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

1. 0:00 – 6:07

   Todd’s background

   1. TJTodd Jackson0:00

      (instrumental music plays) Finding product market fit is the single most important thing that your startup does in the first three years. And it's just under-explored and it's just under-explained as a topic.

   2. LRLenny Rachitsky0:08

      You've been working on a product market fit framework.

   3. TJTodd Jackson0:11

      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.

   4. LRLenny Rachitsky0:22

      There's essentially four levels of product market fit: nascent, developing, strong, extreme.

   5. TJTodd Jackson0:27

      Roughly 60% are never gonna get past L2.

   6. LRLenny Rachitsky0:29

      These four Ps is essentially what you should try to change if you're stuck.

   7. TJTodd Jackson0:34

      You've got the persona, the problem, the promise, and the product. Lattice kept the first one but changed the others. Vanta changed all four.

   8. LRLenny Rachitsky0:41

      Hearing level three tells me level two is basically your pivot from, "I'm just grinding, selling, pitching."

   9. TJTodd Jackson0:47

      This is where it starts to get fun.

   10. LRLenny Rachitsky0:49

       (instrumental music plays) Today, my guest is Todd Jackson. Todd is a partner at the legendary VC firm First Round Capital. I rarely have VCs 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 news feed, photos and groups, including leading a major redesign of the news feed. He's also director of product management at Twitter and VP of product and design at Dropbox. He's also a founder, and sold his 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 WorkOS. If you're building a SaaS app, at some point your customers will start asking for enterprise features like SAML authentication and SCIM provisioning. That's where WorkOS comes in, making it fast and painless to add enterprise features to your app. Their APIs are easy to understand so that you can ship quickly and get back to building other features. And hundreds of other companies are already powered by WorkOS, including ones you probably know like Vercel, Webflow, and Loom. WorkOS also recently launched AuthKit, a complete authentication and user management service. It's essentially a modern alternative to Auth0, but with better pricing and more flexible APIs. AuthKit's design is stunning out of the box, and you can also fully customize it to fit your app's brand. It's an effortless experience from your first user all the way to your largest enterprise customer. Best of all, AuthKit is free for any developer up to one million users. Check it out at workos.com/lenny to learn more. That's workos.com/lenny. This episode is brought to you by Eppo. Eppo is a next generation A/B testing and feature management platform built by alums of Airbnb and Snowflake for modern growth teams. Companies like Twitch, Miro, ClickUp, and DraftKings rely on Eppo to power their experiments. Experimentation is increasingly essential for driving growth and for understanding the performance of new features, and Eppo helps you increase experimentation velocity while unlocking rigorous deep analysis in a way that no other commercial tool does. When I was at Airbnb, one of the things that I loved most was our experimentation platform where I could set up experiments easily, troubleshoot issues, and analyze performance all on my own. Eppo does all that and more with advanced statistical methods that can help you shave weeks off experiment time, an accessible UI for diving deeper into performance, and out of the box reporting that helps you avoid annoying prolonged analytic cycles. Eppo also makes it easy for you to share experiment insights with your team, sparking new ideas for the A/B testing flywheel. Eppo powers experimentation across every use case, including product, growth, machine learning, monetization, and email marketing. Check out Eppo at geteppo.com/lenny and 10X your experiment velocity. That's geteppo.com/lenny. Todd, thank you so much for being here, and welcome to the podcast.

   11. TJTodd Jackson4:56

       Lenny! I'm excited to be here. Thank you for having me.

   12. LRLenny Rachitsky4:58

       So first of all, just to mention, you're a VC, which is very rare for this podcast, but-

   13. TJTodd Jackson5:04

       (laughs)

   14. LRLenny Rachitsky5:04

       ... you are, you're a very special VC. 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 will get a real sense of just how legit you are as a product thinker.

   15. TJTodd Jackson5:17

       Yeah, you got it. So I am a VC. I'm a partner at First Round Capital now, and I've been at First Round for four years, but I was not a VC before First Round. Uh, so I started a company in 2013 called Cover, and that was actually funded by First Round 11 years ago. That's how I got to know First Round. Yeah, and before that to I had worked on Gmail as the product lead kind of in the early days, you know, early 2000s, and at Facebook. And then I started Cover, and we ended up selling Cover to Twitter in 2014, and I worked on a bunch of different products at Twitter. Uh, 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, 'cause I, 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 kinda love doing that over and over again.

2. 6:07 – 9:07

   First Round Capital’s PMF framework

   1. LRLenny Rachitsky6:07

      I feel like we could have a whole other podcast episode on why you decided to move into venture versus staying in product-

   2. TJTodd Jackson6:12

      (laughs) We could do it.

   3. LRLenny Rachitsky6:12

      ... but we're gonna stay, we're gonna stay focused. So the reason we're here is that for over a year, you've been working on a product-market fit framework. 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 and 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 gonna 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?

   4. TJTodd Jackson6:57

      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, you know, all the advice that you find out there on the internet is, like, very general when it comes to product-market fit. Like, you, you'll know it when you see it. You'll know it when you have it, right? It's not specific. And there's so many other startup topics where there is good content on the internet, you know. Like, hiring your first salesperson, running board meetings, uh, 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 that's why your content is really popular too, Lenny. You know, like you, you and I worked on this, uh, product validation article together a little while back, and the seven-part series that you did on, uh, B2B SaaS companies, and, like, the, the PMF benchmarking data that you had. Like, I think it was how long it took to get to-

   5. LRLenny Rachitsky8:11

      Mm-hmm.

   6. TJTodd Jackson8:11

      ... 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, it, y- 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 underexplained 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, Our Paths to Product-Market Fit series where we interview founders about the early days. And I'm just, like, always interested in like, what, what are the patterns? You know, if you talk to enough successful founders, and in this case it's gonna be enterprise founders, and you ask them, "What did, what did you do in the first six to nine months of running your company, of starting your company? What patterns emerged from that?" And we have found a very consistent set of patterns, and that's what we decided to base our framework around.

3. 9:07 – 11:02

   Why product-market fit is so important

   1. LRLenny Rachitsky9:07

      Amazing. And I think you're at such an interesting Venn diagram of, uh, 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. So I, I get why, one, you wanted to do this, and why I think this is gonna 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 is there ... Why did you spend so much time developing this?

   2. TJTodd Jackson9:41

      I think as a founder, there are so many things you have to do. You know, 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. And so sometimes it kind of gets lost that, like, actually the only thing that matters in, in the first couple years is finding product-market fit, and actually what we define as extreme product-market fit, and I'll go into that. Because if, if you find extreme product-market fit, th- the momentum just carries you, and the market pulls you along, and it's easy to know what to build because you're building the thing that your customers want and it's motivating as a team. It's easy to hire people. It's easy... All, everything becomes easier if you find product-market fit. Is, it is the thing that propels the company. And so we work, you know, we, we are a seed-stage venture firm. We t- 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, and make a customer deeply satisfied, and there's enough customers out there like that, it just pulls the whole thing along.

4. 11:02 – 12:55

   Who can benefit from this framework

   1. TJTodd Jackson11:02

   2. LRLenny Rachitsky11:02

      Who is this framework for specifically? For people that are listening, how do they know if this is for them or, or not?

   3. TJTodd Jackson11:07

      This is for early B2B founders, and specifically founders who are doing something that is, uh, more sales-led than bottom-up. I think bo- I think bottom-up is its own kind of world. It's closer to consumer product development in my mind. And I, I, I have done, you know, consumer products. Uh, consumer product, I think there is a little bit more alchemy involved. It's about, you know, having great taste and sort of finding the right thing at the right time, and it just sort of... It's like catching lightning in a bottle. I think the good thing about enterprise, and specifically kind of sales-led B2B, is that there is more science to it. And so it is for sales-led B2B 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.

   4. LRLenny Rachitsky11:53

      Awesome. Okay. So B2B founders, uh, sales-led in the first six to nine months of their journey. Awesome.

   5. TJTodd Jackson11:59

      That's right. Yes.

   6. LRLenny Rachitsky12:00

      You talked about the science of this. I imagine you don't want to overpromise this is gonna help you find product-market fit step one, two, three-

   7. TJTodd Jackson12:07

      Yeah.

   8. LRLenny Rachitsky12:07

      ... profit.How do you think about just the- 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?

   9. TJTodd Jackson12:16

      You know, we can't guarantee success here. Like, fi- uh, I just want to contextualize that finding extreme product-market fit is very, very hard. And what we are trying to do is increase your odds, right? Increase the odds, reduce the role of luck, give you sort of a framework and way of thinking about the things that you need to do. And 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 you- if you know what the path looks like, and you know what the levers are, uh, 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.

   10. LRLenny Rachitsky12:54

       Perfect.

5. 12:55 – 16:54

   The product-market fit method

   1. LRLenny Rachitsky12:55

      Okay, final question. You launched a, a whole program for founders to go through and learn all of this in depth, many week kind of program. We're gonna 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.

   2. TJTodd Jackson13:11

      Yeah, so we launched a new program and we call it Product/Market Fit Method. It is designed, like I said, to help early B2B founders increase the odds of finding product-market fit. It's totally free. Uh, it's a very intensive program. You can see all the details at pmf.firstround.com and the application deadline is May 7th. Uh, the program starts on May 29th. And we actually ran a beta version, like a test version of this last year, late last year, with 11 founders. I think probably some you know, Lenny, from Stripe and Plaid and Airbnb and Twitter. And the feedback was really, it was great. Um, it made me feel very good. (laughs) Um, like what, you know, one of the founders was like, "You know, I feel like these 14 weeks saved me two years of time in what would have been kind of wandering through the desert." And so there's kind of, there's eight sessions in the full program. And the first one is the one we're gonna do today. So the first session is on what we call the levels of product-market fit. The second one is on customer discovery and we actually refer to it as dollar-driven discovery. We get very specific about not just kind of like the normal way of doing customer conversations and customer discovery, but how do you find, like, that a customer is willing to pay money for this thing, and a lot of money? Um, we talk about market validation, product positioning, uh, we do a section on design partners 'cause 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? Uh, how do I convert them to paying customers?" Kind of all that stuff. Uh, we talk about product iteration and pivots. And I sort of refer to this stage as, like, the grind, right? The grind of kind of product iteration. And then we spend a ton of time on founder led sales. And the reason that we do that is we, we really like working with very technical founders. You know, builders, people that are either engineering background, product design, data science, like people who are builders. Um, so that's kind of, uh, the program in a nutshell. And like I said, you know, any, any founder working on a new B2B SaaS company, welcome to apply. And then bonus points if you are technical, like I said, i- you have a clear kind of product idea or a hypothesis, but that you're less than, you know, six to 12 months into, into building, uh, the company.

   3. LRLenny Rachitsky15:19

      I love how incentives are so aligned here. You help companies find product-market fit and First Round does great, everyone does great, and it makes so much sense to build something like this. Uh, 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, do they have time to do a program like this?

   4. TJTodd Jackson15:41

      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 ju- what I think, the way I think about it and the way I've heard from the 11 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.

   5. LRLenny Rachitsky16:10

      Last question. You mentioned that it's free. Uh, how does that work? How does that work for everyone?

   6. TJTodd Jackson16:14

      Yeah, so it's 100% free and it literally it costs you $0, we give you $0, we own 0% of your company. And that, 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 Round Angel Track, which I know you were in, Lenny.

   7. LRLenny Rachitsky16:28

      Mm-hmm.

   8. TJTodd Jackson16:28

      We've run the First Round Review for 10 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.

   9. LRLenny Rachitsky16:49

      Got it. So companies don't have to take money from you guys to be a part of this program?

   10. TJTodd Jackson16:53

       That's right.

6. 16:54 – 21:35

   Broad overview of the framework

   1. TJTodd Jackson16:54

   2. LRLenny Rachitsky16:54

      Okay, let's get into it. 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?

   3. TJTodd Jackson17:02

      Yeah, so our, 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. And for B2B companies 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 a, 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 'cause 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, um, there's products out there, like I was a big fan of WeWork, uh, like as a, as a customer of WeWork, right? And I'm a fan of Casper and these other products. Like tho- those products managed to achieve customer satisfaction and demand, but they never got the efficiency right. And so sort of the whole business just never worked, right, at scale.And 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, like, in the middle of, uh, San Francisco. And you walk up to this vending machine and you, you put a, a dollar in and $100 bill comes out. And that's the product. Like, that would have insane sort of like demand, like there would be a line at that vending machine. I think people would be extremely satisfied, right? Like, they'd be like, "This is awesome." Eh, y- the retention would be very good. I'm sure they would come back tomorrow. But, like, the whole thing is, uh, like, it's ridiculous, right? Like, the, the whole metaphor is ridiculous because it's just not viable to do something like that, and yet you see a lot (laughs) of startups like kind of do this, right? 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, right? And so, you know, that's one of the reasons that we think efficiency and, and how you think about the economic model of what you're doing is very important. And then there's this other aspect that I like, which is we have this concept that we call the marginal customer. And, uh, you know, like the, 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. Like, easier to acquire them, easier to s- to give them good service with a good product. And that's means your efficiency is sort of increasing along the way and your product/market fit is strengthening. So you've gotta have all three of those things, right? 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, like, in this sequence of levels. It happens over multiple years. And for the best enterprise companies, I, like, I would say they tend to reach extreme product/market fit in, like, roughly four to six years, right? There's some variance, uh, but roughly four to six years. And so we s- 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 wanna 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 s- you could spend a bunch of money on marketing and that's gonna increase your demand, but you're r- decreasing your efficiency if you do that. You could invest a bunch in efficiency and, like, automating a whole bunch of stuff, but that actually might harm the customer experience and you're reducing satisfaction. So that, that, that's one of, 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, you know, w- 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.

   4. LRLenny Rachitsky21:01

      Amazing. And we're gonna go through each of these. An 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, the ladder to the next level. So just to summarize it, my notes here of... So there's essentially four levels of product/market fit, basically like the s- the strength of product/market fit that you have.

   5. TJTodd Jackson21:21

      Right.

   6. LRLenny Rachitsky21:22

      Nascent, developing, strong, extreme?

   7. TJTodd Jackson21:24

      Yes.

   8. LRLenny Rachitsky21:25

      Okay. And then you have three dimensions within each of these levels. Satisfaction, demand and efficiency, and we're gonna talk about what all these mean and how you use these. Let's talk about

7. 21:35 – 33:16

   Level one: nascent product-market fit

   1. LRLenny Rachitsky21:35

      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?

   2. TJTodd Jackson21:44

      Yeah. 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 10 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 gotta 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, it's satisfaction first, demand second, efficiency last when you're, when you're at level one. Like, it's, it's actually okay to be inefficient at this stage i- 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.

   3. LRLenny Rachitsky22:37

      Love Vanta. Also happy sponsor and I'm an investor. What a great example.

   4. TJTodd Jackson22:42

      What a great example. (laughs) So Vanta, w- you know, was founded in 2016 by Christina Cacioppo, and she had come from Dropbox and we, we got to work at Dropbox together, which was awesome. She was the PM of Dropbox Paper at that time. And so Vanta, you know, it's, it's a company that does compliance automation, continuous monitoring, and most startups think of, like, Vanta is how you get a SOC 2, but they didn't do that at first, right? And I remember in 2018, like, Christina and I went on a walk around south, the South Park neighborhood in San Francisco, and she fir- i- this was the first time I heard the idea of Vanta. And she had actually in 2016, 2017, like, tried a few other ideas. You know, she had this, like, smart speaker that would record meetings and it would send meeting summaries over Slack.

   5. LRLenny Rachitsky23:24

      B2B Alexa is what she called it, I remember.

   6. TJTodd Jackson23:25

      B2B Alexa. And she had this other idea. It was some- you know, 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, you know, "We're building stuff and then we're seeing if anybody wants it." And then she, she realized that wasn't working and she, 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 s- a lot of startups didn't, like, you know, use any security products. And she was talking to, like, security engineers and, you know, CISOs and, and just CTOs at startups and she would ask them like, "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, like, just kind of doesn't make sense."And she had actually felt this herself, right, when she was on Dropbox Paper. And the, the experience of getting a SOC 2 was onerous, right? And, uh, the reason that she needed to get it is 'cause she- we wanted to sell, you know, start selling Dropbox Paper into enterprise. And so she said to me, "You know, 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, I've got these first few customers, you know, or like sort of design partner pseudo-customers. Uh, it's Segment and Front and Figma." And this, this is twe- 2017, '18, so these companies were, like, smaller at the time, right? Not like the sort of the big companies they are now. And she was like, "Yeah, they're trying to sell into, like, you know, Fortune 500 companies. One of them is actually trying to land, like, a Fortune 10 right now. And they said the thing that's holding them back is they don't have compliance certification, they don't have a SOC 2. And I told them, 'Hey, like, what if I do that for you?'" And they were like, "Oh, y- you can just do that?" And she was like, "Yeah." And she did it, and they landed the deal. And it was, like, one of the clearest examples to me of a product that satisfies a promise. That this product is gonna unlock revenue for you. You are gonna 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 l- That's what you're looking for when you're at level one. A, a problem that really matters to, like, three to five customers.

   7. LRLenny Rachitsky25:42

      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 gave it to them.

   8. TJTodd Jackson25:49

      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, uh, revealing of, like, it's okay to be inefficient at level one, as long as you are delivering incredible satisfaction.

   9. LRLenny Rachitsky26:03

      Yeah, I think, I was just gonna say that. This is the ultimate example of efficiency is not important, which I love is what you're pointing out at this step. Uh, I know you're gonna share another example, but just to summarize what this stage feels like from earlier when you talked about essentially of less than 10 people, you're trying to find three to five customers. 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 the customer element, I imagine, is you're implying they're paying you money.

   10. TJTodd Jackson26:29

       Yes.

   11. LRLenny Rachitsky26:30

       Okay.

   12. TJTodd Jackson26:30

       They're paying you money, and you're delivering a product that solves a problem for them.

   13. LRLenny Rachitsky26:33

       And the product could be potentially a spreadsheet or, like, super Wizard of Oz at this point even.

   14. TJTodd Jackson26:37

       Yeah. That's okay at this level.

   15. LRLenny Rachitsky26:38

       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. And you also mentioned has to satisfy a promise you're giving them. We'll solve SO- SOC 2 for you, and then you actually accomplish that.

   16. TJTodd Jackson27:03

       That's right.

   17. LRLenny Rachitsky27:03

       Is there anything else as a, maybe as a benchmark that tells you you're at this step of product-market fit?

   18. TJTodd Jackson27:10

       Yeah, so like I said, you're kind of pre-seed, less than 10 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 VCs. 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, 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 the- w- there are metrics to track efficiency, right? Things like burn multiple, gross margin, NRR, all of these things. They're, they're, all of them are just, like, not applicable at this stage. It's, it's too early, and you shouldn't be worrying about that stuff. And so, you wanna be feeling this, this sense of progress, right? 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, 12 months and there's yellow flags that are appearing, y- you're starting to feel stuck. And so the yellow flags are something like, you know, let's say your product disappeared overnight. Your customers wouldn't be super disappointed. Let's say you have a handful of happy customers. You have... 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 kind of the marginal customer, the next new customer. Or you're just, y- you know, your usage is low. Like, the, the project is in their hands, but the usage is low. It's not growing that much. It lasts for six months. And this, I think, like, there's a really good example. Uh, Jack Altman, who's the founder of Lattice, he founded Lattice in 2015. Uh, we've talked to him a bunch, uh, you know, on, on the first round pass of product-market fit and other, other, other things. So for those who don't know, you 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.

   19. LRLenny Rachitsky29:14

       Oh.

   20. TJTodd Jackson29:14

       Right back in 2015.

   21. LRLenny Rachitsky29:15

       I did not know that.

   22. TJTodd Jackson29:16

       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, like, are like non-compliant. They think the whole thing's kind of dumb. So I can, I can fix that, right, with, with software." And so the original version of Lattice was for managing OKRs. And he was able to, to sell it and, and so his, 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, "Uh, like, didn't go that well last time. I don't know. Employees don't seem to like it. I don't, 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 in the i- into the ideas of the four Ps, and, and I'll talk about this a little bit more. The four Ps, this is our version of the four Ps. 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, your product has to deliver a promise that solves the problem of your persona. And so Jack actually kept the persona. He was like, "I've gotten to know these heads of HR really well over the last six to nine months. I, like, text with them, I go out to coffee with them, I'm, like, friends with them, and I know them really well. They do- th- this OKR thing just doesn't seem to be a big deal for them, but they've 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, like, started to come back in favor. There was a- i- it was 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 mockups. 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 gonna work better?" And the response was, like, off the charts, and people wanted this thing. And I believe he sold his first five or 10 customers, like, with Figma mockups, right? Like, before he had built anything really. And so that, I think, is an interesting example, right? Of, like, he was sort of stuck in this zone of, like, 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 the- th- this- so this is, like, we do a whole section on pivots, and, like, when to pivot and how to pivot, and I think this is actually the- the best framework for this, is the four Ps. 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-

   23. LRLenny Rachitsky32:16

       Mm-mm.

   24. TJTodd Jackson32:17

       ... you know, Zach Parrett 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, you know, was supposed to, like, help you save money and budget and stuff, and, like, it just wasn't that popular, and the founders were kind of frustrated. But they had built this part of the product that enabled the app to, like, connect to your bank accounts, right? And had solved kind of, like, all the nitty-gritty issues with that. And then they found that, like, their friends wanted to license it from them. So, like, there was- Zach had a friend at Venmo who wanted to license this, and they got, you know, they got Robinhood at some point, they got Coinbase at some point. So, like, that's, like, another example of, like, they actually kept a lot of the code that they had written. They kept the product, but they completely changed the other three Ps, right? Like, instead of solving for consumers who have a problem with budgeting, we are gonna solve for developers at fintech companies who have a problem connecting to bank accounts. And it was, like, a total flip of the four Ps. But that- that's, like, why I really like this framework, 'cause I think it really helps founders think in a structured way about this.

   25. LRLenny Rachitsky33:15

       Todd, this

8. 33:16 – 39:13

   The four P’s

   1. LRLenny Rachitsky33:16

      is amazing. I'm so happy we're doing this. I think this is gonna help a lot of people. Um, I wanna move on to level two, but, uh, first, let me try to summarize some of these key elements. So these four Ps, 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 could change the problem you're solving, you could change the way you're pitching it, which is the promise is how you described it, basically positioning, and then you could also just change your product. Uh, you mentioned Banta changed all four. Some companies change just one. Any advice for how to know which of these to change, like where- what points you to change this versus change that? Is there anything that you've seen?

   2. TJTodd Jackson33:55

      I think different founders approach this differently, and I've seen a lot of founders who are build first and then sell, 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, like, easier, honestly. Rather than guessing, like, "Oh, you know, I'm gonna write- I'm gonna write, you know, 50,000 lines of code and then see if somebody wants this thing," I think it's better to sort of, like, talk to a bunch of customers, know that, like, "Hey, if I had this thing, if I could build this thing, I know it would sell," or, like, "I know these people want this thing." So I tend to approach it from- from that point of view, and therefore I focus on the persona and the problem and the promise, right? What is the promise that is really gonna click for that- for that buyer, for that persona? And then it's the product- the product's job is to satisfy those first three Ps, really.

   3. LRLenny Rachitsky34:55

      And obviously, those are much easier to change and play with versus rebuilding your product, so...

   4. TJTodd Jackson34:59

      Yes.

   5. LRLenny Rachitsky34:59

      ... 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, uh, 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 note, at this nascent stage, you're not, like- it's not roaring product-market fit. It's, as you described, very nascent. You're, like, getting customers, but it's hard. You're- you said it's, like, 20 introductions to one sale.

   6. TJTodd Jackson35:24

      Mm-hmm.

   7. LRLenny Rachitsky35:24

      But you're, like, getting them- I know Retool has a great quote. David has this quote of, uh, like, every customer he got, early on he felt it was the last customer he was ever gonna get, because 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 often to the right, and it's okay if this takes a while. You said that if it's something like- if you spent, like, 12 months at this stage, you're probably stuck in this stage, and signs that you're stuck in this nascent stage versus this is actually normal. Signs you mentioned are if you'd asked people if this went away and they wouldn't be disappointed, they'd be like, "Nah." All right, it's cool. You have many customers, but they're using different features of the product. So to you- the way you described it, essentially, they're just- you're, like, professional services for them. You're not actually building a product. You consult 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 then they're gonna churn pretty quickly.

   8. TJTodd Jackson36:19

      That's right.

   9. LRLenny Rachitsky36:20

      Anything else you wanted to touch on there before we get to level two?

   10. TJTodd Jackson36:22

       The last thing that- 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 ve- 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, (laughs) 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, it's 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- 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, you know, 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, like, get to the essence of, like, is Persona critical for you or am I in the friend zone? And I just think that's, like, a really great way of thinking about this.

   11. LRLenny Rachitsky37:35

       I love that story. It's like, uh, it's like in a relationship, it's like the talk. Are we-

   12. TJTodd Jackson37:39

       (laughs) It's the talk.

   13. LRLenny Rachitsky37:39

       ... are we a, are we a thing?

   14. TJTodd Jackson37:41

       Yeah.

   15. LRLenny Rachitsky37:41

       I love that. That's so good. Like, 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 (laughs) down one on one. Let me tell you about CommandBar. 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 every one. CommandBar 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 CommandBar. To try out CommandBar, you can sign up at commandbar.com/lenny and you can unlock an extra 1,000 AI responses per month for any plan. That's commandbar.com/lenny.

9. 39:13 – 49:13

   Level two: developing product-market fit

   1. LRLenny Rachitsky39:13

      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?

   2. TJTodd Jackson39:19

      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 i- 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 10, and we see some founders who just have phenomenal willpower and grit, and grind their way to five or 10 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, pr- you know, if you're at this level, you probably... Okay, now you're like seed or Series A style company. Um, 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 VCs or from your friends. You are... You're maybe investing in cold outreach and getting that to sort of tuned and- 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 500K to five million 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, uh, new ARR that you take in a period divided by the CAC you spend in that period. So, you know, something in like the .5 to .75 range. You want to get higher eventually, but, like, that's like pretty reasonable for this level. You're just starting to think about retention. Like, you've been around for a year so you've got renewals, right? And you want those renewals renewing. Maybe something like 10%, 20% regretted churn is okay. You don't want to be higher than that. And you want your MRR to be at least 100%. And then things like gross margin and burn multiple, they're still kind of like not the focus. Those are like the classic efficiency metrics, they're not the focus right now. But we would say you want your gross margin to be, like, not worse than 50% and you'd want your burn multiple to be not worse than 5X. Your burn multiple, by the way, is just, um, you know, how much you- how much you burn in a current period, uh, versus how much new ARR comes in. So, you know, if you burn $5 million and you take in one, then you get a burn multiple of five. And you don't want to be worse than that at this stage.

   3. LRLenny Rachitsky41:51

      Amazing. And there's a lot of these benchmarks, which I love. I imagine not everyone's going to hit each of them exactly. I guess how... These are just, like, rough guidelines of, like, you're probably in this stage if you're in this- in this level, right?

   4. TJTodd Jackson42:03

      Yeah, exactly. There's kind of some wide, you know, bars around these metrics.

   5. LRLenny Rachitsky42:07

      Yeah.

   6. TJTodd Jackson42:07

      It's- it's just representative of generally the stage of five to 25 customers.

   7. LRLenny Rachitsky42:10

      I love it. And it's so interesting that people think of product-market fit, as you said, as this binary, like, "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 five million in ARR. A lot of cases they have 20 employees-

   8. TJTodd Jackson42:28

      Between five- between 500 and five million.

   9. LRLenny Rachitsky42:31

      Okay.

   10. TJTodd Jackson42:31

       500K and five million. Yeah.

   11. LRLenny Rachitsky42:32

       500K and five million.

   12. TJTodd Jackson42:32

       Yeah.

   13. LRLenny Rachitsky42:33

       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 that are growing. But it's still just like level two of product-market fit.So I think this is 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 that 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, our ARR will really feel like we got this." So I think this is a really good reminder that a lot of times you're not actually gonna feel so confident this will last, and you're gonna get to like lasting, durable product-market fit. So, I think that's a really great insight here.

   14. TJTodd Jackson43:12

       Yeah, and the thing that's, uh, you know, 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- i- 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, uh, 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, right? And their data is modeled and they see the dashboards and they're like, "Oh, my God. Like, wow, I didn't realize these insights," right? So Lloyd kinda understood, like this is- Looker is not a product you could sell with Figma mock-ups, right? And so what happened was Lloyd would go into these customers. He- he'd spend 20, 30, 40 hours, right, like before they were even a customer, modeling their data, teaching them how to use it, showing in- more people within the organization, like the power of the data and the dashboards. And later, they- they called this their forward deploy process, right? Like 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 like fairly quickly, and it like ... 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 that like once he got to 20 customers, he's like, "I know, I know I'm onto something and, and I've- I thi- I think I 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 were prospecting. I think they did some partner marketing with AWS Redshift. They did these like look-and-tell customer events in San Francisco where they got Looker customers together to talk about sort of like how ... what they were doing in Looker and how they built the product. But really it was like the- the ground- the groundwork was set at level one and then they sort of like moved really quickly through level two.

   15. LRLenny Rachitsky45:32

       So kind of again the- the way to think about this phase is this when you're starting to scale a way to drive demand. You're not just grinding sales cold outreach. 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-

   16. TJTodd Jackson45:48

       Yes.

   17. LRLenny Rachitsky45:48

       ... and people started to talk about it. Uh-

   18. TJTodd Jackson45:50

       Yeah. Let me do another example. Okay, a really different example, uh, is a company called Ironclad. Ironclad, you know, it's a- it's a, um, it's a legal, it's a legal tech company. They founded in 2015. Uh, Jason Boehmig is the founder. AI-powered contract management software. So this was interesting 'cause Jason started out, uh ... 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 like n- uh people were like, "What?" And he found it really hard to sell. Like no one was looking for an AI legal assistant. And so he told us this story. You know, there was an email address on the Ironclad homepage, hello@ironclad.com. This is in 2015. And like he doesn't get very much email but like Jason's checking the- the email. And one day he gets this like one line email and he almost archives it 'cause he doesn't know who it's from and it's one line. But he sees that it's from like a person at a publicly traded company and so he's like, "Oh, maybe there's 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- we do that and we do ... yeah, we ... 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 10 or 12 different vendors, but you guys look pretty cool 'cause there's, you know, some automation, some AI stuff going on like, you know ... Can I check this out?" And Jason's like, "Of course." So he- he and his co-founder take the train from San Francisco down to San Jose. And on the train Jason is- is telling his co-founder, Kai, "Hey, I ... like I need you to code this up right now to make it look like what he- 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 like 10 or 12 other established faces 'cause Ironclad's ... It's more modern, it's automated, it's got this AI stuff. Like it's just a better product, right? Uh, or the demo looks like it's gonna be a better product. And so Jason reflects on this and he's like, "Yeah, the thing for us is like we had been trying to create this new category of AI legal assistant and it was just like a slog," right? And instead i- 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.

   19. LRLenny Rachitsky48:38

       Awesome. So this is an awesome example of positioning/promise is the- is the lever they pull here. Uh, I love the point about category design. That's one of the ongoing-Debates on this podcast, whether you should try to create a new category-

   20. TJTodd Jackson48:51

       I know, it's a hot topic. (laughs)

   21. LRLenny Rachitsky48:51

       ... hot topic. Sounds like you're, uh, in the boat of probably better not to create your own category.

   22. TJTodd Jackson48:56

       I think it's hard to create a category. Like, it, it certainly works in some cases, but if you actually have, like, a really interesting spin on an existing category, like there's people al- there's already buyers spending money on that thing. They're already looking for something to buy, right, which is, uh, you know... So if you can do it, I, I do actually think that way is easier.

10. 49:13 – 55:12

    Signs you’re stuck at level two, and what to do

    1. TJTodd Jackson49:13

    2. LRLenny Rachitsky49:13

       Before we get to level three, what are signs that you're maybe stuck at level two and what should one do about that?

    3. TJTodd Jackson49:21

       Yeah. So the, 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.

    4. LRLenny Rachitsky49:41

       Mm-hmm.

    5. TJTodd Jackson49:41

       Like, as you're getting to the top end of level two, you should start to hear some startups kind of know who you are, you know? Like, "Oh, you need a SOC 2? You're a startup?" Like, "Oh, Vanta," right? Like, "Oh, you know, you need AI-powered contract management software? Oh, Ironclad," right? You sort of start to get known for a thing. And so if you're having trouble opening those floodgates and, and you're, you're sitting there for, I don't know, 12 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 a, you know, that's a satisfaction warning sign, and you... Again, you have to maintain the satisfaction as you work on these other things. It's like every level just gets, like, more things you have to do. Or, you know, you could be finding that the sales cycle's taking too long, you're losing deals late in the funnel, you're losing to competitors. You're just not feeling kind of the urgency from customers or you're struggling to hit the price point that you want. And the way that customers will say this to you, 'cause customers are nice, right? They'll say, "Oh, we don't have the budget," or, like, "Oh, it's, you know, it's just not the right time for us. Like, w- we'd love to talk again, you know, next, next year." Tha- those, that means no, right? When you're hearing that from customers. Like, you want customers who are like, "Oh, of course," like, "yeah, this is kind of expensive, but I'm gonna make this work 'cause I need this," right? And so if you're seeing any of those signs, those are the signs that, that you maybe are stuck or plateauing at this level, and I really think it's, it's important to think about the four Ps and think about, "How am I gonna sort of pivot my way out of this?" Jack Altman, who I mentioned earlier, from Lattice, he's got, like, a great quote on this. Uh, it's up on, uh, in a video on the website, uh, which is like, you know... What did he say? He said, oh, the, the... "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 like, it's psychologically hard as a founder. You've gotten to this many customers, you're starting to plateau, but you're like, "Ah, I don't want to throw this whole thing away," right? But you sorta have to be willing to let go and really focus on nailing the four Ps at this point.

    6. LRLenny Rachitsky51:46

       And in your experience, do you find essentially pivoting is the answer if you're stuck?

    7. TJTodd Jackson51:52

       I think sometimes i- it's, it's nice when it's the ironclad thing, right?

    8. LRLenny Rachitsky51:56

       Mm-hmm. Yeah.

    9. TJTodd Jackson51:56

       It's... Or, I mean, it's, it's nicest when it's the Looker thing of, like, you don't have to change anything, right? You just, 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 'em or maybe two of them. Starting over with all four of these is hard at th- at level two, right? But oftentimes, it's what's required. Like, I, you know, I was mentioning earlier, like, level two is the second most common level to get stuck. Most, you know, l- big chunk of companies are gonna s- get st- stuck at level one, then the second-biggest is at level two. So, eh, uh, sometimes it's hard. I think the trap is not doing enough to realize that you're actually, like, not progressing to product market fit in the way that you need to and just starting to burn money and not make progress and, you know. You've, you've seen many startups kind of struggle with this. I think it's the hardest part of it.

    10. LRLenny Rachitsky52:42

        Yeah, especially once they're at, like, a million, two million, three million ARR. They're like, "Look, we're making all this money," and they don't necessarily realize that they've been stuck at this stage for so long. So just to kind of summarize flags that something is wrong and that you should probably think about changing your persona, your problem, your promise, or your product, is it's been 12 to 18 months at this stage of pro- of product/market fit. You are churning about 20% of customers and these are logo, logo churn, I imagine, just like businesses stop-

    11. TJTodd Jackson53:13

        Yes.

    12. LRLenny Rachitsky53:13

        ... using you.

    13. TJTodd Jackson53:14

        Yep.

    14. LRLenny Rachitsky53:14

        Your sales cycles are really slow. Is there a sense of what slow means, just like a rough heuristic? What, what should it s-

    15. TJTodd Jackson53:20

        Well, some sales cycles are slow. Like if you're selling to companies that are big or selling to government, that type of thing. Um, you know, I, I don't know. Rough rule of thumb is like, you know, and there's different ACVs also. Like if you're the kind of product that is 20K, 30K annual contracts, that was Looker, right? But they were able to do the sales cycle very repeatedly 'cause they closed so often, right? There are some contracts that are 100K, 200K, you know, six-figure contracts. Those can take a long time. Those can take three to six months. You, 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.

    16. LRLenny Rachitsky53:57

        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? Do you start- you're supposed to start seeing more inbound coming at you? Or is it more just sales becomes easier?

    17. TJTodd Jackson54:12

        Eh, well, it's both. So, like, sales becomes easier, but, uh, and, 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, org- completely organically, organic inbound.

    18. LRLenny Rachitsky54:25

        Awesome. Okay. So again, if you're stuck at this stage and these are signs that are like, "Oh, man. This, uh, 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.

    19. TJTodd Jackson54:41

        Yeah, and probably just look for something that is a lot more of a burning pain. It's usually that the problem is not significant enough, important enough to people, or the promise is not, um, valuable enough. It's- it's usually kind of one of those middle two, assuming you have a reasonable persona.

    20. LRLenny Rachitsky54:56

        Awesome. And the reason I- I'm spending so much time here is y- as you said, most companies get stuck here, like B2B SaaS companies, so I think it's really important to-... make sure people have something to go with. And in the course and in the post you put out, there's more examples of companies going through this and what they did.

11. 55:12 – 1:00:17

    Level three: strong product-market fit

    1. LRLenny Rachitsky55:12

       Let's talk about level three. What does level three look like? What should you be focusing on there?

    2. TJTodd Jackson55:16

       Yeah, so level three is strong product-market fit. Uh, this is where I think it starts to get fun. Um, this is where, like, all the product-market fit adages come in, like the fish are jumping into the boat, you know?

    3. LRLenny Rachitsky55:28

       Mm-hmm.

    4. TJTodd Jackson55:28

       The, the rock is rolling down the hill and I'm trying to chase it instead of pushing it up the hill. And, and keep in mind for most enterprise founders, this... We're now three, four, five years into the company, right? So it's, it's not, like, easy to get here. And to get to L3 here, you are looking for repeatability, right? The marginal customer has become much easier. And so you mentioned, Lenny, this, this quote from David Su from Retool, which I love too. And, and, you know, I'll read it again. He said, you know, "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 years. At Retool, every customer we got, whether that was number four or number 14, felt like the last customer we were ever gonna find. It felt like rolling the stone uphill, and if you stop pushing, it's gonna roll back on you and crush you. And that's how it felt until we had a few million in ARR, right? That's when the boulder went down the other side and we had to chase it a- and, and chase it to keep up. And this is, you know, you mentioned earlier like founders were like, "I don't... I'm not sure I ever felt product-market." This is like when you start to feel it, right? And, and Jack Altman, you know, again from Lattice said, "The... Just the biggest shift was in the ease of getting leads." Like, 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." But that is, like, a great feeling. That is a great feeling. Philip Collason from Verkada, he's in, you know, some of the videos on our website, too. His quote, I'll 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. Like, a lot of things had to happen in the span of 12 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 are at level three are now you're probably like 30 to 100 people inside your company. You're probably at, like, series B-ish kind of territory in terms of venture. Like may- maybe late ser- series A, maybe early serie C, but, like, probably around series B. You've really cracked, you know, a demand channel. Like, you've, 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, like, referrals and word a- word of mouth and you're, like, you're getting known like we talked about. ACV ranges are very high, you know, very wide I should say. I'd say, like, if you're in this, like, you know, on your way to, you know, a hundred customers, th- th- where you want to get to with level three is, like, a hundred customers. And so if you're sort of sh- you know, approaching a hundred customers and maybe you have like 75K kind of average ACV, that would be s- strong, right? You're sort of in this wide zone of five 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 s- we were saying it's, it's 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, 'cause 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, you know, 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... But 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 churn's less than 10%. NR is greater than 110%. These are like good kind of benchmarks for this level.

    5. LRLenny Rachitsky58:50

       Hearing level three again tells me level two is where you need to... It's basically your pivot from I'm just grinding customers, selling, pitching, constantly trying to find new people. See 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 a hundred customers. I have, actually have a Da- another quote from David Su at Retool and he actually said even at a hundred customers, he still felt like every customer he was getting was the last one. He's like-

    6. TJTodd Jackson59:33

       Oh, wow.

    7. LRLenny Rachitsky59:33

       He's like, "I can't believe we got DoorDash. That's incredible. That's... Okay, I think there's no more. That's it."

    8. TJTodd Jackson59:39

       He's a critical person. Critical of himself, but a very high expectations person, let's say.

    9. LRLenny Rachitsky59:43

       Yeah. Actually, another quote from, uh, Ali Go- Gotze from Databricks actually said even at 100 million, he wasn't sure of the product-market fit.

    10. TJTodd Jackson59:51

        (laughs) I mean, come on. Yeah.

    11. LRLenny Rachitsky59:52

        'Cause he's like, "I don't know. How big..." I don't know. That's what he felt like, "This is it. Okay, we're done. We're gonna cap out here." And I, and I get that. Okay.

    12. TJTodd Jackson59:58

        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.

    13. LRLenny Rachitsky1:00:05

        But I think that's maybe an interesting insight. Like, 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."

    14. TJTodd Jackson1:00:13

        I think that's what makes a lot of the, the best founders the best.

    15. LRLenny Rachitsky1:00:16

        Indeed.

12. 1:00:17 – 1:02:22

    Signs you’re stuck at level three, and what to do

    1. LRLenny Rachitsky1:00:17

       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?

    2. TJTodd Jackson1:00:25

       Yeah, so level three problems... And again, it's hard to get to level three, 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 gr- regretted churn is greater than 10%. Maybe growth is just slowing down, like you grew 3X each of the prior two years but you're kind of struggling to do a 2X this year. And that, in part, that can become... You know, at level three, you know, we're five years into the company or so, there's probably a lot of competition. Like, if, if you've gotten here, you've got something that's working, right? And people are starting to notice and there's gonna be competitors. And they, they could be the big, the big competitors, they could be the new startups, but you're gonna have to figure out how to navigate probably a tougher market than you entered five years ago. And so-You know, maybe, maybe you found your first scalable channel, but it's getting saturated. You gotta, you gotta find a new channel. These are kind of like the level three problems. Or, like, you're growing, but, uh, like I said, with efficiency, like, you're spending too much money to grow. So you feel like, okay, yeah, we can grow at 3X year over year, or 2X year over year. But it's like, that's gonna push our burn multiple above three again. And you're, then that's a little bit of a pickle to be in, right? When you sort of have to trade off, uh, growth and spend like that.

    3. LRLenny Rachitsky1:01:37

       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 wave. Life's gonna get so much easier from now on." It's never easy, as you said. There's all these things you're always still juggling. You still aren't sure what's gonna keep going.

    4. TJTodd Jackson1:01:55

       No, I agree. It's like you're spinning plates, and the l- higher levels you get, there's more plates. You know, you have to keep spinning. And so at level three and getting to level four, we've got to maintain satisfaction and demand. We cannot let them regress-

    5. LRLenny Rachitsky1:02:08

       Mm-hmm.

    6. TJTodd Jackson1:02:08

       ... uh, in a market that's getting harder, right? And, and, 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 are at level four.

    7. LRLenny Rachitsky1:02:21

       Let's

13. 1:02:22 – 1:06:55

    Level four: extreme product-market fit

    1. LRLenny Rachitsky1:02:22

       talk about level four. What does that look like? What are some problems people run into there?

    2. TJTodd Jackson1:02:25

       Yeah. So first of all, congrats. I mean, if you get to level four, you have a valuable company, right? Like, you, you are probably already a unicorn and you're starting to think about, can I become a decacorn? And so you've reached like the very high, the highest levels of satisfaction, demand, and efficiency. And so the benchmarks at level four are like, okay, now your team is probably bigger than 100 people. Uh, you're like 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 1,000 customers? You're beyond 25 million in ARR. So like 25 million and up, I think, in ARR, it qualifies as level four. And your, your, your other metrics are looking really good too, right? Like your, your sales conversion first call to close won is, is probably better than 15%. Your magic number is greater than one. Your CAC payback's less than 12 months. All these things are like super awesome. And, and finally now you've got your gross margin above 80%. Your burn multiple's ideally less than one at this point. Um, you've got less than 10% churn. You've got greater than 120% NRR. And so now the whole thing is like, well, how do I keep growing? Like, right? I mean, like this, this thing's gotten pretty big, and this is generally, you know, h- you know, when we get to 100 million especially and beyond, the stage that, uh, 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, or I start to think about multiple products, right? As a way to, to expand TAM. And so this is where you see like all the truly great companies, like the legendary companies are all able to do that. Like Vanta has, has begun to do this, right? They have like the Vanta Trust Management Platform. They've got security questionnaires, they've got vendor risk management. So they're starting to do this. You know, you think of Verkada, who I mentioned before, like they started with security cam- cloud security cameras. Now they do alarms, now they do smoke detectors, now they do badge readers. You know, Stripe has sort of classic Stripe, but they've got Stripe Radar, Stripe Atlas. Square has the Square Stand, Cash App, Square Checking, Square Loans, like all, all the companies that are, you know, tens of billions of dollars of value have figured out a way to do this. And it's kind of like the never-ending journey that you said before, Lenny. Like, you know, congrats, you got to level four, but there's just like this endless thirst for continued growth. And, and the interesting thing about that is that it requires finding mod- 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, and it requires this mindset of like, yeah, we've got a little bit of an advantage because people know who we are and we have a customer set that hopefully we can layer on new products to, but it's not easy. You know, you have to get into this mindset of like product market fit is never easy, and if we want to continue to grow, we got to find it again and again and kind of maintain that mindset.

    3. LRLenny Rachitsky1:05:22

       Casey Winters has this great point also that expectations of customers ever increase. And so you have product market fit today, but they're gonna, there's gonna be better products coming out. They're changing... 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, uh, 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?

    4. TJTodd Jackson1:05:52

       The majority of companies, so greater than 50%, probably closer to 60 or 70% are gonna get stuck at L1 or L2. And so that leaves, you know, roughly, let's say, 30% make it to L3 or L4 just in our, our experience looking broadly. And that's our entire goal, right, is like, if that can be... Because again, like once you get to L3, you've got a real shot. You've 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, right? And ha- half the companies that, you know, we were working with at seed were, were able to get to level three pro- strong product market fit, I think that would be epic, and I think our founders, you know, would, uh, it, it would be incredible benefits to the ecosystem from that.

    5. LRLenny Rachitsky1:06:36

       Okay, so essentially 60%-ish of companies don't make it past L2. 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, in the lives of founders, and people that want to use products.

14. 1:06:55 – 1:11:18

    Rough timelines for each level

    1. LRLenny Rachitsky1:06:55

       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 been, I've taken... It's taken a lot longer. Maybe there's a problem."

    2. TJTodd Jackson1:07:10

       Yeah, so again, th- 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 12 to 18 months to- to do level one, because that is the most important level, act- honestly, in my mind, 'cause that's where you're really choosing the right persona and the right problem to focus on. And I think it's, like, just that choice is one of the most important choices that founders make. And th- the interesting thing, you know, my partner, Josh Koppelman, talks about this all the time, is that founders spend 99% of their time building, 'cause that's what they've done, right? And they spend, like, 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 gonna be working for the next, hopefully, like, 10 years of your life. So there's a real imbalance there. And I- and I actually think that, like, that pick is the most important thing. So I would actually like to spend, let's say, somewhere 12 to 18 months in level one, just really figuring that out and figuring out my four Ps. 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 from- through L2, maybe that takes about a year. This is kind of like the looker, the looker path, right? The happy path. And then L3 is kind of long, just 'cause we're going all the way from, you know, five million in revenue up to 25. And that might take, you know, a year or two, probably two years, even in a good case. And then getting from 25 to a- 100 million is hard, obviously, very hard, and then that probably takes a couple years. And then you're figuring out all of these things, like you're- you're growing your team and your company's got a lot more moving parts and functions, and there's, like, 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, you know, 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.

    3. LRLenny Rachitsky1:09:22

       There's a lot of founders in that place, and I- 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, 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, um, what was it, 20 cust- 25 customers.

Episode duration: 1:27:12