False Positives and Service-Market Fit

Most tech-enabled service startups mistake service-market fit for product-market fit

The concept of product-market fit is familiar to most founders. It means (enough) people want what you’re making.

For tech-enabled service startups, there is a related, prior concept: service-market fit.

It’s easy to conflate service-market fit with product-market fit when you’re not used to seeing the distinction. People are paying you for the thing your business does! Isn’t that what product-market fit means?

The difference is in the risk you’re taking, or alternatively, the hypothesis you’re testing.

With product-market fit, there is significant market risk. Many startups fail to achieve product-market fit. The hypothesis fails in testing.

With service-market fit, there is little market risk. Tech-enabled services generally start out as just services that use existing technology well. You’re not testing a hypothesis by offering a service that other people already offer - you know there is demand for what you’re selling.

Service-market fit is a double-edged sword. The good part is that you have customers and revenue right away. Customers give you experiment data. Revenue gives you runway. Both are desirable.

The bad part is that you can fool yourself into thinking you have product-market fit. You have a product (the “tech”) to go along with (or “enable”) your service, but are people buying your service because of the accompanying product?

Worse, revenue enables growth, which is severely negative if you don’t have product-market fit.

Growing without product-market fit robs you of agility. Agility allows you to iterate. If you can’t iterate fast enough, you won’t get to product-market fit.

(Growth before product-market fit also sets bad expectations for fundraising, but you shouldn’t make fundraising a primary driver of business strategy.)

I have seen many tech-enabled startups give themselves enough rope to hang themselves with by mistaking service-market fit for product-market fit and growing too early.

At the company I founded, Castle, we grew to $50k MRR and raised $4M from Y Combinator and Khosla Ventures on service-market fit. Our product worked - the ~60 internal users on Ops depended on it every day to manage properties - but it didn’t make our service 10x better.

Growth hurt agility. Finding product-market fit became difficult, while achieving product market-fit became vital. We couldn’t thread the needle. Castle wound down after 3.5 years.

Here is my suggestion to founders of tech-enabled services: don’t grow until you achieve product-market fit. Get a few customers in the door to start, then move any further demand to a waitlist. Iterate on the product until it achieves fit with the service providers.

Once you know your product actually makes your service 10x better along some dimension, then grow. Don’t fall prey to temptation (or pressure from your investors) to grow before then.