Product market fit: the ultimate risk-killer

• Startups
• Product market fit, Startup, Startups, Strategy, Venture Capital
• February 7, 2021

I recently read a Tweet by Michael Seibel, the Managing Director at Y Combinator and co-founder of the world’s leading live streaming platform Twitch, that went along these lines:

“Too many founders want to outsource the discovery of product/market fit to their employees.  This is a mistake.  You don’t outsource the most important goal of your company.”

The concept of product/market fit (PMF) just means that you’ve found the ideal market in which to sell your product. It sounds so simple in theory, but founders get this wrong all the time. They either miss the most attractive market, thereby short-changing their dreams for their startups, or they pick an unattractive market and watch their businesses die in the process.

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The concept of PMF was developed by Andy Rachleff, a well-known investment expert and lecturer at Stanford Business School. He argues that a good team cannot overcome a bad market decision. Conversely, a mediocre team can do well if they pick the right market. Of course, a great team choosing the right market is when the magic happens.

Marc Andreessen, the creator of Mosaic (the first web browser) and co-founder of a16z (a venture capital firm better known as Andreessen Horowitz), doesn’t mince his words either:

“The only thing that matters is getting to product/market fit.”

Clearly, PMF is important. Genuinely important. Could it be the most important thing? For a witty discussion on many things that are the “most important thing”, check out The Most Important Thing written by Howard Marks, chairman and co-founder of Oaktree Capital.

Risk-killers

One of my favourite venture capitalists, Josh Wolfe (Lux Capital), believes that the greatest startups are risk-killers rather than risk-takers. This is an important distinction.

Chasing growth above PMF creates much higher risk in an already risky game. By first achieving PMF, there are certain risks that have been killed in their infancy. This improves valuation as well as probability of survival.

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Many startups are born from a specific product idea or technological advancement. Because we live in a platform-driven world where an idea can often find application across numerous sectors and countries, startups need to spend a lot of time thinking about the right market to operate in.

It’s a dangerous road to choose a market based on arbitrary early success rather than a sensible understanding of how the product is attractive to customers. Of course, many entrepreneurs need to hustle for cash at every opportunity, especially in South Africa where the venture capital pool isn’t nearly as deep as it is in the United States.

That’s ok, provided you recognise the difference between true progress in your desired market vs. peripheral sources of income. Otherwise, you may chase growth in the wrong places, which could cost you far more in the long run.

How will you know when you’ve achieved product/market fit?

Andreessen described this so well that I won’t even attempt to add to it:

“And you can always feel product/market fit when it’s happening. The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can. Reporters are calling because they’ve heard about your hot new thing and they want to talk to you about it.”

When you find it, you’ll know. Until then, keep looking.

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