The importance of product-market fit.

Published on May 20, 2015

Entrepreneurs can come up with the most complex and genius products which fail in the market for a number of reasons, and a very simple product become the greatest success. There are several key ingredients for success, for instance momentum or market fit. But how do we, from a venture capitalist (VC) point of view, asses the ability to become successful and what are the best steps for entrepreneurs?

As a VC we analyse numerous companies on a daily basis and although this analysis is not done with a basic checklist some aspects are always taken in consideration. One of these aspects is Product-market fit. We basically look for companies who already found feedback from the market. This feedback could be with the successful finish of some pilots or simply with some paying customers. 

The valuation of a company who has demonstrable results is usually higher than a company who is a bit younger, so why do we look for these companies? Basically we only have knowledge from a VC point of view concerning the market, and we only claim to be a specialist in that market (the investing market). So when somebody designed a great product for the marketing market we look for marketers who adopted the product. since we are not marketers we can’t evaluate what that specific market wants and needs. Basically the biggest fear of an investor is that a founder built something based on their own theories about what the world needs, but that no one will actually wants.

So here is the twist, start-ups usually have a need for cash in earlier stages and there might be the claim that the approach of just investing money in later stage start-ups might be a hurdle for some companies, which they won’t survive although they potentially had a great product. Well this is a fact but there are other means to solve this hurdle. First of all we always search for companies who operate lean.  This approach is a direct reference to the book ‘The Lean Start-up’ from Eric Ries. By operating lean the burn rate usually is low which resolves in a lower demand for Cash. A useful advice might be to build an early minimal viable product to test in the market, which might save later expensive pivots.

Another point to consider is that there are a lot of means for very early stage companies to get funding. You might consider looking for government provided cash programs like subsidies, enter an accelerator or incubator program, Search for angel investors or seed investment programs, or the well-known triple F’s (family, friends and fools) next to investing yourself. These parties usually have different incentives for investment or accept the higher risk for the lower prices. This might make building and funding a company a long and hard path to success but then again venturing isn’t the easy way out. An entrepreneur is a risk taker and when successful he will be rewarded as such.

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