Wednesday, April 27, 2016

Why Founder Market Fit is So Important

Josh Kopelman, co-founder of First Round Capital, one of the most iconic and successful venture firms, just posted a must-read Tweetstorm.

Josh's insight is that founders need to be even better pickers than VCs.

Previously, when asked about First Round's investment strategy Josh shared these two insights:

1. We think that founder-market fit is very important. I've lost a ton of money investing in founders with years of enterprise experience who now wanted to pursue a consumer idea — and vice versa.

2. An initial, compelling and unique insight. We want to understand what about your thesis is contrarian (i.e, why do you think the existing players are wrong) — and why you think a startup (and yours specifically) will win.

So what exactly is Founder-Market Fit, and WHY is it so important?

Founder Market-Fit is literally an indicator of a match between the founder and the problem they are going after.

What compelled the founder to start the business?
What experiences this founder has in the space?
What unique insight does the founder have in order to win?

The reality is that most founders start businesses in the spaces they don't know much about.

For example, when you ask someone what business they'd start if they could? Most people say they would open a restaurant.

Opening a restaurant is a terrible business idea for 99% of people. Restaurants business has razor thin margins, and a high failure rate. Just because you eat food and love food, doesn't mean it makes sense to open a restaurant. Most people don't have founder-market fit to start a restaurant, they don't get how hard it is to win in this business.

Similarly, we meet a lot of young founders that are thinking about starting a business that helps young people discover nightlife in big cities. The logic is that they had trouble finding what to do, and so did their friends, and therefore it makes sense to start a business helping people discover what to do.

This is not a great business idea and there is no real founder-market fit here either. Yes, this is indeed a problem, but it is not a unique problem, and there is no specific insight that the founders have.

A bit more subtle problem is when you have experienced founders going after the spaces they don't know much about. As Josh Kopelman said, just because you were successful as a founder of b2b company doesn't mean you will be successful as a founder of a b2c company. This is exactly what happened to me – I sold my first b2b company to IBM and struggled with my second company, which was a consumer facing startup.

Domain experiences and insights really do matter.

If you are starting in a business in the space you don't already know, you are literally spending money and time to get educated. It is literally like going to school, except instead of your parents it is your investors who are paying for your education. And the investors typically don't like that.

Experience is particularly important in b2b space, where domain knowledge is critical. Without strong understanding of the space you can't identify real gaps and real opportunities.

Founders that start businesses in the spaces they don't know about typically struggle.

On the flip side, if you do know your space, you can identify real opportunities, go fast and build a great business. Here are some of the examples of Techstars founders who have a great Founder Market Fit:

DigitalOcean is now the second largest hosting provider in the world. The company was started by a team that worked in the hosting space for 10 years and knew it inside out.

GreatHorn is a security company focused on preventing spearfishing attacks. GreatHorn is founded by Kevin O'Brien who was previously part of five security startups.

The founders of ImpactHealth, a direct-to-consumer health insurance company, have over 10 years of experience in the healthcare and insurance space.

Rahul Sidhu, founder of SPIDR, a company that is focused on modernizing police intelligence, was previously a law enforcement officer in a Los Angeles area.

Bora Celik from Jukely, a Netflix for concerts, spent over a decade as a concert promoter.

These founders know their markets and because of that, they are able to identify real opportunities, go faster and build the business.

What about you? Do you have founder market fit? Why are you doing what you are doing? What unique insights do you have that will help you differentiate and win?

Originally posted on Alex's blog. 




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