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June 25, 2007

The Pmarca Guide to Startups, part 4: The only thing that matters

This post is all about the only thing that matters for a new startup.

But first, some theory:

If you look at a broad cross-section of startups -- say, 30 or 40 or more; enough to screen out the pure flukes and look for patterns -- two obvious facts will jump out at you.

First obvious fact: there is an incredibly wide divergence of success -- some of those startups are insanely successful, some highly successful, many somewhat successful, and quite a few of course outright fail.

Second obvious fact: there is an incredibly wide divergence of caliber and quality for the three core elements of each startup -- team, product, and market.

At any given startup, the team will range from outstanding to remarkably flawed; the product will range from a masterpiece of engineering to barely functional; and the market will range from booming to comatose.

And so you start to wonder -- what correlates the most to success -- team, product, or market? Or, more bluntly, what causes success? And, for those of us who are students of startup failure -- what's most dangerous: a bad team, a weak product, or a poor market?

Let's start by defining terms.

The caliber of a startup team can be defined as the suitability of the CEO, senior staff, engineers, and other key staff relative to the opportunity in front of them.

You look at a startup and ask, will this team be able to optimally execute against their opportunity? I focus on effectiveness as opposed to experience, since the history of the tech industry is full of highly successful startups that were staffed primarily by people who had never "done it before".

The quality of a startup's product can be defined as how impressive the product is to one customer or user who actually uses it: How easy is the product to use? How feature rich is it? How fast is it? How extensible is it? How polished is it? How many (or rather, how few) bugs does it have?

The size of a startup's market is the the number, and growth rate, of those customers or users for that product.

(Let's assume for this discussion that you can make money at scale -- that the cost of acquiring a customer isn't higher than the revenue that customer will generate.)

Some people have been objecting to my classification as follows: "How great can a product be if nobody wants it?" In other words, isn't the quality of a product defined by how appealing it is to lots of customers?

No. Product quality and market size are completely different.

Here's the classic scenario: the world's best software application for an operating system nobody runs. Just ask any software developer targeting the market for BeOS, Amiga, OS/2, or NeXT applications what the difference is between great product and big market.

So:

If you ask entrepreneurs or VCs which of team, product, or market is most important, many will say team. This is the obvious answer, in part because in the beginning of a startup, you know a lot more about the team than you do the product, which hasn't been built yet, or the market, which hasn't been explored yet.

Plus, we've all been raised on slogans like "people are our most important asset" -- at least in the US, pro-people sentiments permeate our culture, ranging from high school self-esteem programs to the Declaration of Independence's inalienable rights to life, liberty, and the pursuit of happiness -- so the answer that team is the most important feels right.

And who wants to take the position that people don't matter?

On the other hand, if you ask engineers, many will say product. This is a product business, startups invent products, customers buy and use the products. Apple and Google are the best companies in the industry today because they build the best products. Without the product there is no company. Just try having a great team and no product, or a great market and no product. What's wrong with you? Now let me get back to work on the product.

Personally, I'll take the third position -- I'll assert that market is the most important factor in a startup's success or failure.

Why?

In a great market -- a market with lots of real potential customers -- the market pulls product out of the startup.

The market needs to be fulfilled and the market will be fulfilled, by the first viable product that comes along.

The product doesn't need to be great; it just has to basically work. And, the market doesn't care how good the team is, as long as the team can produce that viable product.

In short, customers are knocking down your door to get the product; the main goal is to actually answer the phone and respond to all the emails from people who want to buy.

And when you have a great market, the team is remarkably easy to upgrade on the fly.

This is the story of search keyword advertising, and Internet auctions, and TCP/IP routers.

Conversely, in a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn't matter -- you're going to fail.

You'll break your pick for years trying to find customers who don't exist for your marvelous product, and your wonderful team will eventually get demoralized and quit, and your startup will die.

This is the story of videoconferencing, and workflow software, and micropayments.

In honor of Andy Rachleff, formerly of Benchmark Capital, who crystallized this formulation for me, let me present Rachleff's Law of Startup Success:

The #1 company-killer is lack of market.

Andy puts it this way:

  • When a great team meets a lousy market, market wins.
  • When a lousy team meets a great market, market wins.
  • When a great team meets a great market, something special happens.

You can obviously screw up a great market -- and that has been done, and not infrequently -- but assuming the team is baseline competent and the product is fundamentally acceptable, a great market will tend to equal success and a poor market will tend to equal failure. Market matters most.

And neither a stellar team nor a fantastic product will redeem a bad market.

OK, so what?

Well, first question: Since team is the thing you have the most control over at the start, and everyone wants to have a great team, what does a great team actually get you?

Hopefully a great team gets you at least an OK product, and ideally a great product.

However, I can name you a bunch of examples of great teams that totally screwed up their products. Great products are really, really hard to build.

Hopefully a great team also gets you a great market -- but I can also name you lots of examples of great teams that executed brilliantly against terrible markets and failed. Markets that don't exist don't care how smart you are.

In my experience, the most frequent case of great team paired with bad product and/or terrible market is the second- or third-time entrepreneur whose first company was a huge success. People get cocky, and slip up. There is one high-profile, highly successful software entrepreneur right now who is burning through something like $80 million in venture funding in his latest startup and has practically nothing to show for it except for some great press clippings and a couple of beta customers -- because there is virtually no market for what he is building.

Conversely, I can name you any number of weak teams whose startups were highly successful due to explosively large markets for what they were doing.

Finally, to quote Tim Shephard: "A great team is a team that will always beat a mediocre team, given the same market and product."

Second question: Can't great products sometimes create huge new markets?

Absolutely.

This is a best case scenario, though.

VMWare is the most recent company to have done it -- VMWare's product was so profoundly transformative out of the gate that it catalyzed a whole new movement toward operating system virtualization, which turns out to be a monster market.

And of course, in this scenario, it also doesn't really matter how good your team is, as long as the team is good enough to develop the product to the baseline level of quality the market requires and get it fundamentally to market.

Understand I'm not saying that you should shoot low in terms of quality of team, or that VMWare's team was not incredibly strong -- it was, and is. I'm saying, bring a product as transformative as VMWare's to market and you're going to succeed, full stop.

Short of that, I wouldn't count on your product creating a new market from scratch.

Third question: as a startup founder, what should I do about all this?

Let's introduce Rachleff's Corollary of Startup Success:

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

Product/market fit means being in a good market with a product that can satisfy that market.

You can always feel when product/market fit isn't happening. The customers aren't quite getting value out of the product, word of mouth isn't spreading, usage isn't growing that fast, press reviews are kind of "blah", the sales cycle takes too long, and lots of deals never close.

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. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house. You could eat free for a year at Buck's.

Lots of startups fail before product/market fit ever happens.

My contention, in fact, is that they fail because they never get to product/market fit.

Carried a step further, I believe that the life of any startup can be divided into two parts: before product/market fit (call this "BPMF") and after product/market fit ("APMF").

When you are BPMF, focus obsessively on getting to product/market fit.

Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don't want to, telling customers yes when you don't want to, raising that fourth round of highly dilutive venture capital -- whatever is required.

When you get right down to it, you can ignore almost everything else.

I'm not suggesting that you do ignore everything else -- just that judging from what I've seen in successful startups, you can.

Whenever you see a successful startup, you see one that has reached product/market fit -- and usually along the way screwed up all kinds of other things, from channel model to pipeline development strategy to marketing plan to press relations to compensation policies to the CEO sleeping with the venture capitalist. And the startup is still successful.

Conversely, you see a surprising number of really well-run startups that have all aspects of operations completely buttoned down, HR policies in place, great sales model, thoroughly thought-through marketing plan, great interview processes, outstanding catered food, 30" monitors for all the programmers, top tier VCs on the board -- heading straight off a cliff due to not ever finding product/market fit.

Ironically, once a startup is successful, and you ask the founders what made it successful, they will usually cite all kinds of things that had nothing to do with it. People are terrible at understanding causation. But in almost every case, the cause was actually product/market fit.

Because, really, what else could it possibly be?

[Editorial note: this post obviously raises way more questions than it answers. How exactly do you go about getting to product/market fit if you don't hit it right out of the gate? How do you evaluate markets for size and quality, especially before they're fully formed? What actually makes a product "fit" a market? What role does timing play? How do you know when to change strategy and go after a different market or build a different product? When do you need to change out some or all of your team? And why can't you count on on a great team to build the right product and find the right market? All these topics will be discussed in future posts in this series.]

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Comments

Hi Marc,

If a venture is BPMF, running cheap and lean - in your experience, how much time before it _must_ seek a major change in fit?

In other words what is the mean time between revolutions?

Thanks,
Santosh

Excellent way of putting this all in words. I agree. Despite having users, I think our company is still in BPMF at the moment but we will be releasing some new functionality that will move us to APMF soon. (crossing my fingers!). This is why we are bootstrapping at the moment.

I always wonder how so many BPMF companies get $80 million to burn through?

As you said, success comes in all shapes and sizes. I co-write articles on the topic of succes. I have interviewed several people including Jimmy Treybig, founder of Tandem Computers, and Mort Meyerson, former President of EDS and Perot Systems. You can see links to the articles at www.babblesoft.com/articles.php. I have learned quite a bit from this writing endeavor.

Here's to hoping the stars align and we get to APMF sooner rather than later!

Hey Marc, If product/market fit is all that matters, how does one objectively evaluate the 'fitness' criteria for a new product?

Great insight Marc. It's been a great series of posts and I think this one just topped the rest for me.

From your experience, if you begin to see a lot of other startups entering your market, how strong of an indicator would that be of a great market?

Thanks.

Right on Marc! I've got the fit right on a few occasions and looking back, it always seemed to happen when I did the least amount of planning, prep work, and marketing. I just stopped doing my own version of the business long enough to give a "few" people what they were asking me for. Felt like a sidetrack at the time.

All three are important, but I think there's a better reason why team is most important:

It's the hardest thing to change.

You're absolutely right; whether or not the market is right/responsive to your product is the key for success, but some of the biggest and best startups did not actually start out in the market they succeeded in. They had great teams who were able to steer the boat to better waters when they realized they were going off the deep end.

Look at PayPal; originally the idea was simply some software to transact cash exchanges on Palm PDAs -- but the team was nimble enough to adjust to their online dominance, and good enough to create a good product.

One could argue that companies with "great teams" that failed because of "the market" didn't actually have a great team in the first place; the team should have been able to recognize they were not in the right place and adjust accordingly.

I've worked for a number of startups; some have done very well, some have failed miserably, some just kinda stagnate in the middle. Two companies I've worked for "hit the jackpot", both being acquired for around half a billion by large, well-known companies. Both had very good teams, but one didn't change much from its original inception; it "hit the market" and needed little adjustment. The other evolved over time, starting out in an under-performing market, then changing their product to make a big splash in a bigger market.

So, I think I have to respectfully disagree. Team is most important because everything else leads from that; without a good team, you can't identify the market, if you can't identify the market, you have little hope for producing a quality product. Everything derives from the team.

...Paul

Hi all -- I deliberately left this post hanging, will come back to all the fun issues like when to change, and what makes a product "fit", in future posts...

Marc

$80M is chump change. One mobile email company I know of has burned through over $300M in VC, with nothing to show for it. Sure hope you're not invested in them. I'd name names, but they sue everything that moves.

I agree with this blog post, however, I think some teams when they're really good can and do shift markets.

For example, Opsware was in two markets, I think, the Ops and the Ware market. They dropped the Ops and went into the ware market and survived.

Could a more mediocre team do that? I'm not so sure.

A corollary to "The only thing that matters" can be that it is very difficult for offshore startups (in India or China) to be able to nimble enough and achieve product/market fit (if targeting US consumers). I would assume that achieving the right fit will require a few iterations and if you have your engineering teams working out of a remote location in India while the marketing team is sensing the customer/market trends in the US, it is going to be a herculean task. I do not know of any startups from India having achieved this fit/success. Of course sitting in India you can achieve a fit for the Indian market (example Rediff.com) but if you are targeting US markets/consumers, be prepared to slog it out.

Thanks Marc for putting into concise format what was already at the back of my mind but lacking the words.
Nitin
http://nitnblogs.blogspot.com

Great post Marc. However, I do feel that one of the key issue is not address here which is luck (or timing or any other word you can find for it). You might say that you can create your own luck. But let realise it, most company that were really successful can't explain it not because market/fit but pure luck - being in the right time in the right place. Explaining the other factors are just can be done afterward...
Bad factor team, product and market can only explain why they didn't happen not why they happen.

At our first Y-Combinator meeting, we were all given t-shirts that read "Make something people want." Another way to describe the idea of market.

Zaid -- yes, exactly.

Hi Nil -- yes, topic of an upcoming post -- and to foreshadow that, I completely agree with you that for all practical purposes, luck and timing are the same thing.

Hi Nitin -- yes, this is one of the things that makes offshore development MUCH harder than it seems, at least for startups, in my opinion.

Hi Paul and Tim -- great points, and my next post in the series will be on the topic of shifting markets. It is true that it can require a great team to do this. But I still keep the focus on market because there is no shortage of great terms executing on bad markets even now.

Excellent post - I absolutely agree. When Marc talks about a good team, I believe he means a good execution team which is good at building a product and selling it (assuming there's a market for it). Teams which are good (as proven by past success) will still fail if there's no real market for their product.

There's a very common problem with founders who start a company after being involved in a big success in the past. The problem is powerful self-delusion which stems from some deep conviction about having the midas touch, being invincible, and a master of the universe. Such folks are unfortunately very dangerous even when they mean well - they don't really listen to anyone (including their customers). They can often get VC money very easily based on their connections and reputation stemming from their past success. Their startups are not market-driven; they're an ego trip. There are many such examples, and they're quite surreal.

Paul -- the other area we differ is that it is not at all uncommon to see a bad -- or at least, substandard -- team figure out (or stumble on) a great market.

Hi Chris -- that's a great question -- on the one hand, great markets draw lots of competition -- this is one of the reasons why you never want to say "we have no competition" in a venture pitch; it's like saying you're in a terrible market.

But on the other hand, the herd-like behavior of entrepreneurs and VCs alike can see several or even many companies started in a bad market. Classic example: B2B exchanges in the late 90's. Didn't matter how many new entrants you saw, it was still a bad market.

So I think the upshot is that it's hard to draw any conclusions from that kind of herd-like behavior.

Ultimately the only proof of a good market is "the goldfish jumping out of the bowl" as John Doerr used to say -- customers/users going crazy for the product.

I guess the big question is where the great markets are these days for software and hardware products in this maturing industry. How many big holes are left to fill? It certainly seems that it has become more difficult to find them in the last few years - not impossible, just more difficult.

Hi Anonymous -- I'd argue that there are more opportunities than ever -- the markets for both software and hardware are fragmenting fast. They take radically different forms than in the past, though -- e.g. web sites instead of packaged software; consumer gizmos instead of computers for businesses.

Good topic for a future post :-).

I think this is by far the best article/post I have ever read on this topic and this includes having gone to Stanford and listened to many entrepreneurs/VCs talk about it. It is clear, well laid out and gets right to the heart of how to make a big success happen.

That said, as you state at the outset, there are many shades of success— about as many as there are types of entrepreneurs, and what is often missed in these arguments, is that it is on the margin that the other two factors come into play; for instance, if the market is merely good (100% CAGR) and not great (500%+ CAGR) or if the incumbents are not totally brain-dead about reacting to a massive change in the market. I think you'll get to this in the market/product fit so I'll leave it at that.

It is so refreshing to see someone expressing clearly what a lot of VCs have themselves internalized even when they are yapping about team, team, team. Great going.

Marc,
Great post. I appreciated the causality comment -- very true in my opinion. I would also add that VMWare actually had the market available to it as well - Server/Compute Consolidation. CIO's and IT groups were (and are) hungry to achieve higher compute/cost efficiencies in 2001 - 2005 as they worked off the excess of the first bubble. I think it's interesting that one of this year's best companies is one that focused on the cost side of the computing value equation.

I assume by a 'good team' you mean people with pretty high genetic IQ's? I know google rigorously select for IQ in their interviews, it seems to be all they care about. It's by far the most important thing right? Computer companies really do prove that Charles Murray's Bell Curve was correct.

Great post Marc. I guess the next post should focus on how to evaluate markets? :)

truly amazing to read/see how ppl are invested in rationalizing why the team is the most important.
if the co failed b/c of market - then the team was bad. they should have figured it out.
if the company failed b/c of product, then the team was bad since they should have changed the product.
if the company succeeded then the team was great. b/c, b/c...

teams can/will be changed if they don't adjust to the prod/market fit.

i see soooooo many ppl attracted to VC, and start-up punditry seemingly to prove how smart they are.

These posts have an extraordinary educational value for a normal guy trying to hammer out a plan. thanks.

Your thoroughness is filling in many holes for me.

I feel I have a weak product (needs some iterating) and and as of now, non-existent market. However, I feel that if I improve the product, the market will quickly crystalize and it will be a success. I know it in my bones.

However, I am finding it impossible to get other people to commit in concrete terms (investors and potential cofounders). To them, it is a 'bad' idea.

What strategy does one take here.
Does one simply soldier on alone, taking many months with high personal cost and inevitable failure...?

Interesting points in this site:

http://www.ventureblog.com/

regarding team in light of your most recent blog.

Judging by the responses you're getting to this and other posts, and by my own reaction to your first few posts, I would say that your blog has achieved product/market fit (and I'd be willing to bet that your traffic stats prove it).

There is certainly a lesson for aspiring bloggers hidden in there somewhere.

Marc -- fair enough.

I totally agree with your point; success ultimately comes from hitting the market, it just seems like usually the act of hitting the market is a derivative of everything else. You can't hit a market without a product (regardless of how great the market is), and you can't get a product without a team.

There have definitely been successes built on crap teams with crap product, because they managed the right market timing. The question is, do we extol this "luck" as "success"? Or do we put forth that the truly great companies are the ones that had a team good enough to make their own luck?

Any moron can buy a lottery ticket and win huge money -- do we, as a society, consider them "successful"? Or "lucky"?

I think the same should apply to companies; companies that succeed "despite themselves" should be considered "lucky". Those companies that succeed because of how hard they worked and how smart their decisions were, should be considered "successful".

...Paul

Marc,

Another great post in this series, and an excellent point. The iPod, IMHO, exemplifies PMF. Not the first, perhaps not even the best technically, but clearly they read the market better than anyone.

Having gone through this ringer a few times, though, I'm often concerned by how people interpret having a good market. Many folks fall into the trap of waiting to see customers asking for product XYZ. While this may work for products that take a couple months to build, the market may shift completely before you can get a more complex product built.

Marc, I have been reading your blog for quite a while now and I had a similiar set of rules developed from my own observations. I am pretty young but have been in the startup world for a while.

I guess the name of the game is market identification, is it possible you could post on how to go about market research when thinking about a new startup? How does one go about probing the market before investing time in development?

A rising tide lifts all boats. I think that the boats have to be viable to float.

I think that the stage of the market is important. An old crowed market will not pull many new products in. You need to make, in a sense, a new market inside of an old one to make a difference.

Portable music was an old market - since Edison's Grammaphone - but MP3s made a new one inside of the old cassette, record, and CD market.

So the genius is in identifying a great opportunity - a great market. I often wonder how to do this. Do you design a product to give people what they "want" or do you try to give them "what they need" (or, specifically, what YOU think they'11 need)? When I think of the revolutionary products - no one was asking for an iPod or Hybrid car. Yet, when these products can out, everyone lined up to buy them. The definition of a product with great market potential is similar to Justice Potter Stewart’s 1964 attempt to explain what pornography is: “I shall not today attempt further to define the kinds of material I understand to be embraced…but I know it when I see it….”

I have thought about it as well... I feel a good route is:

Identify a pain point that provides a quantifiable ROI. Can a workflow process be quickened? Can the process be refined? Where does the ROI come from? Increased sales? Decreased cost due to saving an employee time?

A great example of this is online spreadsheets. Companies pass endless spreadsheets around using a chaotic distribution method (when you need it it gets emailed). The main problems are decentralization and syncronization. Online spreadsheets seem to have solved this pain point, distribution and syncronization through centralization.

Anyone have additional thought processes?

Marc, PMF is it. You’re one of the few I’ve ever heard say it (exept maybe Andy).

So HOW do you get to a PMF? THAT is the question.

I’m going to assume that the team in place has a decent understanding of the product they want to build. In fact, in most companies, the product is already being built (and sometimes is already built) when the question of “what market will we sell to” comes up.

Given that, how do we find the market that “fits” our product idea? Well, to simplify the process:

1) Start broadly. Don’t eliminate anything in this very early stage, as any market is possible.
2) Define the problem being solved. What are we really trying to do here? Define this in the words of the CUSTOMER. The customer may or may not realize they have a problem (can you say iPod?), but they do.
3) Define the problem being solved again. Go deeper. Really get to the root of what you are trying to do. As you know, most companies want to solve too much. Get really deep
4) Based on the work above, narrow the segments that “appear” to be a good fit. This is a dangerous stage as you are still doing this without research and without hypothesis testing. Narrow the segments just enough, but not too much.
5) Test the hypotheses. Talk to customers, suppliers, resellers, gurus, influencers, trend-watchers, etc. Don’t test your hypotheses in Silicon Valley. Don’t test it with your friends. Test it in the real world with research.
6) Narrow the market segments again. Be careful not to think of segments only as industries. Segments are determined by common attributes that may or may not have anything to do with industries.
7) Apply a relative weighting to the most promising segments so the input from those segments is appropriately considered vs. segments that are less likely to be a fit.
8) Begin the MRD process. You are gathering information from potential target markets that are essentially telling you what to build.
9) This stage is the stage where you want to fail! Test again. This time you can test more deeply. You can test storyboards, product concepts, prototypes, mock-ups, etc. Gather more information from your target segments. You want to get an enormous amount of feedback on what your (weighted) market segments think of all your ideas so you can see what isn’t working, and what market segments are not interested in what you are offering. You want to fail now, before you try to sell a finished product!
10) Narrow the segments, rinse, repeat.

Great article! Prof Steve Kaplan of the University of Chicago, in his study of "people vs market", comes to the same conclusion. His findings can be summarized as:

* A bad management team does not necessarily kill a good idea, but a bad idea is rarely overcome by a good management team.
* You can change teams much easier than you can change businesses and still win.

Ref: http://www.chicagogsb.edu/capideas/dec05/1.aspx

Hi Frank -- yup, that's a great way to put it -- very counterintuitive for a lot of people in my experience but pretty much how it plays out.

Hi Glenn -- thanks for that -- great points!

Hi Kevin -- actually I'm coming out more on a different side, which is that giving people something new that they can do that they find exciting and useful is a more predictable path to success than solving a pain point.

The pain point theory is deeply ingrained in the entrepreneurial mindset at this point but the problem with it is that if people have lived with some form of pain for a long time, they can probably live with it going forward, at least for quite a while. And it can be hard to get them to bite off the effort required to end the pain.

Give them something they're thrilled about, though, and at least in this day and age, they'll usually go for it.

I've heard this described as "aspirin vs vitamins" -- aspirin solves a pain point, whereas vitamins make something better. I'm talking more about a third category -- say, "Oreos" :-).

I think this is very fertile ground for active discussion and debate -- and I will definitely write a future post about it!

Thanks!

Paul -- you raise excellent points but the confounding element is the number of fine teams and great products that fail due to either lack of market, or failing to find fit with the market allowing something else to take their place.

Hi Jake -- while it is true that server consolidation is one of the sources of the appeal of OS virtualization, I actually don't think that server consolidation and cost savings were the primary drivers for the takeoff of VMWare for the first several years.

What I think has happened is that virtualization products have been used more for development, test, and support systems so far -- for a developer, tester, or support person to have multiple independent OS's on their desktop computer is hugely valuable and a big boost to productivity.

Server consolidation has a lot of theoretical appeal but it is much harder in most companies to introduce a new technology into the production server environment than it is into a development, test, or support environment. And so most companies -- even companies that have bought a lot of virtualization software -- have not yet deployed a huge amount of virtualization in production -- yet.

This is one of the reasons I think VMWare is going to grow a LOT over the next few years. It may be that the bulk of its market is still ahead of it.

some good points.
(1) if product/market fit is the key, the successful start-ups should show much high population of "me-too" grade. Based on my knowledge, it is not the case.
(2) Low IQ at high level could be killer to any product/market fit... expecially, the ego exceed the IQ by large margin. See many good start ups fail with good product/market fit. Currently the business world is looking for "Founder controlled" outfits and believe it would have better success rate... (steve Job went back to Apple, and Jerry to Yahoo? ... will see what happened in the future).
(3) Agree with you on market dominant force... sometimes, the outside force (even un-imaginable events) could play a role: telecom is on the upside move because of video download by "small" companies demand. The product/market fit will never go on radar screen initially, unless "god told you so".
-my silly 2 cents.

Marc,
Great article. You highlight a real issue of products that go in search of customers, rather than the other way around. Startups don't have the resources to overcome the apathy/resistance.

I find your definition of market to be somewhat confusing...particularly where a market is created, it's only apparent that there was a market after the fact. (think Ebay--who would have expected the latent demand for an online flea market)?

Would a cleaner term be the "unmet need of the market"? This way, a growing existing market, and a powderkeg of pre-existing (but untapped) market demand can both be seen as exciting, viable business opportunities. Continuing the Ebay example the need would have been: desire to locate and buy/sell specific items at the best price possible.

In this scenario, your product-market fit would be the degree to which any product met the unmet need. The company that best met that need would ultimately emerge.

This could explain why small improvements by fast followers-- who are able to watch the failures of the early market leader-- may then ultimately lead to their success over the market creators...they can build a platform that better meets the true unmet market need that the earlier leaders didn't quite see (and often were too busy executing on what they currently had to address).

The question hits home as I see a huge pent-up unmet needs in the health sector...but a consumer market that does not exist due to the structure of health care finance today. I've talked to a number of people who believe the issue is timing. Would it be better to say that one needs to meet unmet needs today to change it...and be able to shift gears as the change unleashes different needs?

--Vijay

Hi Vijay -- yes, you're absolutely right, often it is apparent that there is only a large market after the fact. This is particularly true for startups whose products actually create new markets, although it is also true in other cases.

Nobody said this was easy :-).

EBay is an interesting case study, actually. In some ways it created a new market, but now that we can look at it with the benefit of hindsight, we can see how many small businesses and individuals had something to sell that they could only previously sell in a limited geographic area. EBay both let those businesses and individuals sell to a much larger universe of potential buyers -- expanding an existing market -- and enabled lots of new businesses and individuals to form that would not have been possible without EBay.

I will be discussing topics like timing and fast followers in upcoming posts...

Thanks!

Had Andy in class, and I was really happy to see you give him a shout out, because the whole first part I was reminded of his lectures. The class version was bit tighter though and I like that:

"When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins. When a great team, meets a great market, something special happens."

Just thought I'd throw this in the mix. Really forces you to change your perspective on what is important.

Also, maybe you could write a post on why you think Ning is in a monster market.

It's also worth noting (if it hasn't yet) that mediocre teams with mediocre products in great markets can attract great talent to make them into a great team.

I've seen that happen quite a few times.

Mark,

Good post, however, I would have to disagree with your assessment based on empirical and factual data that has already been researched on this subject. Team/human capital actually is the #1 factor of success despite the cliche. Please check out www.ghsmart.com for more on this topic (I am in no related to GH Smart).

Additionally, my personal experience has shown that great teams usually choose great markets. How exactly are you defining "great" team? "Great" is often a proxy for a team that is right to sell a specific type of product targeting a specific market.

The "great" serial entrepreneur that fails the 2nd or 3rd time out after a big success usually does so because the behavioral attributes required for success in the new venture are vastly different than those behaviors exhibited in the first, successful venture.

'"Great" is often a proxy for a team that is right to sell a specific type of product targeting a specific market.'

That's not a great team, that's a great startup opportunity.

A great team is a team who would always beat the pants off a mediocre team all else being equal (market, product, etc)

I agree with Tim :-).

Marc,

Since you started this site I am consistently impressed by the posts. Rarely do I get through 2000 words in an article.

Thanks for all the work.

Marc,
I'd agree that dev & test was the beachhead for virtualization and everyone knows that if you can get the developers to love it...it'll find it way into production at some point. However, I believe that virtualization's appeal to the macro trend of cost efficiencies in the IT group certainly pushed it over the chasm. When the CIO can show up to the executive meetings and talk about how they're doing more with less, then they have the attention of the CEO and CFO, the two strategic power players that the CIO has perenially been trying to align with. So combining the beachhead value of giving a valuable tool to dev and test with the tailwind of improving compute efficiency made virtualization a killer app. As much as you may not want to admit it, virtualization has a lot of fans in Finance departments everywhere.

It is very impressive analysis of the success and failure of the startup. Behind it, it is the vision, strategy and execute of the founders/CEO, just like Marc successfully founded the Netscape about 10 years ago.

First founders need to sense the market, then as time goes, the environment may change and market may shift, it is up to founders/CEO to make adjustment and steer in the right direction, no long to say it is difficult to identify the right product at the very first place.

Besides that, it is founders/CEO to encourage/drive the market team and engineer team to work together closely...

In most of time, history repeats itself...

I have substantially revised this post -- thanks very much to all the commenters here and on the Y Combinator news site for helping me realize the various ways it needed to be improved!

Hi Marc --

Markets Matter Most -- right on! As a founder of a new start-up and a former CEO, I couldn't agree more.

I love this piece and love your writing, but as a woman entrepreneur, I'm distressed that your blogroll would suggest that only male entrepreneurs have good new ideas.

ENTREPRENEURS = 18 men (10 of whom are good friends of mine) and if that weren't bad enough, your list of VC's = 16 men (again, I know probably 1/2 of them well) ... ?

Women entrepreneurs are strangers in a strange land. There are weird Freudian things going on in VC conference rooms across America, where young men turn on old men with their brilliant young testosterone-fueled biz plans ... is it a father son thing? Are these guys investing in their nostalgic selves? What the heck? Please write about it.

Do you know how DREADFUL it is to see VC website after website with the TEAM picture featuring all men in blue cotton shirts? It's like a Saturday Night Live skit ... except it's NOT very funny. It's embarrassing.

How would you feel if you went to every VC website and every picture featured African American Men ONLY ... in blue shirts of course. Would you feel there was a fix? Would this seem like a fair game? Wouldn't you like to suggest to them that perhaps they were overlooking a lot of good ideas that white men might have to offer?

Cheers -- Halley

Marc - as per usual, great post.

As "additional reading" on this topic, Allen Morgan at Mayfield posted on this topic as well in a blog entry entitled "Size Matters" (http://allensblog.typepad.com/allens_blog/2007/05/size_matters.html) which I found to be a great complement to your posting which your readers may find of interest.

My only other comment is that yes the market size is hugely important, but the caveat should be if the market is where there are existing incumbents (e.g. the CRM market) that you (a) need significant differentiation and (b) that your solution should address a compelling point of pain (ie it is a "must have" product) whose value outweighs the cost of replacing the legacy infrastructure. In other words, probably most startups looking to get into the CRM market (which is huge) won't get funded unless they can convince an investor about (a) and (b). An interesting post by an entrpreneur on (b) can be found at http://www.centrify.com/blogs/entrepreneurship/ under "Make sure your solution is a must have"

Probably minor nits, but keep up the good work!

"A great team is a team who would always beat the pants off a mediocre team all else being equal (market, product, etc"

I agree with the comment in theory but in practice it's not true. One can't separate the team from the market or product. I'll use basketball as an analogy. Shaq is a "great" center and perennial all-star but if he switched to point guard he would be the worst player in the league. Context does matter in determining "great" teams. A CEO may be "great" at selling direct to an enterprise but if her new company requires a channel strategy she may not be "great" anymore. People are good at different things (I play tennis and have a good serve, but a weak backhand).

Our experience has shown that "great" teams tend to pick "great, large markets." Weak teams by their nature often pick less attractive markets because they lack the knowledge to know if a market opportunity is large OR they lack the talent/brains to determine if a market is large. The one caveat is we see entrepreneurs that get "lucky" and pick a market that's big or pick a market that was small but becomes large because of some external factor beyond their control they never anticipated. Luck in business is too often ignored. We all know many of the self-proclaimed "great teams" from the bubble were really just lucky.

I think it was Vince Lombardi who once said that the definition of a great coach is one who can give the other team his playbook, and still win.

Marc

@Halley: If there is one person who has done more for me as a woman entrepreneur (http://www.ning.com), it's Marc.

I blog at http://blog.ning.com. He had me under Ning'ers, not entrepreneurs :-)

Thanks!

Hi Halley -- I'd be happy to take nominations for female enterpreneur and VC blogs!

They just have to be interesting :-).

Best,
Marc

Hi Marc,
You mentioned video conferencing as a failed market. I dont understand.. isnt WebEx a success.. Any particular reason for including it in the failed category.

I am particularly interested becasue I happen to be working on something similar. And given the main message of the post dont want to miscalculate the market size.

Thanks.

Interesting. The PM mix is certainly to think about before going out to sell. Such startups would generally need to first guage what response the open market would offer before really hammering the Product in the Market. Right said fred! Wonderful insight.
Regards

Great insight from this article Marc!

A couple of things in my opinion that also have impact on startups are:

1. Understanding the real ground reality
You should recognize that the ground reality (market, team, product) should be modified as against what you thought on paper.

2. Ability to change/adapt
Once you recognize that, you should have the capability to deliver the modified product to market. This goes also for market & teams.

As per your classification we are at APMF stage, but we had to make "many" changes to monetize our products.

Keep the insights coming

Sanjay
http://oFFrz.in
http://mVies.in
http://myKidz.in

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