Why You Won’t Raise Money If You Don’t Get Product/Market Fit Right

In startup lingo, product/market fit ranks on top of the list, along with MVP, pivot, scalability, bootstrap, and growth hacking.

In other terms, you can’t ignore it if you are serious about building a lasting company.

It’s even more urgent to master the notion that your fundraising plans will most probably fail if you can’t demonstrate product/market fit (or PMF) to investors.

What is product/market fit exactly, and what should you do to get it right?

How PMF Was Born

Andy Rachleff is widely recognized as the first one to coin the term “product/market fit”.

A co-founder of Silicon Valley’s darling VC firm Benchmark Capital, Rachleff now leads Wealthfront, a robo-advisor he co-founded (initially under the name kaChing).

Rachleff makes it pretty clear that finding product/market fit is the most important task of the entrepreneur. Even more so than executing well.

Stanford GSB to the rescue

What is it exactly, then? Interestingly, Rachleff doesn’t define PMF per se (but Marc Andreessen does, as we will see below).

He describes it as a process: start with the product, then find a group of people who are desperate to buy it

The critical point here is that your prospects must be craving your product, says Rachleff, “because if they’re not desperate, there’s a good enough alternative. Let me tell you, if there’s a good enough alternative, you’re doomed.”

Rachleff has seen PMF magic play out firsthand. He is, therefore, convinced it outranks even the founding team’s quality.

Just like Airbnb found their first desperate customers in the executives traveling to attend a conference in San Francisco, or Google founds theirs in the startups that couldn’t afford $15,000 image-based ads on Yahoo!, Rachleff’s Wealthfront started catering to people who wanted to make money on their savings but didn’t have enough wealth to pay for bespoke services.

He found a crisp way to drive home the idea that the market trumps the team.

The Power Of The Market

Ideas often rely on two key figures to impose themselves on the world. The first one comes up with a set of founding principles, and the second one finds a way to spread them to the masses.

Jesus had Paul, Marx had Lenine, and Rachleff had Marc Andreessen. (No, we don’t rank them all at the same level. But you get the idea.)

The co-founder of Netscape and future VC Hall of Famer with his firm Andreessen Horowitz took the PMF idea and made it stick. He defines it as follows.

This proposition is more complex than it seems. Let’s unpack it now.

There is a hot debate in startup land about the most crucial factor of success: team, product, or market?

We now know what Andy Rachleff thinks about this issue. But it is not what most founders or VCs would say. For many, the team is the #1 success factor in startups. 

Andreessen markedly differs in this respect.

He contends that in a market with many potential customers, your product – however basic it is, as long as it is viable – will be “pulled” out of the startup; and that the team only needs to be able to make that product.

For him, too, the market clearly is the most important success or failure factor in startups.

In passing, Andreessen answers the question founders often ask: how do you know if you have reached product/market fit yet?

How PMF Impacts What Founders Do

The obvious thing to do for entrepreneurs is to reach product/market fit. Not for the free Starbucks or the accolade, but to make their startup viable for the long run.

Andreessen, in his typical style, tells founders to do what it takes to get to PMF. It should be their obsession every day.

That’s all good, but isn’t there a way to reach product/market fit faster by changing the way startups are formed?

In other terms, should you start by identifying a need in the market, or by finding a market for your product? There is a debate on this point, too.

Steve Blank, a serial entrepreneur turned startup guru and a father of the Lean Startup movement, says that both can work.  

He’s all about product/market fit

Note how Blank distinguishes tech startup and others, however.

Andy Rachleff, who’s invested in some of Blank’s former startups, describes one of Blank’s critical findings: the great tech startups were created by entrepreneurs exploiting an inflection point in technology.

They started with the product and found their market – “desperate customers”, as the former VC calls them.

Let’s take Rachleff’s own venture, financial planning service Wealthfront.

The need for a financial planning service for the masses was there, and Rachleff had repeatedly heard about it: most people could not benefit from the wealth management advice that he, as a (very) well-off professional, was offered by his bank or broker. You had to own at least $10 million in assets to afford these services. 

Wealthfront allows its customers to get similar advice with only a few hundred euros. The trick: advanced algorhythms and the rise of APIs, which are now pervasive in the financial services industry.

The technology inflection point, in Wealthfront’s case, was the ability to automatize tedious manual work thanks to these APIs. A couple of pivots and a name change later, Wealthfront reached product/market fit. It now has $20 billion under management.

Conclusion: Build A Product First, Then A Company

Raising money without having reached product/market fit is not impossible, but it’s considerably harder.

Experienced business angels and early-stage VCs will help founders understand how it works, and guide them on the arduous path to product/market fit.  

But most venture capitalists want to make the bet when the first signs of PMF are already visible. They want their money to be used to scale the startup.

He sure talks fast

As Andreessen makes clear in this video, VCs are wary of startups that become “zombies”, i.e., companies that have some early success but then reach a plateau.

If VC money is what you want for your company, make sure you build a unique product by exploiting an inflection in technology, find a market that is desperate for it, and build a company around it only after reaching PMF.

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