The Market

What the greatest technology investors say about the Market

What's the Magic

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“It’s the right person or people, with the right idea, packaged up with the right product at the right time in the right market…and  [] that’s the magic.”  Fred Wilson  #StartupStories: The Pitch @ 4.3 min into video, May 30 2012   http://nytm.org/resources/startupstories;  The Pitch: http://www.youtube.com/watch?v=0GxeVu5izLg

Early Stage Technology Investments Come Down to 4 'M's'

Mark Suster Partner Upfront Ventures and former entrepreneur

“[] [Almost] all VC investments in early stage technology & Internet investments come down to just four key factors []: management, market, money [i.e., valuation] and above all else momentum [i.e., mostly product momentum]. 

[] The number one thing that investors get their checkbooks out [for is] momentum.  [Momentum has various definitions]:  user numbers, revenue, channel partners, biz dev deals, [etc.]. 

[] [Suster’s investment decision is based] 70% [on] management, 30% [on] product. 

[] [Almost] all VCs care about investing in big markets with ambitious teams.

[] Most VCs want to own between 20-25% minimum of [a] company. [] [Investors need to] own enough [equity] to make it worth their time – thus “money”. And all of this is wrapped up in forward progress that [entrepreneurs] demonstrate over time.”   Mark Suster, The Four Main Things that Investors Look for in a Startup,  October 6, 2010

http://www.bothsidesofthetable.com/2010/10/06/the-four-main-things-that-investors-look-for-in-a-startup/

No Great Science to Determining Valuations

Mark Suster Partner Upfront Ventures and former entrepreneur

 “There is no great science to [how prices (valuations) are determined].  The earlier [one] invest[s] the higher the chances the company won’t work out and thus [one] pay[s] a lower price than later-stage investors. [An investor tries] to pay the appropriate price for [his] perceived risks of the company succeeding and protect [himself  if] it isn’t quite as valuable as [he] had hoped.  As the risks [] get eliminated the higher the valuation investors are prepared to pay.”  These risks over time are “[first] product [], [then] market [], [then] growth/scale [] and [finally] monetization/competition [].”    Mark Suster, Why Startups Should Raise Money at the Top End of Normal  June  5, 2011;  http://www.bothsidesofthetable.com/2011/06/05/why-startups-should-raise-money-at-the-top-end-of-normal/

Red Flags: Signals Not to Invest

Rob Hayes Partner First Round Capital

Hayes discusses red flags, things that would make him not want to invest in a founder or entrepreneur. 

Red flag:  If he doesn’t have the best possible people as part of the initial team pre-funding.  “When someone comes to [him] who has already surrounded [himself] with people [] who have quit good jobs [to come and work with him] because they’re so passionate about [] working with this person but also what they’re working on, [] that’s a good indicator.”

Red flag: “[] [The founder] is so enamored with [the] product [to the exclusion of addressing other important business elements.] There have been very few products that have been so good that the world just beat a path to their door [like Google or Facebook]. [] If someone is so enamored with their product that they can’t think through how things might change or they’re focused on one particular slice of the market and they only know that piece of the market and not a much bigger market [], I would be concerned about [that].”

Red flag: “[The founder says] now [he] need[s] to hire a designer[]. [] [Hayes likes] a product with design built in from the very beginning. [] When [Hayes talks] about design [he’s] talking about UX [user experience], feel, everything []”.  Rob Hayes, Rob Hayes of First Round Capital - TWiST #249, (ThisWeekIn Start Ups with Jason Calacanis), Published Apr. 18, 2012 @ 25 min.; http://www.youtube.com/watch?v=GEPqy0ad0BU

Test your Customer Proposition

Bill Gross Founder and CEO business incubator Idealab

“Find a way to test your core proposition with your customer, then manage your resources to adapt after that. Don’t spend the money in advance. You have to test the real customer proposition. You have to make the example be the actual test.”  Bill Gross: Here Are The 12 Lessons I've Learned In My 30 Years Of Being An Entrepreneur,  Dec. 15, 2011; http://www.businessinsider.com/bill-gross-lessons-2011-12#lesson-8-test-test-test-30#ixzz1j6AG0Ars

Product/Market Fit: The Only Thing that Matters for a Startup

Chris Dixon General Partner Andreessen Horowitz, angel investor and former entrepreneur

“An extremely useful concept [] popular among startup founders is what [] entrepreneur and investor Marc Andreessen calls “product/market fit”, which he defines as “being in a good market with a product that can satisfy that market”.  Andreessen argues persuasively that product/market fit is “the only thing that matters for a new startup” and that “the life of any startup can be divided into two parts: before product/market fit and after product/market fit.”

But it takes time to reach product/market fit. [] [Dixon believes that] the best predictor of whether a startup will achieve product/market fit is whether there is [] “founder/market fit” [meaning] founders have a deep understanding of [their market], and are people who “personify their product, business and ultimately their company.””  Chris Dixon,  Founder/market fit, June 19, 2011;  http://cdixon.org/2011/06/19/foundermarket-fit/

Traction is the Only Thing that Matters to Investors

Brendan Baker Greylock Partners

“Through thousands of pitches, I've found that fewer [than] 5% tell a great traction story. [] But first, let's get one thing straight – [traction] is the only thing that matters to investors[.]  Venture investors invest in momentum. Traction is your story of momentum. It's told through quantified evidence of market demand for your product. []

Broadly, I find traction most convincing in the following order:
- Profitability
- Revenues
- Active users
- Registered users
- Engagement
- Partnerships/clients
- Traffic

But this changes depending on your product and market.”  Brendan Baker, Startups: How to Communicate Traction to Investors, Apr. 5, 2011;  http://www.quora.com/Brendan-Baker/Posts/Startups-How-to-Communicate-Traction-to-Investors/comments

 

What Causes Success

Marc Andreessen Co-Founder and General Partner Andreessen Horowitz, investor and Co- Founder Netscape

“[] what correlates the most to success -- team, product, or market? Or, more bluntly, what causes success?

[] I'll assert that market is the most important factor in a startup's success or failure.

Why?   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.

[] 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 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.”  Marc Andreessen, “The Pmarca Guide to Startups, part 4: The only thing that matters, June 25, 2007; http://web.archive.org/web/20070701074943/http://blog.pmarca.com/2007/06/the-pmarca-gu-2.html

Do Whatever is Required to get to Product/Market Fit

Marc Andreessen Co-Founder and General Partner Andreessen Horowitz, investor and Co- Founder Netscape

“[Former Benchmark Capital General Partner Andy] 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.

[] Lots of startups fail before product/market fit ever happens.  My contention, in fact, is that they fail because they never get to product/market fit.

[The] life of any startup can be divided into two parts: before product/market fit (call this "BPMF") and after product/market fit ("APMF").

When you are BPMF, focus obsessively on getting to product/market fit.

Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don't want to, telling customers yes when you don't want to, raising that fourth round of highly dilutive venture capital -- whatever is required.

When you get right down to it, you can ignore almost everything else.”  Marc Andreessen, “The Pmarca Guide to Startups, part 4: The only thing that matters, June 25, 2007; http://web.archive.org/web/20070701074943/http://blog.pmarca.com/2007/06/the-pmarca-gu-2.html