Weekly Reflection
by Paul Asel
In the past year we have developed a proprietary framework to assess Product Market Fit (PMF). Marc Andreessen asserts PMF is “the only thing that matters for a new startup” and that “the life of any startup can be divided into two parts: before product market fit and after product market fit.” Having found that investment risk changes markedly once on the other side of product market fit, so, in line with the industry norm, NGP Capital has demarcated growth stage as post-PMF investing.
In the absence of Product Market Fit, early stage investors focus on Founder Market Fit to assess potential seed and Series A investment. Tom Wilson, partner at SeedCamp, a seed stage investor in 350+ startups, identifies Founder Market Fit as the early stage corollary of Product Market Fit for growth stage investors as follows:
Note that FMF and PMF are adjacent or overlapping but distinct concepts, a point that has important implications for management assessment of growth stage companies. I will address this distinction later, but for now, let’s understand how early stage investors assess Founder Market Fit.
What is Founder Market Fit?
Early stage investors generally agree on three criteria when assessing Founder Market Fit:
- Domain expertise
- Mission-driven mindset
- Relevant skills and traits
Domain Expertise
James Currier at NFX Ventures said that industry experience can be useful but “Too much knowledge is a blocker to innovation.” Currier used the following chart to indicate the tipping point at which industry experience switches from a benefit to potential liability for disruptive innovation.
This fits with my independent study of founder experience at tech incumbents and recent tech IPOs, which found that average prior industry experience for 0 to 1 innovations was less than five years.
SVAngel looks for “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).”
Following are examples of how founders developed domain expertise independent of industry experience by following separate paths of learning that led to disruptive innovation. Several of these stories you know well, but they help illustrate a pattern.
- Steve Jobs and Steve Wozniak, Apple: Steve Jobs may have been one of the early buyers of Wheeler’s books. Jobs had no technical background, but his high school friend Steve Wozniak tinkered with electronics and intrigued Jobs. Wozniak and Jobs developed a game board to replicate Pong, and Jobs used the game board to get hired by Atari where he worked for two years before starting Apple. Together, they attended the Homebrew Computer Club where they were discovered by. Mike Markkula, a product marketing manager at Intel. Markkula provided angel funding and introduced Arthur Rock, who provided an additional $60,000 funding after seeing the crowd gathered around the Apple booth at the Homebrew Computer Show.
- Michael Dell, Dell Computers: Dell received his first computer, an Apple II, at age 15 and promptly disassembled it to see how it worked. During his freshman year at the University of Texas, he started building customized computers for college classmates with parts bought directly from suppliers. From there, his business expanded through word of mouth. He formed Dell Computer in 1984, and left school to establish the first computer company to cut out middlemen and sell directly to consumers.
- Sean Henry, Stord: In middle school, Sean wanted a cell phone but his parents refused to buy him one. So he started buying and selling cell phones on his own. At age 10, Sean developed a passion for cars and began visiting a Lamborghini showroom each weekend. Hebefriended the owner and was hired to sell cars at age 14. He started buying car parts and selling them directly to dealerships. One supplier was Huehoco GMBH, a $2 billion metal parts manufacturer in Germany. At age 17, he convinced Huehoco to hire him to do a study on lean management and present his findings to the Board. Sean went on to Georgia Tech to study Operations and Supply Chain Management. As a freshman in 2015, he developed a warehouse automation system together with a friend and started Stord.
Each of these founders developed domain expertise in non-conventional ways, which enabled them to see the opportunity differently from industry insiders.
The takeaway is simple. Investors need to inquire about founders’ formative years and to hear their stories. Unless we do so, we may miss Founder Market Fit and overlook important traits that form success.
Mission-Driven Mindset
Bill Gates has cited “passion” as the most important criteria in starting a business. Second in importance was “bandwidth.” The ordering was curious coming from a fellow computer nerd. For me, bandwidth computed, passion did not.
But the real world has a way of reordering priorities. Passion now computes. One of my first meetings with an entrepreneur seeking to raise money made an indelible impression on me. He started his pitch by painting a dark picture, “We have 2000% inflation, 30% unemployment, and families are selling their keepsakes in the streets to stay alive.” But then a twinkle and a smile emerged and he said, ”So that’s the problem, now let me tell you about the opportunity.” I was hooked. Since then, I look for CEOs who ‘eat nails for breakfast.’
Relevant Skills and Traits
This is the hardest category to judge for Founder Market Fit. Some skills and traits are consistent across companies and founders. They include the criteria in our management assessment checklist.
Yet we may better think of our management assessment as a balanced scorecard instead of a checklist.
- Risk appetite should be neither too high nor too low.
- Persistence must be balanced with creativity and adaptability.
- Promotional skills are great, but overselling is perilous.
Requisite skills vary depending on the key success factors of the business. A semiconductor firm must have a technical DNA, while logistics or ecommerce firms require operational DNA.
Requisite skills also vary as the business matures. In The Founder’s Mentality, Bain Capital said that the skills required for “Scaling” differ markedly from “Winning.”
Requisite skills may also evolve along with the business strategy. David Beisel, founding partner at seed stage NextView Ventures, coined the term Founder Go to Market Fit for this purpose. When go-to market strategy changes, he advised board directors to assess if the current business DNA is still appropriate.
When Zum expanded its strategy to sell a run of the full school transport network, its sales motion changed significantly, and it recast its sales team. Workfusion did the same when it focused on specific workforce automation solutions for the financial vertical.
Assessing Founder Market Fit
Scott Kupor, A16Z partner and author of Secrets of Sand Hill Road: Venture Capital and How to Get It, highlighted the importance of assessing management well in early-stage investing. According to Kupor, thedeadliest error of early-stage investing is backing the right market but the wrong team.
To assess Founder Market Fit, Josh Kopelman at First Round Ventures considers three questions when assessing Founder Market Fit. What compelled the founder to start the business? What experiences does the founder have in the space? What unique insight does the founder have in order to win?
Venture resources enter non-control investments with multiple co-investors. Resources, management access and timing vary, altering the nature of management assessments. Fortunately, By frontloading much of our management assessment to expedite diligence, we can help qualify businesses in advance and reduce biases that inevitably emerge when we meet great promoters in person.
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