In Defense of Theory (Part II) — Why Product/Market Fit Is the Wrong Mental Model for Systems Innovation

If your innovation appeals to the mainstream, you’re not pushing hard enough

Running a stand in a covered market is a real-time experiment in achieving product/market fit, with instantaneous customer feedback on quality, price, and service.

This is the second article in a multi-part series that argues for greater appreciation of conceptual work in addressing climate change and other wicked societal problems. You can read Part I here and Part III here. The other parts are forthcoming.

In 2007, two flatmates named Brian and Joe hosted guests at their San Francisco home. They would go on to disrupt the market for privately-owned vacation rentals with a company today known as Airbnb. A couple of years later, a similar story started to unfold in the market for ride-hailing. The founders were called Garrett and Travis, their company became known as Uber.

Two companies, two markets, one key to success: achieving product/market fit.

Marc Andreessen, a legendary venture capital investor, defines product/market fit as “being in a good market with a product that can satisfy that market.” It is one of the most important concepts of the Lean Start-up methodology, a dominant framework in entrepreneurship.

Achieving product/market fit is critical for a start-up because it paves the way to revenue and positive cash flow — and ultimately to an exit event. That’s why Andreessen calls product-market fit “the only thing that matters”.

Yet my own experience suggests that for systems innovation, product/market fit may be the last thing that matters.

Here’s why.

Over the past 18 months, I have been running my own experiment in fitting a product to a market: transformation capital.

As a new investment logic designed to catalyse sustainability transitions in the real economy, TransCap is a radical departure from current finance orthodoxy. It challenges the core of our financial system, calling for the adoption of new paradigms, structures, and practices along all stages of the investment process.

TransCap is a very different approach than what mainstream financial institutions are accustomed to. As a consequence, my lived experience of talking to big-brand investment professionals is characterized by blank stares and awkward pauses. I sometimes have to cut entire elements from the narrative to not turn off my audience, and I have yet to find a mainstream financial institution willing to engage with TransCap in a meaningful way.

Clearly, there is no “market” for this “product” yet.

On an emotional level, this is frustrating. But on a rational level, I have come to understand that a weak product/market fit is exactly what’s needed for systems innovation.

Why is that?

Implied in the concept of product/market fit is the idea that there is a market with a specific unmet demand. This unmet demand can be manifest, as was the case for Uber (think: taxis), or it can be latent, as was the situation for Airbnb (think: all those hotel guests who now prefer homestays).

What’s important is that in both cases, markets had already existed when Uber and Airbnb entered the stage. These companies may have redefined and expanded their markets and crushed incumbents in the process, but essentially they started out targeting a demand that had always been there. Their innovations thus delivered incremental improvements in customer experience — more convenient ride-hailing, greater options for vacation rentals — rather than spark radical change in the way society behaves.

Yet science tells us that in order to stave off catastrophic global warming, we will need to transform almost all parts of society and our economy. The change we need cannot be of a superficial nature — it must be deep, structural, and irreversible. This means that we must create new markets, not just improve existing ones.

That’s bad news for anyone trying to bring fundamental change into the world. Because having to create new markets is a lot harder than selling into existing ones. Not only will it take longer and require greater tenacity. It will also be more difficult to attract resources, not least because venture capital is typically designed for innovation with a strong product/market fit.

Humans tend to resist structural innovation, especially when it leads them to lose a piece of their identity or lifestyle. That’s why society initially opposed coffee, refrigeration, and mechanical farm equipment.

So system innovators face a dilemma. Go for truly transformative change and accept that you will be fighting an uphill battle. Or try to serve existing markets and live with the prospect of generating incremental impact at best.

In my experience, there is no in-between zone, no magical nexus between spectacular profitability and society-level impact. And those who claim to have found it are mostly just perpetrators of the greenwishing fallacy.

So, if you’re a systems innovator facing rejection by the mainstream, embrace it as a useful signal, as validation that the type of innovation you’re working on is structurally different.

If, on the other hand, you receive a lot of interest from well-established organisations, you may want to ask yourself:

Are you really pushing hard enough?

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Dominic Hofstetter

Dominic Hofstetter

I write to inform, inspire, and trigger new strategies for tackling climate change.