Ask a Seed VC: How much should I spend to find product-market fit?

by Anthony Ha and Nihal Mehta

Image:Unsplash/Jakub Kapusnak

Welcome back to Ask a Seed VC, Eniac’s advice column about startup fundraising and investing. Today’s question comes from Caleb Madrigal, co-founder of the Latin American carpooling app Tranzee:

How much money should be required to fully test product/market fit? We have only spent somewhere in the area of $1000 on marketing thus far, and that has been enough to get us a little over a thousand users, and the users we have been getting are using the app and seem interested. However, we are running into the chicken-and-egg problem — we need enough drivers to handle all the trips that the riders request, and we need enough riders to support the drivers who join the platform. Our intuition is that we need to spend more marketing dollars to reach a higher critical mass of drivers/riders in various routes. But the problem is, we don’t really know how much we need to spend.

Unfortunately, we don’t have an exact dollar amount that we can give you, but we do have thoughts on how to approach marketing spend and product-market fit. Hopefully they’ll be helpful!

Overall, the key thing to remember is that you don’t always need a large number of users to test product-market fit. In fact, we’ve found that business-to-business companies might only need 10 customers for their initial testing. You’ll need more for a consumer business — exactly how many more will depend on the business, and there was some healthy disagreement within the Eniac team on the number. But it could still be smaller than you think; in some cases, you could start establishing PMF with as few as 100 users.

Remember that when you’re looking for product-market fit, you’re really trying to understand the middle and bottom of the funnel, not the top. In other words, you’re not trying to launch a big marketing campaign that creates awareness of your brand. You’re testing whether customers are actually willing to use and pay for your product, and whether they’ll recommend it to other users as well. (Put more concretely: You’re looking looking for viral co-efficient, or K-factor > 1.)

That is, admittedly, more challenging for a two-sided marketplace like this one — you need a certain number of drivers and passengers in order for both groups to have a good experience. Without that, you don’t really have useful data on PMF.

But again, we’d caution against simply throwing more money at marketing in the hopes that it might somehow change customer behavior. Yes, you need activity on both sides of the marketplace, but you can still try to limit your spend by focusing as tightly as possible.

You’ve already got 1,000 users, so trying to deliver a solid carpooling experience for all of them may be impossible without significantly more capital. But what about a small subset? Presumably you’re already limited to certain routes within a specific geography, but are there ways to narrow that down even more? Maybe you can put all your resources into ensuring you have drivers for just a few of the most popular routes at the most popular times. Instead of thinking in terms of spending more money, ask yourself: What’s the smallest possible number of drivers and passengers that you need have a functioning ecosystem?

Our discussion here has focused specifically on the interplay of marketing spend and PMF; we’re just scratching the surface of the numerous strategies you can use to try to solve the broader chicken-and-egg problem faced by new marketplaces. It’s also worth reading our interview with Attentive CEO Brian Long, in which he discusses how he used surveys and other forms of customer feedback to get to PMF more quickly. Good luck!

Have a question for “Ask a Seed VC”? Email us at advice@eniac.vc. (Requests for investment and pitch decks with no questions beyond “what could I do better?” will be ignored.) Please specify whether or not we should include your name and your company’s name if we publish an answer!