Before product-market fit, find passion-market fit

Naval · July 17th, 2011

Before product-market fit, find passion-market fit.

Building a product is a process, not a discrete action. And the Internet is efficiently arbitraged. Every single simple thing that can be done is being done, or has been done. The lesson of history is that product-market fit is very precise—one wrong tweak or slightly bad timing and you can miss the whole thing.

So the only way you’re likely to find product-market fit is if you’re almost irrationally obsessed with the market and if you’ve been working on it for a long time. Where the journey is the reward. Then, you’re likely to have unique insights (in the details) and consistent execution, through thick and thin, to find fit.

Often, the best companies are ones where the product is an extension of the founder’s personality, which shouldn’t be a big surprise, since everyone is passionate about themselves.

VCs are generalists, and other lies

Naval · February 4th, 2011

The venture industry works on the premise that investors are generalists and entrepreneurs are specialists. VCs are good at being, well, VCs, and the entrepreneurs have to be really good at whatever specific task they set out to do.

This isn’t by choice—ask an entrepreneur what they’re looking for in an investor and they won’t say things like “advice, corporate governance, recruiting.” Entrepreneurs would prefer someone who has specific connections, interest, and knowledge about the market they’re attacking and the technology they’re building.

The problem is that it’s very, very difficult to find VCs by sector and expertise. The new markets feature on AngelList solves that problem. For example, a smartphone baby monitoring company joined AngelList. They wanted to meet investors with who had expertise in Analytics, Babies, Consumer Electronics, Parenting, and Mobile. A music startup joined AngelList and wanted to know which investors still love the music market (and which hate it).

Now you can go find your specialist investor. The one who can really add value. Try the search box or browse.

A conflict of interests

Naval · July 6th, 2010

If you’re a passionate entrepreneur, you can often see the vast potential for your product. In your head, the possibilities of the future branch out, with infinite forks and potential. When pitching to investors, you’ve learned to define your market as broadly as possible while remaining credible. So, it’s not surprising that you’re disappointed when investors don’t disclose a conflict, and you steer clear of investors who might already have an investment in the same space — dating, social gaming, compliance, security, etc.

If you’re an experienced investor, you’ve seen it all. How every startup thinks they can take over the world, but usually has to struggle to accomplish even its one core product or task. How three copycat business plans will arrive in the same week, and how each one thinks they’re unique and protectable. How domain knowledge and therefore your ability to help a startup accrue by having multiple investments in the same space.

Both points of view are pretty extreme, and the truths about conflicts of interest are highly contextual. Here’s how to think about it.

1. The idea

Firstly, the idea — it’s no big deal. If it’s any good, someone has had it before and someone will have it again. If you’re still convinced it’s that good, go file a patent first, and then go talk about it. Keep in mind that investors outside of big tech (cleantech, biotech…) automatically have a bias against “patented” ideas, and most brilliance seems obvious in hindsight. Ask an investor to sign an NDA, and you’ve just filtered out all but the most desperate investors.

2. The space

Secondly, the space — it’s tricky, but you have to define it as realistically narrow. There was a time when having an investment in “web” might have been considered a conflict for another “web” company. There was a time when the term “portal” was a competitive category. Unless it’s head-on competition, Foursquare v. Gowalla, Disqus v. IntenseDebate, Google v. Bing, it’s really, honestly, not competitive. If there’s room for multiple equal-sized players in the space, it’s not as competitive as you might think. Also, theories about where you might zig or zag don’t count — just compare on what you’re doing at this moment.

3. Angels vs. VCs

Thirdly, the type of investor matters — active angels have a lot more deals than active VCs and are more likely to have an investment in an adjacent space. This is not a big problem — angels invest in syndicates and usually only provide help in a contextual, on-demand way. Because VCs are likely to be on your board, have more money into the company, and have more control and information rights, it makes more sense to pay attention to conflicts VCs might have (Disclosure: I consider myself to be an angel investor).

4. Conflict checks

Fourthly, just ask the VC to disclose potential conflicts up front, but don’t be too broad-minded about what constitutes a conflict.

Lastly, beware the “entrepreneur check.” This is where the VC tells you that they like your company, want to do due-diligence, and then just have to check with the entrepreneur in one of their investments about whether this investment would be competitive or not. Since entrepreneurs tend to have an overly-broad view of what’s competitive, this check usually fails. Even in the rare case that it doesn’t, it’s used as an excuse by the investor to pass. Therefore, always insist that they run the “entrepreneur check” early in the process, before you’ve invested too much into this investor.

Your own biggest competition

Our flawed patent system aside, ideas do not have the merit that we were all raised believing. You do have to pick the right space, but after that, execution is everything. Here’s a quick confirmation test — go back to your classmates and pick out the smartest ones, and then the hardest working ones. Now look at who is successful. A certain base level of intellect and idea-formation capability is required, but beyond that are strongly diminishing or even negative returns.

Consequently, the best entrepreneurs display a lot of chutzpah. They aren’t fazed by the competition, nor do they see shadows in every corner. They are their own biggest competition.

One way to start a startup

Naval · April 26th, 2010

I recently answered this question on a Q&A site: “What generic first order principles should a new technology project or startup follow?” But I used the politician’s prerogative to give an answer to the question I wish he had asked:

  1. Move to Silicon Valley.
  2. Pick a great co-founder with complementary skills.
  3. Select people with intelligence, energy and integrity.
  4. Pick a big market.
  5. Develop the minimum viable product to test your hypothesis about what the market needs. Preferably it’s a product that you’re passionate about since you’ll need to stick with it to an irrational point (the Internet especially is efficiently arbitraged).
  6. Iterate like crazy until you find product/market fit. If you don’t find it, do not raise money, do not pass go. Start over.
  7. If you have found product/market fit, raise money from high-quality people that you trust. Keep control.
  8. Scale. Hang on.

Presentation Hacks

Naval · April 13th, 2010

Naval here. Adeo Ressi recently invited me to speak at the Silicon Valley Founder Institute. The topic was how to present to investors.

[Nivi: There’s a lot of new stuff in this presentation — I learned a lot that goes far beyond the topic of pitching VCs. I bolded my favorite parts in the transcript below.]

SlideShare: Presentation hacks
Audio: Interview with chapters (for iPod, iPhone, iTunes)
Audio: Interview without chapters (MP3, play anywhere)
Transcript: See below

Outline

Here’s an outline and transcript of the presentation.

  1. Does the presentation matter?
  2. The presentation doesn’t matter
  3. What really matters
  4. Preparing for your presentation
  5. What’s in the pitch?
  6. Seducing investors
  7. The high concept pitch
  8. The elevator pitch
  9. Elevator pitch example
  10. The 10/20/30 rule of PowerPoint
  11. The 12 pieces of the presentation
  12. Learn from the masters
  13. AngelList

[Read more →]

I'm speaking at SXSW + Holding a SXSW MEETUP

Naval · March 12th, 2010

Naval here.

For those of you going to SXSW, I’ll be on the Seed Combinators Panel on Monday March 15 3:30pm. I’m joining Paul Graham, David Cohen, Marc Nathan, and Joshua Baer to talk about YStars, TechCombinators, SeedBoxes, and the like. Here’s the Plancast if you want me to “count you in.”

I’m also throwing a SXSW Venture Hacks Meetup on Sunday March 14 5-7pm in the Four Seasons Lobby Lounge at 98 San Jacinto Blvd. If you’re coming to the meetup, please RSVP on Facebook xor Plancast so we can get a headcount.

If you’re a Venture Hacker, please come talk to me about your startup and venture hacking at these two events. I’m looking forward to pressing the flesh and kissing some babies.

I'm speaking at The Future of Funding

Naval · January 18th, 2010

Naval here. I’ll be on a panel about “The Growth of Small Firms” at The Future of Funding on Feb 17. Matt Marshall, Mike Maples, Rob Hayes, Reid Hoffman are all on the panel with me.

The conference is full of accessible early-stage investors like Chris Dixon, Mike Maples, George Zachary, Jeff Clavier, Tim Draper, Dave McClure… I’m leaving out a ton of great names — it’ll be a who’s who of early stage investors.

The tickets aren’t cheap but the organizers have kindly given us a 25% discount to share with you. If you’re a Venture Hacks reader, please come introduce yourself to me at the conference.

Extrapolating computing

Naval · November 18th, 2009

Image: Hosting Canada

Remember when mainframes did all of the computing? And workstations were dumb terminals docked to the mainframes? The terminals had less power, but were more “mobile”.

Then everyone got a desktop. And the desktop is where you did most of your computing. And you carried around your underpowered laptop, which had to be synced with your desktop, or docked to a big screen, keyboard and mouse to be usable. The laptop had less power, but it was more mobile than the desktop.

Now most early adopters have a laptop as their main computer. And they’re carrying around their underpowered smartphone, which has to be synced with their laptop on a regular basis. The smartphone has less power but, well, it’s more mobile.

We’ll dock our smartphones to our laptops for a while. But, if we can extrapolate from the history of computing, the laptop is headed for the dustbin.

Which means that Apple will be OK. Google will be OK. But if Windows Mobile is any indicator, Microsoft is in deep, deep trouble.

This post is by Naval Ravikant. If you like it, check out his blog and Twitter.

How to pick a co-founder

Naval · November 12th, 2009

Update: Also see our 40-minute interview on this topic.

Picking a co-founder is your most important decision. It’s more important than your product, market, and investors.

The ideal founding team is two people, with a history of working together, of similar age and financial standing, with mutual respect. One is good at building products and the other is good at selling them.

The power of two

Two is the right number — avoid the three-body problem. Think Jobs and Wozniak, Allen and Gates, Ellison and Lane, Hewlett and Packard, Larry and Sergei, Yang and Filo, Omidyar and Skoll, Julia and Kevin Hartz from Eventbrite, Jennifer Hyman and Jennifer Fleiss from Rent the Runway.

One founder companies can work, against the odds (hello, Mark Zuckerberg). So can three founder companies (hello, @biz, @ev, and @jack). In three founder companies, the politics can be tough — gang-up votes, jockeying for board seats, etc. — but it’s manageable. Four is an extremely unstable configuration and five is right out. When 4-5 founder companies work, it’s because two founders dominate.

Two founders works because unanimity is possible, there are no founder politics, interests can easily align, and founder stakes are high post-financing.

Someone you have history with

You wouldn’t marry someone you’d just met. Date first. This is how long Bill Gates and Paul Allen have known each other:

Go through something difficult, like a Prisoner’s Dilemma or a Zero-Sum Game. If being ethical was lucrative, everyone would do it!

One builds, one sells

The best builders can prototype and perhaps even build the entire product, end-to-end. The best sellers can sell to customers, partners, investors, and employees.

The seller doesn’t have to be a “salesman” or “saleswoman”. They can be technical, but they must be able to wield the tools of influence. Bill Gates and Steve Jobs aren’t salesmen, but they are sellers.

Aligned motives required

If one founder wants to build a cool product, another one wants to make money, and yet another wants to be famous, it won’t work.

Pay close attention — true motivations are revealed, not declared.

Criteria: Intelligence, energy, and integrity

It’s not the kid you grew up next to. It’s not the person you like the most. It’s not the hacker most willing to work for free.

It’s someone of incredibly high intelligence, energy, and integrity. You’ll need all three yourself, and a shared history, to evaluate your co-founder.

Don’t settle

If it doesn’t feel right, keep looking. If you’re compromising, keep looking. A company’s DNA is set by the founders, and its culture is an extension of the founders’ personalities.

Pick “nice” people

Avoid overly rational short-term thinkers. There are bounds to rationality. Partner with someone who is irrationally ethical, or a rational believer that nice people finish first. Be especially careful with the “sales” person here.

What you don’t know

Business founders who don’t code use bad proxies for picking technical co-founders (“10 years with Java!”). Technical founders who don’t sell also use bad proxies (“Harvard MBA!”). Learn enough of the other side to have an informed opinion. If you’re not seriously impressed, move on.

FAQs

What if the right person already has his own startup? Convince him to work on yours part-time — they’ll drop his idea once yours gets traction.

Breakups are hard

If you’re going to fall out with your co-founder, do it early, recover the equity into the option pool to keep the company going, and recruit someone else great to fill the missing slot. Build in founder vesting (a.k.a. the “Pre-Nup”) to keep the breakup from getting messy. Building a great company without a partner is like raising kids without a…

Nearly everything I’ve written on this topic applies to dating and marriage. Coincidence?

Go forth and multiply.

Update: Also see our 40-minute interview on this topic.

This post is by Naval Ravikant. If you like it, check out his blog and Twitter.