Finding PMF: Defining success as an early stage startup

Defining success for an early-stage startup is a complicated question.

The easy answer is to find a problem worth solving and build a solution customers love that they’re willing to pay you for — AKA product market fit.

But how do you go about doing this?

I worked at Amplitude for 3 years after they acquired our previous startup, and spent many years working on growth prior to that at Atlassian. Not only have I experienced many different phases of company building myself but I’ve been fortunate to work with over a thousand companies of varying sizes. I love working the most with other early-stage startups where I’m often asked how do you measure success and what metrics should we be tracking.

While this often depends, I’ll try to provide some general guidance for other B2B SaaS companies based on what I’ve seen work well.

What does success look like for you?

Before jumping into metrics, the first part is defining what success looks like for you and the company. Not all businesses should be created following the same playbook because not all teams share the same values. Getting aligned as a team and creating a shared understanding of what success looks like is crucial. Without this, you’re building a company on a rocky foundation. So how do you solve that?

1. Define your values, mission, goals: Defining clear values, mission, and goals helps provide direction, align efforts, and communicate purpose to stakeholders, customers, and investors, ultimately driving focus and success.
2. Articulate roles and responsibilities: Building and scaling your product is like planning and executing a mission to Mars. You need to make sure you have the right folks for the job withclear roles and responsibilities to help improve efficiency, accountability, and teamwork. This ensures everyone understands their duties and how they contribute to the company's overall goals.
3. Create a business model canvas: A business model canvas helps you gain a holistic view of your business idea, enabling better planning, communication, and iteration as the company evolves.

Continue to refine over time as the understanding of your business evolves. Everyone on your team should be able to articulate the above clearly.

“Show me the incentive and I'll show you the outcome.” — Charlie Munger

While it’s often fun to talk about metrics, we’re building a system of inputs and outputs that define the future success of your business. We want to avoid losing sight of the forest for the trees. Rather, your goal should be to build a sustainable business that delivers customer value.

Let’s try to categorize the phases of startup growth to better articulate what success looks like at each phase and what measures we should be tracking.

Here’s an overview of what we’ll be talking through in this piece.

Phase 1: 💡 Pre-product

You’re in the very early stages of development, focusing on ideation, market validation, and securing initial funding to develop a product.

• Focus area: Customer discovery: problem validation, solution validation, and business model validation
• Metrics: Target 3-5 pilot customers and $0-$500K ARR
• North star: 10 LOIs from ICP customers to kickstart your pilot program
• Recommended tools: Dovetail for synthesis, Clarify for CRM, Grain for call recording

Phase 2: 🌱 Early PMF

You have a product in the market and have begun to show signs of early customer love, but you still need to validate your business model further and build a repeatable go-to-market motion.

• Focus area: Invest heavily in customer success and spend 10+ hours a week talking to customers
• Metrics: Start tracking across acquisition, activation, engagement, and retention
• North star: $1M ARR within 12-18 months
• Recommended tools: Datadog, Amplitude, PostHog for analytics; Clarify for CRM and pipeline management; Lightdash/Hex/Fabi.ai or similar for reporting

Phase 3: 🌲 Growth

You’ve identified product-market fit with a strong initial customer base and are now focused on rapidly scaling your operations and customer acquisition.

• Focus area: Scaling operations, market expansion, and efficiency optimization
• Metrics: NRR >110%, CAC payback <12 months, and Magic Number >0.75
• North star: $10M ARR in <3 years, following the T3D3 (Triple, Triple, Double, Double, Double) framework
• Recommended tools: Inflection/Customer.io for marketing automation; Thena/Pylon/Plain for support; Vitally or Catalyst for customer success

Phase 1: 💡Pre-product

You don’t want to spend years working on something only to discover that you should have done more work upfront validating the business. While it might be tempting to just go build the thing, it’s often the worst thing you can do, as you’ll fall in love with your solution and become blind to new ideas. Your job is to fight confirmation bias and do everything you can to prove yourself wrong quickly.

This is where the importance of customer discovery comes in. Customer discovery is a systematic process to validate a startup's assumptions about customer problems, needs, and solutions before fully developing and launching a product.

Let’s break customer discovery out into the following three sections:

1. Problem validation: Determine whether a problem you've identified exists and is significant enough for your ICP to seek a solution based on direct feedback from potential users.
2. Solution validation: Validate that your proposed solution effectively addresses the identified customer problem and provides value customers are willing to pay for.
3. Business model validation: Analyze all aspects of your business to ensure you can build a viable and sustainable long-term business.

For each of these sections we can define clear goals, signals and measures to track before moving on to the next phase. While this might seem linear, you might need to go through multiple rounds of discovery before discovering the “unique insight” that you’re looking for. So how long should this take and what is your north star metric that you’re looking to achieve?

North star: 10 LOIs from ICP customers to kickstart your pilot program

Timeline: 3-6 months

Beyond your North star, here are the main goals, signals, and measurement methods I’d recommend focusing on during your pre-product phase.

Tooling during pre-product

You don’t need to spend a bunch of time, money, and stress on your tool stack at this stage. Here are the three things I’d recommended setting up to help you keep track of everyone you talk to and the insights they share:

1. Dovetail as a research repo for synthesizing customer insights and organizing the feedback you’ll collect during the problem validation stage.
2. Clarify as your CRM to help you manage your relationships with potential customers and track early sales efforts. ‍
3. Grain to record your calls and meetings so you can easily capture and review customer conversations as you refine your product.

Phase 2: 🌱 Signs of PMF

Once you've gotten your first design partners, it's time to invest heavily in their success. Before you even think about scaling, make sure you've got referenceable customers that absolutely love your product. It's easy to miss the forest for the trees by chasing after the next set of customers before you've been able to get your existing ones successful.

In this phase, your primary focus should be on spending as much time as you can with your customers. I try to spend at least 10 hours a week talking to folks, incorporating continuous customer discovery with both prospects and existing customers. This constant feedback loop is crucial for refining your product and understanding your market.

Now's the time to start thinking about your growth model. A growth model is a strategic framework that identifies the key drivers of a business's expansion, such as customer acquisition, retention, and monetization. You'll need to decide whether you're going for a product-led growth PLG approach, a sales-led strategy, or perhaps a hybrid model.

To track your progress effectively, outline your customer journey and choose metrics based on each stage:

• Acquisition: This is crucial for monitoring your marketing and growth efforts. Track new user visitor discovery and marketing effectiveness through metrics like daily, weekly, and monthly new user growth rate.
• Activation: This indicates early product value and the likelihood of long-term retention. Keep an eye on user onboarding and early value realization with metrics such as day 1, 7, and 14 activation rates.
• Engagement: This shows how users interact with your product and derive value. Measure user interactions and product value delivery through daily, weekly, and monthly active user growth.
• Retention: This is one of the most important measures of customer base engagement. Track user loyalty and continued usage with 1 month, 2 month, and 3 month retention rates.

When thinking about these metrics, it's important to distinguish between leading and lagging indicators. Leading indicators can predict future performance, while lagging indicators show you what's already happened.

If you're already familiar with the AARRR pirate metrics, that’s a great framework to use. Otherwise, prioritize tracking pipeline, ARR, retention, and engagement (weekly active installs or otherwise).

It's worth highlighting that a lot of this data is going to come from your CRM, not just your analytics tool alone. You can use a tool like Clarify to manage your pipeline, look at revenue growth, and understand the retention and in-product engagement of your customer base.

Beyond just tracking numbers, focus on quantifying the value customers are getting from your product. Maintain customer success plans that, over time, turn into case studies. You should know why they're using your product, how it helps their business, etc. This should be the basis of your sales playbook in the future.

Remember, it's not just about being metrics-driven, but outcomes-driven. What are the outcomes that you're looking for? How is your product making a real difference in your customers' businesses?

So, what does success look like in this phase, and how long should it take?

North star: $1M ARR

Timeline: 12-18 months

While hitting $1M ARR is a significant milestone, it's not just about the revenue number. You're looking for a combination of growth, retention, and efficiency metrics that together indicate you're on the right track. More importantly, you're looking for strong customer success stories and a repeatable process for delivering value.

Here are some of the goals, signals, and measurement methods you can use to gauge your progress toward PMF.

*Thanks to the folks at First Round for some great reporting on benchmarks here.

“Don't bring the rocket launcher to the archery competition.” — Zachary Naglieri

Tooling during signs of PMF

Building on the tool stack you started to use in the previous phase, I’d recommend adding the following as you move into phase two:

1. Datadog for monitoring and analytics so you can track usage and monitor product performance as you scale.
2. A product analytics tool like Amplitude or PostHog to help you understand how customers engage with your product and roll out new features.
3. Continued investment in a CRM like Clarify as you manage your growing pipeline and track customer interactions.‍
4. Lightdash, Hex, or Fabi.ai for reporting so you can create custom dashboards, essential for tracking your key metrics and sharing insights across the team.‍

Phase 3: 🌲 Growth

The growth phase is where things start to get really exciting - and let's be honest, a bit scary too. You've proven you can consistently deliver value to customers, and now it's time to pour fuel on the fire.

You're not just running a startup anymore; you're building a real company. Your focus shifts from finding fit to optimizing and expanding your market presence. You're no longer asking if you can build a viable business; you're figuring out just how big this thing can get and how fast you can get there.

You need to be laser-focused on three key areas at this point:

1. Scaling operations: Time to build out your team and processes. You need to support rapid growth without everything falling apart at the seams. Trust me, scaling is hard - you'll feel like you're constantly putting out fires.
2. Market expansion: Look for opportunities to enter new market segments, geographies, or adjacent product areas. But be careful not to spread yourself too thin. As the saying goes, "the main thing is to keep the main thing the main thing."
3. Efficiency optimization: As you scale, you've got to keep a close eye on your unit economics. It's easy to get caught up in top-line growth and forget about profitability. Don't fall into that trap.

Now, let's talk metrics. At this stage, you're dealing with more complex systems and interactions. It's crucial to maintain a holistic view of your business while still being able to dive deep into specific metrics when needed.

Some key metrics to keep an eye on:

1. Net revenue retention (NRR): Aim for >110%. This shows you're not just keeping customers, but they're expanding their usage over time.
2. CAC payback period: Try to keep this under 12 months. You want to recoup your customer acquisition costs quickly.
3. Magic number: Shoot for >0.75. This indicates healthy sales efficiency.
4. Gross margin: 70%+ is where you want to be, ideally. This gives you room to reinvest in growth.
5. Revenue per employee: This is primarily an internal metric and what good looks like will depend on your ARR. Industry benchmarks range from about $55k/employee at under $1M ARR to about $118k/employee at $5-$10M ARR.

These numbers aren't just vanity metrics. They tell the story of your business health and growth potential. Use them to guide your decisions, but don't let them blind you to the qualitative aspects of your business.

So, what's the north star for this phase?

North star: $10M ARR

Timeline: <3 years T2D3

(Source) The T3D3 framework Triple, Triple, Double, Double, Double suggests aiming to triple your revenue for two years, then double it for three years. It's ambitious, no doubt about it, but is the new standard for VC-backed growth to aim for.

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While rapid growth is the goal, it's not just about top-line revenue. You're looking to build a sustainable, efficient growth engine that can continue to scale beyond this phase. Don't sacrifice long-term sustainability for short-term gains.

Reminder: Don't forget about your team during this phase. Growth at this pace is exhilarating, but it can also be exhausting. Make sure you're building a culture that can sustain this level of intensity. Your team is what's going to make or break your success at this stage.

There’s a lot happening on your team and in your product during this growth phase. Don’t get distracted by trying to measure everything. Here’s a breakdown of the most important goals to look toward:

*Note: A few of these goals and metrics are only relevant as you approach that $10M ARR goal. We’ll talk about this stage in future posts, but for right now you can consult those as further out benchmarks to aspire to. **(Source)

Tooling during growth

Building on the tool stack you started to use in the previous phase, I’d recommend adding a few tools for marketing automation, support, and customer success during the growth phase. Here are a few I’ve enjoyed using:

1. Inflection or Customer.io for marketing automation to help you scale your marketing efforts and personalize communications as your customer base grows.
2. Support tools like Thena, Pylon, or Plain to efficiently manage the increasing volume of customer inquiries and maintain high-quality support as you scale.‍
3. Vitally or Catalyst for customer success management to help you proactively manage customer relationships, drive retention, and identify expansion opportunities in your growing customer base.

Recap: Taking this info into your work

“What gets measured gets managed.” — Peter Drucker

Now that we've explored the different phases of growth for company building and what metrics to track, I hope you feel inspired to improve your own journey. As a reminder, here are the key takeaways to keep in mind:

• Understand the metrics for each phase: Pre-product, early PMF, and growth
• Build rituals around your data: We review our metrics on a weekly/monthly/quarterly/annually basis
• Make the most of every day to learn, fail, and improve quickly
• Balance quantitative metrics with qualitative customer insights
• Adapt the framework to your unique situation
• Focus on creating real value for your customers

Remember: Building a startup is a marathon, not a sprint. Persistence, adaptability, and learning from failures are crucial. And, at the end of the day, use these metrics as guideposts, not hard rules.

Huge thanks to James Lee, Somrat Niyogi, and others for their valuable feedback on this article.

Now it's your turn. Take these insights, apply them to your own startup, and go make something amazing. I’d love to hear from you as you start to apply the best practices in this post.