In Arc, our company building immersion for Sequoia’s pre-seed and seed-stage founders, we focus on the path to product-market fit. Using the Arc PMF Framework, we describe three distinct PMF archetypes, depending on how customers view the problem your product solves. This new companion framework is about application: Once you understand the three archetypes and your company’s place in the world, what steps can you actually take day-to-day to pursue PMF, and how do you know you’re on the right track?

Answer the Four Terrifying Questions

Achieving durable product-market fit requires tackling four terrifying questions that should keep you up at night as you build your business. Each terrifying question has positive indicators that mitigate your fear and indicate you’re headed in the right direction, and a resolution that confirms you’re ready to tackle the next terrifying question. As you build conviction in your answers to the terrifying questions, you get closer to PMF.

How to Answer Each Question 

The more overlap between your company and the market opportunity, the closer you get to resolving the terrifying question.

The first terrifying question to confront is: What is my company’s right to exist? Great companies are built on a founder’s authentic insight about a market opportunity. At this stage your work is to understand the category, the competition and your unique advantages as a founder. How clearly can you describe your founder-market fit? Pressure-test the originating belief behind your business. You want to understand if the TAM provides a big enough reward. As you refine your idea, there will be positive indicators that suggest you’re heading in the right direction.

• You can articulate why it’s a compelling category and market, and why now is the moment to capture it
• Your wedge or entry point into the market opportunity becomes clearer
• You can articulate your unique advantage in seizing this specific opportunity—why you have founder-market fit
• Ideation compounds as you hone your direction—information and conversations result in “productive pivots” that build sequentially; you feel progress, not just motion 

Conviction in your originating belief should grow as you pressure-test your idea and see more positive indicators. You know that you’ve answered this question when you’re ready to marry the idea for the next decade-plus, and you’d recruit a best friend to work on it with you. 

For instance, when David Vélez was starting Nubank, he turned down an opportunity to join Sequoia as a partner in California. He had always wanted to start a company, and after finishing Stanford GSB he felt a pull back to Latin America. He then spent months pressure-testing his insight about the opportunity to disrupt Brazilian banking. The deeper he dug, the stronger his conviction in the idea became, and he identified his wedge: credit cards, which offered a lower regulatory barrier to entry. Once he was resolved and knew he was ready to commit, Nubank was born.

You have an insight into a market opportunity, but the terrifying question remains: Do people care enough about the problem you’re solving? If people don’t care enough, you won’t be able to build a meaningful business by addressing it. They need to care about the problem not only in the abstract, but they need to be willing to pay for the solution. Speaking with potential customers gives you this information. You need a critical mass of conversations to produce enough evidence: We’ve seen companies conduct 50+ conversations in a week. Positive indicators that the problem resonates with customers:

• High hit rate on cold outreach (which is more likely to reflect truth vs. warm leads predisposed to “be nice”)
• More people than you invited show up to calls and demos
• Customers’ eyes light up at your pitch and they lean in; your idea represents an unlock for them: “I want this now!”
• Customers express clear willingness to pay for the solution 
• Customer responses help you refine the idea and sharpen what a differentiated solution might look like
  

It’s important to be objective about how customers externalize these positive indicators, and not let confirmation bias cloud your judgement. If only one in 10 customer conversations lean in, the problem may not matter as much as you thought—but what matters most is the depth of engagement. You’re looking for a set of customers who respond passionately and feel your pitch really speaks to them. Dig deeper into what they have in common and laser focus on this segment. It can be easy to talk yourself into believing that customers are more excited about your idea than they are. The conversations that resonate most strongly will help you define your ICP, how they see the problem and why it matters to them. 

The ultimate resolution you’re seeking through these conversations is a set of design partners—initial customers who are excited to co-create the solution with you. If you’re seeing rabid customer interest and you’ve secured design partners, then you’ve successfully validated the problem and answered this terrifying question. 

Before launch, DoorDash’s founders spoke with “three or four hundred” small businesses. While their initial idea was about last-mile delivery, they weren’t initially targeting restaurants, since they thought Grubhub and others had already solved this problem. However, they discovered through customer conversations that competitors only routed orders, and left restaurants to make their own deliveries. Local restaurants that couldn’t afford their own delivery staff were the most passionate merchants DoorDash interviewed, with a burning unmet demand. Their first onboarded customer was a macaroon store in Palo Alto that had been turning down dozens of orders per week because they couldn’t deliver them.

After you’ve validated the problem, there are still likely many different ways you could choose to build your product to solve it. At this stage, the terrifying question becomes: Does your product actually change behavior? It needs to not only work but to delight customers enough to transform their behavior. Your primary task at this stage is iterating on your product and evolving features to find positive indicators that users are consistently engaging with at least one feature. A product feature becoming “sticky” signals that it’s adding enough value to change users’ behavior, in addition to other positive indicators:

• A clear “lightbulb” moment in your demo that makes your product click for people
• Short activation period: users are able to on-ramp and get immediate value from the product, which you can measure as engagement
• A specific feature in your product becomes durably sticky, even if it’s not the entire product surface
• Customers make nuanced feature requests, point to a compelling feature set
• Power user behavior emerges as an outlier pattern among a subset of customers 
• Evangelism and virality emerges—users start telling peers about a specific feature or capability

As you iterate on the product to move your metrics up, your North Star is engaged and retained users. A growing set of retained users, and a low churn rate, give you conviction that your product is indeed changing customers’ behavior. If your most engaged users match the ICP you identified earlier, it should strengthen your conviction in the problem. If not, this will help you refine your understanding of the problem and your ICP, and evolve your product to serve them. 

Drew Houston of Dropbox says product virality is “an exponential game, but also a game of inches.” As Dropbox came out of beta and opened to general availability, the team obsessed over every surface of the onboarding flow and feature usage. They soon figured out that users who shared files with contacts got the most value from the product. As they optimized for file sharing—even advertising on Craigslist to get users in the office to test new designs—the product began to spread virally, with high activation and retention rates, and low churn.

After finding product traction and building conviction in your solution, the next terrifying question to confront is: Will people pay enough for it to build a real business? Scaling a meaningful business requires an exchange of value: customers have to be happy to pay your asking price. Your initial beta customers likely won’t pay your ideal price point, and that’s OK—getting there is a process. As you seek to prove the hypothesis that your price target is realistic, you should iterate on your sales process just like you iterate on product features, testing how to demo, price, package, activate, onboard and support your customers. As you strengthen the value exchange with customers, you’ll see positive indicators: 

• Discovery process confirms your assumptions about budget availability 
• Customers don’t balk at your asking price or slow roll the deal
• High ratio of engaged users upgrading from the free tier to the paid tier
• Contract reviews happen quickly; you don’t get stuck in procurement purgatory
• You don’t find yourself in a knife fight with competitors based on price

The ultimate answer to whether customers will pay enough to build a business is a list of paying customers who feel they get great value from your product at your asking price. But to achieve your ambition and build an important company, you need to grow. You should be able to chart a path to $500M in revenue based on your conviction in the problem, your assessment of the TAM and the strength of the value exchange.

When Block first introduced the Square mobile card reader, they intended to sell the hardware and software to merchants. The founders had answered the terrifying questions of whether people cared enough about the problem and whether their product changed behavior, but they were still iterating on the price point and how much people would pay. As Jack Dorsey explains, at one point they realized the best value exchange would be to give the hardware and software away for free, and charge a percentage fee on each transaction. The company would get recurring revenue rather than a one-time sale, and their customers would get immediate value without any capital outlay—a win-win, which quickly brought them to PMF.

Revisiting the Terrifying Questions

While the terrifying questions build on one another, you shouldn’t think of answering them in a strictly linear way. Practice is always messier than theory, and it’s possible you’ll confront multiple questions at once, and move fluidly between them over time.

For example: In 2022 Robinhood, already a public company with over $1B in annual revenue, made a profound realization about their ICP: their core customer was not the first-time amateur getting started with investing, as they’d thought, but rather the “active trader” making many trades per week or day. In our Crucible Moments podcast, founder Vlad Tenev describes how discovering this caused the team to revisit who cared most about the problem they were solving, whether their product was optimized to deliver those users the most value, as well as the value exchange with those customers. Over two years, the company radically evolved its offerings based on these insights and iterated to strengthen their answer to each terrifying question. The result has been dramatically increasing revenue per user (and Robinhood’s share price along with it).

Every time you expand to a new customer or product line, you confront the same terrifying questions again. PMF is an ongoing pursuit, not a finite destination. But we believe that if you answer each terrifying question, the output is product-market fit.