something here. And the one line email is just, are you a CLM? And he was like, what is a CLM? And he's like, he like googles for it. A CLM is a contract lifecycle management platform.

And he's reading up about clms and he's like, oh, you know, we do that. And we do. Yeah, yeah. And so he replies to the email, yes, we are a CLM. And the customer gets him on the phone and the customer says, oh, you know, I'm in the market for a CLM.

I'm looking at like ten or twelve different vendors. But you guys look pretty cool because there's some automation, some AI stuff going on. Like, can I check this out? And Jason's like, of course. So he and his co founder take the train from San Francisco down to San Jose, and on the train, Jason is telling his co founder, Kai, hey, like, I need you to code this up right now to make it look like what this customer is expecting.

And they get to the meeting and they do the demo, and the customer has like, no idea that they just made this demo on the train. And like, they're a very small company and they win the contract against these ten or twelve other established spaces because ironclads, it's more modern, it's automated, it's got this AI stuff. It's just a better product, or the demo looks like it's going to be a better product. And so Jason reflects on this, and he's like, yeah, the thing for us is we had been trying to create this new category of AI legal assistant, and it was just like a slog, right? And instead, when we changed our positioning to play in an existing category of CLM, but a much better CLM.

But customers are already looking for a CLM. They're already looking to spend money on a CLM and just expand the definition of what that category is. Things just started to click and that's how they got sort of through that zone of like 10, 20, 30 customers. And even if you look at the ironclad website today, it says AI powered contract management software. Right?

Like, that really is the key idea. Still. Awesome. So this is an awesome example of positioning slash promise is the lever they pulled here. I love the point about category design.

Lenny Rachitsky

That's one of the ongoing debates on this podcast. Whether you should hot topic. Sounds like you're in the boat of probably better not to create your own category. I think it's hard to create a category. It certainly works in some cases.

Todd Jackson

But if you actually have a really interesting spend on an existing category, there's already buyers spending money on that thing. They're already looking for something to buy. If you can do it. I do actually think that way is easier. Before we get to level three, what are signs that you're maybe stuck at level two?

Lenny Rachitsky

And what should one do about that? Yeah, so the whole idea of level two is this thing that the marginal customer is getting easier, right? And so you've got to be focusing on demand and the repeatability of demand while you maintain satisfaction. So the yellow flags are like things that are the opposite of that, right? Like your current customers are like pretty happy, but you're just having trouble opening the floodgates.

Todd Jackson

Like as you're getting to the top end of level two, you should start to hear some startups know who you are, like, oh, you need a soc, two, your startup, like, oh, Vanta, right. Oh, you need AI powered contract management software. Oh, ironclad. You sort of start to get known for a thing. And so if you're having trouble opening those floodgates and you're sitting there for, I don't know, twelve months, 18 months, that's kind of a problem.

Or you have things like your regretted churn is greater than 20%. I see that as that's a satisfaction warning sign. And again, you have to maintain the satisfaction as you work on these other things, it's like every level just gets more things you have to do. Or you could be finding that the sales cycle is taking too long. You're losing deals late in the funnel, you're losing to competitors, you're just not feeling the urgency from customers, or you're struggling to hit the price point that you want.

The way that customers will say this to you because customers are nice, they'll say, oh, we don't have the budget, or like, oh, it's just not the right time for us. We'd love to talk again next year. That means no. When you're hearing that from customers, you want customers who are like, oh, of course, yeah, this is kind of expensive, but I'm going to make this work because I need this. And so if you're seeing any of those signs, those are the signs that you maybe are stuck or plateauing at this level.

And I really think it's important to think about the four P's and think about how am I going to sort of pivot my way out of this. Jack Altman, who I mentioned earlier from Lattice, he's got a great quote on this. It's up in a video on the website, which is like, what did he say? He said, oh, most founders do like a 10% pivot, and what they need to be doing is a 200% pivot. And I think, Jack didn't say this, but I think part of my interpretation of this is it's psychologically hard as a founder, you've gotten to this many customers, you're starting to plateau, but you're like, I don't want to throw this whole thing away, right.

But you sort of have to be willing to let go and really focus on nailing the four P's at this point. And in your experience, do you find essentially pivoting is the answer if you're stuck? I think sometimes it's nice when it's the ironclad thing, right. Or I mean it's nicest when it's the looker thing of like you don't have to change anything, right. It just starts working and basically the whole thing works the whole time.

That's not common. It's nice when it's the ironclad thing, when you just sort of change one of them or maybe two of them. Starting over with all four of these is hard at the, at level two, right. But oftentimes it's what's required. Like I, you know, as mentioning earlier, like level two is the second most common level to get stuck.

Most, you know, big chunk of companies are going to get stuck at level one and the second biggest is at level two. So sometimes it's hard. I think the trap is not doing enough to realize that youre actually not progressing to product market fit in the way that you need to and just starting to burn money and not make progress. And youve seen many startups struggle with this. I think its the hardest part of it.

Yeah. Especially once theyre like a million, 2 million, 3 million ARR, theyre like look, were making all this money and they dont necessarily realize that theyve been stuck at this stage for so long. So just to kind of summarize flags that something is wrong and then you should probably think about changing your Persona, your problem, your promise or your product is it's been twelve to 18 months. At this stage of product market fit you are churning about 20% of customers. And these are logo, logo churn I imagine, just like businesses stop using you.

Yep. Your sales cycles are really slow. Is there a sense of what slow means? Just like a rough heuristic, what should. It, well some sales cycles are slow.

Like if you're selling to companies that are big, you're selling to government, that type of thing. You know, I don't know. Rough rule of thumb is like, you know, there's different acvs also. Like if you're the kind of product that is twenty k, thirty k annual contracts, that was looker, right. But they were able to do the sales cycle very repeatedly because they closed so often.

Right. There are some contracts that are one hundred k, two hundred k, you know, six figure contracts. Those can take a long time. Those can take three to six months. You can't basically be in the worst of both worlds where you've got a slow sales cycle and a low acv like that is the quadrant of death, basically.

Lenny Rachitsky

Awesome. Okay. And then the other sign is just you're not finding demand starting to come to you. You're not finding a channel to drive demand. And is a big part of this inbound that you start?

You're supposed to start seeing more inbound coming at you? Or is it more just sales becomes easier? It's both. So, like, sales becomes easier. But like, I think if you are starting to get to level three, which is where we're getting to next, you've probably got 10%, 20% of your inbound coming, uh, or completely organically organic inbound.

Awesome. Okay. So again, if you're stuck at this stage and these are signs that are like, oh, man, this sounds familiar, your advice is find one of these things to shift the person you're going after, the problem you're solving, the way you position it and or your product if you have to. Yeah. And probably just look for something that is a lot more of a burning pain.

Todd Jackson

It's usually that the problem is not significant enough, important enough to people, or the promise is not valuable enough. It's usually kind of one of those middle to assuming you have a reasonable Persona. Awesome. And the reason I'm spending so much time here is, as you said, most companies get stuck here like b two b SaaS company. So I think it's really important to make sure people have something to go with.

Lenny Rachitsky

And in the course and in the post you put out, there's more examples of companies going through this and what they did. So let's talk about level three. What does level three look like? What should you be focusing on there? Yeah.

Todd Jackson

So level three is strong product market fit. This is where I think it starts to get fun. This is where all the product market fit adages come in. The fish are jumping into the boat, the rock is rolling down the hill, and I'm trying to chase it instead of pushing it up the hill. And keep in mind, for most enterprise founders, we're now three, four, five years into the company.

It's not easy to get here and to get to l three. Here you are looking for repeatability. The marginal customer has become much easier. And so you mentioned, Lenny, this quote from David sue from retail, which I love too, and I'll read it again. He said, we talked to someone who said that finding product market fit was so visceral, you immediately felt it like a geyser.

And we honestly never felt that in the first couple of years at retool, every customer we got, whether that was number four, number 14, felt like the last customer we were ever going to find. It felt like rolling the stone uphill, and if you stop pushing, it's going to roll back on you and crush you. And that's how it felt until we had a few million in ARR. That's when the boulder went down the other side and we had to chase it and chase it to keep up. And this is, you know, you mentioned earlier, like founders were like, I'm not sure I ever felt product market, but this is like when you start to feel it right.

And, and Jack Altman, you know, again from lattice, said just the biggest shift was in the ease of getting leads. I remember thinking, I don't even know where these leads are coming from. Just more and more of them are showing up each month. That is a great feeling. That is a great feeling.

Philip Kalazan from Verkata hes in some of the videos on our website, too. His quote ill read, it was after our first year of sales in 2018. Those next two years were crazy. We were barely keeping up with production. We had to scale all the systems.

A lot of things had to happen in the span of twelve to 18 months in order to deliver on everything that customers were hoping the solution was going to do for them. And that in itself was a very formative and tricky part of the journey. So the benchmarks when you were at level three are now you're probably like 30 to 100 people inside your company. You're probably at series B ish kind of territory in terms of venture. Maybe late series A, maybe early Series C, but probably around series B.

You've really cracked a demand channel, you've cracked marketing and sales. You've got at least one channel that is very scalable and probably 10% or more of your inbound is coming from just referrals and word of mouth. And you're like, you're getting known. Like we talked about, acv ranges are very high, very wide, I should say. I'd say if you're in this on your way to 100 customers, where you want to get to at level three is like 100 customers.

And so if you're sort of approaching 100 customers and maybe you have like 75k average acv, that would be strong. Right. You're sort of in this wide zone of 5 million, all the way up to 25 million. ARR, that is very like level three. And you're actually starting now to think about some of these efficiency metrics.

Remember, we've been sort of like, punting efficiency. We were saying it shouldn't be worse than, like, a certain number, but it's, like, not a focus now. It's, like, got to come into focus, because the way that we get to level four is we keep ripping on the satisfaction and the demand, and we tune this thing to get very efficient. So, like, we're talking about our gross margin needs to be above 60%, hopefully above 70%. Our burn multiple is now below three.

Right. Like, ideally we're in, like the. Ideally we're, like, close to one. Right. Burn multiple.

Like, in the one to three zone is where we want to be at level three. Regretted churns less than 10%. NRR is greater than 110%. These are, like, good kind of benchmarks for this level. Curing level three, again tells me level two is where you need to.

Lenny Rachitsky

It's basically your pivot from, I'm just grinding customers, selling, pitching constantly, trying to find new people, to level three, where it's coming at you and life's basically, it's the way you always hear about it. As you described, it's rolling downhill. Fish are jumping in the boat. I haven't heard that one before, but I love this. So essentially, you found a demand channel.

You found a way to get people to come to you. A lot of them are just hearing about you from other people. You don't even know where they're coming from. 10%, you said, are coming from referrals, and you're getting to, like, 100 customers. I actually have another quote from David sue at retool, and he actually said even at 100 customers, he still felt like every customer he was getting was the last one.

Todd Jackson

He's like, oh, wow. He's like, I can't believe we got doordash. That's incredible. That's okay. I think there's no more.

Lenny Rachitsky

That's it. He's a critical person and critical of himself, but a very high expectations person, let's say. Yeah, actually, another quote from Ali Goetze from databricks actually said even at 100 million, he wasn't sure they have product market fit. I don't know. I don't know.

That's what he felt like. This is it. Okay, we're done. We're going to cap out here and I get that. I think if you told many, many pre seed founders that they'd be able to get to 100 million and not know whether they had product market fit, they'd probably take that.

But I think that's maybe an interesting insight. It's often good to be really paranoid and not feel like, okay, we're on our way, let's start pouring in money. Let's do it. I think that's what makes a lot of the best founders the best indeed. Okay, so level three, anything else that would be useful here?

Maybe? What are signs that you're struggling at level three? You're stuck. Yeah. So level three problems and again, it's hard to get to level three.

Todd Jackson

So like, you know, awesome work for getting here, but the problems that might start to emerge are, you know, you've got a leaky bucket, like your NR is below 90% or your regretted churn is greater than 10%. Maybe growth is just slowing down. You grew three x each of the prior two years, but youre kind of struggling to do a two x this year and that in part that can become at level three. Were five years into the company or so theres probably a lot of competition. If youve gotten here, youve got something thats working and people are starting to notice and theres going to be competitors and they could be the big competitors, they could be the new startups, but you're going to have to figure out how to navigate probably a tougher market than you entered five years ago.

And so maybe you found your first scalable channel, but it's getting saturated. You got to find a new channel. These are kind of like the level three props or like you're growing, but like I said, with efficiency, you're spending too much money to grow. So you feel like, okay, yeah, we can grow at three x year over year, two x year over year, but it's like that's going to push our burn multiple above three again. And that's a little bit of a pickle to be in.

Right. When you sort of have to trade off growth and spend like that, you. Kind of make it sound like, oh, life's great, level three people are coming at us. I think it's important to note like never is it easy, never is it like, okay, we're good, let's just ride this way. Life's going to get so much easier from now on.

Lenny Rachitsky

It's never easy. As you said, there's all these things you're always still juggling. You still aren't sure, it's going to keep going. No, I agree. It's like you're spinning plates, and the higher levels you get, there's more plates you have to keep spinning.

Todd Jackson

And so at level three and getting to level four, we've got to maintain satisfaction and demand. We cannot let them regress in a market that's getting harder. Right. And we have to really start focusing on efficiency and the companies that can maintain satisfaction and demand and continue to grow and become really efficient. Now we're at level four, let's talk about level four.

Lenny Rachitsky

What does that look like? What are some problems people run into there? Yeah. So first of all, congrats. I mean, if you get to level four, you have a valuable company.

Todd Jackson

You are probably already a unicorn, and you're starting to think about, can I become a decacorn? You've reached the highest levels of satisfaction, demand and efficiency. The benchmarks at level four are like, okay, now your team is probably bigger than 100 people. You're series C, series D or beyond. You've got more than 100 customers, and you're starting to figure out, how do I get to 200, 300?

Eventually 1000 customers. You're beyond 25 million in ARR. So 25 million and up. I think in ARR it qualifies as level four. And your other metrics are looking really good, too.

Your sales conversion, first call to close one is probably better than 15%. Your magic number is greater than one. Your CAC payback is less than twelve months. All these things are super awesome. Finally, now you've got your gross margin above 80%.

Your burn multiple is ideally less than one. At this point. You've got less than 10% churn, you've got greater than 120% nr. And so now the whole thing is like, well, how do I keep growing? This thing's gotten pretty big.

And this is generally when we get to 100 million, especially and beyond the stage that founders are thinking about. How do I keep growing? By expanding Tam. By expanding total addressable market and to expand TAM, I can usually take my product and bring it into new markets, or I start to think about multiple products as a way to expand TAM. And so this is where you see all the truly great companies, the legendary companies, are all able to do that.

Vanta has begun to do this. They have the Vanta trust management platform. They've got security questionnaires, they've got vendor risk management, so they're starting to do this. You think of Verkata, who I mentioned before, they started with cloud security cameras, now they do alarms, now they do smoke detectors now. They do badge readers.

Stripe has sort of classic stripe, but theyve got stripe radar stripe. Atlas Square has the square stand cash app, square checking, square loans. All the companies that are tens of billions of dollars of value have figured out a way to do this. And its the never ending journey that you said before, Lenny. Congrats.

You got to level four, but theres just this endless thirst for continued growth. The interesting thing about that is that it requires finding product market fit over and over again. Like just because you got to level four on your, on your main product doesn't mean product market fit is free on all these new products, right. And you've been inside Airbnb and I've been inside, you know, Dropbox and Twitter. Like getting new products to be successful is hard, right.

And it requires this mindset of like, yeah, we've got a little bit of advantage because people know who we are and we have a customer set that hopefully we can layer on new products, too. But it's not easy. You have to get into this mindset of product market fit is never easy. And if we want to continue to grow, we got to find it again and again and maintain that mindset. Casey Winters has this great point also that expectations of customers ever increase.

Lenny Rachitsky

And so you have product market fit today, but there's going to be better products coming out. The world changes. And so not only do you have to worry about competitors, there's just expectations continue to rise. So it's a never ending battle to give people a little bit of a broader sense here. What percentage of companies do you find kind of make it through each of these stages in your experience, what are kind of rough numbers you may have in your head?

Todd Jackson

The majority of companies, so greater than 50%, probably closer to 60 or 70%, are going to get stuck at l one or l two. And so that leaves roughly, let's say 30% make it to l three or l four, just in our experience, looking broadly. And thats our entire goal, right. If that can be, because again, once you get to l three, youve got a real shot. Youve got a real shot at building an awesome company.

And so if we get that number, help founders get that number above 30%, like imagine if that was 50 50 and half the companies that we were working with at seed were able to get to level three. Strong product market fit. I think that would be epic. And I think our founders would there be incredible benefits to the ecosystem from that? Okay, so essentially 60% ish of companies don't make it past l two.

Lenny Rachitsky

And I love the way you're framing it of just, like, if we can just get a few more companies further, that makes a massive dent, both, you know, in the world and the lives of founders and people that want to use products. Another question I wanted to talk about briefly is just, again, the timelines of each of these levels. Just in your rough experience, like, how long do each of these levels roughly take so people can get a sense of, like, oh, shit, I've taken. It's taken a lot longer. Maybe there's a problem.

Todd Jackson

Yeah, so again, this whole thing probably takes four to six years. And so let's just pick five years as the number to get to level four. I think the way this works, ideally, is you probably take twelve to 18 months to do level one, because that is the most important level, honestly, in my mind, because that's where you're really choosing the right Persona and the right problem to focus on. On. And I think it's like, just that choice is one of the most important choices that founders make.

And the interesting thing, my partner, Josh Koppelman, talks about this all the time, is that founders spend 99% of their time building, because that's what they've done. They spend 1% of their time picking and picking the market, picking the problem, picking the customer. And in reality, it's that pick that, like, determines the constraints and the boundaries of where you're going to be working for the next, hopefully, like, ten years of your life. So there's a real imbalance there. And I actually think that, like, that pick is the most important thing.

So I would actually like to spend, let's say, somewhere twelve to 18 months in level one. Just really figuring that out and figuring out my four p's. And then hopefully I move very quickly. You know, it takes me a while to get to my first five customers, first five satisfied customers, but they love it. And then I go quickly through l two.

Maybe that takes about a year. This is kind of like the looker path, right? The happy path. And then l three is kind of long, just because we're going all the way from 5 million in revenue up to 25. And that might take a year or two, probably two years, even in a good case.

And then getting from 25 to 100 million is hard, obviously very hard. And then that probably takes a couple of years. And then you're figuring out all of these things, like you're growing your team, and your company's got a lot more moving parts and functions, and there's a demand generation side of the house and sales and there's engineering and the whole thing just gets more complicated with a lot more people. But I think that if you set the foundation really nicely, kind of at level one and level two, then hopefully the whole thing, the boulder is kind of rolling down the hill and it's carrying you forward and you don't just feel like you're pushing this rock uphill for five years. I don't think that's like a, that's not a fun place to be.

Lenny Rachitsky

There's a lot of founders in that place and I know a few. So just, this is really interesting. So you're roughly saying that maybe spend a year, year and a half on level one, which is you just grinding, cold emailing, reaching out, selling customers, and maybe getting to five customers in the first year and a half would be a good, like, that's like, at the extreme, but that's a good outcome. And then maybe another year trying to get to, what was it, 2025, going. From five to 25 quickly.

Todd Jackson

Yeah. If I, if I, if I see a company go from five customers to 25 in a year, that is almost always a strong, that there's a sign that there's some pretty strong product market fit there. Awesome. So many companies don't go through that and they have the funding to kind of keep iterating, exploring, trying to figure things out. I don't know if you have the answer here, but just what's your advice of if it's been like four years and they're not, demand is not starting to come to them, they don't have 25 customers.

Lenny Rachitsky

Is it wait until you run out of money, just give it a shot? Or is it, let's just give the money back and move on to something else? Well, that's a personal decision for founders. I do think if you've been going at it for four to five years and you haven't started to find anything that you're really feeling pull from the market on? I don't know.

Todd Jackson

You've done it for four to five years. It's like, what are the chances that you're going to magically find something? I think there are probably a handful of startups that do it, that figure it out and get back on like an amazing growth curve, but that's the exception rather than the rule. So if a founder wants to return the money to investors, if a founder wants to look for a soft landing, there's no shame in that. Like, product market fit is very, very hard.

That's why we're doing this. That's why we're trying to increase the odds, and we're also trying to, like, you know, sort of make it clear what it looks like and what it doesn't look like. And everybody knows when they do a startup that the odds are that you will not get there. Right. And so there's no shame in that.

And I would completely be supportive of any founder who wants to take that path. I love that advice. I think that was a really important point to make. Let's quickly summarize the levels, and then I want to also summarize the four P's again, because I think that's the thing you can actually do. And so I think I just want to reinforce, here's the four things you should play with if things aren't going in the direction.

Lenny Rachitsky

So first of all, just let's summarize the levels, what it looks like, and what you should be focusing on there. Okay, so level one, nascent product market fit. You're just trying to get three to five customers, and you're focused on satisfaction, first and foremost. Level two is developing. This is where you're going from five to 25 customers, and you're really starting to focus on demand.

Todd Jackson

Level three is strong product market fit. You're going from 25 customers up to 100 or more, and you've got to start thinking about efficiency at that scale. And then level four is extreme. You're more than 100 customers. Your company's awesome.

You got to keep doing all three of those things well, and you have to start looking for ways to expand your total addressable market. Okay, perfect. And then let's come back to the four P's. I have, I have a draft. I have your post up here.

Lenny Rachitsky

So I have kind of the detailed version of each of these things. But could you just talk through these four things? Just like, what is it you should be thinking about changing if things aren't working? The four P's, basically. Yeah.

Todd Jackson

So the four P's, again, are Persona, problem, promise, and product. And the Persona is interesting because in some ways, it's synonymous with the market. A lot of people are like, a lot of people think of the market in this macroeconomic way where it's like, oh, it's this category of ERP software, whatever. Right. I think it's much more tangible for a founder to think of the market as a collection of people.

Jack Altman was thinking about his market as all of the HR leaders out there, and he was thinking about how many of them are there and what are the problems they have and how much money are they willing to spend on solving those problems? It's a collection of people who have money to pay for a product or pay for a service. And so that's really the first p is, like, find the Persona and really try to get into the mind of the Persona. That's another thing I was amazed about, spending time with Zach from plaid and Lloyd from looker and Jack from Lattice. They had all of these people, they were text messaging with all of their customers, and they're meeting them on the weekends and stuff.

They really, really knew their customer well. They were friends with their customers. And so you've got to get so deep into the mind of the Persona and, like, you know, what are their challenges? What are their goals? How do you help them sort of succeed at their job?

That's the stuff that really gets you. You know, kind of earns you the right to get the rest of the p's. Right. And so the problem obviously comes next. And I think about this, and I can actually get into Lenny a little bit if you want to do get into some of the customer discovery stuff, because that's, that's the second session.

Lenny Rachitsky

Perfect segue. Yeah. And I was talking a little bit about, um, we think of it as dollar driven customer discovery. And, you know, like, I think a lot of founders are familiar with customer discovery. I think many like, or they at least talk to customers, which is good.

Todd Jackson

I don't think most of them do it in, like, the highest signal way, because, again, like, customers are their people. They're nice. They're going to be polite. Right. They're also not good at, like, predicting, like, things that they will use or buy or want.

Right. They're very good at talking about their problems, but they're not necessarily good at predicting their own behavior. So we think about it in terms of dollar driven discovery, which is, how do you test the dollar potential of a hypothesis? And this is like, a whole two hour session. Um, but I'll try to do briefly here just to give you.

Lenny Rachitsky

Wow, let's get into it. Let's keep going. I'm just joking. Um, so you've got to identify extreme value, right. This is, like, independent of what I'm building, Lenny.

Todd Jackson

Like, I want to hear about your problems and your challenges and what is most important to you. And so I need to do it in kind of this, like, non leading way, and I need to avoid the trap that we call happy ears with founders, because I found a lot of founders. I want to build this thing. I want you to like my thing. And so I look for the things that you say that sort of like support what I'm doing.

That's the trap, right? And so I could just try it on you, Lenny, like, ooh, yeah, I might say, let's do it. Okay, Lenny. So you're doing Lenny's newsletter and you're building Lenny's podcast. When you think about, we're sitting here in April over the next three months, let's say, what are your top three goals for Lenny's newsletter and Lenny's podcast?

Lenny Rachitsky

Oh, wow. Interesting. I'm trying to find a more scalable way to do this newsletter long term. It's basically something I have to do for the rest of my life, in theory. I don't know if there's an exit path for this newsletter career.

So I'm trying to find ways to scale this over time. That's one. Two is just upleveling the quality of each podcast episode in terms of visuals and audio and trailers and things like that. And then three is make the community more valuable to everyone that listens. That's in the newsletter community.

Those are top of mind. Okay, awesome. And so what's hard about those three things? Like you said, you want to scale the newsletter, you want to increase quality, you want to make the community awesome. What's hard about those things or what's standing in your way of doing those?

I don't, I don't have a, I don't have the answer yet, I guess is the answer. I don't know exactly how to do this yet. You don't know how to do it? Okay, so what if I was able to. It's probably a service, in this case, not a product.

Todd Jackson

What if I was able to give you a service that said, lenny, you're going to be able to scale this podcast. We are going to help you find the 500 best guests in the world that are really excellent. We're going to guarantee they show up. You're going to have endless content on your podcast, in your newsletter.

What do you think about that? What do you think about that idea? I pay a lot of money for that. Okay, so that's an example of a wow statement. And you probably had in the back of your mind, how are you going to do that?

Is that actually going to work? In my experience, that's a good thing and an exciting thing. Like, if I'm sort of pitching a product idea to somebody and they are like, wow, does that really work? I mean, if that thing works, I'd sign up for the waitlist today. That to me is like okay, now I, now I got, I got to figure out how to build that thing.

But like I know if I am able to build it and deliver on that promise they are going to want it. Right. Or you would maybe say signs like you would demonstrate behavior that shows that you're interested in. You'd be like oh Todd, can we meet again next week to talk about this? Or like hey Todd, I actually would love to show this to the people I work with.

Can you send me the deck? Those are the signs that I am looking for. If you had reacted like, yeah, that sounds kind of interesting, that's a no, right? That is a no. That is a polite way of saying, the word interesting is a polite way of saying no.

And so I'm either looking for wow statements or I'm looking for demonstrated behavior that shows interest. I then would probably if I want to keep going with this and this is all in the identifying extreme value, I'd ask you what stands out as valuable here to you and I want to hear you answer quickly. You mentioned it's either going to like it's going to make my product so much better, it's going to drive success for my business or it's going to save me a bunch of money or something, save me a bunch of risk. But something where you would very quickly be able to identify why that's valuable to you. So that's kind of like part one is extreme value.

Then I got to figure out ability to pay and willingness to pay for you. This is easy because you're not at a 5000 person company and you're the boss. This is probably pretty streamlined. There's no procurement function at Lenny's newsletter. Let's say I'm going after a bigger company.

The questions I'd ask on confirming the ability to pay are you currently looking for a product like this or are you building something internally? This is kind of the ironclad thing where Jason was like oh, you're looking for a ClM already. If a customer, another way I think about it is if a customer has a problem and I really think they have a problem and they know they have the problem and they're looking for a solution for the problem or they've even tried to build their own solution to it and failed. That's the best customer because they know how hard they want this thing badly. They've demonstrated that and they've actually failed at building it because they underestimated how hard it was.

So are you currently looking for building a solution here. Essentially, it's like there's a budget you're looking for. Is there money to go towards this problem? That's the next question. I was going to say, where would a budget for this come from?

And the best answer is that there's an existing budget. Either we already spend money in some way for a competing tool or something that can be displaced by you, or we're spending, we put five engineers together to help build this thing. There's some source of budget that I can get. And then the question is, well, how does your team make decisions on third party tools to bring on? And you're never going to get the cleanest answer here.

I mean, in larger companies you might get semi clean answers, but it's something like, okay, this manager can approve it directly up to a certain dollar amount. If not, it goes to this sort of next level up, a manager. And if it's like, if we're going to spend more than 50k on it, we actually have to compare three different alternatives. But whatever, there's some known process. That's what I'm looking for, rather than just a bunch of ambiguity.

So that's kind of like ability to pay. And then I'm going into willingness to pay. I don't want to try to quantify that. And so that's where I go, like, what's your budget for solving this? What are you paying for this other tool?

Let me show you mine. Is that, would you pay, you think that you'd pay less for that? You pay more for that, right. Can you replace this other thing with the thing I have? And then I love this question.

I think you've had Madhavan Ramanujam on the show, right? He has this question. Hes from Simon Kutcher. I love his thing of like Lenny, what is a fair price you would pay for this thing that I just described to you? And then you say your thing and then I go, okay, well, what would be an expensive price?

And then you say, and then I say, okay, what would be a prohibitively expensive price? And you sort of ask those three questions. And generally when people tell you the fair price, its a little bit of like theyre trying to get a deal. And the expensive price is the one, like if the price good, the expensive price is the one that they would actually pay, right? That where they're saying it feels expensive, but you put it in front of them, you say it costs this much.

If it's really good, they want it. Right. And the prohibitively expensive one is the one that's, like, too expensive and they'd have to just, I just can't do that. Right. So I love these style of questions.

I think they're just a lot more specific than what I see most founders doing, which is just like chatting with customers. You really want to try to, like, sort of put them to some questions where you know they're going to answer honestly because you're asking them questions, you're not asking them to speculate, and you're asking them, like, fairly concrete stuff. Oh, and the thing I should say is a two hour session. Like I mentioned, it's one thing to explain this stuff, but it's another thing to see it. And so we show tons of Zoom recordings from founders who have gone through the program.

And we actually do this thing where all the founders who are going through the program, they record all their videos, their customer discovery videos, and then our team watches all of the videos and creates highlight reels and so, and we sit around in a room and watch them together and we say, like, oh, look at these questions that Lenny asked. And did you see how the customer responded? Wow, that's like an eyes light up moment. Or like, Todd asked these questions, kind of leading the witness a little bit, and the customer didn't seem that interested. So the thing that's interesting is, like, as a founder, you never see anybody else's version of this, right?

You only have your own experience. And so just, like, seeing how other founders do this, like, in a real live setting, is like, super, like, people love it. And it's always easy to, like, hear these things. It's much harder to be the person asking these questions to a potential customer you're trying to sell, and it's just asking, like, how much would you pay for this? So I love that you kind of force people through the actual practice of it.

Lenny Rachitsky

Todd, you're going to get a lot of applicants for this program. It sounds amazing. And then you're giving a peek at the stuff that we haven't really talked about on this point you just shared, which is essentially trying to get real skin in the game, insight into how big of a problem this is. I love that you just basically shared a bunch of questions. Someone could just rewind right now and just write down all these questions that you shared and use them when you're talking to customers.

Obviously, the classic problem is they tell you they're going to buy it, but they don't. And all the stuff you shared is, here's ways to get at will. They actually buy it before they have the actual product. Is there anything else you want to say on that? Just like tips for not being tricked and people just saying, oh yeah, I love this thing.

I know you talk through a lot. Of this, but yeah, I think there's a couple of things. One is you have to know what to show people when you're actually showing them something. Lattice is the kind of product I mentioned that could be sold with figma mock ups. Looker couldn't be sold that way.

Todd Jackson

Looker, you actually had to do a demo with their real data. So it required a lot more work to do that. Vanto was neither a demo or a mock up. It was actually doing the work. Pilot was like that.

There's a bunch of companies like that. So you have to figure out what is my product and how does it solve the problem and therefore what fidelity does my early product or early demo have to be at in order to land the sale? And then I think you have to know, when you've talked to enough people, it takes time to talk to people. And kind of the rule of thumb is like if you talk to enough people and you can like predict 70% to 80% of what the next person is going to say to you because you've just talked to so many people and you've heard the pattern so clearly, that's when you've talked to enough people. But these are, you know, these are all like things you got to learn.

And that's why like doing it experientially in the way that we do the program we think is, was best. Is there anything that we haven't covered that you wanted to touch on before we let you go? No, I just, you know, if, if you're listening, if you're a b two b founder kind of in those early days of starting your company or you know, anyone who fits that description and you have an appreciation for just how hard it is to find product market fit and you dont want to go it alone, then please apply to this program or share the application. We promise we will review every single application. And im just really looking forward to working with a group of 20 or so amazing founders and helping them navigate these early days of product market fit.

Finding is what I love to do. So just to make sure the right people apply, remind people who is a great fit to be founders. And you said theyve been at it for six to nine months. Something like that. Something in that zone or earlier.

Yeah. And you sort of have an idea of what your product is, you have a hypothesis about what it is and who it's for, but you probably haven't started writing any code yet. Okay. And if they've been at it for four years and haven't found success, this is not fit for them. That's not a fit.

I could try to help them one on one, but no, that's not a fit for this program. Yeah. And then how do they apply and when their applications do? Yeah. So you go to PMF dot firstround.com.

Applications are open. They're going to go till May 7, and then the program starts on May 29. And if you want to reach out to me specifically, you can find me on Twitter. I'm Jack Tjack. You can follow me dm me.

And yeah, I'm looking forward to working with some amazing founders that I know are listening right now. Amazing. I'm so happy we did this. I feel like this conversation is going to help a ton of founders, and they're going to come back to it again and again. Todd, thank you so much for being here.

Lenny, it's been a pleasure. It's been my pleasure. Bye, everyone. Thank you so much for listening. If you found this valuable, you can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app.

Lenny Rachitsky

Also, please consider giving us a rating or leaving a review as that really helps other listeners find the podcast. You can find all past episodes or learn more about the show at Lenny's podcast.com. See you in the next episode.

A framework for finding product-market fit | Todd Jackson (First Round Capital)

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