02 Jul 2015
This post is all about the only thing that matters for a new startup.
But first, some theory:
If you look at a broad cross-section of startups — say, 30 or 40 or more; enough to screen out the pure flukes and look for patterns — two obvious facts will jump out at you.
First obvious fact: there is an incredibly wide divergence of success — some of those startups are insanely successful, some highly successful, many somewhat successful, and quite a few of course outright fail.
Second obvious fact: there is an incredibly wide divergence of caliber and quality for the three core elements of each startup — team, product, and market. At any given startup, the team will range from outstanding to remarkably flawed; the product will range from a masterpiece of engineering to barely functional; and the market will range from booming to comatose.
And so you start to wonder — what correlates the most to success — team, product, or market? Or, more bluntly, what causes success? And, for those of us who are students of startup failure — what's most dangerous: a bad team, a weak product, or a poor market?
Let's start by defining terms.
The caliber of a startup team can be defined as the suitability of the CEO, senior staff, engineers, and other key staff relative to the opportunity in front of them. You look at a startup and ask, will this team be able to optimally execute against their opportunity? I focus on effectiveness as opposed to experience, since the history of the tech industry is full of highly successful startups that were staffed primarily by people who had never "done it before".
The quality of a startup's product can be defined as how impressive the product is to one customer or user who actually uses it: How easy is the product to use? How feature rich is it? How fast is it? How extensible is it? How polished is it? How many (or rather, how few) bugs does it have?
The size of a startup's market is the number, and growth rate, of those customers or users for that product. (Let's assume for this discussion that you can make money at scale — that the cost of acquiring a customer isn't higher than the revenue that customer will generate.)
Some people have been objecting to my classification as follows: "How great can a product be if nobody wants it?" In other words, isn't the quality of a product defined by how appealing it is to lots of customers?
No. Product quality and market size are completely different.
Here's the classic scenario: the world's best software application for an operating system nobody runs. Just ask any software developer targeting the market for BeOS, Amiga, OS/2, or NeXT applications what the difference is between great product and big market.
If you ask entrepreneurs or VCs which of team, product, or market is most important, many will say team. This is the obvious answer, in part because in the beginning of a startup, you know a lot more about the team than you do the product, which hasn't been built yet, or the market, which hasn't been explored yet.
Plus, we've all been raised on slogans like "people are our most important asset" — at least in the US, pro-people sentiments permeate our culture, ranging from high school self-esteem programs to the Declaration of Independence's inalienable rights to life, liberty, and the pursuit of happiness — so the answer that team is the most important feels right.
And who wants to take the position that people don't matter?
On the other hand, if you ask engineers, many will say product. This is a product business, startups invent products, customers buy and use the products. Apple and Google are the best companies in the industry today because they build the best products. Without the product there is no company. Just try having a great team and no product, or a great market and no product. What's wrong with you? Now let me get back to work on the product.
Personally, I'll take the third position — I'll assert that market is the most important factor in a startup's success or failure.
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.
In short, customers are knocking down your door to get the product; the main goal is to actually answer the phone and respond to all the emails from people who want to buy.
And when you have a great market, the team is remarkably easy to upgrade on the fly.
This is the story of search keyword advertising, and Internet auctions, and TCP/IP routers.
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.
This is the story of videoconferencing, and workflow software, and micropayments.
In honor of Andy Rachleff, formerly of Benchmark Capital, who crystallized this formulation for me, let me present Rachleff's Law of Startup Success:
The #1 company-killer is lack of market.
Andy puts it this way:
- 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.
You can obviously screw up a great market — and that has been done, and not infrequently — but assuming the team is baseline competent and the product is fundamentally acceptable, a great market will tend to equal success and a poor market will tend to equal failure. Market matters most.
And neither a stellar team nor a fantastic product will redeem a bad market.
OK, so what?
Well, first question: Since team is the thing you have the most control over at the start, and everyone wants to have a great team, what does a great team actually get you?
Hopefully a great team gets you at least an OK product, and ideally a great product.
However, I can name you a bunch of examples of great teams that totally screwed up their products. Great products are really, really hard to build.
Hopefully a great team also gets you a great market — but I can also name you lots of examples of great teams that executed brilliantly against terrible markets and failed. Markets that don't exist don't care how smart you are.
In my experience, the most frequent case of great team paired with bad product and/or terrible market is the second- or third-time entrepreneur whose first company was a huge success. People get cocky, and slip up. There is one high-profile, highly successful software entrepreneur right now who is burning through something like $80 million in venture funding in his latest startup and has practically nothing to show for it except for some great press clippings and a couple of beta customers — because there is virtually no market for what he is building.
Conversely, I can name you any number of weak teams whose startups were highly successful due to explosively large markets for what they were doing.
Finally, to quote Tim Shephard: "A great team is a team that will always beat a mediocre team, given the same market and product."
Second question: Can't great products sometimes create huge new markets?
Absolutely. This is a best-case scenario, though.
VMWare is the most recent company to have done it — VMWare's product was so profoundly transformative out of the gate that it catalyzed a whole new movement toward operating system virtualization, which turns out to be a monster market.
And of course, in this scenario, it also doesn't really matter how good your team is, as long as the team is good enough to develop the product to the baseline level of quality the market requires and get it fundamentally to market.
Understand I'm not saying that you should shoot low in terms of quality of team, or that VMWare's team was not incredibly strong — it was, and is. I'm saying, bring a product as transformative as VMWare's to market and you're going to succeed, full stop. Short of that, I wouldn't count on your product creating a new market from scratch.
Third question: as a startup founder, what should I do about all this?
Let's introduce Rachleff's Corollary of Startup Success:
The only thing that matters is getting to product/market fit.
Product/market fit means being in a good market with a product that can satisfy that market.