In his oft-referenced 2007 post, Marc Andreessen writes that “the only thing that matters” in a startup’s quest for success is Product/Market Fit. Great team without P/M Fit? Nope. Great technology without P/M Fit? Sayonara.
So as pre-seed investors our goal is to identify the handful out of a batch of every hundred attempted startups, that have the hint of potential to achieve Product/Market Fit.
Challenging, but not impossible, right?
The problem is that common wisdom says that most successful startups have executed at least one “pivot” before achieving ultimate success. I recall seeing somewhere (if anyone can find the source please let me know, can’t find it) that Y Combinator claims that among all of the great startups accepted into YC, over 66% executed a pivot in the few months they were at YC. (Maybe one of the things that makes YC great is its ability to accelerate “Time-to-Pivot.”)
This therefore presents a huge challenge to pre-seed investors, who have to somehow a) identify great pre-Product/Market Fit companies while b) knowing that the product the team is pitching is unlikely to be the post-pivot product that succeeds.
How does that work? Sounds like a total crapshoot.
I think the answer is that we’re overusing the word “pivot.” Or at least not recognizing that a “pivot” — like Product/Market Fit itself — isn’t binary. It’s not yes/no.There’s a range of Product/Market Fit, from weak to extreme (hint: you need Extreme Product/Market Fit to win(1)). And there’s a range of pivoting, perhaps measurable in degrees.
Startups start off in the Jungle(2). In the jungle it’s virtually impossible that you march in a straight line, out of the jungle straight to to the Dirt Road and then the Highway (per Jeff Bussgang). You’ll have to change direction, based on feedback loops from the market leading to development iterations and back again, hence the “pivot.”
But not all pivots are the same. There have been some famous, extreme, 180-degree pivots. For example, Stewart Butterfield & Co. scrapping their multi-player video game startup to create Slack, and before that Stewart Butterfield & Co. scrapping their multi-player video game startup to create Flickr (anyone want to guess what his next startup is going to build?).
But most startup pivots are going to be more nuanced changes of direction, perhaps 90 degrees or even “just” 45 degrees. Same core concept but a different business model. A different addressable market. Some famous but arguably less extreme examples of pivots may be Android (initially started as a new OS for cameras) and Groupon (initially a consumer activism platform). Android remained an OS but for phones instead. Groupon’s model of campaigns only activating if enough people signed up, continued but in a commercial/SMB context.
In my own portfolio I’ve seen this happen with Breezometer (initially conceived as a B2C air quality app, now selling that data B2B to major corporations in 67 countries), and 40Nuggets (initially generic web traffic optimization, now AutoLeadStar for car dealerships).
In these more common pivot models, the overall idea stays pretty much intact but the implementation or orientation changes.
Understanding eventual (inevitable?) pivots as more nuanced, or existing on a range of degrees, may help answer the initial question above, of how pre-Product/Market Fit investors are supposed to align our belief sets with founders when we know the ultimate product may come out different than the one proposed. Perhaps it’s about identifying rough concepts of future Product/Market Fit, betting on a new approach or method rather than a specific implementation, and being prepared to support the founders in their quest for the specific implementation.
I’d welcome feedback on this: @beninjlm
(1) I’m learning that the great VC thought leaders self-reference. Self-referencing says “by quoting myself I must be right.” When I grow up I want to be a thought-leader.
(2) Don’t stop me, I’m on a roll.