What We Look For
Like many investors, we often get asked "what we look for" when evaluating startups. I recently did an interview (humblebrag) with Tarang Shah for his new book, "Venture Capitalists at Work" where he asked me that question. (Incidentally the book is a great read to hear investors' stories and how they approach and work with founders.) In a nutshell, we look for "founder/market fit", which is an obvious play on Marc Andreessen's concept of "product/market fit." We look for founders who personify their product, business and ultimately their company. This can come in many flavors - building something for themselves; having a deep understanding of the market/industry dynamics; being a big-brained engineer and working on a super hard, challenging technical breakthrough, etc. Anyway, here's the excerpt:
What do you look for in the companies you back? What really stands out when you meet with these promising start-ups?
Lee: Our preference is for founders solving a problem for themselves. It’s more of a bottoms-up approach than looking at a market and saying, “There’s a big market.” There’s a lot of debate among investors whether markets or founders are more important. We look at founders first and hope that we back the ones that are only interested in solving interesting or hard problems. And those, in our experience, usually lead to big markets. Another advantage of a founder building a product or service to solve her own pain point is that she doesn’t have to do market research or focus groups—she is the target market.
And so I think what stands out in the promising founders is this genuine authenticity. It’s like the Supreme Court justice’s definition of pornography— you know it when you see it but you can’t define it. When a founder tells a life story about how they approached the problem, what it means to them and their vision for the future—that’s what we’re usually drawn to. It’s not always sufficient for success. There are many founders we backed who built something for themselves and didn’t succeed, but it could be sufficient to get an investment from us.
A couple of comments:
- One thing I'd say is that solving interesting or hard problems doesn't always lead to big markets. In fact, in the majority of cases they don't. Probably a better way of saying this is that building for large, growing markets usually involves really hard problems to solve and that hard, complex, interesting problems attracts a certain type of personality.
- Another point to emphasize is that this is not a perfect heuristic. Finding this "founder/market fit" is really hard - Chris Dixon wrote a great post (as usual) articulating the limitations of this. (love the circular linkage).
- Finally, the "you know it when you see it" idea is really pretty much spot on for us and so is best illustrated by example. Listen to Jack Dorsey talk about what inspired him to create Twitter, or Dennis Crowley talk about his vision for Foursquare and how that evolved over the past ten years, and you'll get a good sense. It can be deceiving though to look at these two because they are the outliers - there are both many founders who are wildly successful and didn't fit this profile and many founders who absolutely fit this profile and didn't succeed.
- Another great example for us is Daniel Gross, founder of Greplin. He's not as well-known as Jack or Dennis but his story was just as vivid for us when we first met him:
I had this very long list of things I thought would be cool. Greplin was always near the top. But my mistake at Y Combinator was not listening to my own intuition enough. There's the line "Wouldn't it be cool if this thing existed?" but those aren't often good ideas, because you're not the ideal user. It's also very hard to make a product when you're not the target audience. Because you have to make decisions along the way, and unless you would be the target user,, you're going to make the wrong decisions. Understanding that fact was my "a-ha" moment. Greplin was the one project idea I had for which I was the target audience. (link)
Again, there are a ton of limitations to this approach. It's virtually impossible to measure a person's drive or passion; the "scratch your own itch" heuristic doesn't always lead to - or even correlate with - large markets; and this "founder/market" fit isn't sufficient to build the business and the company even when you've found a large market. But it's the approach that I've learned from Ron over the years, and the one that really resonates with us.
