The Most Important Predictor of Startup Success
Many highly accomplished investors and entrepreneurs believe that “Founder-Market Fit” is the most important predictor of startup success. SV Angels’ David Lee seems to have coined the term when he shared that that they prefer startups whose founders have achieved Founder-Market Fit, which he defines as “founders who personify their product, business and ultimately their company.
In the early days, this usually means building something for themselves or starting a company in a sector where they have deep domain expertise (or both).” Chris Dixon (whose Tech Crunch Founder Stories is the inspiration for our pizza and beer version at 1871) points out that Founder-Market Fit is the best way to predict whether a company achieves “Product-Market Fit” which eminent entrepreneur and VC Marc Andreesen, defines as “being in a good market with a product that can satisfy that market” and “the only thing that matters for a new start up”.
The critical idea behind Founder-Market Fit makes sense: an entrepreneur who doesn’t have a deep understanding of their market (Founder-Market Fit) will have a very difficult time creating a great product to satisfy that market (Product-Market Fit). I learned this one the hard way in founding my first start-up: FirstLook.
Like a lot of companies founded around the time of the internet bubble, FirstLook was solving a problem that its founders only understood from looking at it from outside the industry. We quickly learned that despite our research into the industry, our understanding was 2 dimensional — like using a satellite photo to understand the terrain on the ground. We struggled to achieve Product-Market Fit. After burning far too many years and far too much cash, we figured out how to best serve the market, finally pivoting FirstLook onto a trajectory for success.
In contrast, our most recent start-up, MAX (Marketing through Automated eXpertise), has grown to a scale in its first two years that took us 5 years to achieve at FirstLook and is tracking to grow at far more dramatic rates. The difference: Founder-Market Fit — I’d learned the industry from the “inside-out’. Living with a problem and understanding it in a nuanced way provides insights that won’t be apparent to someone looking at it from the “outside-in”. These gaps often only become apparent when start-ups fail to rapidly achieve Product-Market Fit. While it is possible to iterate long enough to figure out Product-Market Fit through pure trial and error, this is incredibly expensive from a cash burn and company morale perspective. Few start-ups have the capital to keep their company afloat long enough to reach Product-Market fit in such an inefficient way.
So how did many of the most successful founders reach Founder-Market Fit? In a word: Experience — the right experience.
Founder-Market Fit can be learned through experience or deep immersion learning. Braintree Founder Bryan Johnson, who is building one of the most exciting payments companies in the world, is a great example of the benefits of Founder-Market Fit through experience. Before creating Braintree, Bryan was a very successful salesman in the payments business, selling the status quo products to companies. He saw the pain and inefficiency of the status quo up close empowering him with the insights and nuanced understanding that serves as the basis of Braintree’s unique solutions. While the road is littered with failed payments start-ups, Chicago’s Braintree is the emerging leader in this exciting space and has secured over $70 million in financing from two of the Valley’s top Venture Capital firms: NEA and Accel. Check out Bryan describing his path to creating Braintree on Chicago Founders’ Stories
In addition, this week’s Chicago Founders’ Stories guest, Siri Founder Dag Kittlaus, became one of the leading thinkers on mobile computing by becoming obsessed with the telecom and mobile phone revolutions in the mid-1990s. Dag read everything he could find on the topics, met with people on the cutting edge, eventually securing a position at Norway’s leading telecom company and later at Motorola where he led cutting edge mobile projects. By the time he started Siri, Dag had already spent thousands of hours immersed in mobile businesses, creating strong Founder-Market Fit. Check out this week’s Chicago Founders’ Stories to hear the whole story.
Finally, one of my favorite stories of deep immersion learning is about a Y Combinator company called 42Floors. Founder Jason Freeman decided that there had to be a better way to search for office space, but he also realized that having a bad consumer experience didn’t make him an expert in solving the problem — any more than having a bad meal qualifies me to create the next great restaurant. Taking advice from (YC Founder) Paul Graham, Freeman decided he wasn’t just going to build a web product, but actually learn the industry first. He got his broker’s license, shadowed a broker in town, and learned, over the course of six months, that his original thought of attacking brokers was incorrect — he should instead work with them. “I chose not to go to war with the brokers, but to work cooperatively with them. And they’re willing to give us their listings because they want to market better than they are currently.”
Freeman’s time spent in deep immersion and achieving Founder-Market Fit saved him from a potential expensive decision, going to war with the brokers might have alienated the customers he now currently serves. The results have been tremendous: 42Floors has grown at a remarkable rate in the year since and has raised nearly $18 million from some of the top firms and Angels in the Valley including SV Angels, Bessemer and NEA.
While Founder-Market Fit isn’t the only factor in these companies’ success, it gave them a real leg up on their competition. As you consider investing significant time or money in a start-up it’s worth remembering the price of weak Founder-Market Fit. In my experience, investing in creating the right Founder-Market Fit like Bryan, Dag and Jason Freeman is the best investment an aspiring entrepreneur can make.
