Market Always Wins: Part 1
Of market, product, or team, the choice of market is the most important determinant of a startup’s success.
Many aspiring entrepreneurs often ask the question, “What matters most for a startup’s success? Is it the choice of market, the product, or the team behind it?”
My perspective is that market always wins. This view has been reinforced by many respected entrepreneurs and investors who have written that the choice of market is the greatest predictor of startup success. In this post, the first in a series on this topic, I will do a brief roundup of some of these writings that have impacted me the most.
Marc Andreessen’s 2007 post: The only thing that matters
Back in the summer of 2007, I had joined a Kleiner Perkins backed startup called Danoo as a product manager. The late spring and early summer of 2007 was an amazing time. The Facebook Platform launched in May 2007, and the first iPhone went on sale in June 2007. Given these breakthrough developments, many aspiring entrepreneurs, including myself, were dreaming about starting our own companies. In July of 2007, I read a post by Marc Andreessen called “The Pmarca Guide to Startups, part 4: The only thing that matters,” a remarkable post whose impact I really felt only after I started my own company.
Many entrepreneurs may have heard of or even read Andreessen’s post, because it was the first time anyone had really discussed the concept of “Product-Market Fit,” a term that has now been embraced as a basic foundation of entrepreneurship.
In addition to the important “Product-Market Fit” concept, however, Andreessen wrote about the only thing that matters to a startup: the choice of market. To explain more about why market matters most, he wrote about what happens in a great market:
In a great market — a market with lots of real potential customers — the market pulls product out of the startup.
The market needs to be fulfilled and the market will be fulfilled, by the first viable product that comes along.
The product doesn’t need to be great; it just has to basically work. And, the market doesn’t care how good the team is, as long as the team can produce that viable product.
He later went on to explain what happens in a bad market:
Conversely, in a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn’t matter — you’re going to fail.
You’ll break your pick for years trying to find customers who don’t exist for your marvelous product, and your wonderful team will eventually get demoralized and quit, and your startup will die.
Finally, he quoted from venture investor Andy Rachleff’s Law of Startup Success:
The #1 company-killer is lack of market.
When a great team meets a lousy market, market wins.
When a lousy team meets a great market, market wins.
When a great team meets a great market, something special happens.
Until I read this post, I had always assumed that an exceptional team was what mattered most to startup success. After all, a great team would be able to iterate its way to success. However, what I took away from Andreessen’s post was that it didn’t matter how strong the team was, how much they tried to iterate their way to product-market fit—if they started with the wrong market, they were basically doomed. I didn’t realize how right Andreessen was until I was pursuing my own startup venture, a couple of years in the future.
Jeremy Liew’s 2007 post: A Rising Tide Lifts All Boats
Around the same time, Jeremy Liew from Lightspeed Venture Partners wrote an article called “A Rising Tide Lifts All Boats.” He reflected on a then-recent study by McKinsey which analyzed the factors of growth for 100 companies in a variety of industries.
McKinsey found that the variance in growth rates for the companies in the study were driven by three factors:
- Overall market growth
- M&A
- Market share
According to Liew, the McKinsey study found that overall market growth was responsible for 43% of the difference in growth rates between the companies, while M&A was responsible for 35% and market share was responsible for 22%.
Liew went on to say:
Simply put, a company’s choice of markets and M&A is four times more important than outperforming in its markets. This finding comes as something of a surprise, since many management teams focus on gaining share organically through superior execution and often factor that goal into their business plans.
Startups can also learn a lesson from this. Riding market growth in a fast growing market is a lot easier than trying to take market share in a slow growth market.
Liew’s post further reinforces the view that market selection is one of the most critical decisions that a startup can make. The implication, similar to what Andreesen wrote, is that even a mediocre product/team in a hyper-growth market will benefit from the notion of a rising tide lifting all boats.
Kirill Sheynkman’s 2011 post: Market, Product, Team
A few years later, after I had already co-founded Dasient and was deep into growing my own start-up company, I came across Kirill Sheynkman’s post “Market, Product, Team.”
Sheynkman proposed an interesting framework, contrasting the chances of success for startups with varying degrees of having a great market, product, or team. Here are the eight scenarios Sheynkman wrote about:
- The dream: Market (yes), Product (yes), Team (yes). Chance of success: 90%. Frequency of happening at Series A: 2%
- Big market, sweet product, needs “adult supervision”: Market (yes), Product (yes), Team (no). Chance of success: 40%. Frequency of happening at Series A: 20%
- The business guys: Market (yes), Product (no), Team (yes). Chance of success: 30%. Frequency of happening at Series A: 20%
- The techies: Market (no), Product (yes), Team (yes). Chance of success: 10%. Frequency of happening at Series A: 25%
- Nice resumes: Market (no), Product (no), Team (yes). Chance of success: 5%. Frequency of happening at Series A: 10%
- Obvious idea: Market (yes), Product (no), Team (no). Chance of success: 5%. Frequency of happening at Series A: 10%
- Nice toy: Market (no), Product (yes), Team (no). Chance of success: 0%. Frequency of happening at Series A: 10%
- Huh?: Market (no), Product (no), Team (no). Chance of success: 0%. Frequency of happening at Series A: 3%
When I read Sheynkman’s post, I immediately thought that this was an extremely useful framework for entrepreneurs and VCs alike to assess startup and funding opportunities, respectively. Although I didn’t realize it at the time, my startup Dasient was very much in “The techies” category. Our investors thought we were in the “Big market, sweet product, needs ‘adult supervision’” category, but that’s another story, for another post.
What struck me as I read the post was that, according to Sheynkman, if you had either an amazing product or an exceptional team, without a great market your chances for success were no greater than 10%. On the other hand, if you chose a great market from the start, and got either the product or the team right, your chances for success immediately climbed to 30-40%. Granted, the chances for success are estimates made by Sheynkman based on years of pattern-matching through investments, but his framework—and his estimates—seem to make sense, and are consistent with the writings of Andreessen and Liew.
As you consider future startup opportunities, you may ask the question: “What’s most important to a startup’s success? Is it market, product, or team?” In my view, the unequivocal answer is that the choice of market is the single most important determinant of a startup’s success. If you choose the wrong market, no matter how great a product you build or how smart your team is, you won’t be able to iterate your way to a big success. An exceptional market will pull product out of the team. A terrible market will inevitably kill the startup. It’s far better for you to place yourself in the middle of a fast-growing market, where the “rising tide lifts all boats” and the market may compensate for shortcomings in product, team, or execution.
In a future post in this series, I will reflect on my own experiences with Dasient, the market choices we made, and what I learned as a result.
