Marc Andreessen, Product/Market Fit

This is a discussion of Marc Andreessen's "The only thing that matters", also sometimes entitled "Product Market Fit." (June, 2007) It is part of a series of discussions of foundational texts on What is a startup business?

Marc Andreessen

Marc Andreessen co-authored Mosaic, the first web browser, founded Netscape, and Andreessen-Horowitz, the venture fund. He is outspoken and active on twitter.

Product/Market Fit

Andreessen opens by declaring that the post is about "the only thing that matters for a new startup." Towards the end of the essay he tells us:

The only thing that matters is getting to product/market fit. (Marc Andreessen, all bold in original)

He begins with some context. He divides the causes of startup success into three components: team, product and market, which he borrows from Andy Rachleff, and goes on to quote Andy:

• When a great team meets a lousy market, market wins
• When a lousy team meets a great market, market wins.
• When a great team meets a great market, something special happens. (Andreessen quoting Andy Rachkeff)

This is a counterintuitive claim. Many people who discuss startups will claim that the founder, or the founding team, is the single most important thing and that "smart" people will figure out how to make something successful.

Peter Thiel, Competition Is for Losers

This is a discussion of Peter Thiel's Wall Street Journal Essay, Competition Is for Losers. It is part of a series of foundational texts on What is a startup business?

You can purchase Peter Thiel's book below:

Peter Thiel

Peter Thiel, cofounded Paypal and invested in Facebook, amongst other things. He is vocal, and always interesting and original, on a range of topics, but here we will discuss his

The essay captures a key idea in the web of ideas that constitute Thiel's view of startups. Thiel explores these ideas at length in 0 to 1, but this essay is actually a chapter from the book that the Wall Street Journal published, and in many ways it gives us a good sense of the larger theory.

 In 1933, Edward Chamberlain (in Theory of Monopolistic Competition) introduced the idea of product differentiation. To grossly simplify the argument, a firm can charge a premium for a product to the extent that the product is differentiated in valuable dimensions from other commodity products. In an extreme case, the firm could have a monopoly on the service or product, and can charge monopolistic prices.

Monopolies, Profit and Competition

Thiel points out how it is possible to produce such a monopoly: by coming up with a novel product or service. And coming up with a novel product or service (from 0 to 1), is not easy because by definition, it has never been done before.

I'm not interested in illegal bullies or government favorites: By "monopoly," I mean the kind of company that is so good at what it does that no other firm can offer a close substitute.(Peter Thiel)

He contrasts this with taking an idea that already exists and simply doing more of it by moving it to a different location, or making incremental improvements on it in scale (1 to n). The problem with this kind of business is that it is hyper-competitive and profits quickly erode.

Q: What would Thiel make of companys that excel at going from 1 to n? Consider that Rocket Internet has a thriving business openly based on copying other ideas.

Morality

Thiel spends some time defending monopolies. He claims that our traditional loathing for monopolies only applies in a "static" world where they rent collect in exchange for little added value.

But the world we live in is dynamic: We can invent new and better things. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren't just good for the rest of society; they're powerful engines for making it better. (Peter Thiel)

Framing the "relevant market"

One of the interesting points he brings up is that a monopoly is defined against a market. He gives two examples that illuminate in different ways. He points out that monopolistic companies define the market as large as possible so as not to be accused of legal monopolies, and companies with small markets define the market as narrowly as possible to appear more dominant.

Suppose you want to start a restaurant in Palo Alto that serves British food. "No one else is doing it," you might reason. "We'll own the entire market." But that is only true if the relevant market is the market for British food specifically. What if the actual market is the Palo Alto restaurant market in general? And what if all the restaurants in nearby towns are part of the relevant market as well? (Peter Thiel)

Find a monopoly

Peter Thiel ends with a great summary, so I'll lets say it.

All happy companies are different: Each one earns a monopoly by solving a unique problem. All failed companies are the same: They failed to escape competition. (Peter Thiel)

Q: I want to interrogate Thiel's central thesis -- that you should come up with a truly original idea, to go from 0 to 1.

He puts forward examples like Google as an example. But Google was not the first search engine, and there were other search engines at the time. Thiel's most famous investment, Facebook, dominates social networks now but it there were dozens of social network at the time, and the market was dominated by MySpace, which itself had overthrown Friendster.

Are these still good examples of going from 0 to 1?

You can purchase Peter Thiel's book below:

What is a Startup Business?

Before we start to talk about what a startup business is, lets talk about why it is important to define it.

 

Define a startup

Definitions are tricky, because they often exclude examples one wishes to include, and they include examples that one wishes to include.

Relying on commonplace assumptions about a set of features will lead to absurd claims as to what constitutes a startup.

What isn't a startup?

The commonplace idea of a startup is a new business, but there is a myth around the startup. Eric Ries in What's a startup? describes the mythology of the startup in the following terms:

What all of these pictures have in common is a narrative that goes something like this: scrappy outsiders, possessed of a unique genius, took outrageous risks and worked incomprehensible hours to beat the odds. (Ries)

But a new business, even a risky one, and hard working founders fall short of the definition of startup. The great counter example here would be the restaurant. Restaurants are risky, and require people to work "incomprehensible hour", but there seems to be wide agreement that a restaurant is not what people mean by a startup. Paul Graham uses it in his essay Startup=Growth, as an example of what is not, in his terms, a startup:

Millions of companies are started every year in the US. Only a tiny fraction are startups. Most are service businesses—restaurants, barbershops, plumbers, and so on. These are not startups, except in a few unusual cases. (Graham)

Peter Thiel also uses the restaurant business as a counter-example in his essay Competition Is for Losers:

Imagine you're running one of those restaurants in Mountain View. You're not that different from dozens of your competitors, so you've got to fight hard to survive. If you offer affordable food with low margins, you can probably pay employees only minimum wage. And you'll need to squeeze out every efficiency: That is why small restaurants put Grandma to work at the register and make the kids wash dishes in the back. (Peter Thiel)

Note that Thiel isn't explicitly talking about the definition of a startup, but is rendering advice.
Definitions and advice

Implicit in the definition of a startup is a normative claim about what you ought to do as a startup. When Graham talks about growth as definitive of a startup, he follows up to tell us that you should do what you can to grow a startup. When Thiel advises startups to produce a large innovation that takes us from "0 to 1", he implies that a startup, as opposed to say a restaurant, is a company that engages in an attempt to go from "0 to 1."

There isn't one main definition of a startup, but there are some key practitioners and theorists in the field who have come up with influential definitions. They happen to be men but if a reader has women to suggest, I will gladly add them to this list. They are many important and influential women in the field, but I haven't come across a definition of startups from them.

Here are some of the people from the "Seminal Essays" section.

 Paul Graham

Paul Graham: A startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of "exit". The only essential thing is growth. Everything else we associate with startups follows from growth. (Graham)

This is from Paul Graham's essay "Startup=Growth".

 

Marc Andreesen

The only thing that matters is getting to product/market fit. (Andreesen)

This is from Marc Andreesen on the Product Market fit.

 

Peter Thiel

All happy companies are different: Each one earns a monopoly by solving a unique problem. All failed companies are the same: They failed to escape competition. (Thiel)

From Peter Thiel's Competition Is for Losers.

 

Steve Blank

Steve Blank: a startup is an organization formed to search for a repeatable and scalable business model. (Blank)

From Steve Blank on what's a startup.

 

Eric Reis

A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty. (Reis)

from Eric Reis' on What is startup.

Steve Blank, What's A Startup?

This is a discussion of Steve Blank's impressively succinct essay What's A Startup?. It is part of a series of discussions of foundational texts on What is a startup business?

You can buy his book, The Startup Owner's Manual here:

Steve Blank

Blank is known primarily as a theoretician, although he has founded and advised many companies. His ideas have been very influential in the culture.

What's A Startup?

Blank has been thinking about startups for a while, so his blog post are focused, but peppered with reference to other areas where he expands on the topic.

He gets right to the point:

In this post we’re going to offer a new definition of why startups exist: a startup is an organization formed to search for a repeatable and scalable business model. (Blank)

And then he unpacks the idea of a business model.

A business model describes how your company makes money. (Blank)

So a startup is an organization formed to search for a repeatable and scalable way to make money. That sounds like any business. What sets Blank's theory apart is probably the detailed process he lays out to form such a business.

Q: Peter Thiel seems to disagree with Blank's model. In particular he advises startups to have big bold plans, that can be modified indefinitely, which deliver an enormous innovation that earns a monopoly. Blank doesn't think this contradicts his own view. Do readers think there is a fundamental distinction here?

The Business Model Canvas

Blank is a fan of the Alexander Osterwalder's Business Model Canvas , which is a template to organize the components of a business.

Startup as hypothesis testing

Blank has specific advice on the role of a founding team.

Your job as a founder is to quickly validate whether the model is correct by seeing if customers behave as your model predicts. Most of the time the darn customers don’t behave as you predicted. (Blank)

The benefit of this advice is it focuses energies on hypothesis testing early on.

Contrast: Although Thiel has claimed that this advice contradicts to come up with a long term plan, the tenure of the plan doesn't seem to be a central component of Blank's thesis. There is something about the MVP that feels small and timid, compared to Thiel's idea of going from 0 to 1 which feels ambitious and large in scale. The question is, if Blank had used a different word -- Initial Hypthesis Product, for instance -- would there still be a fundamental disagreement?

Q: Blank realizes of course that experimentation can be very expensive. You can't usually launch an entire business to see if customers like it, so his idea is to put out a really simple minimal viable product and use that to test it.

The big criticism -- and I am not the first to make it -- is this contrast directly with advice from other people.

Famously, Steve Jobs said in an interview:

"It's not about pop culture, and it's not about fooling people, and it's not about convincing people that they want something they don't. We figure out what we want. And I think we're pretty good at having the right discipline to think through whether a lot of other people are going to want it, too. That's what we get paid to do.
"So you can't go out and ask people, you know, what the next big [thing.] There's a great quote by Henry Ford, right? He said, 'If I'd have asked my customers what they wanted, they would have told me "A faster horse." ' "(Steve Jobs)

This is not the first time Jobs had said this.

Blank is well aware of this criticism, but I don't know that he fully takes on the problem.


You can buy his book, The Startup Owner's Manual here:

Paul Graham, Startup = Growth

This is a discussion of Paul Graham's classic essay Startup=Growth (Sep 2012). It is part of a series of discussions of foundational texts on What is a startup business?

Paul Graham

Paul Graham is the founder of Ycombinator, one of the earliest, and certainly most successful, of the accelerators, and the one that all others copy.

Ycombinator also gave us Hacker News, which is the best aggregator of startup links.

Startup=Growth

But let us turn to his seminal essay, Startup=Growth, and spoiler alert, he thinks the distinguishing feature of a startup is high growth.

Graham summarizes his thesis in the opening:

A startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of "exit." The only essential thing is growth. Everything else we associate with startups follows from growth. (Paul Graham)

The rest of the essay is broken up into sections, to point out the various features that follow from the central growth thesis. Along the way he points out why certain types of certain features of companies seem to reoccur in startups. For instance, why they tend to be software companies.

Contrast: This seems compatible but not identical with Thiel's view that startups should "earn a monopoly by solving a unique problem", and with Andreessen's view that startups should be discover product market fit. You might claim that growth will follow from the monopoly, or the product market fit, depending on which other theory you believe. Would be interested if readers know of another theory of startups that is incompatible with the growth definition.

Redwoods

The central idea of this section is that it is not enough just to serve customers -- that is what a business is after all -- but it must also scale, and to scale by design from their inception. Many startups or software companies because software scales so easily. The challenge for these companies to find something that delights users.

Ideas

First, Graham points out that because the startups are after such huge markets, and the rewards are so high, the solution space has been well explored, and there is a lot of competition.

However, in some areas, technology moves so fast that it produces new opportunities ("Rapid change in one area uncovers big, soluble problems in other areas"), and new solutions to problems, ("startups create new ways of doing things, and new ways of doing things are, in the broader sense of the word, new technology.")

Contrast It would be instructive to compare this to Peter Thiel's advice on ideas, which is to ask yourself what facts you know to be true, but with which most people disagree. Graham's advice seems to be forward looking having to do with new technologies, and new opportunities. Thiel's advice seems to be more introspective because you aren't told to look for an unpopular truth. Q: Do readers think they disagree with each other, agree with each other, or have different opinions that are fundamentally compatible?

Rate

This section is about the growth rate, which is what the whole essay is really about. Graham makes the point that the growth is S shaped and the middle high growth area is what startups aspire to achieve. The best part though is concrete numbers and what they measure:

A good growth rate during YC is 5-7% a week. If you can hit 10% a week you're doing exceptionally well. If you can only manage 1%, it's a sign you haven't yet figured out what you're doing.

The best thing to measure the growth rate of is revenue. The next best, for startups that aren't charging initially, is active users. That's a reasonable proxy for revenue growth because whenever the startup does start trying to make money, their revenues will probably be a constant multiple of active users. (Paul Graham)

When Graham talks about the finding the growth part of the S curve, he sounds closest to Marc Andreessen talking about product market fit.

Q: I would think that the value of a growth rate would depend on the stage of the company. However, he is correct in that any example where I tried 1% per week, I didn't come up with a viable company when the starting point is, say, 10,000 users.

Compass

Graham asserts that the centrality of growth as the metric for success allows founders to focus, and quickly decide between competing claims on their time and attention. He also finds it to be a good way to come up with new ideas en route to solving problems.

Value

Growth rates compound so our intuitions are usually wrong about how fast things can grow and how large they can become:

weekly	yearly
1%	1.7x
2%	2.8x
5%	12.6x
7%	33.7x
10%	142.0x

Deals

Graham describes the motivations for the various actors in a startup story.

Investors get a good risk to return ratio with the added benefit of closely aligned goals because, he claims, capital gains are harder to game than dividends because it is down the waterfall after expenses, salaries etc are paid out.

Founders get to more control of their startup by accepting venture funding.

Finally, acquirers get access to growth.

Understand

Graham summarizes his own argument so well, I'll just quote him again:

If you want to understand startups, understand growth. Growth drives everything in this world. Growth is why startups usually work on technology—because ideas for fast growing companies are so rare that the best way to find new ones is to discover those recently made viable by change, and technology is the best source of rapid change. Growth is why it's a rational choice economically for so many founders to try starting a startup: growth makes the successful companies so valuable that the expected value is high even though the risk is too. Growth is why VCs want to invest in startups: not just because the returns are high but also because generating returns from capital gains is easier to manage than generating returns from dividends. Growth explains why the most successful startups take VC money even if they don't need to: it lets them choose their growth rate. And growth explains why successful startups almost invariably get acquisition offers. To acquirers a fast-growing company is not merely valuable but dangerous too. (Paul Graham)

Eric Reis, What is a startup?

This is a discussion of Eric Reis' esay What is a startup?. It is part of a series of discussions of foundational texts on What is a startup business?

You can purchase Eric's book by clicking on this link:

Eric Reis

Eric Reis has worked for several startups, and has worked with Steve Blank. He is most closely associated with "Lean Startup," which itself is associated with Steve Blank's work.

What is a startup?

Reis' gets to the point early:

A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty. (Reis)

He goes on to take that sentence apart, and defends the use of key phrases, arguing that they are critical. The words that he explains are "human," "new" and "uncertainty."

Human institutions

Reis correctly points out that all institutions are human institutions, except in the narrow sense made up for the sake of argument. However, he goes on to say.

Even for companies that essentially have only one product, the value the company creates is located not in the product itself but with the people and their organization who built it. (Reis)

And the point he makes here is that the systems and habits that a company generates may be as valuable as a piece of technology. Paul Graham explicitly calls new ways of doing this a new technology in the "broad" sense:

The other connection between startups and technology is that startups create new ways of doing things, and new ways of doing things are, in the broader sense of the word, new technology. (Graham)

Although Thiel positions himself contra the lean startup, I don't think he would disagree with this component. One alternative view, however, may come form Marc Andreessen who specifically thinks that a market can pull a product form a mediocre team. Reis is closely aligned with Blank, who acknowledges the centrality of the product market fit in the lean model.

Newness

Reis

And yet the newness of a startup’s product or service is also a key part of the definition. This is a tricky part of the definition, too. I prefer to take the most expansive possible definition of product, one that encompasses any source of value for a set of people who voluntarily choose to become customers. (Reis)

In his emphasis on novelty, Reis sounds closest to Thiel who emphasizes novelty more than almost anyone else we look at. However, Reis has a different idea of novelty:

Even the most radical new inventions always build upon previous technology. Many startups don’t innovate at all in the product dimension, but use other kinds of innovation: repurposing an existing technology for a new use, devising a new business model that unlocks value that was previously hidden, or even simply bringing a product or service to a new location or set of customers previously underserved. (Reis)

Contrast: This may contrasts with Thiel's notion of a startup because I suspect other improvements would count as 1 to n improvements for Thiel. These improvements would not lend themselves to sufficient differentiation to earn a monopoly.

Uncertainty

Reis has the most expansive notion of a startup of any definition I have seen, and the result is that he may define a traditional business very narrowly.

Startups are designed to confront situations of extreme uncertainty. To open up a new business that is an exact clone of an existing business, all the way down to the business model, pricing, target customer, and specific product may, under many circumstances, be an attractive economic investment. But it is not a startup... (Reis)

However, his emphasis on the uncertainty again echoes Thiel's view of a startup taking on a novel problem:

Thus, the land of startups is a unique place, where the risks themselves are unknown. ... Startups are designed for the situations that cannot be modeled, are not clear-cut, and where the risk is not necessarily large – it’s just not yet known. (Reis)

Q: Although uncertainty is where Reis and Thiel agree, it is also where Graham and Andreessen seem to agree with them. Graham considers good ideas to occur in the space where change happens because other spaces are already picked over. Andreessen considers the question of product/market fit to be the big question that is being explored. Is this the area that all definitions converge? Is there anyone that doesn't consider uncertainty to be a hallmark of startups? Or is uncertainty simply the hallmark of all business?


You can purchase Eric's book by clicking on this link: