Josh Kopelman, cofounder of First Round Capital, one of the most iconic and successful venture firms, recently posted a must-read Tweetstorm.
Kopelman’s insight is that founders need to be even better pickers than they are venture capitalists.
When he was previously questioned about First Round’s investment strategy, Kopelman shared these two insights:
- We think that founder-market fitis very important. I’ve lost a ton of money investing in founders with years of enterprise experience who now want to pursue a consumer idea, and vice versa.
- An initial, compelling, and unique insight. We want to understand what about your thesis is contrarian (i.e, why you think the existing players are wrong), and why you think a startup (and yours specifically) will win.
So, you might be wondering, what exactly is founder-market fit, and WHY is it so important?
Founder-market fit is literally an indicator of a match between a founder and the problem they are attempting to address. For example:
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?
The reality is that most founders start businesses in 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.
For 99 percent of people, opening a restaurant is a terrible business idea. The restaurant business has razor-thin margins and a high failure rate. Just because you eat food and love food, doesn’t mean you can and should open a restaurant. Most people don’t have the founder-market fit to start a restaurant, not to mention they don’t understand how hard it is to achieve success in the industry.
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 the founder and his or her friends had trouble finding things to do in their city; therefore it makes sense to start a business to combat this issue.
Just like opening a restaurant, a nightlife discovery business is not a great business idea because there is no real founder-market fit. This may indeed be a problem, but it is not a unique problem, and the founders have no specific insight.
A subtler problem is when you have experienced founders chasing after spaces they don’t know much about. As Kopelman said, just because you were successful as a founder of a b2b company does not 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: a consumer-facing startup.
Domain experiences and insights really do matter.
If you are starting a business in a 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 critical in the b2b space, where domain knowledge is also important. Without a strong understanding of the space you can’t identify real gaps and opportunities.
Founders who start businesses in spaces they don’t know about typically struggle.
If you do know your space, however, you can identify real opportunities, move at a fast pace and build a great business. Here are some of the examples of Techstars founders who have established a great founder-market fit:
DigitalOcean is now the second largest hosting provider in the world. A team that knew the hosting space inside out started the company. They had worked in the space 10 years prior.
GreatHorn is a security company focused on preventing spearfishing attacks. Kevin O’Brien, who had participated in five security startups, founded the company.
A few other examples: ImpactHealth, a direct-to-consumer health insurance company, was founded by entrepreneurs with over 10 years of experience in the healthcare and insurance space. Rahul Sidhu, a former law enforcement officer in Los Angeles, founded SPIDR, a company that modernizes police intelligence. Bora Celik, who spent over a decade promoting concerts, created Jukely, a Netflix-like service for concerts.
These founders know their markets and because of this, they are able to identify real opportunities, move quickly, and build a business.
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?
Image Credit: CC by Startup Market Compiegne
