The Interest Chasm
Imagine you look for a startup job. Startups are often exciting places to work. You might get 10 years of experience in only 3. Will this startup be one of the successful ones? How do you pick? A lot of people think the sweet spot is a startup that recently found product/market fit.
Product/market fit is great. When it’s real, the question for the startup is no longer “will it work?” but “how big could it get?”. It means the startup has something that people will really pay for. All you have to do is keep improving it and expanding the business. Since there’s less risk, you’re willing to get less equity, right? After all, the risk that nobody even wants your product is gone, right?
Hold on. Maybe not.
Early startups tend to claim they have product/market fit when they might not.
You’ll hear: “This is a big problem, we have an idea for a solution! We could be huge!”. That’s technically right, but dangerous. The hard part is actually building it, not finding the problem. There’s a saying that goes “There are a thousand billion-dollar ideas in the valley every day, and 5 people that can build them.” You only found product/market interest: Customers are interested in a solution. You don’t have a solution yet.
But what if the startup has real, paying customers? This is where it’s easy to make costly mistakes. Let’s say a startup has some traction. Some people are paying! This has to be product/market fit, right? Well, probably not. Early adopters just indicates product/market interest, not fit.
There’s no fit if you haven’t crossed the chasm. You haven’t crossed the chasm until you have many pragmatic customers, not just early adopters.
When Uber was just luxury black cars for rich people and everyone hated cabs? Maybe that Uber fit the early, rich adopters. But for the real prize of broader city transportation, Uber’s then offering was just product/market interest. Your average UberX rider from today was merely interested in an Uber that worked for them. The pragmatic customer didn’t hail black towncars with Uber all day.
But once Uber built UberX with a lot of drivers on the road (that was no small feat!) there was product/market fit. The majority of pragmatists had an Uber that worked for them.
A lot of early-stage companies think they have fit when they only have interest.
This is a big problem when it comes to equity.
If the startup thinks it has fit when it only has interest, they will give you less equity. Equity is based in large part on the risk of the company. If the founders do not accurately understand the remaining risk, they won’t give you enough.
As a rule of thumb, if you don’t have product/market fit yet you probably are not going to get equity that matches the risk you take. This view is starting to be widely held. Many top people are talking about it.
The founders probably have 100x the equity they offer you. Educate yourself on the market forces at work. Yes, you need to know your ownership percentage, among other things. If the startup won’t tell you that, they don’t trust you with important information. You don’t want to work with them.
While each company is different (and funding rounds are changing a lot these days), funding rounds generally mean:
- seed: No fit. Maybe some interest.
- series A: some initial fit, but not certain. Not across the chasm.
- series B: product/market fit. Scaling up and looking for new markets.
Don’t get sold on product/market fit when the startup only has interest. Dreams are wonderful, and it can be really rewarding to pursue them. Just be careful to not sell yourself short on an unrealized dream.