Founders who are in the early stages of building their startup may have already developed a strong solution, identified a gap in the market, or simply have an inescapable and driving motivation to build their own company. Ideally, they have a good combination of all three. But do they fit the product market? And what actually is product-market fit?
Investors at Sequoia, one of the world’s largest venture capital firms, have developed a very practical framework for answering these two questions. It distills the landscape into three archetypes.
“Hair on fire” roughly means that your startup is addressing an urgent problem. A security startup, for example, might fit here, especially if it can win initial contracts by parachuting in to fix a security breach or other issue already in progress. Or consider the wave of companies offering services to businesses and users when they suddenly stayed put and worked from home during the peak of Covid-19.
“Hard fact” Translated, this means a startup that solves an existing problem better than what is already out there. A good example of this is Square, which emerged as a new point-of-sale product in a seemingly old and saturated market.
Last, “Future vision” refers to deep tech, moonshots, and out-of-left-field products. This includes quantum startups, but also those building flying cars or even autonomous vehicles that would drive our roads (or any technology needed to produce such vehicles).
Each of these archetypes has its own customer mentality, competitive status in the market, opportunities/overall product goals, challenges, examples of those who got it right and those who didn’t, and so on. Sequoia partner Jess Lee, an early-stage investing specialist, gave a major talk about the concept at TechCrunch’s Early Stage event in Boston in April. Here too, Sequoia has written about the framework.
In summary, the theory can be formulated like this: All startups fit more or less into one of these three archetypes. Therefore, identifying which archetype a company fits into can help it focus and evolve.
Sequoia is so confident in the structure that it uses the framework in its Arc program to help early-stage founders focus on building their business. It also helps the company evaluate potential startup investments. Additionally, and just as important, founders can draw on an archetype to better anticipate and articulate the challenges and opportunities in their field. This can of course be helpful for internal decision-making, but also for fundraising or pitching partnerships or customers.
During her presentation on the framework, Lee said that Sequoia does not have a preferred category among the three.
“I I believe you can create great companies in all of these categories,” Lee said. Still, she acknowledged that certain types of companies may find it particularly difficult to raise money in the current climate.
For Deep Tech and Moonshots – two common types of startups found in the “Future Vision” category – fundraising ““This was easier in a time of zero interest rates when there was a lot of capital flowing,” Lee said. “I do not know if [those companies] could have raised just as much [starting out now] like they had to to get where they are now.”
Lee co-founded Polyvore, which combined social mechanisms and e-commerce – its users contributed fashion and product clips from the Internet and used these products to put together mood boards, with affiliate marketing as the basis. Polyvore was eventually acquired by and separated from Yahoo. Still, the e-commerce and consumer focus has remained with her, she said, adding that she is still interested in finding new winners in the category despite the challenges of breaking into the space these days grasp.
“It’s still doable,” she said. “I feel like a lot of consumer companies fall into the ‘hard fact’ category, and I particularly enjoy working with consumer companies. But you have to be good at marketing and building both your problem and your solution. So it takes a lot to get it right.
“It almost feels like alchemy. I can’t tell you how many founders I’ve met who said, ‘Oh yeah, I worked on Snapchat too.’ I had my own version.’ And it sounded like it was similar, but just the right amount of detail allowed Snapchat to be the one to break through.”
None of this means that the third category, “Hair on Fire,” is easy. “You have to execute ruthlessly,” Lee said. “[You need] so much speed to stay one step ahead of everyone.”
Their conclusion highlights one of the most important aspects of building an early-stage company. “I think there is some degree of founder-market fit in each of these product-market fit categories.”