Venture investors profess a preference for industry disruptors, yet this review and my previous blog finds that investors more readily back incremental innovation with credentialed founders than industry disruptors sponsored by outsiders.
Half the founding CEOs of Zero to One companies claimed difficulty raising funding, almost double the rate of One to N companies. John Foley, founding CEO of Peloton Interactive, described the initial funding process as ‘bone crushing’ despite his pedigree as a proven entrepreneur. Y Combinator rejected Alex Solomon, founder of PagerDuty, four times before admitting him on the fifth try after he had achieved product market fit. Anthony Caselena bootstrapped Squarespace for seven years before receiving a first round of venture funding. Venture investors more readily backed incremental innovations, including three in this sample that they incubated.
Based on thirty years of prior experience working with and investing in startups reinforced by observations from this study, I propose the Founder Opportunity Fit framework in Figure 1.
This framework identifies three stages that companies must traverse from startup to IPO with different demands on executives at each stage. Get to Market refers to the product development stage required to design, create and ship a product. Go to Market is when a company validates Product Market Fit through a repeatable, profitable and scalable sales process. Scale to Opportunity refers to growing the business at a pace and scale to win market leadership and maximize market share.
Founder Opportunity Fit requires insight, functional skills and an entrepreneurial mindset to evolve at each stage of the company development. Founders must either scale with the business, augment the executive team for new skill requirements, or recruit new leadership as the demands of the business change. In our review, 25% of the companies changed CEOs prior to their public offerings, including 29% of founding CEOs in their twenties and 23% of founding CEOs older than thirty when the companies were founded. New CEOs tended to replace technical founders at the Go to Market stage. CEO changes also clustered at the scaling stage as companies prepared for IPOs.
Figure 1: Founder Opportunity Fit
Insight is a key driver at all three stages of the Founder Opportunity Fit framework drawn from industry experience or an outsider’s perspective. Product insight that delivers a differentiated technology is salient at the first stage. Insight that offers a distinctive business model or go to market strategy is relevant in the second stage. Strategic insight in positioning the business for leadership is most pertinent in the third stage. This study observes that initial founder insight identified a distinctive product or business model that delivered a differentiated technology or service to establish and scale the company.
Operating requirements change as the business grows. Technical and product skills are paramount at the Get to Market stage, selling at the Go to Market stage, and financial and operating skills at the Scaling stage. Founders can recruit proven executives with skills required at each of these stages yet founding CEOs must also develop the acumen to effectively manage and apply sound judgment as the business grows.
Company culture and entrepreneurial mindset evolves as a company grows. Speed and resilience are vital at the initial stages of the company requiring a sense of urgency and persistence. Adaptability to changing market conditions and competitive responses is important across the life of the business, especially as the company seeks product market fit. A growth mindset becomes paramount once the company achieves product market fit and seeks to scale.
Founder Opportunity Fit: Final Thoughts for Entrepreneurs and Investors
Traditional wisdom based on Founder Market Fit focuses on domain experience. As we have observed, experience is an ally for incremental One to N innovation but may obstruct disruptive Zero to One innovation. Most innovation — up to 98% according to studies — is incremental, so few entrepreneurs need worry about experiential blind spots that block disruptive innovation. Yet our most iconic technology companies and much of the technology market value on NASDAQ originated from disruptive startups, so understanding the dual impact of experience is vital for investors and entrepreneurs who seek to create a new order of things.
Investors have consistently missed disruptive startups as they overlook high-potential founders by valuing experience over insight. We observed that half of disruptive startups had difficulty raising initial funding, in some cases bootstrapping for up to seven years and overcoming “bone crushing” rejection by over one hundred venture firms. This is from a sampling of the rare companies that made it to the pinnacle of startup success — market leaders and publicly traded unicorns. This sample does not include, and we cannot ascertain, the many startups that may have scaled the heights but lacked access to capital and other resources to reach their potential.
The Founder Opportunity Fit framework offers entrepreneurs a tool to increase their likelihood of success and find their highest and best use of their potential. Entrepreneurs optimize when they combine insight and passion with talent in an initiative with the market and economic potential to drive a large outcome.
Founder Opportunity Fit is also a tool for investors to identify the team that best aligns with a market opportunity. Founder Opportunity Fit is a framework relevant to all investors from seed through growth stage. One should not confuse insight and experience. Insight is the ultimate currency and often the most useful insights come from industry outsiders. As Thiel and Khosla remind us, the essence of disruptive innovation is on heretical truths, not on experience.
