VCs, Superhuman Mail founder share red flags about product-market fit

retained text

Product-market fit — when a startup’s product sells well — has become even harder to find in this AI era. Despite startups achieving record-fast growth, not all customers are sticky and products can be replicated more easily than ever.
Anu Bharadwaj, a partner at Iconiq; Rajeev Dham, a partner at Sapphire Ventures; and Rahul Vohra, the founder of Superhuman Mail, discussed the new rules for product-market fit last week at TechCrunch Disrupt.
“It’s never been easier to gain a bunch of pilots because lots of companies across the board are open to trying new things,” Bharadwaj said to the audience. “But going from pilot to production is really the hard thing.”
Right now, she said, a lot of founders pitch revenue metrics to investors without specifying which revenue they are talking about. “Is it true ARR or is it run rate?” she said. “There’s many ways to obfuscate the whole thing.”
Lately, much chatter on X has focused on AI founders inflating ARR numbers (which could mean “annualized run rate” or the more solid “annual recurring revenue”) to make it seem like their companies are doing better than they are. A common gimmick is counting pilot customers, who might only use the product for a couple of months, in the annualized run rate revenue number, implying that income is expected to continue for the entire year.
It should be obvious, but Bharadwaj pointed out, “It’s definitely in your long-term interest that you be very honest and upfront about what quality of revenue this is.”
She said companies need to separate hype from reality when looking at the quality of their revenue. It’s a red flag, for example, if only a few customers make up much of a company’s revenue or if the customers can easily go to another vendor for a better price. “Churn rate and retention [are] really dependent on that,” she continued.
That’s why Vohra advises startups to track customer engagement and dollar retention, especially for consumer products. “Figure out what benchmark [is] good, great, and excellent for your space,” he said.
For example, at Superhuman, he said that the company tracked ARR but also had their own internal metric called “delighted ARR,” which, he said, “was the ARR only from customers who are super engaged with the product.” He said that metric helped them see how sticky the customers were and how long they were likely to stay around.
“Those users are now still users, those companies are now still customers,” he continued. “We obsessed over serving that particular category of our user base and our customer base.”
The panelists also discussed green flags that indicate a startup has indeed found product-market fit. For Vohra, he said talk to customers to understand what value they find in the product and how they would feel if they could no longer use it. Then be honest with yourself when measuring those responses.
“If you’re 15%, 14%, 13%, or below, consider a complete pivot. Take the codebase, take the team, build something entirely new. “But if you’re 20%, you can totally optimize your way from 20% to 40%,” Vohra said.
Actually, Dham said, it’s important for a founder not to confuse having a vision with having a good business.
At the seed level especially, Bharadwaj said that it’s fine to pivot. She doesn’t even look for product-market fit at that stage, but “does the founder have a thesis that seems plausible and do they have the agility to duck and wave as the situation changes?” she said.
Dham added that he values founders even more these days who have made numerous pivots because it shows they’ve had to make very hard decisions in this ever-shifting moment.
Product-market fit, therefore, is something founders will always have to redefine and re-earn. “Even at a billion in revenue, these companies are re-earning their product-market fit,” he said. “You constantly have to be innovating on products.”
This article was updated.