Why You Should Find Product-Market Fit Before Sniffing Around For Venture Money

When you first start out the only thing that matters is finding a cohort of customers who truly value what you offer. Growth alone means next to nothing.

Why You Should Find Product-Market Fit Before Sniffing Around For Venture Money

Many early-stage entrepreneurs who come to me for advice love to brag about how fast their companies are growing. To the consumer-focused entrepreneur that usually means tons of traffic, and to the enterprise-focused entrepreneur, that’s likely to mean a bunch of trials.


I understand why they want to brag. Growth is sexy. It’s easy to understand, and everyone relates to the excitement. My response is: So what?

When you first start out the only thing that matters is finding a cohort of customers who truly value what you offer. Growth alone means next to nothing. Growth without value to the customer is likely to lead nowhere–or worse, to a big flameout.

Determine Your Value Hypothesis Then Your Growth Hypothesis

In their seminal books on entrepreneurship, Steve Blank and Eric Ries explained how this works: You must first develop and test a value hypothesis and then move on to your growth hypothesis. A value hypothesis is an attempt to articulate the key assumption that underlies why a customer is likely to use your product. A growth hypothesis represents your best thinking about how you can scale the number of customers attracted to your product or service.

Identifying a compelling value hypothesis is what I call finding product/market fit. A value hypothesis addresses both the features and business model required to entice a customer to buy your product. Companies often go through many iterations before they find product/market fit, if they ever do.

Steve and Eric recommend that entrepreneurs first nail their value hypothesis before tackling their growth hypothesis. After all, if the dogs don’t want to eat the dog food then what good is attracting a lot of dogs? You can waste a lot of money if you don’t follow their prescribed order, because you’ll spend more money on growth than determining value.


It might be easier to pursue your growth hypothesis first, but that doesn’t mean it’s the right thing to do. I have seen many entrepreneurs spend a lot of money on attracting traffic to their site or app only to see low conversion rates. Hope springs eternal, and many in this situation believe they have found product/market fit because they have traffic. But traffic without conversion doesn’t mean much. In fact, growth may seduce the entrepreneurs into believing they have achieved their value proposition when they actually haven’t.

A classic example is Viddy. It rode the Facebook platform to attract tens of millions of users. Unfortunately, once downloaded, users found very little value in the product and stopped using it. As a result no real company value was created.

Which brings me to network effects businesses. Some of you may be wondering if network effects businesses are an exception because they benefit from a winner-take-all effect. It’s my experience over my 25-year venture capital career and specifically from my association with many successful network effects businesses at Benchmark (eBay, Equinix, oDesk, OpenTable, Snapchat, Uber, etc.) that you can’t catalyze the network effect if you don’t provide greater value up front than is required in a non-network-effects business. In other words you can’t get growth without exceptional value. Therefore network effects businesses are probably the greatest example of Steve and Eric’s advice.

Enterprise companies are no different from consumer companies when it comes to the timing of investing in value vs. growth. Instead of traffic, enterprise companies seek trials, and their equivalent of a conversion ratio is the percentage of trials that convert into paying customers. Adding trials that don’t convert is of no value. In my experience the best enterprise entrepreneurs pull trials after 30 days to determine if customers really need their product. If the customers do, they will pay despite numerous protests. The customers that don’t convert after 30 days seldom convert after 90 days. If you can’t convert, don’t add trials. Instead try a new value proposition or different type of customer.

Typical VCs Are Part Of The Problem

A lot of venture capitalists are as mistaken as the entrepreneurs. I have had scores of entrepreneurs voice their frustration with venture capitalists’ desire to have an answer to the growth hypothesis prior to the value hypothesis. Many VCs are riveted on how you’re going to get big to the exclusion of everything else. Data tells us the ultimate size of market addressed is the single greatest determinant of outcome, but a large potential market is worthless unless it gets realized. Google provides a great lesson. If traffic were all that mattered, Google would dominate every market it enters. That has clearly not been the case. Unfortunately, a lot of venture capitalists have not gotten the memo.


One of the key things that separates the premier venture capital firms from the rest of the industry is their understanding of this issue. In contrast to the majority of VCs, the best are riveted on product/market fit and want to invest before the growth hypothesis has been resolved.

They’re willing to take this risk because they know in most cases companies that find a compelling value proposition later figure out a way to grow. Waiting until companies resolve both their value and growth hypotheses leads to much higher valuations and therefore, for the VCs, much lower returns.

The next time a VC ignores your success converting potential clients and only wants to discuss how you plan to drive traffic then I suggest you find another VC.

Step On The Gas After You Find Product/Market Fit

The most successful technology companies first get their product/market fit right before stepping on the accelerator. Facebook cut its teeth in the Ivy League without spending a nickel on marketing (or growth as they call it) before making its product more broadly available. Once the company had incredible traction, it broadened its reach. The same can be said for just about every franchise technology company we know (for example: Adobe, Apple, Google, LinkedIn, Oracle, Salesforce, and Twitter).

The classic counter-example is Groupon. It ramped up the hiring of salespeople well in advance of determining if it offered customers (merchants) a compelling value proposition. In their case VCs threw money at the company because of its growth, but the growth never led to profits. The founders were fortunate; they sold a bunch of stock at huge prices before the company went public, but the VCs were left holding the bag because, post IPO, the market realized Groupon didn’t have a value hypothesis. In other words, Groupon was able to succeed for a while without a proven value hypothesis, but sooner or later the truth catches up with everyone.


Customer Delight Makes Your Product Viral

At my company, Wealthfront, we didn’t even hire the people who could address the growth hypothesis until we were confident we had achieved product/market fit.

You know you have fit if your product grows exponentially with no marketing. That is only possible if you have huge word of mouth. Word of mouth is only possible if you have delighted your customer. Net Promoter Score (NPS) is a great tool to measure the magnitude of your product’s or service’s word of mouth. It should come as no surprise that the most successful companies generally have the highest NPS’s.

The beauty of generating significant word of mouth is it helps you recruit better people than you could have attracted otherwise. Had it not been for our delighted clients, we never could have attracted three senior execs from LinkedIn. Their prior experience driving LinkedIn’s growth has allowed us to create a compelling growth hypothesis in much shorter time than we otherwise could have done.

The Best Companies Grow Out Of Value

It might take you a long time and many iterations to find your value proposition. You won’t have the vanity metrics, as Eric Ries calls them, to show your classmates, peers, or VCs. You don’t want the kinds of VCs who care about vanity metrics, and people who pay attention to flashes in the pan are of little value.

Once you do find your value proposition, driving growth is a heck of a lot easier … and more profitable. Entrepreneurs who focus on growth too early get addicted to it, and probably will always pay too much for it. Those with the discipline to find their value proposition first build the best companies.


Andy Rachleff is CEO of the startup Wealthfront, and cofounder and general partner of Benchmark Capital. He can be reached on Twitter @arachleff.

[Image: Flickr user Adam Selwood]