Why Some Start-Ups Never Find Product Market Fit
Start-ups are booming. There are over 200,000 companies in the US alone, with an average funding of $2.7 million dollars. The success rate is also increasing. Many of them succeed by some margin, but some fail completely.
So why are some start-ups failing?
I believe some of the most common reasons are multi-faceted, but lack of customer validation is probably one of the biggest issues.
Today, the founder of a start-up is often seen as a serial entrepreneur. The first business will inevitably fail but if successful, the founder will be ready with another idea. This approach may have worked in the past, but it is no longer sufficient to ensure success.
Some young companies are failing for reasons that are entirely preventable. Many of these companies have received seed funding from VCs who are either unaware of the issues or seem to have little interest in fixing them.
But if you are part of the 0.1% who identifies as a founder of a tech start-up, you are probably running around like a mad man trying to find Product Market Fit.
What is Product Market Fit? If you are not familiar with this term, it basically means that your customers are using your product in the way that you thought they would use it. Simple. Every tech start-up, no matter how seemingly insignificant, has this burning desire to find product market fit.
The idea of “market fit” is deeply rooted in Silicon Valley. The idea is that if your product is useful but doesn’t have a clear use case, then your customers won’t find you. To find market fit, you should therefore first identify the problem that your product solves.
This is what Atlassian did with its Customer Engagement Platform, Jira.
This blog looks at the reasons why so many so-called “unicorns” fail, and how it can be avoided. Some of the issues explored include founder biases, competition equities, product market fit, search vs. discovery, and more.
As always, if you like what you read, leave us a comment.
Founders & Funding
Founder bias is the tendency of founders to see their startup in an overly positive light; they see their company as more innovative, better positioned, and more likely to succeed than objective observers would. It is, in some ways, the founder’s personal form of survivor bias.
Survivor Bias is a specific type of cognitive bias in which the criteria for success is based entirely on those people, ideas, or things that “survive” some process and as such, those who succeed are likely to be determined by factors which were independent of the supposed merit of the idea itself.
Founders overestimate the strength of their value proposition, underestimate the risks, and overestimate their company’s ability to overcome competition. It is a bias that founders need to fight against to create a viable company.
Founder bias can be a powerful force to overcome, especially if a startup is a solo founder or has only a few co-founders.
However, founder bias is far more dangerous than survivor bias, because it can lead to losing sight of real threats to the startup’s survival, or overly optimistic assessments of the startup’s value.
Founder bias often stems from the founder’s personal investment in the company, especially if the founder has put his or her own money into the venture, or has deeply mortgaged other assets, such as their house.
The irony of founder bias is that it is greatest when founder stakes are high, but also when the founder needs outside funding the most.
When the stakes are very high, founders are less likely to discount negative information about their company–it is life-or-death, after all–but it also means they are more likely to discount positive information.
Founders may also be more optimistic than they should be because they’re enjoying the rush of creating something new.
Unfortunately, this bias can result in companies spending money on advertising and marketing, hiring new staff, or other expenditures that are not prudent. Founders can often ignore problems that are clear to everyone else.
Founder bias can also lead to over-compensating when it comes to the people that are brought on board to help build the startup.
Many companies don’t make a careful selection process to decide how to spend their money.
They assume that a certain percentage will be a waste, but they hope that a percentage will provide a return. This is a risky move–especially if the majority of the returns don’t come from the right people.
If a founder is going to commit to a startup idea, he or she must consider the worth of the idea, or else that commitment is blind.
Founders might choose more experienced people to fill the gaps instead of new talent that may have more energy or new ideas.
Founder bias can also cause founders to ignore the advice of their board of directors. When the stakes are high, founders may become more convinced that they are right and ignore others. Founders may also feel that their company is different or that they are different, so they can succeed despite the issues that are being pointed out.
Founders may overestimate their talent or underestimate the talent of others. They may also make decisions for the wrong reasons, such as the benefit of bringing someone on board rather than the needs of the company.
Founder Bias in Web Development
The founder bias is similar to the “not invented here” syndrome, which leads startup companies to use products created by other companies instead of developing products in-house.
Founders are often very conscious of equity dilution, which is often the case when new employees are hired, but often don’t mind when it comes to themselves. Founders are often very conscious of equity dilution, which is often the case when new employees are hired, but often don’t mind when it comes to themselves.
The founder of a social networking startup told me that the biggest mistake he made early on was not rewarding senior employees for helping build the company.
Founders tend to value people’s judgment, often above their own, so they look to hire people who can help them create a successful business. But founders often choose the wrong people to help them. Founders often select people based on their ability to help the startup succeed rather than their ability to help the founders succeed.
Founder bias can also bias decisions about where startups should be located. For example, founders might not think it is appropriate to base themselves in San Jose, Calif. or Boulder, Colo., where they might not be able to work with the right people, but they might think it is okay to base themselves in places like New York, Boston or San Francisco.
I have seen founder bias shape the growth of companies in many ways. For example, I have seen founders often try to hire people that they like or that they want to be like themselves — rather than the right people for the job. This happens for a lot of reasons, including a lack of awareness of what is needed, a lack of knowledge about how to find the right people and a lack of understanding about how a startup is a team sport.
In my role as a startup advisor I have been working with a lot of startups recently, and I can see that founder bias is playing a role in most of them. Hiring people who are similar to founders can limit the company’s growth potential.
According to one study, when founders are in over their heads in terms of business knowledge, the company’s success rate declines, even if the founders are in an experienced team. For example, if the founders are in over their heads in terms of business knowledge, the company’s success rate declines, even if the founders are in an experienced team. I have also seen founders focus more on the business model and the product and less on the market and customer because that is what they like to think about and that is where they excel.
I have also seen founders reluctant to bring in people with experience and deep knowledge of the market and customers because they believe that would take away their vision. I have seen founders often hire people because they are friends, are from the same place — think Harvard, Stanford or Carnegie Mellon — or someone they have worked with in the past. There is little evidence that these hiring biases work well for companies.
I have also seen founders hire people that they think will be good for the company’s culture or that will help them achieve their vision. I have seen founders overwork their team, because it is hard for them to delegate. I have seen founders hire managers without the skills to manage. Most of all, I have seen founder bias cause startups to fail early on, rather than succeed later.
Founder bias can also lead to a potentially scattershot approach to growth. Instead of zeroing in on the right marketing channels, acquiring customers, or investing in the value of your product, founders look for pain points where they can feel like they are doing something to move the needle.
When you are running a startup you need to be hard-working. You need to be spending your time on the things that matter most to your business. You need to be developing strong business relationships. You need to be building your brand. This is what allows you to survive. Founder bias is a recipe for distraction.
When you see that all-hands meetings aren’t working, don’t assume that you must fix the meeting because it is broken. Instead, take a step back and look at your business as a whole. There are likely places where you can improve the flow of your company.
The best entrepreneurs are critically self-reflective. They are constantly looking for ways to improve business.
As you can see Founder’s Bias is the Number One Way for a start-up to not find Product Market fit.
The (Programming) Way
It is important to note that Founders Bias is also something that can be corrected, and the way we’re going to do that is through data and rigorous analysis.
While we may not be able to solve Founder’s Bias entirely, we can treat it as a (big) piece of a much larger puzzle: Product Market Fit.
And this is where we get to the part about programming. The best data analysis tools are the ones that already exist. That’s right, we don’t need to build a new tool, we already have tools like Segment, Mixpanel and Twitter Analytics as well as integrations with Google Analytics. We don’t need to build a data warehouse, we already have services like Amazon Redshift and Postgres.
We don’t need hundreds of thousands of dollars to build a software product. We can build a data-driven product on cloud hosted services in under 4 weeks. We have all of the tools that we need to gather the data that we need.
The difference is that we know exactly what questions to ask.
As the saying goes: “If you want to know what people think, ask them. If you want to really know what people think, listen to what they say, watch what they do, and feel what they feel.”
And if we listen, watch, feel, and ask, we can solve Founder’s Bias.
If you want to learn more about how we can help you overcome founders bias, build your mvp and launch your product to market click here: