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In the early stages, startups often lack impressive numbers to showcase their potential. That’s why investors primarily examine the co-founding team to assess how likely they are to build a thriving company.
In simpler terms, investors are looking for something called founder-market fit when the founders’ skills, experience, and personal qualities align with what the market needs.
But how can a founder determine if they have this so-called founder-market fit?
A background check
Deep industry expertise can indicate a strong match between the founders and their target market. The ability to execute ideas is vital for early-stage founders, and the more bulletproof they are in their domain, the higher the chance they’ll be able to do it.
It’s also about knowing what to disrupt and how, because, at its core, a founder-market fit means that the person starting the company has personally experienced the problem they’re now trying to solve.
In some cases, outsiders have disrupted industries they knew little about, but generally, founders have a much better chance of succeeding if they have a sense of how a specific market works. About 35% of startups fail because the founding team doesn’t know enough about the market and what customers actually need.
The best way to know an entrepreneur has a founder-market fit is to look at their education, previous employment, and projects. How long have the founders been active in this industry? How well do they know its problems? How badly do they want to change the status quo?
There are many examples of this: Airbnb’s founders hosted people in their apartments before building a marketplace for homestays; Slack began as an internal communication tool for a company owned by one of the founders — he knew what app his team needed.
Health tech startup Theranos is a well-known case of the opposite when a lack of industry knowledge — among other things — led to a startup’s failure. Investors were swayed by the founder’s grand vision: they collectively invested $1.3 billion. Unfortunately, they overlooked the significance of the founder’s background.
The founder, Elizabeth Holmes, promised to revolutionize health care while having only two semesters of chemical engineering classes at Stanford.
Synergy among co-founders
When a founder presents me with a startup that heavily relies on sales but struggles to articulate their thoughts, it raises a red flag. In such situations, investors should carefully assess the other co-founders in the team, seeking a partner who brings the required expertise — in this example, in sales.
Founder of Awesomic, a platform that matches web design talents with businesses, Roman Sevast has a background in software development. He takes full responsibility for Awesomic’s technical aspects and product development, while another founder, Stacy Pavlyshyna, is a former digital marketer who handles operations, communications and marketing.
This serves as a good illustration of where both co-founders bring their domain expertise to the table, and their collaboration enables them to achieve a solid founder-market fit.
A prominent global example of a synergistic partnership is the relationship between Steve Wozniak and Steve Jobs.
How to tell investors about founder-market fit
To increase the likelihood of securing funding, early-stage founders should make sure they communicate their founder-market fit to investors. My several tips:
- Share specific examples of the co-founders’ industry challenges and how they resolved them.
- Emphasize accomplishments relevant to the target market, such as previous startup ventures, industry accolades, significant milestones, or partnerships.
- Present a compelling narrative about a co-founder that showcases their in-depth industry knowledge. Instead of stating “5 years of IT experience,” highlight achievements by saying, “developed a product used by 300,000 clients”.
- Demonstrate a scalable business model that aligns with market needs and show how exactly it aligns.
This does not suggest that successful startups can only emerge from founders with prior experience. Quite the opposite, according to Sebastian Mallaby’s book “The Power Law,” groundbreaking ideas often originate from individuals who are outsiders to the industry.
These outsiders, however, must possess certain character traits that enable them to achieve a founder-market fit. I’d like to highlight perseverance and curiosity.
Outsiders should thoroughly study the market to understand their potential customers, launch effective marketing campaigns, and ultimately develop a product that people will find valuable. Curiosity serves as the driving force behind acquiring the necessary knowledge.
Perseverance is crucial because the market landscape constantly changes, and founders continuously overcome new challenges. We seek to invest in founders who are prepared to adapt to evolving market conditions, meet customer demands and embrace emerging trends.
Founders never know which particular problems they will face when starting a business. But if they previously solved problems in a chosen market or if they show they have grit, VCs take it as a good sign.