Product market fit has become somewhat of an overused catchphrase, with everyone acknowledging its importance when it comes to building a billion-dollar business. However, what is less spoken of, and I would argue of equal importance is founder market fit.
As early-stage investors, the three pillars which we rely on when analyzing a startup include:
1) The team
2) The product/technology
3) The market
We evaluate the product itself and make sure the technology is there and the moat is significant, we look at the market and ensure it is ripe for disruption and has a critical need for the offering, and then… it’s all about the team.
Being first-money investors, the strength of the team is more vital than ever. At this stage, we usually do not have numbers or data backing up the business model, therefore we must have 100% faith in the founders- that they are the ones to carry their company through the very rocky road that is the entrepreneurial journey.
Here is where the founder market fit kicks in.
To boil it down, a founder market fit means that the founders building their startup have deep experience in, and knowledge of, the market they are targeting. The core reason is that the ability to execute is of utmost importance for early-stage founders, and the more bullet-proof you are in your domain, the higher chance of execution abilities.
Experience allows you the kind of obsessive commitment to the goal of your startup as the problem resonates so deeply. It allows you to relate to and connect with the people in your sector, be it customers or partners, creating the network so necessary to scale your business.
With experience comes an understanding of the current and future competitive landscape of your market, giving you the competitive edge needed in the cutthroat world of startups. It allows you to talk the right language to your peers and understand the nuances of your product to ensure only top-quality.
All these factors create an ‘experience bias’ in the mind of your early-stage investors who have little to work with but the team- a necessary bias. We might miss opportunities due to this bias, but I would argue that we don’t need to invest in every good company out there, but rather we need to make sure that every company we invest in will turn out to be an incredible company!
At the highest level, a founder market fit would be a founder who has suffered from the very pain point he is now addressing with his startup. A perfect example of this is Roenen Ben Ami the co-founder and CRO of Justt.
Before founding Justt, a chargeback mitigation solution, Roenen himself worked in the world of payments and anti-fraud, building his own risk and monitoring teams. He encountered the issue of chargebacks and saw no solution that catered to his acute pain points. This was the theoretical beginning of Justt, and having such intimate knowledge of the space, their customers, and the pain point continues to give Justt an absolute head start on their playing field. Since then, the company is on steroids, not even 1.5 years old, with more than 170 employees, while hitting all their projections.
While having dealt with the pain point is the highest form of founder market fit, like Roenen whose founder brand is real empathy for his ideal customer, there is also a huge benefit to being familiar and experienced more broadly with the industry you are aiming to disrupt.
One way to feel similar confidence with an early-stage founder that has no experience in the market they wish to enter is if they present you with the data to back up their business model and their vision.
We saw this when two founders came to us around a year ago with a brilliant vision, strong skills, but little experience in their targeted domain. While we could see the promise, we wanted to make sure that they could execute in an unfamiliar industry. After nearly 8 months of setting the targets and them executing and hitting their goals every time, we had enough data to be confident in an investment. This company is now soaring.
This is not to say that successful startups will only come from founders with experience, on the contrary, as Sebastian Mallaby writes in The Power Law,
“radical rethink tends to come from outsiders.”
Indeed, there are times when fresh eyes are essential to innovation. A founder of a company who has strong credentials and a clean slate may be best fitted to fix what’s broken- think Elon Musk and the automotive industry.
But, not everyone is Elon Musk and what we are talking about here is the best way on the investor’s side to mitigate risk at the early stage. In this respect, we cannot dismiss the significance of experience.
There are exceptions to every rule, but in the high-risk model of early-stage investing, our job as VCs is to build an investment thesis and mitigate that risk as much as possible.
Founder market fit is an innate, unfair advantage that sets a true founder apart from his/her competitors, and as such, I believe early-stage investors need to place this as a high priority during their assessments, and founders should acknowledge the benefit of previous experience and lean into that when building their product.